COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP 2017 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(2017) 67 final to SWD(2017) 93 final}
Date: 2017-02-22
Institutions: European Commission, Secretariat-General
Subjects: EU Member State, EU investment, economic disparity, economic growth, economic recovery, euro area, fiscal policy, macroeconomics, multilateral surveillance, structural adjustment

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   EN 

   EUROPEAN COMMISSION  Brussels, 22.2.2017  COM(2017) 90 final   COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP   2017 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(2017) 67 final to SWD(2017) 93 final}   
 
 
1. 

INTRODUCTION 

Europe’s recovery from the economic crisis is steady and is supporting positive  labour 
market  trends.  The  2017  Annual  Growth  Survey1  priorities  are  being  put  into  action  by 
Member States. The recovery is the result of an accommodative monetary policy, a broadly 
neutral  aggregate  fiscal  stance,  pro-growth  fiscal  adjustment  and  the  impact  of  structural 
reforms.  It  is  supported  by  stronger  confidence  among  businesses  and  consumers  about  the 
economic  outlook.  The  disbursement  of  the  European  Structural  and  Investment  Funds  and 
the  projects  being  rolled  out  under  the  Investment  Plan  for  Europe  are  helping  to  mobilise 
private  and  public  investment.  Employment  is  growing  in  almost  all  Member  States, 
unemployment is falling and long-term and youth unemployment rates are gradually receding. 
However, high unemployment, poverty and inequality remain key concerns in some countries, 
and socioeconomic convergence across the EU has yet to resume fully. Productivity growth 
has  improved  but  differs  considerably  between  Member  States  and  overall  remains  at  low 
levels. To secure the recovery, all policy tools — monetary, fiscal and structural — need to be 
used to strengthen growth, investment and financial stability. 

Member States need to act on investment, structural reforms and public finance at the 
same  time  to  accelerate  growth  and  make  it  last.  Monetary  policy  alone  cannot  lift  the 
level of demand or investment. Fiscal policy continues to play an essential role, both in those 
Member States that have fiscal space and those which need to adjust. It needs to be oriented 
toward policies that improve medium-term growth potential. Structural reforms need to focus 
on  providing  enabling  conditions  for  investment,  boosting  labour  force  participation,  and 
ensuring  sustainability  of  public  finance.  Reforms  also  need  to  promote  a  better  business 
environment, foster innovation and increase dynamism in product and services markets. They 
need at the same time to address inequalities, including by encouraging investment in skills, 
improving  matching  processes  in  labour  markets,  modernising  tax  and  social  protection 
systems.  

This  Communication  summarises  the  progress  in  implementing  reforms  and  in 
addressing the imbalances in Member States’ economies. A detailed assessment for every 
Member State, except Greece2, of the progress made in addressing the challenges identified in 
the  country-specific  recommendations  in  2016  is  included  in  the  respective  country  report 
published by European Commission staff. For 13 Member States identified in the 2017 Alert 
Mechanism  Report3,  the country  reports also  include the in-depth  reviews  carried  out  under 
the macroeconomic imbalance procedure. 

The country reports provide a longer-term view of the progress made and the challenges 
ahead.  While  the  European  Semester  runs  on  an  annual  cycle,  reform  priorities  in  the 
Member  States  are  often  decided  upon  at  the  start  of  a  new  government’s  term  and 
implementing  comprehensive structural reforms may take years. To reflect this better in the 
analysis,  the  country  reports  include  for  the  first  time  a  longer-term  assessment  of  the 
implementation of the country specific recommendations. 

1  COM(2016)  725.  For  an  overview  of  EU-level  priorities,  see  also  the  Commission  Work  Programme  2017 
(COM(2016)710) and the Joint Declaration of 13 December 2016 on the EU's legislative priorities for 2017. 
2  To  avoid  duplication  with  reform  measures  set  out  in  the  macroeconomic  adjustment  programme  and  to  be 
consistent  with  the  approach  followed  in  the  previous  years,  the  Commission  has  not  issued  additional 
recommendations to Greece as part of the European Semester. 
3 COM(2016) 728. 

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The analysis also takes stock of the budgetary situation of the Member States. It is based 
on the Commission’s latest economic forecast4 and builds on the Commission’s opinions on 
the draft 2017 budgetary plans for the euro area Member States.5 

The Commission has taken steps to increase the ownership of the reform agenda. It has 
streamlined the country-specific recommendations in recent years. In this European Semester 
round,  the  Commission  has  strengthened  dialogue  with  the  Member  States  at  technical  and 
the  high-level  visits  of  Vice-Presidents  and 
political 
Commissioners. The Member States have also been consulted on the analytical content of the 
country reports before their publication and have had the opportunity to check the accuracy of 
the data and facts presented, but the views remain those of the Commission staff. 

level,  most  notably 

through 

The  European  Semester  process  goes  well  beyond  an  individual  assessment  of  each 
Member  State’s  performance.  It  is  also  a  vehicle  to  facilitate  more  policy  coordination 
within the Member States, including their national parliaments and the closer involvement of 
social  partners. The relevant country reports also identify the potential  risks of spillovers in 
the  euro  area  Member  States  if  policy  action  is  not  taken.  The  country-specific 
recommendations  that  the  Commission  intends  to  propose  in  May  2017  will  also  take  into 
account the recommendations for the euro area6.  

2.  

ECONOMIC AND SOCIAL CONTEXT 

The  European  economy  has  proven  to  be  resilient,  despite  a  number  of  challenges  in 
2016. Growth is primarily supported by private consumption, which has been benefiting from 
the improving labour market and low inflation. 

Moderate  growth  is  also  expected  in  2017-2018,  although  there  are  both  domestic  and 
external  risks.  GDP  growth  in  the  EU  is  expected  to  remain  fairly  steady  at  1.8%  in  both 
2017 and 2018. It should be supported by continued improvement in the labour market, low 
borrowing  costs  and  the  expected  strengthening  in  external  demand.  Private  consumption  is 
set  to  remain  the  main  source  of  growth,  while  investment  growth  is  projected  to  remain 
moderate.  However,  the  economy  still  has  to  overcome  the  legacies  from  the  crises,  in 
particular  long-term  unemployment  that,  if  unaddressed,  could  become  structural.  A  new 
challenge  for  the  EU  economy  originates  from  potential  changes  in  US  policies.  Other 
challenges  include  the  implications  of  the  United  Kingdom’s  referendum  vote  to  leave  the 
EU, the increase in long-term interest rates and the low profitability of some European banks. 

Employment  in  the  EU  reached  232.5  million  people  in  2016,  the  highest  number  ever 
measured. Unemployment has  fallen to  8.5 %,  and the long-term and youth  unemployment 
rates are at 3.8 % and 18.2 % respectively, lower than in previous years. The proportion of the 
EU population at risk of poverty or social exclusion (23.7 %) is the lowest in five years. 

4  European  Commission,  Directorate-General  Economic  and  Financial  Affairs  (2017):  'European  Economic 

Forecast, Winter'. European Economy Institutional Paper 48. 

5 COM(2016) 730. 
6 COM(2016) 726. 

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While  income  distributions  in  the  EU  are  more  equal  than  in  other  major  economies, 
income inequality remains a policy challenge in the EU. Even before the crisis, structural 
changes  translated  into  growing  inequalities  in  the  distribution  of  income,  wealth  and 
opportunities,  prompting  social  concerns  that  redistributive  and  social  policies  could  not 
assuage. The financial crisis has increased the perception of unequal opportunities and unfair 
burden-sharing  in  society.  In  a  number  of  countries,  stagnating  economic  conditions  for  the 
middle  class  have  gone  hand  in  hand  with  the  richest  layers  of  society  often  capturing  an 
increasing share of wealth. Weak fiscal positions and the slow recovery reduced the margin of 
manoeuvre  for  policies  in  a  number  of  countries,  thereby  increasing  social  pressures  to 
respond to inequalities7. 

3. PROGRESS WITH COUNTRY-SPECIFIC RECOMMENDATIONS 

An analysis looking back several years confirms the commitment of all Member States 
to  actively  pursue  structural  reforms.  Since  the  start  of  the  semester  process  in  2011 
substantive progress on a large majority of recommendations has been made, but variety can 
be seen in the pace and depth of the implementation of reforms by Member States. Regarding 
the 2016 country-specific recommendations, most Member States made either some or limited 
progress  in  addressing  the  issues  identified.  The  progress  stayed  broadly  the  same  in  the 
previous  year.  Particularly  encouraging  progress  can  be  noted  in  the  area  of  the  financial 
sector  and  labour  market  policy,  where  many  Member  States  have  taken  steps  to  address 
issues identified last year. In a favourable context of low interest rates, there is also progress 
in  consolidating  public  finances.  Progress  in  improving  the  business  environment  and 
boosting investment has been more varied across the Member States, while the areas showing 
least progress include opening product and services markets and addressing social exclusion. 

Overall,  Member  States  are  on  their  way  to  meet  the  Europe  2020  strategy  targets  on 
energy  and  climate,  while  reaching  other  targets  will  require  sustained  efforts.  Most 
Member States are likely to reach their targets on emission reductions, renewable energy and 
energy  efficiency  by  2020.  Seventeen  Member  States  have  already  reached  their  targets  on 
early school leaving and 12 have reached their targets on tertiary education attainment. While 
the  European  employment  target  of  75%  is  within  reach  and  the  employment  situation 
continues  to  improve  in  almost  all  Member  States,  national  employment  targets  will  prove 
difficult to reach for some Member States. Problems persist in reaching the poverty target as 
the  number  of  people  at  risk  of  poverty  or  social  exclusion  in  Europe  remains  high  (119 
million people). However, this number has decreased in most Member States as labour market 
outcomes  continue  to  improve.  The  number  is  declining  towards  the  level  of  2008,  the 
reference year for which the Europe 2020 target was set, but remains above the Europe 2020 
target  by  around  21.6  million  people.  Progress  towards  the  target  of  3%  in  spending  on 
research  and  development  has  been  slow.  Appendix  2  provides  an  overview  of  all  Europe 
2020 targets. 

