               EUROPEAN COMMISSION
            Brussels, 13.5.2015
            COM(2015) 262 final
            Recommendation for a
            COUNCIL RECOMMENDATION
            on the 2015 National Reform Programme of Italyand delivering a Council opinion on the 2015 Stability Programme of Italy

               Recommendation for a

               COUNCIL RECOMMENDATION

               on the 2015 National Reform Programme of Italy

                  and delivering a Council opinion on the 2015 Stability Programme of Italy

               THE COUNCIL OF THE EUROPEAN UNION,

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

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

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

               Having regard to the recommendation of the European Commission
                  3
               ,

               Having regard to the resolutions of the European Parliament
                  4
               ,

               Having regard to the conclusions of the European Council,

               Having regard to the opinion of the Employment Committee,

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

               Having regard to the opinion of the Social Protection Committee,

               Having regard to the opinion of the Economic Policy Committee,

               Whereas:

               (1)On 26 March 2010, the European Council agreed to the Commission’s proposal to launch a new strategy for growth and jobs, Europe 2020, based on enhanced coordination of economic policies. The strategy focuses on the key areas where action is needed to boost Europe’s potential for sustainable growth and competitiveness.

               (2)On 13 July 2010, the Council, on the basis of the Commission’s proposals, adopted a recommendation on the broad guidelines for the economic policies of the Member States and the Union (2010 to 2014) and on 21 October 2010 it adopted a decision on guidelines for the employment policies of the Member States. Together these form the ‘integrated guidelines’ which Member States were invited to take into account in their national economic and employment policies.

               (3)On 8 July 2014, the Council adopted a Recommendation on Italy’s National Reform Programme for 2014 and delivered its opinion on Italy’s updated Stability Programme for 2014. On 28 November 2014, in line with Regulation (EU) No 473/2013
                  5
               , the Commission presented its opinion on Italy’s draft budgetary plan for 2015
                  6
               .

               (4)On 28 November 2014, the Commission adopted the Annual Growth Survey
                  7
               , marking the start of the 2015 European Semester of economic policy coordination. On the same day, on the basis of Regulation (EU) No 1176/2011, the Commission adopted the Alert Mechanism Report
                  8
               , in which it identified Italy as one of the Member States for which an in-depth review would be carried out.

               (5)On 18 December 2014, the European Council endorsed the priorities for boosting investment, accelerating structural reforms and pursuing responsible growth-friendly fiscal consolidation.

               (6)On 26 February 2015, the Commission published its 2015 country report for Italy
                  9
               . This assessed Italy’s progress in addressing the country-specific recommendations adopted on 8 July 2014. The country report also includes the results of the in-depth review under Article 5 of Regulation (EU) No 1176/2011. The Commission’s analysis leads it to conclude that Italy is experiencing excessive macroeconomic imbalances which require decisive policy action and specific monitoring. In particular, it is essential to tackle the root cause of persistently low labour productivity and weak competitiveness and to put the national debt on a downward trajectory. The need for action to reduce the risk of adverse effects on the Italian economy and, given its size, on the economic and monetary union more widely, is particularly great.

               (7)On 28 April 2015, Italy submitted its 2015 National Reform Programme and its 2015 Stability Programme. To take account of their interlinkages, the two programmes have been assessed at the same time.

               (8)Italy is currently in the preventive arm of the Stability and Growth Pact and subject to the transitional debt rule over 2013-2015. On 27 February 2015, the Commission issued a Report under article 126(3) of the TFEU, as Italy was not expected to make sufficient progress towards compliance with the debt rule in 2014-2015. The analysis concluded that the debt criterion should be considered as complied with at that time.

               (9)On 30 April 2015, after the cut-off date of the Spring Economic Forecast, the Italian Constitutional Court ruled as unconstitutional a temporary non-indexation of higher pensions in 2012-2013. The exact budgetary impact of this ruling will depend on the Italian government's operationalisation thereof, which has still to be clarified. In view of the new information, the issuance of a Report under article 126(3) of TFEU may be deemed warranted at a later stage. In the absence of this new element and pending its further clarification the conclusions from the February report can be considered as still broadly valid at this stage.

               (10)In its 2015 Stability Programme, Italy has requested a temporary deviation of 0.4 percentage points of GDP from the required adjustment path towards the medium-term objective in 2016 to take account of major structural reforms with a positive impact on the long-term sustainability of public finances. The details underpinning these reforms have been set out in Italy’s 2015 National Reform Programme. The areas of reform put forward in the programme as having an impact on public finance sustainability include: (i) public administration and simplification; (ii) product and service markets; (iii) labour market; (iv) civil justice; (v) education; (vi) a tax shift; and (vii) spending review as financing measure. The impact of the reforms on real GDP is estimated by the authorities at 1.8 percentage points by 2020, which seems to be plausible. If fully and timely implemented and on time, these reforms will have a positive impact on the sustainability of public finances. Conditional on the Italian government taking the necessary measures in 2015 to appropriately compensate for the permanent impact of the above-mentioned ruling of the Constitutional Court so as to ensure that: (i) Italy remains under the preventive arm of the Stability and Growth Pact; (ii) an appropriate safety margin with respect to the Treaty reference value is preserved; and (iii) the medium-term objective is reached within the four-year horizon of the Stability Programme. Italy can currently be assessed as qualifying for the requested temporary deviation in 2016, provided that it adequately implements the agreed reforms, which will be monitored under the European Semester.

               (11)The 2015 Stability Programme plans gradual improvement of the headline deficit to 2.6% of GDP in 2015 and further to 1.8% of GDP in 2018. In its 2015 Stability Programme, the government plans to reach the medium-term objective – a balanced budgetary position in structural terms – by 2017. However, the recalculated structural balance
                  10
                reaches the medium-term objective in 2018. The achievement of the medium-term objective by 2017 seems appropriate, taking into account the application for the structural reform clause as well as the commitments enshrined in the 2015 Stability Programme.

               (12)The government debt-to-GDP ratio is projected to peak in 2015 at 132.5% and to gradually decline to 120.0% in 2019. The macroeconomic scenario underpinning the budgetary projections is plausible. The government has yet to specify the additional expenditure cuts that will allow it to avoid implementing the legislated VAT increase in 2016.

               (13)Italy should improve its structural balance by 0.25% of GDP in 2015. Based on the Commission’s 2015 spring forecast, the projected structural adjustment towards the medium-term objective of 0.3%of GDP in 2015 is in line with Italy’s obligations under the preventive arm of the Stability and Growth Pact. In 2016, Italy should improve its structural balance by at least 0.1% of GDP, taking into account the allowed deviation based on the structural reform clause. However, under the no policy change assumption the Commission's forecast shows a deterioration of 0.2% of GDP as a result of which there is a risk of some deviation. Therefore, further measures will be needed. Based on its assessment of the Stability Programme and taking into account the Commission’s 2015 spring forecast, the Council is of the opinion that there is a risk that Italy will not comply with the provisions of the Stability and Growth Pact.

               (14)Despite its expected contribution to the debt-reduction effort, which is a key challenge for Italy, the implementation of the ambitious privatisation programme presented by the Italian authorities has incurred some delays in 2014; as a result, privatisation proceeds in 2014 amounted to 0.2 % of GDP, short of the target of 0.7 % per year.

