Brussels, 30/01/2002 (Agence Europe) - As we thought and announced on several occasions, in the framework of assessing the updated stability and growth programmes of eight Member States (France, Germany, Portugal, Greece, Italy, Ireland, Spain and the United Kingdom) the European Commission for the first time recommended that the EcoFin Council trigger the warning process (so-called "early warning") against Germany and Portugal due to their public deficit that is dangerously close to the fatal 3% of GDP mark. Even though the programmes of the others are regarded as being in compliance with the demands of the Stability and Growth Pacts, France and Italy were also the subject of criticisms regarding public expenditure: these countries are said not to be in a position to meet their objectives aimed at reaching a budget situation close to a balance or a surplus in the medium term.
"For the Commission, such slides in the German and Portuguese public deficits are major, meaning that the conditions are there to launch an early warning procedure against these two countries", Commissioner Pedro Solbes told the press on Wednesday. He explained that the aim of this "preventive" procedure did not consist in penalising States (as when the public deficit of a country reaches the 3% mark), but to "help Member States prevent their deficits closing in to much on the 3% of GDP mark". "Launching an early warning procedure represents an important step, but the political scope of such a proposal should not be exaggerated", he said, before adding that "this procedure is not necessarily a criticism of the budgetary strategy of the Member State concerned". The Commissioner then explained why the Commission had triggered this early warning procedure: Germany exceeded by 1% its public deficit estimates for 2001 (2.6% of GDP according to Commission figures, against the 1.6% predicted in its programme), "even though this slip in the German deficit may especially be explained by the effect of a slowdown in European and world growth, as well as the review of national accounting systems". Mr. Solbes added that the prospects for 2002 for the country were "uncertain", the German authorities having predicted a public deficit of 2.5%, whereas the Commission was counting on 2.7% of GDP. He explained that, in its stability programme of last year, Germany had forecast a deficit of 1% of GDP in 2002, which represents an important difference between the stated objectives and the results secured. "This situation does not lead to debate, it is the facts that are unquestionable and I believe that there is no reason to discuss this with the German authorities", Solbes said firmly, adding that there was a risk of seeing the German public deficit reach 3% and that, therefore, any further slides in public finances had to be avoided (notably spending on health care). In Portugal's case, the situation is different, Solbes explained, for whom the procedure can be explained less by the level of the current public deficit (2.2% in 2001) than by the difference between the forecasts the country made in its programme (1.1% in 2001) and reality. This difference is said to be due to the unexpected slowdown in the country's economy, as well as other factors such as: - an underestimation of the tax income linked to the reform of direct taxation in 2001; - a less clear improvement than expected in the collection and recovery of taxes; - an excess in current primary expenditure. "It is true that the Portuguese Government identified the risk of such a slide and thus adopted an extraordinary budget representing 0.6% of GDP. These measures contributed in reducing the growth in governmental spending, but were not enough to avoid a large slide", he explained. Like Germany, uncertainties reign over the forecasts for 2002 (Portugal predicts a deficit of 1.8%). "France is moving slowly towards a reduction of these budgetary deficits and the French plans are not very ambitious; given the size of the public debt, one may wonder about the measures aimed at attaining the objectives", said Solbes before adding that for Greece "it is the high level of the public debt that is of concern to the Commission" and that for Spain "the problem of the public deficit could jeopardise the position of balance demanded by the Pact".
Mr. Solbes openly placed the European Ministers of the Economy and Finance (who will meet in the EcoFin Council on 12 February in turn to adopt an opinion on these programmes) before their responsibilities, asking them to act along the same lines as the Commission, and that for two main reasons: (1) the credibility of the Stability and Growth Pact depends on it, especially since there is no doubt that certain Member States have not stuck to their budget targets and therefore their deficits are approaching the 3% cut-off point, noted Mr Solbes, adding that if the Commission and Council did not take action, it would be hard to imagine using the rapid alert procedure in the future, which meant the entire monitoring process was at stake; 2) He said that they were obliged to take action not only legally under the Council regulation but also under the political commitments made at the Amsterdam European Council. EUROPE understands that the German Finance Minister, Hans Eichel, is confident about not receiving a "ticking off" from his Council colleagues since the only countries favouring it are reported to be Belgium, the Netherlands, Austria and Denmark.
