COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP 2016 European Semester: Assessment of progress on structural reforms, prevention and correction of macroeconomic imbalances, and results of in-depth reviews under Regulation (EU) No 1176/2011 {SWD(2016) 71 to SWD(2016) 96}
Date: 2016-03-08
Institutions: European Commission, Secretariat-General
Subjects: EU Member State, EU investment, economic disparity, economic growth, economic recovery, employment policy, euro area, fiscal policy, macroeconomics, structural adjustment

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   EN 

   EUROPEAN COMMISSION  Strasbourg, 8.3.2016  COM(2016) 95 final   COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP   2016 European Semester: Assessment of progress on structural reforms,  prevention and correction of macroeconomic imbalances, and results of in-depth reviews under Regulation (EU) No 1176/2011   {SWD(2016) 71 to SWD(2016) 96}   
 
 
1. 

INTRODUCTION 

The European Semester is an important vehicle for delivering reforms at  national and 
EU  level.  It  provides  focus  and  coordination  to  the  efforts  of  all  Member  States  on 
the  Commission 
macroeconomic,  budgetary  and  structural  reforms.  Following 
towards  Completing  Economic  and  Monetary  Union1,  
Communication  on  steps 
the  2016  European  Semester  takes  forward  the  streamlined  process  initiated  in  2015.  
It integrates the euro area and national dimensions, and puts a stronger focus on employment, 
social performance, investment and competitiveness. It promotes convergence and recognises 
the  support  to  reforms  from  European  funds,  in  particular  the  European  Structural  and 
Investment Funds, and technical assistance.  
In  the  Annual  Growth  Survey  20162,  the  Commission  put  emphasis  on  the  need  to 
consolidate  the  recovery,  set  it  on  a  sustainable  path  and  to  accelerate  the  process  of 
upward  convergence.  Euro  area  challenges  and  priorities  were  also  spelled  out  in  the 
recommendation  on  the  economic  policy  of  the  euro  area.3  Pursuing  upward  economic  and 
social convergence is essential to tackle the disparities between and within Member States. In 
this light, the Commission invited Member States to take advantage of the ongoing moderate 
recovery  to  focus  policy  efforts  on  the  three  following  priorities:  re-launching  investment, 
pursuing structural reforms to modernise EU economies and responsible fiscal policies.  

The country reports under the 2016 European semester have been issued at a time when 
it  is  crucial  to  nurture  the  economic  recovery  and  ensure  that  it  is  supported  by  the 
necessary  measures  and  policies  to  unlock  further  growth.  The  reports  demonstrate  that 
Member States are making efforts in this regard. While some reforms may take years to bear 
fruit,  over  time  structural  reforms  will  provide  further  basis  for  sustainable  growth,  a 
competitive  economy,  jobs  and  investment.  Given  the  speed  of  potential  change  in 
macroeconomic conditions in a globalised economy, it is urgent to make the best use of the 
current factors conducive to growth and accelerate the pace of reforms to foster the European 
Union's competitiveness. Economic and social policies will also need to cater for the recent 
inflow  of  migrants  and  refugees,  in  particular  to  provide  for  their  immediate  needs  and 
integration in the labour market. 

The  close  involvement  of  national  Parliaments,  social  partners,  civil  society  and  other 
stakeholders in the design and implementation of reforms is key to successful outcomes. 
It  is  necessary  to  strengthen  effectiveness  and  ownership  of  reform  efforts  in  the  Member 
States.  This  is  reflected  in  the  guidance  that  the  Commission  has  provided  to  the  Member 
States  on  the  process  of  preparation  of  the  National  Reform  Programmes.  The  Commission 
has also developed closer contacts with the social partners at European and national levels to 
discuss the main milestones of the European Semester. The commitment of civil society to the 
implementation of the Europe 2020 strategy should also be built upon further.  
The country reports produced for 26 Member States4 give a view of the overall economic 
and  social  developments  in  each  Member  State.  The  reports  assess  the  progress  made  in 
addressing  the  issues  identified  in  the  2015  country-specific  recommendations  and  –  for  18 
Member  States  –  include  the  in-depth  review  under  the  macroeconomic  imbalances 
procedure. On  the  basis  of  this  analysis, the  Commission  proposes  to  update the  status  of  a 
number of Member States under that procedure. The reports also cover areas of  

1 COM (2015) 600.  
2 COM (2015) 690. 
3 Council document 14860/1/15 REV 1, as endorsed by the European Council of 18-19 February 2016. 
4 Apart from Greece and Cyprus, which are subject to macro-economic assistance programmes. 

2 

 
 
                                                            
macroeconomic importance, such as climate and energy policies, that are subject to separate 
policy processes5. 

The analysis also takes stock of the budgetary situation of the Member States. It is based 
on  the  Commission's  latest  economic  forecast6  and  builds  on  the  Commission's  opinions  on 
the  draft  2016  budgetary  plans  for  euro  area  Member  States,  issued  in  November  2015,  
as  well  as  on  the  guidance7  that  the  Commission  adopted  last  year  on  how  to  ensure  that  
the common fiscal framework is supportive of the EU's jobs and growth agenda. 

The  country  reports  analyse  in  greater  detail  the  barriers  to  investment  identified  by  
the Commission last year and presented together with the Annual Growth Survey 2016. 
It is necessary for Member States to work closely with each other and with the EU institutions 
to address these barriers in the context of the European Semester and to deliver on the third 
pillar of the Investment Plan for Europe8. 

The country reports serve as a starting point for dialogue with the Member States on the 
economic  and  social  challenges  they  face.  These  dialogues  together  with  the  euro  area 
recommendation should feed into the preparation of the National Reform Programmes to be 
presented  in  April.  In  principle,  the  Commission  will  not  issue  recommendations  
on issues that are not identified as challenges in the country reports, and will propose a limited 
number of country-specific recommendations for each Member State. These will differentiate 
as appropriate on the basis of the severity of the challenges, as also reflected in the country-
specific situation under the macroeconomic imbalances procedure.  

2.  

ECONOMIC CONTEXT 

The  European  economy  is  pursuing  its  moderate  recovery  while  external  risks  have 
increased. With GDP growth in 2015 at about only 3%, the world economy has been slowing 
down  and  its  recovery  path  is  surrounded  by  numerous  risks.9  While  the  largest  advanced 
economies are experiencing continuing recoveries or maturing cycles, many emerging market 
economies are facing a difficult outlook. Growth in China is expected to slow down further, 
affecting  mostly  other emerging  and developing economies and having an impact on global 
capital flows.  

The European economy has so far managed to weather the risks, but the impact of a less 
benign external environment is increasingly being felt. The renewed drop in energy prices 
should  continue  to  support  households'  purchasing  power.  The  arrival  of  unprecedented 
numbers  of  refugees  and  migrants  has  led  to  additional  public  expenditure  due  to  increased 
reception  and  other  refugee-related  measures.  Monetary  conditions  are  set  to  remain  highly 
accommodative  and  fiscal  policy  is  expected  to  support  the  recovery  this  year.  However, 
negative  spillovers  from  slow  growth  outside  the  EU  could  be  larger  than  the  direct  trade 
effect.  Low  commodities  prices  could  also  be  a  risk  if  they  lead  to  instability  in  the  world 
economy.  Financial  market  volatility  has  markedly  increased  recently.  In  particular,  bank 
stocks  have  been  experiencing  pronounced  price  falls  and  sovereign  risk  premiums  have 
widened for some Member States.  

5 COM (2015) 572, State of the Energy Union 2015; COM (2015) 576, Climate action progress report. 
6 European Commission, European Economic Forecast, Winter 2016. 
7 COM (2015) 12. 
8 COM (2014) 903. 
9 European Commission, European Economic Forecast, Winter 2016. 

3 

 
 
 
 
                                                            
The  recovery  in  the  EU  remains  slow  and  fragile,  highlighting  the  need  to  step  up 
structural  reforms,  encourage  investment  and  build  a  more  competitive  economy.  
The  recovery  is  weak  both  in  historical  perspective  and  compared  to  other  advanced 
economies. EU economic growth is forecast to be 1.9% of GDP this year and to rise to 2%  
in  2017.  Unemployment  rates  are  set  to  continue  falling  from  9.5%  in  2015  to  9%  in  2016  
in the EU, and the decline should be more pronounced in Member States where labour market 
reforms have been implemented. Private consumption is expected to remain the main driver 
of  growth,  supported  by  improving  labour  markets  and  increasing  real  disposable  incomes.  
As  the  weakening  of  world  demand  reduces  the  prospects  for  an  export-led  recovery,  
a rebound in investment from the current low levels will be essential to sustain a more broad-
based economic recovery and reverse the downward trend in potential growth.  

3. PROGRESS WITH COUNTRY-SPECIFIC RECOMMENDATIONS 

In  the  context  of  overall  macroeconomic  stabilisation,  the  Member  States  made  some 
progress  in  addressing  the  issues  identified  in  the  country-specific  recommendations 
issued in 2015. The 2016 country reports reveal that year-on-year progress stayed at a similar 
level.  Looked  at  in  a  longer  time  frame,  it  is  clear  that  the  implementation  of  key  reforms 
takes  time  to  materialise.  This  can  be  due  to  both  the  complexity  of  the  reforms  to  be 
undertaken, such as the reform of labour and product markets, pensions systems and banking 
sectors,  and  national  election  calendars.  In  a  number  of  Member  States  (Denmark,  Estonia, 
Ireland, Spain, Croatia, Poland, Portugal and Slovakia), national parliamentary or presidential 
elections  took  place  in  2015  or  early  2016.  Both  the  number  and  the  scope  of  the  country-
specific  recommendations  issued  in  2014  and  2015  changed  as  well.  The  Commission  will 
present its full assessment when proposing new country-specific recommendations in May. 