               (15)Over the last year, Italy has taken significant steps to alleviate the tax burden on labour, which nevertheless remains high. The number and scope of tax expenditures, in particular VAT reduced rates, are still excessively high. On property taxation, only slow progress has been made on cadastral reform, under which it is particularly necessary to revise outdated cadastral values. In addition, the revision of environmental taxation and the removal of environmentally harmful subsidies have remained unaddressed. Italy has set up a Committee on environmental taxation. These various dimensions are covered by the enabling law for tax reform, whose implementation has, however, been delayed by a lack of legislative decrees. Despite some action in this area, the efficiency of the tax system in Italy is also undermined by persistently low and costly levels of tax compliance and high tax evasion (estimated by the government at EUR 91 billion annually or 5.6 % of GDP). The government has put forward measures to ensure the accuracy of tax returns that now need to be made fully operational.

               (16)Only limited steps have been achieved toward a lasting improvement in the efficiency and quality of public spending in all layers of the government. The budget savings legislated for, including at the regional and local levels, fall short of what was envisaged in the 2014 National Reform Programme. That the spending review is not yet an integral part of the budgetary process weighs on the overall, long-term efficiency of the exercise. Serious weaknesses continue to affect the management of EU funds, in particular in southern regions. A national strategic plan for ports and logistics is being prepared but only partial steps have been taken to upgrade the management of ports and their connections with the hinterland.

               (17)Italy’s public administration is still characterised by significant inefficiencies which weigh on the business environment and on the country’s capacity to implement reform effectively. Efforts to improve the institutional framework and the overall quality of the public administration have been made and are continuing. An ambitious reform of the Constitution, aimed particularly at clarifying the division of responsibilities between the various layers of government, is expected by the end of 2015. A comprehensive reform of the public administration addressing staff turnover, mobility and compensation is pending. Although a number of steps have been taken to foster transparency and empower the national anti-corruption authority, the revision of the statute of limitations — also considered by other international organisations as a pillar of the fight against corruption in Italy — has still not taken place. Important steps have been taken in recent years both to improve the supply of justice, by revising the geography of courts and creating specialised courts, and to reduce the demand for it, by promoting out-of-court dispute settlements. The length of proceedings remains a major problem and the reforms undertaken still need to bear fruit.

               (18)Since the end of 2008, the non-performing loan ratio of the Italian banking sector has sharply increased, mainly in relation to banks’ corporate exposures. So far the work-out rate of impaired assets has been too low, and their disposal has remained limited. This is partly due to the underdevelopment of Italy’s private distressed debt market. Recent legislation has addressed weaknesses in the corporate governance of the largest cooperative banks (banche popolari), but the role of foundations and the role of small cooperative banks (banche di credito cooperativo) are being addressed through agreements of a non-binding and self-regulatory nature. Further restructuring and consolidation of the Italian banking sector is warranted to improve the effectiveness of financial mediation and support the economic recovery.

               (19)A broad-ranging enabling law for reforming the labour market, the ‘Jobs Act’, was adopted in December 2014 and maintains the direction of previous reforms. It provides in particular for changes in employment protection legislation, the unemployment benefit system, the governance and functioning of active and passive labour market policies and the balance between family and working life. The effective implementation of this law will depend crucially on the necessary legislative implementing decrees being adopted. These address the use of wage supplementation schemes, the revision of contractual arrangements, work-life balance and the strengthening of active labour market policies. Second-level bargaining, which could help to better align wages with productivity and encourage the adoption of innovative solutions within firms, still concerns only a minority of companies. The January 2014 agreement laying down the procedures for measuring trade union representativeness in the manufacturing sector could help to promote second-level bargaining but is not yet operational. The labour market participation of women, although growing, remains among the lowest in the EU. In addition, youth unemployment reached almost 43 % in the third quarter of 2014, and the proportion of young people aged between 15 and 24 not in employment, education or training is the highest in the EU. Some of the causes are to be found in the education system, which is still characterised by below-EU average school outcomes, and relatively high early school leaving rates. Only 54.6 % of those aged 15-34 who graduated from the first and second stages of tertiary education within the previous three years were employed, against the EU average of 78.6 %. Italy has witnessed one of the highest increases in poverty and social exclusion rates in the EU, with a particular impact on children. Social assistance schemes remain fragmented and ineffective in tackling this challenge with resulting substantive cost inefficiencies.

               (20)A range of restrictions on competition still hamper the proper functioning of product and services markets. A law addressing certain barriers in a number of sectors,  including insurance, telecommunications and fuel distribution, is pending in Parliament. Significant barriers remain in other important sectors, including local public services, airports and ports, legal services, banking, pharmacies and healthcare. Significant weaknesses remain in public procurement despite wider use of centralised procurement. Local public services, which show clear signs of inefficiency, remain sheltered from competition, and this has adverse effects on public finances as well. Open tendering is used for a small proportion of contract awards, while the vast majority of contracts are done through in-house awards or similar procedures.

               (21)In the context of the European Semester, the Commission has carried out a comprehensive analysis of Italy’s economic policy and published it in the 2015 country report. It has also assessed the Stability Programme and the National Reform Programme and the follow-up given to the recommendations addressed to Italy in previous years. It has taken into account not only their relevance for sustainable fiscal and socio-economic policy in Italy but also their compliance with EU rules and guidance, given the need to strengthen the overall economic governance of the European Union by providing EU-level input into future national decisions. The recommendations under the European Semester are reflected in recommendations 1 to 6 below.

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

               (23)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 6 below.

               (24)In the context of the European Semester, the Commission has also carried out an analysis of the economic policy of the euro area as a whole. On the basis of this analysis, the Council has issued specific recommendations for the Member States whose currency is the euro. Italy should also ensure the full and timely implementation of these recommendations,

               HEREBY RECOMMENDS that Italy take action in 2015 and 2016 to:

               1.Achieve a fiscal adjustment of at least 0.25% of GDP towards the medium-term objective in 2015 and of 0.1% of GDP in 2016 by taking the necessary structural measures in both 2015 and 2016, taking into account the allowed deviation for the implementation of major structural reforms. Swiftly and thoroughly implement the privatisation programme and use windfall gains to make further progress towards putting the general government debt ratio on an appropriate downward path. Implement the enabling law for tax reform by September 2015, in particular the revision of tax expenditures and cadastral values and the measures to enhance tax compliance.

               2.Adopt the planned national strategic plan for ports and logistics, particularly to help promote intermodal transport through better connections. Ensure that the Agency for Territorial Cohesion is made fully operational so that the management of EU funds markedly improves.

               3.Adopt and implement the pending laws aimed at improving the institutional framework and modernising the public administration. Revise the statute of limitations by mid-2015. Ensure that the reforms adopted to improve the efficiency of civil justice help reduce the length of proceedings.

               4.Introduce binding measures by end-2015 to tackle remaining weaknesses in the corporate governance of banks, particularly the role of foundations, and take measures to accelerate the broad-based reduction of non-performing loans.

               5.Adopt the legislative decrees on the use of wage supplementation schemes, the revision of contractual arrangements, work-life balance and the strengthening of active labour market policies. Establish, in consultation with the social partners and in accordance with national practices, an effective framework for second-level contractual bargaining. As part of efforts to tackle youth unemployment, adopt and implement the planned school reform and expand vocationally-oriented tertiary education.

