European Scrutiny Committee Contents

69 Stability and Growth Pact



Council Decision 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 baseArticles 126(9) and 136 TFEU; —; QMV, excepting the Member State concerned
Document originated
Deposited in Parliament25 May 2010
DepartmentHM Treasury
Basis of considerationEM of 26 July 2010
Previous Committee ReportNone
Discussed in Council10 May 2010
Committee's assessmentPolitically important
Committee's decisionCleared


69.1 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%.[298] Each year the Council of Economic and Finance Ministers (ECOFIN) issues an Opinion on the updated stability or convergence programme of each Member State.[299] 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.

69.2 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.

The document

69.3 This Council Decision is addressed to Greece in order to:

  • reinforce and deepen Commission surveillance of Greece; and
  • set out the measures that Greece will 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 a joint eurozone/IMF package of support.

69.4 As background the recitals of the Decision lay out a chronology of the events that took place in Greece since 27 April 2009, when the Council decided that an excessive deficit existed in Greece and that this should be corrected by 2010 at the latest:

  • following Greece's failure to take effective action by the agreed deadline, the Council, on 16 February 2010, gave notice to Greece to correct the excessive deficit by 2012 at the latest;
  • the notice outlined a series of measures that Greece should undertake to end the present state of excessive deficit and imposed a deadline of 15 May 2010 for effective action to be taken;
  • by March 2010 the Commission had assessed that "Greece was implementing, as requested, the fiscal measures meant to ensure the achievement of the planned deficit target for 2012" and that Greece's programme appeared "sufficient to safeguard the 2010 budgetary targets provided in the Council Decision of 16 February 2010 and in the stability programme";[300]
  • subsequently, however, significant downward revisions to the Commission's GDP forecast for Greece and to Eurostat's estimates of Greece's 2009 government deficit and debt estimates led to a reassessment of the situation in Greece and the conclusion that Greece's consolidation plans "can no longer be considered valid, requiring even more drastic action in the course of the current year";
  • the Commission 2010 Spring Forecast revealed a marked worsening of the economic scenario in Greece, in turn implying a corresponding deterioration of the outlook for public finances at unchanged policy;
  • the forecast now projects sharp contractions in both 2010 and 2011, in contrast to the Commission 2009 Autumn Forecast, which predicted a mild contraction in 2010 followed by a recovery in 2011;
  • to this was added the upward revision of the government deficit outcome for 2009 (from an estimated 12.7% of GDP at the time of Council Decision of 16 February 2010 to 13.6% of GDP according to the fiscal notification submitted by Greece on 1 April 2010), with the risk of a further upward revision (of the order of 0.3 to 0.5 % of GDP) following completion of the investigations that Eurostat is undertaking with the Greek Statistical Authorities; and
  • concerns in the markets for the public finances, meanwhile, were resulting in sharp increases in risk premia on government debt, compounding the difficulties in controlling the path of government deficit and debt.

69.5 The recitals then conclude that:

  • the worse than expected depth of the recession, revised fiscal statistics and increased risk premia "make the achievement of the initial deficit reduction path unfeasible"; and
  • "unexpected adverse economic events with major unfavourable consequences for government finances can be considered to have occurred in Greece".

69.6 Finally the recitals record that the Council:

  • decides, in accordance with Articles 136, never before called on, and 126(9) TFEU, that Greece's deadline for correcting its deficit should be extended by two years to 2014, that the Council's recommendations to Greece should be revised and that fiscal surveillance in Greece should be reinforced and deepened;
  • stresses, in spite of the extended deadline, the "extremely urgent need for Greece to take decisive action, on an unprecedented scale, on its deficit and on other factors contributing to the increase in debt, in order to reverse the increase in the debt-to-GDP ratio and allow it to return as soon as possible to market financing";
  • notes a joint eurozone/IMF stability support package that was extended to Greece "with a view to safeguarding the financial stability of the euro area as a whole"; and
  • underlines that this support is conditional on Greece respecting the articles of the Council Decision — in particular, it is expected to carry out the full list of measures outlined in the Decision in accordance with the calendar set out therein.

