Select Committee on European Scrutiny Seventeenth Report


2 Stability and Convergence Programmes

(a)

(28419)

6801/07


(b)

(28420)

6802/07


(c)

(28421)

6803/07


(d)

(28422)

6804/07


(e)

(28423)

6805/07


(f)

(28424)

6806/07


(g)

(28425)

6807/07


(h)

(28426)

6808/07


(i)

(28427)

6809/07


(j)

(28428)

6812/07

(k)

(28429)

6813/07


(l)

(28430)

6814/07


(m)

(28431)

6815/07


(n)

(28432)

6816/07


(o)

(28433)

6817/07


(p)

(28434)

6818/07


(q)

(28435)

6819/07

+ COR1


(r)

(28436)

6820/07


(s)

(28437)

6821/07


(t)

(28438)

6823/07


Council Opinion on the updated Stability Programme of Germany



Council Opinion on the updated Stability Programme of Greece



Council Opinion on the updated Stability Programme of France



Council Opinion on the updated Stability Programme of Ireland



Council Opinion on the updated Stability Programme of Italy



Council Opinion on the updated Stability Programme of Luxembourg



Council Opinion on the updated Stability Programme of the Netherlands


Council Opinion on the updated Stability Programme of Portugal



Council Opinion on the updated Stability Programme of Finland



Council Opinion on the updated Stability Programme of Slovenia


Council Opinion on the updated Convergence Programme of Denmark


Council Opinion on the updated Convergence Programme of Estonia



Council Opinion on the updated Convergence Programme of Cyprus



Council Opinion on the updated Convergence Programme of Lithuania


Council Opinion on the updated Convergence Programme of Hungary


Council Opinion on the updated Convergence Programme of Malta



Council Opinion on the updated Convergence Programme of Poland




Council Opinion on the updated Convergence Programme of Slovakia


Council Opinion on the updated Convergence Programme of Sweden



Council Opinion on the updated Convergence Programme of the United Kingdom

Legal baseArticles 99(4) and 104 EC; —; QMV
Deposited in Parliament5 March 2007
DepartmentHM Treasury
Basis of considerationEM of 26 March 2007
Previous Committee ReportNone
Discussed in CouncilAdopted by the ECOFIN Council on 27 February 2007
Committee's assessmentPolitically important
Committee's decisionFor debate in European Standing Committee

Background

2.1 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%.[3] Each year the Council of Economic and Finance Ministers (ECOFIN) issues an Opinion on the updated stability or convergence programme of each Member State.[4] These Opinions, which are not binding on Member States, are based on a recommendation from the Commission. The economic content of the programmes is assessed with reference to the Commission's current economic forecasts. If a Member State's programme is found wanting, it may be invited by ECOFIN, in a Recommendation, to make adjustments to its economic policies, though such Recommendations are likewise not binding on Member States. This whole procedure is essentially the Pact's preventative arm.

2.2 On the other hand, the Pact also endorsed a corrective arm involving 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 ECOFIN 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.

The documents

2.3 These documents provide the Council's Opinion on the stability or convergence programmes of 20 Member States, which are assessed in relation to the Commission's autumn 2006 economic forecasts. A summary of the Council's comments for each of these Member States is provided by the Economic Secretary to the Treasury (Ed Balls) in his helpful Explanatory Memorandum, as follows:

    Germany — Council opinion on the updated stability programme, 2005-2008

    "Real GDP growth is estimated to temporarily slow down from 2.3% in 2006 to 1.4% in 2007, after which it is projected at 1.75% on average over the rest of the programme period. For 2006, the programme cites a general government deficit of 2.1%of GDP (revised down to 1.9% by latest government announcement), against a target of 3.3% of GDP set in the previous update of the stability programme. After the envisaged correction of the excessive deficit in 2006, the deficit ratio is projected to decline by 0.5 percentage points per year (except in 2008) to reach 0.5% of GDP in 2010. Germany is currently still in Excessive Deficit procedure, yet in its Council Opinion of October 2006[5] the Council stated that Germany had taken effective action in correcting its excessive deficit and no further steps in the excessive deficit procedure were needed. Government gross debt is estimated to have levelled off at 67.9% of GDP in 2006, above the 60% of GDP Treaty reference value. The programme projects the debt ratio to decline by 3.5 percentage points over the programme period. Overall, Germany appears to be at medium risk with regard to the sustainability of public finances."

