EUCO: Fiscal compact TSCG

The fiscal compact, officially the Treaty on stability, coordination and governance in the economic and monetary union (TSCG), was signed yesterday by 25 of the 27 governments of the EU member states. Only the Czech Republic and the United Kingdom chose to exclude themselves at this stage.

The TSCG text is available in the 22 authentic treaty languages (Bulgarian, Danish, Dutch, English, Estonian, Finnish, French, German, Greek, Hungarian, Irish, Italian, Latvian, Lithuanian, Maltese, Polish, Portuguese, Romanian, Slovak, Slovenian, Spanish and Swedish).


A common concern

The recital reminds us of the obligation of all member states of the European Union to regard their economic policies as a matter of common concern. This obligation was introduced by the Maastricht Treaty, which was signed twenty years ago.

Recently, the failure of the states to adhere to and to enforce this obligation has turned it into a grave concern, common to all EU citizens (and beyond).

The TSCG still builds on the principle of national economic policies, which need to be coordinated intergovernmentally, although it purports to shrink the straitjacket.


Treaty law and enhanced cooperation

The aim of the signatories is to incorporate the substance of the TSCG into the legal framework
of the European Union within five years (Article 16). According to Article 10, enhanced cooperation is seen as an option.

This intergovernmental treaty, close to but outside the institutional framework of the European Union, went through six different drafts, which were not officially made public. However, the draft texts were leaked to selected media. Even if selective leaks violate the principle of equality between EU citizens, openness was served.


Ratification

According to Article 14(2) and (3), the TSCG needs to be ratified by at least twelve euro area member states to enter into force among them.

The meaning is twofold. The final number of ratifying states may be less than 25. For constitutional reasons Ireland is going to call yet another national referendum. Other countries may stumble when they try to transpose the changes into national law, although aid from the European Stability Mechanism (ESM) will become conditional upon the ratification of the TSCG.

On the other hand, a few dropouts won't spoil the party for the masochists.


Euro Summit

The provisions on governance (Euro Summit) apply to all parties from the original entry into force. See Article 14(4). The TSCG legalises the recent practice of euro summits, which have eclipsed the Eurogroup, which meets informally but is mentioned in an EU Treaty protocol.


Political alignment

For the non-euro countries, the TSCG is mainly a symbol of political alignment, since they undertake no concrete obligations, if they do not expressly undertake obligations. See Article 14(5). However, according to Article 12(3) they are granted limited participation rights in the Euro Summit.

The TSCG as a whole applies to the eurozone countries, although only a part of the provisions are real additions to the euro area acquis.

The signing of the TSCG took care of the ”austerity” part at the European Council 1-2 March 2012, so the main part of the EUCO meeting could – for a change – be devoted to economic growth, competitiveness and jobs.



Ralf Grahn
speaker on EU affairs, especially digital policy and law

P.S. Between the global issues and the national level, with a tenuous hold on democracy, the European Union institutions and the eurozone coteries shape our future. At the same time we see a European online public sphere emerging. Grahnlaw (recently ranked fourth among political blogs in Finland), Grahnblawg (in Swedish) and Eurooppaoikeus (in Finnish) are among the more than 900 euroblogs aggregated by multilingual Bloggingportal.eu. Are you following the debates which matter for your future? Is your blog already listed on Bloggingportal?

Immaculate conception of the European Council 4 February 2011

Ahead of the European Council ”summit” on Friday, 4 February 2011, we looked at the preparatory General Affairs Council (GAC) in the blog post: An energetic and innovative European Council? (29 January 2011).

Yesterday the foreign ministers and the ministers for Europe representing the EU member states laboured to bring us the following conclusions, currently available only in English:

3064th Council meeting General Affairs; Brussels, 31 January 2011 (asiakirja 5640/11)

(I have published some general GAC remarks in Finnish.)


Ensuring follow-up

According to Article 16(6) of the Treaty on European Union (TEU), the General Affairs Council shall ensure the follow-up of meetings of the meetings of the European Council...

Yesterday's GAC left us with this memorable, elegant and enlightening sentence concerning the follow-up to the December 2010 meeting (page 8):

The Council took stock of the follow-up being given to the European Council's meeting on 16 and 17 December.

No need to burden the public with any explanations, clarifications, document references or links to relevant documents.

St Matthew knew: Neither cast ye your pearls before swine.

***

Just in passing, let it be known that the Council has provided us with an additional opportunity to ascertain the decisions to be followed in the first place. They have published, in English:

The European Council in 2010 (about 46 pages)

In the introductory part, president Herman Van Rompuy discusses the work of the European Council in 2010. The second part contains the conclusions of the six meetings in 2010, all conveniently in one place. The conclusions of the December meeting duly begin on page 42 for us to read.

The publication is available in Dutch, French and German as well.

Readers of other languages still find the conclusions on the web pages of the (European) Council, as before.


Preparation

Coordination and preparation are the GAC tasks indicated first in Article 16(6) TEU, so let us turn to the preparatory contribution yesterday: Preparation of the February meeting.

The first sentence of the conclusions of the General Affairs Council admirably bring us 'in medias res' (page 8):

The Council examined the draft conclusions for the European Council meeting to be held in Brussels on 4 February.

If we fast-forward to the concluding sentence, leaving out the chaff in between, we may marvel at:

Revised draft conclusions will be submitted to the European Council.

Despite drawing inspiration from the cultural, religious and humanist inheritance of Europe, this is probably as close as you ever get to the miracle of transubstantiation or the immaculate conception in temporal affairs. Miraculously the immaterial draft conclusions turn into revised draft conclusions, unseen by the 'profanum vulgus', untouched by any agent.

Never mind that you would expect the proposals going in to the most important official institution of the European Union to be public knowledge and openly discussed well before the decisions, even guidelines, affecting 501 million people are taken.

Evidently, good governance does not start at the top.

As long as the European Council acts like a summit, the General Affairs Council remains a joke.



Ralf Grahn



P.S. Blenderlaw is the enjoyable legal blog with a transnational twist, written by Caronline Bradley.


