               EUROPEAN COMMISSION
            Brussels, 5.6.2019
            COM(2019) 508 final
            Recommendation for a
            COUNCIL RECOMMENDATION
            on the 2019 National Reform Programme of Greece and delivering a Council opinion on the 2019 Stability Programme of Greece

               Recommendation for a

               COUNCIL RECOMMENDATION

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

               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 Greece 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, Greece should ensure the full and timely implementation of the Recommendation for the euro area, as reflected in recommendation (1) and (2) below. In particular, reforms in line with the post-programme commitments and focusing economic policy related to investment in the specified areas will help address the euro area recommendation.

               (3)The 2019 country report for Greece
                  3
                was published on 27 February 2019. It assessed Greece'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 Greece is experiencing excessive macroeconomic imbalances. The imbalances identified related in particular to the high public debt, the negative net international investment position, the high non-performing loans on banks’ balance sheets and the still high unemployment rate. In addition, deep institutional and structural reforms initiated in recent years to modernise the economy and the State will require many years of sustained implementation for their impact to be fully felt.

               (4)On 26 April 2019, Greece submitted its 2019 National Reform Programme and, on 30 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)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)Greece is currently in the preventive arm of the Stability and Growth Pact and subject to the transitional debt rule. It should also preserve a sound fiscal position which ensures compliance with the primary surplus target set by Decision (EU) 2017/1226 on 30 June 2017 of 3.5% of GDP for 2018 and over the medium term
                  7
               . In spring 2018, the Council issued no country-specific recommendation to Greece in the context of the European Semester because pursuant to Article 12 of Regulation (EU) No 472/2013
                  8
                Greece was exempt from the monitoring and assessment under the European Semester at that time since it was subject to a macroeconomic adjustment programme. The post-programme framework for Greece entails the activation of enhanced surveillance together with Greece’s integration to the European Semester framework of economic and social policy coordination, while maximising the synergies between the enhanced surveillance and European Semester processes.

               (7)In its 2019 Stability Programme, the government plans a headline surplus of between 1.1% and 1.7% of GDP over 2019-2022. The government set its medium-term budgetary objective – a budget surplus of 0.25% of GDP in structural terms as of 2020. Based on the recalculated structural balance
                  9
               , this medium-term budgetary objective is planned to be overachieved throughout the programme period and the general government debt-to-GDP ratio is expected to gradually decline to 153.3% in 2022. The macroeconomic scenario underpinning those budgetary projections has been endorsed by an independent body and is favourable. Based on the Commission 2019 spring forecast, the structural balance is forecast to register a surplus of 1.9% of GDP in 2019 and 0.8% of GDP in 2020, above the medium-term budgetary objective. General government debt is forecast to remain on a downward path and to comply with the transitional debt rule in 2019 and with the debt rule in 2020. Overall, based on the Commission 2019 spring forecast and thus excluding the new measures adopted after its cut-off date, Greece was projected to comply with the provisions of the Stability and Growth Pact in 2019 and 2020. On the same basis, Greece was also considered to comply with the 3.5% of GDP primary surplus target monitored under the enhanced surveillance framework.

               (8)The Stability Programme and Commission 2019 spring forecast do not incorporate new permanent measures announced and adopted shortly after their respective submission and cut-off dates. The Commission estimates the fiscal impact of these measures to exceed 1.0% of GDP in 2019 and subsequent years. It is also assessed that the adoption of these new measures poses a risk for the agreed primary surplus target, as monitored under the enhanced surveillance framework and set by the by Decision (EU) 2017/1226 of 30 June 2017. Moreover, the new measures are expected to reduce the structural balance, raising concerns on the achievement the medium-term budgetary objective in 2020. But, a re-assessment will be carried out in autumn 2019, and will include a revision of the applicable benchmark for the net expenditure growth rate in 2020. While general government debt is forecast to remain on a downward path, some risks could be posed to compliance with the debt reduction benchmark.  This will have to be reassessed in autumn as a result of these newly adopted measures.Following its successful completion of the financial assistance programme under the European Stability Mechanism, Greece is subject to a post-programme surveillance framework integrated into the European Semester and is subject to enhanced surveillance in accordance with Regulation (EU) No 472/2013. The activation of enhanced surveillance for Greece
                  10
                acknowledges the fact that over the medium term, Greece needs to continue adopting measures to address the sources or potential sources of macroeconomic imbalances, while implementing structural reforms to support a robust and sustainable economic growth. Greece made a commitment in the Eurogroup of 22 June 2018 to continue all key reforms adopted under the programme until they are fully completed. Greece also committed to implementing specific actions related to fiscal and fiscal-structural policies, social welfare, financial stability, labour and product markets, privatisation and public administration. Greece is subject to quarterly reporting on progress with implementing its commitments under enhanced surveillance, where a favourable report can, on a six monthly basis, pave the way for the release of debt relief measures worth 0.7% of GDP per annum. The release of the first tranche of policy-contingent debt measures worth EUR 970 million was agreed by the Eurogroup in April 2019. The third Enhanced Surveillance report assessing Greece’s progress with the implementation of its commitments was published on 5 June 2019.

               (9)Reforms that improve the business environment and the quality of institutions, in particular the efficiency of the justice system, would foster economic resilience in Greece, improve payment discipline and should have a significant impact on investment decisions and attracting businesses. Despite recent improvements, the Greek judicial system still faces challenges and displays inefficiencies, as the time to reach a decision is often too long and backlogs weigh on the productivity of courts. Further targeted action in this area is therefore critical, also to facilitate the smooth functioning of the financial system as well as help unlocking investment potential.

               (10)Several years of underinvestment have led to major investment gaps in Greece. Increasing growth-enhancing investment will be instrumental in underpinning longer-term growth and reducing regional disparities. The country report identified priority areas for public and private sector investment.

               (11)Higher investment in education and training is crucial to improve Greece’s productivity and long-term inclusive growth and address barriers to growth in innovative sectors. The Greek education system faces several challenges with inadequate resources, low autonomy, underachievement in basic (including digital) skills and persisting skills mismatches. At all levels, accountability and monitoring, which are necessary for quality improvement of the education system, are largely missing. Promoting quality and inclusive education and training, establishing closer links between education and labour market needs, improving the attractiveness of vocational education and training, and increasing participation in life-long learning are important for underpinning sustainable growth.

