Recommendation for a COUNCIL RECOMMENDATION on the National Reform Programme 2011 of the Czech Republicand delivering a Council opinionon the updated Convergence Programme of the Czech Republic, 2011-2014
Date: 2011-06-07
Institutions: European Commission
Subjects: EU programme, economic growth, employment policy, financial policy, regions of the Czech Republic

EUROPEAN COMMISSION 

Brussels, 7.6.2011 
SEC(2011) 819 final 

Recommendation for a 

COUNCIL RECOMMENDATION 

on the National Reform Programme 2011 of the Czech Republic 

and delivering a Council opinion 

on the updated Convergence Programme of the Czech Republic, 2011-2014 

{SEC(2011) 712 final} 

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Recommendation for a 

COUNCIL RECOMMENDATION 

on the National Reform Programme 2011 of the Czech Republic 

and delivering a Council opinion 

on the updated Convergence Programme of the Czech Republic, 2011-2014 

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 
policies1, and in particular Article 9(3) thereof, 

Having regard to the recommendation of the European Commission2, 

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) 

(2) 

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 
to  boost  Europe’s  potential  for  sustainable  growth  and 
competitiveness. 

is  needed 

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 States3, which together form the “integrated guidelines”. Member States were 
invited  to  take  the  integrated  guidelines  into  account  in  their  national  economic  and 
employment policies. 

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OJ L 209, 2.8.1997, p. 1. 
OJ C, p. . 
Maintained for 2011 by Council Decision 2011/308/EU of 19 May 2011. 

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(3) 

(4) 

(5) 

(6) 

(7) 

On  12  January  2011,  the  Commission  adopted  the  first  Annual  Growth  Survey, 
marking  the  start  of  a  new  cycle  of  economic  governance  in  the  EU  and  the  first 
European semester of ex-ante and integrated policy coordination, which is anchored in 
the Europe 2020 strategy.  

On  25  March  2011,  the  European  Council  endorsed  the  priorities  for  fiscal 
consolidation  and  structural  reform  (in  line  with  the  Council’s  conclusions  of  15 
February and 7 March 2011 and further to the Commission’s Annual Growth Survey). 
It  underscored  the  need  to  give  priority  to  restoring  sound  budgets  and  fiscal 
sustainability,  reducing  unemployment  through  labour  market  reforms  and  making 
new efforts to enhance growth. It requested Member States to translate these priorities 
into  concrete measures to be included  in their Stability or Convergence Programmes 
and National Reform Programmes. 

On  29  April  2011,  the  Czech  Republic  submitted  its  2011  National  Reform 
Programme  and  on  5  May  its  2011  Convergence  Programme  update  covering  the 
period 2011-2014. In order to take into account the interlinkages, the two programmes 
have been assessed at the same time.  

The  global  financial  crisis,  channelled  through  the  Czech  economy's  high  trade 
openness, took a heavy toll on GDP growth and unemployment in the Czech Republic. 
Real GDP declined by 4.1% in 2009, as a result of the fall in exports and in domestic 
investment.  The  unemployment  rate  increased  significantly  from  4.4%  in  2008  to 
7.3% in 2010, and the employment rate fell by 2 percentage points between 2008 and 
2010. However, the high degree of exposure to international trade and a fast recovery 
in the Czech Republic's main trading partners have also facilitated a quick rebound in 
the  real  GDP  growth  rate  in  2010  to  2.3%  and  will  continue  to  support  a  moderate 
recovery. 

Based on the assessment of the updated Convergence Programme pursuant to Council 
Regulation  (EC)  No  1466/97,  the  Council  is  of  the  opinion  that  the  macroeconomic 
assumptions  underpinning  the  programme  are  plausible  in  the  first  two  years  of  the 
programme and too favourable thereafter. The programme is based on a lower growth 
projection  for  2012  compared  with  the  Commission  services  2011  Spring  forecast, 
mainly  on  account  of  a  further  sustained  reduction  in  real  government  consumption 
expenditure,  which  is  not  taken  up  in  the  Commission  services'  no-policy-change 
forecast  for  2012.  The  programme  foresees  a  reduction  of  the  general  government 
deficit below 3% of GDP in 2013 and further to 1.9% of GDP in 2014. The planned 
consolidation  is  mainly  based  on  expenditure  restraint.  The  proposed  measures  are 
broadly  sufficient  to  reach  the  target  by  2013,  as  recommended  by  the  Council,  but 
there  are  risks  to  the  actual  budgetary  outcome  of  measures  as  presented  in  the 
programme.  Moreover,  the  attainment  of  the  targets  for  the  outer  years  of  the 
programme  seems  to  rely  largely  on  favourable  cyclical  conditions  and  further 
efficiency gains in public administration, which may become increasingly difficult to 
materialise.  The  achievement  of  the  medium-term  budgetary  objective  is  foreseen 
beyond the horizon of the programme. The average annual fiscal effort over the period 
2011-2013  is  below  1%  of  GDP  recommended  by  the  Council  under  the  EDP 
procedure of 2 December 2009. 

