               EUROPEAN COMMISSION
            Brussels, 5.6.2019
            COM(2019) 510 final
            Recommendation for a
            COUNCIL RECOMMENDATION
            on the 2019 National Reform Programme of France and delivering a Council opinion on the 2019 Stability Programme of France

               Recommendation for a

               COUNCIL RECOMMENDATION

               on the 2019 National Reform Programme of France and delivering a Council opinion on the 2019 Stability Programme of France

               THE COUNCIL OF THE EUROPEAN UNION,

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

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

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

               Having regard to the recommendation of the European Commission,

               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 21 November 2018, the Commission adopted the Annual Growth Survey, marking the start of the 2019 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. The priorities of the Annual Growth Survey were endorsed by the European Council on 21 March 2019. On 21 November 2018, on the basis of Regulation (EU) No 1176/2011, the Commission also adopted the Alert Mechanism Report, in which it identified France as one of the Member States for which an in-depth review would be carried out. On the same date, the Commission also adopted a recommendation for a Council recommendation on the economic policy of the euro area, which was endorsed by the European Council on 21 March 2019. On 9 April 2019, the Council adopted the recommendation on the economic policy of the euro area (‘Recommendation for the euro area’).

               (2)As a Member State whose currency is the euro and in view of the close interlinkages between the economies in the economic and monetary union, France should ensure the full and timely implementation of the Recommendation for the euro area, as reflected in recommendations (1) to (4) below. In particular, measures to use windfall gains to reduce public debt, to rationalise public expenditure and to focus economic policy related to investment in the specified areas will help address the second euro area recommendation as regards rebuilding fiscal buffers, improving public finances and supporting investment. Measures to simplify the tax system and reduce regulatory restrictions will help address the first euro area recommendation as regards the business environment. Finally, measures to improve employability will help addressing the third euro area recommendation as regards the functioning of the labour market.

               (3)The 2019 country report for France
                  3
                was published on 27 February 2019. It assessed France’s progress in addressing the country-specific recommendations adopted by the Council on 13 July 2018, the follow-up given to the recommendations adopted in previous years and France's progress towards its national Europe 2020 targets. It also included an in-depth review under Article 5 of Regulation (EU) No 1176/2011, the results of which were also published on 27 February 2019
                  4
               . The Commission’s analysis led it to conclude that France is experiencing macroeconomic imbalances. The imbalances identified relate in particular to high public debt and weak competitiveness dynamics in a context of low productivity growth.

               (4)On 26 April 2019, France submitted its 2019 National Reform Programme and its 2019 Stability Programme. In order to take account of their interlinkages, the two programmes have been assessed at the same time.

               (5)Relevant country-specific recommendations have been addressed in the programming of the European Structural and Investment Funds ('ESI Funds') for the 2014-2020 period. As provided for in Article 23 of Regulation (EU) No 1303/2013 of the European Parliament and of the Council
                  5
               , where it is necessary to support the implementation of relevant Council recommendations, the Commission may request a Member State to review and propose amendments to its Partnership Agreement and relevant programmes. The Commission has provided further details on how it would make use of that provision in guidelines on the application of the measures linking the effectiveness of the ESI Funds to sound economic governance
                  6
               .

               (6)France is currently in the preventive arm of the Stability and Growth Pact and subject to the transitional debt rule. In its 2019 Stability Programme, the government plans the headline deficit to increase from 2.5% of GDP in 2018 to 3.1% of GDP in 2019 and to gradually decline thereafter to 1.2% of GDP in 2022. The planned increase of the headline deficit in 2019, which is confirmed by the Commission 2019 spring forecast, is mainly due to the one-off deficit-increasing impact of the transformation of the tax credit on employment and competitiveness into a permanent reduction of employers’ social contributions. Based on the recalculated structural balance
                  7
               , the medium-term budgetary objective — a structural deficit of 0.4% of GDP — is not planned to be achieved over the period covered by the 2019 Stability Programme. According to the 2019 Stability Programme, the general government debt-to-GDP ratio is expected to increase from 98.4% of GDP in 2018 to 98.9% of GDP in 2019 and to decline thereafter to 96.8% in 2022. The macroeconomic scenario underpinning those budgetary projections is plausible. At the same time, the measures needed to support the planned deficit targets from 2020 onwards have not been specified.

               (7)On 5 June 2019, the Commission issued a report under Article 126(3) of the TFEU, as the Stability Programme planned a headline deficit in breach of the 3% of GDP Treaty reference value in 2019 and, based on notified data, the transitional debt rule was prima facie not complied with in 2018. The report concluded that, following an assessment of all the relevant factors, the deficit and debt criteria as defined in the Treaty and in Regulation (EC) No 1467/1997 should be considered as currently complied with.

               (8)On 13 July 2018, the Council recommended France to ensure that the nominal growth rate of net primary government expenditure
                  8
                does not exceed 1.4% in 2019, corresponding to an annual structural adjustment of 0.6% of GDP. Based on the Commission 2019 spring forecast, there is a risk of a significant deviation from the recommended adjustment path towards the medium-term budgetary objective in 2019.

               (9)In 2020, in view of France's general government debt ratio above 60% of GDP and projected output gap of 0.7%, the nominal growth rate of net primary government expenditure should not exceed 1.2%, in line with the structural adjustment of 0.6% of GDP stemming from the commonly agreed adjustment matrix of requirements under the Stability and Growth Pact. According to the Commission 2019 spring forecast under unchanged policies, there is a risk of a significant deviation from that requirement in 2020. France is prima facie not forecast to comply with the transitional debt rule in 2019 and 2020. Overall, the Council is of the opinion that the necessary measures should be taken as of 2019 to comply with the provisions of the Stability and Growth Pact. The use of any windfall gains to further reduce the general government debt ratio would be important.

               (10)Efforts to consolidate government finances have only modestly reduced the public expenditure ratio, which at 56% in 2018, remained the highest in the EU. A steady decrease in public debt will depend on the government’s ability to curb its spending. Since 2017, the government has rolled out a renewed fiscal consolidation strategy over the five-year presidential term. Its success will depend on meeting planned expenditure targets defined for the central and local governments and for the healthcare system.

               (11)Expenditure on healthcare has steadily increased over time. Total expenditure was estimated at 11.5% of GDP in 2017, the highest level among the EU countries adhering to the Organisation for Economic Cooperation and Development (OECD). A new reform of the healthcare system was announced in the autumn of 2018 and a draft law was presented on 13 February 2019. Its success will depend on the set up of a clear legal and organisational framework that provides the right incentives and fosters collaboration between public and private actors. The announced reform of the healthcare system does not include a revision of the growth norm for healthcare expenditure (Objectif National de Dépenses d'Assurance Maladie, ONDAM). This spending norm covers a third of social security spending. Although this objective has been met since 2010, the ONDAM target has already been increased three times since 2017. It was increased for 2018-2020, from an initial target of 2.1% growth to a revised target of 2.3% in the budget law for 2018, and was further increased up to 2.5% in the social security budget act for 2019. This will reflect to some extent the additional expenses to be incurred by ‘Ma santé 2022’.

               (12)At local level, public spending exceeded the planned growth target in 2017. Since 2014, the public expenditure of the local government in France is guided by an expenditure norm indicating yearly non-binding growth targets for both operating public expenditure and financing needs at local level (Objectif d'évolution de la Dépense Locale). In 2018, this expenditure norm was accompanied by legally binding contract agreements between the state and 71% of the 322 biggest local authorities, valid in 2018-2020. The limited reduction in the number of municipalities, however, might hamper compliance with the expenditure norm. The territorial reform of 2014-2016 reduced the number of regions by half, but the number of municipalities only slightly decreased and remained above 34 000, by far the highest in the EU.

               (13)Implementing the renewed fiscal consolidation strategy rolled out by the government for the five-year presidential term also requires the still not fully defined ‘Public Action 2022’ programme to be carried out. This programme aims to deliver substantial efficiency gains for government spending while improving the functioning of the national public administration. The government has given clear priority to methodological and process-related aspects, but has not focused on ex-ante and across-the-board quantification of potential savings. While this approach may stem from a complex reform process and the need to smoothen the public debate over sensitive issues, it also makes it difficult to assess in quantitative terms the overall strategy and its contribution to fiscal consolidation. In particular, it is not clear how exactly and with what timing the reform programme — including the Ministries’ transformation plans that include a wide set of varied measures — would contribute with concrete actions to the very specific objective of reducing the expenditure-to-GDP ratio by 2022. Overall, available information shows partial adherence to the guidance for spending reviews agreed in 2016 by the Eurogroup.