               (12)The share of long-term unemployed, who represented 70% of the unemployed in Greece in 2018, is very high, while high youth unemployment and low labour market participation of women are also a matter of concern. Interventions should focus on improving employment prospects, promoting labour market participation, and fostering conditions for job creation. Effective social dialogue and responsible social partnership in Greece can support the environment for the implementation and ownership of sustained reforms, resulting in a better functioning of the labour market.

               (13)Greece is characterised by high income inequality and has the lowest impact of social transfers on reducing the risk of poverty in the EU (15.83% in 2017 versus an EU average of 33.98%). Investments should focus on enhancing access to inclusive, affordable and high quality social services, as well as on developing day-care centres. Supporting the most deprived and promoting the social integration of children at risk of poverty, of persons with disabilities, of migrants and refugees, while paying attention to geographic disparities would improve social inclusion in Greece.

               (14)Greece initiated a far-reaching reform of the primary healthcare system in 2017, which is crucial to ensure access and requires continued investment through the deployment of local healthcare units (the so called “TOMYs”).

               (15)The Greek transport system faces significant challenges. It is largely road-based and heavily dependent on oil, with all main connections rotating around the Athens– Thessaloniki route. Transport costs are still high while the quality of service, safety standards and penetration of intelligent transport systems remains low. New investment is needed to increase multimodal transport and promote regional integration and urban development.

               (16)Treatment of solid waste and urban and industrial wastewater is the main area needing additional investment in order to align the country’s environmental protection standards with the rest of the EU. The management of solid waste continues to be a major structural challenge, with Greece still relying heavily on landfilling and mechanical-biological treatment instead of more modern techniques. In addition, the proportion of municipal waste that is recycled is only about a third of the EU average. Investments are also needed to improve water treatment, combat ground water salinisation, and support measures to prevent flooding and restore the natural flow of rivers.

               (17)Underdeveloped infrastructures increase energy costs for businesses and households and form a barrier to the uptake of renewable energy. Greece faces a particular challenge here with the electricity connectivity of islands and the connection with neighbouring countries. Further development of commercial gas infrastructure would help grow the market. The reform of both the gas and electricity markets should strive to take advantage of these new infrastructure opportunities.

               (18)The digital transformation of the economy and society remains challenging, with low access to high-speed broadband networks and digital skills well below the EU average. Greece particularly needs to invest in information and communication technology, also to make up for the investment slump during the crisis. Insufficient higher speed broadband connectivity creates major bottlenecks for dynamic export oriented businesses. The investment in innovation and people’s skills is insufficient to promote productivity growth, and the lack of digital skills among the population at large is preventing them from finding employment and hindering the development of innovative businesses.

               (19)Renewed ‘smart specialisation’ strategies at national and regional level, and additional measures to address the most pressing weaknesses of the research and innovation system, are needed to stimulate market-oriented investment in research and development, which remains low and weighs on Greece’s growth potential. Advances in scientific excellence are hindered by the low intensity of public research and development, a lack of a performance-based funding system and weak science-business links. Higher investment is also needed to boost the low levels of technological development, reflected in the very low number of patents compared with other Member States, and to fully tap into the potential of start-ups and scale-ups.

               (20)As a crosscutting theme, investment in the regeneration of deprived urban areas, islands and highlands is needed to counter the loss and deteriorated quality of the country’s physical and human capital during the economic crisis. Sustainable re-development of disadvantaged and/or de-industrialised areas in the Athens-Piraeus and Thessaloniki conurbations and in the principal peripheral urban centres (Patras, Heraklion, Larissa, Ioannina, Agrinion and Chalkis) is a specific short to medium-term priority. Longer-term priorities include developing of sustainable productive activities, upgrading mobility and security systems, energy efficiency and renewable energy, environmental protection and improving resilience to natural risks and socio-economic crises. Interventions should also target the social inclusion, the integration of migrants, the acquisition of skills to reduce unemployment, and cultural activities to increase the attractiveness of deprived areas. Addressing these challenges through integrated urban renewal strategies would maximise the chances of achieving the best economic, social and environmental outcomes.

               (21)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
                  11
               . This would allow Greece to make the best use of those funds in respect of the identified sectors, taking into account regional disparities. Strengthening the administrative capacity for the management of the Funds is an important factor for the success of investment.

               (22)In the context of the 2019 European Semester, the Commission has carried out a comprehensive analysis of Greece’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. It has taken into account not only their relevance for sustainable fiscal and socioeconomic policy in Greece, but also their compliance with Union rules and guidance. This reflects the need to strengthen the Union’s overall economic governance by providing Union-level input into future national decisions.

               (23)In the light of this assessment, the Council has examined the 2019 Stability Programme and is of the opinion that Greece is expected to comply with the Stability and Growth Pact.

               (24)In the light of the Commission’s in-depth review and this assessment, the Council has examined the 2018 National Reform Programme and the 2018 Stability Programme. Its recommendations under Article 6 of Regulation (EU) No 1176/2011 are reflected in recommendation (1) and (2) below. Those recommendations also contribute to the implementation of the first four of the Recommendations for the euro area.

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

               1.Achieve a sustainable economic recovery and tackle the excessive macroeconomic imbalances by continuing and completing reforms in line with the post-programme commitments given at the Eurogroup of 22 June 2018.

               2.Focus investment-related economic policy on sustainable transport and logistics, environmental protection, energy efficiency, renewable energy and interconnection projects, digital technologies, research and development, education, skills, employability, health, and the renewal of urban areas, taking into account regional disparities and the need to ensure social inclusion.

               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) 1007 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)

                        Council Implementing Decision (EU) 2017/1226 of 30 June 2017 amending Implementing Decision (EU) 2016/544 approving the macroeconomic adjustment programme of Greece (2015/1411), OJ L 174, 7.7.2017, p. 22.

