# Official Journal C 49/2008

| | ISSN 1725-2423 |
| --- | --- |
| Official Journal
  of the European Union | C 49 |
| | |
| English edition | Information and Notices | Volume 5122 February 2008 |

ISSN 1725-2423

Official Journal

of the European Union

C 49

English edition

Information and Notices

Volume 5122 February 2008

---

| Notice No | Contents | page |
| --- | --- | --- |
| | I   Resolutions, recommendations and opinions |
| | OPINIONS |
| | Council |
| 2008/C 049/01 | Council opinion of 12 February 2008 on the updated stability programme of Luxembourg, 2007-2010 | 1 |
| 2008/C 049/02 | Council opinion of 12 February 2008 on the updated stability programme of Finland, 2007-2011 | 5 |
| 2008/C 049/03 | Council opinion of 12 February 2008 on the updated stability programme of the Netherlands, 2007-2010 | 8 |
| 2008/C 049/04 | Council opinion of 12 February 2008 on the updated stability programme of Germany, 2007-2011 | 12 |
| 2008/C 049/05 | Council opinion of 12 February 2008 on the updated convergence programme of Sweden, 2007-2010 | 16 |
| 2008/C 049/06 | Council opinion of 12 February 2008 on the updated convergence programme of Hungary, 2007-2011 | 20 |
| 2008/C 049/07 | Council opinion of 12 February 2008 on the updated convergence programme of the United Kingdom, 2007/2008-2012/2013 | 25 |
| 2008/C 049/08 | Council opinion of 12 February 2008 on the updated stability programme of Italy, 2007-2011 | 29 |
| 2008/C 049/09 | Council opinion of 12 February 2008 on the updated stability programme of France, 2007-2012 | 34 |
| 2008/C 049/10 | Council opinion of 12 February 2008 on the updated convergence programme of Romania, 2007-2010 | 39 |
| 2008/C 049/11 | Council opinion of 12 February 2008 on the updated convergence programme of Slovakia, 2007-2010 | 44 |

Notice No

Contents

page

I   Resolutions, recommendations and opinions

OPINIONS

Council

2008/C 049/01

Council opinion of 12 February 2008 on the updated stability programme of Luxembourg, 2007-2010

1

2008/C 049/02

Council opinion of 12 February 2008 on the updated stability programme of Finland, 2007-2011

5

2008/C 049/03

Council opinion of 12 February 2008 on the updated stability programme of the Netherlands, 2007-2010

8

2008/C 049/04

Council opinion of 12 February 2008 on the updated stability programme of Germany, 2007-2011

12

2008/C 049/05

Council opinion of 12 February 2008 on the updated convergence programme of Sweden, 2007-2010

16

2008/C 049/06

Council opinion of 12 February 2008 on the updated convergence programme of Hungary, 2007-2011

20

2008/C 049/07

Council opinion of 12 February 2008 on the updated convergence programme of the United Kingdom, 2007/2008-2012/2013

25

2008/C 049/08

Council opinion of 12 February 2008 on the updated stability programme of Italy, 2007-2011

29

2008/C 049/09

Council opinion of 12 February 2008 on the updated stability programme of France, 2007-2012

34

2008/C 049/10

Council opinion of 12 February 2008 on the updated convergence programme of Romania, 2007-2010

39

2008/C 049/11

Council opinion of 12 February 2008 on the updated convergence programme of Slovakia, 2007-2010

44

| | IV   Notices |
| --- | --- |
| | NOTICES FROM EUROPEAN UNION INSTITUTIONS AND BODIES |
| | Commission |
| 2008/C 049/12 | Euro exchange rates | 48 |

IV   Notices

NOTICES FROM EUROPEAN UNION INSTITUTIONS AND BODIES

Commission

2008/C 049/12

Euro exchange rates

48

| EN | |
| --- | --- |

EN

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I Resolutions, recommendations and opinions

OPINIONS

Council

| 22.2.2008 | EN | Official Journal of the European Union | C 49/1 |
| --- | --- | --- | --- |

22.2.2008

EN

Official Journal of the European Union

C 49/1

---

COUNCIL OPINION

of 12 February 2008

on the updated stability programme of Luxembourg, 2007-2010

(2008/C 49/01)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community,

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies (1), and in particular Article 5(3) thereof,

Having regard to the recommendation of the Commission,

After consulting the Economic and Financial Committee,

HAS DELIVERED THIS OPINION:

| (1) | On 12 February 2008, the Council examined the updated stability programme of Luxembourg, which covers the period 2007 to 2010. |
| --- | --- |

(1)

On 12 February 2008, the Council examined the updated stability programme of Luxembourg, which covers the period 2007 to 2010.

| (2) | Since the end of the 2001-2003 slowdown, Luxembourg is experiencing a new period of strong growth. On average, real GDP grew by 5,25 % and domestic employment by over 3 % a year in 2004-2007. In this context, Luxembourg has been able to bring its public finances back to surplus. Growth should remain strong during the period covered, even if it is forecast to slow down slightly in the coming years. However, despite the currently good condition of the economy and especially of public finances, the problem of population ageing will be particularly severe in Luxembourg and long-term sustainability is therefore a serious challenge. |
| --- | --- |

(2)

Since the end of the 2001-2003 slowdown, Luxembourg is experiencing a new period of strong growth. On average, real GDP grew by 5,25 % and domestic employment by over 3 % a year in 2004-2007. In this context, Luxembourg has been able to bring its public finances back to surplus. Growth should remain strong during the period covered, even if it is forecast to slow down slightly in the coming years. However, despite the currently good condition of the economy and especially of public finances, the problem of population ageing will be particularly severe in Luxembourg and long-term sustainability is therefore a serious challenge.

| (3) | The programme contains two different scenarios for the macroeconomic and budgetary projections: a ‘central’ scenario and a ‘variant’. The ‘central’ scenario is presented by the programme as the reference scenario, on which its budgetary projections are based. Assessed against currently available information (2), it appears to be based on plausible growth assumptions. It envisages that real GDP growth will decrease from 6 % in 2007 to 4,5 % on average over the period 2008-2010. The programme's projections for inflation in 2008 appear to be on the low side, in view of the acceleration in consumer prices at the end of 2007 and of the recent hike in energy prices. The rise in labour costs in Luxembourg has significantly exceeded the EU average since the early 2000s and the programme projects it to remain rather strong over the period covered, which might progressively weaken the country's competitiveness. |
| --- | --- |

(3)

The programme contains two different scenarios for the macroeconomic and budgetary projections: a ‘central’ scenario and a ‘variant’. The ‘central’ scenario is presented by the programme as the reference scenario, on which its budgetary projections are based. Assessed against currently available information (2), it appears to be based on plausible growth assumptions. It envisages that real GDP growth will decrease from 6 % in 2007 to 4,5 % on average over the period 2008-2010. The programme's projections for inflation in 2008 appear to be on the low side, in view of the acceleration in consumer prices at the end of 2007 and of the recent hike in energy prices. The rise in labour costs in Luxembourg has significantly exceeded the EU average since the early 2000s and the programme projects it to remain rather strong over the period covered, which might progressively weaken the country's competitiveness.

| (4) | For 2007, the general government surplus is estimated at 1,2 % of GDP in the Commission services' autumn 2007 forecast and at 1,0 % of GDP in the 2007 update of the stability programme, against a deficit of 0,9 % of GDP targeted in the previous update. The main reason for this large divergence with the target is a strong revision of public finance data in recent years, which resulted in a large upward shift of the series of government balances since 2005. This shift implies that Luxembourg has in recent years constantly been at its medium-term objective (MTO) for the budgetary position, which is an estimated structural deficit (i.e. a cyclically-adjusted deficit net of one-off and other temporary measures) of 0,75 % of GDP. This is a much better outcome than the plan in the 2006 update to achieve the MTO from 2007 onwards. Although the improvement in the general government balance in 2007 was half of what was planned in the 2006 update and the better-than-expected outcome is almost entirely due to the large revision in public finance data, the budgetary implementation in 2007 has thus achieved the objectives endorsed by the Council opinion of 27 February 2007 on the 2006 update (3). The Council notes that it is also consistent with the April 2007 Eurogroup orientations for budgetary policies. |
| --- | --- |

(4)

For 2007, the general government surplus is estimated at 1,2 % of GDP in the Commission services' autumn 2007 forecast and at 1,0 % of GDP in the 2007 update of the stability programme, against a deficit of 0,9 % of GDP targeted in the previous update. The main reason for this large divergence with the target is a strong revision of public finance data in recent years, which resulted in a large upward shift of the series of government balances since 2005. This shift implies that Luxembourg has in recent years constantly been at its medium-term objective (MTO) for the budgetary position, which is an estimated structural deficit (i.e. a cyclically-adjusted deficit net of one-off and other temporary measures) of 0,75 % of GDP. This is a much better outcome than the plan in the 2006 update to achieve the MTO from 2007 onwards. Although the improvement in the general government balance in 2007 was half of what was planned in the 2006 update and the better-than-expected outcome is almost entirely due to the large revision in public finance data, the budgetary implementation in 2007 has thus achieved the objectives endorsed by the Council opinion of 27 February 2007 on the 2006 update (3). The Council notes that it is also consistent with the April 2007 Eurogroup orientations for budgetary policies.

| (5) | In view of these revised data, the current programme no longer envisages a budgetary consolidation like the previous one. The main goal of its medium-term budgetary strategy is now to maintain a nominal surplus of about 1 % of GDP on average and to continue to respect the MTO with a comfortable margin throughout the programme period. The headline surplus is projected to decrease from 1,0 % of GDP in 2007 to 0,8 % in 2008 as a result of cuts in personal income tax before gradually increasing thereafter. The primary surplus would follow a similar path. The increase in the surplus from 2007 to 2010 is planned to be achieved through a decrease by 0,9 percentage point of GDP in the expenditure ratio, more than compensating a decline by 0,7 percentage point of GDP in the revenue ratio. With the exception of 2008 for which they reflect the measures contained in the budget, these figures represent no-policy-change projections rather than targets reflecting the implementation of policy measures. |
| --- | --- |

(5)

In view of these revised data, the current programme no longer envisages a budgetary consolidation like the previous one. The main goal of its medium-term budgetary strategy is now to maintain a nominal surplus of about 1 % of GDP on average and to continue to respect the MTO with a comfortable margin throughout the programme period. The headline surplus is projected to decrease from 1,0 % of GDP in 2007 to 0,8 % in 2008 as a result of cuts in personal income tax before gradually increasing thereafter. The primary surplus would follow a similar path. The increase in the surplus from 2007 to 2010 is planned to be achieved through a decrease by 0,9 percentage point of GDP in the expenditure ratio, more than compensating a decline by 0,7 percentage point of GDP in the revenue ratio. With the exception of 2008 for which they reflect the measures contained in the budget, these figures represent no-policy-change projections rather than targets reflecting the implementation of policy measures.

| (6) | The risks to the budgetary projections in the programme appear broadly balanced. They are based on a plausible macroeconomic scenario and seem attainable. In fact, outcomes could even be slightly better than projected in the programme due in particular to the prudence of revenue projections and the country's good track record in budgetary performance. |
| --- | --- |

(6)

The risks to the budgetary projections in the programme appear broadly balanced. They are based on a plausible macroeconomic scenario and seem attainable. In fact, outcomes could even be slightly better than projected in the programme due in particular to the prudence of revenue projections and the country's good track record in budgetary performance.

| (7) | In view of this risk assessment, the budgetary stance in the programme seems sufficient to maintain the MTO by a large margin throughout the period covered, as envisaged in the programme. The fiscal policy stance implied by the programme is in line with the Stability and Growth Pact throughout the period. The Council notes that it is also consistent with the April 2007 Eurogroup orientations. |
| --- | --- |

(7)

In view of this risk assessment, the budgetary stance in the programme seems sufficient to maintain the MTO by a large margin throughout the period covered, as envisaged in the programme. The fiscal policy stance implied by the programme is in line with the Stability and Growth Pact throughout the period. The Council notes that it is also consistent with the April 2007 Eurogroup orientations.

| (8) | Luxembourg appears to be at medium risk with regard to the sustainability of its public finances. The long-term budgetary impact of ageing is among the highest in the EU, influenced notably by a very considerable projected increase in pension expenditure. The budgetary position in 2007 as estimated in the programme, which is better than the starting position of the previous programme, the low debt ratio, the significant assets accumulated in social security, and a structural primary surplus contribute to offsetting the projected long-term budgetary impact of ageing populations. However, this is not sufficient to cover the sizeable increase in age-related expenditure. Achieving high primary surpluses over the medium term and, as recognized by the authorities, implementing measures aimed at curbing the substantial increase in age-related expenditures would contribute to reducing risks to the sustainability of public finances. |
| --- | --- |

(8)

Luxembourg appears to be at medium risk with regard to the sustainability of its public finances. The long-term budgetary impact of ageing is among the highest in the EU, influenced notably by a very considerable projected increase in pension expenditure. The budgetary position in 2007 as estimated in the programme, which is better than the starting position of the previous programme, the low debt ratio, the significant assets accumulated in social security, and a structural primary surplus contribute to offsetting the projected long-term budgetary impact of ageing populations. However, this is not sufficient to cover the sizeable increase in age-related expenditure. Achieving high primary surpluses over the medium term and, as recognized by the authorities, implementing measures aimed at curbing the substantial increase in age-related expenditures would contribute to reducing risks to the sustainability of public finances.

| (9) | The stability programme seems to be consistent to some extent with the October 2007 implementation report of the national reform programme. In particular, the measures in the stability programme are in line with the 2005 national reform programme and its October 2007 implementation report, for instance the projected increase in R&D expenditure and the new investment projects in rail and road infrastructures. The budgetary implications of those NRP reforms that have a direct budgetary impact are reflected in the stability programme's budgetary projections. |
| --- | --- |

(9)

The stability programme seems to be consistent to some extent with the October 2007 implementation report of the national reform programme. In particular, the measures in the stability programme are in line with the 2005 national reform programme and its October 2007 implementation report, for instance the projected increase in R&D expenditure and the new investment projects in rail and road infrastructures. The budgetary implications of those NRP reforms that have a direct budgetary impact are reflected in the stability programme's budgetary projections.

| (10) | The budgetary strategy in the programme is partly consistent with the country-specific broad economic policy guidelines included in the integrated guidelines and with the guidelines for euro area Member States in the area of budgetary policies issued in the context of the Lisbon strategy. In particular, no reform of the pension system has been initiated to date in order to enhance the sustainability of public finances. |
| --- | --- |

(10)

The budgetary strategy in the programme is partly consistent with the country-specific broad economic policy guidelines included in the integrated guidelines and with the guidelines for euro area Member States in the area of budgetary policies issued in the context of the Lisbon strategy. In particular, no reform of the pension system has been initiated to date in order to enhance the sustainability of public finances.

| (11) | As regards the data requirements specified in the code of conduct for stability and convergence programmes, the programme has some gaps in the required and optional data (4). |
| --- | --- |

(11)

As regards the data requirements specified in the code of conduct for stability and convergence programmes, the programme has some gaps in the required and optional data (4).

The overall conclusion is that public finances have gone back to surplus in a context of strong GDP and employment growth. Recently released revised data indicate that the deterioration in public finances has been significantly more limited than previously estimated. Consequently, Luxembourg has constantly achieved its MTO and the path for the general government balance in the programme is at least 1 % of GDP better in each year than in the previous update. While tax cuts will result in a small decrease in the surplus in 2008, the programme aims at maintaining a surplus of 1 % of GDP on average throughout the period. The macroeconomic scenario and budgetary targets of the programme seem plausible and budgetary outcomes might even be slightly better than planned. However, Luxembourg will have to support in the coming decades a particularly heavy burden resulting from population ageing and no corrective measures have been taken to date. This explains that the country is considered to be at medium risk as regards the long-term sustainability of its public finances, in spite of its currently sound budgetary position.

In view of the above assessment and of the very strong increase in age-related expenditure forecast for the coming decades, Luxembourg is invited to improve the long-term sustainability of its public finances by implementing structural reform measures, in particular in the area of pensions.

Comparison of key macroeconomic and budgetary projections

| | 2006 | 2007 | 2008 | 2009 | 2010 |
| --- | --- | --- | --- | --- | --- |
| Real GDP
  (% change) | SP Nov 2007 | 6,1 | 6,0 | 4,5 | 5,0 | 4,0 |
| COM Nov 2007 | 6,1 | 5,2 | 4,7 | 4,5 | n.a. |
| SP Nov 2006 | 5,5 | 4,0 | 5,0 | 4,0 | n.a. |
| HICP inflation
  (%) | SP Nov 2007 | 3,0 | 2,3 | 2,0 | 2,1 | 2,1 |
| COM Nov 2007 | 3,0 | 2,5 | 2,8 | 2,3 | n.a. |
| SP Nov 2006 | 2,9 | 1,4 | 2,0 | 2,0 | n.a. |
| Output gap (5)

  (% of potential GDP) | SP Nov 2007 | – 0,4 | 0,5 | 0,1 | 0,2 | – 0,8 |
| COM Nov 2007 (6) | – 0,2 | 0,0 | – 0,2 | – 0,6 | n.a. |
| SP Nov 2006 | – 0,3 | – 0,8 | – 0,5 | – 1,6 | n.a. |
| Net lending/borrowing vis-à-vis the rest of the world
  (% of GDP) | SP Nov 2007 | n.a. | n.a. | n.a. | n.a. | n.a. |
| COM Nov 2007 | n.a. | n.a. | n.a. | n.a. | n.a. |
| SP Nov 2006 | n.a. | n.a. | n.a. | n.a. | n.a. |
| General government balance
  (% of GDP) | SP Nov 2007 | 0,7 | 1,0 | 0,8 | 1,0 | 1,2 |
| COM Nov 2007 | 0,7 | 1,2 | 1,0 | 1,4 | n.a. |
| SP Nov 2006 | – 1,5 | – 0,9 | – 0,4 | 0,1 | n.a. |
| Primary balance
  (% of GDP) | SP Nov 2007 | 0,9 | 1,2 | 1,1 | 1,2 | 1,5 |
| COM Nov 2007 | 0,9 | 1,3 | 1,2 | 1,5 | n.a. |
| SP Nov 2006 | – 1,3 | – 0,8 | – 0,2 | 0,3 | n.a. |
| Cyclically-adjusted balance (5)

  (% of GDP) | SP Nov 2007 | 0,9 | 0,7 | 0,8 | 0,9 | 1,6 |
| COM Nov 2007 | 0,8 | 1,2 | 1,2 | 1,7 | n.a. |
| SP Nov 2006 | – 1,3 | – 0,5 | – 0,1 | 0,9 | n.a. |
| Structural balance (7)

  (% of GDP) | SP Nov 2007 | 0,6 | 0,7 | 0,8 | 0,9 | 1,6 |
| COM Nov 2007 | 0,8 | 1,2 | 1,2 | 1,7 | n.a. |
| SP Nov 2006 | – 1,3 | – 0,5 | – 0,1 | 0,9 | n.a. |
| Government gross debt
  (% of GDP) | SP Nov 2007 | 6,6 | 6,9 | 7,1 | 7,2 | 7,0 |
| COM Nov 2007 | 6,6 | 6,6 | 6,0 | 5,4 | n.a. |
| SP Nov 2006 | 7,5 | 8,2 | 8,5 | 8,5 | n.a. |
| Stability programme (SP); Commission services' autumn 2007 economic forecasts (COM); Commission services' calculations. |

2006

2007

2008

2009

2010

Real GDP

(% change)

SP Nov 2007

6,1

6,0

4,5

5,0

4,0

COM Nov 2007

6,1

5,2

4,7

4,5

n.a.

SP Nov 2006

5,5

4,0

5,0

4,0

n.a.

HICP inflation

(%)

SP Nov 2007

3,0

2,3

2,0

2,1

2,1

COM Nov 2007

3,0

2,5

2,8

2,3

n.a.

SP Nov 2006

2,9

1,4

2,0

2,0

n.a.

Output gap (5)

(% of potential GDP)

SP Nov 2007

– 0,4

0,5

0,1

0,2

– 0,8

COM Nov 2007 (6)

– 0,2

0,0

– 0,2

– 0,6

n.a.

SP Nov 2006

– 0,3

– 0,8

– 0,5

– 1,6

n.a.

Net lending/borrowing vis-à-vis the rest of the world

(% of GDP)

SP Nov 2007

n.a.

n.a.

n.a.

n.a.

n.a.

COM Nov 2007

n.a.

n.a.

n.a.

n.a.

n.a.

SP Nov 2006

n.a.

n.a.

n.a.

n.a.

n.a.

General government balance

(% of GDP)

SP Nov 2007

0,7

1,0

0,8

1,0

1,2

COM Nov 2007

0,7

1,2

1,0

1,4

n.a.

SP Nov 2006

– 1,5

– 0,9

– 0,4

0,1

n.a.

Primary balance

(% of GDP)

SP Nov 2007

0,9

1,2

1,1

1,2

1,5

COM Nov 2007

0,9

1,3

1,2

1,5

n.a.

SP Nov 2006

– 1,3

– 0,8

– 0,2

0,3

n.a.

Cyclically-adjusted balance (5)

(% of GDP)

SP Nov 2007

0,9

0,7

0,8

0,9

1,6

COM Nov 2007

0,8

1,2

1,2

1,7

n.a.

SP Nov 2006

– 1,3

– 0,5

– 0,1

0,9

n.a.

Structural balance (7)

(% of GDP)

SP Nov 2007

0,6

0,7

0,8

0,9

1,6

COM Nov 2007

0,8

1,2

1,2

1,7

n.a.

SP Nov 2006

– 1,3

– 0,5

– 0,1

0,9

n.a.

Government gross debt

(% of GDP)

SP Nov 2007

6,6

6,9

7,1

7,2

7,0

COM Nov 2007

6,6

6,6

6,0

5,4

n.a.

SP Nov 2006

7,5

8,2

8,5

8,5

n.a.

Stability programme (SP); Commission services' autumn 2007 economic forecasts (COM); Commission services' calculations.

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(1)  OJ L 209, 2.8.1997, p. 1. Regulation as amended by Regulation (EC) No 1055/2005 (OJ L 174, 7.7.2005, p. 1). The documents referred to in this text can be found at the following website:

http://ec.europa.eu/economy_finance/about/activities/sgp/main_en.htm

(2)  The assessment takes notably into account the Commission services' autumn forecast and the Commission assessment of the October 2007 implementation report of the national reform programme.

(3)  OJ C 70, 27.3.2007, p. 24.

(4)  In particular, there are no data on sectoral balances with the exception of the general government.

(5)  Output gaps and cyclically-adjusted balances according to the programmes as recalculated by Commission services on the basis of the information in the programmes.

(6)  Based on estimated potential growth of 4,8 %, 5,0 %, 5,0 % and 4,9 % respectively in the period 2006-2009.

(7)  Cyclically-adjusted balance excluding one-off and other temporary measures. There are no one-off or other temporary measures for the period 2007-2010 in the most recent programme and in the Commission services' autumn forecast.

Sources:

Stability programme (SP); Commission services' autumn 2007 economic forecasts (COM); Commission services' calculations.

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| 22.2.2008 | EN | Official Journal of the European Union | C 49/5 |
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22.2.2008

EN

Official Journal of the European Union

C 49/5

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COUNCIL OPINION

of 12 February 2008

on the updated stability programme of Finland, 2007-2011

(2008/C 49/02)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community,

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies (1), and in particular Article 5(3) thereof,

Having regard to the recommendation of the Commission,

After consulting the Economic and Financial Committee,

HAS DELIVERED THIS OPINION:

| (1) | On 12 February 2008, the Council examined the updated stability programme of Finland, which covers the period 2007 to 2011. |
| --- | --- |

(1)

On 12 February 2008, the Council examined the updated stability programme of Finland, which covers the period 2007 to 2011.

| (2) | Finland's macroeconomic performance has been strong and balanced over the last years, with growth in the recent years significantly exceeding earlier expectations. The present cyclical upswing in economic activity has been appropriately used to build up budgetary surpluses and to prepare for the effects of population ageing, reducing considerably the risks to the sustainability of public finances. However, the imminent demographic shift is predicted to dampen economic growth already at the end of the programme period and lead to a smaller fiscal surplus, thereby calling for sustained control over public spending. |
| --- | --- |

(2)

Finland's macroeconomic performance has been strong and balanced over the last years, with growth in the recent years significantly exceeding earlier expectations. The present cyclical upswing in economic activity has been appropriately used to build up budgetary surpluses and to prepare for the effects of population ageing, reducing considerably the risks to the sustainability of public finances. However, the imminent demographic shift is predicted to dampen economic growth already at the end of the programme period and lead to a smaller fiscal surplus, thereby calling for sustained control over public spending.

| (3) | The macroeconomic scenario underlying the programme envisages that real GDP growth will moderate over the programme period, while remaining above 3 % in 2008-2009 to drop to just above 2 % by 2011. Judging from currently available information (2), this scenario appears to be based on plausible growth assumptions, leaning towards the cautious side for 2010 and 2011. The programme's projections for inflation appear realistic. |
| --- | --- |

(3)

The macroeconomic scenario underlying the programme envisages that real GDP growth will moderate over the programme period, while remaining above 3 % in 2008-2009 to drop to just above 2 % by 2011. Judging from currently available information (2), this scenario appears to be based on plausible growth assumptions, leaning towards the cautious side for 2010 and 2011. The programme's projections for inflation appear realistic.

| (4) | For 2007, the general government surplus is estimated at 4,5 % of GDP in the current programme update, broadly in line with the Commission services' autumn 2007 forecast, against a target of 2,8 % of GDP set in the previous update of the stability programme. This is due to the carry-over from the better-than-expected outcome in 2006 and the positive growth surprise in 2007, boosting government revenue, while expenditure has been largely contained in line with earlier plans. The implementation of the 2007 budget was broadly in line with the Council opinion on the previous programme (3). The Council also notes that the 2007 budget was broadly consistent with the April 2007 Eurogroup orientations for budgetary policies. |
| --- | --- |

(4)

For 2007, the general government surplus is estimated at 4,5 % of GDP in the current programme update, broadly in line with the Commission services' autumn 2007 forecast, against a target of 2,8 % of GDP set in the previous update of the stability programme. This is due to the carry-over from the better-than-expected outcome in 2006 and the positive growth surprise in 2007, boosting government revenue, while expenditure has been largely contained in line with earlier plans. The implementation of the 2007 budget was broadly in line with the Council opinion on the previous programme (3). The Council also notes that the 2007 budget was broadly consistent with the April 2007 Eurogroup orientations for budgetary policies.

| (5) | The programme's central objective is to ensure sustainability of public finances in the face of population ageing. As in the previous programme, Finland's medium-term objective (MTO) for the budgetary position is defined as a general government surplus of 2 % of GDP in structural terms, i.e. in cyclically-adjusted terms net of one-off and other temporary measures. The headline and the primary balance are set to decline in each year, albeit from a high level in 2007. The programme plans to maintain structural surpluses above the MTO throughout the programme period. Compared with the previous programme, the new update projects the structural surplus (calculated according to the commonly agreed methodology) to be 1,5 percentage points higher in 2007, but by 2010 both updates project the same structural balance. The steeper fall in the surplus in the most recent update is explained by the expenditure ratio declining only marginally while the revenue ratio drops more substantially. The latter reflects the phasing in of announced tax cuts as well as cautiously projected revenues in response to GDP growth. The less marked decline in the expenditure ratio compared with the previous programme reflects a step increase in the multi-annual budgetary ceilings for central government, with expenditure increases being frontloaded to 2008, the first year of the new government term. |
| --- | --- |

(5)

The programme's central objective is to ensure sustainability of public finances in the face of population ageing. As in the previous programme, Finland's medium-term objective (MTO) for the budgetary position is defined as a general government surplus of 2 % of GDP in structural terms, i.e. in cyclically-adjusted terms net of one-off and other temporary measures. The headline and the primary balance are set to decline in each year, albeit from a high level in 2007. The programme plans to maintain structural surpluses above the MTO throughout the programme period. Compared with the previous programme, the new update projects the structural surplus (calculated according to the commonly agreed methodology) to be 1,5 percentage points higher in 2007, but by 2010 both updates project the same structural balance. The steeper fall in the surplus in the most recent update is explained by the expenditure ratio declining only marginally while the revenue ratio drops more substantially. The latter reflects the phasing in of announced tax cuts as well as cautiously projected revenues in response to GDP growth. The less marked decline in the expenditure ratio compared with the previous programme reflects a step increase in the multi-annual budgetary ceilings for central government, with expenditure increases being frontloaded to 2008, the first year of the new government term.

| (6) | The risks to the budgetary projections in the programme appear broadly balanced. In 2008, the budgetary outcome could be better than projected in the programme given the markedly cautious tax revenue assumptions for that year. Some risks could arise from rapid wage growth in the public sector, putting upward pressure on expenditure. On the other hand, the cautious growth projections for the outer years, combined with conservative revenue assumptions, counterbalance the negative risks. |
| --- | --- |

(6)

The risks to the budgetary projections in the programme appear broadly balanced. In 2008, the budgetary outcome could be better than projected in the programme given the markedly cautious tax revenue assumptions for that year. Some risks could arise from rapid wage growth in the public sector, putting upward pressure on expenditure. On the other hand, the cautious growth projections for the outer years, combined with conservative revenue assumptions, counterbalance the negative risks.

| (7) | In view of this risk assessment, the budgetary stance in the programme would allow to meet the MTO by a comfortable margin throughout the programme period, as envisaged in the programme. This is in line with the Stability and Growth Pact. However, a fiscal expansion is planned in 2008, indicated by a decline in the structural surplus of 0,5 percentage point of GDP according to the Commission services' autumn forecast and 1 percentage point according to the programme. While economic conditions are expected to shift from ‘good times’ to neutral during 2008, it is not implausible that the favourable economic conditions of the previous years extend into 2008. Therefore, there is a risk that the fiscal policy stance implied by the programme may turn out to be pro-cyclical in 2008. However, the potential pro-cyclical stimulus to the economy would likely be limited and fiscal policy would assume a broadly neutral stance already in the following year. A sizeable budgetary surplus would still be maintained. |
| --- | --- |

(7)

In view of this risk assessment, the budgetary stance in the programme would allow to meet the MTO by a comfortable margin throughout the programme period, as envisaged in the programme. This is in line with the Stability and Growth Pact. However, a fiscal expansion is planned in 2008, indicated by a decline in the structural surplus of 0,5 percentage point of GDP according to the Commission services' autumn forecast and 1 percentage point according to the programme. While economic conditions are expected to shift from ‘good times’ to neutral during 2008, it is not implausible that the favourable economic conditions of the previous years extend into 2008. Therefore, there is a risk that the fiscal policy stance implied by the programme may turn out to be pro-cyclical in 2008. However, the potential pro-cyclical stimulus to the economy would likely be limited and fiscal policy would assume a broadly neutral stance already in the following year. A sizeable budgetary surplus would still be maintained.

| (8) | Finland appears to be at low risk with regard to the sustainability of public finances. While the long-term budgetary impact of ageing is higher than on average in the EU, enacted pension reforms have helped to contain the projected increase in pension expenditure over the coming decades. The budgetary position in 2007 as estimated in the programme, with a large structural surplus, contributes significantly to offsetting the long-term budgetary impact of ageing and the large assets accumulated by the public pension schemes will help finance part of the increase in pension expenditure. Maintaining high primary surpluses over the medium term would contribute to limiting risks to the sustainability of public finances. |
| --- | --- |

(8)

Finland appears to be at low risk with regard to the sustainability of public finances. While the long-term budgetary impact of ageing is higher than on average in the EU, enacted pension reforms have helped to contain the projected increase in pension expenditure over the coming decades. The budgetary position in 2007 as estimated in the programme, with a large structural surplus, contributes significantly to offsetting the long-term budgetary impact of ageing and the large assets accumulated by the public pension schemes will help finance part of the increase in pension expenditure. Maintaining high primary surpluses over the medium term would contribute to limiting risks to the sustainability of public finances.

| (9) | The stability programme seems to be consistent with the October 2007 implementation report of the National Reform Programme. In particular, the measures identified in the implementation report of the National Reform Programme to contain the population ageing risks are an integral part of the stability programme strategy. It is foreseen to maintain a strong commitment to measures enhancing productivity in public services in order to contain expenditure pressures. At the same time, the multi-annual expenditure ceilings of the central government, which form the basis of the stability programme projections, will provide a firm limit to the costs of the National Reform Programme measures. |
| --- | --- |

(9)

The stability programme seems to be consistent with the October 2007 implementation report of the National Reform Programme. In particular, the measures identified in the implementation report of the National Reform Programme to contain the population ageing risks are an integral part of the stability programme strategy. It is foreseen to maintain a strong commitment to measures enhancing productivity in public services in order to contain expenditure pressures. At the same time, the multi-annual expenditure ceilings of the central government, which form the basis of the stability programme projections, will provide a firm limit to the costs of the National Reform Programme measures.

| (10) | The budgetary strategy in the programme is broadly consistent with the broad economic policy guidelines included in the integrated guidelines for euro area Member States in the area of budgetary policies issued in the context of the Lisbon strategy. |
| --- | --- |

(10)

The budgetary strategy in the programme is broadly consistent with the broad economic policy guidelines included in the integrated guidelines for euro area Member States in the area of budgetary policies issued in the context of the Lisbon strategy.

| (11) | As regards the data requirements specified in the code of conduct for stability and convergence programmes, the programme has some gaps in the required and optional data (4). |
| --- | --- |

(11)

As regards the data requirements specified in the code of conduct for stability and convergence programmes, the programme has some gaps in the required and optional data (4).

The overall conclusion is that the programme envisages continued high surpluses, albeit declining over the programme period. While the risks attached to the budgetary targets are balanced overall, the programme's fiscal projections appear somewhat cautious for 2008. The medium-term budgetary position is sound and should limit the risks to long-term sustainability. Continuing with expenditure restraint will remain crucial to stem the risk of a pro-cyclical fiscal policy stance in 2008 and to adjust to the lower growth path and the implied slower growth of tax revenue over the programme period.

