THE 2015 EUROPEAN SEMESTER: Targeted policy advice to foster

growth and sustainability

Marco ButiDirector-General for Economic and Financial Affairs

European Commission

26 May 2015

Agenda

1. The May 2015 package

2. Economic situation and policy challenges

3. 2015 CSRs

4. Next steps

2

3

1. The May 2015 package

What's in the May Package?

• A Communication sets out the new approach to the 2015 European Semester

• Country-specific recommendations for:

• 26 Member States (not Cyprus or Greece )

• the Euro Area

• Decisions under the Stability and Growth Pact for a few Member States; No action taken under the Macroeconomic Imbalances Procedure

• Technical assessment of the Stability and Convergence programmes (SWDs coming out soon)

4

Countries in the preventive arm

Countries in the corrective arm (EDP)

AT

SK

FR

PT

NL

SI

BE

ES

LU

LV

IT

DE

CY*

EE

EL*

PLUK

CZ

DK

HR

BG

FI

HU

SE

LTRO*

EURO AREA NON-EURO AREA

MT IE

2014-15

2014-15 20152015 20162016

Stability and Growth Pact

*Member States under programme.

20142014 20152015 20162016 20172017

UK

2016-17

2016-17

Member States for which legal steps were adopted by the Commission in the context of the February package.

No effective action Extension of the deadlineNo effective action Extension of the deadline

Member States for which legal steps will be adopted by the Commission in the context of the May package. 5

Rep

ort

1

26

(3)

Rep

ort

1

26

(3)

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2. Economic situation and policy challenges

• Economic tailwinds are breathing extra vitality into an otherwise mild cyclical upswing

• EU GDP growth expected at 1.8% this year, 2.1% next

• Labour markets are slowly improving

• EU unemployment down to 9.2% next year from 9.6% in 2015

• HICP inflation to recover later this year

• Set to increase from 0.1% this year to 1.5% in 2016

• The fiscal outlook continues to improve• Deficit at 2.5% this year and debt on decreasing path

Economic situation

2014 2015 2016 2014 2015 2016 2014 2015 2016

Germany 1.6 1.9 2.0 0.8 0.3 1.8 5.0 4.6 4.4

Ireland 4.8 3.6 3.5 0.3 0.4 1.5 11.3 9.6 9.2

Greece 0.8 0.5 2.9 -1.4 -1.5 0.8 26.5 25.6 23.2

Spain 1.4 2.8 2.6 -0.2 -0.6 1.1 24.5 22.4 20.5

France 0.4 1.1 1.7 0.6 0.0 1.0 10.3 10.3 10.0

Italy -0.4 0.6 1.4 0.2 0.2 1.8 12.7 12.4 12.4

P ortugal 0.9 1.6 1.8 -0.2 0.2 1.3 14.1 13.4 12.6

Euro area 0.9 1.5 1.9 0.4 0.1 1.5 11.6 11.0 10.5

United Kingdom 2.8 2.6 2.4 1.5 0.4 1.6 6.1 5.4 5.3

Real GDP

Overview - the spring 2015 forecast

Inflation Unemployment rate

1999-2007average

2008-2013average 2014 2015* 2016*

IT 1.5 -1.5 -0.4 0.6 1.4EA 2.3 -0.3 0.9 1.5 1.9IT 2.3 2.2 0.2 0.2 1.8EA 2.1 2.0 0.4 0.1 1.5IT 1.4 -0.6 0.1 0.5 0.4EA 1.3 -0.5 0.6 0.9 1.0IT 8.4 9.0 12.7 12.4 12.4EA 8.8 10.2 11.6 11.0 10.5IT 2.9 3.6 3.0 2.6 2.0EA .. 4.2 2.4 2.0 1.7IT 102.9 116.4 132.1 133.1 130.6EA .. 83.6 94.3 94.0 92.5

*Commission Spring Forecast 2015

Real GDP (% change)

Inflation rate (HICP)

Employment (% change)

Unemployment rate

General Government budget balance (% of GDP)

General Government gross debt(% of GDP)

