Excessive Deficit Procedure: European Commission Examines 5 Member States

By: Information Daily Staff Writer
Published: Thursday, January 12, 2012 - 14:04 GMT Jump to Comments

The Excessive Deficit Procedure (EDP) is established in the EU Treaty (Article 126) to ensure that Member States correct gross fiscal policy errors. There are two key reference values: one for the general government deficit (3% of GDP) and one for gross government debt (60% of GDP). The various steps of the EDP are listed in the Treaty and specified further in the Stability and Growth Pact (SGP) legislation - an essential element of substantial reform that reinforces economic governance, including the EU fiscal framework. On 13 December 2011, a new set of rules entered into force; they are often referred to as the "six-pack", as it consists of five regulations and one directive (MEMO/11/898).

The new rules affect both the preventive arm of the SGP - the procedures to promote surveillance and coordination of economic policies and ensure that excessive deficits are avoided - and the corrective arm of the pact, the EDP. New enforcement mechanisms, including, in particular, financial disincentives and fines, were drawn up for non-compliant euro-area Member States in order to make the SGP more effective.

Currently, 23 out of the 27 EU Member States are subject to an EDP (except Estonia, Finland, Luxemburg and Sweden). Thus the new rules on the corrective arm of the SGP are of particular importance.

What are the changes with regard to the Excessive Deficit Procedure?

Better enforcement

A non-interest-bearing deposit of 0.2% of GDP would, as a rule, be requested from a euro area country that is newly placed in EDP. On a recommendation by the Commission, a decision to impose this sanction would be adopted by the Council unless a qualified majority of Member States were to vote against it. This is the so-called "reverse qualified majority" voting procedure, which makes the enforcement of the EDP "semi-automatic".

When a euro area Member States is already subject to an EDP and the Council decides, under Art. 126(8) of the Treaty, that this Member State has not taken effective action to correct its excessive deficit in response to the recommendation by the Council (under Article 126(7) of the Treaty), a fine of 0.2% of GDP is imposed as a rule by the Council on the basis of a Commission recommendation. This decision is also subject to "reverse qualified majority" voting 1.

EU Member States that are not part of the euro area do not face sanctions in the form of a financial deposit or a fine under the six-pack. But for beneficiaries of the Cohesion Fund (some of which are non-euro area countries), failure to comply with the recommendations under the excessive deficit procedure may lead to the suspension of Cohesion Fund commitments.

Debt criterion

The high debt-to-GDP-ratios reached in many Member States, even before the crisis, showed that the EDP had not been effective in curbing debt development. The reform thus introduced new provisions regarding the debt criterion of the Stability and Growth Pact. It is now possible to open an EDP on the basis of the debt criterion. A Member State can be put in EDP if the gap between its debt level and the 60% of GDP reference is not reduced by 1/20th annually (on average over three years) – even if the deficit of the country concerned is below 3% of GDP. The decision is taken after assessing all relevant factors and particularly taking into account the influence of the cycle on the pace of debt reduction.

Member States in EDP before the six-pack was adopted are granted a three-year period for meeting the "1/20th-debt-rule", following the correction of the excessive deficit. Nevertheless, they must show sufficient progress towards compliance.

Why are Belgium, Cyprus, Hungary, Malta and Poland assessed now?

A comprehensive assessment of budgetary implementation in the context of the ongoing EDPs was carried out on the basis of the Commission's 2011 Autumn Forecast, which was published on 10 November 2011. Of the 23 Member States currently in EDP, five are, or were, benefitting from a financial assistance programme2. Budgetary developments in the programme countries are to be reviewed against the provisions of the respective programme documents.

