CELEX: 52011SC0804
Language: en
Date: 2011-06-07 00:00:00
Title: Recommendation for a COUNCIL RECOMMENDATION on the National Reform Programme 2011 of Estoniaand delivering a Council opinionon the Stability Programme of Estonia, 2011-2015

EUROPEAN COMMISSION
                                  Brussels, 7.6.2011
                                  SEC(2011) 804 final
                   Recommendation for a
           COUNCIL RECOMMENDATION
   on the National Reform Programme 2011 of Estonia
             and delivering a Council opinion
    on the Stability Programme of Estonia, 2011-2015
                   {SEC(2011) 715 final}
EN                                                    EN
 ---pagebreak---                                            Recommendation for a
                                    COUNCIL RECOMMENDATION
                         on the National Reform Programme 2011 of Estonia
                                     and delivering a Council opinion
                          on the Stability Programme of Estonia, 2011-2015
   THE COUNCIL OF THE EUROPEAN UNION,
   Having regard to the Treaty on the Functioning of the European Union, and in particular
   Article 121(2) and 148(4) thereof,
   Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of
   the surveillance of budgetary positions and the surveillance and coordination of economic
   policies1, and in particular Article 5(3) thereof,
   Having regard to the recommendation of the European Commission2,
   Having regard to the conclusions of the European Council,
   Having regard to the opinion of the Employment Committee,
   After consulting the Economic and Financial Committee,
   Whereas:
   (1)     On 26 March 2010, the European Council agreed to the European Commission's
           proposal to launch a new strategy for jobs and growth, Europe 2020, based on
           enhanced coordination of economic policies, which will focus on the key areas where
           action is needed to boost Europe’s potential for sustainable growth and
           competitiveness.
   (2)     On 13 July 2010, the Council adopted a recommendation on the broad guidelines for
           the economic policies of the Member States and the Union (2010 to 2014) and, on 21
           October 2010, adopted a decision on Guidelines for the employment policies of the
           Member States,3 which together form the “integrated guidelines”. Member States were
           invited to take the integrated guidelines into account in their national economic and
           employment policies.
   1
           OJ L 209, 2.8.1997, p.1.
   2
           OJ C , , p. .
   3
           Maintained for 2011 by Council Decision 2011/308/EU of 19 May 2011.
EN                                                     2                                         EN
 ---pagebreak---    (3) On 12 January 2011, the Commission adopted the first Annual Growth Survey,
       marking the start of a new cycle of economic governance in the EU and the first
       European semester of ex-ante and integrated policy coordination, which is anchored in
       the Europe 2020 strategy.
   (4) On 25 March 2011, the European Council endorsed the priorities for fiscal
       consolidation and structural reform (in line with the Council’s conclusions of 15
       February and 7 March 2011 and further to the Commission’s Annual Growth Survey).
       It underscored the need to give priority to restoring sound budgets and fiscal
       sustainability, reducing unemployment through labour market reforms and making
       new efforts to enhance growth. It requested Member States to translate these priorities
       into concrete measures to be included in their Stability or Convergence Programmes
       and National Reform Programmes.
   (5) On 25 March 2011, the European Council also invited the Member States participating
       in the Euro Plus Pact to present their commitments on time for their inclusion in their
       Stability or Convergence Programmes and their National Reform Programmes.
   (6) On 29 April 2011, Estonia submitted its 2011 Stability Programme covering the period
       2011-2015 and its 2011 National Reform Programme. In order to take account of the
       interlinkages, the two programmes have been assessed at the same time.
   (7) Estonia was particularly hard-hit by the global financial crisis, which amplified the
       reversal of the domestic real estate and consumption boom. The cumulative loss of
       GDP reached 19% in 2008-09 and the unemployment rate increase almost four fold to
       16.8% by 2010. However, the economy has bounced back quickly and the real GDP
       growth is expected to accelerate in the coming years. The recovery has been driven
       mainly by exports, but domestic demand is gaining ground mostly through strong
       investment. The improved growth outlook has provided a positive impetus to the
       labour market. Employment rate has risen markedly recently, although long-term
       unemployment remains high. While inflation accelerated compared to last year, it is
       expected to moderate in line with developments in the global commodity prices.
   (8) Based on the assessment of the Stability Programme pursuant to Council Regulation
       (EC) No 1466/97, the Council is of the opinion that the macroeconomic scenario
       underpinning the budgetary projections is plausible. The medium-term budgetary
       strategy of the programme is to achieve the medium-term objective, defined as
       structural balance, by 2013, and to maintain it throughout the rest of the programme
       period, by aiming at structural surpluses in 2013 and beyond. The headline general
       government budgetary position is projected to reach surplus by 2013, while in the
       short term the headline deficit is expected to deteriorate somewhat due to the one-off
       impact of environmental investments on carbon credits. The budgetary adjustment of
       the programme relies on holding back growth in government consumption
       expenditure. The programme provides some information regarding measures to reach
       the targeted position and the previous track record of meeting the fiscal targets
       mitigates the risk of missing them in the coming years. In particular, the envisaged
       reforms seek efficiency gains in several areas, such as education and active labour
       market policies. Risks to the budgetary targets thus appear to be broadly balanced.
       Nevertheless, it will be important for the upcoming budgets to provide the key details
       of measures to further enhance the efficiency of public spending, thus underpinning
       the implementation of the Stability Programme.