               (14)Sustainability risks for general government debt remain high in the medium-term. The high general government debt and structural general government deficit pose sustainability challenges, especially in the medium-term. A fiscal effort that translates into a decisive improvement in France’s structural primary balance would be essential to avert such risks. Reducing the general government debt ratio would also improve growth prospects and the resilience of the French economy.

               (15)The planned pension reform could help to decrease the general government debt over the medium-term and therefore reduce debt sustainability risks. The budgetary equilibrium of the pension system is highly dependent on macroeconomic assumptions. According to the latest annual report by France’s Pensions Advisory Council (Conseil d’orientation des retraites), pension expenditures were at 13.8% of GDP in 2017 and are projected to reach 13.5% in 2022, before remaining in a range between 11.6% and 14.4% by 2070 depending on the growth rate assumed for the evolution of GDP and employment over time. More than 40 different pension schemes co-exist in France. These schemes apply to different groups of workers and functions according to different sets of rules. A draft law is expected by the end of the year to progressively unify the rules of these schemes, with a view to simplifying the functioning of the pension system notably to improve its transparency, fairness and efficiency.

               (16)The employment rate continued to increase and reached 71.3% in 2018. The unemployment rate further declined, reaching 9.1% in 2018, but remains well above the EU average (6.8%) and the euro area average (8.2%). In addition, the French labour market remains highly segmented. Almost 85% of new hires are on temporary contracts and the transition rate to permanent contracts is among the lowest in the EU. Involuntary part-time work is also very high, at 42.3% of total part-time work in 2018. The planned reform of the unemployment benefit system (Unédic) is aimed to tackle labour market segmentation by reducing incentives for hiring on very short-term contracts and recalls, and to reduce the debt of the system. Negotiations between social partners on the unemployment benefits system took place at the beginning of 2019. The aim was to i) reduce the debt of the system, ii) amend the rules in order to reduce job insecurity and make the rules more conducive for the unemployed, and iii) find an incentive mechanism to reduce incentives to hiring on very short term contracts. However, social partners did not find an agreement on a new set of rules. The reform is now in the hands of the government, which is committed to finding an agreement by the summer 2019.

               (17)Labour market conditions for vulnerable groups remain comparatively more difficult than for other groups. The employment rate for non-EU born people, at 57.5% in 2018 (against 73.1 % of those born in France), is one of the lowest in the EU. Evidence shows that people with a migrant background tend to be disadvantaged during the recruitment process. Their geographical concentration in poor neighbourhoods is also a matter of concern. Inhabitants of the most deprived areas (such as Quartiers de la politique de la ville), including people with a migrant background, continue to face difficulties on the labour market, with an unemployment rate of 24.7% in 2017. Despite some policy action, the impact of socioeconomic and migrant background on educational performance remains high and hampers labour market integration.

               (18)Low skilled and young people also remain at a disadvantage in the labour market. The unemployment rate of the low skilled declined in 2017 for the first time since 2008, but at 16.2% in 2018, it remains well above pre-crisis levels. Youth unemployment (ages 15-24) decreased by 1.6 percentage points in 2018 to 20.7%, but is still well above the EU average of 15.2%. The unemployment rate of low-skilled young people is still very high, at 35.6% in 2018. Effective active support to find employment, including intensive job counselling and recruitment support, access to up-skilling actions, innovative measures to reach out to the most vulnerable young people not in education, employment or training and firmer action on discriminatory practices, are all key to fostering equal opportunities on the labour market. The outermost regions are confronted with additional challenges and deserve particular attention.

               (19)As labour market conditions improve, several indicators point to skills mismatches. While unemployment and under-employment remain high, shortages of skilled workers are increasing, especially in specific sectors. Skill shortages and lack of competencies are key factors explaining unfilled job vacancies. According to data from France’s Pôle Emploi, in 2017, out of 3.2 million registered job vacancies, 150000 were cancelled due to the lack of suitable candidates. Evidence suggests that, during the crisis and the subsequent recovery, an increase in skill mismatches contributed to unemployment declining at a slower rate and to higher long-term unemployment. Labour market outcomes of initial vocational education and training are improving. The Government introduced a comprehensive set of actions in 2018 to increase access to initial and continuous training and revise the governance and financing of the vocational education and training system. Complementing these reforms, the skills investment plan (Plan d’investissement dans les compétences) aims to train and provide intensive guidance to 1 million young people not in employment, education or training and to 1 million low-qualified jobseekers over the period 2018-2022.

               (20)Overall, the French social protection system is effective in reducing inequality and poverty. The proportion of people at risk of poverty and social exclusion has further decreased to an historical low of 17.1% in 2017, compared to an average of 22.4% in the EU. However, income inequality remains well above the pre-crisis level. Moreover, upwards transition across income quantiles has gone down, especially for the lowest quintile. Some groups, among which single-parent families and people born outside the EU face an increased risk of poverty and social exclusion. Counselling for minimum income beneficiaries is not always sufficient, with wide territorial discrepancies. Further and better coordinated investments in social inclusion, as envisaged by the national strategy against poverty presented in September 2018, could help to tackle these challenges. While the performance of the health system is good overall, regional disparities in access to services could benefit from further investment, especially in the outermost regions.

               (21)Despite recent initiatives, France has not been able to reduce its gap with the Union’s innovation leaders according to the European Innovation Scoreboard. Investment in research and development has remained stable and new companies have difficulty growing. Overall, France is not on track to meet its total research and development intensity target of 3% for 2020 and the level of research and development investment from the business sector is still far below the 2% target. Public expenditure on research and development is above the Union average and includes a wide range of direct and indirect support schemes to business research and innovation efforts, including the research and development tax credit scheme (Crédit d’Impôt Recherche), which is one of the most generous among OECD countries. However, the overall performance of the research and development and innovation ecosystem does not yet match the large amount of public support. While the existing tools, including the Crédit d’Impôt Recherche, were recently evaluated, a comprehensive evaluation of the overall policy mix would help feed the implementation of future policy. The Innovation Council (‘Conseil de l'innovation’), set up in July 2018, is tasked with supervising the simplification measures, which include better coordination between regional and national support to innovation. Closer links between science and business, notably through knowledge transfer schemes, could also help spread innovation, as France continues to score below the Union average for public research and development financed by businesses. Support to competitiveness clusters (‘pôles de compétitivité’) has been renewed for a fourth phase (2019-2022) and priority will be given to clusters organisations well connected with others structures at local level, focused on national industrial priorities and with a track record in EU projects. The Innovation and Industry Fund (‘Fonds pour l’innovation et l’industrie’), financed through privatisations, will also help to provide funding for artificial intelligence. Timely development of related technologies, such as the Internet of things, 5G networks, high performance computing and, more generally, the data economy, will be one of the keys to the success of these initiatives. Major differences among regions also exist in terms of regional investment in research and development and innovation performance. Several rural regions or regions in industrial transition rank below the EU average. The outermost regions are at the low end of the scale.

               (22)At present, France is performing well in energy and climate mitigation policy and remains on track to reach its 2020 greenhouse gas reduction target. However it needs to step up significantly its investment efforts to reach its 2020 renewables and energy efficiency targets, as well as its more ambitious 2030 climate and energy targets, notably in the deployment of renewables and the energy efficient refurbishment of the building stock. As more than half of the current funding for those investments is publicly driven, economic and regulatory conditions would have to make the financing of projects more viable for the private sector in order to tap into significant investment opportunities. Accelerating the penetration of renewables in the heating and cooling sector represents a particularly large untapped potential. High investment needs also concern energy efficiency in buildings. This is particularly the case for the renovation of the housing sector, which accounts for a large share of the total climate investment gap, as the majority of the housing stock is old and contains 7 to 8 million thermal sieves (representing around 20% of the total number of housing). The percentage of building stock reported to satisfy high-energy efficiency standards is lower for firms in France (25%) than in the Union as a whole (39%) in 2017. Significant regional differences prevail in the energy sector. Energy intensity is decreasing in almost all regions, but at differing paces, and considerable differences exist in the penetration of renewable energy. Additional investments in interconnections could contribute to greater integration of the internal EU energy market, while introducing more competition and facilitating the deployment of renewable energy, in particular with the Iberian Peninsula.

