# EUR-Lex - 52012DC0320 - EN

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# 52012DC0320

**Recommendation for a COUNCIL RECOMMENDATION on Latvia’s 2012 national reform programme and delivering a Council opinion on Latvia’s convergence programme for 2012-2015 /* COM/2012/0320 final */**

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Recommendation for a

COUNCIL RECOMMENDATION

on Latvia’s 2012 national reform programme
and delivering a Council opinion on Latvia’s convergence programme for
2012-2015

THE COUNCIL OF THE EUROPEAN UNION,

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

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

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

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

Having regard to the conclusions of the
European Council,

Having regard to the opinion of the
Employment Committee,

After consulting the Economic and Financial
Committee,

Whereas:

(1)       On 26 March 2010, the
European Council agreed to the European Commission’s proposal to launch a new
strategy for jobs and growth, 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 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[4],
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 12 July 2011, the
Council adopted a recommendation on Latvia’s national reform programme for 2011
and delivered its opinion on Latvia’s updated convergence programme for 2011-2014.

(4)       On 23 November 2011, the
Commission adopted the second Annual Growth Survey, marking the start of the
second European Semester of ex-ante and integrated policy coordination, which
is anchored in the Europe 2020 strategy. On 14 February 2012, the Commission,
on the basis of Regulation (EU) No 1176/2011, adopted the Alert Mechanism Report[5], in which it did not identify
Latvia as one of the Member States for which an in-depth review would be
carried out.

(5)       Latvia has met most of the
conditions related to the financial assistance programme in 2011. The
Commission completed the fifth and final review under Latvia's
balance-of-payments programme on 21 December 2011 with an overall positive
assessment on the government's progress in budgetary, financial and structural
reforms. The programme expired in January 2012. Following the expiration of the
programme, Latvia is subject to post-programme surveillance. This surveillance
forms an integral part of the existing procedures and surveillance mechanisms
and it aims at close monitoring of risks that could jeopardise macro-economic
stability and hence affect the repayment capacity. The post-programme
surveillance will continue until the repayment of a large fraction (about 70%) of
loans.

(6)       On 2 March 2012, 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
2 March 2012, the European Council also invited the Member States participating
in the Euro Plus Pact to present their commitments in time for inclusion in
their stability or convergence programmes and their national reform programmes.

(8)       On 30 April 2012, Latvia
submitted its 2012 convergence programme covering the period 2012-2015 and its
2012 national reform programme. In order to take account of their
interlinkages, the two programmes have been assessed at the same time.

(9)       Based on the assessment of
the 2012 convergence programme pursuant to Council Regulation (EC) No 1466/97,
the Council is of the opinion that the macroeconomic scenario underpinning the
budgetary projections is cautious in 2012, taking into account the latest
available information, and plausible in 2013. While macroeconomic projections for
2012 in the programme scenario are very close to those in the Commission's
spring 2012 forecast (with GDP growth projections respectively at 2.0% and 2.2%),
recent economic data indicates that the outturn may be higher. The objective of
the budgetary strategy outlined in the programme is to correct an excessive
deficit by 2012 and to approach the medium-term budgetary objective (MTO) by
the end of the programme period. The 2012 convergence programme has changed the
medium-term objective from -1.0% to -0.5% of GDP; the new MTO adequately
reflects the requirements of the Stability and Growth Pact. The planned
headline deficit in 2012 complies with the deadline for correction of the
excessive deficit established in Council Recommendation of 7 July 2009. For 2013,
the programme targets a headline deficit of 1.4% of GDP, although the planned
expenditure reduction is not yet fully supported by measures. Based on the
(recalculated) structural budget balance[6],
Latvia will approach its MTO by the end of the programme period in 2015. While
the recalculated information suggests that progress towards the MTO is less
than 0.5% of GDP in structural terms in outer years of the programme, planned
expenditure restraint would ensure that the growth rate of government expenditure,
taking into account discretionary revenue measures, would be in line with the expenditure
benchmark of the Stability and Growth Pact. At the same time, possible tax
changes from the second half of 2012, which are not yet reflected in the
programme scenario but acknowledged in the letter accompanying the submission
of the 2012 convergence programme represent a risk to the attainment of targets
in 2013 and beyond. The general government debt ratio is below 60% of GDP,
increasing from 42.6% of GDP in 2011 to 46.7% of GDP in 2014, as the
authorities pre-fund large repayments related to the international financial
assistance programme that are due in 2014-2015, and falling to 38.9% in 2015 as
these repayments are made.

