# EUR-Lex - 52014DC0423 - EN

*|*

# 52014DC0423

**Recommendation for a COUNCIL RECOMMENDATION on Portugal’s 2014 national reform programme and delivering a Council opinion on Portugal’s 2014 stability programme /* COM/2014/0423 final - 2014/ () */**

			*

			*

Recommendation for a

COUNCIL RECOMMENDATION

on Portugal’s 2014 national reform
programme
and delivering a Council opinion on Portugal’s 2014 stability programme

THE COUNCIL OF THE EUROPEAN UNION,

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

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

Having regard to the recommendation of the
European Commission[2],

Having regard to the resolutions of the
European Parliament[3],

Having regard to the conclusions of the
European Council,

Having regard to the opinion of the
Employment Committee,

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

Having regard to the opinion of the Social
Protection Committee,

Having regard to the opinion of the
Economic Policy Committee,

Whereas:

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

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

(3) 
On 29 June 2012, the Heads of State or
Government decided on a Compact for Growth and Jobs, providing a coherent
framework for action at national, EU and euro area levels using all possible
levers, instruments and policies. They decided on action to be taken at the
level of the Member States, in particular expressing full commitment to
achieving the objectives of the Europe 2020 Strategy and to implementing the
country-specific recommendations.

(4) 
Portugal was subject to a macroeconomic adjustment
programme until 17 May 2014 in line with Article 1(2) of Decision 2011/344/EU,
which provided that the financial assistance would be made available for three
years. On 19 March 2014, the Council decided to extend the availability of the
financial assistance by six weeks, to allow for a comprehensive and thorough
assessment of compliance with the programme conditionality and an orderly
disbursement of the last loan tranche. Under Article 12 of Regulation (EU) No
472/2013 Portugal was thus exempt from the monitoring and assessment of the
European Semester for economic policy coordination for the duration of the
programme. Having exited the programme, Portugal should now be fully re-integrated
into the European Semester framework.

(5) 
On 13 November 2013, the Commission adopted the
Annual Growth Survey[4],
marking the start of the 2014 European Semester of economic policy
coordination. On the same day on the basis of Regulation (EU) No 1176/2011, the
Commission adopted the Alert Mechanism Report[5].

(6) 
On 20 December 2013, the European Council
endorsed the priorities for ensuring financial stability, fiscal consolidation
and action to foster growth. It underscored the need to pursue differentiated,
growth-friendly fiscal consolidation, to restore normal lending conditions to
the economy, to promote growth and competitiveness, to tackle unemployment and
the social consequences of the crisis, and to modernise public administration.

(7) 
Pursuant to Regulation (EU) No 472/2013, Portugal was exempted from the obligation to submit its Stability Programme and its
National Reform Programme for the duration of the macroeconomic adjustment
programme. Nevertheless, it submitted an updated Fiscal Strategy Document on 30
April 2014 and a letter from the Portuguese Government providing an update on
developments on the Europe 2020 targets. On 17 May, the
Government presented its ongoing reform programme and new initiatives towards
sustainable growth in a document entitled The Road to Growth, a medium-term
reform strategy for Portugal.

