13 Stability and Growth Pact: excessive
deficit procedure
| (31981)
14038/10
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
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| Legal base | —
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| Document originated | 21 September 2010
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| Deposited in Parliament | 28 September 2010
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| Department | HM Treasury
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| Basis of consideration | EM of 31 October 2010
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| Previous Committee Report | None
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| Discussed in Council | 13 July 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%.[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.
Conclusion
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 http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/110889.pdf,
paragraph 27 and http://register.consilium.europa.eu/pdf/en/09/st14/st14765.en09.pdf.
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
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