13 Stability and Growth Pact
| (a)
(31896)
12936/10
COM(10) 439
(b)
(31897)
12937/10
COM(10) 440
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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
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| Legal base | (a) —
(b) Articles 126(9) and 136 TFEU; —; QMV of eurozone Member States
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| Documents originated | 19 August 2010
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| Deposited in Parliament | 1 September 2010
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| Department | HM Treasury
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| Basis of consideration | EM of 22 September 2010
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| Previous Committee Report | None
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| Discussed in Council | 7 September 2010
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| Committee's assessment | Politically important
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| Committee's decision | Cleared
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Background
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.
Conclusion
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
Ibid. Back
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