(8) 
The objective of the budgetary strategy outlined
in the 2014 Fiscal Strategy Document is to correct the excessive deficit by
2015 in a sustainable manner and reach the medium-term objective by 2017. The
strategy plans to bring the government deficit to 4.0% of GDP in 2014 and to lower
it further to 2.5% of GDP in 2015, in line with the targets set in the Excessive
Deficit Procedure recommendation of 21 June 2013 and re-confirmed by the 12th
review of the macroeconomic adjustment programme. However, on 30 May 2014 the Portuguese Constitutional Court annulled consolidation measures estimated to impact the
budgetary results in 2014 by around 0.35% of GDP, with possible follow-on
effects in 2015. In order to achieve the agreed targets, the government will
have to introduce replacement measures of equivalent size . There are, however,
two rulings of the Constitutional Court still pending which prevents a complete
quantification of the measures to be taken. In view of the limited time
available, the government  may need to resort to measures of a less
growth-friendly nature, particularly on the revenue side. Beyond 2015, the
strategy confirms the aim of achieving the medium-term objective by 2017 by way
of delivering a structural effort of 0.5% of GDP in 2016 and achieving a
structural deficit of 0.5% in 2017. According to the strategy, general
government gross debt will peak at around 130.5% of GDP in 2014 and will
gradually start declining as from 2015. The macroeconomic scenario underlying the
budgetary projections of the strategy is in line with that agreed in the 12th
review of the macroeconomic adjustment programme and is
being analysed by the Public Finance Council. The fiscal
consolidation measures in 2014 are estimated to be sufficient to achieve the
deficit target of 4% of GDP. Nevertheless, downside risks to the target remain,
notably due to legal uncertainties and the statistical impact of operations
aimed at a more efficient management of the debt overhang of some state-owned
enterprises. The 2015 budgetary adjustment is underpinned by fiscal
consolidation measures amounting to 0.8% of GDP which is considered to be
sufficient to achieve the target of 2.5% of GDP. Based on the assessment of the
programme and the Commission forecast, pursuant to Council Regulation (EC) No
1466/97, the Council is of the opinion that the strategy's targets are
consistent with the requirements of the Stability and Growth Pact.

(9) 
Fiscal consolidation needs to be underpinned by
further reforms of the system of public financial management. In particular, despite
progress made under the macroeconomic adjustment
programme, the comprehensive reform of the Budget
Framework Law needs to be completed and further efforts are necessary to strictly
ensure expenditure control by enforcing the commitment control law and to prevent
the further accumulation of public sector arrears. Continued restructuring of
state-owned enterprises, ensuring their financial sustainability and tightly
controlling pension and healthcare expenditure will be crucial. On the revenue
side, there is scope for making the tax system more growth-friendly and further
fostering tax compliance.

(10) 
Portugal faces
challenges relating to unemployment which, notwithstanding the recent
decline, remains very high, particularly for the younger cohorts. The
unemployment rate stood at 17% in 2013 and youth unemployment at 37.7%, substantially
above the EU average, as well as the percentage of young people not in education,
employment, or training. Portugal's traditionally high employment rate has
declined markedly since the start of the economic crisis, from 73.1% in 2008 to
65.6 % in 2013. As regards youth unemployment, in line with the objectives of a
youth guarantee, the main challenges include weak outreach to non-registered
young people, and a need to better align education and training with labour
market needs. Under the macroeconomic adjustment
programme, Portugal has implemented a wide range of
labour market reforms aimed at easing overly restrictive employment protection
legislation, making wage-setting mechanisms more flexible and improving the
functioning of the public employment services and activation policies. Challenges
remain, however, in particular the need to tackle labour market segmentation
and improve the responsiveness of wages to the economic conditions. An
independent evaluation of the effects of the recent reforms in the employment
protection system would help to assess, in particular, their impact on job
creation, precariousness, overall labour costs and on the number of court
appeals against dismissals and their outcome. Despite efforts to alleviate the
negative social impact, the necessary economic adjustment following the crisis
has had negative repercussions in terms of poverty.

(11) 
Portugal has made
significant progress in reforming its education system by means of several measures
to fight early school leaving, and improve tertiary attainment rate and labour
market matching. However, the full implementation and
efficient use of funding remain crucial. In particular, further work is
necessary to reduce skills mismatches, including by increasing the quality and
attractiveness of vocational education and training, including dual vocational
education and training, fostering employers' involvement in helping to design programmes
and providing adequate in job trainings and apprenticeships. There is also a
need to effectively implement career guidance and counselling services for
secondary and tertiary students in line with labour market needs and skills
anticipation, and strengthen links with the business sector.

