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
Date: 2012-05-30
Institutions: European Commission
Subjects: Community loan, European Central Bank, European Union, Portugal, financial intervention, financial planning, public debt, short-term monetary support, stability programme

EUROPEAN COMMISSION 

Brussels, 30.5.2012  
COM(2012) 324 final 

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 

{SWD(2012) 324 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 
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 
to  boost  Europe’s  potential  for  sustainable  growth  and 
action 
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 

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OJ L 209, 02.08.1997, p. 1 
COM(2012)324 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) 

invited  to  take  the  integrated  guidelines  into  account  in  their  national  economic  and 
employment policies. 

On  12  July  2011,  the  Council  adopted  a  recommendation  on  Portugal’s  national 
reform programme for 2011. 

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

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. 

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  3½  per  cent  of  GDP.  Despite  this  one-off  operation,  the 
structural  consolidation  in  2011  was  large  and  amounted  to  3½  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 

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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 

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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 

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