               EUROPEAN COMMISSION
            Brussels, 20.5.2020
            COM(2020) 528 final
            Recommendation for a
            COUNCIL RECOMMENDATION
            on the 2020 National Reform Programme of the United Kingdom and delivering a Council opinion on the 2020 Convergence Programme of the United Kingdom

               Recommendation for a

               COUNCIL RECOMMENDATION

               on the 2020 National Reform Programme of the United Kingdom and delivering a Council opinion on the 2020 Convergence Programme of the United Kingdom

               THE COUNCIL OF THE EUROPEAN UNION,

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

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

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

               Having regard to the recommendation of the European Commission,

               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 the United Kingdom as one of the Member States for which an in-depth review would be carried out.

               (2)Following the withdrawal by the United Kingdom from the EU on 31 January 2020 and the entry into force of the Withdrawal Agreement, the United Kingdom entered a transition period, lasting until 31 December 2020. A single decision taken before 1 July 2020 by the EU and the United Kingdom in the Joint Committee foreseen by the Withdrawal Agreement may extend this period for up to one or two years. During this period, Union law — including that related to the European Semester — continues to apply to and within the United Kingdom.

               (3)The 2020 country report for the United Kingdom
                  3
                was published on 26 February 2020. It assessed the United Kingdom’s progress in addressing the country-specific recommendations adopted by the Council on 9 July 2019
                  4
               , the follow-up given to the recommendations adopted in previous years and the United Kingdom's progress towards its national Europe 2020 targets.

               (4)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, their incomes and companies’ business. It has delivered a major economic shock that is already having serious repercussions in the European Union. On 13 March 2020, the Commission adopted a Communication
                  5
                calling for a coordinated economic response to the crisis, involving all actors at national and Union level.

               (5)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.

               (6)On 20 March 2020, the Commission adopted a Communication on the activation of the general escape clause of the Stability and Growth Pact
                  6
               . The clause, as set out in Articles 5(1), 6(3), 9(1) and 10(3) of Regulation (EC) 1466/97 and Articles 3(5) and 5(2) of Regulation (EC) 1467/97, facilitates the coordination of budgetary policies in times of severe economic downturn. In its Communication, the Commission shared with the Council its view that, given the expected severe economic downturn resulting from the COVID-19 outbreak, the current conditions permit activation of the clause. On 23 March 2020, the Ministers of Finance of the Member States agreed with the assessment of the Commission. 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.

               (7)Continued action is required to limit and control the spread of the pandemic, strengthen the resilience of the national health systems, mitigate the socio-economic consequences through supportive measures for business and households and to 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 get back to a normal functioning of our societies and economies and to sustainable growth, integrating inter alia the green transition and the digital transformation, and drawing all lessons from the crisis.

               (8)The COVID-19 crisis has highlighted the flexibility that the single 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 single market from functioning normally must 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, which include in particular improved purchasing strategies, diversified supply chains and strategic reserves of essential supplies. They are key elements for developing broader crisis preparedness plans.

               (9)The socio-economic consequences of the pandemic are likely to be unevenly distributed across regions in the United Kingdom, due to different specialisation patterns. This poses a substantial risk of further widening the regional disparities within the United Kingdom. The current situation calls for targeted policy responses.

               (10)On 30 April 2020, the United Kingdom submitted its 2020 National Reform Programme and, on 7 May 2020, its 2020 Convergence Programme. In order to take account of their interlinkages, the two programmes have been assessed at the same time.

               (11)The United Kingdom is currently in the preventive arm of the Stability and Growth Pact and subject to the debt rule. On 13 July 2018, the Council recommended the United Kingdom to ensure that the nominal growth rate of net primary government expenditure
                  7
                does not exceed 1,6% in 2019-2020, corresponding to an annual structural adjustment of 0,6% of GDP. The Commission’s overall assessment confirms a risk of significant deviation from the recommended adjustment path towards the medium-term budgetary objective in 2019-2020 and over 2018-2019 and 2019-2020 taken together. Outturn data for 2019-2020 will be available in autumn 2020.

               (12)In its 2019-2020 Convergence Programme, the government plans the headline balance to deteriorate from a deficit of 2,2% of GDP in 2019-2020 to a deficit of 2,5% of GDP in 2020-21. The deficit is projected to increase to 3.1 % of GDP in 2021-22 and to fall to 2,4% of GDP by 2024-2025. After decreasing to an estimated 83,2% of GDP in 2019-2020, the general government debt-to-GDP ratio is expected to decrease to 82,9 % in 2020-2021 according to the 2019-2020 Convergence Programme. However, the macroeconomic scenario underpinning those budgetary projections no longer appears realistic as it does not take into account the economic impact of the COVID-19 pandemic. The projections in the Programme also do not take into account the measures announced by the United Kingdom in response to the COVID-19 pandemic. The macroeconomic and fiscal outlook is affected by high uncertainty due to the COVID-19 pandemic.

               (13)In response to the COVID-19 pandemic, the United Kingdom has adopted 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. The projections in the Convergence Programme do not include these measures, but they are taken into account in the Commission forecast. The budgetary measures amount to about 5.5% of GDP and include support to employees, the self-employed and businesses, as well as welfare measures. In addition, the United Kingdom has announced measures that, while not having a direct budgetary impact, will contribute to support liquidity to businesses. These measures include loan guarantees of about 16% of GDP. The full implementation of those 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, the United Kingdom’s general government balance is forecast at -10,7% of GDP in 2020-2021 and -6,2% in 2021-2022. The general government debt ratio is projected to reach 102,5% of GDP in 2020-2021 and 100,2% in 2022. The macroeconomic scenario underlying the Convergence Programme does not take into account the impact of the COVID-19 pandemic, and the debt and deficit projections in it therefore differ substantially from those of the Commission.

               (15)On 20 May 2020, the Commission issued a report prepared in accordance with Article 126(3) of the Treaty due to United Kingdom’s projected breach of the 3% of GDP deficit threshold in 2020-21.Overall, the analysis suggests that the deficit criterion as defined in the Treaty and in Regulation (EC) No 1467/1997 is not fulfilled.

