# EUR-Lex - 52014DC0425 - EN

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# 52014DC0425

**Recommendation for a COUNCIL RECOMMENDATION on Slovenia’s 2014 national reform programme and delivering a Council opinion on Slovenia’s 2014 stability programme /* COM/2014/0425 final - 2014/ () */**

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Recommendation for a

COUNCIL RECOMMENDATION

on Slovenia’s 2014 national reform
programme
and delivering a Council opinion on Slovenia’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 Regulation (EU) No
1176/2011 of the European Parliament and of the Council of 16 November 2011 on
the prevention and correction of macroeconomic imbalances[2], and in particular
Article 6(1) thereof,

Having regard to the recommendation of the
European Commission[3],

Having regard to the resolutions of the
European Parliament[4],

Having regard to the conclusions of the
European Council,

Having regard to the opinion of the
Employment Committee,

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

Having regard to the opinion of the Social
Protection Committee,

Having regard to the opinion of the
Economic Policy Committee,

Whereas:

(1) 
On 26 March 2010, the European Council agreed to
the Commission’s proposal to launch a new strategy for growth and jobs, Europe
2020, based on enhanced coordination of economic policies, 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) 
On 9 July 2013, the Council adopted a
recommendation on Slovenia’s national reform programme for 2013 and delivered
its opinion on Slovenia’s updated stability programme for 2012-2016. On 15
November 2013, in line with Regulation (EU) No 473/2013[5], the Commission presented its opinion on Slovenia's draft budgetary
plan for 2014[6].

(5) 
On 13 November 2013, the Commission adopted the
Annual Growth Survey[7],
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[8],
in which it identified Slovenia as one of the Member States for which an
in-depth review would be carried out.

(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) 
On 5 March 2014, the Commission published the
results of its in-depth review for Slovenia[9],
under Article 5 of Regulation (EU) No 1176/2011. The Commission's analysis leads
it to conclude that Slovenia continues to experience excessive macroeconomic
imbalances, which require monitoring and continuing strong policy action. While
imbalances have been unwinding over 2013 due to macroeconomic adjustment and
policy action by Slovenia, the magnitude of the necessary correction means that
substantial risks are still present. More specifically, the risks stemming from
an economic structure characterised by weak corporate governance, a high level
of state involvement in the economy, losses in cost competitiveness, a
corporate debt overhang and a considerable increase in government debt warrant
very close attention. While considerable progress has been made in repairing
the banks' balance sheets, determined action with respect to full
implementation of a comprehensive banking sector strategy, including
restructuring, privatisation and enhanced supervision, is still required.

(8) 
On 15 April 2014, Slovenia submitted its 2014 national
reform programme and on 24 April 2014 its 2014 stability programme. In order to
take account of their interlinkages, the two programmes have been assessed at
the same time.

(9) 
The objective of the
budgetary strategy outlined in the 2014 Stability Programme is to correct the
excessive deficit by 2015 and reach the medium-term objective by 2017. The
programme confirms the previous medium-term objective of a balanced budget,
which is in line with the requirements of the Stability and Growth Pact.
However, the (recalculated) structural balance is not expected to reach the
medium-term objective by 2017. The programme plans to bring the deficit below
3% of GDP in 2015, in line with the target set in the Excessive Deficit
Procedure recommendation. Beyond 2015, the programme envisages a steady decline
in the deficit before turning to a surplus of 0.3% of GDP in 2018. The programme
projects that the government debt will peak at 81.1% of GDP in 2015 before
dropping to 76% in 2016. Overall, the budgetary strategy outlined in the
programme is in line with the requirements of the Stability and Growth Pact.
The macroeconomic scenario underpinning the budgetary projections in the
programme, which has been produced by an independent body (the Institute for
Macroeconomic Analysis and Development), is cautious. On 5 March 2014, an
Autonomous Commission Recommendation was addressed to Slovenia. The stability
programme identifies some additional measures that assist in narrowing the gap
with the required fiscal effort. Based on this, it is considered that the
stability programme has partially responded to the Autonomous Commission Recommendation.
Nevertheless, downside risks remain as the measures underpinning the programme
are insufficiently detailed, and many of them have yet to be adopted. Any
potential additional bank recapitalisation needs, stemming from the 2013 asset
quality review and stress test in Slovenia, would increase the deficit and debt
ratios, while any proceeds from the successful privatisation of state owned
entities or banks that have not been incorporated in programme projections
would reduce the debt burden. Based on the Commission forecast, the fiscal
effort over the period 2013-2014 falls short by 1.4% of GDP in terms of
(corrected) change in the structural balance and by 0.5% of GDP in terms of the
amount of required measures estimated as necessary at the time of the Excessive
Deficit Procedure recommendation. For 2015, while the programme projects a
deficit in line with the Excessive Deficit Procedure recommendation, the Commission
2014 spring forecast estimates a deficit of 3.1% of GDP. Moreover, based on the
forecast, the fiscal effort measured both by the (corrected) change in
structural balance and by the underlying amount of discretionary measures to be
implemented  is expected to fall somewhat short of the level recommended by the
Council for 2015. Based on its assessment of the programme and the Commission
forecast, pursuant to Council Regulation (EC) No 1466/97, the Council is of the
opinion that additional efforts, in 2014 and thereafter, are required in order
to ensure full compliance with the Excessive Deficit Procedure recommendation,
including the required structural effort.

