Commission steps under the Excessive Deficit Procedure (EDP)

02 June 2014
by eub2 -- last modified 02 June 2014

The European Commission adopted on 2 June a series of economic policy recommendations to individual EU Member States. As part of this package, the Commission has also adopted several decisions on Member States' public finances under the Stability and Growth Pact.

Which EDP decisions has the Commission taken today?

The European Commission has today recommended that the EU Council of Ministers close the EDP for six countries: Austria, Belgium, Czech Republic, Denmark, the Netherlands and Slovakia.

The Commission has also published a report analysing the reasons for a planned and forecast breach of the Treaty reference value for public debt (60% of GDP) in the case of Finland. It has concluded that the planned breach is explained by Finland's support to the mechanisms set up to safeguard financial stability in the euro area. As such, the debt criterion is fulfilled and an EDP should therefore not be opened.

In addition, the Commission has concluded that two countries, Poland and Croatia, have taken effective action in response to the Council Recommendations to those countries under the EDP.

Closing/Opening of an EDP

How many Member States are currently in an EDP?

At the moment there is an EDP ongoing for 17 EU Member States. This means all EU Member States except Bulgaria, Germany, Estonia, Italy, Hungary, Latvia, Lithuania, Luxembourg, Romania, Finland and Sweden are subject to an EDP. If the Council follows the Commission's Recommendations for closing the EDP for Austria, Belgium, Czech Republic, Denmark, The Netherlands and Slovakia, the overall number of countries in EDP will drop to 11. In the spring of 2011, no fewer than 24 Member States were in EDP.

What is needed for an EDP to be closed?

A decision on closing an EDP is based on a "durable correction" of the excessive deficit. This is deemed achieved if:

    (i) the notified data for the previous year (2013 in these cases) show a deficit below 3% of GDP; and

    (ii) the Commission forecasts that the deficit will not exceed the 3% of GDP reference value over the forecast horizon (currently 2014 and 2015)

Why does the Commission recommend that the Council close the EDP for Austria, Belgium, Czech Republic, Denmark, The Netherlands and Slovakia?

Austria

The EDP for Austria was launched in 2009. After peaking at 4.5% of GDP in 2010, Austria's general government deficit already fell below the 3% of GDP Treaty reference value in 2011. However, due to looming risks related to possible financial sector repair operations, which could have resulted in a deficit above 3% of GDP in following years, the Commission did not recommend early closing of the EDP. These risks have, however, not materialised and for 2013, Austria has notified a deficit of 1.5% of GDP. The Stability Programme for 2014-2018, adopted by the Austrian Government on 29 April 2014, plans that the general government deficit will increase to 2.7% of GDP in 2014 and then decrease to 1.4% of GDP in 2015. The Commission's 2014 Spring Forecast projects a deficit of 2.8% of GDP in 2014 and 1.5% of GDP in 2015. Thus, the deficit is set to remain below the reference value of 3% of GDP over the forecast horizon. The correction therefore fulfils the Council's Recommendation from 2009 to bring the excessive deficit situation in Austria to an end by 2013 at the latest.

Belgium

    The EDP for Belgium was launched in 2009 and stepped up in 2013. After peaking at 5.6% of GDP in 2009, Belgium's general government deficit was brought down to 2.6% of GDP in 2013, in line with the Council's Decision of 21 June 2013. The Stability Programme for 2014-2017, submitted by the Belgian Government on 30 April 2014, plans that the deficit will decline to 2.15% of GDP in 2014 and then fall to 1.4% of GDP in 2015. The Commission's 2014 Spring Forecast projects a deficit of 2.6% of GDP in 2014, and 2.8% of GDP in 2015. Thus, the deficit is set to remain below the Treaty reference value of 3% of GDP over the forecast horizon. The correction fulfils the Council's Decision from 2013 to bring the excessive deficit situation in Belgium to an end by 2013 at the latest.

Czech Republic

The EDP for the Czech Republic was launched in 2009. Having peaked at 5.8% of GDP in 2009, the general government deficit in the Czech Republic was brought down to 1.5% of GDP in 2013, which was the deadline set by the Council. The 2014 Convergence Programme of the Czech Republic projects that the general government deficit will increase to 1.8% of GDP in 2014 and to 2.3% of GDP in 2015. The Commission 2014 spring forecast projects that the general government deficit will reach 1.9% of GDP in 2014 and 2.4% of GDP in 2015. Thus, the deficit is set to remain below the reference value of 3% of GDP over the forecast horizon. The correction fulfils the Council's Recommendation from 2009 to bring the excessive deficit situation in the Czech Republic to an end by 2013 at the latest.

