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IP/09/1694

Brussels, 11 November 2009

Excessive Deficit Procedure steps: the Stability and Growth Pact as the anchor for fiscal exit strategies

Under the budgetary surveillance powers conferred by the EU Treaty, the European Commission today proposed to the Council to set 2013 as the deadline for the correction of the budget deficits in Austria, the Czech Republic, Germany, Slovakia, Slovenia, the Netherlands and Portugal. For Belgium and Italy, which will also have a deficit above 3% in 2009, the comparatively limited size of the deficits and the existence of high debt ratios calls for an earlier deadline of 2012. The Commission also assessed whether "effective action" had been taken in Greece, Spain, France, Ireland and the UK, in response to Council recommendations of last April. It proposes that the Council concludes that Greece has not taken effective action. For the other four countries, it can be concluded that they have taken action, but the worsening of the economic situation compared with the Commission's January forecasts justifies revising the existing recommendations and therefore extending the deadlines by one year as foreseen by the Stability and Growth Pact, i.e. 2013 for France and Spain, 2014 for Ireland and financial year 2014/15 for the UK.

" We all agree on the need to design clear and credible exit strategies to reduce public deficits and debts, which have been dramatically increased by the crisis. The Stability and Growth Pact provides the anchor for such exit strategies through both the excessive deficit procedure and the Stability and Convergence Programmes that will be notified next January. Applying the Pact and devising such strategies is not only compatible with the continuation of the stimulus measures to strengthen the economic recovery in 2010. It is also necessary, in order to avoid an increase in long-term interest rates that would raise the cost of servicing the debt and the financing costs for families and companies, putting a break on the economic recovery itself," said Economic and Monetary Affairs Commissioner Joaquín Almunia. " I believe the deadlines proposed today are appropriate and realistic".

Successive European Councils and G20 meetings have affirmed, at highest level, the need to restore the sustainability of public finances once recovery from the biggest economic contraction since World War II is secured. The European Council has also affirmed that the Stability and Growth Pact (SGP) is the anchor for fiscal exit strategies that Member States need to devise and coordinate. The 2005 revision of the SGP provides the necessary flexibility during the present crisis and allows for differentiated approaches according to Member States' relative fiscal room for manoeuvre.

The autumn economic forecasts show that the average budgetary position in the EU has gone from -0.8% of GDP in 2007, the best position in 30 years, to -2.3% in 2008, the year when the financial crisis turned into a full-blown economic crisis. That figure is expected to treble to -6.9% this year and to increase further to -7.5% in 2010, which will remain largely a stimulus year on account of the recovery being fragile. Public debt is set to increase by more than 20 percentage points of GDP in the same period, and to continue rising even after the deficits start coming down.

The evolution since the second quarter of 2009 and survey-based indicators shows that the EU is coming out of recession. The autumn forecast points to a positive GDP growth of 1.6% in the EU in 2011, well above the estimated present potential, making this the year when Member States, that have not yet done so, should start consolidation.

Assessment of effective action

The Commission examined today the action taken by five countries - France, Greece, Ireland, Spain and the United Kingdom - that were put under the Excessive Deficit Procedure (EDP) in April, on the basis of Commission recommendations under104(7) of the EU Treaty that took as a basis the economic forecasts presented on 19 January.

For Greece , the Commission considers that no effective action has been taken as the strong deterioration in the budgetary position in 2009 (-12.7%, according to autumn forecast, versus the -3.7% committed by the previous government) is mostly the result of an insufficient response by the Greek authorities. On the expenditure side, the 2009 budget execution points to sizeable expenditure overruns (2½ percentage points of GDP) in 2009 of which more than half is attributed to higher-than-budgeted outlays for compensation of employees and increased capital spending. The Commission, therefore, recommends the Council to conclude that Greece has not taken effective action, according to Art 104(8) of the Treaty.

In the case of France, Ireland, Spain and the UK it concluded that effective action had been taken. However, due to unexpected economic events, in other words the worsening global crisis at the turn of the year, which impacted the budget balance beyond the control of the governments, the existing deadlines and implied annual structural adjustment have become unrealistic. In these circumstances, the SGP permits the Council to issue revised recommendations including a revised deadline, on the basis of a Commission proposal. The deadlines have therefore been extended by one year for this group.

Specifically, the Commission recommends that, starting in 2010 in line with the government's intention, France aims for an ambitious annual budgetary adjustment effort of 1 ¼ percentage points of GDP, on average, to reduce the deficit below the 3% Treaty reference value by 2013 . This should contribute to eventually put the public debt - which is on course for increasing by 20 pp to 87% of GDP between 2008 and 2011 - on a declining path.

For Ireland, the Commission recommends that the government specifies consolidation measures in the budget for 2010 in line with the package announced in the April supplementary budget, and ensures an average annual structural budgetary adjustment of 2 pps of GDP over the period 2010- 2014 . It should accelerate the reduction of the deficit if economic or budgetary conditions turn out better than currently expected and seize every opportunity, beyond the structural adjustment, to accelerate the reduction of the gross debt ratio towards the 60% of GDP reference value.

