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7.3.2.  Budgetary discipline and the single currency

    Budgetary policy is perhaps the area in which differences between Member States are still at their strongest. This stems from the fact that the budget is the most characteristic manifestation of national sovereignty in economic terms. The budget is in fact the main instrument of orientation of the economy in general and of individual government policies, such as regional, social, industrial policies, etc. Through its expenditure side the budget has a direct influence on public investment and an indirect influence, through aids of all sorts, on private investment. Through its revenue side the budget acts on savings and on the circulation of currency. A state's budgetary policy may pursue short-term economic objectives (avoidance of a recession or stemming of inflation) or structural improvement objectives pertaining to the national economy and implemented through productive investments. Clearly, although it is difficult, coordination of budgetary policies is extremely important for economic convergence sought by the Treaty on the European Community (now by the Treaty on the Functioning of the European Union) and for participation of a Member State in the third stage of EMU.

    From the third stage of EMU, which began on 1 January 1999, the budgetary policies of the Member States are constrained by three rules: overdraft facilities or any other type of credit facility from the ECB or national central banks to public authorities (European, national or regional) are prohibited (Article 123 TFEU, ex Article 101 TEC); any privileged access of public authorities to the financial institutions are banned (Article 124 TFEU, ex Article 102 TEC) [Regulation 479/2009, last amended by Regulation 220/2014]; neither the Union nor any Member State is liable for the commitments of public authorities, bodies or undertakings of a Member State (Article 125 TFEU, ex Article 103 TEC). Implementing the new arrangements for economic policy coordination, the Council looks closely into actual and prospective developments in Member States' budgetary policies.

    The Commission should monitor the development of the budgetary situation and the level of government debt in the Member States with a view to identifying gross errors. In particular it should examine compliance with budgetary discipline on the basis of the following two criteria [see also section 7.2.3]: a) whether the ratio of the planned or actual government deficit to Gross Domestic Product exceeds a reference value (3% of GDP), unless either the ratio has declined substantially and continuously and reached a level that comes close to the reference value or, alternatively, the excess over the reference value is exceptional and temporary and the ratio remains close to the reference value; b) whether the ratio of government debt to gross domestic product exceeds a reference value (60% of GDP), unless the ratio is sufficiently diminishing and approaching the reference value at a satisfactory pace (Article 126 TFEU, ex Article 104 TEC and Protocol on the excessive deficit procedure). As part of the legislative package of November 2011 for the new EU economic governance, a Directive lays down detailed rules concerning the characteristics of the budgetary frameworks of the Member States, so as to ensure Member States’ compliance with obligations under Article 126 TFEU with regard to avoiding excessive government deficits [Directive 2011/85]. Those rules concern in particular: public accounting systems which include elements such as bookkeeping, internal control, financial reporting, and auditing.

    If a Member State does not fulfil the requirements under one or both of these criteria, the Commission, taking into account all relevant factors, including the medium term economic and budgetary position of the Member State shall address an opinion to the Member State concerned and shall inform the Council accordingly (Article 126 § 5 TFEU, ex Article 104.5 TEC). The Council shall, acting by a qualified majority on a recommendation from the Commission, and having considered any observations which the Member State concerned may wish to make, decide after an overall assessment whether an excessive deficit exists (Article 126 § 6 TFEU ex Article 104.6 TEC). Where the existence of an excessive deficit is decided, the Council shall make recommendations to the Member State concerned with a view to bringing that situation to an end within a given period (Article 126 § 7 TFEU, ex Article 104.7 TEC). If there is no effective action in response to its recommendations within the period laid down, the Council may, first, make its recommendations public (Article 126 § 8 TFEU, ex Article 104.8 TEC) and, then, decide by qualified majority certain measures to be taken by the recalcitrant Member State for the deficit reduction which is judged necessary in order to remedy the situation. In such a case, the Council may request the Member State concerned to submit reports in accordance with a specific timetable in order to examine the adjustment efforts of that Member State (Article 126 § 9 TFEU, ex Article 104.9 TEC).

