Explanatory Memorandum to SEC(2010)743 - Existence of an excessive deficit in Denmark - Main contents
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This page contains a limited version of this dossier in the EU Monitor.
| dossier | SEC(2010)743 - Existence of an excessive deficit in Denmark. |
|---|---|
| source | SEC(2010)743  |
| date | 15-06-2010 |
1. The application of the Stability and Growth Pact in the current crisis situation
Many EU countries are presently facing general government deficits above the 3% of GDP reference value set in the Treaty. The often strong deterioration in the deficit as well as the debt positions must be seen in the context of the unprecedented global financial crisis and economic downturn in 2008/09. Several factors are at play. First, the economic downturn brings about declining tax revenue and rising social benefit expenditure (e.g. unemployment benefits). Second, recognising that budgetary policies have an important role to play in the current extraordinary economic situation, the Commission called for a fiscal stimulus in its November 2008 European Economic Recovery Plan (EERP), endorsed by the European Council in December. The Plan explicated that the stimulus should be timely, targeted and temporary and differentiated across Member States to reflect their different positions in terms of public finance sustainability and competitiveness and should be reversed when economic conditions improve. Finally, several countries have taken measures to stabilise the financial sector, some of which have impacted on the debt position or constitute a risk of higher deficits and debt in the future, although some of the costs of the government support could be recouped in the future.
The Stability and Growth Pact requires the Commission to initiate the excessive deficit procedure (EDP) whenever the deficit of a Member State exceeds the 3% of GDP reference value. The amendments to the Stability and Growth Pact in 2005 aimed at ensuring that in particular the economic and budgetary background was taken into account fully in all steps in the EDP. In this way, the Stability and Growth Pact provides the framework supporting government policies for a prompt return to sound budgetary positions taking account of the economic situation, and thereby ensuring long-term sustainability of public finances.
2. Previous steps in the excessive deficit procedure
Article 126 of the Treaty on the Functioning of the European Union lays down an excessive deficit procedure (EDP). This procedure is further specified in Council Regulation (EC) No 1467/97 “on speeding up and clarifying the implementation of the excessive deficit procedure”1, which is part of the Stability and Growth Pact.
According to Article 126(2) of the Treaty, the Commission has to monitor compliance with budgetary discipline on the basis of two criteria, namely: (a) whether the ratio of the planned or actual government deficit to gross domestic product (GDP) exceeds the reference value of 3% (unless either the ratio has declined substantially and continuously and reached a level that comes close to the reference value; or, alternatively, the excess over the reference value is only exceptional and temporary and the ratio remains close to the reference value); and (b) whether the ratio of government debt to GDP exceeds the reference value of 60% (unless the ratio is sufficiently diminishing and approaching the reference value at a satisfactory pace).
Article 126(3) stipulates that, if a Member State does not fulfil the requirements under one or both of these criteria, the Commission has to prepare a report. This report also has to “take into account whether the government deficit exceeds government investment expenditure and take into account all other relevant factors, including the medium-term economic and budgetary position of the Member State”.
On the basis of the data notified by the Danish authorities in April 20102 and taking into account the Commission services’ spring 2010 forecast, the Commission adopted a report under Article 126(3) for Denmark on 12 May 20103.
Subsequently, and in accordance with Article 126 i, the Economic and Financial Committee formulated an opinion on the Commission report on 27 May 2010.
3. The existence of an excessive deficit
According to data notified by the Danish authorities in April 2010, the general government deficit in Denmark is planned to reach 5.4% of GDP in 2010, thus exceeding the 3% of GDP reference value. The Commission report under Article 126(3) considered that the planned deficit was not close to the 3% of GDP reference value, but that the planned excess over the reference value could be qualified as exceptional within the meaning of the Treaty and the Stability and Growth Pact. In particular, it resulted from a severe economic downturn in the sense of the Treaty and the Stability and Growth Pact. According to the Commission services’ 2010 spring forecast, real GDP in Denmark is projected to recover at 1.6% in 2010 after the sharp contraction of 4.9% in 2009. The 2009 recession reflected the abrupt decline in private consumption, investment and exports as a consequence of the financial crisis and the global recession, in particular the slump in demand from the main trading partners (Germany, United Kingdom, Sweden and Norway). The deficit in 2010 is a consequence of both the economic downturn and the stimulus measures taken in line with the EERP by the Danish authorities. However, the planned excess over the reference value cannot be considered temporary. According to the Commission services’ spring 2010 forecast, the deficit would decline to 4.9% of GDP in 2011 on a no-policy change4 basis. The deficit criterion in the Treaty is not fulfilled.