               (16)The ongoing COVID-19 crisis has created economic and social policy challenges that are unprecedented over the past decades. Unemployment is expected to rise by almost 3pps to 6,7% in 2020 and recover slightly to 6% in 2021, from 3,8% in 2019.  The government of the United Kingdom has adopted emergency measures to alleviate the negative effects of the shock. The cost of the direct fiscal support will depend on demand but it may amount to around GBP 110 billion (5,5% of GDP), complemented by GBP 330 billion (16% of GDP) of credit guarantees for bank loans. Short-time work schemes have been rolled out to protect employment and measures to support the self-employed have also been put in place. The coverage and eligibility to access advance payments of Universal Credit have been temporarily improved and the basic entitlement under universal credit temporarily increased for twelve months. Local Authorities are also to receive additional one-off funding to support economically vulnerable people and households. The government also announced a three-month moratorium on mortgage payments for homeowners in difficulty due to the coronavirus.

               (17)To support the financial position of businesses, the Bank of England has reduced Bank Rate twice, in total from 0,75% to 0,1%, reduced the United Kingdom countercyclical capital buffer rate to 0% from a pre-existing path toward 2% by December 2020, increased its bond-buying program to GBP 645 billion, and enhanced its support for commercial bank lending to the real economy alongside government loan guarantees. The government offered sectors  a year-long moratorium from paying business rates, a deferral of VAT payments as well as cash grants for smaller firms. Liquidity support has also been made available in the form of guarantees and combined grants under the Coronavirus Business Interruption Loan Scheme to small and medium-sized enterprises (SMEs) below a given turnover threshold using a wide range of business finance products, such as revolving credit facilities and other products including term loans. In addition, a general scheme to provide liquidity to SMEs, but also to larger businesses that could include investment support, has been made available to all sectors of activity. In the process of designing and implementing these measures the resilience of the banking sector needs to be taken into account.

               (18)The COVID-19 pandemic has revealed weaknesses in the preparedness and capacity of the health systems in the United Kingdom to respond to such outbreaks, notably in terms of facilities, staff and supplies. This has resulted in the emergency set-up of temporary field hospitals for COVID-19 patients across the United Kingdom. The country’s manufacturing industry was urged to modify its production lines to urgently produce additional medical equipment, such as ventilators, in order to cover the expected level of demand. The COVID-19 crisis has further accentuated existing health workforce shortages. Managing similar crises in the future calls for investments into the health systems across the United Kingdom, including effective and well-resourced public health measures. These investments should aim at providing the necessary equipment, facilities and the required skilled labour, and overall, the capacity to deliver all expected regular healthcare services alongside the care for patients with COVID-19 or similar infectious diseases.

               (19)The current crisis is likely to have a bigger impact on the most vulnerable, exacerbating poverty. The risk of poverty or social exclusion was already increasing before the crisis, despite record low unemployment. In-work poverty and child poverty are also high. Welfare cuts and reforms risk undermining the strong poverty-reducing effect of the United Kingdom tax-benefit system. There is scope to strengthen support to the most vulnerable, including children in poverty, especially given that the crisis is expected to further increase  income inequality.

               (20)Improving labour productivity performance remains a major challenge for the United Kingdom. Output per hour is significantly lower in the United Kingdom than in most other developed economies, and is barely higher than it was before the financial crisis. GDP growth has been driven by employment growth, with practically no increases in productivity in the recent past. Despite a tight labour market, United Kingdom labour productivity has been essentially flat since early 2018. Real wage growth has also remained slow. Many parts of the United Kingdom are relatively poor with comparatively low levels of investment in skills and infrastructure. Limited career progression prospects for people in low-wage jobs negatively affect both productivity and poverty. This condition is set to continue and may even be exacerbated in the light of the COVID-19 crisis. The recent pandemic also poses significant challenges for the education and training systems in the United Kingdom notably as a result of distance learning and varying access to structured learning.  Consequently, there is scope to increase productivity by addressing broad-based problems such as low investment in equipment, infrastructure and research and development, and skills gaps, especially in basic and technical skills. The United Kingdom aims to invest more in research and innovation and improve the use of existing technologies across the economy.

               (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. The United Kingdom has a persistent housing shortage. Capacity constraints are emerging while residential construction remains below what is required to meet estimated demand. The amount and location of land available for new housing is limited by tight regulation of the land market, particularly around big towns and cities. The building sector remains key for housing as well as meeting future energy efficiency and climate targets although reducing the amount of energy used for home heating is complicated by the age of the housing stock and its slow replacement. After decades of public under-investment, the government has started to deal with the infrastructure deficit. There has been encouraging progress on investment in renewables and significant emission reduction has been achieved in the power sector. However, moving towards climate neutrality still faces challenges across the whole of the economy. Use of the United Kingdom’s road, rail and aviation networks is reaching capacity and this contributes to congestion and air pollution. The United Kingdom has an ambition to be at the forefront of zero emission vehicles but most of the rail network is not yet electrified. Although the coverage of full fibre networks in the United Kingdom is still modest, network competition in the full fibre market is growing as the government is significantly increasing public support towards fibre network rollout. Such investment in digital infrastructure, however, needs to be accompanied by improved digital skills as the United Kingdom suffers from a structural deficit of IT specialist skills.

               (22)While the present recommendations focus on tackling the socio-economic impacts of the pandemic and facilitating the economic recovery, the 2019 country-specific recommendations adopted by the Council on 9 July 2019 also covered reforms that are essential to address medium- to long-term structural challenges. Those recommendations remain pertinent and will continue to be monitored in the European Semester until the end of the transition period.

