# EUR-Lex - 52014DC0400 - EN

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# 52014DC0400

**COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE AND THE COMMITTEE OF THE REGIONS 2014 European Semester: Country-specific recommendations Building Growth /* COM/2014/0400 final */**

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COMMUNICATION FROM THE COMMISSION TO
THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN ECONOMIC AND SOCIAL
COMMITTEE AND THE COMMITTEE OF THE REGIONS

2014 European Semester: Country-specific
recommendations

Building Growth

1. 
Introduction

Economic recovery is gaining ground in
Europe[1].
It began in mid-2013 and is expected to gain further strength and spread to all
Member States by 2015. Financial stability is returning, the rise in public
debt is being controlled and external competitiveness is improving, notably in the
most vulnerable countries. This upturn brings the hope that the EU is moving
out of the worst economic and financial crisis in its history and towards a more
sustainable growth path that will generate jobs and improve standards of
living. It also demonstrates that the stronger economic governance and supervision
at EU level, decided in the depths of the crisis, has been instrumental in
improving the conditions for more balanced growth.

However, there is no room for complacency and
these hard-won gains need to be secured to consolidate our capacity to grow.
Recovery is still fragile and unevenly spread. In many parts of Europe, the social
situation is depressed and unemployment has reached unprecedented heights, in
particular among young people. The room for manoeuvre of policy and economic
actors is heavily constrained given the high levels of public and private debt.
At the same time, the long-term challenges confronting the EU – from
demographic ageing to productivity, competitiveness or the sustainable use of
natural resources – have not gone away, and changes in the wider world mean
that the EU must constantly adapt.

Over the last four years, the annual
country-specific recommendations proposed by the Commission have been used as a
compass to exit from the crisis and re-build growth. In this overview document,
the Commission summarises its analysis of progress made over the last year, as
spelled out in its recommendations. It also sets out its views on how the
process has evolved over time and its relevance for the future.

What does the new system of EU economic
governance mean for the EU?

The EU's reinforced economic governance
embodies political recognition of the inter-dependence of the economies of our
Member States. To draw benefit from this inter-dependence and to avoid negative
domino effects in the future, Member States need to follow agreed rules in
their own policy-making but also to be assured that all other Member States
will do likewise. This greater recognition of just how deeply our economies are
inter-twined is already changing policy-making at national and at European
level for the better.

At the core of the new governance system is
a closer partnership between Member States and the Commission. More frequent
and open contacts have led to a better understanding of national situations and
of their European significance.

Greater transparency and predictability of
commitments means national and EU views are now more widely publicised and
discussed outside of government circles, by citizens as well as by market
operators. Key figures such as national accounts are now certified by
independent national bodies.

As a result, the depth and quality of decision-making
at EU level have improved. More detailed analysis is available across themes
and countries. Reliable economic forecasts and statistics are produced very
regularly. The guidance issued is widely seen as relevant and timely, and it
can be followed up from one year to the next. This means for instance that warning
signals are picked up much earlier – for example, weaknesses in the financial
system, the re-emergence of destabilising real estate bubbles, losses in
external competitiveness or a deterioration in the employment and social
situation can all be highlighted as requiring remedial action before there are
negative spill overs to other Member States.

The new coordination and surveillance system
is thus broadly fit for purpose, but the key challenge remains political. Lasting
results can only be delivered if the political will and readiness to act remain
firm. Somewhat paradoxically, this proves easier in crisis times, when
alternatives are scarce, but the lack of pro-active decision in better times is
often the cause of future difficulties. This is why the greater anticipation
and preventive capacity of the new EU governance system is just as relevant in
better times as it was during the crisis.

There is also an ongoing challenge to
ensure that the tools developed at European level are shared and owned more
broadly by a wider range of stakeholders, including the European and national parliaments.
Many decisions and procedures were agreed at record speed during the crisis and
the EU governance system is only now becoming mature. As the process moves into
a new, hopefully more favourable economic period, it will be important to
reflect on ways to streamline it to avoid bureaucratic routine taking over what
must remain a politically relevant and inclusive policy-making process.

The 2014 package of country-specific
recommendations

Today's package reflects the broad priorities
of the Commission's Annual Growth Survey, as taken up by the European
Parliament and the European Council.[2]
It also takes full account of Europe's diversity: the crisis has left Europe
divided from an economic and social point of view, so priorities differ
significantly from one Member State to another. The guidance provided highlights
the interdependence between economies and seeks to steer the convergence needed
to bring the Member States closer to each other and to the world's best
performers – which are often to be found elsewhere in Europe.

The package stresses the importance on implementation
over time[3].
Major reform efforts are underway in many Member States and there is a need to
follow through and see if they are effective. Policy consistency and sequencing
of reforms are crucial for success: while most Member States are clear about
what is planned for the coming twelve months, there is sometimes a lack of
specificity for the next 2-3 years.

The package also points to the need for
stronger collective ownership of the challenges, notably within the Euro area. A
lot can be gained from following reforms which are faced by several Member
States in the same time horizon: issues such as sustainability of pensions, the
effectiveness of R&D or strengthening the resilience of the labour market are
common challenges. Sharing expertise and experience can support Member States,
politically as well as technically. Joint action will also allow Member States
to maximise the benefits of cross-border spill-overs.[4] This is also why it is
important that the Euro area, as a whole, now moves beyond looking at the recommendations
addressed to its members separately, and focuses increasingly on the cross-cutting
elements identified collectively.

Finally, this package shows the importance
of bringing different policies and instruments together, including at EU level.
2014 is a year where the EU is taking stock and consulting on its longer term
growth strategy – the Europe 2020 strategy[5].
The country-specific recommendations decided since 2011 constitute a targeted
reform strategy. They are part of the wider context of Europe 2020 and need to
be fully integrated to embody the EU growth strategy and enable it to pursue
its unique business and social model. Lessons learned and best practices should
feed into adapting the strategy for the coming five years.

2014 is also a year in which Member States
complete their programming and start to make use of the new European Structural
and Investment Funds. Many longer term investments were – of necessity – put on
hold during the crisis. While small in absolute terms, the injection of EU funding
plays a key catalytic role in many Member States. This is why it must be well
targeted to support the most growth-enhancing investments. There is also a need
to use it in conjunction with financial engineering techniques, promoting the
use of loans instead of grants and with schemes to facilitate the financing of
small and medium-sized enterprises, so as to enhance the impact on the EU
economy.

