Category Archives: Stability and growth pact and economic policy coordination

The Stability and Growth Pact is intended to ensure that Member States maintain budget discipline in order to avoid excessive deficits. It therefore contributes to monetary stability. Member States coordinate their economic policies at European level.

Revising the Stability and Growth Pact: Public Finances in EMU 2006

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Revising the Stability and Growth Pact: Public Finances in EMU 2006

Outline of the Community (European Union) legislation about Revising the Stability and Growth Pact: Public Finances in EMU 2006

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These categories group together and put in context the legislative and non-legislative initiatives which deal with the same topic.

Economic and monetary affairs > Stability and growth pact and economic policy coordination

Revising the Stability and Growth Pact: Public Finances in EMU 2006

Document or Iniciative

Communication from the Commission to the Council and the European Parliament: Public Finances in EMU 2006 – The first year of the revised Stability and Growth Pact [COM(2006) 304 final].

Summary

The Commission considers the implementation of the revised Stability and Growth Pact (SGP) to have been mainly positive, particularly the corrective arm of the Pact. However, there remain some concerns related to the implementation of the preventive part of the Pact. Despite the positive results, the Commission draws attention to some challenges ahead.

Consolidating public finances: positive results

The consolidation of public finances has resumed and there has been smooth and consistent implementation of the revised SGP procedures, benefiting from an increased economic rationale for decisions and recommendations. The revised SGP ensures that excessive deficits are properly identified and allows better account to be taken of country-specific economic considerations. When the deficit of a Member State exceeds 3% of gross domestic product (GDP), the Commission must prepare a report providing an overall assessment of the economic and budgetary situation in that Member State. The reports give consideration to all elements that are relevant for an evaluation of the situation, to allow a decision to be taken on the existence of an excessive deficit and deadlines set for its correction. Since the reform, all deficits in excess of 3% of GDP have been considered excessive. In the view of the Commission, this confirms that the SGP remains a rule-based framework, which is the best guarantee that commitments will be honoured and that all Member States will be treated equally.

When deficits in excess of the reference value of 3% of GDP occur, corrective measures must be adopted promptly. The consideration of economic factors is also important and permits the Council to set realistic deadlines for correcting excessive deficits when applying the excessive deficit procedure. Taking account of the economic situation has not, in the opinion of the Commission, led to a more lenient application of the rules. More account has been taken of the development of public debt when applying the excessive debt procedure.

In March 2005, when agreement was reached on the revision of the SGP, the Council stressed that improved cooperation between the Commission, the Council and Member States was important in order to strengthen national ownership of and compliance with the SGP rules. Experience has shown that, by introducing more scope for economic judgement in the budgetary surveillance process, the reform has stimulated a constructive and transparent dialogue about economic policy at EU level. This has strengthened peer support and pressure, thus contributing to the smooth operation of the Pact.

Implementation of the preventive arm of the Pact: some concerns

The 2005 reform of the SGP introduced a number of changes, strengthening the preventive arm of the Pact by increasing its economic rationale. One criticism of the original Pact was that a uniform medium-term budgetary objective of “close to balance or in surplus” imposed inappropriate budgetary policies in some countries experiencing high nominal growth. The revised SGP no longer requires Member States to converge on a uniform close-to-balance budgetary position in the medium term. Rather, an individual medium-term objective is set for each Member State, taking into account the economic and budgetary circumstances in each country, so as to provide a sufficient safety margin with respect to the reference value of 3% of GDP and ensure convergence on prudent levels of debt. The revised SGP also includes a number of simple budgetary policy principles appropriate for Member States that have not yet achieved their medium-term target and for budgetary policy during cyclical upswings. In particular, Member States in the euro zone or participating in the exchange-rate mechanism (ERM II) should aim for an annual structural adjustment in line with the benchmark of 0.5 % of GDP.

The Commission recognises that the medium-term budgetary objectives reflect economic fundamentals and national strategies. It notes that some countries have proposed medium-term targets that are more ambitious than strictly required by the revised SGP. In most cases, this is to allow consistency between the objectives set in the European context and a national strategy to ensure the sustainability of public finances, reflecting the economic situation in each country.

However, the Commission notes that planned budgetary efforts to achieve the objectives are not always sufficiently ambitious and fall short of the 0.5 % benchmark in 2006. According to the Commission Spring Forecast, on average the structural balance for the EU will not improve and for some Member States will even deteriorate. There is a risk that budgetary policy will turn expansionary and pro-cyclical. Rigorous budgetary execution and, possibly, additional consolidation measures in 2006, together with ambitious budgetary policy for 2007, are needed in order to reduce the gap between the progress already made and requirements under the SGP.

Despite clear improvements, the Commission feels that some questions remain about the credibility of the medium-term budgetary adjustments planned by Member States. The Commission notes that the medium-term budgetary projections presented in the 2005 updates of stability and convergence programmes are, in most cases, based on realistic macroeconomic assumptions. Another positive development is the much less frequent use of one-off and other temporary measures within medium-term programmes. In a number of cases, however, the measures necessary to achieve the budgetary objectives are not specified in sufficient detail. The combination, in some programmes, of a concentration of efforts on the end of the period covered by programmes and a lack of detail about the measures underlying the planned reduction in the deficit is a source of concern.

Identifying the challenges ahead for the revised SGP

Experience over the year since the revision of the SGP in the summer of 2005 shows that the EU budgetary framework is regaining credibility. However, the Commission identifies a number of challenges ahead:

  • Respecting the spirit of the reform when the economic climate is favourable. The Commission stresses the importance of conducting prudent budgetary policies when the economic climate is favourable so as to contain the accumulation of debt and ensure it is reduced to sustainable levels. It considers that larger budgetary adjustments should be made in 2006 and will endeavour to ensure that the budgets set for 2007 are ambitious.
  • Putting a greater emphasis on the sustainability of public finances. Despite the progress made in reducing the government deficit, the debt ratio in the EU increased from 62.4 % of GDP in 2004 to 63.4 % of GDP in 2005. Given the long-term challenges faced by most EU Member States, such as an ageing population, large reductions in public debt are needed.
  • Improving governance as regards statistics. The effective implementation of the European budgetary framework depends on the quality, reliability and early publication of harmonised budgetary statistics in accordance with European accounting standards. The ongoing work to strengthen the European statistical system must be intensified.
  • Creating better synergies between budgetary policy and growth. An important challenge facing the EU is how to foster the implementation of reforms that allow progress towards sustainable public finances and, at the same time, enhance growth prospects. In order to support sustainable growth, increased attention should be paid to the implications of budgetary policy on macroeconomic developments.
  • Developing fiscal rules and institutions at national level. The agreement on the SGP reform stressed that national budgetary rules and institutions could play a more prominent role in domestic budgetary surveillance. The Commission welcomed the declaration of national Finance Ministers, in the context of the reform of the SGP. It considers that progress could also be made on strengthening the interaction between national budgetary procedures and the EU budgetary framework.

Requirements for budgetary frameworks of the Member States

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Requirements for budgetary frameworks of the Member States

Outline of the Community (European Union) legislation about Requirements for budgetary frameworks of the Member States

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Economic and monetary affairs > Stability and growth pact and economic policy coordination

Requirements for budgetary frameworks of the Member States

Document or Iniciative

Directive 2011/85/UE of the Council of 8 November 2011 on the requirements for budgetary frameworks of the Member States [Official Journal L 306 of 23.11.2011].

Summary

This Directive shall apply to the national budgetary frameworks of the Member Sates. The budgetary frameworks detail all the measures, rules and institutions through which the public administrations in the Member States conduct the budgetary policy.

The Directive lays down rules applicable to specific elements of the budgetary frameworks, in particular:

  • systems of budgetary accounting and statistical reporting;
  • rules and procedures governing the preparation of forecasts for budgetary planning;
  • country-specific numerical fiscal rules, such as the debt or deficit limits;
  • medium-term budgetary frameworks;

System of accounting and statistical reporting

Member States shall have in place public accounting systems comprehensively and consistently covering all sub-sectors of general government.

The accounting systems must also enable Member States to ensure regular public availability of fiscal data for all sub-sectors of general government.

Furthermore, the public accounting systems shall be subject to internal control and independent audits.

