# EUR-Lex - 52012PC0574 - EN

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# 52012PC0574

**Proposal for a COUNCIL IMPLEMENTING DECISION amending Implementing Decision 2011/344/EU on granting Union financial assistance to Portugal /* COM/2012/0574 final - 2012/0276 (NLE) */**

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EXPLANATORY MEMORANDUM

Upon a request
by Portugal, the Council granted financial assistance to Portugal on 17 May
2011 (Council Implementing Decision 2011/344/EU) in support of a strong economic and reform programme aiming at restoring confidence, enabling the return of the economy to
sustainable growth, and safeguarding financial stability in Portugal, the euro
area and the EU.

In line with Article 3(9) of Decision
2011/344/EU, the Commission, together with the IMF and in liaison with the ECB,
has conducted the fifth review to assess the progress on the implementation of
the agreed measures as well as their effectiveness and economic and social
impact.

Taking into account the recent economic,
fiscal and financial developments and policy actions, the Commission considers
that some changes to the economic policy conditions underpinning the assistance
are necessary to secure the programme's objectives, as explained in the
recitals of the proposed amendments to the Council implementing Decision.

2012/0276 (NLE)

Proposal for a

COUNCIL IMPLEMENTING DECISION

amending Implementing Decision 2011/344/EU
on granting Union financial assistance to Portugal

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty on the
Functioning of the European Union,

Having regard to Council Regulation (EU) No
407/2010 of 11 May 2010 establishing a European financial stabilisation
mechanism[1],
and in particular Article 3(2) thereof,

Having regard to the proposal from the
European Commission,

Whereas:

(1)       In line with Article 3(9)
of Council Implementing Decision 2011/344/EU, the Commission, together with the
International Monetary Fund (IMF) and in liaison with the European Central Bank
(ECB), has conducted the fifth review of the authorities' progress on the
implementation of the agreed measures as well as of the effectiveness and
economic and social impact of the agreed measures.

(2)       The rebalancing of the
Portuguese economy is taking place at a faster-than-expected pace. The second
quarter of 2012 brought a substantial quarter-on-quarter real GDP contraction
of 1.2 percent following a flat first quarter. For the year as a whole, the
projected pace of the economic recession remains unchanged at -3 percent. The
current account deficit is declining more rapidly than anticipated, falling to
3 percent of GDP in 2012 from nearly 10 percent just two years ago. This
adjustment is taking place on the back of well-performing exports and a rapid
fall in imports. Looking forward, economic activity will be affected by a
diminishing stimulus from external demand and the impact of further budgetary
consolidation. As a consequence, GDP growth has been revised downward by about
1 percentage point in both 2013 and 2014 to around -1 and +1 percent.

(3)       In spite of a rigorous
budget implementation on the expenditure side, data until July point to a
budgetary gap of 21⁄4 percent of GDP in 2012 compared with the budget plans.
While the faster-than-projected adjustment from domestic demand to exports is
welcome, it impacts on budgetary execution in two ways. First,
employment-intensive domestic sectors, such as construction, are affected most
negatively and the resulting higher unemployment weighs on social security
budgets. Second, the tax-intensity of production and consumption is falling,
leading to noticeable revenue shortfalls. The growth composition effect on
revenues is amplified by intra-category shifts away from higher-taxed items
such as consumer durables towards lower-taxed items of daily consumption. Also,
the weakness in direct taxation is amplified by negative bracket creep as
falling incomes are taxed at lower rates and tax revenues on profits shrink. By
contrast, expenditure has overall developed according to plans, with
higher-than-budgeted savings on compensations for employees. Although a number
of one-off factors could reduce the gap to about 3⁄4 percent of GDP in 2012, a
large carry-over into 2013 and 2014 of about 11⁄2 percent of GDP would remain,
making the fiscal programme targets over 2012-2014 unattainable.

