European Council Res Gestae (SGP & EU2020)

The European Council 23 to 24 June 2011 was supposed to be the grand finale of the first European Semester, spiced with the Euro Plus Pact, so what did the heads of state or government leave posterity?

The 'Res Gestae' web pages record the deeds of our secular leaders with regard to economic policy:

Committed to implementing reforms

The political leaders discussed economic policy coordination; the amendment of the European Financial Stability Facility (EFSF) and the ratification of the European Stability Mechanism (ESM) treaty; and the situation in Greece.


Economic policy coordination

What does the summary of the European Council conclusions tell us about the road towards sustainable public finances (Stability and Growth Pact, SGP) and growth-enhancing reform policies in line with the Europe 2020 strategy (EU2020)?

The leaders marked the end of the first European Semester under which the EU makes a six-monthly, simultaneous assessment of national stability and convergence programmes planned by member states.

The European Council endorsed country specific guidelines, without any watering down, and noted the determination of member states to do everything necessary to implement the Stability and Growth Pact (SCG). Targets that require additional efforts include employment, energy efficiency, R&D, poverty, and tertiary education. Member states should also give priority to ensuring a sound macroeconomic environment, restoring fiscal sustainability, correcting macroeconomic imbalances and strengthening the financial sector.

Member states are invited to take account of the guidelines when finalising their budgets for 2012, which are then decided on by the national parliaments during the autumn.

These national efforts should be supported by EU level work to enhance economic growth and job creation. In particular, the regulatory burden of SMEs should be reduced and, where appropriate, micro-enterprises should be exempted from certain future regulations, or at least subject to a lighter regime. The Commission should also provide a roadmap on the completion of the digital Single Market by 2015.

With regard to the Euro Plus Pact, the European Council concluded that the next round of commitments to a list of reforms intended to improve the fiscal strength of participants should be broader in scope, more concrete and ambitious, and should include a pragmatic coordinatinon of tax policies.

The statement seems to bear out the ”stronger sense of common responsibility”, noted by president Herman Van Rompuy, although the press release did not bother to specify which country-specific guidelines the European Council endorsed ”without any watering down”.

Usually, one or more working groups, presidency papers, Coreper meetings and Council configurations intervene between Commission recommendations and summit conclusions.


European Council conclusions

How about the Stability or Convergence Programme and the National Reform Programme (NRP) of each EU member state?

Our next step is to take a closer look at the detailed summit conclusions (available in 23 official EU languages):

European Council 23/24 June 2011: Conclusions (EUCO 23/11; 16 pages)

In paragraph 2, the European Council called the assessment provided by the Commission ”a good starting point”, but this time it does not look like an exercise in the use of weasel words, because ”additional efforts” are needed to attain some of the headline targets and goals of the Europe 2020 Strategy for jobs and sustainable growth.

The European Council specified that it endorsed the country-specific recommendations as approved by the Council (paragraph 3).

The conclusions proceed to outline coming measures to promote economic growth and job creation, as well as the next round of commitments under the Euro Plus Pact. Even the conclusion of the Doha Development Round was paid ritualistic observance.

To be continued on a few blogs near you.



Ralf Grahn


P.S. The Commission doesn't understand politics, wrote Ronny Patz on Polscieu (Ideas on Europe). The blog post has generated some interesting comments.

Van Rompuy’s dilemma

How often are the ones who caused the problems the right bunch to solve them?



The European Council on 17 June 2010 drew some preliminary conclusions regarding fiscal consolidation and economic governance (document EUCO 13/10). In principle, the heads of state or government are prepared to strengthen the preventive and the corrective arms of the Stability and Growth Pact (SGP). They are also willing to assess competitiveness and imbalances, as well as to create a surveillance framework for the eurozone.

The task force on economic governance is expected to report to the European Council meeting in October.

Chairman Herman Van Rompuy’s dilemma is that he has to work with the same groups of people (if not individuals) who caused the problems in the first place.

First, the national leaders created a monetary union, without economic union.



Then, Jacques Chirac and Gerhard Schröder shredded the original Stability and Growth Pact, and offered many national leaders an excuse to postpone structural reforms and stray from fiscal prudence.

The national leaders, who sit in the European Council, are the ones to determine the shape and the fate of the coming proposals.

The task force pondering improved economic governance consists of the finance ministers, who until now have never used the existing SGP sanctions, let alone proposed new ones.

In the past, the political leaders and the ministers of finance were at the root of the problem. Can they become part of the solution?




Ralf Grahn

Olli Rehn on improving EU and eurozone economic policy coordination

Olli Rehn, the commissioner for economic and monetary policy, outlined the reform steps the European Union needs, in a speech in Brussels 22 June 2010 (SPEECH/10/329):

Beyond consolidation, we need to act in two further areas: economic governance and structural reform, especially including reform of the financial system.

On 12 May, the Commission made substantial proposals to improve economic policy coordination in the EU. The fiscal framework of the EU, defined by the Stability and Growth Pact, has sound rules. But we can improve it with three main building blocks for reform:

Firstly, we need to synchronise EU surveillance with the national budgetary processes with a "European Semester". Member States should submit their Stability and Convergence Programmes and National Reform Programmes timely, so that they can benefit from early coordination at European level as they prepare their national budgets. We must also put more force behind the Pact – both when there is an Excessive Deficit but also earlier. The Pact must have sufficient teeth to ensure that all Member States exercise fiscal discipline that is not only good individually for the MS but a necessary condition for a smooth functioning of the common currency area.

Secondly, we must look beyond the budget and address macro-economic imbalances between Member States. Both strong exports, based on competitiveness, and domestic demand are important for our prosperity. Strong divergences between Member States can undermine cohesion, especially within the euro area. This must be tackled before it becomes a costly problem for all.

Thirdly, in the medium-to-long term we need to build a crisis resolution mechanism that is permanent. It is better to be safe than sorry.

Moreover, fiscal consolidation should be embedded in a strategy to lift productivity growth and employment rate. In our rapidly ageing societies, this is only possible through significant structural reforms in all areas of economic activity. Last week, the European Council adopted the "Europe 2020" growth strategy to this end.

Proposal on economic policy coordination

The 12 May 2010 proposal Rehn referred to contains analysis and suggested reforms regarding eurozone countries as a group and EU member states as a whole. It is the starting point for the various discussions taking place with a view to finding solutions to common challenges:


Commission Communication: Reinforcing economic policy coordination; Brussels, 12.5.2010 COM(2010) 250 final




Ralf Grahn

Excessive deficit procedure: Finland

The previous blog post, Excessive deficit procedure: Denmark, looked at the relevant summaries of EU legislation and found that they need to be updated.

We check if the Directorate-General for Economic and Financial Affairs (DG ECFIN) offers updated introductory materials.

The European Union is about to start an excessive deficit procedure (EDP) concerning Finland, one of the three countries in the latest batch.

We offer links to the relevant documents, and assess the timely publication of legal materials on the Eur-Lex portal in this case.