                     (8)

                        Regulation (EU) No 472/2013 of the European Parliament and of the Council of 21 May 2013 on the strengthening of economic and budgetary surveillance of Member States in the euro area experiencing or threatened with serious difficulties with respect to their financial stability, OJ L 140, 27.5.2013, p. 1

                     (9)

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

                     (10)

                        Commission Implementing Decision (EU) 2018/1192 of 11 July 2018 on the activation of enhanced surveillance for Greece, OJ L 211, 22.8.2018, p. 1, and Commission Implementing Decision (EU) 2019/338 of 20 February 2019 on the prolongation of enhanced surveillance for Greece, OJ L 60, 28.2.2019, p. 17.

                     (11)

                        SWD(2019) 1007 final.


               EUROPEAN COMMISSION
            Brussels, 5.6.2019
            COM(2019) 520 final
            Recommendation for a
            COUNCIL RECOMMENDATION
            on the 2019 National Reform Programme of Austria and delivering a Council opinion on the 2019 Stability Programme of Austria

               Recommendation for a

               COUNCIL RECOMMENDATION

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

               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 Austria 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, Austria should ensure the full and timely implementation of the Recommendation for the euro area, as reflected in recommendations (1) to (3) below. In particular, focusing economic policy related to investment in the specified areas will help address the second euro area recommendation as regards supporting investment, while the recommendation to shift taxes away from labour addresses the third euro area recommendation regarding functioning of the labour market.

               (3)The 2019 country report for Austria
                  2
                was published on 27 February 2019. It assessed Austria’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 Austria’s progress towards its national Europe 2020 targets.

               (4)On 24 April 2019, Austria 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
                  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)Austria is currently in the preventive arm of the Stability and Growth Pact and subject to the debt rule. In its 2019 Stability Programme, the government expects that the headline balance will improve from a surplus of 0.1% of GDP in 2018 to 0.3% of GDP in 2019 and incrementally reduce to a balanced budget position in 2023. Based on the recalculated structural balance
                  5
               , the medium-term budgetary objective – a structural deficit of 0.5% of GDP – continues to be overachieved throughout the programme period. According to the Stability Programme, the general government debt-to-GDP ratio is expected to gradually decline from 73.8% of GDP in 2018 to 59.8% of GDP in 2023. The macroeconomic scenario underpinning those budgetary projections is favourable. The risks underlying the medium-term budgetary planning appear to be moderate and mainly concern the announced implementation of cost savings in the public administration that are to be used to finance the planned reform of the personal and corporate income tax.

               (7)On 13 July 2018, the Council recommended Austria to achieve the medium-term budgetary objective in 2019, taking into account the allowance linked to unusual events for which a temporary deviation is granted. This is consistent with a maximum nominal growth rate of net primary government expenditure
                  6
                of 2.9%, corresponding to an improvement in the structural balance by 0.3% of GDP. Based on the Commission 2019 spring forecast, the structural balance is forecast to improve from 0.1% of GDP in 2019 to 0.0% of GDP in 2020, above the medium-term budgetary objective. Austria is forecast to comply with the debt rule in 2019 and 2020. Overall, the Council is of the opinion that Austria is projected to comply with the provisions of the Stability and Growth Pact in 2019 and 2020.

               (8)Austria faces medium fiscal sustainability risks in the long term. These risks are due to the projected increase in public expenditure on healthcare, long-term care and pensions. While coverage of healthcare services is generally high in Austria, public healthcare expenditure is projected to increase by 1.3 pps to 8.3% of GDP by 2070 and hence more than the EU average of 0.9 pps. Public expenditure on long-term care is projected to double from 1.9% to 3.8% of GDP by 2070. The introduction of expenditure ceilings through the 2017 Financial Equalisation Law and the Primary Health Care Reform, aimed at reducing the excessive reliance on the hospital sector, have started to address the sustainability issue. The recently adopted Social Security Organisation Act may entail savings in governance and administrative costs but will generate upfront costs. Quality and cost-efficiency would be further helped by more effective public procurement (e.g. EU-wide tendering, the use of award criteria other than price, and aggregating tenders across regions) and a wider use of e-health solutions. In the area of long-term care, recent policy measures - such as the decision to abolish the obligation on patients to use their own private assets to fund long-term inpatient care - are expected to increase, rather than contain, expenditure.

               (9)Pension spending would peak in 2036, at a level of 1.2 pps of GDP above the 2016 reference point. Past reforms have successfully provided incentives to retire later (the effective exit age from the labour market increased by an estimated 1.5 years for men and by 1 year for women between 2014 and 2017). However, closing the gap between the statutory and the effective retirement age remains a challenge and longer working lives should be promoted. In addition, adjusting the minimum age for both early and statutory retirement would help improve long-term sustainability more effectively in the context of an ageing society. Introducing an automatic link between the statutory retirement age and gains in life expectancy in the future could reduce public pension expenditure. Such a reduction is estimated to 2.4 pps of GDP in 2016-2070, thus offsetting the increase that would be the result of an unchanged policy.

               (10)Austria’s fiscal federalism leads to a significant mismatch in expenditure and revenue-raising responsibilities at subnational level. Rather than relying on tax autonomy, subnational budgets are fed by a complex system of tax sharing and intergovernmental transfers. This hampers both fiscal transparency and political accountability, and provides few incentives for efficient public spending. The 2017 Intergovernmental Fiscal Relations Act has introduced a series of changes to streamline the fiscal relations between the different levels of government. The changes include simplifying the distribution of shared taxes, assigning an own source of revenue to the Länder, and agreeing on further reforms for a more transparent allocation of legislative and executive responsibilities between levels of government. As for the latter, the Kompetenzbereinigungspaket constitutes a first step towards the disentangling responsibilities as it re-allocates shared policy areas to either (exclusively) the federal or the Länder level, and reduces mutual rights of assent. However, the law affects only a limited number of policy areas.