               6.Implement the simplification agenda for 2015-2017 to ease the administrative and regulatory burden. Adopt competition-enhancing measures in all the sectors covered by the competition law, and take decisive action to remove remaining barriers. Ensure that local public services contracts not complying with the requirements on in-house awards are rectified by no later than end-2015.

               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(2015) 262..

                     (4)
                  P8_TA(2015)0067, P8_TA(2015)0068, P8_TA(2015)0069..

                     (5)
                  OJ L 140, 27.5.2013, p. 11.

                     (6)
                  C(2014) 8806 final.

                     (7)
                  COM(2014) 902 final.

                     (8)
                  COM(2014) 904 final.

                     (9)
                  SWD(2015) 31 final.

                     (10)
                  The structural balance as recalculated by the Commission based on the information in the Stability Programme, following a commonly agreed methodology.

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


               EUROPEAN COMMISSION
            Brussels, 13.5.2015
            COM(2015) 265 final
            Recommendation for a
            COUNCIL RECOMMENDATION
            on the 2015 National Reform Programme of Luxembourgand delivering a Council opinion on the 2015 Stability Programme of Luxembourg

               Recommendation for a

               COUNCIL RECOMMENDATION

               on the 2015 National Reform Programme of Luxembourg

                  and delivering a Council opinion on the 2015 Stability Programme of Luxembourg

               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 26 March 2010, the European Council agreed to the Commission’s proposal to launch a new strategy for growth and jobs, Europe 2020, based on enhanced coordination of economic policies. The strategy focuses on the key areas where action is needed to boost Europe’s potential for sustainable growth and competitiveness.

               (2)On 13 July 2010, the Council, on the basis of the Commission’s proposals, adopted a recommendation on the broad guidelines for the economic policies of the Member States and the Union (2010 to 2014) and on 21 October 2010 it adopted a decision on guidelines for the employment policies of the Member States. Together these form the ‘integrated guidelines’ which Member States were invited to take into account in their national economic and employment policies.

               (3)On 8 July 2014, the Council adopted a recommendation on Luxembourg’s National Reform Programme for 2014 and delivered its opinion on Luxembourg’s updated Stability Programme for 2014. On 28 November 2014, in line with Regulation (EU) No 473/2013
                  4
               , the Commission presented its opinion on Luxembourg’s draft budgetary plan for 2015
                  5
               .

               (4)On 28 November 2014, the Commission adopted the Annual Growth Survey
                  6
               , marking the start of the 2015 European Semester of economic policy coordination. On the same day, on the basis of Regulation (EU) No 1176/2011, the Commission adopted the Alert Mechanism Report
                  7
               , in which it did not identify Luxembourg as one of the Member States for which an in-depth review would be carried out.

               (5)On 18 December 2014, the European Council endorsed the priorities for boosting investment, accelerating structural reforms and pursuing responsible growth-friendly fiscal consolidation.

               (6)On 26 February 2015, the Commission published its 2015 country report for Luxembourg
                  8
               . The country report assessed Luxembourg’s progress in addressing the countryspecific recommendations adopted on 8 July 2014.

               (7)On 30 April 2015, Luxembourg submitted its 2015 National Reform Programme and its 2015 Stability Programme. To take account of their interlinkages, the two programmes have been assessed at the same time.

               (8)Luxembourg is currently in the preventive arm of the Stability and Growth Pact. In its 2015 Stability Programme, the government plans to bring down the headline surplus from 0.6% of GDP in 2014 to 0.1% of GDP in 2015. Thereafter, it plans to raise it again to 0.9% of GDP in 2018. The government plans to remain at the medium-term objective – a structural surplus of 0.5% of GDP – throughout the programme period. According to the Stability Programme, the government plans to keep the government debt-to-GDP ratio well below the 60% reference value of the Treaty. The debt ratio is expected to hover around 24% throughout the programme period, peaking slightly above 24% in 2016 and declining to below 24% of GDP by 2019. The macroeconomic scenario underpinning these budgetary projections is favourable in 2015 and plausible thereafter. However, from 2016 onwards there are risks to the implementation of the budgetary measures. The Commission's 2015 spring forecast expects the structural balance to remain at the medium-term objective in 2015 and 2016. Based on its assessment of the Stability Programme and taking into account the Commission's 2015 spring forecast, the Council is of the opinion that Luxembourg is expected to comply with the provisions of the Stability and Growth Pact. The fiscal framework of Luxembourg has been significantly strengthened with the adoption of the medium-term budgetary framework and the setting-up of the fiscal council. Nevertheless, significant weaknesses should be tackled in terms of the regular publication of intra-annual fiscal statistics, which is an essential element for real-time monitoring of budgetary developments.

               (9)The expected drop in consumption tax revenues due to the change in regulation related to e-commerce highlights the fragility of at least one part of fiscal revenues. To better ensure their predictability, there is scope for further broadening the tax base and harmonising taxation, in particular by revisiting the currently low taxation on housing property, and making greater use of alternative sources, including environmental taxation. Preparatory work on a comprehensive tax reform (for entry into force in 2017) has been launched.

               (10)The long-term sustainability of public finances is threatened by the growth in pension expenditure, despite recent reform of the system, and by the steady increase in long-term care outlays. Long-term care insurance is projected to run a deficit in 2015
                  9
                and its reserves are expected to gradually reduce with the result that already in 2017 they will fall below the legal minimum of 10 % of expenses. Some measures with saving potential were adopted in the 2015 budget
                  10
               . However, the planned reform of long-term care insurance, which aims at providing people in need of longterm care with an adequate level of services and securing the corresponding financing, has not yet been translated into legislation. The 2012 pension system reform was not ambitious enough, as it addressed only partially the large gap between the statutory and the effective retirement age. Several avenues for early retirement persist. The participation of older workers in the labour market remains very low compared to other EU countries. Draft legislation linked to the pension reform and amending the Code of Work (Age Pact) has been prepared. It comprises a package of measures that aims to keep older workers in employment.

               (11)The Luxembourg economy is characterised by a sizeable divergence of labour productivity across economic sectors, with productivity in the financial sector twice as high as that in the non-financial sectors. This implies that greater variation in sectoral real wages, in line with sectoral labour productivity, could support the reallocation of labour towards emerging competitive sectors or sectors that are suffering from costcompetitiveness losses. Barriers remain to the necessary sectoral wage adjustments in the long term.

               (12)Despite generally well-performing labour markets and high tertiary education attainment rates, employment rates are comparatively low for older workers, women and low-skilled young people. There are institutional obstacles to effective activation policies. Within the public employment service, an important reform is advancing to provide individual guidance to jobseekers, but this is not yet complete. The draft vocational education and training reform and the secondary school reform to improve educational outcomes, notably for those with a disadvantaged socio-economic background, have not been adopted. The announced measures on maternity and education allowances and the planned reform of parental leave can be expected to contribute to increasing the labour market participation of women. Disincentives for second-earners to work arise from the ‘joint taxation’ system and from the design of the social benefit system. Despite high tertiary education attainment rates, education outcomes remain unsatisfactory, and alleviating the situation of people from migrant backgrounds and low-skilled young people remains difficult. Labour market supply challenges related to institutional factors and to the design of the social benefit system persist and are the source of labour market problems.