According to data notified by the Danish authorities in April 2010, the general government gross debt remains below the 60% of GDP reference value, at 45.1% of GDP in 2010. The Commission services’ spring 2010 forecast projects the debt ratio to be at 46% of GDP in 2010 and to increase to 49.5% of GDP in 2011, still to remain below the 60% of GDP reference value. The debt criterion in the Treaty is fulfilled.
In line with the provisions in the Treaty and the Stability and Growth Pact, the Commission also analysed in its report “relevant factors”. According to the Stability and Growth Pact, these can only be taken into account in the steps leading to the decision on the existence of an excessive deficit if the deficit satisfies the double condition of closeness and temporariness. In the case of Denmark, the double condition is not met. Considered on their own merit, the relevant factors in the current case seem to be relatively favourable.
The opinion of the Economic and Financial Committee in accordance with Article 126 i of the Treaty is consistent with the assessment in the Commission report under Article 126(3).
The Commission, having taken into account its report under Article 126(3) and the opinion of the Economic and Financial Committee under Article 126 i, is of the opinion that an excessive deficit exists in Denmark. This opinion, adopted by the Commission on [15 June 2010], is herewith addressed to the Council according to Article 126(5). The Commission proposes that the Council shall decide accordingly, in conformity with Article 126(6). In addition, the Commission is submitting to the Council a recommendation for a Council Recommendation to be addressed to Denmark with a view to bringing the situation of an excessive deficit to an end according to Article 126(7).
4. Recommendations to end the excessive deficit situation
According to Article 3 i of Council Regulation (EC) No 1467/97, the Council recommendation under Article 126(7) has to establish a deadline of six months at most for effective action to be taken by the Member State concerned as well as a deadline for the correction of the excessive deficit, which “should be completed in the year following its identification unless there are special circumstances”. Article 2(6) of the Regulation implies that the “relevant factors” considered in the Commission report under Article 126(3) of the Treaty have to be taken into account in deciding whether special circumstances exist. Article 3 i of the Regulation specifies that the Council has to recommend that the Member State achieves a “minimum annual improvement of at least 0.5% of GDP as a benchmark, in its cyclically adjusted balance net of one-off and temporary measures, in order to ensure the correction of the excessive deficit within the deadline set in the recommendation”.
Special circumstances, which are relevant for the greater flexibility in the application of the EDP introduced with the 2005 reform of the Stability and Growth Pact, are deemed to exist in the case of Denmark. In particular, the 2009 recession reflected the abrupt decline in private consumption, investment and exports as a consequence of the financial crisis and the global recession, in particular the slump in demand from the main trading partners (Germany, United Kingdom, Sweden and Norway). The deficit in 2010 is a consequence of both the economic downturn and the stimulus measures taken in line with the EERP by the Danish authorities.
Against this background, it is appropriate to consider the correction of the excessive deficit in a medium-term framework with a deadline for the correction of 2013. Recognising that the Danish budgetary position in 2010 resulted from measures taken in response to the crisis and amounting to 2.2% of GDP in 2009 and 1.3% in 2010, which was an appropriate response in line with the European Economic Recovery Plan, and the free play of automatic stabilisers, the Danish authorities should implement the fiscal measures in 2010 as envisaged. In particular, in view of the absence of major economic imbalances, a credible and sustainable adjustment path would require the Danish authorities to ensure an average annual structural adjustment of ½% of GDP over the period 2011-2013 and specify the measures that are necessary to achieve the correction of the excessive deficit by 2013, cyclical conditions permitting, and accelerate the reduction of the deficit if economic or budgetary conditions turn out better than currently expected.
Enhanced surveillance under the EDP, which seems necessary in view of the deadline for the correction of the excessive deficit, will require regular and timely monitoring of the progress made in the implementation of the fiscal consolidation strategy to ensure the correction of the excessive deficit. In this context, a separate chapter in the updates of Denmark's convergence programme which will be prepared between 2010 and 2013 could usefully be devoted to this issue.