               (11)Austria’s tax structure is characterised by a high burden on labour (payroll taxes and social security contributions). The burden is set to increase over time, as long as tax brackets are not indexed to inflation. At 55.3% in 2017, the share of labour taxes in total tax revenue was one of the highest in the EU (average: 49.7%). Recent reforms, such as reductions in social security contributions for low-income earners and employers as well as the tax relief for working parents provided by the new Family Bonus plus, have helped lower the labour tax wedge. There remains scope for shifting the tax mix towards sources that support more inclusive and sustainable growth. In particular, recurrent property taxes are found to be relatively growth-friendly and progressive, as higher–income earners are likely to possess more housing wealth. However, due to a largely outdated tax base, revenue from recurrent property taxes in Austria remains low and well below the EU average. A revaluation of the tax base would help generate more revenue and address fairness issues that arise when land/real estate values are decoupled from market prices. Effective, well-designed wealth-related taxes could also make the tax system fairer, especially against the background of Austria’s striking wealth inequality and in the absence of inheritance and gift taxes. Finally, environmental taxes help internalise negative externalities of resource use and polluting activities related to health and climate. In this context, the preferential tax treatment such activities currently enjoy should be reconsidered.

               (12)The labour market is improving; however, the untapped potential of human capital is hampering productivity and long-term growth with changes particularly required for women, low–skilled workers, older workers and people with a migrant background. Despite an overall high employment rate for women (Austria 71.7% vs. EU 67.4% in 2018), the number in full-time employment remains rather low. Female part-time employment is well above the EU average (Austria 47.6% vs. EU 30.8% in 2018) and is mainly related to insufficient childcare facilities and a high share of women performing unpaid care tasks. The current design of childcare services provision and family-related leave do not sufficiently contribute to equal opportunities for men and women on the labour market. Further investment in affordable full-time childcare services and all-day schools would help more women work full-time, better use the labour market potential of women, and improve productivity and long-term inclusive growth. Female part-time employment also explains an important share of the unadjusted gender pay gap, which remains visibly above the EU average (Austria 19.9% vs. EU 16.0% in 2017). Other important drivers of this gap are the over-representation of women in low-paid sectors, segregation related to the choice of education, under-representation of women in management and supervisory positions, and career breaks. Overall, the substantial gender gap in pension income (Austria 40.5% vs EU 35.2%, in 2017), is largely the result of these gender-specific income inequalities generated during working life. Moreover, marginally employed people, a majority of whom are women, are not covered by unemployment benefit. High unemployment rates among the low skilled point to underused labour market potential. More than 44% of all unemployed have completed only basic schooling (up to lower secondary school, ‘Pflichtschule’). Active labour market policies encouraging more people to work or look for a job, including lifelong learning opportunities, remain crucial for realising the labour potential of workers with a migrant background and low-skilled adults. The involvement of social partners in the decision-making process for these policies, despite being traditionally strong, has been challenged.

               (13)Shortages of skilled labour point to the need to invest more in general education and training. Learning outcomes for disadvantaged students have not improved. A wide performance gap remains between students with and without a migrant background. National testing in 2016 showed that the level of basic skills poses a challenge, as around one-quarter of 8th grade pupils do not or only partially meet educational standards in German. Results for those with a weak socio-economic and/or migrant background have hardly improved in national testing. Recent international testing also confirmed a widening gap in reading for those from a lower socio-economic or migrant background. In the Programme for International Student Assessment, Austrian-born pupils outperform first generation migrants by a level equivalent to almost three years of schooling. Recent education reforms partly undermine previous reform efforts and are not in line with EU and OECD best practice. In this context, the expansion of all day schooling has slowed, and tracking and streaming in general school is being intensified. Investment is required to address unequal education outcomes due to socio-economic or migrant background. While Austria performs above average in the EU with regard to the digital skills of its citizens, it is falling behind the top performing countries. There is a growing lack of skilled IT workers in the economy, as increasing demand is not met by a sufficient supply of computing graduates.

               (14)Austria is a country that invests heavily in research and development, with ambitious national targets. However, the scientific and innovation outputs are not at the level of those of EU’s ‘Innovation Leaders’
                  7
               . Increased investment in research and development do not translate entirely into innovation outcomes and productivity growth. In particular, Austria performs poorly on employment in fast-growing innovative firms. Research and development investment would be more effective if it was translated fully into excellent science and ground-breaking innovation. To do so, more and better links between science and business should be enabled and cooperation on smart specialisation priorities between different regions and with other countries should be encouraged. In addition, further investment could generate major productivity gains and innovation outcomes including into eco-innovation, the innovation capacity of small and medium-sized enterprises and in complementary intangible assets.

               (15)While Austria performs better than the EU average in overall progress with digitalisation, it does not reach the level of EU’s ‘Innovation Leaders’. This concerns the use of digital technologies but also their development. Austria’s information and technology sector is comparatively small and has not been subject to the same growth as similar sectors in the ‘Innovation Leader’ countries. Additionally, rural areas lack high-speed connectivity, which increases the divide in digitalisation and innovation capacities between regions. Significant gaps also exist as regards digital infrastructure in schools, for example for the coverage of wireless local area networks. A relaunch of Austria’s overall digitalisation strategy offers an opportunity to adopt targets and indicators and also to monitor progress on the necessary public and private investment in digitalisation.

               (16)Increasing energy efficiency and the share of renewable energy resources would strengthen Austria’s sustainable growth potential and help meet the country’s climate and energy targets for 2030. Available solutions are used only sporadically, and public investment in research and development in the area of environment and energy is below the EU average. Improving energy efficiency and the use of renewable energy in small and medium-sized enterprises would help reduce energy consumption. Investment in building renovation, renewable electricity generation and sustainable mobility could provide a significant boost to the Austrian economy. A transition towards a circular economy requires an overall strategy and increased investment by businesses.

               (17)Despite a recent uptick linked to the favourable economic climate, Austria has not yet managed to rekindle total factor productivity growth and to leave behind the decade-long stagnation in this key driver of economic growth and competitiveness. Levers to support productivity growth relate to the digitalisation of businesses, company growth and competition in services. While Austria’s larger businesses are adopting digital technologies and business models at a good pace, its smaller businesses lag behind. Digitalisation of smaller firms, including micro-enterprises, is particularly important, as they form the backbone of the Austrian economy. The considerable take-up of the programme ‘KMU Digital’ shows demand and interest among small and medium-sized enterprises in getting advice on digitalisation. Prolonging and expanding this programme would help, as well as further policy focus on business digitalisation under Austria’s overall digitalisation strategy.