               (13)In the context of the European Semester, the Commission has carried out a comprehensive analysis of Luxembourg’s economic policy and published it in the 2015 country report. It has also assessed the Stability Programme and the National Reform Programme and the follow-up given to the recommendations addressed to Luxembourg in previous years. It has taken into account not only their relevance for sustainable fiscal and socio-economic policy in Luxembourg but also their compliance with EU rules and guidance, given the need to strengthen the overall economic governance of the European Union by providing EU-level input into future national decisions. The recommendations under the European Semester are reflected in recommendations 1 to 3 below.

               (14)In the light of this assessment, the Council has examined Luxembourg’s Stability Programme, and is of the opinion
                  11
                that Luxembourg complies with the Stability and Growth Pact.

               (15)In the context of the European Semester, the Commission has also carried out an analysis of the economic policy of the euro area as a whole. On the basis of this analysis, the Council has issued specific recommendations for the Member States whose currency is the euro. Luxembourg should also ensure the full and timely implementation of these recommendations,

               HEREBY RECOMMENDS that Luxembourg take action in 2015 and 2016 to:

               1.Broaden the tax base, in particular on consumption, recurrent property taxation and environmental taxation.

               2.Close the gap between the statutory and effective retirement age, by limiting early retirement and by linking statutory retirement age to life expectancy.

               3.Reform the wage-setting system, in consultation with the social partners and in accordance with national practices, with a view to ensuring that wages evolve in line with productivity, in particular at sectoral level.

               Done at Brussels,

                     For the Council

                     The President

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

                     (2)
                  COM(2015) 265.

                     (3)
                  P8_TA(2015)0067, P8_TA(2015)0068, P8_TA(2015)0069.

                     (4)
                  OJ L 140, 27.5.2013, p. 11.

                     (5)
                  C(2014) 8808 final.

                     (6)
                  COM(2014) 902.

                     (7)
                  COM(2014) 904.

                     (8)
                  SWD(2015) 35 final/2.

                     (9)
                  CNS, Budget de l’Assurance Dépendance, exercise 2015, available at

                     http://cns.lu/files/publications/Budget_AD_2015.pdf

                  .

                     (10)
                  Measures 255 and 256 of the 2015 Budget, available at

                     http://www.budget.public.lu/

                  .

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


               EUROPEAN COMMISSION
            Brussels, 13.5.2015
            COM(2015) 267 final
            Recommendation for a
            COUNCIL RECOMMENDATION
            on the 2015 National Reform Programme of Maltaand delivering a Council opinion on the 2015 Stability Programme of Malta

               Recommendation for a

               COUNCIL RECOMMENDATION

               on the 2015 National Reform Programme of Malta

                  and delivering a Council opinion on the 2015 Stability Programme of Malta

               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 26 March 2010, the European Council agreed to the Commission’s proposal to launch a new strategy for growth and jobs, Europe 2020, based on enhanced coordination of economic policies. The strategy focuses on the key areas where action is needed to boost Europe’s potential for sustainable growth and competitiveness.

               (2)On 13 July 2010, the Council, on the basis of the Commission’s proposals, adopted a recommendation on the broad guidelines for the economic policies of the Member States and the Union (2010 to 2014) and on 21 October 2010 it adopted a decision on guidelines for the employment policies of the Member States. Together these form the ‘integrated guidelines’ which Member States were invited to take into account in their national economic and employment policies.

               (3)On 8 July 2014, the Council adopted a recommendation on Malta’s National Reform Programme for 2014 and delivered its opinion on Malta’s updated Stability Programme for 2014. On 28 November 2014, in line with Regulation (EU) No 473/2013
                  4
               , the Commission presented its opinion on Malta’s draft budgetary plan for 2015
                  5
               .

               (4)On 28 November 2014, the Commission adopted the Annual Growth Survey
                  6
               , marking the start of the 2015 European Semester of economic policy coordination. On the same day, on the basis of Regulation (EU) No 1176/2011, the Commission adopted the Alert Mechanism Report
                  7
               , in which it did not identify Malta as one of the Member States for which an in-depth review would be carried out.

               (5)On 18 December 2014, the European Council endorsed the priorities for boosting investment, accelerating structural reforms and pursuing responsible growth-friendly fiscal consolidation.

               (6)On 26 February 2015, the Commission published its 2015 country report for Malta
                  8
               . This assessed Malta’s progress in addressing the country-specific recommendations adopted on 8 July 2014.

               (7)On 17 April 2015, Malta submitted its 2015 National Reform Programme and on 30 April 2015 its 2015 Stability Programme. To take account of their interlinkages, the two programmes have been assessed at the same time.

               (8)Malta is currently in the [preventive] arm of the Stability and Growth Pact [following the abrogation of the Excessive Deficit Procedure in June 2015]. In its 2015 Stability Programme, the government plans a gradual improvement of the headline deficit to 1.6% of GDP in 2015 and further to 0.2% of GDP in 2018. Based on the Commission's 2015 spring forecast, the excessive deficit can be considered to have been corrected in 2014. According to the stability programme, the government plans to meet the medium-term objective – a balanced budgetary position in structural terms – by 2019, one year after the programme period. According to the Stability Programme, the government debt-to-GDP ratio is expected to gradually decline to 61.2% in 2018. The macroeconomic scenario underpinning these budgetary projections is plausible.  There appears to be a risk of some deviation from the required adjustment of 0.6% of GDP towards the medium-term objective in both 2015 and 2016. In 2015, the improvement in the structural balance is forecast to be 0.1% of GDP below the requirement. While the adjustment projected for 2016 is in line with the requirement, there is a risk of some deviation over 2015 and 2016 taken together. Measures to support the planned deficit targets from 2016 onwards have not been sufficiently specified. Therefore, further measures will be needed in 2015 and 2016. Based on its assessment of the Stability Programme and taking to account the Commission's 2015 spring forecast, the Council is of the opinion that Malta is expected to broadly comply with the provisions of the Stability and Growth Pact.

               (9)The sustainability of Malta’s public finances is at risk in the long term, notably in view of a projected increase in age-related expenditure. In the pension system, the legislated increase in the statutory retirement age is being introduced at a very slow pace and there is no specific link between the statutory retirement age and life expectancy. Malta has addressed the challenges of its pensions system through labour market measures and the introduction of thirdpillar pensions, and has made further policy announcements in its national reform programme, but measures aimed at substantially improving the sustainability and adequacy of the system remain to be announced and implemented. Implementation of the 2014 national health systems strategy has started, with the aim of maximising the efficiency of the healthcare system while pursuing its financial sustainability. This needs to be monitored.

               (10)Malta has put in place measures to help its population manage their work and family life balance, in particular through fiscal incentives, the continuing provision of free childcare centres and the introduction of flexible working arrangements. At the same time, the increased demand for informal long-term care and a lack of suitable skills may be preventing older women from seeking work in the labour market. A national literacy strategy and an early schoolleaving strategy were published in June 2014. Work is also ongoing on aligning educational outcomes with market needs, though tangible results are yet to be seen.

               (11)Efforts have been made to provide a framework for the use of venture capital funds and to facilitate access to capital markets, notably through the review of the start-up scheme Malta Enterprise and the announced seed investment programme. Work is also ongoing on setting up a development bank. This needs to be monitored.

               (12)Malta’s efforts to fight tax evasion and encouraging tax compliance through the pursuit of a streamlined revenue collection framework go in the right direction. While work is ongoing, there is a need for concrete measures to accelerate the uptake of electronic payments.