Spain needs to ensure an average annual budgetary adjustment effort of 1¾ pps of GDP starting in 2010 to correct the deficit below 3% in 2013. This is also needed to halt the rise in the government debt ratio, which is expected to surpass 60% in 2010 from less than 40% in 2008. Spain is also encouraged to pursue reforms of its pensions and health-care systems, given the current risks to the long-term sustainability of its public finances.

The deadline for the United Kingdom , which was already in EDP before the crisis, is extended to the 2014/15 fiscal year, which would represent an average annual structural budgetary adjustment of 1¾ pps of GDP between 2010/11 and 2014/15 . The UK authorities have already confirmed the planned reversal in 2010/11 of several fiscal stimulus measures. The 2009 budget also included plans for more ambitious fiscal consolidation from 2011/12 onwards driven by tighter spending plans. All this is needed in view of the expected increase in the public debt to almost 90% of GDP by the end of 2011/12, from 52% in 2008.

New EDP procedures

For Austria, Belgium, the Czech Republic, Germany, Italy, the Netherlands, Portugal, Slovenia and Slovakia, the EDPs were opened in October based on planned deficits above the reference value in 2009. For most Member States in this group, the recommendations under Art 104(7) propose a correction by 2013, which provides an annual structural adjustment that is both feasible and in line with their respective risks to fiscal position. In two cases, Belgium and Italy, the comparatively limited size of the deficits, the existence of high-rising debt ratios together with large interest rate burden, call for an earlier deadline of 2012. Three Member States, namely Germany, Austria and the Netherlands, are recommended to start consolidation in 2011, to allow for the planned stimulus measures in 2010 to be implemented.

Austria, Germany and the Netherlands , thanks to relatively good starting public finance position, have scope to continue with stimulus measures in 2010, as planned, and are recommended to bring their deficit to below 3% in 2013 , with budgetary consolidation beginning in 2011. This would imply an average annual structural adjustment ranging from ½ to ¾ pps of GDP over the period 2011-2013.

For Belgium the Commission has also examined the complement to the Stability Programme for the period 2008-2013, submitted on 21 September. The adjustment path is subject to downside risk as of 2011, stemming from the fact that the underlying measures are not sufficiently specified and that the Belgian programme is based on favourable macroeconomic assumptions. The Council is invited to recommend to Belgium to bring the budget deficit below 3% in 2012 in the light of the debt dynamics. To this end, the Belgian authorities should implement the deficit-reducing measures as planned in the draft budget for 2010, and strengthen the planned adjustment in 2011 and 2012, ensuring an average annual structural adjustment of ¾ pps of GDP over the period 2010-2013 .

In the case of the Czech Republic , Slovakia and Slovenia , the Commission considers that the deficit should be corrected by 2013 . The authorities should therefore implement the deficit reducing measures in 2010 as planned in the draft budget laws, ensure a structural annual average adjustment of ¾ to 1% of GDP over the period 2010-2013 and for the Czech Republic and Slovakia to reinforce the medium-term budgetary framework to avoid expenditure overruns, while Slovenia should reduce the risks to the long-term sustainability of public finances.

For Italy, the Commission believes 2012 is an appropriate deadline in view of a very high debt ratio and related interest payments. It recommends that the government implements the budgetary measures in 2010 as planned in the three-year fiscal package confirmed in the DPEF 2010-2013, and ensures an average annual structural budgetary adjustment of ½ pps of GDP over the period 2010-2012. Italy's debt is expected to reach 115% of GDP in 2009.

In the case of Portugal, t he Commission recommends that the deficit be brought below 3% in 2013, which means an average annual structural budgetary adjustment of 1¼ pps of GDP over the period 2010-2013. Any improvement in the situation should be used to accelerate the reduction of the deficit and the high debt ratio, which is expected to reach 90% in 2011. Portugal is also invited to reinforce the enforceable nature of its medium-term budgetary framework and improve budgetary execution.

Calculation of deadlines

The proposed deadlines ensure equal treatment of Member States while taking into account their different budgetary margin of manoeuvre. The average annual effort required is calculated on the basis of all factors relevant for achieving the fiscal policy objectives, starting with the level of the deficit and debt as well as other indicators, such as the current account position, the level of contingent liabilities of the financial sector, interest payments, risk premia and the expected change in age-related expenditure in the medium term. For countries with high imminent sustainability risks, a more rapid budgetary adjustment is called for with a view to regaining access to market finance. The adjustment path should also contribute to setting the debt level on a course towards the Treaty level of 60% of GDP, in countries where this level was exceeded.

All related documents are available at:

http://ec.europa.eu/economy_finance/netstartsearch/pdfsearch/pdf.cfm?mode=_m2

For a quick overview of 2008 debt and deficit figures and forecasts for 2009-2011 see the autumn forecast press release IP/09/1663 and full document on:

http://ec.europa.eu/economy_finance/thematic_articles/article16132_en.htm


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