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IP/04/552

Brussels, 28 April 2004

Commission proposes new steps in budgetary surveillance for Portugal, the Netherlands, the UK and Italy

Following on the decision taken on 7 April (IP/04/466), the European Commission adopted today a series of budgetary surveillance decisions under the provisions of the Treaty and the Stability and Growth Pact. First, the Commission recommends to the Council of Ministers the end of the excessive deficit procedure for Portugal. The Portuguese deficit, which exceeded the 3% of GDP threshold in 2001, was below 3% of GDP in both 2002 and 2003, in line with the Council recommendation addressed to Portugal in November 2002. The Portuguese case demonstrates that the excessive deficit procedure can be terminated when member states take the necessary budgetary consolidation measures. Second, the Commission adopted a report on the budgetary situation of the Netherlands, whose deficit was above the 3% reference value in 2003. Similarly the Commission adopted a report on the budgetary situation of the UK, whose deficit is estimated above the 3% reference value in the 2003-04 financial year. In the case of the UK, the deficit is however expected to return to below 3% of GDP already this year on both calendar and financial year basis. The Economic and Financial Committee will prepare an opinion on the Commission reports within two weeks from their adoption. These two cases demonstrate that surveillance procedures have enough flexibility to take into account temporary situations without necessarily declaring a member state in an excessive deficit situation if appropriate corrective action is taken in time. Finally, the Commission recommends to the Council to address an early warning to Italy. Italy's budget deficit is forecast to exceed the 3% reference value in 2004 on the basis of current policies. Moreover, the pace of debt reduction in Italy is a source of major concern and coming to a halt. The early warning is the preventive instrument of the Stability and Growth Pact aiming to help the country concerned to take appropriate additional budgetary measures and thereby avoid entering into an excessive deficit position.

The Commission reports for the Netherlands and the UK and the Commission recommendations for Portugal and Italy are adopted on the initiative of Joaquín Almunia, EU Commissioner for economic and monetary affairs.

In Portugal, following the emergence of a budget deficit of 4.4% of GDP for 2001, which led to the country being placed in an excessive deficit situation, the government brought the deficit below 3% in 2002 and 2003. This result, achieved in spite of adverse economic circumstances, complies with the terms of the Council recommendation for the correction of the excessive deficit issued in November 2002. The Commission is therefore recommending to the Council to abrogate the decision on the existence of an excessive deficit.

The Portuguese authorities have made public their intention to carry out additional measures so as to keep the deficit below 3% of GDP in 2004. The abrogation of the excessive deficit for Portugal is expected to be decided by the Council at its meeting of 11 May 2004.

In 2003, the Netherlands recorded a general government deficit above the 3% of GDP Treaty reference value. As this represents prima facie evidence of the existence of an excessive deficit, the Commission is required by Article 104(3) of the Treaty to adopt a report. The report notes that the excess over the 3% reference value in 2003 did not result from an unusual event outside the control of the Dutch authorities, nor from a severe economic downturn in the sense of the Treaty and the Stability and Growth Pact. However, it has to be recognised that the breach of the reference value occurred in a context of strongly negative growth and in spite of substantial savings measures. According to the Commission Spring 2004 forecast, the Dutch government deficit is expected to remain above the reference value in 2004 and 2005. These projections were made under the usual assumption of no further policy changes. In the mean time, however, namely on 16 April, the Dutch government announced further measures aimed at keeping the deficit below 3% of GDP in 2004. The Economic and Financial Committee shall prepare an opinion on the Commission report within two weeks following which the Commission will consider whether further steps under the excessive deficit procedure are necessary for the Netherlands.

The United Kingdom recorded a general government deficit above 3% of GDP in the 2003 calendar year and is forecast to record a deficit above 3% of GDP for the 2003-04 financial year (which is the basis for budgetary surveillance for the UK under the Treaty). As for the Netherlands, the Commission has therefore adopted a report on the budgetary situation of the UK under Article 104(3) of the Treaty. The excess over the 3% of GDP reference value in 2003 did not result from an unusual event outside the control of the United Kingdom authorities, nor from a severe economic downturn in the sense of the Treaty and the Stability and Growth Pact. Unlike the case of the Netherlands, however, the Commission Spring 2004 forecast projects the UK deficit to return to below the reference value in 2004 and 2005. Hence, the excess over the reference value is likely to be small and temporary, which gives margins to conclude that an excessive deficit would not exist in the sense of the Treaty. The Economic and Financial Committee shall prepare an opinion on the Commission report.

Public finance developments in Italy show a significant divergence from the objectives set in successive stability programmes. The Commission forecasts for 2004 a budget deficit of 3.2% of GDP compared to a target of 2.2% of GDP in the 2003 update of the programme and of 0.6% of GDP in the 2002 update. The divergence from the objectives is almost entirely structural. The cyclically adjusted budget deficit is expected to deteriorate by 0.7% of GDP in 2004 according to Commission forecasts. Budgetary plans have been recurrently based on overoptimistic growth assumptions, especially as regards the medium-term growth outlook. The projected interruption of the reduction of the debt, which at 106% of GDP is the highest in the euro area, is a further source of concern. Without extraordinary operations the debt ratio would have barely decreased in Italy since 2001. On the basis of Article 99(4) of the Treaty and Article 6(2) of Council Regulation 1466/97, the Commission is therefore recommending that an early warning be issued to Italy to prevent the occurrence of an excessive deficit.

Full text of the Commission assessment on Portugal available on:

http://ec.europa.eu/economy_finance/about/activities/sgp/procedures_en.htm

Full text of the Commission report on the Netherlands available on:

http://ec.europa.eu/economy_finance/about/activities/sgp/procedures_en.htm

Full text of the Commission report on the United Kingdom available on:

http://ec.europa.eu/economy_finance/about/activities/sgp/procedures_en.htm

Full text of the Commission assessment on Italy available on:

http://ec.europa.eu/economy_finance/about/activities/sgp/proceduresew_en.htm


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