A summary of the Commission's comments on four countries (EUROPE will report on the other four tomorrow):
Germany. The Commission believes Germany's short-term growth perspectives are over optimistic since the country is counting on growth of 1.25% in 2002 and annual growth averaging at 2% during the 2001-2005 period. These growth forecasts, however, would imply a sharp takeoff in 2003 to 2005. The updated Stability Programme also outlines macroeconomic prospects on the low side, forecasting growth of 0.75% in 2003 and medium-term growth of 1.75%, which the Commission views as more plausible. In terms of Germany's public deficit, the Commission asserts that extra economic measures will have to be taken as soon as economic growth is up and running again. The updated programme notes that for 2002, the debt ratio will not fall below 60% of GDP, despite the significant income raised by privatisation and selling UMTS licences (both of which were used to pay off public debt in 2000 and 2001). The proportion of debt is expected to fall to 55.5% GDP in 2005 but as has already been stressed in the past, further privatisation would be necessary at all levels to counteract the dangers of exceeding the medium-term debt targets set in the programme. The expected ageing of the German population will also require the debt ratio to be sharply cut over the next few decades.
Portugal. Output is expected to grow by 1.75% in 2002 and increase slightly to 2.5% in 2003, before evening out at 3% in 2004 and 2005. The Commission writes that an annual growth level of 2.5% on average is low for a country that is in the process of catching up, like Portugal, but it is still plausible, since the country's private sector stakeholders are continuing their adjustment process to cut their levels of debt, adding that the planned adjustment would enable Portuguese public finance to meet the target of an almost balanced budget or a budget surplus in 2004. In the short term, however, Portugal's public finances are very vulnerable to a downward trend in economic growth or in the budget situation, regrets the Commission. The proposed strategy to deal with this is to cut spending in line with the Broad Economic Policy Guidelines. The public administration's debt ratio in 2001 and the projections for the next few years have been revised sharply downwards from the levels set out in the previous update, notes the Commission. Although very much below the 60% ceiling, the targeted debt ratio for 2004 is now 6 points above the percentage outlined in the previous update, which suggests that unbudgeted financial operations must exist which have not been outlined in the programme, the Commission points out. The slow rate at which the public debt is being reduced is seen by the Commission as a continuing source of concern.
France. "The public finance projections included in the 2001 update of the stability programme are in compliance with the requirement of close to balance or in surplus of the Stability and Growth Pact in 2004 and 2005", writes the Commission, adding that France has "a sufficient safety margin to avoid breaching the 3% of GDP limit". Budgetary adjustment should now be speeded up in order to meet the objective of a balanced government account by 2004/2005, recommends the Commission, adding that France's erring off course with regard to the expenditure targets set in the Finance Law for 2001 "is to be largely attributed to cyclical conditions: tax revenues have fallen short of expectation and, while nominal general government expenditure increased more than expected, expenditure in real terms remained in line with plans". The Commission asserts that the macroeconomic assumptions bear downside risks, particularly concerning 2002. The Commission's autumn forecasts projected real GDP growth at around 1.5%, as against 2.5% in the French stability programme. "The government deficit in 2002, the starting point of the programme, could then result higher than projected by French authorities", notes the Commission, with Mr Solbes' department adding "the strategy outlined in the 2001 updated programme to prepare for the budgetary costs of ageing in the programme lacks ambition. Indeed, the stability programme of France makes very little reference to any reform of the pension system, reform which has been delayed several times in recent years".
Italy: the government debt ratio should no longer, contrary to forecasts pass below the 100% mark of GDP in 2003, which postpones for a year the undertaking made by Italy in 1998, the Commission writes, adding that beyond the slow down in the privatisation process in 2001, the programme does not fully explain to review of the debt reduction trajectory. The reforms of pension schemes adopted in the 1990s, which for now are only being implemented gradually, have, according to projections, allowed for the risk of a steep increase in pensions in the GDP being averted in the medium-term.. To attain that result and to guarantee the sustainable nature in the long-term of the situation of public finances in general, Italy must be able to have large primary surpluses in the long term, and that it manage to considerably increase the level of activity. This demonstrates the need to hasten implementation of the reform of pensions and the labour market, as well as the reduction in the high debt ration.