EU: Can expansionary budgets save us from hardship?

Should Europe spend its way out of gloom and ever slowing growth? Are there real alternatives to the so called austerity measures, actually efforts to reduce government borrowing and eventually total debt to sustainable levels?


EU government deficits

According to Eurostat, the 2010 total government deficit in the European Union was EUR 805,008 million, or 6.6 per cent of the gross national product (GDP), while 3% is the maximum prescribed by the stability and growth pact (SGP):

In 2010 the largest government deficits in percentage of GDP were recorded in Ireland (-31.3%), Greece (-10.6%), the United Kingdom (-10.3%), Portugal (-9.8%), Spain (-9.3%), Latvia (-8.3%), Poland (-7.8%), Slovakia (-7.7%), France (-7.1%), Lithuania (-7.0%) and Romania (-6.9%). The lowest deficits were recorded in Luxembourg (-1.1%), Finland (-2.5%) and Denmark (-2.6%). Estonia and Sweden (both 0.2%) registered a slight government surplus in 2010. In all, 21 Member States recorded an improvement in their government balance relative to GDP in 2010 compared with 2009, five a worsening and one remained unchanged.

EU government debt levels

The debt level allowed under the SGP is 60 per cent of GDP. At EUR 9,806,372 million, or 80.2 per cent of GDP, the EU was way above the level allowed by the SGP:

At the end of 2010, the lowest ratios of government debt to GDP were recorded in Estonia (6.7%), Bulgaria (16.3%), Luxembourg (19.1%), Romania (31.0%), the Czech Republic (37.6%), Lithuania (38.0%), Slovenia (38.8%) and Sweden (39.7%). Fourteen Member States had government debt ratios higher than 60% of GDP in 2010: Greece (144.9%), Italy (118.4%), Belgium (96.2%), Ireland (94.9%), Portugal (93.3%), Germany (83.2%), France (82.3%), Hungary (81.3%), the United Kingdom (79.9%), Austria (71.8%), Malta (69.0%), the Netherlands (62.9%), Cyprus (61.5%) and Spain (61.0%).

Budget hawks?

Let us pick two countries perceived as budget hawks by many:

With a government deficit of 10.3% the United Kingdom was firmly ensconced between the bailout cases. The UK debt level was 79.9% of GDP in 2010.

Germany, the reference country for eurozone sovereign debt, ran a public deficit of 4.3% of GDP and its debt level had climbed to 83.2%.


Avoiding hardship?

Keynesian stimulus would be welcome to avert hardship and recession, but the coffers are empty and the markets are shedding government bonds, driving up borrowing costs to ruinous levels. We are only one step away from a sovereign debt stampede.

The historic facts (2010) do not take ongoing and future consolidation efforts into account, but my sad conclusion is that the government hovercrafts are unsustainable in the present circumstances.

Austerity is less evil than disaster.



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

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: Excessive government deficits V

What, if anything, has been said about the amendments in Article 126 of the Treaty on the Functioning of the European Union (TFEU) with regard to excessive government deficits? Let us look at some legal materials.

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Statewatch

Professor Steve Peers covered the Treaty of Lisbon in a number of Statewatch Analyses. ‘EU Reform Treaty Analysis no. 3.4: Revised text of Part Three, Titles VII to XVII of the Treaty establishing the European Community (TEC): Other internal EC policies’ (Version 2, 24 October 2007) includes the current Title VII Economic and monetary policy.

Peers presented the text of Article 104 TFEU (ToL), to be renumbered Article 126 TFEU in the consolidated version, and highlighted the changes. He offered the following comment (page 10):

“The Commission has enhanced power to give warnings and to make a proposal instead of a recommendation in one case (this makes it harder for the Council to change the Commission’s proposal).”

The analysis 3.4 and other useful Statewatch analyses are available through:

http://www.statewatch.org/euconstitution.htm


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FCO

The Foreign and Commonwealth Office (FCO) offers a convenient source of brief annotations on Lisbon Treaty amendments in ‘A comparative table of the current EC and EU treaties as amended by the Treaty of Lisbon’ (Command Paper 7311, published 21 January 2008). It offers the following comment on Article 126 TFEU, Article 104 TFEU (ToL) in the original Lisbon Treaty (page 12):

“Draws on Article 104 TEC. Main new elements in the excessive deficit procedure are
─ the Commission opinion is to be issued to the Member State concerned and the Council is to be informed
─ paragraph 13 change to majority required for decision-making.”

