Source: EURLEX
Language: en
Format: md

EN

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|  | EUROPEAN COMMISSION |

Brussels, 12.1.2010

COM(2011) 11 final

 

COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE AND THE COMMITTEE OF THE REGIONS

Annual Growth Survey: advancing the EU's comprehensive response to the crisis

COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE AND THE COMMITTEE OF THE REGIONS

Annual Growth Survey: advancing the EU's comprehensive response to the crisis 

The context

This first Annual Growth Survey marks the start of a new cycle of economic governance in the EU and the first European semester of economic policy coordination. The EU has taken decisive action to deal with the crisis: as a result, the deterioration of public finances and the increase in unemployment have been less marked than in other parts of the world. The EU's high levels of social protection cushioned the worst impact of the crisis but because of its weak productivity growth, recovery is slower in Europe.

According to the latest forecasts, there are signs of economic recovery albeit still uneven. While financial markets remain volatile, the real economy has shown signs of improvement in some quarters, led by growing exports after the resumption of global trade. Nonetheless uncertainties remain. Periods of renewed confidence in the return to growth alternate with setbacks, also due to the risks associated with the sovereign debt market. European economies face major adjustments. The financial sector has not yet returned to normal conditions and there are situations of vulnerability to stress and dependency on state-support. Credit conditions are not yet back to normal and in a number of Member States household and corporate debts are still excessive.

Impact of the crisis

In spite of the prompt response given by the EU, the legacy of the crisis is far reaching. It has resulted in a large loss in economic activity, a substantial increase in unemployment, a steep fall in productivity, and badly weakened public finances. By the end of 2012, eleven Member States are expected still to remain at output levels below those preceding the crisis. In 2010, EU gross government debt rose, on aggregate, to around 85% of GDP in the euro area and to 80% EU-wide. The budgetary impact of the crisis will compound the effect of demographic change, which will add a fiscal burden of some 4.5% of GDP in the long term. Structural weaknesses that were not tackled before the crisis have become more apparent and urgent.

The crisis has taken a heavy toll on Europe's societies, despite the cushioning provided by welfare systems. The rise of unemployment is a central problem. On aggregate, 9.6% of the working population is unemployed. In some countries, youth unemployment can be as high as 40%. Around 80 million people are estimated to live below the poverty line in Europe.

The economic crisis was a global crisis, but its impact is very different across the world. While unemployment and public deficits increased more sharply in the US than in the EU, the crisis has aggravated the labour productivity gap between the EU and the US. Price and cost competitiveness remain problematic. Emerging economies are returning to growth at a faster pace although some of them also face major economic challenges. Therefore, the EU needs to use this crisis to address decisively the issue of its global competitiveness.

Outlook

The crisis could have a lasting effect on potential growth. Medium term potential growth for Europe is projected to remain low and estimated at around 1.5% up to 2020 if no structural action is taken namely to resolve the labour productivity gap with our main competitors. Given its cyclical nature, recovery alone cannot provide the impetus for leading Europe back to the pre-crisis economic situation and absorb the deficit accumulated.

To avoid stagnation, unsustainable debt trends, accumulated imbalances and ensure its competitiveness, Europe needs to accelerate the consolidation of its public finances, the reform of its financial sector and to frontload structural reforms now.

That is why the European Council adopted the Europe 2020 strategy with ambitious targets for a new growth path
[1](#footnote1)
. The preliminary indications of Member States on their national targets in the five areas agreed under the Europe 2020 strategy clearly show the road that the EU has to travel to deliver its own ambitions.

If fully implemented, this strategy will help the EU come out stronger from the crisis and turn the EU into a smart, sustainable and inclusive economy delivering high levels of employment, productivity, competitiveness and social cohesion. This will deliver the competitive social market economy of the twenty first century, boosting confidence of market actors, companies and citizens alike.

The Annual Growth Survey launches the European semester

In this context, the EU has also decided to change its economic governance. January 2011 launches the first European Semester of ex-ante policy co-ordination starting with this Annual Growth Survey which is anchored in the Europe 2020 strategy.

This Annual Growth Survey brings together the different actions which are essential to strengthen the recovery in the short-term, to keep pace with our main competitors and prepare the EU to move towards its Europe 2020 objectives.

Given the urgency, the Commission has chosen to present 10 priority actions. The Commission will continue its work on a broad range of other policy areas, including trade and a host of internal policies. These are not developed here. In this Communication the Commission focuses on an integrated approach to recovery concentrating on key measures in the context of Europe 2020 and encompassing three main areas:

–The need for rigorous fiscal consolidation for enhancing macroeconomic stability

–Labour market reforms for higher employment

–And growth enhancing measures

This first Annual Growth Survey is designed to apply to the EU as a whole but will need to be tailored to the specific situation of each Member State. The proposed course of action is particularly relevant for the euro area which is currently affected by the sovereign debt crisis. Fiscal consolidation, structural reforms and growth enhancing measures are necessary ingredients for the comprehensive response the euro area must give to the crisis.

But such a comprehensive response will have to include other elements, e.g. the review of the European Financial Stability Facility (EFSF). As regards the latter the Commission considers that the effective financing capacity of the EFSF must be reinforced and the scope of its activity widened. This Annual Growth Survey also constitutes a contribution to the comprehensive response of the euro area to the sovereign debt crisis.

Moreover, progress in establishing a permanent mechanism for resolving sovereign crises is needed to provide certainty and stability in markets. The new European Stability Mechanism should complement in 2013 the new framework for reinforced economic governance, aiming at an effective and rigorous economic surveillance, including reviewing the effectiveness of current financial backstops.

A more detailed analysis underpinning the Commission's assessment is set out in 3 reports that accompany this Communication and include an assessment of the initial setting up of the Europe 2020 strategy at Member State level.

I.MACRO-ECONOMIC PRE-REQUISITES FOR GROWTH

1.Implementing a rigorous fiscal consolidation

The most urgent task for the EU is to restore confidence by preventing a vicious cycle of unsustainable debt, disruption of financial markets and low economic growth. Public expenditure must be put on a sustainable track as a pre-requisite for future growth. Annual adjustments of the structural budget balance in the order of 0.5% of GDP will be clearly insufficient to bring debt ratios close to the 60% requirement. Therefore, stronger consolidation is needed and should be implemented on the basis of the reinforced fiscal rules proposed by the Commission.

All Member States, especially those in excessive deficit procedure, should keep public expenditure growth firmly below the rate of medium term trend GDP growth, while prioritising sustainable growth friendly expenditure in areas such as research and innovation, education and energy. All Member States should demonstrate that their Stability or Convergence Programmes are based on prudent growth and revenue forecasts.

Member States in excessive deficit procedure should set out the expenditure path and the broad measures they intend to take in order to eliminate of their excessive deficits.

Member States facing very large structural budget deficits, very high levels of public debt or high levels of financial distress need to frontload their efforts in 2011. Where economic growth or revenues turn out to be higher than expected, fiscal consolidation should be accelerated.

Some Member States may need to increase taxes. Indirect taxes are more growth-friendly than direct taxes and broadening tax bases is preferable to increasing tax rates. Unjustified subsidies, e.g. environmentally harmful subsidies, should be eliminated.

2.Correcting macro economic imbalances

Large and persistent macroeconomic imbalances are a major source of vulnerability, especially within the euro area. Many Member States need to tackle their lack of competitiveness with greater urgency.

Member States with large current account deficits and high levels of indebtedness should present concrete corrective measures (these could include strict and sustained wage moderation, including the revision of indexation clauses in bargaining systems).

Member States with large current account surpluses should identify and tackle the sources of persistently weak domestic demand (including further liberalisation of the service sector and improving conditions for investment). However, where domestic demand still remains subdued due to a policy or market failure appropriate policies should be put in place.

3.Ensuring stability of the financial sector

At EU level, the regulatory framework must be further reinforced, while the quality of supervision should be enhanced by the ESRB and European Supervisory Authorities, which have become operational at the beginning of 2011. Bank restructuring must be accelerated to safeguard financial stability and underpin the provision of credit to the real economy.

Restructuring of banks, and particularly those which received significant amounts of state aid is essential to restore their long-term viability and ensure a properly functioning credit channel. Public financial support for the banking sector as a whole should be gradually withdrawn, taking into account the need to safeguard financial stability.

In accordance with the recently agreed Basel III framework, banks will be required to progressively strengthen their capital base so as to improve their capacity to withstand adverse shocks. The Commission is also working on a comprehensive bank crisis resolution framework. In addition, another more ambitious and stringent EU-wide stress test will be conducted in 2011.

II.MOBILISING LABOUR MARKETS, CREATING JOB OPPORTUNITIES

There is a risk of a return to growth without sufficiently dynamic job creation. Tackling unemployment and preventing long term exclusion from the labour market is essential. One of the five EU targets of the Europe 2020 strategy is to raise the employment rate to 75% by 2020. Current indications are that the EU will fall short of this target by 2-2.4% - a shortfall that can be made up through the adoption of measures to create jobs and increase labour participation. Given the ageing of the EU population and the relatively low utilisation of labour compared to other parts of the world reforms are needed to promote skills and to create incentives to work.

4.Making work more attractive

The combination of high unemployment rates, low participation in the labour market and fewer hours worked compared to other parts of the world undermines the EU's economic performance. The participation rate of low income earners, young people and second earners is worryingly low. The most vulnerable face the risk of long term exclusion from employment. In response, training and job search should be tied more closely to benefits.

Shifting taxes away from labour should be a priority for all Member States in order to stimulate demand for labour and create growth.

Tax benefit systems, flexible work arrangements and childcare facilities should be geared to facilitating the participation of second earners in the work force. Efforts need to be stepped up to reduce undeclared work both by strengthening the enforcement of existing rules and reviewing tax benefit systems.

5.Reforming pensions systems

Fiscal consolidation should be supported by reform of pension systems, making them more sustainable.

Member States that have not already done so should increase the retirement age and link it with life expectancy.

Member States should reduce early retirement schemes as a priority, and use targeted incentives to employ older workers and promote lifelong learning.

Member States should support the development of complementary private savings to enhance retirement incomes.

In view of demographic change, Member States should avoid adopting measures related to their pension systems which undermine the long term sustainability and adequacy of their public finances.

The Commission will review the Directive on pension funds
[2](#footnote2)
 and present new measures as follow up to the Green Paper on Pensions launched in 2010.

6.Getting the unemployed back to work

European welfare systems have worked to protect people during the crisis. However, once the recovery has gained ground, unemployment benefits should be reviewed to ensure that they provide incentives to work, avoid benefit dependency and support adaptability to the business cycle.

Member States should design benefits to reward return to work or incentives to go into self-employment for the unemployed through time-limited support, and conditionality linking training and job search more closely to benefits.

Member States need to ensure that work pays through greater coherence between the level of income taxes (especially for low incomes) and unemployment benefits.

Member States need to adapt their unemployment insurance systems to the economic cycle, so that protection is reinforced in times of economic down-turn.

7.Balancing security and flexibility

In some Member States employment protection legislation creates labour market rigidity, and prevents increased participation in the labour market. Such employment protection legislation should be reformed to reduce over-protection of workers with permanent contracts, and provide protection to those left outside or at the margins of the job market. At the same time, reducing early school leaving and improving educational achievements is essential to help young people to have access to the labour market.

Member States could introduce more open-ended contracts
[3](#footnote3)
 to replace existing temporary or precarious contracts in order to improve employment perspectives for new recruits.

Member States should simplify their regimes for the recognition of professional qualifications to facilitate the free circulation of citizens, workers and researchers.

III.FRONTLOADING GROWTH –ENHANCING MEASURES

The EU will only meet its ambitious Europe 2020 targets for sustainable and inclusive growth if urgent structural reforms are frontloaded in services and product markets to improve the business environment. To remain competitive in a globalised economy Member States must urgently begin the deep structural reforms needed to enhance the excellence of our research and our capacity to innovate, turning ideas into products and services that meet the demand of high-growth markets, taking advantage of the technological capabilities of our industry and helping SMEs to grow and internationalise. The EU's reform agenda will also have to exploit new sources of growth by turning the limits of traditional resource-based development into new economic opportunities through increased resource efficiency. It must also exploit the EU's first mover advantage on competitive environmental goods and services.

The Single Market can be an important source of growth –as outlined already in the Communication on a Single Market Act- provided quick decisions are taken to remove remaining obstacles. To strengthen it, the Commission will therefore give priority in the Single Market Act to growth enhancing measures in 2011-2012 as illustrated below.

8.Tapping the potential of the Single Market

Barriers to market entry and obstacles to entrepreneurship remain acute in the single market. Cross-border services only represent 5% of GDP, less than a third of trade in goods and only 7% of consumers buy on-line because of the numerous restrictions which prevent the development of cross-border on-line sales.

All Member States should fully implement the Services Directive. The Commission is evaluating its implementation, and the potential for further growth enhancing measures through a further opening of the service sector.

Member States should identify and remove unjustified restrictions on professional services such as quotas and closed shops together with restrictions on the retail industry, such as disproportionate limitations on opening hours and zoning.

The Commission will propose in 2011 measures to rule out geographically based differentiation in e-commerce inside the Single Market. It will also propose a European framework for intellectual property, as this is a key factor for developing both e-commerce and digital industries.

In addition to continuing to press for the conclusion of the Doha Round, the Commission will advance negotiations on Free trade agreements with partners such as India, Canada and Mercosur, and step up regulatory convergence work with major partners and increase symmetry in access to public procurement markets in developed countries and large emerging market economies.

In 2011, legislation will be proposed to enable rapid and interoperable standard-setting including in ICT.

Although sensitive, work should be taken forward on taxation. This has an important economic potential to stimulate growth and job creation, reduce administrative burden and remove obstacles in the Single Market. Tax treatment disadvantaging cross-border trade or investment should be eliminated. In particular the Commission will propose in 2011 measures to modernise the VAT system, to introduce a common consolidated corporate tax base, and to develop a coordinated European approach to taxation of the financial sector. Progress on taxation also implies reducing taxes on labour to the minimum necessary and adapting the European framework for energy taxation in line with the EU energy and climate objectives.

9.Attracting private capital to finance growth

Innovative solutions are required to mobilise urgently a greater share of private EU and foreign savings.

The Commission will make proposals for EU project bonds to help bring public and private financing together for priority investments notably in energy, transport and ICT and will also include these innovative financing instruments in its forthcoming proposals for the next Multi annual Financial Framework.

To facilitate access to finance for SMEs and innovative start-ups, the Commission will make proposals to enable venture capital funds established in one Member State to operate freely anywhere in the EU and to eliminate remaining tax obstacles to cross-border activities.

