16th Nov 2018

EU states to face procedures for high debts

  • Commission President ROMANO PRODI stresses that flexibility in the interpretation of the Pact, does not mean laxity. (Photo: European Commission)

The Commission has proposed to extend its excessive deficit procedure against EU states, to be also used in cases of high debt and not just high deficit. This proposal was adopted unanimously by the Commissioners on Wednesday, as part of the reform of the Stability and Growth Pact (SGP). The Commission can act against high deficits within the existing Treaty and framework of the Pact. The Commission adopted these proposals after failure by some EU states to stick to the rules, and after that the Pact was criticised for its "inflexibility", most notably by the President of the Commission, Romano Prodi.

Prodi calls for \"intelligent\" implementation of the Pact

"These proposals send a clear message that four years after the euro was established we can learn from experience and implement the Stability and Growth Pact in a more intelligent and forward-looking way," President Romano Prodi said. "The Pact stands unaltered. But it will be interpreted in a more open way so as to strengthen the economic rationale - "the intelligence" - underpinning budget policy decisions."

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The Commission will also propose to the Convention on the future of Europe that it be given the authority to issue early warnings directly to Member States - without having to ask member states for approval first.

EU States fail to stick to the rules

The Stability and Growth Pact, which underpins the euro, states that EU states' deficit has to be below 3 per cent of GDP and the general government debt level should be below 60 per cent of GDP. The 3 per cent threshold for deficit has often been criticised for its "rigidity". "It is part of the Maastricht Treaty," Economic Affairs Commissioner Pedro Solbes said. "I agree that it could have been different, but I still think that the 3 per cent threshold remains valid."

Some EU states, however, fail to stick to the Stability and Growth Pact rules. Portugal's deficit reached 4.1 per cent of GDP in 2001. Germany is at risk of an excessive deficit position with a forecast of 3.8 per cent of GDP in 2002, and an early warning was sent to France as its deficit for 2003 is projected to be 2.9 per cent of GDP.

Debt levels in Italy and Greece cause concern

There have also been worrying development as regards government debt. Italy and Greece give most cause for concern as their debt levels remain well above 100 per cent of GDP, and very little progress has been made in the past four years to reduce debt levels towards the 60 per cent of GDP reference value.

So, according to Mr Prodi, the Commission's proposal "will prevent certain interpretations that enabled some Member States to run laxist policies in the past for which they are now suffering the consequences."

5 proposals to improve interpretation of Pact

The Commission is proposing a five-point plan to improve the interpretation of the Pact, thereby introducing more flexibility but which at the same time ensures a more rigorous adherence to the goal of sound and sustainable public finances. "Flexibility does not mean laxity," Mr Prodi said. "It's flexible in a preventive way. Not following figures rigidly but trying to foresee difficulties which might lie ahead."

4 proposals to improve implementation

The Commission is also presenting a four-point programme to improve the implementation of the Stability and Growth Pact. EU states are called to reaffirm their political commitment to the Pact, improving the quality and timeliness of government finance statistics to ensure better surveillance, more effective enforcement procedures and better communication through openness and transparency. The Commission is proposing to specify the criteria that the Commission will use when deciding whether to activate the early-warning mechanism in the event of significant divergence from budgetary targets.

It also proposes to clarify the interpretation of the debt criterion of the excessive deficit procedure, as determining what would constitute a 'satisfactory pace' of debt reduction towards the 60 per cent of GDP reference value.

At the Spring European Council, the EU heads of state will be asked to reaffirm their political commitment to these proposals by adopting a formal resolution.

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