               (23)The 2018 national circular economy roadmap (Feuille de Route Economie Circulaire) is an ambitious policy framework for resource efficiency, whose implementation will hinge on ensuring the corresponding investments. Although the contribution of recycled materials to the overall material demand (circular material use rate) is well above the EU average (19.5% vs. 11.7% in 2016), recycling rates for municipal waste are still slightly below the EU average (41.8% vs. 46.4% in 2016). In this regard, the adoption of a law on the circular economy will be a step forward, including for a wider use of secondary raw materials, notably plastics. New resource-efficient business models and production processes, including industrial symbiosis, need to be further promoted, in particular among small and medium-sized businesses. This can be facilitated by the development of innovative financial instruments and funding for eco-innovation.

               (24)Investments to improve connectivity, especially in more disadvantaged areas, could help address inequalities within the Member State. France scores below the Union average for access to fast broadband network, and fast broadband take-up is low (20% of households against 41% in the Union on average in 2018). The use of mobile broadband services is also still below the Union average. Broadband coverage varies greatly across regions and remains limited in a few rural areas and outermost regions. France’s plan for ultra-fast broadband (Plan France Très Haut Débit) and related measures are expected to significantly contribute to the country reaching its connectivity targets. It will be essential to closely monitor the implementation of these measures, particularly in areas with poor coverage, given the predominantly decentralised approach and potential bottlenecks if not enough skilled workers are available to roll out the network.

               (25)Despite ongoing efforts to increase certainty for taxpayers (Loi pour un État au service d'une société de confiance, ESSOC law) and simplify the system, the French tax system continues to be very complex, which weighs on the business environment. The tax code encompasses multiple rates systems and tax expenditures (tax credit, exemptions, tax reductions). This complexity often aims to achieve specific policy goals, like alleviating the tax burden on the most vulnerable households and incentivising or correcting specific behaviours. However, it risks resulting in a loss of readability, thus increasing compliance costs and legal uncertainty detrimental to France’s attractiveness while creating loopholes.

               (26)Streamlining tax expenditures and reducing the number of small taxes could help further simplify the tax system. Total tax expenditure is estimated at 4% of GDP in 2019. Unlike the previous multiannual framework, the current budgetary framework (2018-2022) does not provide a spending limit for tax expenditures. It sets instead a non-binding target of 28% for the ratio of tax expenditures to the sum of net tax revenues and tax expenditures. While the budget law for 2018 planned a tax spending ratio below the target (28%) set in the 2018-2022 multiannual budgetary framework, this ratio is set to increase in the future (25.5% at the end of 2018 and 26% in 2019).

               (27)The 2019 budget tables a decrease of the overall amount of tax expenditures below EUR 100 billion, putting an end to a five-year period of constant increases in volume. Between 2018 and 2019, however, the number of tax expenditures has increased from 457 to 474. In 2018, the Court of Auditors recommended streamlining the existing tax expenditures and pointed their lack of control and evaluation. Efforts to discontinue taxes which bring limited revenue or that are inefficient should be pursued. In the budget law for 2019, 26 taxes yielding low revenues have been cut, 20 were eliminated in 2019 for a total amount of EUR 132 million and 6 are to be eliminated in 2020 for a total amount of EUR 208 million. The elimination of small taxes is expected to continue in 2020 at the same pace.

               (28)Other taxes on production continue to weigh on businesses. Taxes on production stood at 3.1% of GDP in 2016, higher than Italy (1.4%), Spain (1.0%) and Germany (0.4%). Such taxes have different tax bases (turnover, added value, salaries, land and buildings) and can increase the overall cost of production. This could have a negative impact on competitiveness in particular for the manufacturing sector. The 2019 budget law cuts only one tax on production (‘forfait social’) levied at national level and worth EUR 660 million per year (once fully implemented in 2020).

               (29)Despite progress and the adoption of ambitious reforms, barriers to entry persist and competition in business services and regulated professions remains low. The new OECD intra-EEA services trade restrictiveness index shows that the level of regulatory restrictiveness in France is higher than the European Economic Area (EEA) average in sectors such as accounting, legal services and distribution services. Main barriers arise in the form of restrictive authorisation requirements, reserves of activities, shareholding and voting rights requirements. In the retail sector, France has carried out a number of reforms to reduce the regulatory burden. However a number of operational restrictions still affects the efficiency of retail businesses and puts them at a disadvantage compared to e-commerce. In this context, the retail sector growth in France is rather modest. The 2019 National Reform Programme detailed new measures to strengthen competition in a few specific services sectors (such as driving schools, property management companies and the sales of automotive spare parts). On 4 April 2019, the Competition Authority presented its opinion to ease restrictions on the distribution of medicines while maintaining a high level of public health protection.

               (30)Barriers in services have led to low competition, high profit margins and prices, harming the competitiveness of the whole economy. Churn rates are lower in key business services in France compared to the rest of the EU. The lack of competition in services combined to high labour costs have helped to keep prices high, notably in real estate transactions, housing, catering and legal and accounting services. Since the costs of these services are also borne by other firms using them as inputs, they represent an additional factor weighing on France's competitiveness, including on industry.

               (31)The PACTE law (loi relative à la croissance et la transformation des entreprises) aims to support the growth and transformation of firms. It will reduce the number of thresholds firms face as they grow, although remaining thresholds have become broader in scope and more costly to overcome. It also introduces a five-year transition period before considering that a threshold has been reached and encourages small and medium-sized businesses to use incentives and participation schemes for employees linked to a firm’s performance. Finally, it provides simplified procedures to start or register businesses and introduces new rules to help entrepreneurs get a second chance. It also reduces the time and costs of insolvency procedures, notably for small and medium-sized businesses, including by making them more predictable. According to the French administration’s own estimates, the potential impact of the law on GDP is an increase of 0.32% by 2025 and by 1% in the longer term. Its full and timely implementation remains key to reap the benefits of this reform.

               (32)The programming of EU funds for the period 2021-2027 could help address some of the gaps identified in the recommendations, in particular in the areas covered by Annex D to the country report
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               . This would allow France to make the best use of those funds in respect of the identified sectors, taking into account regional and territorial disparities and the special situation of the outermost regions.

               (33)In the context of the 2019 European Semester, the Commission has carried out a comprehensive analysis of France’s economic policy and published it in the 2019 country report. It has also assessed the 2019 Stability Programme and the 2019 National Reform Programme and the follow-up given to the recommendations addressed to France in previous years. It has taken into account not only their relevance for sustainable fiscal and socioeconomic policy in France, 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.

               (34)In the light of this assessment, the Council has examined the 2019 Stability Programme and its opinion
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                is reflected in particular in recommendation (1) below.

               (35)In the light of the Commission’s in-depth review and this assessment, the Council has examined the 2019 National Reform Programme and the 2019 Stability Programme. Its recommendations under Article 6 of Regulation (EU) No 1176/2011 are reflected in recommendations (1) to (4) below.

               HEREBY RECOMMENDS that France take action in 2019 and 2020 to:

               1.Ensure that the nominal growth rate of net primary expenditure does not exceed 1.2% in 2020, corresponding to an annual structural adjustment of 0.6% of GDP. Use windfalls gains to accelerate the reduction of the general government debt ratio.  Achieve expenditure savings and efficiency gains across all sub-sectors of the government, including by fully specifying and monitoring the implementation of the concrete measures needed in the context of Public Action 2022. Reform the pension system to progressively unify the rules of the different pension regimes, with the view to enhance their fairness and sustainability.

               2.Foster labour market integration for all job seekers, ensure equal opportunities with a particular focus on vulnerable groups including people with a migrant background and address skills shortages and mismatches.

               3.Focus investment-related economic policy on research and innovation (while improving the efficiency of public support schemes, including knowledge transfer schemes), renewable energy, energy efficiency and interconnections with the rest of the Union, and on digital infrastructure, taking into account territorial disparities.

