Tag Archives: Public debt

The corrective arm: the excessive deficit procedure

The corrective arm: the excessive deficit procedure

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

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

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

Reinforcing economic policy coordination

Reinforcing economic policy coordination

Outline of the Community (European Union) legislation about Reinforcing 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

Reinforcing economic policy coordination

Document or Iniciative

Communication from the Commission to the European Parliament, the European Council, the Council, the European Central Bank, the European Economic and Social Committee and the Committee of the Regions of 12 May 2010 – Reinforcing economic policy coordination [COM(2010) 250 – Not published in the Official Journal].

Summary

In this Communication, the Commission assesses the consequences of the global economic crisis of 2009. It considers that it has become fundamentally important for the European Union (EU) to reinforce the coordination of Member States’ economic policies.

The global economic crisis has highlighted certain weaknesses of Economic and Monetary Union:

  • the fiscal imbalances of Member States, in particular the high level of their public debt, which can quickly lead to crisis situations;
  • the interdependence of Member States’ economies;
  • the lack of policy coordination at EU level;
  • the macroeconomic and financial imbalances specific to the euro area which have aggravated the latter’s economic situation.

Faced with these problems, the Commission intends to improve Member States’ economic surveillance in order to avoid excessive budget deficits. It also proposes to broaden surveillance of macroeconomic developments and to reinforce the economic governance of the euro area.

This Communication therefore sets out three main objectives:

  • reinforcing compliance with the Stability and Growth Pact;
  • creating a European Semester;
  • establishing a framework for crisis management in the euro area.

Stability and Growth Pact

The Stability and Growth Pact is a pact by which Member States undertake to control their public deficit in order to avoid fiscal imbalances. The Pact has:

  • a preventive part which is based on the Stability and Convergence Programmes: every year, Member States submit these programmes to the Commission and the Council. The Stability and Convergence Programmes establish the budgetary objectives and economic prospects of each Member State;
  • a corrective part which is based on the excessive deficit procedure: recommendations, or indeed sanctions, may be addressed to a Member State if it does not comply with the Stability and Growth Pact.

The Commission therefore proposes to reinforce the preventive and corrective parts of the Pact by placing a greater focus on debt. For example, the Stability and Convergence Programmes might incorporate new objectives concerning the sustainability of public finances. The Commission also proposes to take better account of the interplay between public debt and budget deficits in the excessive deficit procedure.

In addition, the excessive deficit procedures should be accelerated in order to provide Member States with recommendations as soon as possible, thus enabling them to tackle emerging fiscal imbalances.

European Semester

The Commission proposes to establish an economic European Semester at the start of each year. The aim of the European Semester would be to reinforce Member States’ policy coordination and economic surveillance.

At the start of the European Semester, the European Council shall identify the main economic challenges and provide Member States with strategic guidance on policies. This information will then be used by Member States as a basis for preparing their Stability and Convergence Programmes and their National Reform Programmes.

In full respect of national parliaments’ schedules, the European Semester would allow these programmes to be presented and examined at a time when important budgetary decisions are still in a preparatory phase at the national level.

Measures specific to the euro area

The interdependence of Member States’ economies is even more important in the euro area on account of the single currency. The Commission therefore proposes increased economic surveillance for Member States which have adopted the euro.

A scoreboard might be established for each Member State. It would encompass a set of indicators such as the level of public debt, credit prices, developments in current accounts, productivity and employment. These scoreboards would be accompanied by a qualitative assessment. They would then be used as the basis for recommendations concerning:

  • the field of revenue and expenditure;
  • the functioning of labour, products, services and financial markets.

Finally, the Commission proposes to establish a framework for crisis management to guarantee financial stability in the euro area. Such a framework would take the form of lending to euro-area countries in financial difficulties. The loans would be subject to compliance with a programme setting out the measures to be taken by Member States in order to consolidate their budgets.

Next steps

The Commission will submit several legislative proposals in order to implement the reforms presented in this Communication.

Related Acts

Regulation (EU) No 407/2010 of the Council of 11 May 2010 establishing a European financial stabilisation mechanism. [Official Journal L 118 of 12.5.2010].

Communication from the Commission to the European Parliament, the European Council, the Council, the European Central Bank, the European Economic and Social Committee and the Committee of the Regions of 30 June 2010 – Enhancing economic policy coordination for stability, growth and jobs – Tools for stronger EU economic governance [COM(2010) 367 – Not published in the Official Journal].
This Communication takes up the proposals set out in the Communication on Reinforcing economic policy coordination. It develops these policy ideas into specific, more detailed proposals. In particular, the Communication gives details of the preventive and corrective measures envisaged in order to reinforce compliance with the Stability and Growth Pact. It also describes the cycles of the European Semester.