    Greece — Council opinion on the updated stability programme, 2005-2009

    "Real GDP growth is expected to be broadly stable at around 4% per year. For 2006, the general government deficit is estimated at 2.6% of GDP in the Commission services' autumn 2006 forecast and in the new update, fully in line with the target set in the previous update of the stability programme. The budgetary strategy in the programme aims at correcting the excessive deficit in 2006. Thereafter, the government deficit is planned to continue narrowing steadily over the programme period, to 1.2% of GDP in 2009. The Council-imposed six-month deadline for the correction of the deficit having expired at the end of 2006, the Commission informed the Council that measures taken buy [sic] the Greek authorities were consistent with recommendations and no further steps were necessary. Government gross debt is estimated to have reached 104% of G[D]P in 2006, far above the 60% of GDP Treaty reference value. The programme projects the debt ratio to gradually decline by almost 13 percentage points of GDP over the programme period. Overall, Greece appears to be at high risk with regard to the sustainability of public finances."

    France — Council opinion on the updated stability programme, 2005-2009

    "Growth is estimated at between 2% and 2.5% in 2006/07. From then on it declines slightly to 2.25% for the rest of the programme period. For 2006, the general government deficit is estimated at 2.7% of GDP in the Commission services' autumn 2006 forecast, against a target of 2.9% of GDP for 2006 set in the previous update of the stability programme. The programme foresees a continuous but back loaded decrease in the headline deficit from 2.7% of GDP in 2006 (2.5% in 2007) to 0% of GDP in 2010, amounting to an overall reduction by 2.7 percentage points of GDP. France is currently in the excessive deficit procedure and the deficit is projected at 2.6% in 2007.[6] Government gross debt is estimated to have reached 64.6% of GDP in 2006, above the 60% of GDP Treaty reference value. The programme projects the debt-to-GDP ratio to decline by 6.5 percentage points over the programme period. Overall, France appears to be at medium risk with regard to the sustainability of public finances."

    Ireland — Council opinion on the updated stability programme, 2005-2009

    "Real GDP growth is expected to edge lower from 5.4% in 2006 to an average of a little above 4.5% over the rest of the programme period. For 2006 the general government balance is estimated in the programme as a surplus of 2.3% of GDP, against a budgeted deficit of 0.6% of GDP in the previous update. Surpluses are projected to be maintained throughout the programme period, moderating from an estimated headline surplus of 2.3% of GDP in 2006 to 1.2% in 2007 and progressively declining to 0.6% in 2009. Government gross debt is estimated to have declined to around 25% of G[D]P in 2006, well below the 60% of GDP Treaty reference value. The programme projects the debt ratio to decline by a further three percentage points over the programme period. Overall, Ireland appears to be at medium risk with regard to the sustainability of public finances."

    Italy — Council opinion on the updated stability programme, 2005-2009

    "Real GDP growth is expected to initially decline from 1.6% in 2006 to 1.3% in 2007. Afterwards, economic growth will gradually pick up, to reach 1.7% in 2011. The 2006 stability programme update projects the 2006 deficit as 5.7% of GDP. The budgetary strategy in the programme aims at correcting the excessive deficit in 2007 (the deficit is planned to decline to 2.8% of GDP). Thereafter, the government balance is planned to continue improving steadily over the programme period, to turn into a positive 0.1% of GDP in 2011. Italy is currently in the excessive deficit procedure and the deficit is projected at 2.9% in 2007. Government gross debt is officially estimated to have reached 107.6% of GDP in 2006, far above the 60% of GDP Treaty reference value. The programme projects the debt ratio to gradually decline to reach around 98% of GDP in 2011. Overall, Italy appears to be at medium risk with regard to the sustainability of public finances."

    Luxembourg — Council opinion on the updated stability programme, 2005-2009

    "Real GDP growth is expected to decelerate from 5.5% in 2006 to 4.3% on average over the rest of the programme period. For 2006, the general government deficit is estimated at 1.0% of GDP in the Commission services' autumn 2006 forecast, against a target of 1.8% of G[D]P set in the previous update of the stability programme. The medium-term budgetary strategy is to regain a balanced position within the programme horizon. This is to be achieved through a progressive improvement of the general government balance from an estimated deficit of 1.5% of GDP to a small surplus in 2009 (0.1% of GDP). Government gross debt is estimated to have reached 7.5% of GDP in 2006, well below the 60% of GDP Treaty reference value. The programme projects the debt ratio to rise slightly to 8.5% of GDP by the end of the programme period. Overall, Luxembourg appears to be at medium risk with regard to the sustainability of its public finances."