    As long as a Member State fails to comply with a decision taken in accordance with Article 126 paragraph 9 of the TFEU, the Council may decide to apply or, as the case may be, intensify one or more of the following measures:

    ·         to require the Member State concerned to publish additional information, to be specified by the Council, before issuing bonds and securities,

    ·         to invite the European Investment Bank to reconsider its lending policy towards the Member State concerned,

    ·         to require the Member State concerned to make a non-interest-bearing deposit of an appropriate size with the Union until the excessive deficit has, in the view of the Council, been corrected,

    ·         to impose fines of an appropriate size (Article 126 § 11 TFEU, ex Article 104.11 TEC).

    When the Council adopts the measures referred to in paragraphs 6 to 9, 11 and 12 of Article 126, it acts without taking into account the vote of the member of the Council representing the Member State concerned (Article 126 § 13 TFEU). The Council shall abrogate some or all of its decisions or recommendations referred to in paragraphs 6 to 9 and 11 to the extent that the excessive deficit in the Member State concerned has, in the view of the Council, been corrected (Article 126 § 12 TFEU).

    In view of the difficulties encountered by many Member States in respecting the criteria of the Stability and Growth Pact (SGP) [see section 7.2.4], the European Council meeting in Brussels (22-23 March 2005) agreed on the revision of the Regulations which provide for prevention and correction of excessive deficits. Regulation 1466/97 on the strengthening of the surveillance of budgetary positions requires Member States to submit stability programmes (or convergence programmes in the case of the countries not participating in the single currency) presenting the medium-term objective of a government budgetary position that is close to balance or surplus. In June 2005 three principal changes were introduced to the preventive arm of the SGP [Regulation 1466/97]: (a) the medium-term budgetary objectives will take into account the diversity of economic and budgetary positions and their sustainability, ranging from a deficit of 1% of GDP to a position of balance or in surplus for euro area and the exchange rate mechanism (ERM-II) countries; (b) those countries that have not yet reached their medium-term budgetary objective should pursue an annual improvement of 0.5% of GDP in cyclically adjusted terms (with an extra effort being made in economic good times); (c) Member States that have implemented major structural reforms with a verifiable impact on the long-term sustainability of public finances will be allowed to deviate temporarily from the medium-term budgetary objective or the adjustment path towards it. As part of the legislative package of November 2011 for the new EU economic governance, Regulation 1175/2011, amending Regulation 1466/97, sets out the rules covering the content, the submission, the examination and the monitoring of stability programmes and convergence programmes as part of multilateral surveillance by the Council and the Commission in the context of the European Semester [see section 7.3].

    The purpose of Regulation 1467/97 (corrective arm of the SGP) is to speed up and clarify the implementation of the excessive deficit procedure, in particular as regards the sanctions to be imposed on Member States which fail to take appropriate measures to correct an excessive deficit, and it lays down the deadlines which must be observed for the different stages of the procedure. The reference values of 3% and 60% of GDP for the deficit and debt ratios are the anchors of the system. The amendments introduced in June 2005 entail: a new definition of "severe economic downturn"; clarification of "other relevant factors", under the condition that the general government deficit remains close to the 3% ceiling and that the excess is temporary; extension of the deadlines for correcting any excessive deficit, in order to give a country more time to take effective and more permanent action rather than resort to one-off measures; asking Member States in an excessive deficit situation to achieve a minimum annual budgetary effort of at least 0.5% of GDP in structural terms. As part of the legislative package of November 2011 for the new EU economic governance, new amendments, introduced by Regulation 1177/2011 lay down provisions for speeding up and clarifying the excessive deficit procedure. The economic policy strategy, based on growth and stability-oriented macroeconomic policies and continuous progress in economic reform, allows a flexible response to changing economic conditions in the short run whilst safeguarding and strengthening the productive capacity of the economy over the medium term. Member States are required to compile and transmit to the Commission data on their quarterly government debt [Regulation 1222/2004].

