COMMISSION STAFF WORKING DOCUMENT OVERVIEW OF PROGRESS IN IMPLEMENTING COUNTRY-SPECIFIC RECOMMENDATIONS BY MEMBER STATE Accompanying the document COMMUNICATION FROM THE COMMISSION Annual Growth Survey 2014
Date: 2013-11-13
Institutions: European Commission
Subjects: EU Member State, EU statistics, budgetary equilibrium, competitiveness, economic growth, employment policy, social policy













EUR-Lex - 52013SC0800R(01) - EN











|



52013SC0800R(01)

COMMISSION STAFF WORKING DOCUMENT OVERVIEW OF PROGRESS IN IMPLEMENTING COUNTRY-SPECIFIC RECOMMENDATIONS BY MEMBER STATE Accompanying the document COMMUNICATION FROM THE COMMISSION Annual Growth Survey 2014 /* SWD/2013/0800 final/2 */









Introduction
This
staff working document provides an interim overview of the state of play in the
implementation of the country-specific recommendations (CSRs) in individual
Member States and for the euro-area as a whole. The overview takes account of progress
made over the past three years, illustrating key reforms undertaken since the
launch of the European Semester process, while highlighting implementation gaps
in the light of the latest recommendations adopted in 2013. Given that the
majority of the key challenges addressed are unlikely to be overcome in a
single year, this overview shows the continuity of reform efforts over time.
This analysis is preliminary and technical. The Commission will present its
final assessment, based on the National Programmes and taking into account the
in-depth reviews under the macro-economic imbalances procedure, in the 2014
country-specific recommendations package. 
Information is also
provided on countries implementing an Economic Adjustment Programme (EL, IE,
PT, CY, RO), although there are no separate country-specific recommendations
for these countries beyond the implementation of the Programmes. Some of the
monitoring and reporting obligations under the Stability and Growth Pact do not
apply and most obligations under the European Semester are suspended for Euro
Area Programme Countries since the entry into force of the Two-pack. An
overview is also provided of the situation in Croatia, although it has not yet
received any formal country-specific recommendations. 
Belgium
Public finances: Despite the consolidation efforts made, Belgium retains a
challenging fiscal position in respect of its high debt level. While the
deficit gradually decreased since 2010, it remained above the 3% of GDP
threshold of the Treaties. Belgium is committed to additional measures for 2013.
The pension reform initiated at the end of 2011 tightened minimum age and
career length requirements for early exit and early retirement schemes and
strengthened financial incentives to extend working careers and is being
underpinned through active ageing measures. Given the magnitude of the
challenge, additional measures and reforms seem necessary to safeguard public
finances in the long-term. It is unclear how the Communities' new competences
on long-term care will improve cost effectiveness. 
Financial sector: Belgium has taken measures to stabilise its banking sector by
recapitalising the weakest banks and reforming the supervisory framework for
the financial sector. Nevertheless, the financial situation of some banks,
although improving, deserves continued monitoring, especially in light of the
high level of government contingent liabilities.
Growth and competitiveness: Belgium has taken measures to curb inflationary pressures by
strengthening the competition authority and through regulatory interventions in
the energy and telecommunications markets. As a result, energy prices and
prices for telecommunication services have dropped and overall inflation has
decreased to below the levels observed in neighbouring countries. Further
structural measures remain necessary, in particular in retail and professional
services. Belgium has taken some measures to decrease the accumulated wage gap.
A wage freeze in real terms was enacted for 2013 and 2014 and linear and
targeted reductions in employers' social security contributions have been increased.
A reform of the wage setting mechanism aimed at preventing any future
decoupling of wages and productivity has stalled. Though the strengths of the research
and innovation system have partly compensated for the country’s deteriorating
cost competitiveness, Belgium would benefit from broadening its innovation base
and improving the availability of skilled professionals as well as promoting
entrepreneurship. Given that projections for greenhouse gas emissions remain
well above the target, Belgium needs to implement more ambitious policies notably
in the transport and building sectors, including by putting in place an
effective internal effort-sharing framework between the different competent
entities.
Employment and social policies: While no major shift from labour taxes to less growth-distortive
taxes has been enacted, targeted measures have decreased the tax burden on
labour and several measures have been taken to improve the functioning of the
labour market. The reform of the unemployment benefit system accelerates the
gradual decrease of the benefit level. Some measures have been introduced to increase
traineeship and lifelong learning capacity. A more fundamental reflection on matching
the education and training outcomes and labour market requirements is necessary.
Interregional labour mobility should be further improved. Concrete measures are
also required to tackle increasing youth unemployment, as well as labour market-
and social integration of people of migrant origin.
Bulgaria
Public finances: Bulgaria has taken substantial measures to ensure the
sustainability of its public finances. It corrected its excessive deficit in
2011 and in structural terms reached its Medium-Term Objective of -0.5% of GDP
in 2012. With general government debt at less than 20% of GDP Bulgaria has one of
the lowest debt ratios in the EU. Bulgaria has significantly strengthened its
fiscal framework in recent years which has contributed to maintaining fiscal
discipline and increasing fiscal policy credibility. On the revenue side, tax
compliance and efficiency of the tax administration are still challenges in
Bulgaria. On pension reform Bulgaria has taken some positive steps, but further
efforts are needed in order to discourage early exit from the labour market. Concrete
steps to limit abuse of the invalidity pensions' system are still missing. In
the healthcare sector reforms are being held back by lack of administrative
capacity. 
Growth and competitiveness: Public procurement legislation has been reformed, but further
improvements are needed to strengthen administrative capacity and ensure
enforcement. Recent changes to the rules on late payments will improve the
overall business environment, as would the planned reform of insolvency
procedures, which still needs to be carried forward by the government. Bulgaria
still needs to progress further in reforming its judicial system. Bulgaria’s
transport infrastructure has experienced improvements over recent years, but a considerable
potential remains for improving efficiency. The same is the case in the water
and waste sectors. In this context Bulgaria needs to enhance the administrative
capacity of relevant regulatory bodies. Significant reforms are needed in the
Bulgarian energy sector to bring it into line with the Internal Energy Market
and improve efficiency. 
Employment and social policies: Bulgaria suffers from below-average and declining employment as
well as high unemployment disparities across regions and population groups. Reforms
are needed to improve effectiveness of the employment services and to implement
effective measures to increase youth employment. The overall quality and
efficiency of its education system also need to be improved. Reforms are in
preparation but their adoption and implementation have been delayed. As regards
minimum thresholds for social security contributions, the government has taken
steps to limit their impact, but these efforts have stopped short of a more comprehensive
review of the system. 
Czech
Republic
Public finances: The Czech Republic has taken steps to bring an end to the situation
of an excessive government deficit by 2013. However, further efforts are needed
to address the quality of the fiscal consolidation. In particular, growth-enhancing
expenditures such as public investment experienced sharp cumulative declines between
2010 and 2012. This, along with a low level of absorption of Structural Funds,
puts the long-term growth prospects at risk. Overall, limited progress has been
achieved in terms of improving the efficiency of public expenditure. Reforms
were adopted to increase tax compliance and collection but the introduction of
the single collection point has been delayed and does not fully exploit the
room to reduce the high administrative burden of paying taxes. Some indirect
taxes, notably VAT and excise taxes, were raised. There is however room for a
clearer shift away from labour taxation to areas less detrimental to growth and
for a further reduction of discrepancies in the treatment of the employees and
the self-employed. The 2011 reform of the pension system improved the long-term
sustainability of public finances but
further steps remain necessary.
Growth and competitiveness: Low effectiveness of the public administration remains a major
concern for Czech businesses. The Czech authorities have taken action to fight
corruption and adopted two successive anti-corruption strategies. However, their
implementation has not been effective enough: some key measures were partially
implemented, for example concerning the Public Procurement Act, while others
are still pending, such as the long-awaited Public Servants Act.  Increasing
the quality of compulsory and higher education is essential to the long-term
competitiveness of the Czech Republic. While some EU-funded measures are
underway in the area of compulsory education, no progress was made on the side
of the higher education reform. 
Employment and social policies: While it is widely recognised that the labour market participation
of women with small children and of disadvantaged groups is sub-optimal, only very
limited response was given so far. The government proposal of the new law on
provision of childcare services, accompanied by tax subsidies for care
providers and participating families, is a step in the right direction but could
provide only a partial response to the issue. A reform of
Labour Offices was adopted in 2011 and is being implemented since then. It
remains to be seen whether the undertaken measures are sufficient to ensure
that Labour Offices, equipped with the right staff and tools, can deliver
efficient and targeted job search assistance. 
Denmark
Public finances: Denmark's budget deficit is expected to fall to 1.7% of GDP in 2013.
The positive outlook for the Danish public finances is partly due to one-off
measures, pointing to the importance of prudent fiscal policy going beyond the
EDP horizon in order to safeguard the confidence in Danish economic policy and
cater for costs related to an ageing population. 
