Pasivos laborales

Since spring 2007, the Commission and the Council took action on seven Member States subject to an excessive deficit procedure (EDP). Proceeding in a chronological order, in July 2007, the Council endorsed the Commission communication on action taken for Hungary stating that the measures adopted by this country were considered consistent with the Council recommendation under Article 104(7). As a consequence, no further steps were needed under the excessive deficit procedure.

Furthermore, in July 2007 the Council considered that the Czech Republic had not respected the recommendations formulated under Article 104(7) of the Treaty. As the Czech Republic is a Member State with a derogation,

In September 2007, the Commission considered that the United Kingdom had corrected its excessive deficit. It recommended to the Council to decide to abrogate the excessive deficit procedure for the United Kingdom, which was adopted by the Council in October 2007.

In December 2007, the Council adopted the Commission communication on action taken for Poland stating that the measures implemented by the authorities were consistent with the Council recommendation under Article 104(7). As a consequence, no further steps were needed under the excessive deficit procedure.

Additionally, in May 2008, the Commission assessed that the Czech Republic, Italy, Portugal and Slovakia had corrected their excessive deficits and recommended to the Council the abrogation of the respective excessive deficit procedures. In June 2008, the Council decided accordingly.

In June 2008 the Commission considered that Poland had corrected its excessive deficit and recommended to the Council to abrogate the Polish excessive deficit procedure. The ECOFIN Council meets on 8 July 2008, after the cut-off date, of this report. If the Council decides to close the procedure for Poland, only Hungary will still be in excessive deficit. At the same time, however, it has to be noted that in June 2008 the Commission adopted a report under Article 104(3) of the Treaty initiating the excessive deficit procedure for the United Kingdom (see Table II.2.1) (2_{), which may lead}

to a formal decision that the country is in excessive deficit.

(1_{) Recently acceded Member States went straight into Stage}

Three of EMU, with the status of 'Member State with a derogation' within the meaning of Article 122 EC. Currently, the Member States with a derogation are Bulgaria, the Czech Republic, Estonia, Latvia, Lithuania, Hungary, Poland, Romania, Slovakia and Sweden. (2_{) For documents concerning EDP procedures, see the}

fiscal surveillance section on DG ECFIN's website: http://ec.europa.eu/economy_finance/sg_pact_fiscal_poli cy/excessive_deficit9109_en.htm

Box I.2.1: EU budgetary surveillance

This box describes the enforcement mechanisms of the EU budgetary surveillance framework. It outlines

the excessive deficit procedure, the early warning mechanism and the Commission policy advice.

The excessive deficit procedure

Article 104 of the Treaty states that Member States shall avoid excessive government deficits. In particular Member States shall comply with budgetary discipline by respecting two criteria specified in the Protocol on the excessive deficit procedures annexed to the Treaty: a deficit ratio and a debt ratio not exceeding reference values of respectively 3% and 60% of GDP. Article 104 also sets out the procedure to be followed to identify and correct situations of excessive deficit, and voting modalities in the course of the procedure. The Regulation 1467/97 of the Stability and Growth Pact (SGP), as amended by Council Regulation 1056/05, clarifies the procedure.

The first four steps of the procedure, corresponding to provisions of paragraph 3 to 6 of Article 104, concern the identification of situations of excessive deficit. The excessive deficit procedure is triggered

if the deficit of a Member State exceeds 3% of GDP (1_{). In such a situation, the Commission adopts a}

report, in accordance with Article 104(3), reviewing in detail the economic and budgetary situation the Member State considered. As foreseen in Article 104(4) and Regulation 1467/97, the Economic and Financial Committee formulates an opinion on this report within two weeks. The Commission takes this opinion into account and, if it considers that an excessive deficit exists, addresses an opinion under Article 104(5) to the Council. On the basis of the Commission opinion, the Council decides on the existence of an excessive deficit under Article 104(6).

The subsequent steps of the procedure are dedicated to the correction of excessive deficits. When it decides that an excessive deficit exists, the Council addresses a recommendation to the Member State concerned in accordance with Article 104(7). In this recommendation, the Council sets a deadline for the Member State to correct the excessive deficit and a fiscal effort to be achieved by the Member States concerned to this end (at least 0.5% of GDP as a benchmark). Regulation 1467(97) specifies that the deadline for the correction of the excessive deficit shall be set taking into account an overall assessment of the factors mentioned in the Article 104(3) of the Treaty.