(10) 
With respect to the fiscal rules, in 2013 the
parliament approved a constitutional basis for establishing a general
government budget balance / surplus rule in structural terms. However, the
necessary implementing legislation, namely the Fiscal Rule Act, which was
supposed to be in place by November 2013, has yet to be adopted. In particular,
the necessary legal basis has to be established in order to define the role,
remit and independence of a functioning Fiscal Council.
The timely completion of a comprehensive expenditure review of all budgetary
users in the key expenditure area of health could identify measures to underpin
the fiscal consolidation and identify options for enhancing efficiency and cost
effectiveness..

(11) 
In 2013, it was recommended to Slovenia to strengthen
the long-term sustainability of the pension system and improve the efficiency,
cost effectiveness and quality of the long-term care sector. Slovenia has made
limited progress on measures taken to address this recommendation. An evaluation of the 2012 pension reform was
completed in April 2014 and the first findings are positive. While certain
fiscal savings have been realised, the level of pensions remained unchanged. Slovenia
faces high fiscal sustainability risks in the medium and long term mainly due to an increase in ageing-related spending
implied by Slovenia's demographics. Thus the pension and long-term care systems
will need to be reformed in the medium term if overall expenditure is to be
stabilised over the medium and long term while ensuring the adequacy of
pensions and access to long-term care services.  The
authorities plan to prepare a White Paper for a comprehensive pension reform. A
blueprint for a long-term care reform was adopted at the end of 2013 and the
related legislation is expected by the end of 2014. However, it risks being delayed
because the on-going reorganisation of healthcare insurance is lagging behind.

(12) 
The situation on the labour market has worsened.
Unemployment reached 10.3% in 2013 and youth unemployment climbed to 21.6% in
2013 while the proportion of young people not in employment, education or
training increased by 2.1 pps between 2011 and 2013. The evaluation of the labour
market reform adopted in 2013 points towards decreasing segmentation between
permanent and fixed-term contracts, albeit on the back of an increased use of
other non-permanent contractual forms, while the effect of incentives for the
employment of older and younger people are still unclear. Labour market
segmentation is also being addressed through better regulation of student work.
While a new act is pending approval, concerns remain about whether it will
adequately address shortcomings of previous rules. The
government has made limited progress in implementing last year's recommendation
on the minimum wage, which continues to be indexed only
to inflation, while the act on minimum wage allows for indexation to other
economic conditions. Limited progress has been made in developing effective
tailor-made active labour market policy measures and addressing skills
mismatches.

(13) 
The government has made substantial
progress in addressing the recommendations regarding stability
in the banking sector, conducting a credible Asset Quality Review and Stress
Test, prompt recapitalisations, and the transfer of non-performing loans to the
Bank Asset Management Company. However, the work is far
from complete and determined action to finalise and implement
a comprehensive banking sector strategy as announced in December 2013,
including restructuring, privatisation and enhanced supervision, is required. The level of non-performing loans in the banking system remains
high. It is therefore important for the banks to build internal work-out capacity
for non-performing loans including strengthening the
internal asset management and restructuring units, to accelerate the processing
of non-performing loans while maximising recovery value and preserving viable
businesses. Any further transfer of non-performing loans to the Bank Asset Management Company needs to be carefully designed in order to facilitate swift and efficient
restructuring of corporate credits, particularly in the case of complex,
inter-connected group loans. A comprehensive management strategy and business
plan that would substantiate redemption targets for the Bank Asset Management Company is awaited. Building on the lessons from the asset quality review and stress test, further
decisive measures to improve governance and supervision for all banks and
particularly for those remaining in State ownership are warranted by
strengthening risk management, enhancing credit approval processes and
improving data quality and availability, with the objective to reduce the
levels of non-performing loans and to contain future risks.