(8) 

The Programme set out a clear objective to bring the deficit in public finances below 
3%  of  GDP  by  2013.  The  challenge  will  be  to  ensure  that  measures  underlying  the 

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path  for  the  deficit  reduction  in  2011-13,  as  well  as  in  subsequent  years,  do  not 
compromise  long-term  growth,  especially  by  safeguarding  expenditure  on  education 
and public R&D, and that they provide an adequate buffer for increases in expenditure 
entailed by demographic developments.  

(9) 

The budgetary consolidation strategy includes measures that affect VAT revenue: the 
lower  VAT  rate  is  planned  to  rise  in  2012  and  2013,  while  the  higher  rate  is  to 
decrease in 2013. The government also intends to increase the number of firms liable 
to  VAT  from  2013.  According  to  the  Programme,  these  changes  should  result  in  an 
increase in tax receipts of 0.7% of GDP in 2012 and further by 0.1% of GDP in 2013. 
In addition, there seems to be further scope for boosting revenue from indirect taxes, 
which  stood  at  11.8%  of  GDP  in  2010,  compared  to  the  EU  average  of  13.4%,  and 
thereby  possibly  shift  taxes  away  from  labour.  Furthermore,  the  difference  between 
actual VAT revenue and the theoretical VAT liability is estimated to be significantly 
above the EU average, substantiating the need for measures improving tax compliance. 

(10)  Given  that  the  budgetary  impact  of  ageing  is  projected  to  be  well  above  the  EU 
average, the reform of the pension system is an important issue. The government has 
put  forward  two  sets  of  proposals.  The  first  package  is  expected  to  receive 
Parliamentary  approval  by  September  2011  and  targets  the  public  Pay-As-You-Go 
pillar,  which  has  been  in  deficit  since  2009.  It  includes,  among  other  measures,  an 
increase in the statutory retirement age, which will be unified at 67 years in 2041 for 
men  and  women.  This  set  of  parametric  reforms  goes  some  way  towards  addressing 
the  fiscal  sustainability  problem;  it  may,  however,  not  be  sufficient  to  address  the 
challenges  created  by  population  ageing.  The  second  package  of  measures,  not  yet 
formally approved by the government, would consist in the introduction of a voluntary 
second  private  pillar  in  2013,  with  the  aim  to  increase  diversification  in  retirement 
incomes  and  support  their  future  adequacy  by  promoting  the  development  of  private 
savings.  However, the suggested form of  the  pillar creates few incentives to join the 
scheme  and  may  actually  add  to  the  long-term  pressures  highlighted  above.  The 
operating costs of such pension funds also need to be carefully analysed and kept as 
low as possible to ensure the effectiveness of the system. 

(11)  The labour market is perceived as moderately flexible and had not shown evidence of 
major dysfunctions before the global financial crisis. Yet, some structural weaknesses 
are evident. A key challenge concerns the severe difficulties that women with children 
face  when  re-integrating  into  the  labour  market  after  maternity  leave.  The  issue  is 
significant  also  because  of  its  wider  economic  repercussions:  longer  spells  out  of 
work,  a  high  gender  employment  gap,  and  the  highest  gender  pay  gap  among  all 
Member States. Early return to work remains difficult despite the government's effort 
to give parents greater choice in determining the length of parental leave. The problem 
can  be  attributed  partly  to  the  low  willingness  of  firms  to  provide  part-time 
employment contracts, often used by employees with small children in other Member 
States,  and  partly  to  limited  availability  of  affordable  child-care  facilities,  especially 
for children below the age of three.  

(12)  While the overall unemployment rate remains firmly below the EU average, long-term 
unemployment  is  on  the  rise,  particularly  among  the  20-29  years  old.  The  low-
educated  as  well  as  other  low-wage  earners  face  considerable  difficulties  in  finding 
employment.  High  long-term  unemployment  is  consistent  with  under-funded  and 

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(13) 

relatively  low-scale  active  labour  market  policies  and  a  low  share  of  participants  in 
regular activation measures.  

Inefficiencies  in  public  administration,  which  weigh  on  the  business  environment, 
could  be  addressed  by  comprehensively  implementing  existing  strategies.  The 
government  has  launched  a  'better  regulation'  agenda  in  2007  and  an  anti-corruption 
strategy  for  the  years  2011-2012.  They  announce  measures  that  are  important  to 
improve the quality of the Czech legal and regulatory framework, which ranks below 
the  EU  average  according  to  international  surveys,  and  strengthen  the  confidence  of 
businesses.  A  challenge  is  to  stabilise  the  public  administration,  as  frequent  and  far-
reaching reorganisations impede its efficiency. For doing so, it would be important to 
adopt the Public Servant Act, which has been repeatedly postponed. The government 
has  recently  adopted  measures  to  increase  the  transparency  of  public  procurement. 
However,  one  element  of  the  regulatory  framework,  namely  the  specific  type  of 
company  shares  that  permit  a  fully  anonymous  transfer  of  wealth,  remains  prone  to 
risks and therefore deserves attention. 

