# Official Journal C 142/2010

| | ISSN 1725-2423
  doi:10.3000/17252423.C_2010.142.eng |
| --- | --- |
| Official Journal
  of the European Union | C 142 |
| | |
| English edition | Information and Notices | Volume 531 June 2010 |

ISSN 1725-2423

doi:10.3000/17252423.C_2010.142.eng

Official Journal

of the European Union

C 142

English edition

Information and Notices

Volume 531 June 2010

---

| Notice No | Contents | page |
| --- | --- | --- |
| | I   Resolutions, recommendations and opinions |
| | OPINIONS |
| | Council |
| 2010/C 142/01 | Council Opinion on the updated convergence programme of Hungary, 2009-2012 | 1 |
| 2010/C 142/02 | Council Opinion on the updated stability programme of Ireland, 2009-2014 | 7 |
| 2010/C 142/03 | Council Opinion on the updated stability programme of Italy, 2009-2012 | 13 |
| 2010/C 142/04 | Council Opinion on the updated convergence programme of Latvia, 2009-2012 | 19 |

Notice No

Contents

page

I   Resolutions, recommendations and opinions

OPINIONS

Council

2010/C 142/01

Council Opinion on the updated convergence programme of Hungary, 2009-2012

1

2010/C 142/02

Council Opinion on the updated stability programme of Ireland, 2009-2014

7

2010/C 142/03

Council Opinion on the updated stability programme of Italy, 2009-2012

13

2010/C 142/04

Council Opinion on the updated convergence programme of Latvia, 2009-2012

19

| | IV   Notices |
| --- | --- |
| | NOTICES FROM EUROPEAN UNION INSTITUTIONS, BODIES, OFFICES AND AGENCIES |
| | European Commission |
| 2010/C 142/05 | Euro exchange rates | 25 |
| 2010/C 142/06 | Opinion of the Advisory Committee on restrictive agreements and dominant position given at its meeting of 15 March 2010 regarding a draft decision relating to Case COMP/39.351 — Swedish Interconnectors — Rapporteur: Romania | 26 |
| 2010/C 142/07 | Final Report of the Hearing Officer — Case COMP/39.351 — Swedish Interconnectors | 27 |
| 2010/C 142/08 | Summary of Commission Decision of 14 April 2010 relating to a proceeding under Article 102 of the Treaty on the Functioning of the European Union and Article 54 of the EEA Agreement (Case COMP/39.351 — Swedish Interconnectors) (
  1
  ) | 28 |

IV   Notices

NOTICES FROM EUROPEAN UNION INSTITUTIONS, BODIES, OFFICES AND AGENCIES

European Commission

2010/C 142/05

Euro exchange rates

25

2010/C 142/06

Opinion of the Advisory Committee on restrictive agreements and dominant position given at its meeting of 15 March 2010 regarding a draft decision relating to Case COMP/39.351 — Swedish Interconnectors — Rapporteur: Romania

26

2010/C 142/07

Final Report of the Hearing Officer — Case COMP/39.351 — Swedish Interconnectors

27

2010/C 142/08

Summary of Commission Decision of 14 April 2010 relating to a proceeding under Article 102 of the Treaty on the Functioning of the European Union and Article 54 of the EEA Agreement (Case COMP/39.351 — Swedish Interconnectors) (
  1
  )

1

28

| | V   Announcements |
| --- | --- |
| | ADMINISTRATIVE PROCEDURES |
| | European Investment Bank |
| 2010/C 142/09 | Call for proposals — The European Investment Bank proposes three new EIBURS sponsorships within its EIB-Universities Research Action | 30 |
| | PROCEDURES RELATING TO THE IMPLEMENTATION OF COMPETITION POLICY |
| | European Commission |
| 2010/C 142/10 | Prior notification of a concentration (Case COMP/M.5906 — One Equity Partners/Constantia) (
  1
  ) | 33 |
| 2010/C 142/11 | Prior notification of a concentration (Case COMP/M.5862 — Mahle/Behr/Behr Industry) (
  1
  ) | 34 |
| 2010/C 142/12 | Communication from the French Government concerning Directive 94/22/EC of the European Parliament and of the Council on the conditions for granting and using authorisations for the prospection, exploration and production of hydrocarbons (Notice regarding applications for exclusive licences to prospect for oil and gas, designated the Langlade Licence and the Hermine Licence)
   (
  1
  ) | 35 |
| 2010/C 142/13 | Communication from the French Government concerning Directive 94/22/EC of the European Parliament and of the Council on the conditions for granting and using authorisations for the prospection, exploration and production of hydrocarbons (Notice regarding applications for exclusive licences to prospect for oil and gas, entitled the Sézanne Licences, one submitted by Concorde Energy LLC and the other by Realm Energy International)
   (
  1
  ) | 37 |