DG ECFIN

The European Commission’s Directorate-General for Economic and Financial Affairs (DG ECFIN) offers a number of web pages:



The web page Stability and Growth Pact describes the basic features, and it explains the meaning of the preventive arm and the dissuasive arm (the excessive deficit procedure, EDP) of the SGP, including possible sanctions for euro area members.



The web page Stability and convergence programmes offers an overview of the annual programmes and how they are monitored. It could be clearer with regard to the different programmes: Eurozone countries prepare stability programmes (to maintain fiscal balance), whereas the other member states are seen as on a course towards fulfilment of the criteria for euro adoption, and they submit convergence programmes.



Excessive deficit procedure is a web page, which briefly explains the EDP and mentions the trigger (reference) values: the deficit-to-GDP ratio of 3% and the debt-to-GDP ratio of 60%. The possibility to impose sanctions on euro area members, but not on countries still on the convergence path, could have been explained more clearly.



There is also a web page Relevant legal texts and guidelines, which is helpful for those who want to dig deeper.


Comment


Subject to the remarks already made, my impression is that the introductory web pages offered by DG ECFIN are adequate to the needs of the general reader, who wants information at a glance. The pages have been updated fairly recently, and they take account of the Lisbon Treaty.

ECFIN offers few thrills of web design, but those who want to find news and more detailed factual information are fairly well served.



Excessive deficit procedure Finland



We can find updated information about the excessive deficit procedure initiated against Finland and two other countries on the ECFIN web pages.

However, for the sake of clarity and transparency, this blog argues that legal information concerning the European Union should be published centrally and in a timely manner on the legal portal Eur-Lex.

Formally, the Commission decided to institute the EDP regarding Finland on 15 June 2010. Three SEC documents have already been published on Eur-Lex (in the working languages of the Commission: English, French and German):




COMMISSION OPINION on the existence of an excessive deficit in Finland; Brussels, 15.6.2010 SEC(2010) 745 final




Proposal for a COUNCIL DECISION on the existence of an excessive deficit in Finland; Brussels, 15.6.2010 SEC(2010) 746 final




Recommendation for a COUNCIL RECOMMENDATION with a view to bringing an end to the situation of an excessive government deficit in Finland; Brussels, 15.6.2010 SEC(2010) 747 final


Substance


The Commission recommends that the Council adopts the following recommendation addressed to the Republic of Finland:

(1) Recognising that Finland’s budgetary position in 2010 resulted from measures amounting to 1.8% of GDP in 2009 and 1.1% in 2010, which is an adequate response to the downturn and were in line with the European Economic Recovery Plan principles, as well as from the free play of automatic stabilisers, the Finnish authorities should put an end to the present excessive deficit situation at the latest by 2011.

(2) The Finnish authorities should bring the general government deficit below 3% of GDP in a credible and sustainable manner. Specifically, to this end, the Finnish authorities should:

(a) implement the fiscal measures in 2010 as envisaged in the latest update of the stability programme, while ensuring that the planned breach of the 3%-of-GDP reference value would remain contained and temporary;

(b) ensure a fiscal effort of at least ½% of GDP in 2011;

(c) specify measures to ensure that the planned correction of the excessive deficit in 2011 is secured.

(3) The Council establishes the deadline of [13 January 2011] for the Finnish government to take effective action to specify the measures that will be necessary to progress towards the correction of the excessive deficit. The assessment of effective action will take into account economic developments compared with the economic outlook in the Commission services' spring 2010 forecast.

The Finnish authorities should report on progress made in the implementation of these recommendations in a separate chapter in the forthcoming updates of the stability programme until the abrogation of the excessive deficit procedure.

Ralf Grahn

Excessive deficit procedure: Denmark

Are you looking for materials on how budget monitoring works in the European Union, and what happens if the deficit of a member state balloons?

Are you interested in the excessive deficit procedure (EDP), or the budgetary position of Denmark?



Summaries of EU legislation



For the general reader and as introductory reading for students and others who need to start digging deeper, the Summaries of EU legislation offer first aid.



The thematic web page on Economic and monetary affairs links to various themes. One of these is Stability and growth pact and economic policy coordination.

Let us take a look at two of the pages on offer.



First, to get a picture of the framework: Preventive arm: surveillance of budgetary positions.



Then, for an overview of how the EU tries to steer member states back to the narrow path of budget discipline: The corrective arm: the excessive deficit procedure.


Comment


In both cases we notice that the descriptions are generally still valid, but the summaries have not been updated since 2007.

More than six months from the entry into force of the Lisbon Treaty, the pages still refer to the old treaty (TEC) instead of the relevant provisions of the Treaty on the Functioning of the European Union (TFEU).

For the summaries to serve their purpose, they need to be updated (even rewritten and cleared of debris) regularly.



New excessive deficit procedures


Even the more prudent EU governments have seen their budget positions deteriorate as a consequence of the financial and economic crisis: deficits overshooting the 3 per cent reference value or debt levels surpassing 60 per cent of the GDP.




On 15 June 2010 the European Commission’s D-G Economic and Financial Affairs (ECFIN) has concluded that excessive deficits exist in Cyprus, Denmark and Finland, and it has recommended deadlines for their correction to the Council (further links available).



You can gain an overview of the ongoing excessive deficit procedures, now concerning almost all member states, and for more information you can click on the links to the individual countries.

The country pages concerning Cyprus, Denmark and Finland have been updated.



Denmark


On the legal portal Eur-Lex, under preparatory acts, SEC documents, we find the three relevant documents concerning Denmark (available in English, French and German, the working languages of the Commission):




COMMISSION OPINION on the existence of an excessive deficit in Denmark; Brussels, 15.6.2010 SEC(2010) 742 final




Proposal for a COUNCIL DECISION on the existence of an excessive deficit in Denmark; Brussels, 15.6.2010 SEC(2010) 743 final




Recommendation for a COUNCIL RECOMMENDATION with a view to bringing an end to the situation of an excessive government deficit in Denmark; Brussels, 15.6.2010 SEC(2010) 744 final


The documents follow an established pattern, now based on Article 126 TFEU. The Commission reports the conclusion that an excessive deficit exists (in Denmark), it proposes that the Council confirms the existence, and it makes a recommendation to the Council on the corrective measures to recommend to the country.




Ralf Grahn

EU Commission on stability programme Cyprus

The blog post EU: Updated stability programme Cyprus looked at the economic projections and reform plans of the island state in its own right, but also as an example of the dialogue on economic policy coordination between the European Union and the member states.


Transparency

This blog has criticised the lag between Council opinions and publication in the Official Journal of the European Union (OJEU). However, the Commission deserves brownie points for openness, because it started publishing its findings.

Thanks to the European Commission the monitoring processes are more transparent and credible than they could be under a restrictive interpretation of the Treaty on the Functioning of the European Union (Cf Article 126(7) TFEU).



The Stability and Growth Pact (SGP) pages of the Commission’s D-G Economic and Financial Affairs offer an overview of the member states and the various stages, including links to the documents:

Stability or convergence programme (update);

Commission services’ assessment;

Commission recommendation for a Council opinion;

Council opinion.




The overview page on country-specific excessive deficit procedures (EDP) is also useful.