The  funds  available  under  the  current  EU  multiannual  financial  framework  are  being 
used  by  the  Member  States  to  help  prepare  and  implement  structural  reforms.  The 
implementation of funds on the ground has improved over time in most Member States. The 

7 See Employment and Social Developments in Europe Review, 2014-2016. 

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consistency between the country-specific recommendations related to the main economic and 
social  challenges  and  the  European  Structural  and  Investment  Funds  was  ensured  at  the 
programming  stage  (2014-2015)  through  targeted  investment  and  ex  ante  conditionalities. 
Commission  staff  have  assessed  the  2016  country-specific  recommendations  and  concluded 
that,  at  the  current  stage,  there  is  no  need  to  re-programme  the  operational  programmes.  In 
addition  to  the  European  Structural  and  Investment  Funds,  Member  States  can  access 
financing under the European Fund for Strategic Investments, Horizon 2020, the Connecting 
Europe Facility and other directly managed EU funds. They can also obtain advice from the 
Structural Reform Support Service to facilitate the reform agenda. 

4. ADDRESSING MACROECONOMIC IMBALANCES 

EU  Member  States  are  making  progress  on  correcting  macroeconomic  imbalances, 
although  a  number  of  risks  remain.  Public  budgets  are  in  better  shape.  Nonetheless,  the 
stock of private, public and external debt has been falling at a slow rate. Progress so far has 
been  uneven  in  a  context  of  low  inflation  and  low  growth.  The  reduction  of  domestic  and 
foreign  debt  implied  a  major  deleveraging  process  in  several  Member  States,  with 
implications  for  short-term  growth.  The  correction  of  current  account  balances  in  the  euro 
area and the EU is ongoing. Competitiveness developments have been broadly consistent with 
rebalancing needs. Financial sector deleveraging has resulted in improved capital positions. 

The 2017 Alert Mechanism Report found that 13 Member States warranted an in-depth 
review. All of them experienced imbalances or excessive imbalances in 2016 in the context of 
the macroeconomic imbalance procedure. This selection has been supported by the Council in 
its conclusions on the Alert Mechanism Report8. The country reports analyse macroeconomic 
developments  and  progress 
to  relevant  policy 
recommendations.  The  aim  is  to  prevent  the  build-up  of  risks  and  monitor  progress  on 
correcting existing imbalances9. Given the importance of trade and financial links among EU 
countries, the assessment takes into account cross-border implications. 

the  policy  response 

terms  of 

in 

4.1. Rebalancing in the EU and the euro area 

Large  current  account  deficits  have  been  corrected  but  large  surpluses  have  been 
growing.  After  the  crisis,  a  sharp  correction  took  place  in  countries  with  large  external 
deficits following a reversal in private cross-border financial flows. The process was aided by 
improvements  in  relative  price  competitiveness.  Thereafter,  domestic  demand  and  imports 
remained  subdued  in  net  debtor  countries.  Since  the  stocks  of  net  foreign  liabilities  remain 
high in a number of Member States, their current account positions need to remain at prudent 
levels.  Conversely,  a  symmetric  and  comparable  post-crisis  correction  did  not  take  place  in 
most countries with positive current account balances, and large surpluses have been further 

8 Council document 5735/17. 
9 Article 2 of Regulation No 1176/2011 of the European Parliament and of the Council defines imbalances as 
"any trend giving rise to macroeconomic developments which are adversely affecting, or have the potential to 
adversely affect, the proper functioning of the economy of a Member State or of the economic and monetary 
union, or of the Union as a whole". 

5 

 
 
                                                            
growing  in  some  cases.  As  a  result,  there  is  a  growing  current  account  surplus  for  the  euro 
area as a whole10. 

The  persistent  current  account  surplus  of  the  euro  area  reflects  aggregate  demand 
dynamics that continue to lag behind economic activity. Real domestic demand growth in 
the  euro  area  has  been  lagging  behind  compared  with  pre-crisis  levels.  The  relatively  low 
aggregate  demand  also  affects  negatively  growth  output  and  estimates  of  potential  growth. 
This persistent slack underpins the current historically low levels of core inflation, providing a 
challenging environment for countries that need to reduce domestic and foreign debt. 

Private  and  public  debt  deleveraging  continues,  but  at  a  slow  and  uneven  pace, 
hampered  by  low  nominal  growth.  Persistent  high  levels  of  private  debt  in  a  number  of 
countries,  often  compounded  by  high  stocks  of  government  debt,  are  inhibiting  investment 
and weighing on the balance sheets of some banks. In most countries, balance sheet repair is 
progressing, with deleveraging ongoing as a result of increased net savings in the household 
and  corporate  sectors.  However,  deleveraging  is  not  always  taking  place  where  it  is  most 
needed,  with  some  high-debt  countries  reducing  their  liabilities  more  slowly  than  low-debt 
countries. 

The  resilience  of  the  European  banking  sector  has  continued  to  strengthen,  but  the 
sector  is  facing  a  number  of  challenges  linked  to  subdued  profitability  and,  in  some 
cases,  a  legacy  of  non-performing  loans.  Banks  have  continued  to  strengthen  their  capital 
buffers  even  in  a  context  in  which  bank  profitability,  although  improving,  remains  weak. 
Profitability  is  hampered  by  slow  economic  growth,  traditional  business  models,  cost 
inefficiencies  and  overbanked  markets.  These  fragilities  are  being  further  exposed  by  the 
current low interest environment. Moreover, in some countries, the legacy of non-performing 
loans reduces the room for lending, while low profitability hampers provisioning efforts and 
the internal generation of capital, and reduces opportunities for raising capital in the market.  

A number of Member States need to monitor closely possible overheating risks in some 
sectors.  Member  States  that  made  the  most  rapid  progress  in  addressing  imbalances  are 
witnessing dynamic growth and relatively higher inflation rates, and some are experiencing a 
rise in unit labour costs. Real house prices are on the rise in a majority of Member States. In 
some cases, the increase in real house prices is adding further pressure to already overvalued 
housing markets. 

While  the  recovery  has  been  reflected  in  labour  markets,  issues  such  as  long-term 
unemployment  and  low  productivity  persist.  Labour  markets  have  been  improving  since 
mid-2013,  accompanied  by  a  reduction  in  the  dispersion  of  unemployment  rates  across 
Member  States.  However,  there  are  still  very  high  unemployment  rates  and  stagnant  pay 
levels in a number of EU countries. Social distress persists, especially in the countries hardest 
hit by the financial and debt crises. 

Structural  reforms  have  contributed  to  macroeconomic  rebalancing  and  reform 
commitments need to be maintained. Measures are needed to improve competitiveness, and 

10  Recital  17  of  Regulation  (EU)  1176/2011  of  the  European  Parliament  and  of  the  Council  states  that  "when 
assessing  macroeconomic  imbalances,  account  should  be  taken  of  their  severity  and  their  potential  negative 
economic  and  financial  spill-over  effects."  This  recital  also  states  that  "furthermore,  in  Member  States  that 
accumulate  large  current-account  surpluses,  policies  should  aim  to  identify  and  implement  measures  that  help 
strengthen their domestic demand and growth potential." 

6 

 
                                                            
accelerate  the  efficient  reallocation  of  resources.  Insolvency  frameworks  should  be  made 
more  effective  in  order  to  help  the  correction  of  stock  imbalances.  At  the  same  time,  the 
negative  impact  of  deleveraging  on  short-term  growth  needs  to  limited.  Past  reforms  have 
helped to varying degrees. In some countries with imbalances, reform efforts have been put 
on  hold,  and  there  is  a  risk  of  back-tracking  in  a  number  of  cases,  often  linked  to  political 
uncertainty.  Maintaining  existing  commitments  and  completing  reform  processes  is  a  pre-
requisite for reaping reform benefits fully. 

4.2. Implementing the macroeconomic imbalance procedure 

Monitoring  of  policy  implementation  under  the  macroeconomic  imbalance  procedure 
has been strengthened. Since the categorisation of such imbalances was streamlined in 2016, 
a  process  of  ‘specific  monitoring’  has  been  applied  to  all  countries  with  imbalances  or 
excessive  imbalances.  The  aim  is  to  enhance  the  continuous  monitoring  of  the  policies 
undertaken  under  the  procedure,  by  means  of  Commission  reports  discussed  in  Council 
committees.  The monitoring has  been tailored to reflect the scope of the challenges and the 
severity  of  the  imbalances.  The  Council  has  broadly  supported  the  conclusions  of  specific 
monitoring reports. 

Fewer  Member  States  are  identified  with  imbalances  than  in  2016.  Of  the  13 Member 
States retained for further analysis, the in-depth reviews have found that one Member State is 
experiencing  no  imbalances,  six  are  experiencing  imbalances  and  six  are  experiencing 
excessive imbalances. Appendix 3 summarises the findings of the in-depth reviews. 

The  Commission  will  monitor  closely  policy  commitments  of  countries  identified  with 
imbalances:  

  Ireland and Slovenia are still identified with imbalances. A number of positive economic 
developments  and  implemented  reforms  point  to  their  ongoing  gradual  correction.  The 
sustainable correction of their imbalances is within reach, provided that further efforts are 
made.  The  Commission  will  therefore  monitor  economic  developments  in  these  two 
countries  and  forthcoming  commitments,  notably  their  National  Reform  Programmes 
(NRPs), to prepare its next in-depth review.  