    The Netherlands — Council opinion on the updated stability programme, 2005-2009

    "Real GDP is estimated to grow by 3.25% in 2006, 3% in 2007 and 1.75% per year over the rest of the programme period. For 2006, the general government position is estimated to be balanced in the Commission services' autumn 2006 forecast, against a target of -1.5% of GDP set in the previous update of the stability programme. The programme projects the general government surplus to improve from 0.1% of GDP in 2006 to 0.9% in 2009. Government gross debt is estimated to have fallen to 50.2% of GDP in 2006, below the 60% of GDP Treaty reference value. The programme projects the debt ratio to further decline by 6 percentage points over the programme period. Overall, the Netherlands appears to be at low risk with regard to the sustainability of public finances."

    Portugal — Council opinion on the updated stability programme, 2005-2009

    "Real GDP growth is expected to pick up from 1.4% in 2006 to 1.8% in 2007 and 2.4% in 2008 and eventually to 3% per year over the rest of the programme period. For 2006, the general government deficit is estimated at 4.6% of GDP in the Commission services' autumn 2006 forecast. It is targeted to gradually decline from 4.6% of GDP in 2006 to 0.4% in 2010. Portugal is currently in the excessive deficit procedure and the deficit is projected close to 4% in 2007. Government gross debt is estimated to have reached 67.5% of GDP in 2006, above the 60% of GDP Treaty reference value. The programme projects the debt ratio to increase in 2007 and to decline by close to 6 percentage points over the rest of the programme period. Overall, Portugal appears to be at high risk with regard to the sustainability of public finances."

    Finland — Council opinion on the updated stability programme, 2005-2009

    "Real GDP growth is expected to decelerate from a cyclical peak of 4.5% in 2006 to 2.5% on average over the rest of the programme period. For 2006, the general government surplus is estimated at 2.9% of GDP in both the Commission services' autumn forecast and in the current programme update, against a target of 1.6% of GDP set in the previous update of the stability programme. The general government headline and primary surpluses are projected to follow a slight downward trend, both declining by 0.5% of GDP until 2010. Government gross debt is estimated to have declined to 39% of GDP in 2006, well below the 60% Treaty reference value. The programme projects the debt ratio to decline by 5.5 percentage points over the programme period. Overall, Finland appears to be at low risk with regard to the sustainability of public finances."

    Slovenia — Council opinion on the updated stability programme, 2005-2009

    "Real GDP is estimated to grow steadily at above 4% over the programme period. For 2006, the general deficit is estimated at 1.6% of GDP in the Commission services' autumn 2006 forecast, against a target of 1.7% of GDP set in the December 2005 update of the convergence programme. Until 2008, the general government deficit is planned to linger at around 1.5% of GDP. In 2009, the deficit declines to 1.0% as expenditure reduction outweighs the revenue loss. Government gross debt is estimated to have reached 28.5% of GDP in 2006, well below the 60% of GDP Treaty reference value. The programme projects the debt ratio to decline by 0.8 percentage points over the programme period. Overall, Slovenia appears to be at high risk with regard to the sustainability of public finances."

    Denmark — Council opinion on the updated convergence programme, 2005-2009

    "Real GDP growth is expected to slow from 2.7% in 2006 to 1.0% on average over the rest of the programme period. For 2006, the general government surplus is estimated at 3.2% of GDP in the Commission services' autumn 2006 forecast, against a target of 2.1% of GDP set in the previous update of the convergence programme. The budgetary strategy aims at maintaining structural surpluses of between 0.5% and 1.5% of GDP on average over the programme period to 2010, implying a marked reduction in the general government debt ratio. Government gross debt is estimated to have declined below 30% of GDP in 2006, well below the 60% of GDP Treaty reference value. The programme projects the gross debt ratio to decline by around a further 11 percentage points over the programme period. Denmark appears to be at low risk with regard to the sustainability of public finances."

    Estonia — Council opinion on the updated convergence programme, 2005-2009

    "Real GDP growth is estimated to abate from a peak of 11% in 2006 to 8.25% in 2007 and 7.5% per year in the outer years. For 2006, the general government surplus is estimated at 2.5% of GDP in the Commission services 2006 forecast, against a target of 0.3% of GDP set in the previous update. The budgetary strategy foresees the headline general government surplus to decline from 2.5% of GDP in 2006 to around 1.25% in 2007-2008 and rebound to around 1.5% of GDP thereafter. Government gross debt is estimated to have fallen to 3.7% of GDP in 2006, far below the 60% of GDP Treaty reference value. The programme projects the debt ratio to decline by a further 2 percentage points over the programme period. Overall, Estonia appears to be at low risk with regard to the sustainability of public finances."

