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

EUROPEAN COMMISSION 

Brussels, 7.6.2011 
SEC(2011) 823 final 

Recommendation for a 

COUNCIL RECOMMENDATION 

on the National Reform Programme 2011 of Lithuania 

and delivering a Council opinion 

on the updated Convergence Programme of Lithuania, 2011-2014 

{SEC(2011) 723 final} 

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Recommendation for a 

COUNCIL RECOMMENDATION 

on the National Reform Programme 2011 of Lithuania 

and delivering a Council opinion 

on the updated Convergence Programme of Lithuania, 2011-2014 

THE COUNCIL OF THE EUROPEAN UNION, 

Having  regard  to  the  Treaty  on  the  Functioning  of  the  European  Union,  and  in  particular 
Article 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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3 

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) 

(8) 

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 25 March 2011, the European Council also invited the Member States participating 
in  the  Euro  Plus  Pact  to  present  their  commitments  in  time  to  be  included  in  their 
Stability or Convergence Programmes and their National Reform Programmes. 

On  28  April  2011,  Lithuania  submitted  its  updated  2011  Convergence  Programme 
covering the period 2011-2014 and its 2011 National Reform Programme. In order to 
take account of the interlinkages, the two programmes have been assessed at the same 
time.  

The  Lithuanian  economy  is  recovering  from  a  severe  economic  crisis,  during  which 
GDP contracted by 17% from peak to trough as the collapse in domestic demand was 
amplified by a slump in global trade. The labour market reacted rapidly to the crisis, 
and unemployment rose to a record high, peaking at 18.3% by mid 2010 from as low 
as  4.2%  at  the  beginning  of  2008.  A  strong  commitment  to  the  currency  board 
arrangement, underpinned by substantial fiscal consolidation alongside adjustment in 
private  sector  wages  and  measures  aimed  at  strengthening  financial  system  stability, 
helped  stabilise  the  economy.  As  the  global  economy  recovered,  and  the  economy 
benefitted  from  regained  competitiveness,  exports  surged  and  economic  growth 
resumed  in  2010.  In  2011,  the  recovery  is  gathering  pace  as  domestic  demand  picks 
up. However, even though unemployment is expected to decline at a rapid pace, it will 
remain at double digit level. 

Based  on  the  assessment  of  the  updated  convergence  programme  pursuant  to 
Regulation Council Regulation (EC) No 1466/97, the Council is of the opinion that the 
macroeconomic  scenario  underlying  the  2011  Convergence  Programme  is  plausible. 
While based on somewhat more favourable growth assumptions for 2011, it is broadly 
in  line  with  the  latest  Commission  forecast  for  2012.  The  programme  plans  to  bring 
the deficit below the 3% reference value by 2012, the deadline set by the Council, but 
is  not  sufficiently  underpinned  by  measures  for  2012.  The  accelerating  economic 
momentum  may  lead  to  better  2011  budgetary  outcomes  than  expected  in  the 
programme. However, if temporary consolidation measures that will expire at the end 
of  2011  are  not  renewed  and  complemented  by  sizable  permanent  measures,  the 
programme's  budgetary  targets  for  2012  risk  not  being  met  despite  the  improving 
macro-economic  outlook.  The  average  annual  fiscal  effort  over  the  period  of  2010-
2012  is  well  below  the  2.25%  of  GDP  recommended  by  the  Council  under  the 
excessive deficit procedure (EDP) adopted on 16 February 2010. As economic growth 
and  tax  revenues  are  substantially  stronger  than  expected  at  the  time  of  the  Council 

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(9) 

EDP  Recommendation,  implementation  of  the  required  fiscal  effort  should  allow  for 
faster deficit reduction and progress towards the medium term objective (MTO). The 
medium-term  objective  of  a  structural  surplus  of  0.5%  of  GDP  is  not  foreseen  to  be 
achieved within the programme period.  