Comparison of key macroeconomic and budgetary projections

| | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 |
| --- | --- | --- | --- | --- | --- | --- |
| Real GDP
  (% change) | SP Nov 2007 | 5,0 | 4,4 | 3,3 | 3,0 | 2,5 | 2,1 |
| COM Nov 2007 | 5,0 | 4,3 | 3,4 | 2,8 | n.a. | n.a. |
| SP Dec 2006 | 4,5 | 3,0 | 2,9 | 2,6 | 2,1 | n.a. |
| HICP inflation (8)

  (%) | SP Nov 2007 | 1,6 | 2,4 | 2,4 | 2,2 | 2,0 | 2,0 |
| COM Nov 2007 | 1,3 | 1,5 | 2,4 | 2,1 | n.a. | n.a. |
| SP Dec 2006 | 1,5 | 1,3 | 1,7 | 1,7 | 1,7 | n.a. |
| Output gap (5)

  (% of potential GDP) | SP Nov 2007 | – 0,3 | 0,6 | 0,7 | 0,5 | 0,1 | – 0,7 |
| COM Nov 2007 (6) | – 0,4 | 0,4 | 0,5 | 0,1 | n.a. | n.a. |
| SP Dec 2006 | 0,1 | 0,2 | 0,1 | – 0,2 | – 0,8 | n.a. |
| Net lending/borrowing vis-à-vis the rest of the world
  (% of GDP) | SP Nov 2007 | 4,8 | 4,9 | 4,6 | 5,0 | 5,0 | 4,8 |
| COM Nov 2007 | 5,9 | 5,3 | 5,2 | 5,1 | n.a. | n.a. |
| SP Dec 2006 | 5,4 | 4,8 | 4,6 | 4,4 | 4,1 | n.a. |
| General government balance
  (% of GDP) | SP Nov 2007 | 3,8 | 4,5 | 3,7 | 3,6 | 2,8 | 2,4 |
| COM Nov 2007 | 3,8 | 4,6 | 4,2 | 4,0 | n.a. | n.a. |
| SP Dec 2006 | 2,9 | 2,8 | 2,7 | 2,7 | 2,4 | n.a. |
| Primary balance
  (% of GDP) | SP Nov 2007 | 5,3 | 6,0 | 5,2 | 5,0 | 4,1 | 3,6 |
| COM Nov 2007 | 5,3 | 6,0 | 5,6 | 5,3 | n.a. | n.a. |
| SP Dec 2006 | 4,5 | 4,3 | 4,2 | 4,1 | 3,7 | n.a. |
| Cyclically-adjusted balance (5)

  (% of GDP) | SP Nov 2007 | 4,0 | 4,2 | 3,3 | 3,3 | 2,8 | 2,8 |
| COM Nov 2007 | 4,1 | 4,4 | 3,9 | 4,0 | n.a. | n.a. |
| SP Dec 2006 | 2,9 | 2,7 | 2,7 | 2,8 | 2,8 | n.a. |
| Structural balance (7)

  (% of GDP) | SP Nov 2007 | 4,0 | 4,2 | 3,3 | 3,3 | 2,8 | 2,8 |
| COM Nov 2007 | 4,1 | 4,4 | 3,9 | 4,0 | n.a. | n.a. |
| SP Dec 2006 | 2,9 | 2,7 | 2,7 | 2,8 | 2,8 | n.a. |
| Government gross debt
  (% of GDP) | SP Nov 2007 | 39,2 | 35,3 | 32,8 | 30,4 | 29,0 | 27,9 |
| COM Nov 2007 | 39,2 | 35,7 | 32,4 | 29,8 | n.a. | n.a. |
| SP Dec 2006 | 39,1 | 37,7 | 36,2 | 35,0 | 33,7 | n.a. |
| Stability programme (SP); Commission services' autumn 2007 economic forecasts (COM); Commission services' calculations. |

2006

2007

2008

2009

2010

2011

Real GDP

(% change)

SP Nov 2007

5,0

4,4

3,3

3,0

2,5

2,1

COM Nov 2007

5,0

4,3

3,4

2,8

n.a.

n.a.

SP Dec 2006

4,5

3,0

2,9

2,6

2,1

n.a.

HICP inflation (8)

(%)

SP Nov 2007

1,6

2,4

2,4

2,2

2,0

2,0

COM Nov 2007

1,3

1,5

2,4

2,1

n.a.

n.a.

SP Dec 2006

1,5

1,3

1,7

1,7

1,7

n.a.

Output gap (5)

(% of potential GDP)

SP Nov 2007

– 0,3

0,6

0,7

0,5

0,1

– 0,7

COM Nov 2007 (6)

– 0,4

0,4

0,5

0,1

n.a.

n.a.

SP Dec 2006

0,1

0,2

0,1

– 0,2

– 0,8

n.a.

Net lending/borrowing vis-à-vis the rest of the world

(% of GDP)

SP Nov 2007

4,8

4,9

4,6

5,0

5,0

4,8

COM Nov 2007

5,9

5,3

5,2

5,1

n.a.

n.a.

SP Dec 2006

5,4

4,8

4,6

4,4

4,1

n.a.

General government balance

(% of GDP)

SP Nov 2007

3,8

4,5

3,7

3,6

2,8

2,4

COM Nov 2007

3,8

4,6

4,2

4,0

n.a.

n.a.

SP Dec 2006

2,9

2,8

2,7

2,7

2,4

n.a.

Primary balance

(% of GDP)

SP Nov 2007

5,3

6,0

5,2

5,0

4,1

3,6

COM Nov 2007

5,3

6,0

5,6

5,3

n.a.

n.a.

SP Dec 2006

4,5

4,3

4,2

4,1

3,7

n.a.

Cyclically-adjusted balance (5)

(% of GDP)

SP Nov 2007

4,0

4,2

3,3

3,3

2,8

2,8

COM Nov 2007

4,1

4,4

3,9

4,0

n.a.

n.a.

SP Dec 2006

2,9

2,7

2,7

2,8

2,8

n.a.

Structural balance (7)

(% of GDP)

SP Nov 2007

4,0

4,2

3,3

3,3

2,8

2,8

COM Nov 2007

4,1

4,4

3,9

4,0

n.a.

n.a.

SP Dec 2006

2,9

2,7

2,7

2,8

2,8

n.a.

Government gross debt

(% of GDP)

SP Nov 2007

39,2

35,3

32,8

30,4

29,0

27,9

COM Nov 2007

39,2

35,7

32,4

29,8

n.a.

n.a.

SP Dec 2006

39,1

37,7

36,2

35,0

33,7

n.a.

Stability programme (SP); Commission services' autumn 2007 economic forecasts (COM); Commission services' calculations.

---

(1)  OJ L 209, 2.8.1997, p. 1. Regulation as amended by Regulation (EC) No 1055/2005 (OJ L 174, 7.7.2005, p. 1). The documents referred to in this text can be found at the following website:

http://ec.europa.eu/economy_finance/about/activities/sgp/main_en.htm

(2)  The assessment takes notably into account the Commission services' autumn forecast and the Commission assessment of the October 2007 implementation report of the national reform programme.

(3)  OJ C 71, 28.3.2007, p. 1.

(4)  In particular, external assumptions for the outer years are not provided and inflation projections are provided on the CPI rather than HICP basis. Data on ‘one-off and other temporary measures’ are also not explicitly given in the tables (nor are they mentioned anywhere in the text).

(5)  Output gaps and cyclically-adjusted balances from the programmes as recalculated by Commission services on the basis of the information in the programmes.

(6)  Based on estimated potential growth of 3,4 %, 3,4 %, 3,2 % and 3,2 % respectively in the period 2006-2009.

(7)  Cyclically-adjusted balance excluding one-off and other temporary measures. No one-offs have been identified in the most recent programme or in the Commission services' autumn forecast.

(8)  The most recent programme provides inflation projections on the basis of the national CPI rather than the HICP. CPI inflation was markedly higher than HICP inflation in 2007. The Finnish authorities have indicated that the corresponding HICP inflation projections are 1,3 %, 1,6 %, and 2,3 % for 2006-2008 respectively and that there would be no difference between both series in the remaining years.

Sources:

Stability programme (SP); Commission services' autumn 2007 economic forecasts (COM); Commission services' calculations.

---

| 22.2.2008 | EN | Official Journal of the European Union | C 49/8 |
| --- | --- | --- | --- |

22.2.2008

EN

Official Journal of the European Union

C 49/8

---

COUNCIL OPINION

of 12 February 2008

on the updated stability programme of the Netherlands, 2007-2010

(2008/C 49/03)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community,

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies (1), and in particular Article 5(3) thereof,

Having regard to the recommendation of the Commission,

After consulting the Economic and Financial Committee,

HAS DELIVERED THIS OPINION:

| (1) | On 12 February 2008, the Council examined the updated stability programme of the Netherlands, which covers the period 2007 to 2010. |
| --- | --- |

(1)

On 12 February 2008, the Council examined the updated stability programme of the Netherlands, which covers the period 2007 to 2010.

| (2) | Since 2006, Dutch GDP growth again significantly outpaces potential growth. The current upturn is generally assessed to be a regular cyclical upturn and is not widely mistaken for higher potential growth, as was the case during the rather long boom period at the end of the 1990s. Furthermore, it is more broadly based on both domestic and external sources of growth. However, given the good starting position, the tightness of the labour market may exert upward pressures on wages and prices rather early. |
| --- | --- |

(2)

Since 2006, Dutch GDP growth again significantly outpaces potential growth. The current upturn is generally assessed to be a regular cyclical upturn and is not widely mistaken for higher potential growth, as was the case during the rather long boom period at the end of the 1990s. Furthermore, it is more broadly based on both domestic and external sources of growth. However, given the good starting position, the tightness of the labour market may exert upward pressures on wages and prices rather early.

| (3) | The macroeconomic scenario underlying the programme envisages that real GDP growth will slow down from 2,75 % in 2007 to 2,5 % in 2008 and 1,75 % over the rest of the programme period. Assessed against currently available information (2), this scenario appears to be based on plausible growth assumptions until 2008 and cautious growth assumptions thereafter. Given that there are already signs of overheating in the Dutch labour market, which is expected to put upward pressure on wages, the programme's projections for inflation of 2 % from 2009 appear to be on the low side. |
| --- | --- |

(3)

The macroeconomic scenario underlying the programme envisages that real GDP growth will slow down from 2,75 % in 2007 to 2,5 % in 2008 and 1,75 % over the rest of the programme period. Assessed against currently available information (2), this scenario appears to be based on plausible growth assumptions until 2008 and cautious growth assumptions thereafter. Given that there are already signs of overheating in the Dutch labour market, which is expected to put upward pressure on wages, the programme's projections for inflation of 2 % from 2009 appear to be on the low side.

| (4) | For 2007, the general government deficit is estimated at 0,4 % of GDP in the Commission services' autumn 2007 forecast and in the programme (although the latter also mentions the latest official estimate of 0,2 % of GDP and the outturn could even be better according to the most recent information). The previous update of the stability programme had targeted a surplus of 0,2 % of GDP. The main factors contributing to this deterioration are expenditure overruns (especially in health care) and lower gas revenues, while tax revenues have turned out better than targeted. Although budgetary policy continued to respect its medium-term objective (MTO) in 2007, it was not in line with the invitation in the Council opinion of 27 February 2007 on the previous update of the stability programme (3), which invited the Netherlands to maintain a strong structural position in 2007 (and beyond), thereby avoiding pro-cyclical fiscal policies in good times. The Council notes that it was also not consistent with the April 2007 Eurogroup orientations for budgetary policies as concerns 2007, since expenditure overruns were thus not avoided and unexpected extra revenues were only partially used to reduce government deficit and debt. |
| --- | --- |

(4)

For 2007, the general government deficit is estimated at 0,4 % of GDP in the Commission services' autumn 2007 forecast and in the programme (although the latter also mentions the latest official estimate of 0,2 % of GDP and the outturn could even be better according to the most recent information). The previous update of the stability programme had targeted a surplus of 0,2 % of GDP. The main factors contributing to this deterioration are expenditure overruns (especially in health care) and lower gas revenues, while tax revenues have turned out better than targeted. Although budgetary policy continued to respect its medium-term objective (MTO) in 2007, it was not in line with the invitation in the Council opinion of 27 February 2007 on the previous update of the stability programme (3), which invited the Netherlands to maintain a strong structural position in 2007 (and beyond), thereby avoiding pro-cyclical fiscal policies in good times. The Council notes that it was also not consistent with the April 2007 Eurogroup orientations for budgetary policies as concerns 2007, since expenditure overruns were thus not avoided and unexpected extra revenues were only partially used to reduce government deficit and debt.

| (5) | The main goal of the programme's budgetary strategy is to attain a structural surplus, that is, a cyclically-adjusted surplus net of one-off and other temporary measures, of 1 % of GDP at the end of the planned government term, in 2011. Hence, throughout the programme period, the Netherlands plans to fully respect its medium-term objective (MTO) for the budgetary position, which is a structural deficit ranging from 0,5 to 1 % of GDP. After the significant deterioration in 2007, the programme projects a return to small, broadly stable headline surpluses. The primary balance follows a similar path, stabilising at 2,75 % of GDP in 2008-2010. The previous update of the stability programme assumed a growth slowdown in 2008 rather than in 2009 and targeted a broadly balanced general government budget until 2008 and a surplus of almost 1 % of GDP in 2009. In the current update, the headline adjustment over the programme period is fully revenue-based and front-loaded in 2008. It is mainly driven by increases in gas revenues, a discretionary increase in social contributions and favourable economic growth perspectives. Government expenditures are planned to be governed by expenditure ceilings in real terms, which have been defined for the whole government term in the draft budget for 2008. |
| --- | --- |

(5)

The main goal of the programme's budgetary strategy is to attain a structural surplus, that is, a cyclically-adjusted surplus net of one-off and other temporary measures, of 1 % of GDP at the end of the planned government term, in 2011. Hence, throughout the programme period, the Netherlands plans to fully respect its medium-term objective (MTO) for the budgetary position, which is a structural deficit ranging from 0,5 to 1 % of GDP. After the significant deterioration in 2007, the programme projects a return to small, broadly stable headline surpluses. The primary balance follows a similar path, stabilising at 2,75 % of GDP in 2008-2010. The previous update of the stability programme assumed a growth slowdown in 2008 rather than in 2009 and targeted a broadly balanced general government budget until 2008 and a surplus of almost 1 % of GDP in 2009. In the current update, the headline adjustment over the programme period is fully revenue-based and front-loaded in 2008. It is mainly driven by increases in gas revenues, a discretionary increase in social contributions and favourable economic growth perspectives. Government expenditures are planned to be governed by expenditure ceilings in real terms, which have been defined for the whole government term in the draft budget for 2008.

| (6) | The risks to the budgetary projections in the programme appear broadly balanced until 2008 whilst outcomes could be better than projected from 2009 onwards, as economic growth may be stronger than foreseen in the programme. On the other hand, details regarding the planned measures still need to be fully specified. If economic growth turns out better than foreseen in the programme, this should be reflected in a better budgetary outcome from 2009 onwards in order to prevent a pro-cyclical stance of fiscal policy. |
| --- | --- |

(6)

The risks to the budgetary projections in the programme appear broadly balanced until 2008 whilst outcomes could be better than projected from 2009 onwards, as economic growth may be stronger than foreseen in the programme. On the other hand, details regarding the planned measures still need to be fully specified. If economic growth turns out better than foreseen in the programme, this should be reflected in a better budgetary outcome from 2009 onwards in order to prevent a pro-cyclical stance of fiscal policy.

| (7) | In view of this risk assessment, the budgetary stance in the programme seems sufficient to maintain the MTO by a sizeable margin throughout the programme period, as envisaged in the programme. The fiscal policy stance implied by the programme is in line with the Stability and Growth Pact throughout the period. The Council also notes that the 2008 budget is consistent with the April 2007 Eurogroup orientations for budgetary policies. |
| --- | --- |

(7)

In view of this risk assessment, the budgetary stance in the programme seems sufficient to maintain the MTO by a sizeable margin throughout the programme period, as envisaged in the programme. The fiscal policy stance implied by the programme is in line with the Stability and Growth Pact throughout the period. The Council also notes that the 2008 budget is consistent with the April 2007 Eurogroup orientations for budgetary policies.

| (8) | The Netherlands appears to be at medium risk with regard to the sustainability of public finances. The long-term budgetary impact of ageing is higher than the EU average, influenced notably by a relatively high increase in pension expenditure as a share of GDP over the coming decades. Yet, the projected future rise of tax revenues as a share of GDP, due to the deferred taxation of private pension, would partly compensate the increase in public expenditure over the long term. The budgetary position in 2007 as estimated in the programme, which is worse than the starting position of the previous programme, contributes to offsetting the projected long-term budgetary impact of an ageing population but is not sufficient to cover the substantial increase in age-related expenditure, notably in view of the deterioration of the structural primary balance in 2007 compared to 2006. Ensuring higher primary surpluses over the medium term, as already foreseen in the programme, and/or implementing reform measures that curb the projected increase in age-related expenditure would contribute to reducing risks to the sustainability of public finances. |
| --- | --- |

(8)

The Netherlands appears to be at medium risk with regard to the sustainability of public finances. The long-term budgetary impact of ageing is higher than the EU average, influenced notably by a relatively high increase in pension expenditure as a share of GDP over the coming decades. Yet, the projected future rise of tax revenues as a share of GDP, due to the deferred taxation of private pension, would partly compensate the increase in public expenditure over the long term. The budgetary position in 2007 as estimated in the programme, which is worse than the starting position of the previous programme, contributes to offsetting the projected long-term budgetary impact of an ageing population but is not sufficient to cover the substantial increase in age-related expenditure, notably in view of the deterioration of the structural primary balance in 2007 compared to 2006. Ensuring higher primary surpluses over the medium term, as already foreseen in the programme, and/or implementing reform measures that curb the projected increase in age-related expenditure would contribute to reducing risks to the sustainability of public finances.

| (9) | The stability programme seems to be well consistent with the October 2007 implementation report of the national reform programme. In particular, although the programme does not provide a qualitative assessment of the overall impact of the national reform programme, both documents discuss relevant subsets of the measures embodied in the government's ‘six-pillar strategy’ that overarches general government policies in the current government's term. Focusing on measures with a direct budgetary impact, both documents mention the phasing-out of the transferability of the general tax credit over a period of 15 years starting in 2009. The stability programme in addition refers to plans to reduce unemployment contributions by employees and employers in 2009, which will be financed by an increase in the VAT rate in the same year. |
| --- | --- |

(9)

The stability programme seems to be well consistent with the October 2007 implementation report of the national reform programme. In particular, although the programme does not provide a qualitative assessment of the overall impact of the national reform programme, both documents discuss relevant subsets of the measures embodied in the government's ‘six-pillar strategy’ that overarches general government policies in the current government's term. Focusing on measures with a direct budgetary impact, both documents mention the phasing-out of the transferability of the general tax credit over a period of 15 years starting in 2009. The stability programme in addition refers to plans to reduce unemployment contributions by employees and employers in 2009, which will be financed by an increase in the VAT rate in the same year.

| (10) | The budgetary strategy in the programme is broadly consistent with the broad economic policy guidelines included in the integrated guidelines for euro area Member States in the area of budgetary policies issued in the context of the Lisbon strategy. |
| --- | --- |

(10)

The budgetary strategy in the programme is broadly consistent with the broad economic policy guidelines included in the integrated guidelines for euro area Member States in the area of budgetary policies issued in the context of the Lisbon strategy.

| (11) | As regards the data requirements specified in the code of conduct for stability and convergence programmes, the programme provides all required and most of the optional data. |
| --- | --- |

(11)

As regards the data requirements specified in the code of conduct for stability and convergence programmes, the programme provides all required and most of the optional data.

The overall conclusion is that the programme aims at achieving and maintaining a broadly stable surplus, thereby ensuring a sound budgetary position throughout the period. While fiscal policy was pro-cyclical in good economic times in 2007, the budgetary stance in the programme from 2008 onwards is in line with the Pact. The risks to the budgetary targets seem broadly balanced in 2008. From 2009 onwards, if economic growth turns out better than the cautious economic scenario envisaged in the programme, this should be reflected in a better budgetary outcome than planned. As regards the long-term sustainability of public finances, the Netherlands appears to be at medium risk.

In view of the above assessment and in the light of the projected increase in age-related expenditure and the recent deterioration of the structural balance, the Netherlands is invited to improve the long-term sustainability of public finances by securing the budgetary consolidation as planned in the programme.

Comparison of key macroeconomic and budgetary projections

| | 2006 | 2007 | 2008 | 2009 | 2010 |
| --- | --- | --- | --- | --- | --- |
| Real GDP
  (% change) | SP Nov 2007 | 3,0 | 2,75 | 2,5 | 1,75 | 1,75 |
| COM Nov 2007 | 3,0 | 2,7 | 2,6 | 2,5 | n.a. |
| SP Nov 2006 | 3,25 | 3 | 1,75 | 1,75 | n.a. |
| HICP inflation
  (%) | SP Nov 2007 | 1,7 | 1,5 | 2,25 | 2 | 2 |
| COM Nov 2007 | 1,7 | 1,6 | 2,3 | 2,7 | n.a. |
| SP Nov 2006 | 1,5 | 1,75 | 1,75 | 1,75 | n.a. |
| Output gap (4)

  (% of potential GDP) | SP Nov 2007 | – 0,6 | 0,0 | 0,4 | 0,1 | – 0,4 |
| COM Nov 2007 (5) | – 1,0 | – 0,4 | 0,0 | 0,3 | n.a. |
| SP Nov 2006 | – 0,5 | 0,6 | 0,6 | 0,3 | n.a. |
| Net lending/borrowing vis-à-vis the rest of the world
  (% of GDP) | SP Nov 2007 | 7,7 | 6,6 | 6,5 | 7,2 | 7,5 |
| COM Nov 2007 | 7,3 | 6,6 | 7,2 | 7,9 | n.a. |
| SP Nov 2006 | 6,9 | 6,7 | 7,1 | 7,5 | n.a. |
| General government balance
  (% of GDP) | SP Nov 2007 | 0,6 | – 0,4 | 0,5 | 0,6 | 0,7 |
| COM Nov 2007 | 0,6 | – 0,4 | 0,5 | 1,3 | n.a. |
| SP Nov 2006 | 0,1 | 0,2 | 0,3 | 0,9 | n.a. |
| Primary balance
  (% of GDP) | SP Nov 2007 | 2,8 | 1,8 | 2,7 | 2,7 | 2,7 |
| COM Nov 2007 | 2,8 | 1,8 | 2,7 | 3,3 | n.a. |
| SP Nov 2006 | 2,4 | 2,4 | 2,4 | 2,9 | n.a. |
| Cyclically-adjusted balance (4)

  (% of GDP) | SP Nov 2007 | 1,0 | – 0,4 | 0,3 | 0,5 | 0,9 |
| COM Nov 2007 | 1,1 | – 0,2 | 0,5 | 1,1 | n.a. |
| SP Nov 2006 | 0,4 | – 0,1 | 0,0 | 0,7 | n.a. |
| Structural balance (6)

  (% of GDP) | SP Nov 2007 | 1,0 | – 0,4 | 0,3 | 0,2 | 0,9 |
| COM Nov 2007 | 1,1 | – 0,2 | 0,5 | 0,7 | n.a. |
| SP Nov 2006 | 0,4 | – 0,1 | 0,0 | 0,4 | n.a. |
| Government gross debt
  (% of GDP) | SP Nov 2007 | 47,9 | 46,8 | 45 | 43 | 41,2 |
| COM Nov 2007 | 47,9 | 46,8 | 44,8 | 41,7 | n.a. |
| SP Nov 2006 | 50,2 | 47,9 | 46,3 | 44,2 | n.a. |
| Stability programme (SP); Commission services' autumn 2007 economic forecasts (COM); Commission services' calculations. |

2006

2007

2008

2009

2010

Real GDP

(% change)

SP Nov 2007

3,0

2,75

2,5

1,75

1,75

COM Nov 2007

3,0

2,7

2,6

2,5

n.a.

SP Nov 2006

3,25

3

1,75

1,75

n.a.

HICP inflation

(%)

SP Nov 2007

1,7

1,5

2,25

2

2

COM Nov 2007

1,7

1,6

2,3

2,7

n.a.

SP Nov 2006

1,5

1,75

1,75

1,75

n.a.

Output gap (4)

(% of potential GDP)

SP Nov 2007

– 0,6

0,0

0,4

0,1

– 0,4

COM Nov 2007 (5)

– 1,0

– 0,4

0,0

0,3

n.a.

SP Nov 2006

– 0,5

0,6

0,6

0,3

n.a.

Net lending/borrowing vis-à-vis the rest of the world

(% of GDP)

SP Nov 2007

7,7

6,6

6,5

7,2

7,5

COM Nov 2007

7,3

6,6

7,2

7,9

n.a.

SP Nov 2006

6,9

6,7

7,1

7,5

n.a.

General government balance

(% of GDP)

SP Nov 2007

0,6

– 0,4

0,5

0,6

0,7

COM Nov 2007

0,6

– 0,4

0,5

1,3

n.a.

SP Nov 2006

0,1

0,2

0,3

0,9

n.a.

Primary balance

(% of GDP)

SP Nov 2007

2,8

1,8

2,7

2,7

2,7

COM Nov 2007

2,8

1,8

2,7

3,3

n.a.

SP Nov 2006

2,4

2,4

2,4

2,9

n.a.

Cyclically-adjusted balance (4)

(% of GDP)

SP Nov 2007

1,0

– 0,4

0,3

0,5

0,9

COM Nov 2007

1,1

– 0,2

0,5

1,1

n.a.

SP Nov 2006

0,4

– 0,1

0,0

0,7

n.a.

Structural balance (6)

(% of GDP)

SP Nov 2007

1,0

– 0,4

0,3

0,2

0,9

COM Nov 2007

1,1

– 0,2

0,5

0,7

n.a.

SP Nov 2006

0,4

– 0,1

0,0

0,4

n.a.

Government gross debt

(% of GDP)

SP Nov 2007

47,9

46,8

45

43

41,2

COM Nov 2007

47,9

46,8

44,8

41,7

n.a.

SP Nov 2006

50,2

47,9

46,3

44,2

n.a.

Stability programme (SP); Commission services' autumn 2007 economic forecasts (COM); Commission services' calculations.

---

(1)  OJ L 209, 2.8.1997, p. 1. Regulation as amended by Regulation (EC) No 1055/2005 (OJ L 174, 7.7.2005, p. 1). The documents referred to in this text can be found at the following website:

http://ec.europa.eu/economy_finance/about/activities/sgp/main_en.htm

(2)  The assessment takes notably into account the Commission services' autumn forecast and the Commission assessment of the October 2007 implementation report of the national reform programme.

(3)  OJ C 70, 27.3.2007, p. 21.

(4)  Output gaps and cyclically-adjusted balances according to the programmes as recalculated by Commission services on the basis of the information in the programmes.

(5)  Based on estimated potential growth of 2,1 %, 2,2 %, 2,2 % and 2,2 % respectively in the period 2006-2009.

(6)  Cyclically-adjusted balance excluding one-off and other temporary measures. According to the most recent programme and the Commission services' autumn forecast, one-off and other temporary measures are 0,3 % of GDP in 2009; deficit-reducing.

Sources:

Stability programme (SP); Commission services' autumn 2007 economic forecasts (COM); Commission services' calculations.

---

| 22.2.2008 | EN | Official Journal of the European Union | C 49/12 |
| --- | --- | --- | --- |

22.2.2008

EN

Official Journal of the European Union

C 49/12

---

COUNCIL OPINION

of 12 February 2008

on the updated stability programme of Germany, 2007-2011

(2008/C 49/04)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community,

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies (1), and in particular Article 5(3) thereof,

Having regard to the recommendation of the Commission,

After consulting the Economic and Financial Committee,

HAS DELIVERED THIS OPINION:

| (1) | On 12 February 2008, the Council examined the updated stability programme of Germany, which covers the period 2007 to 2011. |
| --- | --- |

(1)

On 12 February 2008, the Council examined the updated stability programme of Germany, which covers the period 2007 to 2011.

| (2) | Economic growth in Germany was significantly stronger in 2006 and 2007 compared with the first half of the decade. Sustained wage restraint as well as structural reforms helped to regain competitiveness and stimulate employment growth. The marked improvement on the labour market supports the projection of a steady recovery of domestic demand, helping to balance an expected lower growth contribution from net external demand.
  The speed of budgetary consolidation has been remarkable. The general government balance swung from a deficit of almost 3,5 % of GDP in 2005 to a small surplus in 2007. Similarly, the structural deficit was reduced by 2,5 percentage points of GDP between 2005 and 2007. The control of government expenditure was key in the consolidation, with a reduction from almost 47 % of GDP in 2005 to below 44 % in 2007. This owes to the consolidation measures adopted since 2005, but also to the fact that unexpectedly high tax revenues were not spent, but used for deficit reduction. |
| --- | --- |

(2)

Economic growth in Germany was significantly stronger in 2006 and 2007 compared with the first half of the decade. Sustained wage restraint as well as structural reforms helped to regain competitiveness and stimulate employment growth. The marked improvement on the labour market supports the projection of a steady recovery of domestic demand, helping to balance an expected lower growth contribution from net external demand.