69.7 The measures prescribed by the Decision are in its first four Articles, the first two relating to the measures that Greece needs to undertake to correct its deficit and the latter two relating to the deepening and strengthening of fiscal surveillance. The first Article sets out the annual change that will be required in government deficit and consolidated gross debt, requiring that:

  • Greece put an end to the present excessive deficit situation "as rapidly as possible and, at the latest, by the deadline of 2014";
  • the adjustment path towards correction of the excessive deficit aims to achieve a general government deficit not exceeding 8.0% of GDP in 2010, 7.6% of GDP in 2011, 6.5% of GDP in 2012, 4.9% of GDP in 2013 and 2.6% of GDP in 2014;
  • achievement, to this end, of an improvement in the structural balance of at least 10% of GDP over the period 2009-2014; and
  • the debt to GDP ratio, based on the current GDP projections, does not exceed 133.2% in 2010, 145.2% in 2011, 148.8 % in 2012, 149.6 % in 2013 and 148.4 % in 2014.

69.8 The second Article outlines a detailed calendar of the measures and actions that Greece will need to take to correct its deficit, quarter by quarter:

  • the first set of deadlines falls at the end of June 2010 and the final set of deadlines at the end of December 2011;
  • measures to be undertaken focus initially on frontloading a substantial number of spending and tax measures; and
  • later milestones include actions to move structural reform forward as well as actions to improve processes, institutional systems, administrative capacity and accountability structures.

Headline measures include:

  • by June 2010 an increase the VAT rate, increases in fuel, tobacco and alcohol excises, cuts in civil servants remuneration, pension reforms, including the abolition of 'bonuses' (one-off payments) paid to pensioners three times a year, cuts in public investment and significant tax reforms, including the abrogation of all exemptions;
  • by September 2010 a commitment to further fiscal measures in 2011amounting to "at least 3.2% of GDP";
  • by December 2010 reforms to the fiscal framework, together with structural reforms aimed at improving Greece's competitiveness; and
  • in 2011 a commitment to further fiscal measures for 2012 amounting to at least 2.2% of GDP, including further reductions in public sector employment, broadening of the VAT base and structural reforms to public sector pay.

69.9 In order to strengthen fiscal surveillance the third and fourth Articles provide that Greece shall:

  • fully cooperate with the Commission;
  • submit to the Council and the Commission quarterly reports that outline the policy measures taken to comply with the Decision; and
  • transmit without delay any data or document required in order to monitor compliance with the Decision.

The Government's view

69.10 The Financial Secretary to the Treasury (Mr Mark Hoban) says that the Council Decision does not have any direct policy implications for the UK, but that the Government will be monitoring the situation closely as this issue is of importance to all Member States. He also says that there are no direct financial implications for the UK arising from the Decision. However the Minister comments further that:

  • on 10 May 2010 the General Affairs Council took note of conclusions, adopted on 5 May 2010 by all 27 Member States, 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 for 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" 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, including the conditions attached to IMF programmes, the IMF's provision of support through instalments and the IMF's status as a preferred creditor;
  • on 9 May 2010 the ECOFIN Council agreed a European Financial Stabilisation Mechanism (EFSM) to support Member States in need, up to the level of €60 billion (£49.1 billon); [301]
  • 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, but only where there were defaults on loan repayments would there be a cost to the budget;
  • Member States would be liable for a share — based on the UK's contribution to the 2010 EU Budget its share would be approximately 13.8% of any increase, or up to a maximum of around €8 billion (around £6.5 billion);
  • the ECOFIN Council also agreed up to €440 billion (£359.7 billon) to complement the EFSM Regulation through a Special Purpose Vehicle;
  • this is 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 for the UK.


69.11 We are grateful to the Minister for his full account of the content and adoption of this Council Decision and clear the document.

298   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

299   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

300   (31407) 7340/10: see HC 5-xv (2009-10), chapter 9 (24 March 2010). Back

301   (31611) 9606/10 (31796) 12119/10: see chapter 7 in this Report. Back

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