Financial sector: The risks posed by the high levels of household debt in Denmark to
financial stability seem contained. Measures have been introduced by the government
and the financial sector over the past year, which go in the right direction.
However, close monitoring is required to ensure that they have the desired
impact. No changes have been considered so far to reduce distortions and
strengthen the countercyclical features of property taxation.
Growth and competitiveness: Weak domestic competition is resulting in high mark-ups of services
and goods prices in Denmark. In 2012, the government presented a Competition
package with relevant measures. Moreover, a Productivity Commission is
currently analysing the weak productivity growth in the Danish economy and the
potential contribution of non-optimal competition levels of the Danish services
sector. Results are expected before end 2013 and should thereafter be taken
forward in relevant policy measures.
Employment and social policies: Denmark has carried out important reforms of the early retirement
pension, disability pension and the subsidised employment schemes (i.e.
'flex-job' system) to enhance labour supply. However, further efforts are
needed to improve the employability of those at the margins of the labour
market, such as low skilled workers, people with reduced work capacity and
people with a migrant background. The Danish government has taken steps to
improve the situation, in particular by intensifying the training and education
aspect of the active labour market measures, which should benefit also these
groups. Two Expert Committees have also been established to improve active
labour market measures for both insured and uninsured workers. A reform of the
primary and lower secondary education system has been agreed and will be
implemented in the school year 2014-2015. A proposal has also been presented
for a reform of the vocational education and training system, intended to come
into force by August 2015. A reform of the tertiary education system is also
underway. 
Germany
Public finances: Following deficits above 3% of GDP in 2009 and 2010, Germany has
since returned to a sound fiscal position. In 2012, the general government
budget produced a small surplus and the medium-term budgetary objective was
complied with. Over the last years, Germany has increased expenditure on
education and research, but would benefit from further efforts in this respect.
Germany enhanced the efficiency of public spending on healthcare and long-term
care and of the tax system to a limited degree. Steps have been taken towards
the implementation of the constitutional balanced-budget rule ("debt
brake"), though specific implementing rules appear still to be required in
most Länder. 
Financial sector: Germany has strengthened the regulatory and supervisory framework
in the financial sector and has taken steps to align itself with the new EU
regulatory framework. Commission state aid decisions have contributed to the
restructuring of Landesbanken, but Germany needs to take further measures
to support consolidation in the banking sector.
Growth and competitiveness: Germany has taken measures to improve the conditions for
accelerating the expansion of the electricity network and coordination of the
energy network management has begun with some neighbouring Member States. In
the last years, Germany has made very limited efforts to ensure competition in
the railway markets and only marginal reforms have been carried out to open up service
sectors, notably professional services and crafts. Germany has recently adopted
a legislative reform to improve the enforcement of competition law.
Employment and social policies: Germany has made progress in reducing long-term unemployment, but
it could do more to exploit its labour force potential in view of demographic
change. Following a global evaluation of family support measures, the
government needs to take action to phase-out fiscal disincentive to work for
second earners. Germany has increased the number of child care facilities and
has taken a number of initiatives to improve early language learning and
children's reading skills, and to address the early-school leaving rate of
foreign-born students (which is twice as high as the national average). Wages
rose significantly in the last years. Despite the semi-automatic reduction of
the pension contribution rate, the tax wedge on labour remains high, in
particular on low incomes. 
Estonia
Public finances: Estonia has a sound fiscal position, in line with the Stability and
Growth Pact. The main goal of its budgetary strategy is to ensure a sustainable
fiscal policy that supports balanced economic growth. Its Medium Term Objective
is a structural surplus, which was achieved in 2012. A new draft law has been
put forward to comply with the requirements of the Treaty on Stability,
Coordination and Governance and to formalise an already existing, but largely
informal so far, (structural) budget balance rule for the medium term.  Estonia
has still to introduce concrete measures to strengthen the binding nature of the
existing multi-annual expenditure rules and ceilings.
Growth and competitiveness: Estonia has recovered quickly from the 2008-09 crisis. Even though
its GDP growth rate has slowed, the country is still outperforming the EU
average. Estonia is also improving its position in the international value
chain and knowledge-intensive sectors and is benefiting from growing investment
in research and development. However, in 2012 already, decreases
in export shares and a rather large increase in Unit Labour Costs pointed to some
losses in competitiveness. In the first half of 2013, as output growth
decelerated and employment increased, productivity growth in the economy fell,
while wage growth picked up substantially, leading to further competitiveness
losses. Special attention will be required to ensure that education outcomes
better match labour market needs, limiting the risks of wage growth exceeding
productivity gains. The government has initiated several reforms, for instance
of the basis and upper secondary school network, the VET and higher education
reform and more are being prepared such as a long awaited Life Long Learning
Strategy. However, the final design still has to be finalised and the impact of
these reforms will only be visible in the medium to long term.
Employment and social policies: Estonia's labour market has recovered fast from the 2008-9 crisis.
As economic growth continues, although at a somewhat lower pace in 2013, more
unemployed people find a job and real wages increase. However, persistent youth
and long-term unemployment, skills mismatches and labour force losses due to
chronic conditions or health problems remain a major source of concern. In
addition, a persistent shortage of childcare facilities delays the return of
parents, especially women, to the labour market, which prevents them from fully
contributing to the labour market. The government is addressing these
shortcomings through several draft reforms in particular the reform of
incapacity for work scheme, but they still have to be finalised and submitted
to Parliament for adoption. Finally, at the local level, the recurrent mismatch
between fiscal and administrative capacity vis-à-vis devolved responsibilities
negatively impacts the efficiency and quality of services delivered by local
governments in most sectors including in long-term care, family-support
services, education and transport; the same applies for local support measures
necessary to ensure effective health care service provision. Reforms to address
these issues have not been agreed yet. In particular, the submission of a new
Regional Development Strategy to the Government is delayed, while an action
plan to improve local public administration is in preparation.
Ireland
Public finances: Ireland has strictly adhered to the fiscal headline targets
throughout the Economic Adjustment Programme period. The 2013 deficit is
projected at 7.4% of GDP, marginally below the programme and Excessive Deficit Procedure
(EDP) ceiling of 7.5%. Government debt as a percentage of GDP remains high and
should peak in 2013, but should then decline thanks to the consolidation
efforts and higher GDP growth. Budgetary framework reform has been kept in pace
with the advances at the EU level, but expenditure framework and data reporting
and transparency need to be further improved.
Financial sector: The deleveraging and restructuring of domestic banks has progressed
well, even though more remains to be done. Recent efforts have focused on defining
and achieving targets for the sustainable resolution of mortgage arrears,
addressing other non-performing loans and improving the legal and regulatory
framework (personal insolvency and repossession frameworks, Code of Conduct on
Mortgage Arrears and credit register). A comprehensive assessment of banks'
balance sheets ahead of the stress tests to be carried out under the Single
Supervisory Mechanism in 2014 is on-going and will be completed by the end of
November. 
Growth and
competitiveness: Real GDP growth is expected to be
modest at 0.3% in 2013 before accelerating to 1.7% in 2014. This is consistent
with weak private consumption and earnings in the first half of 2013 in spite
of employment growth given persistent households' deleveraging and high
precautionary savings. However, the outlook for the
labour market continues to improve, which eventually should feed through to
domestic demand and output growth. Some key pharmaceutical products
manufactured in Ireland are coming off patent this year and this has led to a
slow-down in export and import growth. Price pressures are expected to remain low,
considering the high degree of spare capacity in the economy and limited
inflationary effect from fiscal measures. 
Employment and social policies: Structural reforms have improved economic fundamentals but some
issues remain work in progress. Recent reforms under the programme have focused
on strengthening activation mechanisms, providing deeper and wider support to
jobseekers (in particular the long-term unemployed and the youth) and improving
the relevance and delivery of further education and training programmes to
foster re-skilling and up-skilling. Work on rolling out these services is not
complete yet. Other reforms under the programme aim at reducing the cost and
increase the efficiency in the provision of health care, reforming the water
sector and reducing legal services costs through increased competition. 
Greece
Public finances: Greece continues to make overall progress under the Second Economic
Adjustment Programme, albeit with some important actions being delayed. Important
measures have been taken to put the Greek public finances on a sustainable
path. Recent fiscal developments have been
broadly on track. However, efforts need to be kept up to ensure the delivery of
a primary budget balance in 2013, and ensure the delivery of further budgetary
improvements. 
Increasing public revenues and reforming an
ineffective revenue administration are key priorities and significant efforts
are needed to make the recently created semi-autonomous revenue administration
fully operational and improve its effectiveness. The
reform of the public administration continues,
with discussions on-going inter alia on the human resources strategy, the
evolution of the mobility scheme, and the implementation of the wage grid with
a view to ensure the sustainability of the wage bill. Several important
structural reforms have been implemented in the areas of healthcare and public
financial management. However, far-reaching reforms are still needed in many
other areas. 
Financial sector: A determined and effective implementation of the privatisation
programme is necessary. The recapitalisation
of the four core banks has been completed.