Overall, Europe is on its way to meet part of the Europe 2020 strategy targets. Member 
States  are  well  on their way  to  reaching  the  climate  change  and  energy  targets,  as  most  are 
likely to reach their targets on emissions reduction, renewable energy and energy efficiency 
by 2020. According to the most recent available data, the EU is also on the right track on the 
education  targets  as  17  Member  States  have  already  reached  their  targets  on  early  school 
leaving  and  12  have  reached  their  targets  on  tertiary  education  attainment.  While  the 
employment target will still prove difficult to reach for many Member States, the employment 
situation has improved in almost all Member States. Towards the end of 2015, employment 
was up by 1.1% reaching the pre-crisis level rate of 70.5%. The employment rate is growing 
faster  for  women,  although  the  gender  gap  is  still  significant.  Further  efforts  are  needed  to 
narrow the gap in the employment rate between men and women. Research and development 
expenditure  as  a  percentage  of  GDP  also  increased  in  about  half  of  the  Member  States  but  
the EU target still seems difficult to reach. Particular problems persist in reaching the poverty 
target as the number of people at risk of poverty or social exclusion in Europe has increased 
due to the economic crisis. However, the most recent trends are more positive as the number 
of people at risk of poverty or social exclusion seems to have decreased in more than half of 
the Member States. This trend is expected to have continued in 2015 in line with the improved 
employment conditions. Appendix 2 provides an overview of all Europe 2020 strategy targets.  

4 

 
 
 
 
 
 
 
 
 
4. ADDRESSING MACROECONOMIC IMBALANCES  

The EU and the euro area Member States are making progress with rebalancing their 
economies.  Some  of  the  imbalances  are  the  legacy  of  the  crisis,  but  many  were  in  place 
before it started and contributed to the deep impact of the crisis. Putting the EU economies on 
the  path  of  sustainable  rebalancing  is  important  not  only  for  individual  Member  States,  
but also for the EU and the euro area as a whole, with a view to achieving a better resistance 
to future shocks and move towards more sustainable, cohesive and higher growth. 

The  in-depth  reviews  provide  a  comprehensive  analysis  of  the  imbalances  experienced 
by the Member States. The in-depth reviews differentiate between the adjustments driven by 
cyclical  factors  and  those  resulting  from  structural  reforms  and  confirm  that  only  the  latter 
provide a foundation for sustainable growth. Given the importance of trade and financial links 
between  EU  countries,  the  analysis  also  looks  into  the  cross-border  implications  of 
rebalancing,  pointing  to  the  need  for  it  to  take  place  both  in  countries  with  large  stocks  of 
external liabilities and in those with surpluses. It remains urgent to reduce debt levels. While, 
in some cases, the reduction of public or private debt is progressing, their elevated levels can 
make economies still vulnerable to potential shocks. In other cases, low but rising debt levels 
can signal growing vulnerabilities. 

4.1. Rebalancing in the EU and the euro area 

The  adjustment  of  the  existing  imbalances  is  hindered  by  several  factors.  Subdued 
nominal  growth  and  very  low  levels  of  inflation  hamper  the  deleveraging  process.  The 
weakening of world demand reduces the prospects for an export-led recovery. Persisting high 
unemployment in some Member States may reduce potential output growth, also because of 
loss of skills and employability.  

The  correction  of  external  imbalances  is  progressing.  In  countries  with  high  external 
liabilities,  the  large  current  account  deficits  of  the  pre-crisis  period  have  been  considerably 
reduced  or  have  moved  to  surplus.  Helped  by  external  factors,  cost  competitiveness  has 
generally  improved.  In  some  Member  States,  there  is  evidence  of  structural  adjustment  in 
terms  of  resources  shifting  to  the  tradable  sector.  The  current  account  of  the  euro  area  is 
currently  posting  one  of  the  world's  largest  surpluses.  The  surplus  of  a  few  Member  States 
stands  out  in  terms  of  size  and  indicates  that  both  internal  demand  and  investment  are 
subdued.  

Vulnerabilities  associated  with  elevated  levels  of  debt  remain  a  source  of  concern.  
In  most  countries,  the  process  of  balance  sheet  repair  is  progressing,  with  deleveraging 
ongoing in the household and corporate sectors. However, this deleveraging is often linked to 
reduced spending. In some countries, the level of private debt relative to GDP has gone down 
due to robust growth recovery. The stock of liabilities remains at an historically high level in a 
number of Member States. In countries where deleveraging pressures weigh on the recovery 
and reduce prospects for investment and consumption, there is an additional need to focus on 
creating conditions for improving productivity and competitiveness to contain the impact of 
deleveraging on growth and employment.  

The  banking  sector  has  increased  its  capitalisation,  but  pressures  remain,  linked  to 
deteriorated  credit  and  asset  quality  and  low  profitability.  Banks  have  made  substantial 
progress  in  adjusting  their  balance  sheets  and  banking  institutions  are  generally  well 
capitalised and liquid. At the same time, due to a combination of several factors, the banking 
sector in some countries is still recording a high share of non-performing loans and bad asset 
quality. If unaddressed, these weaknesses may result in subdued credit growth and suboptimal 

5 

 
 
 
credit allocation. Moreover, the low growth and low interest rate environment has an impact 
on profits in the banking sector. 

Structural  reforms  are  needed  to  facilitate  the  reallocation  of  resources  across  firms, 
sectors  and  regions,  to 
increase  productivity,  competitiveness  and  sustainable 
employment.  Member  States  need  to  improve  the  reallocation  of  available  resources,  by 
shifting  them  to  the  tradable  sectors  and  the  most  productive  firms  operating  within  each 
sector  of  the  economy.  This  can  be  helped  by  reforms  opening  the  product  and  services 
markets,  which  would  also  boost  the  EU  internal  market,  and  by  structural  reforms  to 
eliminate barriers to the free circulation of goods and services.  

4.2. Implementing the macroeconomic imbalances procedure  

The  Commission  has  improved  the  transparency  of  the  macroeconomic  imbalances 
procedure. The assessments in the country reports reflect the commitments contained in the 
Commission Communication on steps towards completing Economic and Monetary Union10, 
notably enhanced transparency in the implementation of the procedure. The findings of the in-
depth  reviews  have  been  more  effectively  presented  in  the  country  reports  by  means  of 
summary  tables,  describing  the  sources  of  imbalances  and  illustrating  the  main  findings 
regarding  the  development  of  relevant  economic  variables,  the  policy  response  and  the 
outstanding  policy  gaps.  The  Commission  services  will  also  issue  a  compendium  that  will 
bring together in a single document relevant information on the macroeconomic imbalances 
procedure. 

The  Commission  is  streamlining  and  stabilising  the  categories  of  macroeconomic 
imbalances.  To  ensure  more  effective  and  simpler  communication,  the  macroeconomic 
imbalances  categories  have  this  year  been  streamlined  from  the  existing  six  to  four:  no 
imbalance,  imbalances,  excessive  imbalances,  and  excessive  imbalances  with  corrective 
action. These categories will be kept stable in the coming years. Specific monitoring will be 
activated  in  case  of  imbalances  or  excessive  imbalances  and  modulated  according  to  the 
gravity  of  underlying  challenges.  The  country-specific  recommendations  will  be  tailored  to 
reflect  the  nature  of  imbalances,  in  the  light  of  reform  measures  proposed  by  the  Member 
States in the National Reform Programmes.  

Table 1: Categorisation of imbalances in the macroeconomic imbalances procedure 

Previous categories  

Streamlined categories  

No imbalances 

No imbalances 

Imbalances, which require policy action and monitoring 

Imbalances,  which  require  decisive  policy  action  and 
monitoring 

Imbalances 

Imbalances,  which  require  decisive  policy  action  and 
specific monitoring 

Excessive  imbalances,  which  require  decisive  policy 
action and specific monitoring 

Excessive imbalances 

Excessive imbalances with corrective action* 

Excessive imbalances with corrective action 

*The 'excessive imbalances with corrective action' category implies the opening of the excessive imbalance procedure under 
Regulation (EU) No 1176/2011. 

10 COM (2015) 600. 

6 

 
 
 
                                                            
Spillovers  to  other  countries  and  systemic  issues  have  also  been  taken  into  account  in  
the in-depth reviews. The identification and assessment of macroeconomic imbalances takes 
into account the fact that a coordinated approach at the euro area level is warranted to address 
imbalances, while supporting the recovery. The macroeconomic imbalances procedure aims at 
preventing  and  correcting  imbalances  that  could  be  harmful  for  the  country  itself,  the  euro 
area or the EU. In its Alert Mechanism Report 201611 published alongside the Annual Growth 
Survey 2016, the Commission considered that 18 Member States should be subject to an in-
depth review to assess in greater detail the severity of possible imbalances. 

Fewer  Member  States  than  last  year  are  considered  to  have  imbalances.  Of  the  18 
Member States retained for further analysis, the in-depth reviews have found that six Member 
States are experiencing no imbalances, seven Member States are experiencing imbalances and 
five  Member  States  are  experiencing  excessive  imbalances.  For  Croatia  and  Portugal,  the 
Commission will review its assessment in May, taking into account the level of ambition of 
their National Reform Programmes (NRPs). Appendix 3 summarises the findings from the in-
depth reviews by Member State. 