In case action by the Member State concerned leads to the correction of the excessive deficit, the Council shall decide, in accordance with Article 104(12), to abrogate its decisions under the excessive deficit procedure. In other words, the procedure is closed. In the event the Council considers that effective action has not been taken, it may decide, as stated in Article 104(8) of the Treaty, to make public its recommendation according to 104(7). In case effective action has been taken but events outside the control of the government with large adverse consequences on the budget prevent the correction of the excessive deficit within the time limits set by the Council, the possibility exists to revise the deadline for the correction of the excessive deficit in a new 104(7) recommendation.

The steps described above apply to all EU countries. The further steps of the procedure depend on whether the Member State is a euro-area Member State. The excessive deficit procedure applies in full to euro-area Member States. For these countries, Article 104(9) stipulates that, provided the Council adopts a decision under article 104(8), it may decide to give notice to the Member State concerned to

(1₎

Article 104(2) of the Treaty states that a deficit of more than 3% of GDP that is only exceptional and temporary may not be considered excessive in case the deficit remains close to the reference value. A deficit above 3% of GDP may also not be considered excessive if it has declined substantially and reached a level that comes close to the reference value. The same Article provides an exception for countries having a debt ratio above 60%, if this ratio diminishes sufficiently and approaches the value of 60% of GDP at a satisfactory pace.

Box (continued)

take the necessary measures to reduce the deficit. The recommendations under article 104(9) of the Treaty shall include a deadline for the correction of the excessive deficit and a fiscal effort to be achieved by the Member States concerned to this end (at least 0.5% of GDP as a benchmark).

This step constitutes a move towards even closer surveillance, and is the ultimate step before the possible imposition of sanctions. If the Member State fails to comply with the recommendations, the Council may decide to impose sanctions no later than two months after notice has been given. In case of compliance with the recommendations formulated in the notice under article 104(9), the decisions taken under articles 104(6) to 104(9) are abrogated with a Council decision in accordance with article 104(12), and the procedure is closed. In case effective action has been taken but events outside the control of the government with large adverse consequences on the budget prevent the correction of the excessive deficit within the time limits set by the Council, the possibility exists to revise the deadline for the correction of the excessive deficit in a new 104(9) notice.

As mentioned above, non-euro-area Member States are not exempt from the obligation to avoid excessive deficits, but the later steps of the EDP do not apply for them. When a Member States outside the euro area in a situation of an excessive deficit fails to respect the recommendations addressed under Article 104(7), it cannot be submitted to the last two steps of the excessive deficit procedure, namely notice foreseen in Article 104(9) and the imposition of sanctions foreseen in Article 104(11). Non- compliance with a recommendation under 104(7) may lead to a renewed recommendation according to Article 104(7), following a decision according to Article 104(8).

The early warning mechanism

In its Article 99(4) the Treaty foresees the possibility for the Council to make recommendations to Member States in case their economic policies ‘are not consistent with the broad guidelines or risk jeopardising the proper functioning of EMU’. Based on this Article, Regulation 1466/97 as amended by Council Regulation 1055/05, which codifies the preventive arm of the SGP, provides the Council with the possibility to issue ‘early warnings’ to Member States in order to prevent the occurrence of an

excessive deficit (1_{). The reference to the early warning comes in the section related to the adjustment}

path to the medium-term budgetary objective (MTO). The Commission policy advice

The 20 March 2005 ECOFIN Council report, which underpins the revised SGP, introduced the possibility for the Commission to issue direct, i.e. without involvement of the Council, policy advice to a

Member State. The so-called Code of Conduct (2_{) further specifies that the policy advice shall be given}

in accordance with Article 211, second indent, of the Treaty and that it shall be made public. The Commission policy advice can be used in a wide range of circumstances not limited to a deviation from budgetary targets. This includes cases in which a Member State's economic policies are not consistent with broad guidelines, delay progress towards sustainability or risk jeopardising the proper functioning of economic and monetary union. Such a broad application allows blending messages of structural reform needs, quality and long-term sustainability of public finances, addressing macroeconomic imbalances and budgetary consolidation. In general, the Commission policy advice differs from the early warning in at least three respects. Firstly, the policy advice reflects only the views of the Commission. Secondly, for a policy advice there is not necessarily a need to have identified a divergence from the

(1₎

Once the new Lisbon Treaty on European Union has entered into force, the Commission will also have the option to issue early warnings directly, without having to involve the Council.