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

               (24)In the context of the 2020 European Semester, the Commission has carried out a comprehensive analysis of the United Kingdom’s economic policy and published it in the 2020 country report
                  8
               . It has also assessed the 2020 Convergence Programme and the 2020 National Reform Programme and the follow-up given to the recommendations addressed to the United Kingdom in previous years. It has taken into account not only their relevance for sustainable fiscal and socioeconomic policy in the United Kingdom, but also their compliance with 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 that assessment, the Council has examined the 2020 Convergence Programme and its opinion
                  9
                is reflected in particular in recommendation (1) below,

               HEREBY RECOMMENDS that the United Kingdom take action in 2020 and 2021 to:

               1.In line with the general escape clause, take all necessary measures to effectively address the 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.

               2.Ensure the adequacy and coverage of the social protection system to provide support for all and in particular those most affected by the crisis.

               3.Foster innovation and support human capital development. 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 housing, clean and efficient production and use of energy, sustainable transport infrastructures and high speed broadband networks.

               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)

                        SWD(2020) 527 final.

                     (4)

                        OJ C 301, 5.9.2019, p. 117.

                     (5)

                        COM(2020) 112 final.

                     (6)

                        COM(2020) 123 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 four-year period. Discretionary revenue measures or revenue increases mandated by law are factored in. One-off measures on both the revenue and expenditure sides are netted out.

                     (8)

                        SWD(2020) 527 final.

                     (9)

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


               EUROPEAN COMMISSION
            Brussels, 20.5.2020
            COM(2020) 517 final
            Recommendation for a
            COUNCIL RECOMMENDATION
            on the 2020 National Reform Programme of Hungary and delivering a Council opinion on the 2020 Convergence Programme of Hungary

               Recommendation for a

               COUNCIL RECOMMENDATION

               on the 2020 National Reform Programme of Hungary and delivering a Council opinion on the 2020 Convergence Programme of Hungary

               THE COUNCIL OF THE EUROPEAN UNION,

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

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

               Having regard to the recommendation of the European Commission,

               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 Hungary as one of the Member States for which an in-depth review would be carried out.

               (2)The 2020 country report for Hungary
                  2
                was published on 26 February 2020. It assessed Hungary’s progress in addressing the country-specific recommendations adopted by the Council on 9 July 2019
                  3
               , the follow-up given to the recommendations adopted in previous years and Hungary'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, their incomes and companies’ business. It has delivered a major economic shock that is already having serious repercussions in the European Union. On 13 March 2020, the Commission adopted a Communication
                  4
                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
                  5
               . The clause, as set out in Articles 5(1), 6(3), 9(1) and 10(3) of Regulation (EC) 1466/97 and Articles 3(5) and 5(2) of Regulation (EC) 1467/97, facilitates the coordination of budgetary policies in times of severe economic downturn. In its Communication, the Commission shared with the Council its view that, given the expected severe economic downturn resulting from the COVID-19 outbreak, the current conditions permit activation of the clause. On 23 March 2020, the Ministers of Finance of the Member States agreed with the assessment of the Commission. 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 pandemic, strengthen the resilience of the national health systems, mitigate the socio-economic consequences through supportive measures for business and households and to 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 get back to a normal functioning of our societies and economies and to sustainable growth, integrating inter alia the green transition and the digital transformation, and drawing all lessons from the crisis.

               (7)The COVID-19 crisis has highlighted the flexibility that the single 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 single market from functioning normally must 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, which include in particular improved purchasing strategies, diversified supply chains and strategic reserves of essential supplies. They are key elements for developing broader crisis preparedness plans.

               (8)The Union legislator has already amended the relevant legislative frameworks
                  6
                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. Hungary is encouraged to make full use of those possibilities to help the individuals and sectors most affected by the challenges.

               (9)The socio-economic consequences of the pandemic are likely to be unevenly distributed across territories due to different specialisation patterns in particular in regions lacking endowment in key assets or markedly relying on sectors depending on face-to-face business to consumers. This entails a substantial risk of widening territorial inequalities within Hungary, aggravating the already observed trend of widening disparities between urban and rural areas. 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 5 May 2020, Hungary submitted its 2020 National Reform Programme and, on 4 May 2020, its 2020 Convergence Programme. In order to take account of their interlinkages, the two programmes have been assessed at the same time.

               (11)Hungary is currently in the preventive arm of the Stability and Growth Pact and subject to the debt rule.

               (12)On 14 June 2019, the Council recommended Hungary to ensure that the nominal growth rate of net primary government expenditure
                  7
                does not exceed 3,3% in 2019, corresponding to an annual structural adjustment of 1,0% of GDP. The Commission’s overall assessment confirms a significant deviation from the recommended adjustment path towards the medium-term budgetary objective in 2019 and over 2018 and 2019 taken together. However, in light of the activation of the general escape clause, further steps under the Significant Deviation Procedure for Hungary are not warranted.

               (13)In its 2020 Convergence Programme, the government plans the headline balance to deteriorate from a deficit of 2,0% of GDP in 2019 to a deficit of 3,8% of GDP in 2020. The deficit is projected to decline to 2,7% of GDP in 2021 and to gradually reach 1,0% of GDP by 2024. After decreasing to 66,3% of GDP in 2019, the general government debt-to-GDP ratio is expected to increase to 72,6% in 2020 according to the 2020 Convergence Programme. The macroeconomic and fiscal outlook is affected by high uncertainty due to the COVID-19 pandemic. There are country-specific risks underlying the budgetary projections, namely risks linked to higher-than-projected expenditures (in line with past trends on high end-of-year spending), as well as potentially lower-than-projected revenue as the projection seems to rely on some revenue buoyancy.