2. 
Overall context

The crisis exposed structural weaknesses in Europe's economy and financial system, which came on top of the
deeper challenges posed by an ageing population and the low growth rates
experienced before the crisis. It also put the structures and governance of the
Euro to an unprecedented test. While there were signs of a gradual recovery in
2010, 2012 was marked by a recession in most parts of the EU, with a rebound
since the second quarter of 2013.

The impact on employment and the social
situation has been severe and far-reaching in many
parts of the EU. From less than 7% in 2008, the EU unemployment rate reached
10.8% in 2013 (i.e. an increase of more than 9 million people). This picture
varies significantly across the EU: in 2013, unemployment rates ranged from
4.9% in Austria and 5.3% in Germany to 27.3% in Greece and 26.1% in Spain. The
situation is particularly worrying for certain categories such as young people
and the long-term unemployed. Since labour market developments typically lag
behind GDP by half a year or more, the outlook is for a modest rise in
employment from this year onwards and a decline in the EU unemployment rate
towards 10.1% by 2015. Cross-country differences are also expected to remain
large in the foreseeable future. Such trends also have a far-reaching impact on
societies. Overall, 
since 2008, the number of people at risk of poverty and social exclusion rose
by more 
than 6 million to reach 124 million in 2012. The number of people facing severe
material deprivation rose by around 7 million. Growing and persistently high
income inequality is also seen as a source of concern for social cohesion.

The reform efforts triggered by the
crisis have been unprecedented, not only in the
countries supported by adjustment programmes. Ireland completed its financial
assistance programme in December 2013, Spain completed its financial sector
programme in early 2014 and Portugal exited from its financial assistance
programme in May 2014. Latvia qualified for Euro membership and joined in 2014.
In Greece and Cyprus, the situation has stabilised and some signs of
improvements are visible.[6]
As shown in today's package, far-reaching reforms have also been initiated or
are under way in other countries. At EU level, and particularly within the Euro
area, economic governance and financial supervision mechanisms have been
decisively reinforced.

EU real GDP is expected to grow again. While the first quarter figures for 2014 were less
positive than foreseen, the current recovery is expected
to continue to spread across countries, gradually gaining strength and becoming
more balanced. Real GDP growth is expected to increase to 1.6% this year and could reach 2.0% in 2015. Importantly,
economic activity has started to strengthen also in the countries most affected
by the crisis and this trend is expected to continue. This year, only Cyprus and
Croatia are still expected to register a negative annual GDP growth rate. By
2015, all EU economies are expected to be growing again. Overall, the EU is
expected to reach the level of economic output it had before the crisis, thus
gradually making up for the lost years.

A rebalancing of the EU economies continues. This was already evidenced by the latest Commission Alert
Mechanism Report.[7]
It was confirmed by the in-depth reviews published by the Commission for 17
Member States as part of the Macroeconomic Imbalance
Procedure,[8]
which showed that a number of external and internal imbalances were being
corrected. In particular, current account positions have improved in a number
of countries, often helped by enhanced cost competitiveness. For the first time
since the establishment of the Macroeconomic Imbalance Procedure, the
Commission concluded that in three countries (Denmark, Malta and Luxembourg),
the challenges identified do not constitute imbalances. Furthermore, Spain is
no longer in a situation of excessive imbalances. However, the correction of
imbalances must continue to be a priority in many countries, notably with regard
to their levels of public and private debt. Moreover, in Member States where
persistent current account surpluses result from large domestic investment
gaps, this hampers the medium- to long-term economic outlook.

Together with ECB action and the return
to growth, the sizeable fiscal consolidation enacted over 2011-2013 has helped
fend off the sovereign debt crisis, but sound
public finances remain an important priority given the high levels of public
debt. Overall, general government deficits have decreased since 2011, to 2.6%
of GDP and 2.5% of GDP in the EU and the euro area respectively in 2014. The composition of the adjustment in recent years has been mainly targetting
the expenditure side of the budget in Ireland, Greece, Lithuania and Portugal,
whereas other countries like France, the Netherlands, Italy and Finland have
relied mostly on increases in taxation. The improvement
in the overall fiscal situation has contributed to the decrease in the interest
premium paid on debt. Public debt is forecast 
to peak this year at EU and euro-area level, but remains above 100% of GDP in
Belgium, Ireland, Greece, Spain, Italy, Cyprus and
Portugal, and thus crucially needs to be put on a steadily downward path. This
is also necessary in other Member States given Europe's demographic situation.

The stabilisation of financial markets
hides divergences between Member States and
financial conditions remain very varied for firms and households across the EU.
The loss of confidence generated by the crisis, together with the impact of the
subsequent unprecedented financial sector reform, led to a tightening of credit
supply for small and medium-sized enterprises since the second quarter of 2007.
Conditions are gradually easing and some first signs of relaxation have been
registered in the first quarter of 2014. However, funding conditions remain
tight in several countries such as Italy, Greece, Spain, Lithuania, Slovenia,
Croatia and Cyprus, especially for small and medium-sized enterprises. The
steps taken at EU level to complete a Banking Union, as well as to correct
major imbalances, will help improve the overall financial environment.

The nature of the challenges facing the
EU is changing. As is typical following deep
financial crisis, the recovery is fragile at first and the nature of the
challenges is changing rapidly. Just a few years ago, in the midst of the
crisis, the vital priority was to re-establish budgetary credibility in the
face of swiftly increasing public deficits and sovereign debt, to stop the negative
spiral between a deteriorating fiscal situation and the risk of instability of
the banking sector, and to correct unsustainable trends in the real economy such
as worrying losses in competitiveness, increasing private debts or high housing
prices. The main challenge now relates to the strengthening of the real economy
– growth and jobs – over time. Priorities vary depending on the country and
include managing the deleveraging of the high levels of public and private debt
accumulated during the crisis; further stabilising the financial sector to
facilitate a pick-up in credit flows to the real economy; pursuing policy
measures to strengthen sources of growth and jobs; reinforcing the conditions
to promote private investment and boost demand; improving skills and helping
people back into employment as well as promoting social cohesion.