               (13)The length of public procurement procedures has been significantly reduced through the introduction of mandatory e-procurement and the strengthening of the relevant government departments. It will be further reduced through the implementation of announced measures, notably the recruitment of additional staff and the introduction of a tracking system. Transport costs play a substantial role in Malta’s economy. A reform of transport has recently been launched, but the government still needs to present a comprehensive transport strategy.

               (14)The National Reform Programme specifies measures to reform the justice system beyond those identified in the country report. As a result, Malta has made some progress in addressing the 2014 countryspecific recommendation on increasing the efficiency of the judiciary. Also, a draft bill is being finalised. When it has been enacted and implemented, it is expected to improve further the efficiency of the judicial system, in particular through the digitisation of court proceedings and the promotion of alternative dispute resolution mechanisms.

               (15)In the context of the European Semester, the Commission has carried out a comprehensive analysis of Malta’s economic policy and published it in the 2015 country report. It has also assessed the Stability Programme and the National Reform Programme and the follow-up given to the recommendations addressed to Malta in previous years. It has taken into account not only their relevance for sustainable fiscal and socio-economic policy in Malta but also their compliance with EU rules and guidance, given the need to strengthen the overall economic governance of the European Union by providing EU-level input into future national decisions. The recommendations under the European Semester are reflected in recommendations 1 to 4 below.

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

               (17)In the context of the European Semester, the Commission has also carried out an analysis of the economic policy of the euro area as a whole. On the basis of this analysis, the Council has issued specific recommendations for the Member States whose currency is the euro. Malta should also ensure the full and timely implementation of these recommendations,

               HEREBY RECOMMENDS that Malta take action in 2015 and 2016 to:

               1.Following correction of the excessive deficit, achieve a fiscal adjustment of 0.6 % of GDP towards the medium-term objective in 2015 and 2016.

               2.Take measures to improve basic skills and further reduce early schoolleaving by promoting the continuous professional development of teachers.

               3.Accelerate the increase in the statutory retirement age and link it to life expectancy.

               4.Improve small and micro-enterprises’ access to finance, in particular through nonbank instruments.

               Done at Brussels,

                     For the Council

                     The President

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

                     (2)
                  COM(2015) 267.

                     (3)
                  P8_TA(2015)0067, P8_TA(2015)0068, P8_TA(2015)0069..

                     (4)
                  OJ L 140, 27.5.2013, p. 11.

                     (5)
                  C(2014) 8809 final.

                     (6)
                  COM(2014) 902.

                     (7)
                  COM(2014) 904.

                     (8)
                  SWD(2015) 37 final.

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


               EUROPEAN COMMISSION
            Brussels, 13.5.2015
            COM(2015) 266 final
            Recommendation for a
            COUNCIL RECOMMENDATION
            on the 2015 National Reform Programme of Hungaryand delivering a Council opinion on the 2015 Convergence Programme of Hungary

               Recommendation for a

               COUNCIL RECOMMENDATION

               on the 2015 National Reform Programme of Hungary

                  and delivering a Council opinion on the 2015 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 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 26 March 2010, the European Council agreed to the Commission’s proposal to launch a new strategy for growth and jobs, Europe 2020, based on enhanced coordination of economic policies. The strategy focuses on the key areas where action is needed to boost Europe’s potential for sustainable growth and competitiveness.

               (2)On 13 July 2010, the Council, on the basis of the Commission's proposals, adopted a recommendation on the broad guidelines for the economic policies of the Member States and the Union (2010 to 2014) and on 21 October 2010 it adopted a decision on guidelines for the employment policies of the Member States. Together these form the ‘integrated guidelines’ which Member States were invited to take into account in their national economic and employment policies.

               (3)On 8 July 2014, the Council adopted a recommendation on Hungary’s national reform programme for 2014 and delivered its opinion on Hungary’s updated convergence programme for 2014.

               (4)On 28 November 2014, the Commission adopted the Annual Growth Survey
                  5
               , marking the start of the 2015 European Semester of economic policy coordination. On the same day, on the basis of Regulation (EU) No 1176/2011, the Commission adopted the Alert Mechanism Report
                  6
               , in which it identified Hungary as one of the Member States for which an in-depth review would be carried out.

               (5)On 18 December 2014, the European Council endorsed the priorities for boosting investment, accelerating structural reforms and pursuing responsible growth-friendly fiscal consolidation.

               (6)On 26 February 2015, the Commission published its 2015 country report for Hungary
                  7
               . This assessed Hungary’s progress in addressing the country-specific recommendations adopted on 8 July 2014. The country report also includes results of the in-depth review under Article 5 of Regulation (EU) No 1176/2011. The Commission’s analysis leads it to conclude that Hungary is experiencing macroeconomic imbalances which require decisive policy action and monitoring. Attention should be given, in particular, to the risks stemming from the net international position (which, despite some progress in the rebalancing of external accounts, is still highly negative), the high level of public debt, the significant regulatory burden on the financial sector and the high level of non-performing loans, which make deleveraging difficult.

               (7)On 30 April 2015, Hungary submitted its 2015 national reform programme and its 2015 convergence programme. To take account of their interlinkages, the two programmes have been assessed at the same time.

               (8)Hungary is currently in the preventive arm of the Stability and Growth Pact and subject to the transitional debt rule for 2013-2015. In its 2015 Convergence Programme, the government plans to gradually improve the headline deficit to 2.4% of GDP in 2015 and further to 1.6% in 2018, and that the medium-term objective – a structural deficit of 1.7% of GDP − is reached by 2017. According to the Convergence Programme, the government plans to gradually reduce the debt-to-GDP ratio to 74.9% in 2015 and to 68.9% in 2018. The macroeconomic scenario underpinning these budgetary projections is broadly plausible until 2016 and becomes favourable thereafter. Measures to support the planned deficit targets from 2016 onwards have not been sufficiently specified, in particular beyond 2016. Based on the Commission's 2015 spring forecast, both the structural balance and net expenditure growth point to a risk of a significant deviation from the required adjustment path towards the medium-term objective in 2015 and 2016. Therefore, further measures will be needed in 2015 and 2016. At the same time, Hungary is forecast to comply with the transitional debt rule in 2015 and, following the end of the transition period, the debt reduction benchmark in 2016. Based on its assessment of the Convergence Programme and taking to account the Commission's 2015 spring forecast, the Council is of the opinion that there is a risk that Hungary will not comply with the provisions of the Stability and Growth Pact. The country's fiscal governance system would benefit from the rigorous application of the already legislated medium-term budgetary framework and from assigning a more prominent analytical role to the Fiscal Council.