For the other 18 countries, the Commission assessed the state of implementation of the respective Council recommendations under Article 126(7). This showed that, in some countries, policies pointed to good progress towards a timely and sustainable correction of the excessive government deficit. However, in some countries a timely and sustainable correction was clearly at risk. These Member States were specifically Belgium, Cyprus, Hungary, Malta and Poland, where the deadline for correcting the excessive deficit has been 2011 or 2012. In four out of these five countries - Hungary, Poland, Belgium and Cyprus - the fiscal effort as adopted by the cut-off date of the Commission's 2011 Autumn Forecast (24 October 2011) was concluded to have fallen short of the effort recommended by the Council, unless further measures were taken. In the case of Malta and Hungary, where the deadline for correcting the excessive government deficit was 2011, it was found that unless further measures were taken to keep the government deficit below 3% of GDP in 2012 and 2013 the general government deficit would not be corrected in a sustainable manner.

What was the response…

…by the European Commission?

In view of this assessment and the imminent upgrade of the common rules of budgetary surveillance, on 11 November 2011, Vice-President Olli Rehn, responsible for Economic and Monetary Affairs and the Euro, addressed letters to the Member States concerned. They were called upon to treat, as a matter of urgency, the adoption of a 2012 budget and/or additional measures that ensure a timely and sustainable correction of the excessive deficit, as the new rules of economic governance would be implemented rigorously from the very first day they enter into force (ie. from 13 December 2011). It was pointed out that in the absence of corrective measures, further steps under the EDP, with the possibility provided by the six-pack of prompting sanctions, would become unavoidable.

… by the Member States concerned?

Since mid-November, all five Member States adopted and/or publically announced binding measures, which were taken into account until 10 January 2012. In the case of Belgium, Cyprus, Malta and Poland, these additional measures are considered sufficient to bring the correction of the excessive deficit back on track, in line with the Council’s recommendations. However, while additional efforts have also been taken in Hungary, the Commission's assessment shows that these efforts are still not sufficient.

Country-specific overview

Belgium

In December 2009, the Council recommended that Belgium bring the deficit below 3% of GDP. According to the Commission's 2011 Autumn Forecast, the general government deficit was expected at 3.6% of GDP in 2011 and, assuming that no further measures were taken, at 4.6% of GDP in 2012 and 4.5% of GDP in 2013.

After the cut-off date of the 2011 Autumn Forecast, the Belgian Government reached an agreement on its 2012 budget proposal, which was formally submitted to Parliament on 21 December 2011. Based on the Commission's assessment of the measures publically announced by the Belgian authorities by 9 January 2012, the general government deficit is projected at 2.9% of GDP in 2012 and 2¾% of GDP in 2013.

In view of this assessment, the Commission considers that no further steps in the excessive deficit procedure of Belgium are needed at present.

Cyprus

In July 2010, the Council recommended that Cyprus bring the government deficit below 3% of GDP by 2012. According to the Commission's 2011 Autumn Forecast, the general government deficit was expected at 6.7% of GDP in 2011 and at 4.9% of GDP in 2012, and, assuming that no further measures were taken, at 4.7% of GDP in 2013.

After the cut-off date of the 2011 Autumn Forecast, the Cypriot Parliament, on 16 December 2011, adopted the 2012 Budget Law and an additional consolidation package. Based on its assessment of the 2012 budget and the accompanying measures, the Commission now foresees the general government deficit to decline to 2.7% of GDP in 2012 and 1.8% of GDP in 2013.

In view of this assessment, the Commission considers that no further steps in the excessive deficit procedure of Cyprus are needed at present.

Hungary

In July 2009, the Council recommended Hungary to bring the deficit below 3% of GDP by 2011 in a sustainable manner. According to the Commission's 2011 Autumn Forecast, Hungary was expected to reach a surplus of 3.6% of GDP in 2011 thanks to temporary measures. Assuming that no additional consolidation steps were taken, the budgetary outcome would swing into deficit again in 2012, estimated at 2.8% of GDP, including measures of a temporary nature, and reach 3.7% of GDP in 2013.

The 2012 budget (approved after the cut-off date of the 2011 Autumn Forecast) included additional expenditure and revenue measures compared to the draft. Moreover, the Hungarian authorities further specified their structural reform programme and adopted additional consolidation measures on 15 December 2011. On the same day, an agreement was concluded between the government and the banking sector on how to share the burden stemming from the support schemes for distressed mortgage borrowers.

