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
Date: 2012-05-30
Institutions: European Commission
Subjects: Latvia, budgetary equilibrium, economic convergence, educational reform, judicial reform, long-term unemployment, pay policy, poverty, public debt, research and development, social integration, tax reform, youth unemployment

EUROPEAN COMMISSION 

Brussels, 30.5.2012  
COM(2012) 320 final 

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 

{SWD(2012) 320 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 
policies1, and in particular Article 5(2) thereof, 

Having regard to the recommendation of the European Commission2, 

Having regard to the resolutions of the European Parliament3, 

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 States4, 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, 02.08.1997, p. 1 
COM(2012)320 final 
P7_TA(2012)0048 and P7_TA(2012)0047 
Council Decision 2012/238/EU of 26 April 2012 

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(3) 

(4) 

(5) 

(6) 

(7) 

(8) 

(9) 

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. 

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 Report5, in which it did not identify Latvia as one of the Member States 
for which an in-depth review would be carried out. 

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.  

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.  

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. 

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. 

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 

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COM(2012) 68 final. 

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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 balance6, 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. 

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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. 

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(14) 

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.  

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 

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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 opinion7 is reflected in particular in recommendation (1) below, 

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

1. 

2. 

3. 

4. 

5. 

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. 

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.  

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  

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. 

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. 

7 

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

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6. 

7. 

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.  

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 

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