               (18)Structural challenges remain for starting and scaling-up businesses in Austria, and in particular highly innovative companies. Austria lags behind comparable EU countries as regards employment in fast-growing innovative firms. This points to a need to improve the conditions for scaling up innovative businesses, which remains hindered by factors such as a venture capital landscape that is less developed and diverse than in ‘Innovation Leader’ countries. Later–stage funding, such as in the forms of venture capital and access to public capital markets for scale-ups, is a bottleneck. The newly created small and medium-sized enterprises segment on the Viennese Stock Exchange is a step in the right direction. High-growth companies are crucial for spreading new technologies and business models, including digital ones, and thus for productivity growth.

               (19)Austria has significant access barriers and restrictive rules on the exercise of business services and regulated professions. These include specific shareholding requirements, extensive reserved activities and interdisciplinary restrictions. Regulatory barriers, notably as regards the daily operation of shops, contribute to the relatively weak development of Austria’s retail sector. A high administrative burden remains a pressing concern for Austria’s businesses. Continued efforts to reduce burdens and the planned evaluation of Austria’s Trade Licence Act (Gewerbeordnung) are important instruments to improve the business environment. More competition in the service sector would also help address Austria’s challenges in spreading digital technologies and business models.

               (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 Austria to make the best use of those funds in respect of the identified sectors, taking into account regional disparities.

               (21)In the context of the 2019 European Semester, the Commission has carried out a comprehensive analysis of Austria’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 Austria in previous years. It has taken into account not only their relevance for sustainable fiscal and socio-economic policy in Austria, but also their compliance with Union rules and guidance. This reflects 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 is of the opinion
                  9
                that Austria is expected to comply with the Stability and Growth Pact.

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

               1.Ensure the sustainability of the health, long-term care, and pension systems, including by adjusting the statutory retirement age in view of expected gains in life expectancy. Simplify and rationalise fiscal relations and responsibilities across layers of government and align financing and spending responsibilities.

               2.Shift taxes away from labour to sources more supportive for inclusive and sustainable growth. Support full-time employment among women, including by improving childcare services, and boost labour market outcomes for the low skilled, in cooperation with the social partners. Raise the levels of basic skills for disadvantaged groups, including people with a migrant background.

               3.Focus investment-related economic policy on research and development, innovation, digitalisation, and sustainability, taking into account regional disparities. Support productivity growth by stimulating digitalisation of businesses and company growth and by reducing regulatory barriers in the service sector.

               Done at Brussels,

                     For the Council

                     The President

                     (1)

                        OJ L 209, 2.8.1997, p. 1.

                     (2)

                        SWD(2019) 1019 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)

                        As defined by the European Innovation Scoreboard 2018 – Innovation leader: SE, DK, FI, NL, UK, LU Strong innovator: DE, BE, IE, AT, FR, SI.

                     (8)

                        SWD(2019) 1019 final.

                     (9)

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


               EUROPEAN COMMISSION
            Brussels, 5.6.2019
            COM(2019) 511 final
            Recommendation for a
            COUNCIL RECOMMENDATION
            on the 2019 National Reform Programme of Croatia and delivering a Council opinion on the 2019 Convergence Programme of Croatia

               Recommendation for a

               COUNCIL RECOMMENDATION

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

               THE COUNCIL OF THE EUROPEAN UNION,

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

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

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

               Having regard to the recommendation of the European Commission,

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

               (2)The 2019 country report for Croatia
                  3
                was published on 27 February 2019. It assessed Croatia’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 Croatia's progress towards its national Europe 2020 targets. It also included an in-depth review under Article 5 of Regulation (EU) No 1176/2011, the results of which were also published on 27 February 2019
                  4
               . The Commission’s analysis led it to conclude that Croatia is experiencing macroeconomic imbalances linked to high levels of public, private and external debt in a context of low potential growth. However, imbalances have been narrowing over recent years supported by robust nominal growth and a prudent fiscal policy. The negative net external position has been improving due to continued current account surpluses. Public debt has declined significantly since its 2015 peak. Private sector debt reduction is ongoing, though its pace is set to abate as credit growth and investment recover. The financial sector is well capitalised and profitable, but the share of non-performing loans, although declining, remains high. Policy action has been stepped up, but thorough implementation of structural measures remains crucial for strengthening the resilience of the economy. Despite some progress, issues with the completeness, accuracy and timelines of economic and government finance statistics remain.

               (3)On 18 April 2019, Croatia submitted its 2019 National Reform Programme and 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 to some extent been addressed in the programming of the European Structural and Investment Funds ('ESI Funds') for 2014-2020. 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)Croatia is currently in the preventive arm of the Stability and Growth Pact and subject to the debt rule. Starting from a general government surplus of 0.2% of GDP in 2018, the 2019 Convergence Programme plans the headline balance to deteriorate to -0.3% of GDP in 2019 and then to gradually improve to a surplus of 0.8% of GDP in 2022. Based on the recalculated structural balance
                  7
               , the medium-term budgetary objective – which has been changed from a structural deficit of 1.75% of GDP in 2019 to 1% of GDP as of 2020 — is planned to continue to be overachieved throughout the programme period. According to the 2019 Convergence Programme, the general government debt-to-GDP ratio is expected to fall from 71.6% of GDP in 2019 to 68.5% in 2020 and to continue declining to 62% in 2022. The macroeconomic scenario underpinning those budgetary projections is plausible. However, the planned budgetary targets appear cautious. The Commission 2019 spring forecast projects the general government balance at 0.1% and 0.5% of GDP in 2019 and 2020, respectively. Based on the Commission 2019 spring forecast the structural balance is forecast to stand at -0.8% of GDP in 2019 and at -0.5% of GDP in 2020, remaining above the medium-term budgetary objective. Croatia is forecast to comply with the debt rule in 2019 and 2020. Overall, the Council is of the opinion that Croatia is projected to comply with the provisions of the Stability and Growth Pact in 2019 and 2020.

               (6)In December 2018, the Croatian Parliament adopted the Fiscal Responsibility Act. It aims to reinforce the set-up and mandate of the Fiscal Policy Commission and lay down numerical fiscal rules, including a structural budget balance rule. In March 2019, the mandate of the State Audit Office was strengthened through the introduction of sanctioning mechanisms for cases of non-compliance with its recommendations and a broadening of the scope of its audits. The fiscal framework will be further strengthened with the adoption of the amended Budget Act. This is expected to improve budgetary planning, collection of fiscal data and the criteria for the issuance of government guarantees.