(14) 
The government has made limited progress in
implementing the recommendations on corporate governance of state-owned
enterprises, which account for one sixth of total value added and form a
complex nexus of domestic banks, insurance groups and non-financial
corporations, with significant cross-shareholding. The
level of state influence creates significant risks for the public finances both
directly and indirectly, through liabilities from guarantees. A coherent
strategy for the management of state-owned enterprises coupled with improved corporate governance would create a more
favourable environment for attracting foreign direct investment. Although first
steps were taken by compiling an initial list of 15 companies for accelerated
privatisation in May 2013, progress to date has been mixed and there is a significant
risk that deadlines will not be met. With delay, the new legislation
underpinning the Slovenia Sovereign Holding, a vehicle for consolidating the
management of state ownership, were introduced in April 2014. A comprehensive
strategy and a precise classification of core and non-core assets, including those earmarked for privatisation, is awaited. There
is a need to identify and implement appropriate measures to secure the
restructuring process and the attainment of its goals including inter alia
maximising the recovery value for creditors and establish a list of the most
urgent restructuring cases for rapid work out

(15) 
The insolvency framework was
amended in 2013 in order to facilitate the timely resolution of non-performing loans but the new framework remains largely untested. A high
level of indebtedness and financial distress has limited the corporate sector's
capacity to invest in future projects. The urgently needed financial and
operational restructuring of the corporate sector has yet to begin on a large
scale. A consolidated view of the various credit exposures in the banking
system is required to accelerate work-out of non-performing loans and to facilitate restructuring negotiations, particularly
in the case of complex, inter-connected group loans. A centralised task force with experienced representatives
of all stakeholders could take the initiative in supporting and accelerating this
process. In the meantime, swift and efficient closure of several on-going
urgent cases under the Bank Asset
Management Company is crucial.

(16) 
Despite its potential,
Slovenia has one of the lowest stocks of foreign direct investment in the EU (34.1%
of GDP vs. 47.1% of GDP on average in the EU in 2012). While privatisation and
corporate restructuring offer many new possibilities for private investors,
there is evidence that the insufficiently developed business environment and
culture hinder Slovenia from taking full advantage of it. In 2012 a process of deregulation of regulated
professions started and until now, the number of regulated professions
decreased from 323 to 262. Further deregulation of regulated professions
would contribute to increasing the number of domestic and foreign services
providers and thus contribute to increased competitiveness. There is a potential to increase the coherence of
measures devised to improve the business environment and entrepreneurial
activities. In this context, the upcoming Smart Specialisation Strategy under
the European Investment and Structural Funds for 2014-20 will provide an
opportunity to focus on key measures such as creating tradable, innovative
products.

(17) 
Slovenia is in the early stages of preparing
comprehensive public sector reform proposals (to be adopted by January 2015).
In this context, Slovenia has to restore the quality and credibility of public
administration. Slovenia has made some progress in improving the quality of the judicial system and has reduced the number of
pending cases. A reform of case management in commercial and civil justice has
improved the functioning of the court system. Recent positive trends in
litigious civil and commercial cases have been maintained.

(18) 
In the context of the European Semester, the
Commission has carried out a comprehensive analysis of Slovenia’s economic
policy. It has assessed the stability programme and the national reform
programme. It has taken into account not only their relevance for sustainable
fiscal and socio-economic policy in Slovenia but also their compliance with EU
rules and guidance, given the need to reinforce the overall economic governance
of the European Union by providing EU-level input into future national
decisions. Its recommendations under the European Semester are
reflected in recommendations (1) to (8) below.

(19) 
In the light of this assessment, the Council has
examined Slovenia’s stability programme, and its opinion[10] is reflected in
particular in recommendation (1) below.

(20) 
In the light of the Commission's in-depth review
and this assessment, the Council has examined the national reform programme and
the stability programme. Its recommendations under Article 6 of Regulation (EU)
No 1176/2011 are reflected in recommendations (1) to (8) below.

(21) 
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. Slovenia
should also ensure the full and timely implementation of these recommendations.

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

1. 
Reinforce the budgetary strategy with
sufficiently specified structural measures, for the year 2014 and beyond to
ensure correction of the excessive deficit in a sustainable manner by 2015 through
the achievement of the structural adjustment effort specified in the Council
recommendation under the Excessive Deficit Procedure. A durable correction of
the fiscal imbalances requires a credible implementation of ambitious
structural reforms to increase the adjustment capacity and boost growth and
employment. After the correction of the excessive deficit, pursue a structural
adjustment of at least 0.5% of GDP each year, and more in good economic
conditions or to ensure that the debt rule is met in order to put the high
general government debt ratio on a sustained downward path. To improve the
credibility of fiscal policy, complete the adoption of a general government
budget balance/surplus rule in structural terms, make the medium-term budgetary
framework binding, encompassing and transparent, and establish the necessary
legal basis for a functioning fiscal council defining its remit within the
budgetary process and introducing clear procedural arrangements for monitoring
budgetary outcomes as soon as possible. Launch a comprehensive review of
expenditure covering state and local government levels, direct and indirect
budget users and municipality-owned providers of utilities and services in the
area of health care by the end of 2014 with a view to realising budgetary
savings in 2015 and beyond.