In  view  of  the  sizable  adjustment  required  to  meet  the  2012  EDP  target  and  make 
progress towards the MTO, and the need to secure the necessary co-financing in order 
to frontload the absorption of EU structural funds and increase productive investment 
in  the  economy,  identifying  further  consolidation  measures  will  be  a  challenge. 
Improvements in public sector efficiency could create additional room for expenditure 
adjustments  without  compromising  the  quality  of  public  services.  In  the  absence  of 
further  reform,  age-related  expenditure  will  increase  at  a  rate  above  the  EU  average 
over the next few decades. In June 2010, the government approved the broad outline 
of a comprehensive social security and pension system reform. The proposal included 
significant  increases  in  the  pensionable  age,  changes  to  the  way  pensions  are 
calculated  and  the  integration  of  state  pensions  into  the  general  scheme  of  social 
insurance.  The  approval  and  successful  implementation  of  all  aspects  of  these 
proposals will be critical for long term fiscal sustainability and could help increase the 
labour  supply  by  providing  stronger  incentives  to  work  for  older  workers  while 
ensuring  the  adequacy  of  pensions.  Moreover,  long-term  fiscal  sustainability  would 
also require a stronger fiscal framework. In particular, in the run-up to the crisis, the 
fiscal  framework  did  not  prevent  recurrent  sizeable  revisions  of  expenditure  targets 
and  pro-cyclical  expenditure  growth  financed  by  revenue  windfalls.  Excessive 
expenditure growth financed by boom-related revenues was at the origin of the large 
fiscal imbalances that emerged during the crisis. They also contributed to overheating 
the economy.  

(10)  The unemployment rate in Lithuania is one of the highest in the EU. The immediate 
concern  is  to  ensure  that  this  rapid  increase  does  not  become  structural.  Very  strict 
labour  regulations  and  disincentives  to  work  within  the  social  assistance  system  are 
compromising the functioning of the labour market. When combined with sufficiently 
funded  active  labour  market  policies,  measures  taken  in  these  domains,  would  help 
reduce  the  risk  of  high  unemployment  becoming  structural,  and  reduce  the  sizeable 
shadow economy.  

(11)  Lithuanian State-Owned Enterprises represent about 18% of GDP. They remain prone 
to inefficiencies with unsatisfactory financial returns. The successful reform of state-
owned  enterprises  would  also  enhance  competition  and  improve  the  business 
environment. In 2010 Lithuania began a reform in five major sectors. The reform set 
out  transparency  guidelines  for  state-owned  enterprises,  providing  a  basis  for 
government  accountability.  The  Government's  Resolution  on  Improvement  of 
Efficiency  in  December  2010  provided  a  further  credible  framework  for  the  reform. 
Nevertheless these remain only frameworks and guidelines, and the Resolution lacks a 
number  of  key  measures  initially  proposed,  and  which  would  have  ensured  the 
separation of regulatory and ownership functions.  

(12)  The energy intensity of the Lithuanian economy is one of the highest in the EU. This 
is  to  a  large  extent  related  to  household  heating  where  poorly  maintained  multi-
apartment buildings account for the bulk of the problem. Despite the introduction of a 
strategy  to  address  this  dating  back  to  2004,  few  investments  have  been  made. 
Moreover,  levels  of  car  ownership  have  increased  rapidly,  whilst  revenues  from 

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energy  and  transport  taxes  have  fallen  relative  to  GDP  and  to  taxes  on  labour 
(considerably above the EU average). Addressing low energy tax rates, including those 
for  the  registration  and  ownership  of  transport  vehicles,  would  support  fiscal 
consolidation in the short-term, whilst also incentivising more efficient energy use.  

(13)  While  Lithuania  has  a  business  regulatory  framework  that  is  favourable  overall,  it 
scores  relatively  poorly  on  start-up  conditions,  the  time  and  cost  involved  in  issuing 
construction permits, and the protection of investors. Improvements to regulations in 
these areas would help stimulate job creation and growth. Competition policy reform 
would further improve the environment, but progress is slow, especially in the energy 
and  food  retail  sectors.  The  completion  of  the  revised  national  energy  independence 
strategy  will  help  address  concerns  over  security  of  supply  and  support  greater 
competition in electricity generation. The implementation of the Third Package of EU 
electricity and gas market legislation would improve retail energy market competition. 
Within  the  food  retail  sector,  Lithuanian  passed  a  law  in  2009  on  the  prohibition  of 
unfair operations of retail trade undertakings. However, the food retail sector continues 
to  show  an  insufficient  level  of  competition,  due  partly  to  its  structure  and 
inefficiencies in market regulation. Concentration in the food retail chains has been on 
an upward trend, with the share of the four largest retailers reaching 72% of the total 
sales in 2008. 