  Germany  is  identified  with  imbalances  reflected  in  its  large  current  account  surplus. 
Recent economic developments do not point to a correction of these imbalances, although 
some  progress  has  been  made 
last  year's  MIP-related  CSRs.  
in  addressing 
The Commission will therefore monitor economic developments and forthcoming policy 
commitments,  notably  the  National Reform Programme (NRP)  and  a possible new NRP 
by the next government, to prepare its next in-depth review.  

  France  is  still  identified  with  excessive  imbalances  but  a  number  of  economic 
developments and implemented reforms point to their ongoing gradual correction. Further 
efforts  remain  necessary  to  achieve  a  sustainable  correction  of  the  imbalances.  The 
forthcoming 
Commission  will 
commitments,  notably  the National Reform Programme (NRP)  and a possible new NRP 
by the next government, to prepare its next in-depth review. On the basis of this review, 
the  Commission  could  consider  revising  the  classification  from  excessive  imbalances  to 
imbalances. 

therefore  monitor  economic  developments  and 

7 

 
  For  three  countries  identified  with  excessive  imbalances,  namely,  Cyprus,  Italy  and 
Portugal, in light of persistent structural weaknesses emerging from the IDR analysis, the 
Commission will review its assessment in May, taking into account the level of ambition 
of their National Reform Programmes (NRPs).  

Table 1: Outcome of the in-depth reviews over 2016-17  

2016  

No imbalances confirmed 

BE, EE, HU, AT, RO, UK  

2017  

FI 

Imbalances 

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

DE, IE, ES, NL, SI, SE 

Excessive imbalances 

BG, FR, HR, IT, PT, CY  

BG, FR, HR, IT, PT, CY 

Countries not selected for an IDR 

CZ, DK, LV, LT, LU, MT, PL, SK  BE, CZ, DK, EE, LV, LT, LU, HU, 

MT, AT, PL, RO, SK, UK 

5. REFORMS BY THE MEMBER STATES 

The strength and sustainability of the recovery depends on how effectively reforms are 
adopted and implemented. A determined process of reforms instils confidence and creates 
the conditions to sustainably generate higher growth and employment. In turn, these depend 
on  the  speed  with  which  reform  processes  in  product,  services  and  labour  markets  deliver 
results that trigger investment and productivity-enhancing resource reallocation. 

Support  for necessary adjustment  and transitions  can maximise the benefits of  reform 
and  ensure  synergies  between  reforms  in  different  policy  areas.  Reforms  in  different 
policy  areas  may  need  to  be  synchronised  and  mutually  supportive,  for  example  by 
developing flexibility in labour and product markets in parallel. The appropriate sequencing 
of  reforms  is  also  important,  as  clear  commitments  and  the  announcement  of  longer-term 
policy agendas have an impact on ownership and public support. 

Facilitating productivity gains in a larger number of firms can foster convergence and 
help reduce inequalities. The increasing heterogeneity in productivity performances is one of 
the  main  drivers  of  income  inequalities  in  EU  economies  and  societies.  It  also  constrains 
competitiveness and growth potential. While the effects of income inequality can be mitigated 
by taxation and social security systems, the need for such corrective measures can be reduced 
by implementing reforms that allow for more evenly spread productivity growth across firms, 
sectors and regions11. Disparities in productivity performance can be tackled, for example by 

11 See European Commission (2016), Single Market Integration and Competitiveness in the EU and the Member 

States. 

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investing  in  skills  and  education,  by  facilitating  technology  transfers  and  by  reallocating 
resources. Such policies help to increase wages and incomes and reduce the burden on public 
finances  for  correcting  existing  inequalities  through  redistributive  measures.  In  Denmark,  a 
Productivity  Commission  was  established  in  2012  to  propose  recommendations  that  could 
enhance  productivity  in  the  private  and  public  sectors.  Several  of  the  recommendations 
published in 2014 have been implemented.  

Distributional  effects  have  to  be  taken  increasingly  into  account  in  the  planning  and 
sequencing  of  structural  reforms.  Member  States  should  introduce  structural  reforms  in  a 
manner that takes into account their short and medium term impact, including distributional 
effects  and  social  costs.  Some  win-win  reforms  imply  no  trade-offs  between  growth  and 
equity. Reforms in the education sector, such as increasing the quality of education and access 
to  it,  contribute  to  economic  growth  and  to  reducing  inequality.  Vocational  training  and 
lifelong  re-training  opportunities  also  help  to  mitigate  the  negative  effect  of  skill-biased 
technical change because they improve the skills endowment of workers. 

Member  States  have  announced  and  implemented  many  tax  reforms  to  support 
investment,  employment  and  social  justice.  Progress  has  been  made  on  improving  tax 
compliance but the fight against tax fraud, avoidance and evasion remains essential to ensure 
fair burden-sharing. Striking the right balance between efficiency and equity requires securing 
the  tax  revenues  needed  for  public  investment  and  welfare.  After  labour  tax  reforms 
implemented at the start of 2016, new measures in the last year have been more limited and 
the  labour  tax  burden,  including  for  low-income  earners,  remains  high  in  a  number  of 
Member States. In some countries, taxation still adds to barriers to private investment. Further 
efforts are needed to make tax compliance simpler, tackle the bias towards debt financing and 
design better fiscal incentives for R&D. 

The  2014-2020  programming  period  under  the  EU’s  multiannual  financial  framework 
required  Member  States,  for  the  first  time,  to  undertake  various  reforms  to  facilitate 
and reinforce the impact of projects through  ex ante conditionality. Key areas for these 
reforms are the public procurement framework; the existence of strategic policy frameworks 
in the fields of social inclusion, labour markets, education and administrative efficiency; and 
the  implementation  of  relevant  EU  legislation.  These  requirements  contribute  to  enhancing 
the  overall  investment  environment  and  facilitate  the  implementation  of  both  EU  funds  and 
European Fund for Strategic Investments projects. These reforms need to be duly followed up 
and implemented by the Member States. Administrative capacity building is important in this 
context.  The  enhanced  use  of  financial  instruments  has  the  potential  to  leverage  EU  funds 
further and increase their impact, but requires appropriate know-how and expertise on the part 
of the administrative managing authorities. 

New policy measures need to be designed and implemented with the close involvement of 
social  partners  to  ensure  ownership  by  a  wider  range  of  stakeholders.  More  complex 
reforms  require  several  years  for  full  implementation.  For  that  reason,  their  design  must  be 
evidence-based and agreed with key stakeholders, such as regional and local authorities and 
the  social  partners.  Member  States  are  aware  of  the  need  to  improve  the  functioning  and 
effectiveness  of 
received  a  country-specific 
recommendation  in  2016  on  capacity  building,  has  adopted  a  new  Labour  Code,  which  the 
government anticipates will improve collective bargaining. Furthermore, Poland has set up a 
new Social Dialogue Council and a new agreement on social dialogue has been established in 
Spain. On the other hand, there is still doubt about the genuine involvement of social partners 
in labour market reforms in some Member States. 

social  dialogue.  Lithuania,  which 

9 

 
5.1 

Boosting investment 

Investment  growth  has  improved  recently  due  to  favourable  financing  conditions, 
capacity  utilisation  above  its  long-term  average  and  lower  corporate  deleveraging 
pressure in some countries. However, a number of cyclical and structural factors explain the 
persistent  weakness  in  investment.  Low  demand  growth  and  expectations  of  weak  potential 
growth  continue  to  hold  back  a  more  sustained  investment  recovery.  The  historical  level  of 
investment  in  the  EU  has  been  21-22%  of  GDP.  After  a  drop  to  19.4%  in  2013,  it  is  now 
gradually  recovering.  Total  investment  is  expected  to  accelerate  slightly  by  2.9  %  in  2017, 
both in the EU and the euro area, and to continue increasing in 2018 by 3.4 % in the euro area 
and by 3.1 % in the EU. It is particularly important to stimulate private investment, given that 
it represents 90% of total investment. 

Investment in intangible assets is improving, albeit slowly and from low levels. While the 
significant  fall  in  investment  in  equipment  and  machinery  partly  explains  the  drop  in 
productivity  after  the  crisis,  structural  issues  affecting  product,  services,  capital  and  labour 
markets  are  responsible  for  the  subdued  performance  of  total  factor  productivity  in  Europe, 
whose  growth  has  been  much  lower  in  the  last  decade  than  in  other  economies.  There  is  a 
particular  need  to  increase  investment  in  knowledge-based  capital,  support  sustainable 
investments  in  line  with  circular  economy  principles,  strengthen  public-private  cooperation 
and make better use of new instruments, including tax incentives.  

Inflows of foreign direct investment into the EU are currently low and trade integration 
and  diversification  in  some  parts  of  the  EU  economy  remain  weak.  Due  to  its  open 
economy, the EU is a leader in exports and imports of goods and services, representing 16 % 
of world trade. Over 30 million jobs in the EU are supported directly and indirectly by exports 
of  goods  and  services  to  the  rest  of  the  world.  However,  only  13 %  of  European  SMEs  are 
active  outside  the  EU  and  there  is  scope  for  Member  States  to  do  more  to  facilitate  the 
participation  of  SMEs  in  international  trade.  The  situation  between  Member  States,  regions 
and  sectors  also  varies  considerably.  While  machinery  and  equipment  in  Germany, 
aeronautics  in  France,  pharmaceutical  products  in  the  United  Kingdom  and  enzymes  in 
Denmark  are  world  leaders,  the  share  in  global  trade  of  a  number  of  sectors  and  Member 
States continues to decline. The reasons for foreign investments, and their terms and nature, 
vary considerably and their impact on job creation is also variable. The countries of origin of 
foreign  direct  investment  in  the  EU  are  changing  -  while  the  USA  and  Japan  remain  active 
investors,  others  such  as  China  and  Mercosur  countries  are  taking  a  higher  profile.  It  is 
important  to  ensure  a  level  playing  field  in  inward/outward  foreign  direct  investment  and 
increased EU access to respective markets in third countries. 