10.Creating cost-effective access to energy

Energy is a key variable for growth. For business, energy prices are a key cost element. For consumers, energy bills represent an important item of the household budget and a particular challenge for low income households. Current plans by Member States risk falling far short of the overall 20% energy efficiency target set in the Europe 2020 strategy. This would lead to lost opportunities for growth across many sectors and regions and loss of employment creating possibilities.

Member States should rapidly implement the third internal market energy package in full.

Member States need to step up their energy efficiency policies. This will lead to significant savings and create jobs in the construction and services sectors.

In 2011, the Commission will propose initiatives to take forward the transport, energy or telecommunication infrastructure needed for a truly integrated single market.

The Commission is developing EU-wide standards for energy efficient products to help the expansion of markets for innovative products and technologies.

Ensuring delivery

The most urgent task in 2011/2012 is to prevent a vicious cycle of unsustainable debt, financial market disruption and low economic growth. The first priority of this Annual Growth Survey is to set budgetary policies on a sound footing through rigorous fiscal consolidation, and to restore the normal functioning of the financial sector. The second priority is a rapid reduction in unemployment through labour market reforms. But tackling these two priorities will be ineffective without a major effort to frontload growth at the same time.

Such policies would also have a positive impact on budgetary consolidation, by generating higher tax revenues and lower public spending on social transfers, and will help reduce the risk of future macroeconomic imbalances. Structural reforms will generate gains already in the short term. Output as well as employment gains are driven by product market and labour market reforms.

Trade is a strong driver of growth. There is a huge untapped potential for export of EU goods and services, but Europe's exports were hit hard by the collapse in global trade. The positive export performance of some Member States shows that success in global markets rests not only on price competitiveness but also on wider factors such as sector specialisation, innovation, and skills levels that enhance real competitiveness.

In this first Annual Growth Survey the Commission has set out 10 actions for the EU in 2011/2012, anchored in the Europe 2020 strategy. It proposes that these form the basis of an agreement by the European Council that Member States should commit to the implementation of these 10 actions. Given the interdependencies of Member states, in particular in the Euro area, ex-ante coordination in the Council is the essential element of the European semester.

Based on the guidance of the European Council, Member States should present by mid-April their national commitments in their medium term budgetary strategies under the Stability or Convergence Programmes and set out in their National Reform Programmes the measures needed to reflect this comprehensive response to the crisis anchored in the Europe 2020 Strategy. Based on recommendations from the Commission, the Council will issue country-specific policy guidance before the summer that Member States should take into account when preparing their budgets for 2012 and in implementing their growth policies. In the spirit of the integrated approach to policy coordination, the Council will assess the fiscal and growth strategies together, looking at their ambition, consistency and their implications at the EU level including the interdependencies within the euro area.

The Commission proposes that upcoming meetings of the European Council should review regularly its implementation, to identify gaps at Member State and EU level and agree rapidly on corrective measures. The proposals set out in this Communication would already enable the next meeting of the European Council to take concrete steps to maintain and accelerate the momentum of efforts to frontload and raise growth, and agree on the timetable for implementing the comprehensive response to the crisis. For the latter, the European Council has already agreed on two benchmarks: for finalising work on the permanent European Stability Mechanism (ESM) by March and the legislative package to enhance economic governance in the EU by June. In the meantime, the publication of the results of a new stress-test will give guidance on the strategy to be followed in completing the repair of the banking sector.

This first Annual Growth Survey is also transmitted to the European Parliament and to the other Institutions and national parliaments.

:   [(1)](#footnoteref1)
    Raising the employment rate, raising the investment levels in R&D, meeting our climate change and energy objectives, improving tertiary or equivalent education levels and reducing early-school leaving, promoting social inclusion through the reduction of poverty.
:   [(2)](#footnoteref2)
    Directive 2003/41/EC of the European Parliament and of the Council of 3 June 2003 on the activities and supervision of institutions for occupational retirement provision (OJ L 235, 23.9.2003, p. 10).
:   [(3)](#footnoteref3)
    As proposed by the Commission in its "New skills and jobs Europe 2020 flagship" - COM(2010) 682 final/2, 26.11.2010.

[Top](#document1)

EN

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|  | EUROPEAN COMMISSION |

Brussels, 12.1.2011

COM(2011) 11 final
  
ANNEXE 2

 

ANNUAL GROWTH SURVEY
  

  
ANNEX 2

MACRO-ECONOMIC REPORT

ANNUAL GROWTH SURVEY
  

  
ANNEX 2

MACRO-ECONOMIC REPORT

Member States' actions in 2011-2012 will be critical in averting a "lost-decade scenario". Policy priorities, timing and content will have to be set according to national circumstances and reflect inter alia the risks to fiscal sustainability and the need to correct excessive imbalances. The most urgent task is to break the vicious circle at work in some Member States of unsustainable debt, financial market disruption and low economic growth. While the draft National Reform Programmes submitted in November acknowledge the urgency of addressing the macro-economic challenges in an integrated way, they often fall short of proposing adequate policy responses.

This supporting document therefore aims at pinpointing measures that have the highest potential of delivering positive macro-economic effects and that Member States could consider implementing in the coming two year. The first section sets the scene by looking at the imbalances and weaknesses that had emerged before the crisis and at the legacy of the worst economic crisis since the Great Depression in the 1930s. The second section focuses on the need to set public finances back on track. The third section makes the case for healing the financial sector swiftly. The last section highlights the urgency of structural reforms to correct macroeconomic imbalances and to fix the ailing growth drivers.

1.Europe going through particularly challenging times

The European economy is slowly emerging from the deepest recession in decades. The economic crisis resulted in a large loss in economic activity in the EU, accompanied with millions of jobs lost and a high human cost. The structural weaknesses pre-dating the crisis which had not been tackled adequately became blatantly apparent.

The EU suffered from structural weaknesses before the crisis. 

While the EU is a wealthy area, its economic growth in the past decade has been weak by international standards (see Graph 1). In terms of GDP per capita, the EU-27 is much richer than the G20 average, but remains well below many non-EU OECD countries and the OECD as a whole. At the same time, its growth performance since 2000 has been very disappointing, below all the developed economies bar Japan and clearly behind most emerging economies. This means that the gap with regard to other developed economies is increasing. As catching up cannot explain the difference, EU's weak growth performance must be related to structural weaknesses. When one goes beyond GDP-type indicators, this overall dull picture conceals some strength in terms of life standards, such as relatively low income inequality, high life expectancy and relatively high environmental performance (for instance as measured by CO2 emissions by unit of output).

Various "bottlenecks" held back growth in the EU over the past decade. Standard growth accounting reveals that before the crisis (2001-07) labour productivity was the main driving force behind growth, while labour utilisation and the increase in working-age population only accounted for around one fourth of total growth; in particular, decreasing labour market participation of youth and prime-age men and a reduction in hours worked per persons were dragging growth down in the EU-27 (see Graph 2). The crisis darkened the picture further. It led to a contraction of GDP, with a sharp increase in unemployment and a significant drop in total factor productivity (TFP), mostly explained by the strong decrease in capacity utilisation. The EU and the euro area are clearly lagging behind the US and Japan as regards both TFP levels and labour utilisation; on the latter, the difference is especially profound at both ends of the age spectrum, as seen in the blatant difference in employment rates (see Graph 3).

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| Graph 1: GDP level and growth  GDP per capita in 2010 (% differential vis-à-vis EU-27 in PPS) |
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| Average economic growth in 2000-2010 |
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| Graph 2:Decomposition of GDP growth | Graph 3: Employment rate |
|  | Total employment over working age population 20-64 |
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Graph 4: Real primary expenditure versus real GDP growth

Average growth rates 2003-2007

![](./../../../resource.html?uri=comnat:COM_2011_0011_FIN.ENG.xhtml.39006.jpg)
Note: Member States are ordered by the size of the excess of average real primary expenditure growth over average real GDP growth.

  

In the years preceding the crisis, several EU Member States deviated from the basic principles of prudent fiscal policy making. Significant revenue windfalls generated by the economic expansion in 2003-2007 were only partially used to accelerate fiscal adjustment. A non-negligible part went into additional spending: the growth rate of primary expenditure exceeded the average rate of economic growth in twelve EU Member States in the good times preceding the crisis (2003-2007), by a large margin in some cases (see Graph 4).The untenable nature of this policy choice became apparent with the onset of the crisis, when the collapse of government revenues suddenly revealed vulnerable underlying budgetary positions with, in many cases, little or no fiscal space left to respond to the economic contraction.

Over the decade preceding the crisis, macroeconomic imbalances in the EU increased considerably as well. Some Member States saw the building-up of significant domestic imbalances. This was reflected in the strong divergence in current accounts and competitiveness developments, as seen in Graph 5 for the euro area. Moreover, some euro area Member States have experienced a worrying loss in export market shares. External imbalances were fed by inappropriate responses of wages to productivity developments, excessive credit growth in the private sector, housing price bubbles as well as structural weaknesses of domestic demand
[1](#footnote1)
.

Graph 5: Evolution of price competitiveness relative to the rest of the euro area 

(indices; 1998 = 100, increases represent losses in competitiveness)

![](./../../../resource.html?uri=comnat:COM_2011_0011_FIN.ENG.xhtml.39007.jpg)

  

Impact of crisis on the real economy and employment

Graph 6: GDP and employment

(2008Q1=100)

![](./../../../resource.html?uri=comnat:COM_2011_0011_FIN.ENG.xhtml.39008.jpg)

Sources: Eurostat; ECFIN Autumn forecast

Note: the profile for forecast employment – available on an annual basis only – has been interpolated linearly to deduce its quarterly profile.

The deep contraction in GDP wiped out on average four years of growth. The loss in output in 2008 and 2009 sent the EU GDP back to 2006 level. The EU is expected to recover the output level seen in the first quarter of 2008 – before the crisis hit the real economy – in the second quarter of 2012 only, according to the Commission’s Autumn 2010 economic forecast (Graph 6). By the end of 2011, only ten Member States are projected to have returned to their output levels in 2008 or above. By the end of 2012, eleven Member States are still expected to remain at output levels below those preceding the crisis. Employment is projected still to fall short of its pre-crisis level at the end of 2012 (by over 1%).

The crisis has taken a heavy toll on Europe's societies with a sharp rise in unemployment. The unemployed represented 7% of the labour force in the EU-27 in 2008. In 2010, they accounted for almost 10%, with the prospect of the unemployment rate remaining above 9% in 2012, as displayed in Graph 7. The unemployment rate is particularly high, exceeding 12%, in Estonia, Ireland, Greece, Slovakia, Latvia, Lithuania and Spain. Long-term unemployment – those unemployed for more than one year – has increased steeply and currently represents around 40% of total unemployment in the EU. This highlights the risk of durable exclusion from the labour market. The rate of unemployment is particularly high amongst the low-skilled, the migrants and the youth. Youth unemployment exceeds 20% in more than half of the EU Member States and reaches 42% in one country (Spain).

  

Graph 7: Actual and structural unemployment rates in the EU-27 

(2008Q1=100)

![](./../../../resource.html?uri=comnat:COM_2011_0011_FIN.ENG.xhtml.39009.jpg)

The crisis decreased potential growth further through the strong rise in structural unemployment and the sharp drop in the investment rate. Potential output growth in the EU-27 is expected to be particularly low (1.1%) over the forecasting horizon (2010-12), owing to both low productivity growth and low labour utilisation. The situation is expected to be even more lacklustre in the euro area, with broadly similar but more acute patterns. The lower use of labour is related to the significant rise in NAWRU (see Graph 7) but also to the further decline in average hours worked per worker and the contraction of working-age population. Potential growth will also be affected by slower capital accumulation resulting from historically low investment rates in the wake of the crisis, and by slow total factor productivity growth which is gradually recovering but only towards the already weak pre-crisis path.

Fiscal imbalances aggravated, with a slow reduction of macro imbalances

Graph 8: Public debt level in 2008 and its forecast rise over 2008-2012

(% GDP)

![](./../../../resource.html?uri=comnat:COM_2011_0011_FIN.ENG.xhtml.39010.jpg)
 Sources: ECFIN Autumn forecast

The crisis had a dramatic impact on public finances in the euro area and the EU. Within a short period of time, government debt-to-GDP ratios increased sharply in almost all Member States wiping out the moderate progress achieved in the pre-crisis years (see Graph 8). At the end of 2010 gross government debt is expected to have climbed to around 84% of GDP in the euro area and around 79% of GDP in the EU, some 20 percentage points above the 2007 levels. At current policies the upward trend is set to continue.

The current sharp deterioration of public finances results from a decline in revenues and increased pressures on expenditure as well as discretionary fiscal stimuli. Government finances in some Member States had become dependent upon highly cyclical or temporary revenue sources. This contributed to the collapse in government revenues on the back of a sharp contraction in economic activity while government expenditures were broadly kept at previously planned levels. Member States allowed their automatic stabilisers to fully function, which helped to soften the impact of global crisis on real economy. However, as this was insufficient to stem the fall in demand and avert the risk of a meltdown of financial systems, most EU governments also implemented discretionary fiscal measures under the common framework of the European Economic Recovery Programme launched by the European Commission in December 2008. 

This recent added pressure on public finances comes on top of the negative public finance effects of demographic ageing. This process has been in the offing for a long time and, in the absence of reforms taken soon, will inexorably produce a significant budgetary burden in the long-term, which will further aggravate the already worrying fiscal situation. With unchanged policies, public support for the elderly in terms of provision of pensions and other old-age benefits (healthcare and long-term care) is projected to increase by some 4½ percentage points of GDP in the EU over the next 50 years. In around one third of the Member States, the increase in ageing-related government spending is likely to exceed 7 percentage points of GDP.

The crisis has only partly, and temporarily, corrected the large macroeconomic imbalances prevailing in many Member States before its outbreak. As the current recession has compressed excessive demand and removed or mitigated some drivers of divergence (i.e. housing market bubbles and credit expansion), the current account deficits have decreased. However, current account imbalances remain significant, especially within the euro area, and are not expected to unwind quickly, as seen in Graph 9. Graph 10 shows that those EU Member States which recorded a large deficit (surplus) in the balance of goods and services at the onset of the crisis were generally still in deficit (surplus) two years later, when economic activity picked up. This partly reflects structural weaknesses, such as weaknesses in domestic demand (in surplus countries) and weak price and cost competitiveness, often combined with high debt levels (in deficit countries).

