Monday, 6 October 2008

EU: Excessive government deficits Ie

Having established the TEC (EMU) ground rules concerning excessive government deficits, we take a look at the secondary European Community (EC) legislation.

Knowing that the times are exceptional, we are going to point out ‘loopholes’ designed to allow for temporary excesses despite the treaty based aim to comply with budgetary discipline.

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Secondary legislation

Reporting deficits 3605/93 (amended)

Implementing legislation on the excessive deficit procedure (reporting deficits) is:

Council Regulation (EC) No 3605/93 of 22 November 1993 on the application of the Protocol on the excessive deficit procedure annexed to the Treaty establishing the European Community
(OJ 31.12.1993 L 332/ 7).

The regulation has been amended three times, so this is a referral to the consolidated version:

http://eur-lex.europa.eu/LexUriServ/site/en/consleg/1993/R/01993R3605-20051223-en.pdf

The Regulation 3605/93 contains definitions based on the European System of Integrated Economic Accounts (ESA), reporting requirements concerning actual data and forecasts, and the quality of data.

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Stability and Growth Pact

The current financial turmoil seems to lead to increased flexibility in the application of state aid rules (microeconomic) and budgetary discipline (macroeconomic). The Stability and Growth Pact contains the rules on excessive government deficits.

The Stability and Growth Pact originally consisted of a Council Resolution and two Regulations. When both France and Germany failed to live up to their obligations, the Pact was softened by superposing new European Council conclusions and amending the Regulations.

Therefore, a comparison between the original and the new Stability Pact may be in order. José Manuel González-Páramo, Member of the Executive Board of the ECB, described the differences to the Conference on “New Perspectives on Fiscal Sustainability” (Frankfurt, 13 October 2005):

http://www.ecb.int/press/key/date/2005/html/sp051013.en.html

I quote González-Páramo:

“Turning to the corrective arm, there are also a number of important changes here:
§ The first of these concerns the so-called “exceptional circumstances” clause. Under the Pact, a deficit above 3% of GDP is not necessarily considered excessive if it can be shown that the breach is “exceptional and temporary”. In this context, a deficit can be considered exceptional if it results from a “severe economic downturn”. The new Pact has made the definition of a severe economic downturn less stringent. Now, any negative growth rate, or even a period of positive but very low growth compared with the trend, can be considered exceptional.
§ The second change concerns the so-called “other relevant factors” to be taken into account when assessing whether a deficit above 3% of GDP is excessive. The old Pact referred to “other relevant factors” without specifying what these might be. By contrast, the new Pact provides an explicit and relatively long list of “other relevant factors” that have to be taken into account when assessing deficit developments in the context of the excessive deficit procedure.
§ The third significant change to the corrective arm concerns the deadlines for correcting excessive deficits. The default deadline for the correction of an excessive deficit remains the “year after its identification, unless there are special circumstances”. But whereas “special circumstances” were hitherto undefined, the list of other relevant factors will now serve as the basis for deciding whether special circumstances exist. In addition, the initial deadline for correcting an excessive deficit should be set such that a minimum fiscal adjustment of 0.5% of GDP per annum is required. And once the initial deadline has been set, it can be revised and extended at a later stage if a Member State is deemed to have taken effective action but fiscal targets are not met because of unexpected adverse economic events.”

For a more detailed view the reader can turn to the unsigned article ‘The Reform of the Stability and Growth Pact’ (European Central Bank, Monthly Bulletin August 2005, pages 59 ─ 73).

http://www.ecb.eu/pub/pdf/mobu/mb200508en.pdf

The ECB did not welcome the softening of the corrective arm of fiscal discipline through added flexibility and discretion.

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Council Resolution (1997)

First, we have the political Resolution of the European Council on the Stability and Growth Pact Amsterdam, 17 June 1997 (OJ 2.8.1997 C236/1). The Resolution starts by emphasising sound government finances and describes the Stability and Growth Pact:

“III. The Stability and Growth Pact, which provides both for prevention and deterrence, consists of this Resolution and two Council Regulations, one on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies and another on speeding up and clarifying the implementation of the excessive deficit procedure.”

The Resolution on the Stability and Growth Pact then sets out guidelines addressed to the member states, the Commission and the Council.

The text is available in the Official Journal as well as on the web page:

http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:31997Y0802(01):EN:HTML

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Surveillance Regulation 1466/97 (amended)

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 (OJ 2.8.1997 L 209/1) has been amended by Regulation 1055/2005 (OJ 7.7.2005 L 174/1), so this is a referral to the consolidated version:
http://eur-lex.europa.eu/LexUriServ/site/en/consleg/1997/R/01997R1466-20050727-en.pdf

The Surveillance Regulation sets out the rules covering the content, the submission, the examination and the monitoring of stability programmes and convergence programmes as part of multilateral surveillance by the Council so as to prevent, at an early stage, the occurrence of excessive general government deficits and to promote the surveillance and coordination of economic policies (Article 1).

We take note that stability programmes are submitted by so called participating member states adopting the single currency and convergence programmes continue to be submitted by non-participating states.

The recital of amending Regulation 1055/2005 (point 2) refers to the report entitled ‘Improving the implementation of the Stability and Growth Pact’ which aims to enhance the governance and the national ownership of the fiscal framework by strengthening the economic underpinnings and the effectiveness of the Pact, both in its preventive and corrective arms, to safeguard the sustainability of public finances in the long run, to promote growth and to avoid imposing excessive burdens on future generations. The report was endorsed by the European Council in its conclusions of 23 March 2005, which stated that the report updates and complements the Stability and Growth Pact, of which it is now an integral part.

In other words, the report is now an integral part of the Stability and Growth Pact, together with the amended Regulations.


To read the European Council conclusions 23 March 2005 with endorsed the Council Report ‘Improving the implementation of the Stability and Growth Pact’ in Annex II (pages 21 ─ 38), go to:

http://www.consilium.europa.eu/ueDocs/cms_Data/docs/pressData/en/ec/84335.pdf


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Excessive Deficit Procedure Regulation 1467/97 (amended)

Council Regulation (EC) No 1467/97 of 7 July 1997 on speeding up and clarifying the implementation of the excessive deficit procedure (OJ 2.8.1997 L 209/ 6) has been amended by Regulation 1056/2005, so this is a referral to the consolidated version:

http://eur-lex.europa.eu/LexUriServ/site/en/consleg/1997/R/01997R1467-20050727-en.pdf


The Regulation on implementation of the excessive deficit procedure sets out to speed up and clarify the excessive deficit procedure, having as its objective to deter excessive general government deficits and, if they occur, to further their prompt correction (Article 1).

The ECB article referred to above deals with the changes to the corrective arm in some detail, from page 63, under the following subheadings:

New definition of “severe economic downturn”

“Other relevant factors”

Pension reforms

Increasing the focus on debt and sustainability

Extension of deadlines for the correction of excessive deficits

Extension of procedural deadlines





Ralf Grahn