Italy vs. Euro Area: Selected indicators

Key policy challenges: Tackling the legacy of the crisis

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• Lower growth potential

• High private and public debt

• Financial stability, credit provision and NPL

• Unemployment and the social impact

CHALLENGESCHALLENGES The AGS three-pillar approachThe AGS three-pillar approach

3-pillar approach for a determined response at EU/EA and national level:

•A boost to investment

• Ambitious structural reforms

•Fiscal responsibility

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3. Country-Specific Recommendations (CSRs) – approach and main features

2015 CSRs – A new approach

• Engagement with governments, parliaments and social partners

• Fewer and more focused CSRs• Only key priority issues of macro-economic relevance• Reflecting the degree of macroeconomic imbalances• Actions to be taken within one year

• The Commission will closely monitor implementation

• Implementation at national level the three–pillar approach: investment, structural reforms and fiscal responsibility

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Member States - Overview

Broad Category Policy areas AT BE BG CZ DE DK EE ES FI FR HR HU IE IT LT LU LV MT NL PL PT RO SE SI SK UKFiscal policy & fiscal governanceLong-term sustainability of public finances, inc. pensionsReduce the tax burden on labourBroaden tax basesReduce the debt biasFight against tax evasion, improve tax administration & tackle tax avoidanceFinancial servicesHousing marketAccess to finance Private indebtednessEmployment protection legislation & framework for labour contractsUnemployment benefitsActive labour market policiesIncentives to work, job creation, labour market participationWages & wage settingChildcareHealth & long-term carePoverty reduction & social inclusionEducationSkills & life-long learningResearch & innovationCompetition & regulatory frameworkCompetition in servicesTelecom, postal services & local public servicesEnergy, resources & climate changeTransportBusiness environmentInsolvency frameworkPublic administrationState-owned enterprisesCivil justiceShadow economy & corruption

Structural policies

Public administration & business environment

Public finances & taxation

Financial sector

Labour market, education & social policies

Italy: 6 CSRs

Business

environment &

competition

Financial sector

Transports &

management of EU funds

Public administration

& civil justice

Labour market &

education

CSR 1: Public finances and taxation

• Make further progress towards putting the general government debt ratio on an appropriate downward path.

• Improve the structural balance by 0.25% of GDP in 2015 and by 0.1% of GDP in 2016.

• The latter because Italy qualifies for the structural reform clause, provided that it adequately implements the agreed reforms and it remains under the preventive arm.

Source: European Commission

CSR 2: Transports and management of EU funds

• Serious weaknesses continue to affect the management of EU funds, in particular in southern regions.

• Investment was hard hit during the crisis aggravating the long-run deterioration in its quality. Hence, it is important to free public resources for productive investment.

• The spending review is not yet an integral part of the budgetary process. There is also need to implement performance budgeting at all level of governments.

Source: European Commission

Overall EU-fund absorption rate

CSR 3: Public administration & justice

• Inefficiencies in public administration and justice system hamper the quality of the business environment and reduce the capacity to implement reforms effectively.

• The revision of the statute of limitations is essential to fight against corruption.

• On civil justice, the length of proceedings remains a major problem and the reforms undertaken still need to bear fruit.

Source: European Commission

European Quality of Government Index 2013 (Average and within country regional variations)

CSR 4: Financial sector

Source: European Commission

• A smooth and efficient functioning of the banking sector is key for the recovery.

• Introduce binding measures by end-2015 to tackle remaining weaknesses in the corporate governance of banks, particularly the role of foundations.

• Take measures to accelerate the broad-based reduction of non-performing loans.

CSR 5: Labour market & education

• Italy's competitiveness remains subdued: sluggish productivity growth continues to push up unit labour costs.

• Full implementation of the 'Jobs act' should improve entry and exit flexibility, enhance labour reallocation and thus productivity.

• Second-level bargaining could help to better align wages with productivity, but it still concerns only a minority of companies.

• School outcomes and adult skills are below the EU average and the labour market relevance of education is still limited.

Source: European Commission

Nominal unit labour cost

CSR 6: Business environment and competition

• Italy's productivity is, indeed, very much subdued.

• The administrative and regulatory burden is still high, weighing on firms' competitiveness.