The most frequent investment challenges in the Member States include an unfavourable 
business  environment,  inefficiencies  in  public  administration,  and  high  sector-specific 
administrative  and  regulatory  burdens  and  barriers  to  investment.  In  several  Member 
States  a  number  of  other  factors  also  continue  to  hamper  investment.  These  factors  are 
rigidities in the product and labour markets; skills mismatches and shortages; weaknesses in 
research  and  innovation  frameworks;  the  complexity  of  taxation  systems;  ineffective  justice 
systems;  sector-specific  barriers,  for  example  in  infrastructure;  and  barriers  to  accessing 
finance, particularly for SMEs. In some Member States, there is still need to step up the fight 
against  corruption.  Overall,  the  rule  of  law,  and  trust  in  the  quality  and  predictability  of 
regulatory, tax and other policies and institutions are also important in the assessment of risks 
related to investment decisions. 

10 

 
Reforms  in  several  Member  States  have  begun  to  address  some  of  these  barriers  to 
investment.  Conditions  of  access  to  finance  have  generally  improved,  partly  as  a  result  of 
external  factors  (in  Croatia,  Ireland  and  Lithuania).  Some  progress  is  seen  in  labour  market 
and education (in Italy and France). The same goes for regulatory and administrative burdens 
(in  France,  Italy,  Portugal  and  Slovenia),  public  procurement  (in  Poland,  Portugal  and 
Sweden), public administration (in Italy and Slovakia) and the justice system (in Croatia, Italy 
and  Malta).  However,  there  has  been  only  limited  progress  in  removing  sector-specific 
regulatory barriers, particularly in services and network industries, as well as barriers linked 
to  the  financing  of  research  and  innovation.  France  has  continued  to  ease  administrative 
procedures  for  investment  in  industry  and  services  by  implementing  a  comprehensive 
simplification programme.  

In addition to the work of the Single Supervisory Mechanism as regards the significant 
institutions in the euro area, supervision of the banking sector has been strengthened at 
national and EU level and efforts were made to improve the management and disposal 
of non-performing loans. In several Member States, asset quality in the banking sector has 
deteriorated during the crisis and still and weighs on credit and investment. This is in spite of 
the declining trend in non-performing loans, whose EU average fell to 5.45% of total loans in 
Q2-2016.  Nevertheless,  dispersion  is  high  across  Member  States,  with  several  of  them 
recording  double-digit  levels  (Bulgaria,  Ireland,  Greece,  Croatia,  Italy,  Cyprus,  Hungary, 
Portugal, Romania and Slovenia). Measures to foster the development of a secondary market 
for  non-performing  loans  have  been  taken  (e.g.  Italy),  but  they  still  have  to  show  their  full 
impact.  Collateral  enforcement  and  insolvency  have  been  made  more  efficient  in  some 
Member  States  (e.g.  in  Bulgaria,  Croatia,  Italy  and  Cyprus).  The  setting-up  of  public  or 
private  Asset  Management  Companies  and  supervisory  measures, including  additional loan-
loss  provisioning  and  capital  requirements  as  well  as  enhanced  monitoring  of  debt 
restructuring  against  arrears  reduction  targets,  have  contributed  to  the  decline  in  non-
performing loans in Bulgaria, Croatia, Hungary, Ireland, Romania and Slovenia. In Italy, non-
performing loans have been declining recently, but the disposal of impaired assets proceeds at 
a slow pace. The deterioration in asset quality continued in Portugal in the first half of 2016, 
reflecting  developments  notably  in  the  real  estate  and  construction  sectors.  In  Cyprus  and 
Greece,  where  non-performing  loans  increased  to  over  40%  in  the  wake  of  the  crisis,  the 
measures  adopted  so  far  (including  debt  restructuring  targets,  impaired  asset  disposal)  have 
yet to produce tangible results. In all, more determined and comprehensive efforts are needed 
in several Member States to bring down non-performing loans levels, together with flanking 
reforms to foster the restructuring of their banking systems. 

Member  States  have  taken  action  both  to  improve  access  to  equity  finance  and  to 
develop  alternative  forms  of  finance  such  as  crowdfunding.  The  success  of  the  2015 
crowdfunding  law  in  Austria  demonstrates  the  strong  positive  impact  of  creating  a  suitable 
legal framework for such alternative forms of financing. Other Member States such as Spain, 
Latvia,  the  Netherlands  and  Hungary  have  facilitated  access  to  finance  for  SMEs  while 
providing  opportunities  for  institutional  investors.  Measures  include  the  consolidation  of 
public support instruments in a single development financing institution, which acts as a one-
stop shop for businesses and provides non-financial support such as counselling and training. 
Another measure is the set-up of dedicated state-owned venture capital or funding for growth 
schemes and other types of funds-of-funds. Nevertheless, access to finance and administrative 
procedures also remain significant barriers to growth and investment in a number of Member 
States,  particularly  for  start-  and  scale-up  SMEs.  Cumbersome  start-up  and  licensing 
regulations continue to act as barriers to SME investment in a number of Member States. 

11 

 
Public investment declined significantly in most Member States during the crisis and it 
has  not  returned  to  the  long  term  level.  Beyond  directly  affecting  output  growth, 
underinvestment  in  both  tangible  and  intangible  assets  —  such  as  R&D  —  hurts  long-term 
productivity as the rate of innovation and diffusion of existing technologies slows down. It is 
important  to  promote  public  investment  —  in  particular  in  education  and  training, 
infrastructure,  and  research  and  innovation  —  while  in  parallel  taking  measures  to  leverage 
private investment. These efforts should also focus on the quality of investment. 

A series of improvements in the public procurement framework have been implemented 
in  recent  years,  both  at  EU  and  Member  State  level,  but  challenges  persist.  Barriers  to 
efficient  public  procurement  practices  restrain  economic  growth  and  the  functioning  of  the 
internal market. Annually public authorities in the EU spend around 14 % of GDP on public 
procurement, which is an essential vehicle for delivering governmental policies and achieving 
national  strategic  objectives.  Well-functioning  public  procurement  markets  boost  national 
competitiveness through stronger public finances, more focused investments and the provision 
of  higher  quality  services  such  as  infrastructure  or  e-government.  In  the  healthcare  sector, 
public  procurement  can  provide  useful  instruments  to  obtain  better  value  for  money  for 
medicines  and  medical  equipment.  In  several  Member  States,  the  publication  rate  remains 
low, resulting in insufficient openness to cross-border business opportunities. The application 
of  procurement  procedures  restricting  competition,  such  as  negotiated  procedure  without 
publication,  varies  greatly  in  Member  States  from  close  to  0 %  to  more  than  20 %.  The 
proportion of contracts for which there is only one bid also remains high. This indicates that 
the  single  market  for  public  procurement  is  not  sufficiently  integrated  and  further  opening 
could boost economic efficiency and growth. 

Social investment is a prerequisite for a successful and lasting recovery. With the support 
of  the  European  Social  Fund,  investments  in  active  labour  market  policies  are  helping  to 
ensure  the  better  provision  of  individualised  services  and  improve  the  capacity  of  public 
employment services. Social investment should also include the use of financial instruments 
such as loan schemes to support micro and/or social enterprises, targeting specific populations 
such as the  self-employed, young people, young  micro-borrowers, women  and the  disabled. 
The Investment Plan for Europe is increasingly contributing to these investments, for example 
by providing a guarantee on loans to about 1,300 microbusinesses in Poland. However, it is 
far from reaching its full potential in boosting human capital development. Additional efforts 
have to be deployed to design instruments adapted to this sector and to ensure that social and 
financial actors cooperate more closely. 

5.2 

Pursuing structural reforms 

Reforms improving labour markets and social security systems 

Many  Member  States  have  implemented  important  reforms  in  employment  protection 
legislation  to  address  segmented  labour  markets.  Denmark  has  introduced  a  reform  of 
active  labour  market policies and a package of measures to  make  work pay and  Poland  has 
taken  steps  to  reduce  the  excessive  use  of  civil  law  contracts.  The  effects  of  such  reforms 
must  be  seen  together  with  other  institutional,  public  administration  and  product  market 
conditions. The uncertainty and complexity surrounding labour litigation can be addressed, in 
particular by reducing the length of procedures and promoting alternative dispute resolution 
procedures,  such  as  mediation.  In  France,  the  law  adopted  in  August  2016  modifying  the 
regulation  on  unfair  dismissals  and  increasing  the  scope  for  company-level  adjustment  of 
working conditions is expected to contribute to reducing segmentation in the labour market. 

12 

 
Some  Member  States  have  taken  steps  to  improve  their  wage-setting  systems.  Keeping 
wages and productivity developments aligned over time is crucial to foster competitiveness. It 
is, however, also important to ensure that pay levels allow decent standards of living. Belgium 
has made wage formation more responsive to the business cycle and changes in productivity. 
In  Finland  a  new  wage-setting  model  is  being  negotiated  where  wage  increases  in  tradable 
industries set an anchor to the wages in non-tradable sectors. 

In spite of some reforms to reduce labour taxation in a number of Member States, the 
tax  wedge  on  labour  remains  high  in  most  countries.  This  is  particularly  the  case  in  the 
euro area. A high tax wedge on labour, by weighing on labour costs and reducing the net take-
home pay of employees, hinders both labour demand and labour supply. There is potential in 
several  Member  States  to  shift  taxation  from  labour  towards  more  growth-friendly  sources 
such as environmental and property taxes. A number of Member States, including Lithuania, 
Hungary and Austria, have taken steps to reduce the tax wedge, mostly targeting low income 
workers. 