(12) 
Portugal has taken
significant steps under the macroeconomic adjustment
programme to improve the capital base of the banking
sector and to strengthen its supervision and resolution framework. However,
important challenges remain and need to be carefully monitored and managed;
these include the profitability of the Portuguese banks. Data for the first
quarter of 2014 show that some of the assisted banks registered positive
results. Asset quality deterioration is still a problem, with impairment levels
remaining high at about 6% of total gross loans and non-performing loans at
elevated levels (10.6%), in particular in the corporate segment (over 16%). Portugal has adopted a number of measures to facilitate lending to viable companies, but
financing conditions remain difficult, particularly for SMEs, and the range of
financing alternatives for the corporate sector, other than bank-based finance,
remains limited. Freshly granted loans to SMEs fell by 4.8% in 2013 as compared
with 2012. The average interest rates on new loans to Portuguese firms have
come down somewhat since early 2013, but remain significantly above euro area
average. Given the high corporate debt overhang and the need for a further deleveraging
of the banking sector, banks' ability to extend credit to viable firms at
reasonable cost remains constrained.

(13) 
With a view to ensuring the efficiency and
sustainability of the energy sector and lowering the energy cost for the
economy, two packages of measures have been enacted under the macroeconomic
adjustment programme. Rents in the energy sector must, however, be further
reduced and the high and rising tariff debt tackled. To this end, Portugal has recently announced a third package of measures, including the extension to
2015 of the 2014 special levy on the energy operators. In addition, improving
cross-border integration of the energy networks and speeding up implementation
of the electricity and gas interconnection projects remain outstanding issues
and call for robust follow-up. In the transport sector, progress has been made
under the programme, in particular in enhancing the competitive position of the
Portuguese ports, drawing up a comprehensive long-term transport plan, after weaknesses and gaps had been addressed, and improving the regulatory framework. However, further measures remain
necessary to effectively implement the comprehensive long-term transport plan
and the reform action plan for ports. Steps are also needed to ensure the
independence and capacity of the transport regulator, and the financial
sustainability of the state-owned enterprises in the sector and enhance
efficiency and competition in rail transport.

(14) 
A landmark reform has been implemented in the
urban lease market with the view to making the housing market more dynamic
including by better balancing rights and obligations of landlords and tenants,
introducing more flexibility in the choice of contract duration and
incentivising renovation works. More work is still required to comprehensively
evaluate the impact of this reform on the basis of data on key drivers of the
market and on the shadow economy in the Portuguese rental market. Portugal has made substantial progress in enhancing its business environment, in particular by fostering better framework conditions, promoting entrepreneurial
culture and improving insolvency proceedings for firms in distress. Attention
should now be shifted to implementation. The simplification
of administrative and licensing procedures has made progress but a number of
measures still require completion. Further efforts are necessary to remove
obstacles to competition in the services sector, in particular by adopting
sectoral amendments, and in professional services, adopting legislation on the
remaining professional bodies. As regards regulation and competition, follow-up
measures are necessary to ensure the independence and autonomy of the national
sectoral regulators and the Competition Authority. Significant delays still
affect payments by public authorities.

(15) 
Good progress has been made under the
macroeconomic adjustment programme in rationalising and modernising the public
administration in terms of employment, remuneration policy, working
conditions, organisational efficiency and quality of services. However, some of
the envisaged reform measures still need to be completed and transparency
improved. Despite significant progress made to improve the efficiency of the
judicial system, further improvements are called for in
particular in terms of the length of proceedings, the clearance rate, the number
of pending cases, and the monitoring and evaluation process.

(16) 
On [17 June 2014], the Commission completed the
12th and final review under the macroeconomic adjustment programme for Portugal. Its analysis leads it to conclude that the successful implementation of the programme
was instrumental in managing economic and financial risks and reducing
imbalances. Portugal has
adopted a wide range of challenging structural reforms under the programme,
which are starting to bear fruit in terms of enhanced competitiveness and
resuming economic growth, but more work is needed to assess the reforms' impact
on the functioning of the economy. Continued monitoring of all implemented
reforms is therefore essential to assess whether they contribute to boosting
competitiveness, output and employment growth.

