JOINT REPORT TO THE EUROPEAN PARLIAMENT AND THE COUNCIL Hong Kong Special Administrative Region: Annual Report 2013
Date: 2014-05-08
Institutions: European Commission, High Representative of the Union
Subjects: Hong Kong, economic cooperation, economic situation, political situation













EUR-Lex - 52014JC0018 - EN











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52014JC0018

JOINT REPORT TO THE EUROPEAN PARLIAMENT AND THE COUNCIL Hong Kong Special Administrative Region: Annual Report 2013 /* JOIN/2014/018 final */









Summary
Since
the handover of Hong Kong to the People’s Republic of China in 1997, the European Union and its Member States have closely followed political and economic
developments in the Hong Kong Special Administrative Region (SAR) under the ‘one
country, two systems’ principle. In line with the commitment given to the
European Parliament in 1997, an annual report is issued on developments in Hong Kong. This is the 16th such report, covering developments in 2013.
The
EU believes that the principle of ‘one country, two systems’, enshrined in the
Sino-British Declaration and the Basic Law of Hong Kong, continued to work well
in 2013. The rights and fundamental freedoms of the people of Hong Kong
continued to be respected, the rule of law was maintained and the market economy
and business environment was preserved.
Bilateral
relations between the EU and Hong Kong continued to deepen, with a visit to Hong Kong in November by the President of the European Commission, José Manuel Barroso.
Trade and economic relations developed well and the EU and Hong Kong continued
and expanded dialogue and cooperation in many areas of mutual interest,
including financial services, customs, the environment, research, education and
culture.
The
EU attaches great importance to Hong Kong’s stability, economic prosperity and
democratic development. It believes that an accountable government contributes
to stability and prosperity and helps maintain Hong Kong’s position as a key
international business centre.
The
EU continues to support substantial progress towards the goal of the Hong Kong government
and the Standing Committee of the National People’s Congress of achieving universal
suffrage by 2017 for the election of the Chief Executive and by 2020 for the
election of the Legislative Council, in accordance with the Basic Law of the
Hong Kong SAR and the wishes of the people of Hong Kong.
Political
developments
In
his first policy address in January 2013, the Chief Executive Chun-ying Leung
set out his long-term blueprint and objectives for Hong Kong under the motto ‘seek
change, maintain stability, serve the people with pragmatism’. He promised to
uphold Hong Kong’s core values, implement the ‘one country, two systems’
principle in accordance with the Basic Law and properly manage the relationship
between Hong Kong and the mainland.
He
said that, as an SAR of China, Hong Kong received strong and steadfast support
from the central government. He believed that, capitalising on the advantages
of the ‘one country, two systems’ principle, Hong Kong had not only opened up
the vast mainland market as its economic hinterland, but also enhanced Hong
Kong’s status as an international hub.
Key
policy initiatives focused on fostering economic development by, inter alia,
strengthening economic relations with the Mainland and developing Hong Kong’s
financial services, business and professional services, international shipping,
innovation and testing; increasing land supply and offering subsidised housing
in the short to medium term; introducing measures to alleviate poverty, improve
care for the elderly, improve the position of women and ethnic minorities and further
develop labour policy, and ensuring environmental protection and conservation
by improving air quality, managing waste and encouraging the construction of green
buildings.
As
in 2012, relations between the executive and the legislature were difficult in
2013. Legislators blocked or delayed a number of initiatives. The executive and
legislature were not able to reach final agreement on matters of vital interest
for Hong Kong, such as solid waste management, particularly landfills. As in
2012, a few legislators of the Legislative Council used filibusters to achieve
their goals. The debate on the 2013 budget was particularly affected by this as
a small number of legislators proposed more than 700 amendments to the 2013
Appropriation Bill.
The
President of the Legislative Council, Jasper Tsang, suggested a structural reason
for the poor relationship between the executive and the legislature, noting
that the current governance system did not provide the executive with strong,
reliable majority support in the Council. He also noted that both the
legislative and executive branches had to respect and consider public views. The
choice of electoral system for Hong Kong’s
Chief Executive and Legislative Council should
make Hong Kong’s governance more efficient. 

