Sunday, 5 October 2008

EU: Excessive government deficits Ia

We look at the European Community (European Union): How much union is there in the economic union?

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As a prelude, Article 2 of the Treaty establishing the European Community (TEC) reminds us that ‘The Community shall have as its task, by establishing a common market and an economic and monetary union … ‘.

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Article 4 TEC presents the guiding principles for the economic and monetary union (EMU), in the latest consolidated version of the treaties, Official Journal of the European Union (OJ) 29.12.2006 C 321 E/45─46):

Article 4 TEC

1. For the purposes set out in Article 2, the activities of the Member States and the Community shall include, as provided in this Treaty and in accordance with the timetable set out therein, the adoption of an economic policy which is based on the close coordination of Member States' economic policies, on the internal market and on the definition of common objectives, and conducted in accordance with the principle of an open market economy with free competition.

2. Concurrently with the foregoing, and as provided in this Treaty and in accordance with the timetable and the procedures set out therein, these activities shall include the irrevocable fixing of exchange rates leading to the introduction of a single currency, the ecu, and the definition and conduct of a single monetary policy and exchange-rate policy the primary objective of both of which shall be to maintain price stability and, without prejudice to this objective, to support the general economic policies in the Community, in accordance with the principle of an open market economy with free competition.

3. These activities of the Member States and the Community shall entail compliance with the following guiding principles: stable prices, sound public finances and monetary conditions and a sustainable balance of payments.

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For the purposes of this series of post we draw attention especially to close coordination of member states’ economic policies, stable prices and sound public finances.

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We remember the introductory Article 98 TEC on the conduct of member states’ economic policies. According to Article 99 TEC these economic policies are a matter of common concern, and the member states have undertaken to coordinate their economic policies.

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Then we have the more detailed treaty provisions on excessive government deficits. The main steps of the procedures are choreographed in Article 104 TEC (ex Article 104c).

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Perhaps it is easier to get an overview, if we start by presenting a bare outline of Article 104 TEC:

(1) Avoidance of excessive government deficits.
(2) Monitoring of budgetary discipline based on reference values and other circumstances: 1) deficit / GDP and 2) debt / GDP.
(3) Commission report on unfulfilment.
(4) Article 114 Committee (Monetary and Financial Committee) opinion.
(5) Commission opinion to the Council.
(6) Council decision, by qualified majority, on existence of excessive deficit.
(7) Council recommendations to the member state.
(8) Making Council recommendations public.
(9) Council notice if member state persists.
(10) Paragraphs 1 to 9 non-justiciable.
(11) Council measures against persisting member state.
(12) Abrogating measures when situation corrected.
(13) Two thirds majority for Council decisions on recommendations, publishing, notice, measures and abrogation.
(14) Implementation in Protocol on the excessive deficit procedure, replacing provisions and detailed rules.

Article 104 TEC follows in the next post.


Ralf Grahn