               4.Continue to simplify the tax system, in particular by limiting the use of tax expenditures, further removing inefficient taxes and reducing taxes on production. Reduce regulatory restrictions, notably in the services sector, and fully implement the measures to foster the growth of firms.

               Done at Brussels,

                     For the Council

                     The President

                     (1)

                        OJ L 209, 2.8.1997, p. 1.

                     (2)

                        OJ L 306, 23.11.2011, p. 25.

                     (3)

                        SWD(2019) 1009 final.

                     (4)

                        COM(2019) 150 final.

                     (5)

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

                     (6)

                        COM(2014) 494 final.

                     (7)

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

                     (8)

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

                     (9)

                        SWD(2019) 1009 final.

                     (10)

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


               EUROPEAN COMMISSION
            Brussels, 5.6.2019
            COM(2019) 514 final
            Recommendation for a
            COUNCIL RECOMMENDATION
            on the 2019 National Reform Programme of Latvia and delivering a Council opinion on the 2019 Stability Programme of Latvia

               Recommendation for a

               COUNCIL RECOMMENDATION

               on the 2019 National Reform Programme of Latvia and delivering a Council opinion on the 2019 Stability Programme of Latvia

               THE COUNCIL OF THE EUROPEAN UNION,

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

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

               Having regard to the recommendation of the European Commission,

               Having regard to the resolutions of the European Parliament,

               Having regard to the conclusions of the European Council,

               Having regard to the opinion of the Employment Committee,

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

               Having regard to the opinion of the Social Protection Committee,

               Having regard to the opinion of the Economic Policy Committee,

               Whereas:

               (1)On 21 November 2018, the Commission adopted the Annual Growth Survey, marking the start of the 2019 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. The priorities of the Annual Growth Survey were endorsed by the European Council on 21 March 2019. On 21 November 2018, on the basis of Regulation (EU) No 1176/2011, the Commission also adopted the Alert Mechanism Report, in which it did not identify Latvia as one of the Member States for which an in-depth review would be carried out. On the same date, the Commission also adopted a recommendation for a Council recommendation on the economic policy of the euro area, which was endorsed by the European Council on 21 March 2019. On 9 April 2019, the Council adopted the recommendation on the economic policy of the euro area (‘Recommendation for the euro area’).

               (2)As a Member State whose currency is the euro and in view of the close interlinkages between the economies in the economic and monetary union, Latvia should ensure the full and timely implementation of the Recommendation for the euro area, as reflected in recommendations (1) to (4) below. In particular, focusing economic policy related to investment in the specified areas and measures to improve skills will help address the first euro area recommendation as regards productivity improvements for euro area rebalancing and tax measures will help address the third euro area recommendation as regards the functioning of the labour market.

               (3)The 2019 country report for Latvia
                  2
                was published on 27 February 2019. It assessed Latvia’s progress in addressing the country-specific recommendations adopted by the Council on 13 July 2018, the follow-up given to the recommendations adopted in previous years and Latvia's progress towards its national Europe 2020 targets.

               (4)On 15 April 2019, Latvia submitted its 2019 National Reform Programme and, on 17 April 2019, its 2019 Stability Programme. In order to take account of their interlinkages, the two programmes have been assessed at the same time.

               (5)Relevant country-specific recommendations have been addressed in the programming of the European Structural and Investment Funds ('ESI Funds') for the 2014-2020 period. As provided for in Article 23 of Regulation (EU) No 1303/2013 of the European Parliament and of the Council
                  3
               , where it is necessary to support the implementation of relevant Council recommendations, the Commission may request a Member State to review and propose amendments to its Partnership Agreement and relevant programmes. The Commission has provided further details on how it would make use of that provision in guidelines on the application of the measures linking the effectiveness of the ESI Funds to sound economic governance
                  4
               .

               (6)Latvia is currently in the preventive arm of the Stability and Growth Pact. In its 2019 Stability Programme, the government plans an improvement of the headline balance from a deficit of 1.0% of GDP in 2018 to a deficit of 0.5% of GDP in 2019 and 0.4% of GDP in 2020 and 2021
                  5
               . Based on the recalculated structural balance
                  6
               , the medium-term budgetary objective, set at a deficit of 1% of GDP in structural terms, is planned to be reached in 2019, taking into account the allowance linked to the implementation of the structural reforms for which a temporary deviation is granted. According to the 2019 Stability Programme, the general government debt-to-GDP ratio is expected to decrease to 33.1% of GDP by 2022. The 2019 Stability Programme's GDP growth projections appear to be plausible. Risks to the budgetary position are balanced.

               (7)On 13 July 2018, the Council recommended that Latvia achieve its medium-term budgetary objective in 2019, taking into account the allowances linked to the implementation of the structural reforms for which a temporary deviation is granted. This is consistent with a maximum nominal growth rate of net primary government expenditure
                  7
                of 4.8% in 2019, corresponding to an improvement in the structural balance by 0.2% of GDP. Based on the Commission 2019 spring forecast, Latvia is expected to be close to its medium-term budgetary objective, taking into account the allowance linked to the implementation of the structural reforms for which a temporary deviation is granted. Thus, the current assessment indicates a risk of some deviation in 2019. At the same time, projected nominal growth rate of net primary government expenditure would currently point to a risk of a significant deviation from the requirement in 2019. If the structural balance is no longer projected to be close to the medium-term budgetary objective, taking into account the allowance linked to the implementation of the structural reforms for which a temporary deviation is granted, in future assessments an overall assessment would need to take into account a possible deviation from the requirement.

               (8)In 2020, in view of Latvia's projected output gap of 1.3%, the nominal growth rate of net primary government expenditure should not exceed 3.5%, in line with the structural adjustment of 0.5% of GDP stemming from the commonly agreed adjustment matrix of requirements under the Stability and Growth Pact. Based on the Commission 2019 spring forecast under unchanged policies, Latvia is expected to be close to its medium-term budgetary objective. Thus, the current assessment indicates risk of some deviation in 2020. At the same time, the projected nominal growth rate of net primary government expenditure would currently point to a risk of a significant deviation from the requirement in 2020. If the structural balance is no longer projected to be close to the medium-term budgetary objective, in future assessments an overall assessment would need to take into account a possible deviation from the requirement. Overall, the Council is of the opinion that Latvia needs to stand ready to take further measures as of 2019 to comply with the provisions of the Stability and Growth Pact.

               (9)The tax revenue as a share of the gross domestic product of Latvia is low compared with the Union average and limits to some extent the delivery of public services, in particular healthcare, and social inclusion. Capital and property are relatively undertaxed and the freezing of the values used to calculate land and property taxes will reduce their revenue further. At the same time, the tax burden on labour remains high for low-wage earners relative to the average of the European Union, despite having been reduced. The share of the shadow economy appears to have declined over the past years by different estimates. Nevertheless, the share of under-reported economic activity is higher in Latvia than in other Baltic States. In particular, underreporting of salaries (‘envelope wages’), particularly in the construction sector, accounts for a large share of the shadow economy.

               (10)Following the closure of its third largest bank due to allegations of money laundering, Latvia tightened the regulation concerning non-resident clients. As a result, non-resident deposits, which are the main source of money laundering risk in Latvia, have significantly decreased since May 2018, but challenges regarding fighting money laundering remain. Moreover, Latvia has come up with a detailed action plan for improving its anti-money laundering/counter terrorist financing strategy.  The main priorities listed in the action plan include enhancing risk-based supervision, ensuring the required human resources for the supervisory authorities, and ensuring effective information exchange and collaboration among the investigative authorities and with the private sector. Attention should be paid to the effective implementation of these measures, once adopted. Finally, law enforcement and judicial authorities’ capacity also need to be increased.

