The pact for stability and growth
An assessment of the Commission’s proposals and the agreement reached at the Dublin European Council
1. Why a pact for stability and growth is being prepared
In order to harvest the benefits of the single currency, economic and monetary convergence in EMU must be durable. This implies, inter alia, low budget deficits on a sustained basis. Budgetary discipline in stage 3 of EMU is necessary to guarantee consistency between fiscal and monetary policy. A firm commitment to budgetary discipline will help to keep short-term interest rates low by eliminating the risk that the new single monetary policy in EMU might be overburdened in the pursuit of price stability. Moreover, a responsible approach to budgetary policy will find favour with the financial markets and so ensure the lowest possible long-term interest rates within EMU. Fiscal discipline, by curbing public debt ratios and hence reducing the interest burden on public debt, will allow government spending to be restructured, by devoting a higher share of public money to priorities such as infrastructures and education which are important to build long-run growth and employment.
These views, which are widely shared and enshrined in the Treaty, led the German Government to present a proposal for a "stability pact for Europe" to ensure budgetary discipline in the final stage of EMU. Following formal proposals of the Commission for secondary legislation, the European Council of Dublin agreed a pact for stability and growth. It is a twin-track approach: a preventive, early-warning system for identifying and correcting budgetary slippages before they bring the deficit above the 3% ceiling and a dissuasive set of rules, with a deterrent effect to put pressure on Member States to avoid excessive deficits or to take measures to correct them quickly if they do occur.
Formally, the pact for stability and growth will comprise of three elements. The preventive aspects will be enshrined in a Council Regulation to reinforce elements of the multilateral surveillance procedure set out in Article 103 of the Treaty. Secondly, the dissuasive elements will be enshrined in a Council Regulation to clarify and accelerate the excessive deficit procedure set out in Article 104c of the Treaty. Thirdly, all parties (the Commission, Member States, the Council) will give their political commitment to the full and timely implementation of the pact in a European Council Resolution. All three elements are to be agreed at the Amsterdam European Council of June 1997.
It should be noted that the pact for stability and growth in no way alters the requirements for participation in EMU, either in the first group or at a later date. Moreover, it will be agreed at EU level, even though full application would only concern the Member States participating in the single currency.
2. Reinforced surveillance of budgetary positions
Secondary legislation under Article 103(5), by reinforcing the budgetary aspects of multilateral surveillance, will provide an early warning system. Participating Member States will be required to submit stability programmes setting out national medium-term budgetary objectives and other relevant information. The key feature of stability programmes will be the specification of national medium-term budgetary targets set close to balance or in surplus. According to the conclusions of the Dublin European Council, "this will allow the automatic stabilisers to work, where appropriate, over the whole business cycle without breaching the 3 per cent reference value of the deficit. Member States will have to respect the 3% ceiling in all circumstances, apart from unusually severe economic downturns or other exceptional conditions".
As a counterpart, Member States not participating in the euro area will submit enhanced convergence programmes. These will be similar in content to stability programmes, but will cover a broader range of variables, inter alia, monetary policy objectives particularly with regard to exchange rates and inflation. They will also reflect the fact that some Member States may not yet fulfil some of the convergence criteria.
The Council will regularly examine both sets of programmes. Should significant slippage from targets be identified, the Council could issue a recommendation under Article 103(5) to the Member State concerned. Such recommendations constitute an early-warning mechanism.
3. Enhancing the excessive deficit procedure
Although the Treaty sets out the various steps and provides for pecuniary sanctions, it was nonetheless considered necessary to codify procedures in secondary legislation so that it acts as a genuine deterrent. The main elements of the proposed legislation include:
How in practice will the excessive deficit procedure work? Member States are required under Regulation 32605/93 to submit planned and actual data on government deficits and debt twice annually, by 1 March and 1 September. If a deficit is greater than 3% or if there is a risk of an excessive deficit, the Commission will prepare a report. This report will examine whether there are exceptional circumstances justifying the breach of the reference value and shall take account of all relevant factors. A breach can only be considered exceptional when resulting from an unusual event outside the control of the relevant Member State and which has a major impact on the financial position of the general government (e.g. a natural disaster) or when resulting from a severe economic downturn. According to the conclusions of the Dublin European Council, the Commission will view an economic downturn as exceptional "only if there is an annual fall of real GDP of 2%". A table below sets out the timetable assuming the deficit is identified on the basis of data reported in March.