V   Announcements

ADMINISTRATIVE PROCEDURES

European Investment Bank

2010/C 142/09

Call for proposals — The European Investment Bank proposes three new EIBURS sponsorships within its EIB-Universities Research Action

30

PROCEDURES RELATING TO THE IMPLEMENTATION OF COMPETITION POLICY

European Commission

2010/C 142/10

Prior notification of a concentration (Case COMP/M.5906 — One Equity Partners/Constantia) (
  1
  )

1

33

2010/C 142/11

Prior notification of a concentration (Case COMP/M.5862 — Mahle/Behr/Behr Industry) (
  1
  )

1

34

2010/C 142/12

Communication from the French Government concerning Directive 94/22/EC of the European Parliament and of the Council on the conditions for granting and using authorisations for the prospection, exploration and production of hydrocarbons (Notice regarding applications for exclusive licences to prospect for oil and gas, designated the Langlade Licence and the Hermine Licence)
   (
  1
  )

(Notice regarding applications for exclusive licences to prospect for oil and gas, designated the Langlade Licence and the Hermine Licence)

1

35

2010/C 142/13

Communication from the French Government concerning Directive 94/22/EC of the European Parliament and of the Council on the conditions for granting and using authorisations for the prospection, exploration and production of hydrocarbons (Notice regarding applications for exclusive licences to prospect for oil and gas, entitled the Sézanne Licences, one submitted by Concorde Energy LLC and the other by Realm Energy International)
   (
  1
  )

(Notice regarding applications for exclusive licences to prospect for oil and gas, entitled the Sézanne Licences, one submitted by Concorde Energy LLC and the other by Realm Energy International)

1

37

| | |
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| | (1)   Text with EEA relevance |

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(1)   Text with EEA relevance

1

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

EN

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I Resolutions, recommendations and opinions

OPINIONS

Council

| 1.6.2010 | EN | Official Journal of the European Union | C 142/1 |
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1.6.2010

EN

Official Journal of the European Union

C 142/1

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COUNCIL OPINION

on the updated convergence programme of Hungary, 2009-2012

2010/C 142/01

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty on the Functioning of the European Union,

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 26 April 2010 the Council examined the updated convergence programme of Hungary, which covers the period 2009 to 2012. |
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(1)

On 26 April 2010 the Council examined the updated convergence programme of Hungary, which covers the period 2009 to 2012.

| (2) | Hungary was in a fragile economic condition when the financial crisis broke out in autumn 2008. The mid-2006 fiscal policy reversal, which was aimed at correcting the existing economic imbalances and restraining the accumulation of the public debt, successfully reduced the budget deficit to 3,8 % of GDP by 2008 (compared to 9,3 % of GDP in 2006) but the adjustment was incomplete when the global financial crisis hit. Moreover, the share of foreign-exchange-denominated debt was relatively high.
  Gross financing needs became more difficult to meet, reflecting investors’ concerns about the sustainability of the budgetary position, the country's high external debt, and the drop in potential growth. Taken together, these factors required a stronger economic policy response, measures to support the banking sector, and significant external assistance from international institutions of EUR 20 billion, including EUR 6,5 billion from the EU (of which EUR 5,5 billion have been disbursed). Since the second half of March 2009, against the background of strong stabilisation and adjustment efforts, access to market-based financing has been regained. Moreover, due to the significant contraction in domestic demand in 2009, a dramatic improvement was registered in the current account, mostly through the trade balance. The exchange rate remained broadly stable since July 2009 and the central bank was able to cut the main policy rate by cumulative 375 basis points between mid-2009 and early 2010. Given the lack of fiscal space and investors’ concerns, the Government has continued to implement its fiscal consolidation policy and only adopted budgetary neutral measures to support the economic recovery. Continuing fiscal consolidation to bring the debt on a declining path and further improve the long-term sustainability of public finances remains a key challenge for Hungary. |
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(2)

Hungary was in a fragile economic condition when the financial crisis broke out in autumn 2008. The mid-2006 fiscal policy reversal, which was aimed at correcting the existing economic imbalances and restraining the accumulation of the public debt, successfully reduced the budget deficit to 3,8 % of GDP by 2008 (compared to 9,3 % of GDP in 2006) but the adjustment was incomplete when the global financial crisis hit. Moreover, the share of foreign-exchange-denominated debt was relatively high.

