Wednesday 2 June 2010

EMU: Stability programme Finland

The latest round of EU Council opinions is the basis for measures in the member states to return from the financial and economic crisis towards fiscal discipline in line with the Stability and Growth Pact.

The procedure and the conclusions illustrate the continuing dialogue between the EU and the member states to coordinate economic policies.

The Council Opinion on the stability programme of Finland has been published in the Official Journal of the European Union (OJEU):

COUNCIL OPINION on the updated stability programme of Finland, 2009-2013; OJEU 28.5.2010 C 138/11.

Council Regulation 1466/97

The procedure refers to Article 5(3) of:

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; link to the consolidated version of 27 July 2005.

Council Regulation 1466/97 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).

Each participating (eurozone) state submits a stability programme (Article 3). There are now 16 euro area member states, which at some point reached the third stage of economic and monetary union (EMU), and the Commission has proposed that Estonia should be allowed to introduce the euro currency from 1 January 2011.

Each non-participating state (which has not adopted the euro) submits a convergence programme (Article 7). Of the 11 member states outside the eurozone, nine have an obligation to join and two have opted out (Denmark and the UK), leaving the door open for later changeover.

According to Article 5(3) the updated stability programmes are examined by the Economic and Financial Committee on the basis of assessments by the Commission and, if necessary, by the Council.

Economic background

The Council began its 26 April 2010 examination of the updated stability programme of Finland, which covers the period 2009 to 2013, with the following remarks on the economic background:

While Finland entered the global crisis in 2008 from a relatively strong position, having built up a substantial surplus in the current account and in government finances, the global crisis has had a particularly strong impact on its highly export-oriented industry, as well as on the domestic sectors through negative confidence effects. Finland allowed full operation of automatic stabilisers and in addition provided for a relatively large discretionary fiscal stimulus. The general government finances therefore weakened by over 6,5 % of GDP in 2009. While consumer confidence quickly rebounded in the course of 2009 to levels exceeding the long-term average, and industrial confidence indicators also improved moderately, the improvement in the real economy has been more gradual. The labour market reaction to the crisis has so far been more subdued than could have been expected from the steep fall in output.

Although much of the observed decline in actual GDP in the context of the crisis is cyclical, the level of potential output has also been negatively affected. In addition, the crisis may also affect potential growth in the medium term through lower investment, constraints in credit availability and increasing structural unemployment. Moreover, the impact of the economic crisis compounds the negative effects of demographic ageing on potential output and the sustainability of public finances. Against this background it will be essential to accelerate the pace of structural reforms with the aim of supporting potential growth. In particular, for Finland it is important to undertake reforms to increase labour supply in the longer term in order to counter the negative effects on the labour market from the ageing of the population.

Council recommendation

After a detailed discussion the Council reached the following conclusions:

The overall conclusion is that that the severe economic crisis has substantially weakened public finances, including the long- term sustainability position. The planned expansionary fiscal policies in 2010 are in line with the EERP [European Economic Recovery Plan]. However, the programme's projections, based on current policies, indicate that the general government deficit would exceed the 3 %-of- GDP reference value in 2010. Moreover, the projected sluggish medium term fiscal consolidation path would not ensure progress towards the programme's MTO [medium-term objective]. Taking also account of the downside risks attached to these projections, it would be highly desirable that the Government takes timely action to specify a comprehensive and concrete medium term fiscal strategy to consolidate from 2011 onwards. In view of the above assessment, Finland is invited to:

(i) implement the 2010 fiscal policy as planned in line with the EERP, while ensuring that the planned breach of the 3 %-of- GDP reference value would remain contained and temporary;

(ii) take timely action to define a comprehensive and concrete medium term fiscal strategy to consolidate from 2011 onwards, also with a view to achieve the MTO and to restore the long-term sustainability of public finances.

Ralf Grahn

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