Growth and competitiveness: The macroeconomic outlook shows the
first signs of recovery, with forecast positive
growth of 0.6% for 2014. After several years of recession, the first
half of 2013 was marked by an overall slackening of the recession and the first
signs of reaching the bottom of the cycle. While declining unit labour costs,
supported by successful labour market reforms, are improving cost
competitiveness, the on-going product markets reforms need to be accelerated
and reinforced. The Economic Adjustment Programme has a strong focus on the
structural reforms needed to create the right conditions for a rebound in
investment, jobs and productivity once the economic cycle turns. Key reforms
to, inter alia, promote an efficient and competitive business environment,
reform the judicial system, develop efficient network industries and services
and opening regulated professions have progressed in line with the Programme
commitments, but the policy decisions still lie ahead. 
Employment and social policies: Fighting unemployment continues to be a top priority. Greece has
implemented ambitious labour market reforms and it is now vital to advance on
the four pillars of the employment action plan: public works programme;
internships for the young ("voucher scheme"); reform of the Public
Employment Service (OAED); and strengthening vocational education and
apprenticeships. Greece is seeking ways to improve the social safety net within
the current budgetary envelope such as including the development of
unemployment assistance for the long-term unemployed and the creation by
January 2014 of a guaranteed minimum income scheme (on a pilot basis).
Spain
Public finances: Spain is committed to correct its excessive deficit by 2016. Spain
advances on reforming its pension system. Gradual increases in the statutory
retirement age and in the contribution period required for a full pension were
adopted in 2011, access to and incentives for early and partial retirement were
curbed in March 2013. A law on the regulation of the sustainability factor in
the pension system is planned to be adopted by the end of the year. Public
finance management has been strengthened; the transparency and control of
regional budgets have improved; an Independent Fiscal Institution is foreseen
to be in place by year end; arrears are being cleared and measures have been
taken to discourage late payments in the future; a 'dis-indexation' law, to be
approved by year end, will eliminate indexation to inflation in public
contracts. Measures have been taken since 2012 to start rebalancing the
relative tax burden towards consumption and environmental taxes, improve tax
compliance and reduce debt bias in personal and corporate income taxation.
However, further efforts are needed and an independent expert group was created
in July to inform the global review of the tax system. 
Financial sector: The financial sector programme, due to end in January 2014, is on
track. Restructuring of banks having received State aid is well underway, compliance
with the horizontal policy requirements is nearly complete. Thereby, the
governance, regulatory and supervisory framework of the Spanish banking sector
has been strengthened.
Growth and competitiveness: Weaknesses in the business environment such as segmentation of the
domestic market or entry barriers in services' industries hold back job
creation. A legislative proposal to foster the functioning of the Spanish
internal market (the law on the guarantee of market unity) has been submitted
to the Parliament. A first draft law reforming professional services is now
under consultation, however its finalisation is falling behind schedule. The
recent law on entrepreneurship has brought about improvements to the framework
for corporate insolvency and more flexible company forms. Since 2012 measures
were also taken to open up the retail sector and to make the housing rental
market more efficient. Following up on measures taken in 2012, the authorities
put forward a legislative package in July 2013 aimed at overhauling the
electricity sector and closing the long-standing electricity tariff deficit.
Further efforts are needed to address shortcomings in competition in transport.
Spain is also taking steps to reform its public administration: in February
2013 the government presented a draft law on local administration reform (to be
adopted by Parliament before end-2013) and work on a broader reform of the
public administration has been launched.
Employment and social policies: Building on previous reforms in 2010
and 2011, the more
comprehensive 2012
labour market reform, together with the 2012 social partners' agreement, seem
to have created the conditions for increased labour market resilience. Yet, it
is too early to judge its impact. Work continues to boost active labour market
policies as well as their links with passive policies. However, effective
application is taking longer than expected and the coordination between the
centre and the autonomous regions still poses a risk to effective delivery. Measures
are being taken under the Youth Entrepreneurship and Employment Strategy to improve
employment of young people. Reforms are also underway to improve VET. Only
limited measures were taken so far to address poverty and social inclusion
issues.
France
Public finances: While France made significant consolidation efforts to bring the
headline deficit down from 7.5 % of GDP in 2009 to 4.8 % in 2012, it did not
correct its excessive deficit by 2013 due to worse than expected economic
condition and was therefore granted two additional years by the Council. Whether
the planned decentralisation reform will bring significant savings for the
general government as a whole remains unclear. The 2013 pension reform is expected to contribute to the long-term
sustainability of the pension system but may remain insufficient in the medium-term.
The planned measures mainly focus on the revenue side, in particular with the
increase in social contributions for both employees and employers. The 2013
pension reform also covers only the general scheme and falls short of fully
addressing the revision of special schemes.
Competitiveness and growth: Some measures have been taken to increase
the efficiency of the tax system by cutting selected tax expenditures. Measures
were also implemented to reduce the debt bias in corporate taxation. The creation
of an intermediate 10% VAT rate in 2013 aims at a simplification of the tax
system but will not reduce inefficiencies (e.g. reduced VAT rate for
restaurants). France has taken some measures to improve competitiveness, in
particular by the introduction of a tax rebate for competitiveness and
employment in 2013. Only limited measures have been taken to increase the
competition in regulated sectors. In network industries, the NOME regulation
will reduce barriers to entry in the energy sector and a reform which seeks to
increase the efficiency of the railway system is underway.
Labour market: The law of June 2013 on securing jobs is a step to improve the
functioning of the labour market. It notably addresses the low access to
lifelong learning. Measures were also taken to support the employment of older
workers and of young people, in particular through subsidised work and
apprenticeships, albeit with somewhat mixed results. Most recently, the
"jobs of the future" programme effectively supports employment prospects
for low-qualified young people while the "Generation Contract" has
shown limited results so far. A reform of the public employment service was
also undertaken in 2012/13. Labour market segmentation was partially addressed
by raising employers' social contributions on contracts lasting less than three
months, in order to reduce the proportion of short term contracts.
Discretionary increases to the minimum wage have been limited in order to
preserve competitiveness, leaving the wage indexation formula to play.
Negotiations between social partners on unemployment benefit systems are to
start soon. Given the level of unemployment, further structural reforms are
needed to reduce the cost of labour. 
Croatia
In view of its accession on 1 July 2013, Croatia
participated in the 2013 European Semester on a voluntary and informal basis by
submitting an economic programme in April 2013. The Commission staff working
document provided a qualitative assessment of the programme concluding that
although some progress had been achieved, very important fiscal and structural
challenges remain. There were no country-specific recommendations. 
Public finances: Over the past years, the fiscal framework in Croatia has been
reformed with three key legal acts entering into force: i) the Budget Act
(2009), ii) the Fiscal Responsibility Act (2011), and iii) the Government
Decision on the establishment of the Fiscal Policy Committee (2011). On the
revenue side, Croatia took measures to shift the structure of taxation away
from labour towards taxes less harmful for growth and to improve tax compliance
through action aimed at combating tax evasion and improving the efficiency of
tax administration. On the expenditure side, steps were initiated to review the
effectiveness and sustainability of expenditure on social protection and
pensions. According to the data notified by the authorities, the general
government deficit in Croatia stood at 5.0% of GDP in 2012. The state deficit
on a cash basis in the first nine months of 2013 came close to 4.0% of GDP,
higher than what was planned for the full year (3%). The general government
gross debt increased rapidly since 2009, reaching 55.5% in 2012 and forecast to
rise further. 
Growth and competitiveness: The low quality of the business environment and low efficiency of
the judiciary as well as the lack of competition in key markets weigh on the
growth prospects for the Croatian economy. During the last years, Croatia took
legislative, institutional and practical measures to reduce administrative
burden and revive investment. Some first measures to modernise the public
administration, improve the efficiency of the judiciary, and implement
prevention mechanisms to fight corruption in the public sector have been taken,
but further measures are required for enhanced administrative and judicial
capacity. Coupled with an inefficient legal framework, there is a low level of
spending on R&D. The new Strategy on Innovation and the planned Smart
Specialisation Strategy are steps in the right direction.
Employment
and social policies: The potential of the Croatian
labour market is severely underutilised, with young people, long term
unemployed, elderly and women being in a particularly unfavourable position. The coverage of active labour market policy measures has improved
recently, however the effectiveness of the measures is still to be evaluated.
Also to improve a weak labour market performance, Croatia adopted first amendments
to the Labour Law, partly addressing employment protection legislation. The second
phase of Labour Law amendments, expected to introduce
more significant changes to employment protection legislation, is under preparation, as is an extensive pension reform. The social
situation is deteriorating, exposing a third of the population to the risk of
poverty. There remains room to improve the effectiveness of the social welfare
system and to address existing disincentives to take up employment among some
groups. The Social Welfare Strategy 2011-2016 and new Social Welfare Acts provide
a broad basis for system reform; however the impact of measures will depend on their
actual implementation.