Gross financing needs became more difficult to meet, reflecting investors’ concerns about the sustainability of the budgetary position, the country's high external debt, and the drop in potential growth. Taken together, these factors required a stronger economic policy response, measures to support the banking sector, and significant external assistance from international institutions of EUR 20 billion, including EUR 6,5 billion from the EU (of which EUR 5,5 billion have been disbursed). Since the second half of March 2009, against the background of strong stabilisation and adjustment efforts, access to market-based financing has been regained. Moreover, due to the significant contraction in domestic demand in 2009, a dramatic improvement was registered in the current account, mostly through the trade balance. The exchange rate remained broadly stable since July 2009 and the central bank was able to cut the main policy rate by cumulative 375 basis points between mid-2009 and early 2010. Given the lack of fiscal space and investors’ concerns, the Government has continued to implement its fiscal consolidation policy and only adopted budgetary neutral measures to support the economic recovery. Continuing fiscal consolidation to bring the debt on a declining path and further improve the long-term sustainability of public finances remains a key challenge for Hungary.

| (3) | Although much of the observed decline in actual GDP in the context of the crisis is cyclical, the level of potential output has also been negatively affected. In addition, the crisis may also affect potential growth in the medium term through lower investment, constraints in credit availability and increasing structural unemployment. Moreover, the impact of the economic crisis compounds the negative effects of demographic ageing on potential output and the sustainability of public finances. Against this background it will be essential to accelerate the pace of structural reforms with the aim of supporting potential growth. In particular, for Hungary it is important to undertake reforms aimed at increasing labour force participation and to rebuild its ability to attract FDI. |
| --- | --- |

(3)

Although much of the observed decline in actual GDP in the context of the crisis is cyclical, the level of potential output has also been negatively affected. In addition, the crisis may also affect potential growth in the medium term through lower investment, constraints in credit availability and increasing structural unemployment. Moreover, the impact of the economic crisis compounds the negative effects of demographic ageing on potential output and the sustainability of public finances. Against this background it will be essential to accelerate the pace of structural reforms with the aim of supporting potential growth. In particular, for Hungary it is important to undertake reforms aimed at increasing labour force participation and to rebuild its ability to attract FDI.

| (4) | The macroeconomic scenario underlying the programme envisages that, after a contraction of 6,7 % in 2009, real GDP will decline further by 0,3 % in 2010 to resume growing by 3,75 % in 2011 and 2012. This is slightly more optimistic than the Commission services’ autumn 2009 forecast, according to which annual GDP growth would decline by 0,5 % in 2010 and grow by 3,1 % in 2011. However, in view of recent information, including the better-than-expected preliminary 2009 GDP figure of – 6,3 % of GDP, the projection for 2010 appears plausible, while the scenario remains slightly favourable in the outer years. According to the programme, growth is expected to rely primarily on the rebound of net exports, with private consumption still contracting in 2010 by around 2,5 %, which according to the most recent information, could be slightly worse. Domestic demand projections look broadly plausible, but the forecast for imports and investment appears to be optimistic. On balance, the macroeconomic scenario seems to be plausible in 2010 and slightly favourable in 2011 and 2012. The nominal path of the reference scenario is driven by the congruous cyclical position of labour and product markets. Specifically, while the significant negative output gap asserts downward pressure on prices, the high unemployment implies the deceleration of wages. Overall, inflation figures appear plausible in 2010 and slightly on the low side thereafter. The programme's macroeconomic scenario is consistent with the underlying monetary and exchange rate assumptions. |
| --- | --- |

(4)

The macroeconomic scenario underlying the programme envisages that, after a contraction of 6,7 % in 2009, real GDP will decline further by 0,3 % in 2010 to resume growing by 3,75 % in 2011 and 2012. This is slightly more optimistic than the Commission services’ autumn 2009 forecast, according to which annual GDP growth would decline by 0,5 % in 2010 and grow by 3,1 % in 2011. However, in view of recent information, including the better-than-expected preliminary 2009 GDP figure of – 6,3 % of GDP, the projection for 2010 appears plausible, while the scenario remains slightly favourable in the outer years. According to the programme, growth is expected to rely primarily on the rebound of net exports, with private consumption still contracting in 2010 by around 2,5 %, which according to the most recent information, could be slightly worse. Domestic demand projections look broadly plausible, but the forecast for imports and investment appears to be optimistic. On balance, the macroeconomic scenario seems to be plausible in 2010 and slightly favourable in 2011 and 2012. The nominal path of the reference scenario is driven by the congruous cyclical position of labour and product markets. Specifically, while the significant negative output gap asserts downward pressure on prices, the high unemployment implies the deceleration of wages. Overall, inflation figures appear plausible in 2010 and slightly on the low side thereafter. The programme's macroeconomic scenario is consistent with the underlying monetary and exchange rate assumptions.