Commission report

One month from the submission of the updated stability programme of Cyprus, the Commission offered its assessment. [Contradictory submission dates are offered in different documents: 1 or 13 April 2010.]



On 12 May 2010 Commission published a press release (IP/10/564) with the main findings on the Cypriot stability programme, including key projections.


For those interested, the Commission’s assessment is available:




Cyprus - Report prepared in accordance with Article 126(3) of the Treaty; Brussels, 12.5.2010 SEC(2010) 590 final (11 pages)


Article 126(3) TFEU is explained in the following way by the Commission (page 2):

The Stability and Growth Pact requires the Commission to prepare a report such as the present one whenever an actual or planned deficit of a Member State exceeds the 3% of GDP reference value. This report, which represents the first step in the “excessive deficit procedure” (EDP), analyses the reasons for the breach of the reference value with due regard to the economic background and all other relevant factors.

The Commission reached the following main conclusions with regard to Cyprus:

According to the April 2010 EDP notification the general government deficit in Cyprus reached 6.1% of GDP in 2009, above and not close to the 3% of GDP reference value. The planned excess over the reference value can be qualified as exceptional within the meaning of the Treaty and the Stability and Growth Pact. However, it cannot be considered temporary. This suggests that the deficit criterion in the Treaty is not fulfilled.

General government gross debt remains below the 60% of GDP reference value in 2009. However it is on a rising trend and it is planned to exceed the reference value in 2010. The debt ratio cannot be considered as diminishing sufficiently and approaching the reference value at a satisfactory pace within the meaning of the Treaty and the Stability and Growth Pact. This suggests that the debt criterion in the Treaty is not fulfilled.

Commission recommendation

At the same time, based on its assessment, the Commission made a recommendation to the Council, in practice a draft decision:



Recommendation for a Council Opinion on the updated stability programme of Cyprus, 2009-2013; Brussels, 12.5.2010 SEC(2010) 595 final (13 pages)



Technical analysis

The Cypriot stability programme was analysed by the staff of DG ECFIN. The technical analysis was finalised on 12 May, although the publication date is 26 May 2010:



Cyprus: Macro fiscal assessment – An analysis of the April 2010 update of the stability programme; Brussels, 26 May 2010 ECFIN/295829/2010 -EN (30 pages)


It took into account information published after the preparation of the Cypriot programme, such as the Commission services’ fresh forecast. The Spring Forecast is also available on the Commission’s web pages:



European Economic Forecast - Spring 2010 (published 5 May 2010; 225 pages)



Comment



In my view, DG ECFIN’s web pages with the Stability and convergence programmes and other information are fairly navigable and clear (although some design effort would not go amiss).

With regard to Cyprus, we find the programme update, the technical assessment and the Commission’s formal recommendation.

Only the Ecofin Council opinion (of 8 June 2010) is still missing.




Ralf Grahn

EU: Updated stability programme Cyprus

Following the financial and economic crisis, what do the economic policy challenges look like for the governments in the EU (and the eurozone)?

How does economic policy coordination take place between the European Union and the member states?

The member states of the European Union shall avoid excessive government deficits. The Commission monitors the budgetary situation and discipline, especially the government deficit and government debt (Article 126 TFEU).



Cyprus is the latest member state to have completed one cycle of multilateral surveillance, from an updated stability programme to a Council opinion.

Cyprus joined the EU in 2004, and it adopted the euro currency in 2008.



Update submission



The Republic of Cyprus submitted its updated stability programme for 2009-2013 on 13 April 2010 (86 pages).

The government presented its views on the two-fold challenges for fiscal policy (page 7):

Undoubtedly, the biggest challenge facing policy makers at the current juncture is to address the economic slowdown, which has affected Cyprus considerably through falling external demand:

• The Government must put in place the elements for a sustainable recovery of growth, and the creation of new jobs in the medium term; and

• At the same time, prepare a strategy to reverse the deteriorating public finances and allow for the fiscal correction in the following years as required by the Stability and Growth Pact.

We are going to look at some of the policy challenges and the responses outlined by the government of Cyprus. Despite different circumstances in the individual member states, there are many similarities between the possible approaches and solutions, both short term and with regard to structural reforms.



Deficit reduction

Having stated the effects of the economic crisis on the Cypriot economy, the government concluded that a turnaround in revenues will not materialise in the short term, and without any corrective measures the deficit could widen further in 2010 (page 8):

Thus, the overriding priority of the Government is to contain the deficit in 2010 to around 6% of GDP – an ambitious goal taking into consideration the difficult environment that Cyprus is facing – and proceed with the fiscal consolidation thereafter, according to the requirements of the Stability and Growth Pact. To achieve this, the Government intends to introduce a number of policy measures which are necessary in view of the deteriorating revenue situation in 2009:

• Town planning amnesty for buildings constructed with minor irregularities opening the way for the issuance of a backlog of outstanding title deeds;

• A systematic attempt to curtail current expenditures;

• Public sector reforms that will address the growing size of the civil service and bring about a bridging of the benefit gap with the private sector. A modernization of the public sector is key and can result in leaner and more productive public services. Such a policy will limit expenditure growth and raise overall productivity;

• A reform of the system of social transfers in order to target benefits better and help more those in greater need.


Additionally, a number of structural fiscal reforms are underway which should lead to better planning of spending, easier control of expenditures and lead to considerable savings on interest expenditure:

• The implementation of a Medium-Term Budgetary Framework (MTBF), which will institutionalize expenditure rules, give more independence to spending ministries and, at the same time, increase their accountability;

• Further improvement of tax collection by addressing tax evasion and avoidance and strengthening tax administration;

• Enhancement of public debt and cash management systems.

Structural reforms

If curbing government spending is one part of the equation, the other part is to enhance economic growth (pages 9 to 10):

During this difficult time internationally, and domestically, it is especially important to continue with the implementation of structural reforms which will help maintain long-term growth at satisfactory levels and boost the economy’s agility and competitiveness. This is more pressing now given that the economy’s potential growth has been affected by the crisis.

Cyprus has already submitted an elaborate outline of structural reforms in its National Reform Programme (NRP). The implementation of these measures is an important pillar of this SP [stability programme], and the funding constitutes an important element of the proposed budget.

• Implementation of policies aimed at upgrading the physical infrastructure and improving the functioning of network industries will be intensified, taking into account environmental concerns. This “Green Agenda” will pave the way for growth in the longer term, but also boost economic activity in the short and medium term. A number of infrastructure projects will be accelerated in particular as part of the EU-led initiative to boost demand in view of the weakening economic activity especially in the construction sector;

• Reforms are being undertaken in the labour market, especially to boost supply of labour among females and address the high gender pay gap, increase employability and labour force adaptabilíty—particularly through lifelong learning—and raise the employment rate. Enhancing human capital is also key in increasing productivity and boosting the economy’s potential growth. Development of human capital is especially important in an economy, dominated by the services sector;

• Furthermore, reforms are being carried out, aimed at strengthening competition, especially in the area of professional services, improving the overall business climate;

• Special emphasis will be put on streamlining the regulatory framework and cutting red tape;

• Another important area is reform of the healthcare system, in particular the reorganization of public hospitals and the gradual introduction of the National Health Insurance Plan. This, together with the recent reform of the social security system, are crucial for tackling the long-term sustainability of public finances;

• Finally, it is widely accepted that R&D and innovation and the wider utilisation of information technology and the attraction of foreign direct investment are important vehicles for boosting productivity and growth. A particular effort is being undertaken to coordinate more effectively government-funded academic and private sector research programmes, so as to encourage innovation. EU structural funds will finance a large part of the budget for Research, Technological Development and Innovation, while the institutional framework for R&D and innovation will be further enhanced. These efforts have been boosted by the special efforts coordinated by the Cyprus Investment Promotion Agency, aiming at attracting foreign direct investment in Cyprus.