               (9)The banking sector's main challenges persisted over the last 12 months, in particular the challenges of restoring market-based lending through better capital accumulation possibilities and more efficient portfolio cleaning. Since mid-2013, bank lending has relied mainly on subsidised schemes, including for about 40% of lending to SMEs. The combination of significant tax and regulatory burdens and a high proportion of problematic loans does not provide banks with the necessary incentives to increase their normal, non-subsidised lending activity. Hungary’s external exposure and the related financial stability risks have decreased considerably due to the recent conversion of foreign exchange denominated mortgages into local currency. At the same time, foreign-exchange indebtedness of households is still the major reason behind the high share of non-performing credit. The majority of the foreign exchange relief schemes adopted to date have not been targeted at distressed borrowers, with the exception of that of the national asset management agency in the household sector, and it is unlikely to resolve the problem of non-performing loans. Efficient portfolio cleaning is hindered by, inter alia, the lack of foreclosures and the inefficiency of in-court and out-of-court resolution proceedings. An agreement recently concluded with the European Bank for Reconstruction and Development includes a number of commitments by the government to tackle the challenges in the financial sector, including, inter alia, by gradually reducing the bank levy and respecting the prior consultation principle. Implementing rigorously these measures would be conducive to returning to a sound and predictable financial policy framework. Over the last year, Hungary has repeatedly extended its direct ownership in the banking sector. State intervention in the banking sector, carried out via increased direct ownership, may entail significant fiscal risks, even where it is only temporary.

               (10)Recent changes in the area of taxation (the introduction of new taxes and increases to existing taxes) have seen a return to the earlier trend of increasing the weight of sector-specific corporate taxes. Both the unpredictability and selectivity of these changes give rise to distortions to investment across sectors. Although a number of new measures have been introduced, the tax burden on some groups of low-income earners has remained among the highest in the EU, with single people especially affected. There appears to be scope for further shifting of the tax burden towards more growth-friendly sources of revenue. Various measures introduced over the last year are helping to tighten up systems to fight tax evasion. Following the successful completion of the programme linking retail outlets’ cash registers to an online system, it is now planned to extend the programme to a number of market services in 2015. The threshold above which an itemised VAT declaration must be submitted was lowered. A system for electronic roadcargo inspection was introduced in 2015, the main aim of which is to reduce carousel VAT fraud. There is, however, still significant scope to improve the administrative efficiency of tax collection and to reduce taxation compliance costs, especially for small and medium-sized enterprises.

               (11)Overall, the Hungarian labour market improved in 2014, with employment recovering in the private sector thanks to the economic upturn. Significant challenges remain with regard to the public work scheme, which has been significantly extended since 2011. The scheme appears to be an inefficient and ineffective active labour market policy, that risks distorting the proper functioning of the labour market. The same resources if spent differently could potentially be more beneficial to the Hungarian economy. The budgetary cost of the scheme has quadrupled over the last four years, to 0.8 % of GDP, and is expected to double again between now and 2018, preventing resources from being used for essential improvements to training and to services required to facilitate participation in the open labour market. There is a risk of public works of such a magnitude creating significant ‘lock-in’ effects and permanently replacing the system of welfare benefits for the lowskilled. The scheme is not adequately coordinated with other active labour market policy measures and does not sufficiently promote the reintegration of participants into the open labour market. The rate of successful exit from the public work scheme was only 13.8% in the first half of 2014, which suggests that public works do not sufficiently support the reintegration of participants into the labour market. Although the scheme is targeted to the long-term unemployed and low skilled, in 2013 47% participants had secondary or tertiary education. The period of eligibility for unemployment benefits (three months) has not been increased and thus does not match the average time (over a year) that job seekers need to find employment. A number of programmes have been implemented to improve the inclusion of Roma in the labour market and a monitoring system has been put in place. Streamlined, coordinated policy measures, capable of significantly reducing poverty, are, however, still lacking. Poverty indicators, although suggesting moderately improving trends, still show poverty to be at a worryingly high level, especially among Roma and children. Gaps remain in both the adequacy and coverage of social assistance.

               (12)Barriers introduced in recent years to market entry in the service sector have not been removed; rather, further barriers were introduced in 2014, hampering the efficient allocation of economic resources, increasing uncertainty for investors and restricting competition. The new barriers include, for example, the requirement for all retail establishments to be centrally authorised. The corruption and lack of transparency affecting public administration, decision-making and public procurement remain a cause of concern. The low level of competition in public procurement and the extensive use of direct awarding of contracts both persisted in 2014. A reorganisation of public procurement administration was undertaken in 2014, the results of which are to be closely monitored. In November 2014, Hungary submitted an action plan for transposing the new public procurement directives and promoting competition and transparency. Several measures to improve the anti-corruption framework have also been announced.

               (13)Although some measures have been implemented to support the education of Roma children, a systematic approach to promoting inclusive mainstream education is yet to be developed. The proportion of Roma children attending schools or classes where the majority of pupils are Roma remains high, and the educational attainment of Roma pupils is lower than the national average. Teachers are not trained to provide sufficient support to disadvantaged groups. More needs to be done to improve the transition between different forms and stages of education, and from education to the labour market. The planned changes to the allocation of state-funded places in secondary education and the increasing admission requirements for higher education may further limit the opportunities for transition between different forms of education, especially for disadvantaged groups. Hungary has the highest drop-out rate in higher education in the EU, at 47 %. The government announced the adoption of a national higher education strategy in December 2014. The strategy included raising the national target for tertiary attainment to 34 %. Overall, recent measures have failed to improve the participation of disadvantaged groups in higher education, and to tackle non-completion of education. The current funding system does not guarantee equitable access.

               (14)In the context of the European Semester, the Commission has carried out a comprehensive analysis of Hungary’s economic policy and published it in the 2015 country report. It has also assessed the Convergence Programme and the 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 EU rules and guidance, given the need to strengthen the overall economic governance of the European Union by providing EU-level input into future national decisions. The recommendations under the European Semester are reflected in recommendations 1 to 5 below.

               (15)In the light of this assessment, the Council has examined Hungary’s convergence programme, and its opinion
                  8
                is reflected in particular in recommendation 1 below.

               (16)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 3 below,

               HEREBY RECOMMENDS that Hungary take action in 2015 and 2016 to:

               1.Achieve a fiscal adjustment of 0.5% of GDP towards the medium-term objective in 2015 and of 0.6% of GDP in 2016.

               2.Take measures to restore normal lending to the real economy and remove obstacles to market-based portfolio cleaning; considerably reduce the contingent liability risks linked to increased state ownership in the banking sector.

               3.Reduce distortive sector-specific taxes; remove the unjustified entry barriers in the service sector, including in the retail sector; reduce the tax wedge for low-income earners, including by shifting taxation to areas less distortive to growth; continue to fight tax evasion, reduce compliance costs and improve the efficiency of tax collection. Strengthen structures in public procurement that promote competition and transparency and further improve the anti-corruption framework.

               4.Reorient the budget resources allocated to the public work scheme to active labour market measures to foster integration into the primary labour market; and improve the adequacy and coverage of social assistance and unemployment benefits.

               5.Increase the participation of disadvantaged groups in particular Roma in inclusive mainstream education, and improve the support offered to these groups through targeted teacher training; strengthen measures to facilitate the transition between different stages of education and to the labour market, and improve the teaching of essential competences.

               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(2015) 266.

                     (4)
                  P8_TA(2015)0067, P8_TA(2015)0068, P8_TA(2015)0069.

                     (5)
                  COM (2014) 902

                     (6)
                  COM(2014) 904 final

                     (7)
                  SWD(2015) 36 final

                     (8)
                  Under Article 9(2) of Council Regulation (EC) No 1466/97.