EN                                             3                                               EN
 ---pagebreak---    (9)  Long-term unemployment remains high and unemployment rates across regions have
        been rather diverging and persistent. Despite considerable increases since 2009,
        financing of active labour market policies remains one of the lowest in the EU, and
        results in a low share of the unemployed receiving active support. The Estonian labour
        market is relatively flexible, reinforced by the decision to postpone increases in the
        unemployment insurance benefit coverage in the Labour Law package to 2013.
        Despite this flexibility, Estonia has a relatively high labour tax wedge, which could
        have negative consequences for labour supply and demand. This problem is
        particularly acute in view of the high unemployment rate of the young and the low-
        skilled, who are exposed to a risk of poverty. Reforms envisaged to reduce social
        insurance contributions address the right issues, but need to take place while
        strengthening the budgetary position. There is potential for efficiency gains through a
        stricter means testing to better target other benefits.
   (10) Estonia’s resource intensity is among the highest in the EU. This is partly the result of
        a production structure concentrated on energy-intensive sectors and industries.
        Another determinant is the low energy efficiency performance at sectoral level. In its
        NRP, Estonia indicates a national energy savings target of 9% in 2016 compared to
        projections (16% by 2020 in the NRP). However, this does not cover major sectors
        and areas of savings potential, such as buildings and transport. Besides, there is little
        information on how and when measures will be implemented and their expected
        results. Hence, improving energy efficiency has further potential. Increasing energy
        efficiency is likely to have a positive impact on the environment and on the security of
        energy supply, but also to reduce inflationary pressures and improve cost
        competitiveness.
   (11) Notwithstanding the overall high share of people with tertiary education, further
        reform of the education system at all levels could help address skill gaps, a large
        number of schools and tertiary education institutions, and a lack of focus in
        professional education resulting in the high share of people with no professional
        qualification (32% in 2009). Given current demographic trends, improving the quality
        of human capital is important for raising potential growth in the medium term. In
        particular, ensuring that tertiary education is aimed at fields of key importance to the
        economy (e.g. engineering) could support the ongoing rebalancing towards tradable
        sectors. Implementing the education reform would also contribute to improving public
        sector efficiency, as the current system of managing education is too fragmented at the
        local level, leading to both inefficient subsidies and low-quality services.
   (12) Estonia has made a number of commitments under the Euro Plus Pact4. These contain
        measures to address public finance sustainability, employment, and competitiveness.
        On the fiscal side, the Pact commits to achieve budget balance by 2013 and a surplus
        in 2014; to include a public sector budget balance requirement in the state budget base
        law; as well as first steps to reform special pension schemes. In order to promote
        employment, some tax incentives are envisaged. For competitiveness, measures focus
        on innovation, higher education, and public service reform. The Pact commitments
        reflect the agenda presented in the National Reform Programme. The objectives set out
        in the Pact would benefit from further measures to strengthen labour market policies,
   4
        More details on the commitments made under the Euro Plus Pact can be found in SEC(2011) 715.
EN                                                 4                                                 EN
 ---pagebreak---          as well as addressing resource efficiency and the energy market. The Euro Plus Pact
         commitments have been assessed and taken into account in the recommendations.
   (13)  The Commission has assessed the Stability Programme and National Reform
         Programme, and the Euro Plus Pact commitments5. It has taken into account not only
         their relevance for sustainable fiscal and socio-economic policy in Estonia but also
         their conformity with EU rules and guidance, given the need to reinforce the overall
         economic governance of the European Union by providing EU level input into future
         national decisions. It considers that while measures to reach the targeted budgetary
         position would have to be specified in forthcoming budgets, the track record of the
         Estonian authorities mitigates the risk of missing the fiscal targets. Further steps
         should be taken to strengthen labour market policies and provide better incentives to
         work, to enhance human capital through a large scale education reform as well as
         addressing resource efficiency and the energy market.
   (14)  In light of this assessment, the Council has examined the 2011 Stability Programme of
         Estonia and its opinion6 is reflected in particular in its recommendation under (1) set
         out below. Taking into account the European Council conclusions of 25 March 2011,
         the Council has examined the National Reform Programme of Estonia,
   HEREBY RECOMMENDS that Estonia should take action within the 2011-2012 period to:
   (1)     Achieve structural surplus by 2013 at the latest, while limiting deficit in 2012 to at
           most 2.1% of GDP in 2012, keeping tight control over expenditure and enhancing the
           efficiency of public spending.
   (2)     Take steps to support labour demand, by reducing the tax and social security burden
           in a budgetary neutral way, especially for low and medium-income earners. Improve
           the effectiveness of active labour market policies by targeting measures on young
           people and the long-term unemployed, especially in areas of high unemployment, in
           order to reduce the risk of poverty.
   (3)     Ensure implementation of planned incentives to reduce energy intensity and improve
           the energy efficiency of the economy, targeted on the buildings and transportation
           sectors, including by ensuring better market functioning.
   (4)     While implementing the education system reform, give priority to measures
           improving the quality and availability of pre-school and professional education, and
           strengthen the system of professional qualifications. Focus education outcomes more
           on labour market needs, and provide opportunities for low-skilled workers to take
           part in life-long learning.
   Done at Brussels,
                                                     For the Council
                                                     The President
   5
         SEC(2011) 715.
   6
         Foreseen in Article 5(3) of Council Regulation (EC) No 1466/97.
EN                                                     5                                          EN