Following an examination of the report by the Economic and Financial Committee (which will replace the existing Monetary Committee), the Commission may decide to issue a recommendation to the Council on the existence of an excessive deficit. Even if the Commission decides not to issue such a recommendation, the Council could request one under Article 109d. Before taking a decision on the existence of an excessive deficit, the Member State concerned will have an opportunity to present arguments "showing than an annual fall of real GDP of less than 2% is nevertheless exceptional in the light of further supporting evidence, in particular on the abruptness of the downturn or on the accumulated loss of output relative to past trends". The other Member States, in evaluating whether the economic downturn is severe, will "as a rule take as a reference point an annual fall in real GDP of at least 0.75%".
In the event of a deficit being considered excessive, the Council will immediately issue a recommendation to the Member State concerned specify a deadline for correction of the excessive deficit (the year following its identification unless special circumstances prevail), and a deadline for taking "effective action" to achieve this result (no more than four months). Effective action should consist of a public announcement committing the government in question to act.
If the Council considers that the announced measures are effective, the procedure is held in abeyance. However, it will resume immediately if the announced measures are not implemented or if they are proving ineffective.
Alternatively, if the government brings forward no measures within the time limit or the measures proposed are judged by the Council to be insufficient, then the next step of the procedure would be engaged. Notice (a final warning) would be issued to the Member State, and if they fail to act within a very tight deadline (two month), then sanctions would be imposed.
While these time delays may at first sight seem short, it should be recognised that the issuing of a Council recommendation or the later steps of the procedure will come as no surprise to a government, which will effectively have had a much longer period in which to prepare corrective measures. Moreover, the seriousness in stage three of moving into excessive deficit should call for urgent action from all those involved.
Legal considerations on the excessive deficit procedure
Secondary legislation on the excessive deficit procedure will be adopted using Article 104c(14), 2nd subparagraph as legal basis. Under this subparagraph, the Council must act unanimously, after consulting both the European Parliament and the ECB. The proposed regulation and the provisions of Protocol n° 5 on the excessive deficit procedure, whose present content is left unchanged, will form a new integrated set of rules.
The voting rules for the various steps of the excessive deficit procedure are as follows:
Secondary legislation will specify how sanctions would be applied on an annual basis. A first sanction should include a non-interest-bearing deposit, possibly supplemented by the non-pecuniary sanctions foreseen by the Treaty. The deposit would be converted to a fine if the excessive deficit is not corrected within two years. The Dublin European Council agreed that "the amount of the deposit or fine will be made up of a fixed component equal to 0.2% of GDP, and a variable component equal to one tenth of the excess of the deficit over the reference value of 3% of GDP. There will be an upper limit of 0.5% of GDP for the annual amounts of deposits". The graph below depicts the quantitative implications of this rule.
4. Political guidance in a European Council Resolution
All parties to the pact (the Commission, Member States, the Council) will give their political commitment to the its full and timely implementation. Aside from providing political commitment at the highest level, a European Council Resolution, as opposed to the normal Council conclusions, has the additional advantage of having the President of the European Commission as a signatory. The resolution will contain political commitments going beyond what is found in secondary legislation, but of course will respect the Treaty.
For its part, the Commission is invited to give a commitment to prepare a report whenever the 3% reference value is breached, thereby launching the excessive deficit procedure. It is also invited to give a commitment to respond favourably to a request from the Council under Article 109d to prepare recommendations. Member States will be invited not to invoke the provision on allowing a breach of the reference values in exceptional circumstances except in clear-cut cases. The Council will be invited to take the necessary decisions as quickly as practicable and should not shy away from difficult decisions.
How the excessive deficit procedure would work beginning in March Annex 1
Member States submit data(1)
Monetary Committee formulates opinion
Ecofin decides on excessive deficit and issues recommand.
Ecofin assesses "effective actions" and may decide to publish recommand.
Ecofin gives notice of specific measures
Ecofin decides to apply sanctions
Commission prepares report
Commission prepares opinion
Member States submit data(1)
N+1 and thereafter
Member States submit data(1)
Ecofin decides to abrogate or intensify sanctions
Member States submit data(1)