(14)  The  crisis  is  expected  to  have  negativly  impacted  on  potential  growth.  Improving 
human  capital  is  important,  despite  the  high  ratio  of  young  people  enrolled  in 
universities, and is hindered by insufficient quality of training, as illustrated by the low 
ranking  of  Czech  tertiary  education  institutes  in  international  surveys.  Furthermore, 
spending per student, in comparable prices, is in the lower quarter of the EU countries 
and  is  especially  limited  for  primary  education.  The  National  Reform  Programme 
outlines measures for all stages of education. A complex reform of tertiary education 
has  been  in  preparation  for  several  years.  Ensuring  quality  and  efficient  tertiary 
education is important for competitiveness and innovation capacity. 

(15)  The  Commission  has  assessed  the  Convergence  Programme  and  National  Reform 
Programme of the Czech Republic4. It has taken into account not only their relevance 
for sustainable fiscal and socio-economic policy in the Czech Republic but also their 
conformity  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.  In  this  light,  the  Commission  considers  that  the  focus  on  fiscal 
consolidation  should  be  kept,  while  protecting  growth-enhancing  expenditure.  The 
long-term sustainability of public finances depends, to a large extent, on the capacity 
to implement now the necessary pension reform. Raising labour market participation, 
in  particular  of  women,  and  job  opportunities  for  the  long-term  unemployed,  are 
essential.  Further  steps  to  improve  the  quality  of  public  services  and  the  regulatory 
framework, as well as the quality of tertiary education, are crucial for competitiveness.  

(16) 

In  light  of  this  assessment,  also  taking  into  account  the  Council  Recommendation 
under Article 126(7) Treaty on the Functioning of the European Union of 2 December 
2009,  the  Council  has  examined  the  2011  update  of  the  Convergence  Programme  of 
the Czech Republic and its opinion5 is reflected in particular in its recommendations 
under (1) and (2) below. Taking into account the European Council conclusions of 25 
March 2011, the Council has examined the National Reform Programme of the Czech 
Republic, 

4 
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SEC(2011) 712. 
Foreseen in Article 9(3) of Council Regulation (EC) No 1466/97. 

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HEREBY  RECOMMENDS  that  the  Czech  Republic  should  take  action  within  the  period 
2011-2012 to: 

(1) 

(2) 

(3) 

(4) 

(5) 

Implement the planned consolidation in 2011 and take countervailing measures of a 
permanent nature in case of any revenue shortfalls  or  expenditure  slippages. Adopt 
fiscal  measures  as  planned  in  the  programme  for  2012  and  underpin  the  target  for 
2013  by  more  specific  measures.  Avoid  cutting  expenditure  on  growth-enhancing 
items and exploit the available space for increases in indirect tax revenue,  improve 
tax compliance, and reduce tax evasion.  

Introduce  a  comprehensive  pension  reform  in  order  to  improve  the  long-term 
sustainability  of  public  finances  and  to  ensure  the  future  adequacy  of  pensions. 
Efforts should focus, first, on further changes to the public pillar, including a more 
rapid increase in the statutory retirement age than planned, underpinned by measures 
promoting  the  employment  of  older  workers;  and,  second,  on  the  development  of 
private  savings.  In  this  context,  ensure  that  the  envisaged  funded  scheme  attracts 
broad participation and is designed to keep administrative costs transparent and low. 

Enhance participation in the labour market by reducing the barriers for parents with 
young  children  to  re-enter  the  labour  market  through  increased  availability  and 
access to affordable childcare facilities. Increase the attractiveness and availability of 
more flexible forms of working arrangements, such as part-time jobs.  

Strengthen the capacity of the public employment service to increase the quality and 
effectiveness  of  training,  job  search  assistance  and  individualised  services,  linking 
funding of programmes to results. In consultation with stakeholders, introduce tailor-
made  training  programmes,  for  older  workers,  young  people,  low  skilled  and  other 
vulnerable groups. 

Take  the  necessary  measures  to  improve  the  quality  of  public  services  in  areas 
essential for the business environment. In this context speed up the implementation 
of  the  anti-corruption  strategy  in  line  with  the  identified  targets,  adopt  the  Public 
Servants Act to promote stability and effectiveness of the public administration, and 
revise the Commercial Code to abolish anonymous shareholding. 

(6) 

Establish a transparent system of quality evaluation of academic institutions and link 
it to its funding in order to improve the performance of tertiary education. 

Done at Brussels, 

For the Council 
The President 

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