Commission takes steps under the excessive deficit procedure for France, Greece, Ireland, Spain and UK; assesses Stability Programme of Cyprus

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1 IP/09/458 Brussels, 24 March 2009 Commission takes steps under the excessive deficit procedure for France, Greece, Ireland, Spain and UK; assesses Stability Programme of Cyprus Following the assessment, in February, of their Stability and Convergence Programmes (see IP/09/274), the European Commission today proposed deadlines for the correction of the budget deficits of Greece, Spain, France and Ireland that were above 3% already in The Commission also proposes a new deadline for the correction of the excessive deficit in the UK. The deadlines proposed take account of the respective fiscal and macroeconomic situations of the countries concerned. Once the recommendations have been adopted by the Council, the five countries will have six months to specify what measures they intend to take to progressively reduce the deficit. The Commission has also examined the updated Stability Programme of Cyprus and found that the fiscal policy in 2009 will be rather expansionary. This should be reversed in the following years in view of the large external imbalances. "National budgetary positions in the EU and elsewhere have deteriorated considerably in the last year and are set to deteriorate further on account of the economic crisis we are living through and the discretionary measures rightly adopted by Member States to sustain demand and promote investment. To limit the costs of the debt for generations present and future, it is crucial that governments devise an adjustment path whereby they commit to correct public deficits from the moment the economy starts to recover, which is expected to happen gradually in The Stability and Growth Pact provides the framework for this exit strategy and a return to sound and sustainable public finances in the medium-to-long term," said Economic and Monetary Affairs Commissioner Joaquín Almunia. Following up on the assessment of the Stability and Convergence Programmes that showed a budget deficit in excess of 3% already in 2008 and after consultation of the Economic and Financial Committee, the Commission today concludes that Greece, Spain, France and Ireland are running excessive deficits in the sense of Article 104 of the EU Treaty and recommends a path for their correction. The Commission also recommends to the Council to adopt a new recommendation under Article setting a new deadline for the correction of the excessive deficit in the UK. The assessments and recommendations are based on the Commission's forecasts of last January, but also include recent budgetary information and national forecasts. The proposed deadlines take into account the starting fiscal position and the scope for manoeuvre in line with the European Economic Recovery Plan, the economic outlook, macroeconomic imbalances and financing conditions. The Ecofin Council is expected to discuss the recommendations at the upcoming April informal gathering and to formalise its position at an upcoming Council formation. At that point, the Member States concerned will have six months to indicate what action they intend to take to progressively reduce the budget deficit.

2 FRANCE The budget deficit is expected to have reached 3.4% of GDP in 2008 and the targets for 2009 and 2010 have been revised up to 5.6% and 5.2%, respectively, according to French estimates early this month. This is broadly in line with the Commission's January forecasts. France is being hit by the global economic crisis, including the collapse of world trade since the fourth quarter of The government has adopted a series of measures that are timely, targeted and temporary, and which, together with the free play of particularly strong automatic stabilisers, explain this budgetary evolution. As the excess over the 3% of GDP reference value is neither temporary nor close, and in view of the public debt that is above the 60% of GDP threshold, the Commission adopted, pursuant to Article 104(6) of the EU Treaty, a draft recommendation inviting the Council to conclude that an excessive deficit exists and recommending its correction by 2012 (Article 104(7)). GREECE After reaching 3.5% of GDP in 2007, the general government deficit of Greece is estimated at 3.7% of GDP in 2008, thereby exceeding the 3% reference value in both years. The deficit is expected to remain above 3% in 2009 and to exceed 4% in 2010 on a no-policy-change basis. In view of the existing macroeconomic imbalances and the ongoing re-pricing of risks in the financial markets, which put further pressure on the high debt burden, as well as the size of the required adjustment that is relatively small, a rapid correction of the deficit by 2010 seems appropriate. Hence, the Commission recommends to the Council that Greece strengthens the fiscal adjustment in 2009 through permanent expenditure restraint. Thereafter, the country should implement additional permanent measures in 2010 in order to bring the headline deficit clearly below the 3% of GDP with a view to recovering competitiveness losses and addressing the existing external imbalances. Greece should also pursue efforts to control factors other than net borrowing, which contribute to the change in debt levels, and improve the collection and processing of economic and in particular general government data. Finally, Greece is invited to improve the quality and sustainability of its public finances and, with a view to recovering competitiveness losses and addressing the existing external imbalances, to urgently implement bold structural reforms. IRELAND While general government debt in Ireland stood at 40.6% of GDP in 2008, below the 60% reference value, the general government deficit is set to have reached 6.3% of GDP. According to the Commission's January forecasts, the deficit is expected to widen further to 11% in 2009 and to 13% of GDP in 2010 on a no-policy-change basis. The Commission, therefore, recommends to the Council to decide on the existence of an excessive deficit in Ireland and to make recommendations with a view to bringing this situation to an end. In view of the very weak economic situation in Ireland and the size of the deficit, a multi-annual deadline for the correction of the excessive deficit appears warranted.