The participation in the labour market of some groups remains a challenge for several 
Member States. Policies targeted at integrating vulnerable groups into the labour market are 
needed  to  ensure  equal  rights,  obligations  and  opportunities  for  all.  In  particular,  non-EU 
nationals  and  people  with  a  migrant  background  are  under-represented  in  the  labour  market 
and face higher unemployment and a greater risk of poverty and social exclusion. These often 
result  from  a  combination  of  factors  such  as  limited  language  knowledge  or  access  to 
education,  lower  skills  or  discrimination.  These  challenges  have  intensified  since  the 
economic crisis and more recently with the higher inflows of asylum seekers. Member States 
including Germany, Austria and Sweden are addressing these challenges through measures to 
promote  the  labour  market  integration  of  refugees.  Likewise,  measures  that  promote  female 
labour market participation can reduce gender inequalities, while having significant beneficial 
effects on  labour  market  performance  and growth. In this context, Member States including 
Ireland and Slovakia have taken steps to extend the provision of childcare, for example. 

Member  States  need  to  ensure  that  all  young  people,  including  the  low-skilled,  have 
their  labour  market  opportunities  improved.  This  includes  helping  workers  adjust  to 
technological  change  and  globalisation.  More  Member  States  have  been  taking  steps  to 
improve  the  overall  governance  and  coherence  of  their  active  labour  market  policies  and 
public employment services. Romania has strengthened its national employment agency and 
Hungary  is  taking  steps  to  reinforce  active  labour  market  policies.  In  Estonia,  the  Work 
Ability  reform  has  been  fully  operational  since  January,  providing  better  activation  support 
services based on an individual approach. 

Participation  rates  in  education  and  training  are  increasing.  Many  Member  States 
continue to reform their education and training systems to increase their inclusiveness and the 
quality of outcomes. Portugal has undertaken successful initiatives in recent years to address 
education inequalities, reduce school failure and raise the basic skills level of its population. 
Several  countries  are  undertaking  reforms  to  improve  vocational  education  and  training 
systems. 

Modernising  social  protection  systems  is  vital  to  ensure  their  sustainability  and 
effectiveness  and  their  link  to  the  labour  market.  The  demographic  challenge  underlines 
the  importance  of  increasing  the  efficiency  of  social  spending.  An  integrated  approach  to 
labour  market  support,  combining  activation  services  with  adequate  social  protection  and 
access to quality social services, can help maximise the return on public spending. Malta has 

13 

 
introduced a package of measures to make work pay, targeting women in particular in order to 
address  their  low  participation  in  the  labour  market.  In  Cyprus,  a  guaranteed  minimum 
income scheme has been introduced, which is expected to help reduce poverty. 

A  number  of  Member  States  face  the  need  to  adapt  their  taxation  systems  and  social 
safety net systems. Both can have important redistributive effects, which differ widely across 
countries.  Between  2010  and  2013,  in  countries  including  the  Czech  Republic,  Spain,  Italy 
and  Portugal,  the  rising  inequality  in  market  income  was  mitigated  (and  in  some  countries 
offset)  by  the  increasing  redistributive  impact  of  taxes  and  transfers.  In  other  countries,  the 
redistributive  effect of taxes and transfers  decreased significantly over the same period, and 
hence did not contribute to mitigating inequality in market income. 

Reforms to foster competitiveness 

Member States have pursued policies to strengthen overall competitiveness. For example, 
central labour market organisations in Finland agreed in February 2016 on a Competitiveness 
Pact to improve the  cost competitiveness of the Finnish economy by 5 % (as part of  a total 
cost competitiveness improvement of 15 %). A broad-based ‘Competitive Romania’ strategy 
was endorsed in July 2016, demonstrating political and societal consensus on the main areas 
for  action  in  2016-2020  that  are  necessary  to  put  Romania  on  the  path  of  sustainable 
economic development. 

The rapid development  of  the collaborative economy  has the  potential to  contribute to 
competitiveness and growth. Some Member States, regions and cities are putting in place a 
framework  to  develop  the  collaborative  economy.  Others  are  adopting  a  more  restrictive 
approach to the collaborative economy business models. Denmark is  currently developing a 
comprehensive strategy, the Netherlands and the United Kingdom have provided a framework 
in  the  tourism  accommodation  sector  and  Estonia  and  Lithuania  have  adapted  their  urban 
passenger transport framework to embrace new business models. In Belgium, Italy and Spain, 
regulation of activities in the collaborative economy suffers from strong regional divergences. 

Member  State  reforms  also  address  a  vast  array  of  challenges  to  attract  and  boost 
investment in the internal market. There is slow progress in reforming services markets in 
particular and regulatory restrictiveness remains a persistent barrier to services investment in 
many  Member  States.  Restrictive  regulatory  requirements  and  burdensome  administrative 
procedures  can  create  barriers  to  entry  or  establishment.  There  is  strong  evidence  that  the 
functioning of services sectors affects the whole economy, not only due to their sheer size but 
also through their links with other sectors of the economy. High regulatory restrictiveness in 
the  services  sector,  in  particular  business  services,  contributes  to  inefficiency  and  low 
productivity  growth.  This  affects  business  dynamics  and  investment  in  the  services  sectors, 
but  also  has  repercussions  on  the  manufacturing  sector.  Anti-competitive  regulation  in  the 
services  sectors  can  impose  potential  costs  on  downstream  industries  that  use  the  output  of 
these sectors as intermediate inputs in the production process.  

While  the  progress  of  reforms  in  professional  services  is  particularly  slow,  there  have 
been  some positive  developments.  Following a  2016  recommendation,  France  has  adopted 
almost  all  secondary  legislation  needed  to  implement  the  provisions  of  the  2015  law  on 
growth and activity which were not directly applicable. This has allowed the lifting of certain 
restrictions on the exercise of a number of regulated professions, but the scope of the reform 
remains  limited.  For  the  professions  of  architects  and  engineers,  in  2015  Luxembourg 
removed some shareholding and voting rights requirements and in 2016 removed fixed tariffs 

14 

 
in public contracts. However, the overall level of restrictiveness for these professions is still 
among the highest in the EU. 

Some  Member  States  have  removed  restrictions  affecting  the  functioning  of  the  retail 
sector and others have initiated reforms. Finland and Denmark plan to liberalise planning 
restrictions,  which  should  allow  retailers  more  flexibility  in  choosing  the  location  of  their 
shops  and  adapting  their  size  to  consumers’  needs.  However,  progress  is  uneven  between 
Member States and there is a trend in some towards introducing new restrictive measures in 
the grocery sector affecting, in particular, foreign retailers. Such measures hamper the single 
market integration in the retail sector. 

Reforms  in  public  administration  are  essential  to  deliver  high-quality  public  services 
and boost entrepreneurship, competitiveness and growth. Spain has almost completed the 
implementation  of  the  recommendations  made  under  the  2013  CORA  reform  of  the  public 
administration. According to the national administration the expected savings may amount up 
to EUR 30.5 billion for the public administration services as a whole and EUR 3.44 billion for 
businesses and citizens. 

Member States have taken some action to improve conditions for SMEs but more needs 
to  be  done.  Member  State  action  in  this  area  includes  the  fourth  national  action  plan  to 
support  SMEs  in  Luxembourg,  the  comprehensive  simplification  programme  in  France,  the 
introduction of lifelong zero social contributions for employers in Belgium on their first hiring 
in 2016-2020 and specific tax exemptions in Romania for high-skilled, high-demand sectors. 
However,  in  many  Member  States  conditions  for  entrepreneurship  and  SME  growth  remain 
difficult.  In  particular,  in  many  Member  States  entrepreneurs  who  have  been  through 
bankruptcy do not get a second chance due to expensive and lengthy insolvency regimes and 
the lack of broad-based campaigns to fight the stigma of business failure. 

Member States have continued to undertake reforms, provide support to exporters and 
promote  rapid  internationalisation  of  their  start-ups.  This  includes  active  business  and 
financing  support  and  trade  promotion  abroad  through  private  business  networks  as  well  as 
economic diplomacy and economic partnerships. Sweden started implementing its new export 
strategy to increase exports and foreign investments. Good practices in this area also include 
Italy’s Start-up Act and new ‘Business 4.0’ strategy which provides, among other things, for 
tax  deductions  for  equity  investments  in  start-ups  and  innovative  SMEs.  It  also  fosters 
knowledge spillover and supports the transition towards high-tech and high-skill sectors. 

5.3 

Ensuring responsible fiscal policies 

General government deficits and debt ratios in the euro area and the EU are expected to 
decline  on  the  back  of  moderate  growth  and  historically  low  interest  rates,  albeit  at  a 
slower pace. According to the latest European Commission forecast, the government deficit 
in  the  euro  area  is  expected  to  continue  to  fall  in  2017  before  stabilising  in  2018  at  1.4 % 
(1.6 %  in  the  EU)  of  GDP.  The  general  government  debt-to-GDP  ratio  of  the  euro  area  is 
expected  to  have  reached  91.5 %  of  GDP  in  2016  (85.1 %  in  the  EU).  It  is  projected  to 
continue  declining  gradually  to  89.2 %  in  2018  in  the  euro  area  (83.6 %  in  the  EU).  Debt 
reduction can be explained mainly by both primary surpluses and a more favourable snowball 
effect, resulting from reduced interest expenditure, modest real GDP growth and the expected 
increase in inflation. 