| (5) | The programme estimates the general government deficit in 2009 at 3,9 % of GDP in 2009, after 3,8 % in 2008. The headline deficit has been broadly stabilised in spite of the strong economic deterioration associated with the global economic downturn and its large unfavourable budgetary effects. This was achieved thanks to the implementation of expenditure cuts, partly of a structural nature and in particular in public wages, pensions, and social benefits. As a result, there was a significant improvement in the structural balance by nearly 3 % of GDP. In addition, a broadly deficit neutral tax reshuffling was implemented to boost the competitiveness of the economy by lowering the tax burden on labour and increase the weight of consumption taxes.
  Given the high public debt level and the stress in financial markets, the authorities have been in a position to support the economic recovery only by taking measures that did not have a budgetary impact. In line with the exit strategy advocated by the Council, and with a view to correcting the excessive deficit by 2011, taking also into account the high public debt-to-GDP ratio, the restrictive fiscal stance in 2009 is planned to be continued over the period 2010-2011. |
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(5)

The programme estimates the general government deficit in 2009 at 3,9 % of GDP in 2009, after 3,8 % in 2008. The headline deficit has been broadly stabilised in spite of the strong economic deterioration associated with the global economic downturn and its large unfavourable budgetary effects. This was achieved thanks to the implementation of expenditure cuts, partly of a structural nature and in particular in public wages, pensions, and social benefits. As a result, there was a significant improvement in the structural balance by nearly 3 % of GDP. In addition, a broadly deficit neutral tax reshuffling was implemented to boost the competitiveness of the economy by lowering the tax burden on labour and increase the weight of consumption taxes.

Given the high public debt level and the stress in financial markets, the authorities have been in a position to support the economic recovery only by taking measures that did not have a budgetary impact. In line with the exit strategy advocated by the Council, and with a view to correcting the excessive deficit by 2011, taking also into account the high public debt-to-GDP ratio, the restrictive fiscal stance in 2009 is planned to be continued over the period 2010-2011.

| (6) | The budget target for 2010 in the programme is a deficit of 3,8 % of GDP, in line with the Council recommendation under Article 104(7) TEC of 7 July 2009 and with the 2010 budget adopted on 30 November 2009. The programme projects revenue to stabilise in nominal terms in 2010, which implies both a further decrease in real terms and a lowering revenue ratio (from 45,9 % in 2009 to 45 % in 2010). On top of the continued widening of the negative output gap, growth composition effects associated with the increasing weight of net exports in the economy and the concomitant lowering share of domestic demand largely explain the decrease of the revenue ratio. In order to offset the fall of the revenue ratio and improve the budgetary balance at the same time, the programme aims at decreasing the expenditure ratio (from 49,8 % in 2009 to 48,8 % in 2010). It mainly relies on structural reforms and specific saving measures (including the pension system, social benefits, public wages and transfers to the local governments as well as to the long distance public transport) amounting to 2 % of GDP, adopted in 2009 and with a budgetary impact in 2010. Although these measures in total should exceed 2 percentage points of GDP in 2010, the structural deficit as recalculated by the Commission services according to the commonly agreed methodology based on the programme data is expected to improve by less than 0,25 percentage point of GDP. The implementation of a significant part of the saving measures was necessary just to counterbalance the underlying upward trend of certain expenditures. In addition, the revenue ratio is expected to decline more than it would have resulted from the use of standard elasticities given both the slight deficit increasing nature of the tax reshuffling measures in 2010 as well as the advance purchases of tobacco stamps ahead of the excise duty increase as of 2010. |
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(6)

The budget target for 2010 in the programme is a deficit of 3,8 % of GDP, in line with the Council recommendation under Article 104(7) TEC of 7 July 2009 and with the 2010 budget adopted on 30 November 2009. The programme projects revenue to stabilise in nominal terms in 2010, which implies both a further decrease in real terms and a lowering revenue ratio (from 45,9 % in 2009 to 45 % in 2010). On top of the continued widening of the negative output gap, growth composition effects associated with the increasing weight of net exports in the economy and the concomitant lowering share of domestic demand largely explain the decrease of the revenue ratio. In order to offset the fall of the revenue ratio and improve the budgetary balance at the same time, the programme aims at decreasing the expenditure ratio (from 49,8 % in 2009 to 48,8 % in 2010). It mainly relies on structural reforms and specific saving measures (including the pension system, social benefits, public wages and transfers to the local governments as well as to the long distance public transport) amounting to 2 % of GDP, adopted in 2009 and with a budgetary impact in 2010. Although these measures in total should exceed 2 percentage points of GDP in 2010, the structural deficit as recalculated by the Commission services according to the commonly agreed methodology based on the programme data is expected to improve by less than 0,25 percentage point of GDP. The implementation of a significant part of the saving measures was necessary just to counterbalance the underlying upward trend of certain expenditures. In addition, the revenue ratio is expected to decline more than it would have resulted from the use of standard elasticities given both the slight deficit increasing nature of the tax reshuffling measures in 2010 as well as the advance purchases of tobacco stamps ahead of the excise duty increase as of 2010.

