EU Commission Mulls More Early Budget Warnings in Apr
Thursday, April 1, 2004 11:34:00 AM
By Matthew Saltmarsh
BRUSSELS (MktNews) - The European Commission is considering whether to issue a new round of "early warnings" this month to those member states whose budget deficits are around the 3% ceiling stipulated in the Stability and Growth Pact.
Sources close to the issue told Market News International that warnings were being considered for the Netherlands, Italy, Greece and the U.K. There is also a possibility that Portugal's current excessive deficit procedure might be terminated, only to be restarted via a new warning.
The executive has been seriously weighing whether to give one or more warnings in part to show that the Stability and Growth Pact is still alive after its sanction mechanism was effectively suspended last autumn, they said. The Commission is obliged to act if its sees a grave budget overshoot.
"If it's established that the Commission sees an excessive deficit emerging, they have to act immediately, according to the treaty," said an EU official.
If agreed by finance ministers, the warnings would constitute the start of close surveillance of the country's budget policy by the executive and fellow finance ministers to try and rectify the high deficit.
"My sense is the Commission wants to give the Pact a shot in the arm and show it's not dead," said another finance official involved in the process.
Next Wednesday, the executive will release its semi-annual economic forecasts, including deficit estimates for 2004. If there is no improvement in the budget outlook then it will be obliged to propose initiating budget procedures against certain members.
Final 2003 data released last month by Eurostat, the Commission's statistic agency, showed that the U.K.'s deficit was 3.2% of GDP, the Netherlands was at 3.0% and Italy was at 2.4%.
Greece's deficit was 1.7%, but the new government in Athens has been conducting an internal audit, which is expected to increase the final 2003 figure. At the time, Eurostat said due to ongoing discussions with the national statistical authorities, notably on the surplus of social security funds, the notified figures for debt and deficit were considered as provisional and could be revised.
If issued, the warnings would probably come after Easter as the executive would have to prepare draft statements.
One source said the Netherlands looks like a prime candidate for a warning, as it's 3% deficit last year might also eventually be revised upwards. A slap on the wrist is also possible for Italy -- given its continued reliance on one-off measures to keep the deficit down combined with pledges for tax cuts -- and Greece, where the deficit should rise on the re-assessment of the government's books.
The cases of the U.K. and Portugal are more complex.
The U.K.'s public finances are of concern as the country is already over the 3% deficit limit and spending is unlikely to fall ahead of the general election either next year or in 2006. But the U.K. is not bound by the Stability and Growth Pact's 3% deficit ceiling -- it has an opt-out of the Maastricht treaty. So it can be given a warning, but cannot be subject to sanctions.
"The U.K. public finances are on a very dangerous path, it's really concerning that current practises might become engrained," said a senior EU official. "But of course you have to pick your battles."
Another official agreed that the appetite for a budget-related tussle with feisty U.K. Chancellor Gordon Brown was, for now, "low."
Portugal, already subject to an excessive deficit procedure under the Pact, has been below the 3% threshold since 2001. But officials remain concerned that Lisbon is also using one-off fiscal transfers to keep the nominal deficit low (it was at 2.8% in 2003). One option could be for finance ministers to end the current procedure and re-start a new one.
Germany and France are also already under the deficit procedure. However, the Pact's teeth were essentially removed last autumn when finance ministers narrowly rejected a proposal by the Commission to require the French and German governments to take tougher action to stay within their permitted budget deficit limits.
That move effectively suspended the procedure and meant that the Pact's financial sanctions would not be implemented.
Earlier this year, the Commission decided to challenge in court that decision, and later this month the European Court of Justice will hear the legal challenge by the executive.
The Commission, which is responsible for enforcing and monitoring EU laws, has argued a court ruling is vital to clarify the disciplinary procedures applied to those who break the Pact's rules. It has also said it would not challenge the opinion of the ECJ.
Meanwhile, on current projections, up to six of the ten new members that will join the EU in May are likely to receive formal budget warnings from the Commission and go into the first stage of the excessive deficit procedure, probably at the July meeting of EU finance ministers.
The list includes three of the largest economies. Eurostat's 2003 data showed Poland's deficit at 4.1%, Hungary's at 5.9% and the Czech Republic's at 12.9%. Cyprus (6.3%), Malta (9.7%) and Slovakia (3.6%) will also likely overshoot.
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