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Commission assesses convergence programmes of Denmark and Lithuania
Commission Européenne - IP/08/257 19/02/2008
Brussels, 19 February 2008
Today the European Commission has examined the updated convergence programmes of Denmark and Lithuania. The Danish programme envisages a sound budgetary position throughout the 2007-2010 period with high, although declining, surpluses against the background of weakening cyclical conditions. Still, the medium-term objective (MTO) – a structural surplus between ¾% and 1¾% of GDP – will be fully respected over the programme period. Lithuania's programme aims at fostering macroeconomic stability via a tighter fiscal policy stance. However, given persistent external and domestic pressures, an even tighter fiscal policy would be appropriate. The programme foresees only a gradual improvement of the structural balance towards the MTO – a structural deficit of 1% of GDP – through a back-loaded revenue-based adjustment. Moreover, the budgetary outcomes could be worse than projected in view of optimistic revenue projections and the absence of a binding medium-term budgetary framework. As regards the long-term sustainability of public finances, both Denmark and Lithuania remain at low risk.
“Public finances in Denmark are among the strongest in the EU. Denmark is commended for consistently generating high budgetary surpluses. The key challenge in the present juncture is to maintain a prudent fiscal stance and to alleviate tensions on the labour market through a mix of structural and macroeconomic policies. Lithuania is strongly encouraged to aim for better budgetary outturns and further structural reforms to address mounting inflationary pressures, maintain competitiveness and tackle remaining bottlenecks in the labour market. This will also be crucial to sustain a rapid catching-up”, said Economic and Monetary Affairs Commissioner Joaquín Almunia.
Today the Commission assessed the updated Convergence Programmes of Denmark and Lithuania. It also assessed the Stability Programmes of Ireland, Greece and Spain (see IP/08/256). Two groups of countries were already assessed in January and discussed at the 12 February EU Finance Ministers Council. On 13 February the Commission examined a third group of programmes. The programmes from the third and fourth group are expected to be discussed at the 4 March EU Finance Ministers Council.
Denmark submitted a new update of its convergence programme on 21 December 2007, covering the period 2007-2010 and giving further indications of developments towards 2015.
Denmark is expected to have recorded a surplus of more than 4.0% of GDP in 2007, against a target of 2.8% in the 2006 update of the convergence programme. This over-performance reflects a strong employment growth and higher revenue from oil- and gas-related activities in the North Sea.
Throughout the period, the programme aims at maintaining sound budgetary positions fully respecting the MTO, which has been revised upwards to a structural surplus (i.e. cyclically adjusted surpluses net of one-off and other temporary measures) of between ¾% and 1¾% of GDP. The projected budgetary targets are declining, but they could turn out better than expected in view of the expected strong 2007 outcome.
The national debt is low and falling to an expected 18.6% in 2010. The risk to long-term sustainability is assessed to be low. For the present, the most important policy challenge is to address labour shortages and looming cost pressures through a mix of structural and macroeconomic policies. Measures need to be identified and implemented to stimulate labour supply. Meanwhile, the fiscal stance should be considered carefully so as to avoid pro-cyclicality. Therefore, containing public consumption expenditure growth, as foreseen in the programme, remains of high priority.
No specific invitations are required.
Lithuania submitted a new update of its convergence programme on 28 December 2007, covering the period 2007-2010.
The programme foresees a tightening of fiscal policy to tackle the large external deficit and inflationary pressures. However, the budgetary targets remain modest in the light of the current high economic growth. The MTO is a structural deficit of 1% of GDP. The Commission sees risks to the achievement of the budgetary targets in the absence of sufficient information on the necessary measures and of a binding medium-term framework. The revenue projections also seem optimistic given recent direct tax cuts and a reliance on improved tax collection.
Lithuania has a low debt ratio. As regards the long-term sustainability of its public finances, it remains at low risk.
In view of the Commission assessment and also given the need to ensure sustainable convergence and a smooth participation in ERM II, Lithuania is invited to contribute to reducing overheating pressures by: (i) aiming for significantly better budgetary outturns in 2008 and thereafter than foreseen in the programme, notably by restraining expenditure growth, saving windfall revenues and reinforcing the binding character of the medium-term expenditure ceilings; (ii) tackling inflationary pressures by promoting wage setting in line with overall productivity gains and adopting structural measures to remove labour market bottlenecks.
Lithuania is also invited to improve compliance with the submission deadline
for stability and convergence programmes specified in the code of
Comparison of key macroeconomic and budgetary projections
 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.
 The analysis of long-term sustainability of public finances takes into account the current level of debt, the current budget deficit/surplus and the expected costs arising from an ageing population, assuming no changes to pension policy.
 The update was submitted more than 3 weeks beyond the 1 December deadline set in the code of conduct in view of the formation of a new government following the November general elections.
 Late submissions affect the effectiveness and consistency of the multilateral surveillance process.