15 

 
Member  States  need  to  support  investment  to  strengthen  the  recovery,  and  to  balance 
sustainability  and 
issued  a 
stabilisation  concerns.  The  Commission 
Communication12 calling for a moderately expansionary fiscal stance and a better distribution 
of  fiscal  efforts  across  the  euro  area.  For  this  purpose,  Member  States  should  pursue  fiscal 
policies  in  respect  of  the  Stability  and  Growth  Pact,  thereby  ensuring  sustainability,  while 
making  the  best  use  of  the  flexibility  in  the  existing  rules.  Member  States  that  have  fiscal 
space  should  use  it  to  support  investment  to  strengthen  the  recovery  and  boost  their 
productive  potential.  Others  should  continue  to  pursue  the  consolidation  of  their  public 
finances. 

recently 

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

In its assessment of the 2017 draft budgetary plans (DBPs) for euro area Member States, published in November 
2016,  the  Commission  indicated  that  for  eight  Member  States  (Belgium,  Spain,  Italy,  Cyprus,  Lithuania, 
Portugal, Slovenia and Finland), these plans posed a risk of non-compliance with the provisions of the Stability 
and  Growth  Pact.  Five  countries  —  Ireland,  Latvia,  Malta,  Austria  and  France  —  were  found  to  be  broadly 
compliant,  while  Germany,  Estonia,  Luxembourg,  the  Netherlands  and  Slovakia  were  compliant  with  the 
requirements. Moreover, Germany, Luxembourg and the Netherlands were expected to be above their medium-
term budgetary objectives and were encouraged to make use of the fiscal space available, while preserving the 
long-term sustainability of national public finances. 

The  assessments  made  for  Spain  and  Lithuania  in  the  November  2016 DBP  round  were  based  on  no-policy-
change  DBPs  as  these  countries  had  caretaker  governments  without  full  budgetary  powers.  Since  then,  the 
incoming  governments  in  both  countries  submitted  updated  DBPs,  on  which  the  Commission  issued  updated 
opinions  on  17 January  2017.  The  updated  DBP  of  Spain  was  assessed  as  being  broadly  compliant  with  the 
requirements  of  the  Pact.  Lithuania’s  updated  DBP  was  still  assessed  as  being  at  risk  of  non-compliance, 
unchanged from the assessment made last autumn. 

Following the finalisation of the 2017 budgets for most Member States, the Commission’s 2017 winter forecast 
provides a basis for assessing how Member States have taken into account the Commission's opinions on their 
draft budgetary plans and have acted upon the commitments they made in the Eurogroup. 

For  Belgium,  Italy  and  Finland,  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 Stability and Growth Pact. The Commission committed in spring 2016 to issue a 
new  Article  126.3  report for  Italy once new  information  became  available  on  the  adjustment  path towards  the 
medium-term budgetary objectives in 2017. The Commission issued this updated report on 22 February. 

The Commission will monitor the budgetary developments of all Member States under the European Semester, 
based  on  the  national  reform  programmes  and  stability  or  convergence  programmes  to  be  submitted  by  mid-
April. It will provide its recommendations in May, together with other procedural steps under the Pact as needed. 

The Commission will in this context also provide its full assessment of Finland’s and Lithuania’s eligibility for 
the flexibility they have applied for. If granted, this could improve the assessment of their compliance with the 
Stability and Growth Pact. 

An  appropriate  fiscal  stance  concerns  not  only  the  direction  and  size  of  the  budget 
balance,  but also the composition and quality of the  public finances behind it. Member 
States  should  improve  composition  inter  alia  by  creating  more  room  for  tangible  and 
intangible  investment  The  effectiveness  and  efficiency  of  public  expenditure  by  all 
government  levels  should  be  regularly  reviewed,  including  with  respect  to  the  objective  of 

12 COM(2016) 727. 

16 

 
                                                            
promoting  fairness.  Ensuring  the  effective  functioning  of  national  fiscal  frameworks  would 
contribute to attaining these goals. 

Improvements in national fiscal frameworks can foster growth-friendly public spending. 
In response to recommendations, Member States have continued to reinforce various aspects 
of  their  fiscal  frameworks.  Austria  adopted  a  new  equalisation  law  in  January  2017 
simplifying transfer rules across layers of governments. Italy finalised the 2009 reform of its 
budget process and structure. Finland enshrined in its legal order an unequivocal comply-or-
explain principle in relation to the opinions of its independent fiscal institution on compliance 
with national fiscal rules. Moreover, there has been a substantive reflection in some Member 
States  on  improving  their  domestic  frameworks.  The  Netherlands  and  Sweden  set  up 
dedicated working groups (an advisory group of high-level civil servants and a parliamentary 
committee, 
frameworks  and  proposed 
improvements during 2016. In almost all Member States, fiscal councils now play an active 
role in the national debate on fiscal policy. They regularly publish independent assessments of 
budget  plans  and  outcomes.  With  the  Bulgarian  fiscal  council  having  become  fully 
operational in the first half of 2016, the Czech Republic, Poland and Slovenia remain the only 
Member States that have no operational fiscal council in place. 

respectively)  which 

the  existing 

reviewed 

The Commission has reviewed the transposition of the Fiscal Compact. The Commission 
was invited to do so by the Treaty on the Stability, Coordination and Governance in the EMU. 
The  Fiscal  Compact  provisions  are  designed  to  strengthen  the  consistency  between  the 
national and European fiscal frameworks and enhance ownership of them in Member States. 
The Commission’s report is adopted alongside this package, following extensive consultation 
with  the  22  Contracting  Parties  (the  euro  area  countries  plus  Bulgaria,  Denmark  and 
Romania)13.  The  report  shows  that  all  Contracting  Parties  have  significantly  adapted  their 
national fiscal frameworks as a result of the Fiscal Compact requirements, in conjunction with 
Union legislation. 

Reforming pension and healthcare systems can enhance the quality of public finances, as 
their medium- and long-term sustainability poses significant challenges in view of high 
debt  levels  and  population  ageing.  In  a  medium-  to  long-term  perspective,  most  Member 
States  face  either  medium  or  high  sustainability  risks14.  These  are  due  to  the  still  high 
projected  stock  of  public  debt  and  projected  increases  in  age-related  public  spending.  The 
risks highlight the need for additional reforms, particularly in healthcare and pensions, which 
on  the  one  hand  address  the  fiscal  concern  and  on  the  other  hand  ensure  accessibility  to 
healthcare  and  adequacy  of  pensions.  Progress  has  been  made  in  many  countries  with  a 
positive  impact  on  long-term  fiscal  sustainability,  notably  due  to  implemented  pension 
reforms and supported by recent fiscal consolidation. 

The  pension  system  was  identified  as  a  challenge  in  a  number  of  Member  States  last 
year. While, in previous years, many Member States had adopted important pension reforms, 

13  The  consultations  aimed  to  give  the  Contracting  Parties  the  opportunity  to  submit  observations  on  the 
Commission’s findings, as provided for in Article 8(1) of the Treaty on Stability, Coordination and Governance 
in the Economic and Monetary Union. 
14 Fiscal sustainability risks were found to be medium or high over the medium and long-term in: Belgium, the 
Czech  Republic,  Ireland,  Spain,  France,  Croatia,  Italy,  Cyprus,  Lithuania,  Luxembourg,  Hungary,  Malta,  the 
Netherlands,  Austria,  Poland,  Portugal,  Romania,  Slovenia,  Slovakia,  Finland  and  the  United  Kingdom.  For  a 
detailed  assessment  of  fiscal  sustainability  challenges,  see  European  Commission  (2017),  ‘Debt  Sustainability 
Monitor 2016’, European Economy, Institutional papers, No 47. 

17 

 
                                                            
progress in reforming pension systems was limited or non-existent among the countries where 
country-specific recommendations were adopted in 2016. Policy challenges remain for this set 
of  countries,  which  need  to  be  addressed  by  ensuring  better  accounting  equivalence  and 
higher effective retirement rates or higher general employment rates.  

Progress  in  reforming  healthcare  systems,  with  the  aim  of  ensuring  cost-effectiveness 
and  access  to  services  while  safeguarding  sustainability,  varies  among  the  Member 
States.15  Several  countries  (Ireland,  Lithuania,  Austria,  Portugal,  Romania,  Slovenia  and 
Finland)  have  made  some  progress  in  addressing  the  country-specific  recommendations 
addressed  to  them.  This  progress  includes  improving  cost-effectiveness,  using  spending 
targets  and  reviews,  shifting  to  and  using  less  costly  care,  and  curbing  informal  payments. 
Others have made only limited progress. The reforms initiated in a number of Member States 
need to continue and be accelerated to make healthcare systems more effective, accessible and 
resilient.  This  will  help  them  contribute  to  the  population's  health,  economic  prosperity  and 
social cohesion. Reforms involve: ensuring access to timely and good-quality healthcare for 
all; shifting from in-patient to outpatient care; investing in health promotion, primary care and 
integrated  care;  improving  the  governance  of  the  systems;  using  medicines  more  rationally; 
using Health Technology Assessment; more centralised public procurement; and e-health and 
health information tools.  

6. 

NEXT STEPS 

The  Commission  will  continue  engaging  in  a  constructive  dialogue  with  the  Member 
States.  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 challenges identified are expected to be addressed by the Member States in 
their national reform programmes, as well as their stability or convergence programmes, to be 
published and presented to the Commission by mid-April. The Commission will discuss the 
main findings of the analysis with the European Parliament. 

The  Member  States  are  expected  to  involve  national  parliaments  and  social  partners 
closely and ensure the ownership of the reform process by a wider range of stakeholders. 
Given that the success of the implementation often relies on lower levels of government, the 
Commission  has  also  called  on  the  Member  States  to  explain  in  their  national  reform 
programmes how regional and local authorities, depending on the division of competences in 
individual  Member  States,  were  involved  in  the  preparation  of  the  programme  and  in  the 
implementation and/or elaboration of reforms. 

