COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE, THE COMMITTEE OF THE REGIONS AND THE EUROPEAN INVESTMENT BANK 2023 European Semester - Spring Package
Date: 2023-05-24
Institutions: European Commission, Secretariat-General
Subjects: EU Member State, EU energy policy, EU environmental policy, European Semester, competitiveness, economic forecasting, economic policy, economic reform, macroeconomics, productivity

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 24.5.2023  COM(2023) 600 final  COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE, THE COMMITTEE OF THE REGIONS AND THE EUROPEAN INVESTMENT BANK 2023 European Semester - Spring Package {SWD(2023) 628-644 final}  
 
 
1. INTRODUCTION 

The  EU  economy  has  continued  to  show  remarkable  resilience  in  a  challenging 
environment marked by Russia’s unprovoked invasion of Ukraine. The EU has successfully 
reduced  its  dependence  on  Russian  fossil  fuels,  contained  the  adverse  impact  on  economic 
activity  and  entered  2023  on  a  better  footing  than  expected.  Rebounding  from  the  stagnation 
experienced  in  late  2022,  GDP  growth  is  set  to  strengthen  over  the  course  of  2023  thanks  to 
significantly  lower  wholesale  gas  prices  and  continued  resilience  in  the  labour  market. 
Nonetheless,  high  inflation  continues  to  affect  the  purchasing  power  of  households,  especially 
among  vulnerable  groups,  leading  to  higher  risks  of  poverty  and  weighing  on  European 
competitiveness,  notably since  energy  prices remain  significantly  higher than in  the  rest  of the 
world.  Furthermore,  the  external  environment  marked  by  rising  protectionism  and  geostrategic 
competition further underlines the need to safeguard the competitiveness and the open strategic 
autonomy  of  the  EU  economy.  The  steady  implementation  of  the  Recovery  and  Resilience 
Facility (RRF) is triggering major reforms and investments across a wide range of policy areas. 
The  roll-out  of  the  RRF  is  supporting  the  economic  expansion  and  will  boost  Member  States’ 
resilience.  

Sustaining  the  momentum  for  reforms  and  investments  will  be  key  to  securing  the  EU’s 
long-term  prosperity,  competitiveness,  fairness  and  resilience.  The  European  Semester, 
supported  by  the  RRF  and  other  EU  funds,  such  as  Cohesion  Policy  and  the  InvestEU 
programme,  is  at  the  centre  of  the  EU’s  future-proof  economic  and  employment  strategy  as 
pointed out in the EU’s Green Deal Industrial Plan1 and the long-term competitiveness strategy2. 
In  particular,  Member  States  should  continue  to  make  progress  on  decarbonising  their 
economies,  address  labour  and  skills  shortages  and  mismatches,  support  quality  job  creation, 
promote equal opportunities, boost digitalisation, research and innovation, reduce administrative 
and regulatory burdens, speed up and simplify administrative and permitting procedures, provide 
adequate framework conditions for investments at national and subnational levels and modernise 
their public administrations. The European Semester continues to provide the policy coordination 
framework  for  that  purpose,  guiding  and  monitoring  the  implementation  of  the  RRF  and  of 
cohesion policy programmes in a complementary way and contributing to the implementation of 
the European Pillar of Social Rights and the EU 2030 headline targets for employment, skills and 
poverty reduction. The 2023 country reports3, which the Commission published today, take stock 
of the challenges, including  those related to  the twin  transition,  social and economic  resilience 
and  competitiveness,  in  every  Member  State,  and  outline  to  what  extent  these  challenges  are 
being addressed in their national recovery and resilience plans (RRPs). The ongoing revisions of 
the  RRPs  and  the  inclusion  of  REPowerEU4  chapters  with  additional  funding  in  the  form  of 
grants  and  loans  provide  a  further  opportunity  to  effectively  respond  to  these  challenges,  in 
particular with regard to implementing the Green Deal Industrial Plan and REPowerEU Plan.  

1 COM(2023) 62 final. 
2 COM(2023) 168 final. 
3 SWD(2023) 601 - 627 
4  Regulation  (EU)  2023/435  of  the  European  Parliament  and  of  the  Council  of  27 February  2023  amending 
Regulation  (EU) 2021/241  as  regards  REPowerEU  chapters  in  recovery  and  resilience  plans  and  amending 
Regulations  (EU)  No 1303/2013,  (EU) 2021/1060  and  (EU) 2021/1755,  and  Directive 2003/87/EC  (OJ  L  63, 
28.2.2023, p. 1). 

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Building on the country reports’ analysis, the Commission proposals for the 2023 country-
specific  recommendations  (CSRs)5  provide  guidance  to  Member  States  on  tackling  key 
economic  and  social  challenges  that  are  only  partially  addressed  or  not  addressed  by  the 
RRPs.  The  four  dimensions  of 
the  EU’s  competitive  sustainability  –  environmental 
sustainability,  productivity,  fairness  and  macroeconomic  stability  –  remain  at  the  heart  of  this 
guidance6. The proposed recommendations emphasise the need to ensure prudent fiscal policy in 
2023-2024,  in  particular  by  phasing  out  the  less  targeted  energy  support  measures  currently  in 
force  and  reducing  debt  in  the  medium  term.  The  recommendations  also  call  on  the  Member 
States  to  steadily  continue,  or  in  several  cases  accelerate,  the  implementation  of  their  RRPs  in 
view of the deadline of  2026  and to  proceed  with the  swift implementation  of  cohesion  policy 
programmes, in close coordination with the RRPs, including by ensuring adequate administrative 
capacities.  The  proposals  for  the  recommendations  also  outline  the  energy-related  reforms  and 
investment  challenges,  including  the  reskilling  and  upskilling  of  the  labour  force  that  Member 
States are asked to address under REPowerEU and their national energy and climate plans7. The 
country  reports  and  Eurostat’s  2022  Sustainable  Development  Goal  Monitoring  Report  also 
provide  updated  and  consistent  reporting  on  progress  towards  the  Sustainable  Development 
Goals (SDGs) across Member States. At EU level, in recent years, progress has been observed on 
various  SDGs,  with  advancement  being  particularly  strong  towards  ensuring  decent  work  and 
economic  growth  (SDG  8)  and  reducing  poverty  (SDG  1).  Significant  progress  has  also  been 
achieved on gender equality (SDG 5).8 The country reports also include the Social Scoreboard, 
which provides a comprehensive overview of employment, equality, skills and social challenges 
related to the implementation of the European Pillar of Social Rights and the implementation of 
the Union of Equality strategies. 

The  constructive  dialogue  with  Member  States  as  well  as  strengthened  inter-institutional 
dialogue  at  EU  level  will  continue  throughout  the  European  Semester  process.  The  close 
policy  dialogue  on  the  RRPs  allowed  the  Commission  and  Member  States  to  strengthen  and 
deepen their cooperation on economic and social policies. This ensures broad ownership and is 
set to continue during the ongoing RRP implementation and their amendments expected in 2023, 
including  in  the  context  of  REPowerEU.  The  topics  covered  in  the  country  reports  and  CSRs 
offer a further opportunity to broaden the dialogue. The Commission will also continue its close 
dialogue  with  the  European  Parliament  on  key  social  and  economic  developments,  and  will 
continue to engage with it at each key stage of the annual European Semester coordination cycle.  

The successful delivery of the European Semester and RRF priorities requires a permanent 
and  structured  involvement  of  social  partners  and  other  stakeholders  and  awareness 
raising  at  both  EU  and  national  levels.  Continuous  exchanges  on  social  and  economic 
developments in the EU take place through the biannual macroeconomic dialogue at political and 

5 COM(2023) 601 - 627 
6 See 2023 Annual Sustainable Growth Survey: COM(2022) 780 final. 
7 See Commission Notice: Guidance to Member States for the update of the 2021-2030 NECPs (C/2022/9264 final). 
8 See Appendix 3. On 15 May, the Commission has also published its first ever EU-level Voluntary Review of the 
implementation of the 2030 Agenda for Sustainable Development (COM(2023) 700 final), to be put forward at the 
2023  United  Nations  High-level  Political  Forum  on  Sustainable  Development.  The  Review  reaffirms  the  EU’s 
commitment  to  the  2030  Agenda  for  Sustainable  Development  in  a  whole-of-government  approach,  linking  the 
internal and external dimensions.  

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technical level among the Council, the Commission, the European Central Bank (ECB) and the 
European social partners. In addition, the active involvement of social partners and stakeholders 
at  EU,  national  and  subnational  level,  as  appropriate,  through  dedicated  regular  meetings  (e.g. 
the RRF stakeholders’ annual events) throughout all the stages of the European Semester and the 
RRF implementation  process  helps  to  jointly identify challenges, improve policy solutions  and 
ensure  broader  ownership  and  transparency  of  the  economic  and  social  policy  agenda9. 
Communication  and  information  actions  also  contribute  to  raising  awareness  of  the  public  and 
increase transparency about the support provided through the RRF10. 

The  Commission  presented  legislative  proposals  for  a  reformed  economic  governance 
framework on 26 April 202311. The key objective of its proposals is to strengthen public debt 
sustainability  and  promote  sustainable,  inclusive  and  resilient  growth  in  all  Member  States 
through  reforms  and  investment.  The  medium-term  fiscal  and  structural  plans  that  Member 
States  will  design  and  present  form  the  cornerstone  of  the  proposals.  According  to  the 
Commission  proposals,  Member  States  would  in  their  plans  set  out  their  expenditure  targets, 
measures  to  address  macroeconomic  imbalances  and  priority  reforms  and  investments  over  a 
period  of  at  least  4  years.  The  new  fiscal  surveillance  process  would  remain  integrated  in  the 
European  Semester,  which  would  thus  continue  to  be  the  central  framework  for  economic  and 
employment policy coordination ensuring the complementarity between the medium-term fiscal 
and  structural  plans  and  the  investments  and  reforms  included  in  RRPs  and  Cohesion  Policy 
programmes. Swift agreement by the European Parliament and the Council on the proposals is an 
urgent priority, and the Commission supports the Council’s resolve to conclude the work on the 
economic governance framework in 2023.   

2. ECONOMIC AND EMPLOYMENT OUTLOOK 

The better-than-expected performance of the EU economy in early 2023 and easing energy 
prices  lift  the  growth  outlook  for  this  year  and  the  next.  Furthermore,  common  efforts  to 
diversify energy supplies, fill gas storage facilities and reduce energy demand, coupled with mild 
weather, have cushioned the socio-economic impact  of  those tensions.  Looking forward, lower 
energy  prices,  mending  supply  chains  and  the  continued  strength  in  the  labour  market  are 
expected  to  support  the  EU  economy.  Though  risk  of  gas  shortages  has  significantly  abated, 
uncertainty remains over the gas prices for next winter and beyond. Overall, economic activity in 
is forecast to expand at a slightly stronger pace than previously expected. EU GDP is expected to 
grow by 1.0% in 2023 and by 1.7% in 2024.  

Inflation  is  projected  to  continue  declining,  but  core  price  pressures  are  proving  more 
persistent,  impacting  on  businesses  and  eroding  households’  purchasing  power.  Headline 
inflation in the EU peaked at 11.5% in October 2022, and inflation divergences across EU and 

9  On 25 January 2023, the Commission proposed a Council Recommendation (COM(2023) 38 final), which sets out 
how EU Member States can further strengthen social dialogue at national level, as well as a Communication on 
reinforcing and promoting social dialogue at EU level. Moreover, the Commission will continue to make use of 
the  existing  fora  under  the  European  Semester  to  inform  and  involve  social  partners  also  on  RRF 
implementation. 

10  The  European  Commission  launched  an  interactive  map  with  real-life  examples  of  the  positive  change  the  

projects financed bring: Recovery and Resilience Facility (europa.eu) 

11  COM(2023) 240 - 242 final. 

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euro  area  Member  States  reached  historic  highs.  However,  price  pressures  have  progressively 
broadened  as  domestic  economic  players  adapted  to  higher  input  prices.  As  a  result,  core 
inflation, which excludes the price of energy and unprocessed food, has proved more persistent, 
though it is expected to have reached its peak in the first quarter of 2023 and to decline gradually 
over the coming quarters. Similarly, food prices  accelerated in the first quarter of 2023 but  are 
expected to peak in 2023, in line with a moderation in agricultural commodity prices. In response 
to  the  high  inflation,  monetary  conditions  have  been  tightening  and  this  trend  is  expected  to 
continue.  As  a  result,  funding  costs  for  banks  have  increased  and  lending  standards  have 
tightened,  slowing  down  the  flow  of  credit  to  the  economy.  While  inflation  is  set  to  continue 
falling in 2023, it will remain well above target and continue to have an effect on households’ 
purchasing power, especially among low- and low-middle income groups, and businesses.  

The  labour  market  remains  strong  and  wage  growth  is  expected  to  strengthen.  The 
employment rate, which reached 74.8% in the last quarter of 2022, is close to its historical high. 
Slack in the labour market12 and unemployment fell to record lows. The job vacancy rate for the 
overall economy  is  above its 2010-2019 average, despite  a slight  decline  in  the second half of 
2022, and labour shortages are holding back production for a  growing number of companies13. 
On wages, nominal compensation per employee increased by 4.9% in the EU in 2022 compared 
to  2021.  However,  this  pace  remains  well  below  inflation,  with  very  wide  variations  among 
industries and across Member States. As a result, real wages decreased by more than 4% in the 
EU  in  2022,  leading  to  a  substantial  erosion  of  the  purchasing  power  of  workers.  The  recent 
increases  in  statutory  minimum  wages  in  a  number  of  Member  States,  together  with  higher 
negotiated  wages,  help  mitigate  losses  in  purchasing  power  experienced  in  2022.  In  2024,  the 
labour  market  is  expected  to  remain  strong  and  wage  growth  is  set  to  pick  up,  outpacing 
inflation.  

The  EU  financial  sector  has  proved  resilient  in  the  face  of  emerging  challenges.  Strong 
regulation, in particular thanks to the application of international standards to all banks, effective 
supervision  and  a  solid  crisis  management  framework,  introduced  in  response  to  the  global 
financial  crisis,  and  progress  in  completing  the  Banking  Union  and  advancing  the  Capital 
Markets Union have made the EU financial system more resilient. The impact of recent market 
turbulence in the US and Switzerland since March 2023 has been contained in the EU. However, 
this episode has highlighted the interconnectedness of global financial markets and the fragility 
of  investor  sentiment.  It  also  highlights  the  crucial  role  of  regulation,  supervision  and  risk 
management  of  the  banking  sector  in  a  challenging  macro-financial  environment.  Persistent 
geopolitical  uncertainties,  protracted  inflation  pressure  and  the  gradual  pass-through  of  tighter 
monetary policy have put pressure on the financial system. Given the very high level of debt in 
some parts of the economy and across the globe, risks remain elevated.  

12   Labour market slack takes into account unemployed people, part-time workers who want to work more, people 
who  are  available  to  work  but  do  not  look  for  work,  and  people  who  are  looking  for  work  but  are  not 
immediately available. This broader definition better reflects the unmet need for employment. 