Forecasts for fiscal planning

Member States shall base their fiscal planning on the most realistic macroeconomic and budgetary forecasts possible. In particular, these forecasts shall include a study of the main fiscal variables based on different assumptions relating to growth and interest rates.

Member States shall make public their macroeconomic and fiscal forecasts, as well as the methods and parameters they have used. They shall also identify the institution responsible for producing these forecasts.

Member States’ forecasts are then compared with the forecasts produced by the Commission. The latter is also required to publish the methods, hypotheses and parameters used. Any significant differences between the Member States’ and the Commission’s forecasts shall be described and explained.

Numerical fiscal rules

EU budgetary surveillance shall be based on the numerical fiscal rules specific to each Member State. The objective of these rules is to avoid excessive public deficit and excessive public debt.

The fiscal rules specific to each country include in particular:

  • the target definition and scope of the rules;
  • the effective compliance with the rules, based on reliable and independent analysis carried out by independent bodies or bodies endowed with functional autonomy vis-à-vis the fiscal authorities of the Member States;
  • the consequences in the event of non-compliance.

Medium-term budgetary frameworks

Member States shall establish a medium- term budgetary framework. This framework is defined as a set of national fiscal procedures extending the development of fiscal policy beyond the annual budgetary calendar. It is accompanied by the adoption of a fiscal planning horizon of at least 3 years. The budgetary framework consists of the following elements:

  • comprehensive and transparent multiannual budgetary objectives, for example in terms of the general government deficit of public debt;
  • projections of each major expenditure and revenue item of the general government;
  • a description of medium-term policies envisaged with an impact on general government finances;
  • an assessment of the effects the policies envisaged could have on the long-term sustainability of the public finances.

Context

The Stability and Growth Pact is a set of rules which establish economic and budgetary surveillance at European level. The aim is to ensure economic and financialstability in the EU.

Member States must therefore pursue sound budgetary policies in order to avoid excessive public deficits which could put the economic and financial stability of the EU in danger.

In 2011 the Stability and Growth Pact was subject to huge reform.. The new measures adopted constitute a significant step in ensuring budget discipline, promoting the stability of the European economy, and preventing a new crisis in the Union.

The Stability and Growth Pact henceforth brings together six legislative acts which entered into force on 13 December 2011:

  • Regulation No. 1173/2011 on the implementation of efficient budgetary surveillance in the euro area;
  • the Regulation (EU) No. 1174/2011 on enforcement measures to correct excessive macroeconomic imbalances in the euro area;
  • the Regulation (EU) No. 1175/2011 amending the surveillance procedures of budgetary positions;
  • the Regulation (EU) No. 1176/2011 on the prevention and correction of macroeconomic imbalances ;
  • the Regulation (EU) No. 1177/2011 amending the procedure concerning excessive deficits;
  • Directive No. 2011/85/EU on requirements for budgetary frameworks of the Member States.

References

Act Entry into force Deadline for transposition in the Member States Official Journal
Directive 2011/85/UE

13.12.2011

–

OJ L 306 of 23.11.2011

Stability and growth pact and economic policy coordination

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Stability and growth pact and economic policy coordination

Outline of the Community (European Union) legislation about Stability and growth pact and economic policy coordination

Topics

These categories group together and put in context the legislative and non-legislative initiatives which deal with the same topic.

Economic and monetary affairs > Stability and growth pact and economic policy coordination

Stability and growth pact and economic policy coordination

The Stability and Growth Pact is intended to ensure that Member States maintain budget discipline in order to avoid excessive deficits. It therefore contributes to monetary stability. Member States coordinate their economic policies at European level.

STABILITY AND GROWTH PACT

Implementation of the pact

  • Resolution of the Amsterdam European Council on the stability and growth pact
  • Surveillance of budgetary policies
  • The corrective arm: the excessive deficit procedure
  • Requirements for budgetary frameworks of the Member States

Implementation of the pact

  • A European Economic Recovery Plan
  • Reporting of planned deficits by Member States
  • European financial stabilisation mechanism

ECONOMIC POLICY COORDINATION

Basic provisions

  • Resolution of the European Council on economic policy coordination (1997)
  • Reinforcing economic policy coordination
  • Streamlining of annual economic and employment policy coordination cycles

Council recommendations

  • Broad guidelines for economic policies
  • Broad Economic Policy Guidelines (2008- 2010)
  • Broad economic policy guidelines (2005- 2008)
  • Broad economic policy guidelines 2003-2005
  • Broad economic policy guidelines (2002)
  • Broad economic policy guidelines (2001)
  • Broad economic policy guidelines (2000)
  • Broad economic policy guidelines (1999)
  • Broad economic policy guidelines (1998)
  • Broad economic policy guidelines (1997)
  • Broad economic policy guidelines (1996)

Public finances in Member States

  • Ensuring the effectiveness of the preventive arm of the Stability and Growth Pact: Public Finances in EMU – 2007
  • Long-term sustainability of public finances in the EU
  • Revising the Stability and Growth Pact: Public Finances in EMU 2006
  • Public finances in Member States in 2005
  • Public finances in Member States in 2004

The European economy

  • The European economy: 2007 Review
  • The European economy: 2006 review – strengthening the euro area
  • The European economy: 2004 Review
  • The OECD and the examination of EC economic policies

Declaration on the Euro area

  • 2009 Annual Statement on the Euro Area
  • 2007 Annual Statement on the Euro Area

Surveillance of budgetary policies

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Surveillance of budgetary policies

Outline of the Community (European Union) legislation about Surveillance of budgetary policies

Topics

These categories group together and put in context the legislative and non-legislative initiatives which deal with the same topic.

Economic and monetary affairs > Stability and growth pact and economic policy coordination

Surveillance of budgetary policies

Document or Iniciative

Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies [See amending acts].

Summary

This Regulation constitutes the preventive arm of the stability and growth pact. It aims to monitor and coordinate Member States’ budgetary policies, by way of a preventive measure to ensure budgetary discipline within the European Union.

To this end, the Regulation provides for a European Semester at the start of each year to assist Member States in putting in place healthy budgetary policies. Member States submit to the Commission stability programmes (for Member States in the euro zone) and convergence programmes (for Member States outside the euro zone) in which they adopt medium-term budgetary objectives. These programmes are assessed by the Commission and are the subject of specific Council recommendations for each State.

European Semester for economic policy coordination

The European Semester comprises a six-month period during which Member States’ budgetary policies are examined.

At the start of the Semester, the Council shall identify the key economic challenges for the European Union (EU) and provide Member States with strategic policy guidelines to be followed.

Subsequently, and on the basis of these guidelines, Member States shall establish:

  • their stability or convergence programmes under this Regulation;
  • their national reform programmes, in line with broad guidelines for economic policy and guidelines for employment policies.

At the end of the European Semester and following an assessment of the programmes, the Council sends recommendations to each Member State. Based on the Commission’s Opinion, the Council thus makes known its assessments before Member States draw up their final budgets for the following year.

Medium-term budgetary objectives

Each Member State has a medium-term deficit objective for its budgetary position, defined in structural terms. The medium-term objectives differ between Member States: they are more stringent where the level of debt and estimated costs of an ageing population are higher.

For the Member States that have adopted the euro and for those participating in the ERM 2 at over – 1 % of GDP, the medium-term objectives may be revised when a major structural reform is undertaken or every three years, when forecasts are published enabling the estimated costs of ageing populations to be updated.

Multilateral surveillance: stability and convergence programmes

The stability and convergence programmes serve as a basis for multilateral surveillance by the Council of the EU. This surveillance, provided for in Article 121 of the Treaty on the Functioning of the EU should prevent, at an early stage, the occurrence of excessive public deficits and promote the coordination of economic policies.

Each Member State must present the Council of the EU and the Commission with a stability programme (for Member States in the euro zone) or a convergence programme (for Member States outside the euro zone).

