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Speech - Remarks by Vice-President at the Press Conference on the Autumn Fiscal Package 2013

Commission Européenne - SPEECH/13/934   15/11/2013

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European Commission

Olli REHN

Vice-President of the European Commission and member of the Commission responsible for Economic and Monetary Affairs and the Euro

Remarks by Vice-President at the Press Conference on the Autumn Fiscal Package 2013

Press Conference, Brussels

15 November, 2013

Today marks the culmination of many intense weeks of work here at the European Commission, analysing for the first time the draft budgetary plans presented by 13 euro area Member States. Today we present the conclusions of this analysis, after which the ball will be back in the court of the countries concerned.

But first let me say a word on the overall economic picture in Europe, repeating the map of last week but just pointing out that the moderate recovery is continuing on the basis of the Flash estimate of Eurostat published yesterday for the third quarter of this year and the structural recovery is currently underway in Europe and will continue with a moderate acceleration over the next two years.

On the basis of yesterday's Eurostat, we have visible signs that the economic rebalancing is Europe proceeding. The economies of Spain and Portugal have moved into positive growth territory.

Yesterday, I welcomed the Eurogroup's confirmation that Spain and Ireland will exit their financial assistance programmes on time and according to plan. Of course, challenges remain for these two countries. But this shows to all Europeans that the adjustment effort pays off, and that it is worth lending financial support, just as we had seen earlier in the case of Latvia that will join the euro next January.

After the significant fiscal consolidation of the past three years, its pace has been slowing down. Much has been done in this field: at the height of the crisis in 2011, there were only three Member States not in Excessive Deficit Procedure. Currently there are 12 out of the EDP and I'm sure there will be more out of EDP next spring.

According to our autumn forecast, the nominal deficit-to-GDP ratio will be reduced below the 3% threshold next year and remain below it in 2015.

At the same time, the debt-to-GDP ratio is now expected to peak and stabilise in 2014, at about 90% in the EU and 96% in the euro area.

This shows that we have certainly more work ahead to ensure the sustainability of our public finances.

Today's package marks a milestone in Europe's reinforced economic governance. The last few years have seen big improvements in the EU's economic governance. We have introduced a coherent annual cycle of budgetary policy and structural policy in Europe, with more integrated steps for the euro area.

In the first half of the yearly cycle, under the European Semester, euro area Member States formulate their medium-term fiscal policies in their Stability Programmes, which the Commission assesses against the provisions under the Stability and Growth Pact.

On the basis of the Commission's work, the Council addresses recommendations to Member States, covering fiscal policy and structural reforms. In the second half of the year, the Member States then finalise their economic policy orientation and their national budgets, and are expected to take into account the commonly agreed policies. This autumn, for the first time, euro area Member States submitted their draft budgetary plans for the forthcoming year to the Commission and to the Eurogroup.

With our opinions on national budgetary plans, we support the euro area Member States in their pursuit of stronger growth and fiscal sustainability.

Of course, if our concerns were ignored, and a non-compliant budgetary plan were enacted, the reinforced fiscal rules with their effective enforcement mechanisms would of course be applied.

Today's package spans a wide range of documents, but draws on the familiar analytical toolbox that we have developed.

Firstly, we have assessed the Draft Budgetary Plans of the thirteen euro area countries not under a programme.

Secondly, six euro area countries had also received a new EDP recommendation in June, so the timing of this assessment of effective action coincides with our assessment of the draft budgetary plans: for Belgium, France, Malta, the Netherlands, Slovenia and Spain. In addition, we have assessed whether effective action has been taken by Poland.

Thirdly, in June, the Council asked five Member States to submit Economic Partnership Programmes, which set out plans for structural reforms with a budgetary impact. They are now a requirement for euro area countries receiving new EDP deadlines.

These five countries are Malta, for which a new excessive deficit procedure was opened in June, as well as Spain, France, the Netherlands and Slovenia, which were granted additional years – until 2014 or beyond – to correct their excessive deficits.

Finally, for three countries, we had to look at the reasons for a breach of the debt or deficit criteria of the Pact, namely Lithuania, Croatia and Finland.

While the opinions are not binding, the Commission may request a revised draft budgetary plan. This would happen in exceptional cases where, as the rules say, the implementation of the Draft Budgetary Plan would put at risk financial stability or entail an obvious significant violation of the recommendations adopted by the Council under the Stability and Growth Pact. That's what the rules say. I am glad that none of the plans fall into this last category.

Having said that, however, in a number of cases, there is scope for significant improvement. For the benefit of transparency, we used some clear language, ranging from compliant to non-compliant with the rules of the Stability and Growth Pact.

In some budget plans there is no margin for any slippage. In others, we see risks that the implementation of the plan could lead to non-compliance down the line over the year. It would be to the benefit of the country concerned to take our opinion into account in the on-going budgetary process, to ensure meeting its fiscal targets and ensure fiscal sustainability.

Let me now take you through a few country cases.

Both Germany and Estonia are in the Preventive Arm of the Stability and Growth Pact – in other words, they are out of the Excessive Deficit Procedure. The Draft Budgetary Plans indicate that both countries are compliant with the requirements of the Stability and Growth Pact.

Both meet their Medium Term Objective, so both are fully in line with the preventive arm of the Pact.

This being said, the Draft Budgetary Plan of Germany is based on a no policy change assumption, and we are looking forward to a new plan once the new government is in place.

Italy and Finland are also out of the Excessive Deficit Procedure. According to their Draft Budgetary Plans and our Autumn Forecast they are, however, both at risk of non-compliance with the requirements of the Stability and Growth Pact.