(2₎

“Specifications on the implementation of the Stability and Growth Pact and guidelines on the format and content of stability and convergence programmes”, endorsed by the ECOFIN Council of 11 October 2005.

2.2.1. The surveillance mechanism in the euro-area Member States

Italy

On 23 May 2005, Eurostat released revised figures on Italian government data, showing a general government deficit of 3.1% of GDP in both 2003 and 2004. Over the same two years, the debt-to-GDP ratio was reported to have remained broadly stable at around 106-107% of GDP. On 24 May, the Italian nstitute of statistics released new public finances data for the period 2000-2004. The deficit was reported at 3.2% of GDP in 2003 and 2004 and thus above 3% of GDP in both years. Although the deficit ratio remained close to the reference value the breach could not be considered temporary because the Commission projected, in its spring 2005 forecast, the deficit to exceed 3% in 2005 and 2006. Taking also into consideration the developments in the debt ratio, the Council decided on 28 July 2005, following a recommendation by the Commission, that Italy had an excessive deficit. At the same time, the Council addressed a recommendation under Article 104(7) specifying that the excessive deficit had to be corrected by 2007. In particular, Italy was recommended to implement with rigour the 2005 budget; reduce the structural deficit by a minimum 1.6 percentage points of GDP by 2007 relative to its level in 2005, with at least half of this correction taking place in 2006; and ensure that the debt-to-GDP ratio diminishes and approaches the reference value at a satisfactory pace.

On 22 February 2006, after the six-month deadline for the authorities to take action, the Commission adopted a communication concluding that the actions taken by Italy, if fully implemented and effective, would be consistent with the Council recommendation. The Commission communication highlighted,

however, that implementation uncertainties persisted, requiring continuous monitoring. On 14 March 2006, the Council agreed with this analysis, stressing the utmost importance of the execution of the 2006 budget and the likely need to identify and implement substantial additional corrective measures for 2007.

Data provided by the Commission (Eurostat) following the reporting by Italy before April 2008 showed that a significant budgetary adjustment took place in 2006 and in 2007, when the general government deficit reached 3.4% and 1.9% of GDP, respectively.

The structural deficit, i.e. the budget balance net of cyclical factors and one-off measures, improved by 1.7% of GDP in 2006 and by about 1¼ percentage point in 2007. This exceeded by a comfortable margin the at least 1.6% of GDP between 2005 and 2007 required by the July 2005 Council recommendation under Article 104(7). According to the Commission services' spring 2008 forecast, the general government deficit is projected to increase to 2.3% of GDP in 2008 and, under the usual no-policy change assumption, to 2.4% of GDP in 2009.

The government debt ratio, which increased by 2% of GDP in 2005 and by a further ½ percentage point in 2006, fell by 2½ percentage points in 2007, to a level of 104% of GDP. According to the Commission services' spring 2008 forecast, the debt ratio is projected to fall to 103.2% of GDP by 2008 and, under the assumption of unchanged policies, around 102½% by 2009.

Overall, the Commission and the Council concluded that the excessive deficit situation in Italy had been corrected. Accordingly, on the basis of Article 104(12) of the Treaty, the Council decided on 3 June 2008 to abrogate its

Box (continued)

MTO or the adjustment path towards it and there is not necessarily a relation to the risk of an excessive deficit. Thirdly, even more than the early warnings, the policy advice is a forward-looking instrument.

decision on the existence of an excessive deficit in Italy.

Portugal

The update of the stability programme submitted on 9 June 2005 by the Portuguese authorities planned a general government deficit in excess of the 3% of GDP reference value for the years from 2005 to 2007. After a reported deficit outturn of 2.9% of GDP in 2004, Portugal projected a significant slippage in the government deficit, reaching 6.2% of GDP in 2005, 4.8% in 2006 and 3.9% in 2007, before falling below 3.0% of GDP in 2008. Over the same years, the debt-to-GDP ratio was projected to increase from 61.9% in 2004 to a peak of 67.8% in 2007. On this basis and following a recommendation by the Commission, the Council decided on 20 September 2005 that Portugal had an excessive deficit.

