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Commission assesses Stability and Convergence Programmes of Italy, Luxembourg, Lithuania and Portugal

European Commission - IP/09/311   25/02/2009

Other available languages: FR DE IT PT LT

IP/09/311

Brussels, 25 February 2009

Commission assesses Stability and Convergence Programmes of Italy, Luxembourg, Lithuania and Portugal

Today the European Commission has examined the updated Stability and Convergence Programmes[1] (SCPs) of Italy, Luxembourg, Lithuania and Portugal. As with last week's 17 other programmes (see IP/09/273 and IP/09/274), the assessment take place against the background of the ongoing sharp economic downturn. Budgetary positions are projected to deteriorate markedly in 2009 in Italy, Luxembourg and Portugal. In the latter two countries, this also reflects significant economic stimulus packages adopted in line with the European Recovery Plan that called for timely, targeted and temporary fiscal measures in Member States with fiscal room for manoeuvre. Italy's recovery measures are budgetary neutral, which seems adequate in view of the country's very high debt ratio. In Lithuania, the planned restrictive fiscal stance over the whole programme period is an appropriate response to address the existing economic imbalances. However, budgetary outcomes in the programme are subject to significant downside risks.

"As a result of the unprecedented global financial crisis and economic downturn, public finances are under considerable stress in most EU countries. Following our analysis of last week, today's assessments confirm that fiscal stimulus measures to support demand and job creation are in line with the European Recovery Plan are in general sufficiently differentiated across Member States to reflect their different positions in terms of fiscal room for manoeuvre and possible economic imbalances. In our analysis, the three T's - timely, targeted, temporary – are broadly followed also by the three countries analysed today that have taken fiscal measures to support their economies. Although external and internal imbalances have started to narrow in Lithuania, it rightly refrained from contributing to the collective effort", said Economic and Monetary Affairs Commissioner Joaquín Almunia.

ITALY

Adding to long-standing structural weaknesses that have prevented satisfactory productivity growth for several years, the global downturn is severely hitting the Italian economy. Also against this backdrop, the government deficit is forecast to have increased from 1.6% of GDP in 2007 to 2.8% in 2008.

The stability programme update for Italy projects the deficit to increase to 3.7% of GDP in 2009, to then gradually return to just below the 3% of GDP threshold by 2011; the debt ratio is set to increase to over 111% at the end of the programme period. The recovery measures adopted by the government can be regarded as adequate in view of the very high debt ratio and are broadly in line with the European Economic Recovery Plan. The deficit and debt outcomes could be higher than projected if economic growth turns out lower than projected and/or expenditure slippages materialise. Possible bank recapitalisations would further increase gross public debt.

In view of the Commission assessment, Italy is invited to: (i) Implement the budgetary measures for 2009 as planned and carry out with determination the structural adjustment path planned over the programme period. Once the economy recovers, pursue an ambitious budgetary consolidation in order to set the very high debt ratio on a steadily declining path and ensure the long-term sustainability of public finances; (ii) Continue the progress made to improve fiscal governance and develop a new framework for fiscal federalism that ensures the accountability of local governments and underpins fiscal discipline; (iii) Pursue efforts to improve the quality of public finances by focussing on spending efficiency and composition, also by reallocating social expenditure so as to create room for a more comprehensive and uniform unemployment benefit system that ensures appropriate work incentives and effective activation policies, without compromising the fiscal consolidation process.

LUXEMBOURG

GDP growth considerably slowed down as a result of the global downturn, from 5.2% in 2007 to an estimated 1.0% in 2008. It is forecast to turn negative (-0.9%) in 2009 before recovering somewhat in 2010 (+1.4%). However, the condition of public finance remained comparatively favourable as the general government balance remained in surplus, though declining from 3.0% of GDP in 2007 to an estimated 2.0% in 2008. Moreover, the public debt, even if it doubled at the end of 2008 as a result of the financing of the support to the financial sector, remains one of the lowest in the EU (14.4% of GDP).

The Stability Programme submitted in October and updated on 2 February 2009 foresees that the surplus will turn into a deficit in 2009 as a result of the crisis and of the support measures decided both in the 2009 budget and afterwards in line with the European Recovery Plan. This deficit will reach 0.6% of GDP and widen to 1.5% in 2010. Although the current developments do not create concern for the long-term sustainability of public finance, the increase in age-related public expenditure, which will be among the strongest in the whole EU, will constitute a particularly heavy burden in the coming decades.

In view of this assessment and of the very strong increase in age-related expenditure forecast for the coming decades, Luxembourg is invited to implement in 2009 as planned the support measures in line with the European Recovery Plan and to improve the long-term sustainability of its public finances by implementing structural reform measures, in particular in the area of pensions.

