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Excessive Deficit Procedure recommendations on Bulgaria, Germany and Hungary: Frequently asked questions

Commission Européenne - MEMO/12/385   30/05/2012

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MEMO/12/385

Brussels, 30 May 2012

Excessive Deficit Procedure recommendations on Bulgaria, Germany and Hungary: Frequently asked questions

What has the Commission proposed today under the Excessive Deficit Procedure (EDP) regarding Bulgaria and Germany?

The Commission is recommending that the Council abrogates the EDP, as foreseen in Article 126(12) of the Treaty, for Bulgaria and Germany. In March this year, Bulgaria and Germany notified that their 2011 general government deficit was below 3% of GDP. Following the validation of these figures by Eurostat on 23 April 2012, and also taking into account the fact that the Commissions’ 2012 spring forecast, published on 11 May (IP/12/466), shows that these deficits will remain durably below 3% of GDP, the Commission has concluded that the correction of the excessive deficit for these countries is ensured.

How has the deficit in Bulgaria and Germany changed?

Bulgaria reduced its general government deficit from 3.1% of GDP in 2010 to 2.1% of GDP in 2011. According to the Commission services' 2012 spring forecast, the deficit is expected to shrink further to 1.9% of GDP in 2012 and 1.7% of GDP in 2013.

Germany decreased its general government deficit from 4.3% of GDP in 2010 to 1.0% of GDP in 2011. According to the Commission services' 2012 spring forecast, the deficit is expected to amount to 0.9% of GDP in 2012 and 0.7% of GDP in 2013.

How many countries are currently under an Excessive Deficit Procedure?

Currently, 23 out of the 27 EU Member States are subject to an EDP (all except Estonia, Finland, Luxembourg and Sweden). If the Council follows the Commission's recommendations and abrogates the EDP for Bulgaria and Germany, that number will drop to 21.

What has the Commission proposed today for Hungary?

The European Commission has today adopted a proposal for a Council decision to lift the suspension of commitments from the Cohesion Fund for Hungary, after concluding that the country has taken the necessary action to correct its excessive deficit, in line with the Council Recommendation of 13 March 2012.

More specifically, the Commission has concluded in its assessment that the 2012 budget deficit target of 2.5% of GDP is expected to be reached and the 2013 budget deficit is expected to be well below the 3% of GDP reference value, despite the slight weakening of the macroeconomic environment, as indicated by the Commission in its 2012 spring forecast.

The Commission will continue to closely monitor budgetary developments in Hungary, in accordance with the Stability and Growth Pact.

Has Hungary already lost any money due to the suspension?

No. The Hungarian authorities have taken prompt and effective action. Because of this, the Commission is proposing that the Council lifts the suspension of commitments from the Cohesion Fund. This will take place well before the date when the suspension was to come into effect (1 January 2013), thereby preventing any loss of money or adverse effects on the implementation of projects.

What was the reason for the suspension?

The suspension of Cohesion Fund commitments for Hungary was triggered by the stepping-up of the Excessive Deficit Procedure, after the Council (following Commission's proposal) concluded on 24 January 2012 that Hungary had "not taken effective action" in response to the Council Recommendation of 7 July 2009. The current Cohesion Fund Regulation explicitly provides for a suspension of the totality or part of the commitments from the Fund in the case of an excessive government deficit and an absence of effective action to correct it.

Why is the Commission not then recommending an abrogation of the EDP for Hungary?

First, the deficit numbers are still relatively close to the threshold, and – once again this year - it is only expected to be respected thanks to "one-off measures", not structural ones that ensure a sustainable effect. This means that the uncertainty about a higher deficit is still significant. Furthermore, the track record of Hungary in the EDP (the country has been in excessive deficit since its accession to the EU) also supports this cautious approach.

The Commission will continue to closely monitor the implementation of the announced measures in response to the Council Recommendations in the context of the Excessive Deficit Procedure.

What are the main features of the Excessive Deficit Procedure (EDP)?

The Excessive Deficit Procedure (EDP) is part of the Stability and Growth Pact, and generally referred to as its "corrective arm". Its legal bases are in Article 126 of the Treaty on the Functioning of the European Union as well as in the Regulation (EC) 1467/97 on speeding-up and clarifying the implementation of the excessive deficit procedure. Both pieces of legislation define the various steps in the procedure.

The objective of the EDP is to correct deviations from sound budgetary policies in the Member States. There are two key reference values which, if breached, can trigger the opening of an EDP: one for the general government deficit (3% of GDP) and another one for gross government debt (60% of GDP). Once an EDP is opened for a country, the Council of the European Union, on the basis of a recommendation from the Commission, issues recommendations which define the size of the fiscal adjustment to be delivered and the deadline by which the excessive government deficit must be corrected.