15 For a review of challenges and policy options in the health sector, see European Commission (2016), ‘Joint 
Report on Health care and Long-term Care Systems & Fiscal Sustainability’, European Economy, Institutional 
papers, No 36. 

18 

 
 
 
 
                                                            
APPENDIX 1 — INTEGRATED SURVEILLANCE OF MACROECONOMIC AND FISCAL IMBALANCES  

Macroeconomic Imbalances 
Procedure (MIP) 16 

BE 

BG 

Excessive imbalances 

Stability and Growth Pact 

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

Preventive arm 

Not yet at MTO; subject to debt rule17 

Comments 

Preventive arm 

Overachieving MTO 

Preventive arm 

Overachieving MTO 

Preventive arm 

At MTO 

Preventive arm 

Imbalances 

Overachieving MTO; subject to debt rule 

Preventive arm 

At MTO 

Preventive arm 

Imbalances 

Not yet at MTO; subject to transitional debt 
rule 

Corrective arm 

Excessive deficit, deadline for correction: 
2016 

At MTO; subject to transitional debt rule 

Under a dedicated financial assistance 
programme 

CZ 

DK 

DE 

EE 

IE 

EL 

16    Both  the  'imbalances'  and  'excessive  imbalances'  categories  entail  specific  monitoring,  to  be  modulated 

depending on the severity of the challenges. 

17   Debt rule: If the 60% reference for the debt-to-GDP ratio is not respected, the Member State concerned will 
be put in the Excessive Deficit Procedure, after taking into account all relevant factors and the impact of the 
economic cycle, if the gap between its debt ratio and the 60% reference is not reduced by 1/20th annually (on 
average over three years). Transitional debt rule: Each Member State in the 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. 

19 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                            
ES 

Imbalances 

FR 

Excessive imbalances 

HR 

Excessive imbalances 

Corrective arm 

Excessive deficit, deadline for correction: 
2018 

Corrective arm 

Excessive deficit, deadline for correction: 
2017 

Corrective arm 

Excessive deficit, deadline for correction: 
2016 

AT MTO; subject to debt rule18 

18   Condition on the abrogation of the EDP decision based on validated outturn budgetary data for 2016. 

20 

 
 
 
 
 
 
                                                            
Macroeconomic Imbalances 
Procedure (MIP) 

Stability and Growth Pact 

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

Comments 

IT 

Excessive imbalances 

CY 

Excessive imbalances 

Preventive arm 

Not yet at MTO; subject to debt rule 

Preventive arm 

At MTO; subject to transitional debt rule 

LV 

LT 

LU 

HU 

MT 

NL 

AT 

PL 

Preventive arm 

At MTO 

Preventive arm 

At MTO 

Preventive arm 

Overachieving MTO 

Preventive arm 

Not yet at MTO; subject to debt rule 

Preventive arm 

Not yet at MTO 

Preventive arm 

Imbalances 

Overachieving MTO; subject to debt rule 

Preventive arm 

Not yet at MTO; subject to debt rule 

Preventive arm 

Not yet at MTO 

Corrective arm 

Excessive deficit, deadline for correction: 
2016 

Not yet at MTO; subject to transitional debt 
rule19 

Preventive arm 

Not yet at MTO 

PT 

Excessive imbalances 

RO 

19   Condition on the abrogation of the EDP decision based on validated outturn budgetary data for 2016. 

21 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                            
SI 

SK 

FI 

SE 

UK 

Preventive arm 

Imbalances 

Not yet at MTO; subject to transitional debt 
rule 

Preventive arm 

Not yet at MTO 

Preventive arm 

No imbalances 

Not yet at MTO; debt-to-GDP ratio above 
above 60% of GDP reference value 

Exit from MIP 

Imbalances 

Preventive arm 

Overachieving MTO 

Corrective arm 

Excessive deficit; deadline for correction: 
2016-17 

(*) The Recommendations under the '2-pack' (Reg. No 473/2013) regarding measures to be taken in order to ensure a timely correction of its excessive 
government deficit only concern euro area Member States. 

22 

 
 
 
 
 
 
 
 
 
APPENDIX 2: PROGRESS TOWARDS EUROPE 2020 TARGETS 

Europe 2020 targets for the 
EU 

2010 data 

Latest available data 

In 2020, based on recent 
trends 

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 % 

68.6 % 

70.1% (2015) 

Target likely to be met 

1.93 % 

2.03% (2015) 

Target unlikely to be met 

14.3 % reduction 

22% reduction (2015) 

Target likely to be met 

12.8 % 

16% (2014) 

Target likely to be met 

5.7 % increase 
(for primary 
energy 
consumption) 

10.7% increase (for 
primary energy 
consumption, 2015) 

Target likely to be met 

13.9 % 

10.8% (2016) 

Target likely to be met 

33.8 % 

39% (2016) 

Target likely to be met 

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

0.5 million 
increase 
(compared to the 
2008 base year) 

1.7 million increase 
(compared to the 2008 
base year) 

Target unlikely to be met 

Sources: European Commission; European Environment Agency.   

23 

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

Bulgaria  is  experiencing  excessive  imbalances.  Vulnerabilities  in  the  financial  sector  are 
coupled  with  high  corporate  indebtedness  in  a  context  of  incomplete  labour  market 
adjustment.  Net  foreign  liabilities  have  fallen  against  the  background  of  a  current  account 
surplus.  The  banking  sector  has  stabilised,  but  the  legacy  issues  linked  to  weak  governance 
and supervision have not yet been fully dealt with. The authorities have completed the asset 
quality review and stress tests for the banking sector, as well as the balance sheet reviews of 
pension  funds  and  insurance  companies.  Follow-up  actions  have  been  addressed  to  the 
concerned companies but remain to be implemented. Deleveraging in the corporate sector has 
been  orderly  but  slow,  leaving  a  large  private  sector  debt  stock  as  well  as  still  high  non-
performing loans levels. Labour market conditions have improved, but employment levels are 
low,  long  term  unemployment  is  high,  and  labour  market  mismatches  persist.  Some  policy 
action has been undertaken to address the main sources of imbalance, but further progress is 
needed to address remaining pockets of vulnerabilities in the financial sector, including bank 
and  non-bank  financial  supervision,  as  well  as  weaknesses  hampering  the  insolvency 
framework. 

Germany  is  experiencing  imbalances.  The  persistently  high  current  account  surplus  has 
cross-border relevance and reflects excess savings and subdued investment in both the private 
and the public sector. The current account surplus increased further in 2015 and 2016 and it is 
expected to remain at a high level. Addressing the surplus has implications on the rebalancing 
prospects  of  the  rest  of  the  euro  area  because  more  dynamic  domestic  demand  in  Germany 
helps  overcoming  low  inflation  and  ease  deleveraging  needs  in  highly-indebted  Member 
States..  Public  investment  has  increased  in  recent  years,  but  as  a  proportion  of  GDP  still 
appears  low  compared  with  the  euro  area  and  in  view  of  the  fiscal  space  and  investment 
backlog,  in  particular  at  municipal  level.  Despite  low  interest  rates  that  create  favourable 
financing conditions, business investment on GDP is still subdued. While recovery in private 
consumption  has  continued,  household  savings  have  reached  record  high  levels  in  the  euro 
area.  Measures  have  been  taken  to  strengthen  public  spending  and  improve  the  design  of 
federal fiscal relations. Further policy action should aim at further strengthening investment, 
including by reforming the services sector and improving the efficiency of the tax system, as 
well  as  stimulating  labour  market  activity  of  second  earners,  low-income  earners  and  older 
workers to boost households’ incomes and counter the effects of ageing. 

Ireland is experiencing imbalances. Despite improvements in flow variables, large stocks of 
public  and  private  debt  and  net  external  liabilities  constitute  vulnerabilities.  Strong 
productivity growth in past years has contributed to improved competitiveness, and the recent 
worsening  in  the  Net  International  Investment  Position  appears  to  be  driven  by  factors 
disconnected  with  the  domestic  economy.  On  the  back  of  a  strong  recovery,  the  ratios  of 
private and government debt to GDP remain high but are falling. The share of non-performing 
loans has been declining over the last years, but remains elevated. Banks are well recapitalised 
and their profitability, albeit still low, is improving gradually. House prices are growing at a 
rapid  pace,  mainly  driven  by  supply  constraints,  but  from  likely  undervalued  levels.  Policy 
measures have been taken in recent years to strengthen the financial sector, restructure debt, 
increase  housing  supply  and  put  public  finances  on  a  sustainable  footing,  and  further 
measures are in the pipeline. 

Spain  is  experiencing  imbalances.  A  strong  economic  recovery  continues  supporting  the 
rebalancing  of  the  economy.  However,  large  stock  imbalances  in  the  form  of  external  and 

24 

 
 
 
 
internal  debt,  both  public  and  private,  continue  to  constitute  vulnerabilities  in  a  context  of 
high unemployment and have cross-border relevance. The rebalancing in the external sector is 
advancing, thanks to the current account surpluses recorded since 2013. However, net external 
liabilities  remain  very  high  and  it  will  take  time  before  they  reach  prudent  levels.  Private 
sector debt reduction is also progressing, supported by favourable growth conditions, while a 
healthier  financial  sector  supports  economic  activity.  However,  deleveraging  needs  are  still 
present, especially for households. Government debt as a share of GDP is not expected to be 
put on a declining path despite a quite robust recovery, on account of large though declining 
deficits. Despite a significant reduction over the past three years, unemployment remains very 
high. Measures have been taken to enhance competitiveness, but further policy action would 
help  sustaining  the  external  surplus,  ensure  a  durable  reduction  of  the  general  government 
deficit and support sustainable growth. 