    Cyprus — Council opinion on the updated convergence programme, 2005-2009

    "Real GDP growth is expected to pick up from 3.7% in 2006 to 4.1% on average over the rest of the programme period. For 2006, the general government deficit is estimated at just below 2% of GDP in the Commission services' autumn 2006 forecast, as target in the previous update of the convergence programme. The general government balance is projected to improve from a deficit of 1.9% of GDP in 2006 to a balanced position in 2010. Government gross debt is estimated to have reached 64.75% in 2006, above the 60% of GDP Treaty reference value. The programme projects that the debt ratio would fall below the 60% of GDP reference value in 2008 and would attain just above 46% of GDP by the end of the programme period. Overall, Cyprus appears to be at high risk with regard to the sustainability of public finances."

    Lithuania — Council opinion on the updated convergence programme, 2005-2009

    "Real GDP growth is expected to decelerate progressively from 7.8% in 2006 to 4.5% in 2009. For 2006, the general government deficit is estimated at 1% of GDP in the Commission services' autumn 2006 forecast against a target of 1.4% of GDP set in the previous update of the convergence programme. The primary deficit is expected to be in balance by 2007 and to record a surplus of 0.8% of GDP at the end of the programme period. Government gross debt is estimated to have reached 18.5% of GDP in 2006, well below the 60% of GDP Treaty reference value. The programme projects the debt ratio to remain at around 19% of GDP in 2007-2008 before decreasing to 17.75% in 2009. Overall, Lithuania appears to be at low risk with regard to the sustainability of public finances."

    Hungary — Council opinion on the updated convergence programme, 2005-2009

    "The economy is expected to slow down for the years 2007 and 2008 (2.2% and 2.6%, respectively), with a recovery to pre-consolidation growth rates of 4.2% in 2009. For 2006, the general government deficit is estimated at 10.1% of GDP in the Commission services' autumn forecast, with a projected reduction to -3.2% by 2009 and a further reduction in 2010. Hungary is still in the excessive deficit procedure. After having concluded twice that Hungary did not comply with its previous recommendations of July 2004 and March 2005, the Council issued new recommendations in October 2006 identifying measures to correct the deficit by 2009, one year later than previously planned.[7] The authorities will supply the first report on progress made by mid-April 2007. The government gross debt is estimated to have reached 67.5% of GDP in 2006, which is above the 60% of GDP Treaty reference value. The programme projects the debt ratio to increase to 71.25% of GDP in 2008. After 2008, it is expected to decrease again and return to 67.5% in 2010. Overall, Hungary appears to be at high risk with regard to the sustainability of public finances."

    Malta — Council opinion on the updated convergence programme, 2005-2009

    "Real GDP growth is estimated to hover around 3% over the programme period. For 2006, the general government deficit is estimated at 2.9% of GDP in the Commission services' autumn 2006 forecast, against a target of 2.7% of GDP set in the previous update of the convergence programme. The update foresees a gradual reduction in the general government deficit leading to a broadly balanced budget by 2009. Malta's 2006 deficit is below the reference value (3% of GDP) but above the target set by the Council, and the deficit is expected to stay just below 3% of GDP. Government gross debt is estimated to have reached 68.25% of GDP in 2006, above the 60% of GDP Treaty reference value. The programme projects the debt ratio to decline by 8.75 percentage points of GDP over the programme period. Overall, Malta appears to be at medium risk with regard to the sustainability of public finances."

      Poland — Council opinion on the updated convergence programme, 2005-2009

      "Real GDP growth increased from 3.2% in 2005 to over 5% in 2006 (5.8% according to the Polish Statistical Office). The forecast is for maintaining a growth rate of around 5%. Poland has been running government deficits that averaged 3.5% of GDP over the 1996-2005 decade; this is estimated to have decreased to 1.9% in 2006. This figure does not include the cost of pension reform, of around 2% of GDP. This cost will have to be taken into account from April 2007, when the transition period for implementing the Eurostat decision of 2004 on sectoral classification of pensions comes to an end. The deficit is planned to narrow by 0.4 percentage points of GDP annually (0.3 percentage points if the pension reform costs are included), from 1.9% of GDP in 2006 to 0.6% of GDP in 2009. Poland is currently still in the excessive deficit procedure and the current Council view is that action taken by Poland is inadequate for the correction of the excessive deficit in 2007. In February 2007 the European Commission recommended further actions for Poland to ensure the correction of the excessive deficit in 2007.[8] Government gross debt is estimated to have reached 42.0% of GDP in 2006, well below the 60% of GDP Treaty reference value. The programme projects the debt ratio to decline by 1.4 percentage points over the programme period. Including the impact of the above-mentioned Eurostat decision, the government gross debt would rise from 48.9% in 2006 to 50.2% in 2009. Overall, Poland appears to be at low risk with regard to the sustainability of public finances."

