Brussels, 16/05/2007 (Agence Europe) - On Wednesday, the Commission said that the correction of Germany's, Greece's and Malta's budget balance was sustainable and credible, and it recommended that the Council abrogate the excessive deficit procedures against them. European Commissioner for Economic and Monetary Affairs Joaquin Almunia said that Berlin's “ambitious” adjustment was “very important for the credibility of the Stability and Growth Pact” (SGP), the reform of which was precipitated by the legal wrangling between Commission and Council following finance ministers' decision to set the procedures against Germany and France aside. “The Greek deficit was reduced to below 3% in 2006 and is expected to stay below that ceiling also this year and next,” the Commissioner told press, reminding Athens of the efforts required to cut the debt, which remains above 100% of GDP. The long road travelled by Malta to consolidate public finances now means that it will be knocking on the door of the euro area from January 2008 (see related article). “The challenge now is to continue on a virtuous path as concerns the consolidation of public finances, in order to benefit fully of their contribution to stability and prosperity after the adoption of the single currency,” Mr Almunia said. In the face of the challenge of an ageing population, however, the three countries must improve the long-term sustainability of their public finances by achieving rapidly their medium-term objective of balanced budgets, the Commission said.
Germany. The excessive deficit procedure against Germany was begun in January 2003. Berlin reduced its deficit to 3.2% in 2005 and to 1.7% in 2006. The structural balance is estimated to have improved by almost one percentage point in 2006, the Commission said. Berlin has already, one year early, achieved what was expected of it by the Council, which gave it notice (Article 104§9 of the Treaty) to correct its deficit by 2007. The Commission's spring forecast (see EUROPE 9421) projects the deficit to decline further to 0.6% of GDP this year, and to 0.3% in 2008. The rise in public debt from 2002 (60.3% of GDP) stabilised at 67.9% in 2005 and 2006. The debt ratio is expected to decline to 65.4% this year and to 63.6% in 2008, thus converging towards the reference value. The Commission stresses that the German government must take advantage of the good times and use any unexpected revenues to reduce the deficit further and must ensure that the planned corporate tax reform does not jeopardise the fiscal consolidation in 2008 (a fall of at least 0.5% per year under the preventive arm of the SGP).
Greece. The procedure begun in May 2004 because of a deficit of 3.2% of GDP in 2003 (in reality 6.2%) led to a formal notice to Athens in February 2005, requiring it to correct the situation by the end of 2006. The deficit was reduced to 2.6% of GDP in 2006 from 5.5% in 2005. The structural adjustment amounted to 4½ percentage points of GDP between 2004 (when it was 7.9%) and 2006, the Commission said. The headline deficit is expected to narrow to 2.4% of GDP in 2007. On a no-policy-change basis, the deficit is expected to increase slightly to 2.7% of GDP next year, Mr Almunia warned, and he hoped to send a “clear signal” that structural correction should be more ambitious. Debt declined from 108½% of GDP in 2004 to 104½% in 2006 and is expected to fall further to around 97½% of GDP by 2008. However, given the strong economic growth (4.3% in 2006 and 3.7% in 2007 according to forecast), Greece is called on to improve the sustainability of its public finances currently put at risk by demographic ageing.
Malta. The closure of the excessive debt procedure, opened on Malta's accession to the EU in 2004, will allow it meet the criteria for joining the euro zone. Called on to come back below 3% by the end of 2006, Malta reduced its deficit to 2.6% last year (compared with 10% in 2003 and 3.1% in 2005) and is expected to continue in similar fashion in 2007 (2.1%) and 2008 (1.6%). Recourse to one-off measures in 2007 is anticipated to remain practically unchanged (0.6% of GDP) from the previous year but to fade away in 2008. After reaching a peak of 73.9% in 2004, the debt-to-GDP ratio started to decline to slightly below 72.5% of GDP in 2005 and to 66.5% in 2006. It is expected to fall further to almost 64% of GDP by 2008. Nevertheless, Malta must make use of this period of growth and further reduce its structural deficit, since, in the long term, the ageing of the population will have a severe effect on public finances, particularly healthcare costs.
Seven member states are still in the excessive debt procedure with varying deadlines (see EUROPE 9421). These are Italy and Portugal from the euro area, and the Czech Republic, Hungary, Poland, Slovakia, and the United Kingdom. With a deficit of 2.8% in 2006 and 2.6% in 2007, the UK is expected to be the next country to exit the procedure. (ab)