The speed of budgetary consolidation has been remarkable. The general government balance swung from a deficit of almost 3,5 % of GDP in 2005 to a small surplus in 2007. Similarly, the structural deficit was reduced by 2,5 percentage points of GDP between 2005 and 2007. The control of government expenditure was key in the consolidation, with a reduction from almost 47 % of GDP in 2005 to below 44 % in 2007. This owes to the consolidation measures adopted since 2005, but also to the fact that unexpectedly high tax revenues were not spent, but used for deficit reduction.

| (3) | The macroeconomic scenario underlying the programme envisages that real GDP growth will slow down from 2,4 % in 2007 to 2 % in 2008 and 1,5 % on average over the rest of the programme period. Judging from currently available information (2), this growth scenario appears plausible until 2008 and cautious thereafter. GDP growth would remain below potential in 2009-2011, yet employment is projected to be continuously increasing. Wage increases are forecast to remain moderate and would thus not lead to inflationary pressure. The trend improvement in price competitiveness observed over the last decade would, however, come to an end. |
| --- | --- |

(3)

The macroeconomic scenario underlying the programme envisages that real GDP growth will slow down from 2,4 % in 2007 to 2 % in 2008 and 1,5 % on average over the rest of the programme period. Judging from currently available information (2), this growth scenario appears plausible until 2008 and cautious thereafter. GDP growth would remain below potential in 2009-2011, yet employment is projected to be continuously increasing. Wage increases are forecast to remain moderate and would thus not lead to inflationary pressure. The trend improvement in price competitiveness observed over the last decade would, however, come to an end.

| (4) | For 2007, the updated programme foresees the budget in balance, broadly in line with the Commission services' autumn 2007 forecast, which projects a surplus of 0,1 % of GDP, against a target of a deficit at 1,5 % of GDP set in the previous update of the stability programme. The marked budgetary improvement over the target resulted from a base effect due to a lower-than-projected 2006 deficit, a stronger cyclical effect and a tighter fiscal stance. Budgetary implementation in 2007 was in line with the policy advice from the Council in its opinion of 27 February 2007 on the previous update of the stability programme (3). The Council notes that, since unexpected tax revenues were fully used for deficit reduction, budgetary implementation was also consistent with the April 2007 Eurogroup orientations for budgetary policies. |
| --- | --- |

(4)

For 2007, the updated programme foresees the budget in balance, broadly in line with the Commission services' autumn 2007 forecast, which projects a surplus of 0,1 % of GDP, against a target of a deficit at 1,5 % of GDP set in the previous update of the stability programme. The marked budgetary improvement over the target resulted from a base effect due to a lower-than-projected 2006 deficit, a stronger cyclical effect and a tighter fiscal stance. Budgetary implementation in 2007 was in line with the policy advice from the Council in its opinion of 27 February 2007 on the previous update of the stability programme (3). The Council notes that, since unexpected tax revenues were fully used for deficit reduction, budgetary implementation was also consistent with the April 2007 Eurogroup orientations for budgetary policies.

| (5) | The main goal of the medium-term budgetary strategy is to ensure the long-term sustainability of public finances. To achieve this, the programme proposes to continue budgetary consolidation, while improving the conditions for growth and employment. The medium-term objective (MTO), which is a balanced position in structural terms (i.e. the cyclically-adjusted balance net of one-off and other temporary measures), was broadly reached in 2007. The programme projects the structural balance to weaken somewhat in 2008 and then to improve subsequently, eventually achieving the MTO again in 2010 and a structural surplus by 2011 (calculated according to the commonly agreed methodology). The previous programme did not foresee achieving the MTO within the programme period. Moreover, economic conditions are assumed to support the move of the general government accounts into small surplus. The improvement in the primary balance follows the same pattern, with the surplus reaching 3,5 % of GDP by 2011. The envisaged consolidation is entirely expenditure-based. This would more than offset the drop in revenue due mainly to the company tax reform and the cut of unemployment insurance contribution rate in 2008. Indeed, the expenditure ratio would fall by 2,5 percentage points to 41,5 % of GDP by 2011, which is planned to be achieved mostly through restraint in social spending. Government gross debt, estimated to decline to 65 % of GDP in 2007, still above the 60 % of GDP Treaty reference value, is projected to decline further by 7,5 percentage points over the programme period. |
| --- | --- |

(5)

The main goal of the medium-term budgetary strategy is to ensure the long-term sustainability of public finances. To achieve this, the programme proposes to continue budgetary consolidation, while improving the conditions for growth and employment. The medium-term objective (MTO), which is a balanced position in structural terms (i.e. the cyclically-adjusted balance net of one-off and other temporary measures), was broadly reached in 2007. The programme projects the structural balance to weaken somewhat in 2008 and then to improve subsequently, eventually achieving the MTO again in 2010 and a structural surplus by 2011 (calculated according to the commonly agreed methodology). The previous programme did not foresee achieving the MTO within the programme period. Moreover, economic conditions are assumed to support the move of the general government accounts into small surplus. The improvement in the primary balance follows the same pattern, with the surplus reaching 3,5 % of GDP by 2011. The envisaged consolidation is entirely expenditure-based. This would more than offset the drop in revenue due mainly to the company tax reform and the cut of unemployment insurance contribution rate in 2008. Indeed, the expenditure ratio would fall by 2,5 percentage points to 41,5 % of GDP by 2011, which is planned to be achieved mostly through restraint in social spending. Government gross debt, estimated to decline to 65 % of GDP in 2007, still above the 60 % of GDP Treaty reference value, is projected to decline further by 7,5 percentage points over the programme period.

| (6) | The risks to the budgetary projections in the programme appear balanced. The macroeconomic outlook is plausible in 2008 and cautious thereafter. Also, over the last two years, the actual budgetary situation turned out better than targeted. The programme seems to assume structural improvements from labour market reforms to be continuing over the programme period. Since no further reforms are planned, the envisaged budgetary outcome requires continued commitment to maintain firm control over expenditure. Likewise, the risks to the projected evolution of the debt ratio appear to be balanced. |
| --- | --- |

(6)

The risks to the budgetary projections in the programme appear balanced. The macroeconomic outlook is plausible in 2008 and cautious thereafter. Also, over the last two years, the actual budgetary situation turned out better than targeted. The programme seems to assume structural improvements from labour market reforms to be continuing over the programme period. Since no further reforms are planned, the envisaged budgetary outcome requires continued commitment to maintain firm control over expenditure. Likewise, the risks to the projected evolution of the debt ratio appear to be balanced.

| (7) | In view of this risk assessment, the budgetary stance in the programme seems sufficient to return to the MTO by 2010, as envisaged in the programme. A sufficient safety margin against breaching the 3 % of GDP deficit threshold with normal macroeconomic fluctuations would be provided throughout the programme period. However, the planned fiscal loosening by around 0,5 % of GDP implies also a divergence from the MTO only in 2008. Therefore, the fiscal policy stance reflected in the programme may not be fully in line with the Stability and Growth Pact. The Council notes that the budgetary plans for 2008 remain consistent with the April 2007 Eurogroup orientations for budgetary policies. Finally, taking into account the risks to the debt projections mentioned above, the debt ratio seems to be sufficiently diminishing towards the reference value over the programme period. |
| --- | --- |

(7)

In view of this risk assessment, the budgetary stance in the programme seems sufficient to return to the MTO by 2010, as envisaged in the programme. A sufficient safety margin against breaching the 3 % of GDP deficit threshold with normal macroeconomic fluctuations would be provided throughout the programme period. However, the planned fiscal loosening by around 0,5 % of GDP implies also a divergence from the MTO only in 2008. Therefore, the fiscal policy stance reflected in the programme may not be fully in line with the Stability and Growth Pact. The Council notes that the budgetary plans for 2008 remain consistent with the April 2007 Eurogroup orientations for budgetary policies. Finally, taking into account the risks to the debt projections mentioned above, the debt ratio seems to be sufficiently diminishing towards the reference value over the programme period.

| (8) | Germany appears to be at medium risk with regard to the sustainability of public finances. The long-term budgetary impact of ageing is close to the EU average, with pension expenditure showing a somewhat more limited increase than in many other countries, as a result of the pension reforms already enacted. The recent pension reform (2007) will gradually increase the statutory retirement age to 67 years, from 2012 onwards, which should further reduce the expected increase in age-related expenditure. The budgetary position in 2007 as estimated in the programme, which is better than the starting position of the previous programme, contributes to offsetting the projected long-term budgetary impact of population ageing. However, this is not sufficient to fully cover future spending pressures. Maintaining high primary surpluses over the medium term and bringing the debt ratio below the Treaty reference value would contribute to reducing risks to the sustainability of public finances. |
| --- | --- |

(8)

Germany appears to be at medium risk with regard to the sustainability of public finances. The long-term budgetary impact of ageing is close to the EU average, with pension expenditure showing a somewhat more limited increase than in many other countries, as a result of the pension reforms already enacted. The recent pension reform (2007) will gradually increase the statutory retirement age to 67 years, from 2012 onwards, which should further reduce the expected increase in age-related expenditure. The budgetary position in 2007 as estimated in the programme, which is better than the starting position of the previous programme, contributes to offsetting the projected long-term budgetary impact of population ageing. However, this is not sufficient to fully cover future spending pressures. Maintaining high primary surpluses over the medium term and bringing the debt ratio below the Treaty reference value would contribute to reducing risks to the sustainability of public finances.

| (9) | While the stability programme does not specify the direct budgetary impact of the Autumn 2007 implementation report of the national reform programme, the budgetary strategies outlined in both documents seem consistent. Principal measures with a direct budgetary impact put forth in the NRP implementation report are mentioned in the stability programme, for example the company tax reform, the increase in the statutory retirement age, the social contribution rate cut, childcare facilities and the second stage of the reform of the federal system with a review of the fiscal relations between levels of government in order to ensure budgetary discipline. |
| --- | --- |

(9)

While the stability programme does not specify the direct budgetary impact of the Autumn 2007 implementation report of the national reform programme, the budgetary strategies outlined in both documents seem consistent. Principal measures with a direct budgetary impact put forth in the NRP implementation report are mentioned in the stability programme, for example the company tax reform, the increase in the statutory retirement age, the social contribution rate cut, childcare facilities and the second stage of the reform of the federal system with a review of the fiscal relations between levels of government in order to ensure budgetary discipline.

| (10) | The budgetary strategy in the programme is broadly consistent with the country-specific broad economic policy guidelines included in the integrated guidelines and the guidelines for euro area Member States in the area of budgetary policies issued in the context of the Lisbon strategy. |
| --- | --- |

(10)

The budgetary strategy in the programme is broadly consistent with the country-specific broad economic policy guidelines included in the integrated guidelines and the guidelines for euro area Member States in the area of budgetary policies issued in the context of the Lisbon strategy.

| (11) | As regards the data requirements specified in the code of conduct for stability and convergence programmes, the programme has some gaps in the required and optional data (4). |
| --- | --- |

(11)

As regards the data requirements specified in the code of conduct for stability and convergence programmes, the programme has some gaps in the required and optional data (4).

The overall conclusion is that, benefiting from continued strong growth, Germany has used unexpected revenues for deficit reduction and therefore broadly achieved its medium-term objective in 2007, much earlier than envisaged in the previous programme, a result to be commended. In 2008, however, public finances could relapse into a structural deficit. The budgetary strategy foresees a gradual return to the medium-term objective thereafter, based on sustained expenditure restraint. The risks attached to the budgetary projections are neutral; while the underlying macro-economic scenario after 2008 is prudent, the envisaged budgetary outcome requires continued commitment to maintain firm control over expenditure. Germany is at medium risk as regards the sustainability of public finances.

In view of the above assessment Germany is invited to:

| (i) | preserve the positive results achieved in 2007 by maintaining firm control over expenditures in line with programme targets and by using unexpected extra revenues for debt reduction; |
| --- | --- |

(i)

preserve the positive results achieved in 2007 by maintaining firm control over expenditures in line with programme targets and by using unexpected extra revenues for debt reduction;

| (ii) | improve the long-term sustainability of public finances, by continuing to implement the growth- and employment-promoting economic reforms enacted and by underpinning the achieved fiscal consolidation with a strengthening of budgetary institutions, in particular through the ongoing revision of federal fiscal relations. |
| --- | --- |

(ii)

improve the long-term sustainability of public finances, by continuing to implement the growth- and employment-promoting economic reforms enacted and by underpinning the achieved fiscal consolidation with a strengthening of budgetary institutions, in particular through the ongoing revision of federal fiscal relations.

The Council also notes that such actions would be consistent with the April 2007 Eurogroup orientations for fiscal policies.

Comparison of key macroeconomic and budgetary projections

| | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 |
| --- | --- | --- | --- | --- | --- | --- |
| Real GDP
  (% change) | SP Dec 2007 | 2,9 | 2,4 | 2 | 1,5 | 1,5 | 1,5 |
| COM Nov 2007 | 2,9 | 2,5 | 2,1 | 2,2 | n.a. | n.a. |
| SP Nov 2006 | 2,3 | 1,4 | 1,75 | 1,75 | 1,75 | n.a. |
| HICP inflation
  (%) | SP Dec 2007 | n.a. | n.a. | n.a. | n.a. | n.a. | n.a. |
| COM Nov 2007 | 1,8 | 2,2 | 2 | 1,8 | n.a. | n.a. |
| SP Nov 2006 | n.a. | n.a. | n.a. | n.a. | n.a. | n.a. |
| Output gap (5)

  (% of potential GDP) | SP Dec 2007 | – 0,2 | 0,7 | 1,1 | 0,8 | 0,5 | – 0,1 |
| COM Nov 2007 (6) | – 0,5 | 0,3 | 0,6 | 0,9 | n.a. | n.a. |
| SP Nov 2006 | – 0,3 | – 0,3 | – 0,2 | 0 | 0 | n.a. |
| Net lending/borrowing vis-à-vis the rest of the world
  (% of GDP) | SP Dec 2007 | 5,2 | 6,1 | 6,1 | 6,3 | 6,3 | 6,3 |
| COM Nov 2007 | 5,2 | 5,8 | 5,8 | 6,1 | n.a. | n.a. |
| SP Nov 2006 | n.a. | n.a. | n.a. | n.a. | n.a. | n.a. |
| General government balance
  (% of GDP) | SP Dec 2007 | – 1,6 | 0 | – 0,5 | 0 | 0,5 | 0,5 |
| COM Nov 2007 | – 1,6 | 0,1 | – 0,1 | 0,2 | n.a. | n.a. |
| SP Nov 2006 | – 2,1 | – 1,5 | – 1,5 | – 1 | – 0,5 | n.a. |
| Primary balance
  (% of GDP) | SP Dec 2007 | 1,2 | 3 | 2,5 | 2,5 | 3 | 3,5 |
| COM Nov 2007 | 1,2 | 2,8 | 2,6 | 2,8 | n.a. | n.a. |
| SP Nov 2006 | 0,5 | 1 | 1 | 1,5 | 2 | n.a. |
| Cyclically-adjusted balance (5)

  (% of GDP) | SP Dec 2007 | – 1,5 | – 0,3 | – 0,8 | – 0,4 | 0 | 0,7 |
| COM Nov 2007 | – 1,3 | – 0,1 | – 0,4 | – 0,2 | n.a. | n.a. |
| SP Nov 2006 | – 2,0 | – 1,5 | – 1,5 | – 1,0 | – 0,6 | n.a. |
| Structural balance (7)

  (% of GDP) | SP Dec 2007 | – 1,5 | – 0,3 | – 0,7 | – 0,3 | 0 | 0,7 |
| COM Nov 2007 | – 1,3 | 0,0 | – 0,4 | – 0,2 | n.a. | n.a. |
| SP Nov 2006 | – 2 | – 1,5 | – 1,5 | – 1 | – 0,6 | n.a. |
| Government gross debt
  (% of GDP) | SP Dec 2007 | 67,5 | 65 | 63 | 61,5 | 59,5 | 57,5 |
| COM Nov 2007 | 67,5 | 64,7 | 62,6 | 60,3 | n.a. | n.a. |
| SP Nov 2006 | 68 | 67 | 66,5 | 65,5 | 64,5 | n.a. |
| Stability programme (SP); Commission services' autumn 2007 economic forecasts (COM); Commission services' calculations. |

2006

2007

2008

2009

2010

2011

Real GDP

(% change)

SP Dec 2007

2,9

2,4

2

1,5

1,5

1,5

COM Nov 2007

2,9

2,5

2,1

2,2

n.a.

n.a.

SP Nov 2006

2,3

1,4

1,75

1,75

1,75

n.a.

HICP inflation

(%)

SP Dec 2007

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

COM Nov 2007

1,8

2,2

2

1,8

n.a.

n.a.

SP Nov 2006

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

Output gap (5)

(% of potential GDP)

SP Dec 2007

– 0,2

0,7

1,1

0,8

0,5

– 0,1

COM Nov 2007 (6)

– 0,5

0,3

0,6

0,9

n.a.

n.a.

SP Nov 2006

– 0,3

– 0,3

– 0,2

0

0

n.a.

Net lending/borrowing vis-à-vis the rest of the world

(% of GDP)

SP Dec 2007

5,2

6,1

6,1

6,3

6,3

6,3

COM Nov 2007

5,2

5,8

5,8

6,1

n.a.

n.a.

SP Nov 2006

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

General government balance

(% of GDP)

SP Dec 2007

– 1,6

0

– 0,5

0

0,5

0,5

COM Nov 2007

– 1,6

0,1

– 0,1

0,2

n.a.

n.a.

SP Nov 2006

– 2,1

– 1,5

– 1,5

– 1

– 0,5

n.a.

Primary balance

(% of GDP)

SP Dec 2007

1,2

3

2,5

2,5

3

3,5

COM Nov 2007

1,2

2,8

2,6

2,8

n.a.

n.a.

SP Nov 2006

0,5

1

1

1,5

2

n.a.

Cyclically-adjusted balance (5)

(% of GDP)

SP Dec 2007

– 1,5

– 0,3

– 0,8

– 0,4

0

0,7

COM Nov 2007

– 1,3

– 0,1

– 0,4

– 0,2

n.a.

n.a.

SP Nov 2006

– 2,0

– 1,5

– 1,5

– 1,0

– 0,6

n.a.

Structural balance (7)

(% of GDP)

SP Dec 2007

– 1,5

– 0,3

– 0,7

– 0,3

0

0,7

COM Nov 2007

– 1,3

0,0

– 0,4

– 0,2

n.a.

n.a.

SP Nov 2006

– 2

– 1,5

– 1,5

– 1

– 0,6

n.a.

Government gross debt

(% of GDP)

SP Dec 2007

67,5

65

63

61,5

59,5

57,5

COM Nov 2007

67,5

64,7

62,6

60,3

n.a.

n.a.

SP Nov 2006

68

67

66,5

65,5

64,5

n.a.

Stability programme (SP); Commission services' autumn 2007 economic forecasts (COM); Commission services' calculations.

---

(1)  OJ L 209, 2.8.1997, p. 1. Regulation as amended by Regulation (EC) No 1055/2005 (OJ L 174, 7.7.2005, p. 1). The documents referred to in this text can be found at the following website:

http://ec.europa.eu/economy_finance/about/activities/sgp/main_en.htm

(2)  The assessment takes notably into account the Commission services' autumn forecast and the Commission assessment of the Autumn 2007 implementation report of the national reform programme. Recent indicators would however point to somewhat lower growth in 2008.

(3)  OJ C 70, 27.3.2007, p. 5.

(4)  In particular, data on HICP inflation and total social transfers are not provided in the programme and not all basic assumptions underlying the macroeconomic scenario are spelled out.

(5)  Output gaps and cyclically-adjusted balances from the programmes as recalculated by Commission services on the basis of the information in the programmes.

(6)  Based on estimated potential growth of 1,2 %, 1,6 %, 1,8 % and 1,9 % respectively in the period 2006-2009.

(7)  Cyclically-adjusted balance excluding one-off and other temporary measures. One-off and other temporary measures are 0,1 % of GDP in 2008 and 2009; all deficit-increasing, according to the most recent programme; and 0,1 % of GDP in 2007 and 2009; all deficit-increasing, according to the Commission services' autumn forecast.

Sources:

Stability programme (SP); Commission services' autumn 2007 economic forecasts (COM); Commission services' calculations.

---

| 22.2.2008 | EN | Official Journal of the European Union | C 49/16 |
| --- | --- | --- | --- |

22.2.2008

EN

Official Journal of the European Union

C 49/16

---

COUNCIL OPINION

of 12 February 2008

on the updated convergence programme of Sweden, 2007-2010

(2008/C 49/05)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community,

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies (1), and in particular Article 9(3) thereof,

Having regard to the recommendation of the Commission,

After consulting the Economic and Financial Committee,

HAS DELIVERED THIS OPINION:

| (1) | On 12 February 2008, the Council examined the updated convergence programme of Sweden, which covers the period 2007 to 2010. |
| --- | --- |

(1)

On 12 February 2008, the Council examined the updated convergence programme of Sweden, which covers the period 2007 to 2010.

| (2) | The Swedish economy has performed well in recent years. In 2007, the economy has entered into a more mature phase that is reflected by a solid domestic demand boosted by buoyant investment and private consumption growth. Against this background, Swedish public finances have also been strong with consistent and sizable general government surpluses.
  The healthy public finances have been supported by a stability-oriented macroeconomic framework, healthy economic growth and a national rules-based budgetary framework. While economic activity is forecast to decelerate gradually in coming years, both economic fundamentals and the fiscal situation are expected to remain favourable. Against this background it is important that the room for manoeuvre provided by strong public finances is not used to permanently increase public consumption expenditure. Notably if local governments were to increase expenditure in good times this could lead to permanently higher public expenditure in the future, which would interfere with the plans for a moderate reduction of the expenditure-to-GDP ratio over time and the government's strategy of lowering taxes aimed at enhancing incentives to work. |
| --- | --- |

(2)

The Swedish economy has performed well in recent years. In 2007, the economy has entered into a more mature phase that is reflected by a solid domestic demand boosted by buoyant investment and private consumption growth. Against this background, Swedish public finances have also been strong with consistent and sizable general government surpluses.

The healthy public finances have been supported by a stability-oriented macroeconomic framework, healthy economic growth and a national rules-based budgetary framework. While economic activity is forecast to decelerate gradually in coming years, both economic fundamentals and the fiscal situation are expected to remain favourable. Against this background it is important that the room for manoeuvre provided by strong public finances is not used to permanently increase public consumption expenditure. Notably if local governments were to increase expenditure in good times this could lead to permanently higher public expenditure in the future, which would interfere with the plans for a moderate reduction of the expenditure-to-GDP ratio over time and the government's strategy of lowering taxes aimed at enhancing incentives to work.

| (3) | The programme contains three different scenarios for the macroeconomic and budgetary projections: a ‘base’ scenario, a ‘low growth’ scenario and a ‘high growth’ scenario. The ‘base’ scenario is considered the reference scenario for assessing budgetary projections although, assessed against currently available information (2), it appears to be based on somewhat optimistic growth assumptions. It envisages that real GDP growth will slow down from 3,2 % in 2007 to 2,6 % on average over the rest of the programme period. The programme's projections for inflation, which foresee an increase above the 2 % Riksbank target, also appear realistic. Higher wage growth combined with weaker productivity growth than in recent years is predicted to raise unit labour costs, which could add to inflationary pressures. |
| --- | --- |

(3)

The programme contains three different scenarios for the macroeconomic and budgetary projections: a ‘base’ scenario, a ‘low growth’ scenario and a ‘high growth’ scenario. The ‘base’ scenario is considered the reference scenario for assessing budgetary projections although, assessed against currently available information (2), it appears to be based on somewhat optimistic growth assumptions. It envisages that real GDP growth will slow down from 3,2 % in 2007 to 2,6 % on average over the rest of the programme period. The programme's projections for inflation, which foresee an increase above the 2 % Riksbank target, also appear realistic. Higher wage growth combined with weaker productivity growth than in recent years is predicted to raise unit labour costs, which could add to inflationary pressures.

| (4) | For 2007, the general government surplus is estimated at 3,0 % of GDP in the Commission services' autumn 2007 forecast, against a target of 1,2 % of GDP set in the previous update of the convergence programme. The better-than-targeted balance is notably due to a base effect (reflecting a stronger outturn in 2006 than projected in the previous programme) and to a stronger-than-anticipated labour market in 2007, which had a more favourable impact on revenue and, to a lesser extent, expenditure than anticipated.
  In line with the implicit policy invitation in the Council opinion of 27 February 2007 on the previous update of the convergence programme (3), the structural balance is estimated to improve significantly in 2007, indicating a counter-cyclical fiscal stance in 2007. |
| --- | --- |

(4)

For 2007, the general government surplus is estimated at 3,0 % of GDP in the Commission services' autumn 2007 forecast, against a target of 1,2 % of GDP set in the previous update of the convergence programme. The better-than-targeted balance is notably due to a base effect (reflecting a stronger outturn in 2006 than projected in the previous programme) and to a stronger-than-anticipated labour market in 2007, which had a more favourable impact on revenue and, to a lesser extent, expenditure than anticipated.

In line with the implicit policy invitation in the Council opinion of 27 February 2007 on the previous update of the convergence programme (3), the structural balance is estimated to improve significantly in 2007, indicating a counter-cyclical fiscal stance in 2007.

| (5) | The main goal of the medium-term budgetary strategy in the programme is to achieve a nominal budget surplus of 1 % of GDP on average over the business cycle, supported by multi-annual expenditure ceilings for the central government and a balanced budget requirement for local governments. This surplus target corresponds to Sweden's medium-term objective (MTO) for the budgetary position of a 1 % of GDP structural surplus (i.e. cyclically adjusted surplus net of one-off and temporary measures), which is foreseen to be respected with a good margin throughout the programme period. The MTO target has been revised downward from 2 % in the previous update, in response to the implementation of the March 2004 Eurostat decision on the recording of second-pillar pension funds outside the government sector as from April 2007 (4). This revision is purely technical and the new target confirms the same level of fiscal ambition. The general government surplus is estimated to decline slightly in 2008 to 2,8 %, from 3,0 % of GDP in 2007. Thereafter the balance is projected to recover progressively to 3,6 % in 2010. The weakening in 2008 reflects significant income tax cuts for low and middle income earners by means of a strengthened in-work tax credit, which are only partly financed through other revenue-increasing and expenditure-decreasing measures. For the rest of the programme period the projections are based on a no-policy-change assumption, according to which both revenue and expenditure ratios are on a gradually declining trend. In view of better-than-expected outturns in 2006 and 2007, these surplus projections are much higher than in the previous update against a broadly similar macroeconomic background. The primary balance and the structural balance show a path that is broadly similar to that of the headline balance. |
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(5)

The main goal of the medium-term budgetary strategy in the programme is to achieve a nominal budget surplus of 1 % of GDP on average over the business cycle, supported by multi-annual expenditure ceilings for the central government and a balanced budget requirement for local governments. This surplus target corresponds to Sweden's medium-term objective (MTO) for the budgetary position of a 1 % of GDP structural surplus (i.e. cyclically adjusted surplus net of one-off and temporary measures), which is foreseen to be respected with a good margin throughout the programme period. The MTO target has been revised downward from 2 % in the previous update, in response to the implementation of the March 2004 Eurostat decision on the recording of second-pillar pension funds outside the government sector as from April 2007 (4). This revision is purely technical and the new target confirms the same level of fiscal ambition. The general government surplus is estimated to decline slightly in 2008 to 2,8 %, from 3,0 % of GDP in 2007. Thereafter the balance is projected to recover progressively to 3,6 % in 2010. The weakening in 2008 reflects significant income tax cuts for low and middle income earners by means of a strengthened in-work tax credit, which are only partly financed through other revenue-increasing and expenditure-decreasing measures. For the rest of the programme period the projections are based on a no-policy-change assumption, according to which both revenue and expenditure ratios are on a gradually declining trend. In view of better-than-expected outturns in 2006 and 2007, these surplus projections are much higher than in the previous update against a broadly similar macroeconomic background. The primary balance and the structural balance show a path that is broadly similar to that of the headline balance.

| (6) | The risks to the budgetary projections in the programme appear broadly balanced. While GDP growth is projected, in the programme, to decelerate gradually over the programme period (5), the composition of growth still remains favourable from the point of view of public finances, notably given the solid private consumption growth. Moreover, the budget projections are supported by a good track record, owing partly to the above-mentioned expenditure ceilings, while tax revenue projections appear plausible. |
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(6)

The risks to the budgetary projections in the programme appear broadly balanced. While GDP growth is projected, in the programme, to decelerate gradually over the programme period (5), the composition of growth still remains favourable from the point of view of public finances, notably given the solid private consumption growth. Moreover, the budget projections are supported by a good track record, owing partly to the above-mentioned expenditure ceilings, while tax revenue projections appear plausible.

| (7) | In view of this risk assessment, the budgetary stance in the programme allows meeting the MTO by a good margin throughout the programme period, as envisaged in the programme. The somewhat weaker budgetary position in 2008 goes along with continued structural reforms aimed at encouraging labour force participation by reducing the tax wedge which thus increases the growth potential of the economy. Most recent information indicating lower growth prospects imply that the risk of a pro-cyclical fiscal policy stance in 2008 is very limited. Moreover, the budgetary deterioration in 2008 would be temporary as it is not expected to spill over into subsequent years. |
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(7)

In view of this risk assessment, the budgetary stance in the programme allows meeting the MTO by a good margin throughout the programme period, as envisaged in the programme. The somewhat weaker budgetary position in 2008 goes along with continued structural reforms aimed at encouraging labour force participation by reducing the tax wedge which thus increases the growth potential of the economy. Most recent information indicating lower growth prospects imply that the risk of a pro-cyclical fiscal policy stance in 2008 is very limited. Moreover, the budgetary deterioration in 2008 would be temporary as it is not expected to spill over into subsequent years.

| (8) | Sweden appears to be at low risk with regard to the sustainability of public finances. The long-term budgetary impact of ageing is lower than the EU average, with pension expenditure projected to remain relatively stable as a share of GDP over the long term, influenced by the considerable expenditure-reducing impact of the reform of the pension system adopted in 1998. The budgetary position in 2007 as estimated in the programme with a high primary surplus contributes to the reduction of gross debt. Maintaining sound government finances with continued surpluses as planned in the programme would contribute to limiting risks to the sustainability of public finances. |
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(8)

Sweden appears to be at low risk with regard to the sustainability of public finances. The long-term budgetary impact of ageing is lower than the EU average, with pension expenditure projected to remain relatively stable as a share of GDP over the long term, influenced by the considerable expenditure-reducing impact of the reform of the pension system adopted in 1998. The budgetary position in 2007 as estimated in the programme with a high primary surplus contributes to the reduction of gross debt. Maintaining sound government finances with continued surpluses as planned in the programme would contribute to limiting risks to the sustainability of public finances.

| (9) | The convergence programme is fully consistent with the October 2007 implementation report of the national reform programme. In particular, both include fiscal measures aimed at increasing incentives to work and increasing labour supply. Focussing on the measures with a direct budgetary impact, income taxes are to be further reduced in 2008 and both the unemployment and the sickness insurance systems are to be reformed to better integrate people that currently stand outside the labour market. The updated convergence programme also describes in qualitative terms the overall impact of the National Reform Programme within the medium term fiscal strategy, in particular with regard to the increase in labour supply on the public finance position at large and the growth potential of the economy. |
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(9)

The convergence programme is fully consistent with the October 2007 implementation report of the national reform programme. In particular, both include fiscal measures aimed at increasing incentives to work and increasing labour supply. Focussing on the measures with a direct budgetary impact, income taxes are to be further reduced in 2008 and both the unemployment and the sickness insurance systems are to be reformed to better integrate people that currently stand outside the labour market. The updated convergence programme also describes in qualitative terms the overall impact of the National Reform Programme within the medium term fiscal strategy, in particular with regard to the increase in labour supply on the public finance position at large and the growth potential of the economy.

| (10) | As regards the data requirements specified in the code of conduct for stability and convergence programmes, the programme provides all required data and most optional data (6). |
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(10)

As regards the data requirements specified in the code of conduct for stability and convergence programmes, the programme provides all required data and most optional data (6).

The overall conclusion is that the medium-term budgetary position is sound with high general government surpluses and Sweden is at low risk with regard to the sustainability of public finances. With GDP growth in 2008 possibly turning out lower than foreseen, the risk of pro-cyclical fiscal policy would be very limited. Moreover, the weakening of the structural budgetary position in 2008 goes along with continued structural reforms aimed at encouraging labour force participation and thus increasing growth potential and is not envisaged to spill over into subsequent years.

Comparison of key macroeconomic and budgetary projections

| | 2006 | 2007 | 2008 | 2009 | 2010 |
| --- | --- | --- | --- | --- | --- |
| Real GDP
  (% change) | CP Nov 2007 | 4,2 | 3,2 | 3,2 | 2,5 | 2,2 |
| COM Nov 2007 | 4,2 | 3,4 | 3,1 | 2,4 | n.a. |
| CP Dec 2006 | 4 | 3,3 | 3,1 | 2,7 | n.a. |
| HICP inflation
  (%) | CP Nov 2007 | 1,4 | 1,7 | 2,7 | 2,5 | 2,1 |
| COM Nov 2007 | 1,5 | 1,6 | 2 | 2 | n.a. |
| CP Dec 2006 | 1,9 | 2,2 | 1,5 | 1,9 | n.a. |
| Output gap (7)

  (% of potential GDP) | CP Nov 2007 | 0,6 | 0,3 | 0,6 | 0,5 | 0,3 |
| COM Nov 2007 (8) | 0,5 | 0,6 | 0,8 | 0,5 | n.a. |
| CP Dec 2006 | 0 | 0,3 | 0,3 | 0,3 | n.a. |
| Net lending/borrowing vis-à-vis the rest of the world
  (% of GDP) | CP Nov 2007 | 6,5 | 7,1 | 7,2 | 7,4 | 7,7 |
| COM Nov 2007 | 6,3 | 7 | 6,9 | 7,2 | n.a. |
| CP Dec 2006 | 6,1 | 7,5 | 7,4 | 7,5 | n.a. |
| General government balance
  (% of GDP) | CP Nov 2007 | 2,5 | 3 | 2,8 | 3,1 | 3,6 |
| COM Nov 2007 | 2,5 | 3 | 2,8 | 3 | n.a. |
| CP Dec 2006 | 1,8 | 1,2 | 1,5 | 2 | n.a. |
| Primary balance
  (% of GDP) | CP Nov 2007 | 4,2 | 4,6 | 4,4 | 4,5 | 4,8 |
| COM Nov 2007 | 4,2 | 4,7 | 4,3 | 4,5 | n.a. |
| CP Dec 2006 | 3,5 | 3 | 3,1 | 3,5 | n.a. |
| Cyclically-adjusted balance (7)

  (% of GDP) | CP Nov 2007 | 2,2 | 2,8 | 2,4 | 2,8 | 3,4 |
| COM Nov 2007 | 2,1 | 2,7 | 2,3 | 2,8 | n.a. |
| CP Dec 2006 | 1,8 | 1 | 1,3 | 1,9 | n.a. |
| Structural balance (9)

  (% of GDP) | CP Nov 2007 | 1,7 | 2,4 | 2,1 | 2,8 | 3,4 |
| COM Nov 2007 | 2,1 | 2,7 | 2,3 | 2,6 | n.a. |
| CP Dec 2006 | 1,8 | 1 | 1,3 | 1,9 | n.a. |
| Government gross debt
  (% of GDP) | CP Nov 2007 | 47 | 39,7 | 34,8 | 29,8 | 24,5 |
| COM Nov 2007 | 47 | 41,1 | 35,7 | 30,5 | n.a. |
| CP Dec 2006 | 47 | 42 | 37,9 | 33,5 | n.a. |
| Convergence programme (CP); Commission services' autumn 2007 economic forecasts (COM); Commission services' calculations. |

2006

2007

2008

2009

2010

Real GDP

(% change)

CP Nov 2007

4,2

3,2

3,2

2,5

2,2

COM Nov 2007

4,2

3,4

3,1

2,4

n.a.

CP Dec 2006

4

3,3

3,1

2,7

n.a.

HICP inflation

(%)

CP Nov 2007

1,4

1,7

2,7

2,5

2,1

COM Nov 2007

1,5

1,6

2

2

n.a.

CP Dec 2006

1,9

2,2

1,5

1,9

n.a.

Output gap (7)

(% of potential GDP)

CP Nov 2007

0,6

0,3

0,6

0,5

0,3

COM Nov 2007 (8)

0,5

0,6

0,8

0,5

n.a.

CP Dec 2006

0

0,3

0,3

0,3

n.a.

Net lending/borrowing vis-à-vis the rest of the world

(% of GDP)

CP Nov 2007

6,5

7,1

7,2

7,4

7,7

COM Nov 2007

6,3

7

6,9

7,2

n.a.

CP Dec 2006

6,1

7,5

7,4

7,5

n.a.

General government balance

(% of GDP)

CP Nov 2007

2,5

3

2,8

3,1

3,6

COM Nov 2007

2,5

3

2,8

3

n.a.

CP Dec 2006

1,8

1,2

1,5

2

n.a.

Primary balance

(% of GDP)

CP Nov 2007

4,2

4,6

4,4

4,5

4,8

COM Nov 2007

4,2

4,7

4,3

4,5

n.a.

CP Dec 2006

3,5

3

3,1

3,5

n.a.

Cyclically-adjusted balance (7)

(% of GDP)

CP Nov 2007

2,2

2,8

2,4

2,8

3,4

COM Nov 2007

2,1

2,7

2,3

2,8

n.a.

CP Dec 2006

1,8

1

1,3

1,9

n.a.

Structural balance (9)

(% of GDP)

CP Nov 2007

1,7

2,4

2,1

2,8

3,4

COM Nov 2007

2,1

2,7

2,3

2,6

n.a.

CP Dec 2006

1,8

1

1,3

1,9

n.a.

Government gross debt

(% of GDP)

CP Nov 2007

47

39,7

34,8

29,8

24,5

COM Nov 2007

47

41,1

35,7

30,5

n.a.

CP Dec 2006

47

42

37,9

33,5

n.a.

Convergence programme (CP); Commission services' autumn 2007 economic forecasts (COM); Commission services' calculations.

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(1)  OJ L 209, 2.8.1997, p. 1. Regulation as amended by Regulation (EC) No 1055/2005 (OJ L 174, 7.7.2005, p. 1). The documents referred to in this text can be found at the following website:

http://ec.europa.eu/economy_finance/about/activities/sgp/main_en.htm

(2)  The assessment takes notably into account the Commission services' autumn forecast and the Commission assessment of the October 2007 implementation report of the national reform programme. Recent indicators would, however, point to somewhat lower growth in 2008.

(3)  OJ C 72, 29.3.2007, p. 17.

(4)  See Eurostat News Release No 30/2004 of 2 March 2004 and No 117/2004 of 23 September 2004.

(5)  The most recent data indicate a somewhat weaker growth than forecast in the program, in particular in 2008.

(6)  In particular, data for general government expenditure by function; breakdown of stock-flow adjustment; and potential GDP growth contributions, which have the effect of making the assessment objectively more difficult, are not provided.