Hong
 Kong maintained its commitment to integrity
and the Independent Commission Against Corruption (ICAC) works with the
community to fight corruption through effective law enforcement, education and
prevention. In 2013, the ICAC received 2 652 corruption complaints, a drop
of 33 % compared to the 3 932 complaints received in 2012, with the
number of pursuable complaints down by by 41 %. The exact reasons for this
decrease are hard to establish. The Chair of the Advisory Committee on
Corruption suggested that one factor might be greater public awareness of
corruption prevention, as a result of the ICAC’s increased efforts in
preventive education. Another factor may have been reduced public confidence in
the ICAC, following the recent controversy regarding overspending on official
entertainment by the former ICAC Commissioner. An Independent Review Committee on
ICAC's  Regulatory Systems and Procedures for Handling Official Entertainment,
Gifts and Duty Visits, appointed by the Chief Executive, and the Public
Accounts Committee of the Legislative Council dealt with the matter. The ICAC
said it would implement all the recommendations the two committees made.
Political
discussions throughout 2013 were dominated by the debate on introducing
universal suffrage for the 2017 Chief Executive election. A variety of
initiatives in this area were launched by academic groups, civil society,
business organisations and political parties. Most of them aimed to make the
future system for nominating candidates more democratic. One initiative, Occupy
Central, launched a campaign for a democratic electoral system, announcing it
would occupy Hong Kong’s central business district if the Hong Kong SAR government’s
reform proposal fell short of international standards.
Members
of the Hong Kong SAR government and the director of the Liaison Office of the
Central People’s Government in Hong Kong joined the public debate about
electoral reform. The director of the Liaison Office highlighted the legal
basis for reform in the Basic Law and the decisions of the Standing Committee
of the National People’s Congress on the methods for selecting the Chief Executive
and forming the Legislative Council. He also said the central government expected
the future electoral system to ensure that only candidates who ‘love the country
and love Hong Kong’ would be elected and appointed.
On
17 October 2013, Chief Executive announced the setting up of a Task Force on Constitutional
Development, headed by the Chief Secretary for Administration, the Secretary
for Justice and the Secretary for Constitutional and Mainland Affairs. On 4
December, the Hong Kong SAR government launched a public consultation on
electoral reform for the 2017 Chief Executive election and the 2016 Legislative
Council election. The consultation document[1]
invited members of the public to send their views to the Constitutional and
Mainland Affairs Bureau by 3 May 2014.
The
launch of the public consultation gave more structure and direction to the
debate on electoral reform. Views diverged greatly, especially on the procedure
for nominating candidates. The positions taken on this matter by the Hong Kong
SAR government and the central government on the one hand, and pan-democracy
parties and sympathisers on the other, continued to be mutually exclusive. In
2015, a compromise will need to be found on this key topic, and other important
issues, to ensure that electoral reform can be concluded in time for the 2016
Legislative Council election and the 2017 Chief Executive election, vital for
the efficient governance of Hong Kong.
The
maintenance of Hong Kong’s high standards on the rule of law and the
independence of the judiciary continued to be a subject of public debate. At
the ceremonial 2013 opening of the legal year, the Chief Justice of the Court
of Final Appeal, the Honourable Geoffrey Ma Tao-li, stressed the need for integrity
of the law and the importance of the constitutional role of judges and
transparency in the judicial process. Chief Justice Ma expressed strong
confidence in the continuing independence of the judiciary in Hong Kong.
Two
rulings of the Court of Final Appeal in 2013 bear out the Chief Justice’s view
that high standards for the rule of law in Hong Kong continue to be upheld. One
confirmed the right of transsexual people who had completed sex-reassignment
surgery to marry and declared that an existing legal impediment to this was unconstitutional.
The other declared that the government’s policy of limiting Comprehensive Social
Security Assistance to those who have lived in Hong Kong for at least seven
years was unconstitutional. Some legal provisions, such as provisions for legal
aid for low-income individuals, could be improved.
European
firms based in Hong Kong continued to cite the rule of law and the high quality
of the judiciary as one of the key reasons for setting up their China or Asia headquarters there. Based on its rule-of-law credentials, the Secretary for Justice,
Mr Rimsky Yuen, continued to promote Hong Kong as a regional hub for
international arbitration and legal services. The China Maritime Arbitration
Commission announced it would set up a branch office in Hong Kong, and arrangements
are being made to facilitate arbitration hearings in Hong Kong by the Permanent
Court of Arbitration, with headquarters in the Hague.