These interesting questions are then discussed in considerable detail in the updated stability programme of Cyprus.




Ralf Grahn

EMU: Format and content of stability and convergence programmes

Improved economic governance, or even economic government, is a hot topic in the European Union. In order to assess various suggestions (and refusals) it is useful to look at the current rules on multilateral budget surveillance in the framework of the Stability and Growth Pact (SGP).



The so called Code of Conduct (21 pages), was endorsed by the Ecofin Council 10 November 2009. It consists of two sections:

• Specifications on the implementation of the Stability and Growth Pact; and

• Guidelines on the format and content of Stability and Convergence Programmes



Both are of interest to those who want to know more about what the monitoring of economic policies entails.



The list of contents of the first section was put on view in the blog post EMU: Implementing the Stability and Growth Pact (SGP).

The second section of the Code of Conduct consists of guidelines on the content and format of the stability and convergence programmes:

SECTION II - GUIDELINES ON THE FORMAT AND CONTENT OF STABILITY AND CONVERGENCE PROGRAMMES

1) Status of the programme and of the measures

2) Content of Stability and Convergence Programmes


ANNEX 1 - MODEL STRUCTURE FOR THE STABILITY AND CONVERGENCE PROGRAMMES


ANNEX 2 - TABLES TO BE CONTAINED IN THE STABILITY AND CONVERGENCE PROGRAMMES

The Code of Conduct was endorsed before the Lisbon Treaty entered into force. Even without any substantive reforms of the procedures under the Stability and Growth Pact, the references to the old treaty provisions (TEC) will hopefully be substituted by references to the TFEU in the following update of the Code of Conduct.




Ralf Grahn

EMU: Implementing the Stability and Growth Pact (SGP)

The Specifications on the implementation of the Stability and Growth Pact and Guidelines on the format and content of Stability and Convergence Programmes, the so called Code of Conduct (21 pages), were endorsed by the Ecofin Council 10 November 2009, before the Lisbon Treaty entered into force. The references to the old treaty provisions (TEC) will surely be substituted by references to the TFEU in the following update of the Code of Conduct.

The first section elaborates on the implementation of the Stability and Growth Pact, and the interested find the following contents:

SECTION I – SPECIFICATIONS ON THE IMPLEMENTATION OF THE STABILITY AND GROWTH PACT



A. THE PREVENTIVE ARM OF THE STABILITY AND GROWTH PACT

1) The Medium term budgetary objective (MTO)

2) The adjustment path toward the medium-term budgetary objective and deviations
from it

3) Commission policy advice and warning



B. THE EXCESSIVE DEFICIT PROCEDURE

1) Commission report under Article 104(3)

2) The decision on the existence of an excessive deficit

3) The correction of an excessive deficit

4) Abrogation of Council decisions in the context of the EDP for Member States having implemented multi-pillar pension reforms

Ralf Grahn

Progress by EU task force on economic governance

Herman Van Rompuy, the chairman of the European Council’s task force on economic governance, presented the work after the second meeting, 7 June 2010.

Van Rompuy will present his progress report to the upcoming European Council meeting.



Remarks by Herman Van Rompuy, President of the European Council, following the second meeting of the Task force on economic governance (Brussels, 7 June 2010; document PCE 118/10) [headings inserted by me]

Objectives


Today, we had the second meeting of the Task Force. Today, we have been able to translate the commitment of the first meeting this into more concrete proposals on two main issues.

Let me briefly recall the four main objectives we agreed upon in the first meeting.

Firstly: strengthening budgetary discipline through the Stability Pact. Secondly, reducing the divergences in competitiveness between the Member States. Thirdly, assuring an effective financial crisis mechanism. Fourthly, improving economic governance and coordination.



Yesterday’s issues



Today, we worked on the first two points: strengthening the Stability Pact and reducing competitiveness divergences. In other words: budget surveillance and macro-economic surveillance. In these two areas, rapid progress can be made. That was clear today from the large consensus on all the main points under discussion.

Therefore, when I make my "Progress Report" to the European Council next week, I will be able to present our first orientations on these two priorities. We will take up the other two points as of our next meeting, on July 12.

We received substantial contributions from Member-States. It shows their close involvement. We could also build on the preparatory work by a group of 'sherpas'.

What did we conclude today?



Stability and Growth Pact



On the Stability Pact, we made progress on a number of elements. Each judged on itself may seem a small step; taken together however, they result in a new way of working.

Until now, the Pact mainly contained heavy sanctions at the end of the procedure: the "nuclear option". It is useful to have this ultimate option, but the Pact needs to consist of a full range a range of tools and "guns" along the way. Therefore, everybody agreed today on ways and means to review the fiscal situation of Member States at an earlier stage, and in a more graduated way.

Let me mention four improvements.

1. The first is the so-called "European semester". In the spring, national budgetary plans would be presented to the Commission and EU Member States. Of course, not to be checked in detail or to be decided upon by the European institutions! That is the prerogative of the national parliaments. However, the main assumptions underlying the budgetary plans, like the levels of growth or inflation, would be examined. So would the main aggregates, like total revenues, total spending and deficit targets.

Timing is key here. A government presenting a budgetary plan with a high deficit will have to justify itself in front of its peers, amongst Finance Ministers. Since this would take place as early as the spring, there would still be time to adjust the plans before the final budget is presented. Moreover, a national parliament would be able to judge its governments' budget plans knowing fully their credibility. Of course, we need to take into account the specificity of some countries.

2. We will also improve the Pact by creating more sanctions earlier on. Sanctions could already kick in before the 3 percent threshold for the annual deficit is trespassed, for instance if warnings have been neglected, or if the level of debt rises too quickly. To use the traffic light image: until now, you only got fined when driving through the red light of the 3 percent; from now on, you could also be in trouble when crossing the orange light. Obviously, the conditions -- under which circumstances orange is an infringement of the rules -- will have to be defined precisely. We have to define a new set of sanctions -- more progressive and consistent. We have asked the Commission to come forward with proposals on this.

3. A third element in the budget surveillance is taking the public debt level better into account. So far, the focus has been almost exclusively on the maximum annual deficit, the 3 percent of GDP. Much less attention has been paid to the level of public debt, the 60 percent. This needs to be corrected. We do not propose a special procedure for "excessive debt", but one idea could be to launch the excessive deficit procedure earlier for countries where debt is not reduced quickly enough. This could be one of the triggers for an orange light I just referred to.

