Recommendation for a COUNCIL RECOMMENDATION on Latvia’s 2013 national reform programme and delivering a Council opinion on Latvia’s convergence programme for 2012-2016
Date: 2013-05-29
Institutions: European Commission
Subjects: Latvia, budget deficit, budgetary equilibrium, building insulation, educational reform, job creation, judicial reform, poverty, stability programme, tax reform, trans-European network

EUROPEAN 
COMMISSION 

Brussels, 29.5.2013  
COM(2013) 364 final 

Recommendation for a 

COUNCIL RECOMMENDATION 

on Latvia’s 2013 national reform programme  

and delivering a Council opinion on Latvia’s convergence programme for 2012-2016 

{SWD(2013) 364 final} 

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Recommendation for a 

COUNCIL RECOMMENDATION 

on Latvia’s 2013 national reform programme  

and delivering a Council opinion on Latvia’s convergence 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 9(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) 

(3) 

On  26  March  2010,  the  European  Council  agreed  to  the  Commission’s  proposal  to 
launch  a  new  strategy  for  growth  and  jobs,  Europe  2020,  based  on  enhanced 
coordination of economic policies, which will focus on the key areas where action is 
needed to boost Europe’s potential for sustainable growth and competitiveness. 

On 13 July 2010, on the basis of the Commission's proposals, 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. 

On 29 June 2012, the Heads of State or Government decided on a Compact for Growth 
and  Jobs,  providing  a  coherent  framework  for  action  at  national,  EU  and  euro  area 
levels using all possible levers, instruments and policies. They decided on action to be 
taken  at  the  level  of  the  Member  States,  in  particular  expressing  full  commitment  to 

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OJ L 209, 2.8.1997, p. 1. 
COM(2013) 364 final. 
P7_TA(2013)0052 and P7_TA(2013)0053. 
Council Decision2013/208/EU of 22 April 2013. 

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(4) 

(5) 

(6) 

(7) 

(8) 

achieving the objectives of the Europe 2020 Strategy and to implementing the country-
specific recommendations. 

On  6  July  2012,  the  Council  adopted  a  recommendation  on  Latvia’s  national  reform 
programme  for  2012  and  delivered  its  opinion  on  Latvia’s  updated  convergence 
programme for 2011-2015. 
On  28  November  2012,  the  Commission  adopted  the  Annual  Growth  Survey5, 
marking  the  start  of  the  2013  European  Semester  of  economic  policy  coordination. 
Also  on  28  November  2012,  the  Commission,  on  the  basis  of  Regulation  (EU)  No 
1176/2011, adopted the Alert Mechanism Report6, in which it did not identify Latvia 
as one of the Member States for which an in-depth review would be carried out. 

On  14  March  2013,  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  29  April  2013,  Latvia  submitted  its  2013  convergence  programme  covering  the 
period 2012-2016 and, on 2 May 2013, its 2013 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  2013  convergence  programme  pursuant  to  Council 
Regulation  (EC)  No  1466/97,  the  Council  is  of  the  opinion  that  the  macroeconomic 
scenario  underpinning  the  budgetary  projections  in  the  programme  is  plausible. 
Economic  growth  is  expected  to  slow  down  somewhat,  to  around  4%  per  year,  over 
the  programme  period,  while  price  increases  are  projected  to  remain  moderate.  The 
general government deficit declined in 2012 to a level well below 3% of GDP and the 
medium-term  objective  (MTO)  was  reached  in  that  year,  considerably  earlier  than 
what was foreseen in the previous programme. The programme confirms the previous 
MTO of -0.5%, which adequately reflects the objectives of the Pact. The objective of 
the budgetary strategy outlined in the programme is to maintain a structural budgetary 
position  which  is  based  on  the  MTO,  with  any  deviation  limited  to  the  incremental 
impact of systemic pension reform; this reform entails a gradual increase in the share 
of  social  security  contributions  which  is  diverted  to  a  funded  pension  scheme  and  is 
implemented in 2013, 2015 and 2016. However, following an overall assessment with 
the recalculated structural balance as a reference, including an analysis of expenditure 
net  of  discretionary  measures,  it  appears  that  the  structural  balance  is  set  to  deviate 
from the MTO by 1.0 pp. of GDP in 2013, i.e. significantly more than the incremental 
impact  of  the  systemic  pension  reform,  and  by  further  0.2  pp.  in  2014.  Government 
debt  is  set  to  remain  well  below  60%  over  the  whole  programme  period,  increasing 
from 40.7% of GDP in 2012 to 44.5% in 2013, as the government accumulates assets 
for  debt  repayments,  and  is  declining  from  2014  as  repayments  take  effect,  reaching 
34.6% by the end of the programme period. The Fiscal Discipline Law was approved 
by  the  Latvian  Parliament  in  January  2013  and  entered  into  force  in  March  2013.  If 
effectively  implemented,  the  new  law  would  considerably  strengthen  the  fiscal 
framework in Latvia, providing an effective mechanism to limit expenditure growth in 
good economic times and serving as a basis for rules-based multi-annual budgeting. 

