18 Stability and Growth Pact
| (26964)
13667/05
SEC(05) 1305
| Draft Decision establishing, in accordance with Article 104(8) of the Treaty establishing the European Community, that the action taken by Hungary in response to the Council Recommendation of 8 March 2005 pursuant to Article 104(7) of the Treaty is proving to be inadequate
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| Legal base | Article 104(8) EC; —; QMV
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| Document originated | 20 October 2005
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| Deposited in Parliament | 31 October 2005
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| Department | HM Treasury |
| Basis of consideration | EM of 14 November 2005
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| Previous Committee Report | None
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| Discussed in Council | 8 November 2005
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| Committee's assessment | Politically important
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| Committee's decision | Cleared
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Background
18.1 The Stability and Growth Pact adopted by the Amsterdam European
Council in June 1997 emphasised the obligation of Member States
to avoid excessive government deficits, defined as the ratio of
a planned or actual deficit to gross domestic product (GDP) at
market prices in excess of a "reference value" of 3%.[42]
The Pact also endorsed action in cases of an excessive government
deficit — the excessive deficit procedure provided for in
Article 104 EC and the relevant Protocol. This procedure consists
of Commission reports followed by a stepped series of Council
Recommendations (the final two steps do not apply to non-members
of the eurozone). Failure to comply with the final stage of Recommendations
allows the Council to require publication of additional information
by the Member State concerned before issuing bonds and securities,
to invite the European Investment Bank to reconsider its lending
policy for the Member State concerned, to require a non-interest-bearing
deposit from the Member State concerned whilst its deficit remains
uncorrected, or to impose appropriate fines on the Member State
concerned.
18.2 After Hungary's accession to the Community May
2004 the Commission initiated the excessive deficit procedure
against the new Member State, given that its deficit had exceeded
3% of GDP in 2003. In July 2004 the Council issued an Article
104(7) Recommendation to Hungary for correction of the deficit,
with a target date for implementation of corrective action of
5 November 2004. However, in January 2005 the Council decided
that Hungary had not taken effective action in response to its
Recommendation and that the deficit target for 2005 would be missed.
Given Hungary is not in the eurozone the Council could only take
action again under Article 104(7), rather than going on to the
next stage of the excessive deficit procedure. Therefore, in March
2005 the Council adopted a new 104(7) Recommendation for Hungary.
The Hungarian authorities were again recommended to take action
in a medium-term framework in order to bring the deficit below
3% of GDP by 2008. In July 2005 it appeared that the targeted
deficit (of 3.6% of GDP) for 2005 was within reach and that the
Hungarian Government had taken effective action. The Commission
concluded that no further steps under the excessive deficit procedure
were necessary at that time.[43]
The document
18.3 In this document the Commission says that on
20 September 2005 the Hungarian authorities submitted a revised
excessive deficit procedure notification announcing a 2005 deficit
of 6.1% of GDP instead of the targeted 3.6% of GDP — even
though no significant change or external shock had occurred in
the macro-economic environment. The increased predicted deficit
partly reflected a Eurostat decision that a large motorway public/private
partnership, which the Hungarian authorities had classified in
the private sector, should be at least partly included in general
government finances. The Hungarian Government informed the Commission
that it did not intend to take action to correct these developments,
contrary to earlier commitments. On this basis the document recommends
that the Council take an Article 104(8) Decision that that the
action being taken by Hungary to correct its excessive deficit
is proving to be inadequate. This the Council did on 8 November
2005. The next step is expected to be a further Article 104(7)
Recommendation to Hungary to reduce its deficit.
The Government's view
18.4 The Economic Secretary to the Treasury (Mr Ivan
Lewis) tells us that the document has no direct policy implications
for the UK.
Conclusion
18.5 We clear the document, but, as with earlier
similar documents, draw it to the attention of the House as background
information on the operation of the Stability and Growth Pact
and on the economies of other Member States.
42 This obligation does not apply to Member States,
including the UK, whilst they remain outside the eurozone, but
they are required to endeavour to avoid excessive deficits. Back
43
See (26677) 10605/05 (26791) 10801/05 (26792) 11282/05 (26793)
11478/05 (26794) 11480/05 (26936) 11124/05: HC 34-viii (2005-06),
para 19 (2 November 2005). Back
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