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| Graph 9: Decomposition of the current account, euro area | Graph 10: Balance of goods and services and its forecast change up to 2010  (positive values= surplus; negative values= deficit; % GDP) |
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| Sources: ECFIN Autumn forecast. | Note: Euro area Member States are identified as surplus or deficit countries on the basis of their current account position in 2006. |

  

The need for differentiated policy responses across Member States

Graph 11: Differentiated starting conditions in 2010

Public deficit /net import of good and services\*\*

![](./../../../resource.html?uri=comnat:COM_2011_0011_FIN.ENG.xhtml.39013.jpg)
 

Public debt /external account deficit\*

![](./../../../resource.html?uri=comnat:COM_2011_0011_FIN.ENG.xhtml.39014.jpg)

Source: ECFIN Autumn forecast

\*External account deficit means net borrowing vis-à-vis the rest of the world (current account plus capital transactions). This concept shows the annual change in external indebtedness.

\*\* Net imports of goods and services is also called 'deficit in the balance of goods and services', and is directly influenced by price competitiveness. The surplus for LU exceeds 30% of GDP, outside the boundaries of this chart.

EU Member States experienced highly different fiscal and external conditions, which call for tailor-made policies. Graph 11 shows in a purely illustrative manner and using different indicators that some Member States face particularly pressing challenges in terms of adjusting their unsustainable public finances and correcting their external imbalances. A one-size-fits-all approach will not work, and Member States' priorities in 2011-2012 should be shaped inter alia by risks to fiscal sustainability and the need to correct imbalances. Member States with large fiscal and/or macroeconomic imbalances face a hard constraint on their policy options and should, as a matter of priority, correct existing imbalances. Member States without major macroeconomic problems or discernable risks should strive to improve longer-term growth drivers, while preventing the occurrence of future imbalances.

2.Reining in public debt through a rigorous and durable fiscal consolidation

The need to consolidate now

Graph 12: Structural deficits and MTOs

(% GDP)

![](./../../../resource.html?uri=comnat:COM_2011_0011_FIN.ENG.xhtml.39015.jpg)

While the crisis has hit government budgets in all EU Member States, the actual state of public finances varies significantly across Member States. As displayed in Graph 12, the distance of the deficit – corrected for the business cycle and one-off measures, i.e. structural deficit – from the medium-term budgetary objective (MTO) is particularly large (more than five percentage points of GDP) in twelve Member States. Member States which followed a more cautious course of fiscal policy ahead of the unprecedented economic downturn are in a comparatively better situation. They had more fiscal space to lean against the headwinds of the recession and, as a result, have accumulated lower fiscal imbalances during the crisis.

Withdrawing the discretionary fiscal stimulus implemented during the crisis will not be sufficient to restore long-term sustainability of public finances. The debt-to-GDP ratio will not only suffer from the accumulation of public deficits but also from the implicit liabilities foreseeable with population ageing and the expected slow medium-term growth in the euro area and the EU. Moreover, government debt ratios in the EU have now reached levels beyond which additional government borrowing acts as a drag on economic growth rather than stimulating it. Servicing high government debt levels requires higher potentially distortive taxes and crowds out productive government spending through higher interest expenditure or both. Further debt building is also likely to increase the risk premia on government bonds further, raising the debt servicing burden even more, generating an unsustainable dynamic and eventually casting doubt on governments' solvency in financial markets. 

The adjustment effort required to put public finances back to a sustainable path is very significant and should be complemented by growth policies. Simple simulations indicate that an annual improvement of the structural budget balance of 0.5% of GDP - the conventional benchmark under the provisions of the Stability and Growth Pact (SGP) - would clearly be insufficient in many EU Member States to bring the debt to GDP ratio close to the Treaty-based threshold of 60% of GDP in the foreseeable future (see Graph 13). Only fiscal corrections of 1% of GDP per year or more would put debt levels in percent of GDP on a firm downward path over the coming two decades. However, fiscal consolidation, while absolutely necessary, might not always be sufficient to reverse adverse debt dynamics quickly and durably. Stronger output growth is imperative to increase fiscal revenue and lower unemployment-related expenditures, while automatically reducing the level of debt expressed as a share of GDP.

Graph 13: Public debt projection in the EU

Percentage of GDP

![](./../../../resource.html?uri=comnat:COM_2011_0011_FIN.ENG.xhtml.39016.jpg)

Note: the projections assume the given rate of consolidation for each Member State until it meets its medium-term budgetary objective (MTO).

As a result, fiscal policy makers in the EU face a formidable double challenge: putting fiscal policy back on a sustainable path while protecting or supporting short-run economic growth and employment. Under current circumstances, there is reason to believe that getting public finances in order will have a positive impact on economic growth in the medium run. Delaying fiscal adjustment would only push out and compound the problem. It would seriously compromise our ability to actively shape our future, and heavily mortgage future generations.

Although the degree of urgency is not the same in all Member States, consolidation remains a key policy priority for all. In 2010, fiscal policy continued to support aggregate demand in the EU and the euro area. As economic recovery is expected to gain gradually momentum in the coming years, it is time to switch the policy stance. Member States with very large structural budget deficits or very high public debt-to-GDP ratios should be frontloading their adjustment in 2011-12. This should be the case in particular for Member States facing high levels of financial distress: some Member States such as Greece and Ireland will accelerate their adjustment in both years, while Spain and Portugal will only do so in 2012.

Key ingredients for a durable and growth-friendly consolidation

History provides rich evidence on how to turn fiscal consolidation into a success in terms of both its lasting effect on public finances through time and the impact on economic growth. The lessons of the past concern five interrelated dimensions of fiscal policy making: the composition of fiscal adjustment, the credibility of the policy strategy, the institutional context, complementary policy initiatives and the burden sharing across society.

(1)Composition of fiscal adjustment: The single most important factor discriminating between success and failure of fiscal consolidation is the composition of adjustment. Expenditure-based corrections, especially corrections of current primary expenditure, are more likely to produce a lasting improvement in public finances and a milder, under some circumstances even a positive, impact on short-run economic growth than revenue-based corrections. Curbing expenditure developments is less distortive for growth than raising the tax burden, which is already high in the EU though significant variation exists among the Member States. In terms of credibility, expenditure cuts demonstrate a stronger commitment of the government to pursuing consolidation efforts. Revenue increases and cuts of investment expenditure may be easier to implement politically, yet weigh on the medium- to long-run growth prospects of an economy and are often reversed over time. In many Member States expenditure control will have to be supplemented by revenue-raising measures. Due attention should also be given to the quality of taxation, by collecting revenues in an efficient way and minimising the negative impact on economic growth while taking equity considerations into account. Broadening tax bases, for example by removing environmentally harmful tax exemptions or tax credits, is preferable to increasing tax rates. Some existing tax expenditures may have no sound economic rationale or provide incentives not in line with their original aims. Tax on immovable property followed by consumption taxes, including environmentally related taxes, are least distortive, while personal income taxes and corporate income taxes could have a more harmful impact on growth.

(2)Credibility of the policy strategy: Convincing and credible plans can generate expectations of lower real interest rates and lower future tax liabilities and, hence, have the potential of boosting consumption spending of private households and investment spending of firms. In practice, the credibility of a multi-annual adjustment plan can be bolstered by front-loading legislation setting out in a legally binding way a roadmap of successive measures that contribute to the planned multi-annual adjustment.

(3)Fiscal institutions: The success of fiscal consolidation also depends on the government's capacity effectively to implement the agreed policy measures via adequate national fiscal frameworks. The quality of the institutional and procedural arrangements governing budgetary policies, such as fiscal rules and multi-annual fiscal frameworks, influences the ability of governments to draw up and effectively put into practice fiscal consolidation programmes without creating excessive political and economic frictions.

(4)Flanking policies: Budgetary policies typically interact with other instruments of economic policy making. This is also the case for fiscal consolidation. The complementary implementation of structural reforms will raise the odds of achieving a lasting fiscal correction, which also protects economic growth in the short run. The channels through which structural reforms help fiscal consolidation are twofold: directly by capping or flattening existing expenditure trends and indirectly by improving the functioning of markets which, in the end, supports economic activity. In actual fact, it is the structural reform dimension which confers and ensures the lasting character of a fiscal adjustment. Some structural reforms, notably reforms of pension systems, could have a positive impact on public finances already in the medium term through curbing expenditures and increasing labour supply.

(5)Socially-balanced fiscal adjustments: Ensuring sound public budgets is a necessary condition to avoid that public debt growing out of control puts in jeopardy our social security systems in the future. In order to achieve the necessary political acceptance, the burden of adjustment needs to be distributed fairly across the different layers of society. Adjustments skewed towards specific constituencies are likely to be reverted as the political composition of governments change endangering the sustainability of fiscal adjustment.

Policy priorities

In order to address the challenges outlined above, action is needed in particular in the following areas in 2011-2012:

At the EU level, the legislative proposals to strengthen economic governance should be adopted according to the fast-track agreement between the co-legislators.

Consolidation in all EU Member States should imperatively start – or continue – in 2011. The planned pace of the fiscal consolidation should be ambitious, and will have to go well beyond the benchmark of 0.5% of GDP per annum in structural terms in most Member States. Member States facing very large structural budget deficits, very high levels of public debt or high levels of financial distress need to frontload their efforts in 2011. Where economic growth or revenues turn out to be higher than expected, fiscal consolidation should be accelerated.

Member States in excessive deficit procedure should set out the expenditure path and the broad measures they intend to take in order to achieve the elimination of their excessive deficits.

All Member States should primarily adjust government expenditure, while protecting growth friendly expenditure e.g. in the area of public infrastructure, education and research and innovation. All Member States, especially those in excessive deficit procedure, should pursue prudent fiscal policy by keeping public expenditure growth firmly below the rate of medium term trend GDP growth. This should be complemented by efforts to raise the cost-efficiency of public expenditures. Where adjustment needs are particularly pressing, expenditure should be reduced. All Member States need to demonstrate that their Stability or Convergence Programmes are based on prudent growth and revenue forecasts.

When a contribution from taxes is necessary, economic distortions should be minimised. At any given level of the overall tax burden, tax systems should be reviewed to make them more employment, environment and growth-friendly, for example via "green tax reforms" which consist of increasing environmental taxes while reducing other more distortionary taxes. Broadening the tax base is preferable to raising tax rates.

Pension reforms, aiming inter alia at raising the effective retirement age, should be enacted and implemented without delay. This will ensure the sustainability of public finances and lead to an increase in active population. Health care systems need to be rigorously monitored and, where needed, reformed to ensure greater cost-efficiency and sustainability, especially in regard to demographic ageing. 

Member States are encouraged to improve their domestic fiscal frameworks, in the area of national systems of public accounting and statistics, macroeconomic and budgetary forecasts, numerical fiscal rules, medium term budgetary frameworks, transparency of general government finances and comprehensive scope of budgetary frameworks.

3.Healing the financial sector swiftly to find the path to recovery

Graph 14: Bank lending in the EU

![](./../../../resource.html?uri=comnat:COM_2011_0011_FIN.ENG.xhtml.39017.jpg)

Source: ECB.

There is a strong correlation between a healthy credit expansion and sustained economic development. Since the outbreak of the financial crisis, credit growth is subdued, notably in corporate lending, as banks have tightened credit standards and firms' demand for financing is low given the poor economic outlook. Since the beginning of 2010 a pick-up in lending is noticeable and coincides with a timid recovery (see Graph 14). The ECB Bank Lending Survey of October 2010 shows that banks have stopped tightening lending conditions for enterprises and an easing of standards is expected for households. However, the lending conditions are not consistent with a strong economic recovery, especially regarding the loans to non-financial corporations (see Annex table).

Balance sheet repair in the banking sector is essential to improve cost efficiency, restore competitiveness and return to normal lending. Yet, banks' profitability outlook is uncertain amid a sluggish recovery, heavy exposures to the real estate sector and tensions in the sovereign debt market. The negative feedback-loop from the real economy to the financial sector has been reinforced in some Member States with high household and non-financial corporate sector indebtedness. As a result, the level of non-performing loans has increased considerably and may increase further in the near term (Graph 15). Recently the overall situation of the banking sector has shown tentative improvement, with higher profits and a strengthening of the capital buffers, though in some cases it reflects capital injections by the government.

A swift exit from sizable public support to banks will remove possible distortions to competition in the financial industry. In more than half of the Member States government assistance exceeded 5% of GDP and included measures such as capital injections, liquidity interventions, asset relief and guarantees (see Graph 16). Exit strategies from public support to banks have been initiated while maintaining flexibility in order to address possible macro-financial stability concerns. Cross border effects of the public interventions have to be taken into account due to the high financial integration in the European Union as illustrated by the level of banking sector assets abroad which attains 50% of GDP for many Member States (see Graph 14).

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| Graph 15: Non-performing loans in the EU  Percentage of total loans | Graph 16: Public interventions in the EU banking sector |
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| Source: ECB, IMF | Source: Commission Services (January 2010). |

Confidence in the banking sector is a prerequisite for maintaining financial stability. One of the tools to maintain confidence on the speed of the exit strategies is the stress test exercise. The objective of the exercise is to assess the banking sector's resilience to low-probability but high-impact events. The sensitivity of the capital buffer is examined to adverse economic and financial conditions. Based on rigorous assumptions, the next EU-wide stress test exercise will be conducted in 2011. The results of the next exercise will be available in June 2011. A good cooperation among national supervisors and EU authorities is critical in this context as well as a clear and transparent communication of the results and their implications. 

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| Graph 17: Banking sector assets abroad  Percentage of GDP | Graph 18: Total banking sector assets  Percentage of GDP |
|  |  |
| Source: BIS, Eurostat | Source: ECB |

The recent crisis has exposed a clear gap in the EU regulatory framework for the banking sector and strengthened the case for action at EU level. The interconnectedness of banks and financial institutions across EU Member States – and with non-EU countries – underscores the importance to monitor developments in the financial sector in an international context. The size of the banking sector assets measured as a percentage of GDP points to the particular vulnerability of some Member States in case of a systemic crisis and the blatant insufficiency of the fiscal means to deal with major financial disruptions (Graph 18). Accordingly, at the EU level the regulatory and supervisory framework has been strengthened and should be completed rapidly. In October 2010, the Commission outlined the aims of the legal framework for crisis management in the financial sector, which will be proposed in spring 2011. The overriding aim is to allow a bank to fail – irrespective of its size – while ensuring the continuity of essential banking services, minimising the impact of that failure on the financial system and avoiding costs to taxpayers. This is essential to avoid the 'moral hazard' that arises from the perception that some banks are too big to fail. Beyond equipping the authorities with common and effective tools and powers to tackle bank crisis, it is also essential to ensure a smooth cooperation among the Member States and the EU institutions both in advance of and during a crisis.