(10)     Latvia should pursue the
strategy of shifting taxation from labour to taxation of consumption, property,
and the use of natural and other resources, while improving the structural
balance. The relatively high tax burden on low-wage earners and the high level
of undeclared work indicate the need for appropriate labour-market policies, a review
of the tax and benefit system and increased efforts to tackle the shadow economy.
Environmental taxes remain relatively underdeveloped and are heavily dominated
by motor-fuel taxation, while taxation on other energy sources, pollution and the
use of natural resources is below the EU average. Further broadening the tax
base to other sources of environmental taxation, in particular pollution, as
well as more broad-based taxation of energy sources, would help in achieving
environmental goals while providing room for a tax shift away from the taxation
of labour.

(11)     In the process of the
on-going reform of fiscal governance, Latvia is invited to ensure adoption of
the Fiscal Discipline Law by the Parliament and to develop a medium term
budgetary framework law to support the long-term sustainability of public
finances. The adoption of the Fiscal Discipline Law will be in line with the
commitments by the Latvian government under the balance-of-payments programme;
the draft law adopted by the government also seeks to implement the evolving EU
acquis in the area of fiscal governance into Latvian legislation. When adopted
and implemented, the new law would considerably strengthen the fiscal framework
in Latvia, which currently lacks an effective mechanism to limit expenditure
growth in good economic times.

(12)     So as to ensure the
continuity of the pension reform, Latvia should restore contributions to the
mandatory funded private pension scheme at 6% of gross wages in 2013, from the
current reduced level of 2% of gross wages.

(13)     Latvia needs to strengthen
and reform the social assistance system and tackle one of the highest
unemployment rates in the EU. The challenge of youth unemployment became
especially evident during the crisis, revealing also high skills mismatches.
Special active labour market policies targeted at young people have been
designed and implemented including vocational training, volunteer work and wage
subsidies for young people. However, given the scale of the problem, these
limited activities have a relatively small impact.

(14)     In 2011, 40% of the Latvian
population is facing the risk of poverty which has implications for the
employability of the workforce and future growth prospects. Latvia adopted an
Emergency Social Safety Net Strategy. Government policies to reduce poverty are
concentrated on the reduction of income inequality, reduced tax burden for
working families and increased access to the labour market. Nevertheless,
Latvia spends relatively little on social protection and social transfers have
only a low impact on poverty reduction, as a large share of social transfers is
redistributed back to middle and high income earners. Spending on means tested
benefits is low, while the role of social safety net is partly fulfilled by
temporary low-paid public jobs. The design of social assistance benefits also
contains poverty and unemployment traps and there are abuses of the system.
Large inequality exists in access to social assistance across local governments
and poor transparency complicates evidence-based decision making. The
challenges of long term unemployment and of youth unemployment became
especially evident during the crisis. Most of the young unemployed do not
possess professional qualifications. The number of young people not in
employment, education or training (NEET's) is relatively high. Measures should
be taken in line with the outcome of the Latvian - Commission joint action team
on youth unemployment

(15)     Latvia should further improve
energy efficiency and promote competition in major energy networks, while
improving connectivity with EU energy networks. The tax system does not provide
sufficient incentives for reducing energy costs and shifting consumption and
investment towards energy efficient products (transport vehicles, insulation of
buildings, heating systems). Energy markets in Latvia remain dominated by
monopolies. For historical reasons, the gas and electricity markets are largely
separated from other EU member states.