               (14)In response to the COVID-19 pandemic, and as part of a coordinated Union approach, Hungary has adopted budgetary measures to increase the intensive care 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 Convergence Programme, those budgetary measures amounted to 2,8% of GDP in 2020, and are entirely financed through reallocation of expenditures within the budget, reserves and new taxes. They include measures aimed at supporting the labour market, tax reliefs for businesses and costs related to the medical emergency. Additional measures to support the recovery (1,4% of GDP) and to support the labour market (0,4% of GDP) have been announced but have not yet been specified. In addition, Hungary has adopted measures that, while not having a direct budgetary impact, will contribute to supporting liquidity to businesses, which the 2020 Convergence Programme estimates at 1,5% of GDP. The authorities are working on additional measures for 0,3% of GDP. Those measures include credit guarantee programmes and government-guaranteed loans. The overall budgetary impact of the fiscal measures reported in the 2020 Convergence Programmes differs from that included in the Commission 2020 spring forecast since only those that were sufficiently specified were assessed and taken into account by the Commission. Overall, the measures adopted by Hungary are in line with the guidelines set out in the Commission Communication on a coordinated economic response to the COVID-19 outbreak. The full specification and adoption of all announced 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.

               (15)Based on the Commission 2020 spring forecast under unchanged policies, Hungary’s general government balance is forecast at -5,2% of GDP in 2020 and -4,0% in 2021. The general government debt ratio is projected to reach 75,0% of GDP in 2020.

               (16)On 14 June 2019, the Council decided in accordance with Article 121(4) of the Treaty on the Functioning of the European Union that a significant observed deviation from the medium-term budgetary objective occurred in Hungary in 2018. In view of the established significant deviation, on 14 June 2019 the Council recommended Hungary to take the necessary measures to ensure that the nominal growth rate of net primary government expenditure would not exceed 3,3% in 2019 and 4,7% in 2020, corresponding to an annual structural adjustment of 1,0% and 0,75% of GDP. On 5 December 2019, the Council adopted Decision (EU) 2019/2172
                  8
               , establishing that Hungary had not taken effective action in response to its Recommendation of 14 June 2019, and issued a revised recommendation. In the Recommendation of 5 December 2019, the Council asked Hungary to take the necessary measures to ensure that the nominal growth rate of net primary government expenditure would not exceed 4,7% in 2020, corresponding to an annual structural adjustment of 0,75% of GDP in 2020. Based on the Commission’s overall assessment and in light of the activation of the general escape clause for 2020, which allows for a temporary departure from the adjustment path towards the medium-term budgetary objective, Hungary is considered to have taken effective action in response to the Recommendation of 5 December 2019.

               (17)On 20 May 2020, the Commission issued a report prepared in accordance with Article 126(3) of the Treaty due to Hungary’s planned breach of the 3% of GDP deficit threshold in 2020. Overall, the analysis suggests that the deficit criterion as defined in the Treaty and in Regulation (EC) No 1467/1997 is not fulfilled.

               (18)The government announced a state of danger on 11 March 2020. On 12 March, borders were closed for travellers, except for returning citizens and European Economic Area residents as well as regular cross-border commuters. Goods transit remained permitted. On 16 March 2020, early child education facilities, schools and universities were closed and teaching started to be given online. As of 17 March 2020, non-essential shops were obliged to close at 3pm and restaurants could remain open only for takeaway service. A partial curfew was introduced on 28 March 2020, meaning people could only leave their area of residence for duly justified reasons, and keeping a distance from other people. Before the COVID-19 outbreak, the Hungarian economy was on track for a gradual slowdown after several years of outstanding growth. Real GDP rose by 4,9% in 2019. After the outbreak of the virus, containment measures were implemented relatively quickly, and official case numbers have so far remained limited. However, the global recession is expected to hit exports particularly strongly due to the dominant role of highly cyclical industries, such as the automotive industry. It is also expected to hit tourism and transport services, which are affected by travel restrictions. Overall, a sharp recession is projected starting in March, then a gradual economic recovery is projected from the second half of the year as containment measures are assumed to be gradually lifted. Unemployment could rise rapidly due to the flexibility of the labour market. Economic performance in 2020 will be contingent on the length of the confinement period as well as on the economic policy response. The European Commission’s Spring Forecast projects a 7% decrease of real GDP in 2020, followed by a recovery of 6% in 2021.

               (19)The government has announced several waves of measures since mid-March to mitigate the economic, social and economic impact of the COVID-19 crisis. The central bank has adopted measures to provide liquidity to the financial sector. Other liquidity-enhancing measures for households and businesses include (i) a payment moratorium until 31 December 2020 for loans and financial lease contracts for companies and households, and (ii) a capping of the interest rate on consumer credits. In the process of designing and implementing these measures the resilience of the banking sector needs to be taken into account. Further measures, mostly targeting the sectors hardest hit by the crisis, such as tourism and services include temporary tax reductions and exemptions, investment subsidies,  infrastructure development, subsidised and guaranteed loans, and capital programmes. In order to preserve jobs, the government launched two types of short-time working arrangements. The general scheme covers up to 70% of lost wages for 3 months under certain conditions and a specific scheme targets research and development (R&D) personnel. The government advanced a previously planned cut in social security contributions by one quarter and announced a one-off wage supplement in the health care sector. Overall, while the fiscal measures aim at supporting businesses and preserving jobs, their scope and coverage remains limited compared to most Member States. Moreover, they are planned to be financed through reallocations across budget chapters and newly raised taxes, and are thus expected to have a limited effect from a macroeconomic stabilisation perspective.

               (20)Various aspects of health outcomes remained worse than in most Member States, reflecting, among others, the high prevalence of risk factors in the population and the limited effectiveness of health care provision. The public share of health spending in Hungary was considerably lower than the EU average. An above-EU average number of Hungarians rely on out-of-pocket expenditure and are increasingly pushed to turn to private health services. This aggravates risks of financial hardship for Hungarian households, with repercussions for social equity and health outcomes. Additional investment and comprehensive reforms are necessary to rationalise the use of resources within the health system, reduce inequities in access and increase the quality of care. Preventive and primary care services are underfinanced and their potential to improve the quality, accessibility and cost-effectiveness of the health system remain underexploited. Although the authorities have started working towards alleviating Hungary's considerable shortage of health workers, regional disparities in the distribution of health personnel continue hindering access to care in some areas and for some vulnerable groups, such as marginalised Roma, but also people with disabilities face particular barriers. In the face of the demand shock for health systems generated by the COVID-19 pandemic, rapid action is required to start addressing these structural challenges and increase the resilience of the Hungarian health system.