The legacy of the crisis is still a
constraint on our recovery. Putting public and
private debt on a sustainable path is important to allow European economies to
regain some flexibility and robustness to shocks, but it should not compromise
growth and can prove difficult in a context of low inflation. The pre-existing
problems of weak productivity developments since the mid-1990s have not
disappeared and will be exacerbated by the effects on growth emanating from
ageing populations. The stabilisation of the banking sector and progress with
alternative forms of funding remain priorities to restore better lending
conditions for the real economy. The high levels of unemployment and social
distress are eroding Europe's human and social capital  and call for decisive
action over time.

Fairness considerations have come to the
fore. The effects of the crisis and of policy
measures on the economic and social situation have an impact on levels of
inequality. The structural nature of certain forms of unemployment, limitations
of access to education and healthcare, certain tax-benefits reforms may all
weigh disproportionally on the more vulnerable parts of society. This is a
political and social matter, which also poses a risk to the EU's future growth
potential.

Growth-enhancing investment remains
crucial for a sustainable recovery. In the short term,
investment growth is projected to strengthen, as the main impediments to firms'
demand and profits, such as uncertainty, financing conditions and de-leveraging
needs are slowly receding, and the economic outlook improves. Fiscal
consolidation should also help public authorities to regain margins for
growth-enhancing investment. However, there are still large gaps across Europe
and to be competitive in the global economy and to
deliver on the expectations of our citizens, it is clear that the EU as a whole
needs to invest more in R&D, innovation, education, skills and active
labour market policies, as well as in energy, transport and the digital
economy. A strategic use of the EU funding agreed for the period 2014-2020 can
play a catalytic role in supporting investment efforts at national level, not
least to improve its industrial competitiveness. More attention should be given
to other instruments at European level that have already been proposed at EU
level, e.g. European project bonds and the possibility of blending structural
funds and EIB loans. Critically important is the need to relaunch private
investment. For this to happen, other decisions, beyond fiscal policy, are
needed. This requires the issue of financial fragmentation in the EMU to be
addressed.

3. 
Key
action strands

Today's package of country-specific
recommendations reflects the Commission's assessment of the progress made by
the Member States over the last year, set in the context described in the
previous section. It also builds on the in-depth reviews published in March
2014.

Over the last year, some progress has been achieved in sustaining
fiscal consolidation, as well as in terms of employment policies. This can be
seen in the number of Member States which have moved out of excessive deficit
procedures, as well as in reforms of employment policies, through the
mobilisation of active labour market policies, the establishment of youth
guarantees and the adjustment of some wage setting systems. However, not enough
is being done to reduce the high tax wedge on labour, although lower taxes on
labour remain crucial for a job-rich recovery. There is only limited progress in
reforming product market and services market as well as on measures to improve
the business environment and the framework conditions for R&D and
innovation. More also needs to be done to improve the competition framework and
the functioning of network industries, including through further upgrading of
infrastructure and opening and integration of markets, such as for energy and
ICT. Moreover, there is still a long way to go to improve the coverage and
performance of education and welfare systems, as well as to improve the
functioning of public administration, which would free budgetary space for
growth-enhancing expenditure.

The Commission stresses the need to pursue reforms in a number of
Member States with excessive imbalances (Croatia, Italy and Slovenia), as well
as in countries where the gravity of imbalances can have damaging spillover
effects (France, Ireland and Spain). All in all, the plans outlined in the
national programmes are encouraging and should be sufficient if implemented as
planned to address a number of pressing macro-economic imbalances identified in
the past. This is why the Commission does not consider it necessary to trigger
the corrective arm of the Macroeconomic Imbalance Procedure at this stage. A
particular focus is thus put on implementation and monitoring of progress for
these countries.

The country-specific recommendations issued today outline reform
priorities in individual Member States for the coming 12-18 months and, where
relevant, take account of the need to tackle imbalances. Recommendations are
also made for the Euro area as a whole to highlight interdependences and ways
to improve the functioning of the Economic and Monetary Union. Annex 1 gives an
overview of the recommendations and Annex 2 sets out the state of play
regarding Member States' Europe 2020 targets. More detailed information on each
Member State is given in the analytical staff working documents that accompany
the recommendations. Comparative background information by policy area is also available
on the Commission's website.[9]

Pursuing differentiated, growth-friendly
fiscal consolidation

Fiscal consolidation has never been an end in itself. It has been
necessary to enable public authorities to re-establish their fiscal credibility
and regain the fiscal space needed to be able to invest in sustainable growth.

In this respect, the Commission has consistently advocated making
fiscal consolidation as growth-friendly as possible. Given the wide differences
across Member States, it has called for differentiated approaches, specific to
each country, and this should continue also in the improving fiscal context.
Overall, the Stability and Growth Pact has demonstrated that it functions well,
when its rules are adhered to.

Substantial improvements in public finances have been achieved in
the EU since 2011 and this was also the case over the last year: deficits are
decreasing and the debt-to-GDP ratio will reach its peak this year, starting to
decrease as of 2015. Several Member States are thus gradually regaining a
fiscal breathing space and can now adopt a less restrictive fiscal stance. Further
efforts are still necessary, even if at a lower pace, for those confronted with
high deficits and debt. Greater attention should be focused on the quality of
public finance and strategic redesign of both spending and revenue plans in
support of growth and jobs.

In line with the rules of the Pact, the Commission
recommends that Austria, Belgium, the Czech Republic, Denmark, Slovakia and the
Netherlands should now exit from the excessive deficit procedure (EDP). As a
consequence, there will be 11 Member States in EDP after this Semester round, bringing the number down from 17 in 2013. In
comparison to 2011, when no less than 24 countries were in EDP, the number has
more than halved.

Box 1. Situation of Member States with regard to the Stability and Growth Pact, as recommended by the Commission on 2 June 2014

No excessive deficit procedure || BG, DE, EE, FI, HU, IT, LT, LU, LV, RO, SE

Abrogation of the excessive deficit procedure || AT, BE, CZ, DK, SK, NL*

On-going excessive deficit procedures with deadlines in: 2014 2015 2016 || MT IE, FR, PL, PT, SI, UK** CY, EL, ES, HR

Notes: * Early
abrogation recommended for NL. ** The UK deadline is fiscal year 2014/2015.