Italy
Public finances: The fiscal consolidation effort since 2011 led to the correction of
the excessive deficit. However, the public debt remains a major burden. Close
monitoring of budgetary developments to ensure strict compliance with the
Stability and Growth Pact is therefore warranted. The reform of the tax system remains
piecemeal. The tax on primary residences was halved in 2013 and is due to be substituted
by a new local service tax from 2014. The proper design of this new tax and the
revision of the cadastral values will be critical to the fairness of property
taxation and to the efficiency of the tax system. Despite previous actions and
those announced for 2014, taxation on labour and capital remains high in Italy.

Financial sector: To strengthen the Italian banking sector, the Bank of Italy
conducted a targeted asset quality review, which is a positive step despite the
limited sample of banks involved. Furthermore, a higher allowance for corporate
equity was proposed to diversify firms' access to finance. Improvements in
banks' corporate governance have however been limited.
Growth and competitiveness: Some measures have been taken to reduce administrative burden,
simplify legislation and improve the business environment. Action was also taken
to foster the efficiency of the justice system and improve the management of EU
funds, which however requires legislative follow-up and should be further developed.
Some reforms to foster competition in the services markets were introduced but implementation
risks exist, notably with regard to professional services. Follow-up action to
tender out local public services is necessary, after the repeal by the Constitutional
Court in 2012 of the provisions foreseeing market opening. Regarding network
industries, measures are on-going to improve market access conditions,
particularly in the gas and transport sectors, but energy prices remain very
high and the upgrading of infrastructures across the country remains a
challenge.
Employment and social policies: Rigidity and segmentation have been structural features of the Italian
labour market. To address these challenges, a reform was adopted in 2012
including limits for atypical contracts, new dismissal rules and an integrated
unemployment benefit scheme. However, implementation is slow, for example as
regards the modernisation of public employment services. An agreement to better
align wages to productivity was reached in 2012 supported by tax rebates, which
needs to be followed-up on the ground. Youth and women unemployment remain
issues of high concern. Measures targeted mainly to youth have been adopted at
several stages, last in August 2013, and should be swiftly implemented.
Challenges linked to education also remain high (i.e. lowest tertiary education
attainment rate in the EU and nearly 24% NEET rate) and therefore urgent
improvements are needed. To better target benefits addressing poverty and
social exclusion, an important step was taken in August 2013, namely to extend
the existing social card to all southern regions. However, financing will
depend on the reprogramming of national contribution to EU structural funds. 
Cyprus
Public finances: Cyprus is currently undertaking a sizeable fiscal consolidation. The
adjustment for the years 2013-2014 is broadly balanced between expenditures and
revenues. On the expenditure side, the 2013 reform of the pension system is
being implemented, consisting of an increase in the retirement age,
disincentives for early retirement and reduced generosity of benefits. Steps
have been made to strengthen the sustainability of the funding structure and a
National Health System is expected to be introduced by end-2015. On public financial
management (PFM), an overarching law to provide a legal basis for sound PFM
principles, defining main processes, roles and responsibilities throughout the
annual budgetary cycle is to be adopted by end-December 2013. On the revenue
side, reforms of the tax revenue and public administration are underway, which
aim at improving tax compliance, fighting tax evasion and making the public
sector more effective in performing its tasks, including by making it easier to
reallocate public sector resources to areas most affected by the economic
crisis.
Financial sector: Against the sharp deterioration of confidence in the banking
sector, reforms were adopted, with a view to restructuring and downsizing
financial institutions, and reinforcing supervision. In
particular, a single resolution authority, involving the Governor of the
Central Bank of Cyprus, the Minister of Finance and the President of the Cyprus
Securities and Exchange Commission, has been established and Bank of Cyprus was
recapitalised and taken out of resolution. The authorities have started implementing the strategy to
restructure the cooperative credit institutions and first mergers have been
completed. A working plan for the integration of the
supervision of the cooperative credit institutions in the Central Bank of
Cyprus was finalised. The gradual
relaxation of the administrative restrictions and the capital controls
continued in line with the road-map agreed with programme partners. 
Growth and competitiveness: The transposition of the third energy package, the preparation of a
strategy for the energy sector, the alignment of legislation with the Services
Directive as well as the effort towards the liberalisation of regulated
professions count among the growth-enhancing measures adopted/envisaged by
Cyprus. Yet, there remains room for additional measures in the transport
sector, also with a view to improving energy efficiency, and encouraging
private sector investment in research and development.
Employment and social policies: After the sustained contraction in employment since 2009 and the
sharp rise in unemployment, Cyprus has taken action oriented towards the
long-term and young unemployed and the improvement of skills by setting up
post-secondary institutions, introducing a New Modern Apprenticeship and
implementing a system of vocational qualifications. However, further efforts
are needed to tackle the high youth unemployment and improve the adaptation of
skills to labour market needs. Cyprus has also reformed its wage indexation
system in the public sector, pursued also by the private sector, and reformed
the social welfare to enhance the protection of vulnerable groups and ensure
appropriate balance between welfare benefits and incentives to take up work.
Latvia
Public finances: The broad-based fiscal consolidation and higher efficiency of
public spending achieved during the macroeconomic adjustment programme have
allowed Latvia to reduce the government deficit from 8.1% of GDP in 2010 to
1.3% in 2012 and to reach the Medium-Term Objective (MTO) in 2012. The excessive deficit
procedure for Latvia was abrogated in June 2013. The 2014 budget is the first
one implemented on the basis of the new Fiscal Discipline Law. Parliament has
adopted tax measures concerning the personal income tax non-taxable thresholds
(general and for dependants) and environmental taxes. 
Financial
sector: Privatisation of several banks after the
financial crisis is on track and financial supervision has been strengthened to
preserve stability of the sector; while specific regulatory measures and close
monitoring of non-resident bank deposits are in place, continued vigilance
remains important.
Growth and competitiveness: Ambitious reforms have been proposed in the
education and science
sectors, which include changes to the governance of higher education
institutions, promoting internationalisation of higher education and science,
and introducing a financing model that rewards quality, combined with increased
national higher education financing. However, their implementation has not
advanced and reforms of the accreditation of study fields have not been
pursued. Latvia has taken significant measures to reduce inefficiencies in the
civil justice system that have a negative impact on the business environment.
The measures taken include a Court reorganisation; several reforms on civil
procedures; implementation of ICT solutions and on transparency through
publication of judgements. The mediation law and modifications to the
insolvency laws are under discussion. In the field of energy, the electricity
market has been liberalised and some measures are being implemented to improve
energy network connections. However, further efforts are needed as regards gas
infrastructure and markets, in particular to guarantee a well regulated
third-party access to transportation grids and storage. Some progress is being
made on energy efficiency. 
Employment and social policies: Latvia has reduced taxes on labour and
further steps to lower taxation of labour are planned for 2014-15. Latvia increased
the coverage of active labour market policies (ALMP), developed new ALMP
measures and modernised VET schools. A Youth Guarantee scheme is under
preparation. The previous decision by Latvia to decrease the level of the Guaranteed
Minimum Income and abolish the Central Government financing was contrary to the
country-specific recommendation. However, there is on-going, although slow,
work on the reform of social assistance to improve coverage and adequacy of
social assistance. Other measures to address poverty and social exclusion include
an increase of the minimum wage and special social services for persons with
disability or assisting disabled children. Regarding child poverty, one of the
highest in Europe, Latvia increased a number of family benefits in 2013 and
further increases are foreseen in 2014.
Lithuania
Public finances: Over the past three years economic growth has been among the
highest in the EU, which has helped reduce the budget deficit. In June 2013,
the Excessive Deficit Procedure was abrogated. While a further downward trend
of the structural deficit is visible, progress towards the MTO was below the
minimum requirement and efforts should be stepped up going forward. While some
measures have been taken, notably regarding property taxation, overall no major
progress was made on taxation in 2012-2013. Given that Lithuania’s tax-to-GDP
ratio is one of the lowest in the EU there is room to increase revenue. The
2013 tax review has been limited in scope, while effects of the extended strategy
to improve tax compliance can be expected rather in the mid-term. The adoption
of fiscal stability laws has been postponed and further action is needed to
strengthen the fiscal framework. Gradual pensionable age increases were adopted
in 2011. Legal amendments to complementary pension savings were adopted in late
2012. However, legislation on a more comprehensive pension system reform and
measures to ensure longer working lives have yet to be introduced.
Growth and competitiveness: Lithuania has improved its competitiveness over the last years due
to persistent wage declines and improvements in non-price competitiveness.
However, there is still a large catching-up potential as regards research and
innovation and education performance. Moreover, reforms in the energy sector
(Lithuania being one of the EU’s most energy and carbon-intensive economies)
should reduce the strong dependence on energy imports. On energy networks,
steps have been taken but the rate of implementation remains rather slow. On
energy efficiency of buildings, Lithuania has removed legal impediments for
granting specific loans to certain categories of owners in 2013. While this is
a step in the right direction, the concrete impact of these measures still
remains to be assessed. The government has put in place the regulatory
framework of a state-owned enterprise reform and significantly improved
transparency. The challenge now is to ensure implementation of all elements of
the reform. 