(7)  Output gaps and cyclically-adjusted balances according to the programmes as recalculated by Commission services on the basis of the information in the programmes.

(8)  Based on estimated potential growth of 3,3 %, 3,4 %, 2,9 % and 2,7 % respectively in the period 2006-2009.

(9)  Cyclically-adjusted balance excluding one-off and other temporary measures. One-off and other temporary measures are 0,5 % of GDP in 2006, 0,4 % in 2007 and 0,3 % in 2008; all deficit-reducing according to the most recent programme and 0,2 % of GDP in 2009; deficit-reducing in the Commission services' autumn forecast. The Commission services do not take into account the effect identified in the programme for 2006 and 2007 in its assessment as they are not considered as one-offs or other temporary measures.

Sources:

Convergence programme (CP); Commission services' autumn 2007 economic forecasts (COM); Commission services' calculations.

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| 22.2.2008 | EN | Official Journal of the European Union | C 49/20 |
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22.2.2008

EN

Official Journal of the European Union

C 49/20

---

COUNCIL OPINION

of 12 February 2008

on the updated convergence programme of Hungary, 2007-2011

(2008/C 49/06)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community,

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies (1), and in particular Article 9(3) thereof,

Having regard to the recommendation of the Commission,

After consulting the Economic and Financial Committee,

HAS DELIVERED THIS OPINION:

| (1) | On 12 February 2008, the Council examined the updated convergence programme of Hungary, which covers the period 2007 to 2011. |
| --- | --- |

(1)

On 12 February 2008, the Council examined the updated convergence programme of Hungary, which covers the period 2007 to 2011.

| (2) | Over the last several years, Hungary has fallen behind in the catching-up process compared to its neighbours. This has been coupled with increasing fiscal laxity, which contributed to considerable internal and external imbalances and relatively tight monetary policy. Since mid-2006, the Government has taken comprehensive measures to consolidate public finances.
  These have set the budget deficit on a decreasing trend from a peak of over 9 % of GDP in 2006 to around 6 % (and possibly below, according to the most recent estimates) in 2007 and have started to lead to an improvement of the external balance. At the same time, the indirect tax increases and hikes in regulated prices have temporarily put upward pressure on inflation, which should decelerate again from 2008. The continued fiscal consolidation supported by improved fiscal governance and enhanced structural reforms should form the basis of a return to robust and balanced growth. It could also contribute to providing more room for manoeuvre for monetary policy and to lowering the risk premia. |
| --- | --- |

(2)

Over the last several years, Hungary has fallen behind in the catching-up process compared to its neighbours. This has been coupled with increasing fiscal laxity, which contributed to considerable internal and external imbalances and relatively tight monetary policy. Since mid-2006, the Government has taken comprehensive measures to consolidate public finances.

These have set the budget deficit on a decreasing trend from a peak of over 9 % of GDP in 2006 to around 6 % (and possibly below, according to the most recent estimates) in 2007 and have started to lead to an improvement of the external balance. At the same time, the indirect tax increases and hikes in regulated prices have temporarily put upward pressure on inflation, which should decelerate again from 2008. The continued fiscal consolidation supported by improved fiscal governance and enhanced structural reforms should form the basis of a return to robust and balanced growth. It could also contribute to providing more room for manoeuvre for monetary policy and to lowering the risk premia.

| (3) | The baseline macroeconomic scenario projects real GDP growth to decelerate to below its long-term average in 2007 and 2008 and to return to 4 % or above from 2009 onwards. In light of currently available information (2), the growth assumptions appear to be plausible for 2007 and 2008, but rather favourable thereafter. In particular, starting from 2009, the programme projects a rather quick recovery and hence a somewhat favourable evolution of domestic demand, in parallel with only a moderate decline in the contribution of net exports. The envisaged robust growth after 2008 hinges on a somewhat optimistic assumption for the increase of labour productivity and on the projected acceleration in private consumption and rebound in investment. The projected improvement in the external balance is plausible provided that fiscal consolidation is continued as planned. Although the foreseen decline in inflation from 7,9 % in 2007 to around 3 % in the outer years is broadly plausible, higher-than-projected wages and sustained pressure from commodity prices may pose risks to the programme's inflation trajectory and thus could further delay nominal convergence. In this context, the continued implementation of structural reforms plays an important role. |
| --- | --- |

(3)

The baseline macroeconomic scenario projects real GDP growth to decelerate to below its long-term average in 2007 and 2008 and to return to 4 % or above from 2009 onwards. In light of currently available information (2), the growth assumptions appear to be plausible for 2007 and 2008, but rather favourable thereafter. In particular, starting from 2009, the programme projects a rather quick recovery and hence a somewhat favourable evolution of domestic demand, in parallel with only a moderate decline in the contribution of net exports. The envisaged robust growth after 2008 hinges on a somewhat optimistic assumption for the increase of labour productivity and on the projected acceleration in private consumption and rebound in investment. The projected improvement in the external balance is plausible provided that fiscal consolidation is continued as planned. Although the foreseen decline in inflation from 7,9 % in 2007 to around 3 % in the outer years is broadly plausible, higher-than-projected wages and sustained pressure from commodity prices may pose risks to the programme's inflation trajectory and thus could further delay nominal convergence. In this context, the continued implementation of structural reforms plays an important role.

| (4) | For 2007, the general government deficit is estimated at 6,4 % of GDP in the Commission services' autumn 2007 forecast, against a target of 6,8 % of GDP set in the previous update of the convergence programme. The programme foresees an even lower deficit outcome of 6,2 % of GDP for 2007, which in light of the most recent information on budgetary implementation appears to be even surpassed. In mid-January, the Government announced yet again a lower deficit forecast of 5,7 % of GDP. The overachievement of the 2007 deficit target is chiefly due to a favourable base effect from 2006 as well as higher-than-expected revenues resulting from tax increases and the implementation of a set of measures addressing tax evasion. The reduction in the deficit would have been even higher had part of the additional room for manoeuvre not been used to raise expenditures more than planned. On the whole the budgetary implementation in 2007 was broadly in line with the invitation in the Council opinion of 27 February 2007 on the previous update of the convergence programme to rigorously implement the 2007 budget (3). |
| --- | --- |

(4)

For 2007, the general government deficit is estimated at 6,4 % of GDP in the Commission services' autumn 2007 forecast, against a target of 6,8 % of GDP set in the previous update of the convergence programme. The programme foresees an even lower deficit outcome of 6,2 % of GDP for 2007, which in light of the most recent information on budgetary implementation appears to be even surpassed. In mid-January, the Government announced yet again a lower deficit forecast of 5,7 % of GDP. The overachievement of the 2007 deficit target is chiefly due to a favourable base effect from 2006 as well as higher-than-expected revenues resulting from tax increases and the implementation of a set of measures addressing tax evasion. The reduction in the deficit would have been even higher had part of the additional room for manoeuvre not been used to raise expenditures more than planned. On the whole the budgetary implementation in 2007 was broadly in line with the invitation in the Council opinion of 27 February 2007 on the previous update of the convergence programme to rigorously implement the 2007 budget (3).

| (5) | The main goal of the update is to correct the excessive deficit by 2009 (reducing it from 6,2 % of GDP in 2007 to 3,2 % of GDP in 2009 (4)), in line with the previous update against a background of a broadly similar macroeconomic scenario, and to further reduce it to 2,2 % of GDP in 2011. As interest expenditure is projected to progressively decline after 2008, the primary balance would improve slightly less, from a deficit of 2,2 % of GDP in 2007 to a surplus of 1,1 % of GDP in 2011. The update confirms the medium-term objective (MTO) for the budgetary position of a 0,5 % of GDP deficit in structural terms (i.e. cyclically-adjusted and net of one-off and other temporary measures), which is not expected to be achieved within the programme period.
  The budgetary consolidation is planned to be realised by reducing the expenditure-to-GDP ratio, after a drop of 1,5 percentage points in 2007, by some 6 percentage points over the programme period; this would more than offset the decrease, from 2008, in the revenue-to-GDP ratio by around 2 percentage points (chiefly driven by a reduction in the tax burden owing to a tax-poor composition of GDP growth). After the expiry of expenditure freezes in 2009, the reduction in the expenditure ratio would be achieved through the progressive phasing-in of structural reforms in the areas of public administration, education, healthcare and pensions as well as further cuts in price subsidies. Government gross debt, estimated at around 65 % of GDP in 2007, i.e. above the 60 % of GDP Treaty reference value, is projected to decline by 3,6 percentage points over the programme period. |
| --- | --- |

(5)

The main goal of the update is to correct the excessive deficit by 2009 (reducing it from 6,2 % of GDP in 2007 to 3,2 % of GDP in 2009 (4)), in line with the previous update against a background of a broadly similar macroeconomic scenario, and to further reduce it to 2,2 % of GDP in 2011. As interest expenditure is projected to progressively decline after 2008, the primary balance would improve slightly less, from a deficit of 2,2 % of GDP in 2007 to a surplus of 1,1 % of GDP in 2011. The update confirms the medium-term objective (MTO) for the budgetary position of a 0,5 % of GDP deficit in structural terms (i.e. cyclically-adjusted and net of one-off and other temporary measures), which is not expected to be achieved within the programme period.

The budgetary consolidation is planned to be realised by reducing the expenditure-to-GDP ratio, after a drop of 1,5 percentage points in 2007, by some 6 percentage points over the programme period; this would more than offset the decrease, from 2008, in the revenue-to-GDP ratio by around 2 percentage points (chiefly driven by a reduction in the tax burden owing to a tax-poor composition of GDP growth). After the expiry of expenditure freezes in 2009, the reduction in the expenditure ratio would be achieved through the progressive phasing-in of structural reforms in the areas of public administration, education, healthcare and pensions as well as further cuts in price subsidies. Government gross debt, estimated at around 65 % of GDP in 2007, i.e. above the 60 % of GDP Treaty reference value, is projected to decline by 3,6 percentage points over the programme period.

| (6) | The risks to the budgetary projections in the programme appear broadly balanced in 2008, due to an expected better outcome in 2007 than foreseen in the programme and since the reserves in the budget could offset possible slippages on the expenditure side. From 2009, the budgetary outcomes could be worse than targeted. The risks to the deficit path stemming from the macroeconomic outlook are neutral in 2008. There is a risk from 2009 of lower-than-expected GDP growth, which would lead to higher deficits. Some signs of relaxation in the enforcement of measures on expenditure are appearing, as since mid-2007 expenditures have been catching up with the higher-than-expected revenues and the nominal freeze of the public wage bill (due to expire in 2009) will not be respected in 2008 (as public sector wages were increased, partly referring to higher-than-expected inflation). Additional risks on the expenditure side may arise if the planned reorganisation of the heavily-indebted national railway company does not lead to a reduction in related government expenditure (5). Further plans and follow-up steps for structural reforms of the public administration, health, pension, price subsidies and education systems play a crucial role in curbing expenditures. Nevertheless, they need to be fully specified and adopted.
  An important reform proposal improving fiscal governance, submitted to Parliament in November 2007, should help enhance the credibility of the budgetary strategy and reduce budgetary risks; however it will require adoption by qualified majority and its effectiveness in reversing the recent pattern of budgetary slippages needs to be tested. Even though the recent budgetary performance has been better than planned, starting from 2009 there is a risk of a budgetary loosening compared to plans as evidenced by past experience. Risks to the budgetary targets equally apply to the debt ratio; therefore its evolution envisaged from 2009 might also be less favourable than projected in the programme. |
| --- | --- |

(6)

The risks to the budgetary projections in the programme appear broadly balanced in 2008, due to an expected better outcome in 2007 than foreseen in the programme and since the reserves in the budget could offset possible slippages on the expenditure side. From 2009, the budgetary outcomes could be worse than targeted. The risks to the deficit path stemming from the macroeconomic outlook are neutral in 2008. There is a risk from 2009 of lower-than-expected GDP growth, which would lead to higher deficits. Some signs of relaxation in the enforcement of measures on expenditure are appearing, as since mid-2007 expenditures have been catching up with the higher-than-expected revenues and the nominal freeze of the public wage bill (due to expire in 2009) will not be respected in 2008 (as public sector wages were increased, partly referring to higher-than-expected inflation). Additional risks on the expenditure side may arise if the planned reorganisation of the heavily-indebted national railway company does not lead to a reduction in related government expenditure (5). Further plans and follow-up steps for structural reforms of the public administration, health, pension, price subsidies and education systems play a crucial role in curbing expenditures. Nevertheless, they need to be fully specified and adopted.

An important reform proposal improving fiscal governance, submitted to Parliament in November 2007, should help enhance the credibility of the budgetary strategy and reduce budgetary risks; however it will require adoption by qualified majority and its effectiveness in reversing the recent pattern of budgetary slippages needs to be tested. Even though the recent budgetary performance has been better than planned, starting from 2009 there is a risk of a budgetary loosening compared to plans as evidenced by past experience. Risks to the budgetary targets equally apply to the debt ratio; therefore its evolution envisaged from 2009 might also be less favourable than projected in the programme.

| (7) | In view of this risk assessment, the budgetary stance in the programme seems broadly consistent with a durable correction of the excessive deficit by 2009 as recommended by the Council provided that the budgetary measures and structural reform steps announced in the programme are fully and effectively implemented. Even if the budgetary plans from 2009 include built-in reserves on the expenditure side, the planned 2009 deficit target of 3,2 % of GDP does not provide an adequate buffer against unforeseen negative budgetary developments. A sufficient safety margin against breaching the 3 % of GDP deficit threshold with normal macroeconomic fluctuations is not expected to be provided within the programme period. In the years following the correction of the excessive deficit, the pace of adjustment towards the MTO implied by the programme is inadequate and not sufficiently backed up with specific measures. Finally, taking into account the risks to the debt projections mentioned above, the debt ratio may not be sufficiently diminishing towards the reference value over the programme period. |
| --- | --- |

(7)

In view of this risk assessment, the budgetary stance in the programme seems broadly consistent with a durable correction of the excessive deficit by 2009 as recommended by the Council provided that the budgetary measures and structural reform steps announced in the programme are fully and effectively implemented. Even if the budgetary plans from 2009 include built-in reserves on the expenditure side, the planned 2009 deficit target of 3,2 % of GDP does not provide an adequate buffer against unforeseen negative budgetary developments. A sufficient safety margin against breaching the 3 % of GDP deficit threshold with normal macroeconomic fluctuations is not expected to be provided within the programme period. In the years following the correction of the excessive deficit, the pace of adjustment towards the MTO implied by the programme is inadequate and not sufficiently backed up with specific measures. Finally, taking into account the risks to the debt projections mentioned above, the debt ratio may not be sufficiently diminishing towards the reference value over the programme period.

| (8) | Though recent reforms in 2006 and 2007 have helped curb the increase in age-related expenditure, Hungary appears to be at high risk with regard to the sustainability of public finances. The long-term budgetary impact of ageing on gross public expenditure continues to be above the EU average. The full materialisation of the budgetary savings expected from the planned introduction of the direct taxation of pensions from 2013 is conditioned on how this taxation will be implemented.
  Moreover, and importantly, the budgetary position in 2007 as estimated in the programme, while significantly improved compared to 2006, still constitutes a risk to sustainable public finances even before the long-term budgetary impact of an ageing population is considered. In addition, the current level of gross debt is above the Treaty reference value. Further budgetary consolidation as planned in the programme would contribute to reducing risks to the sustainability of public finances. |
| --- | --- |

(8)

Though recent reforms in 2006 and 2007 have helped curb the increase in age-related expenditure, Hungary appears to be at high risk with regard to the sustainability of public finances. The long-term budgetary impact of ageing on gross public expenditure continues to be above the EU average. The full materialisation of the budgetary savings expected from the planned introduction of the direct taxation of pensions from 2013 is conditioned on how this taxation will be implemented.

Moreover, and importantly, the budgetary position in 2007 as estimated in the programme, while significantly improved compared to 2006, still constitutes a risk to sustainable public finances even before the long-term budgetary impact of an ageing population is considered. In addition, the current level of gross debt is above the Treaty reference value. Further budgetary consolidation as planned in the programme would contribute to reducing risks to the sustainability of public finances.

| (9) | The convergence programme seems to be consistent to some extent with the October 2007 implementation report of the national reform programme. Focusing on the measures with a direct budgetary impact, both programmes include the already adopted and planned steps to streamline the institutional system of the entire public sector, including through the rationalisation of capacities in the public administration and health-care system, as well as various measures to discourage early retirement. The new update provides some information on the direct budgetary implications of the structural reform plans and the recently adopted measures outlined in the implementation report. However, not all the envisaged measures are quantified in the budgetary projections of the convergence programme and furthermore their incorporation is neither comprehensive nor systematic. |
| --- | --- |

(9)

The convergence programme seems to be consistent to some extent with the October 2007 implementation report of the national reform programme. Focusing on the measures with a direct budgetary impact, both programmes include the already adopted and planned steps to streamline the institutional system of the entire public sector, including through the rationalisation of capacities in the public administration and health-care system, as well as various measures to discourage early retirement. The new update provides some information on the direct budgetary implications of the structural reform plans and the recently adopted measures outlined in the implementation report. However, not all the envisaged measures are quantified in the budgetary projections of the convergence programme and furthermore their incorporation is neither comprehensive nor systematic.

| (10) | The budgetary strategy in the programme is broadly consistent with the country-specific broad economic policy guidelines included in the integrated guidelines in the area of budgetary policies issued in the context of the Lisbon strategy. |
| --- | --- |

(10)

The budgetary strategy in the programme is broadly consistent with the country-specific broad economic policy guidelines included in the integrated guidelines in the area of budgetary policies issued in the context of the Lisbon strategy.

| (11) | As regards the data requirements specified in the code of conduct for stability and convergence programmes, the programme has some gaps in the required and optional data (6). |
| --- | --- |

(11)

As regards the data requirements specified in the code of conduct for stability and convergence programmes, the programme has some gaps in the required and optional data (6).

The overall conclusion is that the programme plans to continue the correction of high deficits of the past years through a necessary frontloaded adjustment effort and envisages modest progress towards the MTO after the planned correction of the excessive deficit in 2009. As a result of the consolidation measures and steps in structural reforms, Hungary is set to considerably outperform its deficit target for 2007 of 6,8 % of GDP and to increase progress towards convergence. It also improves somewhat the target for 2008 (to 4 % of GDP) compared to the previous programme, and in view of the expected better outcome in 2007 it should be feasible, and indeed desirable, to overachieve it. However, the lower deficit targets are combined with higher-than-previously-planned expenditures on the back of better-than-expected revenues, which cannot be counted on after 2008. Moreover, from 2009 the achievement of the budgetary targets is subject to larger risks, linked mainly to possible expenditure overruns in case the announced wide-ranging reform agenda is not fully carried out. Thus, the durability of the planned adjustment hinges on the reinforcement of fiscal governance as well as on completing the structural reforms which are key not only to attract foreign direct investment but also to improve the long-term sustainability of public finances, for which Hungary remains at high risk. Such achievements are also crucial in accelerating economic catching-up and ultimately moving towards lasting convergence.

In view of the above assessment and also the recommendation under Article 104(7) of 10 October 2006 and given the need to ensure sustainable convergence, Hungary is invited to:

| (i) | rigorously implement the 2008 budget, take adequate action to ensure the correction of the excessive deficit by 2009 as planned, where necessary through additional measures; and allocate the better-than-expected revenues to further deficit reduction, also given the insufficient margin in 2009 in view of the risks, thereby also contributing to accelerating the pace of debt reduction towards the 60 % of GDP threshold; |
| --- | --- |

(i)

rigorously implement the 2008 budget, take adequate action to ensure the correction of the excessive deficit by 2009 as planned, where necessary through additional measures; and allocate the better-than-expected revenues to further deficit reduction, also given the insufficient margin in 2009 in view of the risks, thereby also contributing to accelerating the pace of debt reduction towards the 60 % of GDP threshold;

| (ii) | ensure expenditure moderation in a permanent manner by continuing to enhance fiscal rules and institutions and through the adoption and swift implementation of the remaining streamlining measures as announced in the fields of public administration, healthcare, and education system; |
| --- | --- |

(ii)

ensure expenditure moderation in a permanent manner by continuing to enhance fiscal rules and institutions and through the adoption and swift implementation of the remaining streamlining measures as announced in the fields of public administration, healthcare, and education system;

| (iii) | in view of the level of debt and the increase in age-related expenditure, improve the long-term sustainability of public finances by making rapid progress towards the MTO, and continue to reform the pension system as announced after the steps already taken in 2006-2007. |
| --- | --- |

(iii)

in view of the level of debt and the increase in age-related expenditure, improve the long-term sustainability of public finances by making rapid progress towards the MTO, and continue to reform the pension system as announced after the steps already taken in 2006-2007.

Comparison of key macroeconomic and budgetary projections

| | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 |
| --- | --- | --- | --- | --- | --- | --- |
| Real GDP
  (% change) | CP Nov 2007 | 3,9 | 1,7 | 2,8 | 4,0 | 4,1 | 4,2 |
| COM Nov 2007 | 3,9 | 2,0 | 2,6 | 3,4 | n.a. | n.a. |
| CP Dec 2006 | 4,0 | 2,2 | 2,6 | 4,2 | 4,3 | n.a. |
| HICP inflation
  (%) | CP Nov 2007 | 4,0 | 7,9 | 4,8 | 3,0 | 2,9 | 2,8 |
| COM Nov 2007 | 4,0 | 7,7 | 4,9 | 2,8 | n.a. | n.a. |
| CP Dec 2006 | 3,9 | 6,2 | 3,3 | 3,0 | 2,8 | n.a. |
| Output gap (7)

  (% of potential GDP) | CP Nov 2007 | 0,8 | – 0,8 | – 1,4 | – 1,0 | – 0,4 | 0,2 |
| COM Nov 2007 (8) | 1,1 | 0,1 | – 0,3 | 0,0 | n.a. | n.a. |
| CP Dec 2006 | 0,9 | – 0,4 | – 1,2 | – 0,5 | 0,4 | n.a. |
| Net lending/borrowing vis-à-vis the rest of the world
  (% of GDP) | CP Nov 2007 | – 5,7 | – 4,1 | – 2,3 | – 1,7 | – 1,3 | – 0,8 |
| COM Nov 2007 | – 5,7 | – 3,9 | – 1,5 | – 0,4 | n.a. | n.a. |
| CP Dec 2006 | – 6,1 | – 3,6 | – 1,7 | – 0,1 | 0,6 | n.a. |
| General government balance
  (% of GDP) | CP Nov 2007 | – 9,2 | – 6,2 | – 4,0 | – 3,2 | – 2,7 | – 2,2 |
| COM Nov 2007 | – 9,2 | – 6,4 | – 4,2 | – 3,8 | n.a. | n.a. |
| CP Dec 2006 | – 10,1 | – 6,8 | – 4,3 | – 3,2 | – 2,7 | n.a. |
| Primary balance
  (% of GDP) | CP Nov 2007 | – 5,3 | – 2,2 | 0,1 | 0,6 | 0,8 | 1,1 |
| COM Nov 2007 | – 5,3 | – 2,4 | – 0,2 | 0,1 | n.a. | n.a. |
| CP Dec 2006 | – 6,2 | – 2,4 | 0,0 | 0,9 | 1,1 | n.a. |
| Cyclically-adjusted balance (7)

  (% of GDP) | CP Nov 2007 | – 9,6 | – 5,9 | – 3,4 | – 2,7 | – 2,5 | – 2,3 |
| COM Nov 2007 | – 9,7 | – 6,4 | – 4,1 | – 3,8 | n.a. | n.a. |
| CP Dec 2006 | – 10,5 | – 6,6 | – 3,8 | – 3,0 | – 2,9 | n.a. |
| Structural balance (9)

  (% of GDP) | CP Nov 2007 | – 8,9 | – 4,8 | – 3,5 | – 2,8 | – 2,5 | – 2,3 |
| COM Nov 2007 | – 9,4 | – 5,5 | – 4,2 | – 3,9 | n.a. | n.a. |
| CP Dec 2006 | – 9,8 | – 5,6 | – 3,7 | – 3 | – 2,9 | n.a. |
| Government gross debt
  (% of GDP) | CP Nov 2007 | 65,6 | 65,4 | 65,8 | 64,4 | 63,3 | 61,8 |
| COM Nov 2007 | 65,6 | 66,1 | 66,3 | 65,9 | n.a. | n.a. |
| CP Dec 2006 | 67,5 | 70,1 | 71,3 | 69,3 | 67,5 | n.a. |
| Convergence programme (CP); Commission services' autumn 2007 economic forecasts (COM); Commission services' calculations. |

2006

2007

2008

2009

2010

2011

Real GDP

(% change)

CP Nov 2007

3,9

1,7

2,8

4,0

4,1

4,2

COM Nov 2007

3,9

2,0

2,6

3,4

n.a.

n.a.

CP Dec 2006

4,0

2,2

2,6

4,2

4,3

n.a.

HICP inflation

(%)

CP Nov 2007

4,0

7,9

4,8

3,0

2,9

2,8

COM Nov 2007

4,0

7,7

4,9

2,8

n.a.

n.a.

CP Dec 2006

3,9

6,2

3,3

3,0

2,8

n.a.

Output gap (7)

(% of potential GDP)

CP Nov 2007

0,8

– 0,8

– 1,4

– 1,0

– 0,4

0,2

COM Nov 2007 (8)

1,1

0,1

– 0,3

0,0

n.a.

n.a.

CP Dec 2006

0,9

– 0,4

– 1,2

– 0,5

0,4

n.a.

Net lending/borrowing vis-à-vis the rest of the world

(% of GDP)

CP Nov 2007

– 5,7

– 4,1

– 2,3

– 1,7

– 1,3

– 0,8

COM Nov 2007

– 5,7

– 3,9

– 1,5

– 0,4

n.a.

n.a.

CP Dec 2006

– 6,1

– 3,6

– 1,7

– 0,1

0,6

n.a.

General government balance

(% of GDP)

CP Nov 2007

– 9,2

– 6,2

– 4,0

– 3,2

– 2,7

– 2,2

COM Nov 2007

– 9,2

– 6,4

– 4,2

– 3,8

n.a.

n.a.

CP Dec 2006

– 10,1

– 6,8

– 4,3

– 3,2

– 2,7

n.a.

Primary balance

(% of GDP)

CP Nov 2007

– 5,3

– 2,2

0,1

0,6

0,8

1,1

COM Nov 2007

– 5,3

– 2,4

– 0,2

0,1

n.a.

n.a.

CP Dec 2006

– 6,2

– 2,4

0,0

0,9

1,1

n.a.

Cyclically-adjusted balance (7)

(% of GDP)

CP Nov 2007

– 9,6

– 5,9

– 3,4

– 2,7

– 2,5

– 2,3

COM Nov 2007

– 9,7

– 6,4

– 4,1

– 3,8

n.a.

n.a.

CP Dec 2006

– 10,5

– 6,6

– 3,8

– 3,0

– 2,9

n.a.

Structural balance (9)

(% of GDP)

CP Nov 2007

– 8,9

– 4,8

– 3,5

– 2,8

– 2,5

– 2,3

COM Nov 2007

– 9,4

– 5,5

– 4,2

– 3,9

n.a.

n.a.

CP Dec 2006

– 9,8

– 5,6

– 3,7

– 3

– 2,9

n.a.

Government gross debt

(% of GDP)

CP Nov 2007

65,6

65,4

65,8

64,4

63,3

61,8

COM Nov 2007

65,6

66,1

66,3

65,9

n.a.

n.a.

CP Dec 2006

67,5

70,1

71,3

69,3

67,5

n.a.

Convergence programme (CP); Commission services' autumn 2007 economic forecasts (COM); Commission services' calculations.

---

(1)  OJ L 209, 2.8.1997, p. 1. Regulation as amended by Regulation (EC) No 1055/2005 (OJ L 174, 7.7.2005, p. 1). The documents referred to in this text can be found at the following website:

http://ec.europa.eu/economy_finance/about/activities/sgp/main_en.htm

(2)  The assessment takes notably into account the Commission services' autumn 2007 forecast and the Commission assessment of the October 2007 implementation report of the national reform programme.

(3)  OJ C 71, 28.3.2007, p. 23.

(4)  The deficit target of 3,2 % of GDP in 2009 would still exceed the 3 % of GDP threshold specified in the Treaty. As in previous updates, it is assumed in the programme that the Council and the Commission take into account 20 % of the yearly burden on the budget arising from the pension reform (which is expected to amount to 0,3 % of GDP in that year) when taking a decision on abrogating the excessive deficit procedure for Hungary (in line with Council Regulation (EC) No 1467/97 as amended, Article 2, paragraph 7, which stipulates that if the general government deficit ‘... has declined substantially and continuously and has reached a level that comes close to the reference value’, the Council and the Commission should consider the net cost of a pension reform that includes a fully-funded pillar on a linear degressive basis for a transitory period of five years, and taking into account the implementing provisions in the code of conduct).

(5)  Indeed, the programme does not seem to include any possible takeover from the debt of MÁV, the State-owned railway company (over 1 % of GDP), nor any additional capital injections to MÁV; the same assumption was explicitly made in the Commission services autumn 2007 forecast. Moreover, both do not consider either any receipt in relation to the privatisation of the MÁV's cargo division, nor any consequence of the planned privatisation on the sectoral classification of the company.

(6)  In particular, data on the nominal effective exchange rate are not provided.

(7)  Output gaps and cyclically-adjusted balances from the programmes as recalculated by Commission services on the basis of the information in the programmes.

(8)  Based on estimated potential growth of 3,2 %, 3,0 %, 3,0 % and 3,0 % respectively in the period 2006-2009.

(9)  Cyclically-adjusted balance excluding one-off and other temporary measures. One-off and other temporary measures are 0,7 % of GDP in 2006 and 1,1 % in 2007; both deficit-increasing, and 0,1 % of GDP in 2008 and 0,1 % of GDP in 2009; both deficit-reducing according to the most recent programme and 0,3 % of GDP in 2006 and 0,9 % in 2007; both deficit-increasing and 0,1 % of GDP in 2008 and 0,1 % of GDP in 2009; both deficit-reducing according to the Commission services' autumn forecast.

Sources:

Convergence programme (CP); Commission services' autumn 2007 economic forecasts (COM); Commission services' calculations.

---

| 22.2.2008 | EN | Official Journal of the European Union | C 49/25 |
| --- | --- | --- | --- |

22.2.2008

EN

Official Journal of the European Union

C 49/25

---

COUNCIL OPINION

of 12 February 2008

on the updated convergence programme of the United Kingdom, 2007/2008-2012/2013

(2008/C 49/07)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community,

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies (1), and in particular Article 9(3) thereof,

Having regard to the recommendation of the Commission,

After consulting the Economic and Financial Committee,

HAS DELIVERED THIS OPINION:

| (1) | On 12 February 2008, the Council examined the updated convergence programme of the United Kingdom, which covers the period from financial year 2007/2008 to financial year 2012/2013 (2). |
| --- | --- |

(1)

On 12 February 2008, the Council examined the updated convergence programme of the United Kingdom, which covers the period from financial year 2007/2008 to financial year 2012/2013 (2).

| (2) | The United Kingdom economy has displayed robust and remarkably stable growth over the last ten years and in 2007 grew at a rate above potential, though with building imbalances including low household saving and a wider external deficit. Favourable growth conditions have, however, been accompanied by a deterioration in the general government deficit in the current financial year, 2007/2008. After a general government deficit in 2006/2007 of 2,6 % of GDP, the deficit is envisaged in the programme to reach around 3 % of GDP in 2007/2008, with no margin to the reference value.
  Furthermore, there are risks of a further deterioration in economic prospects following the financial market turmoil and a weakening in the housing market in the second half of 2007. This points towards a near-term economic slowdown. Looking ahead, this could constrain revenue growth, reinforcing the need for expenditure restraint if the United Kingdom is to achieve an improvement in the fiscal balance. The recent relatively rapid exchange rate depreciation could also raise inflationary pressures. Particular macroeconomic risks relate to a markedly more abrupt slowdown in housing market activity, which could dampen private consumption growth, and a larger-than-expected weakening in financial services growth and employment. |
| --- | --- |

(2)

The United Kingdom economy has displayed robust and remarkably stable growth over the last ten years and in 2007 grew at a rate above potential, though with building imbalances including low household saving and a wider external deficit. Favourable growth conditions have, however, been accompanied by a deterioration in the general government deficit in the current financial year, 2007/2008. After a general government deficit in 2006/2007 of 2,6 % of GDP, the deficit is envisaged in the programme to reach around 3 % of GDP in 2007/2008, with no margin to the reference value.

