Brussels, 23/01/2007 (Agence Europe) - Following the assessment of the first lot of updated stability programmes (from France, Germany, Italy, the Netherlands and Slovenia) and convergence programmes (from Cyprus, Denmark and Slovakia), Economic and Monetary Affairs Commissioner Joaquin Almunia said on Tuesday that this annual exercise was “better than in the past”. However, Mr Almunia was “not totally happy”, especially about the sustainability of public finances, in particular in those countries where there was a medium or high risk in terms of the ageing population (all except the Netherlands). The other programmes will be assessed at two further meetings in February and March. Austria, the Czech Republic and Romania have yet to submit their updated programmes.
Structural budgetary adjustment is taking place in the three main euro zone economies, although greater efforts are required to reach the medium-term objective (MTO). Rome will have to fully implement its 2007 budget in order to correct its excessive deficit, while Paris and Berlin must now concentrate on the budgetary correction objective of at least 0.5% of GDP annually, as allowed for in the Stability and Growth Pact (SGP) during periods of good growth. Slovenia, which has undertaken to consolidate its public finances, can still improve its efforts and the Netherlands, which put forward a sound strategy, must beware of pro-cyclical fiscal policies, the Commission also says.
For those countries outside the eurozone, the situation is also quite varied. Denmark, which is “an example of fine budgetary policy” and Cyprus, which is making progress towards its MTO, submitted convergence programmes in line with the SGP, says the Commission. Cyprus, which hopes to join the euro in 2008 and which will ask the Commission to assess its convergence before the month of March, seems to be on course to bring its debt below 60% of GDP. It should, however, undertake further reform of its pensions system to take account of the risks related to the ageing population, risks which are among the greatest in the EU. Slovakia will be able to correct its excessive debt before the end of the year, but the structural adjustment must be strengthened this year and progress towards the medium-term objective must be speeded up. The following are the scenarios by country:
Germany. The stability programme for 2006-2010 appears to be plausible until 2008 and mildly favourable thereafter, with no deficit adjustment planned. Debt, which was 2.1% of GDP in 2006 (probably 1.9%) will come down to 1.5% this year, and stay at that level the year after, before falling to 0.5% in 2010. The Commission considers there are risks for the budgetary targets after 2007, for instance from the social expenditure side and the company tax reform planned for 2008. The debt ratio, which was close to 68% of GDP in 2006, will not decline sufficiently in terms of the SGP, since it is expected to reach 64.5% at the end of the programme period. The Commission invites Germany, therefore, to benefit from economic good times to strengthen structural adjustment towards the medium-term objective, improve the sustainability of public finances, particularly through the reform of the health system, and improve the budgetary framework so as to strengthen fiscal discipline at all levels of the government. After its next forecast (in May), the Commission will present a recommendation to end the excessive debt procedure against Germany.
France. For the period 2006-2010, the macroeconomic scenario is plausible and the targets aim for a return to budgetary balance and a return to a debt ratio of under 60% of GDP by the end of the period. The deficit reduction, from 2.7% of GDP in 2006 to 0.2% in 2010, is concentrated on the last two years (-0.9 percentage points each time). Debt should fall from 64.9% in 2006 to 58% in 2010. The Ecofin Council next week will approve the ending of the excessive debt procedure against France, Mr Almunia said. There are, however, risks and the budgetary stance in the programme may not be sufficient to ensure that the MTO is achieved in 2010. The Council should invite Paris to exploit current growth and the robust growth prospects to frontload the adjustments towards the MTO, especially in 2007 (this year effort will be 0.3% of GDP in structural terms when the SGP requires 0.5%) and to strengthen the monitoring of expenditure in all sub-sectors (territorial and local units).
Italy. Between 2006 - 2011, the scenario seems to be plausible and seeks to correct the deficit by the end of 2007, as recommended by the Council in July 2005. The MTO should be reached by the end of the programme period, with a positive budgetary balance of 0.1% in 2011. The programme, however, does not contain details of the adjustment strategy, and this is a risk after 2007. Despite a high level of debt (it will fall below 100% of GDP in 2011), Italy, which has undertaken pensions reform, is at medium risk over the effect of the ageing population on public finances.
Rome is therefore obliged to comply with its obligations on 2007 deficit correction for reaching its MTO by the end of the programme, and to fully implement pension reform, improve budget procedure transparency, as well as develop spending follow-up and inspection mechanisms. Possible suspension of excessive deficit procedures will not be decided before May 2008, when the Commission examines the definitive results for 2007 and forecasts for 2008.
Netherlands. Given the sound results registered, the Commission identifies a “lack of ambition” in the updated programme. The Dutch MTO is a deficit in the range of 0.5 to 1% of GDP in structural terms, unchanged from the previous update of the programme. The only real risk is budgetary orientation for this year, which appears to be pro-cyclical but is not expected to affect the capacity of the country to respect the MTO over the whole period. Debt is expected to fall from 50.2% in 2006 to 44.2% in 2009.
Slovenia. The latest newcomer to the eurozone, Ljubljana aims to achieve a medium-term objective of a deficit of 1% of GDP in 2009, which “is not ambitious” given the positive economic situation in the country and the fact that the Stability and Growth Pact imposes a higher adjustment level for other eurozone countries. Slovenia is expected to benefit from the good economic situation and swiftly reach its MTO by focusing on adjustment at the beginning of the period, particularly taking the impact of demographic ageing into account on the country's public finances. On this point, it is also expected to push current pensions reform forward, geared especially to increasing labour participation of older workers and encouraging the development of private pension saving schemes.
Denmark. The programme is particularly prudent. It expects quite low growth rates between 2008-10. The country will respect its MTO for the period covered (of between ½ and 1½% of GDP on average) and significantly reduce its debt ratio (from 29.8% of GDP in 2006 to 19% in 2010).
Cyprus. In 2006 the deficit accounted for 1.9% of GDP but is expected to decline to 0.1% by 2010, the end of the period covered by the updated programme, where debt is expected to reach 46.1% of GDP (as opposed to 64.7% in 2006). The budgetary stance in the programme seems sufficient to ensure that the MTO is reached by 2008 and maintained thereafter. The budgetary costs of an ageing population are, however, projected to be so significant that Cyprus will have to control public spending on pensions and implement new reforms in this area, as well as in the area of health care.
Slovakia. The programme aims to correct the excessive deficit by 2007 (from 3.7% in 2006, it is expected to go to 2.9% this year, and reach 1.9% in 2009). Bratislava set its MTO (deficit of 0.9% of GDP) after the period covered, namely after 2010. The Commission observes that budgetary adjustment forecast for post-2007 appears limited but should be strengthened throughout the programme period in view of strong growth prospects. The Commission hopes that Slovakia will be able to benefit from this to increase structural adjustment, and strengthen the binding nature of spending thresholds set by central government. (ab)