13   European Commission (2022), ‘European Business Cycle Indicators – A closer look at labour shortages across 

the EU’, European Economy-Technical Paper, 59.  

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3. BUILDING A ROBUST AND FUTURE-PROOF EU ECONOMY – KEY OBJECTIVES 
FOR THE 2023 COUNTRY-SPECIFIC RECOMMENDATIONS 

Economic policy should continue to tackle the risks linked to high inflation, in particular 
for  vulnerable  households  and  companies,  and  address  long-term  challenges.  Despite  the 
decrease  in  energy  inflation,  it  will  take  time  for  price  pressures  to  disappear.  Combating 
inflation remains a key  policy priority in  the coming period. This  requires monetary and fiscal 
policies  to  be  consistent.  In  that  context,  fiscal  measures  taken  to  respond  to  the  energy  price 
shock  should  be  wound  down  in  2023.  If  energy  prices  increase  again  and  support  cannot  be 
fully  discontinued,  targeted  policies  to  support  vulnerable  households  and  companies  –  rather 
than wide and less effective support policies – will remain crucial. The moderate wage increases 
so  far  have  not  fuelled  further  price  inflation,  while  corporate  profitability  has  increased. 
Nevertheless, nominal wages are expected to continue increasing and the interaction with price 
developments  should  be  closely  monitored.  The  ongoing  tightening  of  financial  conditions  has 
also  put  the emphasis  on the need to  monitor macro-financial  risks and further  advance  on the 
Capital Markets Union and complete the Banking Union. Beyond short-term priorities, policy at 
Member  State  and  EU  level  needs  to  continue  addressing  long-term  challenges,  including  the 
need  to  strengthen  the  competitiveness,  productivity,  skills  and  resilience  of  the  EU  economy,  
taking  into  account  demographic  developments  and  to  make  swift  progress  on  the  digital  and 
green transition, in line with the Green Deal Industrial Plan. 

The RRF is essential to accelerate the twin green and digital transition and strengthen the 
EU’s  resilience  to  future  challenges,  while  contributing  to  the  implementation  of  the 
European  Pillar  of  Social  Rights;  it  should  continue  to  be  deployed  without  delay.  Two 
years into its implementation, the RRF is receiving a high level of public support by European 
citizens14,  has  delivered  considerable  financial  support  and  helped  the  EU’s  post-COVID 
economic recovery and the strengthening of EU’s resilience. All RRPs have been in place since 
the  end  of  2022,  reflecting  all  or  a  significant  subset  of  the  relevant  CSRs.  Several  Member 
States  were  helped  in  the  preparation  and  implementation  of  their  plans  through  the  Technical 
Support Instrument. The Commission has so far processed 24 payment requests under the RRF, 
and  has  disbursed  a  total  of  over  EUR  152  billion  to  date  under  the  RRF  for  the  successful 
implementation  of  reforms  and  investments.  With  the  inclusion  of  REPowerEU  chapters,  the 
RRF  has  also  demonstrated  its  flexibility  to  address  newly  emerging  challenges  linked  in 
particular  to  the  EU’s  energy  security  and  the  industrial  transition  to  a  net-zero  economy.  To 
fully reap these benefits, RRPs need to be implemented swiftly, including by addressing the risks 
of delays in a number of cases. While the implementation of the RRPs was broadly on track as of 
the end of 2022, some Member States are facing challenges in administering funds, due in part to 
limited  administrative  capacity  or  investment  bottlenecks.  The  ongoing  process  of  revising  the 
RRPs represents  an opportunity to  address  these issues and increase the  absorption  capacity of 
RRF  funds.  However,  at  the  same  time,  it  is  expected  that  the  revisions  to  the  plans  will  also 
impact  the  disbursement  schedule  of  RRF  funds  in  2023  and  beyond.  To  ensure  sufficient 
predictability  of  the  EU's  borrowing  operations  and  at  the  same  time  provide  to  the  budgetary 

14 Three-quarters of EU respondents (74%)  think that the principle of solidarity at the  heart of the RRF  is a good 
approach  for  the  EU  to  emerge  stronger  from  the  Covid-19  pandemic,  while  two-thirds  of  EU  respondents 
believe  it  will  have  a  positive  impact  on  future  generations  (see  Flash  Eurobarometer  515  survey  on  the  “EU 
Recovery Plan NextGeneration EU”, in January 2023). 

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authority,  as  part  of  the  Draft  Budget  2024  procedure,  adequate  visibility  in  terms  of  funding 
needs  in  the  months  to  come,  it  is  important  to  properly  reflect  the  expected  delays  in  the 
planning  of  future  payments.  Simultaneously,  the  successful  revision  process  of  the  plans  will 
allow Member States to get back on track in 2024 and catch up on the disbursement schedule. In 
parallel, in addition to more than EUR 186 billion disbursed by the 2014-2020 cohesion policy 
programmes  since  the  beginning  of  the  pandemic  to  Member  States,  the  2021-2027  cohesion 
policy  programmes  will  mobilise  around  EUR  505  billion  for  EU  Member  States  and  regions. 
These programmes also need to be implemented rapidly, including by addressing implementation 
capacity issues.  

This  year’s  country  reports  identify  policy  action  needed  at  Member  State  level  to 
overcome immediate economic and social challenges, while also increasing resilience, long-
term  competitiveness  and  productivity.  The  country  reports  provide  a  holistic  analysis  of 
Member  States’  resilience15,  economic  and  social  developments  and  challenges,  taking  the 
regional dimension into account. They include an assessment of progress on the implementation 
of the European Pillar of Social Rights via the Social Scoreboard and on achieving the 2030 EU 
headline and national targets on employment, skills and poverty reduction, as well as the SDGs. 
They  also  pay  particular  attention  to  long-term  competitiveness  and  productivity,  while 
providing  updated  and  more  detailed  analysis  on  energy  security  and  affordability,  the  clean 
energy  transition  and  environmental  sustainability.  Country  reports  identify  challenges  that  are 
only partially or not addressed by the RRPs as well as any emerging challenges. They also take a 
close look at the progress on RRP implementation, providing examples of milestones and targets 
reached, while highlighting cases where implementation risks and delays should be addressed.  

In line with the country report analysis, the Commission recommendation for CSRs reflect 
the challenges identified and the implementation status of the RRPs. The recommendations 
are divided into four subparts:  

1.  a  recommendation  on  fiscal  policy,  including  fiscal  and  structural  reforms,  where 

relevant; 

2.  a  recommendation  to  continue  or  accelerate  implementation  of  the  RRP,  including  its 
revisions  and  the  integration  of  REPowerEU  chapters,  taking  into  account  potential 
country-specific  implementation  risks,  and  to  swiftly  implement  the  adopted  cohesion 
policy programmes; 

3.  an updated recommendation on the clean energy transition in line with the REPowerEU 

objectives;  

4.  where  relevant,  an  additional  recommendation  on  outstanding  and/or  newly  emerging 

economic or employment challenges.  

15 The resilience dashboards, developed by the Commission, aim to provide a holistic assessment of resilience in the 
EU  and  its  Member  States.  They  assess  resilience  as  the  ability  to  make  progress  towards  policy  objectives 
amidst challenges. 

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The  updated,  more  granular  recommendation  on  energy-related  reform  and  investment 
challenges feeds into the ongoing finalisation of REPowerEU chapters and guides Member 
States in the update of their national energy and climate plans. The REPowerEU chapters as 
part of the RRPs, with the accompanying additional funding, should duly address the challenges 
identified  by  the  CSRs  with  REPowerEU  relevance16.  The  CSRs  will  provide  Member  States 
with guidance to tackle key challenges that are only partially or not addressed by the initial RRPs 
and will help implement the Green Deal Industrial Plan at national and regional level.  

4.  INCREASING  COMPETITIVENESS  AND  PRODUCTIVITY  IN  A  SOCIALLY 
INCLUSIVE WAY – OVERVIEW OF IDENTIFIED COMMON CHALLENGES 

Beyond the timely implementation of the reforms and investments covered in the RRPs, Member 
States face a number of outstanding or emerging common and country-specific challenges.  

4.1 Macroeconomic stability  

The  impact  of  high  inflation  induces  a  new  vulnerability  in  a  context  where  public  debt 
needs to decrease. Coordinated policy action at EU and national level helped cushion the impact 
of COVID-19 and of the surge in energy prices and its economic and social impact, especially on 
vulnerable  firms  and  households.  However,  these  crises  led  to  higher  public  debt  in  several 
Member States. More recently, fiscal policy measures put in place in 2022 to tackle the energy 
crisis  have  had  sizeable  fiscal  costs.  According  to  the  Commission’s  2023  Spring  Economic 
Forecast,  the  net  cost  of  these  measures  amounted  to  1.2 %  of  annual  EU  GDP  in  2022  and  a 
similar amount in 2023. Fiscal policy should be prudent in order to ensuring debt sustainability, 
thereby also supporting monetary policy. In parallel, divergences in inflation rates and tightening 
financial conditions have increased macroeconomic vulnerabilities.  

Strong EU and euro area fiscal policy coordination is instrumental in ensuring a consistent 
fiscal and monetary policy mix and will facilitate the task of monetary policy. In 2023 and 
2024,  fiscal  policies  should  be  prudent  in  order  to  ensure  focus  on  medium-term  debt 
sustainability  while  raising  potential  growth  and  ensuring  the  green  and  digital  transition  in  a 
sustainable and resilient manner. Depending on their debt challenge, Member States should keep 
debt at prudent levels or ensure a plausible and continuous debt reduction in the medium term. 
The  fiscal  adjustment  for  2024  should  be  consistent  with  the  current  legislation  under  the 
Stability and Growth Pact and all Member States should maintain or bring their deficit below the 
3% of GDP Treaty reference value. As outlined in the Commission’s Communication on fiscal 
policy  guidance  for  2024  of  8  March  202317,  the  fiscal  component  of  the  proposed  country-
specific  recommendations  incorporates  those  elements  of  the  legislative  proposals  of  26  April 
2023 that are consistent with the existing legislation.  

Fiscal  measures  taken  to  respond  to  the  energy  price  shock  should  be  wound  down.  The 
continued  decline  in  energy  commodity  prices  is  curbing  headline  inflation  from  its  peak  in 
October  2022,  although  core  inflation  remains  high  and  is  on  an  upward  trend.  Against  this 

16   More  information  on  the  REPowerEU  chapters  and  their  link  to  the  CSRs  is  available  in  the  ‘Guidance  on 

Recovery and Resilience Plans in the context of REPowerEU’ (OJ C 80, 3.3.2023, p. 1). 

17   COM(2023) 141 final. 

7 

 
 
                                                           
backdrop, protracted non targeted fiscal support to households and firms strengthens inflationary 
pressures. This raises the likelihood of central banks stepping up monetary policy tightening, and 
would put  pressure on  financial stability.  If renewed energy price increases necessitate  support 
measures,  these  should  be  focused  on  protecting  vulnerable  households  and  firms,  fiscally 
affordable and they should preserve incentives for energy savings. Furthermore, Member States 
should  improve  the  quality  and  composition  of  their  public  finances,  continue  to  protect 
nationally financed investment and ensure the effective use of the RRF and other EU funds, such 
as the InvestEU programme, in particular in light of the green and digital transition and the need 
to strengthen the EU’s economic and social resilience. In light of the devastating floods that hit 
Italy in May 2023, the cost of direct emergency support related to those floods will be taken into 
account in subsequent assessments of compliance and will in principle be considered as one-off 
and temporary measures. 

As uncertainty about the macroeconomic outlook remains high at present, the Commission 
considers  that  a  decision  on  whether  to  place  Member  States  under  the  excessive  deficit 
procedure should not be taken this spring, as already indicated in its Communication of 8 
March  2023  on  fiscal  policy  guidance  for  2024.  At  the  same  time,  the  Commission  will 
propose to the Council to open deficit-based excessive deficit procedures in spring 2024 on the 
basis of the outturn data for 2023, in line with existing legal provisions. Member States should 
take account of this when executing their 2023 budgets and when preparing their draft budgetary 
plans for 2024 this autumn.  

A balanced tax mix, effective tools to fight aggressive tax planning strategies and improved 
tax compliance contribute to the fair treatment of taxpayers and efficient funding of public 
services.  Shifting  part  of  the  tax  burden  from  labour  to  other  types  of  taxes,  including 
environmental and immovable property taxation, while duly taking account of the distributional 
impact of such a shift, would support the green transition and boost sustainable growth and job 
creation.  Aggressive  tax  planning  strategies  by  firms  or  individuals  in  one  Member  State  can 
have  negative  spillover  effects  on  the  rest  of  the  EU.  This  therefore  calls  for  decisive  and 
coordinated  action.  The  adoption  of  the  EU  Minimum  Tax  Directive  (Pillar  2)  on  a  minimum 
effective tax rate of 15%, to be implemented by the end of 2023, has been a crucial milestone18. 
Similarly,  the  continued  modernisation  and  digitalisation  of  tax  administrations  should  further 
reduce compliance costs and boost tax revenue.  

Tightening  financial  conditions  have  increased  vulnerabilities  and  risks  in  some  Member 
States,  and  divergent  inflation  across  the  EU  may  lead  to  competitive  pressures.  High 
nominal GDP growth driven by inflation helps reduce debt-to-GDP ratios in both the public and 
private  sector  in  the  short  run,  while  higher  interest  rates  feed  only  gradually  into  the  cost  of 
servicing  debts.  However,  the  tightening  of  financing  conditions  increase  the  risks  associated 
with  high  debt  levels.  House  prices  grew  strongly  in  several  Member  States  in  2022,  but  the 
increases  have  started  to  moderate  as  incomes  come  under  pressure  and  interest  rates  rise.  In 
parallel, the divergence in inflation rates, accompanied by increases in profit margins and labour 

18   Council  Directive  (EU)  2022/2523  of  14  December  2022  on  ensuring  a  global  minimum  level  of  taxation  for 
multinational enterprise groups and large-scale domestic groups in the Union (OJ L 328, 22.12.2022, p. 1). The 
Commission is also working on specific initiatives, including BEFIT and FASTER, and has proposed a series of 
measures to modernise the EU’s Value Added Tax System (COM(2022) 701, COM(2022) 703 and COM(2022) 
704) to simplify tax rules, cut red tape, and curb aggressive tax planning and tax avoidance practices.  

8 

 
 
                                                           
costs, may lead to  cost  competitiveness  losses in  some industries  and regions. Current  account 
deficits have widened in some Member States, reflecting much higher energy import prices but 
also, in some cases, strong domestic demand.  