On the same date, the Council addressed a recommendation under Article 104(7) specifying that the excessive deficit had to be corrected by 2008. Specifically, Portugal was recommended to limit the deterioration of the fiscal position in 2005 and to ensure an adjustment of the structural deficit of 1.5% of GDP between 2005 and 2006, followed by a further decrease of, at least, ¾ percentage points in each of the two subsequent years; to rapidly implement reforms to contain and reduce expenditure and to stand ready to adopt the additional measures which might be necessary to achieve the correction of the excessive deficit by 2008; to ensure that the government gross debt ratio was brought onto a downward path also by avoiding debt-increasing financial transactions, and by considering carefully the possible impact on debt of major public investment projects.

The Commission communication of 21 June 2006, adopted after the six-month deadline for the authorities to take action, considered that the action taken by Portugal in response to the Council recommendation represented adequate progress towards the correction of the excessive deficit. In particular, Portugal (i) achieved a 2005 deficit outturn as planned; (ii) adopted a comprehensive package of corrective measures which, provided the full and effective implementation, was in line with the required

structural adjustment in 2006; (iii) confirmed the deficit target for 2008 below 3% of GDP and a structural adjustment path in accordance with the Council recommendation; (iv) implemented or initiated expenditure-containing measures and kept fiscal targets in spite of a more cautious assessment of GDP growth prospects; (v) planned to bring government debt back on a declining path as from 2008; and (vi) took action to improve the quality of public finance statistics. On 11 July 2006, the Council agreed with this analysis.

Data provided by the Commission (Eurostat) following the reporting by Portugal before 1 April 2008 indicate that the general government deficit in 2007 was 2.6% of GDP, following government deficit outturns of 6.1% of GDP in 2005 and 3.9% of GDP in 2006. In all, a government deficit below the 3% of GDP reference value was achieved one year before the deadline set by the Council in its recommendation under Article 104(7).

These developments led to a significant reduction of the structural deficit (i.e., the cyclically-adjusted deficit net of one-off and other temporary measures) in 2006 and 2007. In the former year, a reduction of some 2% of GDP was achieved, followed by a further decline by about 1% of GDP in the latter. These results went well beyond the Council recommendation under Article 104(7) asking for a reduction of the structural balance by 1.5% of GDP in 2006 from 2005 and, at least, ¾% of GDP in 2007.

According to the Commission services’ spring 2008 economic forecast the general government deficit is projected to decline to 2.2% of GDP in 2008 and, under the assumption of unchanged policies, to increase to 2.6% of GDP in 2009. The structural balance is expected to improve by a ¼% of GDP in 2008. At unchanged policies, a worsening by ¼% of GDP is projected for 2009. The government gross debt ratio rose above the 60% of GDP reference value in 2005. In 2006, the debt ratio went further up to 64.7% of GDP and fell back to 63.6% of GDP in 2007.

According to the Commission services' spring 2008 economic forecast, the government debt ratio is expected to rebound marginally to over 64% of GDP in 2008 and, on the basis of the no-

policy change assumption, to come at 64¼% of GDP in 2009.

Overall, the Commission and the Council concluded that the excessive deficit situation in Portugal had been corrected. Accordingly, on the basis of Article 104(12) of the Treaty, the Council decided on 3 June 2008 to abrogate its decision on the existence of an excessive deficit in Portugal.

2.2.2. The surveillance mechanism in the non-euro-area Member States

The Czech Republic

The Commission services' 2004 spring forecast revealed for the Czech Republic a deficit of 12.9% of GDP for 2003 (5.9% of GDP excluding a major one-off operation related to imputed state guarantees). On 5 July 2004, the Council decided, on the basis of a Commission recommendation, that the Czech Republic had an excessive deficit and issued a recommendation under Article 104(7) of the Treaty for its correction by 2008. The Czech authorities were recommended to implement with vigour the measures envisaged in the May 2004 convergence programme, in particular to cut the wage bill of central government and to reduce spending of individual ministries. Furthermore, they were invited to: (i) allocate higher-than-