Table 2: Outcome of the 2016 in-depth reviews (streamlined categories)  

No imbalances  

Imbalances*  

BE, EE, HU, AT, RO, UK 

DE, IE, ES, NL, SI, FI, SE 

Excessive imbalances*  

BG, FR, HR, IT, PT 

*Both  the  'imbalances'  and 'excessive  imbalances'  categories  entail  specific  monitoring,  to  be  modulated  depending  on  the 
severity of the challenges.  

Under  the  streamlined  categories  of  the  macroeconomic  imbalances  procedure, 
surveillance  will  include  specific  monitoring  for  all  Member  States  concerned  by 
imbalances  and  excessive  imbalances.  Specific  monitoring  should  ensure  the  enhanced 
surveillance  of  the  policy  response  to  the  imbalances  identified,  through  an  intensified 
dialogue  with  the  national  authorities,  expert  missions  and  regular  progress  reports  to  be 
discussed  with  all  Member  States.  Such  contacts  will  also  help  the  monitoring  of  the 
implementation  of  the  country-specific  recommendations  in  the  Member  States  concerned.  
The monitoring may vary depending on the exact nature of the imbalance. As a rule, countries 
experiencing  excessive  imbalances  will  be  subject  to  tighter  monitoring.  Countries  in  the 
category  'excessive  imbalances  with  corrective  action'  will  be  subject  to  the  excessive 
imbalance procedure (EIP), which entails policy recommendations to remedy the imbalances 
and follow-up through a corrective action plan. 

11 COM (2015) 691. 

7 

 
 
 
 
 
 
 
 
 
                                                            
5. REFORMS BY THE MEMBER STATES  

There is progress in the reforms in most of the Member States. These reform efforts need 
to be sustained and reinforced in order to prepare economies for future shocks and build up 
competitiveness.  The  strength  and  sustainability  of  the  recovery  depends  on  the  speed  and 
effectiveness of the adoption and implementation of the reforms. EU funds, in particular the 
European  Structural  and  Investment  Funds,  can  and  should  be  used  to  facilitate  reforms. 
While last year's country-specific recommendations identified issues that were at the heart of 
economic  and  social  policy  discussions  in  the  Member  States,  in  several  cases  the  country 
reports point to new developments, such as the influx of migrants and refugees. 

Qualitative  aspects  of  the  reforms  are  important  for  success.  An  efficient  allocation  of 
resources  towards  more  productive  firms  would  increase  productivity  and  growth  rates. 
Furthermore,  it  would  increase  investment  by  more  efficient  firms,  strengthening  the  long-
term growth potential of Member States’ economies. Reforms in product, services and labour 
markets take time to deliver results but they trigger this reallocation of resources, activating 
investment and modernising the productive base of the EU economy. 

The reforms at Member State level are needed to complement those undertaken at EU 
level.  There have  been a number of  policy reforms and tools agreed at the EU level,  which 
aim  at  providing  a  better  business  environment  and  a  more  certain  and  stable  regulatory 
environment, such as the single market strategy, the digital single market, the energy union, 
the capital markets union, the circular economy package and the better regulation agenda. The 
section  below  describes  progress  by  Member  States  in  advancing  reforms  in  the  areas 
identified in last year's country-specific recommendations.  

5.1 

Re-launching investment  

Improving  investment  conditions  requires  action  on  several  fronts.  There  is  a  need  to 
attract more private financing for investments in the real economy and to ensure good 
quality  public  investment.  In  line  with  the  Investment  Plan  for  Europe,  for  investment  to 
start  contributing  to  growth  and  employment  creation  more  strongly,  it  is  necessary  to 
improve  risk  financing,  to  create  a  better  environment  for  investment  and  to  develop  better 
structured  and  more  visible  investment  projects.  The  Commission  already  implemented  a 
number of reforms at European level to spur investment such as the proposal under Solvency 
II.  Commission  services  also  provided  a  detailed  identification  of  the  main  investment 
challenges  in  each  Member  State12.  These  include  regulatory  and  administrative  barriers, 
public procurement, taxation, judicial systems, access to finance and insolvency frameworks, 
education and skills, and sectoral regulations. In addition, the Commission identified the need 
to  have  access  to  increased  and  more  diversified  sources of  funding  and  the  need  to  extend 
priorities  beyond  traditional  infrastructure  to  include  human  capital  and  related  social 
investment. 

12 SWD (2015) 400. 

8 

 
 
 
 
 
 
 
 
                                                            
Investment  has  so  far  failed  to  emerge  as  a  strong  driver  of  the  recovery.13  Member 
States  are  encouraged  to  ensure  an  environment  that  is  conducive  to  investment  –  by 
removing  bottlenecks,  providing  greater  regulatory  predictability,  reinforcing  the  single 
market, identifying a stable pipeline of projects and ensuring coordination and planning by all 
levels  of  the  administration.  For  most  Member  States,  the  negative  impact  of  the  financial 
crisis  on  investment  is  still  being  felt  while  some  have  experienced  shifts  in  the  relative 
balance between public investment and private or business investment. Ireland is an example 
of  a  Member  State  where,  after  a  major  and  difficult  adjustment  process,  strong  private 
investment is playing a central role in the economic recovery. 

EU funds have continued to play a key role in a number of Member States. In Bulgaria, 
the  Czech  Republic,  Estonia,  Croatia,  Latvia,  Lithuania,  Hungary,  Malta,  Poland,  Portugal, 
Romania,  Slovenia  and  Slovakia,  EU  funds  account  for  a  large  share  of  investment.  The 
Commission  is  working  closely  with  the  Member  States  to  improve  how  the  funds  are 
managed and invested. Absorption rates can be increased through strengthened administrative 
capacity of national and regional administrations and technical assistance, contributing also to 
an optimal combination of the different EU funds. 

In  the  2014-2020  multiannual  financial  framework,  the  European  Structural  and 
Investment Funds are closely linked to the objectives of the Europe 2020 strategy and to 
the  macroeconomic  challenges  identified  in  the  country-specific  recommendations. 
Beyond  absorption  levels,  it  is  important  to  make  sure  that  EU  funds  are  put  to  the  most 
effective  use  in  terms  of  addressing  the  economic  and  social  challenges  in  Member  States. 
The  delayed  programming  of  some  of  the  funds  calls  for  extra  efforts  now  to  ensure  a 
speedier  and  smooth  disbursement.  Some  Member  States  still  need  to  fulfil  ex-ante 
conditionalities, otherwise the Commission may suspend interim payments to the priorities of 
the  programmes  concerned.  Financing  under  the  European  Fund  for  Strategic  Investments, 
Horizon  2020,  the  Connecting  Europe  Facility  (including  over  EUR  4.1  billion  for  the 
transport  sector  alone)  and  other  directly  managed  EU  funds  is  additional  to  the  European 
Structural  and  Investment  Funds,  and  these  opportunities  should  optimally  be  combined. 
Under the European Structural and Investment Funds, more than EUR 450 billion are made 
available  to  Member  States  between  2014  and  2020  to  finance  smart  and  inclusive  growth, 
competitiveness and cohesion.  

Despite  some  progress,  barriers  to  investment  persist  in  some  key  sectors  in  many 
Member  States.  This  is  particularly  the  case  for  services,  network  industries  and 
construction.  The  relatively  favourable  business  environment  in  Member  States  such  as 
Estonia  and  the  United Kingdom  acts  as  an  incentive to  investment.  However,  a  number  of 
Member  States  are  characterised  by  barriers  to  investment  in  the  form  of  administrative 
burden,  bureaucracy,  inefficient  public  administration,  legal  uncertainty  or  changing 
legislative  environments,  and  a  lack  of  transparency,  which  hampers  the  fight  against 
corruption. Cumbersome or lengthy procedures in large scale projects have been identified in 
several Member States.  These  can create entry or establishment barriers, for  example  in the 
retail  sector  and  professional  services.  Difficult  access  to  finance  also  acts  as  a  brake  on 
investment in some Member States. 

13 European Commission, European Economic Forecast, Winter 2016. 

9 

 
 
 
 
                                                            
Restoring lending to the real economy 

The financial sector has continued to ease credit conditions. Despite reduced credit growth 
in countries where deleveraging is ongoing, positive developments are taking place in credit 
supply.  According  to  the  January  2016  European  Central  Bank  lending  survey14,  banks 
reported a continued net easing of credit standards on loans to enterprises and to households 
for house purchase, and on consumer credit. Competition remained the main factor driving the 
easing in banks’ credit standards on loans to enterprises. Banks continued to ease terms and 
conditions for new loans across all loan categories, particularly for enterprises. The progress 
being made in strengthening banks is also supportive of easier credit conditions. 

There  has  been  some  progress  in  improving  access  to  finance.  Several  Members  States 
have put in place or stepped up initiatives to improve access to finance. Hungary launched the 
Funding  for  Growth  Scheme.  Several  initiatives  to  improve  access  to  finance  for  small  and 
medium-sized enterprises, in particular by tapping EU funds, are also underway. For example, 
Portugal has made available resources for investments in equity and venture capital through 
European  structural  funds  and  national  funds.  Malta  is  combining  local  and  EU  funds  to 
provide SMEs with tax credits, grants or financial guarantees.  

Insolvency frameworks have been improved in a number of Member States. Croatia has 
revised  the  corporate  and  personal  insolvency  legislation.  Ireland  introduced  changes  to  the 
insolvency  framework  aiming  at  increasing  the  use  of  personal  insolvency  and  bankruptcy 
schemes.  Spain  introduced  a  new  personal  insolvency  framework  and  made  corporate 
insolvency procedures and out-of-court procedures more flexible. 

