Documents considered by the Committee on 27 October 2010 - European Scrutiny Committee Contents

13 Stability and Growth Pact




COM(10) 439




COM(10) 440

Commission Communication: Follow-up to the Council Decision of 10 May 2010 addressed to Greece, with a view to reinforcing and deepening fiscal surveillance and giving notice to Greece to take measures for the deficit reduction judged necessary to remedy the situation of excessive deficit

Recommendation for a Council Decision amending Council Decision 2010/320/EU of 10 May 2010 addressed to Greece with a view to reinforcing and deepening fiscal surveillance and giving notice to Greece to take measures for the deficit reduction judged necessary to remedy the situation of excessive deficit

Legal base(a) —

(b) Articles 126(9) and 136 TFEU; —; QMV of eurozone Member States

Documents originated19 August 2010
Deposited in Parliament1 September 2010
DepartmentHM Treasury
Basis of considerationEM of 22 September 2010
Previous Committee ReportNone
Discussed in Council7 September 2010
Committee's assessmentPolitically important
Committee's decisionCleared


13.1 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%.[79] Each year the Council of Economic and Finance Ministers (ECOFIN) issues an Opinion on the updated stability or convergence programme of each Member State.[80] 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.

13.2 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.

13.3 On 10 May 2010 a Council Decision was addressed to Greece with a view to:

  • reinforcing and deepening Commission surveillance of Greece; and
  • setting out the measures that Greece would need to take to end the present excessive deficit situation 'as rapidly as possible, at the latest, by the deadline of 2014' and to comply with the conditionality for the granting of the joint eurozone/IMF package of support.[81]

The documents

13.4 The Commission Communication, document (a), assesses the progress made by Greece in implementing the measures set out by the May 2010 Council Decision. The Communication's two annexes provide details of implementation for measures to be adopted by end-June 2010 and measures to be adopted in September 2010. The assessment is based on a report submitted by the Greek Government in August 2010, in accordance with the Decision and on a review carried out in conjunction with the IMF between 24 July and 4 August 2010. As background, the Commission outlines Greece's fiscal consolidation plans and actions:

  • the target is for the general government budget deficit to progressively reduce from 13.6% of GDP in 200 to reach 2.6% of GDP by 2014;
  • in the course of 2010 Greece has adopted four fiscal consolidation packages, with measures quantified by the Commission at 8% of GDP; and
  • of this, measures taken in response to the May 2010 Council Decision amount to 2.5% of GDP in 2010 — these are the subject of the assessment.

13.5 The Commission assesses Greece as having met the quantitative criteria set with respect to fiscal consolidation and notes that the budget deficit contracted more than expected in the first half of the year:

  • on a cash basis, total state outflows were reduced by 16.9% (against a target of 5.3%) while cash receipts increased by 5.9% (against a target of 15.6% for the year as a whole);
  • receipt intake is expected to increase in the second half of the year, as some measures only took effect in July 2010;
  • consolidation by local government and social security funds has been less effective than that by central government; and
  • the cash figures will require end-year adjustments to reflect items such as accounts payable and called guarantees.

13.6 The Commission also identifies a number of risks to continued fiscal consolidation in the coming months:

  • tax revenue has been performing below target;
  • historically the accumulation of accounts payable has been an issue, especially in the health services;
  • as the economy contracts, more state guarantees may be called upon;
  • performance by local governments and social security funds may slip in the second half of the year;
  • given the sharp reduction in expenditure in the first half of the year, some 'catch-up spend' may take place in the second half of the year; and
  • public enterprises are reliant on subsidies and transfers.

13.7 The Commission says that Greece has also achieved significant progress in structural fiscal reforms:

  • a strengthened budget law and implementing measures against tax evasion have been introduced;
  • pension reform has been legislated ahead of schedule, although it will require some follow-up actions;
  • broader structural reform is also on track, with good progress on business environment reform, absorption of structural and cohesion funds and labour market reform;
  • the Financial Stability Fund has been established; and
  • the Bank of Greece is in the process of strengthening its banking supervision function.

13.8 The report submitted to the Commission included most of the information and data required by the May 2010 Council Decision. In addition it contained detailed information on implementation of structural reform. However, some public spending data remained incomplete, and the Commission sets out where processes need to be strengthened.