LITHUANIA

The Lithuanian economy is facing a severe downturn mainly due to a fall in domestic demand. The deepening global financial crisis and weakening external demand contribute to aggravating the contraction of the economy. While external and internal imbalances have started to narrow, weakened cost competitiveness due to several years of wage growth exceeding productivity growth dampen prospects of an early export-led economic recovery. The general government balance deteriorated considerably in 2008 mainly reflecting an expansionary fiscal policy.

The programme targets a deficit of 2.1% of GDP in 2009 and a gradual decline in the deficit thereafter to a balanced position in 2011. Taking into account the risks related to the macroeconomic scenario and the lack of information on measures needed to underpin fiscal consolidation after 2009, the budgetary outcomes in the programme are subject to significant downside risks, with the headline deficit possibly exceeding 3% of GDP in 2009 and 2010, while the debt ratio will remain very comfortably below 60% of GDP reference level. The planned restrictive fiscal stance from 2009 until 2011 is an appropriate response in the light of existing imbalances.

In view of the above assessment and also given the need to ensure sustainable convergence and a smooth participation in ERM II, Lithuania is invited to: (i) implement measures needed to achieve the budgetary target in 2009 by prioritising expenditures and continue targeted fiscal consolidation in the medium-term; (ii) implement public sector wage restraint to facilitate the alignment of whole-economy wages with productivity and to strengthen cost competitiveness; (iii) strengthen fiscal governance and transparency, by enhancing the medium-term budgetary framework and reinforcing expenditure discipline.

PORTUGAL

The Portuguese economy is undergoing a deceleration of economic activity as a result of sluggish external demand, reflecting the financial crisis and the weak economic situation of main trading partners.

Portugal's stability programme expects the economy to be in a recession in 2009, with a contraction of 0.8% of GDP in real terms in 2009, and a recovery thereafter. Moreover, the competitiveness gap has not been reduced, reflecting mostly a feeble productivity growth, which remains a major weakness of the Portuguese economy. The Portuguese authorities have adopted various measures to stimulate economic activity in 2009 in line with the Recovery Plan, amounting to 0.8% of GDP, combining higher expenditure and tax cuts. As a consequence of these 2009 discretionary measures and the economic downturn, public finances are severely affected and, according to the stability programme update, the government deficit is estimated to have been 2.2% of GDP in 2008 and to reach 3.9% of GDP in 2009. After 2009 the update expects a gradual reduction of the budget deficit to 2.9% in 2010 and 2.3% of GDP in 2011.

Based on this evaluation, the Commission proposes three policy invitations for Portugal: (i) implement the measures in line with the Recovery Plan as planned, while avoiding a further deterioration of public finances in 2009; (ii) Carry out with determination the planned structural adjustment in 2010 and beyond, strengthening the pace of budgetary consolidation if cyclical conditions are better than projected; (iii) further strengthen the budgetary framework and ensure that fiscal consolidation measures are also geared towards enhancing the quality of the public finances in the light of the needed adjustment of the economy to address existing imbalances.

The country-specific opinions are available at:

http://ec.europa.eu/economy_finance/thematic_articles/article14128_en.htm

ITALY

Comparison of key macro economic and budgetary projections

 
 