4. Member States also supported ensuring the independence of national statistical offices for data provision, free from political influence.

On all these Pact-related points, there was a strong convergence of views.



Competitiveness


Let me come to the second point on the agenda: the competitiveness surveillance. Here again, we will change our way of working.

During the crisis we have learnt -- the hard way -- something we could have known all along: that sound budgetary policies are necessary but not sufficient to ensure competitiveness. Over the years, competitiveness in some Member States has improved thanks to wage moderation and productivity improvement. Others have accumulated important losses of competitiveness and balance of payments deficits on the current account. Moreover, some countries were growing quickly and had apparently sound public finances, but underlying weaknesses and imbalances, including private sector debts, provoked an abrupt reversal in times of crisis.

These imbalances are a particular problem for members of the Euro area. Countries can no longer devalue; for some economies, membership of the Euro zone acted as a "sleeping pill". We need to avoid a "rude awakening" by the market forces. Therefore we have asked the Commission to develop indicators of competitiveness; to come up with the tools aligned to this analysis. They should function as an early warning, a wake-up call. In my view we also need corrective measures for those who do not act in time when warned.

Before, it is as if we were looking at Member States’ fiscal positions through the keyhole of the annual deficit, whereas we now all want to use the bay window of their economies. Therefore macro-economic surveillance should function next to the budget surveillance of the Pact.


Progress report



I am happy about the progress made on these two main points on the agenda, in a very constructive atmosphere. I will report about it to the European Council next week. I am confident that the Heads of State and Government will share our determination to resolve these issues quickly.

The remarks by Van Rompuy contribute to the discussion on improving economic governance, but naturally credible action has to follow.




Ralf Grahn

EU: Stability programme France

France has traditionally called for strong eurozone governance or even government, but good practices start at home. Have they?

The latest EU Council opinion on the French stability programme spells out the need for corrective action.




For some background remarks on economic policy coordination, you can read the blog post EU: Useful stability and convergence programmes? (3 June 2010).


Stability programme France

The Council’s assessment of the French stability programme has been published in the Official Journal of the European Union (OJEU):



COUNCIL OPINION on the updated stability programme of France, 2009-2013; OJEU 29.5.2010 C 140/6



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

Economic activity in France lost its dynamism in the course of 2008 and declined sharply in the fourth quarter and in the first quarter of 2009. From the second quarter of 2009, it picked up again, supported by stimulus measures in France and in neighbouring countries. One prominent challenge for economic policy is the situation of public finances. Specifically, since 2002 the deficit in France has been either above or close to the 3 % of GDP threshold, mainly a reflection of insufficient consolidation efforts. In this context, France was under an excessive deficit procedure between 2002 and 2007, and received a policy advice from the Commission in May 2008. Following the notification of a deficit above the 3 % of GDP threshold in 2008, a new excessive deficit procedure was launched in February 2009, which foresees the correction of the excessive deficit by 2013. Other challenges include addressing the supply-side weaknesses which lead to insufficient external competitiveness, as well as increasing labour utilisation.

Council recommendation


After a detailed assessment and also in the light of the recommendation under Article 126 TFEU of 2 December 2009, the Council invited France to:

(i) use, throughout the programme period, windfalls related to an improvement of the macro-economic and fiscal outlook, as well as the implementation of all envisaged tax measures to accelerate the deficit reduction and the decline of the gross debt ratio back towards the 60 % of GDP reference value;

(ii) stand 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, and further specify the measures necessary to ensure an average annual fiscal effort of above 1 % of GDP over the period 2010-2013 and to achieve a correction of the excessive deficit by 2013;

(iii) ensure that the budgetary framework is reinforced, in particular on the expenditure side, and effectively supports the achievement of the outlined medium-term fiscal plans at all sub-government levels, as planned by the French government.

France is also invited to provide more information on the broad measures underpinning the envisaged consolidation in the outer years of the programme, at the latest in the EDP [excessive deficit procedure] chapters of the forthcoming stability programme updates.

The financial crisis, the economic downturn and the subsequent battering of member states’ budgets have led to a new culture of crisis summits, not only for the European Union as a whole, but significantly for the eurozone.

There is need for a critical evaluation of how much the unofficial summits of the eurozone leaders and the unofficial Euro Group have achieved in terms of sustainable solutions. This culture of more or less chaotic “government by communiqés” seems to have led to deteriorating standards of transparency.

What would be achieved by more intergovernmental arrangements outside the treaty framework, if that is what “economic government” in the euro area means?

France has a long history of trying to create Europe in its own image, but the country has traditionally been short on accepting sustainable institutional underpinnings for its ambitions for Europe.

The EU already has the Stability and Growth Pact. Leading by example would be a good start for France, ahead of credible European level economic government.




Ralf Grahn

EMU: Convergence programme Denmark

What if we should look less to the daily fluctuation of market sentiments and more to the mundane coordination of economic policy between the European Union and the member states?


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



COUNCIL OPINION on the updated convergence programme of Denmark, 2009-2015; published OJEU 28.5.2010 C 138/6.



Council Regulation 1466/97

The procedure refers to Article 9(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 Estonia has been proposed 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, leaving the door open for later changeover.

Article 9(3) concerns the examination of updated convergence programmes.

Denmark has not adopted the euro currency and it is one of the two EU member states to have opted out of the obligation to introduce the euro (the UK being the other one).



Economic background


The Council starts its examination of 26 April 2010 of the updated Danish convergence programme, which covers the period 2009 to 2015, with the following observations about the economic background:

The economic crisis hit the Danish economy hard in 2009, pushing Denmark into its deepest recession since the end of the Second World War. Denmark entered the crisis from a relatively comfortable position after a period of sustained strong growth with substantial surpluses in the current account and government finances and low public debt. The downturn began in 2008 when the housing bubble burst and was aggravated by falling exports, reflecting the collapse in world trade and declining investment on the back of receding final demand and tighter financing conditions. Despite disposable incomes still rising, private consumption weakened significantly, as the bleak economic outlook, falling real estate prices and rising unemployment affected consumer confidence. In response to the sharp fall in output, the Danish authorities adopted several large fiscal stimulus measures in line with the European Economic Recovery Plan (EERP) comprising tax cuts, investment projects and raising public consumption expenditures. On top of the fiscal support to economic activity, two bank rescue packages were adopted, providing guarantees and capital injections. These measures are expected to turn a comfortable budget surplus in 2008 into a deficit as from 2009 that is set to exceed the 3 %-of-GDP reference value of the Stability and Growth Pact between 2010 and 2012. Public debt, while moving up in parallel, is still expected to remain below the 60 %-of-GDP reference value. The exchange rate has been stabile throughout 2009 and the interest rate spread vis-à-vis the ECB has come down substantially. In order to ensure a sustainable development of public finances, a key challenge will be to ensure continued reform to increase labour supply. Another challenge for the Danish authorities will be to ensure that the scaling back of stimulus measures takes place in a timely manner once the recovery is self-sustaining.

As we see, the financial crisis and the severe economic downturn strained even the most robust economies.



