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IP/10/53

Brussels, 27 January 2010

Commission concludes Hungary, Latvia, Lithuania and Malta have taken effective action to correct their budget deficits; extends deadlines for Lithuania and Malta

The European Commission today assessed the action taken by Malta, Lithuania, Latvia and Hungary in response to recommendations proposed by the Commission and endorsed by the Council in July 2009 in respect to the correction of their respective budget deficits. The Commission proposes to extend the deadline for the correction in the cases of Malta and Lithuania. While it concluded that both Member States had taken effective action, the previous deadlines can no longer be deemed realistic in view of a significant worsening of the economic situation, justifying an extension by one year to 2011 for Malta and 2012 for Lithuania. As to Hungary and Latvia, the Commission concluded that they had complied with the Council recommendations but they will need to pursue the efforts to bring their deficits below 3% by the agreed deadlines of respectively 2011 and 2012.

" I am pleased to be able to conclude that Malta, Lithuania, Hungary and Latvia have all undertaken adequate steps towards correcting their budget deficits. In the case of Malta and Lithuania, however, the worsening in the economic situation since the recommendations were made justifies extending the deadline by one year. Hungary and Latvia, which are benefitting from conditional balance-of-payments support, seem on track to bring their deficits to below 3% by the agreed deadlines but they need to pursue their efforts to ensure this really happens", said Economic and Monetary Affairs Commissioner Joaquín Almunia.

In spring 2009, the Commission proposed to open the excessive deficit procedure (EDP) for Malta, Lithuania and Latvia, on the basis of budget deficits above 3% in 2008 and recommended their correction by 2010, 2011 and 2012, respectively. In the case of Hungary, which has been under the Excessive Deficit Procedure (EDP) since 2004, the Commission proposed to revise the recommendation under Article 126.7 of the Lisbon Treaty (previously 104.9) with a new deadline of 2011 in view of the deterioration of the economic situation. The Council endorsed the Commission's recommendations on all four countries in July 2009, setting a deadline of 7 January 2010 to assess whether effective action has taken.

In cases where recommendations are complied with but the economic situation deteriorated significantly and beyond the control of the countries concerned, the Stability and Growth Pact (SGP) permits the Council to revise the recommendations, including a new deadline, on the basis of a Commission proposal.

Malta

The Commission has concluded that effective action has been taken in response to the July 2009 Council recommendations. However, due to a sharper impact of the global crisis on the Maltese economy, than was expected in the spring 2009 forecast, the budgetary position has been adversely affected beyond the government’s control. As a result, the existing deadline of 2010 for the correction of the excessive deficit has become unrealistic. Therefore the Commission recommends that the deadline should be extended to 2011. To this end, the Maltese authorities should achieve the 2010 deficit target of 3.9% of GDP set in the budget, if necessary by adopting additional consolidation measures, and ensure in 2011 a fiscal effort of ¾ p.p. of GDP.

Lithuania

The Commission has also concluded that effective action has been taken in response to the July recommendations. However, the contraction in the economic activity in 2009 turned out to be much deeper than projected last spring and the increase in last year's deficit was bigger than expected, in spite of significant consolidation measures. Therefore, the deadline of 2011 is no longer realistic and the Commission recommends a revised deadline of 2012 for the correction of the excessive deficit, in line with the authorities' fiscal consolidation objectives and the stability benefits implicit in the anchoring of the economy to a medium-term euro entry prospect. The correction of the excessive deficit by the new deadline would represent an average annual fiscal effort of 2¼% of GDP between 2010 and 2012.

Hungary

In the case of Hungary, the Commission has concluded that the authorities have acted in compliance with the most recent recommendations issued by the Council in July 2009. In particular, Hungary has respected the 2009 deficit target of 3.9% of GDP by adopting fiscal consolidation measures amounting to 1½% of GDP in 2009. It has also adopted a central government 2010 budget in line with the deficit target of 3.8% of GDP. However, there are considerable risks attached to the 2010 deficit target, both on the revenue and the expenditure side. In view of already agreed non-compensated tax cuts in 2011, the required cumulative 0.5% of GDP effort necessary to bring the deficit below 3% in 2011 will have to be ensured through additional measures. The Commission will continue to closely monitor budgetary developments in Hungary in accordance with the Treaty and the SGP as well as in the context of the monitoring under the balance of payments assistance.

Latvia

The Commission has concluded that the Latvian authorities have taken effective action. In particular, expenditure cuts have been implemented broadly as planned, so that the 2009 deficit is projected to be close to, but below, 10% of GDP, in line with the target set in the Council's July 2009 recommendations. The 2010 budget adopted by Parliament on 1 December should be sufficient to deliver the 8.5% of GDP deficit target set for 2010. Moreover, financial sector supervision has been satisfactorily strengthened. Looking beyond 2010, some measures envisaged to achieve the consolidation path have already been outlined in the context of the balance of payments assistance programme. The Commission will continue to closely monitor budgetary developments in Latvia in accordance with the Treaty and the SGP as well as in the context of the monitoring under the balance of payments assistance.

Information on outstanding EDP procedures

The Commission will assess whether Romania and Poland, the two other countries for which the Council adopted recommendations in July 2009, have taken effective action in the coming weeks.

In total, 20 EU countries are in EDP. In December 2009, the Council endorsed the Commission's recommendations under Article 126.7 of the Treaty for 13 of them, setting deadlines for the correction of the deficit ranging from 2012 (for Italy and Belgium) to the 2014/15 fiscal year for the United Kingdom. In the case of Greece, the Council agreed that the country had not taken effective action to correct the deficit by the 2010 deadline agreed at the beginning of 2009; the Commission will shortly propose stepping up the procedure with a recommendation under Art 126.9 of the Treaty, as was recalled recently by Commissioner Almunia.

The deterioration in the public finances was inevitable as governments had to support the economy and stabilise the financial sector in the wake of the financial crisis to limit the impact of the recession on jobs and to make the recession as short as possible - in line with the recovery plan proposed by the Commission. But governments in the EU and at the G20 agree that an exit strategy to restore public finances is needed when recovery materializes and EU leaders agree that the SGP is the cornerstone of that exit strategy for European countries. They also agree that budgetary consolidation overall should start at the latest in 2011, when growth is expected to return. According to the Commission's autumn forecast, GDP growth is expected to reach 1.6% in the EU that year (1.5% for the euro area).

The deadlines proposed today are based on the same methodology used in the recommendations adopted by the ECOFIN in December which aims at ensuring 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 relevant factors, starting with the level of the deficit and debt as well as the current account position, the level of contingent liabilities of the financial sector, interest payments, risk premia and other factors.

All documents relating to country-specific excessive deficit procedures are available at:

http://ec.europa.eu/economy_finance/ articles/sgp/2010_01_27_sgp_en.htm


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