Denmark

The EDP for Denmark was launched in 2010. The general government deficit stayed within the 3% of GDP reference value in the period 2010-2013, except in 2012, when the balance was negatively affected by a one-off reimbursement related to a pension reform in 2011. The one-off reimbursement is estimated to have weakened the fiscal balance by 1.5% of GDP in 2012. The general government deficit amounted to 2.5% of GDP in 2010, 1.9% of GDP in 2011, 3.8% of GDP in 2012 and 0.8% of GDP in 2013. Denmark's 2014 Convergence Programme plans a general government deficit of 1.3% of GDP in 2014 and 2.9% of GDP in 2015. The Commission 2014 Spring Forecast projects the general government deficit at 1.2% of GDP in 2014 and 2.7% of GDP in. Thus, the deficit is set to remain below the reference value of 3% of GDP over the forecast horizon. The correction fulfils the Council's Recommendation from 2010 to bring the excessive deficit situation in Denmark to an end by 2013 at the latest.

The Netherlands

The EDP for The Netherlands was launched in 2009 and the deadline was extended by one year in 2013. Having peaked at 5.6% of GDP in 2009, The Netherlands' general government deficit was steadily brought down to 2.5% of GDP in 2013. The 2014 Stability Programme of The Netherlands plans that the general government deficit will increase to 2.9% of GDP in 2014 and then decrease to 2.1% of GDP in 2015. The Commission 2014 Spring Forecast projects that the general government deficit will reach 2.8% of GDP in 2014 and 1.8% of GDP in 2015. Thus, the deficit is set to remain below the Treaty reference value of 3% of GDP over the forecast horizon. The correction fulfils, ahead of schedule, the Council's Recommendation from 2013 to bring the excessive deficit situation in The Netherlands to an end by 2014 at the latest.

Slovakia

The EDP for Slovakia was launched in 2009. Having peaked at 8% of GDP in 2009, the general government deficit in Slovakia was brought down to 2.8% of GDP in 2013. The 2014 Stability Programme targets a headline deficit of 2.6% of GDP in 2014 and a further reduction to 2.5% of GDP in 2015, 1.6% of GDP in 2016 and 0.5% of GDP in 2017. The Commission 2014 Spring Forecast projects that the general government deficit will increase slightly to 2.9% of GDP in 2014 and then return to 2.8% of GDP in 2015. The deficit is thus set to stay below the Treaty reference value of 3% of GDP over the forecast horizon. The correction fulfils the Council's Recommendation from 2009 to bring the excessive deficit situation in Slovakia to an end by 2013 at the latest.

Report on Finland's compliance with the EDP's debt criterion

As set out in Article 126(3) of the Treaty, the Commission has prepared a report to comprehensively assess the excess of Finland's government debt over the 60% of GDP Treaty reference value, and to conclude whether the breach of the debt criterion merits the launch of an EDP for Finland.

The general government gross debt ratio in Finland has increased rapidly over recent years, growing from 48.7% of GDP in 2010 to 57.0% in 2013. According to Finland's Stability Programme, general government gross debt is expected to reach 61.0% of GDP by the end of 2015 and to increase further in 2016. The risk of breaching the reference value is confirmed by the Commission 2014 Spring Forecast, which projects gross debt at 61.2% of GDP in 2015.

According to the Commission's assessment, though, the planned breach is explained by Finland's support to the mechanisms set up to safeguard financial stability in the euro area. Overall, therefore, the analysis presented in the report suggests that the debt criterion of the Treaty is fulfilled.

Effective action assessment

What is the assessment of effective action by countries under EDP?

Countries placed in EDP are given a deadline of six months (or three months for a serious breach) to take effective action to comply with a recommendation in accordance with Article 126 (7) of the Treaty.

Following the expiry of the deadline, the Commission shall assess whether the Member State has taken effective action, i.e. has taken sufficient measures to ensure adequate progress towards the correction of the excessive deficit situation.

According to Regulation (EC) No 1467/97 and the Code of Conduct on the implementation of the Stability and Growth Pact, a country should be considered to have taken effective action if it has acted in compliance with the Article 126(7) Recommendation and brought the situation of excessive deficit to an end within a given period. The Code of Conduct states that the assessment of effective action should take into account whether the Member State concerned has achieved the annual budgetary targets and the underlying improvement of its cyclically adjusted balance, net of one-off and other temporary measures, recommended by the Council.

The methodology for assessing effective action requires that the Commission first considers whether the Member State is compliant with the nominal target and the underlying improvement in the structural balance, as required in the EDP Recommendation. If this is the case, the EDP is held in abeyance.

What is the Commission's assessment of action taken by Poland?