(17) 
Since after the end of the macroeconomic
adjustment programme, which will be legally concluded on 28 June 2014, Portugal will be fully re-integrated in the European Semester exercise, the Commission, on this
basis and in the light of its 12th and final review under the macroeconomic
adjustment programme, has assessed the documents submitted by Portugal. It has taken into account not only their relevance for sustainable fiscal and
socio-economic policy in Portugal but also their compliance with EU rules and
guidance, given the need to reinforce the overall economic governance of the
Union by providing EU-level input for future national decisions. Its
recommendations for Portugal under the European Semester are reflected in
recommendations (1) to (8) below.

(18) 
In the light of this assessment, the Council has
examined Portugal’s stability programme, and its opinion[6] is reflected in
particular in recommendation (1) below. These recommendations were prepared in
the wake of the very recent successful conclusion of the adjustment programme
and therefore build on the programme's achievements to secure its lasting
implementation.

(19) 
In the context of the European Semester the
Commission has also carried out an analysis of the economic policy of the euro
area as a whole. On the basis of this analysis, the Council has issued specific
recommendations for the Member States whose currency is the euro. Portugal should also ensure the full and timely implementation of these recommendations.

HEREBY RECOMMENDS that Portugal take action within the period 2014-2015 to:

1.           Fully
implement the budgetary strategy for 2014 so as to achieve the fiscal targets
and prevent the accumulation of new arrears. For the year 2015, rigorously
implement the budgetary strategy as laid out in the Fiscal Strategy Document
2014, in order to bring the deficit to 2.5% of GDP, in line with the target set
in the Excessive Deficit Procedure recommendation, while achieving the required
structural adjustment. Replace consolidation measures which  the Constitutional Court considers unconstitutional by measures of similar size and quality as
soon as possible. The correction of the excessive deficit should be done in a
sustainable and growth-friendly manner, limiting recourse to one-off/temporary
measures. After the correction of the excessive deficit, pursue the planned
annual structural adjustment towards the medium-term objective, in line with
the requirement of an annual structural adjustment of at least 0.5% of GDP,
more in good times, and ensure that the debt rule is met in order to put the
high general debt ratio on a sustainable path. Prioritise expenditure-based
fiscal consolidation and increase further the efficiency and quality of public
expenditure. Maintain tight control of expenditure in central, regional and
local administration. Continue the restructuring of the state-owned
enterprises. Develop a durable solution to ensure the medium-term sustainability
of the pensions system by the end of 2014. Control health care expenditure
growth and proceed with the hospital reform. Review the tax system and make it
more growth-friendly. Continue to improve tax compliance and fight tax evasion
by increasing the efficiency of tax administration. Strengthen the system of public
financial management by swiftly finalising and implementing the comprehensive
reform of the Budgetary Framework Law by the end of 2014. Ensure strict
compliance with the Commitment Control Law. Effectively implement single wage and
supplements' scales in the public sector from 2015 onwards.

2.           Maintain minimum wage
developments consistent with the objectives of promoting employment and
competitiveness. Ensure a wage setting system that promotes the alignment of
wages and productivity at sectoral and/or firm level. Explore, in consultation
with the social partners and in accordance with national practice, the
possibility of firm-level temporary opt-out arrangements from sectoral
contracts agreed between employers and workers' representatives. By September
2014, present proposals on firm-level opt-out arrangements from sectoral
contracts agreed between employers and workers' representatives and on a
revision of the survival of collective agreements.

3.           Present, by March 2015, an
independent evaluation of the recent reforms in the employment protection
system, together with an action plan for possible further reforms to tackle
labour market segmentation. Pursue the ongoing reform of active labour market
policies and Public Employment Services aimed at increasing employment and
labour participation rates, specifically by improving job counselling/job
search assistance and activation/sanction systems with a view to reducing
long-term unemployment and integrating those furthest away from the labour
market. Address the high youth unemployment, notably by effective skills
anticipation and outreach to non-registered young people, in line with the
objectives of a youth guarantee. Increase the threshold for the eligibility for
the minimum income scheme. Ensure adequate coverage of
social assistance, while ensuring effective activation of benefit recipients.