3 Hence, the Commission recommends to the Council that the Irish authorities take measures to achieve the 2009 deficit target. Thereafter, additional annual efforts going beyond those foreseen in the January 2009 Stability Programme addendum might be necessary to bring the deficit below the 3% of GDP reference value by 2013, if downside risks to the budgetary targets were to materialize. The strategy's credibility hinges on the timely specification of the consolidation measures to achieve this consolidation path. Given the scale of the required adjustment, a broad-based consolidation effort will be necessary, addressing both the expenditure and the revenue side of the budget. In order to further enhance the credibility of the mediumterm consolidation strategy, it will also be crucial to strengthen the Irish medium-term budgetary framework. SPAIN Spain's updated Stability Programme estimated the 2008 government deficit at 3.4% of GDP. For 2009 and 2010, the Commission's January forecast projects government deficits close to 6% of GDP on average (2010 being based on a nopolicy change scenario). Public debt, which had been reduced to 36.2% of GDP in 2007, increased to 40.3% of GDP in 2008 and is expected to grow above 50% of GDP in In view of the size of the deficit, the economic situation and other factors a deadline for the correction of the excessive deficit by 2012 seems appropriate. Therefore, the Commission recommends to the Council that the Spanish authorities bring the general government deficit below 3% of GDP by The Spanish authorities are also invited to ensure that consolidation towards the medium-term objective of a balanced budget is sustained after the excessive deficit has been corrected. Finally, the Spanish authorities are also urged to improve the long-term sustainability and the quality of public finances. UNITED KINGDOM The United Kingdom is under the excessive deficit procedure since July 2008, when the Council recommended, on the basis of a Commission proposal, to bring the general government deficit below 3% of GDP by 2009/10. But since then the budgetary situation has worsened substantially on account of the sharper-thanexpected economic slowdown and the deficit-increasing discretionary measures adopted by the UK in line with the European Recovery Plan. According to the 2008 update of the UK's convergence programme, the deficit in 2009/10 is projected to reach 8.2% of GDP, with the discretionary loosening accounting for around one-third of the increase over the previous year. The January forecasts of the Commission envisage an even sharper contraction in economic activity and project a deficit in 2009/10 of 9½% of GDP. The government gross debt ratio, which was close to 40% of GDP in 2007/08, is expected by the UK authorities to rise considerably to almost 70% of GDP in 2013/14. Against this background, the Commission recommends to the Council to decide that, in a context of progressively weakening economic conditions, the UK authorities have not taken effective action to end the excessive deficit situation by 2009/10 and to adopt a new recommendation under Article setting a new deadline of the 2013/14 financial year to correct the deficit below 3%. To this end, the UK authorities are asked in 2010/11 and beyond, to ensure additional annual efforts beyond those envisaged in the 2008 update of the UK's convergence programme. The UK is also recommended to reverse progressively the increase in the government gross debt ratio.

4 Stability programme of Cyprus The Commission has also examined the Stability Programme of Cyprus. Cyprus has adopted a significant stimulus package for 2009 in line with the European Recovery Plan that is expected to result, in the programme, in a budget deficit of nearly 1% in 2009 as opposed to an estimated surplus of roughly the same amount last year. In the subsequent years, the structural deficit would deteriorate further. Whilst the deficit would remain below 3%, this does not appear warranted by the economic prospects, which remain relatively good, or desirable given the existence of a large external imbalance. Moreover, against the background of a sharp deterioration in the global economic environment, the budgetary strategy is subject to significant downside risks. In light of the high external imbalance, maintaining prudent budgetary policies and strengthening fiscal sustainability should remain a priority. The Commission, therefore, recommends to the Council to invite Cyprus to: (i) Implement the measures in response to the Recovery Plan as planned while avoiding further deterioration of public finances in 2009 compared to the target; (ii) Reverse the projected fiscal loosening in 2010 and beyond, by restraining expenditures in order to ensure a sound fiscal position in the medium term; (iii) In view of the ongoing fiscal deterioration and of the projected impact of ageing on government expenditure, improve the long-term sustainability of public finances by pursuing the reform of the pension and health care systems. The related documents are available at:

5 CYPRUS Comparison of key macroeconomic and budgetary projections SP Jan Real GDP COM Jan n.a. n.a. (% change) CP Dec n.a. SP Jan HICP inflation COM Jan n.a. n.a. (%) CP Dec n.a. SP Jan Output gap 1 COM Jan n.a. n.a. (% of potential GDP) CP Dec n.a. n.a. Net lending/borrowing vis-àvis SP Jan the rest of the world COM Jan n.a. n.a. CP Dec n.a. SP Jan General government revenue COM Jan n.a. n.a. CP Dec n.a. General government SP Jan expenditure COM Jan n.a. n.a. CP Dec n.a. General government balance Primary balance Cyclically-adjusted balance 1 Structural balance 3 Government gross debt Notes: SP Jan COM Jan n.a. n.a. CP Dec n.a. SP Jan COM Jan n.a. n.a. CP Dec n.a. SP Jan COM Jan n.a. n.a. CP Dec n.a. SP Jan COM Jan n.a. n.a. CP Dec n.a. SP Jan COM Jan n.a. n.a. CP Dec n.a. 1 Output gaps and cyclically-adjusted balances from the programmes as recalculated by Commission services on the basis of the information in the programmes. 2 Based on estimated potential growth of 3.1%, 2.8%, 2.6% and 2.4% respectively in the period Cyclically-adjusted balance excluding one-off and other temporary measures. There are no one-off and other temporary measures according to the most recent programme and according to the Commission services' January interim forecast. Source: Stability programme (SP); Commission services January 2009 interim forecasts (COM); Commission services calculations