The EDP has been reinforced by the new set of rules that entered into force on 13 December 2011 to strengthen EU economic governance, and in particular the EU framework for fiscal surveillance. As it consists of five regulations and one directive, this reform is often referred to as the "six-pack" (MEMO/11/898).

In addition to rendering operational the debt criterion for opening an EDP, the six-pack also strengthened the enforcement mechanisms, including, in particular, financial sanctions for non-compliant euro area Member States in order to give more teeth to the SGP.

How have the new rules for economic governance (the "six-pack") reinforced the Excessive Deficit Procedure?

Better enforcement

Financial sanctions have been significantly strengthened for euro area Member States. New sanctions can now be imposed throughout the Excessive Deficit Procedure (EDP) on a recommendation by the Commission for a Council decision. This decision is deemed adopted unless a qualified majority of Member States votes against it. This is the so-called "reverse qualified majority voting" procedure, which makes the enforcement of financial sanctions in the framework of EDP "semi-automatic".

First, a non-interest-bearing deposit, of 0.2% of GDP as a rule, can be requested from a euro area Member State that is newly placed in EDP.

When a euro area Member State is already subject to an EDP and the Council decides, under Art. 126(8) of the Treaty, that this Member State has not taken effective action to correct its excessive deficit in response to the recommendation by the Council (under Article 126(7) of the Treaty), a fine of 0.2% of GDP is imposed as a rule1.

EU Member States that are not part of the euro area do not face sanctions in the form of a financial deposit or a fine under the six-pack. But for beneficiaries of the Cohesion Fund (some of which are non-euro area countries), failure to comply with the recommendations under the EDP may lead to the suspension of Cohesion Fund commitments, as foreseen by the Regulation governing the Fund.

Debt criterion

The high debt-to-GDP-ratios that many Member States had already accumulated even before the crisis, showed that the EDP had not been effective in curbing debt developments. The reform therefore introduced new provisions to render operational the debt criterion of the EDP. An EDP may now also be launched in Member States whose debt level exceeds 60% of GDP, if the gap between its debt level and the 60% of GDP reference is not reduced by an extent in order of 1/20th annually (on average over three years) and it is not projected to decrease by this amount by the end of the next two years – even if the deficit of the country concerned is below 3% of GDP. The decision is taken only after taking into account the influence of the cycle on the pace of debt reduction, as well as after assessing all relevant factors.

Member States already in EDP at the time of the entry into force of the six-pack are granted a three-year period for meeting the "1/20th-debt-rule", following the correction of the excessive deficit. Nevertheless, they must show sufficient progress that will ensure compliance with the debt rule at the end of the transition period.

Is a further strengthening of the Excessive Deficit Procedure foreseen?

On 23 November 2011, the European Commission tabled a proposal for two new regulations to further strengthen fiscal discipline and surveillance in the euro area. The proposal is often referred to as the "two-pack". This is still under discussion in Parliament and Council. For euro area Member States in the EDP, the planned rules introduce a new system of monitoring. If adopted by the Council, this would more regularly provide the Commission with the information needed to judge whether or not there was a risk of non-compliance with the deadline set by the Council to correct the excessive deficit. If this was the case, the Commission would address a recommendation to the Member State concerned (MEMO/11/822).

Moreover, the "two-pack" appears as an appropriate vehicle to incorporate elements of the Treaty on Stability, Coordination and Governance, that was signed by 25 Heads of State or Government in the beginning of March, into EU law. Some of those elements complement or reinforce the EDP, such as the requirement to submit economic partnership programmes detailing structural reforms deemed necessary to ensure an effective and durable correction of the excessive deficits.

For more information:

Europe 2020 website (for the Country-Specific Recommendations):

http://ec.europa.eu/europe2020/index_en.htm

IP/12/513 Commission sets out the next steps for stability, growth and jobs

MEMO/12/386 2012 country-specific recommendations in the context of the European Semester: Frequently asked questions

MEMO/12/388 Following in-depth reviews, Commission calls on Member States to tackle macroeconomic imbalances

IP/12/466 Spring forecast 2012-13: towards a slow recovery  

STAT/12/62 Provision of deficit and debt data for 2011 - first notification Euro area and EU27 government deficit at 4.1% and 4.5% of GDP respectively Government debt at 87.2% and 82.5%

1 :

Also under the next step in EDP for a euro area Member State, namely a Council notice under Article 126(9), any further decision that no effective action was taken would trigger a similar sanction. As regards sanctions under Article 126(11), the latest step of the procedure, they are adopted by qualified majority voting, excluding the Member State concerned.


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