    As part of the legislative package of November 2011 for the new EU economic governance, a Regulation establishes an alert mechanism for the early detection of emerging macroeconomic imbalances [Regulation 1176/2011]. Two other Regulations set out systems of sanctions for the effective enforcement of the Stability and Growth Pact (SGP) in the euro area: the one for enhancing the enforcement of both the preventive and the corrective parts of the SGP [Regulation 1173/2011]; the other for the effective correction of excessive macroeconomic imbalances in the euro area [Regulation 1174/2011]. When taking decisions on these sanctions, the role of the Council is limited, and reversed qualified majority voting is used, i.e. the recommendation of the Commission should be deemed to be adopted by the Council unless it would decide by a qualified majority to reject it.

    According to the  Court of Justice, the excessive deficit procedure is a stage-by-stage procedure with strict deadlines where the Treaty (Article 104 TEC, new Article 126 TFEU), the implementing regulation (1467/97) and the Stability Pact specify the manner in which it is carried out and the respective roles and powers of the institutions. The procedure may result in the imposition of sanctions on Member States.

    For the first time, in November 2002, the Council noted the existence of an excessive deficit in Portugal (4.1 % of GDP) and asked the Portuguese authorities to implement with resolve their budgetary plans for 2002, aimed at reducing the deficit to 2.8 % of GDP [Decision 2002/923]. In January 2003, the Council noted the existence of an excessive deficit in Germany and recommended that the German Government put an end to the excessive deficit situation as quickly as possible [Decision 2003/89] It also gave an early warning to France in order to prevent the occurrence of an excessive deficit [Recommendation 2003/90]. On 3 June 2003, the Council, assessing the situation on the basis of Article 104(6) of the EC Treaty, concluded that an excessive deficit existed in France [Decision 2003/487 abrogated by Decision 2007/154]. On 5 July 2004 the Council decided that an excessive deficit existed in Greece and issued a recommendation to the Greek authorities, urging them to take various measures to correct it [Decision 2004/917]. In December 2004, the Commission decided to launch an infringement procedure for the continued failure of the Greek authorities to provide the Commission with reliable budgetary data and to strengthen the data monitoring mechanisms so as to ensure that Eurostat, as the statistical authority, can carry out effective checks on the data notified by the Member States [COM/2004/0784]. In February 2005 the Council gave notice to Greece, in accordance with Article 104(9) of the EC Treaty, to take measures for the deficit reduction judged necessary in order to remedy the situation of excessive deficit [Decision 2005/441]. On January 2006, the Council recommended to the United Kingdom to bring an end to the situation of an excessive government deficit [Decision 2006/125]. The Commission and Council recommendations are followed by the Member States. Thus, the Council put an end to the excessive deficit procedure with regard to Germany [Decision 2007/490] and Greece [Decision 2007/465].

    In 2009, however, due to the global financial crisis and to the worse recession since 1929, twenty of the EU’s 27 Member States were running deficits above the threshold of 3% of GDP and the Commission and the Council had to give them time, in order to return to fiscal orthodoxy. The deadline for the correction of the budget deficits was set for some countries at 2012, for most at 2013 and for Ireland, the UK and Greece at 2014. The Council gave notice to Greece to take measures for the deficit reduction judged necessary in order to remedy the situation of excessive deficit [Decision 2010/182] and decided to make public Recommendation 2010/190 with a view to ending the inconsistency with the broad guidelines of the economic policies in Greece and removing the risk of jeopardising the proper functioning of the economic and monetary union [Decision 2010/181].