To
better meet the changing needs of society, the Secretary for Justice,  in his
capacity as the Chairman of the Law Reform Commission,  also undertook to study
possible law reform in the areas of archives law, access to information and
third-party funding for arbitration.
Hong
 Kong residents continued to exercise the
right of freedom of speech and association. The annual
4 June and 1 July marches took place in 2013, as did two other large political
demonstrations. The Chair of the Equal Opportunities Commission addressed the
annual gay pride parade, and numerous smaller demonstrations on political or
socio-economic issues, relating to Hong Kong and the mainland, were held throughout
the year. The great majority of demonstrations were peaceful and in general the
police acted proportionately.
The media, including the digital media, continued to be free and
to give voice to a range of views. Nevertheless, there was a growing
impression, recorded in the annual report of the Hong Kong Journalists
Association, that both the print and the electronic media exercised
self-censorship, especially when covering affairs concerning mainland China. Based on 2013 trends, the 2014 Press Freedom Index from Reporters without Borders downgraded
 Hong Kong by three places to 61st place, citing self-censorship and a growing
influence exerted by the central government’s Liaison Office. The continued functioning
of the ‘one country, two systems’ principle, and Hong Kong’s reputation as a
territory where the business environment benefits from free flows of
information, will continue to depend on media freedom. Statements by the Chief
Executive in support of media freedom were therefore very welcome.
Hong
 Kong’s relations with the mainland drew much
public debate and media attention. Occasionally, the fast-growing economic and
people-to-people links, including tourism, caused social disquiet in Hong Kong and posed policy problems for the authorities. These included issues such as increased
demand from people from the mainland for housing and places in primary and
secondary schools (especially close to the border between Hong Kong and the mainland),
jobs for mainland jobseekers, the increased pressure on public transport due to
fast rising numbers of mainland Chinese tourists (from 35 million in 2012 to 41
million in 2013[2]),
and rising demand for certain consumer goods, including baby milk formula,
which occasionally caused scarcity in Hong Kong.
The
government introduced various measures to safeguard the interests of Hong Kong residents and stabilise the market against fast rising prices and shortages. Such
measures, however, did not halt the rise in the number of expressions of anti-mainland
sentiment in the media (including on social media) and the emergence of a few
radical anti-mainland groups.
Economic
Developments
Hong
 Kong remains one of the world’s leading
financial centres and trading hubs. The four main industries in Hong Kong (financial
services, trading and logistics, tourism, and professional and producer
services) have been the driving force of Hong Kong’s economic growth, providing
the impetus for growth in other sectors and creating employment. Riding on China’s economic boom, the city plays an important role in trade and investment with the mainland.
 Hong Kong has been able to prosper on the back of its core values — the rule
of law, the free flow of information, transparency and its stance against
corruption.
In
2013, Hong Kong performed well economically and continued to score highly on
many of the global surveys measuring economic freedom and competitiveness.[3] 
Despite its economic achievements, Hong Kong also faces new competitive challenges
from the economic liberalisation of China and the rise of other economic
centres in the region. Its economy recorded steady growth of 2.9 % in real
terms in 2013. Domestic demand was the key growth driver, while the performance
of the external sector remained modest due to weak global economic conditions. Employment
levels were healthy, with the unemployment rate hovering around 3.3 % for
most of the year. Consumer prices rose by 4.3 %[4].
With
the support of the central government, Hong Kong continued to be the largest
offshore renminbi (RMB) centre in the world.  It hosted the largest pool of renminbi
deposits outside Mainland China, at more than RMB 1 trillion[5] as at
the end of 2013. It continued to maintain its competitive edge over other
financial centres in terms of market infrastructure and liquidity, with a good
range of RMB investment products. The "CNH Hong Kong Interbank Offered
Rate fixing (CNH HIBOR fixing)" was officially launched on 24 June 2013,
setting benchmark rates for offshore lending and facilitating the creation of
more hedging options. The mutual recognition of fund products between mainland China and Hong Kong is seen as the next step in establishing Hong Kong as the Asian hub for fund
management. Regulators on the mainland and in Hong Kong have laid out plans for
the upcoming launch of the scheme, which would allow international managers to
sell fund products on the mainland and allow mainland funds to be sold in Hong Kong.  