               EUROPEAN COMMISSION
            Brussels, 22.5.2017
            COM(2017) 525 final
            Recommendation for a
            COUNCIL RECOMMENDATION
            on the 2017 National Reform Programme of Finlandand delivering a Council opinion on the 2017 Stability Programme of Finland

               Recommendation for a

               COUNCIL RECOMMENDATION

               on the 2017 National Reform Programme of Finland

                  and delivering a Council opinion on the 2017 Stability Programme of Finland

               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 16 November 2016, the Commission adopted the Annual Growth Survey,
                  5
                marking the start of the 2017 European Semester of economic policy coordination. The priorities of the Annual Growth Survey were endorsed by the European Council on 9-10 March 2017. On 16 November 2016, on the basis of Regulation (EU) No 1176/2011, the Commission adopted the Alert Mechanism Report,
                  6
                in which it identified Finland 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. That Recommendation was endorsed by the European Council on 9-10 March 2017 and adopted by the Council on 21 March
                  7
               .

               (2)As a country whose currency is the euro and in view of the close interlinkages between the economies in the economic and monetary union, Finland should ensure the full and timely implementation of the Recommendation for the euro area which is reflected in recommendations 1 to 2 below.

               (3)The 2017 country report for Finland
                  8
                was published on 22 February 2017. It assessed Finland’s progress in addressing the country-specific recommendations adopted by the Council on 12 July 2016, the follow-up given to the recommendations adopted in previous years and Finland’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 22 February 2017.
                  9
                The Commission’s analysis leads it to conclude that Finland is not experiencing macroeconomic imbalances.

               (4)On 28 April 2017, Finland submitted its 2017 National Reform Programme and its 2017 Stability Programme. To take account of their interlinkages, the two programmes have been assessed at the same time.

               (5)The relevant country-specific recommendations have been taken into account in the Member States' programmes for the European Structural and Investment Funds (ESI Funds) covering the 2014-2020 period. As foreseen in the legislation governing the ESI Funds,
                  10
                where it is necessary to support the implementation of relevant country-specific recommendations, the Commission may request a Member State to review and amend its relevant ESI Funds programmes. The Commission has provided further guidelines on the application of those rules.
                  11

               (6)Finland is currently in the preventive arm of the Stability and Growth Pact and subject to the debt rule. In its 2017 Stability Programme, the government plans a deterioration in the headline balance from -1.9% of GDP in 2016 to -2.3% in 2017, followed by steady improvement thereafter, reaching -0.2% in 2020. The medium-term budgetary objective — a deficit of 0.5% of GDP in structural terms — is projected to be met from 2019 onwards. However, based on the recalculated
                  12
                structural balance, the medium-term budgetary objective will only be achieved as of 2020. According to the Stability Programme, the general government debt-to-GDP ratio is expected to peak at 64.7% in 2017 and to decline to 62.7% in 2020. The macroeconomic scenario underpinning these budgetary projections appears to be favourable especially regarding 2018 and 2019. The scenario is based on an expectation that employment would expand by close to 2% per year in 2018-2019 which is significantly more than the annual average increase over the past 10 years (+0.2%).

               (7)On 22 May 2017, the Commission issued a report under Article 126(3) of the TFEU, as Finland's general government debt exceeded the 60%-of-GDP reference value. The report concluded, following an assessment of all the relevant factors, that the debt criterion should be considered as complied with.

               (8)The 2017 Stability Programme indicates that the budgetary impact of the exceptional inflow of refugees is significant and provides adequate evidence of the scope and nature of these additional budgetary costs. According to the Stability Programme, the costs were 0.34% of GDP in 2016. According to the Commission, the eligible additional expenditure in 2016 amounted to 0.17% of GDP. The provisions set out in Article 5(1) and Article 6(3) of Regulation (EC) No 1466/97 cater for this additional expenditure, in that the inflow of refugees is an unusual event, its impact on Finland's public finances is significant and sustainability would not be compromised by allowing for a temporary deviation from the adjustment path towards the medium-term budgetary objective. Therefore, the required adjustment towards the medium-term budgetary objective for 2016 has been reduced to take into account these costs. According to the 2017 Stability Programme, the costs related to the exceptional inflow of refugees are projected to decrease by 0.15% of GDP in 2017. The Commission will make a final assessment on 2017, including on the eligible amounts, in spring 2018 on the basis of observed data as provided by the authorities.

               (9)In its 2017 Draft Budgetary Plan,
                  13
                Finland requested to avail of the flexibility under the preventive arm pursuant to the "Commonly agreed position on Flexibility within the Stability and Growth Pact" endorsed by the ECOFIN Council in February 2016 in view of the planned implementation of major structural reforms with a positive impact on the long-term sustainability of public finances (request for 0.5% of GDP flexibility) and national expenditures on projects co-financed by the EU under the European Structural and Investment Funds (request for 0.1% of GDP flexibility).

               (10)The request for flexibility for structural reforms refers to reforms in the labour market, in particular the Competitiveness Pact and the pension reform. For more than 90% of employees, the Pact freezes wages for 12 months, and permanently increases the annual working time by 24 hours without compensation. In addition, employees will permanently pay a larger proportion of the contributions to social security. To compensate for the wage freeze and the increased cost burden for employees, the government lowered the taxes on earned income permanently as from 2017. The pension reform will raise the lowest statutory retirement age from 63 to 65 by 2027; thereafter, the retirement age will be linked to life expectancy. Both reforms came into force in 2017. As a result of the Competitiveness Pact, improved cost competitiveness could lead to higher employment and an increase in real GDP of some 1.5%-2% as presented in the 2017 draft budgetary plan. Given the nature of the measure, there are uncertainties surrounding the estimates for employment or GDP, but they seem to be broadly plausible. Therefore, these reforms will have a positive impact on the sustainability of public finances. Furthermore, the results of the detailed assessment of the output gap estimate for 2017 carried out on the basis of the Commission 2017 spring forecast imply that Finland meets the minimum benchmark in 2017. As an additional assurance to safeguard the 3%-of-GDP deficit reference value, Finland's government has publicly committed to take additional measures in 2017, if necessary, to ensure compliance with the fiscal rules, including the observance of the 3%-of-GDP reference value of the Treaty.
                  14
                On this basis, Finland can currently be assessed as qualifying for the requested temporary deviation of 0.5% of GDP in 2017, provided that it adequately implements the agreed reforms, which will be monitored under the European Semester.

               (11)Regarding the request for flexibility for additional investment, the information provided by the 2017 Stability Programme appears to confirm that Finland's temporary deviation from the adjustment path towards the medium-term budgetary objective in 2017 is being effectively used for the purposes of increasing investments. Therefore, and also taking into account the above-mentioned elements regarding the minimum benchmark and that the detailed assessment of the output gap estimate confirms that Finland is experiencing bad economic times, Finland can currently be assessed as qualifying for a temporary deviation of 0.1% of GDP in 2017 to take account of national investment expenditure in projects co-financed by the EU. The Commission will carry out an ex post assessment in order to verify the actual amount of the national expenditure in co-financed investment projects and of the related allowance.

