Recommendation for a COUNCIL RECOMMENDATION on the National Reform Programme 2011 of Slovakiaand delivering a Council opinionon the updated Stability Programme of Slovakia, 2011-2014
Date: 2011-06-07
Institutions: European Commission
Subjects: EU programme, Slovakia, economic growth, employment policy, financial management

EUROPEAN COMMISSION 

Brussels, 7.6.2011 
SEC(2011) 815 final 

Recommendation for a 

COUNCIL RECOMMENDATION 

on the National Reform Programme 2011 of Slovakia 

and delivering a Council opinion 

on the updated Stability Programme of Slovakia, 2011-2014 

{SEC(2011) 733 final} 

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Recommendation for a 

COUNCIL RECOMMENDATION 

on the National Reform Programme 2011 of Slovakia 

and delivering a Council opinion 

on the updated Stability Programme of Slovakia, 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 5(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. 

1 
2 
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, Slovakia submitted its 2011 Stability Programme update covering 
the period 2011-2014 and on 2 May its 2011 National Reform Programme. In order to 
take account of the interlinkages, the two programmes have been assessed at the same 
time. 

Given its large trade openness and specialisation in durable manufacturing goods, the 
Slovak economy was strongly hit by the collapse in world trade and aggregate demand 
which followed the financial crisis. As a result, in 2009, GDP contracted by 4.7% and 
unemployment  rose  to  12%.  In  2010,  mostly  on  account  of  the  recovery  in  external 
demand,  the  economic  situation  significantly  improved  in  terms  of  output  growth 
(4.1%  increase  in  GDP),  but  it  continued  to  deteriorate  in  terms  of  jobs  with 
unemployment reaching 14.5%, one of the highest levels and largest increases in the 
EU.  Employment  will  remain  well  below  the  pre-crisis  levels  in  2011-12.  The  crisis 
induced  a  significant  deterioration  of  public  finances  and  the  general  government 
deficit increasing from 2% of GDP in 2008 to 8% of GDP in 2009-10. While still at a 
relatively  low  level,  the  debt-to-GDP  ratio  also  increased  by  15  percentage  points, 
reaching 41% of GDP in 2010. 

Based  on  the  assessment  of  the  updated  Stability  Programme  pursuant  to  Council 
Regulation  (EC)  No  1466/97,  the  Council  is  of  the  opinion  that  the  macroeconomic 
scenario  underlying  the  programme  is  plausible  for  the  initial  two  years  but  too 
favourable towards the end of the programme period. The programme plans to bring 
the deficit below the 3% of GDP in 2013, in line with the deadline set by the Council 
and  further  to  2.8%  of  GDP  in  2014.  Beyond  2011,  the  adjustment  is  broadly 
expenditure-based.  There  are  downside  risks  to  budgetary  targets  mainly  due  to  the 
implementation  of  proposed  measures.  The  programme  does  not  foresee  the 
achievement  of  the  Medium  Term  Objective.  Meeting  the  budgetary  targets  would 
imply  for  the  period  2011-2013  an  average  annual  fiscal  effort  of  around  1.4%  of 
GDP. 

(9) 

The  deficit  is  expected  to  decline  substantially  in  2011  thanks  to  consolidation 
measures  estimated  in  the  Slovak  Stability  Programme  at  some  2.5%  of  GDP.  The 
adjustment is expected to continue further in 2011 and 2013 through a reduction in the 

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deficit  by  around  1  percentage  point  of  GDP  each  year.  The  consolidation  effort 
focuses  primarily  on  the  expenditure  side,  through  savings  in  expenditure  on  goods 
and services and on the wage bill, which may however be difficult to pursue further on 
a sustainable basis. Overall, the challenge for Slovakia is to ensure that consolidation 
safeguards  and  even  increases  expenditure  in  growth-enhancing  items,  such  as 
education  and  transport  infrastructure.  In  particular,  the  low  government  gross  fixed 
capital formation, which is expected to decrease further, is a matter of concern. There 
is  scope  to  increase  revenues  from  taxes  that  are  least  harmful  to  growth,  such  as 
property  and  environmental  taxes,  and  to  improve  the  efficiency  of  tax  collection, 
especially in view of the large VAT gap.  