4.           Improve the quality and
labour-market relevance of the education system in order to reduce early school
leaving and address low educational performance rates. Ensure efficient public
expenditure in education and reduce skills mismatches, including by increasing
the quality and attractiveness of vocational education and training and
fostering co-operation with the business sector. Enhance cooperation between
public research and business and foster knowledge transfer.

5.           Monitor banks' liquidity
position and potential capital shortfalls, including by on-site thematic
inspections and stress-testing. Continue the assessment of the banks' recovery
plans and introduce improvements to the evaluation process where necessary. Implement
a comprehensive strategy to reduce the corporate debt overhang and reinforce
efforts to widen the range of financing alternatives, including for early
stages of business developments, by enhancing the efficiency of the debt
restructuring tools (particularly PER and SIREVE) for viable companies,
introducing incentives for banks and debtors to engage in restructuring
processes at an early stage and improving the availability of financing via the
capital market. Ensure that the identified measures support the reallocation of
financing towards the productive sectors of the economy. Implement, by end September
2014, an early warning system to detect weak financial conditions of firms,
including SMEs, with a view to supporting early corporate debt restructuring,
decreasing SME loans arrears, and speeding up the resolution of non-performing
loans.

6.           Implement the second and
third package of measures in the energy sector aimed at reducing energy costs
for the economy, while eliminating the electricity tariff debt by 2020, and
closely monitor implementation. Improve the cross-border integration of the energy
networks and speed up implementation of the electricity and gas interconnection
projects. Implement the comprehensive long-term transport plan and the
"chronogram" setting out the ports sector reforms. Ensure that the
renegotiations of the existing port concessions and the new authorisation
schemes are performance-oriented and in line with internal market principles, in
particular procurement rules. Ensure that the national regulatory authority for
transport (AMT) is fully independent and operational by the end of September
2014. Ensure the financial sustainability of the state-owned enterprises in the
transport sector. Strengthen efficiency and competition in the railways sector,
by implementing the plan for the competitiveness of CP Carga, after the
transfer of the freight terminals, and by ensuring the management independence
of the state-owned infrastructure manager and railway undertakings.

7.           Further improve the
evaluation of the Portuguese housing market, including by setting up, by the end
of November 2014, a more systematic monitoring and reporting framework and issue
a comprehensive report on the shadow economy in that market. Continue efforts
to carry out further inventories of regulatory burdens with a view to
including, by March 2015, sectors not yet covered. Adopt and implement, by the end
of September 2014, the outstanding licensing decrees and sectoral amendments. Remove,
by the end of September 2014, remaining restrictions in the professional
services sector and enact the professional bodies' amended by laws which have
not yet been adopted under the macroeconomic adjustment programme. Eliminate
payment delays by the public sector. Ensure adequate resources of the national
regulators and competition authority and swiftly adopt the by laws of the
national competition authority.

8.           Continue to rationalise
and modernise central, regional and local public administration. Implement the
reforms to enhance the efficiency of the judicial system and increase
transparency. Step up efforts to evaluate the implementation of reforms
undertaken under the macroeconomic adjustment programme as well as planned and
future reforms. In particular, insert mandatory systematic ex ante and ex post
assessments in the legislation process. Set up a functionally independent central
evaluation unit at government level, which assesses and reports every six months
on the implementation of these reforms, including consistency with the ex
ante impact assessment, with corrective action if needed.

Done at Brussels,

For
the Council

The
President

[1]               OJ L 209, 2.8.1997, p. 1.

[2]               COM(2014) 423 final.

[3]               P7_TA(2014)0128 and P7_TA(2014)0129.

[4]               COM(2013) 800 final

[5]               COM(2013) 790 final

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