Furthermore, there are risks of a further deterioration in economic prospects following the financial market turmoil and a weakening in the housing market in the second half of 2007. This points towards a near-term economic slowdown. Looking ahead, this could constrain revenue growth, reinforcing the need for expenditure restraint if the United Kingdom is to achieve an improvement in the fiscal balance. The recent relatively rapid exchange rate depreciation could also raise inflationary pressures. Particular macroeconomic risks relate to a markedly more abrupt slowdown in housing market activity, which could dampen private consumption growth, and a larger-than-expected weakening in financial services growth and employment.

| (3) | The programme contains two macroeconomic scenarios: a central scenario and an alternative scenario based on trend growth one quarter of a percentage point lower than the central view. The public finances projections are based on the alternative scenario, which is designed to be more cautious than the central scenario. Both scenarios assume some feed-through to tighter credit conditions as a result of recent financial market disruption. The alternative scenarios considered the reference scenario in the assessment of the updated programme. This scenario envisages a slowdown in economic growth from 3,0 % in 2007/2008 to 2,0 % in 2008/2009. In 2009/2010, the programme expects growth to gather pace again, rising to 2,75 %. Assessed against currently available information (3), including increasing prospects of a significant downturn in the housing market and protracted financial market difficulties, this scenario appears to be based on growth assumptions that are favourable until 2009/2010 and plausible thereafter. The programme's projections for inflation in the short term also appear to be on the low side, primarily due to its assumption on oil prices next year. However, the near-term prospect of activity levels depressed relative to potential should lead to a subsequent moderation in inflation, which should preserve price stability. |
| --- | --- |

(3)

The programme contains two macroeconomic scenarios: a central scenario and an alternative scenario based on trend growth one quarter of a percentage point lower than the central view. The public finances projections are based on the alternative scenario, which is designed to be more cautious than the central scenario. Both scenarios assume some feed-through to tighter credit conditions as a result of recent financial market disruption. The alternative scenarios considered the reference scenario in the assessment of the updated programme. This scenario envisages a slowdown in economic growth from 3,0 % in 2007/2008 to 2,0 % in 2008/2009. In 2009/2010, the programme expects growth to gather pace again, rising to 2,75 %. Assessed against currently available information (3), including increasing prospects of a significant downturn in the housing market and protracted financial market difficulties, this scenario appears to be based on growth assumptions that are favourable until 2009/2010 and plausible thereafter. The programme's projections for inflation in the short term also appear to be on the low side, primarily due to its assumption on oil prices next year. However, the near-term prospect of activity levels depressed relative to potential should lead to a subsequent moderation in inflation, which should preserve price stability.

| (4) | For 2007/2008, the general government deficit is estimated at 3,0 % of GDP in the Commission services' autumn 2007 forecast, against an estimate of 2,3 % of GDP set in the previous update of the convergence programme. The structural deficit, defined as the cyclically-adjusted budget balance calculated according to the commonly agreed methodology, net of one-off and other temporary measures, will be higher by 0,5 % of GDP than in the previous financial year. The deterioration in the budgetary position has primarily resulted from lower than expected receipts from corporate taxation; though compared with the previous programme a deficit-increasing national accounts reclassification should be noted of around 0,25 % of GDP per annum. More recent information, including in-year data on central government revenues, implies a clear risk that the deficit will be higher in 2007/2008, thus exceeding the reference value. In this context, the expected deterioration in the public finances is not in line with the pursuit of consolidation recommended in the Council opinion of 27 February 2007 on the previous update of the convergence programme (4). |
| --- | --- |

(4)

For 2007/2008, the general government deficit is estimated at 3,0 % of GDP in the Commission services' autumn 2007 forecast, against an estimate of 2,3 % of GDP set in the previous update of the convergence programme. The structural deficit, defined as the cyclically-adjusted budget balance calculated according to the commonly agreed methodology, net of one-off and other temporary measures, will be higher by 0,5 % of GDP than in the previous financial year. The deterioration in the budgetary position has primarily resulted from lower than expected receipts from corporate taxation; though compared with the previous programme a deficit-increasing national accounts reclassification should be noted of around 0,25 % of GDP per annum. More recent information, including in-year data on central government revenues, implies a clear risk that the deficit will be higher in 2007/2008, thus exceeding the reference value. In this context, the expected deterioration in the public finances is not in line with the pursuit of consolidation recommended in the Council opinion of 27 February 2007 on the previous update of the convergence programme (4).

| (5) | The update does not specify a quantitative medium-term objective (MTO) for the budgetary position. The programme presents projections on a no-policy-change basis and envisages a gradual reduction in the general government deficit. In 2008/2009, the deficit-to-GDP ratio is projected to be slightly lower than in the previous year. During the same year, the structural deficit is estimated to improve by about 0,3 percentage points. The primary deficit is expected to edge upwards as the rise in primary expenditure is only partly offset by a drop in interest payments. Subsequently, the programme forecasts a reduction in the general government deficit by 0,5 p.p. in 2009/2010 and by an average of 0,25 p.p. per annum during the following three financial years. The primary balance is expected to improve from a deficit of 0,9 % of GDP in 2008/2009 to balance in 2010/2011. Over the programme period, an increase in the revenue-to-GDP ratio and a drop in the expenditure ratio are expected to contribute around three-fifths and two-fifths of the adjustment, respectively. The increase in the revenue ratio is evenly spread through the programme period, with fiscal drag on personal income taxation and, to a lesser extent, already announced measures contributing to higher revenues.
  On the expenditure side, the spending envelope set out in the 2007 Comprehensive Spending Review (CSR) implies a significant drop in annual average expenditure growth between 2008/2009 and 2010/2011 when compared to the annual average during the preceding 10 years. Departments have already made good progress against efficiency targets in the SR04 period (ending 2007/2008) and have set out publicly a summary of proposed savings for the CSR period. However, in 2008/2009, total expenditure is still expected to grow more rapidly than nominal GDP, contributing to an increase in the deficit ratio. Compared with the previous programme, though partly reflecting the national accounts reclassification referred to above, the new update projects a weaker budgetary outlook, particularly in the early years of the programme period. The gross debt ratio is set to remain well under the reference value of 60 % of GDP, even if projected to be on a rising trend until 2010/2011. |
| --- | --- |

(5)

The update does not specify a quantitative medium-term objective (MTO) for the budgetary position. The programme presents projections on a no-policy-change basis and envisages a gradual reduction in the general government deficit. In 2008/2009, the deficit-to-GDP ratio is projected to be slightly lower than in the previous year. During the same year, the structural deficit is estimated to improve by about 0,3 percentage points. The primary deficit is expected to edge upwards as the rise in primary expenditure is only partly offset by a drop in interest payments. Subsequently, the programme forecasts a reduction in the general government deficit by 0,5 p.p. in 2009/2010 and by an average of 0,25 p.p. per annum during the following three financial years. The primary balance is expected to improve from a deficit of 0,9 % of GDP in 2008/2009 to balance in 2010/2011. Over the programme period, an increase in the revenue-to-GDP ratio and a drop in the expenditure ratio are expected to contribute around three-fifths and two-fifths of the adjustment, respectively. The increase in the revenue ratio is evenly spread through the programme period, with fiscal drag on personal income taxation and, to a lesser extent, already announced measures contributing to higher revenues.

On the expenditure side, the spending envelope set out in the 2007 Comprehensive Spending Review (CSR) implies a significant drop in annual average expenditure growth between 2008/2009 and 2010/2011 when compared to the annual average during the preceding 10 years. Departments have already made good progress against efficiency targets in the SR04 period (ending 2007/2008) and have set out publicly a summary of proposed savings for the CSR period. However, in 2008/2009, total expenditure is still expected to grow more rapidly than nominal GDP, contributing to an increase in the deficit ratio. Compared with the previous programme, though partly reflecting the national accounts reclassification referred to above, the new update projects a weaker budgetary outlook, particularly in the early years of the programme period. The gross debt ratio is set to remain well under the reference value of 60 % of GDP, even if projected to be on a rising trend until 2010/2011.

| (6) | The budgetary outcomes could be worse than projected in the programme, especially due to lower tax revenues and the possible materialisation of liabilities as a result of a deeper and more prolonged downturn in financial sector activity. Tax-rich expenditures, especially household consumption, could also be particularly depressed by an extended period of housing market adjustment. A deficit overrun in 2007/2008 arising from the revenue side could extend also into a higher deficit in 2008/2009. Given the risks attending macroeconomic performance in 2008, the convergence programme's assumption that in 2009/10 the UK economy will swiftly recover to potential growth appears optimistic and thus carries a risk that the deficit will be higher than projected. Meanwhile, the sharp slowdown in expenditure growth that is targeted in the latest CSR is accompanied by objectives for considerable efficiency gains in the provision of public services, which, if not achieved, could trigger pressures for higher expenditure than set out in the CSR. The projections for 2011/2012 and 2012/2013, subsequent to the forthcoming CSR period, assume continued moderate growth in expenditure but are beyond the detailed departmental spending plans set up for the preceding years. |
| --- | --- |

(6)

The budgetary outcomes could be worse than projected in the programme, especially due to lower tax revenues and the possible materialisation of liabilities as a result of a deeper and more prolonged downturn in financial sector activity. Tax-rich expenditures, especially household consumption, could also be particularly depressed by an extended period of housing market adjustment. A deficit overrun in 2007/2008 arising from the revenue side could extend also into a higher deficit in 2008/2009. Given the risks attending macroeconomic performance in 2008, the convergence programme's assumption that in 2009/10 the UK economy will swiftly recover to potential growth appears optimistic and thus carries a risk that the deficit will be higher than projected. Meanwhile, the sharp slowdown in expenditure growth that is targeted in the latest CSR is accompanied by objectives for considerable efficiency gains in the provision of public services, which, if not achieved, could trigger pressures for higher expenditure than set out in the CSR. The projections for 2011/2012 and 2012/2013, subsequent to the forthcoming CSR period, assume continued moderate growth in expenditure but are beyond the detailed departmental spending plans set up for the preceding years.

| (7) | In view of this risk assessment, the budgetary stance in the programme may not be sufficient to ensure the limited consolidation foreseen in the programme. There is a clear risk that the deficit will be higher in the near term, thus breaching the reference value. A deficit level that provides a safety margin against breaching the 3 % of GDP deficit threshold with normal economic fluctuations (estimated at 1,5 % of GDP) is unlikely to be achieved within the programme period. The pace of fiscal consolidation should be strengthened over the programme period. |
| --- | --- |

(7)

In view of this risk assessment, the budgetary stance in the programme may not be sufficient to ensure the limited consolidation foreseen in the programme. There is a clear risk that the deficit will be higher in the near term, thus breaching the reference value. A deficit level that provides a safety margin against breaching the 3 % of GDP deficit threshold with normal economic fluctuations (estimated at 1,5 % of GDP) is unlikely to be achieved within the programme period. The pace of fiscal consolidation should be strengthened over the programme period.

| (8) | The United Kingdom appears to be at medium risk with regard to the sustainability of public finances. The long-term budgetary impact of ageing is close to the EU average, with pension expenditure showing a somewhat more limited increase than on average in the EU, in part as a result of the fact that the United Kingdom relies relatively more on private pension arrangements than do other EU countries. The 2007 reforms, addressing the concern of potentially inadequate future pension provision, are likely to involve a somewhat higher increase in age-related expenditure. The budgetary position in 2007 as estimated in the programme, which is significantly worse than the starting position of the previous programme, constitutes a risk to sustainable public finances even before the long-term budgetary impact of an ageing population is considered. Achieving high primary surpluses would contribute to reducing risks to the sustainability of public finances. |
| --- | --- |

(8)

The United Kingdom appears to be at medium risk with regard to the sustainability of public finances. The long-term budgetary impact of ageing is close to the EU average, with pension expenditure showing a somewhat more limited increase than on average in the EU, in part as a result of the fact that the United Kingdom relies relatively more on private pension arrangements than do other EU countries. The 2007 reforms, addressing the concern of potentially inadequate future pension provision, are likely to involve a somewhat higher increase in age-related expenditure. The budgetary position in 2007 as estimated in the programme, which is significantly worse than the starting position of the previous programme, constitutes a risk to sustainable public finances even before the long-term budgetary impact of an ageing population is considered. Achieving high primary surpluses would contribute to reducing risks to the sustainability of public finances.

| (9) | The convergence programme appears to be consistent with the September 2007 implementation report of the national reform programme. In particular, both programmes integrate the 2007 Comprehensive Spending Review, including the gradual implementation of the government's objectives to increase efficiency and value for money in public service provision. The direct budgetary implications of important reform elements highlighted in the implementation report of the national reform programme, including the increase in the value and coverage of the State-pension as well as recent initiatives taken to increase housing supply, promote R&D and innovation and raise the skill levels in the workforce, have been taken into account in the budgetary projections of the convergence programme. |
| --- | --- |

(9)

The convergence programme appears to be consistent with the September 2007 implementation report of the national reform programme. In particular, both programmes integrate the 2007 Comprehensive Spending Review, including the gradual implementation of the government's objectives to increase efficiency and value for money in public service provision. The direct budgetary implications of important reform elements highlighted in the implementation report of the national reform programme, including the increase in the value and coverage of the State-pension as well as recent initiatives taken to increase housing supply, promote R&D and innovation and raise the skill levels in the workforce, have been taken into account in the budgetary projections of the convergence programme.

| (10) | The budgetary strategy in the programme is broadly consistent with the country-specific broad economic policy guidelines included in the integrated guidelines in the area of budgetary policies issued in the context of the Lisbon strategy. |
| --- | --- |

(10)

The budgetary strategy in the programme is broadly consistent with the country-specific broad economic policy guidelines included in the integrated guidelines in the area of budgetary policies issued in the context of the Lisbon strategy.

| (11) | As regards the data requirements specified in the code of conduct for stability and convergence programmes, the programme continues to have substantial gaps in the required and optional data (5), with no evidence of improvement in response to the Council's previous invitation in this regard. |
| --- | --- |

(11)

As regards the data requirements specified in the code of conduct for stability and convergence programmes, the programme continues to have substantial gaps in the required and optional data (5), with no evidence of improvement in response to the Council's previous invitation in this regard.

The overall conclusion is that the programme confirms a significant deterioration in the United Kingdom's budgetary position that, coupled with a probably weaker macroeconomic context than envisaged, carries a clear risk that general government deficit will breach the 3 % of GDP deficit reference value in the near term. While the programme envisages some fiscal tightening from 2008/2009 through a progressive increase in tax revenues and a reduction in previously rapid growth in current expenditure, there are risks to the achievement of this consolidation. These primarily stem from the deterioration in macroeconomic prospects and risks to the achievements of spending targets. The projected speed of consolidation is itself unambitious. The debt ratio remains significantly below the 60 per cent of GDP reference value, increasing slightly before falling from 2010/2011 onwards only. The long-term sustainability of United Kingdom public finances has deteriorated when compared to the previous programme, mainly due to the deterioration of the starting position, although the United Kingdom remains at medium risk.

In view of the above assessment, the United Kingdom is invited to:

| (i) | implement measures necessary for the deficit not to exceed the reference value of 3 per cent of GDP; |
| --- | --- |

(i)

implement measures necessary for the deficit not to exceed the reference value of 3 per cent of GDP;

| (ii) | strengthen the pace of fiscal improvement over the programme period, which would also address the increased risks to the long-term sustainability of the public finances. |
| --- | --- |

(ii)

strengthen the pace of fiscal improvement over the programme period, which would also address the increased risks to the long-term sustainability of the public finances.

The United Kingdom is again invited to improve compliance with the data requirements of the code of conduct.

Comparison of key macroeconomic and budgetary projections

| | 2006/2007 | 2007/2008 | 2008/2009 | 2009/2010 | 2010/2011 | 2011/2012 | 2012/2013 |
| --- | --- | --- | --- | --- | --- | --- | --- |
| Real GDP
  (% change) | CP Nov 2007 (6) | 3 | 3 | 2 | 2,75 | 2,5 | 2,5 | 2,5 |
| COM Nov 2007 | 3 | 3 | 2 | 2,5 | n.a. | n.a. | n.a. |
| CP Dec 2006 (6) | 2,75 | 2,75 | 2,5 | 2,5 | 2,5 | 2,5 | n.a. |
| HICP inflation
  (%) | CP Nov 2007 (6) | 2,5 | 2,25 | 2 | 2 | 2 | 2 | 2 |
| COM Nov 2007 (7) | 2,3 | 2,4 | 2,2 | 2 | n.a. | n.a. | n.a. |
| CP Dec 2006 (6) | 2,5 | 2 | 2 | 2 | 2 | 2 | n.a. |
| Output gap (8)

  (% of potential GDP) | CP Nov 2007 (6) | – 0,1 | 0 | – 0,5 | – 0,3 | – 0,4 | – 0,4 | – 0,3 |
| COM Nov 2007 (7)
   (9) | – 0,3 | – 0,1 | – 0,4 | – 0,6 | n.a. | n.a. | n.a. |
| CP Dec 2006 (6) | – 0,6 | – 0,6 | – 0,6 | – 0,5 | – 0,4 | – 0,3 | n.a. |
| General government balance (10)

  (% of GDP) | CP Nov 2007 | – 2,6 | – 3 | – 2,9 | – 2,4 | – 2,1 | – 1,8 | – 1,6 |
| COM Nov 2007 | – 2,6 | – 3 | – 3 | – 2,7 | n.a. | n.a. | n.a. |
| CP Dec 2006 | – 2,8 | – 2,3 | – 1,9 | – 1,7 | – 1,6 | – 1,4 | n.a. |
| Primary balance (10)

  (% of GDP) | CP Nov 2007 | – 0,4 | – 0,8 | – 0,9 | – 0,3 | 0 | 0,3 | 0,5 |
| COM Nov 2007 | – 0,5 | – 1 | – 1 | – 0,7 | n.a. | n.a. | n.a. |
| CP Dec 2006 | – 0,6 | – 0,2 | 0,1 | 0,3 | 0,5 | 0,7 | n.a. |
| Cyclically-adjusted balance (8)
   (10)

  (% of GDP) | CP Nov 2007 | – 2,5 | – 3 | – 2,7 | – 2,3 | – 1,9 | – 1,6 | – 1,5 |
| COM Nov 2007 | – 2,5 | – 2,9 | – 2,8 | – 2,4 | n.a. | n.a. | n.a. |
| CP Dec 2006 | – 2,5 | – 2,1 | – 1,7 | – 1,5 | – 1,4 | – 1,3 | n.a. |
| Structural balance (11)

  (% of GDP) | CP Nov 2007 | – 2,5 | – 3 | – 2,7 | – 2,3 | – 1,9 | – 1,6 | – 1,5 |
| COM Nov 2007 | – 2,5 | – 2,9 | – 2,8 | – 2,4 | n.a. | n.a. | n.a. |
| CP Dec 2006 | – 2,5 | – 2,1 | – 1,7 | – 1,5 | – 1,4 | – 1,3 | n.a. |
| Government gross debt (12)

  (% of GDP) | CP Nov 2007 | 43,4 | 43,9 | 44,8 | 45,1 | 45,3 | 45,2 | 44,9 |
| COM Nov 2007 | 42,6 | 43,3 | 44,5 | 45,2 | n.a. | n.a. | n.a. |
| CP Dec 2006 | 43,7 | 44,1 | 44,2 | 44,2 | 44 | 43,6 | n.a. |
| Convergence programme (CP); Commission services' autumn 2007 economic forecasts (COM); Commission services' calculations. |

2006/2007

2007/2008

2008/2009

2009/2010

2010/2011

2011/2012

2012/2013

Real GDP

(% change)

CP Nov 2007 (6)

3

3

2

2,75

2,5

2,5

2,5

COM Nov 2007

3

3

2

2,5

n.a.

n.a.

n.a.

CP Dec 2006 (6)

2,75

2,75

2,5

2,5

2,5

2,5

n.a.

HICP inflation

(%)

CP Nov 2007 (6)

2,5

2,25

2

2

2

2

2

COM Nov 2007 (7)

2,3

2,4

2,2

2

n.a.

n.a.

n.a.

CP Dec 2006 (6)

2,5

2

2

2

2

2

n.a.

Output gap (8)

(% of potential GDP)

CP Nov 2007 (6)

– 0,1

0

– 0,5

– 0,3

– 0,4

– 0,4

– 0,3

COM Nov 2007 (7)
   (9)

– 0,3

– 0,1

– 0,4

– 0,6

n.a.

n.a.

n.a.

CP Dec 2006 (6)

– 0,6

– 0,6

– 0,6

– 0,5

– 0,4

– 0,3

n.a.

General government balance (10)

(% of GDP)

CP Nov 2007

– 2,6

– 3

– 2,9

– 2,4

– 2,1

– 1,8

– 1,6

COM Nov 2007

– 2,6

– 3

– 3

– 2,7

n.a.

n.a.

n.a.

CP Dec 2006

– 2,8

– 2,3

– 1,9

– 1,7

– 1,6

– 1,4

n.a.

Primary balance (10)

(% of GDP)

CP Nov 2007

– 0,4

– 0,8

– 0,9

– 0,3

0

0,3

0,5

COM Nov 2007

– 0,5

– 1

– 1

– 0,7

n.a.

n.a.

n.a.

CP Dec 2006

– 0,6

– 0,2

0,1

0,3

0,5

0,7

n.a.

Cyclically-adjusted balance (8)
   (10)

(% of GDP)

CP Nov 2007

– 2,5

– 3

– 2,7

– 2,3

– 1,9

– 1,6

– 1,5

COM Nov 2007

– 2,5

– 2,9

– 2,8

– 2,4

n.a.

n.a.

n.a.

CP Dec 2006

– 2,5

– 2,1

– 1,7

– 1,5

– 1,4

– 1,3

n.a.

Structural balance (11)

(% of GDP)

CP Nov 2007

– 2,5

– 3

– 2,7

– 2,3

– 1,9

– 1,6

– 1,5

COM Nov 2007

– 2,5

– 2,9

– 2,8

– 2,4

n.a.

n.a.

n.a.

CP Dec 2006

– 2,5

– 2,1

– 1,7

– 1,5

– 1,4

– 1,3

n.a.

Government gross debt (12)

(% of GDP)

CP Nov 2007

43,4

43,9

44,8

45,1

45,3

45,2

44,9

COM Nov 2007

42,6

43,3

44,5

45,2

n.a.

n.a.

n.a.

CP Dec 2006

43,7

44,1

44,2

44,2

44

43,6

n.a.

Convergence programme (CP); Commission services' autumn 2007 economic forecasts (COM); Commission services' calculations.

---

(1)  OJ L 209, 2.8.1997, p. 1. Regulation as amended by Regulation (EC) No 1055/2005 (OJ L 174, 7.7.2005, p. 1). The documents referred to in this text can be found at the following website:

http://ec.europa.eu/economy_finance/about/activities/sgp/main_en.htm

(2)  The UK financial year runs from April to March.

(3)  This assessment takes notably into account the Commission services' autumn forecast and the Commission assessment of the October 2007 implementation report of the national reform programme.

(4)  OJ C 72, 29.3.2007, p. 20.

(5)  In particular, the data on projections for employment, unemployment, wage inflation and a detailed breakdown of general government revenue and expenditure on a harmonised ESA 95 basis are not provided.

(6)  Economic assumptions underlying the authorities' projections for public finances. The economic assumptions are based on a scenario which assumes that trend growth is one-quarter percentage point lower than the government's neutral view.

(7)  On a calendar-year basis. Numbers reported in 2006/2007 column refer to the 2006 calendar year.

(8)  Output gaps and cyclically-adjusted balances according to the programmes as recalculated by Commission services on the basis of the information in the programmes.

(9)  Based on estimated potential growth of 2,9 %, 2,8 %, 2,6 % and 2,6 % respectively in the period 2006-2009.

(10)  Figures for the primary balance in the convergence programmes adjusted to use gross rather than net interest payments.

(11)  Cyclically-adjusted balance excluding one-off and other temporary measures. There are no one-off and other temporary measures during the programme period.

(12)  Figures in the convergence programmes derived using GDP excluding the FISIM adjustment, which raises the debt ratio by about 0,8 percentage points when compared to the Commission services' autumn 2007 forecast.

Sources:

Convergence programme (CP); Commission services' autumn 2007 economic forecasts (COM); Commission services' calculations.

---

| 22.2.2008 | EN | Official Journal of the European Union | C 49/29 |
| --- | --- | --- | --- |

22.2.2008

EN

Official Journal of the European Union

C 49/29

---

COUNCIL OPINION

of 12 February 2008

on the updated stability programme of Italy, 2007-2011

(2008/C 49/08)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community,

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies (1), and in particular Article 5(3) thereof,

Having regard to the recommendation of the Commission,

After consulting the Economic and Financial Committee,

HAS DELIVERED THIS OPINION:

| (1) | On 12 February 2008, the Council examined the updated stability programme of Italy, which covers the period 2007 to 2011. |
| --- | --- |

(1)

On 12 February 2008, the Council examined the updated stability programme of Italy, which covers the period 2007 to 2011.

| (2) | Real GDP growth in Italy has been below the euro area average since the 1990s and potential growth is estimated to have fallen from above 2 % in the early 1990s to around 1,5 % over the last 15 years. On the positive side, Italy has enjoyed robust employment growth since the turn of the century and its unemployment rate has fallen substantially, also reflecting the impact of labour market reforms.
  But, while there remains a long way to go before Italy catches up with the EU average in terms of employment rates, the combination of dynamic employment growth and sluggish GDP growth highlights Italy's productivity problem. Notwithstanding the recent recovery, medium-term prospects for the Italian economy remain challenging under the strain of major structural weaknesses. These include in particular limited internal competition in services markets, which have started to be addressed in recent years. The structural weaknesses have fed into low productivity growth, a steady loss of external competitiveness and, until recently, a positive inflation differential with the euro area average. A public debt-to-GDP ratio above 100 % and the still relatively high though declining, budgetary deficit, increase economic uncertainty and generate a high cost of debt service, making Italy vulnerable to increases in interest rates. They also prevent more productive uses of public resources and limit the ability of fiscal policy to allow automatic stabilisers to work effectively. Further containing the structural primary expenditure ratio, following its recent stabilisation, and increasing potential growth, also through an improvement of the quality of public finances, are key to rapidly reducing the debt ratio and putting public finances on a sustainable path. |
| --- | --- |

(2)

Real GDP growth in Italy has been below the euro area average since the 1990s and potential growth is estimated to have fallen from above 2 % in the early 1990s to around 1,5 % over the last 15 years. On the positive side, Italy has enjoyed robust employment growth since the turn of the century and its unemployment rate has fallen substantially, also reflecting the impact of labour market reforms.

But, while there remains a long way to go before Italy catches up with the EU average in terms of employment rates, the combination of dynamic employment growth and sluggish GDP growth highlights Italy's productivity problem. Notwithstanding the recent recovery, medium-term prospects for the Italian economy remain challenging under the strain of major structural weaknesses. These include in particular limited internal competition in services markets, which have started to be addressed in recent years. The structural weaknesses have fed into low productivity growth, a steady loss of external competitiveness and, until recently, a positive inflation differential with the euro area average. A public debt-to-GDP ratio above 100 % and the still relatively high though declining, budgetary deficit, increase economic uncertainty and generate a high cost of debt service, making Italy vulnerable to increases in interest rates. They also prevent more productive uses of public resources and limit the ability of fiscal policy to allow automatic stabilisers to work effectively. Further containing the structural primary expenditure ratio, following its recent stabilisation, and increasing potential growth, also through an improvement of the quality of public finances, are key to rapidly reducing the debt ratio and putting public finances on a sustainable path.

| (3) | The macroeconomic scenario underlying the programme envisages that real GDP growth slows from 1,9 % in 2007 to 1,5 % in 2008. This would be followed by a mild but steady acceleration throughout the remainder of the programme period, whereby growth is expected to reach 1,8 % in 2011. Taking into account recent developments, the growth assumption for 2008 in the programme appears to be rather favourable (2), as real GDP growth in 2008 is currently expected to be clearly below that of the programme, which may have implications for the level of the economic activity also after 2008. The programme's projections for inflation also appear to be on the low side for 2008 and plausible thereafter. These inflation prospects, and the underlying moderation in unit labour cost growth, appear to be consistent with a containment of the competitiveness losses of the Italian economy. |
| --- | --- |

(3)

The macroeconomic scenario underlying the programme envisages that real GDP growth slows from 1,9 % in 2007 to 1,5 % in 2008. This would be followed by a mild but steady acceleration throughout the remainder of the programme period, whereby growth is expected to reach 1,8 % in 2011. Taking into account recent developments, the growth assumption for 2008 in the programme appears to be rather favourable (2), as real GDP growth in 2008 is currently expected to be clearly below that of the programme, which may have implications for the level of the economic activity also after 2008. The programme's projections for inflation also appear to be on the low side for 2008 and plausible thereafter. These inflation prospects, and the underlying moderation in unit labour cost growth, appear to be consistent with a containment of the competitiveness losses of the Italian economy.

| (4) | For 2007, the general government deficit is estimated at 2,4 % of GDP in the 2007 update of the stability programme, against a target of 2,8 % of GDP set in the previous update. In the Commission services' autumn 2007 forecast, the deficit was expected at 2,3 % of GDP. These lower deficit projections benefited from the 1,8 pp. higher nominal GDP growth in 2007 vis-à-vis the 2006 programme and from an effective implementation of the corrective measures in 2006 and 2007, partly offset by around 0,9 % of GDP of additional expenditure, mainly social transfers and capital expenditure, decided in the course of 2007. In light of more recent information, the 2007 deficit could turn out substantially lower than estimated in the autumn forecast; hence, well below the 3 % of GDP Treaty reference value. Budgetary implementation in 2007 is in line with the invitation in the Council opinion of 27 February on the previous update of the stability programme (3) related to the correction of the excessive deficit. The likely very positive 2007 budgetary outturn could have been even better if the above-mentioned additional expenditure had not been not adopted during the year, so it cannot be considered fully in line with the invitation to take advantage of better-than-expected budgetary developments for deficit reduction. The Council notes that the implementation of the 2007 budget is also not fully consistent with the April 2007 Eurogroup orientations for budgetary policies. |
| --- | --- |

(4)

For 2007, the general government deficit is estimated at 2,4 % of GDP in the 2007 update of the stability programme, against a target of 2,8 % of GDP set in the previous update. In the Commission services' autumn 2007 forecast, the deficit was expected at 2,3 % of GDP. These lower deficit projections benefited from the 1,8 pp. higher nominal GDP growth in 2007 vis-à-vis the 2006 programme and from an effective implementation of the corrective measures in 2006 and 2007, partly offset by around 0,9 % of GDP of additional expenditure, mainly social transfers and capital expenditure, decided in the course of 2007. In light of more recent information, the 2007 deficit could turn out substantially lower than estimated in the autumn forecast; hence, well below the 3 % of GDP Treaty reference value. Budgetary implementation in 2007 is in line with the invitation in the Council opinion of 27 February on the previous update of the stability programme (3) related to the correction of the excessive deficit. The likely very positive 2007 budgetary outturn could have been even better if the above-mentioned additional expenditure had not been not adopted during the year, so it cannot be considered fully in line with the invitation to take advantage of better-than-expected budgetary developments for deficit reduction. The Council notes that the implementation of the 2007 budget is also not fully consistent with the April 2007 Eurogroup orientations for budgetary policies.

| (5) | The programme's budgetary strategy aims at pursuing fiscal consolidation towards the medium term objective (MTO) of a balanced position in structural terms, i.e. cyclically-adjusted and net of one-off and other temporary measures, which is planned to be reached by 2011. On the back of a similar economic outlook to the one in the previous programme, deficit targets for 2008-2011 are broadly unchanged. However, the projected adjustment in 2008 is around 0,5 pp. of GDP lower than envisaged in the previous update, as the unchanged target is planned against a better starting position. The government deficit is targeted to narrow by only 0,2 pp. of GDP in 2008 but by around 0,75 pp. per year thereafter to turn into a balanced position in 2011. The composition of the adjustment is provided only for 2008, when the 0,2 pp. of GDP deficit reduction is planned mainly on the expenditure side.
  After 2008, the programme only provides the overall size of the consolidation package that is required each year to achieve the budgetary targets relative to trends under an unchanged legislation scenario, without any indication on their composition. The gross debt-to-GDP ratio, estimated at 105 % in 2007, i.e. far above the 60 % of GDP Treaty reference value, is planned to decline by around 10 percentage points over the programme period. |
| --- | --- |

(5)

The programme's budgetary strategy aims at pursuing fiscal consolidation towards the medium term objective (MTO) of a balanced position in structural terms, i.e. cyclically-adjusted and net of one-off and other temporary measures, which is planned to be reached by 2011. On the back of a similar economic outlook to the one in the previous programme, deficit targets for 2008-2011 are broadly unchanged. However, the projected adjustment in 2008 is around 0,5 pp. of GDP lower than envisaged in the previous update, as the unchanged target is planned against a better starting position. The government deficit is targeted to narrow by only 0,2 pp. of GDP in 2008 but by around 0,75 pp. per year thereafter to turn into a balanced position in 2011. The composition of the adjustment is provided only for 2008, when the 0,2 pp. of GDP deficit reduction is planned mainly on the expenditure side.