A permanent "European Stability Mechanism" will be established by euro area Member States to safeguard the financial stability of the euro area as whole. It will replace the current European Stabilisation Mechanism, which consists of the European Financial Stability Facility (EFSF) and the European Financial Stabilisation Mechanism (EFSM), which will remain in force until June 2013.

Basel III rules impose tougher capital requirements on banks, which will enhance macro-financial stability. In September 2010, the Basel Committee on Banking Supervision announced a substantial strengthening of existing capital definitions. In general, banks' capital will be lower according to the new definition, which increases the gap with the regulatory requirements. In addition to stricter definitions, the minimum capital requirements will also be gradually increased.

Policy priorities

In order to address the challenges that were outlined above, action is needed in particular in the following areas in 2011-2012. In this, coordination at EU level is of paramount importance.

Restructuring of banks, and particularly those which received significant amounts of State aid, is essential to restore their long-term viability and ensure a properly functioning credit channel. Bank restructuring will therefore safeguard financial stability and underpin the provision of credit to the real economy. Public financial support for the banking sector as a whole should be gradually withdrawn, taking into account the need to safeguard financial stability.

Progress is needed in establishing a permanent mechanism for resolving sovereign debt crises so as to provide certainty and stability in financial markets. In 2013, the new European Stability Mechanism will provide stability in markets and complement the new framework for reinforced economic governance, aiming at an effective and rigorous economic surveillance, including reviewing the effectiveness of the current financial backstops.

The implementation of financial reforms must continue, including a reinforcement of the regulatory and supervisory framework and addressing the market failures exposed by the crisis. At EU level, the regulatory framework must be further reinforced, while the quality of supervision should be enhanced by the ESRB and European Supervisory Authorities, which are operational as of the beginning of 2011.

Banks will be required progressively to strengthen their capital base so as to improve their capacity to withstand adverse shocks. This is in accordance with the recently agreed Basel III framework. In addition, another more ambitious and stringent EU-wide stress test will be conducted in 2011 with a view to assessing the resilience of the banking sector.

4.Structural reforms to support growth and correct macroeconomic imbalances

Structural reforms can serve two goals: restoring the main growth drivers, and preventing or correcting imbalances as a key framework condition for growth. These reforms can boost the use of labour and labour productivity. Structural reforms can also help restore competitiveness and reduce external imbalances in the short run by reducing price and wage rigidities.Facilitating the needed reallocation of labour and capital across sectors and firms is instrumental for both growth and the reduction of external imbalances. While many structural measures could support both growth and macroeconomic adjustment, some of them, such as educational policies, require more time to pay off and are better suited to unlock long-term growth drivers. Nevertheless, this does not mean that action to strengthen these policies should be deferred.

  

Accelerating reforms to raise growth and jobs

In the absence of resolute policies, potential growth is likely to remain weak in the coming decade
[2](#footnote2)
. Over the period 2011-20, the average potential growth rate is projected to be around 1½% in the EU-27 in absence of policy changes, as seen in Graph 19. This is significantly lower than the rates observed in the EU in the past two decades, which were, moreover, much lower than those recorded in the US. This is accounted for by the pronounced underutilisation of labour in the wake of the crisis, combined with the contraction of labour due to population ageing at the end of the period and fairly slow productivity growth in the EU-27. Most Member States have been strongly affected by the crisis, through both capital accumulation and labour utilisation, and are expected to record a reduction in their labour resources at the end of the decade owing to the population ageing.

Graph 19: Potential output growth up to 2020 in the EU-27

Macroeconomic scenario based on the production function approach

![](./../../../resource.html?uri=comnat:COM_2011_0011_FIN.ENG.xhtml.39022.jpg)

Source: ECFIN Autumn forecast

Confirming past trends, the growth outlook is even worse in the euro area. Over the period 2001-2010, average potential growth was 1. 6% in the euro area, as compared with 1.8% in the EU-27 (Graph 20). The picture for output growth and productivity growth will be particularly gloomy for the euro area in the decade ahead, as both are expected to stand at around 1¼% on average. However, the projected use of labour is very similar to that expected for the EU as a whole.

  

Graph 20: Potential output growth up to 2020 in the euro area

Macroeconomic scenario based on the production function approach

![](./../../../resource.html?uri=comnat:COM_2011_0011_FIN.ENG.xhtml.39023.jpg)

Source: ECFIN Autumn forecast

The experiences from past economic and financial crises indicate that policy responses matter greatly. For example, the deep recessions which started in 1991 in Sweden and Finland were relatively short lived and did not result in a reduction in potential output growth. This was inter alia thanks to significant restructuring of their economies. On the other hand, an insufficient policy reaction to the financial crisis, combined with mounting competitive pressures from emerging economies, contributed to the slowdown in long-run potential growth in Japan in the course of 1990s.

Urgent actions are required both at national and EU level. EU-level policies will contribute to raising growth by, for instance, strengthening the Single Market and facilitating the conditions for investment In all Member States, removing the most important bottlenecks to growth in the medium-term would imply frontloaded structural reform efforts (for more detail, see the progress report on Europe 2020 annexed to the Annual Growth Survey).

Correcting macro imbalances and restoring the key framework condition of growth

Tackling external imbalances is particularly relevant for the euro area and will require comprehensive structural reforms geared at speeding-up and improving adjustment. The correction of imbalances is crucial for the EU and even more so for the euro area, as a monetary union. Imbalances in some euro area Member States may also undermine the credibility of the single currency. Economic policy actions will be needed in many different areas including in labour, product and services markets. The policy response will have to differ significantly across Member States and will have to be carefully designed to address the specific vulnerabilities and needs of the country concerned while taking into account potential spillovers across the EU. In general, structural policies should strive to make the economies more flexible to cater for the adjustment needs in the EU.

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| Graph 21: Net external financial liabilities; euro area Member States  % GDP | Graph 22: Net external financial liabilities; non-euro area Member States  % GDP (different scale from Graph 23) |
|  |  |

Note: Data are not available for Cyprus, United Kingdom, Malta and Luxembourg

For Member States showing large current account deficits, weak competitiveness and weak adjustment capacity, large price and cost adjustments will be needed to restore domestic and external competitiveness. An important metric to assess the sustainability of current account deficits is the overall net foreign asset position, measuring the level of external debt (Graphs 21 and 22). Despite the reduction in the level of current account deficits following the crisis, large deficit Member States have continued to see their debt grow vis-à-vis the rest of the world. While market mechanisms could drive this adjustment by a strong contraction in domestic demand and a large unemployment rise, a faster and less painful adjustment could be achieved via appropriate wage policies. These would include changes to wage indexation rules, appropriate signals from public sector wage settlements and more efficient wage setting mechanisms. Product market reforms will also be necessary to tackle nominal rigidities and reduce the final good prices by lowering the embedded rent (i.e. lower mark-up of prices over costs). The full implementation of the services directive, which will enhance competition in regulated services, is a particularly important policy step. Policies to strengthen non-price competitiveness are also essential in this respect.

Measures tackling the nominal rigidities would need to be completed by structural measures supporting the reallocation of labour across firms and sectors. Moving the economy to a more sustainable path will require unwinding all past excesses and therefore not only improving the price-competitiveness of the export sector and reducing the relative prices of non-tradable. The price rebalancing will be associated with rechanneling of capital and labour resources from the non-tradable to the tradable sector, directly exposed to foreign competition. On the labour side, this reallocation will include an adaptation of employment protection legislation and better financial incentives to move from unemployment to employment. This reallocation will be supported by relative wage adjustment between tradable and non-tradable sectors. Active labour market policies will have a supporting role: strengthening placement agencies, providing training, and better targeting active labour market policies to most vulnerable groups. The improvement in the business environment, implying enhancing competition in regulated services and further reduction in administrative burdens, may support capital mobility in the direction of the most productive sectors.

In Member States with large current account surpluses, the sources of persistently weak domestic demand need to be identified. Recent data are encouraging and indicate that an adjustment is ongoing with domestic demand increasingly gaining strength and past (corporate) balance sheet adjustment processes coming to an end. However, where domestic demand still remains somewhat subdued due to a policy or market failure, appropriate policies should be put in place. Such policies could include further liberalisation of the services sector and improving the conditions for investment.

Policies need to be put in place to prevent imbalances from emerging in the future. The conditions that have led to excessive credit growth and asset price bubbles will need to be reviewed. A key challenge for policy makers will therefore be to devise and put in place structural reforms that limit the occurrence of credit and asset price excesses but also to devise specific instruments to cool-off demand if necessary. Regulatory measures reducing the pro-cyclicality of credit supply appear to be particularly relevant in this context and more work is needed. Without prejudice to the internal market, this could mean to ensure that bank capital requirements duly reflect regional differences in asset price overvaluation. Structural features of the housing market that increase the likelihood of bubble building including tax incentives for mortgages need to be reviewed. Moreover, improved flexibility and adjustment capacities of the economies through product markets and will render them more resilient and facilitate the necessary adjustments in case of major shocks.

Policy priorities

In order to address the challenges that were outlined above, action is needed in particular in the following areas in 2011-2012:

EU-level growth drivers must be mobilised. Agreements should be sought on key legislative proposals in the context of the Single Market Act (for more detail, see the progress report on Europe 2020).

In Member States with large current account deficits or high levels of indebtedness, reforms affecting wage-setting systems and services markets are important to improve price and wage responsiveness. Improvements in the business environment through enhancing competition (e.g. via the Services Directive) and reductions in administrative burdens will also help in this respect. 

Measures supporting the reallocation of resources across firms and sectors are strongly needed. They include an employment protection legislation which does not hinder reallocation of resources across sectors, better financial incentives to work and active labour market policies better targeted to the most vulnerable. Measures that eliminate hindrances to entry and exit (start-up conditions) and investment (such as the harmonisation of corporate tax bases) will also be important in facilitating sectoral reallocation towards higher value added and faster growth activities.

Member States with large current account surpluses need to identify and tackle the sources of weak domestic demand. Such policies could include further liberalisation of the services sector and improving the conditions for investment.

All Member States should frontload structural reform efforts that remove their most important bottlenecks to growth in the medium-term. Based on the draft National Reform Programmes (NRPs) submitted by Member States, the planned measures appear to be insufficient in terms of ambition, and thus are unlikely to have a material impact on growth and jobs in the medium run. Member States, in their final NRPs, need to be much more precise on their reform plans, to frontload key actions and to step up their overall level of ambition.

Annex : Table 1. Some country-specific indicators on growth and jobs, fiscal position, financial market conditions and macro imbalances

![](./../../../resource.html?uri=comnat:COM_2011_0011_FIN.ENG.xhtml.39026.jpg)

:   [(1)](#footnoteref1)
    See European Commission (2010), Surveillance of intra-euro-area competitiveness and imbalances, European Economy 1.
:   [(2)](#footnoteref2)
    Potential growth corresponds to a concept of sustainable trend growth compatible with supply-side conditions, correcting for the short-term cyclical fluctuations in actual GDP growth.

[Top](#document2)

EN

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|  | EUROPEAN COMMISSION |

Brussels, 12.1.2011

COM(2011) 11 final
  
ANNEXE 3

ANNUAL GROWTH SURVEY
  

  
ANNEX 3

DRAFT JOINT EMPLOYMENT REPORT

ANNUAL GROWTH SURVEY
  

  
ANNEX 3

DRAFT JOINT EMPLOYMENT REPORT

This year's Joint Employment Report, mandated by Article 148 TFEU, is part of the Commission package to launch the European Semester. As key input to strengthened economic guidance, the JER is primarily a forward looking analysis, expanding on key employment messages contained in the Annual Growth Survey. The analysis and messages it contains are based on the employment situation in Europe, the implementation of the Employment Guidelines
[1](#footnote1)
 as well as on the results of country examination of the draft National Reform Programmes carried out by the Employment Committee
[2](#footnote2)
.

1.employment Performance is affecting the macro-economic framework conditions

An improved but still fragile labour market situation…

The labour market in the EU has continued to stabilise and there are now signs of recovery in some Member States. Indeed, the deterioration in employment in the EU seems to have come to an end in the second quarter of 2010, as employment grew, by 0.2 %, for the first time in nearly two years. Nevertheless, at 221.3 million people
[3](#footnote3)
, employment was by then still down by 5.6 million people when compared to its peak in the second quarter of 2008, reflecting marked declines in manufacturing and construction. The employment of workers aged 20 to 64 also stood at 208.4 million people corresponding to an employment rate of 68.8%
[4](#footnote4)
.

The unemployment rate, currently at 9.6 %, has remained unchanged since February 2010 and has broadly stabilised. Unemployment now stands at 23.1 million persons. Long-term unemployment is increasing across all the population groups, although to a different extent. Of these almost 5 million were unemployed for 6 to 11 months. The crisis has aggravated the risk for the low-skilled and non-EU migrants. At 5.2 million, youth unemployment is up by nearly 1.2 million people compared to the low of spring 2008 (an increase of almost 30%). Despite this the labour market for young people in the EU has been improving since last autumn, with youth unemployment generally declining since September 2009. The youth unemployment rate now stands at 20.4 % in the EU, 0.1 percentage points lower than one year ago.

Following the continued rise in unemployment, the number of unemployment benefit recipients continued to increase between June 2009 and June 2010 in most Member States. The number of recipients of (non contributory) social assistance schemes also increased significantly in a majority of Member States and in some countries these schemes cushioned most of the social impact of the crisis. No strong pressure on disability schemes was observed, while beneficiaries of early retirement schemes increased in a few countries.

… with short-term mis-matches,…

Recently demand for labour has continued to show a relative improvement, with job vacancies, online worker demand and workplace activity through temporary work agencies surpassing the levels observed a year ago.

There are, however, some rising concerns of a mismatch between supply and demand. Over the last year we have seen an increase in both unemployment rates and job vacancy rates. This could point out a mismatch between the skills of jobseekers and those skills required for the available jobs. This needs to be carefully monitored in the next quarters to check if the upward trend observed over the last year is simply temporary or risks becoming structural. In fact, the sectors that are recovering quicker are not the ones that shed most jobs at the onset of the crisis, probably reflecting a shift in skill and sectoral needs during the crisis.