2007
2008
2009
2010
2011
Real GDP
(% change)
SP Feb 2009
1.5
-0.6
-2.0
0.3
1.0
COM Jan 2009
1.5
-0.6
-2.0
0.3
n.a.
SP Nov 2007
1.9
1.5
1.6
1.7
1.8
HICP inflation
(%)
SP Feb 2009
2.0
3.5
1.2
1.7
2.0
COM Jan 2009
2.0
3.5
1.2
2.2
n.a.
SP Nov 2007
1.9
2.0
2.0
1.8
1.9
Output gap1
(% of potential GDP)
SP Feb 2009
1.7
0.3
-2.3
-2.7
-2.5
COM Jan 20092
1.8
0.3
-2.3
-2.7
n.a.
SP Nov 2007
-0.6
-0.6
-0.6
-0.6
-0.6
Net lending/borrowing vis-à-vis the rest of the world
(% of GDP)
SP Feb 2009
-1.6
-1.6
-1.3
-1.1
-0.9
COM Jan 2009
-1.6
-2.2
-1.3
-1.5
n.a.
SP Nov 2007
-1.3
-0.8
-0.6
-0.4
-0.2
General government revenue
(% of GDP)
SP Feb 2009
46.6
46.4
46.8
46.8
46.6
COM Jan 2009
46.6
46.4
46.5
46.5
n.a.
SP Nov 2007
46.2
46.3
45.9
45.8
45.7
General government expenditure
(% of GDP)
SP Feb 2009
48.2
49.0
50.5
50.0
49.5
COM Jan 2009
48.2
49.2
50.3
50.2
n.a.
SP Nov 2007
48.6
48.5
47.9
47.3
47.0
General government balance
(% of GDP)
SP Feb 2009
-1.6
-2.6
-3.7
-3.3
-2.9
COM Jan 2009
-1.6
-2.8
-3.8
-3.7
n.a.
SP Nov 2007
-2.4
-2.2
-1.5
-0.7
0.0
Primary balance
(% of GDP)
SP Feb 2009
3.4
2.5
1.3
1.9
2.6
COM Jan 2009
3.4
2.3
1.0
1.2
n.a.
SP Nov 2007
2.5
2.6
3.4
4.2
4.9
Cyclically-adjusted balance1
(% of GDP)
SP Feb 2009
-2.4
-2.7
-2.6
-1.9
-1.6
COM Jan 2009
-2.5
-2.9
-2.7
-2.4
n.a.
SP Nov 2007
-2.0
-1.9
-1.2
-0.4
0.2
Structural balance3
(% of GDP)
SP Feb 2009
-2.5
-2.9
-2.7
-2.0
-1.7
COM Jan 2009
-2.6
-3.1
-2.8
-2.5
n.a.
SP Nov 2007
-2.2
-2.0
-1.3
-0.5
0.2
Government gross debt
(% of GDP)
SP Feb 2009
104.1
105.9
110.5
112.0
111.6
COM Jan 2009
104.1
105.7
109.3
110.3
n.a.
SP Nov 2007
105.0
103.5
101.5
98.5
95.1
Notes:
 
 
 
 
 
 
1Output gaps and cyclically-adjusted balances according to the programmes as recalculated by Commission services on the basis of the information in the programmes.
2Based on estimated potential growth of 1.1%, 0.9%, 0.6% and 0.7% respectively in the period 2007-2010.
3Cyclically-adjusted balance excluding one-off and other temporary measures. One-off and other temporary measures are 0.1% of GDP in 2007, 0.2% in 2008 and 0.1% 2009-2011; all deficit-reducing according to the most recent programme and in the Commission services' January interim forecast.
 
 
 
 
 
 
 
Source:
 
 
 
 
 
 
Stability programme (SP); Commission services’ January 2009 interim forecasts (COM); Commission services’ calculations

LUXEMBOURG

Comparison of key macro economic and budgetary projections



2007
2008
2009
2010
Real GDP
(% change)
SP Oct 2008
5.2
1.0
-0.9
1.4
COM Jan 2009
5.2
1.0
-0.9
1.4
SP Nov 2007
6.0
4.5
5.0
4.0
HICP inflation
(%)
SP Oct 2008
2.7
4.1
0.6
2.5
COM Jan 2009
2.7
4.1
0.6
2.5
SP Nov 2007
2.3
2.0
2.1
2.1
Output gap1
(% of potential GDP)
SP Oct 2008
3.2
1.1
-2.5
-3.8
COM Jan 20092
3.2
1.1
-2.3
-3.5
SP Nov 2007
0.5
0.1
0.2
-0.8
Net lending/borrowing vis-à-vis the rest of the world
(% of GDP)
SP Oct 2008
n.a.
n.a.
n.a.
n.a.
COM Jan 2009
n.a.
n.a.
n.a.
n.a.
SP Nov 2007
n.a.
n.a.
n.a.
n.a.
General government revenue
(% of GDP)
SP Oct 2008
41.0
43.2
42.8
42.8
COM Jan 2009
41.0
43.6
44.0
42.9
SP Nov 2007
38.5
37.8
37.9
37.8
General government expenditure
(% of GDP)
SP Oct 2008
37.8
41.2
43.4
44.3
COM Jan 2009
37.8
40.6
43.5
44.3
SP Nov 2007
37.5
36.9
36.9
36.6
General government balance
(% of GDP)
SP Oct 2008
3.2
2.0
-0.6
-1.5
COM Jan 2009
3.2
3.0
0.4
-1.4
SP Nov 2007
1.0
0.8
1.0
1.2
Primary balance
(% of GDP)
SP Oct 2008
3.5
2.3
-0.3
-1.2
COM Jan 2009
3.5
3.3
1.0
-0.9
SP Nov 2007
1.2
1.1
1.2
1.5
Cyclically-adjusted balance1
(% of GDP)
SP Oct 2008
1.6
1.5
0.6
0.4
COM Jan 2009
1.6
2.4
1.6
0.3
SP Nov 2007
0.7
0.8
0.9
1.6
Structural balance3
(% of GDP)
SP Oct 2008
1.6
1.5
0.6
0.4
COM Jan 2009
1.6
2.4
1.6
0.3
SP Nov 2007
0.7
0.8
0.9
1.6
Government gross debt
(% of GDP)
SP Oct 2008
7.0
14.4
14.9
17.0
COM Jan 2009
7.0
14.4
15.0
15.1
SP Nov 2007
6.9
7.1
7.2
7.0
Notes :
1 Output gaps and cyclically-adjusted balances according to the programmes as recalculated by Commission services on the basis of the information in the programmes.
2 Based on estimated potential growth of 4.2%, 3.2%, 2.7% and 2.8% respectively in the period 2007-2010.
3 Cyclically-adjusted balance excluding one-off and other temporary measures. One-off and other temporary measures are 0% of GDP in 2009, 2010 and 2011] according to the most recent programme and in the Commission services' January interim forecast.
Source: Stability programme (SP), Commission services’ January 2009 interim forecasts (COM); Commission services’ calculations