P.S. 2: I am happy if you want to read my Euroblogs. The internal market and the Europe 2020 strategy (EU2020 flagship initiatives) are going to be among the main themes, upstream on Grahnlaw (in English), Grahnblawg (in Swedish) and Eurooppaoikeus (in Finnish), as well as downstream on the trilingual Grahnlaw Suomi Finland. We can get acquainted on Facebook and on Twitter @RalfGrahn, too.

EU Commission proposes stronger economic governance

The discussion about economic governance in the European Union and the eurozone has been enriched by new proposals.



On 12 May 2010 the European Commission published a communication Reinforcing economic policy coordination; COM(2010) 250 final (12 pages).



A short while ago, the European Central Bank published its proposals on reinforcing economic governance in the Euro Area (14 pages), addressed to the task force chaired by Herman Van Rompuy.



Commission proposal main points



Yesterday, 30 June 2010, Olli Rehn, the commissioner for economic and monetary policy, explained the European Commission’s new proposals on tools for enhanced EU economic governance (SPEECH/10/350).



The key tool to improved surveillance is the European Semester: prior coordination of economic policies. Rehn hopes that the Ecofin Council on 13 July 2010 endorses the launch of the European Semester from 2011 and a revision of the Code of Conduct for the Stability and Growth Pact (SGP).



In a press release, the Commission presented the key proposals for reinforced macro-economic, budgetary and structural surveillance (IP/10/859).



In a clear manner, an explanatory memorandum offered further detail about the proposed toolbox for stronger economic governance in Europe (MEMO/10/288).



Commission communication



During the course of writing this blog post, the Commission’s Directorate-General for Economic and Financial Affairs managed to replace its machine translated web page on enhancing economic policy coordination for growth and jobs with a page in real English.

The same thing happened with the Commission communication. The unreadable machine translation was replaced by a document revised by human beings, even if the text may still be somewhat provisional:



Enhancing economic policy coordination for stability, growth and jobs – Tools for stronger EU economic governance; Brussels, [??] COM(2010) 367/2 (15 pages)

The communication COM(2010) 367 has not yet been posted on the legal portal Eur-Lex, under preparatory documents.




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

EU General Affairs Council 14 June 2010

The General Affairs Council (GAC) shall ensure consistency in the work of different Council configurations. It shall prepare and ensure the follow-up to meetings of the European Council, in liaison with the President of the European Council and the Commission (Article 16(6) TEU).



Coordination, preparation and follow-up



Article 2 of the Rules of Procedure of the Council adds some detail to how the GAC is intended to coordinate policies and to prepare the European Council meetings, with a final GAC meeting within five days of a coming summit, as a rule preventing later discussion by other Council formations on items on the European Council’s agenda.

Even if the GAC tasks seem to cover all policy areas, it continues to meet in parallel with the Foreign Affairs Council (FAC). Thus, the coordinating role of the GAC is probably negligible with regard to the EU’s external action. (Cf. Article 2(5) of the Rules of Procedure.)

The GAC also follows up the guidelines, conclusions and decisions by the European Council.



GAC agenda 14 June 2010



The General Affairs Council will meet Monday, 14 June 2010 in Luxembourg, where the Council meetings take place three months annually.



The items on the agenda are:

Non-legislative activities

- European Council, Brussels, 17 June 2010

- EEAS [European External Action Service]

- Strategic Report of 2010 by the Commission on the Implementation of the Cohesion Policy Programmes (Presentation by the Commission; Council conclusions)

- Outermost Regions (Presentation by the Commission of the 2010 Forum for Outermost Europe, Brussels, 27/28 May 2010; Council conclusions)



Legislative deliberations

- European Citizens' Initiative (General Approach)

The European Council meets Thursday, 17 June 2010.




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

EU aim: Quality and sustainability of public finances

Despite the Brussels jargon, the ten ‘Europe 2020 integrated guidelines’ should make Europeans sit up and take notice. These policy aims concern the bread and butter issues for this decade. Success or failure decides our jobs, pensions, living standards and quality of public services; in short: prosperity.

On 17 June 2010 at the European Council meeting, the heads of state or government are going to add their remarks to the proposed objectives ahead of final adoption.



The blog post Adopting EU broad economic policy guidelines (BEPGs) looked at the procedure and context, and the entry EU’s proposed BEPGs (broad economic policy guidelines) presented an overview of the BEPGs and their relationship with the guidelines for employment policies. Together they form the ‘Europe 2020 integrated guidelines’.



Public finances



The first guideline in the Ecofin Council’s report to the European Council (document 10262/10) is:

Ensuring the quality and the sustainability of public finances

The financial crisis and the economic downturn put severe strain on public finances, now seen in the form of the European sovereign debt crisis and the rude awakening in the eurozone.

Almost all EU member states now accumulate debt at an unsustainable pace, and many of the economies are burdened with heavy levels of government debt.

Among the most developed in the world, several EU members have been forced to call in the International Monetary Fund, and the IMF has undertaken to stand ready for the collective defence of the euro area.

During the last weeks and days, a number of member state governments have slammed on the brakes and hastily announced major budget cuts for the coming years, in some cases even with immediate effect.

Strikes, protests, social unrest and hardship are on the menu, not only in the so called PIIGS (Portugal, Ireland, Italy, Greece and Spain), but in most EU member states, not forgetting the difficulties in the new members in Central Europe.

Panicky reactions take the citizens by surprise and cause anger, but somehow the governments should be able to return to more sustainable and predictable policies.

The Ecofin proposal sketches a virtuous path towards better economic governance (page 8):

As part of comprehensive ‘exit strategies’ for the economic crisis, Member States should carry out ambitious reform programmes to ensure macroeconomic stability and the sustainability of public finance, improve competitiveness, and reduce macroeconomic imbalances and enhance labour market performance. Temporary measures introduced in response to the crisis should be withdrawn in a coordinated manner as appropriate when the recovery is secure. The withdrawal of the fiscal stimulus should be implemented and coordinated within the framework of the Stability and Growth Pact.

