Documents considered by the Committee on 10 March 2010 - European Scrutiny Committee Contents


7 Growth and Stability Pact: excessive deficit procedure

(a)

(31359)

5902/10


(b)

(31360)

5903/10


(c)

(31361)

6231/10


Council Recommendation with a view to bringing to an end to the situation of an excessive government deficit


Council Recommendation with a view to bringing to an end to the situation of an excessive government deficit


Council Recommendation with a view to bringing to an end to the situation of an excessive government deficit

Legal base Article 126(7); —; QMV of eurozone Member States less the one concerned
Documents originated
Deposited in Parliament 1 March 2010
Department HM Treasury
Basis of consideration EM of 6 March 2010
Previous Committee Report None
Discussed in Council 16 February 2010
Committee's assessment Politically important
Committee's decision Cleared

Background

7.1 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%.[14] Each year the Council of Economic and Finance Ministers (ECOFIN) issues an Opinion on the updated stability or convergence programme of each Member State.[15] 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.

7.2 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 126 TFEU (formerly 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.

7.3 On 7 July 2009 the Council issued Recommendations to Malta, Lithuania and Romania with a view to ending the excessive government deficits of these Member States. It recommended Malta to correct its excessive deficit by 2010 at the latest, and to bring the public debt back on a declining path towards the 60% of GDP reference value. It recommended to Lithuania to correct its excessive deficit by 2011 at the latest. And it recommended to Romania to correct its excessive deficit by 2011 at the latest.[16]

The documents

7.4 In the new Recommendation to Malta, document (a), the Council:

·  found that unexpected adverse economic events, with major unfavourable consequences for government finances, had occurred;

·  referred particularly to a larger than expected decline in real GDP, a larger than expected budgetary impact from the downturn, a much lower intake of indirect taxes and lower employment, with the associated fall of contributions to social security;

·  noted that, in response to the Council's recommendations in July 2009, Malta executed the 2009 budget measures as planned — additional measures to support the economy in line with the European Economic Recovery Plan were taken, along with compensatory measures to offset the support measures, including improving tax administration and reducing the number of public sector employees, all compensatory measures were permanent, whereas only 40% of the support measures under the recovery plan had budgetary effects beyond 2010; and

·  concluded, that, overall, Malta could be considered to have taken effective action.

7.5 In the document the Council set, in light of the severe economic downturn in Malta, a new deadline of 2011 at the latest for the correction of the excessive deficit. It recommended Malta to:

·  achieve the 2010 deficit target by adopting additional consolidation measures if necessary;

·  ensure a 0.75% point GDP fiscal effort in 2011;

·  specify the measures necessary to achieve the correction of the excessive deficit in 2011; and

·  strengthen the binding nature of the medium-term budgetary framework and improve the monitoring of budget execution.

The Council established a deadline of 16 August 2010 for Malta to take effective action towards correcting the excessive deficit and invited the Maltese authorities to implement reforms to raise the potential growth rate of GDP and to pursue further social security reforms towards addressing risks to the long-term sustainability of the public finances.

7.6 In the new Recommendation to Lithuania, document (b), the Council:

·  found that unexpected adverse economic events, with major unfavourable consequences for government finances, had occurred;

·  referred particularly to the larger than expected GDP contraction in 2009, the effect on public finances being more than expected and negative revenue surprises having doubled between the Commission's spring and autumn forecasts in 2009;

·  noted that, in response to the Council's recommendations in July 2009, Lithuania implemented the fiscal consolidation measures outlined in the 2009 budget, adopted a second supplementary budget later in the year, had a total fiscal adjustment of around 8% of GDP, the 2010 budget included further substantial cuts in expenditure, combined with some tax measures, and completed a "National Accord" with social partners that detailed a number of medium-term structural reforms in addition to the fiscal consolidation measures;

·  noted that the net consolidation effort was estimated to be equivalent to around 1.50% of GDP, in line with the Council recommendations — even though some of the measures would expire or could be reversed in the future; and

·  concluded, that, overall, Lithuania had taken effective action.

7.7 In the document the Council set, in light of the severe economic downturn in Lithuania, a new deadline of 2012 at the latest for the correction of the excessive deficit. It recommended Lithuania to:

·  implement rigorously the corrective measures planned in the 2010 budget, adopting additional measures if necessary to achieve the envisaged consolidation;

·  ensure an annual average fiscal effort of at least 2.25% of GDP over 2010 to 2012;

·  specify and adopt the additional measures necessary to achieve the correction of the excessive deficit by 2012 and, to this end, adopt and swiftly implement the planned structural reforms;

·  enhance the medium-term budgetary framework by strengthening fiscal governance and transparency for example.

The Council established a deadline of 16 August 2010 for Lithuania to take effective action towards correcting the excessive deficit and invited the Lithuanian authorities to implement reforms towards raising the potential growth rate of GDP.

7.8 In the new Recommendation to Romania, document (c), the Council:

·  found that unexpected adverse economic events, with major unfavourable consequences for government finances, had occurred;

·  referred particularly to a larger than expected contraction of GDP in 2009, lower than projected government revenue and a widening of the budget deficit despite efforts to cut public expenditure;

·  noted that, in response to the Council's recommendations in July 2009, public expenditure in Romania was reduced by 1.50% of GDP, the 2010 budget was consistent with a structural effort of 2.0% of GDP, underpinned by appropriate measures, the Romanian authorities had undertaken several steps to improve fiscal governance, revised public compensation legislation and drafted new legislation that aimed to reform the pension system and strengthen the fiscal framework; and

·  concluded that, overall, Romania had taken effective action.

7.9 In the document the Council set, in light of the severe economic downturn in Romania, a new deadline of 2012 at the latest for the correction of the excessive deficit. It recommended Romania to:

·  implement the fiscal measures for 2010 under the budget law and continue consolidation in 2011 and 2012;

·  ensure an average fiscal effort of 1.75% of GDP over the period 2010 to 2012;

·  specify the measures necessary to correct the excessive deficit by 2012; and

·  continue implementing measures to improve fiscal governance by, in particular, adopting and implementing the Fiscal Responsibility Law.

The Council established a deadline of 16 August 2010 for Romania to take effective action towards correcting the excessive deficit and invited the Romanian authorities to implement reforms towards raising the potential growth rate of GDP, including through enhancing the functioning of the labour market.

The Government's view

7.10 The Economic Secretary to the Treasury (Ian Pearson) says that there are no policy implications for the UK arising from these documents (on which the Government had no vote) and that the Government is in broad agreement with the Council's assessments.

Conclusion

7.11 Whilst we are content to clear these documents, we draw them to the attention of the House for the information they provide about the fiscal situation of these three Member States.


14   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

15   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

16   (30759) 11396/09 (30761) 11398/09 (30765) 11402/09 : see HC 19-xxvi (2008-09), chapter 23 (10 September 2009). Back


 
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