               (7)The territorial fragmentation of Croatia’s public administration affects its efficiency and exacerbates regional disparities. Many small local governments often lack adequate financial and administrative resources to provide the services under their remit. This creates wide disparities in public service provision between financially and administratively strong and weak local units across Croatia. At the central government level, the authorities have taken steps towards the simplification of the cumbersome state agencies system, but the legal framework introducing a higher degree of homogeneity across the system is pending. It is planned to devolve the responsibilities of branch-offices of the central administration operating at local level to the counties’ administration.

               (8)The health care system has accumulated further debt in 2018, which poses a risk for public finances. Financing of the system relies on contributions by the working population and state budget transfers, though the latter have been consistently below full cost coverage. The financial situation of the health care system is expected to improve due to the increase in the health insurance premium introduced in 2019 and the excise duties on tobacco in December 2018. The ongoing functional integration of hospitals and actions aimed at improving primary care could lead to increased efficiency in spending, but implementation is proceeding slowly.

               (9)The wage-setting framework lacks consistency across the public administration and public services, which affects equality of treatment and hinders central control over the public wage bill. New legislation on wage setting for civil servants has been postponed several times. The aim of the law is to achieve greater harmonisation across the public administration through the introduction of common wage grids and job complexity coefficients, based on more consistent job descriptions and competence frameworks. Croatia has a social dialogue framework, but the social partners express concerns that the working methods and procedures hinder real dialogue. The fragmentation of the trade unions also weakens the effectiveness of social dialogue.

               (10)In 2018, the unemployment rate continued its rapid decline. Youth unemployment also decreased considerably, but remains high. However, activity and employment rates in Croatia remain low, with early retirement and care responsibilities playing an important role in inactivity. Access to employment needs to improve, for example by anticipating and providing appropriate skills. Many drivers of inactivity are still present and the current measures to help people enter the labour market appear to be insufficient. The capacity of labour market institutions remains limited and cooperation between employment services, social services and other relevant stakeholders is weak. An important package of pension system reforms entered into force in 2019. The main objectives of the reform are threefold: i) to address  design inconsistencies, which have resulted in unfair treatment of certain cohorts of pensioners; ii) to improve the adequacy of the pension system by extending working lives; and iii) to strengthen the institutional setup and performance of the second pension pillar.

               (11)Socio-economic differences are an important determinant of educational attainment in Croatia. The country performs below the EU average when it comes to education, in particular early childhood education and care, basic skills, tertiary educational attainment, adult participation in learning, and the labour market relevance of vocational education and training. Croatia is implementing the curricular reform as a pilot project, but the reform will achieve its full potential only if it is implemented in full and accompanied by training of teachers.

               (12)Despite still relatively high unemployment, labour shortages are affecting some sectors of the economy, mainly because of skills gaps. Improving digital skills could raise productivity and close some skills gaps. The limited labour market-relevance of vocational education and training contributes to low employment rate among graduates. Student participation in programmes that include work-based learning is low. The establishment of the Regional Centres of Competences and the experimental programme in dual education should improve the quality of vocational education and training and facilitate the identification of skills needs. Participation in adult education programmes, offered as part of measures to help people find work or training, is low. This is especially true of those most in need of education, such as low-qualified and unemployed persons.

               (13)The proportion of the population at risk of poverty or social exclusion is declining, but remains above the EU average. This risk mainly concerns the elderly and people with disabilities. The capacity of social benefits to reduce poverty remains weak compared to the EU average. The authorities have taken steps to improve the recording of social benefits provided at the local level by harmonising their classification. This should result in a better overview of the benefits provided across the territory, which could then be used to improve the effectiveness of the social protection system in reaching those most in need.

               (14)The transport network is unbalanced, with railway infrastructure lagging significantly behind, resulting in low quality of service and barriers to workers’ mobility. Public transport in smaller cities lacks adequate infrastructure. Greenhouse gas emissions from road transport have increased significantly over the last five years. The share of renewable energy sources in the transport sector is far below the 2020 target of 10%. Additional efforts and investments are needed to effectively reduce the high proportion of fossil fuel-powered cars, promote inter-modality and more generally curb rising greenhouse gas emissions from the transport sector.

               (15)Croatia’s high energy intensity could be decreased by investments in energy efficiency and smart energy systems. Particular attention could go to reducing the energy consumption in buildings and improving the energy efficiency of district heating networks. Investments in wind and solar have considerable potential too, as have renewables in heating and cooling. Their promotion would also enable Croatia’s islands to increase self-reliance in energy, in line with the ‘Clean Energy for EU islands’ initiative. In addition, Croatia is particularly vulnerable to climate risks, especially floods and forest fires.

               (16)Investments could also promote the transition to a circular economy. They are needed to support separate waste collection and recycling as alternatives to landfilling, develop alternatives to raw materials and increase demand for recycled content and raise public awareness of sustainable consumption practices and behaviour. In addition, significant investment is also necessary to ensure the collection and treatment of wastewater in agglomerations above 2 000 population equivalent. Investment in water networks could reduce leakage of drinking water and fulfil unmet quality requirements.

               (17)Research and innovation capacities and the uptake of advanced technologies need investment to strengthen innovation performance and foster productivity growth, which is being hampered by fragmented and inefficient research and innovation policies. Croatia’s 2016-2020 'smart specialisation' strategy (RIS3) aims to foster innovation, overcome fragmentation in the system and ensure that research and development activities are organised around key economic priorities, but its implementation is expected to accelerate further. Investment could support collaboration between universities and businesses, to enable the transfer of technology and commercialisation of research outcomes and could strengthen governance.

               (18)Measures to improve corporate governance in state-owned enterprises have slowly progressed. A new Code of Corporate Governance was adopted and mid-term planning and performance reporting were mandated. Still, the combination of state-owned enterprises’ heavy presence in many sectors and their low profitability and weak productivity continue to weigh on the economy. In 2018, the list of companies of special interest was further reduced and more companies are now formally eligible for sale, but there is no clear privatisation strategy in place. The authorities’ efforts appear to focus on disposing of the large remaining stock of minority shares and activating non-productive assets. Corruption is perceived to be widespread and growing. Effective tools to prevent and sanction corruption are lacking, in particular at local level. There remains a need to enhance oversight and sanctioning mechanisms for appointees to local public companies.