After 2008, the programme only provides the overall size of the consolidation package that is required each year to achieve the budgetary targets relative to trends under an unchanged legislation scenario, without any indication on their composition. The gross debt-to-GDP ratio, estimated at 105 % in 2007, i.e. far above the 60 % of GDP Treaty reference value, is planned to decline by around 10 percentage points over the programme period.

| (6) | The risks to the deficit projections in the programme appear broadly balanced in 2008 but the budgetary outcomes could be worse than projected in the programme thereafter. While the likely positive outturn for 2007 would provide a favourable base effect for 2008, the 2008 budget law envisages that, after having secured the achievement of the budgetary target, better-than-expected permanent revenue may be used to fund tax cuts. In light of recent economic developments, the deficit outturn in 2008 is also subject to the risk of a significantly lower GDP growth. The achievement of the 2,2 % of GDP deficit target in 2008 could imply a deterioration of both the headline and structural balance relative to 2007. (4) The scenario of unchanged legislation implies a significant underestimation of expenditure trends. This, together with the fact that no information is given on the composition of the necessary consolidation package on top of this scenario, implies clear risks. In particular, appropriate measures aimed at curbing expenditure developments remain to be spelled out. In view of these risks to the budgetary targets, from 2009 onwards the evolution of the debt ratio may be less favourable than projected in the programme. |
| --- | --- |

(6)

The risks to the deficit projections in the programme appear broadly balanced in 2008 but the budgetary outcomes could be worse than projected in the programme thereafter. While the likely positive outturn for 2007 would provide a favourable base effect for 2008, the 2008 budget law envisages that, after having secured the achievement of the budgetary target, better-than-expected permanent revenue may be used to fund tax cuts. In light of recent economic developments, the deficit outturn in 2008 is also subject to the risk of a significantly lower GDP growth. The achievement of the 2,2 % of GDP deficit target in 2008 could imply a deterioration of both the headline and structural balance relative to 2007. (4) The scenario of unchanged legislation implies a significant underestimation of expenditure trends. This, together with the fact that no information is given on the composition of the necessary consolidation package on top of this scenario, implies clear risks. In particular, appropriate measures aimed at curbing expenditure developments remain to be spelled out. In view of these risks to the budgetary targets, from 2009 onwards the evolution of the debt ratio may be less favourable than projected in the programme.

| (7) | In view of this risk assessment, the budgetary stance in the programme is consistent with a correction of the excessive deficit in 2007 as recommended by the Council. However, a sufficient safety margin against breaching the 3 % of GDP deficit threshold with normal macroeconomic fluctuations may not be secured before 2010 and the budgetary stance in the programme may not be sufficient to ensure that the MTO is achieved by the end of the programme period, as envisaged in the programme. In 2008, the structural balance risks deteriorating substantially, unless the better-than-projected 2007 starting position is carried through. For 2008, the adjustment towards the MTO implied by the programme is inadequate and should be strengthened to be in line with the Stability and Growth Pact, which specifies that, for euro area and ERM II Member States, the annual improvement in the structural balance should be 0,5 % of GDP as a benchmark. Furthermore, the Council notes that the budgetary stance in 2008 is not consistent with the April 2007 Eurogroup orientations for budgetary policies calling for a carefully designed fiscal policy for 2008 so as to accelerate the adjustment towards the MTO. From 2009 onwards, the budgetary stance in the programme should be backed up with measures. Finally, taking into account the risks to the debt projections mentioned above, the debt ratio may not be sufficiently diminishing towards the reference value over the programme period. |
| --- | --- |

(7)

In view of this risk assessment, the budgetary stance in the programme is consistent with a correction of the excessive deficit in 2007 as recommended by the Council. However, a sufficient safety margin against breaching the 3 % of GDP deficit threshold with normal macroeconomic fluctuations may not be secured before 2010 and the budgetary stance in the programme may not be sufficient to ensure that the MTO is achieved by the end of the programme period, as envisaged in the programme. In 2008, the structural balance risks deteriorating substantially, unless the better-than-projected 2007 starting position is carried through. For 2008, the adjustment towards the MTO implied by the programme is inadequate and should be strengthened to be in line with the Stability and Growth Pact, which specifies that, for euro area and ERM II Member States, the annual improvement in the structural balance should be 0,5 % of GDP as a benchmark. Furthermore, the Council notes that the budgetary stance in 2008 is not consistent with the April 2007 Eurogroup orientations for budgetary policies calling for a carefully designed fiscal policy for 2008 so as to accelerate the adjustment towards the MTO. From 2009 onwards, the budgetary stance in the programme should be backed up with measures. Finally, taking into account the risks to the debt projections mentioned above, the debt ratio may not be sufficiently diminishing towards the reference value over the programme period.

| (8) | Italy is at medium risk with regard to the sustainability of public finances. The long-term budgetary impact of ageing is lower than the EU average, with pension expenditure showing a more limited increase than on average in the EU, thanks to the pension reforms adopted. Yet, pension expenditure as a share of GDP remains among the highest in the EU and the projections hinge upon the assumption that the recently adopted reforms are fully implemented, in particular that the revision of the actuarial coefficients is implemented as of 2010 as foreseen in the current legislation and without departing from the contributory principle underlying the reformed pension system. The budgetary position in 2007 as estimated in the programme, which is better than the starting position of the previous programme, contributes to offsetting the projected long-term budgetary impact of ageing but is still insufficient to fully cover future spending pressures, even when factoring in the likely better outturn. Moreover, the current level of gross debt is well above the Treaty reference value and reducing it will require high primary surpluses to be achieved and maintained over a long period. |
| --- | --- |

(8)

Italy is at medium risk with regard to the sustainability of public finances. The long-term budgetary impact of ageing is lower than the EU average, with pension expenditure showing a more limited increase than on average in the EU, thanks to the pension reforms adopted. Yet, pension expenditure as a share of GDP remains among the highest in the EU and the projections hinge upon the assumption that the recently adopted reforms are fully implemented, in particular that the revision of the actuarial coefficients is implemented as of 2010 as foreseen in the current legislation and without departing from the contributory principle underlying the reformed pension system. The budgetary position in 2007 as estimated in the programme, which is better than the starting position of the previous programme, contributes to offsetting the projected long-term budgetary impact of ageing but is still insufficient to fully cover future spending pressures, even when factoring in the likely better outturn. Moreover, the current level of gross debt is well above the Treaty reference value and reducing it will require high primary surpluses to be achieved and maintained over a long period.

| (9) | The stability programme is fully consistent with the October 2007 implementation report of the national reform programme. In particular, budgetary developments and the fiscal policy strategy presented in the report are in line with those described, in more detail, in the stability programme. Although not in a systematic way, the budgetary projections in the programme explicitly take into account the public finance implications of the structural reform actions with a direct budgetary impact envisaged in the report, namely the package included in the Protocol agreement on Welfare, Competitiveness and the Labour market of 23 July 2007, as well as some actions in the area of research and development. |
| --- | --- |

(9)

The stability programme is fully consistent with the October 2007 implementation report of the national reform programme. In particular, budgetary developments and the fiscal policy strategy presented in the report are in line with those described, in more detail, in the stability programme. Although not in a systematic way, the budgetary projections in the programme explicitly take into account the public finance implications of the structural reform actions with a direct budgetary impact envisaged in the report, namely the package included in the Protocol agreement on Welfare, Competitiveness and the Labour market of 23 July 2007, as well as some actions in the area of research and development.

| (10) | The budgetary strategy in the programme is partly consistent with the country-specific broad economic policy guidelines included in the integrated guidelines and the guidelines for euro area Member States in the area of budgetary policies issued in the context of the Lisbon strategy. Italy should have pursued a more ambitious consolidation strategy given the favourable cyclical and budgetary developments. Measures aimed at improving the quality of public finances which have been undertaken include a reclassification of the budget and a spending review. Further measures aimed at curbing the upward trend in current primary expenditure and improving its efficiency and cost effectiveness remain to be spelled out. |
| --- | --- |

(10)

The budgetary strategy in the programme is partly consistent with the country-specific broad economic policy guidelines included in the integrated guidelines and the guidelines for euro area Member States in the area of budgetary policies issued in the context of the Lisbon strategy. Italy should have pursued a more ambitious consolidation strategy given the favourable cyclical and budgetary developments. Measures aimed at improving the quality of public finances which have been undertaken include a reclassification of the budget and a spending review. Further measures aimed at curbing the upward trend in current primary expenditure and improving its efficiency and cost effectiveness remain to be spelled out.

| (11) | As regards to the data requirements specified in the code of conduct for stability and convergence programmes, the programme has gaps in the required and optional data (5). |
| --- | --- |

(11)

As regards to the data requirements specified in the code of conduct for stability and convergence programmes, the programme has gaps in the required and optional data (5).

The overall conclusion is that the programme is consistent with a correction of the excessive deficit in 2007, which should be achieved by a good margin. The 2007 budgetary outturn is likely to outperform expectations due to the favourable cyclical and budgetary developments. This result could have been even better in the absence of the additional expenditure approved during the year. In 2008, the structural balance risks deteriorating substantially, unless the better-than-projected 2007 starting position is carried through. The planned adjustment towards the MTO is back-loaded to the outer years of the programme. The programme provides no information on the composition of the fiscal consolidation strategy after 2008, which hinders its proper assessment. In particular, appropriate measures aimed at curbing expenditure developments remain to be spelled out. In the light of these risks, the MTO may not be achieved by 2011 as planned in the programme and the debt ratio may not be sufficiently diminishing towards the 60 % of GDP reference value over the programme period. With regard to the sustainability of public finances, Italy is at medium risk but this assessment assumes the full implementation of the pension reforms.

In view of the above assessment, and also in the light of the recommendation under Article 104(7) of 28 July 2005, Italy is invited to:

| (i) | building on the positive results of 2007, strengthen the budgetary target for 2008, so as to secure an ambitious adjustment; and implement the planned fiscal consolidation thereafter, with specified measures to ensure adequate progress towards the MTO, so as to achieve it within the programme period and thus accelerate the pace of debt reduction; |
| --- | --- |

(i)

building on the positive results of 2007, strengthen the budgetary target for 2008, so as to secure an ambitious adjustment; and implement the planned fiscal consolidation thereafter, with specified measures to ensure adequate progress towards the MTO, so as to achieve it within the programme period and thus accelerate the pace of debt reduction;

| (ii) | in view of the very high level of government debt, fully implement the pension reforms, notably the planned periodical actuarial adjustment, so as to avoid significant increases in age-related spending; and |
| --- | --- |

(ii)

in view of the very high level of government debt, fully implement the pension reforms, notably the planned periodical actuarial adjustment, so as to avoid significant increases in age-related spending; and

| (iii) | spell out the budgetary strategy within a medium time perspective in line with the SGP and its Code of Conduct, continue the effort to improve the quality of public finances by focussing on their composition, increasing the transparency of the budgetary process and effectively implementing mechanisms to monitor and control expenditure. |
| --- | --- |

(iii)

spell out the budgetary strategy within a medium time perspective in line with the SGP and its Code of Conduct, continue the effort to improve the quality of public finances by focussing on their composition, increasing the transparency of the budgetary process and effectively implementing mechanisms to monitor and control expenditure.

The Council also notes that such actions would be consistent with the April 2007 Eurogroup orientations for fiscal policies.

Comparison of key macroeconomic and budgetary projections

| | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 |
| --- | --- | --- | --- | --- | --- | --- |
| Real GDP
  (% change) | SP Nov 2007 | 1,9 | 1,9 | 1,5 | 1,6 | 1,7 | 1,8 |
| COM Nov 2007 | 1,9 | 1,9 | 1,4 | 1,6 | n.a. | n.a. |
| SP Dec 2006 | 1,6 | 1,3 | 1,5 | 1,6 | 1,7 | 1,7 |
| HICP inflation
  (%) | SP Nov 2007 | 2,2 | 1,9 | 2,0 | 2,0 | 1,8 | 1,9 |
| COM Nov 2007 | 2,2 | 1,9 | 2,0 | 1,9 | n.a. | n.a. |
| SP Dec 2006 | 2,2 | 2,1 | 1,7 | 1,5 | 1,5 | 1,5 |
| Output gap (6)

  (% of potential GDP) | SP Nov 2007 | – 1,0 | – 0,6 | – 0,6 | – 0,6 | – 0,6 | – 0,6 |
| COM Nov 2007 (7) | – 1,1 | – 0,8 | – 0,9 | – 1,0 | n.a. | n.a. |
| SP Dec 2006 | – 0,9 | – 0,9 | – 0,8 | – 0,7 | – 0,5 | – 0,5 |
| Net lending/borrowing vis-à-vis the rest of the world
  (% of GDP) | SP Nov 2007 | – 1,9 | – 1,3 | – 0,8 | – 0,6 | – 0,4 | – 0,2 |
| COM Nov 2007 | – 1,9 | – 1,6 | – 1,5 | – 1,5 | n.a. | n.a. |
| SP Dec 2006 | – 2,3 | – 2,0 | – 2,0 | – 2,0 | – 1,9 | – 1,8 |
| General government balance
  (% of GDP) | SP Nov 2007 | – 4,4 | – 2,4 | – 2,2 | – 1,5 | – 0,7 | 0,0 |
| COM Nov 2007 | – 4,4 | – 2,3 | – 2,3 | – 2,3 | n.a. | n.a. |
| SP Dec 2006 | – 5,7 | – 2,8 | – 2,2 | – 1,5 | – 0,7 | 0,1 |
| Primary balance
  (% of GDP) | SP Nov 2007 | 0,1 | 2,5 | 2,6 | 3,4 | 4,2 | 4,9 |
| COM Nov 2007 | 0,1 | 2,5 | 2,4 | 2,5 | n.a. | n.a. |
| SP Dec 2006 | – 0,9 | 2,2 | 2,8 | 3,4 | 4,2 | 5,0 |
| Cyclically-adjusted balance (6)

  (% of GDP) | SP Nov 2007 | – 3,9 | – 2,0 | – 1,9 | – 1,2 | – 0,4 | 0,2 |
| COM Nov 2007 | – 3,9 | – 1,9 | – 1,9 | – 1,8 | n.a. | n.a. |
| SP Dec 2006 | – 5,3 | – 2,3 | – 1,8 | – 1,2 | – 0,4 | 0,3 |
| Structural balance (8)

  (% of GDP) | SP Nov 2007 | – 2,7 | – 2,2 | – 2,0 | – 1,3 | – 0,5 | 0,2 |
| COM Nov 2007 | – 2,7 | – 2,0 | – 2,0 | – 1,9 | n.a. | n.a. |
| SP Dec 2006 | – 3,9 | – 2,5 | – 1,9 | – 1,2 | – 0,4 | 0,3 |
| Government gross debt
  (% of GDP) | SP Nov 2007 | 106,8 | 105,0 | 103,5 | 101,5 | 98,5 | 95,1 |
| COM Nov 2007 | 106,8 | 104,3 | 102,9 | 101,2 | n.a. | n.a. |
| SP Dec 2006 | 107,6 | 106,9 | 105,4 | 103,5 | 100,7 | 97,8 |
| Stability programme (SP); Commission services' autumn 2007 economic forecasts (COM); Commission services' calculations. |

2006

2007

2008

2009

2010

2011

Real GDP

(% change)

SP Nov 2007

1,9

1,9

1,5

1,6

1,7

1,8

COM Nov 2007

1,9

1,9

1,4

1,6

n.a.

n.a.

SP Dec 2006

1,6

1,3

1,5

1,6

1,7

1,7

HICP inflation

(%)

SP Nov 2007

2,2

1,9

2,0

2,0

1,8

1,9

COM Nov 2007

2,2

1,9

2,0

1,9

n.a.

n.a.

SP Dec 2006

2,2

2,1

1,7

1,5

1,5

1,5

Output gap (6)

(% of potential GDP)

SP Nov 2007

– 1,0

– 0,6

– 0,6

– 0,6

– 0,6

– 0,6

COM Nov 2007 (7)

– 1,1

– 0,8

– 0,9

– 1,0

n.a.

n.a.

SP Dec 2006

– 0,9

– 0,9

– 0,8

– 0,7

– 0,5

– 0,5

Net lending/borrowing vis-à-vis the rest of the world

(% of GDP)

SP Nov 2007

– 1,9

– 1,3

– 0,8

– 0,6

– 0,4

– 0,2

COM Nov 2007

– 1,9

– 1,6

– 1,5

– 1,5

n.a.

n.a.

SP Dec 2006

– 2,3

– 2,0

– 2,0

– 2,0

– 1,9

– 1,8

General government balance

(% of GDP)

SP Nov 2007

– 4,4

– 2,4

– 2,2

– 1,5

– 0,7

0,0

COM Nov 2007

– 4,4

– 2,3

– 2,3

– 2,3

n.a.

n.a.

SP Dec 2006

– 5,7

– 2,8

– 2,2

– 1,5

– 0,7

0,1

Primary balance

(% of GDP)

SP Nov 2007

0,1

2,5

2,6

3,4

4,2

4,9

COM Nov 2007

0,1

2,5

2,4

2,5

n.a.

n.a.

SP Dec 2006

– 0,9

2,2

2,8

3,4

4,2

5,0

Cyclically-adjusted balance (6)

(% of GDP)

SP Nov 2007

– 3,9

– 2,0

– 1,9

– 1,2

– 0,4

0,2

COM Nov 2007

– 3,9

– 1,9

– 1,9

– 1,8

n.a.

n.a.

SP Dec 2006

– 5,3

– 2,3

– 1,8

– 1,2

– 0,4

0,3

Structural balance (8)

(% of GDP)

SP Nov 2007

– 2,7

– 2,2

– 2,0

– 1,3

– 0,5

0,2

COM Nov 2007

– 2,7

– 2,0

– 2,0

– 1,9

n.a.

n.a.

SP Dec 2006

– 3,9

– 2,5

– 1,9

– 1,2

– 0,4

0,3

Government gross debt

(% of GDP)

SP Nov 2007

106,8

105,0

103,5

101,5

98,5

95,1

COM Nov 2007

106,8

104,3

102,9

101,2

n.a.

n.a.

SP Dec 2006

107,6

106,9

105,4

103,5

100,7

97,8

Stability programme (SP); Commission services' autumn 2007 economic forecasts (COM); Commission services' calculations.

---

(1)  OJ L 209, 2.8.1997, p. 1. Regulation as amended by Regulation (EC) No 1055/2005 (OJ L 174, 7.7.2005, p. 1). The documents referred to in this text can be found at the following website:

http://ec.europa.eu/economy_finance/about/activities/sgp/main_en.htm

(2)  The assessment also takes into account the Commission services' autumn forecast and the Commission assessment of the October 2007 implementation report of the national reform programme.

(3)  OJ C 70, 27.3.2007, p. 17.

(4)  This is particularly true for the structural balance. The measure adopted on 31 December 2007 to discontinue the obligation by tax collectors to advance to government the payment of a certain amount of taxes to be collected in the following year could have a negative impact (0,3 % of GDP) on the headline balance in 2007. However, it would not have any impact on the structural balance in 2007 because of its one-off nature.

(5)  In particular, there is no breakdown of the budget consistent with the deficit targets for the years 2009-2011.

(6)  Output gaps and cyclically-adjusted balances from the programmes as recalculated by Commission services on the basis of the information in the programmes.

(7)  Based on estimated potential growth of 1,5 %, 1,6 %, 1,5 % and 1,7 % respectively in the period 2006-2009.

(8)  Cyclically-adjusted balance excluding one-off and other temporary measures. According to the most recent programme and the Commission services' autumn forecasts, one-off and other temporary measures are: 1,2 % of GDP in 2006, deficit-increasing; 0,2 % of GDP in 2007, deficit reducing, and 0,1 % of GDP per year, deficit reducing, from 2008 onwards.

Sources:

Stability programme (SP); Commission services' autumn 2007 economic forecasts (COM); Commission services' calculations.

---

| 22.2.2008 | EN | Official Journal of the European Union | C 49/34 |
| --- | --- | --- | --- |

22.2.2008

EN

Official Journal of the European Union

C 49/34

---

COUNCIL OPINION

of 12 February 2008

on the updated stability programme of France, 2007-2012

(2008/C 49/09)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community,

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies (1), and in particular Article 5(3) thereof,

Having regard to the recommendation of the Commission,

After consulting the Economic and Financial Committee,

HAS DELIVERED THIS OPINION:

| (1) | On 12 February 2008, the Council examined the updated stability programme of France which covers the period 2007 to 2012, one year more than the required reference period to coincide with the government programme. |
| --- | --- |

(1)

On 12 February 2008, the Council examined the updated stability programme of France which covers the period 2007 to 2012, one year more than the required reference period to coincide with the government programme.

| (2) | Between 2001 and 2005, annual real GDP grew by just above 1,5 % on average. This was in line with average growth in the euro area, while inflation was marginally below the euro average. Since 2006, GDP growth in France has fallen below the euro area average, with evidence of structural problems and a related deterioration in competitiveness. Although the unemployment rate has improved since 2005, it remains well above the euro area average, and the employment rate and the hours worked are still low.
  In this context, the adopted measures and wide-ranging labour and product market reforms planned by the government over the coming five years would, if fully implemented, increase potential growth and competitiveness, and improve the long-term sustainability of public finances. Government deficits and debt ratios, though decreasing, remain high. While positive steps have been taken recently to curb spending, notably in social security, France has the highest expenditure-to-GDP ratio in the euro area and its deficit is still fairly close to the 3 % of GDP threshold. Thus, France's plans to implement reforms to increase potential growth, improve the competitiveness of the French economy and help sustain the budgetary consolidation process as well as to forcefully restrain expenditure at all levels of government and improve its efficiency would contribute to meet the key challenges for the coming years. |
| --- | --- |

(2)

Between 2001 and 2005, annual real GDP grew by just above 1,5 % on average. This was in line with average growth in the euro area, while inflation was marginally below the euro average. Since 2006, GDP growth in France has fallen below the euro area average, with evidence of structural problems and a related deterioration in competitiveness. Although the unemployment rate has improved since 2005, it remains well above the euro area average, and the employment rate and the hours worked are still low.

In this context, the adopted measures and wide-ranging labour and product market reforms planned by the government over the coming five years would, if fully implemented, increase potential growth and competitiveness, and improve the long-term sustainability of public finances. Government deficits and debt ratios, though decreasing, remain high. While positive steps have been taken recently to curb spending, notably in social security, France has the highest expenditure-to-GDP ratio in the euro area and its deficit is still fairly close to the 3 % of GDP threshold. Thus, France's plans to implement reforms to increase potential growth, improve the competitiveness of the French economy and help sustain the budgetary consolidation process as well as to forcefully restrain expenditure at all levels of government and improve its efficiency would contribute to meet the key challenges for the coming years.

| (3) | The programme contains two different scenarios for the macroeconomic and budgetary projections: a ‘low’ growth scenario and a ‘high’ growth scenario. The ‘low’ growth scenario is considered the reference scenario for assessing public finance projections. It envisages that real GDP growth will pick up from 2 % in 2007 to 2-2,5 % in 2008 and to 2,5 % over the rest of the programme period, which is higher than the Commission services' estimate of potential growth of just above 2 %. The announced growth-enhancing labour and product market reforms will gradually contribute to a higher growth potential, the size and timing of which is subject to uncertainties. Assessed against currently available information (2), even this scenario appears to be based on favourable growth assumptions, especially for 2009. Less buoyant growth in the medium term than foreseen in the programme is therefore a risk also due to somewhat favourable assumptions concerning the international environment. |
| --- | --- |

(3)

The programme contains two different scenarios for the macroeconomic and budgetary projections: a ‘low’ growth scenario and a ‘high’ growth scenario. The ‘low’ growth scenario is considered the reference scenario for assessing public finance projections. It envisages that real GDP growth will pick up from 2 % in 2007 to 2-2,5 % in 2008 and to 2,5 % over the rest of the programme period, which is higher than the Commission services' estimate of potential growth of just above 2 %. The announced growth-enhancing labour and product market reforms will gradually contribute to a higher growth potential, the size and timing of which is subject to uncertainties. Assessed against currently available information (2), even this scenario appears to be based on favourable growth assumptions, especially for 2009. Less buoyant growth in the medium term than foreseen in the programme is therefore a risk also due to somewhat favourable assumptions concerning the international environment.

| (4) | For 2007, the general government deficit is estimated at 2,6 % of GDP in the Commission services' autumn 2007 forecast, against a target of 2,5 % of GDP set in previous update of the stability programme. In the new update the deficit is expected to come out at 2,4 % of GDP. Revenue windfalls, which partly result from a positive base effect following higher-than-expected revenues in 2006, broadly offset the costs of the fiscal package adopted in summer aimed at supporting growth (mainly involving tax cuts) and especially the higher-than-budgeted expenditure increase (notably in healthcare despite corrective measures taken to reduce the breach in the national health insurance spending objective (ONDAM) following the detection of slippages by the ‘Alert Committee’ in June 2007). Thus, despite the possible achievement of the budgetary objective set in the previous update, the budgetary implementation in 2007 can only be considered to be partly in line with the policy invitation included in the Council opinion of 27 February 2007 on the previous update of the stability programme (3) to ‘exploit the robust growth prospects and the positive base effect from stronger than previously expected 2006 outturn to frontload the adjustment towards the MTO ... with a view to achieving (it) in 2010 as planned and in particular to fully and effectively implement the 2007 budget and seize any opportunity to step up the structural adjustment’. The Council also notes that the budgetary implementation does not appear to be consistent with all the April 2007 Eurogroup orientations for budgetary policies since unexpected extra revenues were partially used for tax reductions and higher-than-budgeted expenditure. |
| --- | --- |

(4)

For 2007, the general government deficit is estimated at 2,6 % of GDP in the Commission services' autumn 2007 forecast, against a target of 2,5 % of GDP set in previous update of the stability programme. In the new update the deficit is expected to come out at 2,4 % of GDP. Revenue windfalls, which partly result from a positive base effect following higher-than-expected revenues in 2006, broadly offset the costs of the fiscal package adopted in summer aimed at supporting growth (mainly involving tax cuts) and especially the higher-than-budgeted expenditure increase (notably in healthcare despite corrective measures taken to reduce the breach in the national health insurance spending objective (ONDAM) following the detection of slippages by the ‘Alert Committee’ in June 2007). Thus, despite the possible achievement of the budgetary objective set in the previous update, the budgetary implementation in 2007 can only be considered to be partly in line with the policy invitation included in the Council opinion of 27 February 2007 on the previous update of the stability programme (3) to ‘exploit the robust growth prospects and the positive base effect from stronger than previously expected 2006 outturn to frontload the adjustment towards the MTO ... with a view to achieving (it) in 2010 as planned and in particular to fully and effectively implement the 2007 budget and seize any opportunity to step up the structural adjustment’. The Council also notes that the budgetary implementation does not appear to be consistent with all the April 2007 Eurogroup orientations for budgetary policies since unexpected extra revenues were partially used for tax reductions and higher-than-budgeted expenditure.

| (5) | The main goal of the budgetary strategy in the update of the stability programme is to significantly curb public expenditure, in a context in which growth is assumed to strengthen through the adopted and announced structural reforms, in order to achieve the medium-term objective (MTO) of a balanced position in structural terms (i.e. the cyclically-adjusted balance net of one-off and other temporary measures) in 2012 at the latest.
  According to the reference scenario, the headline deficit would fall marginally in 2008, from 2,4 % of GDP in 2007 to 2,3 % of GDP, and then more rapidly, by 0,6 percentage point per year, until a balanced position is reached in 2012. At the same time, the primary surplus would improve from 0,2 % of GDP in 2007 to 2,5 % of GDP in 2012. Despite the background of more favourable macroeconomic growth assumptions and of a better initial budgetary position, the programme postpones the adjustment planned in the previous update, which had set 2010 as a target year to achieve the MTO. The structural adjustment is very limited in the first programme year and it is spread over a longer period. The deficit reduction is planned to be fully expenditure-based. The expenditure ratio is planned to decrease by nearly 3 percentage points of GDP. The revenue-to-GDP ratio would also decline somewhat in 2008 and 2009 and stabilise thereafter. Government gross debt, estimated at 64,2 % of GDP in 2007 in the update, i.e. above the 60 % of GDP Treaty reference value, is projected to decline by over 4 percentage points of GDP over the programme period and reach the reference value in 2012. |
| --- | --- |

(5)

The main goal of the budgetary strategy in the update of the stability programme is to significantly curb public expenditure, in a context in which growth is assumed to strengthen through the adopted and announced structural reforms, in order to achieve the medium-term objective (MTO) of a balanced position in structural terms (i.e. the cyclically-adjusted balance net of one-off and other temporary measures) in 2012 at the latest.

According to the reference scenario, the headline deficit would fall marginally in 2008, from 2,4 % of GDP in 2007 to 2,3 % of GDP, and then more rapidly, by 0,6 percentage point per year, until a balanced position is reached in 2012. At the same time, the primary surplus would improve from 0,2 % of GDP in 2007 to 2,5 % of GDP in 2012. Despite the background of more favourable macroeconomic growth assumptions and of a better initial budgetary position, the programme postpones the adjustment planned in the previous update, which had set 2010 as a target year to achieve the MTO. The structural adjustment is very limited in the first programme year and it is spread over a longer period. The deficit reduction is planned to be fully expenditure-based. The expenditure ratio is planned to decrease by nearly 3 percentage points of GDP. The revenue-to-GDP ratio would also decline somewhat in 2008 and 2009 and stabilise thereafter. Government gross debt, estimated at 64,2 % of GDP in 2007 in the update, i.e. above the 60 % of GDP Treaty reference value, is projected to decline by over 4 percentage points of GDP over the programme period and reach the reference value in 2012.

| (6) | The budgetary outcomes could be worse than targeted in the programme. The macroeconomic scenario, which relies upon a benign international environment, appears favourable over the entire programme period. This is to some extent linked to the fact that it relies on the implementation of structural reforms including those of the special pension regimes and the review of the labour contracts already broadly agreed, as well as reforms that are yet to be decided. In order to have their full effect on potential growth, structural measures should be implemented with determination. On the expenditure side, for the near term, there are some concrete measures to support restraint (e.g. the introduction of a minimum payment charged to patients for certain healthcare expenditures and the partial replacement of retirees in public administration).
  For the medium term, when the consolidation is expected to be larger, there should be a positive effect stemming notably from the ‘General Review of Public Policies’ which should lead to structural reforms in all fields of public expenditure, to be decided in the spring of 2008 and covering the period 2009-2011 but the precise measures are not yet fully specified and hence their budgetary impact is uncertain. The extension of the state expenditure rule to cover transfers to local government could contribute towards containing expenditure. Local government and social security spending remains a risk to overall government expenditure. In view of these risks attached to the budgetary targets, the debt ratio could also turn out higher than projected in the programme. |
| --- | --- |

(6)

The budgetary outcomes could be worse than targeted in the programme. The macroeconomic scenario, which relies upon a benign international environment, appears favourable over the entire programme period. This is to some extent linked to the fact that it relies on the implementation of structural reforms including those of the special pension regimes and the review of the labour contracts already broadly agreed, as well as reforms that are yet to be decided. In order to have their full effect on potential growth, structural measures should be implemented with determination. On the expenditure side, for the near term, there are some concrete measures to support restraint (e.g. the introduction of a minimum payment charged to patients for certain healthcare expenditures and the partial replacement of retirees in public administration).

For the medium term, when the consolidation is expected to be larger, there should be a positive effect stemming notably from the ‘General Review of Public Policies’ which should lead to structural reforms in all fields of public expenditure, to be decided in the spring of 2008 and covering the period 2009-2011 but the precise measures are not yet fully specified and hence their budgetary impact is uncertain. The extension of the state expenditure rule to cover transfers to local government could contribute towards containing expenditure. Local government and social security spending remains a risk to overall government expenditure. In view of these risks attached to the budgetary targets, the debt ratio could also turn out higher than projected in the programme.

| (7) | In view of the risk assessment above and the fact that the structural balance would hardly improve in 2008 and thereafter improve by close to 0,5 percentage points of GDP on average per year, the budgetary stance in the programme is not sufficient to ensure that the MTO is achieved by 2010 as planned in the previous programme and may not be sufficient to be achieved even by 2012 as envisaged in the programme. Moreover, the Council notes that the budgetary stance is not consistent with the Eurogroup's April 2007 orientations. According to the programme, a sufficient safety margin against breaching the 3 % of GDP deficit threshold with normal macroeconomic fluctuations would be reached in 2009. In view of the risks to the budgetary targets, it could be achieved later. The adjustment implied by the programme is not in line with the 0,5 % of GDP benchmark in the Stability and Growth Pact in particular due to the inadequate adjustment in 2008. The Council notes that this is not consistent with the orientations of the April 2007 Eurogroup. Taking into account the risks to the deficit projections mentioned above, the debt ratio may not be sufficiently diminishing towards the reference value over the programme period. |
| --- | --- |

(7)

In view of the risk assessment above and the fact that the structural balance would hardly improve in 2008 and thereafter improve by close to 0,5 percentage points of GDP on average per year, the budgetary stance in the programme is not sufficient to ensure that the MTO is achieved by 2010 as planned in the previous programme and may not be sufficient to be achieved even by 2012 as envisaged in the programme. Moreover, the Council notes that the budgetary stance is not consistent with the Eurogroup's April 2007 orientations. According to the programme, a sufficient safety margin against breaching the 3 % of GDP deficit threshold with normal macroeconomic fluctuations would be reached in 2009. In view of the risks to the budgetary targets, it could be achieved later. The adjustment implied by the programme is not in line with the 0,5 % of GDP benchmark in the Stability and Growth Pact in particular due to the inadequate adjustment in 2008. The Council notes that this is not consistent with the orientations of the April 2007 Eurogroup. Taking into account the risks to the deficit projections mentioned above, the debt ratio may not be sufficiently diminishing towards the reference value over the programme period.

| (8) | France is at medium risk with regard to the sustainability of public finances. The long-term budgetary impact of ageing is slightly lower than the EU average, with pension expenditure showing a somewhat more limited increase, as a result of the pension reforms already enacted. The budgetary position in 2007, as estimated in the programme, albeit improved compared with last year, still constitutes a risk to sustainable public finances even before the long-term budgetary impact of an ageing population is considered. Moreover, the current level of gross debt is above the Treaty reference value. Progress with budgetary consolidation would contribute to reducing risks to the sustainability of public finances. |
| --- | --- |

(8)

France is at medium risk with regard to the sustainability of public finances. The long-term budgetary impact of ageing is slightly lower than the EU average, with pension expenditure showing a somewhat more limited increase, as a result of the pension reforms already enacted. The budgetary position in 2007, as estimated in the programme, albeit improved compared with last year, still constitutes a risk to sustainable public finances even before the long-term budgetary impact of an ageing population is considered. Moreover, the current level of gross debt is above the Treaty reference value. Progress with budgetary consolidation would contribute to reducing risks to the sustainability of public finances.

| (9) | The stability programme is consistent to some extent with the October 2007 implementation report of the national reform programme. In particular, both programmes present the government's wide ranging reform agenda, including the labour market reform, the reorganisation of the public administration, and the improvement of the competitive framework of companies. So far, the government has notably adopted a university reform, additional incentives to corporate research as well as the elimination of taxation on overtime, the reform of the retail sector (loi Galland) and has agreed on reforming the special pension regimes and on the merger of the ANPE (the unemployment agency) and Unedic (the unemployment benefit fund). Moreover, reforms under way cover a wide range of areas such as further reforming the pension system and the labour market including through a review of the labour contracts, as well as the modernisation of the French economy taking into account the proposals of the ‘Attali Commission’. The implementation report covers a broader range of issues while the stability programme contains more information on recent developments. Both programmes do not provide systematic information on the direct budgetary costs (or savings) associated with the main reforms envisaged, although they are reported to underpin the budgetary consolidation of the stability programme |
| --- | --- |

(9)

The stability programme is consistent to some extent with the October 2007 implementation report of the national reform programme. In particular, both programmes present the government's wide ranging reform agenda, including the labour market reform, the reorganisation of the public administration, and the improvement of the competitive framework of companies. So far, the government has notably adopted a university reform, additional incentives to corporate research as well as the elimination of taxation on overtime, the reform of the retail sector (loi Galland) and has agreed on reforming the special pension regimes and on the merger of the ANPE (the unemployment agency) and Unedic (the unemployment benefit fund). Moreover, reforms under way cover a wide range of areas such as further reforming the pension system and the labour market including through a review of the labour contracts, as well as the modernisation of the French economy taking into account the proposals of the ‘Attali Commission’. The implementation report covers a broader range of issues while the stability programme contains more information on recent developments. Both programmes do not provide systematic information on the direct budgetary costs (or savings) associated with the main reforms envisaged, although they are reported to underpin the budgetary consolidation of the stability programme

| (10) | The budgetary strategy in the programme is partly consistent with the country-specific broad economic policy guidelines and the guidelines for euro area Member States in the area of budgetary policies issued in the context of the Lisbon strategy. In particular, France is unlikely to achieve its medium-term budgetary objective by 2010 and the size of the government debt ratio remains unsatisfactorily high. |
| --- | --- |

(10)

The budgetary strategy in the programme is partly consistent with the country-specific broad economic policy guidelines and the guidelines for euro area Member States in the area of budgetary policies issued in the context of the Lisbon strategy. In particular, France is unlikely to achieve its medium-term budgetary objective by 2010 and the size of the government debt ratio remains unsatisfactorily high.

| (11) | As regards the data requirements specified in the code of conduct for stability and convergence programmes, the programme has some gaps in the required and optional data (4). |
| --- | --- |

(11)

As regards the data requirements specified in the code of conduct for stability and convergence programmes, the programme has some gaps in the required and optional data (4).