Employment and social policies: The labour market situation in Lithuania improved further but youth
and long term unemployment levels remain a serious concern. There is an
increasing lack of skilled labour force. The government has taken a number of
steps to tackle youth unemployment, with some positive results and a Youth
Guarantee scheme is under preparation. However, ALMP measures have not yet been
refocused for better targeting the low skilled and those further away from the
labour market. Promotion of apprenticeships in VET remains insufficient. Employment
protection legislation remains restrictive: changes to the labour code were
limited and will have no major impact. Initial reforms to support
liberalisation of fixed-term contracts in the private sector were undertaken
but are not sufficient due to the limited period and limited scope. The
implementation of cash social assistance reform measures has been launched
aiming to improve targeting. Increases in the general minimum wage should
improve in work poverty rates and might reduce general poverty. However, these
measures do not appear sufficient to tackle poverty and social exclusion.
Luxembourg
Public finances: Luxembourg has made progress in its fiscal consolidation efforts towards
reaching its medium-term objective. However, further efforts are needed to
ensure the long-term sustainability of public finances. A draft bill has been
prepared to put in place a medium-term budgetary framework, but its adoption is
delayed. The reform of the pension system adopted in December 2012 can only be considered
as a first step in the right direction to ensure the long-term sustainability
of public finance. Additional measures, including those related to the
long-term care, are needed. Luxembourg has not yet taken measures to extend the
application of the standard VAT rate, which would help increase revenues from
consumption.
Growth and competitiveness: Luxembourg's nominal unit labour costs increased by almost 16%
between 2008 and 2012, almost two times faster than in neighbouring countries.
However, the measures taken by Luxembourg to improve the wage-setting system
have only been partial and temporary. Luxembourg has made some efforts to
diversify the structure of the economy, which is heavily dependent on the
financial sector (ca. 30% of total value added). However, further efforts are
needed, notably to tackle current weakness of Luxembourg’s research and innovation
system. Recent legislation has considerably reduced the regulatory burden
relating to professional services and made access easier for service providers.
The debt bias in the corporation taxation is likely to have contributed to the
high level of indebtedness of corporations, but no measures have yet been taken
to address this. Luxembourg is not on track to achieve its greenhouse
gas target and further efforts are needed to offset the negative externalities
resulting from low level of taxation on energy products for transport and to
improve the public transport system.
Employment and social policies: Luxembourg's education system faces specific challenges due to
multilingualism demands, the high proportion of people with migrant backgrounds
in the population (43.1%), and the specific skills required by a strongly
specialised labour market with a large financial sector. The situation for
migrants and young people with low skills remains difficult. Luxembourg has taken
measures including setting up a career guidance centre, an Employment
Observatory, so-called 'fit for jobs' incentives, and a ‘Youth Guarantee’,
which point in the right direction. However, implementation remains partial so
far. A reform of the secondary school system is currently being prepared. In
view of a weak employment rate of older workers, financial incentives have been
put in place through the pension reform to prolong working careers. 
Hungary
Public finances: The Hungarian Excessive Deficit Procedure was abrogated in June
2013, following which the authorities, on balance, adopted a slightly
expansionary fiscal stance. The Commission fiscal forecast for 2014 is just at
the Treaty reference value (3% of GDP) with sizeable deficit-increasing risks.
In addition, recent fiscal policy decisions do not indicate any shift towards a
more growth-friendly fiscal strategy. On reinforcing fiscal governance, some
measures have been taken but further efforts are needed. 
Financial sector: Credit to SME has picked up and the sector's exposure to foreign-currency
denominated (FX) loans has been reduced thanks to the implementation of the central
bank's Funding for Growth Scheme (FGS). However this scheme can have
substantial medium-term fiscal costs. Sector specific taxes on the financial
sector have actually been increased once again in 2013. In addition, the
government is currently planning a new support scheme for households' FX
mortgages and the associated costs could further reduce credit supply of banks.
The supervisory authority has been merged into the Magyar Nemzeti Bank’s (MNB),
which should increase its emergency powers and the integration of macro- and
micro-prudential tools. As regards portfolio cleaning no new steps were
adopted, while the share of non-performing loans in the banking sector's
balance sheet is rather high (close to 20%) in addition to the high share of
restructured loans. 
Growth and competitiveness: Hungary's economic growth has been lower than that of regional peers
(PL, CZ, SK) due to the deleveraging of indebted sectors and a worsening
business environment. The latter is to a large extent driven by the lack of
predictability, distortive effects of government policies that imposed a
growing number of restraints on investors and the quality of corporate
taxation, in particular on the financial sector. No measures have been taken so
far to address the recommendations relating to the business environment. 
Employment and social policies: The labour market is lagging behind of the EU average, with a
generally low employment rate. Youth and long-term unemployment are the main
sources of concern. A Youth Guarantee scheme is under preparation. The wide
scale public work programmes introduced by the government in 2011 has helped
containing unemployment, but its long term employability effects are still to
be proved. The planned activation element goes in the right direction, but
still remains a one-off measure. The impact of life-long learning programmes is
still to be seen. The early school leaving, life-long learning and higher
education strategies are all still under preparation. The government introduced
targeted social contribution reductions to increase labour demand in the open labour
market; however the effect of this measure is still not detectable. Despite a
moderate increase in the overall active labour force, poverty and social
exclusion are increasing and high number of people faces severe material
deprivation. These have been exacerbated by a reduction in length and level of
unemployment benefits and thus the in-cash social assistance supports with the
restrictions on eligibility criteria.
Malta
Public finances: Malta plans to bring its general government deficit to 2.7% of GDP
in 2013 but the Commission Autumn Forecast projects this at 3.4% of GDP. Malta
announced measures to increase tax compliance and fight tax evasion but their
implementation is still ongoing. Debt bias in corporate taxation still needs to
be addressed. A reform of the fiscal framework is expected by the end of the
year. The sustainability of Malta's public finances in the long-run remains
challenging as projected growth in age-related expenditure remains well above
the EU average. Regarding the reform of the pension system, the ongoing
increases in retirement age are too gradual and not linked to life expectancy.
Malta plans to offset this in the short- to medium-term through other measures,
such as raising the employment rate of women and older workers (an active
ageing strategy is expected by the end of the year), but a long-term response
is missing. Healthcare expenditure adds to the challenge. The authorities are
putting in place a number of measures to improve the adequacy of the system,
but their financial impact is unclear. 
Financial sector: The authorities plan to revise two banking regulations that deal
with loan-loss provisioning and concentration risk. These draft regulations are
still in the process of discussion and the initial deadline was already missed.
To enhance supervision, the authorities set up a Join Financial Stability Board
and have proposed an amendment to the Central Bank of Malta Act.
Growth and competitiveness: Plans are underway to diversify energy supply by converting the current
oil-fired power plant to gas and constructing a new LNG power plant. In
addition, an electricity interconnector with Italy is under way, but its
completion has been delayed. On renewable energy, support schemes were put in
place, but problems were registered on developing the important planned wind
farms. Some limited measures have been implemented to address shortcomings in
the transport sector, but the uptake of public transport as envisaged in
on-going reform has been modest. In general further efforts in energy
efficiency appear needed. Malta is introducing an e-procurement framework to
increase the efficiency in public procurement and a reform of the judicial
system started in 2013.
Employment
and social policies: While still very low, the
employment rate of women is increasing. Measures have been introduced since
2011 (e.g. opening of public and private childcare and afterschool centres),
though their reach and affordability remain an issue. Maternity leave was
extended and new income tax incentives introduced for working parents. The
early school leaving rate remains high, but measures have been introduced to
address the issue. Measures addressing literacy, lifelong learning and the
reintegration of job seekers and inactive persons into the labour market are
planned, complementing on-going reforms of the apprenticeship scheme. Malta's
cost-of-living adjustment mechanism has specific characteristics which appear
to mitigate its negative effects. Malta is, however, encouraged to closely
monitor its impact and stand ready to reform it as appropriate.
The Netherlands
Public finances: Also due to weak economic developments, the Netherlands has had an
excessive budget deficit since 2009. According to the Commission 2013 Autumn
Forecasts, the economy contracted by 1.2% in 2012 and is expected to contract
by 1% in 2013 before slightly expanding in 2014. The Netherlands has adopted a
first pillar pension reforms. The second pillar and long term care reforms are
still to be adopted. The measures to improve the functioning of pension funds
can be expected to reduce fiscal subsidies to the system while at the same time
supporting the employability of older workers. 
Financial sector: In view of significant structural distortions in the Dutch housing
market further reforms are necessary, also in order to limit the spill-overs to
the wider economy holding back the recovery. Since April 2012, a series of
measures have been implemented. Some of these concern adjusting the fiscal
treatment of housing finance. The gradual move to limit mortgage interest tax
deductibility and increase the incentive to amortise is useful, but the
phasing-in of this measure is too slow. The recent introduction of some
differentiation of rents in the social housing sector based on income is a
welcome step, but its impact still has to be assessed.
