Various Documents considered by the Committee - European Scrutiny Committee Contents

13 Stability and Growth Pact: excessive deficit procedure



COM(10) 495

Commission Communication: Assessment of the action taken by Lithuania and Romania in response to the Council Recommendations of 16 February 2010 with a view to bringing an end to the situation of excessive government deficit

Legal base
Document originated21 September 2010
Deposited in Parliament28 September 2010
DepartmentHM Treasury
Basis of considerationEM of 31 October 2010
Previous Committee ReportNone
Discussed in Council13 July 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%.[36] Each year the Council of Economic and Finance Ministers (ECOFIN) issues an Opinion on the updated stability or convergence programme of each Member State.[37] 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 In October 2009 the European Council endorsed a fiscal exit strategy, incorporating four principles:

  • it should be coordinated across countries and should be consistent with the values of the Stability and Growth Pact;
  • a timely withdrawal of fiscal stimulus measures and, providing that economic forecasts indicate the recovery is strengthening, fiscal consolidation should start no later than 2011;
  • the planned pace of fiscal consolidation should be ambitious; and
  • crucial supplementary policies should be implemented, which should include strengthened national budgetary frameworks and efforts to support long-term fiscal sustainability.[38]

13.4 On 7 July 2009 the Council adopted excessive deficit procedure Recommendations for Lithuania and Romania. On 16 February 2010 the Council revised the Recommendations, in view of the 'unexpected adverse economic events with major unfavourable consequences for government finances'.[39]

The document

13.5 In this Communication the Commission presents an assessment of the action taken by Lithuania and Romania in response to the Recommendations of 16 February 2010. Its overall judgement is that both Lithuania and Romania have taken action representing adequate progress and no further steps in the excessive deficit procedure are needed. For each assessment the Commission outlines the measures taken to date and concludes that progress made so far with implementation is satisfactory. Its assessments identify areas of concern and risks that still remain and make suggestions on the pace, extent and nature of the required consolidation to meet excessive deficit procedure deadlines.

13.6 For Lithuania the Commission:

  • suggests that the outlook for economic activity has become more favourable since the Council produced its Recommendations in February 2010;
  • says real GDP is expected to fall by only 0.6% in 2010 and grow by 3.2% in 2011 — this compares favourably with a fall of 3.9% in 2010 and growth of 2.5% in 2011, the expectation in the autumn 2009 Commission forecast;
  • notes annual growth compared with the same period a year earlier has recently been confirmed in the second quarter of 2010 as 1.3%;
  • says Lithuania has broadly implemented the deficit-reducing Recommendations by the Council;
  • recalls that these measures included large cuts in expenditure and some revenue-increasing measures;
  • says Lithuania has also advanced the implementation of structural reforms, with the adoption of a social security reform paper being a significant example of this;
  • suggests that the forthcoming 2011 budget should include additional measures, as further considerable adjustment is needed in the coming years in order to achieve the correction of the excessive deficit by 2012;
  • suggests also that longer-lasting measures should replace temporary ones and consolidation should be accelerated; and
  • concludes that Lithuania has taken action representing adequate progress towards correction of the excessive deficit within the timeframe set and considers that no further steps in the excessive deficit procedure are needed at present.

13.7 For Romania the Commission:

  • highlights that it updated its forecast for Romania in July 2010 and the new figures showed a significant downward revision compared with the autumn 2009 version;
  • notes that the update forecasts real GDP to contract by 1.9% this year, compared with the 0.5% growth that was originally predicted;
  • notes also that projections for GDP growth in 2011 have been downgraded, from 2.6% at the time of the Recommendation to 1.5%;
  • comments that these worse-than-expected conditions reflect the negative impact of regional financial difficulties in the first and second quarters of 2010, as well as country-specific factors such as flooding in the spring and the short-term effects of additional fiscal consolidation measures;
  • suggests that Romania has implemented consolidation measures included in the 2010 budget law and is on course to achieve the revised 2010 deficit target of 7.3% of GDP;
  • says that the planned extra savings in expenditure combined with substantial carry-overs from the 2010 consolidation measures should result in a subsequent reduction of the deficit to below 5% of GDP in 2011;
  • notes that Romania has also made progress on structural reforms, with the adoption of a draft pension reforms by the government and the adoption of a Fiscal Responsibility Law by the parliament as examples of this;
  • says that, despite the considerable steps taken by the Romanian government towards restoring public finances, significant risks still remain;
  • draws attention to the importance of keeping in force the consolidation measures that have been implemented for longer than originally envisaged and of ensuring that their positive effect is not offset by other policies;
  • suggests that, additionally, the government should continue to implement the reforms agreed in the context of the IMF-led multilateral financial assistance programme and avoid making declarations about new and expensive policy initiatives or changes to the consolidation package, which would give rise to uncertainty; and
  • concludes that Romania has taken action representing adequate progress towards correction of the excessive deficit within the timeframe set and considers that no further steps in the excessive deficit procedure are needed at present.

The Government's view

13.8 The Financial Secretary to the Treasury (Mr Mark Hoban) says that:

  • the Communication has no policy implications for the UK;
  • in the 17 June European Council Conclusions, in line with the view of the G20, Member States agreed on a coordinated and differentiated exit strategy to ensure sustainable public finances; and
  • the Government believes that Member States should take forward fiscal consolidation as a priority to reduce their deficits and support recovery.


13.9 We are grateful to the Minister for his full description of the Commission's Communication. We have no questions to raise and clear the document.

36   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

37   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

38   See, paragraph 27 and  Back

39   (30760) 11397/09 (30761) 11398/09 (30764) 11401/09 (30765) 11402/09: see HC 19-xxvi (2008-09), chapter 23 (10 September 2009) and (31360) 5903/10 (31361) 6231/10: see HC 5-xiii (2009-10) chapter 7 (10 March 2010).  Back

previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2010
Prepared 2 December 2010