An increasing number of Member States is thus
becoming subject to the rules of the preventive arm of the Stability and Growth
Pact. These rules have been considerably reinforced under the Six-Pack
legislation to ensure that Member States continue to follow an appropriate path
towards their medium-term budgetary objective.

In line with EU requirements, fiscal frameworks
have been strengthened at national level and will help monitor the soundness of
public finances, through greater accountability and transparency. This includes
the setting up of independent fiscal institutions with a defined role in the
national annual budgetary cycle.

While there is progress across the board,
some Member States still need to put in place suitable bodies or to strengthen existing
ones to enable them to undertake their tasks in an independent manner (Bulgaria,
the Czech Republic, Luxembourg, Malta, Poland, Croatia, Hungary, Italy,
Slovenia and Spain). The Commission will take the
necessary action to ensure that the new legal requirements are applied
even-handedly.

Depending on the
available fiscal space, the Commission recommends that public investment in
infrastructure, research, innovation and human capital should be given
priority, including through greater cost-efficiency of spending. This is notably underlined in the recommendations for the Czech
Republic, Germany, Italy, the Netherlands, Poland, the United Kingdom and, to
some extent, Spain. In general, more can be done to maximise
the impact of public spending and facilitate the allocation of scarce resources
to investment. Some Member States, such as Germany, are also recommended to
increase domestic demand by accelerating public investment, fiscal space
allowing, and to encourage private investment. This would
boost potential growth, help meet long-term needs and contribute to the recovery.

The structure of tax systems, and particularly the shifting of the
tax base from labour to other sources, is an essential aspect of on-going
reforms. A priority for many Member States is to alleviate labour taxation in
order to increase incentives to work and to reduce the relatively high cost of
labour, in particular for low-skilled workers. While several Member States have
taken or started to take tax measures in response to the last year's
recommendations in this area (Austria, Belgium, Italy, France, Latvia, Hungary
and the Netherlands), progress has been limited overall. Thus most tax
challenges identified in the last year's recommendations remain valid also for
2014/2015.

More generally, progress can still be made
to reduce the overall tax burden and/or to make the tax system more efficient
and less distortive. It is possible to conduct such reforms in a way that
improves the efficiency of the tax collection, encourages economic activity and
job creation and brings greater fairness to the tax system. Some
recommendations thus focus on improving tax compliance and the fight against
fraud, on broadening the tax base by closing loopholes in existing taxes (such
as removing exemptions, allowances, reduced rates and other specific regimes),
on removing environmentally-harmful subsidies and on further shifting the tax
base away from labour to taxation which is less detrimental to growth such as
environmental or recurrent property taxes. Efforts to limit labour taxation can
accompany more specific tax-benefit measures to increase financial incentives
to work and to reduce the relatively high cost of labour for low-skilled
workers.

Recent developments have also shown that a
number of multinational companies are using tax planning strategies to reduce
their global tax burden, by taking advantage of the technicalities of and
mismatches between tax systems, and substantially reducing their tax
liabilities. The cross-border dimension of many tax planning structures and the
increased mobility of capital makes the fight against aggressive tax planning
difficult for individual jurisdictions. This issue requires more intensive and
urgent attention by Member States and at European level. It erodes the tax
bases of Member States, which are already financially constrained. Some Member
States need to reflect on ways to maintain revenue sustainability in
anticipation of EU and international efforts to address base erosion and
profit-shifting and should review their tax conventions to strengthen
anti-abuse mechanisms.

Social protection systems represent a large share of public
expenditure in many Member States and the ageing of the population is expected
to have a major impact on state-funded pensions and healthcare in particular.
For instance, over 70% of the projected increase in age-related public spending
is due to health and long-term care.

The Commission points to the need to pursue
pension reforms in more than half of the Member States, so that the systems
continue to be socially adequate and financially sustainable. A key parameter
for the sustainability of pensions systems is the point in time when people are
legally allowed to retire, i.e. the statutory retirement age. Further linking the
statutory retirement age to life expectancy will help to preserve the financial
stability of public pension systems as the share of older people increases in
the EU population. Longer periods of contribution during working life would
also help to maintain the adequacy of pensions. Such reforms need to go
hand-in-hand with efforts to increase employment possibilities for older
workers, including through lifelong learning and incentives to work longer, so
that the actual exit age from the labour market, i.e. the effective retirement
age, is more closely aligned with the statutory age.

In recent years, 23 Member States have
legislated to increase pension age. In many cases (for instance in the Czech
Republic, Estonia, Greece, Croatia, Italy, Lithuania, Malta, Poland, Slovenia,
Slovakia and the United Kingdom) this is accompanied by an equalisation of
pension ages between men and women. Several Member States have also introduced
an explicit link between pension age and future gains in life expectancy. This
is the case in Cyprus, Denmark, Greece, Italy, the Netherlands and Slovakia. In
addition, most have taken steps to curb early retirements. However, most of the
easier measures have now been exhausted and there needs to be more progress in
closing the potential future financial gap. Recommendations are thus maintained
for several countries, notably to ensure a better connection between statutory
retirement age and life expectancy.

Table 1. Statutory
and early retirement age across the EU

Source: Commission services

The Commission also draws attention to the
need to reform healthcare systems so that they deliver on their objectives to
provide universal access to high-quality care in a cost-effective manner and to
secure their financial sustainability. This is for instance the case in Austria, Bulgaria, the Czech Republic, Finland, France, Malta,
Poland, Portugal, Romania, Slovakia, Germany, Ireland and Spain.

Restoring normal lending to the
economy

Over the last year,
financial fragmentation considerably receded in the sovereign- and
corporate-debt markets, with most bond spreads of vulnerable Member States
continuing to narrow, thanks to investor confidence in the success of the
ongoing fiscal adjustment and economic reforms. However, despite some
normalisation in bank funding conditions, financial fragmentation in the Euro
area lending market continues to hurt mainly small and medium-sized enterprises
and impair the transmission of monetary policy.

The banking sector experienced some
restructuring in 2013 and the adjustment still needs to continue in several
countries. Credit growth was negative (-1.9%) in 2013, contrary to the previous
year (0.7%). Credit expansion was visible in some Nordic, Central and Eastern
European countries during 2013.

