Monday, 7 June 2010

EU: Stability programme Slovenia

The current market turmoil and the end-of-the-eurozone prophecies raise two questions in my mind: Are the prescriptions given in the latest spate of Council opinions wrong? If not, do the governments lack credibility when it comes to restoring sustainable growth and budget discipline?

With this blog series we invite readers to judge the Council opinions and the prospects for corrective action for themselves.



Framework

The economic policies of the EU member states are regarded as a matter of common concern (Article 121(1) TFEU). With markets suddenly distrustful and many economists appearing as doomsday prophets, the economic policies have become a real concern – for everyone.

Stability programmes for eurozone countries on the one hand, and convergence programmes for member states still without the euro on the other hand, are part of the ongoing dialogue between the European Union and the member states.



There are some background remarks on economic policy coordination in the European Union in the blog post EU: Useful stability and convergence programmes? (3 June 2010). For a fuller view, you can read the provisions on economic policy in the Treaty on the Functioning of the European Union as well as the relevant protocols.



Slovenia


The Council issues its assessments and recommendations individually for each member state.



Now in turn is the EU Council opinion on the stability programme of Slovenia, the first of the new member states to enter the eurozone (2007):



COUNCIL OPINION on the updated stability programme of Slovenia, 2009-2013; published in the Official Journal of the European Union (OJEU) 3.6.2010 C 144/22


Even if it has taken the European Union more than a month to publish the Council opinions officially in the OJEU, they concern the economic prospects in the medium term. As such, they should be useful with regard to our initial questions.



Economic situation


On 26 April 2010 the Council of the European Union examined the updated stability programme of Slovenia, which covers the period 2009 to 2013. The Council began its assessment with a brief description of the economic situation:


In the years preceding the crisis, Slovenia enjoyed solid economic growth driven by buoyant exports and investment. Rapid expansion ended in the last quarter of 2008 when the Slovenian economy was hit hard and rather abruptly by the global crisis, chiefly through the trade channel given Slovenia's high degree of openness. The economic slowdown after a phase of emerging risks of overheating and competitiveness losses is bringing about some adjustment of the economy: since the end of 2008, the inflation differential with the euro area and the external deficit have both gradually decreased, with the latter approaching balance in 2009.

As a result of the economic downturn, in conjunction with recovery measures taken in line with the European Economic Recovery Plan (EERP) and strong in-built expenditure dynamics, the Slovenian budgetary position deteriorated rapidly. The sharp increase in the general government deficit, from 1.8 % of GDP in 2008, to an estimated 5.7 % in 2009 led the Council to decide, on 2 December 2009, on the existence of an excessive deficit in Slovenia, with a deadline for the correction of this situation by 2013. Besides returning to sound public finances, including through further reforms of the pension system, key challenges for the Slovenian economy are strengthening its resilience and regaining competitiveness so as to be able to benefit fully from the global economic recovery. This requires a better alignment of wage and productivity developments and the implementation of structural reforms.



Council recommendation

After a detailed discussion, and in the light of the recommendation under Article 126(7) TFEU of 2 December 2009, the Council of the European Union invited Slovenia to:


(i) rigorously implement the foreseen consolidation measures in 2010 and bring the deficit below the 3 % of GDP reference value by 2013 as planned by fully specifying, adopting and implementing the indicated expenditure- containment measures in line with the average annual fiscal effort recommended by the Council Article 126(7), while standing ready to adopt further consolidation measures in case risks related to the fact that the macroeconomic scenario of the programme is more favourable than the scenario underpinning the Article 126(7) Recommendation materialise;

(ii) pursue efforts to enhance expenditure control and the enforceable nature of the multi-annual budgetary plans and improve public spending efficiency and effectiveness;

(iii) in view of the significant projected increase in age-related expenditure, further reform the pension system and set a more ambitious MTO [medium-term objective] that takes sufficiently into account the implicit liabilities related to ageing.



Eurozone financial stability



On 31 May the European Central Bank (ECB) published its Financial Stability Review June 2010, which assesses the stability of the euro area financial system both with regard to the role it plays in facilitating economic processes and with respect to its ability to prevent adverse shocks from having inordinately disruptive impacts (page 7).

The Financial Stability Review (225 pages) offers a view of the inter-related financial markets and the consolidation measures of eurozone governments.




Naturally, Slovenia is represented in the unofficial Euro Group, which plays an important part in the efforts to restore fiscal stability in the euro area. The Euro Group president is Jean-Claude Juncker, the prime minister of Luxembourg, where the next meeting is going to take place today, Monday 7 June 2010.




Ralf Grahn