Tag Archives: excessive deficit procedure

To Amend or Not to Amend? That is the Question

Today EU leaders will discuss a very important proposal put forward by France and Germany. It’s all about fiscal supervision and bail-outs, and the question is whether an amendment of the Treaties is necessary or not. Germany insists that a credible system of fiscal monitoring needs a credible sanctioning mechanism in order to keep EU Member States’ spending in check. To do that, Germany proposes the introduction of new texts in the Treaties. In exchange Germany would support a permanent bail-out mechanism. But it turns out that many are opposed to this proposal.

A number of media (EUobserver, Euractiv, FT’s brusselsblog) report that a number of Member states are very critical of the proposal. Viviane Reding has called the plans “irresponsible” and has been immediately reprimanded by France’s State Secretary in charge of European affairs, Pierre Lellouche. But that’s another story.

The important debate here is not whether an amendment is achievable in the medium term (it will probably be put to referendum in Ireland and possibly the UK and Denmark). The conceptual shift in the coordination of economic governance is where interests of Member States diverge.

Germany wants to impose strict fiscal discipline on all eurozone members, including the possibility of removing a Member State’s voting rights. But many argue that such budget austerity may not be the solution to the problem. George Soros himself has compared the proposals to the 1930s, where some countries became overly focused on balancing budgets during a depression. Other go further and note that it is Greece, in fact, which is bailing out Germany – in the form of an annual trade deficit that has averaged 5 billion euros, stimulating German jobs but destroying them in Greece. That is why many economists advocate for measures to stimulate demand in trade surplus countries – Germany, Netherlands, Denmark, etc.

Axel Weber, president of the German national bank, disagrees. He says that the proposal of raising wages to support domestic demand and reduce competitiveness neglects that wages are not a political control variable. Moreover, according to him simulation studies show that the effects would be confined almost entirely to the home economy in the form of changes in employment.

So who’s got it right? I’m not sure, and I am (thankfully) not an economist. But the German position will not be easy to defend unless it addresses the concerns about German policies that stimulate the aggregation of a trade surplus.

The Debate on Economic Governance Intensifies in the EU

The Van Rompuy task force on economic governance has produced its report that will be discussed during the European Council meeting on 28 October. According to Mr. Van Rompuy this will be the biggest reform of the Economic and Monetary Union since the euro was created.

The most important provision is about creating a mechanism for macro-economic surveillance. The mechanism will serve as an early warning system for detecting substantial macroeconomic imbalances, including strong divergences in competitiveness. The mechanism will operate for eurozone member states.

The second reform concerns the corrective arm of the Stability and Growth Pact. The debt criterion will carry much more weight when deciding on the excessive deficit procedure. According to Euractiv the task force has also endorsed plans for an interest-bearing fine on countries with high debts. The task force has also endorsed the European Semester for the coordination of budget planning.

The new proposals may need the revision of the Treaties. Le Figaro reports that France and Germany have agreed on such a revision in 2013 (hat tip: OpenEurope).

In summary, the report of the task force will generally repeat the proposals of the Commission on European economic governance. The big question, however, remains – will these proposals suffice to reverse current macroeconomic imbalances in the eurozone and the EU in general. Economists remain sceptical, and if we do not manage those imbalances, all other political measures will have only incremental value.

Strengthening of Eurostat Powers to Check National Accounts

We all know the background story – Greece had certain problems with its statistical data record, so to speak. Now the Council has adopted an amendment of the regulation on statistical data that is used by the Commission in the excessive deficit procedure. From now on the Commission service Eurostat will be entitled to have access to the accounts of government entities at central, state, local and social security levels, including the provision of underlying detailed accounting information, relevant statistical surveys and questionnaires and further related information.

This is a classical example of an ex-post strengthening of the regulatory framework. Let’s hope it works this time.

Commission Recommendations on the Bulgarian Excessive Deficit

The European Commission has recommended to the Council to declare an excessive deficit for Bulgaria in 2009 equal to 3.9% of GDP. The further Commission recommends the Bulgarian authorities to bring the general government deficit below 3% of GDP in a credible and sustainable manner by 2011 at the latest.

I am not sure whether it is possible to lower the Bulgarian budget deficit below 3% in 2011. There is ample evidence that the Bulgarian government will really struggle to maintain its budget deficit in 2010 at 4.8% of GDP as proposed in the budget amendment currently reviewed by the Bulgarian Parliament. I really cannot see how this can be achieved.

Excessive Deficit May Prompt Suspension of Regional Aid?

The European Commission considers suspending structural funds for states which are regularly in breach of the EU’s stability and growth pact. An additional criterion being considered is a public debt ratio above 60% of GDP. The Commission also plans to deepen and broaden budgetary surveillance in the future.

I can follow the logic of the Commission in desiring to impose a budget discipline in the EU, but I am particularly worried about Bulgaria. As we already know, there probably will be an excessive deficit procedure against Bulgaria for 2009 and possibly for 2010. True, the gross public debt is relatively small. But even now we face substantial problems in using the structural funds. Any further restriction or suspension of regional aid by the Commission can be devastating for a country that simply is not competitive enough on the EU markets.

Surprise: Bulgaria Had Excessive Budget Deficit in 2009

It turns out that Bulgaria had excessive budget deficit in 2009. The Bulgarian government says it has just now discovered annexes to service and construction contracts that imply an additional financial burden of 1 billion Euro.

This means that the European Commission will have to start an excessive deficit procedure against Bulgaria.

More, it looks like Bulgaria will also have at least 7% budget deficit this year, according to the Bulgarian newspaper 168 chasa.

New Excessive Deficit Procedure Steps

The European Commission has proposed to the Council to define deadlines for the correction of the excessive deficit for Lithuania, Malta, Poland and Romania. The Commission also recommends setting a new deadline for the correction of the deficit in Hungary.

Codified Regulation on the Excessive Deficit Procedure

The new, codified Regulation (EC) No 479/2009 on the application of the Protocol on the excessive deficit procedure annexed to the Treaty establishing the European Community has been published in the Official Journal.

It provides legal definitions of “government”, “government deficit”, “government surplus”, “government investment” and “government debt” for the purposes of the excessive deficit procedure.

Deadlines for the Correction of Budget Deficits

The European Commission has proposed deadlines for the correction of the budget deficits of Greece, Spain, France and Ireland to the Council. EC also proposed a new deadline for the correction of the excessive deficit in the UK.

This is an important step forward in the procedure. Once the deadlines are approved by the Council, the Member States concerned will have six months to take effective action regarding budgetary outcomes in 2009 and to specify the measures that will be necessary to progress towards the correction of the excessive deficit.

We have to observe very carefully this procedure, since it will provide evidence about the practical enforceability of the Stability and Growth Pact.