(4)       In view of the large revenue
shortfalls and the more subdued growth outlook, the deficit targets haven been adjusted
to 5.0 percent of GDP in 2012, 4.5 percent in 2013 and 2.5 percent of GDP in
2014. As the fiscal gap is assessed to be essentially outside the control of
the government a revision of the targets to accommodate part of the shortfall
seems appropriate. Even under the revised targets significant consolidation
efforts of 3 percent and 13⁄4 percent of GDP will be necessary in 2013 and 2014. In
order to maintain the credibility of the Programme some degree of front-loading
of the adjustment is warranted.

(5)       A range of structural
spending and revenue measures underpin the revised fiscal targets. Measures
worth 1⁄4 percent of GDP will be taken still in 2012 to reach the target of 5
percent of GDP. This includes, inter alia, spending freezes and a frontloading
of some of the measures planned for next year. For 2013, consolidation measures
amounting to 3 percent of GDP will be incorporated in the budget to achieve the
target of 4.5 percent of GDP. These include a further decrease in the wage
bill, a reduction in intermediate consumption, a cut in social transfers, a
further rationalisation in the health sector, reduced spending on capital
formation, as well as revenue increases achieved via a reform of the personal
income tax simplifying the tax structure, broadening the base by eliminating
some tax expenditures, increasing the average tax rate while improving
progressivity, broadening the corporate income tax base by eliminating interest
deductibility, rising excises taxes and changing property taxation. For 2014, a
comprehensive expenditure review has been initiated with a view to identifying
spending cuts (of EUR 4 billion over 2014-2015) to reach a budget deficit of 2.5
percent of GDP.

(6)       Instruments to control government
expenses are put in place. The new commitment control system is being
implemented but full compliance needs to be ensured so as to avoid a further
build-up of new arrears. Budgetary fragmentation will be reduced and costly
inefficiencies are being tackled across a broad range. This includes containing
losses of public sector enterprises, renegotiating public-private partnerships
and pushing for further savings in the health care sector.

(7)       Under the Commission's
current projections for nominal GDP growth (-1.0 % in 2011, ‑2.7 %
in 2012, 0.3 % in 2013 and 2.2 % in 2014) and the revised fiscal targets,
the path for the debt-to-GDP ratio is expected as follows: 107.8 % in 2011,
119.1 % in 2012, 123.7 % in 2013 and 123.6 % in 2014. The debt-to-GDP
ratio would therefore be stabilised at below 124 % and be placed on a
declining path in 2014, assuming further progress in the reduction of the
deficit. Debt dynamics are affected by several below-the-line operations, including
sizeable acquisitions of financial assets, notably for possible bank
recapitalisation and financing to state-owned enterprises and differences
between accrued and cash interest payments.

(8)       The liquidity and the
solvency conditions of the banking system have improved since the fourth
review, reflecting the ongoing deleveraging, the exceptional liquidity support
provided by the Eurosystem, and a capital augmentation worth over EUR 7
billion. Banks presented their updated funding and capital plans (4th edition).
Albeit slightly less optimistic on deposits growth, all banks foresee to meet
the indicative loan to deposit target of 120% by 2014. Overall, the
implementation of the Memorandum of Understanding on the financial sector part
is proceeding in accordance with the envisaged objectives to preserve financial
stability. Some efforts are still needed in some banks to meet the end of the
year 10% core tier 1 target of the Banco de Portugal.

(9)       Progress in the
implementation of reforms to raise competitiveness, employment and the growth
potential is broadly satisfactory. The revised Labour Code entered into force
in August 2012. Further important reforms in the area of severance payment and
collective bargaining are planned by the end of September. The Government has
recently adopted a number of Active Labour Market Policies aimed at improving
the functioning of Public Employment Services, supporting employment creation,
strengthening activation and offering more effective training opportunities.
The judiciary reforms in the areas of civil procedure and court organisation,
which will speed up civil and commercial litigation and unclog the court
system, are progressing well. Steps have been taken to improve the framework
for the recognition of professional qualifications with the adoption of
amendments to the law transposing Directive 2005/36/EC of the European
Parliament and the Council on the mutual recognition of Professional
Qualifications and with the adoption by the government of a law proposal aimed at
improving the functioning of highly regulated professions. Work on the implementation
of the Services Directive has advanced at a steady pace as regards
sector-specific legislation, with the adoption of the remaining necessary
sector-specific legislative amendments expected by the end of the year. Further
efforts in the implementation of the zero authorisation initiative and the
set-up of the point of single contact foreseen by the Directive 2006/123/EC of
12 December 2006 on services in the internal market[2] are essential to reduce the
administrative burden. In view of facilitating access to finance to Small and
Medium Enterprises (SMEs), the Government is committed to adopt, if necessary,
a number of additional initiatives, including mechanisms to strengthen the
export orientation of SMEs.