According to the new Council Recommendation issued on 10 December 2013, Poland was recommended to reach a headline deficit of 4.8% of GDP in 2013, 3.9% of GDP in 2014 and of 2.8% of GDP in 2015 (excluding the impact of the asset transfers from the second pillar pension system). Based on the macroeconomic forecast underlying the Council Recommendation, this is consistent with an improvement of the structural balance of 1% of GDP in 2014 and 1.2% of GDP for 2015. Poland was also recommended to implement rigorously the measures it had already announced and adopted, while complementing them with additional measures to achieve a sustainable correction of the excessive deficit by 2015. Poland was given a deadline of 15 April 2014 to take effective action and to report in detail on the consolidation strategy that is envisaged to achieve the recommended targets.

According to the Commission's assessment, Poland has met the recommended headline balance, as well as the recommended change in the structural balance in 2014. The Commission thus considers that the procedure is to be held in abeyance and no further steps are needed.

However, there are risks to a durable correction of the excessive deficit by the established deadline, as the fiscal effort measured by both the corrected change in the structural balance and the bottom-up assessment are well below the recommended level.

How does the Commission assess the action taken by Croatia?

The Council opened the EDP for Croatia on 28 January 2014 and recommended correcting the excessive deficit by 2016. The EDP Recommendation requires Croatia to reach a headline deficit target of 4.6% of GDP in 2014, 3.5% of GDP in 2015 and 2.7% of GDP in 2016. This is consistent with an improvement in the structural balance of 0.5% of GDP in 2014, 0.9% of GDP in 2015 and 0.7% of GDP in 2016, and with adopting consolidation measures amounting to 2.3% of GDP in 2014 and 1.0% of GDP in 2015 and 2016, in order to reach the required adjustment of the structural balance. Croatia was given a deadline of 30 April 2014 to take effective action and to report in detail on the consolidation strategy that is envisaged to achieve the recommended targets.

Croatia is expected to meet the 2014 headline target and the bottom-up approach shows that the country has taken the amount of measures deemed necessary to reach the structural targets spelled out in the EDP Recommendation. In view of this, and the outcome of the careful analysis and other qualitative factors, the Commission considers that the EDP for Croatia is to be held in abeyance.

However, considering that the Commission currently expects the 2015 headline balance and the structural improvement to be below the targets recommended by the Council, the 2015 budget needs to include structural adjustment measures to ensure compliance with the Council Recommendation.

General

What is the next step?

The EU's Council of Finance Ministers will discuss the Commission's Recommendations at its meeting on 20 June in Luxembourg.

What are the main features of the EDP?

The EDP is a rules-based process established in the Treaty on the Functioning of the European Union (TFEU, Article 126) to ensure that Member States correct gross fiscal policy errors. There are two key reference values, which, when breached, constitute criteria on the basis of which the opening of an EDP can be warranted: one for the general government deficit (3% of GDP) and one for gross government debt (60% of GDP). To ensure the correction of excessive deficits, Member States in EDP are subject to recommendations that are to be respected by a certain deadline.

The various steps within the EDP are listed in the Treaty and specified further in the Stability and Growth Pact (SGP) legislation (Regulation (EC) 1467/97). While the EDP corresponds to the "corrective arm" of the SGP, it is complemented by a "preventive arm" (defined in Regulation (EC) 1466/97), which comprises procedures to promote surveillance and coordination of economic policies and ensure progress towards fiscal sustainability.

The EDP has recently been reinforced as part of the overhaul of the economic governance architecture in the EU, partly in response to the economic crisis. In particular, the legislative package known as the "Six Pack" has significantly reformed economic and budgetary surveillance in the EU.

Are euro area programme countries covered by the EDP?

Yes, there is an ongoing EDP for the two remaining programme countries, Greece and Cyprus. But there are certain provisions in order to avoid a doubling of monitoring and reporting requirements. Since the entry into force of the "Two Pack" Regulation (EU) No 472/2013 on 30 May 2013, the monitoring of euro area programme countries' compliance with their recommendations under the EDP takes place within the regular monitoring of the programme provided for by Article 7(4) of the same Regulation.

In accordance with the constant practice followed by the Commission, the monitoring of progress made by the concerned Member State in the budgetary area focuses on whether the corrective measures negotiated with the Member State have been adequately implemented. Evidence of having effectively taken the measures detailed in the programme for the achievement of the budgetary targets is therefore considered sufficient to conclude that the Member State concerned has taken effective action to correct the excessive deficit in the sense of Articles 3 and 5 of Regulation (EC) No 1467/97.

This methodology – which replaces the method described in the Code of Conduct – takes into account the specific nature of the economic and budgetary discipline applying to Member States subject to a macro-economic adjustment programme.

Contrary to the EDP, the Macroeconomic Imbalance Procedure does not cover Member States which are subject to an adjustment programme.

Further information