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Commission assesses stability programmes of Greece and Portugal

European Commission - IP/07/174   13/02/2007

Other available languages: FR DE PT EL

IP/07/174

Brussels, 13 February 2007

Commission assesses stability programmes of Greece and Portugal

Having examined their updated stability programmes[1], the European Commission finds that significant structural budgetary adjustment is under way in Portugal and Greece. The achievement of the medium-term budgetary targets is, however, surrounded by risks, and strong efforts to further consolidate public finances are still required. Greece appears to have corrected its excessive deficit in 2006, but the budgetary consolidation pace should be strengthened from 2007 onwards to fully exploit the strong growth prospects and to address the risk of higher-than-expected deficits from 2008 onwards. The fiscal policy strategy of Portugal is broadly consistent with a correction of the excessive deficit by 2008, conditional on the full and effective implementation of the measures envisaged and on the adoption of additional measures in case of lower-than-projected economic growth. Both countries remain at high risk as regards the long-term sustainability of public finances.

“Greece is on the right track to put its public finances on a sounder footing, but it should use the good economic times to reduce its debt further and put its pension system on a sustainable ground. . Portugal is also making a big effort to correct its deficit next year, but should stand ready to implement additional measures in case risks materialise and ensure rapidly, thereafter, a sufficient safety margin against breaching the 3% rule," said Economic and Monetary Affairs Commissioner Joaquín Almunia.

GREECE

Greece submitted a new update of its stability programme on 18 December 2006, covering the period 2006-2009. The programme assumes a correction of the excessive deficit in 2006, as recommended by the Council, and sets a medium-term objective (MTO) of a balanced or surplus position in structural terms (cyclically-adjusted and net of one-off and temporary measures). The budgetary targets are broadly unchanged from the previous update with the general government deficit and gross debt projected to fall, respectively, to 1¼% and 91¼% of GDP by 2009. The long-term budgetary impact of ageing in Greece is uncertain as long-term projections of pension expenditure are not available. But with a very high debt ratio and significant expected budgetary costs of an ageing population, Greece appears to be at high risk with regard to the sustainability of public finances.

Overall, the programme is consistent with the correction of the excessive deficit in 2006, but the pace of adjustment in subsequent years, especially after 2007, should be strengthened in order to fully exploit strong growth prospects and to address the risks of higher-than-expected deficits from 2008.

Therefore, the Council should invite Greece to: (i) taking into account the good times, strengthen, after the excessive deficit has been corrected, the adjustment towards the MTO and ensure that the debt-to-GDP ratio is reduced accordingly; (ii) continue improving the budgetary process by increasing its transparency, spelling out the budgetary strategy within a longer time perspective and effectively implementing mechanisms to monitor and control primary expenditure; and (iii) in view of the very high level of debt and the projected increase in age-related expenditure, improve the long-term sustainability of public finances by achieving the MTO, controlling public pension and healthcare expenditures and resolutely implementing the enacted reforms; and produce as soon as possible long-term projections for age-related expenditure.

PORTUGAL

Portugal submitted a new update of its stability programme on 15 December 2006, covering the period 2006-2010. The programme aims at correcting the excessive deficit by 2008, the deadline set by the Council, on the basis of structural measures within a medium-term framework. The MTO is a deficit of 0.5% of GDP in structural terms.

After the planned correction of the excessive deficit, the programme targets an adjustment that is in line with the Pact, but given the risks to the budgetary targets, the budgetary stance does not seem to lead to the achievement of a sufficient safety margin against breaching the 3% of GDP deficit threshold until the end of the programme period. The debt ratio, which was 67.4% of GDP in 2006, would be diminishing sufficiently towards the reference value at the end of the programme period. Portugal remains at high risk as regards the long-term sustainability of public finances.