The FCO comparative table is available at:

http://www.official-documents.gov.uk/document/cm73/7311/7311.asp

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House of Commons Library

The UK House of Commons Library Research Paper 07/86 ‘The Treaty of Lisbon: amendments to the Treaty establishing the European Community’ (published 6 December 2007) discussed ‘H. Economic and Monetary Policy’ on pages 61 to 64. Article 104 TFEU (ToL) is described on page 62:

“Article 104 (Constitution Article III-184) covers excessive deficits. As in the Constitution, Article 104(5) (III-184(5)) has been changed to the effect that, if the Commission considers that an excessive deficit has occurred or may occur, it can address an opinion directly to the Member State concerned and inform the Council. Previously, the Commission would address this opinion to the Council. Article 104(7) (Constitution Article III-184(6)) adds that when an excessive deficit is established by the Council, recommendations to correct this will be brought forward without “undue delay”. Council decisions relating to Member States will be made without the vote of the Member State concerned (sub-paragraph 13) by a qualified majority.”

The Research Paper added the following useful comment on page 64:

“While the IGC did not agree on a new Stability and Growth Pact, a Conference Declaration regarding the Pact was annexed to the Treaty (“Declaration on Article 104 of the Treaty on the Functioning of the European Union”), in which the Conference confirms that the Pact is an “important tool” in the Union’s economic and fiscal policy and “reaffirms its commitment to the provisions concerning the Stability and Growth Pact as the framework for the coordination of budgetary policies in the Member States”.”

The Library Research Paper 07/86 is available at:

http://www.parliament.uk/commons/lib/research/rp2007/rp07-086.pdf

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House of Lords

I found nothing on Article 104 TFEU (ToL) or 126 TFEU in the House of Lords European Union Committee report ‘The Treaty of Lisbon: an impact assessment, Volume I: Report’ (HL Paper 62-I, published 13 March 2008).

The report is available at:

http://www.publications.parliament.uk/pa/ld200708/ldselect/ldeucom/62/62.pdf


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The following post is going to present additional legislative materials on Article 126 TFEU.


Ralf Grahn

EU: Excessive government deficits IV

What does the EU Lisbon Treaty say about excessive government deficits? Let us take a look at our legal materials.

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The current Treaty establishing the European Community (TEC) was to become the Treaty on the Functioning of the European Union (TFEU), and generally the innovations as agreed in the 2004 IGC were to be inserted into the Treaty by way of specific modifications ‘in the usual manner’ (points 17 and 18, pages 6 and 7).

I found nothing specific in the mandate of the intergovernmental conference (IGC 2007 Mandate, Council document 11218/07, 26 June 2007) about Article 104 TEC or excessive government deficits.

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In Article 2, point 90 of the original Treaty of Lisbon (ToL) the IGC 2007 agreed on the following concerning Article 104 TEC (OJ 17.12.2007 C 306/71─72):

EXCESSIVE DEFICIT PROCEDURE

90) Article 104 shall be amended as follows:

(a) paragraph 5 shall be replaced by the following:

‘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 and shall inform the Council accordingly.’;

(b) in paragraph 6, the word ‘recommendation’ shall be replaced by ‘proposal’;

(c) in paragraph 7, the first sentence shall be replaced by ‘Where the Council decides, in accordance with paragraph 6, that an excessive deficit exists, it shall adopt, without undue delay, on a recommendation from the Commission, recommendations addressed to the Member State concerned with a view to bringing that situation to an end within a given period.’;

(d) in the introductory words of the first subparagraph of paragraph 11, there is a change to the French which does not affect the English version;

(e) in paragraph 12, at the beginning of the first sentence, the words ‘its decisions’ shall be replaced by ‘its decisions or recommendations’;

(f) paragraph 13 shall be replaced by the following:

‘13. When taking the decisions or recommendations referred to in paragraphs 8, 9, 11 and 12, the Council shall act on a recommendation from the Commission.

When the Council adopts the measures referred to in paragraphs 6 to 9, 11 and 12, it shall act without taking into account the vote of the member of the Council representing the Member State concerned.

A qualified majority of the other members of the Council shall be defined in accordance with Article 205(3)(a).’;

(g) in paragraph 14, third subparagraph, the words ‘, before 1 January 1994’ shall be deleted.