Quality and sustainability of public finances

Here is how the representatives of the member states see the common challenges and needed actions (page 12 to 13):

Guideline 1: Ensuring the quality and the sustainability of public finances


Member States should vigorously implement budgetary consolidation strategies under the Stability and Growth Pact (SGP) and in particular recommendations addressed to Member States under the excessive deficit procedure, and/or in memoranda of understanding, in the case of balance-of-payments support. In particular Member States should achieve consolidation in line with Council recommendations and meet their medium-term objectives in line with the SGP. Without prejudice to the legal framework of the SGP, this implies for most Member States achieving a consolidation well beyond the benchmark of 0.5 % of gross domestic product (GDP) per year in structural terms until debt ratios are on a solid declining path. Fiscal consolidation should start in 2011 at the latest, earlier in some Member States where economic circumstances make this appropriate, provided that the Commission forecasts continue to indicate that the recovery is strengthening and becoming self-sustaining.

In designing and implementing budgetary consolidation strategies should focus on expenditure restraint and prioritise growth-enhancing expenditure items within for example areas such as education, skills and employability, research and development (R&D) and innovation and investment in networks with positive impacts on productivity, where appropriate for example high-speed internet, energy and transport interconnections and infrastructure. Where taxes may have to rise, this should, where possible, be done in conjunction with measures to make tax systems more employment, environment and growth-friendly for example by shifting the tax burden towards environmentally harmful activities. Tax and benefits systems should provide better incentives to make work pay.

Furthermore, Member States should strengthen national budgetary frameworks, enhance the quality of public expenditure and improve the sustainability of public finances, pursuing in particular determined debt reduction, reform of age-related public expenditure, such as pensions and health spending, and policies contributing to raising employment and effective retirement ages to ensure that age-related public expenditure and social well-fare systems are financially sustainable.

Budget efficiency and quality of public finances are also important at the EU level.

Credibility?

Is it going to be different this time?

When reading the economic and employment guidelines for the decade ahead, we are confronted with the missed targets of the Lisbon reform agenda for growth and jobs, regulatory and supervisory failures regarding reckless financial operators and weak coordination of economic policies between member state governments, despite the Stability and Growth Pact.

The intentions and programmes have not been bad, but coordination, open or otherwise, between ‘sovereign’ member states can hardly be seen as a success story.

Since the Lisbon Treaty mainly leaves these policy areas and powers unchanged, credibility remains a big question.

It is not the sole prerogative of the United Kingdom to reframe questions of needed powers at the right level in sterile terms of ‘sovereignty’: the assured power for all to hang separately.

Vestigia terrent, said the fox.




Ralf Grahn

EU’s proposed BEPGs (broad economic policy guidelines)

Procedure and context were discussed in the blog entry Adopting EU broad economic policy guidelines (BEPGs) (9 June 2010).

The Ecofin Council approved a report on the BEPGs to the European Council 17 June 2010:



Report to the European Council on broad economic policy guidelines (document 10262/10; 20 pages)


The Recommendation on the BEPGs is linked with the coming Council Decision on the guidelines for employment policies. Legally, they are two distinct documents, but together they form the ‘Europe 2020 integrated guidelines’.


Here is an overview of these ‘Europe 2020 Integrated Guidelines’:

Guideline 1: Ensuring the quality and the sustainability of public finances

Guideline 2: Addressing macroeconomic imbalances

Guideline 3: Reducing imbalances in the euro area

Guideline 4: Optimising support for R&D and innovation, strengthening the knowledge triangle and unleashing the potential of the digital economy

Guideline 5: Improving resource efficiency and reducing greenhouse gases

Guideline 6: Improving the business and consumer environment and modernising the industrial base in order to ensure the full functioning of the internal market

Guideline 7: Increasing labour market participation and reducing structural unemployment

Guideline 8: Developing a skilled workforce responding to labour market needs, promoting job quality and lifelong learning

Guideline 9: Improving the performance of education and training systems at all levels and increasing participation in tertiary education

Guideline 10: Promoting social inclusion and combating poverty

The Council proposes that the BEPGs (Guidelines 1 to 6) are in force until 2014 without change. The member states design national reform programmes (NRPs) consistent with the ‘Europe 2020 integrated guidelines’.




Ralf Grahn

EU: Convergence programme and budget cuts United Kingdom

Britain’s prime minister David Cameron is a busy man. He met Herman Van Rompuy, a man the politically illiterate crew in Downing Street brand as the “EU President”, when in fact he is the president of the European Council (without a vote). They also refer to the “EU Council”, when they clearly mean the upcoming meeting of the European Council 17 June 2010, where Cameron sits together with the other heads of state or government from the EU member states. (Luckily, the press release was short; only two obvious misnomers.)



Today, Cameron also spoke on the economy, preparing the ground for budget cuts:

This year – at least according to the previous government’s forecasts – [the budget deficit] is set to be over 11 per cent of GDP. Today, our national debt stands at £770 billion.

Within just five years it is set to nearly double, to £1.4 trillion.

The cuts will be specified in an emergency budget in two weeks.

Cameron referred to the G20 meeting as an endorsement for the UK plans, but references to the European Union were mostly confined to the terrifying example of Greece.



Convergence report

Despite the UK’s soloist streak, it is a member of the European Union. The Commission monitors Britain’s economy and the Council issues opinions, as for other member states. The latest opinion of the Council of the European Union has been published in the Official Journal of the European Union (OJEU):



COUNCIL OPINION on the updated convergence programme of the United Kingdom, 2009/2010-2014/2015: published OJEU 4.6.2010 C 146/18



Economic situation


On 26 April 2010 the EU Council examined the updated convergence programme of the United Kingdom, which covers the period 2009/2010 to 2014/2015. The Council began its assessment with a brief description of the economic situation:

The economic and financial crisis, which began in 2007 after several years of strong growth, saw UK economic output fall cumulatively by around 6 %, with modest recovery starting to appear in the final quarter of 2009. The crisis was preceded and partly aggravated by a period of progressive increases in leverage of the household and financial sectors, such that a dependence on net capital inflows was large and persistent. In response to the unfolding crisis, the Bank of England responded with an aggressive programme of interest rate reductions, liquidity support for the banking sector and, from March 2009, quantitative easing. The government also intervened extensively to stabilise the financial system, including by major equity injections, deposit guarantees and the provision of liability insurance. In line with the EERP [European Economic Recovery Plan], the government implemented a sizeable fiscal stimulus, which in combination with the operation of automatic stabilisers and the effects on revenue of falls in asset prices contributed to a major deterioration in public finances. The weakening of the sustainability of UK public finances was aggravated by the fact that the primary balance was already in substantial structural deficit in the period leading up to the crisis, leading to the general government headline deficit soon going well above the 3 % of GDP reference value as the crisis unfolded. Accordingly, the United Kingdom was made subject to an excessive deficit procedure on 8 July 2008 and on 2 December 2009 the Council issued the latest recommendations in accordance with Article 126(7) of the Treaty on the Functioning of the European Union (TFEU) to correct the deficit by 2014/2015. The main challenges for the UK economy over the next years are to stabilise the public finances in the context of ongoing efforts by the household sector to reduce outstanding gearing; to achieve adequate levels of credit provision from a still fragile financial system, with many credit providers having reduced their lending capacity; and to underpin a shift of production towards greater tradeable output so as to permanently improve its external balance.