(16)     Inefficiencies in the civil
justice system have a negative impact on business and the economic environment,
as the risk and cost of doing business increases. There is a large backlog of
proceedings in the first and second instance courts in civil and commercial
cases, especially as regards contractual obligations and insolvencies. The professional
performance of judges should be evaluated. Further improvements in the
insolvency law regime are warranted.

(17)     Despite the relatively high
educational attainment, a significant share of the workforce does not possess
professional qualifications and has limited access to higher education.
Universities perform poorly in worldwide rankings and are characterized by low
international competitiveness and weak governance. Low cooperation among
universities, research institutions, and businesses affects the very low
innovation performance. A systematic and effective research and innovation
strategy is lacking. Latvia also has the lowest business R&D expenditure in
the EU.

(18)     Latvia has made a number of
commitments under the Euro Plus Pact. These commitments, and the implementation
of the commitments presented in 2011, relate to fostering employment, improving
competitiveness, enhancing sustainability of public finances and reinforcing
financial stability. The Commission has assessed the implementation of the Euro
Plus Pact commitments. The results of this assessment have been taken into
account in the recommendations.

(19)     In the context of the
European Semester, the Commission has carried out a comprehensive analysis of
Latvia’s economic policy. It has assessed the convergence programme and
national reform programme. It has taken into account not only their relevance
for sustainable fiscal and socio-economic policy in Latvia 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 (7) below.

(20)     In the light of this
assessment, the Council has examined Latvia’s convergence programme, and its
opinion[7]
is reflected in particular in recommendation (1) below,

HEREBY RECOMMENDS that Latvia should
take action within the period 2012-2013 to:

1.           Ensure planned progress
towards the timely correction of the excessive deficit. To this end, implement
the budget for the year 2012 as envisaged and achieve the fiscal effort
specified in the Council recommendation under the Excessive Deficit Procedure. Thereafter,
implement a budgetary strategy, supported by sufficiently specified structural
measures, for the year 2013 and beyond, to make sufficient progress towards the
medium-term budgetary objective (MTO), and to respect the expenditure
benchmark. Use better than expected cyclical revenue to reduce government debt.

2.           Implement measures to
shift taxation away from labour to consumption, property, and use of natural
and other resources while improving the structural balance; ensure adoption of
the Fiscal Discipline Law and develop a medium term budgetary framework law to
support the long-term sustainability of public finances; restore contributions
to the mandatory funded private pension scheme at 6% of gross wages from 2013.

3.           Take measures to reduce
long-term and youth unemployment by fighting early school leaving, promoting
more efficient apprenticeships and VET, enhancing the quality, coverage and
effectiveness of active labour market policy and its training component and
through an effective wage subsidy scheme

4.           Tackle
high rates of poverty and social exclusion by reforming the social assistance system
to make it more efficient, while better protecting the poor. Ensure better targeting
and increase incentives to work.

5.           Further encourage energy
efficiency by providing incentives for reducing energy costs and shifting
consumption towards energy-efficient products, including vehicles, buildings
and heating systems. Promote competition in major energy networks (electricity,
natural gas, heating) and improve connectivity with EU energy networks.

6.           Take measures to improve
management and efficiency of the judiciary, in particular to reduce the backlog and length of procedures. Take steps to improve the insolvency regime and the mediation
laws.

7.           Continue reforms in higher
education, inter alia, by implementing a new financing model that rewards
quality, strengthens links with market needs and research institutions, and
avoids fragmentation of budget resources. Design and implement an effective
research and innovation policy encouraging companies to innovate, including via
tax incentives, upgrading infrastructure and rationalising research
institutions.

Done at Brussels,

For
the Council

The
President

[1]               OJ L 209, 02.08.1997, p. 1

[2]               COM(2012)320 final

[3]               P7_TA(2012)0048 and P7_TA(2012)0047

[4]               Council Decision 2012/238/EU of 26 April 2012

[5]               COM(2012) 68 final.

[6]               Cyclically adjusted balance net of one-off and
temporary measures, recalculated by the Commission services on the basis of the information provided in the programme, using
the commonly agreed methodology.

[7]               Under Article 9(2) of Council Regulation (EC) No
1466/97.