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The TFEU table of equivalences confirms that Article 104 TFEU (ToL) in the original Treaty of Lisbon was to be renumbered Article 126 TFEU in the consolidated version, under the title ‘Economic and monetary policy’, renumbered Title VIII (OJ 17.12.2007 C 306/211─212).

(In the consolidated version of the Lisbon Treaty, OJ 9.5.2008 C 115, the Tables of equivalences start on page 361, but the ToL numbers have been omitted.)

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Consolidated Lisbon Treaty

Article 126 of the Treaty on the Functioning of the European Union (TFEU) is found in the consolidated versions of the Treaty on European Union and the Treaty on the Functioning of the European Union, published in the Official Journal of the European Union, OJ 9.5.2008 C 115/99─102:

Part Three Union policies and internal actions

Title VIII Economic and monetary policy

Chapter 1 Economic policy

Article 126 TFEU
(ex Article 104 TEC)

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 with a view to identifying 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:

— either the ratio has declined substantially and continuously and reached a level that comes close to the reference value,

— 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 sufficiently diminishing and approaching the reference value at a satisfactory pace.

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

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 and shall inform the Council accordingly.

6. The Council shall, on a proposal from the Commission, and having considered any observations which the Member State concerned may wish to make, decide after an overall assessment whether an excessive deficit exists.

7. Where the Council decides, in accordance with paragraph 6, that an excessive deficit exists, it shall adopt, without undue delay, on a recommendation from the Commission, recommendations addressed to the Member State concerned with a view to bringing that situation to an end within a given period. Subject to the provisions of paragraph 8, these recommendations shall not be made public.

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

9. If a Member State persists in failing to put into practice the recommendations of the Council, the Council may decide to give notice to the Member State to take, within a specified time limit, measures for the deficit reduction which is judged necessary by the Council in order to remedy the situation.

In such a case, the Council 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. The rights to bring actions provided for in Articles 258 and 259 may not be exercised within the framework of paragraphs 1 to 9 of this Article.

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

— to require the Member State concerned to publish additional information, to be specified by the Council, before issuing bonds and securities,

— to invite the European Investment Bank to reconsider its lending policy towards the Member State concerned,

— to require the Member State concerned to make a non-interest-bearing deposit of an appropriate size with the Union until the excessive deficit has, in the view of the Council, been corrected,

— to impose fines of an appropriate size.

The President of the Council shall inform the European Parliament of the decisions taken.

12. The Council shall abrogate some or all of its decisions or recommendations referred to in paragraphs 6 to 9 and 11 to the extent that the excessive deficit in the Member State concerned has, in the view of the Council, been corrected. If the Council has previously made public recommendations, it shall, as soon as the decision under paragraph 8 has been abrogated, make a public statement that an excessive deficit in the Member State concerned no longer exists.

13. When taking the decisions or recommendations referred to in paragraphs 8, 9, 11 and 12, the Council shall act on a recommendation from the Commission.

When the Council adopts the measures referred to in paragraphs 6 to 9, 11 and 12, it shall act without taking into account the vote of the member of the Council representing the Member State concerned.

A qualified majority of the other members of the Council shall be defined in accordance with Article 238(3)(a).

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

The Council shall, acting unanimously in accordance with a special legislative procedure and after consulting the European Parliament and the European Central Bank, adopt the appropriate provisions which shall then replace the said Protocol.

Subject to the other provisions of this paragraph, the Council shall, on a proposal from the Commission and after consulting the European Parliament, lay down detailed rules and definitions for the application of the provisions of the said Protocol.

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Proposal from the Commission

The difference between a proposal and a recommendation is more than semantic.

Here is a reminder of the significance of a proposal from the Commission, as laid out in the Treaty of Lisbon (consolidated version, OJ 9.5.2008 C 115/173):

Article 293 TFEU
(ex Article 250 TEC)

1. Where, pursuant to the Treaties, the Council acts on a proposal from the Commission, it may amend that proposal only by acting unanimously, except in the cases referred to in paragraphs 10 and 13 of Article 294, in Articles 310, 312 and 314 and in the second paragraph of Article 315.

2. As long as the Council has not acted, the Commission may alter its proposal at any time during the procedures leading to the adoption of a Union act.

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The following post is going to take a look at some comments concerning Article 126 TFEU.


Ralf Grahn