               (11)Latvia faces challenges on delivering on several of social protection and inclusion principles of the European Pillar of Social Rights. Income inequality in Latvia is high, as the redistribution through the tax-benefit system is low. The adequacy of social benefits remains low and the impact of social transfers on poverty and inequality reduction is limited. The poverty risk among the elderly and the people with disabilities is relatively high and increasing due to benefits not keeping pace with wage growth. The at-risk-of-poverty or social exclusion rate for the elderly was 49.0% in 2018 (European Union average: 18.2% in 2017) and for the disabled people with disabilities 40.7% in 2017, (European Union average: 29.3% in 2017). The state social security benefit for people with disabilities and minimum old-age pensions, have not been revised since 2006. The minimum income level reform, announced in 2014, has not been implemented, which negatively affects the poorest households. Access to long-term care also remains weak. Investments are thus required to address social exclusion, including food and material aid for the most deprived. Moreover, investments, including infrastructure, are needed to improve access to childcare, long-term care, employment and other social services, and to enable integration of health and social services, including the transition from institutional to community-based care. The share of people facing severe housing deprivation is among the highest in Europe (15.2% vs 4.0% in average in 2017 in the European Union) and social housing is scarce. Investment is needed to improve the provision of affordable housing.

               (12)While overall employment rates are high and increasing, headcount employment is negatively affected by the adverse demographic developments and emigration. In addition, employment varies between regions and skill levels. Older people with outdated skills encounter more difficulties. The low level of digital skills among the labour force limits the use of digital technologies by businesses and the potential for innovation. Adult participation in learning and the involvement of the unemployed in active labour market measures is lower than the average of the European Union.

               (13)The education system faces a challenge to consolidate resources while improving quality and efficiency. While Latvia’s education system performs well in terms of learning achievement, access to quality education remains dependent on the place of residence and type of school. Curriculum reform in vocational education and training aimed at aligning it with new skills requirements has progressed and the vocational school environment is significantly improved. However, attractiveness remains low with enrolment rates and the employment rate of recent graduates below the average of the European Union.

               (14)Ensuring skills’ supply is one of the main areas where demand for investment remains significant. Matching investment, including through infrastructure, is required to improve the quality, effectiveness and labour market relevance of education and training, and to promote lifelong learning, notably flexible upskilling and reskilling opportunities. Investment are also needed to improve access to employment, including to improve outreach and coverage of active labour market policies, enhance the workability of workforce, as well as sectoral and regional labour mobility. In a broader context, strengthening social partners' capacity is important in promoting the fair working conditions and delivering on the European Pillar of Social Rights.

               (15)Low public spending for healthcare and unhealthy lifestyle choices are the main reasons for the population’s poor health outcomes. The recently increased funding for healthcare addresses some of the access restrictions linked to the annual service limits and long waiting times. However, public financing for healthcare remains well below the European Union average. Timely and equal access to healthcare is limited. This leads to high self-reported unmet needs for care due to high out-of-pocket payments, especially for vulnerable groups, as well as inequality of opportunities. Reforms to boost efficiency and quality in healthcare are progressing but are in an early phase and should be accelerated, including effective prevention measures, streamlining of the hospital sector, strengthening primary care and targeting quality management. In addition, Latvia faces health workforce shortages, especially of nurses, which hamper the delivery of public healthcare and pose risks to the success of the health reforms. If the division of health services into two baskets ("full" and "minimum") comes into effect, it risks further limiting equitable access to healthcare and leading to adverse health outcomes. Matching investments in healthcare, including infrastructure, are needed to increase the accessibility, affordability and quality of healthcare in order to improve the population’s health status and ensure healthier and longer working lives.

               (16)Latvia invests little in research and development and its investment gap in innovation is important. In 2017, Latvia’s share of expenditure on research and development was among the lowest in the European Union and has been rather stable over the past decade. Moreover, research funding relies almost entirely on European Union Funds. As a result, Latvia is a moderate innovator with some strong points, such as its information, communications and technology infrastructure but its performance lags behind in human resources, in public-private sector cooperation and in investment in intellectual property.

               (17)Important investment gaps also remain to address regional disparities. Significant economic differences persist between Riga and Latvia’s other regions. While Latvia as a whole is converging with the European Union, the gap in economic performance between the capital region and the other regions has not narrowed since Latvia’s accession to the European Union. The competitiveness and quality of public services differs considerably among the different Latvian regions, influencing their territorial attractiveness. Investment needs should therefore address significant regional differences in mobility and digital infrastructure, in particular the last mile connections. Gaps in connectivity in the Trans-European Transport Network and with peripheral and border regions are still extremely pronounced having a negative impact on Latvia’s economic activities and exports. Investments gaps also exist to complete the Rail Baltica project and the key electricity infrastructure projects that form part of the Baltic energy market interconnection plan. Additionally, investment in resource efficiency is also needed in order to speed up Latvia's energy transition. More efforts are needed to improve overall energy efficiency, in particular in the residential and transport sectors.

               (18)The recent adoption of the whistleblower law marks a positive step and the country’s anti-corruption body has also gathered momentum recently thanks to it uncovering a number of high profile corruption cases. Nevertheless, government decision-making is still perceived to be influenced by favouritism and the procurement process as susceptible to corruption due to lack of transparency, in particular in municipalities and state-owned and municipal enterprises. Legislative amendments on conflict of interest regime may give rise to abuses. The recently adopted Code of Ethics does not cover politically appointed persons.

               (19)Public services have not been adjusted to the declining and ageing population. The declining population and urbanisation leave infrastructure and public services underused in the rural areas. Public administration, education, healthcare services require strategies to preserve access to quality services in scarcely populated and dwindling areas, while ensuring greater efficiency. A general administrative territorial reform to be implemented by December 2021 has been recently announced. A timely implementation of this reform could contribute to enhancing the accountability and efficiency of the public sector, all the more in light of the operational programme for European Union funds, which is to be approved by the year 2020.

               (20)The programming of EU funds for the period 2021-2027 could help address some of the gaps identified in the recommendations, in particular in the areas covered by Annex D to the country report
                  8
               . This would allow Latvia to make the best use of those funds in respect of the identified sectors, taking into account regional disparities. Strengthening the country’s administrative capacity for the management of these funds is an important factor for the success of this investment.

               (21)In the context of the 2019 European Semester, the Commission has carried out a comprehensive analysis of Latvia’s economic policy and published it in the 2019 country report. It has also assessed the 2019 Stability Programme and the 2019 National Reform Programme and the follow-up given to the recommendations addressed to Latvia in previous years. It has taken into account not only their relevance for sustainable fiscal and socioeconomic policy in Latvia, but also their compliance with Union rules and guidance, given the need to strengthen the Union’s overall economic governance by providing Union-level input into future national decisions.

               (22)In the light of this assessment, the Council has examined the 2019 Stability Programme and its opinion
                  9
                is reflected in particular in recommendation (1) below.

               HEREBY RECOMMENDS that Latvia take action in 2019 and 2020 to:

               1.Ensure that the nominal growth rate of net primary government expenditure does not exceed 3.5% in 2020, corresponding to an annual structural adjustment of 0.5% of GDP. Reduce taxation for low-income earners by shifting it to other sources, particularly capital and property, and by improving tax compliance. Ensure effective supervision and the enforcement of the anti-money laundering framework.

               2.Address social exclusion notably by improving the adequacy of minimum income benefits, minimum old-age pensions and income support for people with disabilities. Increase the quality and efficiency of education and training in particular of low-skilled workers and jobseekers, including by strengthening the participation in vocational education and training and adult learning. Increase the accessibility, quality and cost-effectiveness of the healthcare system.

               3.Focus investment-related economic policy on innovation, provision of affordable housing, transport notably on its sustainability, resource efficiency and energy efficiency, energy interconnections and on digital infrastructure, taking into account regional disparities.

               4.Strengthen the accountability and efficiency of the public sector, in particular with regard to local authorities and state-owned and municipal enterprises and the conflict of interest regime.

               Done at Brussels,

                     For the Council

                     The President

                     (1)

                        OJ L 209, 2.8.1997, p. 1.

                     (2)

                        SWD(2019) 1013 final.

                     (3)

                        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).

                     (4)

                        COM(2014) 494 final.

                     (5)

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

                     (6)

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

                     (7)

                        SWD(2019) 1013 final.

