Recommendation for a COUNCIL RECOMMENDATION on the 2016 national reform programme of Estonia and delivering a Council opinion on the 2016 stability programme of Estonia
Date: 2016-05-18
Institutions: European Commission, Secretariat-General
Subjects: Estonia, budget deficit, economic policy, economic reform, equal pay, innovation, private investment, public service, research and development, stability programme

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   EUROPEAN COMMISSION  Brussels, 18.5.2016  COM(2016) 327 final   Recommendation for a COUNCIL RECOMMENDATION on the 2016 national reform programme of Estonia and delivering a Council opinion on the 2016 stability programme of Estonia  
 
 
Recommendation for a 

COUNCIL RECOMMENDATION 

on the 2016 national reform programme of Estonia 
and delivering a Council opinion on the 2016 stability programme of Estonia 

THE COUNCIL OF THE EUROPEAN UNION, 

Having  regard  to  the  Treaty  on  the  Functioning  of  the  European  Union,  and  in  particular 
Articles 121(2) and 148(4) thereof, 

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of 
the  surveillance  of  budgetary  positions  and  the  surveillance  and  coordination  of  economic 
policies1, and in particular Article 5(2) thereof, 
Having regard to the recommendation of the European Commission2, 
Having regard to the resolutions of the European Parliament3, 

Having regard to the conclusions of the European Council, 

Having regard to the opinion of the Employment Committee, 

Having regard to the opinion of the Economic and Financial Committee, 

Having regard to the opinion of the Social Protection Committee, 

Having regard to the opinion of the Economic Policy Committee, 

Whereas: 

(1) 

On  26  November  2015,  the  Commission  adopted  the  Annual  Growth  Survey4, 
marking  the  start  of  the  2016  European  Semester  of  economic  policy  coordination. 
The priorities of the Annual Growth Survey were endorsed by the European Council 
on 17-18 March 2016. On 26 November 2015, on the basis of Regulation (EU) No 
1176/2011,  the  Commission  adopted  the  Alert  Mechanism  Report5,  in  which  it 
identified Estonia as one of the Member States for which an in-depth review would 
be carried out. On the same day, the Commission also adopted a recommendation for 
a  Council  recommendation  on  the  economic  policy  of  the  euro  area6.  This 
recommendation was endorsed by the European Council on 18-19 February 2016 and 
adopted by the Council on 8 March 2016. As a country whose currency is the euro 
and  in  view  of  the  close  interlinkages  between  the  economies  in  the  economic  and 

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OJ L 209, 2.8.1997, p. 1. 
COM(2016) 327 final. 
P8_TA(2016)0058, P8_TA(2016)0059, and P8_TA(2016)0060. 
COM(2015) 690 final. 
COM(2015) 691 final. 
COM(2015) 692 final. 

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(2) 

(3) 

(4) 

(5) 

(6) 

monetary union, Estonia should ensure the full and timely implementation  of those 
recommendations. 
The 2016 country report for Estonia7 was published on 26 February 2016. It assessed 
Estonia’s  progress  in  addressing  the  country-specific  recommendations  adopted  by 
the Council on 14 July 2015 and Estonia's progress towards its national Europe 2020 
targets.  It also included the in-depth review under Article 5 of Regulation (EU) No 
1176/2011. On 8 March 2016, the Commission presented the results of the in-depth 
review.8  The  Commission’s  analysis  leads  it  to  conclude  that  Estonia  is  not 
experiencing  macroeconomic imbalances.  