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 the United Kingdom to:

(i) avoid any further measures contributing to the deterioration of public finances in 2010/2011 and in the event of weaker economic growth than foreseen in the programme contain the government deficit in 2010/2011 to at most that forecast in the January 2010 programme 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) target a more ambitious reduction of the government deficit to less than the 3 % of GDP Treaty reference value by 2014/2015 at the latest, including by strengthening the planned pace of fiscal effort from 2011/2012 onwards in line with the Council recommendation under Article 126(7), and seize any further opportunities, including from better-than-expected economic and market conditions, to accelerate the reduction of the gross debt ratio towards the 60 % of GDP reference value, thereby also improving the long-term sustainability of public finances;

(iii) publish in 2010 the detailed departmental spending limits underlying the overall expenditure projections for at least the three-year period beyond 2010/2011;

(iv) implement the expenditure efficiency savings identified in the Operational Efficiency Programme (OEP) and in other value for money initiatives.

The United Kingdom is also invited to improve compliance with the data requirements of the code of conduct.

The United Kingdom 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 Council reiterates its invitation that all subsequent updates should also provide a chapter with this information as long as a Member State remains subject to an excessive deficit procedure.

The gloomy prospects prime minister David Cameron referred to today can hardly have come as a surprise, after the new coalition government took office. The 26 April 2010 assessments by the Council and its recommendations to the member states were public knowledge, although it took the EU more than a month to publish them in the OJEU.

Until the promised budget cuts take effect, the UK’s government borrowing pace is breath-taking. Luckily, the sky-rocketing debt level was fairly low before the financial and economic crisis.



The latest UK House of Commons Library research paper (10/39) Economic Indicators June 2010 contains valuable information about the real economy, finance and UK public finances.



Convergence reports 2010


Because of their opt-outs, Denmark and the United Kingdom are the two loners among the EU’s non-euro member states. Therefore, they are not examined in the convergence reports 2010.

Still, for a European perspective and comparison with the nine other EU member states still outside the euro area, you can study the convergence reports published by the European Central Bank and the European Commission:



European Central Bank: Convergence Report May 2010 (273 pages)



European Commission: Convergence Report 2010 (Prepared in accordance with Article 140(1) of the Treaty); Brussels, 12.5.2010 COM(2010) 238 final (30 pages)



Commission staff working document accompanying the Convergence Report 2010; Brussels, 12.5.2010 SEC(2010) 598 final (197 pages)



Naturally, Britain takes part in the Ecofin Council (and other Council configurations), but it does not participate in the unofficial Euro Group, which met today in Luxembourg.




Ralf Grahn

EU: Stability programme and elections in the Netherlands

On 9 June 2010 the Dutch are going to elect a new House of Representatives after the fall of the government led by Jan Peter Balkenende. Even such a “virtuous” country as the Netherlands was severely hit by the financial and economic crisis, so the new government coalition faces the difficult challenge to find a way to return to economic growth and fiscal prudence. Does this tally with the election campaign and voters' perceptions?



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?

These questions are especially acute with regard to the PIIGS, but how about the Dutch, often seen as a hard-working Northern breed of the Germanic type?

This long blog series invites 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, but left to be coordinated among the governments (Article 121 TFEU). Some of these governments were really proud of this, when they announced the contents of the Lisbon Treaty.

With markets suddenly distrustful and many economists appearing as doomsday prophets, the economic policies have become a real concern – for everyone – but potential remedies seem to take a lot of flak.

As it is, 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.



The Netherlands

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 the Netherlands, which has been a member of the eurozone since 1999:



COUNCIL OPINION on the updated stability programme of the Netherlands, 2009-2012; published OJEU 4.6.2010 C 146/12


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 the Netherlands, which covers the period 2009 to 2012. The Council began its assessment with a brief description of the economic situation:

In 2009, economic activity experienced a severe contraction of 4 %. The fall in world trade hit the Dutch economy relatively hard, resulting in a negative contribution of net exports to growth. Domestic demand also put a drag on growth throughout the year as private consumption decreased due to important negative wealth and confidence effects, and investment suffered from decreasing demand, lower profitability and tightening credit conditions. Government consumption was the only demand component supporting economic activity, mainly due to the 1 % of GDP stimulus package implemented in line with the EERP [European Economic Recovery Plan]. For 2010, GDP growth is expected to be positive again, most likely driven by net exports on the back of the recovery in world trade. Private consumption is set to remain subdued, as real disposable income is negatively affected by lower wage growth and increasing unemployment and investment is expected to suffer from the low capacity utilisation rate, decreased profitability and still difficult credit conditions. The budgetary position eroded very quickly in 2009 from a surplus of 0.7 % of GDP in 2008 to a deficit of 4.9 % of GDP as a result of the recovery measures taken by the government in response to the economic crisis, the full working of the automatic stabilisers, and decreasing gas revenues. For 2010, a further deterioration is foreseen. The 2009 budget deficit in excess of the 3 % of GDP reference value triggered an excessive deficit procedure. In this context, the Council issued recommendations to the Netherlands in December 2009, setting 2013 as the deadline for correcting the excessive deficit. Bringing the deficit below 3 % of GDP by that date will be one of the main policy challenges for the Netherlands. Other challenges include addressing the long-term sustainability of public finances, the continued strengthening of confidence in the financial sector, and ensuring access to finance for the corporate sector.