               (12)On 12 July 2016, the Council recommended Finland to achieve an annual fiscal adjustment of at least 0.6% of GDP towards the medium-term budgetary objective in 2017. While ensuring a continued respect of the minimum benchmark (i.e. a structural deficit of 1.1% of GDP), the Commission 2017 spring forecast indicates scope for an additional temporary deviation of 0.6% of GDP in 2017 under the structural and investment clauses. On that basis, the structural balance would be allowed to deteriorate by 0.5% of GDP in 2017. Based on the Commission 2017 spring forecast, Finland would be compliant with the preventive arm requirements. If the current updated estimate of the decrease of the budgetary impact in 2017 stemming from the exceptional inflow of refugees were taken into account, the conclusion of the overall assessment would not change. For 2018, Finland should achieve its MTO, taking into account the allowance in relation to unusual events (granted for 2016) as well as the allowances related to the implementation of the structural reforms and investments (granted for 2017).
                  15
                Based on the Commission 2017 spring forecast, this is consistent with a maximum nominal growth rate of net primary government expenditure
                  16
                of 1.6%, corresponding to an annual structural adjustment of 0.1% of GDP. Under unchanged policies, Finland would be compliant with the preventive arm requirements in 2018. If the current updated estimate of the decrease of the budgetary impact in 2017 stemming from the exceptional inflow of refugees were taken into account, the conclusion of the overall assessment would not change. At the same time, Finland is prima facie forecast not to comply with the debt reduction benchmark in 2017 and 2018. Overall, the Council is of the opinion that Finland needs to stand ready to take further measures to ensure compliance.

               (13)Due to an ageing population and a declining workforce, expenditure on pensions, health and long-term care is set to increase from 23 % of GDP in 2013 to 27 % by 2030. In January 2017, a pension reform entered into force that will raise the lowest statutory retirement age from 63 to 65 by 2027 and will link the statutory retirement age to changes in life expectancy. The costs of social and healthcare services, currently a responsibility of the municipalities, amount to 10 % of GDP. Without a reform of the system, that expenditure is forecast to grow by 2.4 % annually in the coming years in nominal terms and increase as a share of GDP. The reforms’ main aims include the reduction of the long-run sustainability gap in public finances through better control of the costs. This will be achieved through the integration of services, larger entities as providers of services and digitalisation. The first batch of legislative proposals for the social and healthcare service reforms was presented to the parliament in March 2017. These laws will establish the legal framework for the 18 new counties that will take over responsibility for the social and healthcare services from the municipalities as from 2019. The legislative proposals for the most controversial parts of the reform, in particular on the patients’ freedom to choose their service provider, still need to be finalised because of the reform being implemented from 2019 as planned.

               (14)Wage increases have been moderate over recent years. The average year-on-year increase in negotiated wages was 0.7 % in 2014-2016. Due to weak growth of labour productivity, cost competitiveness has improved only gradually. In 2016 the social partners signed the Competitiveness Pact aimed at improving Finland’s cost competitiveness in a stepwise manner in 2017. For more than 90 % of employees, the Pact freezes wages for 12 months and increases annual working time permanently by 24 hours without additional compensation. In addition, employees will permanently pay a larger proportion of social contributions. These measures are expected to support the expansion of exports and employment in the coming years. The upcoming wage negotiation round in the latter half of 2017 will be crucial to secure these expected positive effects as the Pact did not fully close the cost competitiveness gap to peer economies.

               (15)The labour market situation started to improve gradually in 2016, but challenges remain. Employment in the manufacturing sector declined by 21 % between 2008 and 2015. Other sectors such as construction, real estate and healthcare, are showing signs of labour shortages. This highlights the need for targeted active labour market policies and continued investments in adult learning and in vocational training to enable occupational mobility. The open vacancies-to-employment ratio was in 2016 almost as high as in 2007, while the unemployment rate was two percentage points higher. This may reflect mismatches between labour demand and supply, low attractiveness of certain vacant jobs or limited incentives to take up work. Continued efforts are needed to ensure better labour market outcomes for the inactive, especially those in the 25-39 age group, the long-term unemployed and migrants. Ensuring improved social and labour market outcomes of people with migrant background will also require continued investments in their education.

               (16)In terms of activation, the complex benefits system with its different types of allowances can result in significant inactivity and low wage traps, as well as bureaucratic problems on reinstating of benefits. It would be crucial to address these traps. To increase the incentives to accept job offers, the obligation for the unemployed to accept a job offer and the obligation to participate in activation schemes have been tightened. In addition, the duration of earnings-related unemployment benefits was reduced. Positive incentives, such as allowing the use of basic unemployment benefit as mobility and wage subsidies to activate jobseekers, were introduced. Further increased incentives to accept work could be complemented with the elimination of existing bureaucratic barriers to take up a job or to become an entrepreneur.

               (17)Non-cost competitiveness acts as a drag on export performance and may limit the attractiveness of Finland for foreign investors. Structural change is unfolding, but has slowed down recently. Progress has been made in opening up services sectors such as retail trade and transport to competition, and proposals have been put forward to increase competition in other domestic service sectors. While international comparisons rank Finland among the leading countries in the world in terms of its business environment and investment appeal, the existing stock of inward investments in Finland is below the EU average when compared to the size of the economy.

               (18)In the context of the European Semester the Commission has carried out a comprehensive analysis of Finland’s economic policy and published it in the 2017 country report. It has also assessed the Stability Programme and the National Reform Programme and the follow-up given to the recommendations addressed to Finland in previous years. It has taken into account not only the relevance of the programmes and follow-up measures for sustainable fiscal and socioeconomic policy in Finland, but also their compliance with EU rules and guidance, given the need to strengthen the EU’s overall economic governance by providing EU-level input into future national decisions.

               (19)In the light of this assessment, the Council has examined the Stability Programme and its opinion
                  17
                is reflected in particular in recommendation 1 below,

               HEREBY RECOMMENDS that Finland take action in 2017 and 2018 to:

               1.Pursue its fiscal policy in line with the requirements of the preventive arm of the Stability and Growth Pact, which implies to achieve its medium term budgetary objective in 2018, taking into account the allowances linked to unusual events, the implementation of the structural reforms and investments for which a temporary deviation is granted. Ensure timely adoption and implementation of the administrative reform to improve cost-effectiveness of social and healthcare services.

               2.Promote the further alignment of wages with productivity developments, fully respecting the role of social partners. Take targeted active labour market policy measures to address employment and social challenges, provide incentives to accept work and promote entrepreneurship.

               3.Continue to improve the regulatory framework and reduce the administrative burden to increase competition in services and to promote investment.

               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(2017) 525 final.

                     (4)
                  P8_ TA(2017)0038, P8_ TA(2017)0039, and P8_ TA(2017)0040.

                     (5)
                  COM(2016) 725 final.

                     (6)
                  COM(2016) 728 final.

                     (7)
                  2017/C92/01.

                     (8)
                  SWD(2017) 91 final.

                     (9)
                  COM(2017) 90 final.

                     (10)
                  Article 23 of 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.

                     (11)

                        COM(2014) 494 final.

                     (12)
                  Cyclically-adjusted balance net of one-off and temporary measures, recalculated by the Commission using the commonly agreed methodology.

                     (13)
                  Ministry of Finance publications 36c/2016.

                     (14)
                  VM/712/04.00.05.01/2016.

                     (15)
                  Finland is allowed to deviate from its medium-term budgetary objective in 2018 because temporary deviations are carried forward for a period of three years.

                     (16)
                  Net government expenditure is comprised of total government expenditure excluding interest expenditure, expenditure on Union programmes fully matched by Union funds revenue and non-discretionary changes in unemployment benefit expenditure. Nationally financed gross fixed capital formation is smoothed over a 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.

                     (17)
                  Under Article 5(2) of Council Regulation (EC) No 1466/97.