(14)  Lithuania  has  made  a  number  of  commitments  under  the  Euro  Plus  Pact4.  To 
strengthen fiscal sustainability, Lithuania will adopt laws to facilitate the accumulation 
of  funds  in  the  State  Treasury  reserve  for  difficult  economic  periods  and  promote  a 
responsible  anti-inflationary  budgetary  policy.  A  number  of  important  measures  to 
reform the pension and social security system have also been announced. Employment 
measures focus on fostering employment, combating illegal and undeclared work, and 
promoting  flexible  employment  agreements.  To  improve  the  business  environment  a 
number  of  commitments  have  been  made  to  strengthen  business  inspectorates, 
increase  transparency  and  reduce  the  administrative  burden  on  business.  These 
commitments  relate  to  all  four  areas  of  the  pact.  Overall,  they  reflect  the  reform 
agenda outlined in the Convergence Programme and the National Reform Programme. 
The  range  of  measures  in  the  employment domain would, if implemented, provide a 
welcome contribution to generating demand for labour. These commitments have been 
assessed and taken into account in the recommendations. 

(15)  The  Commission  has  assessed  the  Convergence  Programme  and  National  Reform 
Programme, including the Euro Plus Pact commitments5. It has taken into account not 
only their relevance for sustainable fiscal and socio-economic policy in Lithuania 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  measures  to 
ensure  compliance  with  the  budgetary  targets  for  2012  will  need  to  be  specified. 
Further steps should be also taken to reform the  pension system in order to  improve 
fiscal sustainability and to encourage longer working lives, improve the functioning of 
the  labour  market,  implement  the  state-owned-enterprises  reform  package,  improve 

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5 

More details on the commitments made under the Euro Plus Pact can be found in SEC(2011) 723. 
SEC(2011) 723. 

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energy  efficiency  and  address  low  taxes  on  energy,  and  strengthen  competition  in 
certain sectors.  

(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 June 2010, 
the  Council  has  examined  the  2011  update  of  the  Convergence  Programme  of 
Lithuania  and  its  opinion6  is  reflected  in  particular  in  its  recommendation  under  (1) 
and  (2)  set  out  below.  Taking  into  account  the  European  Council  conclusions  of  25 
March 2011, the Council has examined the National Reform Programme of Lithuania, 

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

(1) 

(2) 

(3) 

(4) 

(5) 

(6) 

Adopt  additional  fiscal  measures  of  a  permanent  nature  by  the  time  of  the  2012 
budget  to  correct  the  excessive  deficit.  Reinforce  tax  compliance  and  take  full 
advantage of the economic recovery to further accelerate deficit reduction and ensure 
progress  towards  the  Medium  Term  Objective  by  at  least  0.5%  of  GDP  annually. 
Strengthen the fiscal framework, in particular by introducing enforceable and binding 
expenditure ceilings in the medium-term budgetary framework. 

Adopt the proposed implementing legislation on Pension System Reform. In order to 
enhance  participation  in  the  labour  market,  remove  fiscal  disincentives  to  work  for 
people at or approaching pensionable age.  

Enhance  labour  market  flexibility  by  amending  the  Labour  Code  to  make  it  more 
flexible  and  to  allow  better  use  of  fixed-term  contracts.  Amend  the  relevant 
legislation, in particular the Law on Cash Social Assistance, to ensure that the social 
assistance system does not contain disincentives to work. 

Implement all aspects of the State-Owned Enterprise reform package by the end of 
2011,  ensuring  a  separation  of  ownership  and  regulatory  functions,  clear  enterprise 
objectives,  enhanced  transparency  and  a  separation  of  commercial  and  non-
commercial activities. 

Improve  the  energy  efficiency  of  buildings  through  a  rapid  implementation  of  the 
Holding Fund and take steps to shift taxation towards energy use, starting with taxes 
on registration and ownership of passenger transport vehicles. 

Take steps to improve start-up conditions, the delivery of construction permits, and 
to strengthen competition in the energy and retail sectors. 

Done at Brussels, 

For the Council 
The President 

6 

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

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