Council recommendation

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

(i) in the context of the fundamental budget review, specify the measures supporting the consolidation from 2011 and especially in the following years, further strengthen the consolidation effort to secure the required average annual fiscal effort to bring the deficit below 3 % of GDP by 2013, and throughout the programme period use windfalls related to an improvement of the macroeconomic and fiscal outlook to accelerate the deficit reduction and the decline of the gross debt ratio back towards the reference value;

(ii) further improve the long-term sustainability of public finances by implementing structural reforms that curb the projected increase in age-related expenditure.

The Netherlands are also invited to provide more information on the path and the broad measures underpinning the envisaged consolidation in the outer years as soon as the information becomes available and at the latest in the EDP [excessive deficit procedure] chapter of the forthcoming Stability Programme.

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, the Netherlands 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 finance ministers of the eurozone countries met today, Monday 7 June 2010.




Ralf Grahn

EU: Convergence programme Sweden

Brownie points for those who read and think about these EU documents, despite the Swedish hoop-la surrounding the upcoming (19 June) wedding of the Crown Princess, the future Queen Victoria, and the global commotion caused by the FIFA World Cup in South Africa.

Importance is a word with several meanings.



Competitive and social and with healthy public finances, Sweden has been able to weather the financial and economic crisis better than most countries, despite its unilateralist approach to treaty compliance.

The basic division of stability programmes for eurozone countries and convergence programmes for member states still without the euro means that Sweden is assessed together with the EU economies with more catch-up to do.



The blog post EU: Useful stability and convergence programmes? (3 June 2010) presents some reasons for reading and thinking about these country by country examinations.



You can then move on to the EU Council opinion on the convergence programme of Sweden, a country outside the eurozone despite a treaty obligation to join. The opinion was published in the Official Journal of the European Union (OJEU):




COUNCIL OPINION on the updated convergence programme of Sweden, 2009-2012; OJEU 4.6.2010 C 146/7



Economic background


On 26 April 2010 the Council of the European Union examined the updated convergence programme of Sweden, which covers the period 2009 to 2012. The EU Council started its assessment with a brief introduction to the economic situation in Sweden:

After being severely hit by the recession at the end of 2008, the Swedish economy has stabilised, but with GDP growth being negative throughout 2009. Somewhat uncharacteristically at this stage of the cycle, the Swedish economy has been mainly driven by consumer demand while industrial production, investment activity and exports have merely bottomed out after previous deep falls. Household spending has been helped by supportive fiscal and monetary policies and a stabilisation of the situation in the financial markets. An improving labour market outlook, rising stock market indices and a resumption of the previous upward trend in house prices have also contributed to strengthening consumer confidence. As the economy slipped into recession, the Swedish currency weakened by almost 30 % on a trade- weighted basis in less than a year, but has since recovered about three quarters of its lost value. Its recent appreciation should contribute to dampen inflationary pressures, already subdued by significant slack in the economy. The recession and the fiscal policy response it triggered have swung the public sector balance from a surplus of 2.5 % of GDP in 2008 to a deficit of 0.8 % of GDP in 2009. In order to ensure a sustainable development of public finances, a key challenge will be to avoid that a potentially rather job- anaemic recovery leads to lasting negative effects on long-term unemployment and a permanent loss of labour supply. Ensuring that active labour market policies remain of high quality even as they expand in scope will be important in this regard. Another challenge for policy makers will be to carefully calibrate the withdrawal of the various stimulus measures so as to neither nip the recovery in the bud nor contribute to the build-up of potentially destabilising household-sector imbalances.

Council recommendation


After a detailed discussion, and given the need to ensure sustainable convergence, while recognising the exemplary performance of Swedish fiscal policy in line with the Stability and Growth Pact in recent years, the Council of the European Union invited Sweden to:

(i) implement the 2010 fiscal policy as planned in line with the EERP [European Economic Recovery Plan], while aiming to avoid breaching of the 3 %-of-GDP reference value;

(ii) ensure that the nominal budgetary adjustment projected in the programme is achieved, if necessary by timely adoption of consolidation measures to ensure that lower-than- expected growth does not derail the envisaged consolidation of government finances in the outer years of the programme, as well as to ensure progress towards the MTO [medium-term objective],

Sweden is also invited to improve compliance with the data requirements of the code of conduct.

Convergence reports 2010


For a wider view and comparison between nine EU member states still outside the euro area, you can study the convergence reports published by the European Central Bank and the European Commission:



European Central Bank: Convergence Report May 2010 (273 pages)



European Commission: Convergence Report 2010 (Prepared in accordance with Article 140(1) of the Treaty); Brussels, 12.5.2010 COM(2010) 238 final (30 pages)



Commission staff working document accompanying the Convergence Report 2010; Brussels, 12.5.2010 SEC(2010) 598 final (197 pages)




Ralf Grahn

EU: Stability programme Spain

Portugal, Italy, Ireland, Greece and Spain: The abbreviation PIIGS has become shorthand for five troubled economies in the 16 member eurozone. Their total population is about 132 million, which is about 40 per cent of the euro area total (almost 330 million).

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?

These questions are especially acute with regard to the PIIGS.

This long blog series invites 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, but left to be coordinated among the governments (Article 121 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.



Spain


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 Spain, which has been a member of the eurozone since 1999:



COUNCIL OPINION on the updated stability programme of Spain, 2009-2013; published OJEU 4.6.2010 C 146/1


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 Spain, which covers the period 2009 to 2013. The Council began its assessment with a brief description of the economic situation:

After more than a decade of strong GDP growth, Spain went through a severe recession in 2009. The downturn was caused by a sharp fall in domestic demand mirroring the narrowing of macroeconomic imbalances accumulated during the boom phase and was aggravated by the global financial crisis. Notably, the credit boom has ended and the private sector has quickly increased its saving rate; the oversized housing sector has been shrinking with both lower prices and activity; the external deficit has declined from high levels; and, inflationary pressures have softened.