Recommendation

After a detailed discussion, the Council invited Denmark to:

(i) reinforce efforts ensuring that the planned breach of the 3 %-of-GDP reference value would remain contained as well as to swiftly correct the projected excess of the deficit over the reference value, and to

(ii) specify the measures to underpin fiscal consolidation for the MTO [medium-term objective] to be reached by 2015 as planned.

Ralf Grahn

Eurozone: Budget consolidation in Austria

On 26 April 2010 the Council examined the updated stability programme of Austria, which covers the period 2009 to 2013:



COUNCIL OPINION on the updated stability programme of Austria, 2009-2013; OJEU 27.5.2010 C 137/7.


The Opinion describes the effects of the financial and economic crisis, which pushed the Austrian economy into the deepest recession in post-war history. Public finances deteriorated significantly. The Council decided on 2 December 2009 that an excessive deficit existed in Austria and issued a recommendation to correct the deficit by 2013.

In comparison with the 3 per cent government deficit and 60 per cent government debt to GDP, the reference values of the Stability and Growth Pact, the Opinion offers the following picture:

The Austrian stability programme estimates the general government deficit in 2009 at 3.5 % of GDP. Government gross debt is estimated at 66.5 % of GDP in 2009, up from 62.5 % in the year before.

The Council makes the evaluation that overall, in 2010 the budgetary strategy set out in the programme is consistent with the Council recommendation under Article 126(7) TFEU. However, from 2011 on, taking into account the risks, the budgetary strategy may not be consistent with the Council recommendation under Article 126(7) TFEU.

The consolidation path outlined in the programme, starting in 2011 is not underpinned by appropriate measures. In addition, the budgetary strategy is not sufficient to bring debt-to-GDP ratio back on a downward path.

In view of the new assessment and in the light of the recommendation under Article 126 TFEU of 2 December 2009, the Council of the European Union invited Austria to:

(i) substantiate the measures deemed necessary to underpin the planned consolidation from 2011 onwards, in order to achieve the recommended average annual fiscal effort of 0,75 % of GDP and bring the general government deficit below the 3 % of GDP reference value by 2013; and seize, as prescribed in the EDP recommendation, any opportunities beyond the fiscal effort, including from better economic conditions, to accelerate the reduction of the gross debt ratio back towards the 60 % of GDP reference value;

(ii) further improve the budgetary framework to reinforce fiscal discipline at all levels of government through enhanced transparency and accountability notably by aligning legislative, administrative and financing responsibilities between the different levels of government and by strengthening enforcement mechanisms under the internal stability pact.

Austria is also invited to submit in time for the assessment of the effective action under the excessive deficit procedure an addendum to the programme to report on progress made in the implementation of the Council recommendation under Article 126(7) of 2 December 2009 and to outline in some detail the consolidation strategy that will be necessary to progress towards the correction of the excessive deficit.

The Opinion is useful as an example of the periodic assessment of a eurozone government’s economic and budgetary policies, as well as peer pressure towards action.




Ralf Grahn

EU and eurozone membership paradoxes

The Copenhagen criteria for accession to the European Union require, among other things, democracy. Thus, the EU would not qualify for membership.



According to Eurostat, in 2009 the government deficit in the euro area was 6.3 per cent and government debt at 78.7 per cent of GDP.

Following the financial crisis and the economic downturn, which led to huge bail-outs and high unemployment, the eurozone as a whole wildly overshoots the reference values of 3 per cent and 60 per cent of GDP.

Thus, the eurozone as a whole would fail the convergence criteria of the Stability and Growth Pact for euro introduction, based on the figures for last year.

Here are the main Eurostat findings:

In 2009 the largest government deficits in percentage of GDP were recorded by Ireland (-14.3%), Greece (-13.6%) the United Kingdom (-11.5%), Spain (-11.2%), Portugal (-9.4%), Latvia (-9.0%), Lithuania (-8.9%), Romania (-8.3%), France (-7.5%) and Poland (-7.1%). No Member State registered a government surplus in 2009. The lowest deficits were recorded by Sweden (-0.5%), Luxembourg (-0.7%) and Estonia (-1.7%). In all, 25 Member States recorded a worsening in their government balance relative to GDP in 2009 compared with 2008, and two (Estonia and Malta) an improvement.

At the end of 2009, the lowest ratios of government debt to GDP were recorded in Estonia (7.2%), Luxembourg (14.5%), Bulgaria (14.8%), Romania (23.7%), Lithuania (29.3%) and the Czech Republic (35.4%). Twelve Member States had government debt ratios higher than 60% of GDP in 2009: Italy (115.8%), Greece (115.1%), Belgium (96.7%), Hungary (78.3%), France (77.6%), Portugal (76.8%), Germany (73.2%), Malta (69.1%), the United Kingdom (68.1%), Austria (66.5%), Ireland (64.0%) and the Netherlands (60.9%).

Is there any correlation between both sets of membership criteria?




Ralf Grahn

Tracking eurozone crisis measures: Reinforcing the Maginot Line?

In March, were the European leaders on top of things, or were they reinforcing the Maginot Line?

The main issues for the March 2010 European Council were the Europe 2020 strategy, the upcoming G20 summit and the next steps concerning climate change.

However, the Spring European Council gave some attention to questions regarding the Stability and Growth Pact, relevant to the eurozone crisis measures we are tracking in this series of blog posts.

These were important matters, but were our leaders prepared for later events?



European Council 25 to 26 March 2010

Source:



European Council 25/26 March 2010 conclusions (document EUCO 7/10)



Economic monitoring


Among monitoring mechanisms intended for the Europe 2020 strategy for jobs and growth ─ the successor to the Lisbon strategy ─ the European Council mentioned the following relevant to economic policy coordination as well as strengthened coordination and surveillance of the budgetary discipline of eurozone countries (point 6,page 5):

c) Overall economic policy coordination will be strengthened by making better use of the instruments provided by Article 121 of the Treaty (TFEU)

d) Coordination at the level of the eurozone will be strengthened in order to address the challenges the euro area is facing. The Commission will present by June 2010 proposals in that respect, making use of the new instruments for economic coordination offered by Article 136 of the Treaty (TFEU).

The integrity of the Stability and Growth Pact and the specific responsibility of the ECOFIN Council in overseeing its implementation were mentioned, in point 6(f).

Rapid decisions were required on the Commission’s proposals to ensure the quality, reliability and timeliness of national data; point 6(h).



Task force on economic governance

The European Council initiated the Van Rompuy task force on economic governance:

7. The European Council asks the President of the European Council to establish, in cooperation with the Commission, a task force with representatives of the Member States, the rotating presidency and the ECB, to present to the Council, before the end of this year, the measures needed to reach the objective of an improved crisis resolution framework and better budgetary discipline, exploring all options to reinforce the legal framework.

Financial regulation and supervision



The European Council wanted rapid progress on financial regulation and supervision, incentives in the financial sector and a report on a “Tobin tax”:

8. Rapid progress is required on the strengthening of financial regulation and supervision both within the EU and in international fora such as the G20, while ensuring a level-playing field at the global level. Progress is particularly needed on issues such as capital requirements; systemic institutions; financing instruments for crisis management; increasing transparency on derivative markets and considering specific measures in relation to sovereign credit default swaps; and implementation of internationally agreed principles for bonuses in the financial services sector. The Commission will shortly present a report on possible innovative sources of financing such as a global levy on financial transactions.

