69 Stability and Growth Pact
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9443/10
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| 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
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| Legal base | Articles 126(9) and 136 TFEU; —; QMV, excepting the Member State concerned
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| Document originated | —
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| Deposited in Parliament | 25 May 2010
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| Department | HM Treasury
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| Basis of consideration | EM of 26 July 2010
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| Previous Committee Report | None
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| Discussed in Council | 10 May 2010
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| Committee's assessment | Politically important
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| Committee's decision | Cleared
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Background
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.
Conclusion
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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