               (19)Excessive administrative and legislative requirements and parafiscal (non-tax) charges burden businesses, particularly smaller ones. The identification of administrative burden has been completed, allowing the authorities to proceed with the implementation of warranted relief measures. Cuts in parafiscal charges have been lagging. The high number of overly regulated professional services hampers competition. There has been progress in certain sectors, most notably taxi services, but excessive restrictions remain in place for many economically important professions.

               (20)Substantial backlogs and lengthy proceedings in civil and commercial courts reduce legal certainty, while inefficiencies in criminal justice hamper the fight against economic and financial offences. The perception of independence of the judiciary has further deteriorated. Amendments to the law on the State Judicial Council were adopted in 2018. With the exception of the High Commercial Court, the continued reduction in backlogs was mainly due to a decline in the incoming caseload. Electronic communication is being tested in some courts but has yet to be extended nationally.

               (21)The programming of EU funds for the period 2021-2027 could help address some of the gaps identified in the recommendations and in particular in the areas covered by Annex D to the country report
                  8
               . This would allow Croatia 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 to manage these funds is an important factor for the success of these investment. The institutional setup for public procurement requires strengthening to improve compliance and enable strategic procurement to achieve policy objectives and ensure efficient public spending.

               (22)In the context of the 2019 European Semester, the Commission has carried out a comprehensive analysis of Croatia’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 Croatia in previous years. It has taken into account not only their relevance for sustainable fiscal and socioeconomic policy in Croatia, but also their compliance with Union rules and guidance. This reflects the need to strengthen the Union’s overall economic governance by providing Union-level input into future national decisions.

               (23)In the light of this assessment, the Council has examined the 2019 Convergence Programme and is of the opinion
                  9
                that Croatia is expected to comply with the Stability and Growth Pact.

               (24)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) to (4) below. Fiscal policies referred to in recommendation (1) contribute inter-alia to address imbalances linked to high government debt.

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

               1.Reinforce the budgetary framework and monitoring of contingent liabilities at central and local level. Reduce the territorial fragmentation of the public administration and streamline the functional distribution of competencies.

               2.Deliver on the education reform and improve both access to education and training at all levels and their quality and labour market relevance. Consolidate social benefits and improve their capacity to reduce poverty. Strengthen labour market measures and institutions and their coordination with social services. In consultation with the social partners, introduce harmonised wage-setting frameworks across the public administration and public services.

               3.Focus investment-related economic policy on research and innovation, sustainable urban and railway transport, energy efficiency, renewables and environmental infrastructure, taking into account regional disparities. Increase the administration’s capacity to design and implement public projects and policies.

               4.Improve corporate governance in state-owned enterprises and intensify the sale of such enterprises and non-productive assets. Enhance the prevention and sanctioning of corruption, in particular at the local level. Reduce the duration of court proceedings and improve electronic communication in courts. Reduce the most burdensome parafiscal charges and excessive product and services market regulation.

               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) 1010 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)

                        SWD(2019) 1010 final

                     (9)

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


               EUROPEAN COMMISSION
            Brussels, 5.6.2019
            COM(2019) 526 final
            Recommendation for a
            COUNCIL RECOMMENDATION
            on the 2019 National Reform Programme of Finland and delivering a Council opinion on the 2019 Stability Programme of Finland

               Recommendation for a

               COUNCIL RECOMMENDATION

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

               THE COUNCIL OF THE EUROPEAN UNION,

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

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

               Having regard to 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 Finland 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, Finland should ensure the full and timely implementation of the Recommendation for the euro area, as reflected in recommendations (3) and (4) below. In particular, focusing economic policy related to investment in the specified areas will help address the second euro area recommendation as regards supporting investment, and measures to contain household indebtedness will help address the fourth euro area recommendation as regards reducing private debt.

               (3)The 2019 country report for Finland
                  2
                was published on 27 February 2019. It assessed Finland’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 Finland's progress towards its national Europe 2020 targets.

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

               (5)Relevant country-specific recommendations have been addressed in the programming of the European Structural and Investment Funds ('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)Finland is currently in the preventive arm of the Stability and Growth Pact. In its 2019 Stability Programme, which was submitted on a no-policy-change basis by the previous government shortly before the general elections in April, the government plans a headline balance of -0.3% of GDP in 2019, down from 0.7% of GDP from 2018. According to the Government, the balance is projected to improve further in 2020 to 0% and, thereafter, to worsen again to -0.1% in 2021 and -0.3% in 2022. Based on the recalculated structural balance
                  5
               , the medium-term budgetary objective, set at a structural deficit of 0.5% of GDP, is planned to continue to be overachieved throughout the programme period, taking account of the allowances in 2019 linked to the implementation of the structural reforms for which a temporary deviation is granted. The general government debt-to-GDP ratio, which peaked at 63.4% in 2015, declined to 58.9% in 2018. According to the 2019 Stability Programme, the debt ratio will continue to decrease and reach 57.4% of GDP in 2021. It is projected to increase again in 2022 to 57.7% of GDP. The macroeconomic scenario underpinning those budgetary projections appears to be broadly plausible. The main risks to the budgetary projections relate to the possible larger-than-expected cost of ageing and higher inflation.

               (7)On 13 July 2018, the Council recommended Finland to achieve the medium-term budgetary objective in 2019, taking account of 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
                  6
                of 2.9% in 2019, corresponding to an allowed deterioration in the structural balance by 0.2% of GDP. According to the Commission 2019 spring forecast, Finland is expected to be at its medium-term budgetary objective in 2019 taking account of the granted allowance linked to the structural reform clause.

               (8)In 2020, in view of Finland's projected output gap of 0.8%, the nominal growth rate of net primary government expenditure should not exceed 1.9%, 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. According to the Commission 2019 spring forecast under unchanged policies, Finland is projected to be at risk of some deviation in 2020. Overall, the Council is of the opinion that Finland is projected to comply with the provisions of the Stability and Growth Pact in 2019 and needs to stand ready to take further measures to ensure compliance with the provisions of the Stability and Growth Pact in 2020.