Member States have introduced policies to
improve access to finance, for instance to create or expand loan guarantee
schemes, or to foster alternative financing mechanisms, for instance through
the development of corporate bond markets (Denmark, Estonia, Italy and
Portugal) or venture capital markets (the Czech Republic, Germany, Spain,
Estonia, the Netherlands, and Portugal). Public resources have also been
mobilised to sustain investment in innovation, especially by SMEs. Such reforms
naturally take time to have an impact on the ground. The Commission thus
stresses the need to persevere in a number of domains.

At the EU level, the decision to create a
Banking Union is of major significance. Completing the policy agenda and
further repairing banks' balance sheets and equity buffers if the current asset
quality reivew reveals such needs, will further contribute to repairing the
credit channel. The next frontier would be to build deeper capital markets
which are better suited than bank credit to financing innovative projects and
long term investment.

Promoting growth and competitiveness
for today and tomorrow

Structural reforms
are necessary to improve framework conditions for growth and jobs, as well as
to strengthen the adjustment capacity of our economies. This is particularly
crucial at a time where unemployment remains high. Overall, progress compared
to 2013 remains limited and the Commission proposes to maintain a number of
recommendations into 2014.

Well-functioning services play an essential
role for economic growth, both directly as a key source of jobs, and
indirectly, as they represent an increasingly important input for other sectors
and the productivity of the economy. Many opportunities can still be opened up
at national level, but also at European level by completing the single market,
particularly in the service and ICT industries.

Better infrastructure and interconnections
are crucial for the quality of transport, ICT and energy networks. Some action
has been taken in response to last year's recommendations but this must be
maintained over time. Progress in implementing the recommendations linked to
the functioning of the railway sector, telecommunications infrastructure and
postal services in Austria, Belgium, Germany, Spain France, Italy, Romania and
Poland is heterogeneous, ranging from substantial progress in Belgium in the
area of telecommunications, to some progress achieved in France and Spain in
the railway sector, limited progress in Germany, Romania, Italy and Poland as
regards railway and/or broadband and no progress in the postal sector in
Belgium. More progress is also expected in the functioning and opening up of services
at local level.

Recent events have again underlined the
need for the EU to continue reducing its external energy dependence and to put
in place a strong energy security strategy. This is an integral part of the
EU's energy and climate strategy. The Commission has recently put forward a
strategy[10]
for making a qualitative move forward in securing the EU's energy needs, such as by diversifying sources of supply and enhancing energy
technologies, moderating energy demand through energy efficiency, more
cost-effective development of renewable energy, and enhancing networks. The
strategic analysis underpinning these proposals is also reflected in several of
the recommendations in this year's package.

An efficient competition framework is a key
aspect for the functioning of markets in goods and services. Progress has been
mixed in this area. Some action has been taken to implement  new competition
laws and to enhance the powers of the national  competition and regulatory
authorities. However, in some countries, there is a case for reinforcing the
independence of the competition authorities, including through providing them
with sufficient financial and human resources.

Significant benefits can also be obtained
from improvements to the quality of research and innovation systems and from a
prioritisation of R&D efforts. Further investments should be accompanied by
in-depth reforms to modernise the public-private research and innovation system
and to improve the broader framework conditions for companies to become more
knowledge-intensive. The Innovation Union Scoreboard documents how Member
States perform and the Commission has identified a series of specific
regulatory bottlenecks at Member State level. Globally, the innovation gap is
increasing in the EU, with some countries (Sweden, Germany, Denmark and
Finland) performing particularly well and others affected by deteriorating
performance (the United Kingdom, Poland, the Czech Republic, Hungary, Portugal,
Romania, Greece, Bulgaria and Malta). There have been some encouraging,
catching-up trends in Latvia, Slovakia, Lithuania and Estonia.

Efforts are being made by Member States to
deliver on their climate and energy targets for 2020, although the Commission
recommends some futher steps to make it happen. A particular focus is also put
on resource efficiency and several recommendations are made, for instance, to
continue to improve waste management.

Tackling unemployment and the social
consequences of the crisis

As a result of the
crisis, unemployment has increased very significantly in most countries and
long-term unemployment, which now represents half of total unemployment on
average, has been rising to an historically high level in most Member States.
Structural unemployment and labour market mismatches have also been growing.
Job destruction has mainly affected precarious occupations, with temporary
contracts bearing the brunt of the downturn. The overall number of part-time
jobs has been increasing. Recent figures suggest a stabilisation of
unemployment at EU level, and a reduction in some countries, but improvements
will take time and the impact of the crisis extends far beyond the labour
market.

In some Member States, the real gross disposable income of
households has declined and overall, nearly a
quarter of the EU population is now considered to be at risk of poverty or
exclusion. The main drivers of poverty and social exclusion are long-term
unemployment, labour market segmentation and wage polarisation but the
weakening of the redistributive impact of tax and benefits systems also plays a
role. In a number of countries, the stabilisation impact of social spending has
weakened over time as the number of long-term unemployed losing their
entitlements increased. The need to restore the financial sustainability of
welfare systems has also played a role. In several cases, measures were taken
to reduce the level or duration of benefits, with tightened eligibility rules
to increase incentives to take up work, but this has also led to excluding
beneficiaries from certain schemes. A new Scoreboard[11] was developed by the Commission and is
now being used to monitor unemployment,
poverty and inequality trends as part of the overall EU economic governance.

Against the background of a deteriorating
employment situation, many Member States have launched important reforms, for
instance to tackle labour market segmentation (Spain, Portugal, Italy or France
among others). The quality and effectiveness of active labour market policies
and the efficiency of public employment services are also essential to fight
unemployment and recommendations are addressed to a number of Member States in
this regard. In particular, Bulgaria, Germany, Estonia, Ireland, Greece, Italy,
Luxembourg, Spain, Protugal, Slovakia, Finland, Sweden and the United Kingdom
have strengthened and/or improved the efficiency of their active labour market
policies.