(10)     Building on the independent
report on the main National Regulator Authorities (NRA), Portugal will prepare
a framework law that protects the public interest and promotes market
efficiency. The law shall guarantee the Regulator's independence and financial,
administrative and management autonomy to exercise their responsibilities, in
full compliance with EU law. The law shall also contribute towards the
effectiveness of the competition authority in enforcing competition rules
therefore supporting and complementing the effect of the recently adopted
competition law.

(11)     The fifth update of the
Memorandum of Understanding includes a full section on promoting a
business-friendly licensing environment which provides a more detailed calendar
and specific milestones in the revision of some important legal regimes such as
environment and territorial planning, industrial, commercial and tourism
licensing,

HAS ADOPTED THIS DECISION:

Article 1

Article 3 of Implementing Decision
2011/344/EU is amended as follows:

(1) paragraphs 3 and 4 are replaced by the
following:

'3. The general government deficit shall
not exceed 5.9 % of GDP in 2011, 5.0 % in 2012, 4.5% of GDP in 2013 and 2.5% of
GDP in 2014 in line with the revised excessive deficit procedure requirements.
For the calculation of this deficit, the possible budgetary costs of bank
support measures in the context of the Portuguese Government’s financial sector
strategy shall not be taken into account. Consolidation shall be achieved by
means of high-quality permanent measures and minimising the impact of
consolidation on vulnerable groups.'

'4. Portugal shall adopt the measures
specified in paragraphs 5 to 8 before the end of the indicated year, with exact
deadlines for the years 2011-2014 being specified in the Memorandum of
Understanding. Portugal shall stand ready to take additional consolidation
measures to reduce the deficit to below 3 % of GDP by 2014 in case of
deviations from targets.'

(2) paragraphs 6 to 9 are replaced by the
following:

'6. Portugal shall adopt the following
measures during 2012, in line with specifications in the Memorandum of
Understanding:

(a) The general government deficit shall not
exceed 5.0% of GDP in 2012. Portugal shall continue to closely monitor fiscal
developments and implement further policy adjustments to achieve the 2012
target. To this effect, Portugal shall freeze some of the 2012 budget
appropriations for investment projects not yet initiated; increase stamp duties
on high value properties; rise tax rates on investment income; frontload some
of the 2013 budget measures affecting social benefits; implement additional
measures generating savings in intermediate consumption and raising revenues
from sales in order to secure the deficit target for 2012.

(b) Portugal shall aim at a reduction of
expenditure in 2012 of at least EUR 6.8 billion including a reduction in public
sector wages and employment; cuts in pensions; a comprehensive reorganisation
of the central administration, eliminating redundancies and other
inefficiencies; reducing transfers to state-owned enterprises; reorganising and
reducing the number of municipalities and parishes; cuts in education and
health; lower transfers to regional and local authorities; and reductions in capital
expenditure and in other expenditure as set out in the Programme.

(c) On the revenue side, Portugal shall
implement revenue measures of at least EUR 3 billion, including broadening VAT
bases through reducing exemptions and rearranging the lists of goods and
services subject to reduced, intermediate and higher rates; an increase in
excise taxes; broadening the corporate and personal income tax bases by
reducing tax deductions and special regimes; ensuring the convergence of
personal income tax deductions applied to pensions and labour income; and
changes in property taxation by substantially reducing exemptions. These
measures shall be complemented by action to fight tax evasion, fraud and informality.