Overall, the programme is broadly consistent with a correction of the excessive deficit by 2008, conditional on a full and effective implementation of the measures announced therein and on the reinforcement of such measures in case of lower-than-projected economic growth. After the correction of the excessive deficit, the programme envisages adequate progress towards the MTO, but there are risks to the achievement of the budgetary targets, which could require additional measures.

In the light also of the recommendation under Article 104(7) of 20 September 2005, the Council should therefore invite Portugal to: (i) implement with rigour the structural measures envisaged in the programme so as to correct the excessive deficit by 2008 and stand ready to reinforce these measures to deal with the budgetary impact of possible lower-than-projected economic growth; (ii) once the excessive deficit has been corrected, carry out the envisaged adjustment towards the MTO, backing it up with reinforced measures if necessary; and ensure that the debt-to-GDP ratio is reduced accordingly; (iii) pursue the ongoing reform of public administration; continue strengthening the budgetary framework, including the assessment and control of budgetary execution at all levels of the general government, notably in order to attain the planned expenditure containment; and (iv) in view of the level of debt and the projected increase in age-related expenditure, improve the long-term sustainability of public finances by achieving the MTO and by securing and possibly enhancing the benefits of the adopted pension reforms.

The Commission recommendations for these Council Opinions are available at:

http://ec.europa.eu/economy_finance/about/activities/sgp/country/doctype/cr_en.htm

GREECE

Comparison of key macroeconomic and budgetary projections


2005
2006
2007
2008
2009
Real GDP
(% change)
SP Dec 2006
3.7
4.0
3.9
4.0
4.1
COM Nov 2006
3.7
3.8
3.7
3.7
n.a.
SP Dec 2005
3.6
3.8
3.8
4.0
n.a.
HICP inflation
(%)
SP Dec 2006
3.5
3.3
3.3
2.8
2.6
COM Nov 2006
3.5
3.3
3.3
3.3
n.a.
SP Dec 2005
3.5
3.2
3.0
2.7
n.a.
Output gap
(% of potential GDP)
SP Dec 20061
0.9
1.0
0.9
1.1
1.5
COM Nov 20065
1.5
1.5
1.5
1.8
n.a.
SP Dec 20051
1.1
1.1
1.1
1.5
n.a.
General government balance
(% of GDP)
SP Dec 2006
-5.2
-2.6
-2.4
-1.8
-1.2
COM Nov 2006
-5.2
-2.6
-2.6
-2.4
n.a.
SP Dec 2005
-4.3
-2.6
-2.3
-1.7
n.a.
Primary balance
(% of GDP)
SP Dec 2006
-0.4
2.0
2.0
2.4
2.9
COM Nov 2006
-0.4
2.0
1.8
1.7
n.a.
SP Dec 2005
0.9
2.3
2.4
2.8
n.a.
Cyclically-adjusted balance
(% of GDP)
SP Dec 20061
-5.6
-3.0
-2.8
-2.3
-1.8
COM Nov 2006
-5.9
-3.3
-3.3
-3.1
n.a.
SP Dec 20051
-4.8
-3.1
-2.8
-2.4
n.a.
Structural balance2
(% of GDP)
SP Dec 20063
-5.6
-3.4
-2.8
-2.3
-1.8
COM Nov 20064
-5.9
-3.7
-3.3
-3.1
n.a.
SP Dec 2005
-4.8
-3.7
-2.8
-2.4
n.a.
Government gross debt
(% of GDP)
SP Dec 2006
107.5
104.1
100.1
95.9
91.3
COM Nov 2006
107.5
104.8
101.0
96.4
n.a.
SP Dec 2005
107.9
104.8
101.1
96.8
n.a.
Notes:
1Commission services calculations on the basis of the information in the programme.
2Cyclically-adjusted balance (as in the previous rows) excluding one-off and other temporary measures.
3One-off and other temporary measures taken from the programme (0.4% of GDP in 2006).
4One-off and other temporary measures taken from the Commission services’ autumn 2006 forecast (0.4% of GDP in 2006).
5Based on estimated potential growth of 3.7%, 3.8%, 3.6% and 3.5% respectively in the period 2005-2008.
Source:
Stability programme (SP); Commission services’ autumn 2006 economic forecasts (COM); Commission services’ calculations