The recent increases in interest rates have raised concerns about pockets of vulnerability in 
the financial sector, calling for careful monitoring. Progress made by the EU in strengthening 
banking  supervision  and  completing  the  Banking  Union  are  important  steps  to  ensure  macro-
financial  stability19.  In  addition,  non-performing  loans  have  been  declining  and  continue  to  be 
addressed,  while  the  rise  in  interest  rates  is  improving  the  banking  sector’s  profitability. 
Nevertheless,  rising  mortgage  rates  and  the  deterioration  in  debt  servicing  capacity  due  to  a 
decline  in  real  household  income  is  exerting  downward  pressure  on  house  prices  in  some 
countries.  The  commercial  real  estate  sector  in  some  countries  saw  similar  falls  amid  higher 
financing costs and weaker occupancy rates. Against this background, monitoring asset quality, 
engaging  with  distressed  debtors  in  a  timely  and  proactive  manner  (in  particular  viable  ones), 
further  improving  the  efficiency  of  insolvency  frameworks  and  further  developing  secondary 
markets  for  non-performing  loans  remain  important.  More  broadly,  the  challenges  related  to 
digitalisation  still  remain  and  have  even  intensified  in  some  areas,  as  demonstrated  by  more 
frequent  large-scale  cyber  incidents.  Risks  relating  to  non-bank  financial  intermediation  and 
those  that  may  emerge  with  the  increased  use  of  decentralised  finance  need  to  be  properly 
monitored  and  addressed.  On  all  these  issues,  cooperation  between  national  and  European 
supervisory  authorities  as  well  as  with  the  ECB  and  international  regulatory  bodies  is  of 
paramount importance. 

The  Commission  has  identified  vulnerabilities  related  to  macroeconomic  imbalances  or 
excessive imbalances in 11 Member States in the context of the macroeconomic imbalance 
procedure.  For  six  Member  States,  recent  vulnerabilities  seem  to  be  contained  at  present  and 
temporary. Box 2 summarises the findings on macroeconomic imbalances in the Member States 
at this occasion; Appendix 4 provides more details.   

19   The EU is also finalising the negotiations on the Banking Package, and the Commission has recently adopted a 
proposal to improve the applicability of its crisis management and deposit insurance framework for smaller and 
medium-sized banks (COM(2023) 225 final).  

9 

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

As part of the spring 2023 European Semester package, the Commission has adopted a 
report  under  Article  126(3)  TFEU  for  16  Member  States.  These  consist  of  Belgium, 
Bulgaria, Czechia, Germany,  Estonia,  Spain,  France,  Italy,  Latvia, Hungary, Malta, Austria, 
Poland,  Slovenia,  Slovakia  and  Finland.  For  all  these  Member  States  except  Finland,  the 
report assesses their compliance with the deficit criterion. In the case of  Bulgaria, Germany, 
Estonia,  Slovenia  and  Slovakia,  the  report  was  prepared  due  to  a  planned  deficit  in  2023 
exceeding  the  3%  of  GDP  Treaty  reference  value,  whereas  the  other  Member  States  had  a 
general government deficit in 2022 exceeding 3% of GDP. In addition, for France, Italy and 
Finland the report assesses compliance with the debt criterion in 2022 based on outturn data. 

As already indicated in its Communication of 8 March 2023 on fiscal policy guidance for 
2024,  the  Commission  does  not  propose  to  open  new  excessive  deficit  procedures  in 
spring  2023.  Russia’s  war  of  aggression  against  Ukraine,  together  with  the  remaining 
macroeconomic and fiscal impact of the COVID-19 pandemic, creates uncertainty, including 
for  designing  a  detailed  path  for  fiscal  policy.  As  regards  Member  States  with  a  debt  ratio 
above the 60% of GDP reference value, the Commission considers, within its assessment of 
all  relevant  factors,  that  compliance  with  the  debt  reduction  benchmark  would  imply  a  too 
demanding frontloaded fiscal effort that risks jeopardising growth. Therefore, in the view of 
the  Commission,  compliance  with  the  debt  reduction  benchmark  is  not  warranted  under  the 
prevailing economic conditions. 

Romania  is  the  only  Member  State  under  an  excessive  deficit  procedure,  based  on  the 
pre-pandemic developments. On 3 April 2020 the Council decided that an excessive deficit 
existed in Romania based on planned excessive deficit in 2019. In its revised recommendation 
of 17 June 2022, the Council asked Romania to put an end to the excessive deficit situation by 
2024 at the latest. Romania’s general government deficit in 2022 was in line with the Council 
recommendation.  At  the  same  time,  the  adjustment  in  the  structural  balance  was  below  the 
level recommended by the Council, while the nominal growth rate of net primary government 
expenditure was above the one recommended. The procedure is kept in abeyance. 

The  Commission  will  continue  monitoring  Member  States’  economic  and  budgetary 
situation.  In the autumn, the Commission will adopt opinions on euro area Member States’ 
Draft  Budgetary  Plans,  to  ensure  that  the  2024  budgets  are  consistent  with  the  country-
specific  recommendations  that  are  also  part  of  the  spring  2023  European  Semester  package 
and  will  be  adopted  by  the  Council  later  in  2023.  In  spring  2024,  the  Commission  will 
propose to the Council to open deficit-based Excessive Deficit Procedures on the basis of the 
outturn data for 2023, in line with existing legal provisions.  

10 

 
 
Box 2: Macroeconomic imbalances in the Member States 

The  Commission  has  assessed  the  existence  of  macroeconomic  imbalances  for  the  17 
Member States selected for in-depth reviews in the 2023 Alert Mechanism Report. Of those, 
10 Member States had been identified with imbalances or excessive imbalances in the last annual 
cycle of surveillance under the Macroeconomic Imbalance Procedure. The other 7 were deemed 
to display risks of newly emerging imbalances. As part of this year’s surveillance cycle, and to 
inform  the  identification  of  imbalances  and  excessive  imbalances  in  these  year’s  in-depth 
reviews, the Commission examined the impact of common shocks on the economies of selected 
Member  States  and  published  three  thematic  notes  –  on  inflation,  house  prices  and  external 
sustainability[1].   

The  assessment  of  macroeconomic  vulnerabilities  is  marked  by  uncertainty  in  the face  of 
high inflation. If divergent inflationary dynamics were to continue, cost competitiveness could 
be  undermined  in  Member  States  with  high  inflation,  which  could  result  in  increasing 
vulnerabilities.  At  the  same  time,  high  inflation  comes  with  the  risk  of  tighter  financing 
conditions.  Inflation  also  has  adverse  distributional  consequences.  A  return  to  low  and 
converging  inflation  trends  across  the  EU  would  lower  these  concerns.  Similarly,  the  strong 
increase  in  housing  prices  since  2020,  together  with  the  sharp  increase  in  financing  costs  and 
pressure  on  real  household  incomes,  raises  the  prospect  of  price  corrections,  in  particular  in 
Member States with more overvalued property markets.   

Long-standing  imbalances  related  to  public  and  private  debts  have  resumed  their 
downward  trend  aided  by  nominal  economic  growth,  in  particular  high  inflation.  Private 
sector  and  public  debt  ratios  have  been  declining,  as  nominal  GDP  growth  has  had  a  strong 
denominator  effect.  The  tightening  of  financing  conditions  adds  risk,  particularly  in  countries 
and sectors where variable interest  rates are prevalent or where  (re)financing needs are higher; 
exchange rate volatility may weigh on debt servicing where debts are held in foreign currencies. 
On  the  external  side,  high  nominal  GDP  growth  reduces  the  value  of  countries’  external 
positions in terms of GDP, while the sharp decline in trade balances led to an overall reduction in 
current accounts, also for net-creditor countries. However, the further reductions in energy prices 
from  their  mid-2022  highs  are  expected  to  strengthen  current  accounts  in  2023,  deficits  and 
surpluses alike, with some Member States still recording significant current account deficits and 
surpluses.  The  banking  sector  weathered  the  pandemic  well,  and  non-performing  loans  have 
continued to fall, particularly in countries where they were highest.  

The  Commission  took  a  number  of  decisions  under  the  Macroeconomic  Imbalance 
Procedure. Vulnerabilities are receding in Cyprus to lead to an improvement in its classification 
of imbalances. Conversely, in Hungary, vulnerabilities have increased to an extent that leads to a 
new  finding  of  imbalances.  Some  Member  States  being  subject  for  an  in-depth  review  for  the 
first time in recent years were not found experiencing imbalances at this juncture. Developments 
are  generally  favourable  in  the  remaining  Member  States  analysed  but  relevant  challenges 
remain. Implementation of the country-specific recommendations under the European Semester 

[1] 

‘Housing  Market 
‘External  Sustainability  Analysis’,  European  Economy-Institutional  Papers  196; 
Developments’, European Economy-Institutional Papers 197; ‘Inflation Differentials in Europe and Implications 
for Competitiveness’, European Economy-Institutional Papers 198. 

11 

 
 
                                                           
and  the  policy  agenda  embedded  in  the  RRPs  should  support  a  further  reduction  in 
macroeconomic vulnerabilities.  

-  Cyprus  is  experiencing  imbalances  after  experiencing  excessive  imbalances  until  2022  as 
vulnerabilities related to private, government, and external debt have overall declined but remain 
a concern. 

-  Hungary  is  now  found  to  be  experiencing  imbalances.  Risks  are  tilted  on  the  downside,  and 
imbalances may become excessive in the future if policy action is not urgently taken. 

-  Germany,  Spain,  France,  the  Netherlands,  Portugal,  Romania,  and  Sweden  continue  to 
experience imbalances. 

-  Risks  in  Romania  are  tilted  on  the  downside,  and  imbalances  may  become  excessive  in  the 
future  if  policy  action  is  not  urgently  taken.  On  the  other  hand,  vulnerabilities  are  receding  in 
Germany, Spain, France and Portugal to the extent that a continuation of these trends next year 
would provide ground for a decision of no imbalances.  

- Greece and Italy continue to experience excessive imbalances, but their vulnerabilities appear 
to be receding, including due to policy progress.  

-  Czechia,  Estonia,  Latvia,  Lithuania,  Luxembourg,  and  Slovakia  are  not  found  to  be 
experiencing imbalances as vulnerabilities seem overall to be contained at present. 

Appendix 4 details the country-specific aspects for the 17 concerned Member States. 

4.2 Energy and environmental sustainability  

Despite  achievements  on  security  of  energy  supply  in  recent  months,  preparing  for  next 
winter does not leave room for complacency. Over the last year, the EU has made remarkable 
progress in saving energy, diversifying its energy supplies and optimising existing infrastructure. 
EU natural gas consumption dropped by 17.7% from August 2022 to March 2023 compared with 
average gas consumption for the same months between 2017 and 202220. The share of Russian 
pipeline  imports  in  total  EU  gas  imports  dropped  to  7%  in  January  2023  from  around  50% 
historically.  This  results  from  a  combination  of  measures  taken  by  the  EU  and  national 
governments,  structural  demand  changes,  but  also  high  prices.  Seaborne  liquified  natural  gas 
(LNG)  played  a  leading  role  in  replacing  Russian  gas  volumes,  with  a  sharp  increase  from  81 
bcm  in  2021 to  around  135 bcm  in  2022. New  LNG projects  should further increase the EU’s 
LNG import capacity while avoiding unnecessary  lock-ins  for the future. However,  a  potential 
complete  halt  to  the  Russian  gas  supply,  infrastructure  incidents,  droughts  and  unplanned 
maintenance  of  power  plants  could  create  concerns  for  the  EU’s  security  of  supply,  requiring 
continued  vigilance.  The  diversification  effort  via  LNG  will  be  strengthened  in  2023  with  the 
first  joint  gas  purchases  and  the  intensification  of  the  outreach  to  alternative  gas  suppliers.  In 
addition, measures in the REPowerEU chapters of Member States’ RRPs together with cohesion 
policy programmes, revenues from the EU Emissions Trading System, financial support from the 

20 Eurostat, 19 April 2023. 

12 

 
 
 
                                                           
Innovation and Modernisation Funds and the InvestEU programme are expected to contribute to 
energy  security  through  boosting  clean  energy  alongside  energy  efficiency  and  incentivising 
energy  demand  reductions,  as  well  as  address  energy  poverty,  tackle  internal  and  cross-border 
transmission  and  distribution  bottlenecks.  Furthermore,  it  remains  crucial  to  streamline 
investments, simplify permitting procedures and overcome barriers to enable the deployment of 
renewables and their integration into the grid. Efforts should also be made to support electricity 
storage and grid resilience to deal with increasing supply and demand variability.  

With the approval of a large part of the ‘Fit for 55’ package, the focus should now turn to 
the  implementation  of  measures  to  meet  the  climate,  energy  and  transport  targets.  The 
package strikes a balance between pricing, targets, standards and support measures to deliver on 
the 2030 climate target set in the European Climate Law. The higher 2030 climate, transport and 
energy targets and the EU’s decision to reduce dependence on Russian fossil fuels imply that the 
green transition should continue to accelerate. The forthcoming challenge involves the steadfast 
implementation of the planned and/or agreed measures. At the same time, defining new climate 
and  energy  policy  measures  is  necessary  to  meet  the  higher  2030  ambition.  The  update  of 
Member  States’  national  energy  and  climate  plans  will  be  conducive  to  this.  The  plans,  which 
should  take  into  account  the  latest  CSRs21,  provide  short-,  medium-  and  long-term  investment 
predictability  and  are  crucial  for  mobilising  the  large-scale  investments  needed  to  achieve  the 
2030 and 2050 climate objectives22. Further efforts are needed in most areas such as adaptation 
to climate change , including for sustainable water management, the food systems, including the 
preservation of soils and halting the loss of biodiversity, and other land use sectors. In parallel, 
Member States need to deliver on the other environmental policy objectives agreed at EU level, 
including achieving zero pollution for air, water and soil. The annual investment gap to deliver 
on  the  EU’s  environmental  objectives  beyond  climate  and  energy  is  estimated  at  EUR  110 
billion23.  Budgetary  planning  should  take  into  account  contingent  liabilities  linked  to  climate-
related  risks  and  green  budgeting  practices  should  be  further  developed  to  redirect  public 
investment, consumption and taxation to green priorities.  

Strengthening  the  green  transition  of  our  industries  will  reduce  the  EU’s  overall 
dependence  on  fossil  fuels  and  increase  our  resilience  to  energy  supply  shocks.  Many 
companies,  particularly  small  and  medium-sized  enterprises  (SMEs)  and  those  in  energy-
intensive  industries,  have  been  severely  impacted  by  energy  price  increases,  even  after  taking 
into  account  government  support.  Policies  should  continue  to  focus  on  promoting  the  green 
transition  in  areas  such  as  the  energy  efficiency  of  industrial  and  manufacturing  processes  and 
buildings, the decarbonisation of industry and the circular economy24. Synergies with the digital 
transition should be maximised. Member States, through their RRPs, should continue investing 
in  renewable  or  fossil-free  hydrogen  in  the  hard-to-abate  applications  in  industry  and  certain 
transport  sectors,  such  as  road  transport,  maritime  and  aviation.  Moreover,  further  reducing 
environmentally  harmful  subsidies  and  integrating  the  polluter  pays  principle  would  help 
internalise  costs  of  nature  degradation  and  encourage  resource  efficiency  and  productivity.  To 

21 Commission Notice: Guidance to Member States for the update of the 2021-2030 NECPs (C/2022/9264 final). 
22 See also COM(2022)83 final and SWD(2022) 230 final.  
23 COM(2022) 438 final. 
24 Accelerating the transition to a circular economy can increase the EU’s open strategic autonomy and significantly 

contribute to primary energy savings. 