(10)  Thanks  to  the  reform  of  2005,  which  introduced  multi-annual  planning,  programme 
budgeting  and  several  fiscal  rules,  Slovakia  significantly  improved  its  fiscal 
framework.  However,  the  current  set-up  has  not  prevented  the  government  from 
running deficits even in years of high economic growth. Among the main weaknesses 
is the fact that the fiscal targets for the outer years can be easily amended and do not 
therefore  serve  the  purpose  of  anchoring  the  budgetary  process  in  the  years  ahead. 
Expenditure  ceilings  as  proposed  in  the  Stability  Programme  update  and  in  the 
National  Reform  Programme  could  overcome  this  flaw,  provided  they  embrace  the 
largest possible share of the general government spending. The current lack of timely 
published  information  in  particular  for  local  government  and  social  security  funds  is 
an additional obstacle for the year-on-year monitoring of fiscal developments and the 
enforcement of fiscal rules. Finally, Slovakia lacks an independent institution, which 
could  be  directly  involved  in  preparatory  works,  monitoring,  and  assessment 
mechanisms related to the budget. 

(11)  Slovakia  is  among  the  Member  States  that  face  significant  challenges  with  regard  to 
the long-term sustainability of public finances. Ageing-related expenditure is projected 
to grow faster than the EU average over the next decades. Pensions would be the main 
source  of  this  increase,  despite  a  major  reform  implemented  in  2004-06.  The  reform 
did  not  address  systematically  the  projected  future  increases  in  life  expectancy. 
Additional future pressures on the pay-as-you-go pillar may come from a strong merit 
component for the calculation of pensions and the indexation mechanism. Changes to 
the  fully-funded  pillar  in  2008-09,  including  the  requirement  for  pension  funds  to 
cover  incurred  losses  and  the  removal  of  compulsory  participation  for  new  labour 
market  entrants,  undermined  its  viability.  The  National  Reform  Programme  and  the 
Stability  Programme  envisage  several  adjustments  to  the  pension  system  that  would 
address its current shortcomings.  

(12)  Tackling  sizable  increases  in  unemployment  before  it  becomes  structural  is  another 
major challenge. The unemployment rate currently stands at over 14%. The long-term 
unemployment rate of 9.2% remains the highest in the EU and it coexists with strong 
regional  disparities  and  skill  mismatches.  Although  the  labour  market  in  Slovakia 
operates  under  relatively  flexible  conditions,  the  Government  plans  to  increase  this 
flexibility further through amendments to the Labour code. The unemployment rate is 
particularly high amongst low-skilled workers, and their employment rate is one of the 
lowest in the EU. This may be due to a relatively high tax wedge of 34% for the low 
paid  (67%  of  the  average  wage),  reducing  incentives  to  hire  low-skilled  workers.  In 
addition,  targeted  and  well  designed  active  labour  market  policies  can  play  a  major 
role  in  the  unemployed  back  into  work.  At  present,  expenditure  and  participation  in 
such  policies  are  among  the  lowest  in  the  EU  and  there  is  little  monitoring  or 

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evaluation of their effectiveness. A reform of labour market services and active labour 
market policies is planned by the Government by the end of this year. 

(13)  Given  the  importance  of  an  adequately  skilled  workforce  for  improving  non-price 
competitiveness,  Slovakia  has  put  forward  an  ambitious  target  to  increase  higher 
educational  attainment  from  the  current  17.6%  to  40%  by  2020.  With  a  view  to 
reducing  skill  mismatches,  Slovakia  is  reforming  school  education  and  vocational 
education  and  training,  as  outlined  in  the  National  Reform  Programme.  However, 
tertiary educational attainment remains well below the EU average, with quality being 
an  issue,  as  suggested  by  a  variety  of  existing  indicators.  The  low  education 
achievements of the marginalised Roma communities are a major factor contributing 
to  long  term  unemployment  in  Slovakia.  Participation  of  working  age  people  in  life 
long learning remains very low (2.8%) compared to the EU average, which seems to 
have a negative impact on employability and further undermines efforts to reduce the 
current high unemployment. 

(14)  The  need  to  promote  a  more  growth-enhancing  business  environment  in  Slovakia  is 
recognised  in  the  National  Reform  Programme,  as  are  the  need  to  improve  the 
performance  of  the  judiciary,  make  public  procurement  more  transparent  and  fight 
corruption, although there are risks related to implementation. However, the problem 
of  weak  public  institutions  is  not  sufficiently  addressed,  and  more  could  be  done  to 
strengthen  evidence-based  policy-making.  Within 
the  public  administration, 
insufficient  capacity  and  high  turnover  of  staff  tend  to  lower  its  effectiveness  and 
transparency,  weaken  analytical  capabilities,  and  hamper  the  effective  absorption  of 
EU  funds  and  efficient  use  of  public  resources  in  general.  These  factors  hamper  the 
growth potential of economy and its competitiveness. 