…a concern about competitiveness…

In response to the economic crisis a majority of Member States used short time working arrangements (STWA) to allow firms to absorb the drop in production without the immediate need to lay off staff accordingly. The downside of using STWA is the labour hoarding and the subsequent decline in the productivity per worker. Previous downturns, in which labour hoarding occurred, tended to be followed by periods of jobless growth, as the increased production was met by a recovery in productivity and working time, rather than by additional jobs. Labour productivity growth was negative throughout the period between mid 2008 and the first quarter of 2009 but has been positive thereafter at around 2% per annum.

With the economic crisis, maintaining competitiveness and supporting labour demand through lowering total labour costs gained additional relevance across the Member States. Data suggest that wages have adjusted quite well to the low demand conjuncture in the euro area as a whole – although with a lag as a result of longer lasting collective agreements –, as negotiated wages saw an increase 3.5% per annum in third quarter 2008 but an increase of only of 2.1% in second quarter 2010 in the euro area.

Growth in real unit costs in the EU rose steeply from third quarter of 2008 until mid 2009, but have fallen equally fast thereafter and in second quarter 2010 were at -2% per annum suggesting that they should not pose a threat to competitiveness for the EU as a whole. However for some countries a further reduction of total labour costs per worker may well be required to restore outside EU-competitiveness to pre-crisis levels.

… and a need for action on labour taxation and social security contributions

Efforts have also been made by Member States to reduce non wage labour costs, as captured by the tax wedge
[5](#footnote5)
. Rebates on social security contributions (SSC) to boost labour demand were typically made conditional upon net job creation - i.e. largely limited to new hires – in several Member States during the crisis. Some countries also decided on general cuts in employer's SSC, most often with a permanent nature. The non-wage labour cost cuts were largely targeted to the most difficult to employ, such as low skilled, young unemployed, long-term unemployed and older workers.

2.Identifying priority areas for growth enhancing reforms

The achievement of the agreed headline targets in the areas of employment, education and social inclusion requires the implementation of a broad spectrum of integrated actions with a view to create more flexible, secure and inclusive labour markets. Flexicurity policies are the best instrument to this end; nevertheless, the four components of flexicurity (flexible and reliable contractual arrangements, active labour market policies, life-long learning, and modern social security systems) must be strengthened to ensure enhanced focus on the most cost-effective reforms while providing better flexibility and security
[6](#footnote6)
.

This means first and foremost removing institutional obstacles that prevent proper functioning of Member States' labour markets. These bottlenecks can have severe negative effects on employment growth and labour market performance and to some extent can also prevent social inclusion and the reduction of poverty. The following analysis stems from the policy areas identified by EMCO and SPC as essential to monitor the implementation of the guidelines.

2.1.Reaching full employment

The achievement of full employment requires the implementation of integrated actions as set out in employment guideline 7.

Labour market participation

The low employment rate of older workers (55 to 64 years old) reaches a mere 46.4%. This is a function of practices of age management in labour markets and workplaces but also partly the result of various forms of early and/or disability retirement schemes. The improper functioning of labour markets for elderly people (low demand from employers, low levels of up-skilling, the lack of assistance for job search, the referral to early retirement benefits, insufficient reintegration and re-training provision after redundancy) can cause an early exit from the labour market. Also, in some countries the links between contributions, duration of employment and value of pension rights is limited or not visible enough.

There is a clear need to foster women’s greater involvement in the labour market. The overall employment rate of women in Europe is still only 62.4% (20-64). Inadequate fiscal treatment of 2nd earners (higher effective taxes for married women than for single earners) is seen in some countries as an obstacle impeding continued female participation in or returning to the labour market. High marginal effective tax rates resulting from the family based taxation elements, the phasing out of means-tested or income-based benefits (such as child benefits or housing benefits) together with the lack of use of in-work benefits, are potential obstacles for the re-entry of women to the labour market for some Member States.

Too few young people are making it onto the labour market. The lack of tailor made pathways combining career orientation services, opportunities for up-skilling, quality apprenticeships and pre-work placements are hampering the positive transition to work for young people
[7](#footnote7)
. Lack of clear information on new labour market entrants are thus leading employers to hesitate to fill vacancies as it may be unclear from the outset what their skills and productivity levels will be and whether they will fit the job requirements. Ensuring young people are properly equipped for the labour market needs to be stepped up in many Member States.

Labour market functioning and segmentation

In many labour markets the large differences in relative levels of employment protection legislation result in a division between well-protected workers with permanent contracts and less-protected workers with atypical, mostly temporary, contracts. The impact of the crisis has highlighted this issue: job losses for workers in temporary work were almost four times higher than for those in permanent employment. While temporary work is not a negative phenomenon per se, its limited function as a stepping stone toward more permanent employment relationships hinders productivity and better career and earnings prospects – in particular for the young people.

At the same time, many Member States are faced with insufficient or weak labour market transitions where the labour market is characterised by rigidity and relatively low turnover to meet changing demand patterns. In addition to inappropriate EPL, this is also caused by the rigidity of working (time) arrangements, i.e. insufficient internal flexibility. These factors have a negative direct impact on economic activity through hampering the efficient allocation of labour resources.

Barriers to labour geographical mobility may also prevent the proper labour market functioning. Limited portability of pensions and other social security rights reduces the possibility of effective (re)allocation of labour, as do housing and transport impediments by hindering people from moving or commuting to where jobs are available.

Different Member States also see a significant level of undeclared work with an important part of the workforce not being registered due to lack of enforcement of existing rules and dis-incentivising tax benefit systems. The result is artificially low official employment rates or hours worked and a dual or parallel labour market with one part subject to very poor standards and conditions which reduces productivity and tax revenue as well as increasing the risks of exclusion.

High quality industrial relations based on dialogue and trust between strong social partners contribute to solutions towards reducing segmentation and proper labour market functioning. Social dialogue has proved to be effective during the crisis. Establishing consensus is important when austerity measures must be decided, as only a repartition of efforts that is regarded as fair will guarantee socially acceptable and successful reforms. However, the operational capacity of social partner organisations and the quality of industrial relations differs; thus the full potential of autonomous, negotiated solutions based on joint analyses and negotiations between social partners is still to be developed in several Member States.

  

Job creation

Many Member States have lowered non-wage labour costs on a temporary basis in response to the crisis. Further permanent cuts will promote more employment especially when targeted at low skilled individuals and in those countries where the later represent high labour potential. Fiscal neutrality can be achieved by shifting taxation from labour to energy and/or property. In many Member States the debate over the current taxation of labour and of other resources is already taking place.

The labour markets that are emerging from the crisis are changing and many Member States are looking at creating high value added and sustainable greener economies. These are essential for the creation of more jobs and for meeting the climate/energy targets. At the same time it is necessary to support workforce adaptability. Synergies between policies to ensure their mutual reinforcement and to secure a win-win solution for the economy, the environment and employment are not yet fully established. . The sectors which are suffering most from job losses are strongly male-dominated (gas, electricity, coal, oil). While some jobs in those sectors will become obsolete, others will demand new skills, causing a redistribution of jobs within the same sector or to other sectors. New skills are also needed in the so called 'white jobs' sectors such as healthcare where demand is growing and shortages are acute and growing in the face of an ageing society.

The take up of self employment and entrepreneurship remains low amongst Member States and less than half of such ventures survive beyond three years. The net benefits of self employment are not perceived as sufficiently greater than other alternatives so as to make it an attractive career option for the best and brightest individuals. Measures continue to discourage self-employment and combining economic and labour market policy initiatives to create an environment in which entrepreneurship can prosper are still too limited.

Active Labour Market Policies (ALMPs)

In a number of Member States there is a lack of well targeted ALMP measures aimed at the long-term unemployed, vulnerable and disadvantaged groups. In some Member States the effects of ALMP activities are low as relatively many vacancies still co-exist with high long term unemployment. Part of this is caused by poor cooperation between the different levels of government involved in the management of the ALMPs with the responsibilities divided on several regional levels. For others, the reason is linked to inefficient Public Employment Services due to higher caseloads resulting from influx of clients, budgetary cuts and downsizing of PES, deficits in skilled staff, lack of training, inadequate types of expenditure paid by the ALMP or insufficient focus on more cost-effective measures. Modernisation of the PES business and service model so to ensure that individualised support is available to all those that need is still insufficient.

Gender Equality and work life balance

Involuntary part-time work among women is still an issue in some Member States, as a result of inadequate childcare facilities during working hours or after-school, and is also due to the lack of services for children and other dependent persons. Moreover, care for the elderly and disabled is becoming a significant challenge with the ageing of the population, both for society and for women. In some Member States the reintegration of women into the labour market is further impeded due to unfriendly career break labour markets and unbalanced take-up of parental responsibilities. In some countries lengthy (financed) parental leave risks being a hindrance for career development and imposes severe fiscal burdens on the public budget and on productivity due to skill depreciation.

Social security systems

In the aftermath of the crisis, long term and structural unemployment is now an urgent problem for many Member States. Unemployment benefit systems and other benefit schemes should provide the right incentives to work, to avoid benefit dependency, but at the same time ensure the much needed income support and adaptability to the business cycle. Appropriate compliance criteria with temporary and partial sanctions for non-compliance by benefit recipients ready for work are not in place in many Member States. Also, practices for identifying those who are not job-ready are missing in some Member States, just as are adequate policies for targeting them.

Wage setting and labour costs

Wages need to adjust in such a way to balance labour demand and supply, ensure an efficient use of labour, and provide rewards commensurate with the contribution to value added. In this respect, it is key that over the medium term real wages grow in line with labour productivity across occupations and economic activities.

From a macroeconomic perspective, wage dynamics are also important for the correction of internal and external imbalances. In particular, in some Euro-zone countries, a durable correction of large accumulated current account deficits and the absorption of large unemployment pools require dynamics of nominal labour costs inducing over the medium term an adequate adjustment in price competitiveness. In this respect, nominal labour cost dynamics in other Euro-zone countries are a relevant benchmark.

Against this background, it is proving challenging for several Member States to find the right balance in collective wage agreements between the flexibility needed for adjusting labour markets to changing conditions and contracts specifying wage levels to protect and stimulate the investments needed in order to increase the value of jobs.

2.2.A highly skilled and educated workforce

A strong human capital base is the key to sustainable growth, employment and international competitiveness. By 2020 85% of jobs will require high or medium level skills and the proportion of jobs for the low-qualified will reduce to 15%. It is therefore essential that Member States continue, in line with integrated guidelines 8 and 9 and with the Strategic framework for European cooperation in education and training (ET2020)
[8](#footnote8)
, in reforming their education and training systems and equipping people with higher and more relevant skills and key competences.

Insufficient quality of training and education is hindering transitions on the labour market as a large number of people of all ages and qualification levels do not possess the right mix of skills and competences. The responsiveness of training systems remains insufficient to respond to the challenge to equip workers and job seekers with basic skills and transversal key competences. This points to limited co-operation on the development of curricula involving social partners and Public Employment Services.

There is potential to develop further measures and tools to anticipate and prepare projections of future skills gaps and needs at Member State, regional, and sectoral levels (skills forecasts, employer surveys, sectoral studies, enhance quality statistical data) This concerns both the way in which these efforts are undertaken, as well as how their results are disseminated between key actors such as career guidance services, statistical offices, NGOs, sectoral bodies, and made use of in the design of curricula.

The participation of adults in lifelong learning is also often too low. This is mainly due to lack of incentives for companies to train workers, insufficient support to workers to engage in training and inadequate offer responding to the needs of particular groups.

Moreover complex structure of financing and a vast array of providers make it difficult to implement coherent strategies to coordinate and stipulate public, companies and individuals training activities. Multiple spheres of responsibility, overlapping funding and the absence of a genuine lead weaken the governance of the system. Inequitable access to lifelong training in particular remains a key issue: since a large proportion of continuing training is provided by employers, employees on permanent contracts have better access to lifelong learning then people on temporary contracts or the unemployed. Low skilled people participate five times less in adult learning than adults with high qualifications levels. More flexible learning pathways, including through validation of non-formal and informal learning, and targeted measures such as work place training and partnerships with enterprises and social sector organisations aiming at low skilled people, unemployed adults, migrants, ethnic minorities and people with disabilities, are not sufficiently developed to attract learners. Specific accompanying measures would also be helpful for workers in declining sectors.

Improving the level of basic skills and key competences by tackling early school leaving

Early school leaving is a complex phenomenon caused by multiple socio-economic, educational and individual factors. Many Member States tackle it through focussing on improving the quality of education and training provision, including through innovative learning and teaching methods, and more targeted support for pupils at risk. Some countries plan also structural changes to enhance flexibility of learning pathways and to offer programmes that combine learning and working. However, the impact of such measures often remains low as they are not always complemented with early intervention policies, in particular better access to pre-primary education, and compensatory measures facilitating return to education for drop-outs. Holistic approaches closely coordinated with other relevant policy sectors are often lacking to address all multi-related factors.

More people need to acquire the highest qualifications levels

In many Member States investment in higher education is too low or has even suffered severe cutbacks due to the economic crisis. For a modern and well-performing university system, a total investment of 2% of GDP (public and private funding combined), is the minimum required for knowledge-intensive economies. The modernisation of higher education systems, with tailored curricula, practice and output oriented forms of learning, better governance and funding needs to be accelerated. Incentives for tertiary institutions to enter into cooperation with business and the wider world and opening up higher education institutions to the needs of society, in particular to underrepresented groups remain a challenge.

Similarly, in relation to the vocational education and training the quality and attractiveness at all levels is an important shortcoming.

2.3.Inclusive growth: combating poverty and exclusion

Exclusion from the labour market, poor working conditions and the lack of opportunities to remain and progress on a segmented labour market are major determinants of poverty. The following covers policy priorities as set out in employment guideline 10.

Preventing and fighting poverty through inclusive labour markets

A job is the best safeguard against poverty. The unemployed and the inactive (non retired adults) represent respectively 10% and 21% of the population at-risk-of-poverty or exclusion (with the unemployed facing the highest risk: 58% against 13.5% for the employed). However, the working poor represent 24% of the people at risk-of poverty or exclusion in the EU. It is therefore important that labour market policies aim at ensuring living wages for those in work, by addressing labour market segmentation, low skills, low pay and under-employment (including involuntary part-time working) and at facilitating access to the labour market for lone parents and second earners.

Preventing poverty through adequate and sustainable social protection systems and access to high quality services

Most Member States report that fiscal consolidation measures will impact on social protection systems. Measures such as tightening conditionality, shortening duration, or reducing the level, changing indexation rules of benefit schemes may affect adequacy. On the financing side, exemptions from social insurance and other social security contributions may weaken the sustainability of the schemes, while measures to widen the social insurance base could help. Under these conditions, the efficiency of social spending can be improved through better implementation (e.g. simplification of rules, reduction of administration costs, performance indicators, or addressing fraud and error), but broader strategies to improve efficiency and effectiveness in all areas of social protection are needed, including through a greater emphasis on prevention, the integrated provision of services and enhanced quality of intervention.