Contents
| 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | ||
| Real GDP (% change) | COM spring 2010 | 1,7 | -0,9 | -4,9 | 1,6 | 1,8 | n.a. | n.a. |
| CP February 2010 | n.a. | -0,9 | -4,3 | 1,3 | 1,6 | 2.0 | 2,3 | |
| Output gap1 (% of potential GDP) | COM spring 2010 | 2,6 | 0,2 | -5,1 | -3,9 | -2,7 | n.a. | n.a. |
| CP February 20103 | n.a. | 0.3 | -4.5 | -3.9 | -3.1 | -2.0 | -0.9 | |
| General government balance (% of GDP) | COM spring 2010 | 4,8 | 3,4 | -2,7 | -5,5 | -4,9 | n.a. | n.a. |
| CP February 2010 | n.a. | 3,4 | -2,9 | -5,3 | -4,1 | -3,1 | -1,8 | |
| Primary balance (% of GDP) | COM spring 2010 | 6,3 | 4,8 | -0,7 | -3,4 | -2,7 | n.a. | n.a. |
| CP February 2010 | n.a. | 4,8 | -1,3 | -3,7 | -2,3 | -1,2 | 0,3 | |
| Cyclically-adjusted balance1 (% of GDP) | COM spring 2010 | 3,1 | 3,3 | 0,6 | -3,0 | -3,1 | n.a. | n.a. |
| CP February 2010 | n.a. | 3.2 | 0.0 | -2.8 | -2.1 | -1.7 | -1.1 | |
| Structural balance4 (% of GDP) | COM spring 2010 | 3,1 | 3,3 | 0,6 | -2,7 | -3,1 | n.a. | n.a. |
| CP February 2010 | n.a. | 3.2 | 1.4 | -1.1 | -1.0 | -0.8 | -0.3 | |
| Government gross debt (% of GDP) | COM spring 2010 | 27,4 | 34,2 | 41,6 | 46,0 | 49,5 | n.a. | n.a. |
| CP February 2010 | n.a. | 33,4 | 38,5 | 41,8 | 46,2 | 48,3 | 48,1 | |
| Notes: | ||||||||
| 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 1.4%, 0.6%, 0.5% and 0.9% respectively in the period 2008-2011. | ||||||||
| 3 Based on estimated potential growth of 1.4%, 0.6%, 0.5% and 0.9% respectively in the period 2008-2011. | ||||||||
| 4 Cyclically-adjusted balance excluding one-off and other temporary measures. One-off and other temporary measures are 1.4% of GDP in 2009, 1.7% in 2010, 1.1% in 2011, 0.9% in 2012, 0.8% in 2013 and 0.0% in 2015; all deficit-reducing according to the most recent programme and 0.2% of GDP in 2010 deficit-reducing according to the Commission services' spring 2010 forecast. Due to differences in methodology, the one-offs reported in the programme do not qualify as one-offs according to the Commission services' definition. Using this definition, the one-offs would be 0.2%-of-GDP deficit reducing in 2010 and zero in the remaining years. | ||||||||
| Source: | ||||||||
| Convergence programme (CP); Commission services’ spring 2010 forecasts (COM); Commission services’ calculations. |
COUNCIL DECISION
on the existence of an excessive deficit in Denmark
THE COUNCIL OF THE EUROPEAN UNION,
Having regard to the Treaty on the Functioning of the European Union, and in particular Article 126(6) thereof,
Having regard to the proposal from the European Commission,
Having regard to the observations made by Denmark,
Whereas:
According to Article 126 of the Treaty on the Functioning of the European Union Member States shall avoid excessive government deficits.
The Stability and Growth Pact is based on the objective of sound government finances as a means of strengthening the conditions for price stability and for strong sustainable growth conducive to employment creation.
The excessive deficit procedure (EDP) under Article 126 of the Treaty, as clarified by Council Regulation (EC) No 1467/97 on speeding up and clarifying the implementation of the excessive deficit procedure5 (which is part of the Stability and Growth Pact), provides for a decision on the existence of an excessive deficit. The Protocol on the excessive deficit procedure annexed to the Treaty sets out further provisions relating to the implementation of the EDP. Council Regulation (EC) No 479/20096 lays down detailed rules and definitions for the application of the provision of the said Protocol.