At
the same time, China increased the pace of renminbi internationalisation, with London, Paris, Frankfurt, Singapore and Taipei all now able to develop as hubs for offshore
RMB business. Hong Kong was quick to forge alliances with other offshore
markets. In December 2013, the Hong Kong and Singapore stock exchanges signed a
cooperation pact on developing renminbi investment products. Nevertheless,
external competition is expected to increase as new market players emerge. 
China’s
economic reforms created opportunities and challenges for Hong Kong. Beijing’s plan to create a pilot free trade zone in Shanghai sparked strong reactions in Hong Kong. The policy measures needed to allow Shanghai’s new zone to pilot wider
convertibility of the RMB and freer, market-oriented interest rates attracted
much speculation from the media and business. Some fear that liberalisation in
these areas would threaten Hong Kong’s position as Asia’s leading financial
centre. The consensus in the business community was that Hong Kong needed to
sharpen its edge in order to maintain its competitiveness.  
Economic
ties between Hong Kong and mainland China were further strengthened by
expanding the scope of services covered by their free trade agreement. On 29
August 2013, Hong Kong and Mainland China signed Supplement X to the Closer
Economic Partnership Arrangement (CEPA). Both parties have publicly stated that
the scope and depth of liberalisation under the CEPA goes beyond any FTA that Mainland
China has concluded with other partners. In total there are now 403
liberalisation measures for trade in services under the CEPA. The central government
has pledged to achieve liberalisation of trade in services between the mainland
and Hong Kong through the CEPA by late 2015, i.e. before the end of the 12th
Five-Year Plan. The Guangdong provincial government launched its proposal to
bring Guangdong, Hong Kong and Macao together in a free trade zone, aiming for
liberalisation of trade in services between Guangdong province and Hong Kong by the end of 2014. 
The
governments of Hong Kong and Guangdong have jointly invested in large
infrastructure projects, creating new transport links between Hong Kong and the
Pearl River Delta. Construction of the Guangzhou-Shenzhen-Hong Kong Express
Rail Link and the Hong Kong- Zhuhai-Macao Bridge, started in 2010 and is making
steady progress.
In
response to calls from the local business community, Hong Kong has become more
active in regional and plurilateral initiatives to maintain its competitiveness
as a regional trading/services hub. Hong Kong initially planned to join the
Association of Southeast Asian Nations (ASEAN) - China free trade area but
eventually accepted ASEAN’s proposal to negotiate a bilateral agreement. In May
2013, Hong Kong announced that it would take part in negotiations for the Trade
in Services Agreement (TiSA) involving 23 World Trade Organisation members. In
addition to the CEPA, Hong Kong has signed free trade agreements with New Zealand, the European Free Trade Association and Chile.
Domestically,
addressing the overheated property market was a key priority for the government
in 2013. A series of measures were rolled out to dampen demand, including
sizeable stamp duties on property transactions and tightening up mortgage
lending rules. The government also abolished a 14-year-old application list mechanism
and resumed the lead in selling government sites in the annual Land Sale
Programme through government-initiated land sale. House prices stabilised
noticeably as a result and the volume of sales plunged by 37.7 %[6] in
2013. Faced with the risk of an asset bubble in an extremely low interest rate
environment, the government repeatedly voiced its determination to keep these
stringent fiscal measures in place, despite pressure from the real estate
sector. Chief Executive Leung also pledged to increase the housing supply to
tackle the soaring house prices that were pushing home ownership out of reach
of the general public and fuelling social discontent. The government announced
a supply-led housing strategy with a target of creating 470 000 new
housing units over the coming decade, of which 60 % would be public
housing.
The
government stepped up its efforts to address the widening income and wealth gaps.
A major move was the publication, for the first time, of an official poverty
line for Hong Kong in September 2013 which was set at half of median monthly
household income.  Analysis of the situation in 2012 showed that before
intervention, there were 541 000 households with a total of 1 312 000
people falling below the line and the poverty rate was 19.6 %. After intervention,
around one million people lived below the poverty line, representing a poverty
rate of 15.2 %. The publication of the poverty line has raised
expectations that the government would put more effective measures in place to
alleviate poverty.