               (21)The socio-economic consequences of the outbreak may be significant and the impact of the government decree of 18 March 2020 permitting bilaterally agreed derogations from the Labour Code still needs to be assessed. According to the Commission forecast, unemployment is expected to rise to 7,0% in 2020 and recover to 6,1% in 2021. Sectors excessively hit by the crisis account for a large share of the Hungarian economy, employing low-to-medium-skilled workforce on highly flexible work contracts. Until early 2020, the overall employment rate continued to improve amid a strong economic expansion, but this did not benefit all groups equally. The gaps in employment between skills groups and between men and women remained wide in comparison with the EU average, the latter due partly to the limited supply of quality childcare. Despite being scaled down, the public works scheme, which was not effective in leading participants to jobs in the primary labour market, remained sizeable. There is scope for strengthening other policies to effectively help unemployed or inactive people find work or access training to improve their targeting. The duration of unemployment benefits is the shortest in the EU, at a maximum of three months, which even in favourable economic conditions was well below the average time needed to find a job. In line with the principles of the European Pillar of Social Rights, social protection schemes and measures need to protect those at risk of losing their employment, as well as the self-employed and unemployed. Short-time work schemes, where employees receive income support from the State for the hours not worked, are a good way to protect employment. During the pandemic, short-time work schemes are most efficient if their administration is simple and quick, and eligibility is not restricted to certain sectors or business types.

               (22)While Hungary's overall poverty situation improved before the crisis, the trend can reverse quickly during the downturn. Income inequalities increased over the past decade, due in part to changes in the tax and benefit system. Even before the COVID-19 outbreak, both severe material deprivation and material and social deprivation were high, particularly among households with several children and among the Roma population. The shortage of municipal flats for social rental and a lack of financial support for renters hinders mobility. The minimum income benefit has remained nominally unchanged since 2012 and is one of the lowest in the EU. The pandemic is expected to hit hardest the vulnerable groups who lack access to care and essential services and who live in overcrowded households. Measures fostering their activation and integration in the labour market will be needed when economies recover. Already before the crisis, education outcomes were below the Union average and strongly influenced by the pupils' socio-economic background. Early school leaving rates were high, particularly among Roma pupils. The low participation of vulnerable groups in quality education is a missed opportunity to build human capital and social cohesion. Teachers’ salary is one of the lowest in the EU. The low number of students participating in higher education is not in line with the strong demand for highly skilled workers. The unexpected shift to distance learning is likely to further increase inequalities. Evidence from the yearly national competence tests suggests that it is difficult to reach many pupils through digital education because of the lack of digital tools. Learners from disadvantaged backgrounds experience negative effects of distance learning also due to overcrowded households and low education of parents. Recent and ongoing investments in digitalisation of education have been important and need to conitnue.

               (23)In the context of the COVID-19 crisis, it is particularly important to ensure the functioning of critical infrastructure and the free circulation of goods throughout the Single Market and to monitor and ensure the correct functioning of supply chains in cooperation with neighbouring countries. Hungary is a small open economy with intensive cross-border transport of goods. In addition, many Hungarians work abroad and commute on a weekly basis. Hungary may also need seasonal frontier workers in agriculture. Currently imposed travel restrictions may delay the circulation of goods and workers but could be alleviated by ensuring the Green Lanes at borders.

               (24)Among services, retail is one of the most affected sectors due to the measures that prevented many businesses from functioning altogether or limited their operations significantly. Regulatory flexibility would help retail rebound in the aftermath of COVID-19. Hungary has the highest number of regulated professions in the EU. Professional services will play an important role in facilitating the exit from and recovery after the crisis. Ensuring smooth access to and exercise of professions, through streamlining their regulatory frameworks and related administrative procedures, is therefore of crucial importance, especially for small and medium-sized enterprises and micro enterprises including sole practitioners, who were particularly hit by the crisis. Liquidity support to businesses through loans and guarantees, with a focus on small and medium-sized enterprises, is of utmost importance, and the distribution of liquidity support to firms must be effectively and swiftly implemented by intermediaries. In the process of designing and implementing these 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 small and medium-sized enterprises. Newly-founded start-ups and scale-ups may need specific support, for example incentives for venture capital fund to increase their investments in these firms. These support measures will also help to avoid fire sales of strategically important European firms.

               (25)Research and innovation is a critical driver for long-term growth and competitiveness. Hungary ranks as a moderate innovator. The shortage of highly skilled workers is a key obstacle to innovation. Spending on research and development (R&D) is increasing slow and was mainly fueled by the business sector, which benefits from the largest public support in the EU. However, R&D spending in the public sector decreased over the last decade. Investment in innovative small- and medium sized-enterprises (SMEs), as well as strengthening cooperation between business, research, academia and the public sector, increase the country's research and innovation capacity called for by the COVID-19 crisis. Investments in public research and innovation, and a supportive research environment is necessary for recovery.

               (26)To foster the economic recovery, it will be important to front-load mature public investment projects and promote private investment, including through relevant reforms. Hungary’s National Energy and Climate Plan identifies investment needed to tackle the climate and energy transition. Together with investment in digitalisation and the green transition, these will make the Hungarian economy more sustainable and resilient once the country recovers from the crisis. Currently energy efficiency in the residential sector is low, which also contributes to air pollution. The persistent breaches of air quality standards have severe health and environmental repercussions. The main sources of air pollution include residential solid fuel combustion, agriculture and transport emissions. Just 1% of gross inland energy consumption is covered from low-carbon renewable sources, and highly polluting biomass contributes to approximately 10%. From a low base, solar installations have been showing a rapid increase. In accordance with its National Energy and Climate Plan and long term climate neutrality, Hungary intends to rely more on renewable energy sources, mainly solar energy. In the current economic situation energy policy can generate green growth and can contribute to the economic recovery. Road congestion has been a growing challenge until the outbreak of the COVID-19 pandemic, entailing negative economic impacts and increasing greenhouse gas emissions and air pollution. More widespread telework opportunities and more attractive public transport systems would also help mitigate the environmental impact of transport. The circular economy is still in an initial phase, recycling of municipal waste is underdeveloped and economic instruments do not provide sufficient incentives. Landfilling remains the predominant waste management method. Water quality and supply remain concerns. Hungarians’ digital skills and the use of digital technologies by firms and public services remain below the EU average. Efforts should be maintained to offer efficient digital public services for citizens and businesses. The programming of the Just Transition Fund for the period 2021-2027 could help Hungary 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 country report
                  9
               . This would allow Hungary to make the best use of that fund.