Stability or convergence programmes must include the following information:

  • the medium-term budgetary objective, an adjustment path for achieving the objective, government balance as a percentage of GDP, the foreseeable trend for the government debt ratio, the growth rate planned for government expenditure, the growth path of government revenue at unchanged policy, and quantified discretionary revenue measures. In addition, convergence programmes have to state the relationship between these objectives and price and exchange rate stability, as well as the medium-term objectives of monetary policy;
  • information on implicit liabilities related to ageing, and contingent liabilities (such as public guarantees) with a potentially large impact on government accounts;
  • information on the consistency of the programmes with the broad economic policy guidelines and the national reform programmes;
  • the main assumptions underlying the economic outlook, which are likely to influence the realisation of the stability and convergence programmes (growth, employment, inflation and other important variables);
  • an assessment and a detailed analysis of the budgetary measures and other economic policy measures – taken or envisaged – of relevance in achieving the programme’s aims;
  • an analysis of how changes in the main economic assumptions would affect the budgetary and debt positions;
  • where applicable, the reasons for a deviation from the adjustment path needed to achieve the medium-term budgetary objective.

Stability and convergence programmes must be submitted every year during the month of April. They are published by the Member States.

Examination of the stability and convergence programmes

On the basis of assessments by the Commission and the Economic and Financial Committee, the Council examines the medium-term budgetary objectives presented by Member States in their programmes. It checks in particular:

  • whether the medium-term budgetary objective is based on plausible economic assumptions;
  • whether the measures taken or envisaged are sufficient to achieve the budgetary objective;
  • whether an assessment of the adjustment path shows that the Member State concerned is seeking to improve its (cyclically adjusted) budgetary balance year-on-year;
  • whether annual growth in government expenditure by the Member State concerned is not too high – i.e. does not exceed a benchmark rate in the medium term.

When making its assessments, the Council must take account of the implementation of major structural reforms, especially pension reforms.

The Council is to examine the programme within three months of its submission. On a recommendation from the Commission and after consulting the Economic and Financial Committee, the Council delivers an opinion on the programme. Where it considers that the objectives and content of a programme should be strengthened, the Council can invite the Member State concerned to adjust it.

Avoiding the occurrence of an excessive deficit: the early warning mechanism

As part of multilateral surveillance, the Council monitors the implementation of stability and convergence programmes on the basis of information provided by the Member States and assessments carried out by the Commission and the Economic and Financial Committee.

Thus, if the Commission identifies a significant divergence from the medium-term budgetary objective or from the adjustment path that should lead to that objective being achieved, it will address recommendations to the Member State concerned to prevent the occurrence of an excessive deficit (early warning mechanism, Article 121(4) of the Treaty on the Functioning of the EU).

Furthermore, recommendations adopted in the Council may be made public.

Context

The stability and growth pact is a set of rules putting in place economic and budgetary surveillance at European level. The objective is to guarantee the economic and financial stability of the EU.

Member States must therefore apply healthy budgetary policies in order to avoid the occurrence of excessive government deficits which might endanger the economic and financial stability of the EU.

In 2011, the stability and growth pact was the subject of extensive reforms. The new measures adopted are an important step in guaranteeing budgetary discipline, promoting the stability of the European economy and preventing another crisis within the Union.

The stability and growth pact now includes six legislative acts which entered into force on 13 December 2011:

  • Regulation (EU) No 1173/2011 on the effective enforcement of budgetary surveillance in the euro area;
  • Regulation (EU) No 1174/2011 on enforcement measures to correct excessive macroeconomic imbalances in the euro area;
  • Regulation (EU) No 1175/2011 amending this Regulation on surveillance procedures for budgetary positions;
  • Regulation (EU) No 1176/2011 on the prevention and correction of macroeconomic imbalances;
  • Regulation (EU) No 1177/2011 amending the procedure on excessive deficits;
  • Directive No 2011/85/EU on requirements for budgetary frameworks of the Member States.

References

Act Entry into force Deadline for transposition in the Member States Official Journal

Regulation (EC) No 1466/97

1.7.1998

–

OJ L 209 of 2.8.1997
Amending act(s) Entry into force Deadline for transposition in the Member States Official Journal

Regulation (EC) No 1055/2005

27.7.2005

–

OJ L 174 of 7.7.2005

Regulation (EU) No 1175/2011

13.12.2011

–

OJ L 306 of 23.11.2011

 

The corrective arm: the excessive deficit procedure

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The corrective arm: the excessive deficit procedure

Outline of the Community (European Union) legislation about The corrective arm: the excessive deficit procedure

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These categories group together and put in context the legislative and non-legislative initiatives which deal with the same topic.

Economic and monetary affairs > Stability and growth pact and economic policy coordination

The corrective arm: the excessive deficit procedure

Document or Iniciative

Council Regulation (EC) No 1467/97 of 7 July 1997 on speeding up and clarifying the implementation of the excessive deficit procedure [Official Journal L 209 of 2 August 1997] [See amending acts].

Summary

The aim of this Regulation is to clarify and speed up the excessive deficit procedure provided for in Article 126 of the Treaty on the Functioning of the European Union (EU) (formerly Article 104 of the Treaty on the European Community). The emergence of excessive deficits must be prevented and rapidly corrected.

The reference value: 3 % of GDP

As set out in the Protocol on the excessive deficit procedure annexed to the Treaty on the Functioning of the EU (by the Maastricht Treaty in 1992), the reference value for government deficit is 3 % of gross domestic product (GDP). A deficit exceeding this value is considered exceptional when:

  • it results from an unusual event outside the control of the Member State concerned which has a major impact on the financial position of the government;
  • it results from a severe economic downturn (if the excess over 3 % of GDP is the result of negative annual GDP growth or a cumulative fall in production over a prolonged period of very low annual growth).

Moreover, the excess over the reference value is considered temporary if the European Commission’s budget forecasts state that the deficit will fall below the reference value when the unusual circumstance or serious downturn is over.

The existence of an excessive deficit: considering all factors

The European Commission carries out an assessment, and the Council of the European Union decides whether or not there is an excessive deficit. The Commission prepares a report and must take all relevant factors into account.

The relevant factors include:

  • developments in the medium-term economic position (potential growth);
  • prevailing cyclical conditions;
  • the implementation of policies aimed at encouraging research and innovation;
  • developments in the medium-term budgetary position, particularly fiscal consolidation efforts in “good times”;
  • reform of retirement pension schemes.

The European institutions are also required to give due consideration to any other factors which, in the opinion of the Member State concerned, are relevant for assessing the excess over the reference value.

The excessive deficit procedure

7. Commission Report. Within two weeks of the Commission adopting the report it draws up if a Member State does not fulfil the criteria laid down in Article 126 of the Treaty on the Functioning of the EU, the Economic and Financial Committee formulates an opinion.

The Commission takes this opinion into account and, if it considers an excessive deficit to exist, addresses an opinion to the Member State concerned. It also informs the Council.

Council Recommendation

On the basis of the Commission’s opinion, the Council decides, by a qualified majority, whether an excessive deficit exists. The Council also considers any observations made by the Member State concerned.

If the Council decides that an excessive deficit exists, when it makes that decision, it issues recommendations to the Member State concerned. The Council establishes a deadline of no more than six months for effective action to be taken. The correction of the excessive deficit should be completed in the year following its identification, unless there are special circumstances. In its recommendations, the Council is to request the Member State to achieve a minimum annual improvement of at least 0.5 % of GDP as a benchmark.

If unexpected adverse economic events with major unfavourable consequences for government finances occur after the adoption of the Council’s recommendations, and if the Member State concerned has acted in accordance with the recommendations, the Council may adopt revised recommendations.

Where no effective action has been taken within six months of the identification of an excessive deficit, the Council decides whether to make its recommendations public. When considering whether effective action has been taken in response to its recommendations, the Council bases its decision on the public declarations of the Member State concerned.

Formal notice and sanctions. Within two months of its decision establishing that no effective action has been taken, the Council may give notice to the Member State concerned to take measures to reduce the deficit. If effective action has been taken in compliance with a notice, and unexpected adverse economic events with major unfavourable consequences for government finances occur after the adoption of that notice, the Council may decide, on a recommendation from the Commission, to adopt a revised notice.

No later than four months after notice has been given, the Council normally decides to impose sanctions if the Member State fails to comply with the Council’s decisions.

As stipulated in Article 139, paragraph 2(b) of the Treaty on the Functioning of the EU (formerly Article 122 of the Treaty on the European Community), the formal notices issued by the Council and the sanctions provided for in Article 129 of the Treaty do not apply to Member States not (yet) participating in the euro.

Abeyance of the procedure

The excessive deficit procedure may be held in abeyance:

  • if the Member State concerned acts in compliance with the recommendations made by the Council;
  • if the participating Member State concerned acts in compliance with the notices issued by the Council.

