# EUR-Lex - 52012DC0324 - EN

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# 52012DC0324

**Recommendation for a COUNCIL RECOMMENDATION on Portugal’s 2012 national reform programme and delivering a Council opinion on Portugal’s stability programme for 2012-2016 /* COM/2012/0324 final */**

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Recommendation for a

COUNCIL RECOMMENDATION

on Portugal’s 2012 national reform
programme
and delivering a Council opinion on Portugal’s stability programme for
2012-2016

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 Portugal’s national reform programme for 2011.

(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.

(5)       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.

(6)       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.

(7)       On 2 May 2012, Portugal
submitted its stability programme covering the period 2012-2016 and on 7 May
2012, Portugal submitted its national reform programme.

(8)       On 17 May 2011, the
Council adopted Implementing Decision 2011/344/EU to make available to Portugal
medium-term financial assistance for a period of three years from 2011 to 2014
in accordance with Council Regulation (EU) No 407/2010 of 11 May 2010 establishing
a European financial stabilisation mechanism. The accompanying Memorandum of
Understanding signed on the same day and its successive supplements lay down
the economic policy conditions on the basis of which the financial assistance
is disbursed.

(9)       Portugal has made good
progress on a number of fronts, but significant challenges remain. Achieving
the fiscal targets remains essential if the government is to regain full market
access within the programme period. To limit the risks to the 2012 fiscal
targets, rapid and determined implementation of the structural-fiscal measures
of the programme is paramount. At the same time, the government needs to focus
on reforms that address Portugal’s competitiveness challenges. The 2012 budget
does not pursue earlier plans of a ‘fiscal devaluation’. This makes it all the
more important to adopt rapidly additional structural reforms in the labour and
product markets with a view to reducing labour costs, increasing flexibility
and lowering entry barriers. Perseverance and resolve on the part of the
government will be required to overcome strong vested interests that stand in
the way of reforms.

(10)     Overall,
the Third Review of the Economic Adjustment Programme has concluded that Portugal's
implementation of the conditionality set out in the Memorandum of Understanding
remains on track. In particular, the fiscal deficit target for 2011 (5.9% of
GDP) has been overachieved by resorting to a transfer of banks' pension funds
to the state amounting to 31⁄2 per cent of GDP. Despite this one-off operation,
the structural consolidation in 2011 was large and amounted to 31⁄2 per cent of
GDP. Banks are on track to meet the capital
requirements under the Programme by the end of the year but capital positions
have to improve further in 2012 in line with Programme requirements and as a
result of the European Banking Authority’s requirement to cater for sovereign
exposures, the special on-site inspection programme and the planned transfer of
banks’ private pension plans.

(11)     The decline of GDP in 2011
was less marked than forecast, as exports and consumption performed better than
foreseen. However, the fourth quarter of 2011 and beginning of 2012 showed weak
domestic demand, a sharp rise in unemployment and low business confidence. According
to the Commission spring forecast, the outlook for 2012 has deteriorated and
GDP is now projected to fall by 3.3 per cent, i.e. three percentage points more
than in the autumn forecast. Economic growth in 2013 will also be more limited
than originally expected. While the external adjustment has so far been
remarkably fast, with Portuguese exports gaining market shares outside the EU
and imports falling considerably, its persistence is still uncertain. Given the
large external debt Portugal has accumulated, very substantial further
adjustment of a structural nature is required.

(12)     The
budget for 2012 targets a government deficit of 4.5% of GDP, which is in line
with the Economic Adjustment Programme requirements and
with the Council recommendations given to Portugal under the Excessive Deficit Procedure. Medium-term fiscal consolidation plans presented in the stability
programme are also consistent with the Economic Adjustment Programme's deficit
headline targets and a deficit-to-GDP ratio of 3% of GDP is expected by 2013. The 2012 budget includes consolidation measures amounting to more
than 5% of GDP, which are made up of permanent structural measures. Two thirds
of the measures are on the expenditure side and include a significant cut of
public sector wages and pensions, a reduction in the number of government
employees by 2% (full-time equivalent) and a rationalisation of state-owned
enterprises. On the revenue side, the budget envisages a reduction in tax
exemptions, an increase in the number of goods and services taxed at the
standard VAT rate, higher personal income and corporate taxes, an increase in
excise taxes and enhanced efforts to fight tax evasion and fraud. The deficit
is expected to decrease further to 1.8% of GDP in 2014 and 1% of GDP in 2015.
The main risks to the budgetary targets are mainly related to the state-owned
enterprise sector and local and regional governments. In terms of the
structural balance, the fiscal structural adjustment is expected to be over 7
percentage points of GDP in 2011-2012. The MTO of -0.5% of GDP adequately
reflects the requirements of the Stability and Growth Pact. As regards public
debt, it is expected to peak at 115.7% of GDP in 2013 and gradually decline
thereafter.

(13)     The success of the Economic
Adjustment Programme depends crucially on the implementation of a wide range of
structural reforms that will remove the rigidities and bottlenecks that
underlie the economy’s decade-long stagnation. Noticeable
progress has been made until now. The far-reaching and ambitious reform agenda
is on track in the areas of labour market, health care, housing, judiciary and
the insolvency and regulatory framework including competition. Also,
privatisations so far have been highly successful. In network industries, progress
was more mixed. In particular, in the energy sector a comprehensive strategy to
eliminate the sector's rising debt by tackling excessive rents remains to be
fleshed out.

(14)     A strategic re-programming
of the Structural Funds is underway, with a focus on support to youth
employment and competitiveness (in particular SMEs). The new measures
strengthen actions in the areas of employment passport, training and
professional qualifications and access to finance for Small and Medium
Enterprises.

(15)     Portugal has made a number
of commitments under the Euro Plus Pact. The commitments, and the
implementation of the commitments presented in 2011, relate to improving
competitiveness, the employment rate and the sustainability of public finances,
while strengthening financial sustainability.

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

Implement the measures as laid down in
Implementing Decision 2011/344/EU and further specified in the Memorandum of
Understanding of 17 May 2011 and its subsequent supplements.

Done at Brussels,

For
the Council

The
President

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

[2]               COM(2012)324 final

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

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