The
government launched a four-month consultation on Hong Kong’s population policy
in October 2013, with a view to forging a consensus and formulating sustainable
policy measures. It is estimated that the labour force will start declining
from 2018. Alleviating poverty and helping the ageing population will both be
key long term fiscal challenges. The government will need to manage a complex
and controversial policy agenda in the coming years, including: increasing productivity;
attracting talent; importing labour; assimilating new immigrants; social
welfare; elderly care; fiscal sustainability; managing economic growth while
maintaining a balanced and harmonious society.
Hong
 Kong’s business community was vocal on the issue
of manpower shortage, calling for relaxation of the labour import regime. The
Hong Kong General Chamber of Commerce claimed that there were up to 110 000
unfilled vacancies (as of July 2013), close to the historic high of 122 000
in 1989. Construction, retail trade, catering and care consistently suffered from
labour shortages. The issue may generate heated debates between labour unions,
legislators and business leaders in the future. Against a backdrop of
favourable labour market conditions, wages increased considerably in 2013. Lower-skilled
workers also received significant wage increases, reflecting the generally
tight labour market conditions. The statutory minimum wage was increased from HKD
28 to HKD 30 in May 2013.
The
government rolled out two important environmental policy plans in 2013: ‘A clean
air plan for Hong Kong’ and ‘Sustainable use of resources 2013–22’. It also replaced
its air pollution index with a new health-based air quality index providing people
in Hong Kong with information on the short-term health risk based on real time
readings of air pollution levels. With a target of reducing solid waste by 40 %
within ten years, the action plan on resources includes a possible
waste-charging scheme, expanding the existing landfills and building a new incinerator,
encouraging more recycling and waste reduction at source. The public is
increasingly concerned by and interested in issues relating to the environment.
Implementing these government plans would require a strong political
commitment, public engagement, support from the community at large and
cross-border cooperation within the Pearl River Delta, particularly for clean
air initiatives.  
European
Union — Hong Kong Relations and Cooperation
In
2013, bilateral relations and cooperation between the European Union and Hong Kong continued to develop and strengthen. Hong Kong remains an important player in the
region and a key conduit for two-way trade and investment flows between the EU
and mainland China.
The
EU retained its position as Hong Kong’s second largest trading partner after mainland
  China[7].
Bilateral trade in goods between the EU and Hong Kong recorded growth of 3.9 %
to reach EUR 46 billion in  2013, with the EU enjoying a growing trade surplus[8].
The
EU was the largest source of foreign companies in Hong Kong, with a total
of 1 921 companies, comprising 452 regional headquarters, 725 regional
offices and 744 local offices (as of June 2013)[9].
EU businesses are active in a wide variety of sectors, mainly financial and
business services, trading, logistics, construction and retailing. EU companies
are key players in Hong Kong’s banking, insurance and securities
sectors. As home to one of the biggest European business communities in Asia, it continues to attract a considerable number of European citizens to live and work there.
Investment
relations between the EU and Hong Kong have strengthened significantly in
recent years. EU foreign direct investment (FDI) outflows to Hong Kong
quadrupled from EUR 3.7 billion in 2009 to EUR 15 billion in 2012,[10]
reflecting EU business’ sustained interest in Hong Kong as an investment hub.
FDI inflows from Hong Kong to the EU recorded an annual average amount of EUR 5.3
billion over the same period.  FDI stock held by the EU in Hong Kong rose from
€90 billion in 2009 to €133 billion in 2012.  Conversely, FDI stock held by Hong Kong in the EU almost doubled from €27.5 billion to €50 billion during the same
period.
The
EU business community prizes Hong Kong’s respect for the rule of law, its high
standards of transparency, its freedom of information and of the media, its preferential
access to the mainland Chinese market and the availability of high-quality
service providers. The EU considers these factors essential for Hong Kong’s continued prosperity and for maintaining its strength as a regional and
international business centre.
The
seventh structured dialogue meeting between the European Union and the Hong
Kong SAR government took place in Hong Kong on 14 November 2013. The structured
dialogue is an effective platform that allows the EU and Hong Kong to discuss
issues of mutual interest and identify areas for future cooperation. At the
2013 meeting, both sides agreed to strengthen collaboration and exchanges in relation
to education, innovation, the environment and competition law. The EU
appreciated Hong Kong’s efforts to update its financial services regulations and
its active engagement against money laundering activities and the financing of
terrorism. The EU expressed its wish to engage Hong Kong in technical
discussions about the automatic exchange of tax information taking into account international
developments in the field of cooperation between tax authorities and to see
swift progress on updating the air services agreements between the EU Member
States and Hong Kong so that their bilateral air services agreements comply
with the EU designation clause. The
EU also expressed the wish to intensify regulatory dialogue in the area of
investment funds.