13 

 
 
                                                           
ensure  that  no  person  and  no  region  is  left  behind,  distributional,  territorial  and  social  impacts 
should be factored in. The Just Transition Fund should be well deployed to contribute to a fair 
transition  for  the  territories  most  affected,  including  by  supporting  reskilling  and  upskilling 
measures. 

Member  State  action  to  shorten  and  simplify  permitting  procedures  is  critical  for 
accelerating  the  manufacturing  and  deployment  of  renewable  energy  and  other  net-zero 
solutions.  Lengthy  and  complex  permitting  procedures  at  national  level  constitute  a  major 
bottleneck  in  the  deployment  of  renewable  energy  sources  in  most  Member  States.  In  2022, 
based  on  the  reporting  from  businesses,  the  Single  Market  Enforcement  Taskforce25  reviewed 
around  170  process-related  barriers  to  permitting  for  renewable  energy  sources  across  the 
Member States and agreed to remove more than 80 of them. Notable examples include lengthy 
procedures,  understaffed  permitting  authorities,  fragmented  decision-making  and  lack  of 
coordination, leading to inconsistent decisions and timing across regions.  

The  faster  expansion  and  upgrade  of  the  electricity  transmission  and  distribution 
infrastructure, including cross-border interconnectors, is a key condition for integrating a 
significantly higher share of renewable energy sources and for the further electrification of 
demand. Member States should focus on new long- and short-term energy storage facilities to 
ensure  flexibility  and  security  of  supply  in  energy  systems  with  a  high  share  of  variable 
renewables. Member States’ ambition to deploy offshore renewable energy (111 GW by 2030) 
underlines  the  need  for  Member  States  to  swiftly  develop  crucial  offshore  grids  and  the 
necessary onshore grid reinforcements. 

A strong and innovative manufacturing capacity in clean tech value chains will accelerate 
the  green  transition.  To  strengthen  the  resilience  and  competitiveness  of  the  net-zero 
technologies  in  the  EU  and  make  the  EU  energy  system  more  secure  and  sustainable,  the 
Commission  proposed the Net  Zero  Industry  Act in  March 202326. At the  same time, Member 
States  need  to  further  leverage  their  talent,  intellectual  assets  and  industrial  capabilities  and 
further  encourage  private  investors  to  participate  in  EU-based  start-ups  and  scale  up 
innovations27. Member States should also focus on overcoming challenges related to the shortage 
of  skilled  workers 
the 
competitiveness of the clean energy sector is key to delivering on the REPowerEU plan and the 
EU’s longer-term ambition28. 

technology  segments.  Strengthening 

in  various  clean  energy 

Clean  tech  manufacturing  needs  to  secure  access  to  critical  raw  materials,  including 
through  diversification,  recycling  and  substitution.  Meeting  the  EU’s  green  and  digital 
transition objectives requires access to secure, sustainable and diversified sources of critical raw 
materials,  reducing  our  dependence  on  single  suppliers  and  building  secure  and  sustainable 
supply chains for mining, processing and refining and for recycling. In this context, capitalising 
on  and  expanding  cooperation  with  EU  trading  partners,  including  by  engaging  in  mutually 
beneficial strategic partnerships with emerging markets and developing economies, will be key. 
Circular economy solutions  and business  models  also  imply significant  opportunities to  pursue 

25 Single Market Enforcement Taskforce (2022), ‘Report 2021-2022’ 
26 COM(2023) 62 final.  
27 See also COM(2022) 332 final. 
28 COM(2022) 643 final. 

14 

 
 
                                                           
strategic  autonomy  objectives  while  being  respectful  of  the  environment.  Designing  for 
recyclability,  recycling  and  advancing  the  transition  to  a  circular  economy  are  priorities  of  the 
Critical  Raw  Materials  Act29.  This  should  be  complemented  by  Member  States,  for  instance 
regarding  permanent  magnets  and  the  reuse  of  extractive  waste.  Coherent  strategies  should  be 
developed  that  not  only  remove  obstacles  but  also  promote  the  exploration,  extraction, 
processing  and  recycling  of  materials  across  Europe.  More  generally,  the  transition  of  EU 
industries to circularity is yet to materialise, as resource productivity  only marginally increased 
between 2012 and 2021.  

4.3 Productivity  

A well-functioning single market reduces gaps in productivity and competitiveness between 
EU Member States and regions. The single market has underpinned Europe’s prosperity since 
it  was  created  three  decades  ago.  EU  businesses  benefit  from  a  “home  market”  of  over  450 
million consumers for their products, easier access to a wide range of suppliers and lower unit 
costs, whereas  EU citizens benefit from  more innovation,  lower prices and higher standards of 
safety and environmental protection because of the competition between companies30. Moreover, 
it protects the EU from major demand or supply shocks and can help to contain price pressures at 
times  of  high  inflation.  In  the  medium  to  long  term,  it  can  help  address  supply  chain 
vulnerabilities and support scaling-up capacities for the twin transition and EU’s resilience and 
security.  Although  the  single  market  is  fundamental  to  the  EU’s  global  attractiveness,  average 
productivity  growth  has  slowed  down  in  the  last  few  decades  and  been  weaker  than  in  other 
major economies, hampering the competitiveness of EU companies31. In several Member States 
and EU regions, productivity is actually stagnating, resulting in growing disparities in particular 
within EU Member States. There are also significant regional disparities in access to education, 
research  and  innovation  and  mobility,  further  accentuated  in  rural  and  outermost  areas  and  in 
extremely  remote  areas  such  as  the  outermost  regions  where  access  to  essential  and  social 
support  services  remains  a  challenge  in  general.  The  implementation  of  the  cohesion  policy 
programmes  and  the  RRPs  until  2026  will  contribute  substantially  to  improving  the  EU’s 
competitiveness  and  boosting  EU  cohesion.  Beyond  investment  measures,  including  under  the 
InvestEU  programme,  the  RRPs  include  reforms  aimed  at  simplifying  the  regulatory 
environment at  national  and regional  level, speeding up  access  to  finance and improving SME 
growth and resilience by reskilling and upskilling employees or strengthening their research and 
development capacities. 

A  genuine  single  market  for  services  would  also  bring  substantial  productivity  gains.  EU 
service markets face several challenges, including low competitive pressure,  lower productivity 
levels and lower growth rates than manufacturing, poor integration of cross-border services and 
low  professional  mobility.  Reducing  regulatory  restrictions  at  national  level  would  increase 
competition  and  facilitate  workforce  mobility  and  increase  the  offer  of  services  where  most 
needed.  It  would  strengthen  the  competitiveness  of  manufacturing  industries  that  also  source 
many  professional  services  and  increasingly  offer  their  products  in  combination  with  services. 
However,  progress  has  been  slow  in  reducing  regulatory  barriers,  and  in  some  cases  reforms 

29 COM(2023) 160 final. 
30 COM(2023) 162 final 
31 COM(2023) 168 final. 

15 

 
 
                                                           
have been reversed and a high level of restrictions remain32. For example, regulatory barriers are 
particularly  prevalent  in  key  business  services  (legal,  accountancy  and  for  architects)  in  many 
Member  States.  The  construction  sector,  key  to  the  green  transition,  often  suffers  from 
authorisation  and  qualification  requirements  that  are  unnecessarily  burdensome.  Fragmented 
responsibilities  and  activities  reserved  for  several  professions  and  specialisations  (in  particular 
architects  and  civil  engineers)  further  impact  the  free  movement  of  professionals.  In  retail 
services,  the  level  of  restrictions  remained  either  unchanged  or  even  higher  for  many  Member 
States in 2022 compared to 201833.  

Removing  regulatory  obstacles,  while  ensuring  good  governance  and  the  respect  for  the 
rule of law, increases institutional resilience and improves the business environment. 60% 
of the barriers that EU businesses report facing today are of the same type as those reported 20 
years  ago.  Most  of  these  relate  to  national  regulation  and  administrative  practices  that  can  be 
addressed directly by Member States. The benefits of removing Member State-level barriers to 
the single market for goods and services alone could add EUR 713 billion to the whole economy 
by the end of 202934. Tackling legislative and administrative obstacles is supported by reforms 
under the RRF, and the Commission has invited Member States to further strengthen reforms in 
this  area  as  part  of  their  ongoing  revisions.  This  complements  the  work  of  the  Single  Market 
Enforcement  Taskforce,  as  mentioned  above.  The  use  of  SOLVIT35  for  addressing  problems 
related  to  the  application  of  single  market  legislation  is  also  increasing,  especially  among 
business  stakeholders.  Good  governance  and  respect  for  the  rule  of  law,  in  particular 
independent,  quality  and  efficient  justice  systems36,  functioning  and  effective  tax  systems,  as 
well as effective insolvency  and  robust anti-corruption and anti-fraud frameworks are  also  key 
determinants of an economy that works for people and help improving the business environment. 
Furthermore,  the  Commission  will  make  a  fresh  push  to  rationalize  and  simplify  reporting 
requirements for companies and administrations, with the aim to reduce those burdens by 25%, 
without undermining the related policy objectives.  

Well-functioning capital markets are crucial to funding the green and digital transition and 
supporting  EU  macroeconomic  resilience  and  the  EU’s  open  strategic  autonomy.  Public 
financing, in conjunction with accelerating the Capital Markets Union, can unlock the significant 
amounts  of  private  financing  required  for  the  twin  transition.  While  progress  has  been  made 
since  the  Capital  Markets  Union  initiative  was  launched  in  2015,  EU  capital  markets  remain 
fragmented  and  underdeveloped,  showing  the  need  for  further  concrete  action.  In  a  climate  of 
rising  interest  rates,  many  businesses,  particularly  SMEs,  have  difficulties  accessing  finance. 
Exacerbated  by  high  energy  prices,  late  payments  also  constitute  a  barrier  to  the  resilience  of 
businesses, in particular SMEs. This calls for stepping up collective efforts to advance, involving 
policymakers  and  market  participants  across  the  EU37.  Further  gains  in  EU  productivity  and 

32 COM(2021) 385 final. 
33 European Commission, 2022 update of the Retail Restrictiveness Indicator, forthcoming. 
34 COM (2023) 162 final,16.3.2023. 
35 SWD(2022) 325 final. 
36 In addition to the European Semester, the Commission’s Rule of Law Report also covers in one of its pillars the 

functioning of justice systems. 

37 The European Commission will publish an SME Relief Package in June 2023 and has recently tabled proposals to 
make EU clearing services more attractive and resilient, harmonise certain corporate insolvency rules across the 

16 

 
 
                                                           
 
competitiveness  will  come  from  more  innovative  and  safe  payment  systems  and  from  an  open 
finance framework that will allow us to reap the benefits of digitalisation. 

Digitalisation  plays  an  important  role  in  increasing  competitiveness  and  requires  a 
workforce  with  stronger  digital  skills,  including  for  SMEs,  and  further  digitalisation  of 
public  services.  A  digitally  skilled  population  increases  technological  progress  and  drives 
productivity. The digitalisation of SMEs is indispensable for increasing their innovation potential 
and competitiveness. This can be strengthened by comprehensive action, as suggested by the two 
recent  proposals  for  Council  recommendations  on  proposed  digital  education  and  skills38,  in 
which  the  structured  dialogue  on  digital  education  and  skills  prepared  the  ground.  The  digital 
transformation  of  governments,  which  includes  broadening  the  range  and  interoperability  of 
public services available online and the availability of open data, improves business efficiency. 
Furthermore,  the  digital  transition  strengthens  the  green  transition,  as  digital  technologies  like 
space  data  and  services  play  a  significant  role  in  climate  action39.  The  Digital  Decade  policy 
programme offers a roadmap to unlock the EU’s digital transformation potential, paving the way 
for a more competitive Europe.  

Public  procurement  markets  need  open  competition  to  deliver  the  best  value  for  public 
money. The number of public tenders with only one bid has been increasing in recent years. In 
2022,  it  reached  the  highest  share  at  EU  level  (37%)  since  the  adoption  of  the  2014  Public 
Procurement  Directive40.  Efforts  by  Member  States  to  reduce  this  share  are  needed  to  create  a 
level  playing  field.  Public  procurement  can  stimulate  supply  chains  by  diversifying  demand. 
Used  strategically  with  the  focus  not  only  on  price,  it  can  also  improve  quality,  resilience  and 
sustainability.  Through  the  Net-Zero  Industry  Act,  it  should  become  easier  for  innovative, 
sustainable  SMEs,  or  for  consortia  including  SMEs,  to  participate  in  procurement41.  Where 
possible, tenders should be designed in a way that allows SMEs to participate. 

Innovation is one of the main drivers of stronger productivity growth, but it faces several 
bottlenecks.  Shortages  of  highly  skilled  staff  in  science,  technology,  engineering  and 
mathematics (STEM) have become a common challenge for most Member States, undermining 
the growth potential of firms, including in high-innovation, high-technology sectors. Innovation 
is highly concentrated in some Member States and EU regions, particularly in capital regions and 
other metropolitan regions, and remains much higher in Northern and Western Europe. Stronger 
innovation  performance  is  held  back  by  a  series  of  shortcomings  such  as  insufficient  and/or 
irregular  public  R&D  investment,  weak  academia-business  linkages  in  most  Member  States  or 
ineffective  public  support  for  business  innovation.  Breakthrough  innovations  are  for  example 
impacted by a lack of scale-up ventures, difficulties in accessing capital, regulatory burden and 
barriers  in  the  single  market.  Many  measures  are  being  implemented  in  the  RRPs.  Cohesion 
policy investments  and other initiatives such as the Regional  Innovation  Valleys will  also  help 
address these challenges.  

EU,  and  alleviate  the  administrative  burden  for  companies  of  all  sizes,  in  particular  SMEs,  for  listing  and 
remaining listed: COM(2022) 696 final. 
38 COM(2023) 205 final; COM(2023) 206 final.  
39 See for example the EU action plan for the digitalisation of the energy system: COM(2022) 552. 
40 Directive 2014/24/EU of the European Parliament and of the Council of 26 February 2014 on public procurement 

and repealing Directive 2004/18/EC Text with EEA relevance (OJ L 94, 28.3.2014, p. 65). 