    Greece was a special case. Partly because of the faults of her governments, which brought the budgetary deficit from 3.7% of GNP in 2008 to 12.7% at the end of 2009, and partly because of the global financial and economic crises, which stopped abruptly the until then constant growth of her GNP, Greece was found, in the beginning of 2010, not only with a vastly excessive deficit, but at the verge of bankruptcy. The Greek crisis was a test for the solidity of the European economic and monetary union. It could seriously harm it with the attacks of speculators against its feeble rings, as happened with the first effort of creation of EMU in 1971 [see section 7.2.1]. It could, on the contrary, become an incentive to strengthen the economic side of EMU, which was originally rather feeble and consolidate the spirit of solidarity inside the euro area. As we will see in the next section, the leaders of the Eurogroup were forced, first, to give financial support to Greece and, then, to devise a European Mechanism of financial stabilisation with the participation of the International Monetary Fund. Greece, on its side, was obliged to adopt an ambitious plan to correct its fiscal imbalances and to reform its economy by 2014, under the supervision of the European Commission, the European Central Bank and the IMF. Thereafter, a new notice was given to Greece to take measures for the deficit reduction judged necessary to remedy the situation of excessive deficit [Decision 2011/734]. A similar adjustment programme was adopted for Cyprus [Decision 2013/463]. In 2015, Greece submitted to the Commission and to the Council a Programme aiming to ensure the adoption of a set of reforms needed to improve the sustainability of public finances and the regulatory environment. On 15 July 2015, an agreement was reached at services level between the Government and the Commission in respect of the Programme, to be laid down in a Memorandum of Understanding on Specific Economic Policy Conditionality (the ‘Memorandum of Understanding’) [Decisions 2016/542 and 2015/544].

    The Euro Plus Pact agreed, on 25 March 2011, by the euro area Heads of State or government and joined by Bulgaria, Denmark, Latvia, Lithuania, Poland, Romania (for this reason called ''plus'') is meant to further strengthen the economic pillar of the economic and monetary union and achieve a new quality of economic policy coordination, with the objective of improving competitiveness, thereby leading to a higher degree of convergence reinforcing the European social market economy. This Pact focuses primarily on areas that fall under national competence and are important for increasing competitiveness and avoiding harmful imbalances. The Member States that have signed up to the Pact are committed, on the basis of the indicators and principles it contains, to announce a set of concrete actions, on time for their inclusion in their Stability or Convergence Programmes [see section 7.2.4] and National Reform Programmes.

    A Regulation lays down provisions for strengthening the economic and budgetary surveillance of Member States whose currency is the euro, where those Member States: (a) experience or are threatened with serious difficulties with respect to their financial stability or to the sustainability of their public finances, leading to potential adverse spill-over effects on other Member States in the euro area; or (b) request or receive financial assistance from one or several other Member States or third countries, the European Financial Stabilisation Mechanism (EFSM), the European Stability Mechanism (ESM), the European Financial Stability Facility (EFSF), or another relevant international financial institution such as the International Monetary Fund (IMF) [Regulation 472/2013]. This Regulation also lays down provisions for enhanced economic policy coordination.

    Another Regulation sets out provisions for enhanced monitoring of budgetary policies in the euro area and for ensuring that national budgets are consistent with the economic policy guidance issued in the context of the Stability and Growth Pact (SGP) and the European Semester for economic policy coordination, by: (a) complementing the European Semester, as established in Article 2-a of Regulation 1466/97; (b) complementing the procedure for the prevention and correction of excessive macroeconomic imbalances, as established by Regulation 1176/2011; (c) complementing the multilateral surveillance system of budgetary policies, as established by Regulation 1466/97; (d) complementing the procedure for correcting a Member State's excessive deficit, as established by Article 126 TFEU and by Regulation 1467/97; and (e) guaranteeing the consistency between budgetary policies and measures and reforms taken in the context of the procedure for prevention and correction of excessive macroeconomic imbalances as established by Regulation 1176/2011 and, where appropriate, in the context of an economic partnership programme as referred to in Article 9 [Regulation 473/2013].

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