Growth and competitiveness: Structural reforms have been taken, but since 2012 the momentum for
much-needed reforms appears to have faded. In difficult economic times with
rising unemployment, renewed efforts are needed to increase the growth
potential of the Dutch economy. The Netherlands has improved its ranking in the
Innovation Union Scoreboard 2013, which puts the Netherlands in the group of
‘innovation followers’ with above-average performance. Several measures have
been announced, are being implemented and were interpreted as steps in the
right direction. Consequently, the recommendation on competitiveness and
R&D was dropped in 2013. Even though public spending on education seems to
be safeguarded from budgetary cuts, funding for unconditional fundamental
research is under pressure. In 2012 and 2013 measures were taken to improve the
business environment, but there is scope for further improvement in some areas.

Employment and social policies: The labour market situation in the Netherlands has recently deteriorated.
The measures to improve labour market participation include increased tax
credits on labour and a progressive reduction of tax disincentives for
second-income earners. Furthermore, it was envisaged to increase labour
mobility by reviewing employment protection legislation and the duration of
unemployment benefits, but also implementing measures to integrate specific
groups into the labour market. At the end of 2012, the government tabled a
number of reforms concerning socio-economic policies. The envisaged measures on
the unemployment benefit scheme, employment protection/ dismissal legislation,
and the new Participation Act still need to be implemented. However, the
measures are planned to be phased in slowly. Additional reforms are needed in
order to improve the functioning of the labour market. 
Austria
Public finances: Austria has successfully reduced its general government deficit and
is working towards reaching the Medium Term Budgetary Objective, while the
annual structural adjustment needs to be strengthened. The overlapping
responsibilities between federal, regional and local levels, as well as
inconsistencies between funding and spending responsibilities, represent a
challenge that needs to be addressed. In fact this situation may put at risk
some reforms which are currently being implemented, such as the target system
for expenditure in the healthcare system. 
Financial sector: A restructuring of (partially) nationalised banks is underway, but
further action is needed and budgetary risks need to be closely monitored.
Growth and competitiveness: Further efforts are needed to facilitate competition and the
provision of services, including by removing excessive barriers for service
providers and by reviewing whether existing restrictions in regulated
professions are justified by general interest. A competition law reform is
currently being implemented but concerns regarding a too limited allocation of
resources to the federal competition authority remain. Furthermore, Austria,
despite having made available some additional budgetary resources since 2012,
has not yet taken all the measures required to ensure that the increasing
number of students get access to a high-quality, adapted training and actually
complete their studies. 
Employment and social policies: Austria has taken measures to strengthen, in the medium term, the
participation of older workers in the labour market and to limit early exit
from employment. The implementation of these measures and their effectiveness
will require close monitoring. No measures have been taken to bring forward the
alignment of the statutory retirement age for women and men. The burden on
labour in terms of effective tax and social security contribution remains high
and no action has been taken to shift taxation from low-income labour towards
tax bases less detrimental to growth. Some measures have been taken to increase
labour market participation of women. Child care and long-term care services
are being expanded to some extent, although the budget allocation does not
appear ambitious enough to meet the rising demand. Some measures were taken to
tackle labour market participation of people with migrant background, such as
the language acquisition strategy, and to improve educational outcomes,
especially of disadvantaged young people. Progress is slow and the
effectiveness of these measures needs close monitoring.
Poland
Public finances: With a view to complying with the recommendation under the
Stability and Growth Pact to reach a deficit of 3% of GDP in 2014, Poland
submitted further fiscal measures mainly relating to the pension system, the
fiscal framework, tax compliance as well as tax revenue measures. Poland did
not minimise cuts in growth enhancing expenditure as a significant part of
deficit reduction efforts came from cuts in investments in recent years. A
reform of the fiscal rules has been enacted but not yet been implemented. Tax
compliance remains a problem. Since the beginning of 2013 Poland is gradually
increasing the statutory pension age to 67 years. On the other hand, the
special farmers' social security scheme and the special pension system for
miners remain unreformed. As regards cost effectiveness in the healthcare
sector, Poland announced some measures related to the management of the
National Health Fund. Some measures to improve targeting of social policies are
also foreseen in a draft regulation on social care. Their impact, however, will
need to be assessed on the basis of final legal provisions.
Growth and competitiveness: The reform of science and higher education has been a step in the
right direction but innovation performance of Polish companies remains low. The
measures taken so far to increase business R&D investment and in-house
innovation have not led to a clear improvement and public instruments to
support innovation are not well targeted. Efficient instruments such as
existing tax incentives are hardly used and improvements or alternative tax
schemes are not being explored. Most of the measures in the energy sector are
only at the preparation stage. However, in both electricity and gas sector some
efforts have been made, with the launch of some projects in development and
upgrade of the electricity grid and the gas trading platform opened in 2012.
Concerning energy efficiency, the government has modernised public buildings.
Despite some efforts, railway investment projects are still largely delayed,
while the railway regulator has been strengthened. Poland has set a serious
reform agenda to eliminate or reduce qualification requirements for up to 230
professions and a first tranche of legislative changes already entered into
force. Poland has not yet taken action directly responding to the
recommendations relating to waste and water management as well as the
acceleration of broadband coverage.
Employment and social policies: A number of efforts have been made to reduce youth unemployment. The
government has introduced several reforms in the area of education and training.
Additional measures to improve targeting of employment policy, in particular in
relation to youth, are under preparation. A lifelong learning strategy was
adopted in September 2013. However, further efforts are needed to improve
access to apprenticeships and work-based learning. Poland took only minor steps
to reduce labour market segmentation and in-work poverty. The number of
childcare places is growing, but the offer of nurseries remains too low to
substantially increase female labour market participation. A permanent and
credible reform of farmers' social security system KRUS still needs to be
implemented.
Portugal
Public finances: Fiscal consolidation has progressed over the past three years with a
fiscal effort of about 5.1% of GDP. The general government deficit is expected
to be 5.95% of GDP in 2013 according to the Commission 2013 autumn forecast. The
government has confirmed its deficit target of 4% of GDP in 2014, underpinned
by permanent consolidation measures. Fiscal consolidation in 2013 includes
increases in personal income and property taxation, and the frontloading of
some measures envisaged in the Public Expenditure Review. Following
Constitutional Court rulings, the two bonus payments to public sector workers
and pensioners that had been cut in 2012 were reinstated in 2013. Public sector
reforms continue to strengthen public financial management, fight tax evasion,
restructure state enterprises, and reduce costs of public-private partnerships.

Financial sector: Portuguese banks have significantly improved capital ratios from
the beginning of the Economic Adjustment Programme and, with a more balanced
funding structure and available liquidity, they are in a good position to
weather short periods of uncertainty and cope with a potential further
deterioration in asset quality. The financial sector continued its deleveraging
at an elevated pace on the back of weak loan demand and reached a
loan-to-deposit ratio of 122 % at the end of the second quarter 2013. Measures
to ensure adequate funding for viable small and medium-sized companies are
being implemented, including initiatives to encourage the diversification of
financing sources. 
Growth and competitiveness: The Economic Adjustment Programme’s agenda of structural reforms is
well advanced. Important progress has been made in the areas of judiciary,
network industries, housing, services and regulated professions. Progress is
being made, although with some delays, in the reduction of barriers to doing
business via easing of administrative burdens and licensing procedures. Further
progress is still necessary to make the transport sector more sustainable and
open to competition, especially in ports. Some important measures have been
adopted to improve the liquidity conditions of the business sector, in
particular Small and Medium Enterprises (SME).
Employment and social policies: Employment has been declining markedly since the start of the
economic crisis with the employment rate falling from 73.1% in 2008 to 66.5 %
in 2012. While the labour market situation has recently improved, unemployment
remains high, particularly among the young. As part of the long-term strategy
for job creation the following reforms were implemented: collective bargaining
rules become more flexible, a significant reduction in severance payments, a reduction
of unemployment benefits to increase the incentives to return to the labour
market, changes in working time arrangements and reforms in ALMPs and VET in
order to reduce labour skills mismatches. Important measures have also been
adopted in the area of education.
Romania
Public finances: Romania’s excessive deficit procedure ended in June 2013. Fiscal
governance has been enhanced through a Fiscal Responsibility Law, the creation
of a Fiscal Council, pension reform and measures to improve the budgeting
process. However, government payment arrears and fiscal sustainability and
efficiency of the healthcare system continue to pose a problem. A further
challenge is the low rate of tax compliance, leading to significant revenue
shortfalls, in particular in the areas of VAT and labour taxation. 
Financial sector: A series of measures have been taken to strengthen the financial
sector: the bank resolution framework was enhanced and the deposit guarantee
funds strengthened, international reporting standards were introduced for the
whole banking sector, and measures to further discourage un-hedged consumer and
SME borrowing in foreign exchange were adopted. The on-going deterioration of
assets quality is being addressed by new measures. 
Growth and competitiveness: Romania is facing important competitiveness challenges: prevalence
of low- and medium-technology sectors; low public and private investment in R&D;
low productivity in industry and services and difficulties of enterprises to
grow. A National Competitiveness Strategy encompassing all of these policy
areas is under development. Restructuring
of state-owned companies, and improvement of their governance and their
performance, in particular in the transport and energy sector, has been slow.
