The corrective arm of the Stability and Growth Pact (SGP) is concerned with the procedure to be followed if a country's public finances fall outside the requirements of the Treaty. It is based on Article 126 of the Treaty and implemented through Council Regulation (EC) No 1467/97 of 7 July 1997(33) on speeding up and clarifying the implementation of the excessive deficit procedure. Article 126 specifies that Member States shall avoid excessive government deficits and defines the criteria according to which compliance with budgetary discipline should be examined in terms of whether the ratio of the planned or actual deficit to gross domestic product or the ratio of government debt to gross domestic product exceed respective reference values. Both these conditions are subject to further specification. In the case of the deficit, a ratio that has declined substantially and continuously and reached a level close to the reference value, or one where the excess over the reference value is only exceptional and temporary and results in a ratio still close to the reference value, need not be classified as a breach. In the case of the debt, a sufficiently diminishing debt ratio which approaches the reference value at a satisfactory pace, could also be in line with the requirements of the Treaty. The references values are given in Protocol 12 on the Excessive Deficit Procedure (EDP) as 3% of GDP for the deficit and 60% of GDP of the debt.
According to the Treaty, the Commission prepares a report if a Member State does not fulfil the requirements specified under either the deficit or debt criteria. The Commission report should take into account the other relevant factors. Following an opinion by the Economic and Financial Committee, the Commission can address an opinion to the country in question if it considers that an excessive deficit exists. On the Commission's proposal, the Council decides whether an excessive deficit exists and where it finds that one does, it adopts recommendations under Article 126(7) addressed to the Member State in question to take action and put an end to
(33) In 2005, Council Regulation 1467/97 (OJ L 209, 2.8.1997) was amended by Council Regulation (EC) No 1055/2005 of 27 June 2005.
the excessive deficit in a given time period, on the basis of a Commission recommendation.
In case of failure to put the recommendations into practice, the following steps of the procedure differ between euro area and non euro area Member States. Specifically, a new recommendation under Article 126(7) can be issued to non euro area Member States, whereas euro area Member States are, based on a Commission recommendation, given notice by the Council to take measures for the deficit reduction, in accordance with Article 126(9). Only if the Member State does not comply even with this notice does the Council impose sanctions, again on the basis of a Commission recommendation. (34) To date, sanctions have never been applied, as this step has never been reached, i.e., the Council has not adopted any decision establishing that inadequate action has been taken to comply with an notice under Article 126(9).
Regulation (EC) No 1467/97 specifies the implementing provisions for the excessive deficit procedure. In particular, it specifies the factors to be taken into account and the mechanism for doing so in the various stages of the EDP, the timetable to be followed in the different steps, the minimum correction to be required of countries where an excessive deficit has been found, the conditions for abeyance and abrogation and the specifications for how the sanctions are to be applied. However, only the deficit criterion is specifically referred to and no explicit provisions are made for the application of the debt criterion. In this way, while the caveats on the deficit criterion are clarified, there is no definition in the legislation of how a "sufficiently diminishing and approaching reference value at satisfactory pace" debt level is to be judged. In the same way, while the level of sanctions to be imposed in the case of deficit overrun are set out in
(34) In particular, the Council should immediately take a decision to require a non-interest-bearing deposit, but can decide to supplement the deposit by other sanctions envisaged in Article 126(11) of the Treaty. If the Member State continues to fail to take effective action the deposit is increased. The deposit is transformed into a fine if two years after its imposition the situation of excessive deficit is not yet corrected. Specifically, the Council can require the Member State concerned to publish additional information before issuing bonds and securities and invite the European Investment Bank to reconsider its lending policy towards it.
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detail in the secondary legislation, no analogous clarification is made in the cases of debt overruns. Although the lack of specification about the interpretation of the debt criterion is not a legal barrier to its application, it has nonetheless been the case that in absence of an agreed interpretation no EDPs have been opened on the basis of the debt criterion since the introduction of the SGP. As illustrated in Chapter I.1, average government debt in EU has hovered around the 60% of GDP threshold since the introduction of the euro. Graph II.3.1 shows the evolution of government debt ratios from 2000 to 2007 for all EU countries which had debt above 60% at some point during that period. As can be seen ten Member States were in this position, of which seven were members of the euro area at the time. (35) Despite the fact that a number of countries had instances of either increasing and/or very slowly declining high debt, no EDPs were opened either exclusively on the debt criterion.
At the time of the Maastricht Treaty, when it was thought the deficit and debt thresholds were established, in principle, adherence to the deficit criterion should have been sufficient to ensure that the debt-to-GDP ratio was on a declining path for
(35) Malta and Cyprus joined the single currency in 2008 and
Hungary is not a member.
countries with a ratio above 60%. A nominal GDP growth rate of 5% means that a 3% of GDP deficit is consistent with debt converging to 60% of GDP, in the absence of other operations that affect the debt but not the deficit – so called "below-the-line" operations. As the 3% threshold is a limit and not an average, even a lower nominal growth rate should be consistent with debt falling if the deficit criterion in the Treaty is adhered to. Overall, until 2008, the EDP has functioned relatively well in keeping headline deficits below 3% of GDP and fostering, in most cases, a rapid correction when breaches of the 3% level have occurred. Nevertheless, it is clear that this has not been sufficient to push debt ratios on a steadily declining path. Besides an unsatisfactory reduction of deficits in goods times, in turn increasing the frequency of breaches of the 3% threshold in bad times, two factors help explain the lack of progress in reducing debt ratios: below-the-line operations, instead of averaging zero over time as one could have a priori expected, have had a consistently debt-increasing effect; the growth rate of the EU economies has been trending down, making the assumption of a nominal GDP growth rate of 5% look increasingly optimistic.
Graph II.3.1: General government debt as % of GDP, 2000-2007, countries over the 60% threshold
40 50 60 70 80 90 100 110 120 2000 2001 2002 2003 2004 2005 2006 2007 BE DE EL FR IT CY HU MT AT PT EL IT PT BE FR DE HU MT AT CY
Part II Evolving budgetary surveillance