LITHUANIA

Comparison of key macro economic and budgetary projections

 
 
2007
2008
2009
2010
2011
Real GDP
(% change)
CP Jan 2009
8.9
3.5
-4.8
-0.2
4.5
COM Jan 2009
8.9
3.4
-4.0
-2.6
n.a.
CP Dec 2007
9.8
5.3
4.5
5.2
n.a.
HICP inflation
(%)
CP Jan 2009
5.8
11.2
5.4
3.6
-0.1
COM Jan 2009
5.8
11.1
5.6
4.8
n.a.
CP Dec 2007
5.8
6.5
5.1
3.6
n.a.
Output gap1
(% of potential GDP)
CP Jan 2009
7.1
5.4
-2.8
-5.7
-4.0
COM Jan 20092
7.7
6.6
-0.5
-4.8
n.a.
CP Dec 2007
3.3
1.5
-0.4
-1.3
n.a.
Net lending/borrowing vis-à-vis the rest of the world
(% of GDP)
CP Jan 2009
-12.7
-10.2
-1.8
-4.7
-5.7
COM Jan 2009
-13.2
-10.7
-4.8
-4.7
n.a.
CP Dec 2007
-12.5
-12.7
-14.5
-15.4
n.a.
General government revenue
(% of GDP)
CP Jan 2009
33.9
33.8
35.8
37.3
36.4
COM Jan 2009
33.9
33.9
34.8
36.0
n.a.
CP Dec 2007
35.5
37.4
38.6
39.4
n.a.
General government expenditure
(% of GDP)
CP Jan 2009
35.2
36.7
37.8
38.3
36.4
COM Jan 2009
35.2
36.8
37.8
39.4
n.a.
CP Dec 2007
36.4
37.9
38.5
38.6
n.a.
General government balance
(% of GDP)
CP Jan 2009
-1.2
-2.9
-2.1
-1.0
0.0
COM Jan 2009
-1.2
-2.9
-3.0
-3.4
n.a.
CP Dec 2007
-0.9
-0.5
0.2
0.8
n.a.
Primary balance
(% of GDP)
CP Jan 2009
-0.5
-2.3
-1.2
0.0
1.1
COM Jan 2009
-0.5
-2.2
-2.0
-2.3
n.a.
CP Dec 2007
-0.1
0.3
0.9
1.4
n.a.
Cyclically-adjusted balance1
(% of GDP)
CP Jan 2009
-3.1
-4.4
-1.3
0.5
1.1
COM Jan 2009
-3.3
-4.6
-2.9
-2.1
n.a.
CP Dec 2007
-1.8
-0.9
0.3
1.1
n.a.
Structural balance3
(% of GDP)
CP Jan 2009
-2.6
-4.9
-1.8
0.1
1.1
COM Jan 2009
-2.7
-4.6
-2.9
-2.1
n.a.
CP Dec 2007
-1.2
-0.9
0.3
1.1
n.a.
Government gross debt
(% of GDP)
CP Jan 2009
17.0
15.3
16.9
18.1
17.1
COM Jan 2009
17.0
17.1
20.0
23.3
n.a.
CP Dec 2007
17.6
17.2
15.0
14.0
n.a.
Notes:
 
 
 
 
 
 
1Output gaps and cyclically-adjusted balances according to the programmes as recalculated by Commission services on the basis of the information in the programmes.
2Based on estimated potential growth of 6.1%, 4.5%, 2.8% and 1.8% respectively in the period 2007-2010.
3Cyclically-adjusted balance excluding one-off and other temporary measures. One-off and other temporary measures are 0.6% of GDP in 2007; deficit-increasing, 0.5% in 2008, 0.5% in 2009 and 0.5% in 2010; all deficit-reducing according to the most recent programme and 0.6% of GDP in 2007; deficit-increasing according to the Commission services' January interim forecast.
 
