Documents considered by the Committee on 16 March 2011 - European Scrutiny Committee Contents

10 Stability and Growth Pact




COM(10) 739




COM(10) 740

Commission Communication: Follow-up to the Council Decision 2010/320/EU 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 for a second time Decision 2010/320/EU 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 originated9 December 2010
Deposited in Parliament15 December 2010
DepartmentHM Treasury
Basis of considerationEM of 16 February 2011
Previous Committee ReportNone
Discussed in Council20 December 2011
Committee's assessmentPolitically important
Committee's decisionCleared


10.1 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%.[47] Each year the Council of Economic and Finance Ministers (ECOFIN) issues an Opinion on the updated stability or convergence programme of each Member State.[48] 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.

10.2 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.

10.3 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.[49]

10.4 On 7 September 2010, following an assessment of Greece's response, the Council addressed a further Decision to Greece amending the May 2010 Decision. The main amendments were:

  • revision of fiscal consolidation targets as a percentage of GDP to take into account higher than forecast nominal GDP growth (consolidation target levels were unchanged);
  • removal of approval of pension reform legislation from the conditions, reflecting the fact that the Greek parliament had approved pension reform ahead of the programme's schedule — in its place were introduced a small number of detailed actions related to pension reform implementation that were still outstanding; and
  • specification of more detailed measures for some conditions relating to structural reform (in particular the health services, railway operators and a review of central administration).[50]

The documents

10.5 In its Communication, document (a), the Commission assesses the progress made by Greece in implementing the measures set out by the May 2010 Council Decision. The assessment is based on a report submitted by the Greek government, in accordance with the requirements set by the Council Decision and on a review carried out in conjunction with the IMF and the European Central Bank. The Commission:

  • outlines, as background, Greece's fiscal consolidation plans — the target is for the general government budget deficit to progressively reduce from 15.4% of GDP in 2009, reaching 2.6% of GDP by 2014;
  • identifies some issues with budget implementation — total state revenues increased by 3.4% from January to September 2010 (against a target of 15.6% for the year as a whole), while cash outflows contracted by 9.2% (against a target of 7.6% for the year as a whole) and the government may also partially deliver on its commitment to under-execute spending to offset slippages in social security and local government expenditure;
  • forecasts the deficit calculated according to ESA95[51] standards for 2010 to be around 1.75% of GDP above the original programme target — this reflects the materialisation of risks identified in the previous, September 2010, in particular around one third of this deviation can be attributed to the revision of Greek fiscal statistics;
  • expects the increase in government debt to remain within the original ceiling set by the programme;
  • notes the continued commitment of the Greek government to the programme and its intention to implement additional measures in 2011 to compensate for slippage in 2010 — the 2011 budget includes new measures worth 2.5% of GDP, including cuts in untargeted spending, a reduction in short-term contracts in the public sector, targeting of household subsidies and better management of state assets;
  • identifies measures to tackle structural problems in health expenditure and the management of state owned enterprises that have been included in the 2011 budget — further detailed measures will need to be specified to meet the 2012-2014 consolidation targets;
  • says progress continues to be made on structural reforms, although at a slower pace than before the summer of 2010 — in particular, there has been progress on structural fiscal reform and the first stage of pension reform was adopted;
  • calls for more ambition on privatisation plans, but welcomes the government's commitment to use privatisation proceeds to redeem debt;
  • says the report and other data 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;
  • sets out, however, areas where data provision is still incomplete; and
  • that, despite the expectation that it will miss one of its 2010 targets and a slower pace in the adoption of reform, Greece is satisfactorily complying with the conditions set by the May 2010 Council Decision.

10.6 Commission reviews are conducted quarterly and the third review is expected to take place in the spring of 2011.

10.7 The Commission's Recommendation for a Council Decision, document (b), summarises its conclusions on how Greece is complying with conditionality, as covered in the Communication, document (a), and outlines developments in Greece since the adoption of the May 2010 Council Decision. In particular, the Commission:

  • outlines data revisions resulting from the Eurostat validation of Greek government deficit and debt statistics; and
  • details some amendments to programme conditionality, to reflect additional measures required to offset some slippage against 2010 targets — these do not constitute a reduction in the adjustment's programme level of ambition.

10.8 The main amendments to the May 2010 Council Decision, as amended in September 2010, are:

  • debt-to-GDP ratio targets are modified to take into account the revisions to past data;
  • additional fiscal consolidation measures for 2011 are listed; and
  • more detailed measures are specified for some conditions relating to structural reform and reform of the public administration (in particular the health services, state owned enterprises and procurement).

The Government's view

10.9 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.

10.10 The Minister also says that there are no direct financial implications for 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);[52]
  • 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;
  • 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; and
  • neither the European Financial Stabilisation Mechanism nor the Special Purpose Vehicle provided assistance to Greece.


10.11 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.

47   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

48   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

49   (31615) 9443/10: see HC 428-i (2010-11), chapter 69 (8 September 2010) and (31611) 9606/10 (31796) 12119/10: see HC 428-i (2010-11), chapter 7 (8 September 2010). Back

50   (31896) 12936/10 (31897) 12937/10: see HC 428-v (2010-11), chapter 13 (27 October 2010). Back

51   The European System of National and Regional Accounts, see:  Back

52   IbidBack

previous page contents next page

© Parliamentary copyright 2011
Prepared 24 March 2011