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Joaquín Almunia

Member of the European Commission responsible for Economic and Monetary Affairs

Strengthening economic governance and improving the Stability and Growth Pact

Press Conference
Breydel Press Room, Brussels, 3 September 2004

When I presented to you the Public Finance Report in June, I indicated the Commission’s intention to continue its intensive preparatory work and consultations with member states in order to present a Communication on economic governance in September. This is where we are. The Communication adopted by the College today takes stock of the experience of the first 5 years of Economic and Monetary Union and proposes improvements to the economic governance framework capable to deliver more growth and stability for Europe.

I am grateful to the Dutch Presidency and in particular Gerrit Zalm for putting the issue on the Ecofin agenda in November and on the Eurogroup agenda next week. It is true that as Mr. Zalm has said earlier in the week the debate is likely to spill over into the Luxembourg Presidency. But it seems to me that there is now a consensus among member states to move ahead in close cooperation with this debate in order to improve our economic and budgetary coordination in a way that increases credibility and ensures effective implementation.

With this Communication today we are making sure that this debate on economic governance is kept as open and transparent as possible. Academics, parliamentarians, the press could participate and put their ideas forward. But at the same time this Communication marks the limits to this debate. With the Constitution just approved by the Heads of State and Government last summer, there is a clear consensus among the Commission, Member States and the ECB that we have to propose solutions and improvements within the EMU framework of our current Treaty and future Constitution. And this framework is based on national but coordinated economic policies and on budgetary policies that respect among other things the 3% of GDP budget deficit limit and the 60% of GDP debt criterion.

On this basis, the Commission’s ideas cover two areas: first economic and second budgetary coordination.

On the economy it is very clear that we need to coordinate more our actions on structural reforms and our efforts to implement the Lisbon agenda. Europe needs to raise its growth potential and Europe needs to create more jobs and prepare itself for the future. It is also clear that we cannot rely exclusively on one instrument, the Growth and Stability Pact, to coordinate our economic policies. We need to use more effectively the Broad Economic Policy Guidelines, an instrument that by its nature is more flexible. At the same time we have to improve enforcement through more pre-emptive action and peer-pressure particularly during economic upswings. The selective use of early warnings under Article 99(4) of the current Treaty would be a useful way to do that in our view.

Let me now turn to the budgetary coordination. What the press calls the reform of the Stability and Growth Pact although we tend to see it as an evolution rather than a reform. Our ideas aim to:

  • increase focus on sustainability of public finances;
  • better take into account economic developments;
  • strengthen enforcement and
  • better link the EU coordination instruments, the Broad Economic Policy Guidelines and the Stability and Growth Pact.

With these objectives in mind the Commission believes that the debate should be limited to four main issues:

Firstly, the need to put more focus on debt and sustainability in the surveillance of budgetary positions.

In principle compliance with the deficit ceiling should implicitly ensure adequate debt reduction and sustainability of budgetary positions. In practice in many countries the debt dynamics have not developed as expected due to one-off measures or due to the surfacing of implicit debt liabilities. We have therefore to increase our focus on debt dynamics in order to complement continued rigorous attention to deficit developments. Lets be clear public debt is an issue not only in countries with high debt levels but also in some other member states where we see public debt rising primarily due to ageing populations.

Secondly, the need to better take into account different economic and debt situations when setting the medium-term budgetary objective for each member state in a Union of 25. This is not about creating a Pact “a la carte” but it is about applying economic rationale given the increasing economic diversification in an EU of 25 Member States. At the same time such country specific medium term objectives should ensure compliance at all times with the 3% of GDP rule and therefore guarantee equal treatment within the Union.

Thirdly, the need to ensure earlier actions to correct inadequate budgetary developments during the good moments of the economic cycle. This is the famous “cagnotte” debate. We all know that if member states had done more consolidation efforts during the good years, 1999 and 2000, we might have avoided some excessive deficit procedures in place today. Here we have to strengthen peer-pressure, possibly also by using early warnings, in order to ensure that member states stick to appropriate budgetary policies during the good times.

By tackling the above three areas we will, I believe, strengthen the preventive elements of the Pact and avoid being in situations where several member states are in excessive deficit procedure as is the case today. We will also ensure that our budgetary policy actions are not shortsighted but are really geared towards ensuring sustainable public finances over the long term.

But even when you put in place a perfect preventive health system you cannot avoid that there are patients. In order to be consistent with our preventive actions we need to take more into account economic circumstances and developments in the implementation of the Excessive Deficit Procedure. This could be done mainly in two aspects of the procedure:

  • First, the current SGP definition of the “exceptional circumstances” that allows a country to be exempt from excessive deficit procedures could be improved to cater for protracted slowdowns as opposed to only severe recessions as is now the case. A careful analysis of both nominal and structural deficit developments should be used in order to avoid the weakening of the surveillance framework.
  • Second, the adjustment path for the correction of an excessive deficit has to take account economic developments. Differences in cyclical conditions could justify a country-specific approach. The principle remains that an excessive deficit should be corrected promptly. But a clear distinction should be made between the budgetary adjustment effort required from a country in excessive deficit and the eventual deficit outcome that is inevitably influenced from factors outside the control of each government.

It is my firm conviction that improvements along the suggested lines would strengthen the economic rationale of the SGP and its application. There is a trade-off between economic rationale and simplicity. And we have to make sure that while enhancing the economic rationale we also increase predictability, transparency and guarantee equal treatment among member states.

I would also like to stress that, while some of the suggestions in the Communication may eventually lead to legislative changes, most of them would not affect the Pact Regulations. This is a political process in which we have to work together with the Member States’ governments in order to improve our economies for now and for the future. The issues involved are complex and several discussions will be needed at technical level. Some more specific economic-analytical tools to assess the conduct of budgetary surveillance could be spelled out in a Code of Conduct, which could accompany the SGP. But the majority of the issues would probably be covered in a political resolution. We would have to come back to that issue and with the Commission’s concrete proposals with the new Barroso Commission.

Let me finally say a few words about coordination between economic and budgetary policies and about statistics.

Greater coordination and coherence between our economic and our budgetary policy objectives is necessary if we are to succeed. It is of no use to set ambitious objectives in our economic policy if we cannot afford to pay for the necessary investment that is needed for their achievement. And at the same time we cannot run budgetary policies with the sole objective of stability without creating the necessary room for growth policies. It is therefore essential that Member States governments and the Commission pay particular attention to ensure consistency between the Broad Economic Policy Guidelines and the Stability and Growth Pact procedures.

Finally budgetary and economic surveillance is impossible without reliable statistics. Several examples over the first five years of EMU have shown that there are serious shortcomings in the collection of national statistics in some member states. We need to ensure minimum European standards for the institutional set-up of statistical authorities and we need to accept the principle of tougher surveillance mechanisms by Eurostat in this important domain.

Thank you for your attention.

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