Investing in active inclusion strategies

Poor economic conditions and high unemployment create risks of long-term exclusion, affecting the employability and skills of the work force and undermining the mental and physical health of populations. Weak safety nets and a lack of activation measures for the most vulnerable risk aggravating persistent social and labour market exclusion. These need to be reinforced where needed by improving their coverage and adequacy.

Active inclusion strategies combining adequate income support, access to the labour market and social services are needed to prevent long-term exclusion and to increase the efficiency of social spending. For instance, this can be done by linking social assistance to activation measures and access to enabling and personalised services.

Fiscal consolidation and lack of public funding risks affecting the financing and quality of social services that are needed to support the employability of the work force and the sustainable reintegration of the most excluded in society and on the labour markets. In many Member States, ensuring the sustainable financing of social services and the quality of intervention remains a challenge.

In many Member States, more targeted efforts are needed to support specific groups (youth, the disabled, migrants) or to prevent and tackle over-indebtedness, homelessness and housing exclusion. A number of countries intend to promote social innovation and foster public-private partnerships and tap into the potential of the social economy.

Improving labour market prospects for parents will help break the inter-generational transmission of poverty.

Twenty five million children are at risk of poverty or exclusion. Policies to fight child poverty are still at very different stages of implementation and considerable differences in outcomes remain. Experiencing poverty and deprivation in young age affects children’s well-being and can have long term detrimental impacts on their educational achievements and future life chances.

Supporting the labour market participation of parents, including of lone parents and second earners is crucial to fight child poverty. However, such efforts need to be part of broader strategies to support children and families, which include investments in the quality of child care (quality standards, professionalization of staff, etc), early childhood intervention in areas such as health and education, and maintaining or improving income support to families through better targeting and design and a combination of targeted and universal benefits. However, some countries report that fiscal consolidation measures will also negatively affect child and family benefits and other benefits that are important for families (housing).

To make progress on lifting 20 Million of people out of poverty in a period of fiscal consolidation, social welfare systems need to set priorities combining efficiency and fairness. With the prospect of recovery, active inclusion strategies can help to ensure that the benefits of growth and employment are widely shared. Breaking the inter-generational transmission of poverty, starting with children, and ensuring fair chances for everyone is a top priority.

3.The Way forward: striving for more employment

Most Member Sates start move from crisis management to structural reforms….

Looking ahead, according to the Commission's autumn economic forecast, the EU economy, while still fragile, is recovering at a faster pace than previously envisaged, and it seems that the labour market may perform somewhat better this year than previously expected. Against this background, a majority of Member States are likely to move their focus from cyclical demand management to structural reforms.

As highlighted in the Annual Growth Survey, the following priorities in the realm of structural labour market reforms require immediate attention:

Targeted temporary reductions in employer social security contributions, particularly in the cases of newly hired youngsters, women or parents returning to work, older unemployed workers or low income earners, can facilitate transitions into employment with lower financial costs than the costs associated with the unemployment and social benefits which they would receive if not employed.

While ensuring decent pay, enhanced flexible wage adjustment and hiring, including differentiated experience based entry wages accompanied by secondary benefits and access to employment services and training, could help tackle the current high levels of youth unemployment. Improving the responsiveness of wage setting processes to market developments in conjunction with the social partners is also necessary, so that wages properly and promptly reflect labour productivity and ensure the EU's competitiveness position vis-à-vis the rest of the world and inside the EU and Member States.

Tax reforms combined with greater access to services and a wider use of in-work benefits can have important impact in reducing unemployment and inactivity traps. In particular, more effective in-work benefits and tax credits combined with quicker referrals of unemployed young people to appropriate training programmes or apprenticeship schemes can make work more attractive to them. Female employment could also be stimulated by providing more in-kind assistance combined with reducing the marginal effective tax rate of second earners by curtailing family based taxation and out-of-work or means tested benefits. More generally, interlinking tax and benefits so that those eligible for non-employment benefits get an earned income tax credit for income stemming from work can attract the inactive to employment.

Enhancing greater internal flexibility, including the adjustment of work organisation or working time such as short time working arrangements (as operated in the past 18 months). Internal flexibility can be supported effectively by public authority, saving jobs and protecting valuable human capital, but that this entails a considerable public expenditure.

Supporting flexible working arrangements (flexitime, teleworking) for those returning from parental leave could also ease the reconciliation of work and private life and contribute particularly to women’s employment. Extending full-time day-care facilities, especially for children under 3 years old, is essential to ensure that the negative impact of parenthood on employment, mainly affecting women, is strongly reduced. In addition, a more equal take up of parental leave between both parents is necessary to compensate the need to shorten parental leave schemes for countries in which it exceeds 12 months.

Further efforts to eliminate premature retirement schemes and increase the statutory retirement age need to be pursued to increase the participation of older workers in employment. Longer working careers could also be encouraged by a more direct link between later retirement and building up more pension entitlements and promoting measures that foster active and healthy ageing. 

Further reforms to unemployment benefits systems and other benefit schemes should aim at combining efficiency gains and fairness. In particular, reforms should aim at adjusting them with the business cycle; by increasing the duration and coverage in the downturn and the opposite in an upturn, safety nets are reinforced at times when most needed.

Unemployment benefits should be reviewed to ensure that they provide incentives to work. Benefits should be designed to reward return to work for the unemployed through time-limited support, and conditionality linking training and job search more closely to benefits: the mutual responsibilities approach should be the norm, that is, facilitate the access to unemployment benefits combined with increasing the frequency of contacts, strengthened follow-up, monitored job-search efforts and use of sanctions for non-compliance.

Focusing on the reduction of segmentation in the labour market which could be facilitated by altering employment protection legislation, by for instance extending the use of open-ended contractual arrangements with a gradual increase of protection rights to diminish the existing divisions between those holding atypical and permanent contracts.

Despite the current tight fiscal framework, immediate attention needs to be given to maintain and where possible, increase the level of targeted investments and reforms in the education and training sector. It is important to avoid the risk that job opportunities are missed by a large proportion of the young and the low skilled population in a restructured post-crisis labour market with changed job-requirements.

…. while the available fiscal room will influence the prioritization of measures

Stepping up reform measures at times of ambitious fiscal consolidation calls for a careful selection of reforms. The pace of recovery, as well as the available fiscal room to finance policy measures, are very divergent across the Member States.

Social expenditure is likely to reach 30.7% of GDP in 2011, against 27.5% in 2007. This overall figure hides a wide variety of national shares and a great diversity in the capacity of Member States to meet the rising demand for social protection, with large gaps in the safety nets that will need to be reinforced in some countries. Fiscal consolidation will also require a better targeting of social expenditures.

In addition, job creation for the EU will probably continue to be subdued in the near future. This reflects between others the usual lag with which labour markets reacts to a change in economic activity and also the fact there has been substantial labour hoarding during the crisis alongside reductions in working time.

In selecting priorities for reform, Member States will most likely want to prioritise their choices in function of their available fiscal room for manoeuvre and the business cycle position they are in. To this end, the table below may help as it groups the policy priorities according to the amount of public investments required (smaller or larger) and according to policy focus being more short term or longer term.

For example, reducing early retirement schemes (first bullet in the top-left cell) would require less public investments and can be expected to mainly have a longer term effects on employment. On the other hand, reducing non-wage labour costs (bottom-right cell), will require more sizeable public investments and will have more short term effects on reducing unemployment. Going through the table may give an insight which policy priorities are most appropriate for Member States, given their public finance restrictions and labour market situation.

  

|  |  |  |
| --- | --- | --- |
|  | Short term urgency of tackling unemployment | Longer term focus on increasing employment |
| Smaller public investments required | –Support targeted training  –Re-enforce obligations approach in UB systems  –Reduce unemployment traps with in-work benefits  –Improve wage responsiveness | –Reduce early retirement schemes  –Improve exit age and pension rights link  –Align generosity of UB systems with business cycle  –Reconsider EPL to reduce segmentation  –Enhance employment. services cooperation, including with training providers |
| Larger public investments required | –Support internal flexibility, adjustment of work organisation  –Reduce non-wage labour costs/ provide hiring subsidies  – | –Improve fiscal incentives for 2nd earners  –Increase access to childcare facilities  –Modernise education and training system |

As a first milestone the JER will feed into the deliberations of the spring European Council. It will offer guidance to Member States for their full National Reform Programmes. In these, Member States will need to indicate in full what choices they are making. If deemed necessary the Commission will propose and Council will adopt employment recommendations to address the areas insufficiently tackled.

Job creation is vital. Europe 2020 promotes the interaction of employment, innovation, R&D, industrial, and environmental policies to boost jobs growth and reduce social exclusion: the flagships detail how this is to happen. Employment policy makers need to make the right choices. The first imperative is a rapid reduction in unemployment and to put in place effective labour market reforms for more and better jobs.

:   [(1)](#footnoteref1)
    OJ L 308, 24.11.2010, p. 46, “Council Decision of 21 October 2010 on guidelines for the employment policies of the Member States (2010/707/EU)”.
:   [(2)](#footnoteref2)
    Brussels 23 and 24 November 2010.
:   [(3)](#footnoteref3)
    National Accounts Data.
:   [(4)](#footnoteref4)
    LFS data.
:   [(5)](#footnoteref5)
    Tax wedge = (employer SSc + employee SSc + payroll taxes + income tax) / Total Labour Cost.
:   [(6)](#footnoteref6)
    COM (2010) 682, “An agenda for new skills and jobs”.
:   [(7)](#footnoteref7)
    COM(2010) 477, “Youth on the Move”.
:   [(8)](#footnoteref8)
    Council conclusions of 12 May 2009 (2009/C 119/02).

[Top](#document3)

EN

|  |  |
| --- | --- |
|  | EUROPEAN COMMISSION |

Brussels, 12.1.2011

COM(2011) 11 final
  
ANNEXE 1

 

ANNUAL GROWTH SURVEY
  

  
ANNEX 1

PROGRESS REPORT ON EUROPE 2020

ANNUAL GROWTH SURVEY
  

  
ANNEX 1

PROGRESS REPORT ON EUROPE 2020

The presentation of this Annual Growth Survey, which marks the start of the first "European Semester", comes at a turning point for the European Union. Two years on, Europe is slowly emerging from recession. Recovery is gaining strength and pace, although uncertainties remain on sovereign markets and the financial sector is still being repaired and reformed.

As the outlook begins to improve, the time for resolute policy action comes. Bringing Europe out of the crisis has never meant just an orderly return to business as usual. The crisis has exposed fundamental weaknesses of the European economy and revealed growing internal imbalances. Recovery based on sustainable and job creating growth will only be possible if the underlying structural weaknesses are addressed and Europe can use the crisis to trigger a profound transformation of its economic structure.

Yet, while Europe contained and absorbed the impact of the crisis relatively better than other parts of the world, the pace of its recovery from the global turmoil risks being slower. The crisis has further aggravated the labour productivity gap with the US. Price and cost-competitiveness remain problematic. Emerging economies are returning to growth at a faster pace than the EU although some of them also face major economic challenges.

Europe 2020 is the agenda that the EU and its Member States have decided to "help Europe recover from the crisis and come out stronger, both internally and at the international level"
[1](#footnote1)
. Pulling Europe out the crisis requires a coordinated, comprehensive programme of reforms, covering fiscal consolidation, return to sound macro-economic conditions and front loading growth-enhancing measures.

The EU and its Member States have the collective responsibility of undertaking the necessary – but difficult– structural, forward looking reforms at the same time as they put the fiscal situation in order and restore healthy macro-economic conditions.

Europe needs to step up coordination of reform and economic policies to ensure that macro-economic adjustment, fiscal consolidation and policy reforms go together. While fiscal consolidation is an essential pre-requisite for growth, it is not sufficient to drive growth. In the absence of pro-active policies, potential growth is likely to remain weak in the coming decade. Growth will depend crucially on the environment for industry and business, in particular SMEs. Without growth, fiscal consolidation will be an even bigger challenge.

The June 2010 European Council introduced the concept of a "European Semester", bringing together macro-economic policy developments and structural reforms under Europe 2020. The "European Semester" is a time-window in the first half of each year in which Member States reporting under the Stability and Growth Pact and reporting under the Europe 2020 Strategy are aligned and policy guidance and recommendations are given to Member States before national budgets are finalised. This will strengthen the ex ante dimension of economic policy coordination and surveillance in the EU, making it possible to combine the benefits of a common agenda at EU level and of tailor-made action at national level. In this way, the EU can draw timely lessons from national developments and Member States can incorporate the European perspective and guidance into their national policies for the following year.

In this new policy coordination cycle, each year the Commission will present, in the Annual Growth Survey, its assessment of the main economic challenges facing the EU and recommend priority action to address them. Based on this input, the Spring European Council will give guidance on the main challenges ahead. Taking this guidance into account, Member States will then prepare their medium term budgetary strategies in their Stability or Convergence Programmes and will set out in their National Reform Programmes the measures needed to move towards the Europe 2020 targets and to address obstacles to growth. Both documents will be submitted simultaneously by mid-April. In the closing stage of the "Semester", based on recommendations from the Commission, the Council will issue country-specific policy guidance before the summer. Member States will thus be able to factor in these contributions when preparing their budgets for the following year.

In this first "European Semester", the Annual Growth Survey focuses on key messages on actions that should be addressed as a matter of priority by Member States. The analysis underpinning the messages is set out in three accompanying reports.

1.Frontloading growth-enhancing initiatives

Action at Member States level is critical in avoiding a "lost decade scenario"…

The survey of the macro-economic and labour market situation across the EU shows that Member States need to act in 2011 and 2012 to avoid a slide into sluggish and job-poor growth (the "lost-decade scenario)". The most urgent task is to break the vicious circle of unsustainable debt, disruption on financial markets and low economic growth at work in some Member States. The first priority is to set budgetary policies back on track while protecting growth-enhancing policies, and to heal the financial sector swiftly to find the path to recovery. The second priority is a rapid reduction in unemployment and putting in place effective labour market reforms for more and better jobs. Tackling these priorities will only be effective if they are backed up by a major effort to kick-start growth at the same time.