Table 2. Unemployment, youth unemployment
and NEET indicators, 2013

|| Unemployment rates in % || Youth unemployment rates in % || Youth unemployment (thousands) || NEET rates 15-24 in % || NEET 15-24 (thousands)

EU || 10.8 || 23.4 || 5 611 || 13.0 || 7 345

BE || 8.4 || 23.7 || 97 || 12.7 || 168

BG || 13.0 || 28.4 || 65 || 21.6 || 167

CZ || 7.0 || 18.9 || 69 || 9.1 || 104

DK || 7.0 || 13.0 || 57 || 6.0 || 43

DE || 5.3 || 7.9 || 356 || 6.3 || 558

EE || 8.6 || 18.7 || 11 || 11.3 || 17

IE || 13.1 || 26.8 || 57 || 16.1 || 86

EL || 27.3 || 58.3 || 176 || 20.6 || 219

ES || 26.1 || 55.5 || 951 || 18.6 || 832

FR || 10.3 || 24.8 || 699 || 11.2 || 818

HR || 17.2 || 49.7 || 74 || 18.6 || 96

IT || 12.2 || 40.0 || 655 || 22.2 || 1 337

CY || 15.9 || 38.9 || 16 || 18.7 || 20

LV || 11.9 || 23.2 || 22 || 13.0 || 31

LT || 11.8 || 21.9 || 27 || 11.1 || 44

LU || 5.8 || 17.4 || 3 || 5.0 || 3

HU || 10.2 || 27.2 || 84 || 15.4 || 175

MT || 6.5 || 13.5 || 4 || 9.9 || 6

NL || 6.7 || 11.0 || 157 || 5.1 || 104

AT || 4.9 || 9.2 || 54 || 7.1 || 70

PL || 10.3 || 27.3 || 407 || 12.2 || 547

PT || 16.5 || 37.7 || 148 || 14.2 || 156

RO || 7.3 || 23.6 || 187 || 17.2 || 442

SI || 10.1 || 21.6 || 16 || 9.2 || 20

SK || 14.2 || 33.7 || 73 || 13.7 || 97

FI || 8.2 || 19.9 || 66 || 9.3 || 59

SE || 8.0 || 23.4 || 154 || 7.5 || 92

UK || 7.5 || 20.5 || 924 || 13.3 || 1 021

Source: Commission services

To support job creation, a number of
countries have taken steps aimed at decentralising their wage setting system
and easing the adaptation of wage conditions to the economic environment (e.g,
France, Italy, Portugal and Spain). The scope for reducing non-labour costs,
notably the tax wedge, has not always been fully used given the current budget
constraints, but recent steps have been taken in that direction (France, Italy)
and more action is foresen (e.g. Spain).

In a number of recommendations, the
Commission also puts a particular focus on the coverage, adequacy and design of
unemployment benefits and social assistance. The aim is to ensure that the
appropriate balance is struck between supporting people back into employment
and ensuring adequate income support in a situation of growing poverty.

Young people have been particularly
affected by the crisis. The EU youth unemployment rate increased sharply – more
than 7.5 percentage points between 2008 and 2013 (from 15.6% to 23.3%) - and it
is currently nearly 2.5 times higher than the adult rate, affecting 5.6 million
young people aged 15-24. There is also a large number of young people neither
working nor studying: in total, in 2013 7.3 million people in the age group
15-24 were neither in employment nor in education or training, an overall share
of 13% of this age group. Important efforts have been initiated at EU level and
national levels to fight youth unemployment (see Box 2). In line with the
objectives of a youth guarantee, recommendations are made, for instance on the
effectiveness of public employment services, on the quality of education and
training, including apprenctiships and on a better outreach to inactive young
people.

The Commission also highlights the fact
that, contrary to its recommendations, many Member States such as Bulgaria,
Italy, Slovakia and Romania have cut public spending for education in recent
years. The supply of appropriate educational facilities is necessary to absorb
young students, at a time of increased enrolment rates in higher-level
education partly as a result of reduced chances of labour market entry since
the crisis. As reflected in the Commission's recommendations, it is also
important that education and training systems contribute to the upgrading of
the human capital of older workers,[12]
with a view to achieving longer and more productive
working lives.

Box 2. Implementing the EU Youth Guarantee

The
Youth Guarantee recommendation, proposed by the Commission and adopted last
year by the Council, commits Member States to the objective of ensuring that
all young people under 25 receive a quality offer of work, education or
training within 4 months of leaving formal education or becoming unemployed.
This implies establishing effective and innovative structures, processes and
measures as well as pursuing reforms to achieve more successful transitions
from school to the labour market.

The
Commission has received Youth Guarantee Implementation Plans from all Member
States which are now being implemented. The "Youth Guarantee service
provider", in many cases the Public Employment Services, will be key to
success, bringing millions of young people "not in employment, education
or training" (NEETs) under the wings of the Youth Guarantee.  Progress is also
being made on early activation and reaching out to young people not registered
with the employment services.

Stakeholders,
social partners and companies have committed under the European Alliance for
Apprenticeships, mobilising to increase the supply, quality and attractiveness
of apprenticeships, underpinning the importance of apprenticeship reform.
Private sector involvement will also be crucial to ensure the supply of quality
offers. For some Member States, the Commission notes particularly important
challenges in establishing their Youth Guarantee, as reflected in its recommendations
(Spain, Italy, Slovakia, Croatia, Portugal, Poland, Bulgaria, Ireland).

Following
proposals by the Commission and endorsement by the European Council, EU funding
is mobilised to support the fight against youth unemployment. A special fund
(the EUR 6 billion Youth Employment Initiative) will provide support to Member
States and regions with particularly high youth unemployment rates (above 25%
for the 15-24 age group in 2012). Currently, Member States are preparing their
respective Operational Programmes through which these funds will be committed
over the next two years. The European Social Fund can also support youth
employment.

Modernising
public administration

Several Member
States have launched major reforms to improve the quality and efficiency of
their administration. This reflects a significant increase in awareness
regarding the role that the quality of public administration plays in overall
economic performance and competitiveness, as well as the pressure of fiscal
consolidation.

Reform priorities vary. Some Member States
have started to address overlaps between different parts and layers of
government. Others are working on strengthening the administrative capacity of
the public service, its professionalism and the quality of policy-making.