5.2 

Pursuing structural reforms to modernise economies 

In  the  2016  Annual  Growth  Survey,  the  Commission  placed  emphasis  on  effective 
coordination between Member States, aiming at higher productivity and upward convergence; 
the need to balance flexibility and security in labour market policies; and the need for more 
integrated and competitive product and services markets. 

Employment and social policy  

Employment is now growing in both the EU and the euro area. Unemployment, including 
youth  unemployment,  is  decreasing.  At  the  same  time,  long-term  unemployment  was  still 
growing in 2015 compared to 2014 even though, in the course of the year, a gradual reduction 
has been observed. Long-term unemployment concerns 10.5 million people and accounts for 
48%  of  total  unemployment.  Youth  unemployment  stands  at  20%,  meaning  that  four  and  a 
half million young people are unemployed. In some Member States, many young people are 
leaving  the  country.  In  Greece,  Spain,  Croatia  and  Italy,  youth  unemployment  amounts  to 
around  40%  or  more.  In  addition,  a  number  of  Member  States  have  high  levels  of  young 
people who are not in employment, education or training, reaching more than 20% in Bulgaria 
and Italy. 

14 European Central Bank, The euro area bank lending survey, Fourth quarter of 2015, January 2016. 

10 

 
 
 
 
 
 
                                                            
In order to strengthen the EU's competitiveness position, it remains important that, over 
the  medium  term,  real  wages  continue  to  move  in  line  with  productivity.  A  number  of 
countries  have  made  efforts  to  enhance  the  responsiveness  of  their  labour  markets  and  to 
facilitate  the  growth  of  firms.  This  included  the  removal  of  some  thresholds  rules  for  firms 
and  the  improvement  of  the  predictability  of  the  outcomes  of  labour  disputes,  which  can 
facilitate  initial  hiring  by  firms.  While  there  has  been  overall  an  alignment  of  wage 
developments with productivity levels in the EU, in a few Member States progress in this area 
has  been  limited.  In  line  with  2015  country-specific  recommendations,  inter-sectorial  wage 
moderation agreements were concluded in Finland for 2014-2015 and in Spain for 2015-2017. 
New  mechanisms  to  set  the  minimum  wage  were  introduced  in  Ireland  and  a  national 
mandatory minimum wage was introduced in Germany. 

Further  efforts  are  needed  to  tackle  the  segmentation  of  labour  markets.  Reducing  the 
regulatory gap between open-ended and non-standard contracts can foster transitions towards  

open-ended contracts and promote the creation of stable employment, incentivising employers 
and employees to invest in skills and lifelong learning. Reforms along these lines continued in 
2015,  in  line  with  country-specific  recommendations,  especially  in  countries  experiencing 
considerable  labour  market  duality  such  as  Italy  and  Poland.  As  part  of  a  comprehensive 
labour  market  reform,  Italy  has  simplified  contractual  arrangements  and  labour  law 
procedures and has reduced the scope for reinstatement following unfair dismissals. 

The  Youth  Guarantee,  now  in  its  third  year  of  implementation,  is  delivering  results.  
The situation of young people in the EU is improving, and efforts towards better school-to-
work transitions have been stepped up, including by early activation and outreach to those not 
in employment, education or training. Improved outreach, better tailored public employment 
services’  support to  young people, improved  design of active labour  market instruments  for 
young  people  and  a  stronger  focus  on  quality  apprenticeships  are  among  the  main  results. 
Reforms  in  the  context  of  the  Youth  Guarantee  accelerated,  particularly  in  Member  States 
facing significant challenges, such as Italy and Portugal, and in Member States receiving EU 
financial support with which innovative, large scale measures and structural reforms could be 
tackled. 

While progress has been made in bringing back to the labour market the unemployed, 
further  reform  of  active  labour  market  policies  is  needed.  A  number  of  Member  States 
such  as  Spain,  France, Latvia and Finland  have launched new active measures targeting the 
long-term  unemployed.  Italy  is  starting  to  reform  the  governance  of  active  labour  market 
policies  and  strengthen  the  links  with  passive  policies.  However,  some  other  challenges 
remain  to  be  addressed,  such  as  insufficient  coordination  between  employment  and  social 
services,  lack  of  involvement  and  partnerships  with  employers,  comparatively  low 
participation rates in active labour market policy measures and their insufficient funding. In 
addition, some countries do not  provide individualised approaches  based on profiling, skills 
matching or intensive counselling. The Recommendation on the integration of the long-term 
unemployed  into  the  labour  market  adopted  by  the  Council  in  December  201515  offers  the 
Member States the guidance on how to step up efforts to tackle long-term unemployment.  

Poverty requires a comprehensive policy response. Steps have been or are being taken in a 
number of Member States with regard to social assistance and, in particular, adequacy and/or  

15 Council document 14361/15. 

11 

 
 
 
                                                            
coverage  of  minimum  income.  Given  that  income  support  should  be  combined  with  good 
labour  market  matching,  various  financial  and  non-financial  incentives  are  also  being 
introduced  to  facilitate  a  return  to  the  labour  market.  These  include  the  design  of 
unemployment benefit systems in Denmark and Italy and in-work benefits in Malta. In order 
to strike a balance between the objectives of reducing poverty and increasing labour market 
participation,  some  Member  States,  such  as  the  United  Kingdom,  are  trying  to  streamline 
various  benefits  into  broader  schemes.  Concerns  about  the  effects  of  increasing  numbers  of 
children affected by poverty have seen some Member States step up the corresponding social 
benefits. There has  been limited progress  on the  inclusion of Roma in  the relevant Member 
States. 

The  successful  integration  of  migrants  and  refugees  in  some  Member  States  requires 
particular attention. The high inflow of migrants and refugees over the last year is a major 
challenge for many Member States and the EU. However, it is also an opportunity, especially 
for  Member  States  undergoing  demographic  changes.  Experience  with  earlier  flows  of 
refugees  suggests  that  they  may  face  greater  difficulties  to  integrate  into  the  labour  market 
than average third-country nationals. Successful integration requires, among other things, an 
early  assessment  of  skills,  a  quick  recognition  of  qualifications  and  appropriate  language 
training  in  order  to  provide  early  and  effective  access  to  the  labour  market,  healthcare  and 
housing. Given the high share of children and young people (about 26%), education systems 
in  particular  need  to  adapt  quickly  and  offer  tailored  programmes  for  basic  and  linguistic 
skills. Moreover, the successful integration of women deserves particular attention. 

The performance of education and training systems remains a concern in many Member 
States. Although the share of early school-leavers has come down on average to 11.1%, nine 
Member  States  are  still  above  the  Europe  2020  strategy  headline  target  of  10%.  These 
structural  weaknesses  put  Europe's  growth  potential  at  risk.  Many  Member  States  are 
developing  skills  strategies  and  implementing  structural  reform  of  their  education  systems. 
The Czech Republic has adopted a higher education reform and Bulgaria has adopted the Pre-
school  and  School  Education  Act,  which  provides  a  consolidated  legal  framework  for 
improving  the  quality  and  equity  of  education  at  primary  and  secondary  levels.  Italy  has 
introduced a school reform increasing school autonomy, introducing merit-based components 
for teachers' salaries and improving the system of teacher recruitment. 

The  tax  burden  on  labour  should  be  further  lowered.  Many  Member  States  have  taken 
measures  to  reduce  labour  taxation.  For  example,  Estonia  and  France  took  steps  to  reduce 
labour  taxation  on  low  income  earners.  Moreover,  labour  taxation  reforms  have  been 
implemented  in  some  Member  States  characterised  by  high  unemployment  rates,  such  as 
Belgium, Spain and Italy. However, the tax wedge on labour, in particular on low incomes, 
remains high in several Member States and has even increased in some countries.  

Business environment and network industries 

transparency, 

light  and  predictable  regulations  contribute 

A  more  business  and  employment  friendly  regulatory  environment  will  encourage 
private  investment.  Improving  public  administration  practices,  eliminating  corruption, 
introducing 
increasing 
competitiveness,  growth  and  job  creation.  Progress  can  be  reported  in  this  sense.  Italy  took 
steps  to  reform  further  and  accelerate  insolvency  foreclosure  procedures.  France  has 
continued  pursuing  an  ambitious  simplification  agenda  comprising  by  now  more  than  600 
measures,  of  which  about  one  third  have  been  implemented  so  far.  Croatia  made  some 
progress  in  improving  the  pre-insolvency  and  insolvency  framework  for  corporate  entities. 
Malta  has  introduced  a  number  of  new  technological  and  procedural  systems  to  reduce 
bureaucracy  and  delays  in  civil  courts.  In  Latvia,  there  has  been  substantial  progress  on 

to 

12 

 
 
mediation  and  arbitration  frameworks.  The  quality,  independence  and  efficiency  of  justice 
systems  remain  a  challenge  in  certain  Member  States,  even  if  justice  reforms  made  some 
progress in Italy, Latvia and Slovenia. 

There is further scope for cutting red tape, strengthening both administrative efficiency 
and  regulatory  quality.  Delays  in  licensing  procedures  remain  significant  and  over  two 
thirds  of  Member  States  still  charge  start-ups  over  the  limit  of  EUR  100  suggested  in  the 
Small  Business  Act.  Structural  reforms  are  often  delayed  by  the  lack  of  implementation 
capacity  and  unstable  institutional  structures.  The  efficiency  of  public  investment  is  often 
hampered  by  shortages  related  to  project  appraisal,  procurement,  implementation  and  weak 
coordination  between  different  levels  of  government.  The  provision  of  advanced  and  well-
integrated e-government services for businesses remains a challenge in many Member States.  