Successful reforms will consist in improving the functioning of the labour and product markets, stimulating innovation and improving the framework conditions to do business in Europe. This will attract greater private-sector investment, which in turn will help enhance the quality of public finances. On the labour market side, reform efforts should focus on tackling low labour market participation by certain groups and the poor functioning of the labour market. Such policies would also have a positive impact on budgetary consolidation, by generating higher tax revenues and lower public spending on social transfers, and would help reduce the risk of future macroeconomic imbalances. Structural reforms can generate significant gains even in the short term. Output and employment gains alike are driven by improving framework conditions, product market and labour market reforms.

  

Flagship initiatives and EU levers must be mobilised to support national efforts

EU-level actions will also contribute to raising growth in ways that are smart, sustain able and inclusive. The Commission has mapped out an ambitious agenda, to be delivered by means of seven flagship initiatives as well as parallel action on horizontal policies supporting the strategy.

The Commission has presented the seven flagship initiatives set out in the Europe 2020 Strategy
[2](#footnote2)
. Each of the Flagships addresses specific issues and contains measures dedicated to specific policy areas. Their real significance lies in that fact that they are closely intertwined and mutually supportive. Thus, some key measures, such as the need for a new system of intellectual property rights, are relevant to different flagship initiatives - in this example the Innovation Union, Industrial Policy and the Digital Agenda.

Delivery of the Europe 2020 strategy also relies on the effective mobilisation and refocusing of all the EU instruments and tools to support reforms. To that end, the Strategy calls for action to enhance the single market, the EU budget and the tools for external economic action and to gear them to delivering the Europe 2020 objectives:

–In line with that commitment, the Commission has launched a debate on a future Single Market Act, to re-vitalise the single market and tap into new sources of growth
[3](#footnote3)
 ;

–The Communication on the "EU budget review", sets out general orientations and possible options for how the EU budget can provide support for the Europe 2020 objectives, better reflecting the Strategy's priorities in the EU spending policies
[4](#footnote4)
;

–Finally, the Communication on "Trade, Growth and World Affairs: Trade Policy as a core component of the EU's 2020 Strategy", sets out how trade and investment policy can be a key driver for growth
[5](#footnote5)
.

Priorities for growth at EU level

The Europe 2020 Strategy presents a wide range of integrated policy reforms to be implemented in the coming years. To match the scale and urgency of the challenge to accelerate economic recovery and job creation, in 2011 and 2012, EU efforts will need to concentrate on the adoption of those measures that can most directly support Member States reform actions, do not require large public investments and have the greatest impact on growth and job creation. Therefore, the Commission will focus on a number of priority EU level measures to boost growth. These measures, selected from policies in the flagship initiatives, should have clear economic benefits in the short/medium run and lend themselves to relatively fast adoption. For example, priority should be given to taking the Single Market to a new stage by tapping the full potential of the services sector, attracting private capital to finance fast-growing innovative companies, modernising standard setting and intellectual property regimes, and creating cost-effective access to energy. The Commission will also propose measures in the field of VAT, common consolidated corporate tax base and energy taxation to improve tax environment of businesses, fight against double taxation and deliver on the EU climate and energy agenda.

The importance of services sectors themselves, and as input providers to other sectors, makes a stronger internal market in services an important driver of growth and job creation for EU economies. The full implementation of the Services Directive will increase competition, modernise the regulatory framework and advance significant structural reforms. Further action should be taken to deepen the internal market for services.

Measures promoting more open and more efficient public procurement can substantially reduce costs for the public sector and foster competition in the relevant markets. The efficient use of the resulting savings may have sizable macroeconomic benefits. Better access to public procurement markets in third countries may also produce additional gains in Europe.

Better infrastructure in sustainable energy, transport and information technology (in particular broadband technology) can help promote growth and jobs, in line with the long-term decarbonisation objectives. In this perspective, recourse to innovative financing including EU project bonds can contribute to the adjustment capacity of the economy.

At the microeconomic level, greater competition in both transport and energy sectors could lead to an increase in economic efficiency as a result of the entry of new suppliers and lower prices, and a more rational use of labour and capital via innovation. At macroeconomic level, these measures might lead to an increase in economic activity since the gains in the transport and energy sectors can spread to the rest of the economy because of the importance of these inputs in the production costs of other activities.

Industry and manufacture are a major source of private sector innovation and technological development and provide the majority of EU exports. Their recovery is essential for economic growth. At the same time, a well functioning single market for environmental goods and services offer major opportunities for growth, innovation and jobs.

When it comes to standard setting, being the first-mover globally is of the essence. Therefore, the Commission will propose measures to speed up and modernise standard setting in Europe, including for ICT. In the fast-evolving and interconnected field of ICT, this is indeed a particular challenge. The Commission will also develop EU-wide specific standards to help emerge a market for innovative, resource efficient and low carbon products and technologies.

To facilitate cross-border transactions in the Single Market, the Commission will in addition present, in 2011, a user-friendly legal instrument on European Contract Law that businesses and consumers can choose for their transactions in the Single Market and a regulation that will simplify the cross-border recovery of debt, including by means of bank attachments. This should help overcome the present situation in which only 37% of cross-border debt can be recovered in the EU.

In order to unlock the current situation where content available online can't always be accessed lawfully cross-border within the Union, the Commission will put forward a European framework for intellectual property that will boost e-commerce and the digital industries in particular.

Concerning access to finance, especially for SMEs and innovative start-ups, a package of measures such as the venture capital passport aiming to remove cross-border barriers, including tax obstacles arising from diverging national regulations can contribute to reducing financing costs for start-ups by means of lower risk premia and thus foster innovation. The Commission will also address the question of attracting long-term foreign investors to the EU.

2.First steps towards the Europe 2020 targets

The June 2010 European Council, which adopted the Europe 2020 Strategy and its five EU-headline objectives, called on Member States to act now "to implement these policy priorities at their level. They should, in close dialogue with the Commission, rapidly finalise their national targets, taking account of their relative starting positions and national circumstances, and according to their national decision-making procedures. They should also identify the main bottlenecks to growth and indicate, in their National Reform Programmes, how they intend to tackle them".

In the autumn of 2010, Member States, in close co-operation with the Commission, worked on setting national targets and on developing strategies for their implementation. They were invited to present by mid November, in a draft version, their National Reform Programme ("NRPs"), indicating their envisaged national targets and the necessary reforms to reach these targets and remove long-standing barriers to growth. The fact that each Member State sets its own level of ambitions as regards the overall Europe 2020 targets is an important element of this strategy, ensuring that national targets are "politically owned", i.e. subject to an internal political debate.

Except for two Member States, all other Member States have set themselves national targets. In some cases, they presented only provisional targets or qualitative objectives. Furthermore, given the preliminary nature of the reflection, some targets are drafted as ranges or as "minimum targets" based on current policies.

Although no final conclusions can be drawn from the preliminary figures provided in the draft NRPs, some trends of general relevance can be identified. There is a risk of a relatively low level of ambition in setting national targets and of an excessive focus on the short term, with insufficient attention to designing reform trajectories covering the whole period up to 2020. The purpose of the targets is not just numerical – it is to generate momentum with each Member State committing to stretch itself to make measurable progress in key areas which are summarised by the five headline targets. In most cases, the aggregation of the provisional national targets shows that the EU still has some way to travel to meet the EU headline targets agreed by the European Council. It is understandable that for some Member States it may be difficult to take ambitious commitments in a period of economic uncertainties. However, in the logic of long-term National Reform Programmes, what is important is to set a trajectory which takes into account the current circumstances, but aims to achieve the right result at the end of the period. Recognising both that this is the first year of a new approach and the particular challenges for many Member States of raising their level of ambition at a time of fiscal consolidation, the Commission proposes to make a mid-term review in 2014. This will enable the EU to analyse the reasons whether the desired level of progress can be achieved and to take additional measures if needed.

The following section provides a preliminary overview of the draft national targets as they stand today, presented in a table in annex. By April 2011, all Member States are expected to commit to precise national targets, covering all five EU-headline targets. As from next year, the "Annual Growth Survey" will monitor progress towards the headline targets more closely, reporting on the finalised national targets.

2.1.Employment

The EU headline target is a 75% employment rate for women and men aged 20 to 64 by 2020, to be achieved through greater participation of young people, older workers and low skilled workers as well as the better integration of legal migrants. Low labour market participation is one of Europe's longstanding key structural weaknesses. Before the crisis, Europe's employment rates were several percentage points lower than those of the US and Japan. The crisis has dramatically worsened unemployment, while demographic changes threaten to further shrink the available workforce. Increasing labour market participation would have a significant impact on Europe's future growth.

The analysis of the draft NRPs shows that Member States have taken ownership of this target and have to a large extent set out to tackle labour market bottlenecks. Most Member States have chosen a point target, but several countries have proposed a target range, namely Austria, Belgium, Cyprus, Italy and Slovakia. The Netherlands and the United Kingdom have not yet set an official national target. The targets proposed range from 62.9% (Malta) to 80% (Sweden).

If all Member States could achieve their stated national target for 2020 or achieve the lower value of their target range, the average EU employment rate among those Member States that have set a national target would be 72.4%. If all Member States could achieve the upper value of their target range, this EU average employment rate would be 72.8%. In other words, based on present national employment rate targets, the EU as a whole would fall short of the 75% target by 2.2-2.6 percentage points.

2.2.Research & Development

Both in level of resources invested, in particular private sector resources, and effectiveness of spending Europe, lags significantly behind the US and other advanced economies. Such a gap negatively affects growth perspectives, in particular for the sectors holding the largest growth potential. The Europe 2020 target requires that conditions for R&D investment are improved, with the view to raising the combined private and public investment level to at least 3% of GDP.

The compilation of all provisional national targets indicates an aggregated level of 2.7 or 2.8% of GDP, which is below the expected target of 3% GDP invested in R&D, but which represents a significant effort, particularly in the current budgetary context. Some Member States have taken steps to increase significantly their public investment in research, innovation and education, recognising that these investments will fuel future growth. Some Member States indicated high but nonetheless realistic targets, despite the difficulty of committing to the private component of their R&D target.

Another closely related aspect of the EU's performance in innovation is the share of fast-growing, innovative companies in the economy
[6](#footnote6)
. Member States need to start gearing their reforms to removing obstacles to the growth of innovative companies, including by improving framework conditions and access to finance.

2.3.Climate action and energy policy

Achieving sustainable growth means transforming Europe into a competitive, resource efficient, low carbon economy and society. Such a vision underpins the threefold target set out in Europe 2020: reducing greenhouse gas emissions by at least 20% compared to 1990 levels or by 30% if the conditions are right; increasing the share of renewable energy sources in the EU final energy consumption to 20%; and increasing by 20% energy efficiency.

National targets already exist regarding renewable energy sources and the reduction of greenhouse gas emissions.

Regarding energy efficiency, the analysis of the draft NRPs shows that, at this stage, Member States have taken limited ownership of this target. Some Member States did not provide indications on this target while others used different methodologies to express their national targets. Due to these differences and to incomplete information, clarification of the objectives to be reached by each Member State is urgently needed.

However, preliminary assessment shows that cumulative efforts would fall significantly short (reaching less than 10%) of the EU overall target of reducing energy consumption by 20% by 2020. This is worrying because energy efficiency is the most cost effective way to reduce emissions, improve energy security and competitiveness and to make energy consumption more affordable as well as create employment. Similarly, in the field of climate mitigation, the existing and planned measures are not yet sufficient to reach the 2020 headline targets.

2.4.Education and training

Promoting innovation and growth also requires an appropriate supply of skilled and trained workforce. A highly skilled population is also essential to stem the challenges of demographic change and social inclusion in Europe. Investing in quality education, training and lifelong learning is therefore a key dimension for a smart, sustainable and inclusive growth.

Europe 2020 sets a twin headline target in respect of education, namely that by 2020 less than 10% of the population aged 18-24 should have left school early; and that at least 40% of the EU's young adults (30-34 years) should have completed tertiary or equivalent education. The analysis of the draft NRPs reveals that on average greater attention is paid to the analysis of current challenges and possible answers than to defining concrete reform plans and measures. In most draft NRPs it is unclear whether measures described are launched in response or at least adjusted to the priorities of Europe 2020.

All draft NRPs have set national targets for the reduction of early school leaving and for increasing the number of tertiary graduates, with the exception of United Kingdom (which sets no targets) and the Netherlands (which sets a target for early school leaving but not for tertiary attainment).

For early school leaving, while some Member States have set highly ambitious targets, the overall effort seems likely to result in Europe falling short of the 10% target for 2020. With the targets submitted in the draft NRPs and not including countries that have not yet defined targets (UK for both targets, NL for higher education), a rate of 10.5% early school leavers would be achieved by 2020 thus missing the common European target of 10%. In absolute figures this would mean that in 2020 roughly an additional 200 000 young Europeans would have dropped out from education and training.

Similarly, the currently submitted national targets for tertiary attainment will not be sufficient to reach the overall 2020 target. With a total tertiary attainment rate of 37.3% by 2020 the common European target of 40% will be missed. In absolute figures this would mean that in 2020 there would be roughly 800 000 fewer tertiary graduates aged 30-34 than if the 40% rate was achieved.

2.5.Social inclusion/fight against poverty

There can be no sustainable growth unless its benefits accrue to all segments of the society. Yet, inequality has been growing across Europe in the past decade, with more and more people experiencing poverty and social exclusion. The economic crisis has dramatically increased the number of people falling or risking to fall below the poverty level. Reversing this trend and ensuring that growth and social cohesion go together is a key objective of the Europe 2020 Strategy. The EU headline target aims at reducing the number of Europeans living below the poverty line by 25%, thus lifting at least 20 million people out of poverty. The target is defined on the basis of three indicators
[7](#footnote7)
 which reflect the multiple facets of poverty and exclusion across Europe. It extends the original concept of relative income poverty to cover the non monetary dimension of poverty and situations of exclusion from the labour market. It also reflects the diversity of situations and priorities across Member States.

Preliminary analysis shows that relative poverty remains a main challenge in most EU countries. Improving overall living standards can significantly help reducing poverty and exclusion in countries with lower GDP per capita and high material deprivation rates. Fighting labour market exclusion is a priority for all countries, including for those with developed welfare systems that protect people relatively well from income poverty, but provide weak incentives and/or little support for the labour market participation of those furthest away from the labour market.

In their draft NRPs, a majority of countries have set targets, although they do not meet yet the level of ambition agreed by the European Council. Most Member States have used the three agreed indicators to define the EU target, thereby acknowledging that broad strategies are needed to tackle poverty in all its dimensions. However, the level of ambition should be raised to reflect the interaction between the targets, in particular the link between labour participation and poverty. Several countries have still not set their target. It is urgent that these countries rapidly finalise the process.