               (27)In response to the COVID-19 epidemic, on 11 March 2020, the government declared a ‘state of danger’. Its duration is not pre-defined and the government has discretionary power to maintain it or to terminate it. The concrete measures taken by the government last until the termination of the ‘state of danger’. On 30 March 2020, the Parliament passed a new law that allows the government to set aside by decree any law. The emergency powers granted appear more extensive than those adopted in other Member States, in light of the combined effect of broadly defined powers and the absence of a clear time limit. Certain emergency measures using those powers raise questions as regards their necessity and proportionality and interfere with business activities and the stability of the regulatory environment. Such measures include allowing derogation from labour laws, deploying military liaison officers in strategic companies and placing under State supervision a publicly traded company. As stated on 15 May 2020 Prime Minister Viktor Orbán expects that at the end of the month the government will be able to return to Parliament the special mandate it was given due to the coronavirus epidemic. Strengthening judicial independence would also be crucial for an effective oversight over the emergency measures concerned.

               (28)Social partners’ involvement in policy initiatives and implementation has been insufficient in recent years, which has weakened the quality and predictability of policy-making and increased the chances of policy mistakes. Consultations and impact assessments have been recurrently bypassed by applying special legislative procedures, such as individual member’s bills and urgent procedures. The involvement of stakeholders has been weakened further during the current system of ruling by government decree., also in light of the goverrnment decree of 18 March 2020 that permits bilateral derogations from the Labour Code.

               (29)The lack of competition in public procurement remains an important concern, since wider opening to competition is a key solution to face the crisis, revive the small business sector and help the economy to restart. Despite the new legislative changes and digitalisation of public procurement, nearly half of all public tenders result in a single-bid procedure. The high number of single bids undermines the effectiveness of the public procurement system. The professionalisation of public procurement could help to improve compliance with Union rules and enable strategic procurement. Commission audits on public procurement related to projects co-funded by the Union and carried out in recent years identified systemic deficiencies and showed weaknesses in the public procurement control system. In 2019, the Commission imposed around EUR 1 billion of financial corrections on Hungary due to these deficiencies.

               (30)Tackling aggressive tax planning is key to improve the efficiency and fairness of tax systems. Spill-over effects of taxpayers' aggressive tax planning strategies between Member States call for a coordinated action of national policies to complement EU legislation. Hungary has taken measures against aggressive tax planning by implementing previously agreed international and European agreed initiatives, but the absence of withholding taxes in Hungary on outgoing income to offshore financial centres could provide an escape route for profits to leave the EU without paying their fair share of taxes. While the outgoing income flows such as royalties, interest and dividends towards offshore financial centres were relatively small in 2013-2017, Hungary records volatile and relatively high capital inflows and outflows through special purpose entities suggesting potential vulnerability to aggressive tax planning practices.

               (31)In the context of the COVID-19 crisis, it is particularly important to ensure the functioning of critical infrastructure and the free circulation of goods throughout the single market and to monitor and ensure the correct functioning of supply chains in cooperation with neighbouring countries. Hence, lifting measures adopted during the COVID-19 crisis, in particular restricting the exports of medicinal substances and products, to primarily supply them in Hungary, will contribute to addressing the needs of citizens across the EU coherently and in a spirit of solidarity, avoid the risk of shortages and disruptions of supply chains. Ultimately, it will pave the way to a successful EU coordinated COVID-exit strategy.

               (32)While the present recommendations focus on tackling the socio-economic impacts of the pandemic and facilitating the economic recovery, the 2019 country-specific recommendations adopted by the Council on 9 July 2019 also covered reforms that are essential to address medium- to long-term structural challenges. Those recommendations remain pertinent and will continue to be monitored throughout next year’s European Semester annual cycle. That also applies to recommendations regarding investment-related economic policies. The latter recommendations should be taken into account for the strategic programming of cohesion policy funding post-2020, including for mitigating measures and exit strategies with regard to the current crisis.

               (33)Corruption, access to public information and media freedom caused concerns even before the crisis. These areas are even more exposed to further deterioration in the state of danger as control mechanisms have become weaker. Investigation and prosecution appears less effective in Hungary than in other Member States. Determined systematic action to prosecute high-level corruption is lacking. Accountability for decisions to close investigations remains a matter of concern as there are no effective remedies against decisions of the prosecution service not to prosecute alleged criminal activity. Restrictions on access to information continue to hinder the fight against corruption. Dissuasive practices for accessing public information can deter citizens and non-governmental organisations from exercising their constitutional rights.

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

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

               (36)In the light of that assessment, the Council has examined the 2020 Convergence Programme and its opinion
                  10
                is reflected in particular in recommendation (1) below,

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

               1.In line with the general escape clause, take all necessary measures to effectively address the 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. Address shortages of health workers and ensure an adequate supply of critical medical products and infrastructure to increase the resilience of the health system. Improve access to quality preventive and primary care services.

               2.Protect employment through enhanced short-time working arrangements and effective active labour market policies and extend the duration of unemployment benefits. Improve the adequacy of social assistance and ensure access to essential services and quality education for all.