Weak public administration remains a major challenge for growth and
competitiveness, and hampers absorption of EU funds. The action plans designed
to improve the effectiveness of public administration are slowly being
implemented. A strategy for strengthening public administration is being
prepared for the end of 2013. The success of the National Priority Action Plan
for increasing the EU Funds absorption has been very limited, though there has
been an increase of absorption rate of EU funds.
Employment and social policies: Total unemployment in Romania is relatively
low, but increasing (7.5% in September 2013). However, youth unemployment is
high (23%) whereas the overall employment rate was only 63.8% in 2012. In 2013, the Romanian authorities have been implementing a national
plan to boost youth employment. A national employment strategy 2013-2020 is
under preparation targeting youth, older workers, people working in
agriculture, women and vulnerable groups. To fight undeclared work, a law on
activities provided by daily labourers is under implementation since 2011.
Poverty reduction remains a major challenge for Romania. A social assistance
reform started in 2011 should help to increase the efficiency and effectiveness
of social assistance benefits.
Slovenia
Public finances: Slovenia is committed to correct its excessive deficit by 2015. The
fiscal framework is undergoing further changes after the constitutional
amendment setting the basis for the general government budget balance/surplus
rule adopted in May 2013. The last pension reform stabilises pension
expenditure only until 2020 and pension expenditure is projected to increase
well above the EU average after that. The government has established a working
group to consider options for further reform. Longer term sustainability
pressures also stem from the projected increase of demand for long-term care
and related expenditure, in light of ageing population. In May 2013 the
government issued plans for strengthening the community based long-term care
and the adoption of a new Act on long-term care is foreseen in the first half
of 2014. 
Financial sector: Several Slovenian banks experienced sustained pressure on their
relatively low capital buffers and their dependence on the state for capital is
a substantial threat to fiscal sustainability. In August 2013, the Bank of
Slovenia initiated an independent Asset Quality Review and Stress Testing
exercise covering almost 70% of the banking sector. The exercise is on track,
to close by end 2013. The new Bank Asset Management Company is largely ready to
receive assets to help relieving bank balance sheets. The Slovenian authorities
have made first steps to review their framework for bank regulation by end-2013
and to strengthen supervisory capacity, transparency and statistical
disclosure. 
Growth and
competitiveness: Data reported by Supreme Court
appear to confirm that certain positive trends in judicial efficiency have
continued. A framework for out-of-court financial restructuring of non-financial
companies is under preparation but the September 2013 deadline as outlined in
the CSRs has been missed. An expert working group was formed in mid-September
to incorporate out of-court restructuring within the insolvency code and new
amendments to the insolvency law were adopted by the government in October. The
Ministry of Finance has prepared a new draft law in September establishing the Slovenia
Sovereign Holding, which is envisaged as a vehicle for consolidating the state's
indirect ownership stakes and facilitating privatisation of non-core assets. However,
the September 2013 deadline for classifying state-owned assets has been missed.
The 2012 inter-ministerial process to streamline Slovenia's numerous regulated
professions has not advanced since May 2013. The newly independent Competition
Protection Agency has been strengthened with additional staff but the agency suffers
from limited financial resources which are compounded by budget cuts planned
for 2014.
Employment
and social policies: Regarding labour
market reforms,
a working group has been created and tasked with reporting on the
implementation and impact of the March 2013 reform by March 2014. A new student
work regulation is under preparation aiming to preserve flexibility while
introducing social security contributions to reduce distortions, flanked by
measures in the education sector to limit access to student status. A revision
of the minimum wage act is under consideration and negotiations with the social
partners will start. Rather limited actions have been implemented to address
skills mismatches. Slovenia prepared and implemented some new tailor-made
Active labour market policy measures, whose effectiveness will need to be
closely monitored. 
Slovakia
Public finances: Slovakia embarked on an
intensive consolidation effort to correct the excessive deficit by 2013. To the
extent that this effort also relies on one-off measures, these will need to be
replaced by more structural ones in the future, in order to ensure the
sustainability of the correction. Government investment and expenditure on
education (as percentage of GDP) have decreased in recent years and are
budgeted to fall further, a sign of the difficulties encountered in addressing
the recommendation to safeguard growth-enhancing expenditure. The 2012 reform
of the pension system increased its long-term sustainability, but the public
pension scheme is still projected to be in deficit in the long term. Planned
reforms of the healthcare system have so far not progressed. Several measures
have been taken in 2012/13 to reduce distortions in the taxation of labour
across different employment types and to improve VAT compliance. Further efforts are needed to improve tax
compliance going beyond VAT. Scope remains for a greater reliance on taxes that are less detrimental to growth, such
as property and environmental taxation.
Growth and competitiveness: Slovakia faces a challenge in terms of supporting more
knowledge-based growth and competitiveness in the medium term. Strengthening
institutions, human capital, innovative capacity and the business environment
are pre-conditions for addressing such challenge. Measures were taken during
2012/2013 to make public procurement and the judicial system more transparent, also
enhancing the independence of the Public Procurement Office. The reform process
of the judicial system, however, continues. As of 2012, the government launched
an important reform of the public administration with implementing measures
spanning over several years. Improving competition and the transparency of
price-setting mechanisms in regulated industries, notably in the energy sector,
remains to be tackled.
Employment and social policies: Slovakia has taken steps to reform active labour market policies.
However, it remains to be seen whether the implementation of the May 2013
reform will yield the expected result, in particular as regards impact
evaluation and the capacity of public employment services, and more targeted
measures for the most disadvantaged jobseekers remain needed. Availability of good
quality, affordable early childhood education and care, in particularly for
children below three years of age, remains an obstacle to female participation
in the labour market. Slovakia has yet to act on enhancing social inclusion of
marginalised communities. As regards education, Slovakia took a number of
measures, in particular the youth action plan has been launched, and amendments
to the acts on vocational education and training, higher education and
life-long learning have been adopted.
Finland
Public finances: Public finances in Finland have been overall sound and Finland has
implemented the planned fiscal consolidation measures. Nevertheless, the
worsening economic climate has made it difficult to achieve the expected results
in terms of moving towards Finland's medium-term budgetary objective. Finland
did not meet its Medium-Term Objective (MTO) of 0.5 % structural surplus in
2012 and set a new MTO at a deficit of 0.5% in 2013. However, according to the
Commission 2013 Autumn Forecast, this will not be met. In August 2013 the
Finnish government launched a structural reform programme, which complemented
and reinforced earlier commitments and measures to promote growth and reduce
the sustainability gap. Preparation of comprehensive reforms of the municipal
structure, healthcare and social services is underway. These are steps in the
right direction but they need to be further developed before they can be
assessed. Pension reform is planned for 2017. 
Growth and competitiveness: Finland is an innovation leader and its expenditure in research and
development continues to be the highest in the EU. However, it faces a number
of challenges, in particular loss of export market shares over the past years, which
are threatening the country's competitive position. The efficiency of the
Finnish research and innovation system in turning investments in R&D into
new innovative products and services is of critical importance. The government
has, among other measures, offered temporary tax incentives to support research
and investments, additional support to finance restructuring and growth in the
ICT sector, and is committed to do a comprehensive reform of research
institutes and funding. A programme has been set up to promote competition in
the product market. From 2014 onwards, Finland will lower the tax rate on
corporate income and there are proposals to cut the regulatory burden and to
reform the support system to enterprises. The success depends on the details of
the reforms, which have not been published so far. 
Employment and social policies: The Finnish labour market is generally performing well. The most
pressing challenges relate to the ageing of the population. It is important to
maintain the supply of labour in the future and to improve the sustainability
of the pension and long-term care systems. Early exit will be prevented by
reducing access to early retirement, although currently some pathways still
remain and measures are foreseen to improve the quality of working life and
thus extend the careers. An extension of the Youth Guarantee and a temporary
skills programme for young adults have been introduced in 2013. A pilot
programme to address long-term unemployment has also been launched. Social
Partners have agreed on a new framework wage agreement for next three years
(2+1), ensuring moderate wage increases in order to improve the competitiveness
of the economy. The agreement includes also a roadmap towards the agreement on
pension reform. These are concrete steps in the right direction but impacts
still remain to be seen. 
Sweden
Public finances: Sweden has a sound fiscal position, in line with the Stability and
Growth Pact, while using available fiscal space to support growth and jobs.
Sweden’s plans for the medium- and long-term will need to be clarified
including how and when it foresees to reach the national surplus target of 1%
of GDP and how it will deal with high healthcare expenditure in the longer term.

Financial sector: Some measures have been implemented over the past years which have
contributed to the stabilisation of household debt, although at a high level (around
80% of GDP). However, in the last three months household debt and credit seem
to be on an upward trend again. Recent measures introduced by the Financial Supervisory
Authority are welcome, but may need to be stepped up. No changes have been
considered so far to household property taxation or to the tax deductibility
rules for mortgage interest payments.