 
 
 
 

 
Source:
 
 
 
 
 
 
Convergence programme (CP); Commission services’ January 2009 interim forecasts (COM); Commission services’ calculations

PORTUGAL

Comparison of key macro economic and budgetary projections

 
 
2007
2008
2009
2010
2011
Real GDP
(% change)
SP Jan 2009
1.9
0.3
-0.8
0.5
1.3
COM Jan 2009
1.9
0.2
-1.6
-0.2
n.a.
SP Dec 2007
1.8
2.2
2.8
3.0
3.0
HICP inflation
(%)
SP Jan 2009
2.4
2.6
1.2
2.0
2.0
COM Jan 2009
2.4
2.7
1.0
2.0
n.a.
SP Dec 2007
2.3
2.1
2.1
2.1
2.1
Output gap1
(% of potential GDP)
SP Jan 2009
0.2
-0.4
-2.1
-2.5
-2.5
COM Jan 20092
0.8
0.2
-1.7
-2.5
n.a.
SP Dec 2007
-2.2
-1.8
-1.1
-0.2
0.5
Net lending/borrowing vis-à-vis the rest of the world
(% of GDP)
SP Jan 2009
-8.7
-10.5
-9.2
-8.4
-7.6
COM Jan 2009
-8.7
-10.2
-8.2
-8.7
n.a.
SP Dec 2007
-7.0
-5.8
-5.6
-4.9
-4.7
General government revenue
(% of GDP)
SP Jan 2009
43.2
43.5
44.1
43.6
43.6
COM Jan 2009
43.1
44.2
42.6
42.4
n.a.
SP Dec 2007
42.4
42.7
42.8
43.1
43.1
General government expenditure
(% of GDP)
SP Jan 2009
45.7
45.8
48.0
46.5
45.9
COM Jan 2009
45.7
46.3
47.2
46.8
n.a.
SP Dec 2007
45.4
45.1
44.4
43.5
43.3
General government balance
(% of GDP)
SP Jan 2009
-2.6
-2.2
-3.9
-2.9
-2.3
COM Jan 2009
-2.6
-2.2
-4.6
-4.4
n.a.
SP Dec 2007
-3.0
-2.4
-1.5
-0.4
-0.2
Primary balance
(% of GDP)
SP Jan 2009
0.2
0.8
-0.6
0.4
1.1
COM Jan 2009
0.2
0.8
-1.7
-1.3
n.a.
SP Dec 2007
-0.1
0.5
1.3
2.2
2.5
Cyclically-adjusted balance1
(% of GDP)
SP Jan 2009
-2.7
-2.0
-3.0
-1.8
-1.2
COM Jan 2009
-3.0
-2.3
-3.8
-3.3
n.a.
SP Dec 2007
-2.0
-1.6
-1.0
-0.3
-0.4
Structural balance3, 4
(% of GDP)
SP Jan 2009
-2.7
-2.0
-3.0
-1.8
-1.2
COM Jan 2009
-3.1
-3.0
-3.9
-3.3
n.a.
SP Dec 2007
-2.1
-1.6
-1.0
-0.3
-0.4
Government gross debt
(% of GDP)
SP Jan 2009
63.6
65.9
69.7
70.5
70.0
COM Jan 2009
63.6
64.6
68.2
71.7
n.a.
SP Dec 2007
64.4
64.1
62.5
59.7
56.7
Notes:
 
 
 
 
 
 
1Output gaps and cyclically-adjusted balances according to the programmes as recalculated by Commission services on the basis of the information in the programmes.
2Based on estimated potential growth of 0.7%, 0.7%, 0.4% and 0.5% respectively in the period 2007-2010.
3Cyclically-adjusted balance excluding one-off and other temporary measures. There are no one-off and other temporary measures in the programme; according to the Commission services' January 2009 interim forecast they are 0.1% of GDP in year 2007, 0.7% in year 2008 and 0.1% in year 2009, all deficit-reducing.
4Using the recalculated cyclically-adjusted balance, based on the information in the programme, and the definition of one-offs and other temporary measures applied by the Commission services , the structural balance would be -2.8% of GDP in 2007, -2.7% of GDP in 2008, -3.1% in 2009 and -1.8% of GDP in 2010.
 
 
 
 
 
 
 
Source:
 
 
 
 
 
 
Stability programme (SP); Commission services’ January 2009 interim 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, 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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