The period during which the procedure is held in abeyance is not included in the periods relating to the giving of notice or to the imposition of sanctions.

Corrective action

The Council sets a deadline for corrective action to be taken by the Member State. This corrective action must comply with the Council’s recommendations and its sanctions. Upon the expiry of this deadline, the Commission gives the Council its opinion on the corrective measures taken by the Member State concerned. The Commission’s opinion is based on the premise that these measures have been fully implemented and that economic developments are in line with forecasts.

In order to examine a participating Member State’s adjustment efforts, the Council may ask the Member State to submit reports in accordance with a specific timetable:

  • if action by that participating Member State is not being implemented or, in the Council’s view, is proving to be inadequate;
  • if actual data indicate that an excessive deficit has not been corrected by that participating Member State within the time limits specified in the recommendations.

Sanctions

Sanctions resulting from a procedure for excessive deficit first take the form of a non-interest-bearing deposit with the EU. The amount of this deposit comprises:

  • a fixed component equal to 0.2 % of GDP;
  • a variable component equal to one tenth of the difference between the deficit as a percentage of GDP in the year in which the deficit was deemed to be excessive and the reference value of 3 % of GDP.

Each following year, the Council may decide to intensify sanctions by requiring an additional deposit. This will be equal to one tenth of the difference between the deficit as a percentage of GDP in the preceding year and the reference value of 3 % of GDP.

Deposits may not exceed the upper limit of 0.5 % of GDP per year.

As a rule, a deposit is converted into a fine if, in the Council’s opinion, the excessive deficit has not been corrected after two years.

The Council may decide to abrogate some or all of the sanctions, depending on the significance of the progress made by the participating Member State concerned in correcting the excessive deficit.

The Council will abrogate all outstanding sanctions if the decision on the existence of an excessive deficit is repealed. Any fines already imposed will not be reimbursed to the participating Member State concerned.

Both the interest on the deposits lodged with the Commission and the yield from any fines will be distributed among Member States without an excessive deficit, in proportion to their share of the total gross national product (GNP) of the eligible Member States.

Context

The aim of the Stability and Growth Pact is to prevent excessive budget deficits emerging in the euro zone after the beginning of the third phase of Economic and Monetary Union (EMU), which started on 1 January 1999.

As the Treaty only sets out quantitative criteria for adopting the single currency and does not specify a budgetary policy to be implemented after the introduction of the euro, Member States judged it necessary to adopt the Stability and Growth Pact. It is therefore in keeping with the principles set out in the Treaty and extends its provisions.

The Pact is intended to ensure sound management of public finances in the euro zone in order to prevent a situation arising in which one Member State’s lax budgetary policy penalises the other Member States through interest rates and undermines confidence in the economic stability of the euro zone. It is designed to ensure the sustained and lasting convergence of the economies of Member States belonging to the euro zone.

Moreover, this Regulation was the subject of an initial revision in June 2005. A second recast is currently underway. The Proposal for the new regulation should be adopted by the European Parliament and the Council of the EU towards the end of 2011.

References

Act Entry into force Deadline for transposition in the Member States Official Journal

Regulation (EC) No 1467/97

1.1.1999

–

OJ L 209, 2.8.1997
Amending act(s) Entry into force Deadline for transposition in the Member States Official Journal

Regulation (EC) No 1056/2005

27.7.2005

–

OJ L 174, 7.7.2005

Resolution of the Amsterdam European Council on the stability and growth pact

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Resolution of the Amsterdam European Council on the stability and growth pact

Outline of the Community (European Union) legislation about Resolution of the Amsterdam European Council on the stability and growth pact

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These categories group together and put in context the legislative and non-legislative initiatives which deal with the same topic.

Economic and monetary affairs > Stability and growth pact and economic policy coordination

Resolution of the Amsterdam European Council on the stability and growth pact

Document or Iniciative

Resolution of the European Council on the Stability and Growth Pact (Amsterdam, 17 June 1997) [Official Journal C 236 of 02.08.1997].

Summary

This Council resolution establishes the political basis for the stability and growth pact. It provides the Member States, the Council and the Commission with firm policy guidelines for implementation of the stability and growth pact.

The Member States undertake to abide by the medium-term budgetary objective of positions close to balance or in surplus. In addition the Member States:

  • are invited to make public, on their own initiative, the Council recommendations made to them;
  • commit themselves to taking the corrective budgetary action they deem necessary to meet the objectives of their stability or convergence programmes;
  • will launch the corrective budgetary adjustments they deem necessary without delay on receiving information indicating the risk of an excessive deficit;
  • will correct excessive deficits as quickly as possible after their emergence;
  • undertake not to invoke the exceptional nature of a deficit linked to an annual fall in GDP of less than 2 % unless they are in severe recession (annual fall in real GDP of at least 0.75 %).

The Commission:

  • will exercise its right of initiative under the Treaty in a manner that facilitates the strict, timely and effective functioning of the stability and growth pact;
  • will present without delay the necessary reports, opinions and recommendations to enable the Council to adopt decisions rapidly;
  • undertakes to prepare a report whenever there is the risk of an excessive deficit or whenever the planned or actual government deficit exceeds the reference value of 3 % of GDP;
  • undertakes, in the event that it considers a deficit exceeding 3 % of GDP is not excessive and that this opinion differs from that of the Economic and Financial Committee, to present in writing to the Council the reasons for its position;
  • undertakes, following a request from the Council, to make, as a rule, a recommendation for a Council decision on whether an excessive deficit exists.

The Council is committed to rigorous and timely implementation of all elements of the stability and growth pact in its competence and in addition is:

  • urged to regard the deadlines for the application of the excessive deficit procedure as upper limits;
  • invited always to impose sanctions if a participating Member State fails to take the necessary steps to bring the excessive deficit situation to an end and to apply rigorously the whole range of sanctions provided for;
  • invited always to state in writing the reasons which justify a decision not to act.

In September 2004 the Commission reacted to this and to the debate surrounding the stability and growth pact by issuing a communication on strengthening economic governance and clarifying the implementation of the Stability and Growth Pact. It proposes a series of improvements to the pact. The Commission focuses particularly on the trend in economic factors in the Member States and the long-term sustainability of public finances.

At the European Council of 22 and 23 March 2005the Finance Ministers reached a political agreement on better management of the stability and growth pact.

Related Acts

Council Regulation (EC) No 1467/97 of 7 July 1997 on speeding up and clarifying the implementation of the excessive deficit procedure [Official Journal L 209 of 02.08.1997]
Council Regulation (EC) No. 1467/97 clarifies and speeds up the excessive deficit procedure so that it acts as a genuine deterrent.

Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies [Official Journal L 209 of 02.08.1997].
Council Regulation (EC) No 1466/97 governs the surveillance of the Member States’ budgetary positions and the coordination of their economic policies.

Resolution of the European Council on economic policy coordination

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Resolution of the European Council on economic policy coordination

Outline of the Community (European Union) legislation about Resolution of the European Council on economic policy coordination

Topics

These categories group together and put in context the legislative and non-legislative initiatives which deal with the same topic.

Economic and monetary affairs > Stability and growth pact and economic policy coordination

Resolution of the European Council on economic policy coordination (1997)

Document or Iniciative

Resolution of the European Council, of 13 December 1997, on economic policy coordination in stage 3 of economic and monetary union and on Articles 111 and 113 of the EC Treaty [Official Journal C 35 of 2.2.1998].

Summary

The euro-area Member States will share a single monetary policy and a single exchange rate, while the other aspects of economic policy will remain national issues. To the extent that national economic developments will influence monetary conditions in the euro-area, closer Community surveillance and coordination of economic policies among euro-area Member States will be necessary.

All Member States, including those remaining outside the euro-area (Denmark, the United Kingdom and Sweden) must be included in the coordination of economic policies, as they all participate in the single market and may also participate in the new exchange rate mechanism.

Enhanced surveillance and coordination should cover the following areas:

  • macroeconomic developments in Member States and the development of the exchange rate for the euro;
  • budgetary positions and policies;
  • structural policies in labour, product and services markets, as well as cost and price trends.

Coordination must adhere to the principle of subsidiarity.