The overall conclusion is that the pace of budgetary consolidation and debt reduction has slowed down in 2007 and is planned to be significantly less ambitious in the coming years than planned in the previous update of the stability programme, especially as concerns 2008. The envisaged consolidation is back-loaded and the achievement of the MTO through an expenditure-based adjustment is postponed from 2010 to 2012 under the more plausible of the two macroeconomic scenarios presented by the French authorities. Moreover, even this adjustment path is subject to important risks. While tax cuts adopted in summer 2007 are already impacting on public finances, the authorities have also adopted measures to curb public expenditure in 2008, notably in social security, broadened the coverage of expenditure rules for the state, and have embarked on structural reforms. Structural reforms will be crucial to increase potential growth, improve competitiveness, and sustain the budgetary consolidation process. However, measures underlying the ambitious planned reduction in the expenditure ratio over the programme period have still to be further specified and implemented. The programme objectives are also subject to risks stemming from the macroeconomic assumptions, which are favourable and the assumptions on the impact of structural reforms on growth. In view of the debt and deficit levels and the projected increase in age-related expenditure, France appears to be at medium risk with regard to the sustainability of public finances.

In view of the above assessment France is invited to:

| (i) | strengthen the pace of budgetary consolidation and debt reduction, including through a rigorous implementation of the 2008 budget, so as to ensure that the safety margin against breaching the 3 % deficit threshold is attained more rapidly and — cyclical conditions permitting — aim to reach the MTO by 2010, in order to decisively contribute to the improvement of the long-term sustainability of public finances; |
| --- | --- |

(i)

strengthen the pace of budgetary consolidation and debt reduction, including through a rigorous implementation of the 2008 budget, so as to ensure that the safety margin against breaching the 3 % deficit threshold is attained more rapidly and — cyclical conditions permitting — aim to reach the MTO by 2010, in order to decisively contribute to the improvement of the long-term sustainability of public finances;

| (ii) | effectively enforce existing expenditure rules and take further steps in order to guarantee the respect of the ambitious multi-annual expenditure reduction targets of the general government by all sub-sectors, thus leading to a reduction in the expenditure to GDP ratio; |
| --- | --- |

(ii)

effectively enforce existing expenditure rules and take further steps in order to guarantee the respect of the ambitious multi-annual expenditure reduction targets of the general government by all sub-sectors, thus leading to a reduction in the expenditure to GDP ratio;

| (iii) | continue and accelerate structural reforms, so as to increase potential growth and curb public expenditure. |
| --- | --- |

(iii)

continue and accelerate structural reforms, so as to increase potential growth and curb public expenditure.

The Council also notes that such actions would be consistent with the April 2007 Eurogroup orientations for fiscal policies.

Comparison of key macroeconomic and budgetary projections

| | 2006 (8) | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 |
| --- | --- | --- | --- | --- | --- | --- | --- |
| Real GDP
  (% change) | SP Nov 2007 | 2,0 | 2-2,5 | 2-2,5 | 2,5 | 2,5 | 2,5 | 2,5 |
| COM Nov 2007 | 2,0 | 1,9 | 2,0 | 1,8 | n.a. | n.a. | n.a. |
| SP Dec 2006 | 2,0-2,5 | 2,0-2,5 | 2,25 | 2,25 | 2,25 | n.a. | n.a. |
| HICP inflation
  (%) | SP Nov 2007 | 1,9 | 1,4 | 1,7 | 1,6 | 1,6 | 1,6 | 1,6 |
| COM Nov 2007 | 1,9 | 1,5 | 1,7 | 1,6 | n.a. | n.a. | n.a. |
| SP Dec 2006 | 2,0 | 1,9 | 1,75 | 1,75 | 1,75 | n.a. | n.a. |
| Output gap (5)

  (% of potential GDP) | SP Nov 2007 | – 0,5 | – 0,8 | – 0,8 | – 0,6 | – 0,5 | – 0,3 | 0,0 |
| COM Nov 2007 (6) | – 0,2 | – 0,3 | – 0,3 | – 0,6 | n.a. | n.a. | n.a. |
| SP Dec 2006 | – 0,6 | – 0,6 | – 0,5 | – 0,4 | – 0,3 | n.a. | n.a. |
| Net lending/borrowing vis-à-vis the rest of the world
  (% of GDP) | SP Nov 2007 | – 2,1 | – 2,3 | – 2,5 | – 2,3 | – 2,2 | – 2,1 | – 2,0 |
| COM Nov 2007 | – 2,1 | – 2,3 | – 2,2 | – 2,2 | n.a. | n.a. | n.a. |
| SP Dec 2006 | – 2,0 | – 1,8 | – 1,8 | – 1,7 | – 1,6 | n.a. | n.a. |
| General government balance
  (% of GDP) | SP Nov 2007 | – 2,5 | – 2,4 | – 2,3 | – 1,7 | – 1,2 | – 0,6 | 0,0 |
| COM Nov 2007 | – 2,5 | – 2,6 | – 2,6 | – 2,7 | n.a. | n.a. | n.a. |
| SP Dec 2006 | – 2,7 | – 2,5 | – 1,8 | – 0,9 | 0,0 | n.a. | n.a. |
| Primary balance
  (% of GDP) | SP Nov 2007 | 0,0 | 0,2 | 0,5 | 0,9 | 1,4 | 2 | 2,5 |
| COM Nov 2007 | 0,0 | 0,0 | 0,0 | – 0,1 | n.a. | n.a. | n.a. |
| SP Dec 2006 | – 0,1 | 0,1 | 0,7 | 1,7 | 2,5 | n.a. | n.a. |
| Cyclically-adjusted balance (5)

  (% of GDP) | SP Nov 2007 | – 2,3 | – 2,0 | – 1,9 | – 1,4 | – 1,0 | – 0,4 | 0,0 |
| COM Nov 2007 | – 2,5 | – 2,4 | – 2,5 | – 2,4 | n.a. | n.a. | n.a. |
| SP Dec 2006 | – 2,4 | – 2,2 | – 1,6 | – 0,7 | 0,2 | n.a. | n.a. |
| Structural balance (7)

  (% of GDP) | SP Nov 2007 | – 2,5 | – 2,0 | – 1,9 | – 1,4 | – 1,0 | – 0,4 | 0,0 |
| COM Nov 2007 | – 2,8 | – 2,5 | – 2,6 | – 2,4 | n.a. | n.a. | n.a. |
| SP Dec 2006 | – 2,5 | – 2,2 | – 1,6 | – 0,7 | 0,2 | n.a. | n.a. |
| Government gross debt
  (% of GDP) | SP Nov 2007 | 64,2 | 64,2 | 64 | 63,2 | 61,9 | 60,2 | 57,9 |
| COM Nov 2007 | 64,2 | 64,3 | 64,1 | 64,1 | n.a. | n.a. | n.a. |
| SP Dec 2006 | 64,6 | 63,6 | 62,6 | 60,7 | 58,0 | n.a. | n.a. |
| Stability programme (SP); Commission services' autumn 2007 economic forecasts (COM); Commission services' calculations. |

2006 (8)

2007

2008

2009

2010

2011

2012

Real GDP

(% change)

SP Nov 2007

2,0

2-2,5

2-2,5

2,5

2,5

2,5

2,5

COM Nov 2007

2,0

1,9

2,0

1,8

n.a.

n.a.

n.a.

SP Dec 2006

2,0-2,5

2,0-2,5

2,25

2,25

2,25

n.a.

n.a.

HICP inflation

(%)

SP Nov 2007

1,9

1,4

1,7

1,6

1,6

1,6

1,6

COM Nov 2007

1,9

1,5

1,7

1,6

n.a.

n.a.

n.a.

SP Dec 2006

2,0

1,9

1,75

1,75

1,75

n.a.

n.a.

Output gap (5)

(% of potential GDP)

SP Nov 2007

– 0,5

– 0,8

– 0,8

– 0,6

– 0,5

– 0,3

0,0

COM Nov 2007 (6)

– 0,2

– 0,3

– 0,3

– 0,6

n.a.

n.a.

n.a.

SP Dec 2006

– 0,6

– 0,6

– 0,5

– 0,4

– 0,3

n.a.

n.a.

Net lending/borrowing vis-à-vis the rest of the world

(% of GDP)

SP Nov 2007

– 2,1

– 2,3

– 2,5

– 2,3

– 2,2

– 2,1

– 2,0

COM Nov 2007

– 2,1

– 2,3

– 2,2

– 2,2

n.a.

n.a.

n.a.

SP Dec 2006

– 2,0

– 1,8

– 1,8

– 1,7

– 1,6

n.a.

n.a.

General government balance

(% of GDP)

SP Nov 2007

– 2,5

– 2,4

– 2,3

– 1,7

– 1,2

– 0,6

0,0

COM Nov 2007

– 2,5

– 2,6

– 2,6

– 2,7

n.a.

n.a.

n.a.

SP Dec 2006

– 2,7

– 2,5

– 1,8

– 0,9

0,0

n.a.

n.a.

Primary balance

(% of GDP)

SP Nov 2007

0,0

0,2

0,5

0,9

1,4

2

2,5

COM Nov 2007

0,0

0,0

0,0

– 0,1

n.a.

n.a.

n.a.

SP Dec 2006

– 0,1

0,1

0,7

1,7

2,5

n.a.

n.a.

Cyclically-adjusted balance (5)

(% of GDP)

SP Nov 2007

– 2,3

– 2,0

– 1,9

– 1,4

– 1,0

– 0,4

0,0

COM Nov 2007

– 2,5

– 2,4

– 2,5

– 2,4

n.a.

n.a.

n.a.

SP Dec 2006

– 2,4

– 2,2

– 1,6

– 0,7

0,2

n.a.

n.a.

Structural balance (7)

(% of GDP)

SP Nov 2007

– 2,5

– 2,0

– 1,9

– 1,4

– 1,0

– 0,4

0,0

COM Nov 2007

– 2,8

– 2,5

– 2,6

– 2,4

n.a.

n.a.

n.a.

SP Dec 2006

– 2,5

– 2,2

– 1,6

– 0,7

0,2

n.a.

n.a.

Government gross debt

(% of GDP)

SP Nov 2007

64,2

64,2

64

63,2

61,9

60,2

57,9

COM Nov 2007

64,2

64,3

64,1

64,1

n.a.

n.a.

n.a.

SP Dec 2006

64,6

63,6

62,6

60,7

58,0

n.a.

n.a.

Stability programme (SP); Commission services' autumn 2007 economic forecasts (COM); Commission services' calculations.

---

(1)  OJ L 209, 2.8.1997, p. 1. Regulation as amended by Regulation (EC) No 1055/2005 (OJ L 174, 7.7.2005, p. 1). The documents referred to in this text can be found at the following website:

http://ec.europa.eu/economy_finance/about/activities/sgp/main_en.htm

(2)  The assessment takes notably into account the Commission services' autumn forecasts and the Commission assessment of the October 2007 implementation report of the national reform programme.

(3)  OJ C 70, 27.3.2007, p. 13.

(4)  In particular, assumptions on short- and long-term interest rates are not provided. Moreover, figures for 2006 are not provided in the programme, except for the table on cyclical developments.

(5)  Output gaps and cyclically-adjusted balances from the programmes as recalculated by Commission services on the basis of the information in the programmes.

(6)  Based on estimated potential growth of 2,0 %, 2,1 %, 2,0 % and 2,1 % respectively in the period 2006-2009.

(7)  Cyclically-adjusted balance excluding one-off and other temporary measures. One-off and other temporary measures are 0,1 % of GDP in 2006 and 0 for the rest of the period covered (2007-2012) according to the most recent programme. According to the Commission services' autumn forecast they are 0,3 % of GDP in 2006, 0,05 % of GDP in 2007 and 0,1 % of GDP in 2008.

(8)  As the most recent programme does not provide information for 2006 (except for cyclical developments), figures were taken from the Commission services' autumn 2007 forecast.

Sources:

Stability programme (SP); Commission services' autumn 2007 economic forecasts (COM); Commission services' calculations.

---

| 22.2.2008 | EN | Official Journal of the European Union | C 49/39 |
| --- | --- | --- | --- |

22.2.2008

EN

Official Journal of the European Union

C 49/39

---

COUNCIL OPINION

of 12 February 2008

on the updated convergence programme of Romania, 2007-2010

(2008/C 49/10)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community,

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies (1), and in particular Article 9(3) thereof,

Having regard to the recommendation of the Commission,

After consulting the Economic and Financial Committee,

HAS DELIVERED THIS OPINION:

| (1) | On 12 February 2008, the Council examined the updated convergence programme of Romania, which covers the period 2007 to 2010. |
| --- | --- |

(1)

On 12 February 2008, the Council examined the updated convergence programme of Romania, which covers the period 2007 to 2010.

| (2) | Romania has experienced strong economic growth averaging 6,5 % annually between 2003 and 2006. However, the strongly performing economy is showing clear signs of overheating with a high and growing external account deficit (projected at close to 13 % of GDP in 2007) with a smaller coverage of FDI financing-despite sustained non-privatization related investment in 2007 — but still mitigated by a larger share of medium and long term capital inflows based on so far available 2007 data.
  Growing labour shortages, strong wage growth hampering competitiveness and rapid increases in household borrowing are other signs of overheating. A sudden increase in inflation, after a long period of successful disinflation, was triggered primarily by supply-side shocks due to the weather-related poor performance of the agricultural sector in 2007. This was underpinned by the effects on aggregate demand of income and credit growth, non-restrictive fiscal and public wage policies and the depreciation of the Leu since August 2007 (following the appreciation in recent years). For Romania to maintain its fast convergence track towards the average EU-27 per capita GDP, it will be crucial to address the growing external imbalances. In this context, fiscal policy has an important role by cooling down internal demand, while also improving the quality of public finance, in particular through a shift towards growth-enhancing investment. |
| --- | --- |

(2)

Romania has experienced strong economic growth averaging 6,5 % annually between 2003 and 2006. However, the strongly performing economy is showing clear signs of overheating with a high and growing external account deficit (projected at close to 13 % of GDP in 2007) with a smaller coverage of FDI financing-despite sustained non-privatization related investment in 2007 — but still mitigated by a larger share of medium and long term capital inflows based on so far available 2007 data.

Growing labour shortages, strong wage growth hampering competitiveness and rapid increases in household borrowing are other signs of overheating. A sudden increase in inflation, after a long period of successful disinflation, was triggered primarily by supply-side shocks due to the weather-related poor performance of the agricultural sector in 2007. This was underpinned by the effects on aggregate demand of income and credit growth, non-restrictive fiscal and public wage policies and the depreciation of the Leu since August 2007 (following the appreciation in recent years). For Romania to maintain its fast convergence track towards the average EU-27 per capita GDP, it will be crucial to address the growing external imbalances. In this context, fiscal policy has an important role by cooling down internal demand, while also improving the quality of public finance, in particular through a shift towards growth-enhancing investment.

| (3) | The macroeconomic scenario underlying the programme envisages real GDP growth to accelerate from 6,1 % in 2007 to 6,5 % in 2008 and to ease towards 5,8 % in 2010. Assessed against currently available information (2), projected growth in 2008 and 2009 is on the high side. In particular, it is unclear how the reduction of the negative contribution of net exports to growth will be achieved in a context of rising unit labour costs and strong demand pressures, exacerbated by a non-restrictive fiscal policy. The size and the fast deterioration of the external imbalances is a reason for concern as witnessed by the depreciation trend of the Leu since mid-2007, against the background of a general risk-repricing in international financial markets. The programme's projections for inflation also appear to be on the very low side. The strong inflationary pressures from wage developments (including public wages), rapid increases in international food and commodity prices and the weaker exchange rate (after a long period of appreciation), suggest a more pronounced slow-down of the rapid disinflation process. The inflation (HICP) differential with the EU-27 is thus expected to stabilize or to narrow only slightly over the forecast period. Overall, the mix of policies in the programme might not lead to progress towards nominal convergence. |
| --- | --- |

(3)

The macroeconomic scenario underlying the programme envisages real GDP growth to accelerate from 6,1 % in 2007 to 6,5 % in 2008 and to ease towards 5,8 % in 2010. Assessed against currently available information (2), projected growth in 2008 and 2009 is on the high side. In particular, it is unclear how the reduction of the negative contribution of net exports to growth will be achieved in a context of rising unit labour costs and strong demand pressures, exacerbated by a non-restrictive fiscal policy. The size and the fast deterioration of the external imbalances is a reason for concern as witnessed by the depreciation trend of the Leu since mid-2007, against the background of a general risk-repricing in international financial markets. The programme's projections for inflation also appear to be on the very low side. The strong inflationary pressures from wage developments (including public wages), rapid increases in international food and commodity prices and the weaker exchange rate (after a long period of appreciation), suggest a more pronounced slow-down of the rapid disinflation process. The inflation (HICP) differential with the EU-27 is thus expected to stabilize or to narrow only slightly over the forecast period. Overall, the mix of policies in the programme might not lead to progress towards nominal convergence.

| (4) | According to the updated programme, the projected 2007 general government deficit is 2,9 % of GDP, 0,2 percentage point higher than the Commission services' autumn forecast and the target of the previous programme. The positive base effect from the lower than expected deficit in 2006 was offset by the increase in expenditure outweighing the increase in revenue in 2007. Budgetary implementation in 2007 is therefore not in line with the invitation in the Council opinion of 27 March 2007 on the previous convergence programme to ‘exploit the good times to significantly strengthen the pace of adjustment towards the MTO by aiming for more demanding budgetary targets in 2007’ (3). |
| --- | --- |

(4)

According to the updated programme, the projected 2007 general government deficit is 2,9 % of GDP, 0,2 percentage point higher than the Commission services' autumn forecast and the target of the previous programme. The positive base effect from the lower than expected deficit in 2006 was offset by the increase in expenditure outweighing the increase in revenue in 2007. Budgetary implementation in 2007 is therefore not in line with the invitation in the Council opinion of 27 March 2007 on the previous convergence programme to ‘exploit the good times to significantly strengthen the pace of adjustment towards the MTO by aiming for more demanding budgetary targets in 2007’ (3).

| (5) | The update confirms the previous programme's main objective to achieve the medium-term objective (MTO) for the budgetary position, a structural deficit (i.e. a deficit in cyclically-adjusted terms net of one-off and other temporary measures) of 0,9 % of GDP, by 2011 (i.e. beyond the programme period). The programme targets a stabilisation of the headline deficit at 2,9 % of GDP over the period 2007-2009 and a reduction to 2,4 % of GDP in 2010. The primary balance follows a similar path. No fiscal policy effort is made between 2007 and 2009 when the structural deficit is estimated to remain constant at around 3,5 % of GDP and only in 2010 a 0,75 % adjustment towards the MTO is envisaged. Compared with the previous convergence programme, which targeted a relatively gradual rather than fully back-loaded adjustment to the MTO, the budgetary targets are less ambitious despite the programme's more favourable growth assumptions in 2008-2009. The adjustment in the update is driven by a significant increase in the revenue-to-GDP ratio (by 3,5 percentage points, mostly relying on optimistic revenue-base projections) outpacing a marked increase in the expenditure-to-GDP ratio (by close to 3 percentage points).
  The largest contribution to the revenue increases (1,4 percentage points of GDP) is made by taxes due to an assumed buoyancy of direct taxes (income taxes are expected to increase due to a favourable evolution of average earning and the number of employees and corporate taxes would benefit from a positive effect of the employers' social contribution cuts), but also due to VAT measures (concerning the timing of some VAT receipts), though not sufficiently spelled out in the programme. ‘Other revenues’ rise by a similar amount which also reflects an assumed increase in EU funds. Social contributions are subject to several reform measures in 2008 with an assumed net positive effect (6 percentage points rate cuts, introduction of the second pension pillar and broadening of the pension contribution base by removing the ceiling of five times the average wage and by including bonuses in the tax base). On the expenditure side, the change stems to a large extent from a substantial increase in public investment due to an assumed significant increase in the absorption of EU funds, which seems ambitious. Also, social payments (especially pensions) are expected to substantially increase. This increase will only be partly offset by a sharp decline in compensation of employees and subsidies (both not substantiated in the programme). |
| --- | --- |

(5)

The update confirms the previous programme's main objective to achieve the medium-term objective (MTO) for the budgetary position, a structural deficit (i.e. a deficit in cyclically-adjusted terms net of one-off and other temporary measures) of 0,9 % of GDP, by 2011 (i.e. beyond the programme period). The programme targets a stabilisation of the headline deficit at 2,9 % of GDP over the period 2007-2009 and a reduction to 2,4 % of GDP in 2010. The primary balance follows a similar path. No fiscal policy effort is made between 2007 and 2009 when the structural deficit is estimated to remain constant at around 3,5 % of GDP and only in 2010 a 0,75 % adjustment towards the MTO is envisaged. Compared with the previous convergence programme, which targeted a relatively gradual rather than fully back-loaded adjustment to the MTO, the budgetary targets are less ambitious despite the programme's more favourable growth assumptions in 2008-2009. The adjustment in the update is driven by a significant increase in the revenue-to-GDP ratio (by 3,5 percentage points, mostly relying on optimistic revenue-base projections) outpacing a marked increase in the expenditure-to-GDP ratio (by close to 3 percentage points).

The largest contribution to the revenue increases (1,4 percentage points of GDP) is made by taxes due to an assumed buoyancy of direct taxes (income taxes are expected to increase due to a favourable evolution of average earning and the number of employees and corporate taxes would benefit from a positive effect of the employers' social contribution cuts), but also due to VAT measures (concerning the timing of some VAT receipts), though not sufficiently spelled out in the programme. ‘Other revenues’ rise by a similar amount which also reflects an assumed increase in EU funds. Social contributions are subject to several reform measures in 2008 with an assumed net positive effect (6 percentage points rate cuts, introduction of the second pension pillar and broadening of the pension contribution base by removing the ceiling of five times the average wage and by including bonuses in the tax base). On the expenditure side, the change stems to a large extent from a substantial increase in public investment due to an assumed significant increase in the absorption of EU funds, which seems ambitious. Also, social payments (especially pensions) are expected to substantially increase. This increase will only be partly offset by a sharp decline in compensation of employees and subsidies (both not substantiated in the programme).

| (6) | The budgetary outcomes could be worse than projected in the programme. In particular, given the favourable tax elasticity assumed by the programme and the most recent information regarding budgetary execution, the planned level of revenue in 2007 is unlikely to be achieved. This would imply a negative base effect for revenue over the programme period, implying worse budgetary outcomes than projected for the period 2008-2010. This could be amplified by favourable growth assumptions retained for the years 2008-2009. The buoyancy of especially social contributions and indirect taxes may also be overestimated. On the expenditure side, the programme seems to continue the pattern of over-budgeting of investment spending. Consequently, there are risks that resources allocated to investments will be, at least partly, shifted to current spending as seen in the past, in particular to those items which seem under-budgeted in the programme, namely the compensation of employees, social transfers and subsidies.
  Although the programme expects a more prudent public wage policy over 2008-2010, this is not substantiated in the programme and does not seem realistic in the light of past public wage overruns: in 2006 and 2007, wage bill increases were more than twice as high as originally planned. Taking this expenditure shift into account, the expenditure-to-GDP ratio may be higher than planned in particular for the years 2009-2010. Additional risk factors are weaknesses in budgetary planning and execution, expenditure pressures in the election years 2008 and 2009 and uncertainty regarding the amount of compensations by the general government to owners of properties nationalised during the communist regime under the so-called ‘property fund’. Moreover, the fiscal tightening foreseen in 2010 is not sufficiently substantiated with measures. |
| --- | --- |

(6)

The budgetary outcomes could be worse than projected in the programme. In particular, given the favourable tax elasticity assumed by the programme and the most recent information regarding budgetary execution, the planned level of revenue in 2007 is unlikely to be achieved. This would imply a negative base effect for revenue over the programme period, implying worse budgetary outcomes than projected for the period 2008-2010. This could be amplified by favourable growth assumptions retained for the years 2008-2009. The buoyancy of especially social contributions and indirect taxes may also be overestimated. On the expenditure side, the programme seems to continue the pattern of over-budgeting of investment spending. Consequently, there are risks that resources allocated to investments will be, at least partly, shifted to current spending as seen in the past, in particular to those items which seem under-budgeted in the programme, namely the compensation of employees, social transfers and subsidies.

Although the programme expects a more prudent public wage policy over 2008-2010, this is not substantiated in the programme and does not seem realistic in the light of past public wage overruns: in 2006 and 2007, wage bill increases were more than twice as high as originally planned. Taking this expenditure shift into account, the expenditure-to-GDP ratio may be higher than planned in particular for the years 2009-2010. Additional risk factors are weaknesses in budgetary planning and execution, expenditure pressures in the election years 2008 and 2009 and uncertainty regarding the amount of compensations by the general government to owners of properties nationalised during the communist regime under the so-called ‘property fund’. Moreover, the fiscal tightening foreseen in 2010 is not sufficiently substantiated with measures.

| (7) | In view of this risk assessment, the budgetary stance in the programme is insufficient to ensure that the MTO is achieved by 2011, as envisaged by the programme. A safety margin against breaching the 3 % of GDP deficit reference value (estimated at 1,75 % of GDP) would not be provided by the end of the programme period and thus there is a serious risk that the reference value will be breached in the near term. After a sharp deterioration in the deficit in 2007, no adjustment towards the MTO can be expected before 2010 despite the fact that the economy is showing signs of overheating. This is not in line with the Stability and Growth Pact. The budgetary stance does not help addressing the macroeconomic imbalances identified above, in particular the high and growing external deficit and domestic demand pressures, which put at risk macroeconomic and financial stability. |
| --- | --- |

(7)

In view of this risk assessment, the budgetary stance in the programme is insufficient to ensure that the MTO is achieved by 2011, as envisaged by the programme. A safety margin against breaching the 3 % of GDP deficit reference value (estimated at 1,75 % of GDP) would not be provided by the end of the programme period and thus there is a serious risk that the reference value will be breached in the near term. After a sharp deterioration in the deficit in 2007, no adjustment towards the MTO can be expected before 2010 despite the fact that the economy is showing signs of overheating. This is not in line with the Stability and Growth Pact. The budgetary stance does not help addressing the macroeconomic imbalances identified above, in particular the high and growing external deficit and domestic demand pressures, which put at risk macroeconomic and financial stability.

| (8) | In the absence of long-term projections of age-related expenditures, based on the common macroeconomic assumptions as carried out by the EPC/Commission, it is not possible to assess the impact of population ageing in Romania on a comparable and robust basis as it currently done for the other Member States. While a significant impact of ageing on expenditure cannot be excluded given the current demographic structure, the 2007 budgetary position in the programme, with a large structural deficit, is not sufficient to stabilise debt even before considering the long-term budgetary impact of ageing. Improving the structural budgetary position over the medium-term would thus contribute to containing risks to the sustainability of public finances. |
| --- | --- |

(8)

In the absence of long-term projections of age-related expenditures, based on the common macroeconomic assumptions as carried out by the EPC/Commission, it is not possible to assess the impact of population ageing in Romania on a comparable and robust basis as it currently done for the other Member States. While a significant impact of ageing on expenditure cannot be excluded given the current demographic structure, the 2007 budgetary position in the programme, with a large structural deficit, is not sufficient to stabilise debt even before considering the long-term budgetary impact of ageing. Improving the structural budgetary position over the medium-term would thus contribute to containing risks to the sustainability of public finances.

| (9) | The convergence programme seems to be consistent to some extent with the July 2007 national reform programme (NRP). In particular, it confirms the main government policy priorities such as improving the quality and management of government expenditure, the business environment and the public administration and the main reforms directly affecting public finances in particular in the areas of labour market, pension, health care and education. It also confirms the expenditure priorities in the fields of education, research, health, infrastructure, environment and agriculture. On the other hand, the convergence programme does not provide systematic information on the direct budgetary costs associated with the main reforms envisaged in the NRP. |
| --- | --- |

(9)

The convergence programme seems to be consistent to some extent with the July 2007 national reform programme (NRP). In particular, it confirms the main government policy priorities such as improving the quality and management of government expenditure, the business environment and the public administration and the main reforms directly affecting public finances in particular in the areas of labour market, pension, health care and education. It also confirms the expenditure priorities in the fields of education, research, health, infrastructure, environment and agriculture. On the other hand, the convergence programme does not provide systematic information on the direct budgetary costs associated with the main reforms envisaged in the NRP.

| (10) | As regards the data requirements specified in the code of conduct for stability and convergence programmes, although there is some progress, the programme has some gaps in the required and optional data (4). |
| --- | --- |

(10)

As regards the data requirements specified in the code of conduct for stability and convergence programmes, although there is some progress, the programme has some gaps in the required and optional data (4).

The overall conclusion is that the budgetary strategy outlined in the programme is not in line with a prudent fiscal policy, necessary to contain the growing external deficit and inflationary pressures which put at risk macroeconomic and financial stability and the convergence process. The programme does not envisage a reduction of the deficits, entailing a risk of an excessive deficit. Progress towards the MTO is insufficient and fully back-loaded despite strong growth prospects. In view of the risks to the budgetary targets and the significant adjustment that would be necessary after the programme period, the MTO is unlikely to be achieved by 2011 as planned.

In view of the above assessment and the need to ensure sustainable convergence, Romania is invited to:

| (i) | significantly strengthen the pace of adjustment towards the MTO by aiming for substantially more demanding budgetary targets in 2008 and subsequent years in order to contain the risk of an excessive deficit, foster macroeconomic stability and rein in widening external imbalances and address the risks to the long-term sustainability of public finances; |
| --- | --- |

(i)

significantly strengthen the pace of adjustment towards the MTO by aiming for substantially more demanding budgetary targets in 2008 and subsequent years in order to contain the risk of an excessive deficit, foster macroeconomic stability and rein in widening external imbalances and address the risks to the long-term sustainability of public finances;

| (ii) | restrain the envisaged high increase in public spending, improve its expenditure composition so as to enhance the economy's growth potential and improve the planning and execution of expenditure within a binding medium-term framework; |
| --- | --- |

(ii)

restrain the envisaged high increase in public spending, improve its expenditure composition so as to enhance the economy's growth potential and improve the planning and execution of expenditure within a binding medium-term framework;

| (iii) | pursue policies to contain inflationary pressures, complementing the recommended tighter fiscal stance, with appropriate public wage policy and further structural reforms. |
| --- | --- |

(iii)

pursue policies to contain inflationary pressures, complementing the recommended tighter fiscal stance, with appropriate public wage policy and further structural reforms.

Comparison of key macro economic and budgetary projections

| | 2006 | 2007 | 2008 | 2009 | 2010 |
| --- | --- | --- | --- | --- | --- |
| Real GDP
  (% change) | CP Dec 2007 | 7,7 | 6,1 | 6,5 | 6,1 | 5,8 |
| COM Nov 2007 | 7,7 | 6,0 | 5,9 | 5,8 | n.a. |
| CP Jan 2007 | 8,0 | 6,5 | 6,3 | 5,9 | n.a. |
| HICP inflation
  (%) | CP Dec 2007 | 6,6 | 4,8 | 5,7 | 4,0 | 3,3 |
| COM Nov 2007 | 6,6 | 4,7 | 5,6 | 4,6 | n.a. |
| CP Jan 2007 | 6,6 | 4,5 | 4,3 | 3,2 | n.a. |
| Output gap (5)

  (% of potential GDP) | CP Dec 2007 | 2,2 | 2,1 | 2,1 | 1,8 | 1,1 |
| COM Nov 2007 (6) | 2,4 | 2,1 | 1,3 | 0,3 | n.a. |
| CP Jan 2007 | 2,1 | 2,2 | 1,9 | 1,1 | n.a. |
| Net lending/borrowing vis-à-vis the rest of the world
  (% of GDP) | CP Dec 2007 | – 10,3 | – 12,6 | – 10,5 | – 10,1 | – 10,2 |
| COM Nov 2007 | – 10,3 | – 12,8 | – 14,5 | – 15,3 | n.a. |
| CP Jan 2007 | – 10,2 | – 8,9 | – 8,3 | – 7,8 | n.a. |
| General government balance
  (% of GDP) | CP Dec 2007 | – 1,9 | – 2,9 | – 2,9 | – 2,9 | – 2,4 |
| COM Nov 2007 | – 1,9 | – 2,7 | – 3,2 | – 3,9 | n.a. |
| CP Jan 2007 | – 2,3 | – 2,7 | – 2,6 | – 2,0 | n.a. |
| Primary balance
  (% of GDP) | CP Dec 2007 | – 1,0 | – 2,0 | – 2,1 | – 2,1 | – 1,6 |
| COM Nov 2007 | – 1,0 | – 1,8 | – 2,3 | – 3,0 | n.a. |
| CP Jan 2007 | – 1,2 | – 1,6 | – 1,5 | – 1,0 | n.a. |
| Cyclically-adjusted balance (5)

  (% of GDP) | CP Dec 2007 | – 2,6 | – 3,6 | – 3,6 | – 3,5 | – 2,8 |
| COM Nov 2007 | – 2,6 | – 3,3 | – 3,6 | – 4,0 | n.a. |
| CP Jan 2007 | – 3,0 | – 3,4 | – 3,2 | – 2,3 | n.a. |
| Structural balance (7)

  (% of GDP) | CP Dec 2007 | – 2,2 | – 3,4 | – 3,4 | – 3,4 | – 2,7 |
| COM Nov 2007 | – 2,6 | – 3,3 | – 3,6 | – 4,0 | n.a. |
| CP Jan 2007 | – 3,0 | – 3,4 | – 3,2 | – 2,3 | n.a. |
| Government gross debt
  (% of GDP) | CP Dec 2007 | 12,4 | 11,9 | 13,6 | 14,2 | 14,9 |
| COM Nov 2007 | 12,4 | 12,5 | 12,8 | 13,5 | n.a. |
| CP Jan 2007 | 12,8 | 13,5 | 12,6 | 11,7 | n.a. |
| Convergence programme (CP); Commission services' autumn 2007 economic forecasts (COM); Commission services' calculations. |

2006

2007

2008

2009

2010

Real GDP

(% change)

CP Dec 2007

7,7

6,1

6,5

6,1

5,8

COM Nov 2007

7,7

6,0

5,9

5,8

n.a.