France is experiencing excessive imbalances. In a context of low productivity growth, high 
public  debt  and  weak  competitiveness  may  imply  risks  looking  forward,  with  cross-border 
relevance. Competitiveness has started to improve, and export market shares have stabilised 
in  recent  years.  However,  subdued  productivity  growth  prevents  a  faster  recovery  of  cost 
competitiveness  despite the measures to reduce the labour cost and a moderate evolution of 
wages. Profit margins of non-financial corporations have somewhat recovered since 2013, but 
continue  to  weigh  on  investment.  Government  debt  is  still  growing,  albeit  at  a  decelerated 
pace,  and  sustainability  risks  in  the  medium  term  are  high.  Past  policy  commitments  have 
been translated into action to improve the functioning of product and labour markets and the 
competitiveness  of  SMEs.  While  recent  reforms  constitute  notable  progress,  some  policy 
challenges remain to be addressed and further action would be needed, notably to increase the 
efficiency  of  public  spending  and  taxation,  to  reform  the  minimum  wage  and  the 
unemployment  benefit  system,  and  to  improve  the  education  system  and  the  business 
environment. 

Croatia  is  experiencing  excessive  imbalances.  Vulnerabilities  are  linked  to  high  levels  of 
public, private and external debt, both largely denominated in foreign currency, in a context of 
low potential growth. The current account surpluses have begun to translate into a decrease of 
the  gross  external  debt,  which  nevertheless  remains  elevated.  The  acceleration  of  the 
economic recovery is contributing to a further reduction in the private debt-to-GDP ratio, and 
as  of  this  year  public  debt-to-GDP  is  also  on  a  declining  path.  Despite  recent  losses,  the 
financial sector remains relatively well-capitalised and profitability is recovering. The rate of 
non-performing  loans  has  started  to  decrease,  but  remains  high.  A  number  of  measures  on 
insolvency  frameworks  and  improving  labour  market  flexibility  have  been  adopted  in 
previous  years  and  public  finances  have  improved  markedly,  but  progress  with  structural 
reforms  has  been  stalling  since  mid-2015.  Policy  gaps  remains,  notably  on  the  front  of  the 
management  of  public  finances,  the  modernisation  of  public  administration,  improving  the 
business environment and addressing the low activity rates. 

Italy  is  experiencing  excessive  imbalances.  High  government  debt  and  protracted  weak 
productivity dynamics imply risks with cross-border relevance looking forward, in a context 
of high non-performing loans and unemployment. The public debt ratio is set to stabilise but 
has not yet on a downward path due to the worsening of the structural primary balance and 
subdued  nominal  growth.  Competitiveness  remains  weak  as  productivity  dynamics  have 
remained  subdued,  also  due  to  the  slow  investment  recovery.  The  stock  of  non-performing 
loans has only started to stabilise and still weighs on banks’ profits and lending policies while 
capitalisation  needs  may  emerge  in  a  context  of  difficult  access  to  equity  markets.  Labour 

25 

 
 
 
 
participation and employment are rising, but unemployment, particularly long-term, remains 
high,  with  negative  consequences  on  future  growth.  After  positive  reforms  of  the  budgetary 
process,  labour  market,  banking  sector,  insolvency  procedures,  judiciary  system  and  public 
administration,  the  reform  momentum  has  weakened  since  mid-2016  and  important  policy 
gaps remain, in particular with regards to competition, taxation, fight against corruption and 
the reform of the framework for collective bargaining. 

Cyprus  is  experiencing  excessive  imbalances.  A  very  high  share  of  non-performing  loans 
burdens the financial sector and high stock of private, public, and external debt hangs on the 
economy,  in  the  context  of  high  unemployment  and  weak  potential  growth.  The  current 
account  is  still  negative  and  is  not  adequate  to  guarantee  a  sustainable  evolution  of  the  net 
external  liabilities  stock.  Government  debt  is  expected  to  have  peaked,  but  the  current 
relaxation of fiscal policy is  foreseen to  slow down the needed  adjustment.  Despite a  major 
restructuring  of  the  banking  sector  and  improved  capital  positions,  the  stock  of  non-
performing  loans  is  slowly  declining  but  remains  very  high.  Poor  contract  enforcement, 
inefficiencies in the judicial system and bottlenecks in the implementation of the foreclosure 
and  insolvency  legislation  hamper  private  sector  deleveraging  and  the  reduction  of  non-
performing loans. Reform momentum has weakened since 2016 and policy gaps persist in the 
areas of public administration, fiscal management, the justice system, the framework for title 
deeds, electricity and privatisation. 

The Netherlands is experiencing imbalances. These imbalances are related to the high stock 
of  private  debt  and  the  large  current  account  surplus,  with  cross-border  relevance.  Private 
sector  debt  has  only  very  gradually  decreased  in  the  last  years.  Nominal  mortgage  debt  is 
increasing, against the background of resuming house price growth. The large current account 
surplus, which mainly reflects structural features of the economy and policy settings regarding 
non-financial  corporations,  is  decreasing  due  to  recovering  domestic  demand.  Household 
deleveraging needs contribute to aggregate savings. Recent measures, aiming at reducing the 
tax and non-tax wedge on labour, can contribute to support domestic demand. However policy 
challenges remain on the front of pension reform and interest rate deductibility of mortgages, 
with a view to rebalance incentives to take up mortgage debt. 

Portugal  is  experiencing  excessive  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  decreasing  but  still  elevated  unemployment  and  low  productivity.  Potential 
growth still lags behind its pre-crisis level, affected by persistent bottlenecks and rigidities in 
the product and labour markets together with major external imbalances. The current account 
balance is still below the level required for a significant adjustment of net external liabilities, 
and  unit  labour  costs  are  increasing  due  to  sluggish  productivity  growth  and  rising  wages. 
Private  debt  is  declining,  and  government  debt  has  stabilised,  in  a  context  of  remaining 
deleveraging needs. The large stock of non-performing loans is not yet stabilised and, together 
with  low  profitability  and  relatively  thin  capital  buffers,  they  pose  risks  to  banks’  balance 
sheets. Labour market conditions have improved but youth and long-term unemployment, as 
well as market segmentation, are still high The reform momentum has weakened since 2014, 
and  policy  gaps  persist  in  the  areas  of  product  and  services  markets,  skills  and  innovation, 
fiscal sustainability, corporate debt restructuring, and labour market rigidities. 

Slovenia  is  experiencing  imbalances.  Weaknesses  in  the  banking  sector,  corporate 
indebtedness,  and  fiscal  risks  constitute  vulnerabilities.  Stock  imbalances  are  gradually 
unwinding,  including  in  light  of  resumed  growth.  The  corporate  sector  has  undergone  a 

26 

 
 
 
 
 
substantial  deleveraging,  and  private  investment,  including  in  the  form  of  foreign  direct 
investment,  has  resumed,  although  stocks  of  inbound  foreign  direct  investment  remain  low 
compared to regional peers. Public debt has peaked in 2015, and a downward adjustment is 
expected  in  the  coming  years.  Progress  on  the  front  of  banking  sector  restructuring  has 
coincided with a rapidly falling share of non-performing loans, which is expected to continue 
to  decline.  Relevant  measures  have  been  taken  by  the  government  to  consolidate  and 
restructure  the  banking  sector,  and  to  improve  the  governance  of  state-owned  enterprises. 
However, further policy action is needed to address corporate debt and remaining weaknesses 
in the financial sector, to ensure the long-term sustainability of public finances, and improve 
the business environment.  

Finland is  experiencing no imbalances. In  the past years, Finland recorded competitiveness 
losses  linked  to  the  decline  of  key  sectors  and  wage  growth  above  productivity.  Potential 
growth  has  fallen  post-crisis  and  the  growth  of  labour  productivity  is  expected  to  remain 
subdued.  The  banking  sector  is  well  capitalised  and  fairly  profitable,  and  the  share  of  non-
performing  loans  is  low.  Private  debt  as  a  share  of  GDP  is  rising  but  at  a  slower  rate. 
Government debt has been growing fast in past years but remains at relatively prudent levels 
and the pace of increase has recently decelerated. Dynamic start-up activity supports structural 
change. Following a strong push from the government, social partners agreed on measures to 
improve  cost  competitiveness  especially  on  the  front  of  labour  costs  and  to  enhance  the 
resilience  of  firms  through  more  flexible  wage  setting  practices.  Measures  have  been  taken 
also  to  contain  the  incentives  for  taking  up  excessive  mortgage  debt.  Emerging  policy 
challenges are linked to the continued increase in long-term unemployment, which highlights 
the  need  to  better  target  active  labour  market  policies  and  to  continue  to  invest  in  life-long 
learning and vocational training. 

Sweden  is  experiencing  imbalances.  Persistent  house  price  growth  from  already  overvalued 
levels coupled with a continued rise in household debt poses risks of a disorderly correction. 
The already high household indebtedness keeps growing, while housing prices, which appear 
to  be  overvalued,  continue  to  rise  at  an  elevated  pace.  Although  banks  appear  adequately 
capitalised,  a  disorderly  correction  could  also  affect  the  financial  sector  as  banks  have  a 
growing  exposure  to  household  mortgages.  In  such  a  case,  there  could  be  spill-overs  to 
neighbouring  countries  since  Swedish  banking  groups  are  of  systemic  importance  in  the 
Nordic-Baltic  region.  Awareness  of  mounting  risks  among  the  authorities  is  high,  and  in 
recent  years  measures  have  been  taken  to  rein  in  mortgage  debt  growth  and  raise  housing 
construction.  However,  policy  steps  implemented  so  far  have  not  been  sufficient  to  address 
overheating in the housing sector. Overall, policy gaps remain in the area of housing-related 
taxation,  the  macro-prudential  framework,  and  in  addressing  bottlenecks  for  new  housing 
supply as well as barriers to efficient usage of the existing housing stock. 

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