                     (8)

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


               EUROPEAN COMMISSION
            Brussels, 5.6.2019
            COM(2019) 523 final
            Recommendation for a
            COUNCIL RECOMMENDATION
            on the 2019 National Reform Programme of Romania and delivering a Council opinion on the 2019 Convergence Programme of Romania

               Recommendation for a

               COUNCIL RECOMMENDATION

               on the 2019 National Reform Programme of Romania and delivering a Council opinion on the 2019 Convergence Programme of Romania

               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 21 November 2018, the Commission adopted the Annual Growth Survey, marking the start of the 2019 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. The priorities of the Annual Growth Survey were endorsed by the European Council on 21 March 2019. On 21 November 2018, on the basis of Regulation (EU) No 1176/2011, the Commission also adopted the Alert Mechanism Report, in which it identified Romania as one of the Member States for which an in-depth review would be carried out.

               (2)The 2019 country report for Romania
                  3
                was published on 27 February 2019. It assessed Romania’s progress in addressing the country specific recommendations adopted by the Council on 13 July 2018, the follow-up given to the recommendations adopted in previous years and Romania'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 27 February 2019
                  4
               . The Commission’s analysis led it to conclude that Romania is experiencing macroeconomic imbalances. In particular, vulnerabilities are linked to diminishing cost competitiveness and a widening current account deficit in a context of an expansionary fiscal policy and an unpredictable business environment. Recent legislative initiatives create risks for the functioning of the financial sector and may harm private investment.

               (3)On 9 May 2019, Romania submitted its 2019 National Reform Programme and, on     8 May 2019, its 2019 Convergence Programme. In order to take account of their interlinkages, the two programmes have been assessed at the same time.

               (4)Relevant country-specific recommendations have been addressed in the programming of the European Structural and Investment Funds ('ESI Funds') for the 2014-2020 period. As provided for in Article 23 of Regulation (EU) No 1303/2013 of the European Parliament and of the Council
                  5
               , where it is necessary to support the implementation of relevant Council recommendations, the Commission may request a Member State to review and propose amendments to its Partnership Agreement and relevant programmes. The Commission has provided further details on how it would make use of that provision in guidelines on the application of the measures linking the effectiveness of the ESI Funds to sound economic governance
                  6
               .

               (5)Romania is currently in the preventive arm of the Stability and Growth Pact. In its 2019 Convergence Programme, the government plans a headline deficit of 2.8% of GDP in 2019, and its gradual reduction thereafter, to 2.0% of GDP in 2022. Based on the recalculated structural balance
                  7
               , the medium-term budgetary objective, set at a structural deficit of 1% of GDP, is not planned to be achieved over the programme horizon. According to the Convergence Programme, the general government debt-to-GDP ratio is expected to remain below 40% by 2022. The macroeconomic scenario underpinning those budgetary projections is favourable. Moreover, the measures needed to support the planned deficit targets have not been sufficiently specified.

               (6)On 22 June 2018, the Council decided in accordance with Article 121(4) of the Treaty on the Functioning of the European Union (‘TFEU’) that a significant observed deviation from the medium-term budgetary objective occurred in Romania in 2017. In view of the established significant deviation, on 22 June 2018 the Council recommended Romania to take the necessary measures to ensure that the nominal growth rate of net primary government expenditure
                  8
                does not exceed 3.3% in 2018 and 5.1% in 2019, corresponding to an annual structural adjustment of 0.8% of GDP in each year. On 4 December 2018, the Council found that Romania had not taken effective action in response to the Council recommendation of 22 June 2018 and issued a revised recommendation. In the new recommendation the Council asked Romania to take the necessary measures to ensure that the nominal growth rate of net primary government expenditure does not exceed 4.5% in 2019, corresponding to an annual structural adjustment of 1.0% of GDP. On XX June 2019, the Council found that Romania had not taken effective action in response to the Council recommendation of 4 December 2018. Moreover, based on 2018 outturn data Romania was found to be in significant deviation from the recommended adjustment in 2018.In line with Article 121(4) TFEU and Article 10(2) of Regulation (EC) No 1466/97, the Commission issued a warning to Romania on 5 June 2019 that a significant deviation from the adjustment path toward the medium-term budgetary objective was observed in 2018. On XX June 2019, the Council adopted a subsequent Recommendation confirming the need for Romania to take the necessary measures to ensure that the nominal growth rate of net primary government expenditure does not exceed 4.5% in 2019, corresponding to an annual structural adjustment of 1.0% of GDP. Based on the Commission 2019 spring forecast, there is a risk of a deviation from that recommendation in 2019.

               (7)For 2020, the Council on XX June 2019 recommended Romania to take the necessary measures to ensure that the nominal growth rate of net primary government expenditure does not exceed 5.1%, corresponding to an annual structural adjustment of 0.75% of GDP. Based on the Commission 2019 spring forecast under unchanged policies, there is a risk of a deviation from that requirement in 2020. In addition, the Commission 2019 spring forecast projected a general government deficit above the 3%-of-GDP Treaty reference value in 2019 and in 2020. Overall, the Council is of the opinion that significant further measures will be needed as of 2019 to comply with the provisions of the Stability and Growth Pact, in light of a strongly deteriorating fiscal outlook, in line with the recommendation addressed to Romania on XX June 2019 with a view to correcting the significant observed deviation from the adjustment path toward the medium-term budgetary objective.

               (8)Romania's budgetary planning regularly ignores the provisions of the national fiscal framework. The national structural deficit rule requires compliance with or convergence to the medium-term budgetary objective of a structural deficit not exceeding 1% of GDP. In 2016 Romania departed from the medium-term budgetary objective and is on a divergent path since, in breach of the national deficit rule. The two 2018 budget amendments adopted in autumn 2018, departed once again from several auxiliary rules prohibiting increases in deficit and expenditure ceilings during the ongoing fiscal year. The 2019 budget, adopted by the government in February 2019 and approved by the Parliament in March, again departed from multiple fiscal rules, including the structural deficit rule. Moreover, as in previous years, the authorities did not send an update of the medium-term fiscal strategy to Parliament by the statutory August deadline, thereby undermining its guiding role. Also, as in previous years, the authorities did not comply with the requirement to sign a statement that the 2019 budget and the fiscal strategy respect the fiscal rules and principles of fiscal responsibility.

               (9)Tax compliance remains low. As regards Value Added Tax, the difference between theoretically expected and actually collected revenues remains very high. The large informal economy represents an additional challenge for tax compliance, while the high levels of undeclared work deprive the state budget of significant resources. Furthermore, the prevalence of cash payments facilitates tax evasion. In the past year, Romania achieved limited progress in addressing the repeated country-specific recommendation to strengthen tax compliance and collection. The introduction of electronic cash registers connected to the tax administration’s IT system is progressing rather slowly. The tax administration is taking steps to set up a risk assessment system for auditing taxpayers.

               (10)After several years of continued efforts to consolidate the financial sector, financial stability was again strained in 2018 by a set of government and parliamentary legislative initiatives. The tax on banks’ assets adopted by the government via an emergency ordinance at the end of December 2018, without impact assessment or stakeholder consultation, raised a number of serious concerns related to its negative impact on banks’ prudential situation, the conduct of monetary policy and ultimately investment and economic growth. The manner of its adoption and its provisions have had a significant adverse effect on the exchange rate, the government’s ability to borrow on the market and ultimately on stakeholders’ perception of operational risks. While some controversial aspects of the tax were amended in March 2019, the changes were again adopted via a government emergency ordinance and without an impact assessment. The most challenging aspects of the bank tax on total assets were removed. However, under the new formulation the tax may distort credit incentives, which could result in a misallocation of credit to the economy. The potential implications of these changes for monetary policy transmission should be assessed. Several legislative initiatives adopted by Parliament at the end of 2018, although declared unconstitutional by the Constitutional Court in March 2019, have put additional strain on the banking sector and reinforced the overall perception of an unpredictable legal framework. Past experience shows that such initiatives could be put forward again by the legislature.

               (11)The new pension law, adopted by Parliament in December 2018, is likely to pose risks to the sustainability of public finances. The pension point, i.e. the main parameter used for pension indexation, is set to increase by 15% in September 2019 and by 40% in September 2020. The pension law would change several parameters used to calculate pension benefits. In particular, the pension point value is set to rise, as the indexation factor for existing pensions would no longer converge towards prices but would instead remain permanently composed of wages and prices. Moreover, the contributory period used to calculate a person's pension will be shortened, leading to higher pension expenditure for new pensions. On the other hand, the abolishment of the correction index for new pensions (which used to partly link the first pension to wages) will mitigate the overall pension expenditure increase caused by the other parameters. Some structural challenges that affect pension adequacy remain unaddressed. The effective average retirement age is close to the EU average, but is not equal between women and men. Coupled with shorter contributory periods for women, this results in a considerable pension gender gap.