               3.Ensure liquidity support to 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 clean and efficient production and use of energy, sustainable transport, water and waste management, research and innovation, and digital infrastructure for schools.

               4.Ensure that any emergency measures be strictly proportionate, limited in time, in line with European and international standards and should not interfere with business activities and the stability of the regulatory environment. Ensure effective involvement of social partners and stakeholders in the policy-making process. Improve competition in public procurement.

               5.Strengthen the tax system against the risk of aggressive tax planning.

               Done at Brussels,

                     For the Council

                  The President

                     (1)

                        OJ L 209, 2.8.1997, p. 1.

                     (2)

                        SWD(2020) 516 final.

                     (3)

                        OJ C 301, 5.9.2019, p. 117

                     (4)

                        COM(2020) 112 final.

                     (5)

                        COM(2020) 123 final.

                     (6)

                        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) and 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)

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

                     (8)

                        OJ L 329, 19.12.2019, p. 91–93

                     (9)

                        SWD(2019) 1016 final

                     (10)

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


               EUROPEAN COMMISSION
            Brussels, 20.5.2020
            COM(2020) 504 final
            Recommendation for a
            COUNCIL RECOMMENDATION
            on the 2020 National Reform Programme of Denmark and delivering a Council opinion on the 2020 Convergence Programme of Denmark

               Recommendation for a

               COUNCIL RECOMMENDATION

               on the 2020 National Reform Programme of Denmark and delivering a Council opinion on the 2020 Convergence Programme of Denmark

               THE COUNCIL OF THE EUROPEAN UNION,

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

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

               Having regard to the recommendation of the European Commission,

               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 Denmark as one of the Member States for which an in-depth review would be carried out.

               (2)The 2020 country report for Denmark
                  2
                was published on 26 February 2020. It assessed  Denmark’s progress in addressing the country-specific recommendations adopted by the Council on 9 July 2019
                  3
               , the follow-up given to the recommendations adopted in previous years and Denmark'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, their incomes and companies’ business. It has delivered a major economic shock that is already having serious repercussions in the European Union. On 13 March 2020, the Commission adopted a Communication
                  4
                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
                  5
               . The clause, as set out in Articles 5(1), 6(3), 9(1) and 10(3) of Regulation (EC) 1466/97 and Articles 3(5) and 5(2) of Regulation (EC) 1467/97, facilitates the coordination of budgetary policies in times of severe economic downturn. In its Communication, the Commission shared with the Council its view that, given the expected severe economic downturn resulting from the COVID-19 outbreak, the current conditions permit activation of the clause. On 23 March 2020, the Ministers of Finance of the Member States agreed with the assessment of the Commission. 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 pandemic, strengthen the resilience of the national health systems, mitigate the socio-economic consequences through supportive measures for business and households and to 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 get back to a normal functioning of our societies and economies and to sustainable growth, integrating inter alia the green transition and the digital transformation, and drawing all lessons from the crisis.

               (7)The COVID-19 crisis has highlighted the flexibility that the single 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 single market from functioning normally must 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, which include in particular improved purchasing strategies, diversified supply chains and strategic reserves of essential supplies. They are key elements for developing broader crisis preparedness plans.

               (8)The Union legislator has already amended the relevant legislative frameworks
                  6
                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. Denmark is encouraged to make full use of those possibilities to help the individuals and sectors most affected by the challenges.

               (9)On 7 May 2020, Denmark submitted its 2020 National Reform Programme and, on 5 May 2020, its 2020 Convergence Programme. In order to take account of their interlinkages, the two programmes have been assessed at the same time.

               (10)Denmark is currently in the preventive arm of the Stability and Growth Pact.

               (11)In its 2020 Convergence Programme, the government plans the headline balance to deteriorate from a surplus of 3,7% of GDP in 2019 to a deficit of 8,0% of GDP in 2020. The deficit is projected to decline to 2,4% of GDP in 2021. After decreasing to 33,2% of GDP in 2019, the general government debt-to-GDP ratio is expected to increase to 40,7% in 2020 according to the 2020 Convergence Programme. The macroeconomic and fiscal outlook is affected by high uncertainty due to the COVID-19 pandemic.

               (12)In response to the COVID-19 pandemic, and as part of a coordinated Union approach, Denmark has adopted 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 Convergence Programme, those budgetary measures amounted to 4,9% of GDP. The measures include strengthening health care services, temporary compensation for fixed costs of businesses, temporary wage compensation scheme and emergency aid for distressed sectors. In addition, Denmark has announced measures that, while not having a direct budgetary impact, will contribute to support liquidity to businesses, which the 2020 Convergence Programmes estimates at approximately 15% of GDP. Those measures include tax deferrals for personal and corporate income taxes and loan guarantees (3,7% of GDP). Compared to the Commission 2020 spring forecast, the main difference is that the Convergence Programme includes expected future losses stemming from COVID-19-related State guarantees (0.5% of GDP). Overall, the measures taken by Denmark are in line with the guidelines set out in the Commission Communication on a coordinated economic response to the COVID-19 outbreak. The full implementation of those 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.

               (13)Based on the Commission 2020 spring forecast under unchanged policies, Denmark’s general government balance is forecast at -7,2% of GDP in 2020 and -2,3% in 2021. The general government debt ratio is projected to remain below 60% of GDP in 2020 and 2021.

               (14)On 20 May 2020, the Commission issued a report prepared in accordance with Article 126(3) of the Treaty due to Denmark’s planned breach of the 3% of GDP deficit threshold in 2020. Overall, the analysis suggests that the deficit criterion as defined in the Treaty and in Regulation (EC) No 1467/1997 is not fulfilled.

