23 Stability and Growth Pact: excessive
deficit procedure
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7897/09
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7899/09
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(d)
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Council Decision on the existence of an excessive deficit in France
Council Recommendation to France with a view to bringing an end to the situation of an excessive government deficit
Council Decision on the existence of an excessive deficit in Greece
Council Recommendation to Greece with a view to bringing an end to the situation of an excessive government deficit
Council Decision on the existence of an excessive deficit in Ireland
Council Recommendation to Ireland with a view to bringing an end to the situation of an excessive government deficit
Council Decision on the existence of an excessive deficit in Spain
Council Recommendation to Spain with a view to bringing an end to the situation of an excessive government deficit
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| Legal base | Article 104 EC; —; QMV for Decisions, two thirds of weighted votes of all Member States except the one concerned for Recommendations
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| Deposited in Parliament | 30 April 2009
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| Department | HM Treasury |
| Basis of consideration | EM of 12 May 2009
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| Previous Committee Report | None
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| Discussed in Council | 6 April 2009
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| Committee's assessment | Politically important
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| Committee's decision | Cleared
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Background
23.1 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%.[104]
Each year the Council of Economic and Finance Ministers (ECOFIN)
issues an Opinion on the updated stability or convergence programme
of each Member State.[105]
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.
23.2 On the other hand, the Pact also endorsed a
dissuasive or 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
23.3 On 3-4 April 2009, an informal ECOFIN endorsed
Council Decisions that an excessive deficit exists for France,
Greece, Ireland and Spain. Recommendations were issued for these
four countries giving dates by which their excessive deficit should
be corrected. They were each given six months to put in place
actions to achieve this. The Council Decisions and Recommendations
were officially adopted at the GAERC Council on 27 April 2009.
At the same time a Council Decision and a Council Recommendation
were also adopted for the UK, which we report on separately.[106]
A summary of the Council's Opinions and Recommendations for each
of the four Member States is provided by the Economic Secretary
to the Treasury (Ian Pearson) in his helpful Explanatory Memorandum,
as follows:
Excessive Deficit of France
"According to the data notified by the French
authorities, the general government deficit was 3.2% of GDP in
2008. According to the Commission's January forecast, the general
government deficit is forecast to reach 5.4% of GDP in 2009. The
Commission's report, while considering this close to the reference
value, did not consider it to be temporary or exceptional. On
the basis of the Commission's report, the Council decided that
an excessive deficit exists in France.
"The Council recommended that the French authorities
put an end to the situation of excessive deficit by 2012. This
should be carried out in a credible and sustainable manner by
taking action in a medium-term framework, in accordance with a
path for reduction set out by the French authorities on 5 March
2009. The French authorities should specifically, after implementing
planned budgetary measures in 2009, strengthen the annual average
fiscal effort to at least 1% of GDP starting in 2010. The authorities
should further implement reforms to contain current expenditure,
especially in the areas of healthcare and local authorities.
"The Council further invites the French authorities
to ensure that budgetary consolidation, after the correction of
the excessive deficit, should be toward the medium-term objective."
Excessive deficit procedure of Spain
"According to the January 2009 Stability Programme
of Spain,[107] the
general government deficit is estimated at 3.4% of GDP in 2008.
According to the Commission's January 2009 interim forecast, the
general government headline deficit will reach 6.2% in 2009. The
Commission's report, while considering the excess close to the
reference value, did not consider it to be either exceptional
or temporary. On the basis of the Commission's report, the Council
decided that an excessive deficit exists in Spain.
"The Council recommended that the Spanish authorities
put an end to the situation of excessive deficit by 2012. This
should be carried out in a credible and sustainable manner by
taking action in a medium-term framework, in accordance with a
path for reduction set out by the Spanish authorities in the January
2009 update of their Stability Programme. To this end, Spain should
implement an annual fiscal adjustment effort of at least 1.25%
of GDP to begin in 2010.
"The Council further invites the Spanish authorities
to ensure that budgetary consolidation, after the correction of
the excessive deficit, should be toward the medium-term objective.
Moreover, the Council invites the Spanish authorities to improve
the sustainability of public finances by enacting further pension
reform measures."
Excessive deficit of Ireland
"According to the Stability Programme of Ireland,[108]
the general government deficit reached 6.3% in 2008. According
to the Commission the deficit would widen to 11% of GDP in 2010.
The Commission's report, while considering this exceptional as
resulting from a severe economic downturn, did not find the excess
to be temporary or close to the reference value. On the basis
of the Commission's report, the Council decided that an excessive
deficit exists in Ireland.
"The Council recommended that the Irish authorities
put an end to the situation of excessive deficit by 2013. This
should be carried out in a credible and sustainable manner by
taking action in a medium-term framework, in line with the reduction
path as specified in the January 2009 addendum to the October
2008 Stability Programme. This will involve ensuring meeting a
target of 9.5% of GDP in 2009, followed by a planned average annual
fiscal effort of at least 1.5% of GDP from 2010. The Irish authorities
are further recommended to spell out the detailed measures that
are necessary to achieve this consolidation path and implement
them rigorously.
"The Council further invites the Irish authorities
to ensure that budgetary consolidation, after the correction of
the excessive deficit, should be toward the medium-term objective.
Moreover, the Council invites the Irish authorities to improve
the sustainability of public finances by enacting further pension
reform measures."
Excessive deficit of Greece
"The general government deficit in Greece reached
3.5% of GDP in 2007, and is estimated by the Commission's January
2009 forecast at 3.6% in 2008 and 4.4% in 2009. On the basis of
a Commission report, the Council decided that an excessive deficit
exists in Greece.
"The Council recommends that the Greek authorities
put an end to the present excessive deficit by 2010. Specifically,
the authorities should strengthen the fiscal adjustment in 2009
through permanent measures, mainly on the expenditure side, as
well as implementing those already announced. They should further
implement additional measures in 2010 in order to bring the headline
deficit clearly below the 3% of GDP reference value by the end
of the year. The Council further recommends that the authorities
continue efforts to control factors, other than net borrowing,
which contribute to a change in debt levels and to continue efforts
to improve the collection and processing of statistical data.
"The Council further invites the Greek authorities
to ensure that budgetary consolidation, after the correction of
the excessive deficit, should be toward the medium-term objective.
To this end the authorities should implement permanent measures
including controlling current primary expenditure, including public
wages and urgently implement structural reforms."
The Government's view
23.4 The Minister says that:
- the Government believes in
a prudent interpretation of the Stability and Growth Pact;
- the European Council has agreed that the flexibility
provided for in the Stability and Growth Pact should be used;
- this is important, not only in allowing space
for fiscal policy to support the economy in the short term, but
also in ensuring an appropriate pace of consolidation over the
medium term; and
- the Government therefore supports, where appropriate,
a medium-term framework for Member States to address their excessive
deficits.
Conclusion
23.5 These documents, which we clear, usefully
summarise what is expected of the four Member States in relation
to their excessive deficits and so we draw them to the attention
of the House.
104 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
105
The 16 Member States (Austria, Belgium, Cyprus, Germany, Greece,
Finland, France, Ireland, Italy, Luxembourg, Malta, the Netherlands,
Portugal, Slovakia, Slovenia and Spain) that have adopted the
euro have Stability Programmes, whereas the other 11 Member States
(including the UK) produce Convergence Programmes. Back
106
(30582) 30583) 7955/09 7956/09: see chapter 24 in this Report. Back
107
(30598) 7323/09: see chapter 25 in this Report. Back
108
(30594) 7318/09: see chapter 25 in this Report. Back
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