3.National Reform Programmes

3.1.Draft National Reform Programmes

The Europe 2020 targets are a core element of the National Reform Programmes, which should represent a much broader and comprehensive reform agenda. Member States were invited to transmit their draft NRPs by 12 November 2010 and to include the following four building blocks:

–A medium term macro-economic scenario: All draft NRPs contain a macro-economic scenario and dedicate particular attention to macro-structural obstacles to growth, in particular in the fiscal area.

–The national targets translating the Europe 2020 headline targets: most draft NRPs included them (see above).

–An identification of the main obstacles to growth and jobs. The draft NRPs most of the time confirmed the obstacles to growth identified by the EPC in June 2010 and by EMCO in October 2010. In some cases, few additional challenges were included.

–Main measures to "frontload" growth-enhancing initiatives. Almost all drafts were silent on the frontloading of structural reforms to boost sustainable growth in the medium-to-long term.

The draft NRPs vary in terms of detail and degree of preparation, some being more complete and further advanced than others. As a general feature, the pressures on potential growth and employment are not fully acknowledged in the draft NRPs. Macro-economic scenarios presented by Member States tend to be overly optimistic compared to the Commission's assessment. At the same time, employment scenarios are too pessimistic as they are influenced by negative short term factors. A preliminary review of the draft NRPs shows the following main issues:

–A large majority of Member States face significant fiscal challenges in reducing structural deficits, lowering often high debt ratios and containing the costs of ageing population. In many countries, strengthening the quality of public finances and the institutional framework via better fiscal control would help sustainability.

–Most Member States highlighted the need to ensure a stable and well functioning financial sector, capable of providing financial intermediation without State support. The challenges in this area include household-over indebtedness, ensuring efficient regulatory supervision and a well functioning banking sector.

–Addressing competitiveness and current-account imbalances is relevant for all Member States, but particularly for the smooth functioning of EMU. Within the euro area, this is reflected actions to reduce intra euro area imbalances, e.g. strengthening of domestic demand conditions, relative wage and price adjustments, greater wage flexibility, and the reallocation of resources from the non-tradable to the tradable sector.

–All Member States also have identified the need to improve labour market participation and/or conditions for employment, and to tackle poor functioning of labour markets and labour market segmentation, insufficient occupational and geographical mobility, insufficient incentives to work and the exclusion of different age groups.

–Most Member States also acknowledged challenges relating to productivity improvements and facilitating the transition towards higher value added production and exports; these relate to higher capital investment, ensuring an efficient regulatory business environment, administrative efficiency as well promoting higher degrees of competition.

–Finally, Member States recognise a need to promote innovation capacity and to strengthen investment in human capital with a view to raising growth potential and to reduce mis-matches on the labour market.

However, at this stage, the policies presented in the draft NRPs fall short of providing a clear response to the important macro-economic challenges and growth bottlenecks. The policy actions often refer to channels through which the challenges could be addressed rather than to concrete measures. While more detail was provided regarding fiscal consolidation measures, little attention was given to structural reforms that could boost growth in the medium and long run. Many draft NRPs provide an overview of planned measures that would allow Member States to reach their national targets. The list of measures however often included already implemented measures or measures that are already quite advanced. Planned policy action was often presented in rather vague terms, with little details on the precise nature of the measures, the implementation timeline, the expected impact, the risk of partial or unsuccessful implementation, the budgetary cost and the use of EU Structural Funds. An exception to this trend was the programmes presented by Member States receiving financial assistance, which presented more detailed measures.

3.2.Co-operating towards final National Reform Programmes

The time between the submission of the draft and final NRPs will be used for an exchange between the Commission and the Member States and for peer review within the Council. In November 2010, the EMCO peer reviewed the employment elements of the draft NRPs and in December, the EPC looked at the macro-economic elements in a horizontal review.

After the adoption of this Annual Growth Survey, which provides overall guidance to the Member States for finalising their NRPs, the Commission will again contact Member States bilaterally to discuss the finalisation of their NRPs in the light of this guidance and their particular circumstances.

In parallel national consultations should be finalised in order to secure strong ownership of the NRPs. These consultations should involve political actors (national parliaments, regional and local authorities) as well as social partners and other stakeholders in the preparations. In only a limited number of cases have the draft NRPs already been the subject of consultations at different levels. While some Member States indicated that they would engage in consultations before finalising their NRPs, most have not provided information on the consultation process.

The insufficient attention to structural reforms that could boost growth in the medium and long run is worrying. In the absence of such growth-enhancing policies, consolidation strategies could turn out to be self-defeating.

The objective is that the final NRPs reflect a reform programme targeted and politically owned by the Member States, and by different actors within the Member States, while at the same time following certain common criteria necessary to allow for synergies and better monitoring. In particular, it is expected that the final NRPs should provide:

–potential and effective medium-term output growth estimates covering (at least) a four-year horizon. The macro-economic scenarios presented under the 2011 programmes should therefore cover the period up to 2014;

–ambitious and realistic targets covering all five EU-headline targets, accompanied by trajectories until 2020 to reach the targets, and a mid-term review in 2014;

–more detail on long-term measures, going beyond those already in preparation, including a coherent plan for reforming research and innovation systems, based on an analysis of the individual Member State's strengths and weaknesses
[8](#footnote8)

–budgetary implications of reforms – including where appropriate clearer indications of national progress in and plans to use the Structural Funds to support growth friendly investment;

–measures to remove the bottlenecks to growth, including details on the time-line, expected effects and budgetary consequences. These will address growth drivers or framework conditions to growth and can include e.g. measures to support the internal market, the business environment, growth and internationalisation of SMEs, structural reforms in services markets (e.g. the Services Directive) the uptake of a digital society and economy, better consumer conditions etc. The benefits, notably in terms of productivity, from a wider uptake of information and communication technologies are well-known and therefore deserve in many cases targeted policy measures;

–information on the involvement and contributions of the different stakeholders. Communication efforts to bring reform programmes closer to stakeholders and citizens, as well as mechanisms set up in the Member States to monitor the implementation of reforms, should also be mentioned in this context.

4.Conclusions

For this first Annual Growth Survey, monitoring and assessing progress poses a special challenge, given that the Europe 2020 Strategy was put in place very recently. In the months following adoption of the Strategy and its endorsement by the European Council in June 2010, action at EU level naturally focused on laying down the framework and in launching the seven flagship initiatives. Member States, in turn, have begun to take the first steps to set in motion their own reform programmes. Taking into account the novel nature of the first cycle of implementation of Europe 2020, Member States presented draft National Reform Programmes, foreshadowing the final documents to be submitted by April 2011.

The thematic review shows that while there is a general awareness of the urgency of fiscal consolidation and of the need to restore order in the financial and banking sector, much less investment has been made in defining the reforms needed to address imbalances and re-start growth and job creation. This is also the case as regards the preliminary national targets that show the EU is likely to fall short of the agreed headline targets at EU level. Nonetheless, the preliminary data shows that the gaps are not so large that they cannot be closed by determined action in the coming years. What matters most in the early years is to generate momentum towards targets that stretch each Member State, no matter what its starting point. Priority should be given in the next months to progress on structural reforms by taking action at national level and by frontloading growth enhancing measures within the flagship initiatives, in line with the key messages of this Annual Growth Survey.

Managing the return to fiscal discipline and macro-economic stability, while delivering structural reforms, will be main themes for the "European Semester". Based on the conclusions of the March European Council, the Commission will assess the NRPs and the Stability and/or Convergence Programmes by June 2011 and will make integrated country specific recommendations to Member States, based on the Europe 2020 integrated guidelines and provide guidance on budgetary policy under the Stability and Growth Pact
[9](#footnote9)
. The recommendations and the Council Opinions on the Stability and Convergence Programmes will be adopted by the Council in July 2011. It will then be for the EU to act and for Member States to turn these recommendations and opinions in concrete decisions when setting their national budgets for 2012 in the second half of the year.

Annex: 
  
Provisional Europe 2020 Targets
[10](#footnote10)

|  |  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Member States' draft targets | Employment rate (in %) | R&D in % of GDP | Emissions reduction targets (compared to 2005 levels) [11](#footnote11) | Renewable energy | Energy efficiency – reduction of energy consumption in Mtoe [12](#footnote12) | Early school leaving in % | Tertiary education  in % | Reduction of poverty in number of persons [13](#footnote13) |
| AT | 77-78% | 3.76% | -16% | 34% | 7.2 | 9.5% | 38% (including ISCED 4a, which currently is at about 12%) | 235.000 |
| BE | 71-74% | 2.6-3.0% | -15% | 13% | No target in NRP | 9.5-10% | 46-48% | 330.000-380.000 |
| BG | 76% | 1.5% | 20% | 16% | 3.2 | 11% | 36% | 260.000 (500.000) |
| CY | 75-77% | 0.5% | -5% | 13% | 0.46 | 10% | 46% | 18.000 |
| CZ | 75% | 2.70 | 9% | 13% | No target in NRP | 5.5% | 32% | 30.000 |
| DE | 75% | 3% | -14% | 18% | 37.7 | Less than 10% | 42% (including ISCED4 which currently is at 11.4) | 330.000  (660.000) |
| DK | 78.5% | 3% | -20% | 30% | No target in NRP | Less than 10% | 40% | 22.000 |
| EE | 76% | 3% | 11% | 25% | 0.49 (end-use only) | 9.5% | 40% | 49.500 |
| EL | 70% | 2% | -4% | 18% | 5.4 | 10% | 32% | 450.000 |
| ES | 74% | 3% | -10% | 20% | 25.2 | 15% | 44% | No target in NRP |
| FI | 78% | 4% | -16% | 38% | 4.21 | 8% | 42% | 150.000 |
| FR | 75% | 3% | -14% | 23% | 43 | 9.5% | 50% | 1.600.000 by 2015 |
| HU | 75% | 1.8% | 10% | 13% | No target in NRP | 10% | 30.3% | 450.000-500.000 |
| IE | No target in NRP | No target in NRP | -20% | 16% | 2.75 | 8% | 60% | 186.000 |
| IT | 67-69% | 1.53% | -13% | 17% | 27.9 | 15-16% | 26-27% | 2.200.000 |
| LT | 72.8% | 1.9% | 17% | 23% | 0.74 (end-use only) | 9% | 40% | 170.000 |
| LU | 73% | 2.6% | 5% | 11% | 0.19 (end-use only) | Less than 10% | 40% | 3.000 |
| LV | 73% | 1.5% | -16% | 40% | 0.67 | 13.4% | 34-36% | 121.000 |
| MT | 62.9% | 0.67% | 14% | 10% | 0.24 | 29% | 33% | 6.560 |
| NL | No target in NRP | No target in NRP | 1% | 14% | No target in NRP | Reduce the number of ESL to 25 000   (= down to 9%) | No target in NRP | No target in NRP |
| PL | 71% | 1.7% | 19% | 15% | 13.6 | 4.5% | 45% | 1.500.000-2.000.000 |
| PT | 75% | 2.7-3.3% | -17% | 31% | No target in NRP | 10% | 40% | 200.000 |
| RO | 70% | 2% | 4% | 24% | 10 | 11.3% | 26.7% | 580.000 |
| SE | 80% | 4% | 13% | 49% | No target in NRP | 10% | 40-45% | No target in NRP |
| SI | 75% | 3% | 17% | 25% | No target in NRP | 5.1% | 40% | 40.000 |
| SK | 71-73% | 0.9-1.1% | 5% | 14% | 1.08 (end-use only) | 6% | 30% | 170.000 |
| UK | No target in NRP | No target in NRP | -16% | 15% | No target in NRP | No target in NRP | No target in NRP | Existing child poverty target |
| Estimated EU | 72.4-72.8% | 2.7-2.8% | -20%  (compared to 1990 levels) | 20% | less than 10% | 10.5% | 37.3% |  |
| EU headline target | 75% | 3% | -20%  (compared to 1990 levels) | 20% | 20% increase in energy efficiency | 10% | 40% | 20.000.000 |

:   [(1)](#footnoteref1)
    European Council conclusions, 17 June 2010.
:   [(2)](#footnoteref2)
    Digital Agenda for Europe (COM(2010) 245 final/2, 19.5.2010), Youth on the Move (COM(2010) 477, 15.9.2010), Innovation Union (COM(2010) 456, 6.10.2010), An industrial policy for the globalisation era (COM(2010) 614, 27.10.2010) An agenda for new skills and jobs. A European Contribution towards full employment (COM(2010) 682, 23.11.2010), A European Platform against Poverty and Social Exclusion: A European Framework for Social and Territorial Cohesion (COM(2010) 758, 15.12.2010). The "Resource efficient Europe" Flagships will be presented by the end of January 2011
:   [(3)](#footnoteref3)
    "Towards a Single Market Act" - COM(2010) 608, 27.10.2010.
:   [(4)](#footnoteref4)
    "The EU Budget Review" - COM(2010) 700, 19.10.2010.
:   [(5)](#footnoteref5)
    "Trade, Growth and World Affairs: Trade Policy as a Core Component of the EU's 2020 Strategy - COM(2010) 612, 9.11.2010.
:   [(6)](#footnoteref6)
    The Commission is developing such an indicator in response to the request of the European Council - COM(2010) 546, 6.10.2010, p. 29.
:   [(7)](#footnoteref7)
    The at-risk-of poverty rate, severe material deprivation and people living in households with very low work intensity.
:   [(8)](#footnoteref8)
    As an aid to carrying out this analysis, Member States are encouraged to use the "self assessment toold" provided as part of the Innovation Union Flagship Initiative, COM(2010) 546 (final)
:   [(9)](#footnoteref9)
    Council recommendation of 13 July 2010 on broad guidelines for the economic policies of the Member States and of the Union (2010/410/EU) and Council Decision of 21 October 2010 on guidelines for the employment policies of the Member States (2010/707/EU), which together form the Europe 2020 Integrated Guidelines.
:   [(10)](#footnoteref10)
    The final national targets will be set out in the National Reform Programmes in April 2011.
:   [(11)](#footnoteref11)
    The national emissions reduction targets defined in Decision 2009/406/EC (or "Effort Sharing Decision") concerns the emissions not covered by the Emissions Trading System. The emissions covered by the Emissions Trading System will be reduced by 21% compared to 2005 levels. The corresponding overall emission reduction will be -20% compared to 1990 levels.
:   [(12)](#footnoteref12)
    It should be noted that the national projections also vary as to the base year(s) against which savings are estimated.
:   [(13)](#footnoteref13)
    Estimated contribution to EU target.

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