On 28 April 2016, Estonia submitted its 2016 stability programme and on 10 March 
2016  it  submitted  its  2016  national  reform  programme.  To  take  account  of  their 
interlinkages, the two programmes have been assessed at the same time. 

recommendations  have  been  addressed 

Relevant  country-specific 
the 
programming  of  the  European  Structural  and  Investment  Funds  for  the  2014-2020 
period.  As  foreseen  in  Article  23  of  Regulation  (EU)  No  1303/2013,  where  it  is 
necessary  to  support  the  implementation  of  relevant  Council  recommendations,  the 
Commission may request a Member State to review and propose amendments to its 
Partnership  Agreement  and  relevant  programmes.  The  Commission  has  provided 
further  details  on  how  it  would  make  use  of  this  provision  in  guidelines  on  the 
application  of  the  measures  linking  effectiveness  of  the  European  Structural  and 
Investment Funds to sound economic governance9. 

in 

Estonia  is  currently  in  the  preventive  arm  of  the  Stability  and  Growth  Pact.  In  its 
2016 stability programme, the government plans a headline deficit at around 0.5% of 
GDP  over  2016-2018,  turning  to  balance  thereafter.  In  structural  terms,  Estonia 
continues  to  meet  the  medium-term  budgetary  objective  -  a  structural  balance  - 
throughout  the  programme  period.  According  to  the  stability  programme,  the 
government  debt-to-GDP  ratio  is  expected  to  stay  at  around  10%  of  GDP  in  2017 
and  to  decrease  to  about  9½  %  of  GDP  in  2020.  The  macroeconomic  scenario 
underpinning  these  budgetary  projections  is  plausible  for  2016  but  optimistic  for 
2017.  Based  on  the  Commission  2016  spring  forecast,  the  structural  balance  is 
forecast to move from a surplus of 0.6% of GDP in 2015 to a budget balance in 2016 
and to a small deficit of 0.2% of GDP in 2017, which can be considered as close to 
the medium-term budgetary objective. Further deviations would be assessed against 
the  requirement  to  maintain  the  structural  balance  at  the  medium-term  budgetary 
objective. Based on its assessment of the stability programme and taking into account 
the  Commission  2016  spring  forecast,  the  Council  is  of  the  opinion  that  Estonia  is 
expected to comply with the provisions of the Stability and Growth Pact. 

Estonia has taken important steps to improve labour market participation, including 
by implementing the Work Ability reform. This reform, which entered into force in 
January 2016 and will be fully implemented from January 2017, will increase overall 
labour supply. It will be a challenge to help reintegrate those who have been out of 
the labour market for a long time. New active labour market measures are being put 
in place to help the beneficiaries of the Work Ability reform to enter and stay in the 
labour market and changes have also been made in the financial support scheme.  

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SWD(2016) 76 final. 
COM(2016) 95 final. 
COM(2014) 494 final. 

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(7) 

(8) 

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(10) 

(11) 

(12) 

Estonia has taken action to improve work incentives by reducing the tax burden on 
labour  for  all  income  groups,  including  low-income  earners.  This  may  have 
contributed to Estonia having a lower unemployment rate and a higher employment 
rate  for  low-skilled  workers  than  the  EU  average.  Among  the  measures  already 
adopted,  an  additional  tax  refund  is  planned  as  of  2017  for  low  income  earners. 
However, this leads to high effective marginal tax rates, which risks creating a low 
wage  trap  and  encouraging  the  payment  of  envelope  wages.  The  impact  of  these 
measures will only be known after evaluation.  

Implementation of the Lifelong Learning Strategy 2020, together with the Vocational 
Education and Training  programme  for 2015-2018, helped increase  participation  in 
vocational education and training, and its labour market relevance. The proportion of 
vocational education and training students in apprenticeships is expected to  increase 
but  the  drop  out  rates  in  vocational  education  and  training  remain  a  matter  for 
concern. 

There  are still some shortages in  early childhood education and  care places for 0-3 
year-olds, but the situation is improving, with additional places created each year. 