Public procurement remains an area requiring further improvement. For some Member 
States,  shortcomings  in public  procurement  remain  one  of  the  main  sources  of  irregularities 
detected in audits of the use of the European Structural and Investment Funds. These act as a 
deterrent to investment and the correct functioning of the single market. Public procurement is 
also an area where there are corruption concerns.  

Investments  in  the  energy  and  transport  networks  contribute  to  integrated  and  better 
functioning markets, improved security of supply, and are essential for the transition to 
a low-carbon economy. The completion of electricity and gas interconnectors between Spain 
and France will, for example, be crucial for ensuring the security of supply and improving the 
functioning of energy markets. The investments in electricity transmission capacity as well as 
gas interconnections with and between the Baltic states are also progressing with the aim of 
integrating these Member States into the European networks and energy markets. The recent 
completion of the electricity connections between the three Baltic states and Poland, Finland 
and  Sweden  brings  the  interconnection  ratio  to  around  25%,  with  further  investments  in 
interconnections between the Baltic states on-going. Spain has established a fund to improve 
land access to maritime ports. 

The  modernisation  of  the  EU  economy  requires  the  elimination  of  the  infrastructure 
deficits in  digital communication networks.  The expected  increase in the demand  of high 
quality communication networks should not be delayed by late supply-side reactions. In some 
Member  States,  despite  significant  efforts  to  improve  the  coverage  of  new  generation 
communications infrastructure networks, it will be difficult to meet the Digital Agenda target 
on the coverage of next generation networks of 30 Mbps or more for all by 2020.  

Reforms in product and services markets 

The number of restrictions in services sectors remains high in many EU Member States. 
As reflected in the latest Commission estimates accompanying the publication of the Single 
Market  Strategy16,  regulatory  restrictions  have  a  proven  detrimental  impact  on  investment, 
growth and employment.  

The track record of the European Semester in this area proves that reforms pay off. The 
OECD17 has estimated that structural reforms introduced in Italy in 2012 should increase GDP 
by 1.5 percentage points five years after their introduction. Many of these reforms responded 
to  recommendations  issued  to  Italy  in  the  context  of  the  Semester.  Other  reforms  have 

16 COM (2015) 550. 
17 OECD, Italy. Structural Reforms: Impact on Growth and Employment. February 2015. 

13 

 
 
                                                            
delivered visible results faster. In response to a recommendation issued to Spain in 2012, the 
introduction of express licences for the opening of commercial establishments led to an extra 
7,000 establishments being opened in the first half of 2013. 

Country  reports  show  positive  but  still  slow  progress  in  reforming  services  markets  in 
many Member States. The contribution of the business services sector to the productivity of 
manufacturing and other services sectors is essential for the modernisation of EU economies. 
The  level  and  number  of  restrictions  prevailing  in  the  markets  of  professional  business 
services, especially in engineering, accounting, architecture and legal services, warrant special 
attention.  

Reforms in professional services can bring tangible results but progress is particularly 
slow.  Following  a  2011  recommendation,  Slovenia  adopted  in  2012  a  programme  aimed  at 
deregulating professions. Further recommendations were issued in subsequent  years, leading 
to  the  full  deregulation  or  the  simplification  of  the  access  to  professions  in  several  sectors 
(construction,  retail,  tourism)  at  present.  Poland  started  in  2012  a  gradual  and  extensive 
process  of  reforms  of  regulated  professions.  The  reform  covered  248  professions  and,  for 
most  of  them,  the  existing  barriers  have  been  partially  abolished,  while  for  70  of  them 
restrictions have been completely abolished. Poland adopted the third and last tranche of this 
deregulation  reform  in  2015.  Following  a  2014  country-specific  recommendation  on  legal 
services,  Ireland  had  made  significant  progress  by  the  end  of  2015,  adopting  legislation  for 
the opening of those markets. 

The  construction  sector  can  provide  an  important  contribution  to  consolidating  the 
recovery but reforms are needed. The recovery of the sector after the crisis is proving to be 
slow and difficult and reforms would contribute to reactivating it, although the unsustainable 
pre-crisis levels should not be taken as a reference. In 2015, the Commission carried out an 
in-depth  review  of  barriers  in  the  construction  sector,  which  confirmed  a  wide  diversity  of 
treatment across Member States.  

Country-specific  recommendations  on  the  construction  sector  were  issued  to  eliminate 
regulatory restrictions in Denmark, Germany, Lithuania, Poland, Slovakia and Sweden 
in  recent  years.  So  far,  progress  is  limited.  As  of  June  2015,  a  new  Construction  Law 
simplified  the  administrative  obligations  regarding  construction  in  Poland.  However,  it 
addressed  only  a  limited  number  of  issues.  In  Sweden,  a  commission  of  inquiry  has  been 
assigned  to  investigate  and  come  up  with  proposals  on  how  to  improve  competition  in  the 
housing  construction  and  building  materials  sectors.  In  Slovakia,  an  amendment  to  the 
Construction Act was adopted in September 2015 to streamline the administrative procedures 
for obtaining land-use and construction permits.  

Stepping  up  reforms  to  reduce  regulatory  barriers  in  the  retail  sector  would  have  a 
considerably  positive  impact.  Increased  competitive  pressures  following  a  reduction  in 
barriers  would  improve  market  structure  and  investment  dynamics,  leading  to  the  entry  of 
more  efficient  and  innovative  firms.  Consumers  would  benefit  from  lower  prices,  more 
variety, innovation and higher quality, thereby stimulating consumption. 

Overall,  Member  States  have  made  some  progress  in  improving  the  regulatory 
environment  in  the  retail  sector,  but  still  more  effort  is  needed.  In  particular,  there  is 
scope to improve establishment conditions. Finland has abolished the law regulating opening 
hours and some steps have also been taken to improve establishment conditions in the retail 
sector through amendments to land use planning. In Spain, the 2014 reform in the retail sector 
set the grounds for improved establishment and operational conditions. However, the benefits 

14 

 
of  this  reform  can  only  be  reaped  in  practice  when  the  autonomous  communities  adopt  the 
necessary implementing acts.  

Country reports also highlight the need for further reforms aimed at reducing barriers 
in  product  markets.  Italy  has  undertaken  reforms  in  recent  years  to  reduce  market 
restrictions  and  increase  competition  through  a  liberalisation  package  in  2012  and  a  more 
recent  privatisation  plan  and  competition  law.  It  is  expected  that  increased  competition  in 
energy and telecommunications sectors and the privatisation plan could boost GDP by almost 
0.2%  in  2020.  Some  Member  States  still  show  a  comparatively  high  level  of  regulatory 
burden for product markets in sectors such as electricity, gas, telecommunications, post, rail 
and road transport.  

Reforms  by  Member  State  to  improve  efficiency  in  the  use  of  resources  and  to  bring 
forward  a  much  more  circular  economy  will  contribute  towards  stimulating 
investments.  Several  Member  States  are  taking  steps  in  this  direction.  Circular  economy 
programmes  have  been  put  in  place  in  Belgium  and  the  Netherlands.  Portugal  adopted  a 
Commitment  for  Green  Growth,  setting  out  an  extensive  range  of  measures  promoting  the 
transition to a more resource efficient, green and low-carbon economy. 

Innovation  

Innovation  is  a  driver  for  modernising  the  economy,  attracts  investment  and  supports 
economic  growth.  Creating  conditions  for  innovation  requires  a  combination  of  financial 
incentives and a stronger link between business and academia. In order to stimulate research, 
development  and  innovation,  an  increasing  number  of  Member  States  emphasise  indirect 
support measures, such as tax incentives. For example, Poland introduced new research and 
development tax incentives at the beginning of 2016. There are also new tax exemptions for 
funds on the sale of stocks of qualifying companies, which is expected to provide a stimulus 
to  equity  financing  for  innovative  businesses.  Estonia  launched  initiatives  to  promote 
innovation in public procurement and provided funding for several technology centres and an 
innovation  voucher  system,  enabling  small  and  medium-sized  enterprises  to  cooperate  with 
universities  and  competence  centres.  However,  the  link  between  academia,  research  and 
business  innovation  needs  to  be  strengthened  in  many  Member  States,  particularly  in  those 
where  overall  innovation  performance  recently  stagnated  or  even  decreased,  and  in  others 
where  a  significant  gap  to  the  performance  of  the  innovation  leaders  still  remains,  despite 
some recent progress. 

5.3 

Responsible fiscal policies 

Although  headline  budget  deficits  have  been  substantially  reduced  in  recent  years  and 
are  projected  to  continue  decreasing,  several  Member  States  are  falling  short  of  the 
requirements  under  the  Stability  and  Growth  Pact.  The  debt-to-GDP  ratio  is  forecast  to 
decrease gradually from the peak reached in 2014. The deficit reduction over the period 2015 
to 2017 is mostly driven by the economic recovery and lower interest expenditure, while other 
items of revenue and expenditure are overall expansionary. As a result, the structural deficit is 
expected  to  increase  slightly  in  the  euro  area  and  to  stabilise  in  the  EU  after  years  of 
continuous  improvement.  Fiscal  policies  should  be  assessed  against  the  twin  objectives  of 
long-term sustainability of public finances and the need to support the moderate recovery.  