(d) Portugal shall continue adopting measures
to reinforce public finance management. Portugal shall implement the measures
provided for in the new Budgetary Framework Law, including setting up a
medium-term budgetary framework. The local and regional budgetary frameworks
shall be considerably strengthened, in particular by aligning the respective
financing laws with the requirements of the Budgetary Framework Law. Portugal
shall step up the reporting and monitoring of public finances and reinforce
budgetary execution rules and procedures. The Portuguese Government shall apply
the strategy for the validation and settlement of arrears and step up the
implementation of the commitment control law to prevent the creation of new
arrears. Portugal shall implement the new legal and institutional PPPs
framework. No PPP shall be launched until the new framework is fully effective.
Based on a study prepared by an international auditing firm, Portugal shall
develop a detailed strategic plan, in full compliance with applicable EU law
including Public Procurement law, in view of obtaining substantial fiscal
gains, while minimising the debt burden and ensure sustainable reduction of
government liabilities. Portugal shall adopt a law to regulate the creation and
the functioning of state-owned enterprises (SOEs) at the central, regional and
local levels.

(e) Portugal shall apply the new legislation to
reorganise and significantly reduce the number of local government entities.
These changes will come into effect by the beginning of the next local election
cycle. In addition, Portugal shall deepen efforts to streamline the public
sector by reducing entities and improving task sharing at all levels of
government.

(f) Portugal shall deepen the reform of the
revenue administration by reinforcing the links between the Autoridade Tributária
e Aduaneira and the revenue collection units of the Social Security, reducing
the number of municipal offices and addressing remaining bottlenecks in the tax
appeal system.

(g) Portugal shall implement the financial
arrangement with the Autonomous Region of Madeira.

(h) Portugal shall adopt measures to improve
the efficiency and sustainability of SOEs at central, regional and local level.
Portugal shall explore options for managing the heavy debt load of SOEs,
including Parpública, and to ensure improved conditions for market financing.
Portugal shall aim at reaching operational balance at sector level by the end
of 2012.

(i) Portugal shall continue implementing the
privatisation programme. The direct sale of Caixa Geral de
Depositos (CGD) insurance arm Caixa Seguros is ongoing.

(j) The Portuguese Government shall submit
draft legislation to the Portuguese Parliament to align severance payments with
the Union average of 8-12 days per year of work and create a compensation fund
for severance payments.

(k) Portugal shall promote wage developments
consistent with the objectives of fostering job creation and improving firms’
competitiveness with a view to correcting macroeconomic imbalances. Over the
Programme period, any increase in minimum wages shall take place only if
justified by economic and labour market developments. Measures shall be taken
to address weaknesses in the current wage bargaining schemes, including
legislation to redefine the criteria and modalities of the extension of
collective agreements and to facilitate firm-level agreements. Until then, the collective
agreements shall not be extended.

(l) Portugal shall continue to improve the
effectiveness of its active labour market policies in line with the results of
the assessment report and the action plan to improve the functioning of the
Public Employment Services.

(m) Portugal shall implement the measures set
out in its action plans to improve the quality of secondary and vocational
education and training.

(n) The functioning of the judicial system
shall be improved by implementing the measures proposed under the Judicial
Reform Map and by applying targeted measures to progressively eliminate the
court backlog and to foster alternative dispute resolution.

(o) Portugal shall continue opening up the
economy to competition. The Portuguese Government shall take the necessary
measures to ensure that obstacles to free movement of capital will not be
created by their action and in particular, that the Portuguese State or any
public body does not conclude, in a shareholder capacity, agreements which may
hinder the free movement of capital or influence the management control of
companies. Functioning of Professional services shall be fostered by improving
the recognition of framework on professional qualification and by eliminating unnecessary
restrictions on regulated professions. In construction and real estate
activities, Portugal shall make the requirements for cross border providers
less burdensome and review obstacles to the establishment of services
providers.