               (12)The reform of the pension system introduced in 2008 has been gradually rolled back. After repeated postponements of the scheduled increases in contributions to the second pillar pension funds, which should have reached 6% of gross wages by 2016, contributions were reduced to 3.75% of gross wages as of 2018. Second pillar pension funds were further weakened by a set of measures adopted by the government via an emergency ordinance at the end of 2018. Contributions to these funds were made optional after a minimum contributory period of five years. The minimum capital requirements for second pension pillar fund management companies were increased significantly, triggering a risk of exits by fund management companies from the Romanian market. The administrative fees levied on gross contributions were also significantly cut, thus potentially affecting the financial results of fund management companies and increasing the likelihood of market exits. This could have negative implications for the development of the local capital market and the pool of institutional investors, as well as depriving the economy of a much needed source of long term investment. Furthermore, the weakening or undoing of the second pillar will result in less diversified retirement income and expose pensions to higher political and demographic risks. In March 2019, via an emergency ordinance, the government maintained the new minimum capital requirements for fund management companies, but postponed to December 2019 the deadline to pay the entire additional capital. Other provisions in the December 2018 emergency ordinance that endanger the viability of second pension pillar funds remain unchanged.

               (13)Challenges linked to the quality and inclusiveness of the education and training system have a negative impact on Romania’s inclusive growth potential. Spending on education remains one of the lowest in the EU, particularly at levels of education that are key to preventing early school leaving (which remains high), ensuring equal opportunities and tackling inequalities later in life. Participation in quality early education and care remains below the EU average, including due to lack of facilities. This has implications for labour market participation of women as well as the early acquisition of skills. Modernisation of the school network and optimisation to address demographic trends is lagging behind, with 10 % of schools being overcrowded, while 58 % have excess capacities. The acquisition of basic and digital skills faces significant challenges. Teachers' abilities to apply a learner-centred approach are not sufficiently developed. Rural-urban disparities persist and vulnerable groups, including the Roma, continue to have limited access to high-quality, inclusive education.

               (14)The labour market has been under increasing pressure, as the unemployment rate (4.2% in 2018) is very low, while the labour force is declining and skills shortages persist. Women's activity rate, particularly for the young and middle-aged, is low. This is mainly due to personal and family responsibilities and the low participation of children aged 0-3 in formal childcare. Active labour market policies provide a limited response to labour market needs, with measures focused mainly on financial incentives rather than on tailor-made and comprehensive approaches. The delay of the planned reform for the public employment service remains an important barrier for modernised service-delivery to employers and the unemployed. Upskilling and integrated services delivery is also weak. Skills are not evolving in line with the needs of expanding economic sectors, with 81% of employers having difficulties filling job vacancies. The ICT sector is growing, while the number of Romanians aged 20-29 holding a degree in science, technology, engineering or maths fell between 2014 and 2016. At present there is no a global or sector-level assessment of skills needs and the forecasting of skills remains unused, hampering the adaptation of the education and training system to labour market needs. The roll-out of dual vocational education and training to address skills shortages has started. However, vocational education and training is still considered a second-rate option by students and parents and the relatively low employment rate for recent vocational education and training graduates indicates that labour market relevance is a challenge. Higher education is not sufficiently aligned with the labour market. Although tertiary educational attainment has doubled over the decade, it remains low.

               (15)Despite recent improvements, poverty and income inequality remain high, and regional disparities are deepening. One in three Romanians is still at risk of poverty and social exclusion, with particular groups such as children, the Roma, people with disabilities and the elderly being more affected. Social services have insufficient quality and coverage, and uneven geographical distribution, not correlated with communities’ specific needs. Only around 20% of administrative territorial units have licensed social services. Services are usually concentrated around richer or urban areas, while needs are more pressing in poorer, rural areas and regions. The limited integration of employment, education, health and social services does not allow for the sustainable inclusion of various disadvantaged groups. People with disabilities are given only limited support for independent living and accessing employment. The situation of the Roma community shows very little progress. Housing deprivation is the highest in the EU and is detrimental to social inclusion. Housing policies are being decentralised without a strategic framework, and poor communities often lack financial resources. The social reference index used as a basis for most social benefits has not been updated since 2008 and has also depreciated considerably in relation to the minimum wage. As a result, poverty rates for people with low and very low work intensity have increased by half since 2010. Furthermore, social security for atypical workers is inadequate. One in three atypical workers is at risk of severe material deprivation. Daily and seasonal workers do not have formal access to social security rights covering unemployment, maternity leave, accidents and occupational injuries. The implementation of the minimum inclusion income reform initiated in 2016, which would increase the coverage and adequacy of social assistance, was further postponed to 2021.

               (16)Social dialogue is characterised by low collective agreement coverage, in particular at sectoral level, also due to the current definition of sectors. The authorities have initiated plans to revise the definitions of economic sectors but no agreement has yet been reached. Beyond the collective bargaining framework, the timely and meaningful involvement of social partners on policy issues and reforms is limited. Most social dialogue takes place formally, within the Economic and Social Council and the Social Dialogue Committees. However, despite the established framework of dialogue and consultations, the stability and the role of these institutions has weakened over the last year.

               (17)After years of moderate wage growth, Romania is experiencing one of the fastest rates of wage growth in the EU. This is driven by government policies increasing public and minimum wages, record low unemployment rate and structural labour supply shortages. The minimum wage continues to be set in a non-systematic manner, without an objective mechanism. Consecutive increases over the years resulted in one in three employees earning the minimum wage in 2017, a rate almost four times higher than in 2011.

               (18)The healthcare system faces many challenges. Low funding, inefficient use of public resources and the lack of reform limit the effectiveness of the health system. Continued emigration has resulted in a sizeable shortage of doctors and nurses. Health infrastructure and the prevalence of informal payments remain sources of concern. Access to healthcare services for those living in rural areas and vulnerable groups is limited. These factors in turn have a negative impact on the people's health which remains below the EU average, despite recent improvements. Improvements in community care are much needed but are delayed. The pilot project for setting up community care centres has started with a delay, impacting the roll-out of integrated care services. The long-term care sector is not ready to deal with a rapidly ageing population. There are very few at-home and day-care services, mainly concentrated in areas with higher income. Coverage and public spending on long-term care are among the lowest in EU and access to long-term care, rehabilitation and palliative care is poor.

               (19)The quality of infrastructure, including in the transport, energy, waste and wastewater sectors remains poor and limits Romania’s growth prospects. Despite significant public investment after Romania joined the EU, its physical infrastructure remains underdeveloped. The general condition and reliability of the road and rail networks are very poor. The infrastructure is not keeping up with the traffic demand generated by an expanding economy. The road network is among the least developed in the EU and the reform of the railway sector is lagging behind. Greenhouse gas emissions from road transport have increased strongly over the last five years. Moreover, heavy underinvestment in maintenance has reduced train speed and affected delivery times of rail freight transport. Urban transport suffers from chronic underfinancing, poor sector organisation and the weak administrative capacity of local providers. In addition, energy, waste, water and wastewater infrastructure and energy interconnections continue to show deficiencies. The waste management system continues to be characterised by very low recycling of municipal waste and very high landfill rates. Challenges remain to achieve the energy efficiency target, in particular there is still a wide margin to improve energy efficiency in buildings.

               (20)Romania’s overall innovative capacity remains low and its future competitiveness is challenged by the large productivity and innovation gap between foreign-owned and domestic firms. Romania’s investment in research and development is the lowest in the EU (0.5% of GDP) and public research and development expenditure further declined from 0.32% of GDP in 2011 to 0.21% of GDP in 2017, impeding any capacity building. As a consequence, the quality of the public science base remains very low and science-business links underdeveloped. As the number of tertiary graduates in science, technology, engineering and mathematics has also further declined, skills shortages pose a great challenge to the innovative potential of the Romanian economy. Digitalisation is a key challenge if Romanian innovation and competitiveness are to improve. Romania scores poorly on many components of the Digital Economy and Social Index, including digital public services, digital skills of the overall population and digitalisation of businesses.

