Pedro Solbes, EU commissioner for economic and monetary affairs, on Wednesday set out the Commission's proposals to reform the operations on the EU's stability and growth pact, which commits member states to limit their budget deficits. As I indicated earlier in the week, it is hard to see how these proposals, which are likely to benefit mainly non-Euro zone members can be well received by the hard-pressed debit-ridden countries (Greece, Italy and Germany in particular). A careful reading of the text could see it as an unambiguous tightening of the pact, especially the part which refers to the requirement for " a careful examination to be made by the Commission of outstanding public debt, contingent liabilities (such as implicit pension obligations) and other costs associated with ageing populations." It remains to be seen how EU finance ministers will interpret and react to the text. The Communication presents five proposals to improve the interpretation of the Pact in order to ensure a more rigorous adherence to the goal of sound and sustainable public finances:
Due account should be taken of the economic cycle when establishing budgetary objectives at EU level and when carrying out the surveillance of Member States budgetary positions. The 'close to balance or in surplus' requirement of the SGP would be defined in underlying terms. This isolates out the impact of the economic cycle on budgetary positions. As such, it provides a better picture of the true state of public finances in a country, and enables the Commission to carry out a better assessment of compliance with budgetary commitments given in the Stability and Convergence programmes.
Clear transitional arrangements should be established for countries with underlying deficits exceeding the "close to balance or in surplus' requirement. They would be required to achieve an annual improvement in the underlying budget position of 0.5% of GDP each year until the 'close-to-balance or surplus' requirement of the SGP has been reached. This rate of improvement in the underlying budget position should be higher in countries with high deficits or debt. Also, a more ambitious annual improvement in underlying budget positions should be envisaged if growth conditions are favourable. This proposal recognises that account must be taken of economic conditions when setting the pace of budgetary consolidation, but that the deadline for reaching the goal of the Pact cannot be postponed indefinitely.
A pro-cyclical loosening of the budget in good times should be viewed as a violation of budgetary requirements at EU level, and should lead to an appropriate and timely response through the use of instruments provided in the Treaty. Countries must avoid a pro-cyclical loosening of budget policies in good times as the automatic stabilisers provide enough cushion over the economic cycle.
Budgetary policies should contribute to growth and employment. The 'close to balance or in surplus' requirement should be combined with the right incentives to help ensure the implementation of the Lisbon strategy. A small temporary deterioration in the underlying budget position of a member state could be envisaged, if it derives from the introduction of a large structural reform, like for example a tax reform or a long term public investment programme whether in physical infrastructure or in human capital. However, this should only be envisaged if the Member State concerned fulfils strict starting budgetary conditions: substantial progress towards the 'close to balance or in surplus' requirement and general government debt below the 60% of GDP reference value. Moreover, the Commission must verify that there is a clear and realistic deadline for returning to a position of "close to balance or in surplus", and that an adequate safety margin is provided at all times to prevent nominal deficits from breaching the 3% of GDP reference value. To reflect differences in the sustainability of public finances across Member States, a small deviation from the 'close to balance or in surplus' requirement of a longer-term nature could be envisaged for Member States where debt levels are well below the 60% of GDP reference value, and when public finances are on a sustainable footing. This will require a careful examination to be made by the Commission of outstanding public debt, contingent liabilities (such as implicit pension obligations) and other costs associated with ageing populations.
The sustainability of public finances should become a core policy objective at EU level with greater weight being attached to government debt ratios in the budgetary surveillance process. Countries with high debt levels well above the 60% of GDP reference value would be required to set down ambitious long-term debt reduction strategies in their stability and convergence programmes. Failure to achieve a "satisfactory pace" of debt reduction towards the 60% of GDP reference value should result in the activation of the debt criterion of the excessive deficit procedure.
Source: European Commission for Economic and Financial Affairs