      Slovakia — Council opinion on the updated convergence programme, 2005-2009

      "Real GDP growth is expected to increase from 6.6% in 2006 to 7.1% in 2007 and then decrease to 5.5% and 5.1% in 2008 and 2009, respectively. For 2006, the general government deficit is estimated at 3.4% of GDP in the Commission services' autumn forecast, against a target of GDP set in the previous update of the convergence programme. The headline deficit should gradually decline from 3.7% of GDP in 2006 to 0.2% of GDP in 2009 and the primary deficit from 1.9% of GDP in 2006 to 0.2% of GDP in 2009. Slovakia is currently in the excessive deficit procedure and the deficit is projected close to 3% in 2007.[9] Government gross debt is estimated to have reached 33.1% of GDP in 2006, well below the 60% of GDP Treaty reference value. The programme projects the debt ratio to decline by 3.4 percentage points over the programme period. Overall, Slovakia appears to be at medium risk with regard to the sustainability of public finances."

      Sweden — Council opinion on the updated convergence programme, 2005-2009

      "Real GDP growth is estimated to slow from 4.0% in 2006 to 3.0% on average over the rest of the programme period. For 2006, the general government surplus is estimated at 2.8% of GDP in the Commission services' autumn 2006 forecast, against a projected outturn of 0.9% in the previous update of the convergence programme. The budgetary strategy presented in the update foresees a decline in the surplus in 2007 (from 3.0% of GDP in 2006 to 2.4%) and thereafter projects a progressive recovery (to 3.1% in 2009). Government gross debt is estimated to have fallen to 46.5% of GDP in 2006, well below the 60% of GDP Treaty reference value. The programme projects the debt ratio will continue following a downward path, falling by 13.5 percentage points over the programme period. Overall, Sweden appears to be at low risk with regard to the sustainability of public finances."

      United Kingdom — Council opinion on the updated convergence programme, 2005-2009

      "The programme envisages real GDP growth of 2.75% in 2007 and 2008, easing to 2.5% on average over the rest of the programme period. For 2006/7, the general government deficit is estimated at 3.0% of GDP in the Commission services' autumn 2006 forecast. The programme projects a reduction of the deficit below 3% of GDP by 2006/07 (2.8%) and to 1.4% of GDP by the end of the projection period in 2011/12. The UK is currently in the excessive deficit procedure.[10] The gross debt ratio, which stood at 42.1% of GDP in 2005/06, though remaining well below the Treaty reference value of 60% of GDP, is projected to rise slowly over the projection period, peaking at just above 44% of GDP in 2008/09. Thereafter, the ratio is expected to stabilise and then begin to decline at the end of the programme period. Overall, the UK appears to be at medium risk with regard to the sustainability of public finances."

    The Government's view

    2.4 The Minister reminds us that the Government has consistently supported a prudent interpretation of the Stability and Growth Pact, "which takes into account the economic cycle, sustainability and the important role of public investment". He adds that it agrees with the Council Opinions in these cases.

    Conclusion

    2.5 These documents show the working of the Stability and Growth Pact in relation to the stability and convergence programmes of Member States. And the documents and the Minister's summaries also give a useful summary overview of the public finances of these 20 Member States in the context of their overall economies and implicitly of the Community's economy as a whole. We think it would be useful to have the documents debated in European Standing Committee, together with the Opinions for the remaining seven Member States when we have been able to report on them, in order to explore the operation of the Stability and Growth Pact and Member States' actions in relation to it. Accordingly we recommend such a debate.


    3   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

    4   The 13 Member States (Austria, Belgium, Germany, Greece, Finland, France, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Slovenia and Spain) that have adopted the euro have Stability Programmes, whereas the other 14 Member States ( including the UK) produce Convergence Programmes. Back

    5   Unpublished. Back

    6   The Opinion is based on a Commission draft which was outdated on this point. In fact France is no longer in the excessive deficit procedure: see paragraph 15 of this report on (28401) 5519/07. Back

    7   (28004) 13530/06 (28005) 13763/06: see HC 41-iv (2006-07), para 17 (14 December 2006). Back

    8   Not yet published. Back

    9   (26272) 5053/05: see HC 38-ix (2004-05), para 10 (23 February 2005). Back

    10   (28003) 13074: see HC 41-vi (2006-07), para 9 (17 January 2007). Back


     
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