the 

to  enhancing 

(15)  Slovakia  has  made  a  number  of  commitments  under  the  Euro  Plus  Pact4.  The 
commitments  refer  to  three  areas  of  the  Pact  that  are  relevant  for  Slovakia:  public 
finance sustainability, employment, and competitiveness. On the fiscal side, Slovakia 
long-term  sustainability  of  public  finances  and 
commits 
strengthening  the  national  fiscal  framework  by  adopting  a  new  legal  act  on  fiscal 
responsibility. Employment measures concern the planed labour code revision with a 
view to making the labour market even more flexible. The competitiveness measures 
increasing 
focus  on  reducing 
transparency  of  public  procurement  and  the  judiciary  system,  and  increasing 
effectiveness  of  the  tax  system.  The  above  commitments  reflect  the  reform  agenda 
outlined in the Stability Programme and the National Reform Programme. They step 
up ongoing reform projects related to business environment and enforcement of rights, 
as  well  as  open  the  important  issue  pensions  and  long-term  sustainability  of  public 
finance.  These  commitments  have  been  assessed  and  taken  into  account  in  the 
recommendations. 

the  administrative  burden, 

tackling  corruption, 

(16)  The  Commission  has  assessed  the  Stability  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 Slovakia but 
also their conformity with EU rules and guidance, given the overall need to reinforce 

4 
5 

More details on the commitments made under the Euro Plus Pact can be found in SEC(2011) 733. 
See SEC(2011) 733. 

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the overall economic governance of the European Union by providing EU level input 
into  future  national  decisions.  In  this  light,  the  Commission  considers  that  there  are 
downside  risks  to  achieving  the  budgetary  targets  beyond  2011.  The  consolidation 
effort  should  safeguard  spending  on  growth-enhancing  items  and  be  supported  by 
measures  to  strengthen  fiscal  governance  and  long-term  sustainability  of  public 
finance.  Further  steps  in  2011-12  should  focus  on  strengthening  of  domestic  sources 
for  growth,  addressing  the  recent  surge  in  unemployment  in  particular  through  a 
reduction of the tax wedge for low paid workers and a reform of active labour market 
policies, addressing skill mismatches, improving the quality of education and training 
and  the  business  environment,  and  strengthening  public  institutions  and  their 
governance. 

(17) 

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  Stability  Programme  of 
Slovakia  and  its  opinion6  is  reflected  in  particular  in  its  recommendations  under  (1), 
(2) and (3) below. Taking into account the European Council conclusions of 25 March 
2011, the Council has examined the National Reform Programme of Slovakia, 

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

(1) 

(2) 

(3) 

(4) 

(5) 

Implement  the  2011  budget  as  envisaged  and  introduce  the  planned  specific 
measures of a permanent nature in 2012 and 2013 to reduce the deficit below 3% of 
GDP  by  2013.  Safeguard  growth-enhancing  expenditure  and  use  available  room  to 
increase revenue by increasing efficiency of VAT collection. 

Strengthen  fiscal  governance  by  adopting  in  2011  and  implementing  from  2012 
binding multi-annual  expenditure  ceilings, covering the central government and the 
social  security  system.  In  addition,  introduce  an  independent  Fiscal  Council  and 
ensure timely publication of budgetary data at all levels of the government. 

Enhance the long-term sustainability of public finances by further adjusting the pay-
as-you-go pillar of the pension system, in particular by linking the pensionable age to 
life expectancy, and by creating incentives to ensure the viability of the fully-funded 
pension pillar so as to progress towards fiscal sustainability while assuring adequate 
pensions.  

Take steps to support labour demand for the low-skilled unemployed by reducing the 
tax  wedge  for  low-paid  workers.  In  addition,  introduce  measures  to  increase  the 
administrative  capacity  of  public  employment  services  with  a  view  to  improve 
targeting,  design  and  evaluation  of  active  labour  market  policies,  especially  for  the 
young and long-term unemployed. 

Speed up the implementation of planned education, vocational education and training 
reforms and take steps to improve the quality of higher education and its relevance to 
market needs. Develop a framework of incentives for both individuals and employers 
to encourage participation of the low-skilled in life-long learning. 

6 

Foreseen in Article 5(3) of Council Regulation (EC) No 1466/97. 

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(6) 

Ensure  the  implementation  of  planned  measures  aimed  at  a  more  effective 
application  of  public  procurement  rules,  a  higher  performance  and  transparency  of 
the judicial system.  

Done at Brussels, 

For the Council 
The President 

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