Italy's compliance with the debt rule is at risk next year, as its structural adjustment is not sufficient to comply with the requirements for the debt criterion that have been recently introduced with the reinforced Pact with the latest reforms.

Let me say regarding Italy that the Government has stressed to me its commitment to carry on the process of economic reforms to increase productivity and competitiveness, including through the spending review, which will be focused on reforming the public administration in its various articulations at central and local level. We count on strong and effective delivery of these comments by the government and parliament on the basis of the expenditure review and the very valuable work underway by Mr. Carlo Cottarelli, who is leading this review.

In case of Finland there is a risk of a significant deviation from the adjustment path towards its Medium-Term Objective.

Moreover, the debt ratio in Finland is projected to breach the 60% of GDP threshold in 2014, in fact, both according to the national plans and the Commission forecast. Consequently, the Commission has decided to prepare a report under Article 126(3), in order to comprehensively assess the excess over the debt reference value and to find out whether this breach merits the launch of an EDP.

This profound thorough analysis, including all relevant factors, has led us to the conclusion that the breach does not point yet to the existence of an excessive deficit situation. However, the trend is very worrying and we will have to closely monitor developments in Finland concerning public debt. The next checkpoint is likely to be in the context of our winter forecast in the early part of next year.

Among the countries which received EDP recommendations this June, one country, Belgium, was requested to correct the deficit already this year, and seems to be on the right track to fulfil its commitments. Our deficit forecast is at 2.8% of GDP this year, clearly below the 3% of GDP threshold. Consequently, Belgium is considered to be broadly compliant with the Pact, and if this is confirmed by actual Eurostat data next spring, the procedure is likely to be closed for Belgium and Belgium could exit EDP. Of course, this requires that Belgium should then follow the adjustment path towards its medium-term budgetary objective from then onwards.

Three other countries, France, the Netherlands and Slovenia, are not expected to meet their nominal targets, expressed as the deficit-to-GDP ratio. But they have delivered effective action and therefore can be regarded as compliant with the requirements of the Pact, based on the Autumn Forecast, when we focus on the structural fiscal effort. However, this is without any margin for manoeuvre or slippage, which means that quite substantial efforts will still be needed in the coming years to stay on track.

Spain has made great efforts to stabilise its public finances and pursue structural reforms to lay the foundations for a more sustainable growth model and more robust job creation. Its determined implementation of the financial sector programme has led to the successful outcome welcomed at yesterday's Eurogroup.

Nevertheless, our analysis indicates that Spain's Draft Budgetary Plan is at risk of non-compliance with the requirements of the Pact in 2014.

The nominal target is expected to be broadly met and the required fiscal target delivered in 2013, but both targets, nominal and structural, are at risk in 2014.

This is why Spain is asked to make some adjustments in its budgetary process to bring it in line with the requirements of the Stability and Growth Pact.

Regarding Malta, while the country appears to have taken effective action, our analysis of the Draft Budgetary Plan for 2014 shows a risk of non-compliance with the rules of the Pact. We are therefore inviting the national authorities to take the necessary measures in the national budgetary process to ensure full compliance in 2014.

In terms of countries that are in the preventive arm of the Pact, we have adopted today three reports to see whether the debt and/or deficit criteria are breached. Finland, as I have already mentioned, but also for Lithuania, we conclude that it is not warranted to open an Excessive Deficit Procedure, at least at this stage.

Croatia has reported a deficit above 3% of GDP last year and this year and the debt ratio is projected to exceed 60% of GDP next year.

Therefore, the Commission has adopted a Report based on Article 126(3) that points to a continuous breach of both reference values.

We therefore expect to propose to the Council later this year to open an Excessive Deficit Procedure for Croatia on account of both the deficit and debt criteria.

Finally, concerning Poland, after careful consideration, we have come to the conclusion that effective action has not been taken in response to the Council recommendation of last June. You can study the reasons for that in the opinion and more precisely. If I were to sum it up I would say that under the updated statistical regime, called ESA2010, which will be introduced across Europe next autumn, Poland's nominal deficit is estimated to rise significantly above 3%.

With the aim of providing early guidance, we have already anticipated the effects of the statistical update. This is why we are proposing to the Council a new recommendation to Poland, with a smoother path for the correction of its excessive deficit by 2015, which is one year later than under the current recommendation.

We have mapped our assessment of the thirteen draft budgetary opinions to the euro area.

While there is well-grounded reason for criticism – otherwise the map would be all green – our assessment gives us confidence that national budgetary authorities will take our opinions into account in concluding their budgetary procedures between now and the end of the year. As I mentioned earlier, in case our concerns were to be ignored and a non-compliant budgetary plan were to be enacted – which I do not expect to be the case of course – the reinforced fiscal rules with their effective enforcement mechanisms would be applied as necessary.

I have to add that the budgetary plans still do not pay sufficient attention to the composition of fiscal consolidation. Especially the general trend of decreasing public capital expenditure observed in the past few years, while stabilising, is not yet being reversed. Continued progress with sound public finances should be supported by growth-friendly structural measures, in line with the Annual Growth Survey that we presented on Wednesday last week. I am looking forward to a frank and open discussion on these issues at the special Eurogroup one week from today, Friday 22nd of November, where I will put the accent, not only on the compliance of the countries, but on the composition of fiscal consolidation from the point of view of economic growth and on economic reforms supporting sustainable growth and fiscal sustainability.

Thank you very much.


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