15 

 
 
 
 
Growth  could  be  supported  by  making  the  composition  of  revenue  and  expenditure 
more  growth-friendly.  More  progress  needs  to  be  made  on  reducing  the  tax  burden  on 
labour.  Building  on  the  progress  made  on  fighting  tax  evasion  and  improving  tax 
administration,  further  efforts  are  needed  to  make  tax  systems  fairer  and  more  effective,  to 
address disincentives to employment creation, to prioritise growth-friendly expenditure and to 
preserve  productive  public  investment.  In  this  regard,  the  projected  further  reduction  in  the 
ratio  of  public  investment  to  GDP  over  the  period  2015  to  2017  shows  that  more  effort  is 
needed. 

Box 1. Update on surveillance under the Stability and Growth Pact 

In its assessment of the 2016 draft budgetary plans for euro area Member States, published in November 2015, 
the Commission indicated that for four countries (Spain, Italy, Lithuania and Austria18), these plans posed a risk 
of  non-compliance  with  the  provisions  of  the  Stability  and  Growth  Pact.  Seven  countries  (Belgium,  Ireland, 
France,  Latvia,  Malta,  Slovenia  and  Finland)  were  found  to  be  broadly  compliant,  while  Germany,  Estonia, 
Luxembourg,  the  Netherlands  and  Slovakia  were  compliant  with  the  requirements  for  2016.  Portugal  did  not 
submit its draft budgetary plan by the deadline but only on 22 January 2016, due to national elections in October 
2015 and the time needed to form a new government.  

Following the finalisation of the 2016 budgets for most Member States, the Commission's 2016 winter forecast 
provides  a  basis  for  assessing  how  Member  States  have  taken  into  account  the  Commission  opinions  on  their 
draft budgetary plans and have acted upon their commitments made in the Eurogroup.  

  Spain is projected to have missed its headline deficit target for 2015 and is projected to miss a timely 

and durable correction by 2016, while the recommended fiscal effort is not being delivered.  

  Regarding  Belgium,  Finland  and  Italy,  the  Commission  continues  its  close  monitoring  of  compliance 
with  the  debt  criterion  and  stresses  the  importance  of  continued  strong  implementation  of  compliance 
with the recommended structural adjustments under the Pact. The Commission will reassess the situation 
in  May  on  the  basis  of  the  outturn  data  for  2015,  the  forthcoming  Stability  Programmes  and  the 
Commission's 2016 spring forecast. 

  Portugal submitted its Draft Budgetary Plan on 22 January 2016. In its opinion on the Draft Budgetary 
Plan,  the  Commission  considered  that  the  government's  plans  are  at  risk  of  non-compliance  with  the 
provisions of  the  Stability  and Growth Pact  and  invited  the  authorities  to  take  the  necessary measures 
within the national budgetary process to ensure that the 2016 budget will be compliant with the Stability 
and Growth Pact. The Commission will reassess the situation in May on the basis of Portugal's nation al 
reform programme. 

The Commission will monitor the budgetary developments of all Member States in the context of the European 
Semester, based on the National Reform Programmes and Stability or Convergence Programmes to be submitted 
by mid-April, and will provide its recommendations in May, together with other procedural steps under the Pact 
as needed. 

The  country  reports  include  also  an  assessment  of  the  Member  States'  response  to 
recommendations  calling  for  strengthening  the  institutional  and  longer  term  dimension  of 
their fiscal policy.  

Fiscal institutions and governance, and long term sustainability of public finances 

Many Member States took steps to reinforce various aspects of their fiscal frameworks. 
Progress  is  being  made  towards  stronger  national  fiscal  frameworks,  which  are  key  to 
achieving and maintaining appropriate fiscal policies. Bulgaria adopted legislation specifying 
the conditions to guide the correction of slippages, Croatia has made some efforts to improve 

18 In the case of Austria, the draft budgetary plan was found to be broadly compliant after correcting for the 

planned additional costs related to the exceptional inflow of refugees and migrants. 

16 

 
 
 
                                                            
the  accuracy  of  budgetary  planning  and  to  tighten  expenditure  control,  Portugal  further 
reformed the Budget Framework Law and Slovenia adopted implementing legislation for the 
constitutional budget balance rule. Furthermore, independent fiscal institutions monitoring the 
application of national fiscal rules and fiscal plans have been established or reinforced in most 
Member States. To date, the Czech Republic and Poland remain the only Member States that 
have not legislated for the establishment of fiscal councils.  

The Commission is reviewing the transposition of the rules set out in the so-called Fiscal 
Compact,19  which  are  designed  to  strengthen  the  consistency  between  the  national  and 
European fiscal frameworks and enhance their ownership in Member States. The Commission 
is  engaging  in  consultations  with  Contracting  Parties,  with  a  view  to  giving  them  the 
opportunity to submit their observations on the Commission's findings, as foreseen in Article 
8(1) of the Treaty on Stability, Coordination and Governance in the Economic and Monetary 
Union, prior to the adoption of its report in 2016. 

The projected increase in age-related expenditure could pose risks for the sustainability 
of public finances in the medium to long run. The population is rapidly ageing in the EU 
and  in  the  euro  area  in  particular.  The  working  age  population  is  expected  to  decline  at  an 
annual  average  rate  of  0.4%  over  the  coming  four  decades.  Ageing  has  a  direct  impact  on 
public  finances  through  spending  on  pensions,  health  care  and  long  term  care.  Unless 
corrective  measures  are  taken,  more  than  half  of  the  Member  States  face  either  medium  or 
high  sustainability  challenges.20  Good  progress  has  been  made  in  many  countries  and  long 
term sustainability challenges have decreased since the beginning of the crisis, notably due to 
implemented  pension  reforms  and  recent  fiscal  consolidation.  However,  there  remain 
significant challenges to be faced in terms of projected developments of age-related spending. 

Progress  in  reforming  pension  systems  varies  among  the  Member  States.  The  pension 
system  was  identified  as  a  longer  term  challenge  in  a  number  of  Member  States  (Belgium, 
Bulgaria,  Croatia,  Lithuania,  Luxembourg,  Malta,  Austria,  Poland,  Portugal,  Romania  and 
Slovenia)  in  last  year's  country-specific  recommendations.  Belgium  adopted  the  last  part  of 
the pension reform that was agreed in 2014, notably an increase in the statutory retirement age 
to 66 years in 2025 and 67 in 2030. In Finland, the Parliament adopted a pension reform in 
November 2015. In particular, the earliest eligibility age for old age pension will be gradually 
raised to 65 by 2025. As of 2027, the earliest eligibility for old age pension will be linked to 
life expectancy so that the time spent working in relation to the time spent in retirement will 
remain at the 2025 level. In France, the agreement in October 2015 between social partners is 
expected to improve the financial situation of the complementary pension scheme. 

For  a  number  of  Member  States,  the  country-specific  recommendations  identified 
healthcare  systems  as  requiring  particular  attention.  Progress  in  reforming  health  care 
systems, with the aim of ensuing efficiency and affordable access to services, varies among 
the Member States. Ireland, Spain and Romania have taken action to control expenditure on 
medicines.  Romania  has  made  progress  in  remedying  the  inefficient  use  of  resources  and 
Ireland has made progress on implementing activity-based funding. Slovakia has strengthened 
the gatekeeping role of general practitioners, its financial audits and information system. The 
Czech  Republic  is  improving  hospital  efficiency,  the  contractual  transparency  between 
insurers and providers and the centralisation of public procurement procedures. The reforms 
initiated in a number of Member States need to continue and be deepened so as to ensure a 

19 i.e., the fiscal part of the Treaty on Stability Coordination and Governance in the EMU. 
20 For an assessment of fiscal sustainability challenges, see European Commission (2016), 'Fiscal Sustainability 
Report 2015', European Economy, Institutional papers, No 18.  

17 

 
                                                            
sustainable financing basis  for  health  systems as well as adequate access for all to effective 
health care. 

6. 

NEXT STEPS 

Following the discussions in the Council and broader dialogue with the European Parliament, 
social  partners  and  stakeholders,  the  recommendations  for  the  economic  policy  of  the  euro 
area have been endorsed by the European Council at its meeting of 18-19 February 2016. 

The  analysis  presented  in  the  country  reports  will  be  discussed  with  the  Member  States  in 
bilateral meetings. Commission Vice-Presidents and Commissioners will visit Member States 
to meet the governments, national Parliaments, social partners and other stakeholders.  

The identified challenges are expected to be addressed by the Member States in their National 
Reform Programmes,  as well as  Stability or  Convergence Programmes,  to  be published  and 
presented to the Commission by mid-April. The Commission has called on Member States to 
consult  closely  national  Parliaments  and  social  partners  when  preparing  their  national 
programmes.  

18 

 
 
 
  
APPENDIX 1 - INTEGRATED SURVEILLANCE OF MACROECONOMIC AND FISCAL IMBALANCES 

Outcome of the 2016 in-
depth reviews under the 
Macroeconomic 
Imbalances Procedure 
(MIP)21 

Stability and Growth Pact 

(MTO: medium term objective / 
EDP: excessive deficit procedure)22 

Comments, including changes as of 
8 March 2016 

BE 

No imbalances 

BG 

Excessive imbalances 

CZ 

DK 

DE 

Imbalances 

EE 

No imbalances 

IE 

Imbalances 

EL 

ES 

Imbalances 

FR 

Excessive imbalances 

HR 

Excessive imbalances  

Preventive arm 
Not yet at MTO; subject to 
transitional debt rule23 

Exit from MIP 

Preventive arm 
Not yet at MTO 

Preventive arm 
At MTO 

Preventive arm 
Not yet at MTO 

Preventive arm 
Overachieving MTO; subject to debt 
rule 

Preventive arm 
Overachieving MTO 

Corrective arm 
Excessive deficit, deadline for 
correction: 2015  
Not yet at MTO; subject to 
transitional debt rule24 

Corrective arm 
Excessive deficit, deadline for 
correction: 2016 

Corrective arm 
Excessive deficit, deadline for 
correction: 2016 

Corrective arm 
Excessive deficit, deadline for 
correction: 2017 

Corrective arm 
Excessive deficit, deadline for 
correction: 2016 

Under a dedicated financial assistance 
programme 

Autonomous fiscal recommendation in 
view of risks to the timely correction 

IT 

Excessive imbalances 

Preventive arm 

21 Both the 'imbalances' and 'excessive imbalances' categories entail specific monitoring, to be modulated depending on the 

severity of the challenges.  