To ensure the smooth functioning of economic and monetary union (EMU), the broad economic policy guidelines should provide more concrete and country-specific guidelines and focus more on measures to improve growth potential and create jobs.

Member States should commit themselves to a comprehensive and speedy exchange of information on economic developments and policy intentions with a cross-border impact, even if there is no threat of a deterioration in the budgetary situation. For its part, the Council could show more inclination to address recommendations to Member States whose economic policies are not consistent with the broad guidelines.

The Economic and Financial Affairs Council (ECOFIN) occupies the defining position at the centre of the economic coordination and decision-making process. Whenever matters of common interest are addressed, they will be discussed by the ministers of all Member States. However, the ministers of the Member States participating in the euro-area may meet informally among themselves to discuss issues connected with their shared specific responsibilities for the single currency (this formation of ministers normally meets the day before the ECOFIN Council meeting).

As the Council must monitor the development of the euro exchange rate, it is important for it to be able to exchange views and information with the European Central Bank (ECB). It may, in exceptional circumstances, formulate general guidelines for exchange-rate policy in relation to non-EC currencies. These must respect the independence of the ESCB and be consistent with the primary objective of the European System of Central Banks (ESCB), which is to maintain price stability.

The Council should decide on the position of the Community on issues of particular relevance to EMU, in connection with both bilateral relations with third countries and proceedings in international organisations or informal international groupings. Only euro-zone Member States will participate in votes.

The Council and the European Central Bank will represent the Community at international level in compliance with the allocation of powers laid down in the Treaty. On elements of economic policy other than monetary and exchange-rate policy, the Member States should continue to present their policies outside the Community framework, while taking full account of the Community interest.

Representation in international organisations should take account of those organisations’ rules. For example, only countries can be members of the International Monetary Fund (IMF).

In the light of the allocation of responsibilities laid down in the Treaty, the harmonious economic development of the Community will necessitate continuous dialogue between the Council and the ECB, involving the Commission and respecting all aspects of the independence of the ESCB.

The Economic and Financial Committee will provide the framework within which the dialogue can be prepared and pursued at senior official level.

Broad economic policy guidelines 2003-2005

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Broad economic policy guidelines 2003-2005

Outline of the Community (European Union) legislation about Broad economic policy guidelines 2003-2005

Topics

These categories group together and put in context the legislative and non-legislative initiatives which deal with the same topic.

Economic and monetary affairs > Stability and growth pact and economic policy coordination

Broad economic policy guidelines 2003-2005

The broad economic policy guidelines are the main instrument for coordinating the economic policies of the Member States. For the first time they cover a period of three consecutive years in order to rationalise and synchronise the process of coordinating economic policies with employment policy. The broad outlines for 2003-2005 emphasise the contribution of economic policies to the Lisbon programme, which seeks to make the European Union the most competitive and dynamic knowledge-based economy in the world.

Document or Iniciative

Council Recommendation 2003/555/EC of 26 June 2003 on the broad guidelines of the economic policies of the Member States and the Community (2003-2005) [See amending acts].

Summary

The first part contains the general guidelines for all Member States and the Community and a section devoted to the challenges specific to the euro area. The second part contains recommendations for individual Member States and takes account of their specific situations. The Commission has updated the broad guidelines for 2004 in a new recommendation that includes the 10 new Member States in the current framework for economic policy coordination. The policy guidelines for the EU15 remain entirely relevant.

GENERAL ECONOMIC POLICY GUIDELINES

Meeting the Lisbon strategic goal

Lisbon Programme. In spring 2000 the European Union set itself the goal of becoming “the most competitive and dynamic knowledge-based economy in the world”. To help it achieve this goal, it decided to rationalise the various processes for coordinating economic policy and employment policy. The broad economic policy guidelines emphasise the contribution of these policies to the Lisbon programme between 2003 and 2005. They focus on the key economic policy issues and the priorities for the coming three years. They also contain recommendations for the short term, which will be adjusted each year, if necessary.

Employment policy. In addition to these broad economic policy guidelines, Member States must apply the employment guidelines and related recommendations.

Strengthening the EU’s economy

Economic growth. Economic growth has been significantly weaker than anticipated because of geopolitical tensions, a slowdown in external demand and falling confidence among businesses and consumers. Employment prospects are therefore likely to deteriorate in 2003. Inflation has remained just above 2%, but could drop below that level in future. Economic policies must therefore bolster confidence and thereby help to create conditions for stronger domestic demand and job creation in the short term and an expansion of growth potential in the medium term.

Growth and stability-oriented macroeconomic policies

Macroeconomic policies. These play a key role in sustaining growth and employment and in preserving price stability. Member States should, in particular:

  • reach or maintain budgetary positions that are close to balance or in surplus throughout the economic cycle;
  • correct any excessive deficits in line with the stability and growth pact;
  • subject to this, avoid pro-cyclical policies that counteract the symmetric play of the automatic stabilisers over the cycle.

Member States should promote the right framework for wage negotiations by the social partners. It is important that they ensure that:

  • nominal wage increases are consistent with price stability and productivity gains. Labour cost increases should remain moderate to allow more job-creating investment.

Economic reforms to raise Europe’s growth potential

Structural reforms. Structural reforms are essential to increase the EU’s growth potential. To yield maximum synergies, they should be implemented in a comprehensive and coordinated way. The Member States should introduce the following measures over the next three years (the reforms to boost employment are described in detail in the employment guidelines):

Employment:

  • make the tax and benefits system more employment-friendly;
  • make sure that wage bargaining systems take account of differences in productivity and that these are reflected in wages;
  • review labour market regulations (access to the labour market, employment protection, more flexible work organisation);
  • facilitate labour mobility (both geographical and occupational);
  • ensure efficient active labour market policies.

Productivity:

  • foster competition in the markets for goods and services (by increasing the transposition rate of internal market directives, by further opening up public procurement, by ensuring the independence of competition authorities and by reducing and reorienting state aid etc.);
  • accelerate the integration of EU capital markets (by implementing the Risk Capital Action Plan by 2003 and the Financial Services Action Plan by 2005);
  • foster entrepreneurship and the creation of small and medium-sized Enterprises (SMEs);
  • promote investment in knowledge, new technologies and innovation by increasing public and private expenditure on research and development (R&D) to make progress towards the 3% of GDP objective, for example by developing a framework conducive to R&D, facilitating the protection of intellectual property, promoting the e-Europe 2005 Action Plan, developing the Galileo satellite navigation system and improving education and training;
  • enhance the contribution of the public sector to growth (by providing more growth-enhancing, cost-effective investment in physical and human capital and knowledge, increasing the efficiency of the public sector and promoting joint public-private initiatives, etc.).

Strengthening sustainability

Long-term sustainability of public finances:

  • reduce public debt ratios to cater for the ageing of the population. Member States with government debt ratios above the 60% of the GDP reference value should ensure a satisfactory pace of government debt reduction towards that value;
  • design, introduce and effectively implement reforms of pension systems, for example encouraging people to extend their working lives, linking benefits to contributions better and improving access to supplementary pension schemes, etc.;
  • like the Member States, the Community should apply strict budgetary discipline.

Economic and social cohesion:

  • modernise social protection systems while ensuring an adequate level of protection and fighting poverty and exclusion;
  • improve the functioning of markets to encourage private investment in regions that lag behind, ensure that public support, including from EU sources, is focused on investment in human capital and infrastructure, and that investment programmes are designed and administered efficiently.

Environment: efficient management of natural resources:

  • reduce sectoral subsidies, tax exemptions and other incentives that have a negative environmental impact;
  • reduce subsidies to non-renewable energy, promote energy efficiency and increase the proportion of renewable energy;
  • adjust the system of transport taxes, charges and subsidies to better reflect environmental damage and social costs and to increase competition in transport modes such as rail freight;
  • renew efforts to meet the commitments under the Kyoto protocol, for example by introducing a greenhouse gas emissions trading scheme.

Challenges specific to the euro area

Challenges. Economic growth failed to fulfil its potential in 2002. The guidelines list four challenges for the euro area:

  • to strengthen potential growth,
  • to cater for balanced macroeconomic policies,
  • to monitor inflation differences,
  • to strengthen economic policy coordination.