13.9 The Commission's conclusion is that Greece is satisfactorily complying with the conditions set by the Council Decision and that the budgetary deficit ceilings are achievable.

13.10 Reviews are conducted quarterly, and the second review is expected to take place in the autumn.

13.11 In its Recommendation, document (b), the Commission presents a draft Council Decision, adopted by the ECOFIN Council on 7 September 2010, to amend conditions set for Greece in the May 2010 Council Decision, to reflect developments since then. The Recommendation summarises the Commission's conclusions on how Greece is complying with conditionality and outlines economic developments in Greece since May 2010. It notes in particular the higher than expected impact of indirect tax increases on inflation, which, in turn, have increased the forecast for nominal GDP. The Commission then details some amendments to programme conditionality, to reflect the changed circumstances — these do not constitute a reduction in the adjustment's programme level of ambition.

13.12 The main amendments are:

  • fiscal consolidation targets as a percentage of GDP are revised to take into account higher than forecast nominal GDP growth (consolidation target levels are unchanged);
  • approval of pension reform legislation is removed from the conditions, reflecting the fact that the Greek parliament has approved pension reform ahead of the programme's schedule — in its place are introduced a small number of detailed actions related to pension reform implementation that are still outstanding; and
  • more detailed measures are specified for some conditions relating to structural reform (in particular the health services, railway operators and a review of central administration).

The Government's view

13.13 The Financial Secretary to the Treasury (Mr Mark Hoban) says that the Commission Communication does not have any direct policy implications for the UK. However the Government will be monitoring the situation closely as this issue is of importance to all Member States. The Minister says that the Government broadly agrees with the Commission's assessment and that Greece's compliance with its adjustment programme is subject to separate scrutiny from the IMF Board.

13.14 The Minister also says that there are no direct financial implications to the UK arising from the Council Decision. But he adds that:

  • on 10 May 2010 the General Affairs Council took note of the conclusions of the Member States, adopted on 5 May 2010, that "Member States whose currency is the euro have decided to provide stability support to Greece in an intergovernmental framework via pooled bilateral loans. The EU Member States entrust the Commission with the tasks in relation to the coordination and management of the stability support set out in an inter-creditor agreement to be concluded by the euro area Member States providing the support." As the UK is not in the eurozone there are no financial implications arising from these loans to the UK;
  • the IMF will follow normal procedures in financing its stand-by arrangement with Greece — the IMF borrows resources from its members to finance its ongoing lending operations, contributions are drawn widely across members' "quota subscriptions" to the IMF as well as through bilateral loans and the UK participates in these arrangements along with other IMF members;
  • UK loans to the IMF are held as part of the Official Reserves and do not add to public sector net debt as they are treated as financial assets;
  • there are a number of safeguards to protect UK contributions to the IMF — these include the conditions attached to IMF programmes, the IMF's provision of support through instalments and the IMF's status as a preferred creditor;
  • in parallel to the assistance being provided to Greece, on 9 May 2010 the ECOFIN Council agreed a European Financial Stabilisation Mechanism to support Member States in need, up to the level of €60 billion (£49.10 billon);[82]
  • should the mechanism be called upon the Commission would raise the money on capital markets — loans would be granted in parallel with IMF programmes and would be subject to policy conditionality, the EU budget would be used to guarantee the loans and only where there were defaults on loan repayments would there be a cost to the EU budget;
  • Member States would be liable for a share through their monthly subscriptions to the EU budget — based on the UK's contribution to the 2010 EU Budget, the UK's share would be approximately 13.8% of any increase, or up to a maximum of around €8 billion (around £6.5 billion);
  • eurozone Member States also agreed up to €440 billion (£359.70 billon) to complement the mechanism through a Special Purpose Vehicle — a voluntary intergovernmental agreement of eurozone Member States, lasting three years, which has no bearing on the EU budget; and
  • the Government has chosen not to participate in the Special Purpose Vehicle and will not make contributions — there is therefore no question of any liability arising to the UK.


13.15 We are grateful to the Minister for the information he gives us about the latest developments in relation to Greece's fiscal situation and clear the documents from scrutiny.

79   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

80   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

81   See (31615) 9443/10: HC 428-i (2010-11) chapter 69 (8 September 2010), and (31611) 9606/10 (31796) 12119/10: HC 428-i (2010-11) chapter 7 (8 September 2010). Back

82   IbidBack

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