Estonia has the highest gender pay gap in the EU, at 28.3 % in 2014. This creates a 
risk  of  not  making  full  use  of  the  potential  of  women.  The  gender  pay  gap  is 
attributed,  among  other  factors,  to  occupational  and  sectoral  gender  segregation  in 
the  labour  market,  the  lack  of  transparency  of  wages  in  the  private  sector  and  the 
longer  career  breaks  for  women  due  to  care  responsibilities.  The  government  has 
announced a series of measures to address the gender pay gap. The planned measures 
are still to be adopted and implemented, inter alia improving data collection, giving 
labour  inspectorates  the  task  of  monitoring  how  employers  apply  the  principle  of 
equal pay, promoting wage transparency, providing fathers with incentives to take up 
part  of  the  parental  leave  and  increasing  access  to  childcare  facilities.  The  Welfare 
Plan 2016-2023 includes gender equality objectives, with measures to tackle gender 
segregation in the labour market and fight stereotypes. Measures are planned to ease 
the care burden in families and to bring carers into the labour market, with expected 
positive effects on women's labour market participation.  

In Estonia, access to public services is not guaranteed in all municipalities  and the 
local  provision  of  quality  services  in  areas  such  as  transport,  education,  long-term 
care  for  the  elderly  and  other  social  services  at  local  level  remains  a  challenge.  In 
March 2016, the  government submitted the draft Administrative Reform  Act  to  the 
parliament to pave the way for a local government reform. The reform foresees both 
voluntary  and  government-initiated  mergers,  with  a  view  to  offer  accessible  and 
quality  services  and  to  ensure  more  efficient  and  competent  governance.  The 
amended Social Welfare Act sets minimum requirements for nine social services but 
its  implementation  is  at  risk  due  to  the  weaknesses  in  service  provision  by 
municipalities. The proposed local government reform has not yet been adopted.  

Estonia has one of the highest ratios of investment to GDP for both the private and 
the public sectors. However, some challenges remain for the country to improve the 
investment environment  further. Estonia took  action to implement the ‘Knowledge-
based  Estonia’ 
the 
Entrepreneurship Growth Strategy, which together comprise its framework for smart 
specialisation.  Insufficient  synergies  between  these  strategies  can  hamper  private 
research, development and innovation investment, especially since business research 
and  technology  investment  decreased  to  0.6  %  of  GDP  in  2014  and  Estonia  is 

research,  development  and 

strategy  and 

innovation 

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(13) 

unlikely  to  reach  its  3%  of  GDP  research,  development  and  innovation  target  in 
2020.  The  number  of  companies  cooperating  with  research  institutions  is  limited, 
resulting in a low level of patent applications. Meanwhile, in recent years, the overall 
structure  of  Estonia’s  export  of  manufactured  goods  seems  to  have  shifted  towards 
lower-value  goods.  Labour  and  skills  shortages  may  constitute  a  barrier  to  greater 
investment in high technology sectors.  

In  the  context  of  the  European  Semester,  the  Commission  has  carried  out  a 
comprehensive  analysis  of  Estonia’s  economic  policy  and  published  it  in  the  2016 
country report. It has also assessed the stability programme and the national reform 
programme and the follow-up given to the recommendations addressed to Estonia in 
previous  years.  It  has  taken  into  account  not  only  their  relevance  for  sustainable 
fiscal and socio-economic policy in Estonia but also their compliance with EU rules 
and guidance, given the need to strengthen the EU’s overall economic governance by 
providing EU-level input into future national decisions. The recommendations under 
the European Semester are reflected in recommendations 1 and 2 below. 

(14) 

In  the  light  of  this  assessment,  the  Council  has  examined  the  stability  programme, 
and  is  of  the  opinion  that  Estonia  is  expected  to  comply  with  the  Stability  and 
Growth Pact. 

HEREBY RECOMMENDS that Estonia take action in 2016 and 2017 to: 

1.  Ensure  the  provision  and  accessibility  of  high  quality  public  services,  especially 
social services, at local level, inter alia by adopting and implementing the proposed 
local government reform. Adopt and implement measures to narrow the gender pay 
gap, including those foreseen in the Welfare Plan.  

2.  Promote  private  investment  in  research,  development  and  innovation,  including  by 

strengthening cooperation between academia and businesses. 

Done at Brussels, 

For the Council 
The President 

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