Recommendations. The Council advises national decision-makers in the euro area to strive for an economic policy mix that is compatible with price stability and with business and consumer confidence. Countries in the euro area should maintain budgetary positions that are close to balance or in surplus throughout the economic cycle in cyclically adjusted terms. Where necessary, they must ensure an annual improvement of at least 0.5% of GDP, and those countries with excessive deficits need to correct them. They are asked to analyse the causes of inflation differences in order to take measures in sectors where such differences are undesirable. As far as policy coordination is concerned, the members of the euro area should deepen the analysis and discussion of economic developments (exchange of information, external representation, etc.) and improve the efficiency of coordination procedures in the area of structural reforms.

COUNTRY-SPECIFIC ECONOMIC POLICY GUIDELINES

The second part of the broad economic policy guidelines contains a section for each of the Member States, setting out the challenges and, within the overall strategy, specific recommendations taking account of differences in performance, outlook and structures. Only the main challenges facing each Member State are listed below.

Belgium

  • continue the budgetary adjustments in the forthcoming years, in particular with a view to ensuring the long-term sustainability of public finances in the face of population ageing;
  • increase participation and employment rates, especially for older workers and women;
  • enhance competition in certain service sectors, increase the efficiency of the public administration and improve the business environment.

Denmark

  • ensure an adequate labour supply in view of the ageing of the population;
  • enhance competition in certain sectors and improve the efficiency of the public sector.

Germany

  • promote job creation and adaptability and mobilise the unutilised employment potential;
  • increase productivity through improvements in the business environment and the efficiency of the education system;
  • reduce the general government deficit to below 3% of GDP in 2005;
  • secure the long-term viability of pension and health-care systems.

Greece

  • take appropriate measures to reach a budgetary position close to balance or in surplus;
  • increase the low level of productivity;
  • reduce the high rate of structural unemployment and increase employment rates, particularly for women.

For additional information on the budgetary data provided by the Greek authorities to the Community, please consult the Eurostat report.

Spain

  • raise the low employment rates, especially among women, and reduce wide regional labour market disparities;
  • increase the low level of productivity;
  • ensure the long-term sustainability of public finances in the face of population ageing.

France

  • rapidly reduce the general government deficit to below 3% of GDP;
  • increase labour market participation and reduce structural unemployment;
  • ensure the long-term sustainability of public finances in the face of population ageing;
  • ensure competition in the network industries and accelerate the adoption of internal-market measures in order to create a level playing-field.

Ireland

  • achieve a smooth transition from double-digit economic growth to lower, sustainable growth by ensuring stable macroeconomic conditions and strengthening the supply side of the economy.

Italy

  • avoid an excessive deficit;
  • rapidly consolidate public finances and ensure the long-term sustainability of public finances in the face of population ageing;
  • raise the low employment rate, especially among women and older workers, and reduce the wide economic disparities between north and south;
  • strengthen the knowledge-based economy;
  • improve the business environment and enhance competition in the energy and service sectors.

Luxembourg

  • increase participation and employment rates, especially for older workers;
  • improve the business environment and encourage entrepreneurship in order to achieve a more balanced economic structure.

Netherlands

  • pursue budgetary adjustment in the coming years in the face of weaker potential growth and the budgetary costs of ageing;
  • take additional measures to avoid an excessive deficit;
  • draw currently inactive people into the labour market;
  • tackle the relatively slow productivity growth (increased competition and more business investment in R&D).

Austria

  • ensure the sustainability of public finances in the face of population ageing;
  • continue to improve the technology base and encourage business investment in R&D and innovation;
  • promote effective competition in areas such as the press, food distribution, pharmacies, insurance, furniture retailers and network industries.

Portugal

  • take additional measures to avoid an excessive deficit;
  • accelerate the consolidation of public finances and curb the rapid growth in public expenditure;
  • increase overall competitiveness (make the education system more efficient, invest in R&D, increase competition and check the high nominal wage growth);
  • ensure the long-term sustainability of public finances in the face of population ageing.

Finland

  • reduce the high level of structural unemployment and increase the employment rate of older workers;
  • enhance competition in certain sectors and improve the efficiency of the public sector.

Sweden

  • ensure an adequate labour supply in view of the ageing of the population;
  • enhance competition in certain sectors and improve the efficiency of the public sector.

United Kingdom

  • strengthen the budgetary position to avoid budgetary imbalances
  • increase the relatively low level of productivity;
  • address the high numbers of working-age people claiming sickness and disability benefits and sustain labour supply in the longer term;
  • improve the quality and efficiency of public services.

Cyprus

  • ensure a reduction of the general government deficit on a sustainable basis;
  • increase the diversification of the economy towards higher value-added activities.

Czech Republic

  • reduce the general government deficit and ensure the sustainability of public finances;
  • reform retirement and healthcare systems;
  • address labour-market structural problems;
  • improve conditions for accelerated productivity growth;
  • promote entrepreneurship.

Estonia

  • address the sizeable current account deficit through an appropriate budgetary policy;
  • address labour-market structural problems;
  • improve conditions for increasing productivity;
  • develop effective competition in network industries such as electricity, gas and telecommunications.

Hungary

  • ensure a further reduction of general government deficit on a sustainable basis;
  • increase employment rates and address labour-market structural problems;
  • enhance cost competitiveness through wage moderation policies;
  • improve conditions for increasing productivity;
  • develop effective competition in network industries such as electricity, gas and telecommunications.

Latvia

  • achieve a more pronounced reduction in the general government deficit on a sustainable basis;
  • increase employment rates and address labour-market structural problems;
  • enhance cost competitiveness through wage moderation policies;
  • improve conditions for increasing productivity;
  • develop effective competition in network industries such as electricity, gas and telecommunications.

Lithuania

  • address labour-market structural problems;
  • maintain low general government deficits;
  • improve conditions increasing productivity;
  • develop effective competition in network industries such as electricity, gas and telecommunications.

Malta

  • ensure a reduction of the general government deficit on a sustainable basis and the long-term sustainability of public finances;
  • increase employment rates, especially among women;
  • encourage effective competition, taking into account the specific characteristics of the small domestic economy.

Poland

  • urgently address the deep-seated structural problems in the labour market;
  • ensure a reduction of the general government deficits on a sustainable basis and the long-term sustainability of public finances;
  • improve conditions for increasing productivity;
  • speed up the restructuring of the economy and accelerate privatisation in industry;
  • improve the business environment.

Slovakia

  • ensure a further reduction of the general government deficit on a sustainable basis;
  • continue to address the deep-seated structural problems in the labour market;
  • improve the business environment and support entrepreneurship;
  • improve conditions for increasing productivity.

Slovenia

  • lower inflation in a sustainable way;
  • increase employment rates, especially for older workers;
  • improve conditions for sustained productivity growth;
  • promote the development of effective competition in all segments of the economy, notably in network industries such as electricity, gas and telecommunications.

References

Act Entry into force Deadline for transposition in the Member States Official Journal
Council Recommendation 2003/555/EC – – Official Journal L 195 of 01.08.2003
Amending act(s) Entry into force Deadline for transposition in the Member States Official Journal
Commission Recommendation on the update of the BEPGs (2003-05) [COM(2004) 238] – – –

Related Acts

Commission Recommendation on the Broad Economic Policy Guidelines for the Member States and the Community [COM(2005) 141 final – Not published in the Official Journal]
On 12 April 2005 the Commission presented a Recommendation concerning the broad economic policy guidelines for the period 2005-08. In the Recommendation it relaunches the Lisbon strategy and sets out to reflect those objectives in the BEPGs.

The Commission discusses:

  • Macroeconomic policies for growth and jobs.

The Member States must:

– achieve a balanced budget;

– safeguard economic sustainability;

– promote an efficient allocation of resources;

– ensure coherent macroeconomic and structural policies;

– ensure that wage developments contribute to macroeconomic stability;

– ensure a dynamic and well-functioning euro area.

  • Macroeconomic reforms to raise growth potential.

The Commission recommends that the Member States:

– extend and deepen the internal market by speeding up transposal of directives;

– ensure open and competitive markets;

– create a more attractive business environment;

– facilitate access by small and medium-sized enterprises to financing;

– develop proper transport infrastructures;

– encourage research and endeavour to improve innovation services, especially for technology transfers;

– encourage sustainable use of resources and strengthen the synergies between environmental protection and growth;

– concentrate on developing new technologies and markets.