(p) The competition and regulatory framework
shall be improved. Portugal shall reinforce the independence, autonomy and governance
of the main national regulatory authorities; implement the Competition Law with
a view to improving the speed and effectiveness of the enforcement of
competition rules; and monitor the inflow of new cases and report on the
functioning of the specialised court for competition, regulation and supervision.

(q) In the energy sector, Portugal shall take
measures to facilitate entry, promote the establishment of the Iberian gas
market and shall take further steps towards the full transposition of the Third
EU Energy Package. To ensure the National Regulatory Authority’s independence,
autonomy and all powers foreseen in the Package, Portugal shall adopt the new
regulators' bylaws as agreed in July 2012 with EC/ECB/IMF by the third quarter
2012, and ensure that they are effective before end of year in time for
the liberalisation of the electricity and gas market. Portugal shall take
measures to review the support and compensation schemes for the production of
electricity. Portugal shall take measures to reduce excessive rents and
eliminate the tariff debt ('défice tarifário') by 2020, focusing on
compensation schemes for power guarantee, special regime (renewables -
excluding those granted under tender mechanisms - and cogeneration), and the
ordinary regime ('CMECs' and 'CAEs').

(r) In other network industries, in particular
transport, telecommunications and postal services, Portugal shall adopt
additional measures to promote competition and flexibility.

(s) Portugal shall adopt a number of measures
in view of increasing the efficiency of the licensing schemes for territorial
planning, industrial and commercial licensing and tourism. In addition the
Portuguese government shall analyse and fast-track applications for the
licensing of planned investment projects which are left unresolved or undecided
for more than 12 months.

(t) Portugal shall prepare an action plan with
measures to facilitate access to finance and to export markets for companies,
in particular for SMEs.'

'7. Portugal shall adopt the following
measures during 2013, in line with specifications in the Memorandum of
Understanding:

(a) The general government deficit shall not
exceed 4.5% of GDP in 2013. The 2013 budget shall include permanent
consolidation measures of at least 3% of GDP aiming at a reduction of the
general government deficit within the timeframe referred to in Article 3(3).
The government shall explore ways to increase the weight of expediture
reduction in the overall consolidation package for 2013 in order to ensure a
medium-term growth friendly fiscal adjustment tilted towards the expenditure
side. The government shall use contingency measures in the course of 2013 in
case of slippages given possible implementation risks.

(b) The budget shall include revenue measures such
as a reform of the personal income tax simplifying the tax structure,
broadening the base by eliminating some tax expenditures, increasing the
average tax rate while improving progressivity; broadening the corporate income
tax base, increasing investment income tax rate; higher excises taxes and
changes in property taxation.

(c) On the expenditure side, the 2013 budget
shall identify measures such as lowering expenditures in the central administration,
education and health; streamlining public and private social transfers and
subsidies; reducing transfers to local and regional authorities; reduction of the
wage bill by decreasing permanent and temporary staff and reducing overtime pay;
and lower operational and capital expenditures by SOEs.

(d) Portugal shall complete the elimination of
the court backlog.

(e) Portugal shall improve the business
environment by reducing administrative burden through the extension of
simplification reforms (Points of Single Contact – PSC - and ‘Zero
Authorisation’ projects) to all sectors of the economy. In particular, Portugal
shall adapt the content and the information available at the PSC to ensure
conformity with Directive 2006/123/EC of the European Parliament and the
Council* and with Directive 2005/36/EC of the European Parliament and of the
Council**. Portugal shall alleviate credit constraints of small and
medium-sized enterprises, including through the implementation of Directive
2011/7/EU of the European Parliament and of the Council***.

(f) Portugal shall adapt the content and the
information available at the Point of Single Contact (PSC) for the 44 amended
regimes to ensure conformity with the Services Directive, shall adapt the
content and information available at the PSC for the 13 regimes to ensure
conformity with the Professional Qualifications Directive

(g) Portugal shall continue implementing its
privatisation programme, which shall be expanded to include additional
companies and assets to the ones identified in the Memorandum of Understanding
for sale or concession in 2013.'