The downturn has led to dramatic employment losses and unemployment rates. The current crisis is taking a heavy toll also on Spanish public finances. Besides falling activity, fiscal developments reflect an accommodative policy response with the implementation of sizeable stimulus measures. Already in 2008, the government deficit exceeded 3 % of GDP and on that basis an excessive deficit procedure was opened in March 2009. The most recent step in this procedure was the issuance by the Council of a revised recommendation under Article 126(7) of the Treaty on the functioning of the European Union (TFEU) in December 2009, whereby Spain is called to end its excessive deficit situation by 2013. The main challenges ahead are the continuation of the adjustments, including the narrowing of the external deficit and rebalancing of the sources of GDP growth away from domestic demand, in particular the housing sector, and towards the external sector. That will require reforms to boost productivity and potential GDP growth, as well as to create jobs in a sustained way. At the same time, competitiveness has to be enhanced, also by means of appropriate cost-reducing policies, i.e. contained wage growth and mark-ups vis-à-vis trading partners. These structural competitiveness problems, together with cyclical factors, reflecting strong economic growth above its main trading partners, fuelled a sizeable current account deficit, which widened rapidly over the last decade, peaking in 2007, when it reached double-digit figures, before dipping to about half in 2009. Finally, if up to now the government sector has cushioned the sharp private sector retrenchment, there is no room to continuing doing so without further compromising fiscal sustainability. Thus, proceeding with a credible and sustained fiscal consolidation strategy is a main challenge for the years ahead.

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 Spain to:

(i) implement with rigour the ambitious fiscal plans envisaged in the programme so as to correct the excessive deficit by 2013, backing it up with concrete measures in the years beyond 2010, and 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; seize as prescribed in the EDP [excessive deficit procedure] recommendation any further opportunity beyond the fiscal efforts, including from better economic conditions, to accelerate the reduction of the gross debt ratio towards the 60 % of GDP reference value;

(ii) in view of the projected increase in age-related expenditure and the rapid rise of the government debt ratio, improve the long-term sustainability of public finances also by implementing reforms to the old-age pension scheme as proposed by the Government;

(iii) ensure that the budgetary framework effectively supports the achievement of the outlined medium-term fiscal plans at all levels of the general government sector, and closely monitor adherence to the budgetary targets throughout the year;

(iv) ensure that fiscal consolidation measures are also geared towards continuing the improvement of the quality of the public finances in the light of the need for further adjustment of existing macroeconomic imbalances.

Spain is also invited to improve compliance with the data requirements of the code of conduct.

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.




Spain is currently the holder of the rotating Council presidency, including the Ecofin Council. Naturally, Spain 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

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

EU: Stability programme Slovakia

Stability programmes for eurozone countries on the one hand, convergence programmes for member states still without the euro.




You can start by reading the background remarks on economic policy coordination in the European Union, in the blog post EU: Useful stability and convergence programmes? (3 June 2010).



You can then move on to the EU Council opinion on the stability programme of the latest eurozone entrant Slovakia, published in the Official Journal of the European Union (OJEU):



COUNCIL OPINION on the updated stability programme of Slovakia, 2009-2012; OJEU 3.6.2010 C 144/17



Economic background


On 26 April 2010 the Council of the European Union examined the updated stability programme of Slovakia, which covers the period 2009 to 2012. The Council began its assessment with a brief description of the economic situation:

With an average real GDP growth rate of over 7 % over the period 2003-2008, Slovakia was one of the best performing EU countries during the boom phase. Sound macroeconomic policies over that period allowed avoiding large macroeconomic imbalances, which enabled Slovakia to adopt the euro in January 2009. However, given its large trade openness, the Slovak economy was strongly affected by the crisis. Real GDP is estimated to have fallen by 4.7 % in 2009, and the depreciation of neighbouring countries’ currencies implied a further appreciation of Slovakia's real effective exchange rate.

To contain the effects of the crisis, the authorities allowed a full operation of automatic stabilisers and, in line with the European Economic Recovery Plan, adopted anti-crisis measures in November 2008 and February 2009 (0.5 % of GDP for both 2009 and 2010). With the government deficit expected at some 6 % of GDP in 2009, on 2 December 2009 the Council decided on the existence of an excessive deficit and recommended its correction by 2013. Considering the weakening of Slovakia’s external competitiveness due to temporary depreciation of neighbouring countries’ currencies and widening fiscal imbalances during the crisis, a credible and sustainable reduction of the government deficit should be a key element of the authorities’ strategy for the coming years.

Council recommendation

After a detailed discussion, and in the light of the recommendation under Article 126 TFEU of 2 December 2009, the EU Council invited Slovakia to:

(i) implement the deficit reducing measures in 2010 as planned in the budget, and back up the consolidation path for the following years with specific measures to secure the correction of the excessive deficit if possible by 2012, and by 2013 at the latest;

(ii) continue reforms of the pension system with a view to ensuring the sustainability of government finances;

(iii) implement the envisaged measures to further strengthen the fiscal framework, in particular the introduction of enforceable multiannual expenditure ceilings.

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, Slovakia is represented in the 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 Monday, 7 June 2010.




Ralf Grahn

EU: Convergence programme Romania

Stability programmes for eurozone countries on the one hand, convergence programmes for member states still without the euro.




You can start by reading the background remarks on economic policy coordination in the European Union, in the blog post EU: Useful stability and convergence programmes? (3 June 2010).



You can then move on to the EU Council opinion on the convergence programme of Romania, published in the Official Journal of the European Union (OJEU):



COUNCIL OPINION on the updated convergence programme of Romania, 2009-2012; OJEU 3.6.2010 C 144/12



Economic background


On 26 April 2010 the Council of the European Union examined the updated convergence programme of Romania, which covers the period 2009 to 2012. The EU Council started its assessment with a brief introduction to the economic situation in Romania:

With an average annual GDP growth rate of 6.8 % between 2004 and 2008, Romania was one of the fastest growing EU Member States. Growth was driven by a domestic demand boom for both consumption and investment, which was fuelled by a rapid financial deepening, high capital inflows and steadily increasing income expectations. This, together with high wage inflation, caused the sharp increase in the current account deficit to 12.3 % of GDP in 2008. In addition, years of pro-cyclical budgetary policies led to a sizeable deterioration in the underlying fiscal position, with the structural deficit (i.e. the cyclically-adjusted balance net of one-off and other temporary measures) rising to 8.5 % of GDP in 2008. The sudden increase in risk aversion during the financial crisis caused markets to become increasingly concerned about these imbalances. Capital inflows plunged and pressures on the exchange rate increased, resulting in a cumulative depreciation by about 30 % of the leu against the euro between August 2007 and January 2009. The drop in capital inflows, the balance-sheet effects of the currency depreciation and a sharp decline in export demand caused a severe recession in late 2008 and the first half of 2009, which was reflected in a 7.1 % decline of GDP in 2009. The National Bank of Romania lowered its key rate by a total 325 basis points to 7.0 % between February 2009 and February 2010. The current account deficit narrowed to around 4.25 % of GDP in 2009.