Constraints in housing supply, together
with debt-inducing housing taxation, tend to create upward-bias in housing
prices. On the rental market, some measures have been taken but further reforms
are needed to the rent-setting system. Several bills are planned for late 2013,
early 2014 to improve construction time and increased competition in the
construction sector. 
Growth and competitiveness: While Sweden is a top performer according to most R&D
indicators, it faces a number of challenges that could threaten the country's
competitive position in the medium-term, in particular falling business
investment in R&D and little commercialisation of innovative output. In
October 2012, Sweden adopted a new innovation strategy addressing the related
2012 CSR, which is now being implemented.
Employment and social policies: The Swedish labour market is generally performing well but there
are groups with weak attachment on the labour market, notably the youth and people
with a migrant background. The government is taking a number of measures,
including new proposals to further reform the VET system, the introduction of
work introduction agreements and the continued negotiations on “job pacts” that
aim to reduce first year’s costs for employers that hire young people and
provide continued education to those youth. These are steps in the right
direction, but concrete impacts still have to be seen. The VAT reduction for
restaurants introduced in 2011 was presented as a measure to reduce youth
unemployment. An evaluation of its effects on prices, wages and employment in
the sector is underway and should deliver preliminary results in January 2014.
United
Kingdom
Public finances: The fiscal consolidation strategy is being implemented and is
moving in the right direction, but the average pace has slowed over the period.
The budget deficit is decreasing and is expected to fall to 4.4% in 2015-16. By
contrast, the high and rising level of government debt remains a concern as it
has increased substantially between 2009 and 2012, when it reached 88.8%. 
Financial sector: The recent Funding for Lending Scheme is starting to improve access
to credit for households and corporations. The Banking Reform Bill is due to
come into force in early 2014. While the credit flow to the economy is
improving, it mostly goes to large companies and to the real estate sector.
SMEs still report difficulties in accessing bank credit. There have however
been some signs of improvements in the availability of non-bank credit. The
establishment of a government-backed Business Bank in 2014 should facilitate
easier access to finance for SMEs. 
The housing market has picked up across all
regions, albeit with large regional variations, but there are persistent
shortages in housing supply. Measures aimed at boosting demand for houses, in
particular the Help to Buy Scheme, risk creating an asset price bubble, further
harming affordability and increasing household indebtedness. No reform of
property taxation has been implemented or is planned and no measures have been
taken to broaden the VAT base. 
Growth and competitiveness: There is broad consensus that economic recovery is taking hold, with
both hard output data and forward-looking survey indicators showing strong
improvements. Net exports have started to contribute positively to growth but
this was due to a large fall in imports as opposed to a rebound in exports. The
Growth and Infrastructure Act 2013, which applies to England and Wales, became
law in April 2013. The government announced the “Investing in Britain’s future”
package, which details a pipeline of public investment in infrastructure of
over £100 billion until 2020, policy reforms to stimulate new private sector
investment in energy generation and a further roll-out and extension of the
guarantees scheme to encourage the financing of major projects. It is too early
for an assessment, but on energy capacity, the measures introduced do not seem
to provide an adequate level of certainty beyond 2020.
Employment and social policies: Since the onset of the crisis, the labour market has shown some
resilience and the employment rate, at 71.7%, is high. However, areas of
concern remain, in particular in relation to youth unemployment and the NEETs
rate. Many people, especially young workers, are in precarious part-time or
temporary jobs. Furthermore, the UK has too many low-skilled workers, and a
shortage of workers with high-quality vocational and technical skills. The
programmes introduced by the Government to tackle these issues, in particular
the Work Programme and the Youth Contract, have fallen short of the Government
targets. The UK also faces a broader productivity challenge – recent official
data show it losing ground on G7 competitors (with output per hour worked 16%
below the G7 average in 2012, and still 2% below its level in 2007). The UK has
one of the highest at-risk-of-poverty-or-social-exclusion rates for lone parent
households in the EU28. Action to improve childcare provision and affordability
has been introduced, but the roll-out of the flagship welfare reform, the
Universal Credit, is encountering several challenges. 
Euro area
The economic situation in the euro area
remains challenging given the imbalances which were built up during the 2000s,
financial market fragmentation and sustained policy uncertainty related to the
completion of the economic and monetary union. In order to create sustainable
growth and investment opportunities, further reforms are needed to improve the
adjustment capacity and the competitiveness of euro area Member States. 
Regarding the consistency of the overall
policy mix as well as the need to monitor and coordinate reforms, the Eurogroup
of September discussed the economic situation and its implications of the euro
area and Member States CSRs. Specific policy areas such as banking union and
the situation in selected euro area Member States have been discussed in the
Euro group in September and October. Nonetheless, coordination of economic
policies in the euro area needs to be further strengthened, notably by
increasing the level of commitment, ownership and implementation of economic
reforms.  
Regarding fiscal policy, all Euro Area
Member States have submitted their draft budgetary plans: this marks an
important milestone in enhancing the coordination of the fiscal policies of the
Member States. After impressive consolidation in the last three years,
consolidation is set to continue, although its pace will decelerate over time.
This is the result of frontloaded consolidation at the euro area level, which
was necessary in view of risks to debt sustainability, and consistent with a
gradual correction of excessive deficits. The pattern of consolidation across
Member States continues to be adequately differentiated according to the
fiscal space. Moreover, given the slowdown in the adjustment needs, the short
term impact on growth will diminish and there is more scope for growth-friendly
consolidation. Further improvements can be made in this area – for example, the
composition of taxation does not rely enough on base broadening and less
distortive taxation, and expenditure cuts are too focused on growth friendly
expenditure such as investment. Member States are invited to enhance further
the focus on a growth friendly fiscal policy anchored in a medium term fiscal
framework. While a lot of progress has been made on strengthening the
credibility of medium term fiscal strategies in most Euro Area Member States,
further progress can be made by a full and timely transposition of the Treaty
on Stability, Coordination and Governance (TSCG) and the directive on budgetary
frameworks by the end of 2013.  Moreover, Member States are invited to
complement their budgetary policies with structural reforms that enhance
economic growth potential in order to further enhance debt sustainability. 
Regarding financial market fragmentation, the Commission and the EIB have made proposals on the implementation
of measures aimed at financing the economy. Notably, it was proposed to expand
joint risk-sharing financial instruments between the Commission and the
European Investment Bank (EIB) to leverage private
sector and capital market investments in SMEs, with the aim of expanding the
volume of new loans to SMEs across the EU. These proposals should now be
implemented as soon as possible with the greatest possible participation by
Member States being necessary to reach critical mass. Furthermore, and in a
longer term perspective, decreasing the importance of bank intermediation
within the EU should be envisaged. The ECB has also announced
details of the comprehensive assessment of banks starting in November and
lasting 12 months and the EBA produced technical standards on non-performing
loans and forbearance. Also, the Euro group started its discussion on credible
fiscal backstops. Finally, further progress towards a Banking Union is being
made with the agreement on the Single Supervisory Mechanism (SSM), the on-going
discussions on the Banking Recovery and Resolution Directive and the Deposit
Guarantee Directive between the Council, the Parliament and the Commission and
the discussions on the Single Resolution Mechanism (SRM). Completing the
Banking Union is urgent and requires not only a Single Supervisory Mechanism
but also a Single Resolution Mechanism. In this context, it is essential that
the Bank Recovery and Resolution Directive and the Deposit Guarantee Directive
are adopted by the end of the year and the Single Resolution Mechanism is
adopted before the end of the current legislative period.
Regarding structural reforms, there is a
large divergence in performance. The euro area is moving beyond the classic
dichotomy between core and periphery which has characterised developments in
the euro crisis up to now. Programme countries have undertaken an impressive
reform agenda but need to continue their pace of reform as economic
fundamentals are not yet corrected. The Commission progress reports on Spain
and Slovenia, which face excessive imbalances, demonstrate a stepping up of
policy action by these Member States after the identification of excessive
imbalances and important measures still have to be taken to correct them. Imbalances
in other countries, be it current account deficit or surplus countries, also need
to be addressed to strengthen the economic fundamentals and the growth
potential. Competitiveness developments in big Member States such as France and
Italy have a more direct bearing on the euro area increasing the responsibility
of these Member States to implement structural reforms which will enhance the
prospects of the euro area as a whole. 
Finally, regarding the employment and
social situation in the euro area, the Commission has adopted a Communication
on the Social Dimension of the EMU. Furthermore, the stability of EMU
necessitates ambitious action by Member States to ensure proper functioning
labour markets while preventing prolonged unemployment amongst vulnerable
groups. In this regard it is essential that EU Member States step up their
efforts to make the Youth Unemployment Initiative and Youth Guarantee
operational by January 2014. 
As a conclusion, the overview of the
progress on the euro area CSRs demonstrates that action is being taken to
overcome current economic challenges. However, the reform agenda is not
finished and strengthening the path of recovery requires that Member States
take collective ownership and commit to undertake the necessary reforms at
Member State and euro area level required for the proper functioning of the EMU
in order to ensure a durable improvement in the living conditions for its
citizens.