The Recommendation is an integral part of the growth and employment guidelines (2005-08). It forms Part I of the single document. Part II comprises a proposal for a Council Decision on the employment guidelines for the Member States.

Commission Communication: Second Implementation Report on the 2003-05 BEPGs (presented in accordance with Article 99(3) of the EC Treaty) [COM(2005) 8 final – Not published in the Official Journal]

The Commission concludes in its second report that progress in implementing the BEPGs for 2003-05 is mixed. Some Member States are making faster progress than others: Belgium, Denmark, Finland, Ireland, the Netherlands and the United Kingdom have given a relatively good follow-up. As regards the new Member States, implementation is heading in the right direction, particularly in Cyprus and Slovakia. The Commission considers that the business environment is more favourable, that competition policies have become more effective and that environmental sustainability has been improved. It notes that the pace of labour market reforms appears to have been maintained. By contrast, it regrets that progress in the transition to a knowledge-based economy has been limited. In addition, the market integration process appears to have slowed down. It is concerned that a number of Member States do not have a sound budgetary position and/or have not set about correcting their excessive deficits. The long-term sustainability of public finances was still not secured in 14 Member States in 2004. The overall pace of the reform remained unchanged in 2004. Clearly, given the current pace of reform, full implementation of the BEPGs for 2003-05 will not be secured and it will, therefore, be difficult to fulfil the ambitions spelt out in Lisbon.

Commission Communication on the implementation of the 2003-05 broad economic policy guidelines [COM(2004) 20 final – Not published in the Official Journal]

In this communication, the Commission examines the measures taken or planned in 2003. It also sets out the information required for updating the guidelines in 2004. A detailed evaluation of the implementation of the specific recommendations for each country is given in an annex [SEC(2004) 44 – Not published in the Official Journal].

In general, the Commission found that the pace of reforms had accelerated in certain areas, such as labour markets, competition, the business environment, new technologies, education and reform of pension systems. However, there was insufficient progress in the areas of market integration, investment in research, and social and environmental sustainability. The Commission was also concerned about the deterioration in budgetary positions in several Member States.

 

Public finances in Member States in 2004

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Public finances in Member States in 2004

Outline of the Community (European Union) legislation about Public finances in Member States in 2004

Topics

These categories group together and put in context the legislative and non-legislative initiatives which deal with the same topic.

Economic and monetary affairs > Stability and growth pact and economic policy coordination

Public finances in Member States in 2004

Document or Iniciative

Communication from the Commission to the Council and the European Parliament: Public finances in EMU – 2004 [COM(2004)425 final – Not published in the Official Journal].

Summary

The Commission analyses public finances in European and Monetary Union (EMU) in 2004 and emphasises the need to strengthen the economic governance framework in the Union. It notes more frequent use of the excessive deficit procedure and refers to the strains that are a source of uncertainty in implementing the budgetary surveillance framework, notably because of the divergent interpretation of the provisions of the Treaty and the stability and growth pact by the Community institutions. It proposes an improved analysis of budgetary developments. It also stresses that budgetary discipline and economic growth are mutually compatible objectives. It analyses the link between long-term fiscal and growth policies with a view to improving the quality of public finances.

Review of the current situation

Slower growth is contributing to budget deficits throughout the European Union (EU). Enlargement of the Union in 2004 led to growing disparities in the budgetary performances of Member States. The most significant deficits are those of Germany and France. Given their size, both countries affect the overall outcome for the euro area. The Commission is concerned about the public finance situation in Italy given its high debt-to-GDP ratio but also about the deterioration in actual balances in several countries outside the euro area, including Poland and the United Kingdom. However, it notes the soundness of public finances in Belgium, Spain, Finland, Ireland and Luxembourg. Outside the euro area, Denmark, Estonia and Sweden maintained surpluses throughout the cyclical slowdown.

The last two years have seen frequent use of the excessive deficit procedure. In 2003 Germany, France and Portugal were in an excessive deficit position. In the case of Germany and France, the probability of bringing the deficits below 3 % of GDP in 2004 was very low in the light of the draft budgets submitted for 2003. The Commission therefore moved forward with the excessive deficit procedure with the aim of urging these two countries to correct their deficits at least by 2005. In 2004 the Commission also started the excessive deficit procedure for Greece, the Netherlands and the United Kingdom, which registered deficits above 3 % of GDP in 2003. On the basis of its forecasts, the Commission recommended that an “early warning” be sent to Italy given the risk that it would breach the 3 % reference value in 2004. The procedure was also started for several new Member States following their accession to the EU. Recommendations were addressed to them with a view to helping them pursue a credible mulitiannual adjustment path.

In the immediate future, in spite of an improving growth outlook, the Commission considers that budgetary prospects for 2004 and 2005 are not very promising and that achieving sound public finances will take time. The deficit in Germany and France is projected by the Commission to remain above 3 % of GDP in 2004. The two Member States are committed to bringing down the deficit to below 3 % of GDP in 2005. Greece, Italy, the Netherlands and Portugal could also see their deficits breach the 3 % threshold if no corrective measures are taken. The budgetary situation in most of the new Member States is expected to improve over the next two years.
Unfortunately, a close-to-balance position will not be reached by most Member States, including Germany, France, Portugal and the United Kingdom, by 2007 (0.7 % of GDP for the euro area). These countries do not have an adequate safety margin to prevent a breach of the 3 %- of-GDP reference value in the event of adverse economic conditions. The Commission considers that the medium-term objectives of some Member States are based on overly optimistic growth assumptions.

The poor implementation record for the stability and convergence programmes is hampering achievement of the Lisbon objectives for making the EU the most competitive and most dynamic economy in the world. It is vital that Member States reach budgetary positions which ensure that the automatic stabilisers work freely and mitigate the impact of population ageing on the sustainability of public finances. As economic conditions improve, efforts will be needed to improve the underlying budgetary positions: the difficulties experienced by certain Member States in complying with the Treaty requirements in 2002 and 2003 reflect the fact that they did not carry out enough fiscal adjustment during the good economic times in 1999 and 2000.

Overcoming current difficulties

The Commission notes tensions in the implementation of the procedures laid down in the Treaty and the stability and growth pact (SGP) as regards budgetary surveillance, notably on account of the divergent application of the SGP by the Community institutions. In February 2002, for instance, the Commission recommended that the Council address an “early warning” to Germany and Portugal. The Council did not follow the Commission’s proposals on account of the commitments made by those countries. Similarly, the Council did not follow in 2003 the Commission’s recommendations regarding Germany and France which extended by one year the deadline for correcting the excessive deficit situation and which entailed triggering the following stages in the procedure.

The Commission has announced a strategy aimed at seeking legal clarity on the provisions of the Treaty and the SGP, pursuing budgetary surveillance and strengthening economic governance. Accordingly, at the end of January 2004 it asked the European Court of Justice to annul the decisions taken by the Council and the conclusions adopted at its November meeting. The Commission is pursuing budgetary surveillance in accordance with the provisions of the Treaty and the SGP. This involves assessing the 2003 updates of the stability and convergence programmes and preparing draft opinions for the Council. It is updating the broad economic policy guidelines (BEPGs), including the country-specific recommendations for certain Member States.

The Commission considers that the temporary slippages affecting budgetary positions must be identified more quickly. The Report on Public Finances in EMU – 2004 highlights four areas where progress has been made in analysing budgetary developments:

  • the role of one-off measures. “One-off” measures taken by governments are becoming a frequent and sizeable feature of budgetary policies in the EU. In the Commission’s view, it is important to take account of such measures and the reasons behind them in the budgetary surveillance process. It would like to see greater transparency of budget measures and better reporting of them by Member States, including in the stability and growth programmes;
  • the use of cyclically adjusted budget balances. At present, a common methodology which provides figures for cyclically adjusted budget balances (CABs) is used to disentangle changes in the budget which reflect the economic cycle from those which do not, the latter reflecting measures decided by policymakers. The Commission proposes excluding the component of the change attributable to unexpected changes in potential growth in order to correct the fiscal adjustment measures made at the level of Member States;
  • the assessment of the long-term sustainability of public finances. Budgetary surveillance includes an assessment of the long-term sustainability of public finances on the basis of the updated stability and convergence programmes. The Commission is stepping up the quantitative analysis of the results obtained, thereby giving the assessment a higher information value. It notes that the risks to long-term sustainability are most serious in five countries (Germany, Belgium, France, Greece and Italy) and that two countries (Netherlands and United Kingdom) face medium-term difficulties. Spain and Portugal envisage difficulties over the long-term projections for pension expenditures. Six countries (Austria, Denmark, Finland, Italy, Luxembourg and Sweden) seem to be well placed to meet the costs of an ageing society on the basis of current policies;
  • the consideration of contingent liabilities. To obtain a comprehensive picture of the sustainability of public finances, liabilities other than those included in the Maastricht definition of gross debt should be considered. “Contingent liabilities” correspond to government obligations that materialise only when particular events occur, and the stock of such liabilities is relatively high in the new Member States. Given the differing national situations and trends in the EU, the Commission considers that improved disclosure and monitoring of contingent liabilities would help to strengthen budgetary discipline in the Union.