               (15)The COVID-19 pandemic affected Denmark heavily in the first half of 2020, putting the health system under pressure and markedly reducing economic activity in certain sectors. Denmark implemented timely measures to stem the pandemic and to strengthen the health system, including far-ranging initiatives to mitigate its economic consequences. The resulting economic downturn was addressed by a series of strong economic and financial measures by the government and the Central Bank, including direct support to partly cover businesses’ fixed costs and wage expenditures, tax deferrals and liquidity provision for banks and firms, credit schemes and other monetary policy measures. In the process of designing and implementing these measures the resilience of the banking sector needs to be taken into account. These measures effectively reduced the economic shock of the pandemic, but did not prevent a significant loss of output, a large number of bankruptcies and insolvencies and marked increases in unemployment and persons at risk of poverty, including among those in vulnerable situations (e.g. persons with disabilities). According to the Commission forecast, unemployment is expected to moderately increase to around 6½% in 2020 before recovering to below 6% in 2021.

               (16)The ongoing COVID-19 crisis underlines the need for Denmark to continuously work to strengthen the resilience of its health system. One issue of particular concern is the shortage of health workers, and the lack of specialised doctors and nurses in e.g. intensive care (in particular nurse anaesthetists). Continuous efforts to address these labour shortages is key. In the short term, Denmark should work to ensure the availability of critical medical products, including personal protective equipment for health workers. Research is ongoing to find not only an antiviral treatment and a vaccine, but also better and faster testing.

               (17)To foster the economic recovery, it will be important to front-load mature public investment projects and promote private investment, including through relevant reforms. Denmark is performing well in the field of digitisation, as evidenced by the European Commission’s Digital Scoreboard. However, to maintain this strong position in the long term and to ensure its competitiveness and benefit from the digital transformation, Denmark would need investment in digital infrastructure as well in education, training and upskilling. Denmark’s National Energy and Climate Plan reports important investment needs to tackle successfully the climate and energy transition. The largest investments are required for the installation of new renewable energy capacity, while significant investment needs are also identified in households (energy efficiency and conversion of heat supply), sustainable transport, industry as well as biogas and district heating. Denmark's climate policy objectives aim to reduce greenhouse gas emissions by 70% by 2030, compared with 1990, and achieve climate neutrality by 2050 at the latest. To reflect this, energy consumption would need to be put on a downward trend, requiring investments that follow a comprehensive approach and focus on sectors where energy savings are particularly promising. The economic recovery from the COVID-19 crisis could be fostered by front-loading planned green investments and advancing ambitious environmental, climate, energy and infrastructure investment projects, such as in housing, offshore wind, energy connectivity and railway electrification. Transport is Denmark's largest source of greenhouse gas emission, making further policy action in this area particularly pertinent. The government's "Green Transport Policy", which aims to allocate EUR 15 billion (DKK 112,7 billion) mainly to transport infrastructure projects in 2021-2030, is currently under negotiation to give greater considerations to climate and environmental objectives. The programming of the Just Transition Fund for the period 2021-2027 could help Denmark 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 country report. This would allow Denmark to make the best use of that fund.

               (18)Overall research and development (R&D) spending has not translated into higher productivity growth in Denmark. An integrated innovation strategy, which clearly spells out what Denmark wants to achieve within the global innovation landscape, is missing. Research and innovation activity remains concentrated in a small number of large firms and foundations and mostly in the pharmaceutical and biotechnology sectors. The eight largest companies account for almost 40% of total private R&D expenditure (vs. worldwide average of 19%). Overall R&D spending remains high, but the absolute number of companies active in R&D has declined since 2009, largely because smaller firms are not engaging in R&D. Only 33% of SMEs introduced product or process innovations. Therefore further policy efforts could be needed to broaden the innovation base with the objective to include more companies. Responding to changing skill needs after COVID-19, also in light of future technological changes, requires sustained investment in upskilling and reskilling schemes, including through adult learning

               (19)Denmark has taken steps to strengthen its anti-money laundering (AML) framework. In 2019, new legislation was adopted and national authorities and regulators started to implement a range of measures to strengthen Denmark's preventive AML framework. The Financial Supervisory Authority has been granted sanctioning powers and a higher budget to enhance its AML supervisory capacity. The Financial Intelligence Unit has also received additional staffing and funding. It is crucial that the enhanced AML framework is translated into effective supervision and enforcement. In particular, the AML supervisor will need to fully implement the risk-based approach. The enhanced capacity of the Financial Intelligence Unit will need to show that weaknesses, highlighted by the Danish Court of Auditors report, have been adequately addressed.

               (20)While the present recommendations focus on tackling the socio-economic impacts of the pandemic and facilitating the economic recovery, the 2019 country-specific recommendations adopted by the Council on 9 July 2019 also covered reforms that are essential to address medium- to long-term structural challenges. Those recommendations remain pertinent and will continue to be monitored throughout next year’s European Semester annual cycle. That also applies to recommendations regarding investment-related economic policies. The latter recommendations should be taken into account for the strategic programming of cohesion policy funding post-2020, including for mitigating measures and exit strategies with regard to the current crisis.

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

               (22)In the context of the 2020 European Semester, the Commission has carried out a comprehensive analysis of Denmark’s economic policy and published it in the 2020 country report. It has also assessed the 2020 Convergence Programme and the 2020 National Reform Programme and the follow-up given to the recommendations addressed to Denmark in previous years. It has taken into account not only their relevance for sustainable fiscal and socioeconomic policy in Denmark, 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.

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

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

               1.In line with the general escape clause, take all necessary measures to effectively address the 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. Enhance the resilience of the health system, including by ensuring sufficient critical medical products and addressing the shortage of health workers.

               2.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, sustainable transport as well as research and innovation. Support an integrated innovation strategy with a broader investment base.

               3.Improve the effectiveness of anti-money laundering supervision and effectively enforce the anti-money laundering framework.

               Done at Brussels,

                     For the Council

                     The President

                     (1)

                        OJ L 209, 2.8.1997, p. 1.

                     (2)

                        SWD(2020) 503 final.

                     (3)

                        OJ C 301, 5.9.2019, p. 117.

                     (4)

                        COM(2020) 112 final.

                     (5)

                        COM(2020) 123 final.

                     (6)

                        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) and 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 9(2) of Council Regulation (EC) No 1466/97.