41 See also the New European Innovation Agenda: COM(2022) 332 final. 

17 

 
 
                                                                                                                                                                                           
4.4 Fairness  

While  the  EU  labour  market  has  so  far  proved  resilient,  high  inflation  and  uncertainty 
could affect labour market prospects and are affecting households. The labour market in the 
EU  achieved  a  record  employment  rate  of  [74.8%]  in  the  [fourth  quarter]  of  2022,  marking 
substantial progress towards the 2030 employment rate target of at least 78%. Labour and skills 
shortages  remain  high  and  above  2019  levels,  but  started  declining  in  the  second  half  of  2022 
amid  a  continued  positive  overall  labour  market  performance.  Nonetheless,  the  slowdown  in 
economic activity is expected to translate into more muted labour market developments in 2023 
and  2024,  while  regional  disparities  in  the  labour  market  remain  high  with  employment  rates 
lower than 50% in some regions. At the same time, sizeable employment gaps persist for some 
population groups, including women and young people. Steep increases in prices, especially for 
food, energy and transport, have affected the purchasing power of low- and lower-middle income 
households  in  particular.  These  items  represent  higher  shares  in  their  consumption  baskets, 
calling  for  well-targeted  social  policy  measures.  In  this  context,  responsive  wage  policies,  and 
effective collective bargaining are key to promoting adequate real wage developments, especially 
for low-income workers.  In this  regard,  regular updates of minimum  wages, play  an important 
role.  The  adoption  of  the  EU  minimum  wage  directive42  creates  a  positive  momentum  for 
measures ensuring adequate minimum wages.  

To mitigate the loss  in  purchasing power and prevent an increase in poverty risks,  social 
protection systems need to be safeguarded and strengthened, including their adequacy and 
sustainability.  Continuous  monitoring  of  the  social  situation  and  prompt  policy  responses  are 
needed to prevent people falling into poverty or social exclusion, including energy poverty, and 
exacerbating  existing  inequalities.  In  the  context  of  the  rising  cost  of  living,  closing  gaps  in 
access to adequate and sustainable social protection and social inclusion systems plays a key role 
in minimising the impact of high inflation on vulnerable people, alongside wage developments 
that  mitigate  the  loss  in  purchasing  power  in  particular  for  low  earners.  Structural  or  ad  hoc 
mechanisms to adjust social benefits in response to high inflation are important to maintain their 
adequacy, while ensuring that the respective costs remain fiscally sustainable. At the same time, 
social  protection  systems  and  inclusion  systems  need  to  preserve  work  incentives  and  actively 
promote  labour  market  participation  and  integration,  including  through  integrated  quality 
services.  Population  ageing,  the  burden  of  chronic  diseases,  new  health  demands  and  new 
technologies  will  also  require  the  creation  of  more  jobs,  with  changing  skill  sets,  in  the  health 
and  social  sectors.  Access  to  affordable,  quality  and  sustainable  healthcare  and  long-term  care 
needs  to  be  improved.  E-health  continues  to  transform  the  way  people  access  and  receive 
healthcare,  requiring  an  increasing  level  of  digital  skills  as  well  as  higher  versatility  from  the 
health workforce.   

Education  and  training  systems  are  key  to  addressing  and  preventing  labour  and  skills 
shortages.  The  largest  labour  shortages  are  currently  in  healthcare  and  long-term  care, 
hospitality, construction, ICT and related occupations, and in key sectors for the green transition 

42  Directive  (EU)  2022/2041  of  the  European  Parliament  and  of  the  Council  of  19  October  2022  on  adequate 

minimum wages in the European Union (OJ L 275, 25.10.2022, p. 33).  

18 

 
 
                                                           
such as renewables and energy efficiency. Beyond cyclical developments, skills shortages reflect 
structural changes in the EU economy, including population ageing and the ongoing green and 
digital  transformations,  which  leads  to  changing  skills  requirements.  At  the  same  time,  they 
expose the existing weaknesses in education and training systems. While improving, the share of 
young  people  not  in  employment,  education  or  training  remains  high  in  some  Member  States. 
Already  in  2018,  one  in  five  15-year-olds  lacked  basic  skills,  and  young  people  from 
disadvantaged backgrounds were almost six times more likely to underachieve academically. In 
the last few years, the pressure on education and training systems has increased as they have had 
to  cope  with  the  impact  of  the  pandemic,  lack  of  appropriate  digital  infrastructure  and  the 
growing  shortage  of  teaching  staff,  at  all  levels  of  education,  particularly  in  subjects  most 
relevant for the twin transition. While tertiary educational attainment is on the rise, the share of 
STEM  (science,  technology,  engineering,  and  mathematics)  graduates  falls  short  of  labour 
market  demand  in  most  Member  States.  Strengthening  the  quality,  inclusiveness  and  labour 
market  relevance  of  education  and  training  systems  at  all levels  throughout  the  Union  remains 
key  for  strong  labour  markets  and  a  fair  transition.  Similarly,  increasing  the  labour  market 
participation  of  women,  young  people  and  underrepresented  and  vulnerable  groups,  such  as 
persons  with  disabilities,  people  with  a  migrant  background  and  Roma,  remains  a  major 
opportunity for inclusive growth and equality. 

In  particular,  the  development  and  acquisition  of  skills  and  competences  relevant  for  the 
green  transition is  becoming  more pressing.  It  is  becoming increasingly important  to  ensure 
that all workers, in particular those in sectors and regions more affected by the green transition, 
can benefit from the employment gains of a net-zero economy. Vocational and technical profiles 
will  be  particularly  sought  after  in  light  of  the  accelerated  energy  transition  and  technological 
transformation  in  the  context  of  the  EU  Green  Deal  Industrial  Plan.  Member  States  face 
significant  and  growing  labour  shortages,  while  low  training  provision  in  key  sectors  could 
create bottlenecks in the transition to a net-zero economy. The challenge is even stronger in some 
peripheral  or  economically  stagnant  regions.  In  this  context,  it  is  crucial  that  Member  States 
support the anticipation, acquisition and provision of skills for the green economy, as highlighted 
in the CSRs to all Member States and in line with the Council Recommendation on ensuring a 
fair  transition  towards  climate  neutrality,  to  match  labour  market  needs  and  offer  equal 
opportunities for all. Promoting upskilling and reskilling for public sector  workers at  all levels 
(including local administration) would also accelerate investments and reforms necessary for the 
green transition.43  

The  RRF  and  cohesion  policy  funds,  in  particular  the  European  Social  Fund  Plus,  help 
address  challenges  in  education  and  training  systems  at  all  levels.  Supported  measures 
include  enhancing  access  to  early  childhood  education  and  care,  curriculum  reforms, 
modernising higher education, facilitating the transition from the education system to the labour 
market,  creating  upskilling  and  reskilling  opportunities  –  in  particular  for  skills  relevant  to  the 
green  transition  –  as  well  as  reforming  and  modernising  active  labour  market  policies.  By 

43  The  EU  Technical  Support  Instrument  (TSI)  will  facilitate  exchanges  between  officials  from  national  and/or 
regional administrations through the flagship initiative PACE (Public Administration Cooperation Exchange) as 
a way to enhance administrative capacity and foster best practices (Regulation (EU) 2021/240 of the European 
Parliament  and  of  the  Council  of  10  February  2021  establishing  a  Technical  Support  Instrument,  OJ  L  57, 
18.2.2021, p. 1). 

19 

 
 
                                                           
supporting  an  accelerated  requalification  of  the  workforce  towards  skills  relevant  to  the  green 
transition,  the  dedicated  REPowerEU  chapters  to  be  included  in  the  existing  RRPs  will  ensure 
additional  funding  for  reforms  and  investments  in  this  area.  Coupled  with  these  increased 
investments,  including  under  the  InvestEU  programme,  the  ambitious  and  sustainable  legal 
migration  policy  proposed  by  the  Commission  in  its  Skills  and  Talent  package44  can  also  help 
address labour and skills shortages and unlock the full potential of the European workforce. The 
European  Year  of  Skills  2023  will  provide  fresh  impetus  to  engage  stakeholders  and  mobilise 
public and private funding in order to address skills shortages and medium- to long-term labour 
shortages in particular in digital and green skills45.  

Since the start of the Russian war of aggression against Ukraine, nearly 4 million displaced 
people have been welcomed in the EU under the Temporary  Protection Directive.  Labour 
market inclusion is fundamental for displaced people to be financially independent, support their 
families  and  contribute  to  the  host  community46.  According  to  available  estimates47,  between 
600 000 and 1 million beneficiaries of temporary protection have found employment across the 
EU,  while  more  than  350 000  have  registered  as  jobseekers.  Language  barriers  are  a  major 
obstacle  to  getting  displaced  people  into  work,  making  the  provision  of  language  training  of 
crucial importance. The swift validation of skills and recognition of qualifications, including in 
sectors in demand such as healthcare, is also important to ensure that people can access work that 
matches their skills and experience. Many Member States have already taken important steps to 
facilitate  this  process,  in  line  with  the  Commission’s  guidance48,  using  also  the  funding 
flexibilities  provided  by  CARE  (Cohesion  Action  for  Refugees  in  Europe).  As  many 
beneficiaries  of  temporary  protection  are  women  with  children,  the  availability  of  early 
childhood  education  and  care  services  is  a  particularly  critical  precondition  for  their  labour 
market participation.  

The  implementation  of  the  European  Pillar  of  Social  Rights  continues  to  guide  upward 
social convergence in the EU. Two years after the Porto Social Summit and the commitments 
made on the 2030 headline targets on employment, skills and poverty reduction, putting in place 
the necessary reforms and investments to make progress towards the national targets remains a 
priority  for  Member  States.  This  is  key  to  supporting  upward  social  convergence  and  social 
cohesion in the EU. As part of the Spring Package, the Commission also proposes to carry over 
the  Employment  Guidelines  to  the  next  annual  cycle.  This  follows  a  major  change  in  2022  to 

44 COM(2022) 657 final. 
45 The European Year of Skills 2023 aims to address skills shortages and medium- to long-term labour shortages by 
reskilling  and  upskilling  the  European  workforce  and  by  ensuring  better  matchmaking  between  supply  and 
demand in the labour market. 

46 COM(2023) 140 final. 
47 It is difficult to estimate the actual number of beneficiaries of temporary protection that are employed across the 
EU  due  to  the  unavailability  of  data  from  some  Member  States  and  differences  in  the  type  of  administrative 
sources used. In particular, some countries report the cumulative number of ‘notifications of employment’ (i.e. 
the  declarations  submitted by employers  when hiring Ukrainian citizens),  which corresponds to the  number of 
jobs created rather than to the number of people actually employed. 

48  Communication  from  the  Commission  on  Guidance  for  access  to  the  labour  market,  vocational  education  and 
training and adult learning of people fleeing Russia’s war of aggression against Ukraine (OJ C 233, 16.6.2022, p. 
1). 

20 

 
 
                                                           
better reflect the post-COVID environment and most recent policy initiatives, as well as growing 
discussions on the importance to ensure sustainable and inclusive wellbeing 

5. CONCLUSION 

In the face of the current geopolitical reality and complex economic and social challenges, 
the EU seeks to build a robust and future-proof economy that secures competitiveness and 
long-term  prosperity  for  all.  This  requires  an  integrated  approach  across  all  policy  areas  to 
increase productivity, resilience, fairness and sustainable growth throughout the whole economic 
base. The European Semester provides the right policy coordination framework for that purpose, 
also  embedding  implementation  of  the  RRF  and  of  cohesion  policy  programmes.  While  RRP 
implementation  is  well  underway  in  some  Member  States,  in  others  it  faces  the  risk  of  delays 
with  regard  to  the  indicative  implementation  calendars  agreed  in  the  Council  Implementing 
Decisions. While the implementation of the 2014-2020 cohesion policy programmes will come 
to  an  end  in  2023,  the  recently  adopted  2021-2027  programmes  offer  an  opportunity  to  boost 
investment  in  full  complementarity  with  the  RRF.  To  ensure  lasting  progress,  Member  States 
should  continue  to  focus  on  the  full  and  timely  implementation  of  the  RRPs  until  2026  and 
proceed  swiftly  to  implement  the  recently  agreed  cohesion  policy  programmes.  The  envisaged 
revisions  of  the  RRPs,  including  REPowerEU  chapters  with  additional  funding  along  with  the 
cohesion policy programmes, are an opportunity to respond to persisting challenges identified in 
the context of the European Semester, including in the area of climate and energy.  

The  2023  country  reports  provide  a  snapshot  of  the  economic,  labour  market  and  social 
developments and challenges that Member States are currently facing.  The analysis of  the 
challenges underpins the 2023 CSRs. This year’s European Semester pays particular attention to 
the topic of long-term competitiveness and productivity, while also providing an updated, more 
detailed analysis of energy security and affordability. The Commission calls for ambitious action 
by  Member  States  to  address  the  vulnerabilities  exposed  by  recent  crises  and  identified  in  the 
country  reports  at  national  and  regional  level.  This  includes  strengthening  resilience  and 
productivity,  facilitating  access  to  financing,  providing  affordable  energy,  reducing  strategic 
dependencies,  accelerating  the  circular  economy  transition,  ensuring  the  skills  for  the  future, 
supporting  the  creation  of  quality  jobs  and  making  the  economic,  scientific,  industrial  and 
technological base fit for the green and digital transition while leaving no one behind. 

The Commission calls on the European Council to endorse and on the Council to adopt the 
Commission proposals for the 2023 CSRs. It also calls on all EU Member States to implement 
the recommendations fully and in a timely manner, in close dialogue with their social partners, 
civil society organisations and other stakeholders. 

21 

 
 
APPENDIX 1 – OVERVIEW OF THEMATIC AREAS COVERED IN THE COUNTRY-SPECIFIC RECOMMENDATIONS 

Broad 
Category 

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Digital transition, productivity, and single 
market 

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22 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
APPENDIX  2  –  PROGRESS  IN  THE  IMPLEMENTATION  OF  THE  COUNTRY-
SPECIFIC RECOMMENDATIONS 

The  2023  European  Semester  takes  stock  of  the  Member  States’  policy  action  to  address 
structural challenges identified in the CSRs adopted since 2019. Following the establishment 
of the RRF as a key tool to deliver EU and national policy priorities, the 2023 CSR assessment 
takes  into  account  the  policy  action  taken  by  the  Member  States  to  date49  as  well  as  the 
commitments  undertaken  in  the  RRPs,  depending  on  their  degree  of  implementation.  The 
assessment therefore reflects the current, still relatively early stages of implementation of RRPs, 
rather  than  the  level  of  progress  that  could  be  achieved  assuming  a  full  implementation  of  the 
plans until 202650.  

Figure 1: Current level of implementation of 
2019-2020 CSRs 

Figure  2:  Implementation  of  2019-2022 
CSRs:  annual  assessment 
each 
consecutive  year  versus  implementation 
to date 

in 

Full Implementation
2%

No Progress
2%

Substantial 
Progress
12%

Limited 
Progress
30%

Some 
Progress
54%

100%

80%

60%

40%

20%

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2020

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Annual assessment
Multiannual assessment
Average of annual assessment
Average of multiannual assessment

Note: The multiannual assessment in Figure 1 looks at implementation of 2019-2020 CSRs from the time the recommendations 
were first adopted until publication of this Communication.  In Figure 2, annual assessment shows the progress recorded in 
the first year after CSRs adoption while the multiannual assessment shows this year's assessment of past CSRs. Note that the 
2021 CSRs only relate to fiscal policy. 

