Documents considered by the Committee on 5 April 2011 - European Scrutiny Committee Contents

12   Stability and Growth Pact




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COM(11) 85




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

Council Decision amending 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

Document originated(a)  24 February 2011

(b)  —

Deposited in Parliament(a) 8 March 2011

(b) 22 March 2011

DepartmentHM Treasury
Basis of considerationEM of 30 March 2011
Previous Committee ReportNone
Discussion in Council7 March 2011
Committee's assessmentPolitically important
Committee's decisionCleared


12.1  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%.[44] Each year the Council of Economic and Finance Ministers (ECOFIN) issues an Opinion on the updated stability or convergence programme of each Member State.[45] 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.

12.2  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 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.

12.3  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.[46]

12.4  In September and December 2010, following assessments by the Commission of Greece's response, the Council addressed two further Decisions to Greece amending the May 2010 Decision. The main amendments were:

  • modification of debt-to-GDP ratio targets to take into account the revisions to past data;
  • 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;
  • listing of additional fiscal consolidation measures for 2011; and
  • specification of more detailed measures for some conditions relating to structural reform and reform of the public administration (in particular the health services, state owned enterprises and procurement).[47]

The documents

12.5  In its Communication, document (a), the Commission presents its third assessment of the progress made by Greece in implementing the measures set out by the May 2010 Council Decision. The accompanying Commission Staff Working Paper provides the analytical detail to support the findings. 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:

  • identifies some issues with the 2010 budget implementation;
  • says that the government deficit[48] ceiling for 2010 is estimated to have been missed by around €4.1 billion (£3.5 billion) and to have amounted to 9.6% of GDP as opposed to the 8% target;
  • points out, however, that this amounts to a reduction in the deficit of almost 6% points compared to 2009;
  • says that the debt ratio for Greece increased from 127% of GDP at the end of 2009 to 141% in 2010;
  • comments that the increase in government debt has, however, remained within the ceiling established in the May 2010 Council Decision (ceiling — €34.058 billion (£28.05 billion), estimated outcome — €28.87 billion (£24.62 billion));
  • reports that, for 2011, the Greek government has confirmed its commitment to meet the fiscal target for 2011;
  • highlights that, as a result of a higher-than-expected deficit and debt levels and lower-than-expected GDP, larger consolidation efforts are necessary;
  • says that the Greek government has, however, committed to fully recoup the ground lost in 2010 in order to restore a sustainable fiscal position;
  • says that the 2011 Greek budget contains new deficit reduction measures worth 2.25% of GDP, bringing total fiscal consolidation measures in 2011 to 5.75% cent of GDP — two thirds of the measures agreed in November 2010 are on the expenditure side, most are of a structural nature, with temporary measures worth 0.3% of GDP;
  • notes that the 2011 budget will start to tackle two key structural problems — excessive health spending and losses by state-owned enterprises;
  • says that, in order to achieve the 2011 budgetary targets, tax revenues will, however, have to increase by €1.5 billion (£1.28 billion);
  • believes that this will be challenging and will depend on Greece achieving concrete results from combating tax evasion and the efficiency of collection;
  • lists areas of the structural reform agenda that are being implemented (although in some cases slower than planned), for example, strengthening the legislative framework to fight tax evasion and tax administration;
  • says budgetary institution reforms are progressing and progress has been made on healthcare reform;
  • explains that certain measures have, however, been delayed, including the simplification of public sector remuneration;
  • says the Greek government has committed itself to publishing an inventory of state-owned assets, including stakes in listed and non-listed enterprises and commercially viable real estate and land;
  • believes privatisation will yield €50 billion (£42.6 billion) in 2011-15, with €15 billion (£12.8 billion) of this in 2011-12;
  • highlights that the Greek government will prepare a medium-term fiscal strategy for 2012-15 in accordance with Greek budget law, with a view to reducing the general government deficit below 3% of GDP by 2014; and
  • estimates that the fiscal gap between a baseline no-policy scenario and the 2011 target set by the Council currently stands at 8% of GDP — out of this, fiscal measures worth 2% of GDP have been identified so far.

12.6  The Commission concludes that, overall, despite the 2010 fiscal slippage, Greece is getting ready to take the necessary actions to implement the required policies to remain on track, with a view to putting an end to the excessive deficit by 2014. Therefore the Commission believes Greece is satisfactorily complying with the May 2010 Council Decision.

12.7  Consequent on the Commission Communication, document (a), the Council believed it appropriate to amend for the third time, as in document (b), the May 2010 Council Decision to ensure Greece meets its deficit target for 2011. The main requirements amended or added through this new Decision include:

  • clearing arrears accumulated in 2010;
  • implementing a medium-term strategy plan which identifies permanent fiscal consolidation of at least 8% of GDP, plus a contingency reserve, to be published before end-March 2011;
  • an anti-tax evasion plan which includes quantitative performance indicators;
  • producing a detailed action plan with a timeline to complete and implement the simplified public sector remuneration system;
  • continuing to implement comprehensive health care reform started in 2010 to keep public health expenditure at or below 6% of GDP;
  • fighting waste and mismanagement in state-owned companies yielding fiscal savings of at least €800 million (£682 million);
  • publication of an inventory of state-owned assets, with a view to accelerating privatisation plans; and
  • reform of the secondary/supplementary pension schemes, by merging schemes and starting calculation of benefits on the basis of the new notional defined contribution system.

12.8  The new Council Decision does not amend the timeline for Greece to end the present excessive deficit situation "as rapidly as possible, at the latest, by the deadline of 2014".

The Government's view

12.9  The Financial Secretary to the Treasury (Mr Mark Hoban) says that the Commission Communication, document (a), 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.

12.10  The Minister also says that there are no direct financial implications for the UK arising from either of documents. 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; and
  • 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 installments and the IMF's status as a preferred creditor.


12.11  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.

44   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

45   The 17 Member States (Austria, Belgium, Cyprus, Germany, Estonia, 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 10 Member States (including the UK) produce Convergence Programmes. Back

46   (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

47   (31896) 12936/10 (31897) 12937/10: see HC 428-v (2010-11), chapter 13 (27 October 2010) and (32338) 17753/10 (32339) 17752/10: see HC 428-xx (2010-11), chapter 10 (16 March 2011). Back

48   On an ESA 95 basis, that is the European System of National and Regional Accounts, see:  Back

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