Council recommendation

After a detailed discussion, and in the light of the recommendation of 16 February 2010 under Article 126(7) TFEU, as well as given the need to ensure sustainable convergence, the Council of the European Union invited Romania to:

(i) rigorously implement the fiscal consolidation measures for 2010 agreed as part of the balance-of-payments support programme and take further corrective action, if needed, to achieve the 2010 target for the general government deficit. The Romanian authorities are also invited to specify, in the context of the Medium-Term Budgetary Framework to be prepared by end May 2010, the fiscal consolidation measures necessary to achieve the programme budgetary targets in 2011 and 2012;

(ii) improve the fiscal framework by adopting and implementing the fiscal responsibility law. In particular, take into account the analysis of the Fiscal Council in the design and conduct of fiscal policy;

(iii) adopt and implement the draft pension law which would contribute to significantly improve the long-term sustainability of public finances.

Convergence reports 2010


For a wider view and comparison between nine EU member states still outside the euro area, you can study the convergence reports published by the European Central Bank and the European Commission:



European Central Bank: Convergence Report May 2010 (273 pages)



European Commission: Convergence Report 2010 (Prepared in accordance with Article 140(1) of the Treaty); Brussels, 12.5.2010 COM(2010) 238 final (30 pages)



Commission staff working document accompanying the Convergence Report 2010; Brussels, 12.5.2010 SEC(2010) 598 final (197 pages)




Ralf Grahn

EU: Stability programme Portugal

The abbreviation PIIGS has become shorthand for the troubled economies which represent five out of 16 members and a considerable proportion of the population of the eurozone: Portugal, Italy, Ireland, Greece and Spain.



Stability programmes for eurozone countries on the one hand, convergence programmes for member states still without the euro.


You can start by reading the background remarks on economic policy coordination in the European Union, in the blog post EU: Useful stability and convergence programmes? (3 June 2010).



You can then move on to the EU Council opinion on the stability programme of eurozone Portugal, published in the Official Journal of the European Union (OJEU):



COUNCIL OPINION on the updated stability programme of Portugal, 2009-2013; OJEU 3.6.2010 C 144/6



Economic background


On 26 April 2010 the EU Council examined the updated stability programme of Portugal, which covers the period 2009 to 2013. The Council began its assessment by a brief presentation of the economic situation:

The global crisis has caught the Portuguese economy in a situation of sluggish economic growth for almost a decade, reflecting structural weaknesses, notably low productivity and potential GDP growth. After stagnation in 2008, real GDP fell in 2009 by 2.7 % driven by shrinking domestic demand, notably investment and to a lesser extent household consumption, whereas net trade was largely neutral to growth. The unemployment rate rose to 10 % in late 2009. The government deficit reached 9.4 % of GDP in 2009 after 2.8 % of GDP in 2008 as a result of sharply falling activity and the implementation of some stimulus measures, but it also reflects prior weaknesses as revealed by high, even if declining, structural deficits in pre-crisis years. On the basis of a planned government deficit in excess of 3 % of GDP in 2009 and an increasing debt in excess of 60 % of GDP, the Council decided in December 2009 that an excessive deficit existed in Portugal and set a deadline of 2013 for its correction. At the same time, large external imbalances persist despite the slump in GDP, with net external borrowing representing 9.5 % of GDP and a negative net international investment position of over 110 % of GDP at the end of 2009. External imbalances relate to eroded competitiveness, reflecting not only low productivity growth but also insufficient labour costs adjustment in a context of, first, increased competition in global markets, notably in labour-intensive sectors where Portugal used to show a comparative advantage and, second, rather benign financing conditions for a number of years. However, financial turbulence during the crisis has been contained. A lasting improvement in economic performance will require considerable adjustments. In the fiscal domain, consolidation is essential to contain an otherwise increasing public debt that undermines long-term sustainability. At the same time, an overarching objective is to raise potential GDP growth, notably by boosting productivity and create jobs in a durable manner. Continued efforts to that end would also help to narrow the large external imbalance, which will remain a major drag on national income in the coming years given the service of the high external debt. Narrowing the external imbalance will require rebalancing the sources of GDP growth towards the external sector by regaining competitiveness through structural reform efforts and lower labour costs growth vis-à-vis trading partners.

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 Portugal to:

(i) achieve the 2010 deficit target of 8.3 % of GDP, if necessary by reinforcing the consolidation by adopting additional measures; back-up the strategy to bring the deficit below 3 % by 2013 by the timely implementation of concrete measures; stand ready to adopt further consolidation measures in case the macroeconomic scenario proves more favourable than the scenario underpinning the Article 126(7) recommendation and/or any slippages emerge; seize any opportunity beyond fiscal efforts, including from better economic conditions, to accelerate the reduction of the gross debt ratio towards the 60 % of GDP reference value;

(ii) implement an effective multi-annual budgetary framework in order to ensure the adherence to the budgetary targets across the government sector and to firmly contain expenditure over the medium-term;

(iii) enhance the quality of public finances, along the lines envisaged in the programme, notably by improving the efficiency and effectiveness of public spending in the various areas of government action; decisively address the situation of loss-making state-owned enterprises; and factor into the fiscal sustainability position the spending commitments and risks arising from public-private partnerships;

(iv) frame fiscal consolidation measures together with efforts to raise productivity and potential GDP growth in a sustained way, to boost competitiveness and to narrow the large external imbalances, which will also help improving the sustainability of public finances.

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.




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




Ralf Grahn

EU: Stability programme Malta

Stability programmes for eurozone countries on the one hand, convergence programmes for member states still without the euro.

You can start by reading the background remarks on economic policy coordination in the European Union, in the blog post EU: Useful stability and convergence programmes? (3 June 2010).