From a multiannual perspective, at least some progress has been recorded for 68% of the 
2019-2020  CSRs  (see  Figure  1).  Compared  to  last  year’s  assessment,  additional  progress  has 

49  Including  policy  action  reported  in  the  national  reform  programmes  as  well  as  in  RRF  reporting  (biannual 
reporting  on  progress  in  the  implementation  of  milestones  and  targets  and  resulting  from  the  payment  request 
assessment).  

50 Member States were asked to effectively address in their RRPs all or a significant subset of the relevant CSRs, in 
particular  those  of  2019  and  2020.  The  CSR  assessment  presented  here  takes  into  account  the  degree  of 
implementation  of  the  measures  included  in  the  RRPs  and  of  those  done  outside  of  the  RRPs  at  the  time  of 
assessment. Measures envisaged in the Annexes of the adopted Council Implementing Decisions on the approval 
of the  assessment of the  RRPs,  which  have  not  yet been adopted or implemented but are considered as credibly 
announced  in  line  with  the  CSR  assessment  methodology,  warrant  ‘limited  progress’.  Once  implemented,  these 
measures can lead to ‘some/substantial progress’ or ‘full implementation’, depending on their relevance. 

23 

 
 
 
 
  
                                                           
 
 
 
 
 
 
 
been made on both 2019 CSRs of a structural nature and more crisis-oriented 2020 CSRs. The 
percentage  of  these  CSRs  having  achieved  at  least  some  progress  of  implementation  has  thus 
steadily increased from 59% in 2021, via 63% in 2022, now reaching 68%. This shows clearly 
the incentives provided by the RRF since 2021, whose performance-based approach is expected 
to  continue  reinforcing  CSR  implementation  in  the  years  to  come.  Member  States  have  made 
most  progress  in  recent  years  on  access  to  finance  and  financial  services,  followed  by  labour 
market  functioning,  anti-money  laundering  and  business  environment.  At  the  same  time, 
progress  has  been  less  visible  in  the  areas  of  the  single  market,  competition  and  state  aid, 
housing, long-term care and pension systems.  

Progress  in  the  implementation  of  the  recommendations  adopted  in  2022  has  also  been 
substantial.  Member  States  have  made  at  least  ‘some  progress’  in  almost  52%  of  the 
recommendations addressed to them in July 2022 (Figure 2). Considering those areas in which a 
significant number of Member States received a recommendation in 2022, most progress overall 
has  been  achieved  on  budgetary  framework  and  fiscal  governance,  followed  by  transport, 
business  environment  and  energy  efficiency.  By  contrast,  less  progress  has  been  made  in 
addressing recommendations on taxation policy. 

The results of the 2023 CSR assessment, together with those of previous years, will be available 
on the Commission website. 

24 

 
 
 
 
APPENDIX 3 – EU-WIDE PROGRESS ON SDG IMPLEMENTATION 

 Note: The figure above shows the pace at which the EU has progressed towards each of the 17 goals over the most recent five-
year period according to the selected indicators. The method for assessing indicator trends and aggregating them at goal level as 
well as more detailed analyses are available on the Eurostat website: Overview – Sustainable development indicators – Eurostat 
(europa.eu). 

Over the last five-year period assessed, the EU has made significant progress towards ensuring 
decent work and economic growth (SDG 8) and reducing poverty (SDG 1). Significant progress 
has  also  been  made  towards  achieving  gender  equality  (SDG  5).  Good  but  more  moderate 
progress has also been achieved towards the goals on reducing inequalities (SDG 10), ensuring 
quality education (SDG  4), fostering peace  and personal  security within  the EU’s territory  and 
improving access  to  justice and trust  in  institutions (SDG 16), health  and well-being  (SDG 3), 
despite  the  setbacks  caused  by  the  COVID-19  pandemic,  and  on  innovation  and  infrastructure 
(SDG  9).  Progress  towards  the  remaining  goals  -  zero  hunger  (SDG  2),  clean  water  and 
sanitation (SDG 6) and affordable and clean energy (SDG 7) - has been less significant.   

More progress is expected for three goals – climate action (SDG 13), life on land (SDG 15) and 
global partnerships  (SDG 17)  – as EU Member  States are set  to  implement  the higher level  of 
ambition in  the  environmental  targets set  at EU level.  Regarding  climate action (SDG 13), the 
EU  has  set  very  ambitious  and  unparalleled  climate  targets  for  2030  and,  as  compared  to  past 
trends,  they  will  require  more  efforts.  The  EU  has  already  put  in  place  the  policy  measures  to 
deliver these additional efforts, notably via the ‘Fit for 55’ package, with a revision of the EU 
emissions  trading  system  (ETS),  and  the  Effort  Sharing  Regulation  that  sets  binding  annual 
greenhouse gas emissions targets for Member States. In the area of energy, the EU has also set 
more ambitious targets for 2030. This implies that stronger progress is expected to be visible in 

25 

 
 
 
 
the coming  years in the area of energy efficiency and renewable energies in the EU, as well.51 
Concerning life on land (SDG 15), even though terrestrial protected areas have increased since 
2013,  the  EU  continues  to  face  steady  declines  in  common  bird  and  grassland  butterfly 
populations. Additional efforts needed to reverse the degradation of ecosystems are envisaged in 
the EU 2030 Biodiversity Strategy, in the EU forest strategy for 2030 launched this year and in 
the  EU  Soil  Strategy,  which  sets  a  2030  objective  on  restoring  degraded  land  and  soil  and 
combatting  desertification.  Regarding  partnerships  for  the  goals  (SDG  17),  the  trend  partially 
reflects  cyclical  effects  and  notably  the  increase  in  public  debt  resulting  from  the  COVID-19 
crisis.   

51 Moreover, data for 2021 were strongly affected by the severe floods in Germany, Luxembourg, and Belgium and 
in 2021 net greenhouse gas emissions, even if still below pre-pandemic levels, partially bounced back from the 
low levels hit during the pandemic.  

26 

 
 
 
 
                                                           
APPENDIX  4  –  FINDINGS  OF  IN-DEPTH  REVIEWS  OF  MACROECONOMIC 
IMBALANCES IN EU COUNTRIES 

Imbalances or excessive imbalances have been identified in 11 out of the 17 Member States 
for which an in-depth review was carried out. The in-depth review (IDR) analysis looks at the 
gravity  of  the  imbalances,  their  recent  and  prospective  evolution  and  related  policy  responses. 
Relevant spillovers and the systemic cross-border implications of imbalances are also taken into 
account.  The  IDRs  have  been  informed  by  the  findings  of  three  thematic  notes,  on  i)  external 
sustainability, on ii) inflation differentials and their implications for competitiveness, and (iii) on 
housing  market  dynamics,  which  focussed  on  a  number  of  the  Member  States  selected  for  an 
IDR in the current round.52 

High inflation marks the backdrop against which  imbalances are now evolving.  Persistent 
high  inflation  may  adversely  affect  competitiveness  if  not  matched  by  productivity  gains,  and 
can  lead  to  macroeconomic  imbalances  developing  or  exacerbating,  in  the  presence  of  other 
vulnerabilities.  This  can  occur  if  inflation  becomes  entrenched,  particularly  in  the  presence  of 
price-wage spirals, possibly exacerbated by increased profit margins, that spill into the prices of 
tradable  goods  and  services.  This  is  more  likely  to  be  the  case  the  higher  the  domestic  valued 
added  into  exports  is.  It  can  then  negatively  impact  competitiveness,  possibly  resulting  in 
increased external indebtedness. Inflation also brings challenges for households whose incomes 
currently  lag  well  behind  prices,  resulting  in  a  loss  of  purchasing  power  and  having  adverse 
distributional  consequences.  For  those  firms  that  are  not  able  to  pass  through  their  increased 
costs  into  prices,  persistent  inflation  hampers  debt-servicing,  possibly  impacting  the  financial 
sector  and  slowing  down  economic  growth  through  receding  consumption  and  investment. 
Bringing down inflation requires policy  efforts, including by  reining in demand, which may in 
turn  affect  short-term  GDP  growth.  This  is  a  particular  concern  where  core  inflation  is  well 
above the EU or euro area averages and risks persisting; in those cases bringing down inflation 
cannot rely on monetary policy alone.  

Inflation  divergence  across  Member  States  is  at  historically  high  levels.  A  part  of  the 
divergence in inflation is related to the differentiated impact of the higher energy and food prices 
on  the  various  countries,  reflecting  their  different  sourcing  of  energy,  diverse  economic 
structures and related energy demand, as well as the share of energy and food in consumption. 
However,  for  several  countries  it  is  accompanied  by  other  sources  of  inflationary  pressures, 
including  increases  in  unit  labour  costs  and  corporate  mark  ups  and  profits.  In  addition, 
government  spending,  including  support  measures,  have  in  some  cases  contributed  to  inflation 
differentials  among  EU  and  euro  area  countries.  In  countries  where  inflation  results  to  a  large 
degree from energy prices pass-through, the normalisation of energy prices should be sufficient 
to bring down inflation differentials, in the absence of other effects materialising and as long as 
prices  adjust  down  where  needed.  Yet  where  inflation  results  mostly  from  domestic  price 
pressures, related to wages and profits dynamics, it may be more difficult to swiftly unwind the 

52 These notes were published on 5 April 2023 as ECFIN institutional papers. 

27 

 
 
                                                           
inflation  dynamics,  particularly  if  those  price  dynamics  are  more  lasting  or  rooted  in  more 
permanent factors and thereby structural measures may be needed to lead to more competition in 
certain markets. 

Inflation differentials are a heightened concern within a monetary union and that calls for 
special  attention.  In  a  monetary  union,  divergent  inflationary  effects  make  the  task  of  the 
monetary  authority  particularly  difficult,  as  the  uniform  transmission  of  changes  in  monetary 
stance to all parts of the union may be impaired. As the re-alignment of domestic costs and prices 
via changes in  the nominal  exchange rate is  not  an option, persistent  inflation differentials  can 
entrench  lasting  competitiveness  losses  and  structural  shifts  that  may  be  difficult  and  costly  to 
overcome; they may require additional tightening of fiscal policy to dampen any excess demand, 
reduce the build up of vulnerabilities and avoid the need for more damaging corrections in the 
future.  

For  non-euro  area  countries,  the  nominal  exchange  rate  can  adjust  to  counter  any 
competitiveness  pressures,  but  that  can  also  entail  risks.  In  particular,  devaluation  and 
depreciation can usher in further inflationary pressures as imported goods and services  become 
more expensive. At the same time, the cost of foreign-currency denominated debt increases and 
can lead to higher risk premium on issuing sovereign debt and in borrowing from abroad.  

High  private  and  government  debt  ratios  continued  declining  in  2022,  sometimes  even  at 
accelerated  pace,  but  vulnerabilities  remain.  After  the  pause  in  deleveraging  caused  by  the 
COVID-19 crisis, debt-to-GDP ratios have since reduced with higher nominal GDP growth. This 
marks  a  return  to  the  long-standing  trend  of  deleveraging,  which  has  seen  marked  declines  in 
debt  ratios  over  the  years  for  many  countries.  In  some  high  debt  cases,  debt-to-GDP  ratios 
declined  more  in  2022  than  in  the  previous  years,  due  to  the  strong  denominator  effect. 
Nonetheless,  debt  ratios  remain  high  and,  particularly  for  government  debt,  sometimes  still 
visibly above their pre-COVID-19 crisis levels. In some cases, the reduction in government debt 
ratios  has  been  limited  by  the  support  measures  enacted  to  mitigate  the  impact  of  the  higher 
energy prices.  

Continued  nominal  GDP  growth  is  projected  to  support  further  deleveraging,  but  in  a 
context  of  less  favourable  financing  conditions.  Strengthening  potential  GDP  growth,  in 
particular by effectively implementing the RRPs, will further support a reduction of debt-to-GDP 
ratios. While high inflation currently increases nominal GDP and reduces the indebtedness as a 
share of economic output, inflation is expected to come down while tighter financing conditions 
may  weigh  on  the  servicing  of  high  debts.  This  is  more  of  a  concern  where  interest  rates  are 
variable  or  change  more  rapidly  or  where  financing  needs  are  higher;  debt  and  borrowing  in 
foreign currencies may compound those concerns for some countries. In those cases, changes in 
perceptions or risk appetite of financial markets cannot be excluded, requiring sound economic 
and fiscal policies. 

External positions have typically been weakened by a shock to energy import prices, with 
domestic demand buoyance contributing further in some cases. Trade balances have declined 

28 

 
 
significantly  across  the  EU  as  energy  import  costs  have  increased.  Still,  some  countries  were 
more  affected  than  others  due  to  their  dependency  on  fossil  fuel  energy  and  the  geographical 
sourcing of that energy. In addition, in some cases, the deterioration in current accounts has been 
magnified by falling non-energy balances where domestic demand growth has been very strong. 
Conversely, further recovery of  cross-border tourism has helped containing the deterioration in 
the current  accounts of some large net-debtor countries with  significant tourism sectors, but  in 
some  cases  that  was  not  enough  to  avoid  significant  current  account  deficits.  Large  current 
account surpluses declined too, but remained significant.  

Going forward, lower energy import prices are expected to increase the current accounts of 
nearly all Member States in 2023, deficits and surpluses much alike. The large negative net 
international investment positions (NIIPs) improved further in 2022 supported by nominal GDP 
growth  and  despite  worsening  current  accounts;  they  are  expected  to  improve  further  this  year 
and next  but  at  a lower  pace, reflecting the lower nominal  GDP growth and in  some cases the 
persistence  of  large  external  borrowing  needs.  Despite  the  increase  in  current  accounts  that 
should result from the reduction in energy prices, in a number of cases, current account deficits 
may continue to be weaker than in recent years and their evolution should be closely followed. 
Current  account  surpluses,  which  declined  in  2022,  are  projected  to  increase  in  2023  as  the 
energy  price  effect  reverses,  but  to  more  moderate  levels.  A  stabilisation  of  energy  prices  at  a 
higher level or persistently higher inflation are risk factors that could lead to lasting deterioration 
in external balances. The inflow of RRF funds will support the external position in a number of 
cases over the coming years.  

House prices continued to grow strongly for most of 2022 but a cooling of housing markets 
was evident in the later months. Nominal house prices continued to accelerate in most Member 
States over 2022, pushing price-to-income ratios further up. The trend changed over the course 
of the  year  with  house price  growth starting to  cool  down and  a number  of countries  recorded 
falls in nominal prices in the second half of 2022. Tighter financing conditions together with falls 
in  real  household  incomes  have  dampened  housing  demand  and  started  a  correction  in  house 
prices. 