Many of these reforms include efforts to increase
the use of ICT and further deploy e-government services, such as e-procurement,
as a way to increase transparency and reduce costs. An increasing number of
Member States are also looking into ways to modernise tax collection, for
example by providing pre-filled tax forms, on-line services and "one time
only" data for citizens and business. Member States are also addressing
the issue of administrative burden, using impact assessments when designing new
legislation and reviewing the stock of existing national legislation to make it
more fit for purpose and to reduce red tape. At EU level, the Commission has
been working for several years to overhaul EU legislation, eliminating outdated
rules, reducing the burden of compliance and striving to improve the overall
quality of EU law.[13]

The improvement of the quality,
independence and efficiency of national justice systems is another important
element in the modernisation of public administration, and it has a direct
economic significance for starting businesses, contract enforcement, including
employment contracts, debt recovery, property and social rights, as well as for
all disputes with public administration on taxation and social security. As a
response to last years' recommendations, a number of Member States, namely
Italy, Spain, Latvia, Hungary and Slovenia, have made progress in this area
while progress has been more limited in other countries. The Commission is
recommending further action in a number of cases.

High levels of corruption have a negative
impact on the business environment as well as their more generally corrosive
effects on society. Following on previous year's recommendations and the
publication in 2014 of its anti-corruption report[14], the Commission
recommends further action to a number of Member States.

4. 
Conclusion

Sustained policy efforts at all levels in
recent years have put the EU economy on much firmer ground. Driven by a clear
political determination to safeguard the integrity and future of the Economic
and Monetary Union, all strands of economic policy-making have been working
together to overhaul economic governance, to improve economic fundamentals and
to create effective financial firewalls so as to ensure a more sustainable
growth model in future.

The EU economic outlook is now
strengthening. However, growth will remain uneven and fragile over 2014-2015 so
the momentum for ongoing structural reform must be maintained. Moreover, over
the longer term, the EU's growth potential is still relatively low. This means
that high unemployment levels and the difficult social situation will only
improve slowly and that the large investment gap will take time to be filled. The
Commission has emphasised in a number of recommendations the need for policies
to take more steps in good times to build up resilience for bad times. Given
the need for higher, more sustainable levels of growth and employment, the
Commission highlights the need for more determined effort in key policy areas
and pinpoints where current efforts are not sufficient.

The reinforced economic governance system
of the EU will prove its usefulness also in the post-crisis era. As Europe
gradually exists from prolonged and deep economic crisis, it will be important
to take the opportunity of the public consultation on the Europe 2020 strategy,
as well as of the upcoming review of the Two-Pack and Six-Pack legislation, to
review priorities for growth and jobs and to reflect more broadly on how to use
policy coordination to boost them, paying particular attention to the need for
coordination inside the Euro area.

The fundamental challenge for the EU in the
coming years is a political one. Member States have taken action where it was
immediately needed, for example, on fiscal consolidation and have taken some
measures in areas of structural reform. But outside of the programme countries
the pace of necessary change has been slower and more timid than is needed.
Away from the immediate impact of the crisis it will be more difficult to keep
up the political momentum for reform. And yet, if the EU is to grow in the
future and to be able to reap the benefits of globalisation, it must find the
political will to deliver on structural reforms and to promote investments. The
Commission considers that the reinforced economic governance cycle has an
important role to play in this process but it cannot replace the political will
needed to drive the EU forward to a period of sustainable growth and
prosperity. Economic and Monetary Union is still work in progress and further
steps will be necessary to truly reflect the interdependence between Europe's
economies, in particular between those that share the same currency.

Annex 1 - Overview of EU country-specific recommendations for
2014-2015

Public finances || Financial sector || Structural reforms || Employment and social policies

|| Sound public finances || Pension and healthcare systems || Fiscal framework || Taxation || Banking and access to finance || Housing market || Network industries || Competition in service sector || Public administration and smart regulation || R&D and innovation || Resource efficiency || Labour market participation || Active labour market policy || Wage setting mechanisms || Labour market segmentation || Education and training || Poverty and social inclusion

AT || || || || || || || || || || || || || || || || ||

BE || || || || || || || || || || || || || || || || ||

BG || || || || || || || || || || || || || || || || ||

CZ || || || || || || || || || || || || || || || || ||

DE || || || || || || || || || || || || || || || || ||

DK || || || ||   || ||   || || || || || || || || || || ||

EE || || || || || || || || || || || || || || || || ||

ES || || || || || || || || || || || || || || || || ||

FI || || || || || || || || || || || || || || || || ||

FR || || || || || || || || || || || || || || || || ||

HR || || || || || || || || || || || || || || || || ||

HU || || || || || || || || || || || || || || || || ||

IE || || || || || || || || || || || || || || || || ||

IT || || || || || || || || || || || || || || || || ||

LT || || || || || || || || || || || || || || || || ||

LU || || || || || || || || || || || || || || || || ||

LV || || || || || || || || || || || || || || || || ||

MT || || || || || || || || || || || || || || || || ||

NL || || || || || || || || || || || || || || || || ||

PL || || || || || || || || || || || || || || || || ||

PT || || || || || || || || || || || || || || || || ||

RO || || || || || || || || || || || || || || || || ||

SE || || || || || || || || || || || || || || || || ||

SI || || || || || || || || || || || || || || || || ||

SK || || || || || || || || || || || || || || || || ||

UK || || || || || || || || || || || || || || || || ||

Note: Country-specific recommendations for 2014-2015 proposed by the Commission on 2 June 2014. Cyprus and Greece should implement commitments under EU/IMF financial assistance programmes. Recommendations for Portugal are conditioned by exit from the programme. More information at : http://ec.europa.eu/europe2020/index_en.htm ||||

Annex
2 – Overview of Europe 2020 targets[15]

*Countries that have expressed their
national target in relation to an indicator different than the EU headline
target indicator

Member States targets || Employment rate (in %) || R&D (in % of GDP) || Emissions reduction targets (compared to 2005 levels)[16] || Renewable energy (in % of gross final energy consumption) || Energy efficiency[17] || Early school leaving in % || Tertiary education in % || Reduction of population at risk of poverty or social exclusion (in number of persons)

EU headline target || 75% || 3% || -20% (compared to 1990 levels) || 20% || 20% || <10% || 40% || 20,000,000

AT || 77-78% || 3.76% || -16% || 34% || 31.5 || 9.5% || 38% (including ISCED 4/4a) || 235,000

BE || 73.2% || 3.0% || -15% || 13% || 43.7 || 9.5% || 47% || 380,000

BG || 76% || 1.5% || 20% || 16% || 15.8 || 11% || 36% || 260,000 (persons living in monetary poverty)*