• A range of restrictions on competition still hamper the proper functioning of product and services markets.

• Local public services, which show clear signs of inefficiency, remain sheltered from competition, and this has adverse effects on public finances as well.Source: European Commission

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5. Next steps

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• June 2015: discussion of the country-specific recommendations in the committees of the Council and in the relevant Council formations

• 25-26 June 2015: endorsement of the country-specific recommendations by the European Council

• July 2015: final approval of the country-specific recommendations by the Ecofin Council

THEN

• National semester!

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Useful information

• http://ec.europa.eu/europe2020/making-it-happen/country-specific-recommendations/index_en.htm

Background slides

Recommendation 1: public finances & taxation

Achieve a fiscal adjustment of at least 0.25% of GDP towards the medium-term objective in 2015 and of 0.1% of GDP in 2016 by taking the necessary structural measures in both 2015 and 2016, taking into account the allowed deviation for the implementation of major structural reforms. Swiftly and thoroughly implement the privatisation programme and use windfall gains to make further progress towards putting the general government debt ratio on an appropriate downward path. Implement the enabling law for tax reform by September 2015, in particular the revision of tax expenditures and cadastral values and the measures to enhance tax compliance.

Recommendation 2: transports & management of EU funds

Adopt the planned national strategic plan for ports and logistics, particularly to help promote intermodal transport through better connections. Ensure that the Agency for Territorial Cohesion is made fully operational so that the management of EU funds markedly improves.

Recommendation 3: public administration & civil justice

Adopt and implement the pending laws aimed at improving the institutional framework and modernising the public administration. Revise the statute of limitations by mid-2015. Ensure that the reforms adopted to improve the efficiency of civil justice help reduce the length of proceedings.

Recommendation 4: financial sector

Introduce binding measures by end-2015 to tackle remaining weaknesses in the corporate governance of banks, particularly the role of foundations, and take measures to accelerate the broad-based reduction of non-performing loans.

Recommendation 5: labour market & education

Adopt the legislative decrees on the use of wage supplementation schemes, the revision of contractual arrangements, work-life balance and the strengthening of active labour market policies. Establish, in consultation with the social partners and in accordance with national practices, an effective framework for second-level contractual bargaining. As part of efforts to tackle youth unemployment, adopt and implement the planned school reform and expand vocationally-oriented tertiary education.

Recommendation 6: business environment & competition

Implement the simplification agenda for 2015-2017 to ease the administrative and regulatory burden. Adopt competition-enhancing measures in all the sectors covered by the competition law, and take decisive action to remove remaining barriers. Ensure that local public services contracts not complying with the requirements on in-house awards are rectified by no later than end-2015.

Stability and Growth Pact

2.2 Proposed SGP decisions

February Package

BE

Country

Follow-up to February Package

IT

FI

FR

Action Comment

May Package

Action Comment

Report article 126(3)

•Compliance with the SGP.

•No need to open EDP at that stage.

No further action

deemed required.

Report article 126(3)

• Conclusions from February remain broadly valid.

• Need to closely monitor for IT due to recent ruling by the Italian Constitutional Court (possible new Report article 126(3) later.

• Non-compliance with deficit and debt criteria leaning toward opening EDP.

Revised recommen-

-dation

• Extension of deadline by two years.

Wait for effective

action DDL

• 10 June deadline to report on effective action.

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2.2 (cont.) Proposed SGP decisions

MT

Country

Other elements of May Package

PL

UK

May Package

Action Comment

Proposedabrogation

of EDP

• Timely and durable correction of excessive deficit.• Compliance with debt rule ensured.

No EDP step but strong

CSR in May

• Risk of timely and durable correction of excessive deficit.• However:

o HR: bottom-up fiscal effort complied with over 2014-2015;o ES: nominal target complied with in 2014;o PT: close to 3% of GDP in 2015.

• Durable correction 1 year ahead of deadline.• Excess over 3% explained by net directs costs of 'systemic' pension reform.

Revised recommen-

-dation

• Excessive deficit not corrected by deadline of 2014-15.• Non-effective action to comply with EDP recommendation.• New deadline for correction in 2016-17.

HR

ES

PT33