Going  forward,  house  prices  are  expected  to  moderate  further  amid  tightening  financial 
conditions and incomes that are under pressure, while housing supply is buffeted by rising 
construction costs. Where house prices seem to be more overvalued and where price increases 
have  occurred  alongside  high  –  and  rising  –  household  indebtedness,  households  and  lenders 
may display increased vulnerability to downward corrections of house prices. In particular, those 
countries where variable interest rates prevail may be more affected as debt service obligations 
rise  rapidly,  particularly  where  mortgage  terms  are  long  and  interest  forms  a  sizeable  part  of 
monthly  payments,  and  possibly  hit  consumption  and  GDP.  At  the  same  time,  some  Member 
States  are marked by additional concerns around their commercial real  estate sectors, which in 
some  cases  have  been  particularly  hit  by  the  higher  financing  costs.  Beyond  the  immediate 
future,  supply  constraints  that  were  already  present  before  the  pandemic  can  be  expected  to 
persist over the coming years, which altogether may contain prices falls but remain a bottleneck 
to  increases  in  the  housing  stock;  in  fact,  construction  activity  has  recently  fallen  in  some 

29 

 
 
countries. If unaddressed, those supply constraints may lead to renewed upward price pressures 
and deteriorating affordability over the medium term.  

The  banking  sector  has  shown  increased  strength,  benefitting  from  past  reforms,  but 
vulnerabilities may increase in the current macroeconomic context. Member States with high 
legacy  non-performing  loans  continued  to  reduce  them,  sometimes  substantially  so.  However, 
should downside risks such as a worsening of the economic outlook, and heightened volatility in 
financial  markets  materialise,  this  could  raise  issues  for  banks'  balance  sheets.  Higher  interest 
rates  should  help  banks'  profit  margins  but  can  also  create  challenges  if  households  and  non-
financial corporations struggle on servicing their debts.  In Member States with a strong banks-
government  nexus,  increased  financing  costs  for  the  sovereign  may  also  pose  a  risk  for  banks. 
Exposure  to  housing  and  especially  commercial  real  estate  sectors  may  become  a  source  of 
concern in some countries. 

Table 1: MEMBER STATES CLASSIFICATION UNDER THE MIP  

2022 IDRs outcomes 

2023 IDRs outcomes 

No imbalances 

HR, IE 

CZ, EE, LV, LT, LU, SK 

Imbalances 

DE, ES, FR, NL, PT, RO, SE 

CY, DE, ES, FR, HU, NL, PT, RO, 
SE 

Excessive 
imbalances 

CY, EL, IT 

EL, IT  

p.m.: No IDR 

AT, BE, BG, CZ, DK, EE, FI, HU, 
LV, LT, LU, MT, PL, SK, SI 

AT, BE, BG, DK, HR, FI, IE, MT, 
PL, SI 

Note: Member States with classification changed between 2022 and 2023 are marked in bold in 
both columns. 

Other Member States not experiencing imbalances  

Czechia  is  not  found  to  experience  imbalances.  Vulnerabilities  relate  to  price  competitiveness 
and house prices, but seem limited going forward as household debt is contained and inflation is 
expected  to  decelerate  significantly  faster  than  the  EU  average.  The  economy  was  strongly 
affected  by  the  energy  price  shock  with  inflation  rising  fast.  A  loose  fiscal  stance  since  the 
pandemic  has  also  contributed  to  the  acceleration  of  inflation.  While  overall  price  pressures 
remain elevated, cost competitiveness is projected to partially recover going forward amid falling 
energy prices, without there being any immediate external sustainability challenges.  Inflation is 
expected  to  decelerate  significantly  faster  than  the  EU  average.  However,  if  inflation  persists, 
that could pose some risks for Czechia’s competitiveness. The recent deterioration of the current 

30 

 
 
 
  
 
account warrants close monitoring going forward. In recent years, demand for housing increased 
strongly,  spurred  by  low  interest  rates,  high  income  growth  and  loosened  macroprudential 
measures, and supply of housing did not keep up. House prices grew more strongly during the 
pandemic  but  started  to  moderate  in  mid-2022  amid  higher  interest  rates  and  stricter  lending 
conditions.  However,  risks  of  a  significant  house  price  correction  appear  to  be  low,  household 
debt is contained, and the banking sector is sound; a continued limited supply response over the 
medium-term would nonetheless continue to drive prices up. Continued efforts are needed to rein 
in  inflation.  Bringing  inflation  down  quickly  requires  a  strong  deceleration  in  demand  growth, 
which in turn can be achieved by sufficiently tight monetary and fiscal policy.  

Estonia  is  not  found  to  experience  imbalances.  Vulnerabilities  relating  to  competitiveness  and 
house price developments have recently increased but overall seem to be contained at present. 
Wages and especially prices grew strongly in 2022, but the competitiveness losses seem limited, 
while  the  current  account  has  recorded  only  a  small  deficit  and  is  forecast  to  come  close  to 
balance  this  year  and  next.  Nonetheless,  inflation  and  wage  pressures,  if  persistent,  risk 
impairing  Estonia’s  competitiveness,  particularly  as  core  inflation  is  well  above  the  euro  area 
average.  House  prices  have  grown  strongly  since  the  pandemic,  but  do  not  show  signs  of 
overvaluation.  House  prices  are  likely  to  moderate,  given  the  interest  rate  rises  and  the  recent 
economic  recession.  Moreover,  household  debt  and  borrowing  are  relatively  moderate  and  the 
financial  sector  is  sound.  The  policy  setting  is  overall  favourable,  although  some  additional 
efforts  could  help  to  address  the  risks  from  the  identified  vulnerabilities.  Continued  counter-
cyclical fiscal and macroprudential policies, reinforced when needed, would be important in that 
respect. Fostering competition in the domestic market could help to manage price pressures.  

Latvia is not found to experience imbalances. Vulnerabilities relating to external borrowing and 
housing  remain  mild;  risks  to  competitiveness  are  pertinent,  but  overall seem  contained  in  the 
near future. The recent widening of the current account deficit was significant, but the deficit is 
expected  to  narrow  substantially  this  year  and  further  in  2024.  Latvia’s  net  international 
investment position, which improved markedly in the past decade, is expected to remain broadly 
stable.  Nonetheless,  inflation  and  wage  pressures,  if  persistent,  risk  impairing  Latvia’s 
competitiveness, particularly as core inflation is well above the euro area average. While house 
price  growth  has  been  elevated  recently,  the  house  price  overvaluation  does  not  appear  to  be 
substantial. Moreover, house price growth slowed down in late 2022, mortgage lending has been 
weak, and household debt is limited and falling in terms of household income. Latvia faces key 
structural economic challenges related to declining labour supply, which has contributed to fast 
unit labour cost increases and risks impairing competitiveness over the medium term. The policy 
setting  is  overall  favourable,  although  some  additional  efforts  could  help  to  address  the  risks 
from the identified vulnerabilities. Policies to safeguard competitiveness, including measures to 
increase the quality and quantity of labour supply, would be important in that respect. Shortening 
the  construction  permitting  process  would  help  supporting  housing  supply  and  improve  the 
housing market situation. 

found 

is  not 

to  experience 

Lithuania 
to  price 
competitiveness,  external  balances  and  house  price  developments  have  recently  increased  but 
overall seem to be contained at present. The economy was strongly affected by the energy price 
shock  with  inflation  rising  fast;  however,  Lithuania’s  competitiveness  is  projected  to  recover 
slowly  as  energy  prices  are  falling.  The  current  account  deteriorated  markedly  in  2022  on 

imbalances.  Vulnerabilities  relating 

31 

 
 
account of the increased energy import prices but is forecast to move close to balance this year. 
Going forward, mild  current  account  deficits  will not  compromise external  sustainability  given 
its sound stock position. Nonetheless, inflation and wage pressures, if persistent, risk impairing 
Lithuania’s  competitiveness,  particularly  as  core  inflation  is  well  above  the  euro  area  average. 
House prices have grown strongly since the pandemic, but there is no evidence of overvaluation 
and  prices  are  now  moderating  given  the  interest  rate  rises  and  the  economic  recession 
underway. In addition, household debt is low, and the banking sector is well capitalised, highly 
profitable  and  records  low  non-performing  loans.  The  policy  setting  is  overall  favourable, 
although  some  policies  could  help  to  address  the  risks  from  the  identified  vulnerabilities. 
Continued counter-cyclical fiscal and macroprudential policies, reinforced when needed, would 
be  important  in  that  respect.  At  the  same  time,  more  focus  on  fostering  competition  in  the 
domestic market and policies to increase the quality and quantity of labour supply could help to 
manage price and unit labour cost pressures.  

Luxembourg is not found to experience imbalances. Vulnerabilities relating to high house prices 
and high household debt have recently increased but overall seem to be contained so far and are 
expected to ease over the medium term. Strong population growth alongside increased mortgage 
credit, incentivised by fiscal support, has pushed up demand for housing, while supply has been 
restricted by the limited land available for construction and by land hoarding. The widening gap 
between housing demand and supply has resulted in strong house price increases with growing 
risks of house prices overvaluation and deteriorating affordability. House prices clearly cooled in 
late 2022, and the number of housing transactions declined sharply, as the rise in interest rates 
have led to a turn in the market. However, a sharp correction in house prices is not expected as 
incomes are holding up well and the supply shortage is expected to continue. Household debt is 
very  high  in  terms  of  disposable  income  and  has  been  increasing  while  borrowing  cooled 
somewhat in late 2022. Households’ financial assets are also substantial, indebtedness increases 
towards the higher levels of income and wealth, and the banking sector is sound, which overall 
mitigates  macro-financial  risks.  Additional  policy  efforts,  including  by  stepping  up  and 
prioritising  the  adoption  and  implementation  of  recent  measures,  including  recurrent  taxes  to 
increase the supply of buildable land, combined with the ongoing reform of land-use planning, 
could  help  to  boost  housing  supply,  including  through  the  supply  of  affordable  and  social 
housing targeted to  those most in  need. The efficiency of the rental market  could  be  improved 
too.  In  addition,  reducing  the  mortgage  interest  deductibility,  which  was  recently  significantly 
increased, would reduce the fiscal incentives to borrow which supports high house prices.  

Slovakia  is  not  found  to  experience  imbalances.  Vulnerabilities  relating  to  competitiveness, 
housing, household debt and external balance have been increasing, but overall seem contained 
in the near future and are expected to ease as economic conditions normalise. The economy was 
strongly hit by the energy prices shock with inflation rising fast. Core inflation and unit labour 
costs growth are well above the euro area average. While they are forecast to normalise, there is 
the  risk  that  pressure  on  cost  competitiveness  could  take  time  to  unwind,  and  that  strong 
domestic  demand  will  continue  to  put  pressures  on  external  accounts.  The  current  account 
deteriorated markedly in 2022 owing to  higher energy import prices as  well as marked falls in 
net exports of non-energy goods. The current account deficit is forecast to improve mildly but to 
remain  large  in  2023  and  2024,  despite  the  falling  energy  prices.  Nonetheless,  external 
sustainability risks are assessed to be limited in the near term. Government deficits are forecast 

32 

 
 
to be significant this year and next and to correct from 2024. House prices appear to be mildly 
overvalued after several years of marked growth. That occurred alongside high borrowing, which 
is now cooling, and a strong increase in household debt, which altogether present some risk for 
financial  stability.  However,  the  banking  sector  remains  well  capitalised,  highly  profitable  and 
recording low non-performing loans. Continued efforts are needed to tackle Slovakia’s economic 
vulnerabilities. In particular, excess demand should be reined in to support the correction of the 
current account deficit and the core inflation differential vis-à-vis the rest of the euro area. That 
can  be  achieved  by  ensuring  adequate  fiscal  consolidation  and  measures  to  address  household 
debt,  while  retaining  housing  affordability  through  property  taxation  and  measures  supporting 
housing supply.  

Member States experiencing imbalances  

Cyprus is experiencing imbalances after being identified with excessive imbalances until 2022. 
Vulnerabilities  related  to  private,  government  and  external  debt  have  overall  declined  but 
remain  a  concern.  In  particular,  high  debts  including  non-performing  loans  have  decreased 
significantly  and  are  expected  to  continue  doing  so,  while  current  account  deficits  remain  an 
issue. Private debt  has been decreasing since 2015, except  in  2020 amid the COVID-19 crisis, 
and is expected to continue declining this year and next supported by nominal GDP growth. Still, 
higher  interest  rates  could  put  pressure  on  debt  service  though,  as  variable  interest  rate  loans 
prevail. Private and external debt stocks are affected by the presence of special purpose entities 
in Cyprus, which elevate the levels but pose limited risks to the economy. Non-performing loans 
held  by  banks  have  declined  very  markedly  over  recent  years  thanks  to  non-performing  loans 
sales,  write-offs,  cash  repayments,  curing  and  debt-to-asset  swaps.  The  government  debt  has 
been steadily  falling; it declined below its pre-pandemic level and is expected to fall further in 
2023  and  2024.  Despite  the  recovery  in  tourism,  the  large  current  account  deficit  widened  in 
2022, reflecting robust domestic demand as well as high energy prices; it is expected to decrease 
somewhat  this  year  and  next  but  to  remain  large.  The  policy  response  has  been  favourable. 
Several  measures  included  in  the  RRP  are  expected  to  help  diversifying  the  economy,  support 
export growth, and alleviate the over-reliance on oil imports. As part of the RRP, a package of 
amending  laws  on  credit-acquiring  companies  and  credit  servicers  was  adopted  in  mid-2022, 
improving their working environment and supporting non-performing loans reduction. Following 
several  extensions,  the  suspension  of  foreclosures  came  to  an  end  this  February:  an  effective 
foreclosure framework is key to encourage borrowers to participate in loan restructuring, further 
reduce  non-performing  loans  in  the  economy,  help  reduce  private  indebtedness,  and  enhance 
payment discipline.  

Spain  continues  to  experience  imbalances.  Vulnerabilities  related  to  high  private,  government 
and external debt, which have cross-border relevance, are receding but remain present. External 
debt  and  especially  private  debt  ratios  declined  over  the  2010s’  and,  after  a  temporary 
interruption  in  2020,  resumed  their  decline  in  2021  and  are  expected  to  continue  declining 
favoured  by  economic  growth.  However,  they  remain  at  still  elevated  levels.  The  external 
position has benefited from a current account that has been in surplus for a decade even if it has 
narrowed  more  recently  reflecting  the  impact  of  the  pandemic  on  tourism  exports  and  of  the 
higher  energy  prices  in  2022.  The  government  debt  remains  high.  In  2022,  it  has  resumed  the 
downward trajectory that delivered improvements before the pandemic driven by strong nominal 
GDP growth, but remains above pre-pandemic levels. At a more moderate pace, prospects are for 

33 

 
 
a continuation of this reduction in 2023 and 2024, underpinned by policy measures in the RRP. 
The financial system showed resilience in face of the recent shocks induced by the pandemic and 
the energy crisis. Unemployment has been decreasing again, but it still stands high and pockets 
of vulnerability remain, including very high long-term and youth unemployment. Potential risks 
affecting the further narrowing of vulnerabilities relate mainly to the impact of the tightening of 
financial  conditions  on  households  and  firms’  financial  positions  as  well  as  on  the  medium  to 
long-term  sustainability  of  government  debt  in  face  of  the  current  market  conditions  and 
population  ageing.  Policy  progress  has  been  favourable  and  continuing  implementing  the  RRP 
should deliver further improvements. 