2. 
Based on the public
consultation, agree measures to ensure the sustainability of the pension system
beyond 2020, encompassing adjustments of key parameters, such as linking the
statutory retirement age to gains in life expectancy and encouraging private
contributions to the second pillar of the pension system. Contain age-related
expenditure on long-term care by targeting benefits to those most in need and
refocusing care provision from institutional to home care.

3. 
Following consultation with social partners and
in accordance with national practices, develop a comprehensive Social Agreement
by the end of  2014 ensuring that wage developments, including the minimum
wage, support competitiveness, domestic demand and job creation. Redefine the
composition of the minimum wage and review its indexation system. Take measures
for further decreasing segmentation, notably addressing the efficiency of
incentives for hiring young and older workers and the use of civil law
contracts. Adopt the Act on Student Work. Prioritise outreach to non-registered
young people ensuring adequate public employment services capacities. To increase employment of low-skilled
and older workers, adapt the working environment to longer working life and
focus resources on tailor made active labour market policy measures, while
improving their effectiveness. Address skills mismatches by improving the
attractiveness of vocational education and training and by further developing
cooperation with the relevant stakeholders in assessing labour market needs.

4. 
Complete the privatisation of NKBM in 2014 as
planned,  prepare Abanka for privatization in 2015, continue the prompt implementation
of restructuring plans of the banks in receipt of state aid and the necessary
consolidation of the banking sector. Based on the lessons from the asset
quality review and stress test finalise the comprehensive action plan for banks
in August 2014, including specific measures to improve governance, supervision,
risk management, credit approval process and data quality and availability.
Reinforce banks' capacity to work out non-performing loans by  strengthening
the internal asset management and restructuring units. Clarify the mandate of
the Bank Asset Management Company by publishing a comprehensive management
strategy and business plan by September 2014, detailing its role in
restructuring of its assets, redemption targets, budgets, asset management
plans and expected returns, while ensuring adequate resources.

5. 
Continue to implement the privatisations
anounced in 2013 with the time-frames set. Adopt a strategy for the Slovenian
Sovereign Holding with a clear classification of assets in line with the
timeline and definitions established in the 2014 Slovenian Sovereign Holding
Act. By November 2014, commit to a short-term (one- to two- year horizon)
divestment schedule for a number of well-targeted assets with a clear time scale.
Make it fully operational as a vehicle for the management of assets remaining
in state ownership and divestment of the assets earmarked according to the management acts, within the time frame stipulated by the law. By September 2014, adopt and implement a corporate
governance code for state-owned enterprises to ensure professional, transparent
and independent management.

6. 
Finalise a corporate restructuring master plan
by the end of 2014 with clear priorities and effective implementation process. Set
up a central corporate restructuring task force monitoring and coordinating the
overall restructuring process, providing the necessary expertise, guidance and
advice, and facilitating the negotiation process between all stakeholders
involved. Establish a list of the most urgent restructuring cases, while maximising
the recovery value for creditors. Promote the use of the available legal
mechanisms and international best practices to all stakeholders in the
restructuring process. Evaluate recent changes in the insolvency legislation by
September 2014, being ready to introduce any additional necessary measure.
Further reduce the length of judicial proceedings at first instance in
litigious civil and commercial cases including cases under the insolvency
legislation, and the number of pending cases, in particular enforcement and
insolvency cases.

7. 
Reduce obstacles to doing business in Slovenia
in key areas for economic development rendering the country more attractive to
foreign direct investment particularly through accelerated liberalisation of regulated
professions, reduction of administrative burden including leaner authorisation
schemes. Ensure sufficient budgetary autonomy for the Competition Protection Agency
and increase its institutional independence. Streamline priorities and ensure consistency
between the 2011 Research and Innovation and the 2013 Industrial Policy
Strategies with the upcoming strategies on Smart Specialisation and Transport,
ensure their prompt implementation and assessment of effectiveness.

8. 
Take effective measures
to fight corruption, enhancing transparency and accountability, and introducing
external performance evaluation and quality control procedures.

Done at Brussels,

For
the Council

The
President

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

[2]               OJ L 306, 23.11.2011, p. 25.

[3]               COM(2014) 425 final.

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

[5]               OJ L 140, 27.5.2013, p.11.

[6]               C(2013) 8010 final

[7]               COM(2013) 800 final.

[8]               COM(2013) 790 final.

[9]               SWD(2014) 88 final.

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