22 Categorisation based on the estimated outturn for 2016 as reflected in the Commission 2016 winter forecast. 
23  Debt  rule:  If  the  60%  reference  for  the  debt-to-GDP  ratio  is  not  respected,  the  Member  State  concerned  will  be  put  in 
excessive deficit procedure, after taking into account all relevant factors and the impact of the economic cycle, if the gap 
between its debt level and the 60% reference is not reduced by 1/20th annually (on average over 3 years). Transitional debt 
rule:  Each  Member  State  in  excessive  deficit  procedure  is  granted  a  three-year  period  following  the  correction  of  the 
excessive deficit for meeting the debt rule. This does not mean that the debt rule does not apply at all during this period as 
Member States should make sufficient progress towards compliance during this transitional period. A negative assessment 
of the progress made towards compliance with the debt benchmark during the transition period could lead to the opening of 
an excessive deficit procedure. 

24 Conditional on the abrogation of the EDP decision based on outturn data for 2015. 

19 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                            
CY 

LV 

LT 

LU 

HU 

No imbalances 

MT 

NL 

Imbalances 

AT 

No imbalances 

PL 

PT 

Excessive imbalances 

RO 

No imbalances 

SI 

Imbalances 

SK 

FI 

SE 

Imbalances 

Imbalances 

UK 

No imbalances 

(Situation as at 8 March 2016) 

Not yet at MTO; subject to debt rule 

Corrective arm 
Excessive deficit, deadline for 
correction: 2016 

Under a dedicated financial assistance 
programme 

Preventive arm 
Not yet at MTO 

Preventive arm 
Not yet at MTO 

Preventive arm 
Overachieving MTO 

Preventive arm 
Not yet at MTO; subject to debt rule 

Preventive arm 
Not yet at MTO; subject to debt rule 

Exit from MIP 

Preventive arm 
Not yet at MTO; subject to  
transitional debt rule 

Preventive arm 
Not yet at MTO; subject to 
transitional debt rule 

Preventive arm 
Not yet at MTO 

Corrective arm 
Excessive deficit, deadline for 
correction: 2015  
Not yet at MTO; subject to 
transitional debt rule 

Preventive arm 
Not yet at MTO 

Corrective arm 
Excessive deficit, deadline for 
correction: 2015 
Not yet at MTO; subject to 
transitional debt rule 

Preventive arm 
Not yet at MTO 

Preventive arm 
Not yet at MTO; debt above 60% of 
GDP reference value 

Preventive arm 
At MTO 

Corrective arm 
Excessive deficit, deadline for 
correction: 2016-17 

20 

Exit from MIP 

Exit from MIP 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
APPENDIX 2 - PROGRESS TOWARDS EUROPE 2020 STRATEGY TARGETS 

Europe 2020 strategy targets 
for the EU 

1. Increasing the employment 
rate of the population aged 20-
64 to at least 75% 

2. Increasing combined public 
and private investment in R&D 
to 3% of GDP 

3a. Reducing greenhouse gas 
emissions by at least 20% 
compared to 1990 levels 

3b. Increasing the share of 
renewable energy in final 
energy consumption to 20% 

3c.Moving towards a 20 % 
increase in energy efficiency 

4a. Reducing school drop-out 
rates to less than 10% 

4b. Increasing the share of the 
population aged 30-34 having 
completed tertiary education to 
at least 40% 

5. Lifting at least 20 million 
people out of the risk of poverty 
and social exclusion 

2010 data 

Latest available data 

68.6% 

69.2% (2014) 
70.5% (3Q 2015) 

In 2020, based on recent 
trends 

Target unlikely to be met 

1.93% 

2.03% (2014) 

Target unlikely to be met 

14.3% reduction 

23% reduction (2014) 

Target likely to be met 

12.8% 

16% (2014) 

Target likely to be met 

5.6% increase (for 
primary energy 
consumption) 

15.7% increase (2014) 

Target likely to be met 

13.9% 

11.2% (2014) 

Target likely to be met 

33.8% 

37.9% (2014) 

Target likely to be met 

1.4 million 
increase 
(compared to the 
2008 base year) 

4.5 million increase 
(2014) 

Target unlikely to be met 

21 

 
 
 
 
 
 
 
 APPENDIX 3 - FINDINGS FROM IN-DEPTH REVIEWS BY MEMBER STATE 

Belgium is experiencing no macroeconomic imbalances. A weak export and competitiveness 
performance is coupled with high public indebtedness, which may pose risks going forward. 
However, recent developments point to a stabilisation of export market shares and a reduction 
in  wage  growth.  Even  though  public  indebtedness  is  elevated  and  not  on  a  firm  downward 
path, which implies vulnerabilities, short-term risks appear contained. Recent policy measures 
include  wage  moderation  and  reductions  of  social  security  contributions.  To  ensure  the 
durability  of  the  correction,  structural  reforms  of  the  wage-setting  framework  would  be 
needed. The fiscal effort required to ensure the long-term sustainability of public finances is 
more demanding in a context of subdued nominal growth.  

imbalances.  The  economy 

is  experiencing  excessive  macroeconomic 

Bulgaria 
is 
characterised by remaining fragilities in the financial sector and high corporate indebtedness 
in a context of high unemployment. Although banking sector liquidity and profitability have 
improved, a  more robust  assessment of  the sector  can  only  be based on the upcoming  asset 
quality review and stress tests. Long-term unemployment has further increased in a context of 
adjustment  issues  linked  to  labour  market  frictions,  while  skill  mismatches  hamper  job 
creation. Looking forward, the plan to reform and develop banking supervision has yet to be 
fully  implemented  and  improving  the  efficiency  of  the  insolvency  procedure  remains  a 
challenge,  with  legislative  proposals  in  preparation.  Furthermore,  vulnerabilities  in  the  non-
banking sector remain to be addressed. 

Germany  is  experiencing  macroeconomic  imbalances.  The  large  and  persistent  current 
account  surplus  has  cross-border  relevance  and  reflects  excess  savings  and  subdued 
investment  in  both  the  private  and  public  sectors.  Weak  domestic  investment  hampers 
potential  growth  and  strong  reliance  on  external  demand  entails  macroeconomic  risks  in  a 
context of subdued foreign demand. While private consumption has strengthened somewhat, 
the  weakness  of  investment  appears  entrenched.  Public  investment  has  fallen,  despite  the 
available fiscal space and favourable financing conditions, and steps taken to increase public 
investment are insufficient to meet the infrastructure investment gap. Further action is needed 
to facilitate conditions for private investment, including by reforming the services sector and 
improving the efficiency of the tax system. 

Estonia is experiencing no macroeconomic imbalances. Rising unit labour costs may expose 
the country to competitive losses, but are projected to moderate in light of productivity growth 
and  falling  real  wage  growth.  Housing  prices  have  risen  strongly,  although  in  line  with 
income developments, and the supply of housing is expected to adjust to recovering demand. 
Nevertheless,  further  price  increases  may  pose  risks  for  the  real  economy,  which  requires 
attention.  Policy  efforts  to  boost  productivity  and  higher  value-added  exports  need  to  be 
stepped  up  and  efforts  to  boost  labour  supply  and  ease  wage  pressures  are  still  at  an  early 
stage.  Several  macro-prudential  policies  have  been  implemented  with  an  impact  on  house 
prices yet to be assessed. 

Ireland  is  experiencing  macroeconomic  imbalances.  Large  stocks  of  net  external  liabilities 
and of public and private debt constitute vulnerabilities, despite improvements. Net external 
liabilities  are  on  a  sharp  declining  trend,  in  light  of  a  large  current  account  surplus  and 
competitiveness gains. Public debt and private debt are on a downward trajectory, on the back 
of  favourable  growth  conditions.  Banks  are  well  recapitalised  and  bank  profitability  is 
improving. Non-performing loans are declining from high levels. Despite a strong rebound in 
property  prices  in  2014,  there  is  no  clear  evidence  of  overvaluation.  Nevertheless,  the 

22 

 
 
 
 
 
 
economy  remains  exposed  to  potentially  significant  cyclical  swings  and  external  shocks.  A 
broad  set  of  policy  measures  have  been  taken,  notably  during  the  financial  assistance 
programme,  to  address  key  challenges  in  terms  of  banking  sector  repair,  insolvency 
frameworks, the housing market and fiscal sustainability. 

Spain  is  experiencing  macroeconomic  imbalances.  Large  stock  imbalances  in  the  form  of 
external and internal debt, both public and private, continue to constitute vulnerabilities in a 
context of high unemployment and have cross-border relevance. The current account balance 
and cost competitiveness are improving but net external liabilities are not projected to reach 
prudent  levels  rapidly.  Private  sector  deleveraging  is  on  track  and  is  now  supported  by 
favourable growth conditions, while public debt keeps increasing. Measures have been taken 
in the financial sector, the corporate and personal insolvency frameworks and the employment 
protection  legislation.  However,  further  action  is  needed,  in  particular  regarding  the  wage-
setting process, innovation and skills and compliance with the stability and growth pact.  