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COM(2012) 750 final. 
COM(2012) 751 final. 

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(9) 

Latvia  has  reduced  taxes  on  labour  and  plans  to  take  further  steps  in  this  regard  in 
2014  and  2015.  However,  the  tax  wedge  for  low-wage  earners  is  still  among  the 
highest  in  the  EU,  indicating  a  need  for  appropriate  calibration  of  tax  policy  to 
stimulate employment for the low-skilled. Moreover, shifting taxation from labour to 
recurrent  property  taxes  and  taxes  on  the  use  of  natural  and  other  resources  should 
improve the structural balance. Environmental taxes remain relatively underdeveloped 
and  are  heavily  dominated  by  motor-fuel  taxation,  while  taxation  of  other  energy 
sources,  pollution  and  the  use  of  natural  resources  is  below  the  EU  average.  Further 
broadening of the tax base to include other sources of environmental taxation would 
help  in  achieving  environmental  goals.  The  government  has  stepped  up  efforts  to 
combat the informal economy and these efforts should be maintained. 

(10)  While  the  post-crisis  structural  adjustment  has  been  successful,  the  experience  of  a 
pronounced boom-bust cycle calls for monitoring future credit growth and the stability 
of the bank funding base related to foreign deposit inflows by appropriate micro- and 
macro-prudential policies.  

improved 

(11)  Latvia has taken a number of steps to tackle high long-term and youth unemployment. 
Funding  and  coverage  of  active  labour  market  policies  was  increased  in  2013  as 
compared  to  2012,  new  measures  are  being  implemented,  including  profiling  of  the 
term 
unemployed  and 
unemployment and youth unemployment are still high, activation of the unemployed 
and benefit recipients is low and access to social services is poor. There are concerns 
that vocational education and training is failing to provide sufficient quality of skills 
for  the  workforce  and  there  is  limited  availability  of  quality  work-based  training. 
Establishment  of  comprehensive  career  guidance  and  continued  implementation  of 
reforms in vocational education and training, including improving the quality and the 
accessibility of its work-based learning and apprenticeship components are necessary. 

job  search  assistance.  Nevertheless, 

long 

(12)  A  high  proportion  of  the  Latvian  population  is  at  risk  of  poverty  or  social  exclusion 
(40%) and  for children it is  even higher (43.6%). Overall, the at-risk-of-poverty rate 
increased slightly in 2012, suggesting that growth does not automatically translate into 
less  poverty,  and  targeted  policies  are  necessary.  Latvia  has  taken  some  steps  to 
address  poverty  of  unemployed  and  children.  However,  there  has  been  less  direct 
action to address the problems of the social assistance system in particular in relation 
to  transparency,  benefit  adequacy  and  coverage,  and  insufficient  activation  measures 
for  benefit  recipients.  Lack  of  fiscal  space  has  led  Latvia  to  decrease  the  level  of 
guaranteed  minimum  income  (GMI)  and  to  abolish  the  state  budget  financing  of  the 
GMI benefit. These decisions are likely to aggravate extreme poverty and exacerbate 
the  existing  inequality  in  access  to  social  assistance  across  local  governments,  while 
reducing central government incentives to invest in policy development and control of 
social  assistance.  It  is  important  to  monitor  the  effects  of  these  decisions  to  prevent 
any deterioration in the situation.  

(13)  Latvia  has  proposed  an  ambitious  reform  that  can  be  expected  to  have  a  significant 
positive impact on the quality of its higher education system. Reform plans cover an 
overhaul  of  the  accreditation  process,  the  separation  of  academic  and  management 
functions  of  the  universities,  the  development  of  a  new  financing  model,  and  a 
consolidation  of  the  higher  education  institutions.  However,  the  plans  are  still  at  an 
early stage and need to be properly implemented to ensure that the foreseen positive 
impacts  materialise.  Moreover,  in  2013,  an  evaluation  will  be  carried  out  of  the 
effectiveness of scientific institutions and their development strategies. This important 

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assessment should help underpin future reform and funding of scientific institutions, in 
support of increased innovation activity in Latvia. 