CP Jan 2007

8,0

6,5

6,3

5,9

n.a.

HICP inflation

(%)

CP Dec 2007

6,6

4,8

5,7

4,0

3,3

COM Nov 2007

6,6

4,7

5,6

4,6

n.a.

CP Jan 2007

6,6

4,5

4,3

3,2

n.a.

Output gap (5)

(% of potential GDP)

CP Dec 2007

2,2

2,1

2,1

1,8

1,1

COM Nov 2007 (6)

2,4

2,1

1,3

0,3

n.a.

CP Jan 2007

2,1

2,2

1,9

1,1

n.a.

Net lending/borrowing vis-à-vis the rest of the world

(% of GDP)

CP Dec 2007

– 10,3

– 12,6

– 10,5

– 10,1

– 10,2

COM Nov 2007

– 10,3

– 12,8

– 14,5

– 15,3

n.a.

CP Jan 2007

– 10,2

– 8,9

– 8,3

– 7,8

n.a.

General government balance

(% of GDP)

CP Dec 2007

– 1,9

– 2,9

– 2,9

– 2,9

– 2,4

COM Nov 2007

– 1,9

– 2,7

– 3,2

– 3,9

n.a.

CP Jan 2007

– 2,3

– 2,7

– 2,6

– 2,0

n.a.

Primary balance

(% of GDP)

CP Dec 2007

– 1,0

– 2,0

– 2,1

– 2,1

– 1,6

COM Nov 2007

– 1,0

– 1,8

– 2,3

– 3,0

n.a.

CP Jan 2007

– 1,2

– 1,6

– 1,5

– 1,0

n.a.

Cyclically-adjusted balance (5)

(% of GDP)

CP Dec 2007

– 2,6

– 3,6

– 3,6

– 3,5

– 2,8

COM Nov 2007

– 2,6

– 3,3

– 3,6

– 4,0

n.a.

CP Jan 2007

– 3,0

– 3,4

– 3,2

– 2,3

n.a.

Structural balance (7)

(% of GDP)

CP Dec 2007

– 2,2

– 3,4

– 3,4

– 3,4

– 2,7

COM Nov 2007

– 2,6

– 3,3

– 3,6

– 4,0

n.a.

CP Jan 2007

– 3,0

– 3,4

– 3,2

– 2,3

n.a.

Government gross debt

(% of GDP)

CP Dec 2007

12,4

11,9

13,6

14,2

14,9

COM Nov 2007

12,4

12,5

12,8

13,5

n.a.

CP Jan 2007

12,8

13,5

12,6

11,7

n.a.

Convergence programme (CP); Commission services' autumn 2007 economic forecasts (COM); Commission services' calculations.

---

(1)  OJ L 209, 2.8.1997, p. 1. Regulation as amended by Regulation (EC) No 1055/2005 (OJ L 174, 7.7.2005, p. 1). The documents referred to in this text can be found at the following website:

http://ec.europa.eu/economy_finance/about/activities/sgp/main_en.htm

(2)  The assessment takes notably into account the Commission services' autumn forecast and the Commission assessment of the July 2007 national reform programme.

(3)  OJ C 89, 24.4.2007, p. 19.

(4)  In particular, data on short-term and long-term interest rates, general government expenditure by function and details on long-term sustainability projections are missing.

(5)  Output gaps and cyclically-adjusted balances according to the programmes as recalculated by Commission services on the basis of the information in the programmes.

(6)  Based on estimated potential growth of 5,7 %, 6,4 %, 6,7 % and 6,9 % respectively in the period 2006-2009.

(7)  Cyclically-adjusted balance excluding one-off and other temporary measures. According to the most recent programme, one-off and other temporary measures are 0,4 % of GDP in 2006, 0,2 % in 2007, 0,2 % in 2008, 0,1 % in 2009 and 0,1 % in 2010 (all deficit-increasing). There are no one-offs in the Commission services' autumn forecast as the Commission services do not consider the compensations under the so-called property fund as one-offs.

Sources:

Convergence programme (CP); Commission services' autumn 2007 economic forecasts (COM); Commission services' calculations.

---

| 22.2.2008 | EN | Official Journal of the European Union | C 49/44 |
| --- | --- | --- | --- |

22.2.2008

EN

Official Journal of the European Union

C 49/44

---

COUNCIL OPINION

of 12 February 2008

on the updated convergence programme of Slovakia, 2007-2010

(2008/C 49/11)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community,

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies (1), and in particular Article 9(3) thereof,

Having regard to the recommendation of the Commission,

After consulting the Economic and Financial Committee,

HAS DELIVERED THIS OPINION:

| (1) | On 12 February 2008, the Council examined the updated convergence programme of Slovakia, which covers the period 2007 to 2010. |
| --- | --- |

(1)

On 12 February 2008, the Council examined the updated convergence programme of Slovakia, which covers the period 2007 to 2010.

| (2) | Slovakia is currently experiencing a period of strong growth induced by wide-range structural reforms introduced in previous years combined with substantial inflows of FDI, especially into the manufacturing sector. Although consequential to growth employment picked up as well and the unemployment rate fell substantially, certain segments of the population concentrated in eastern regions do not seem to take part in this economic expansion.
  Apart from constituting a drag on public finances and a social problem, the low employability of certain segments of the labour force limits the country's potential output growth and thus hampers the catching-up process. This unevenness in the distribution of economic activity across population groups and regions would call for an increase in the quality of public education and some reallocation of government expenditure to education, R&D and innovation and infrastructure development. Following a predominantly restrictive budgetary policy in previous years, the fiscal stance turned expansionary in 2006, while monetary conditions tightened on the back of increased policy rates and continued exchange rate appreciation which however, as testified by the strong growth in exports and falling current account deficit, does not seem to have affected external competitiveness of the Slovak economy. As a Member State with a derogation and an ERMII participant Slovakia should gear its macroeconomic and structural policies towards achieving sustainable convergence. Although inflation has decelerated markedly in 2007, it is expected to pick up again on the back of rising food and energy prices, strong growth, a tightening labour market and a fading effect of the strong exchange rate appreciation in 2006-2007. In order to meet the inflation targets set out in the programme — which assumes euro area membership from 2009 — and to contain possible inflationary pressures after the disinflationary effect from past substantial exchange rate appreciation fades out, further structural reforms are necessary and the government should stand ready to adopt a tighter fiscal stance than that envisaged in the programme. |
| --- | --- |

(2)

Slovakia is currently experiencing a period of strong growth induced by wide-range structural reforms introduced in previous years combined with substantial inflows of FDI, especially into the manufacturing sector. Although consequential to growth employment picked up as well and the unemployment rate fell substantially, certain segments of the population concentrated in eastern regions do not seem to take part in this economic expansion.

Apart from constituting a drag on public finances and a social problem, the low employability of certain segments of the labour force limits the country's potential output growth and thus hampers the catching-up process. This unevenness in the distribution of economic activity across population groups and regions would call for an increase in the quality of public education and some reallocation of government expenditure to education, R&D and innovation and infrastructure development. Following a predominantly restrictive budgetary policy in previous years, the fiscal stance turned expansionary in 2006, while monetary conditions tightened on the back of increased policy rates and continued exchange rate appreciation which however, as testified by the strong growth in exports and falling current account deficit, does not seem to have affected external competitiveness of the Slovak economy. As a Member State with a derogation and an ERMII participant Slovakia should gear its macroeconomic and structural policies towards achieving sustainable convergence. Although inflation has decelerated markedly in 2007, it is expected to pick up again on the back of rising food and energy prices, strong growth, a tightening labour market and a fading effect of the strong exchange rate appreciation in 2006-2007. In order to meet the inflation targets set out in the programme — which assumes euro area membership from 2009 — and to contain possible inflationary pressures after the disinflationary effect from past substantial exchange rate appreciation fades out, further structural reforms are necessary and the government should stand ready to adopt a tighter fiscal stance than that envisaged in the programme.

| (3) | The macroeconomic scenario underlying the programme envisages that real GDP growth will drop from 8,8 % in 2007 to 5,0 % in 2010. Assessed against currently available information (2), this scenario appears to be based on plausible growth assumptions until 2009 and cautious ones for 2010, as the exceptional export performance recorded in 2007 induced by the launch of new production capacities in the manufacturing sector is not expected to be repeated in the coming years. The programme's projections for inflation appear to be on the low side as they are based on more favourable external assumptions than the Commission services' autumn 2007 forecast and on a different assumption on the fading out of the effect of past exchange rate appreciation. |
| --- | --- |

(3)

The macroeconomic scenario underlying the programme envisages that real GDP growth will drop from 8,8 % in 2007 to 5,0 % in 2010. Assessed against currently available information (2), this scenario appears to be based on plausible growth assumptions until 2009 and cautious ones for 2010, as the exceptional export performance recorded in 2007 induced by the launch of new production capacities in the manufacturing sector is not expected to be repeated in the coming years. The programme's projections for inflation appear to be on the low side as they are based on more favourable external assumptions than the Commission services' autumn 2007 forecast and on a different assumption on the fading out of the effect of past exchange rate appreciation.

| (4) | For 2007, the general government deficit is estimated at 2,7 % of GDP in the Commission services' autumn 2007 forecast, against a target of 2,9 % of GDP set in the previous update of the convergence programme and of 2,5 % of GDP in the current update. This improvement was enabled by a revenue over-performance outweighing higher-than-budgeted expenditure. Given that the estimated 2007 deficit outturn is lower (by 0,2 % of GDP) than previously targeted both in nominal and structural (i.e. cyclically-adjusted net of one-off and other temporary measures) terms, the Slovak authorities have partly responded to the invitation in the Council opinion of 27 February 2007 on the previous update of the convergence programme (3) which called for a strengthening of the structural adjustment in order to ensure the correction of the excessive deficit in 2007 with a larger margin. |
| --- | --- |

(4)

For 2007, the general government deficit is estimated at 2,7 % of GDP in the Commission services' autumn 2007 forecast, against a target of 2,9 % of GDP set in the previous update of the convergence programme and of 2,5 % of GDP in the current update. This improvement was enabled by a revenue over-performance outweighing higher-than-budgeted expenditure. Given that the estimated 2007 deficit outturn is lower (by 0,2 % of GDP) than previously targeted both in nominal and structural (i.e. cyclically-adjusted net of one-off and other temporary measures) terms, the Slovak authorities have partly responded to the invitation in the Council opinion of 27 February 2007 on the previous update of the convergence programme (3) which called for a strengthening of the structural adjustment in order to ensure the correction of the excessive deficit in 2007 with a larger margin.

| (5) | The main goal of the budgetary strategy is to reach the medium-term objective (MTO) for the budgetary position of a structural deficit of just below 1 % of GDP by 2010. The programme foresees the general government deficit to decrease from 2,5 % of GDP in 2007 to 0,8 % of GDP in 2010 in nominal terms, with the primary balance improving from a deficit of 1,0 % of GDP in 2007 to a surplus of 0,5 % of GDP in 2010. The adjustment in both structural and nominal terms is back-loaded towards the end of the programme period. Compared to the previous update, the new update broadly confirms the planned adjustment against a more favourable macroeconomic scenario. Fiscal consolidation is envisaged to be expenditure-based (especially cuts in social payments and compensation of public employees) as the expenditure ratio is planned to be reduced by 3 percentage points of GDP over the programme horizon while the revenue ratio would decline by half this amount. |
| --- | --- |

(5)

The main goal of the budgetary strategy is to reach the medium-term objective (MTO) for the budgetary position of a structural deficit of just below 1 % of GDP by 2010. The programme foresees the general government deficit to decrease from 2,5 % of GDP in 2007 to 0,8 % of GDP in 2010 in nominal terms, with the primary balance improving from a deficit of 1,0 % of GDP in 2007 to a surplus of 0,5 % of GDP in 2010. The adjustment in both structural and nominal terms is back-loaded towards the end of the programme period. Compared to the previous update, the new update broadly confirms the planned adjustment against a more favourable macroeconomic scenario. Fiscal consolidation is envisaged to be expenditure-based (especially cuts in social payments and compensation of public employees) as the expenditure ratio is planned to be reduced by 3 percentage points of GDP over the programme horizon while the revenue ratio would decline by half this amount.

| (6) | The budgetary outcomes could be better in 2008 and worse in 2009 and 2010 than projected in the programme. In particular, strong growth prospects, already adopted revenue-increasing measures (broadening of the corporate tax base and increase in the maximum ceiling for social contribution foreseen to generate additional revenue of some 0,3 % of GDP) and the likely outflow of participants from the second pension pillar (4) (positive impact estimated at about 0,2 % of GDP) should allow for a better-than-foreseen deficit outcome in 2008 if expenditure growth is kept more in check than suggested by the programme as was the case in previous years. However, apparent risks exist for the planned fiscal consolidation back-loaded to 2009 and 2010. In particular, there are no binding expenditure ceilings, there is a lack of information on the measures that underpin the adjustment and there are potentially some risks to expenditure related to planned partnerships with the private sector notably as regards construction of motorways. |
| --- | --- |

(6)

The budgetary outcomes could be better in 2008 and worse in 2009 and 2010 than projected in the programme. In particular, strong growth prospects, already adopted revenue-increasing measures (broadening of the corporate tax base and increase in the maximum ceiling for social contribution foreseen to generate additional revenue of some 0,3 % of GDP) and the likely outflow of participants from the second pension pillar (4) (positive impact estimated at about 0,2 % of GDP) should allow for a better-than-foreseen deficit outcome in 2008 if expenditure growth is kept more in check than suggested by the programme as was the case in previous years. However, apparent risks exist for the planned fiscal consolidation back-loaded to 2009 and 2010. In particular, there are no binding expenditure ceilings, there is a lack of information on the measures that underpin the adjustment and there are potentially some risks to expenditure related to planned partnerships with the private sector notably as regards construction of motorways.

| (7) | In view of this risk assessment, the budgetary stance in the programme seems broadly consistent with a durable correction of the excessive deficit by 2007 as recommended by the Council. A sufficient safety margin against breaching the 3 % of GDP deficit threshold with normal macroeconomic fluctuations (estimated around a structural deficit of 2 % of GDP) would only be provided from 2010 onwards if the envisaged consolidation is strictly implemented (5). Moreover, the budgetary stance in the programme seems insufficient to ensure that the MTO is achieved by the end of the programme period, as envisaged in the programme. In 2008, only a slight improvement (0,25 % of GDP) in the structural balance can be expected when good times are foreseen to occur.
  The pace of adjustment towards the MTO implied by the programme in 2008 should be therefore strengthened to be in line with the Stability and Growth Pact, which specifies that, for euro-area and ERM II Member States, the annual improvement in the structural balance should be 0,5 % of GDP as a benchmark and that the adjustment should be higher in good economic times. Moreover, budgetary room needs to be created for the expected increase in inflows of EU funds in order to maintain the restrictive fiscal stance planned for 2009-2010. The planned adjustment in the remaining years of the programme — in line with the Pact — should be strictly implemented and, if necessary, backed up with measures. Finally, should inflationary pressures emerge, a tighter fiscal stance than foreseen in the programme would be required. |
| --- | --- |

(7)

In view of this risk assessment, the budgetary stance in the programme seems broadly consistent with a durable correction of the excessive deficit by 2007 as recommended by the Council. A sufficient safety margin against breaching the 3 % of GDP deficit threshold with normal macroeconomic fluctuations (estimated around a structural deficit of 2 % of GDP) would only be provided from 2010 onwards if the envisaged consolidation is strictly implemented (5). Moreover, the budgetary stance in the programme seems insufficient to ensure that the MTO is achieved by the end of the programme period, as envisaged in the programme. In 2008, only a slight improvement (0,25 % of GDP) in the structural balance can be expected when good times are foreseen to occur.

The pace of adjustment towards the MTO implied by the programme in 2008 should be therefore strengthened to be in line with the Stability and Growth Pact, which specifies that, for euro-area and ERM II Member States, the annual improvement in the structural balance should be 0,5 % of GDP as a benchmark and that the adjustment should be higher in good economic times. Moreover, budgetary room needs to be created for the expected increase in inflows of EU funds in order to maintain the restrictive fiscal stance planned for 2009-2010. The planned adjustment in the remaining years of the programme — in line with the Pact — should be strictly implemented and, if necessary, backed up with measures. Finally, should inflationary pressures emerge, a tighter fiscal stance than foreseen in the programme would be required.

| (8) | Slovakia appears to be at medium risk with regard to the long-term sustainability of public finances. The long-term budgetary impact of ageing is lower than the EU average, with pension expenditure showing a more limited increase than in many other countries, notably thanks to the 2005 pension reform. However, those projections hinge upon the assumption that a relatively low share of workers will leave the mixed pension system in the first half of 2008, during which they will have the opportunity to do so. The budgetary position in 2007 as estimated in the programme with a structural primary deficit constitutes a risk to sustainable public finances even before considering the long-term budgetary impact of an ageing population. Consolidating the public finances, as planned in the convergence programme, would therefore contribute to reducing risks to the sustainability of public finances. |
| --- | --- |

(8)

Slovakia appears to be at medium risk with regard to the long-term sustainability of public finances. The long-term budgetary impact of ageing is lower than the EU average, with pension expenditure showing a more limited increase than in many other countries, notably thanks to the 2005 pension reform. However, those projections hinge upon the assumption that a relatively low share of workers will leave the mixed pension system in the first half of 2008, during which they will have the opportunity to do so. The budgetary position in 2007 as estimated in the programme with a structural primary deficit constitutes a risk to sustainable public finances even before considering the long-term budgetary impact of an ageing population. Consolidating the public finances, as planned in the convergence programme, would therefore contribute to reducing risks to the sustainability of public finances.

| (9) | The convergence programme seems to be consistent to some extent with the October 2007 implementation report of the national reform programme. It confirms that the government's expenditure priorities (healthcare, education and agriculture) continue to partly diverge from the key challenges identified in the NRP (information society; R&D and innovation; business environment; and education and employment). Moreover, it does not specify whether the national R&D expenditure target of 0,8 % of GDP will be met by 2010 while education spending tends to increasingly rely on EU Structural Funds. The programme does not contain a qualitative assessment of the overall impact of the National Reform Programme within the medium term fiscal strategy but it provides systematic information on the direct budgetary costs associated with the main reforms envisaged in the NRP for 2008. |
| --- | --- |

(9)

The convergence programme seems to be consistent to some extent with the October 2007 implementation report of the national reform programme. It confirms that the government's expenditure priorities (healthcare, education and agriculture) continue to partly diverge from the key challenges identified in the NRP (information society; R&D and innovation; business environment; and education and employment). Moreover, it does not specify whether the national R&D expenditure target of 0,8 % of GDP will be met by 2010 while education spending tends to increasingly rely on EU Structural Funds. The programme does not contain a qualitative assessment of the overall impact of the National Reform Programme within the medium term fiscal strategy but it provides systematic information on the direct budgetary costs associated with the main reforms envisaged in the NRP for 2008.

| (10) | In terms of progress in implementing its ERM II commitments, the fiscal targets in successive convergence programmes have been consistently overachieved but the targets themselves have turned out not to be particularly ambitious given the better-than-originally-assumed initial fiscal position and stronger-than-expected economic performance. As regards income policies, collective bargaining agreements in the public sector have provided an important signal of wage moderation for the whole economy. With a view to containing credit growth, the National Bank of Slovakia has closely monitored risk management practices of banks and strengthened cooperation with home country supervisors of banks operating in Slovakia. |
| --- | --- |

(10)

In terms of progress in implementing its ERM II commitments, the fiscal targets in successive convergence programmes have been consistently overachieved but the targets themselves have turned out not to be particularly ambitious given the better-than-originally-assumed initial fiscal position and stronger-than-expected economic performance. As regards income policies, collective bargaining agreements in the public sector have provided an important signal of wage moderation for the whole economy. With a view to containing credit growth, the National Bank of Slovakia has closely monitored risk management practices of banks and strengthened cooperation with home country supervisors of banks operating in Slovakia.

| (11) | As regards the data requirements specified in the code of conduct for stability and convergence programmes, the programme provides all required and most of the optional data (6). |
| --- | --- |

(11)

As regards the data requirements specified in the code of conduct for stability and convergence programmes, the programme provides all required and most of the optional data (6).

The overall conclusion is that the programme is consistent with a correction of the excessive deficit by 2007. Thereafter, it envisages back-loaded progress towards the MTO in a context of strong growth prospects; in 2008, the envisaged structural improvement is not in line with the Pact and should be more ambitious. Given risks to the budgetary targets from 2009 onwards, the MTO may not be achieved by 2010 as planned in the programme and therefore additional efforts might be required. Moreover, should inflationary pressures emerge, a tighter fiscal stance than foreseen in the programme would be required along with further structural reforms to improve the labour market performance. As regards the long-term sustainability of public finances, Slovakia appears to be at medium risk. With respect to medium-term challenges, the programme does not envisage any progress in reallocating expenditure towards R&D and innovation while it states that education spending should increasingly rely on EU funds.

In view of the above assessment and the recommendation under Article 104(7) of 5 July 2004 and also given the need to ensure sustainable convergence and a smooth participation in ERM II, Slovakia is invited to:

| (i) | exploit the strong growth conditions to strengthen the pace of structural adjustment towards the MTO in 2008 and strictly implement the envisaged structural consolidation thereafter backed up, if necessary, by additional measures as well as more binding medium-term expenditure ceilings; and |
| --- | --- |

(i)

exploit the strong growth conditions to strengthen the pace of structural adjustment towards the MTO in 2008 and strictly implement the envisaged structural consolidation thereafter backed up, if necessary, by additional measures as well as more binding medium-term expenditure ceilings; and

| (ii) | introduce further structural reforms to improve the labour market performance and stand ready to adopt a tighter fiscal stance, in particular in order to contain possible inflationary pressures, especially after the disinflationary effect of past substantial exchange rate appreciation fades out. |
| --- | --- |

(ii)

introduce further structural reforms to improve the labour market performance and stand ready to adopt a tighter fiscal stance, in particular in order to contain possible inflationary pressures, especially after the disinflationary effect of past substantial exchange rate appreciation fades out.

Comparison of key macroeconomic and budgetary projections

| | 2006 | 2007 | 2008 | 2009 | 2010 |
| --- | --- | --- | --- | --- | --- |
| Real GDP
  (% change) | CP Nov 2007 | 8,3 | 8,8 | 6,8 | 5,8 | 5,0 |
| COM Nov 2007 | 8,3 | 8,7 | 7,0 | 6,2 | n.a. |
| CP Dec 2006 | 6,6 | 7,1 | 5,5 | 5,1 | 5,0 |
| HICP inflation
  (%) | CP Nov 2007 | 4,3 | 1,7 | 2,3 | 2,6 | 2,7 |
| COM Nov 2007 | 4,3 | 1,7 | 2,5 | 3,0 | n.a. |
| CP Dec 2006 | 4,4 | 3,1 | 2,0 | 2,4 | 2,6 |
| Output gap (7)

  (% of potential GDP) | CP Nov 2007 | – 0,5 | 1,8 | 2,3 | 2,1 | 1,4 |
| COM Nov 2007 (8) | – 0,8 | 1,0 | 1,3 | 0,8 | n.a. |
| CP Dec 2006 | – 0,9 | 1,0 | 1,6 | 1,9 | 2,4 |
| Net lending/borrowing vis-à-vis the rest of the world
  (% of GDP) | CP Nov 2007 | – 8,4 | – 3,4 | – 1,9 | – 1,1 | – 0,4 |
| COM Nov 2007 | – 7,8 | – 4,2 | – 2,7 | – 1,6 | n.a. |
| CP Dec 2006 | – 6,4 | – 3,1 | – 2,5 | – 2,0 | – 1,6 |
| General government balance
  (% of GDP) | CP Nov 2007 | – 3,7 | – 2,5 | – 2,3 | – 1,8 | – 0,8 |
| COM Nov 2007 | – 3,7 | – 2,7 | – 2,3 | – 2,4 | n.a. |
| CP Dec 2006 | – 3,7 | – 2,9 | – 2,4 | – 1,9 | n.a. |
| Primary balance
  (% of GDP) | CP Nov 2007 | – 2,2 | – 1,0 | – 0,9 | – 0,3 | 0,5 |
| COM Nov 2007 | – 2,2 | – 1,2 | – 0,8 | – 0,9 | n.a. |
| CP Dec 2006 | – 1,9 | – 0,9 | – 0,6 | – 0,2 | n.a. |
| Cyclically-adjusted balance (7)

  (% of GDP) | CP Nov 2007 | – 3,5 | – 3,0 | – 3,0 | – 2,4 | – 1,2 |
| COM Nov 2007 | – 3,4 | – 3,0 | – 2,7 | – 2,6 | n.a. |
| CP Dec 2006 | – 3,4 | – 3,2 | – 2,9 | – 2,5 | n.a. |
| Structural balance (9)

  (% of GDP) | CP Nov 2007 | – 3,1 | – 3,0 | – 3,1 | – 2,4 | – 1,2 |
| COM Nov 2007 | – 3,4 | – 3,0 | – 2,7 | – 2,6 | n.a. |
| CP Dec 2006 | – 3,5 | – 3,2 | – 2,9 | – 2,5 | n.a. |
| Government gross debt
  (% of GDP) | CP Nov 2007 | 30,4 | 30,6 | 30,8 | 30,5 | 29,5 |
| COM Nov 2007 | 30,4 | 30,8 | 30,7 | 30,6 | n.a. |
| CP Dec 2006 | 33,1 | 31,8 | 31,0 | 29,7 | n.a. |
| Convergence programme (CP); Commission services' autumn 2007 economic forecasts (COM); Commission services' calculations, |

2006

2007

2008

2009

2010

Real GDP

(% change)

CP Nov 2007

8,3

8,8

6,8

5,8

5,0

COM Nov 2007

8,3

8,7

7,0

6,2

n.a.

CP Dec 2006

6,6

7,1

5,5

5,1

5,0

HICP inflation

(%)

CP Nov 2007

4,3

1,7

2,3

2,6

2,7

COM Nov 2007

4,3

1,7

2,5

3,0

n.a.

CP Dec 2006

4,4

3,1

2,0

2,4

2,6

Output gap (7)

(% of potential GDP)

CP Nov 2007

– 0,5

1,8

2,3

2,1

1,4

COM Nov 2007 (8)

– 0,8

1,0

1,3

0,8

n.a.

CP Dec 2006

– 0,9

1,0

1,6

1,9

2,4

Net lending/borrowing vis-à-vis the rest of the world

(% of GDP)

CP Nov 2007

– 8,4

– 3,4

– 1,9

– 1,1

– 0,4

COM Nov 2007

– 7,8

– 4,2

– 2,7

– 1,6

n.a.

CP Dec 2006

– 6,4

– 3,1

– 2,5

– 2,0

– 1,6

General government balance

(% of GDP)

CP Nov 2007

– 3,7

– 2,5

– 2,3

– 1,8

– 0,8

COM Nov 2007

– 3,7

– 2,7

– 2,3

– 2,4

n.a.

CP Dec 2006

– 3,7

– 2,9

– 2,4

– 1,9

n.a.

Primary balance

(% of GDP)

CP Nov 2007

– 2,2

– 1,0

– 0,9

– 0,3

0,5

COM Nov 2007

– 2,2

– 1,2

– 0,8

– 0,9

n.a.

CP Dec 2006

– 1,9

– 0,9

– 0,6

– 0,2

n.a.

Cyclically-adjusted balance (7)

(% of GDP)

CP Nov 2007

– 3,5

– 3,0

– 3,0

– 2,4

– 1,2

COM Nov 2007

– 3,4

– 3,0

– 2,7

– 2,6

n.a.

CP Dec 2006

– 3,4

– 3,2

– 2,9

– 2,5

n.a.

Structural balance (9)

(% of GDP)

CP Nov 2007

– 3,1

– 3,0

– 3,1

– 2,4

– 1,2

COM Nov 2007

– 3,4

– 3,0

– 2,7

– 2,6

n.a.

CP Dec 2006

– 3,5

– 3,2

– 2,9

– 2,5

n.a.

Government gross debt

(% of GDP)

CP Nov 2007

30,4

30,6

30,8

30,5

29,5

COM Nov 2007

30,4

30,8

30,7

30,6

n.a.

CP Dec 2006

33,1

31,8

31,0

29,7

n.a.

Convergence programme (CP); Commission services' autumn 2007 economic forecasts (COM); Commission services' calculations,

---

(1)  OJ L 209, 2.8.1997, p. 1. Regulation as amended by Regulation (EC) No 1055/2005 (OJ L 174, 7.7.2005, p. 1). The documents referred to in this text can be found at the following website:

http://ec.europa.eu/economy_finance/about/activities/sgp/main_en.htm

(2)  The assessment takes notably into account the Commission services' autumn forecast and the Commission assessment of the October 2007 implementation report of the national reform programme.

(3)  OJ C 72, 29.3.2007, p. 1.

(4)  In the first half of 2008 the second pension pillar will be temporarily opened, allowing current participants to leave and new participants to join the scheme.

(5)  The output gap estimates presented in the programme differ substantially from the Commission services estimates that are based on the information in the programme using the common agreed methodology.

(6)  In particular, the data on the functional classification of government expenditure (COFOG) for 2010 are not provided.

(7)  Output gaps and cyclically-adjusted balances according to the programmes as recalculated by Commission services on the basis of the information in the programmes.

(8)  Based on estimated potential growth of 6,4 %, 6,7 %, 6,7 % and 6,7 % respectively in the period 2006-2009.

(9)  Cyclically-adjusted balance excluding one-off and other temporary measures. One-off and other temporary measures are 0,4 % of GDP in 2006 — deficit-increasing and 0,1 % of GDP in 2008 — deficit-reducing according to the most recent update of the programme. There are no one-off measures in the Commission services' forecast.

Sources:

Convergence programme (CP); Commission services' autumn 2007 economic forecasts (COM); Commission services' calculations,

---

IV Notices

NOTICES FROM EUROPEAN UNION INSTITUTIONS AND BODIES

Commission

| 22.2.2008 | EN | Official Journal of the European Union | C 49/48 |
| --- | --- | --- | --- |

22.2.2008

EN

Official Journal of the European Union

C 49/48

---

Euro exchange rates (1)

21 February 2008

(2008/C 49/12)

1 euro=

| | Currency | Exchange rate |
| --- | --- | --- |
| USD | US dollar | 1,4736 |
| JPY | Japanese yen | 159,27 |
| DKK | Danish krone | 7,4551 |
| GBP | Pound sterling | 0,7527 |
| SEK | Swedish krona | 9,3136 |
| CHF | Swiss franc | 1,6205 |
| ISK | Iceland króna | 98,77 |
| NOK | Norwegian krone | 7,8615 |
| BGN | Bulgarian lev | 1,9558 |
| CZK | Czech koruna | 25,088 |
| EEK | Estonian kroon | 15,6466 |
| HUF | Hungarian forint | 264,02 |
| LTL | Lithuanian litas | 3,4528 |
| LVL | Latvian lats | 0,6964 |
| PLN | Polish zloty | 3,5666 |
| RON | Romanian leu | 3,6533 |
| SKK | Slovak koruna | 33,06 |
| TRY | Turkish lira | 1,7743 |
| AUD | Australian dollar | 1,6037 |
| CAD | Canadian dollar | 1,4925 |
| HKD | Hong Kong dollar | 11,4937 |
| NZD | New Zealand dollar | 1,8415 |
| SGD | Singapore dollar | 2,078 |
| KRW | South Korean won | 1 396,97 |
| ZAR | South African rand | 11,4705 |
| CNY | Chinese yuan renminbi | 10,5234 |
| HRK | Croatian kuna | 7,2839 |
| IDR | Indonesian rupiah | 13 505,54 |
| MYR | Malaysian ringgit | 4,7465 |
| PHP | Philippine peso | 59,784 |
| RUB | Russian rouble | 36,177 |
| THB | Thai baht | 46,271 |
| BRL | Brazilian real | 2,5241 |
| MXN | Mexican peso | 15,8729 |

Currency

Exchange rate

USD

US dollar

1,4736

JPY

Japanese yen

159,27

DKK

Danish krone

7,4551

GBP

Pound sterling

0,7527

SEK

Swedish krona

9,3136

CHF

Swiss franc

1,6205

ISK

Iceland króna

98,77

NOK

Norwegian krone

7,8615

BGN

Bulgarian lev

1,9558

CZK

Czech koruna

25,088

EEK

Estonian kroon

15,6466

HUF

Hungarian forint

264,02

LTL

Lithuanian litas

3,4528

LVL

Latvian lats

0,6964

PLN

Polish zloty

3,5666

RON

Romanian leu

3,6533

SKK

Slovak koruna

33,06

TRY

Turkish lira

1,7743

AUD

Australian dollar

1,6037

CAD

Canadian dollar

1,4925

HKD

Hong Kong dollar

11,4937

NZD

New Zealand dollar

1,8415

SGD

Singapore dollar

2,078

KRW

South Korean won

1 396,97

ZAR

South African rand

11,4705

CNY

Chinese yuan renminbi

10,5234

HRK

Croatian kuna

7,2839

IDR

Indonesian rupiah

13 505,54

MYR

Malaysian ringgit

4,7465

PHP

Philippine peso

59,784

RUB

Russian rouble

36,177

THB

Thai baht

46,271

BRL

Brazilian real

2,5241

MXN

Mexican peso

15,8729

---

(1)

Source: reference exchange rate published by the ECB.

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