France is experiencing excessive macroeconomic imbalances. Large public debt coupled with 
deteriorated productivity growth and competitiveness may imply risks looking forward, with 
cross-border relevance. Public debt keeps increasing and recent developments do not point to 
a clear upswing in competitiveness and productivity. Although profit margins have increased, 
no recovery in investment is projected before 2017. Policy measures were taken to reduce the 
labour tax wedge and policy commitments have recently been stepped up. However, effective 
structural  reform  implementation  remains  essential,  including  regarding  the  wage  setting 
system, regulatory impediments to firms' growth, while the ambition of the spending review 
needs to be stepped up. 

Croatia  is  experiencing  excessive  macroeconomic  imbalances.  Vulnerabilities  are  linked  to 
high  levels  of  public,  corporate  and  external  debt  in  a  context  of  high  unemployment.  The 
modest economic recovery is set to ease corporate deleveraging and the improvement in the 
current account balance should contribute to a reduction in external liabilities, but public debt 
is expected to continue rising. In the banking sector, non-performing loans remain high and 
profitability is weak. Further consolidation effort and improvements in fiscal governance are 
needed.  Although  measures  have  been  taken  to  improve  the  insolvency  framework  and 
enhance  labour  market  flexibility,  substantial  policy  gaps  remain  requiring  specific  policy 
actions,  in particular regarding  governance  of state owned  enterprises, public administration 
efficiency and the resolution of non-performing loans.  

Italy  is  experiencing  excessive  macroeconomic  imbalances.  High  government  debt  and 
protracted  weak  productivity  dynamics  imply  risks  looking  forward,  with  cross-border 
relevance.  Despite  moderate  wage  growth,  competitiveness  remains  weak  as  productivity 
dynamics  have  been  deteriorating,  which  limits  unit  labour  cost  adjustment.  The  slow 
resolution  of  non-performing  loans  weighs  on  banks’  balance  sheets.  High  long-term 
unemployment  weighs  on  growth  prospects.  Public  debt  reduction  would  require  higher 
primary  surpluses  and  sustained  nominal  growth  looking  forward.  Policy  action  has  been 
taken 
loans,  public 
administration, justice and education. Policy gaps remain, especially regarding privatisations, 
the collective bargaining framework, the spending review, market opening measures, taxation 
and the fight against corruption. 

institutions,  address  non-performing 

labour  market 

to  reform 

Hungary  is  experiencing  no  macroeconomic  imbalances.  Although  high  external  debt 
rollover  needs  and  the  share  of  non-performing  loans  remain  a  concern,  risks  linked  to 
external  and  internal  liabilities  have  been  reduced.  The  marked  reduction  in  net  external 

23 

 
 
 
 
 
 
liabilities has been driven by high current and capital account surpluses. Credit flows to the 
private  sector  remain  subdued  in  a  context  of  low  bank  profitability.  Policy  measures  have 
been taken to make the regulatory environment more predictable in the financial sector, lower 
the tax burden on banks, reduce the proportion of debt held in foreign currency and introduce 
subsidised lending schemes. The impact of these recent measures on bank lending is still to 
materialise.  Moreover,  policy  gaps  remain  regarding  non-cost  competitiveness,  productivity 
and the overall business environment. 

The  Netherlands  is  experiencing  macroeconomic  imbalances.  The  large  and  persistent 
current  account  surplus  has  cross-border  relevance.  The  surplus  mainly  reflects  structural 
features  of  the  economy  and  policy  settings  regarding  non-financial  corporations.  The 
household  sector  is  characterised  by  a  very  large  debt  stock  and  deleveraging  needs.  The 
current account surplus has narrowed slightly since 2013 due to improved cyclical conditions 
but household deleveraging contributes to maintaining the current account surplus at its high 
level.  Measures  have  been  taken  to  support  the  household  deleveraging  process,  but  the 
phasing-in is slow. A package of tax measures is expected to strengthen consumption and thus 
contribute to a declining surplus in 2016. 

Austria is experiencing no macroeconomic imbalances. Austrian banks' exposure abroad and 
foreign currency loans imply a potential for adverse spill-overs, also in view of bank capital 
positions  and  profit  prospects.  However,  banks'  foreign  exposures  have  been  reduced  while 
improved  capitalisation  and  risk  reduction  measures  are  expected  gradually  to  support  the 
banking sector's lending capacity. The restructuring of financial institutions has had an impact 
on  public  finances  but  is  now  advancing  without  the  need  for  additional  public  support. 
Supervisory  measures  have  strengthened  the  risk-bearing  capacity  and  resilience  of  the 
domestic banking sector and improved the local funding base and asset quality of operations 
abroad. Export market shares have deteriorated but are stabilising after years of losses. 

Portugal  is  experiencing  excessive  macroeconomic  imbalances.  The  large  stocks  of  net 
external  liabilities,  private  and  public  debt  and  a  high  share  of  non-performing  loans 
constitute  vulnerabilities  in  a  context  of  elevated  unemployment.  The  current  account  has 
adjusted  to  a  small  surplus.  While  households'  indebtedness  has  declined,  corporate  debt  is 
still weighing on firms' performance. Public debt is expected gradually to decline from a very 
high  level.  Policy  action  has  been  taken  regarding  the  financial  sector,  access  to  finance, 
insolvency  procedures, 
long-term  fiscal 
sustainability. However, policy gaps persist regarding product and services markets, corporate 
debt restructuring, fiscal issues and selected areas of the labour market.  

labour  market  functioning,  education  and 

Romania is experiencing no macroeconomic imbalances. Risks are linked to the high stock of 
net foreign liabilities, vulnerabilities of the banking sector and pro-cyclical fiscal policy along 
with strong wage growth. In a context of strengthened recovery, net external liabilities have 
declined  from  a  high  level.  With  the  support  of  the  Commission,  action  has  been  taken  to 
strengthen  the  financial  sector.  The  banking  sector  is  now  well  capitalised  and  liquid  but 
several currently discussed legislative initiatives pose a risk for its stability. Public wages and 
the minimum wage were increased and tax cuts were implemented. This poses a risk of fiscal 
policy becoming pro-cyclical.  

Slovenia  is  experiencing  macroeconomic  imbalances.  Weaknesses  in  the  banking  sector, 
corporate  indebtedness,  and  fiscal  risks  constitute  vulnerabilities.  The  reduction  in  external 
liabilities is progressing, the banking sector has stabilised and vulnerabilities in the corporate 
sector  are  being  addressed  through  operational  and  financial  restructurings.  Deleveraging 

24 

 
 
 
 
 
  
pressures  are  easing  but  still  weigh  on  corporate  investment  and  recovery  prospects.  The 
business  environment  remains  hampered  by  administrative  burden.  Policy  measures  have 
been taken regarding the corporate governance of the "bad bank" and significant progress has 
been  made  regarding  the  governance  of  state-owned  enterprises.  Progress  on  reducing  the 
administrative burden has instead been limited, and the strategy on foreign direct investment 
has  yet  to  be  fully  implemented.  Further  action  is  needed  to  put  debt  on  a  sustainable 
downward path. 

Finland  is  experiencing  macroeconomic  imbalances.  Finland  has  recorded  competitiveness 
losses  linked  to  the  decline  of  key  sectors  and  companies  and  wage  growth  above 
productivity, resulting in a sharp decline in the current account balance. Private debt is large, 
is  sound.  Cost 
which  may  constitute  vulnerability,  although 
competitiveness  has  gradually  started  to  improve  and  the  fall  in  export  market  shares  has 
slowed down, while the current account is moving towards a surplus. Deleveraging pressures 
are expected to remain limited. Moderate wage increases have been agreed by social partners 
and  initiatives  have  been  launched  to  revive  growth  in  high-tech  sectors  and  to  facilitate 
exports.  Recent  measures  on  household  mortgages  may  limit  the  growth  of  household 
indebtedness.  

the  financial  sector 

Sweden  is  experiencing  macroeconomic  imbalances.  High  and  increasing  household  debt 
associated with high and growing house prices in a context of positive credit flows pose risks 
of  disorderly  correction  with  implications  for  the  real  economy  and  the  banking  sector.  No 
house prices correction has taken place and the current drivers of the growth of house prices 
will  probably  remain  in  place  in  the  near  term.  Policy  measures  have  been  taken  in  the 
macroprudential  domain,  which  may  however  remain  insufficient.  Overall,  policy  gaps 
remain in the area of housing-related taxation, the amortisation of mortgages, the functioning 
of housing supply and the rental market. 

The United Kingdom is experiencing no macroeconomic imbalances. High household sector 
debt  and  elevated  house  price  levels  as  well  as  the  large  current  account  deficits  may 
constitute vulnerabilities. However, household balance sheets are strong in aggregate and both 
household  debt  levels  and  house  price  growth  have  fallen  since  2014.  Moreover,  risks 
associated  with  the  large  current  account  deficit  are  mitigated  by  a  favourable  institutional 
framework  and  low  foreign  currency  liabilities,  and  the  deficit  is  expected  to  decline  as 
adverse  cyclical  conditions  unwind.  Several  government  initiatives  have  yet  to  exert  a 
material impact on the imbalance between housing supply and demand. 

____________________________ 

25