You can then move on to the EU Council opinion on the stability programme of the euro area country Malta, published in the Official Journal of the European Union (OJEU):



COUNCIL OPINION on the updated stability programme of Malta, 2009-2012; OJEU 3.6.2010 C 144/1



Economic background


On 26 April 2010 the EU Council examined the updated stability programme of Malta, which covers the period 2009 to 2012. The Council began its assessment with a brief description on the economic situation:

The global crisis has affected Malta chiefly through the trade channel, with the impact on the financial sector remaining contained. In 2009, economic activity contracted as exports, but also investment, contracted sharply, while private consumption is estimated to have been relatively stable on the back of resilient employment and some recovery measures in line with the European Economic Recovery Plan (EERP). The concomitant severe drop in imports is estimated to have led to a significant narrowing of the external deficit in 2009.

The impact of the downturn and some non-recurrent expenditure-increasing items in 2008 led to a significant widening of the general government deficit in 2008-2009 compared to 2007. Against this background, and taking into account the high debt ratio, the Council decided on 7 July 2009 on the existence of an excessive deficit in Malta and, on 16 February 2010, adopted a recommendation to correct this situation by 2011. In addition to restoring a sound fiscal position and improving long-term fiscal sustainability, given the expected increase in age- related expenditure, Malta faces the challenge of strengthening competitiveness to improve the economy's resilience to future external shocks. This will require, on the one hand, raising human capital, unlocking business potential and continuing efforts to move towards higher value-added activities and, on the other, promoting an efficient wage setting process that allows a close link between wage and productivity developments.

Council recommendation

After a detailed discussion, and in the light of the recommendation under Article 126(7) TFEU of 16 February 2010, the Council of the European Union invited Malta to:

(i) achieve the 2010 deficit target of 3.9 % of GDP, if necessary by adopting additional consolidation measures; back up the strategy to bring the deficit below 3 % of GDP in 2011 with concrete measures 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; and considerably strengthen the strategy for 2012 to ensure an adjustment towards the MTO [medium-term objective] in line with the requirements of the Stability and Growth Pact; seize, as prescribed in the EDP [excessive deficit procedure] recommendation, any opportunity beyond the fiscal efforts, including from better economic conditions, to accelerate the reduction of the gross debt ratio towards the 60 % of GDP reference value;

(ii) in view of the significant projected increase in age-related expenditure, improve the long-term sustainability of public finances by implementing further reforms of the social security system;

(iii) strengthen the binding nature of the medium-term budgetary framework and improve the monitoring of budget execution throughout the year, and enhance the efficiency of public spending, especially in the area of health.

Malta is also invited to provide more information on the broad measures underpinning the envisaged consolidation measures in the EDP chapter of the stability programme.

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.



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






Ralf Grahn

EU: Convergence programme Poland

Stability programmes for eurozone countries on the one hand, convergence programmes for member states still without the euro. You can start by reading the background remarks on economic policy coordination in the European Union, in the blog post EU: Useful stability and convergence programmes? (3 June 2010).



You can then move on to the EU Council opinion on the convergence programme of Poland, published in the Official Journal of the European Union (OJEU):



COUNCIL OPINION on the updated convergence programme of Poland, 2009-2012; OJEU 2.6.2010 C 143/17



Economic background


On 26 April 2010 the EU Council examined the updated convergence programme of Poland, which covers the period 2009 to 2012. The Council began its assessment with a brief description of the economic situation:

With real GDP estimated to have increased by 1.7 %, Poland was the only EU country that recorded positive growth in 2009. This performance reflects a constellation of favourable factors including sound fundamentals at the outset of the crisis, a well capitalised and sound financial sector, the relatively low degree of openness of the economy, a sizeable depreciation of the Polish currency at an early stage of the crisis, as well as timely accommodative monetary and fiscal policies.

While some of the factors that supported growth are of temporary nature — the margin for supportive fiscal policy has largely disappeared and the exchange rate is now appreciating — Poland's economic outlook has improved significantly in recent months. Key challenges for the years ahead will be to bring government finances back to a sustainable position and secure a sustained catching-up process without compromising fiscal and macroeconomic stability. Poland did not use the good economic times (2006-2008) to consolidate its public finances, and the structural government deficit (i.e. the cyclically-adjusted balance net of one-off and other temporary measures calculated in accordance with the commonly agreed method on the basis of the data in updated programme) is estimated to have reached 7 % of GDP in 2009. Based on the April 2009 EDP [excessive deficit procedure] notification by the Polish authorities of a 2008 government deficit of 3.9 % of GDP, on 7 July 2009 the Council decided on the existence of an excessive deficit and recommended its correction by 2012.

Council recommendation

After a detailed discussion, and in the light of the recommendation under Article 104(7) TEC of 7 July 2009, as well as given the need to ensure sustainable convergence, the Council of the European Union invited Poland to:

(i) implement the 2010 budget rigorously, under-executing primary current expenditure plans wherever possible and allocating windfall revenue to deficit reduction;

(ii) strengthen the planned budgetary adjustment in 2011 in order to achieve the recommended average annual fiscal effort of 1.25 % of GDP in line with the Article 104(7) Recommendation and stand ready to adopt further consolidation measures in 2011 and 2012 in case risks related to the fact that the programme scenario is more favourable than the scenario underpinning the recommendation under Article 104(7) TEC materialise;

(iii) proceed with strengthening the fiscal framework, including through introduction of an expenditure rule covering a larger share of the general government primary expenditure than the ‘temporary’ rule presented in the Convergence Programme, with appropriate monitoring and enforcement mechanisms. This would require to reduce the share of statutory spending in total expenditures.

Poland is also invited to add, in its next update of the convergence programme, more precise information in the separate chapter on progress made to bring the excessive deficit situation to an end, as requested by the Council in its recommendations under Article 104(7) of 7 July 2009.

Convergence reports 2010


For a wider view and comparison between nine EU member states still outside the euro area, you can study the convergence reports published by the European Central Bank and the European Commission:



European Central Bank: Convergence Report May 2010 (273 pages)



European Commission: Convergence Report 2010 (Prepared in accordance with Article 140(1) of the Treaty); Brussels, 12.5.2010 COM(2010) 238 final (30 pages)



Commission staff working document accompanying the Convergence Report 2010; Brussels, 12.5.2010 SEC(2010) 598 final (197 pages)




Ralf Grahn