__________________________

- OJ L 376, 27.12.2006, p. 36.

** OJ L 255, 30.9.2005, p. 1 '

*** OJ L 48, 23.2.2011, p. 1.

'8. The general government deficit shall
not exceed 2.5% of GDP in 2014. To achieve this objective Portugal shall apply
a thorough expenditure reducing plan worth about EUR 4 billion over 2014-2015.
A comprehensive expenditure review to fully specify the additional sources of
savings shall be carried out for the sixth review and measures shall be fully specified
by February 2013. The fiscal consolidation plans for 2014-2015 shall be fully
defined in the 2013 Stability Programme.'

'9. With a view to restoring confidence in
the financial sector, Portugal shall adequately recapitalise its banking sector
and ensure an orderly deleveraging process. In that regard, Portugal shall
implement the strategy for the Portuguese banking sector agreed with the Commission,
the ECB and the IMF so that financial stability is preserved. In particular,
Portugal shall:

(a) advise banks to strengthen their collateral
buffers on a sustainable basis and monitor the outstanding government
guaranteed bank bonds;

(b) ensure that banks reach the Programme
target of the Core Tier 1 ratio of 10 % at the latest by the end of 2012;

(c) ensure a balanced and orderly deleveraging
of the banking sector, which remains critical to eliminating funding imbalances
on a permanent basis. Banks’ funding plans aim at reducing the loan-to-deposit
ratio to an indicative value of around 120% in 2014 and reducing the reliance
on Eurosystem funding in the medium term. Those funding plans shall be reviewed
quarterly;

(d) continue to streamline the state-owned CGD;

(e) optimise the process for recovering the
assets transferred from BPN to the three state-owned SPVs through the
outsourcing to a professional third party of the management of the assets, with
a mandate to gradually recover the assets over time. The Portuguese government
shall select the party managing the credits through a competitive bidding
process and include adequate incentives to maximise the recoveries and minimise
operational costs into the mandate. Ensure timely disposition of the subsidiaries
and the assets in the other two state-owned SPVs.

(f) based on the set of preliminary proposals
to encourage the diversification of financing alternatives to the corporate
sector presented, develop and evaluate
the different options put forward with a view to set priorities. Assess the
effectiveness of EU-compatible government-sponsored export credit insurance
schemes with a view to take appropriate measures to promote exports;

(g) ensure the initial and periodical funding
arrangements for the Resolution Fund in two steps – first by the approval of a
decree-law on the banks' contributions to the resolution fund by November 2012
and secondly by the approval of a supervisory notice on the specific periodic
contributions by banks one month later; adopt the supervisory notices on
recovery plans by the end of October 2012; adopt the regulation on resolution
plans by the end of November 2012; and adopt the rules applicable to setting-up
and operation of bridge banks in line with Union competition rules by the end
of October 2012. Priority shall be given to the review of the recovery and
subsequent resolution plans of the banks that are of systemic importance;

(h) establish a framework for financial
institutions to engage in out-of-court debt restructuring for households and SMEs
and implement an action plan to raise public awareness of the restructuring
tools.'

(3) The following paragraph 10 is added:

'10. In order to ensure the smooth
implementation of the Programme’s conditionality, and to help to correct
imbalances in a sustainable way, the Commission shall provide continued advice
and guidance on fiscal, financial market and structural reforms. Within the
framework of the assistance to be provided to Portugal, together with the IMF
and in liaison with the ECB, it shall periodically review the effectiveness and
economic and social impact of the agreed measures, and shall recommend
necessary corrections with a view to enhancing growth and job creation,
securing the necessary fiscal consolidation and minimising harmful social
impacts, particularly on the most vulnerable parts of Portuguese society.'

Article 2

This Decision is addressed to Portugal.

Article 3

This Decision shall be published in the Official Journal of the European Union.

Done at Brussels,

For
the Council

The
President

[1]               OJ L 118, 12.5.2010, p. 1.

[2]               OJ L 376, 27.12.2006, p. 36.