               (21)Romania achieved limited progress in addressing a country specific recommendation to strengthen project prioritisation and preparation in public investment. The Ministry of Finance is in charge of preparing a priority list of public investment projects above RON 100 million (EUR 21 million) and monitoring their implementation but the projects are managed by the line ministries. The list of priority projects currently includes approximately 130 projects, mostly in the transport area. Most of these priority projects could be co-financed by the EU funds. The uptake of EU funds is held back by factors like limited administrative capacity to prepare, prioritise and implement large investment projects. Even though recently large infrastructure projects are being prepared and sent to the European Commission for approval, some important projects such as the Sibiu-Piteşti motorway (ensuring the connectivity with the TEN-T Rhine-Danube and Orient-East Mediterranean corridors) are still missing and implementation in general continues to lag behind. Moreover, EU funds absorption has so far been driven by projects prepared for the previous programming period whereas a pipeline of new projects for the current period is yet to be fully developed.

               (22)Efficient public procurement is key to achieving important policy objectives in Romania, including efficient public spending, the modernisation of public administration and promoting innovation, sustainable and inclusive growth. Romania has made limited progress in addressing the country-specific recommendation to improve the transparency of public procurement. The efficiency of public procurement continues to be an issue, while the irreversibility of certain measures, notably the streamlining of the ex-ante control, is at stake. The national public procurement strategy stresses the importance of a unitary ex-ante control performed by the National Agency for Public Procurement. Recurrent legislative initiatives risk undermining the achievement of the objectives in the strategy. The predictability and stability of the public procurement legislation remain important challenges and the national public procurement strategy is not fully implemented.

               (23)The conduct of public policy making has become increasingly unpredictable, weighing on the business environment. A recent example is the adoption through government emergency ordinance of a set of far-reaching measures affecting the functioning of the banking sector, the second pension pillar fund managers, energy and telecommunication companies, without stakeholder consultation or impact assessment. Regulatory impact assessments remain a formality, while their quality and actual use vary substantially across sectors. There is only limited quality control of regulatory impact assessments and policy design. There is no sustainable policy monitoring mechanism with a transparent reporting system and ex-post evaluations. Important legislative initiatives are often announced just before adoption. The involvement of stakeholders in designing and implementing reforms is weak, and genuine dialogue rarely exists, although the institutional structures for it are available. Cumbersome administrative procedures particularly affect small and medium-sized businesses. For example, burdensome administrative procedures for setting up businesses as well as regulatory requirements imposed on services providers, including regulated professions, impede further market development. The adoption of relevant legislation on human resource management in public administration is still delayed. High fragmentation of responsibilities and resources affects the consistency and availability of public services provided, especially at local level. National and regional strategies for different public services are not well translated into integrated measures at regional and local level. Funding of public services is uneven across the country and often does not correspond to local needs. Factors like a unified strategic approach per type of service, existing gaps and needs to develop new services are overlooked. Local authorities’ revenues lack stability and predictability. Limited action has been taken to improve the balance between responsibilities to be decentralised and the allocation of financial resources to allow local authorities to deliver quality services. Additional actions are needed to increase administrative capacity at local level.

               (24)State-owned enterprises have a key role in critical infrastructure sectors such as energy and rail transport. Their economic and financial performance has recently improved, on the back of a favourable macroeconomic environment. However, transparency and disclosure of financial and operational results have not improved and corporate governance rules continue to be only sparsely applied. Specific examples include the repeated appointment of interim boards, departing from the spirit of the law, and the non-use of enforcement tools available under the legislation for non-compliant companies. Risks that the legislation on state-owned enterprises could be substantially weakened have not abated. This amounts to a reversal of progress made on country-specific recommendations from 2015 and 2016. As a result, key conditions for promoting the efficient use of public resources are being impaired, and space is allowed for distorted investment decisions. The transfer of the ownership of several of the larger state-owned enterprises to the new Sovereign Development and Investment Fund will require a thorough implementation of strong corporate governance rules both for the Fund and the companies in its portfolio.

               (25)Developments throughout the past year have raised concerns with regard to the rule of law and strengthened previous serious concerns regarding the irreversibility and sustainability of Romania’s earlier progress on reforming its judicial system and tackling high-level corruption. These issues are the subject of monitoring under the Cooperation and Verification Mechanism. Amendments to three justice laws are now in force and contain a number of measures weakening the legal guarantees for judicial independence. These are likely to undermine both the effectiveness of daily work by judges and prosecutors and public confidence in the judiciary. Pressure is being put on judicial institutions and on individual magistrates, including by setting up a specialised prosecution section for crimes allegedly committed by magistrates. Ongoing steps to amend the criminal code and the criminal procedure code would have a negative impact on the effectiveness of criminal investigations and trials and also reduce the scope of corruption as an offence. Further concerns relate to the processes for dismissing and appointing high-level magistrates. Recent announcements suggest that measures related to the reform of the justice system may be reconsidered.

               (26)Under the Cooperation and Verification Mechanism, the Commission continues to monitor the judicial reform and the fight against corruption in Romania. These areas are therefore not covered in the country-specific recommendations for Romania, but are relevant for developing a positive socio-economic environment in the country.

               (27)The programming of EU funds for the period 2021-2027 could help address some of the gaps identified in the recommendations, in particular in the areas covered by Annex D to the country report
                  9
               . This would allow Romania to make the best use of those funds in respect of the identified sectors, taking into account regional disparities. Strengthening the country’s administrative capacity for the management of these funds is an important factor for the success of this investment.

               (28)In the context of the 2019 European Semester, the Commission has carried out a comprehensive analysis of Romania’s economic policy and published it in the 2019 country report. It has also assessed the 2019 Convergence Programme and the 2019 National Reform Programme and the follow-up given to the recommendations addressed to Romania in previous years. It has taken into account not only their relevance for sustainable fiscal and socioeconomic policy in Romania, 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.

               (29)In the light of this assessment, the Council has examined the 2019 Convergence Programme and its opinion
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                is reflected in particular in recommendation (1) below.

               (30)In the light of the Commission’s in-depth review and this assessment, the Council has examined the 2019 National Reform Programme and the 2019 Convergence Programme. Its recommendations under Article 6 of Regulation (EU) No 1176/2011 are reflected in recommendations (1), (2) and (4), (5) below. Fiscal policies referred to in recommendation (1) contribute inter-alia to address imbalances linked to competitiveness and the external position.

               HEREBY RECOMMENDS that Romania take action in 2019 and 2020 to:

               1.Ensure compliance with the Council recommendation of XX June 2019 with a view to correcting the significant deviation from the adjustment path toward the medium-term budgetary objective. Ensure the full application of the fiscal framework. Strengthen tax compliance and collection.

               2.Safeguard financial stability and the robustness of the banking sector. Ensure the sustainability of the public pension system and the long-term viability of the second pillar pension funds.

               3.Improve the quality and inclusiveness of education, in particular for Roma and other disadvantaged groups. Improve skills, including digital, notably by increasing the labour market relevance of vocational education and training and higher education. Increase the coverage and quality of social services and complete the minimum inclusion income reform. Improve the functioning of social dialogue. Ensure minimum wage setting based on objective criteria, consistent with job creation and competitiveness. Improve access to and cost-efficiency of healthcare, including through the shift to outpatient care.

               4.Focus investment-related economic policy on transport, notably on its sustainability, low carbon energy and energy efficiency, environmental infrastructure as well as innovation, taking into account regional disparities. Improve preparation and prioritisation of large projects and accelerate their implementation. Improve the efficiency of public procurement and ensure full and sustainable implementation of the national public procurement strategy.

               5.Ensure that legislative initiatives do not undermine legal certainty by improving the quality and predictability of decision-making, including by appropriate stakeholder consultations, effective impact assessments and streamlined administrative procedures. Strengthen the corporate governance of state-owned enterprises.

               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(2019) 1022 final.

                     (4)

                        COM(2019) 150 final.

                     (5)

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

                     (6)

                        COM(2014) 494 final.

                     (7)

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

                     (8)

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

                     (9)

                        SWD(2019) 1022 final.

                     (10)

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