               (9)Due to the ageing population and declining workforce, spending on pensions, health and – especially – social care (long-term care) is projected to increase in the coming decades. According to the 2018 Fiscal Sustainability Report, the projected increase in ageing costs would require a fiscal consolidation amounting to 2% of GDP to stabilise the debt-to-GDP ratio in the long term. A reform of regional government, health and social services, designed to address these challenges and to ensure equal access and reduce waiting times, was rejected by the Finnish Parliament on 7 March 2019. The ratio of self-declared unmet medical needs in Finland remains above the EU average. In particular, people outside the workforce are having difficulties getting the necessary medical care due to long waiting lists.

               (10)Amid a shrinking working-age population and rising levels of vacancies, the Finnish labour market is tightening. At the same time, activity and employment rates in Finland are lower than in the other Nordic countries and structural unemployment remains at 7% in 2018. This partly reflects inactivity and unemployment traps hindering a better use of the labour force. The main barriers to getting people back to work include the complex benefits system and the combination of different types of allowances. Benefits are phased out rapidly as income increases, which creates the risk that taking up work might not be sufficiently financially rewarding. Uncertainty surrounding the level of benefits and the time to reinstate them reduces the attractiveness of short-term or part-time work. The basic income experiment, the preliminary results of which were published in February 2019, provides some information for revising the social security system to combine benefits more effectively with earnings.

               (11)Investments in active inclusion, especially of groups furthest from the labour market, are necessary to increase the participation rate now that activity and employment rates are close to pre-crisis levels. Comprehensive reforms aiming at fostering labour market participation could bring about better opportunities in the labour market for some groups. This concerns people with a migrant background, women at childbearing age, low-skilled men, people partially able to work and persons with disabilities. Some services for the unemployed and inactive are dispersed among separate authorities and providers. Helping these groups to join and remain in the labour market requires tailor-made and integrated activation and rehabilitation services and policies. Long caretaking responsibilities for women contribute to the gender employment gap and the gender pay gap. The government initiated a process to reform family leave, but did not carry it through.

               (12)Ensuring the supply of labour in times of demographic and technological change is key to fostering sustainable and inclusive growth in Finland. Investing in skills, especially those relevant to the labour market, would help meet the challenges created by structural change in the economy. Technological change calls for continuous training and reskilling of the workforce through flexible ways of learning, including by focusing on adult learning, education and training. This should increase occupational mobility, reducing skills mismatches and helping to meet future labour market needs.

               (13)Finland is at risk of missing the 2020 municipal waste recycling target of 50%. In particular, municipal waste is increasingly incinerated (60% in 2017 compared to 55% in 2016).

               (14)While public spending on research and development is now stabilising, Finland experienced the sharpest decline of all EU Member States since 2009 in private-sector investment in research and development. Despite an improvement in the macro-economic situation in recent years, private-sector investment in research and development has not recovered yet. A higher intensity of investment in research and development is a key factor enabling structural change to favour knowledge-intensive sectors of the economy and strengthen long-term growth potential. In addition, cooperation between higher education institutions and the business sector remains one of the key bottlenecks to stimulating innovations and bringing them to the market.

               (15)With a dispersed population, transport bottlenecks may prevent people from moving to find jobs. Strategic investment in the transport infrastructure may improve labour mobility and thereby strengthen the functioning of labour markets. In parallel, as transport costs have a relatively high impact on the final price of products in Finland compared to other EU Member States, infrastructure interconnections could enhance access to markets abroad.

               (16)Strategic investment in decarbonising energy-intensive industries and the transport sector would help achieve long-term economic and climate goals. Finland is a leader in clean energy innovation and private research and development spending in this area. Further investment in some of its clean energy programmes by 2021, as committed, would help Finland meet its carbon neutrality objectives. Besides Finland’s ambitious objectives for increasing the share of biofuels, electrification is a cost-efficient option for decarbonising the transport sector, given the advanced decarbonisation of power generation.

               (17)Low interest rates and the improved economic outlook have increased the overall volume of lending, especially through housing corporations (which provide a distinctive form of home ownership). In parallel, consumer credit is increasing rapidly and a rising share of this lending is granted by foreign banks, financial institutions other than credit institutions, small-loan companies and peer-to-peer lending. Household debt therefore remains at a historically high level (67% of GDP in 2017). The debt is predominantly at a variable rate, which constitutes a risk if interest rates rise in the medium term. The Finnish Financial Supervisory Authority has adopted a number of measures to contain the increase in the indebtedness of households. However, no active reduction of the debt burden is expected soon, especially as interest rates remain low and consumer confidence is still relatively strong.

               (18)At this stage, Finland does not have a comprehensive (i.e. collecting both positive and negative information on debtors) credit registry that covers its major banks. The lack of this can prevent banks having a clear overview of households’ overall indebtedness. Some preparatory work for the setting up of a registry of this kind has been carried out in the last year.

               (19)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
                  7
               . This would allow Finland to make the best use of those funds in respect of the identified sectors, taking into account regional disparities.

               (20)In the context of the 2019 European Semester, the Commission has carried out a comprehensive analysis of Finland’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 Finland in previous years. It has taken into account not only their relevance for sustainable fiscal and socioeconomic policy in Finland, but also their compliance with Union rules and guidance, given the need to strengthen the Union’s overall economic governance by providing Union-level input into future national decisions.

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

               (22)In the light of 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 Finland take action in 2019 and 2020 to:

               1.Ensure that the nominal growth rate of net primary government expenditure does not exceed 1.9% in 2020, corresponding to an annual structural adjustment of 0.5% of GDP. Improve the cost-effectiveness of and equal access to social and healthcare services.

               2.Improve incentives to accept work and enhance skills and active inclusion, notably through well-integrated services for the unemployed and the inactive.

               3.Focus investment-related economic policy on research and innovation, low carbon and energy transition and sustainable transport, taking into account regional disparities.

               4.Strengthen the monitoring of household debt and establish the credit registry system.

               Done at Brussels,

                     For the Council

                     The President

                     (1)

                        OJ L 209, 2.8.1997, p. 1.

                     (2)

                        SWD(2019) 1025 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) 1025 final.

                     (8)

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