The 2005 reform of the Stability and Growth Pact sought to strengthen its effectiveness and economic underpinnings as well as to safeguard the sustainability of the public finances in the long run. It aimed at ensuring that in particular the economic and budgetary background was taken into account fully in all steps in the EDP. In this way, the Stability and Growth Pact provides the framework supporting government policies for a prompt return to sound budgetary positions taking account of the economic situation.
Article 126(5) of the Treaty requires the Commission to address an opinion to the Council if the Commission considers that an excessive deficit in a Member State exists or may occur. Having taken into account its report in accordance with Article 126(3) and having regard to the opinion of the Economic and Financial Committee in accordance with Article 126 i, the Commission concluded that an excessive deficit exists in Denmark. The Commission therefore addressed such an opinion to the Council in respect of Denmark on [15 June 2010]7.
Article 126(6) of the Treaty states that the Council should consider any observations which the Member State concerned may wish to make before deciding, after an overall assessment, whether an excessive deficit exists. In the case of Denmark, this overall assessment leads to the following conclusions.
According to data notified by the Danish authorities in April 2010, the general government deficit in Denmark is planned to reach 5.4% of GDP in 2010, thus exceeding the 3% of GDP reference value. The planned deficit is not close to the 3% of GDP reference value, but that the planned excess over the reference value can be qualified as exceptional within the meaning of the Treaty and the Stability and Growth Pact. In particular, it resulted from a severe economic downturn in the sense of the Treaty and the Stability and Growth Pact. According to the Commission services’ 2010 spring forecast, real GDP in Denmark contracted by 4.9% in 2009 and is projected to recover at 1.6% in 2010. The deficit in 2010 is a consequence of both the economic downturn and the stimulus measures taken in line with the EERP by the Danish authorities. However, the planned excess over the reference value cannot be considered temporary. According to the Commission services’ spring 2010 forecast, the deficit would decline to 4.9% of GDP in 2011 on a no-policy change8 basis. The deficit criterion in the Treaty is not fulfilled.
According to data notified by the Danish authorities in April 2010, the general government gross debt remains below the 60% of GDP reference value, at 45.1% of GDP in 2010. The Commission services’ spring 2010 forecast projects the debt ratio to be at 46% of GDP in 2010 and to increase to 49.5% of GDP in 2011, still to remain below the 60% of GDP reference value. The debt criterion in the Treaty is fulfilled.
According to Article 2 i of Council Regulation (EC) No 1467/97, “relevant factors” can only be taken into account in the steps leading to the Council decision on the existence of an excessive deficit in accordance with Article 126(6) if the double condition - that the deficit remains close to the reference value and that its excess over the reference value is temporary - is fully met. In the case of Denmark, this double condition is not met. Therefore, relevant factors are not taken into account in the steps leading to this decision.
HAS ADOPTED THIS DECISION:
Article 1
From an overall assessment it follows that an excessive deficit exists in Denmark.
Article 2
This decision is addressed to The Kingdom of Denmark.
For the Council
The President
1OJ L 209, 2.8.1997, p. 6. The report also takes into account the “Specifications on the implementation of the Stability and Growth Pact and guidelines on the format and content of stability and convergence programmes”, endorsed by the ECOFIN Council of 10 November 2009, available at ec.europa.eu/economy_finance/sgp/legal_texts.
2According to Council Regulation (EC) No 479/2009, Member States have to report to the Commission, twice a year, their planned and actual government deficit and debt levels. The most recent notification of Denmark can be found at:
epp.eurostat.ec.europa.eu/portal/page/portal.
3All EDP-related documents for Denmark can be found at the following website:
ec.europa.eu/economy_finance/sgp/deficit.
4The no-policy change forecast takes into account the (partial) withdrawal of measures of extraordinary nature linked to the crisis.
5OJ L 209, 2.8.1997, p. 6.
6OJ L 145, 10.6.2009, p. 1.
7All EDP-related documents for Denmark can be found at the following website:
ec.europa.eu/economy_finance/sgp/deficit.
8The no-policy change forecast takes into account the (partial) withdrawal of measures of extraordinary nature linked to the crisis.
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