Internal and international progress

The European Council was not oblivious of the need for progress:

9. This requires that the EU make rapid progress on all these issues internally. In particular, work on the new European supervisory framework needs to be concluded in time for the European Systemic Risk Board and the three European Supervisory Authorities to begin work in early 2011.

10. The Council and the Commission will report back on these issues to the June 2010 European Council, ahead of the Toronto Summit.

Correct me if I am wrong, but my feeling is that the complicated structures of EU decision making were not amenable to quick and decisive action. There was not yet a sense of ‘clear and present danger’ strong enough to cut through the differences between the member states.




Ralf Grahn

EU: Excessive government deficits IIa

Did the European Convention have anything to say about avoiding excessive government deficits, an important part of economic and monetary union (EMU), as elaborated in the Stability and Growth Pact?

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Article III-76 of the draft Constitution, proposed by the European Convention, corresponds with Article 104 TEC, and it is located in Part III ‘The policies and functioning of the Union’, Title III ‘Internal policies and action’, Chapter II ‘Economic and monetary policy’, Section 1 ‘Economic policy’.

In the draft Treaty establishing a Constitution for Europe, the ‘monster’ clause on excessive government deficits (Article III-76) is found in OJ 18.7.2003 C 169/41─42:

Article III-76 Draft Constitution

1. Member States shall avoid excessive government deficits.

2. The Commission shall monitor the development of the budgetary situation and of the stock of government debt in the Member States in order to identify gross errors. In particular it shall examine compliance with budgetary discipline on the basis of the following two criteria:

(a) whether the ratio of the planned or actual government deficit to gross domestic product exceeds a reference value, unless:

(i) either the ratio has declined substantially and continuously and reached a level that comes close to the reference value;

(ii) or, alternatively, the excess over the reference value is only exceptional and temporary and the ratio remains close to the reference value;

(b) whether the ratio of government debt to gross domestic product exceeds a reference value, unless the ratio is diminishing sufficiently and approaching the reference value at a satisfactory pace.

The reference values are specified in the Protocol on the excessive deficit procedure.

3. If a Member State does not fulfil the requirements under one or both of these criteria, the Commission shall prepare a report. The report of the Commission shall also take into
account whether the government deficit exceeds government investment expenditure and take into account all other relevant factors, including the medium-term economic and budgetary position of the Member State.

The Commission may also prepare a report if, notwithstanding the fulfilment of the requirements under the criteria, it is of the opinion that there is a risk of an excessive deficit in a Member State.

4. The Economic and Financial Committee shall formulate an opinion on the report of the Commission.

5. If the Commission considers that an excessive deficit in a Member State exists or may occur, it shall address an opinion to the Member State concerned.

6. The Council of Ministers shall, on a proposal from the Commission, having considered any observations which the Member State concerned may wish to make and after an overall assessment, decide whether an excessive deficit exists. In that case it shall adopt, according to the same procedures, recommendations addressed to the Member State concerned with a view to bringing that situation to an end within a given period. Subject to paragraph 8, those recommendations shall not be made public.

Within the scope of this paragraph, the Council of Ministers shall act without taking into account the vote of the representative of the Member State concerned, and a qualified majority shall be defined as the majority of the votes of the other Member States, representing at least three fifths of their population.

7. The Council of Ministers, on a recommendation from the Commission, shall adopt the European decisions and recommendations referred to in paragraphs 8 to 11. It shall act without taking into account the vote of the representative of the Member State concerned, and a qualified majority shall be defined as the majority of the other Member States, representing at least three fifths of their population.

8. Where it establishes that there has been no effective action in response to its recommendations within the period laid down, the Council of Ministers may make its recommendations public.

9. If a Member State persists in failing to put into practice the recommendations of the Council of Ministers, the Council of Ministers may adopt a European decision giving notice to the Member State to take, within a specified time-limit, steps for the deficit reduction which is judged necessary by the Council of Ministers in order to remedy the situation.

In such a case, the Council of Ministers may request the Member State concerned to submit reports in accordance with a specific timetable in order to examine the adjustment efforts of that Member State.

10. As long as a Member State fails to comply with a European decision adopted in accordance with paragraph 9, the Council of Ministers may decide to apply or, as the case may be, intensify one or more of the following measures:

(a) to require the Member State concerned to publish additional information, to be specified by the Council of Ministers, before issuing bonds and securities;

(b) to invite the European Investment Bank to reconsider its lending policy towards the Member State concerned;

(c) to require the Member State concerned to make a noninterest-bearing deposit of an appropriate size with the Union until the Council of Ministers considers that the excessive deficit has been corrected;

(d) to impose fines of an appropriate size.

The President of the Council of Ministers shall inform the European Parliament of the measures adopted.

11. The Council of Ministers shall abrogate some or all of the measures referred to in paragraph 6 and paragraphs 8 to 10 if it considers the excessive deficit in the Member State concerned to have been corrected. If the Council of Ministers has previously made public recommendations, it shall state publicly, as soon as the decision under paragraph 8 has been abrogated, that there is no longer an excessive deficit in the Member State concerned.

12. The rights to bring actions provided for in Articles III-265 and III-266 may not be exercised within the framework of paragraphs 1 to 6 or paragraphs 8 and 9.

13. Further provisions relating to the implementation of the procedure described in this Article are set out in the Protocol on the excessive deficit procedure

A European law of the Council of Ministers shall lay down the appropriate measures to replace the said Protocol. The Council of Ministers shall act unanimously after consulting the European Parliament and the European Central Bank.

Subject to the other provisions of this paragraph, the Council of Ministers, on a proposal from the Commission, shall adopt European regulations or decisions laying down detailed rules and definitions for the application of the said Protocol. It shall act after consulting the European Parliament.

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The next post is going to look at some legal materials concerning the European Convention proposal.


Ralf Grahn

EU: Excessive government deficits Ih

The Ecofin Council Conclusions ‘Immediate responses to financial turmoil’ (Council document 13930/08, 7 October 2008) shed some light on how ‘flexible’ the member states aim to be when implementing the EMU rules, namely the Stability and Growth Pact, including the excessive deficit procedure:

“The application of the Stability and Growth Pact should also reflect the current exceptional
circumstances, in accordance with the provisions of the Pact.”

In other words, the Pact can be bent, but not broken.

The Conclusions are available at:

http://www.consilium.europa.eu/ueDocs/cms_Data/docs/pressData/en/misc/103202.pdf


Ralf Grahn

EU: Excessive government deficits Ig

At the intergovernmental level, under the ‘old’ Stability and Growth Pact, the failure of France and Germany to avoid excessive budget deficits and the inability of the Council to decide on effective recommendations, in the first case where sanctions should have been meted out, brought the Stability and Growth Pact into disrepute and led to the subsequent court case launched by the Commission.