Based on the Commission's assessment of these measures, on top of the 2011 Autumn Forecast, the general government deficit is projected at 2¾% of GDP in 2012 and 3¼% of GDP in 2013, even without taking into account the possible negative effects of a worsening in the macroeconomic scenario and the elevated level of yields.

Thus, the excessive deficit cannot be considered corrected in a sustainable manner.

Therefore, the Commission adopted a recommendation for a Council decision under Article 126(8) of the Treaty establishing that no effective action has been taken in response to the Council recommendation of July 2009. At a later stage, subject to the Council's adoption of the recommended decision on no effective action, the Commission will adopt for Hungary a recommendation for a new Council recommendation under Article 126(7) of the EU Treaty with a view to bringing to an end the situation of an excessive deficit. This decision shall be taken by the Council within two months of the Council decision establishing that no effective action has been taken.

Malta

In February 2010, the Council recommended that Malta brings the deficit below 3% of GDP by 2011. According to the Commission's 2011 Autumn Forecast the general government deficit was estimated at 3% of GDP in 2011 and, assuming that no further measures were taken, the deficit was projected to widen to 3.5% of GDP in 2012 and further to 3.6% of GDP in 2013.

After the cut-off date of the 2011 Autumn Forecast, the Maltese government adopted its 2012 budget draft on 14 November 2011. Based on the Commission's assessment of the budget, the general government deficit projections are updated to 2.6% of GDP in 2012 and 2.9% of GDP in 2013.

In view of this assessment, the Commission considers that no further steps in the excessive deficit procedure of Malta are needed at present.

Poland

In July 2009, the Council recommended that Poland brings the deficit below 3% of GDP in a credible and sustainable manner by 2012. According to the Commission's 2011 Autumn Forecast, the general government deficit was expected at 5.6% of GDP in 2011 and at 4.0% of GDP in 2012 and, assuming that no further measures were taken, at 3.1% of GDP in 2013.

After the cut-off date of the 2011 Autumn Forecast, the new Polish Government adopted a revised 2012 Budget Law on 8 December 2011. Based on the Commission's assessment of the revised budget, the general government deficit is projected at 3.3% of GDP in 2012 and 2.6% of GDP in 2013. In the case of Poland, the assessment in the context of the EDP needs to take into account the provisions of the "six-pack" pertaining to the budgetary impact of systemic pension reforms3.

In view of this assessment, the Commission considers that no further steps in the excessive deficit procedure of Poland are needed at present.

When will the other EU Member States be assessed?

The Commission will continue to monitor budgetary implementation in all Member States currently in EDP, including the five countries concerned by the current communication. The next comprehensive assessment will be made in the context of the Commission's 2012 Spring Forecast, which will be published in May 2012.

Is further strengthening regarding the Excessive Deficit Procedure foreseen?

On 23 November 2011, the European Commission tabled a proposal for two new regulations to further strengthen fiscal surveillance in the euro area. For euro area Member States in the EDP, the planned rules introduce a new system of graduated monitoring. If adopted by the Council, this would also regularly provide the Commission with the information needed to judge whether or not there is a risk of non-compliance with the deadline to correct the excessive deficit. If this should be the case, the Commission would address a recommendation to the Member State in question (MEMO/11/822).

1 : Also under the next step in EDP for a euro area Member State, namely a Council notice under Article 126(9), any further decision under Art. 126(8) that no effective action was taken would trigger the same procedure. However, sanctions under Article 126(11) would be adopted by qualified majority voting, excluding the Member State concerned.

2 : These countries are Greece, Ireland, Portugal, Romania and Latvia. The balance of payment programme (BoP) for Latvia expires on 20 January 2012.

3 : Notably, in case the excess of the deficit over the reference value of 3% of GDP includes the effects of such a pension reform, the full net direct cost of the reform to the public budget will be taken into account provided certain criteria are fulfilled.

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