2013
saw a number of high-level visits from the European Union institutions to the
Hong Kong SAR. The most high-profile visit was that of European Commission
President José Manuel Barroso in November, during which he met with the Hong
Kong Chief Executive and the President of the Legislative Council. President
Barroso spoke at an event marking the 20th anniversary of the European Union
Office to Hong Kong and Macao, underlining the long-standing ties between the
EU and Hong Kong and the EU’s commitment at the highest level to continuing to develop
this relationship. Another high-level visit was that of the Chair of the
European Banking Authority, Andrea Enria, in March. Regular visits by senior
officials have ensured exchanges in areas of common interest including European
Union external relations, financial services regulation, macroeconomic issues,
trade and investment, product and food safety and the environment and
competition. Four delegations of the European Parliament also visited Hong Kong and helped to further improve bilateral relations and cooperation with the
Legislative Council.
European
business in Hong Kong is primarily represented by the European Chamber of
Commerce, which carried out a number of activities to facilitate dialogue with
the government and enhanced the profile of EU business and industry in 2013.
Some of the Chamber’s activities during the year were carried out in
partnership with the Hong Kong EU Academic Programme (EUAP) which was launched
on 1 September 2012. EUAP comprises a consortium led by the Hong Kong Baptist University, including the Chinese University of Hong Kong, the University of Hong Kong and Lingnan University. It promotes academic research, develops
outreach activities to enhance the visibility of the EU and strengthens
academic cooperation with EU higher education institutions.
To
further strengthen ties with Hong Kong, diplomatic missions from the EU and its
 Member States continued to pursue public diplomacy efforts to raise the EU’s
profile in Hong Kong, increase knowledge of EU policies and provide more information
about them. These policies include trade and regulatory policies, energy and
climate change, financial services regulation, customs matters, gender equality
policies, intercultural dialogue, academic matters and the EU’s role in the
world. A key vehicle for this has been the fruitful series of meetings between
the EU Heads of Missions, senior members of the Hong Kong Government and
Legislative Council and other leading figures.
The
EU diplomatic missions also worked together to enhance people-to-people
contacts and promote academic exchanges, with joint activities such as the EU
Higher Education Fair, the EU Film Festival and the ‘Model EU’ initiative.
The
EU will continue to nurture its relationship with Hong Kong, increase economic,
trade and investment links, further cooperation with business and civil society
and promote mobility and exchanges with the people of Hong Kong. Key priorities
for 2014 include: financial services regulation and taxation; customs matters; intellectual
property rights enforcement; further developing education, research, trade and
investment ties.
[1] ‘Consultation Document on the Methods for Selecting the Chief
Executive in 2017 and for Forming the
Legislative Council in 2016.’ This
document relates to forming the Legislative Council in 2016, not in 2020.
[2] Source: Hong Kong Tourism Board.
[3] Hong
Kong was ranked as the world’s second most business-friendly place after Singapore in the Doing Business 2014 report by the World Bank Group. According to UNCTAD’s
World Investment Report 2013, Hong Kong was the third largest FDI recipient in
the world (US$ 75 billion), and the third largest source of FDI in Asia (US$ 84 billion) in 2012. 
[4] All economic
indicators pertaining to the Hong Kong economy are official statistics released
by the Hong Kong Census and Statistics Department.
[5] According to the Hong Kong Monetary
Authority, total RMB deposits and outstanding certificates of RMB deposits
amounted to CNH 1 053 billion at the end of 2013. Total RMB deposits
and outstanding certificates of RMB deposit as at the end of 2012 stood at CNH 720
billion.
[6] The number of
agreements for purchase of residential property declined to 50 676 in 2013
from 81 333 in 2012, according to the Hong Kong SAR government.
[7] The ranking is
based on the trade statistics released by the Hong Kong Census and Statistics
Department.
[8] Source:  Eurostat:
Comext database.
[9] Source: Hong Kong Census and Statistics Department
[10] FDI data retrieved
from Eurostat on 16 December 2013.