(14)  Latvia has put forward policy measures addressing energy savings for the main sectors 
of the economy. It is expected that in coming years more than 70 % of energy savings 
will  be  generated  in  the  buildings  sector.  However,  the  implementation  of  housing 
insulation projects has been slow and the number of completed projects remains small 
relative to the stock of buildings, with large energy losses. The potential for efficiency 
gains  in  this  field  is  significant  as  energy  intensity  of  Latvian  households  was  the 
highest  in  the  EU  in  2010.  In  2012,  Latvia  made  progress  in  opening  its  electricity 
market  to  competition  and  participation  in  regional  markets.  Direct  contracting  with 
electricity  suppliers  is  fully  enforced  in  the  business  sector  and  is  introduced  on 
voluntary  basis  for  households.  Latvia  is  set  to  join  Nord  Pool  Spot  trading  in  June 
2013.  However,  there  has  been  no  progress  in  opening  the  natural  gas  market  and  a 
single-source  dependency  prevails.  The  authorities  are  also  facing  difficult 
negotiations on the ownership and management of the gas storage facility, which is of 
high importance for the proper functioning of the regional gas market. 

(15)  The  Latvian  judicial  system  is  characterised  by  inefficiencies  in  the  civil  justice 
system.  The  system  combines  several  unfavourable  factors  such  as  lengthy 
proceedings  to  solve  civil  and  commercial  cases  in  first  instance  and  low  clearance 
rates  leading  to  a  backlog  of  court  cases.  Disposition  times  are  particularly  long  for 
insolvency  proceedings.  Moreover,  many  cases  do  not  get  resolved  at  first  instance, 
which creates delays at all levels, up to the Supreme Court. Positive steps to improve 
the efficiency and quality of the system have been taken recently, but it is too early to 
assess their impact. It is particularly important to devote sufficient attention to human 
resources  management  policies  within  the  judiciary.  Stronger  involvement  of  the 
Judicial Council, rethinking of the role of management positions within the judiciary 
and  more  training  of  judges  could  contribute  to  a  higher  quality  judiciary. 
Amendments to the Law on Insolvency were proposed by the end of 2012. However, 
the scope of the amendments is limited and does not address the shortcomings of the 
law in a comprehensive way. For instance, problems have been identified in relation to 
the  practical  implementation  of  the  law,  in  particular  with  regard  to  the  role  of  the 
insolvency  practitioners,  their  responsibilities  with  regard  to  the  judges  and  the 
effective liquidation of assets, as well as issues with personal insolvencies, which also 
need to be addressed. 

(16) 

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 (6) below. 

(17) 

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, 

7 

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

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HEREBY RECOMMENDS that Latvia should take action within the period 2013-2014 to: 

1. 

2. 

3. 

4. 

5. 

6. 

Reinforce  the  budgetary  strategy  to  ensure  that  the  deviation  from  the  MTO  only 
reflects the incremental impact of the systemic pension reform. Within this strategy, 
reduce  taxation  of  low-income  earners  by  shifting  taxation  to  areas  such  as  excise 
duties,  recurrent  property  taxes  and/or  environmental  taxes.  Maintain  efforts  to 
improve  tax  compliance  and  combat  the  shadow  economy.  Continue  strengthening 
the fiscal framework through effective implementation of the Fiscal Discipline Law 
and multi-annual budgeting. 

Tackle long-term and youth unemployment by increasing coverage and effectiveness 
of  active  labour  market  policies  and  targeted  social  services.  Improve  the 
employability  of  young  people,  for  example  through  a  Youth  Guarantee,  establish 
comprehensive  career  guidance,  implement  reforms  in  the  field  of  vocational 
education and training, and improve the quality and accessibility of apprenticeships. 

Tackle  high  rates  of  poverty  by  reforming  social  assistance  for  better  coverage,  by 
improving  benefit  adequacy  and  strengthening  activation  measures  for  benefit 
recipients. Reinforce the delivery mechanisms to effectively reduce child poverty. 

Implement  the  planned  reforms  of  higher  education  concerning,  in  particular,  the 
establishment  of  a  quality-rewarding  financing  model,  reform  of  the  accreditation 
system, consolidation of the institutions and promotion of internationalization. Take 
further  steps  to  modernise  research  institutions  based  on  the  on-going  independent 
assessment. 

Continue improving energy efficiency, especially of residential buildings and district 
heating networks, provide incentives for reducing energy costs and shift consumption 
towards  energy-efficient  products.  Improve  connectivity  with  EU  energy  networks 
and take steps towards liberalisation of the natural gas market, including provision of 
clear rules for third-party access to storage capacities. 

Complete pending reforms to improve the efficiency and quality of the judiciary and 
reduce the backlog and length of proceedings, including as regards insolvency. Put in 
place  a  comprehensive  human  resources  policy  and  take  steps  to  implement  the 
mediation laws and streamline the arbitration court system. 

Done at Brussels,  

For the Council 
The President 

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