PORTUGAL
Comparison of key macroeconomic and budgetary projections

 
 
2005
2006
2007
2008
2009
2010
Real GDP
(% change)
SP Dec 2006
0.4
1.4
1.8
2.4
3.0
3.0
COM Nov 2006
0.4
1.2
1.5
1.7
n.a.
n.a.
SP Dec 2005
0.5
1.1
1.8
2.4
3.0
n.a.
HICP inflation
(%)
SP Dec 20066
2.5
3.2
2.2
2.2
2.1
2.1
COM Nov 2006
2.1
2.9
2.2
2.1
n.a.
n.a.
SP Dec 20056
2.3
2.3
2.2
2.2
2.1
n.a.
Output gap
(% of potential GDP)
SP Dec 20061
-2.5
-2.6
-2.4
-1.8
-0.7
0.2
COM Nov 20065
-2.0
-2.0
-1.8
-1.5
n.a.
n.a.
SP Dec 20051
-2.3
-2.7
-2.5
-1.8
-0.7
n.a.
General government balance
(% of GDP)
SP Dec 2006
-6.0
-4.6
-3.7
-2.6
-1.5
-0.4
COM Nov 2006
-6.0
-4.6
-4.0
-3.9
n.a.
n.a.
SP Dec 2005
-6.0
-4.6
-3.7
-2.6
-1.5
n.a.
Primary balance
(% of GDP)
SP Dec 2006
-3.3
-1.7
-0.7
0.4
1.5
2.5
COM Nov 2006
-3.3
-1.7
-1.0
-0.7
n.a.
n.a.
SP Dec 2005
-3.2
-1.7
-0.6
0.6
1.5
n.a.
Cyclically-adjusted balance
(% of GDP)
SP Dec 20061
-4.9
-3.4
-2.6
-1.8
-1.2
-0.5
COM Nov 2006
-5.1
-3.7
-3.2
-3.2
n.a.
n.a.
SP Dec 20051
-5.0
-3.4
-2.6
-1.8
-1.2
n.a.
Structural balance2
(% of GDP)
SP Dec 20063
-4.9
-3.4
-2.6
-1.8
-1.2
-0.5
COM Nov 20064
-5.1
-3.7
-3.2
-3.2
n.a.
n.a.
SP Dec 2005
-5.0
-3.4
-2.6
-1.8
-1.2
n.a.
Government gross debt
(% of GDP)
SP Dec 2006
64.0
67.4
68.0
67.3
65.2
62.2
COM Nov 2006
64.0
67.4
69.4
70.7
n.a.
n.a.
SP Dec 2005
65.5
68.7
69.3
68.4
66.2
n.a.
Notes:
 
 
 
 
 
 
 
1Commission services calculations on the basis of the information in the programme.
2Cyclically-adjusted balance (as in the previous rows) excluding one-off and other temporary measures.
 
3There are no one-off and other temporary measures in the programme.
4There are no one-off and other temporary measures in the Commission services’ autumn 2006 forecast.
5Based on estimated potential growth of 1.2% in the period 2005-2007 and 1.4% in 2008.
6Private consumption deflator.
Source:
 
Stability programme (SP); Commission services’ autumn 2006 economic forecasts (COM); Commission services’ calculations


[1] According to Council Regulation (EC) No 1466/97 on the strengthening of budgetary surveillance and the surveillance and coordination of economic policies (as amended by Regulation No 1055/2005), Member States must submit updated macroeconomic and budgetary projections every year. Such updates are called stability programmes in the case of countries that have adopted the euro, and convergence programmes in the case of those that have not yet done so. This Regulation is also referred to as the 'preventive arm' of the Stability and Growth Pact.


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