France continues to experience imbalances. Vulnerabilities related to high government debt, and 
competitiveness  and  low  productivity  growth,  which  have  cross-border  relevance,  remain 
present  but  have  shown  signs  of  reduction.  Government  debt  has  been  declining  since  the 
rebound  in  GDP  in  2021,  following  an  increase  during  the  pandemic.  In  2022,  various  fiscal 
measures significantly mitigated the impact of the energy crisis but slowed debt reduction. Debt 
is forecast to further decline this year and next, but it is projected to enter an upward trend again 
thereafter  in  the  absence  of  policy  action,  remaining  high  and  above  pre-pandemic  levels,  and 
medium-term fiscal sustainability challenges remain high. Policy measures taken in recent years 
aiming at enhancing potential growth might help correct the projected increase in public debt in 
the  medium  term.  Several  reforms  have  been  adopted  to  boost  cost  competitiveness.  A  small 
positive  effect  on  competitiveness  is  already  visible,  and  their  full  impact  is  expected  to 
materialise over the coming years. Likewise, labour productivity is expected to benefit from the 
effective  implementation  of  planned  investments  and  reforms.  The  French  economy  displayed 
resilience  over  the  last  year,  as  cost  competitiveness  was  less  affected  by  increases  in  energy 
prices than in the rest of the euro area. Exports are improving owing to the further recovery of 
cross-border  tourism  and  the  aircraft  industry,  which  were  much  affected  by  the  pandemic. 
While  private  sector  debt  increased  during  the  worst  of  the  pandemic,  higher  corporate 
borrowing  went  hand  in  hand  with  increases  in  equity  and  accumulation  of  liquidity  buffers. 
Higher  interest  rates  may  make  public  and  private  deleveraging  more  difficult.  The  policy 
response  has  been  favourable,  but  there  remain  challenges,  centred  on  public  finance 
management. An effective implementation of recently adopted reforms remains central to further 
reduce  vulnerabilities,  namely  the  reform  of  public  finances  management  and  the  new 
mechanism to conduct annual public spending evaluations. Both actions are crucial to  continue 
to  curb  expenditure  and  keep  public  debt  on  a  sustained  downward  trend.  Moreover,  the 
government  has  adopted  a  reform  of  the  public  pension  system  that  is  expected  to  help  public 
debt sustainability. 

Germany  continues  to  experience  imbalances.  The  persistent  large  current  account  surplus, 
reflecting  also  subdued  investment  relative  to  savings,  which  has  cross-border  relevance,  has 
been  gradually  reduced,  most  recently  amid  the  energy  crisis,  but  is  expected  to  increase 
markedly.  The  current  account  surplus  receded  slowly  until  2019  with  a  gently  increasing 
domestic  investment  ratio  and  a  falling  trade  balance  and  has  since  been  marked  by  unusual 
economic  circumstances.  It  decreased  markedly  in  2022  on  the  back  of  higher  import  energy 
prices, along with a narrowing of the non-energy trade surplus and a recovery in tourism imports. 
In 2022, the surplus remained above the levels suggested by the country's fundamentals and it is 
expected to rebound markedly in 2023 and remain almost unchanged in 2024, but it is projected 
to  stay  below  the  MIP  threshold.  Wages  are  forecast  to  grow  strongly,  supporting  domestic 

34 

 
 
demand, while unit labour costs may grow faster than in the rest of the euro area. Nonetheless, 
consumption and investment are temporarily dampened by high inflation. In recent years, house 
prices  have  shown  sharp  increases,  even  if  easing  somewhat  since  mid-2022.  Housing  supply 
cannot  catch  up  with  demand  amid  weak  residential  investment,  which  may  add  to  continuing 
risks of overvaluation. A further reduction of vulnerabilities would benefit from the timely and 
effective  implementation  of  the  public  investment  initiatives  and  removing  of  obstacles  to 
investment.  

Hungary is experiencing imbalances. Vulnerabilities related to very strong price pressures and 
external and government financing needs have increased and are significant. Inflation has risen 
significantly and has not yet started moderating visibly. Should inflation remain elevated for an 
extended  period,  it  would  further  undermine  cost  competitiveness  and  could  leave  financing 
costs  elevated.  The  large  current  account  deficit  was  strongly  increased  by  the  higher  energy 
prices in 2022, and short-term external debt has risen. Improvements in the current account this 
year and next hinge on the expected further moderation of energy prices, but the current account 
deficit  is  nonetheless  forecast  to  remain  non-negligeable  in  2023  and  2024.  The  high  energy 
intensity of the economy is important for current account dynamics. The government deficit has 
been large, only partly driven by the policy responses to the pandemic and the energy crises, and 
accounts  for  much  of  the  external  borrowing  of  the  economy.  The  government  debt  ratio 
decreased thanks to marked nominal GDP growth, but that may be challenged by a slowdown in 
activity  and  the  persistence  of  high  deficits.  Sovereign  borrowing  costs  have  increased  since 
2021,  and  the  government  is  facing  an  increasing  interest  burden,  while  debt  maturity  is  still 
relatively  low.  House  prices  doubled  over  five  years  but  price  increases  halted  in  late  2022. 
However, the likelihood of a substantial nominal price drop seems limited amid low household 
indebtedness, and also in light of the current high inflation environment. Policy inconsistencies 
have exacerbated the identified vulnerabilities.  Effective coordination and clear demarcation of 
macroeconomic policies, underpinned by a strong institutional policy framework, is instrumental 
to safeguard fiscal and external sustainability as well as to anchor expectations. Timely and full 
implementation  of  structural  reforms  included  in  Hungary’s  Recovery  and  Resilience  Plan  is 
expected to help reduce macroeconomic vulnerabilities and support growth and adjustment in the 
medium term. 

The  Netherlands  continues  to  experience  imbalances.  Vulnerabilities  relating  to  high  private 
debt  levels  and  a  large  current  account  surplus,  which  have  cross-border  relevance,  persist 
despite some signs of reduction. The current account surplus, despite recent data revisions, and 
private  debt  are  large  by  international  standards  as  well  as  above  the  fundamentals  of  the 
economy.  The  large  current  account  surplus  dropped  in  2022,  driven  by  worsening  terms  of 
trade, with the current account in constant prices increasing, and by a widening of the deficit in 
primary incomes. With improving terms of trade, the surplus is expected to rebound markedly in 
2023 and stabilise in 2024. Limited policy progress has been made but more needs to be done to 
reduce obstacles to investment. Non-financial corporation and household debt remains high: the 
latter  is  more  of  a  concern  as  it  makes  households  vulnerable  to  shocks,  with  those  risks 
exacerbated  by  the  high  and  rising  overvaluation  of  house  prices.  Going  forward,  debt  is 
expected to continue on its moderately decreasing path. Despite moderately falling house prices, 
pressure  on  the  housing  market  remains,  notably  as  new  housing  construction  remains 
significantly  below  government  targets.  At  the  same  time,  debt-financed  homeownership 

35 

 
 
continues  to  be  subsidised  by  favourable  taxation,  while  policies  regarding  the  private  rental 
market risk undermining its development.  

Portugal continues to experience imbalances. Vulnerabilities related to high private, government 
and  external  debt  are  receding  but  remain  present.  After  a  temporary  interruption  due  to  the 
outbreak of the pandemic, private sector and government debt ratios returned to declining paths 
in  2021 and  are  expected to  continue declining,  favoured by  economic  growth. While they  are 
now below pre-pandemic levels, they remain at  still elevated levels. The clearly negative NIIP 
improved  too,  both  before  and  after  the  pandemic,  and  external  indebtedness  is  projected  to 
further recede, supported by continued economic growth despite some slowdown in  2023. The 
small  current  account  deficit  worsened  marginally  in  2022  reflecting  higher  energy  prices  but 
that deterioration was mitigated by the further marked recovery in exports, especially of tourism. 
Going forward, the assumed continued easing of energy prices and a further increase in tourism 
exports, as well as ongoing policies in support of energy efficiency and renewables, are projected 
to balance the current account and to further support adjustment in the NIIP. House prices have 
grown strongly for several years, while non-performing loans continued to decline from already 
moderate levels. The main risks to the further narrowing of vulnerabilities relate to the impact of 
the  tightening  of  financial  conditions  and  to  an  uncertain  external  environment,  and  their 
potential  impact  on  economic  growth.  Policy  progress  has  been  favourable,  with  a  particular 
focus on the RRP, and continuing implementing the RRP should deliver further improvements.  

Romania continues to experience imbalances. Vulnerabilities relate to external accounts, linked 
to  large  government  deficits,  while  overheating  pressures  have  increased.  The  large  current 
account  deficit  worsened  considerably  after  the  pandemic-induced  recession  and  makes  the 
economy vulnerable to external funding shocks. The continuation of large current account deficit 
risks  driving  the  NIIP  further  into  negative  territory.  Signs  of  overheating  are  clearly  visible, 
with  core  inflation  uncomfortably  high,  wage  growth  well  in  double  digit  territory  and  a 
relatively low unemployment rate. Cost competitiveness indicators are expected to stabilise, but 
structural  issues  persist.  The  exchange  rate  appears  to  be  above  the  level  suggested  by 
fundamentals and remains heavily managed.  The government deficit has been large for several 
years  and  has  accounted  for  much  of  the  excess  of  demand  and  of  the  subsequent  external 
deficits; even if improving, the government deficit is forecast to remain significant this year and 
next.  The  narrowing  of  the  government  deficit  in  2022  was  mainly  driven  by  marked  nominal 
GDP  growth,  which  in  turn  rests  much  on  overheating  domestic  demand.  Risk  premia  and 
sovereign  borrowing  costs  are  significantly  higher  than  in  the  pre-pandemic  years.  Given  the 
ongoing tightening in global liquidity conditions, it will be important to reverse ongoing trends. 
Going forward, fiscal adjustment should be the preferred way to bring demand more in line with 
supply  and  to  contain  domestic  and  external  deficits.  Full  implementation  of  tax  and  pension 
reforms  included  in  the  RRP  as  well  as  adherence  to  fiscal  targets  under  the  excessive  deficit 
procedure would go a long way in containing current dynamics. 

Sweden continues to experience imbalances. Vulnerabilities relating to its real estate market and 
high private debt persist. Real estate prices are high, and have been rising until recently. House 
price increases have gone hand in hand with rising private debt. In 2022, against a backdrop of 
marked  tightening  in  monetary  and  financing  conditions,  real  estate  prices  started  to  decline 
visibly in what seems to be the start of an unwinding of the accumulated vulnerabilities. Prices 
remain  significantly  overvalued  and  are  expected  to  decline  further.  The  turnover  in  the  real 

36 

 
 
estate sector has recently declined markedly, and, as a result, demand for newly built dwellings 
has also fallen. The adverse developments have, so far, been limited to the construction and real 
estate  sectors,  which  are  now  declining  sharply  after  years  of  high  growth.  As  a  whole,  the 
Swedish  economy  is  expected  to  contract  in  2023,  with  the  changes  in  monetary  conditions 
affecting the balance sheets of households and commercial real estate companies and their room 
to  consume  and  invest.  The  impact  of  increased  interest  rates  on  mortgage  payments  is 
substantial, due to the prevalence of variable interest rates and very long duration mortgages. The 
impact of changing conditions on the financial sector has been limited; the sector is strong and 
records high profit margins and risk-weighted capital ratios, likely serving as a bulwark against a 
propagation of the real estate sector problems to the wider economy through the financial sector, 
although it is highly exposed to real estate. Policy progress has been limited. In particular, the tax 
system  continues  favouring  homeownership  through  low  recurrent  property  taxation  and 
promotes  debt-financed  housing  acquisition  through  significant  tax  deductibility  of  mortgage 
interest payments. In addition, the inefficient rental market has seen limited reform. 

Member States experiencing excessive imbalances  

Greece  continues  to  experience  excessive  imbalances.  Vulnerabilities  relating  to  high 
government debt and a high stock of non-performing loans in the context of high unemployment 
have been receding, but its external position has deteriorated. A key concern is that the current 
account deficit markedly widened in 2022, despite the recovery in tourism revenue. Even though 
it is forecast to narrow somewhat this year and next, the external deficit is set to stay well above 
the  level  that  is  required  to  ensure  a  lasting  improvement  in  the  net  international  investment 
position.  While  the  government  debt-to-GDP  ratio  remains  the  highest  in  the  EU,  it  improved 
markedly  in  2022,  largely  thanks  to  strong  nominal  GDP  growth,  and  it  is  expected  to  recede 
further in 2023 and 2024. Non-performing loans recorded a sharp fall last year building on large 
reductions  in  earlier  years,  yet  remain  high  and  continue  to  weigh  on  banks’  profitability  and 
lending capacity, which in turn impinges on the capital deepening and on the productivity growth 
of  the  economy.  The  policy  response  has  contributed  to  the  unwinding  of  imbalances  and  the 
implementation  of  the  RRP  represents  a  major  opportunity  to  tackle  remaining  structural 
weaknesses. Yet more efforts are needed, in particular to ensure that external balances are put on 
a  firmly  improving  path,  and  that  non-performing  loans  decline  further  including  through 
increasing  the  effectiveness  of  debt  enforcement  and  improving  the  secondary  non-performing 
loans market.  

Italy continues to experience excessive imbalances. While there have been some improvements, 
vulnerabilities  related  to  high  government  debt  and  weak  productivity  growth,  in  a  context  of 
labour  market  fragilities  and  some  weaknesses  in  financial  markets,  which  carry  cross-border 
relevance, persist. Italy’s long-standing vulnerabilities have receded somewhat over recent years 
but  remain  significant  and  are  not  expected  to  unwind  quickly.  Persistent  low  productivity 
growth  has  been  a  key  factor  behind  Italy’s  protracted  weak  economic  growth,  which  slows 
down  government  debt  deleveraging,  dents  employment  opportunities  and  impacts  banks’ 
balance  sheets.  The  government  debt  ratio  further  declined  in  2022  along  with  the  economic 
recovery. However, it remains high and constitutes a  substantial  fiscal  sustainability  challenge. 
The public debt ratio is forecast to further decline by 2024 but to increase in the medium term in 
the  absence  of  consolidation  measures.  The  government  has  implemented  further  measures  to 
support  the  resilience  of  the  financial  sector  and  non-performing  loans  have  significantly 

37 

 
 
declined, but banks are still significantly exposed to the sovereign. Some progress has been made 
with policies to tackle imbalances, but sustained efforts are warranted and the implementation of 
the  RRP  remains  the  key  policy  priority  as  it  includes  comprehensive  reforms  and  significant 
investments. Putting the high government debt on a firm downward path, in a context of rising 
debt  servicing  costs  and  rising  age-related  costs,  requires  a  multipronged  approach  relying  on 
prudent  fiscal  policies  with  adequate  primary  surpluses,  growth-enhancing  investments  and 
reforms, greater tax compliance as well as an efficient use of national and European resources. 
Italy is facing challenges that, alongside a continued strong implementation of the RRP, would 
benefit  from  additional  policy  efforts,  notably  in  the  areas  of  taxation,  fiscal  framework  and 
pension systems as well as in the areas of demography, labour market, and energy. 

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