There have been criticisms that the EU budgetary surveillance framework focuses too much on disciplinary aspects and so is not growth-friendly. The Commission concludes that budgetary discipline does not rule out economic growth. Budgetary discipline and sound public finances contribute to a macroeconomic environment that fosters growth, and the fiscal framework prevents protracted deficits that may have an impact on future income. The Commission’s analysis suggests that the budgetary adjustment in the 1990s induced by the EU fiscal framework resulted in growth of limited duration and magnitude but laid the foundations for better growth prospects. In the absence of the framework, the budget deficits would have crowded out private investment and further reduced potential growth compared with current figures.

The Commission highlights the need to strengthen economic governance in the EU. The framework which applies to the conduct of national fiscal policies and the processes underlying the coordination of economic policies in the EU need to be reassessed. For instance, the Treaty rules on public finances contribute to growth and allow room for proper implementation of the Lisbon strategy. However, the BEPGs could assume a more prominent role in economic policy coordination by providing better fiscal guidance to Member States. The Commission again stresses the importance of improving the interpretation of the fiscal rules in order to take debt developments in Member States into account. Lastly, the Commission recalls the advantages of clarifying the respective roles of the Council and the Commission in implementing the Treaty instruments. It also emphasises the importance of an improved dialogue between all the actors concerned at both national and Community level.

Since 2000 the Commission has produced an annual report on public finances in the European Union. It also adopts communications on the subject.

Related Acts

Commission Communication to the Council and the European Parliament – Public finances in EMU – 2003 [COM(2003)283 final – Not published in the Official Journal]
The European Commission recommends establishing a coherent medium-term strategy to tackle the problem of growing budget imbalances and stimulate growth.

Commission Communication to the Council and the European Parliament – Public finances in EMU – 2002 [COM(2002)209 final – Not published in the Official Journal]
The Commission takes stock of the trend in budgetary policies. There are economic situations to be faced up to while the budgetary framework for the Economic and Monetary Union has to be improved. The Commission underscores the importance of the early warning procedure. To ensure that the stability and growth pact is credible, the Commission believes that its objectives must be attained, while the long-term viability of public finances must be secured. In addition, the quality of public expenditure must be guaranteed and enlargement must be prepared.

Commission Communication to the Council and the European Parliament – Public finances in EMU – 2001 [COM(2001)355 final – Not published in the Official Journal]
This communication analyses the budgetary results of the Member States in 2000 and considers the short- and medium-term prospects. The budgetary policy debate is influenced by a variety of factors, in particular the stability and growth pact objective of attaining a budget position close to balance or in surplus, The importance of a budgetary policy that ensures an appropriate mix of macro-economic policies, the enlargement of the debate to embrace the quality and viability of the public finances, and the need for coordination on budget issues. Lastly the Commission sets out in detail the path to be followed, that is to say closer coordination on budgetary matters.

The European economy: 2004 Review

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The European economy: 2004 Review

Outline of the Community (European Union) legislation about The European economy: 2004 Review

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These categories group together and put in context the legislative and non-legislative initiatives which deal with the same topic.

Economic and monetary affairs > Stability and growth pact and economic policy coordination

The European economy: 2004 Review

Document or Iniciative

The EU Economy 2004 Review – Summary and main conclusions [COM(2004) 723 final – Not published in the Official Journal].

Summary

The communication reviews economic progress in the European Union in 2004. It influences the mid-term review of the Lisbon Strategy by analysing first macroeconomic developments in the euro area and then four major topics: convergence, employment, productivity and the environment.

Belated recovery of the economy and its resilience to economic shocks

The Commission notes that economic prospects brightened in 2004 against the background of a favourable international environment. Growth was driven mainly by exports, while domestic demand in the euro area gathered pace. However, the two main components of domestic demand, investment and private consumption, remained too unsteady to speak of a secure recovery.

In spite of the improvement in economic prospects, the rebound of the EU economy is belated and sluggish compared with the other major economies such as the United States. The Commission wonders about the euro area’s economic resilience. Is it more sensitive than other regions to economic shocks? Are its economic structures less favourable to economic resurgence?

Analysis shows that, although adverse economic events have impacted on economic confidence indicators, their effects on industrial production were short-lived and not particularly deep. Rather, structural rigidities have been a more significant factor in the late cyclical adjustment in the euro area. These rigidities impact mainly on investment activity. Thus, the speed of the return to potential output will be determined by how much these rigidities continue to weigh on investment once the cyclical impact of a lack of demand and financial constraints holding back investment growth have worn off.

The slow price adjustments in the euro area stem from wage rigidities and imperfect competition.

Making the Union competitive by 2010

In the communication the Commission focuses on the four areas that hold the key to making the Union competitive by 2010. These are:

Convergence: On 1 May 2004 ten new Member States joined the Union. The Commission examines the conditions that will enhance their capacity to catch up economically and in terms of convergence since they start from income levels significantly below the EU average. Admittedly, the new Member States have already embarked on a major economic convergence process, but this has been entirely driven by investment and productivity. The Commission takes the view that the fairly low employment rates in those countries will have to be increased and domestic savings progressively mobilised in order to complement foreign direct investment. Macroeconomic stability will have to be further entrenched and public deficits reduced. To this end, domestic reforms must continue. The Commission considers that the EU’s Structural Funds can help to foster convergence provided that there is more targeted geographical and thematic concentration.

Employment: For the Commission it is difficult to see how the employment objectives of the Lisbon Strategy, namely the increase in employment rates envisaged by 2010, can be achieved. This is partly because of the economic slowdown but also because progress on structural reforms has been slow and insufficient. The Commission does though note progress in some areas, such as improving female employment. It takes the view that the strategy is clear but reminds Member States that much remains to be done as regards reforms: wage differentiation, labour market regulations, improvement in education and training, etc. These reforms must be country-specific, taking into account the mix of labour market and social protection regulations.

Productivity: The EU economy must not only achieve a higher labour input but also enhance productivity growth. The productivity slowdown is structural, reflecting low productivity growth in mid-tech industries, the relatively small size of the EU’s information and communication technologies (ICT) production industry, etc. In addition, the higher returns which can be earned outside Europe on the back of globalisation and increased international capital mobility may exert pressure on capital productivity within the EU. These developments could be part of the explanation as to why labour productivity growth has declined. The Commission notes that total factor productivity is determined by the competences of workers and the technological level of capital equipment. It would like to see the knowledge-based economy better entrenched in Europe and the gap with the United States closed. The US economy has shifted towards high-productivity growth industries such as the ICT-producing and ICT-using sectors. Thanks to its superior innovation system and the larger amount of resources allocated to research, the United States is in a better position to cope with the globalisation-induced competitive and technological pressures evident since the mid-1980s. Reforms which would allow new and innovative firms to develop and the process of internal integration to be pursued are particularly needed.

Environment: Protection of the environment and economic growth are often seen as competing aims, but the demand for environmental protection has risen along with economic growth. Environmental policy aims to place these resources under a common-property regime by providing for restrictions on activity which is hazardous or damaging to the environment. Public action, market forces and the growth of the service sector have triggered a reduction in the pollution intensity of economic activity in the EU. The Commission notes that the increase in environmental protection has not taken place because pollution has been exported through large-scale relocation. Environmental policies cause an adjustment of economic structures, for example by adapting the property-rights regimes for natural resources to take account of their increased scarcity and new scientific insights. They must also take account of the health risks to which the public is exposed.