CY || 75-77% || 0.5% || -5% || 13% || 2.8 || 10% || 46% || 27,000

CZ || 75% || 1% (public sector only) || 9% || 13% || 39.6 || 5.5% || 32% || Maintaining the number of persons at risk of poverty or social exclusion at the level of 2008 (15.3% of total population) with efforts to reduce it by 30,000

DE || 77% || 3% || -14% || 18% || 276.6 || <10% || 42% (including ISCED 4) || 320,000 (long-term unemployed)*

DK || 80% || 3% || -20% || 30% || 17.8 || <10% || >40% || 22,000 (persons living in households with low work intensity)*

EE || 76% || 3% || 11% || 25% || 6.5 || 9.5% || 40% || Reduction of the at risk of poverty rate after social transfers to 15%, equivalent to an absolute decrease by 36,248 persons*

EL || 70% || 1.21% || -4% || 20% || 27.1 || 9.7% || 32% || 450,000

ES || 74% || 2% || -10% || 20% || 121.6 || 15% (school drop-outs) || 44% || 1,400,000-1,500,000

FI || 78% || 4% || -16% || 38% || 35.9 || 8% || 42% (narrow national definition) || 770,000 persons living at risk of poverty or social exclusion, equivalent to an absolute decrease by 140,000 persons

FR || 75% || 3% || -14% || 23% || 236.3 || 9.5% || 50% (17-33 year-olds) || 1,900,000

HR || 62.9% || 1.4% || 11% || 20% || 9.19 || 4% || 35% || Reduction of the number of persons at risk of poverty or social exclusion to 1,220,000, equivalent to a decrease by 152,000 persons compared to 2011

HU || 75% || 1.8% || 10% || 14.65% || 26.6 || 10% || 30.3% || 450,000

IE || 69-71% || approx. 2% (2.5% of GNP) || -20% || 16% || 13.9 || 8% || 60% || 200,000 (persons in combined poverty)*

IT || 67-69% || 1.53% || -13% || 17% || 158.0 || 16% || 26-27% || 2,200,000

LT || 72.8% || 1.9% || 15% || 23% || 6.485 || <9% || 48.7% || Reducing the number of persons at risk of poverty or social exclusion to 814,000

LU || 73% || 2.3-2.6% || -20% || 11% || 4.482 || <10% || 66% || 6,000

LV || 73% || 1.5% || 17% || 40% || 5.37 || 10% || 34-36% || 121,000 (at risk of poverty after social transfers and/or living in households with very low work intensity)*

MT || 70% || 2% || 5% || 10% || 0.825 || 10% || 33% || 6,560

NL || 80% || 2.5 % || -16% || 14% || 60.7 || <8 % || >40% || 100,000 (people aged 0-64 living in a jobless household)*

PL || 71% || 1.7% || 14% || 15% || 96.4 || 4.5% || 45% || 1,500,000

PT || 75% || 2.7-3.3% || 1% || 31% || 22.5 || 10% || 40% || 200,000

RO || 70% || 2% || 19% || 24% || 42.99 || 11.3% || 26.7% || 580,000

SE || >80% || 4% || -17% || 49% || 43.4 || <10% || 40-45% || Reduction of the % of women and men aged 20-64 who are not in the labour force (except full-time students), the long-term unemployed or those on long-term sick leave to well under 14%*

SI || 75% || 3% || 4% || 25% || 7.313 || 5% || 40% || 40,000

SK || 72% || 1.2% || 13% || 14% || 16.2 || 6% || 40% || 170,000

UK || No target in NRP || No target in NRP || -16% || 15% || 177.6 || No target in NRP || No target in NRP || Existing numerical targets of the 2010 Child Poverty Act and Child Poverty Strategy 2011-2014*

[1]               See the latest economic forecasts from the European
Commission at:

http://ec.europa.eu/economy_finance/eu/forecasts/2014_spring_forecast_en.htm

[2]           COM (2013)800 of 13.11.2013, Parliament's
report P7_TA (2014)0128 and P7_TA (2014)0129, European Council of 19/20
December 2013 (EUCO 217/13) and 20/21 March 2014 (EUCO 7/1/14).

[3]               The "Europe 2020" website gives a one-page
summary by Member State of the main areas of progress in implementing country-specific
recommendations since 2011 and the remaining changes identified in the 2014
package. See: http://ec.europa.eu/europe2020/index_en.htm

[4]               A pilot project of ex ante coordination of major
economic reform plans has been undertaken in the Economic Policy Committee and
a feasibility test on ex ante coordination of major social policy reforms was
carried out by the Social Protection Committee.

[5]              See on-going public consultation at: http://ec.europa.eu/europe2020/public-consultation/index_en.htm

[6]              Since Greece and Cyprus are still the subject of detailed
financial assistance programmes, they are not subject to country-specific recommendations
and thus not covered in this package.

[7]               COM(2013)790 of 13.11.2013.

[8]              COM(2014)150 of 5.3.2014.

[9]               See: http://ec.europa.eu/europe2020/index_en.htm

[10]             COM(2014)330 of 28.5.2014.

[11]             COM(2013)690 of 2.10.2013 and COM(2013)801 of
13.11.2013.

[12]             Recent analysis confirms that beyond the situation of
young people, there is also an alarmingly high share of adults – around 20% –
with very low basic skills. The European Structural and Investment Funds can
also help to finance action in this field.

[13]             See COM(2013)685 of 2.10.2013 for the latest details on
the EU level.

[14]             COM(2014)38 of 3.2.2014.

[15]             The
national targets as set out in the National Reform Programmes (NRP) in April
2014.

[16]             The
national emissions reduction targets defined in Decision 2009/406/EC (or
"Effort Sharing Decision") concern the emissions not covered by the
Emissions Trading System. The emissions covered by the Emissions Trading System
will be reduced by 21% compared to 2005 levels. The corresponding overall
emission reduction will be -20% compared to 1990 levels. Targets are defined in
terms of reduction of emissions or maximum increase in emissions.

[17]             The
Energy Efficiency Directive 2012/27/EU sets out in article 3(1)(a) that the
European Union 2020 energy consumption has to be of no more than 1474 Mtoe of primary
energy or no more than 1078 Mtoe of final energy. This table only reports on
primary energy consumption levels in 2020 expressed in Mtoe.