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ECJ

The European Court of Justice was called upon to resolve questions relating to the excessive deficit procedure under the ‘old’ Stability and Growth Pact in case C-27/04, when the Council had left the procedure against France and Germany in abeyance.

The 13 July 2004 judgment of the ECJ in Commission / Council concerning annulment of measures of the Council 15 November 2003, was the following:

1. Declares the action of the Commission of the European Communities inadmissible in so far as it seeks annulment of the failure of the Council of the European Union to adopt the formal instruments contained in the Commission’s recommendations pursuant to Article 104(8) and (9) EC;

2. Annuls the Council’s conclusions of 25 November 2003 adopted in respect of the French Republic and the Federal Republic of Germany respectively, in so far as they contain a decision to hold the excessive deficit procedure in abeyance and a decision modifying the recommendations previously adopted by the Council under Article 104(7) EC;

See :
http://curia.europa.eu/jurisp/cgi-bin/form.pl?lang=en&Submit=Rechercher&alldocs=alldocs&docj=docj&docop=docop&docor=docor&docjo=docjo&numaff=C-27/04 &datefs=&datefe=&nomusuel=&domaine=&mots=&resmax=100

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C-27/04 analysis

Barbara Dutzler and Angelika Hable, in ‘The European Court of Justice and the Stability Pact ─ Just the Beginning?’ (European Integration online Papers, EIoP, Vol. 9 (2005) No. 5, 1 March 2005), presented the excessive deficit procedure step by step, as applied to Germany and France, as well as a detailed analysis of the ECJ judgment:

http://eiop.or.at/eiop/pdf/2005-005.pdf

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New Stability and Growth Pact analysis

Franz-Christoph Zeitler, member of the executive board of the Deutxche Bundesbank ‘What remains of the Stability and Growth Pact?’ (26 August 2005) assessed the ‘new’ Stability and Growth Pact, saying that overall the fiscal rules have been significantly weakened. By contrast, the challenges facing a stability-oriented fiscal policy in terms of public acceptance have grown considerably:


http://www.bundesbank.de/download/presse/reden/2005/20050826zeitler_en.pdf

According to Zeitler:

“The problems and weaknesses of the old pact were not due to it being too rigid. On the contrary, they lay in the weakness of the political decision-making process for the incentives and sanctions system and in a preventive effect which was too modest.”

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Excessive deficit procedures: current and closed

The European Commission, Economic and Financial Affairs, offers information on the Stability and Growth Pact with a page on ongoing and closed excessive deficit procedures concerning specific countries:

http://ec.europa.eu/economy_finance/sg_pact_fiscal_policy/excessive_deficit9109_en.htm

***

This glimpse at the existing (‘new’) Stability and Growth Pact, including the excessive deficit procedure, has not resulted in conclusive evidence of the margins of appreciation or the limits of Council discretion concerning small, exceptional and temporary excesses above the reference value of 3 % of GDP, in a situation where fiscal restraint seems to be heading for abandonment (suspension) following the financial turmoil and weakening real economy in Europe.

Even under exceptional circumstances, extraordinary budgetary excesses would presumably have to meet the tests of necessity and proportionality.

Readers with knowledge and views are invited to comment.


Ralf Grahn

EU: Excessive government deficits If

As an interlude, we complement our presentation of legal materials with some suggestions for further reading on economic and monetary union (EMU), including excessive government deficits.

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Wikipedia


For the general reader, Wikipedia offers a very short introduction ‘Economic and Monetary Union of the European Union’, although the article mainly outlines monetary union (the single currency), not economic policy:

http://en.wikipedia.org/wiki/Economic_and_Monetary_Union_of_the_European_Union


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Stability and Growth Pact


The Economic and Financial Affairs web pages of the European Commission offer a page ‘Stability and Growth Pact’ with links to relevant documents:

http://ec.europa.eu/economy_finance/other_pages/other_pages12638_en.htm


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EMU legal and political texts

The joint publication by the Council Secretariat and the Commission ‘Economic and monetary union ─ Legal and political texts’ is called selective, but manages to compile more than enough for more casual readers on its 276 pages. The materials are still fresh, published in June 2007, and they offer “all you need” in one handy chunk, available in print form through OPCE’s EU Bookshop and as a free download at:

http://bookshop.europa.eu/eubookshop/FileCache/PUBPDF/QC7606262ENC/QC7606262ENC_002.pdf

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Implementation requirements

The Commission’s ‘Specifications on the implementation of the Stability and Growth Pact and Guidelines on the format and content of Stability and Convergence Programmes’ presents a lot of factual information about the reporting and programme criteria:

http://ec.europa.eu/economy_finance/about/activities/sgp/codeofconduct_en.pdf


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EMU at ten

The European Commission’s publication ‘EMU@10: successes and challenges after 10 years of Economic and Monetary Union’ looks at the history, the shortcomings and the challenges of EMU. The 342 page report proceeds to propose the Commission’s reform agenda. EMU@10 is available at:

http://ec.europa.eu/economy_finance/publications/publication12682_en.pdf

The report was accompanied by a Communication bearing the same name, COM(2008) 238 final:

http://ec.europa.eu/economy_finance/emu10/com2008_238en.pdf

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Public finances in EMU

The European Commissions 314 page report ‘Public finances in EMU ─ 2008’ offers a wealth of information on the fiscal policies and effects both in the Eurozone (and the EU) as a whole and for each member state. The report shows how robust the public economies of the member states were before the financial sector meltdown:

http://ec.europa.eu/economy_finance/publications/publication12832_en.pdf

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On the back of the report ‘Public finances in EMU ─ 2008’ the Commission published a Communication ‘The role of quality public finances in the EU governance framework’ COM(2008) 387 final, with suggestions for improvements:

http://ec.europa.eu/economy_finance/publications/publication12836_en.pdf

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Convergence Report

Ten member states still outside the Eurozone are studied in ‘Convergence Report 2008’ on fulfilment of their obligations to achieve economic and monetary union. The Report consists of the Commission Communication COM(2008) 248 and a Technical Annex (224 pages in all).
These member states ‘with a derogation’ are Bulgaria, the Czech Republic, Estonia, Latvia, Lithuania, Hungary, Poland, Romania, Slovakia and Sweden.

(Denmark and the United Kingdom have legal arrangements not to adopt the euro, and are not included in the report, whereas Sweden stays outside the Eurozone artificially.)
The Convergence Report 2008, which includes a recap of the convergence criteria, is available at:

http://ec.europa.eu/economy_finance/publications/publication12574_en.pdf

The different language versions of the Convergence Report 2008 can be accessed through the web pages of the European Central Bank, too; here is the English version:

http://www.ecb.eu/pub/pdf/conrep/cr200805en.pdf

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Stability reports

The majority (15 ─ soon 16 ─ of 27) member states already having adopted the single currency file stability reports. The latest Council opinion is on the updated stability programme of Belgium: Council Opinion of 8 July 2008 on the updated stability programme of Belgium, 2007-2011 (OJ 19.7.2008 C 182/1) offers a picture of the procedures and assessments:

http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:C:2008:182:0001:0005:EN:PDF


Ralf Grahn

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