| (7) | The main goal of the programme's medium-term strategy is to reduce the general government deficit from 3,8 % of GDP in 2010 to below 3 % by 2011 (2,8 %) and then further to 2,5 % in 2012. The 2011 and 2012 deficit targets result in a recalculated structural deficit of 1,25 % and 2,5 % of GDP, respectively. It means that a structural improvement by around 3 percentage points of GDP in 2009 is projected to be followed by a 0,1 % of GDP improvement in the period 2010-2011 (compared to an almost 1 % of GDP deterioration in the Commission services Autumn 2009 forecast). In 2012, the structural balance would even deteriorate by 1 % of GDP. Regarding 2011, despite the recovery of the economy, the revenue ratio is expected to further decline in view of (i) the increasing weight of net exports which makes growth less tax-rich; (ii) the lagged effect of the contraction of the economy; and (iii) the adoption in 2009 of a reduction of the overall tax burden linked to the personal income tax as of 2011. The acceleration of the absorption of the EU funds may only partly offset these developments, leaving an overall decline in the revenue ratio by 0,8 % of GDP. The convergence programme broadly lists a number of possible measures on the expenditure side that would more than offset the fall of the revenue ratio and bring the deficit to 2,8 % of GDP. They refer mainly to a further real wage decrease in the public sector, an additional decline of social benefits in real terms and strict discipline of the management at the budget chapters. However, the bulk of these measures has not been specified in detail. The medium-term objective (MTO) is a structural balance of – 1,5 % of GDP, which given the most recent projections and debt levels reflects the objectives of the Pact. The programme aims at complying with the MTO in 2011, which is projected to be attained already in 2010 and maintained in 2011, according to the structural balance recalculated by the Commission services according to the commonly agreed methodology and given the substantial output gap projected for 2010 and 2011. However, further consolidation efforts would be needed to maintain the MTO in 2011 and prevent a structural deterioration in 2012. The measures backing the 2012 target should also be better specified. |
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(7)

The main goal of the programme's medium-term strategy is to reduce the general government deficit from 3,8 % of GDP in 2010 to below 3 % by 2011 (2,8 %) and then further to 2,5 % in 2012. The 2011 and 2012 deficit targets result in a recalculated structural deficit of 1,25 % and 2,5 % of GDP, respectively. It means that a structural improvement by around 3 percentage points of GDP in 2009 is projected to be followed by a 0,1 % of GDP improvement in the period 2010-2011 (compared to an almost 1 % of GDP deterioration in the Commission services Autumn 2009 forecast). In 2012, the structural balance would even deteriorate by 1 % of GDP. Regarding 2011, despite the recovery of the economy, the revenue ratio is expected to further decline in view of (i) the increasing weight of net exports which makes growth less tax-rich; (ii) the lagged effect of the contraction of the economy; and (iii) the adoption in 2009 of a reduction of the overall tax burden linked to the personal income tax as of 2011. The acceleration of the absorption of the EU funds may only partly offset these developments, leaving an overall decline in the revenue ratio by 0,8 % of GDP. The convergence programme broadly lists a number of possible measures on the expenditure side that would more than offset the fall of the revenue ratio and bring the deficit to 2,8 % of GDP. They refer mainly to a further real wage decrease in the public sector, an additional decline of social benefits in real terms and strict discipline of the management at the budget chapters. However, the bulk of these measures has not been specified in detail. The medium-term objective (MTO) is a structural balance of – 1,5 % of GDP, which given the most recent projections and debt levels reflects the objectives of the Pact. The programme aims at complying with the MTO in 2011, which is projected to be attained already in 2010 and maintained in 2011, according to the structural balance recalculated by the Commission services according to the commonly agreed methodology and given the substantial output gap projected for 2010 and 2011. However, further consolidation efforts would be needed to maintain the MTO in 2011 and prevent a structural deterioration in 2012. The measures backing the 2012 target should also be better specified.

| (8) | The budgetary outcomes could be worse than projected in the programme. In 2010, revenue could turn out lower than expected of 0,25 % of GDP, in particular since in view of the earlier cut-off date the programme did not take into account the Constitutional Court's decision of revoking the general value-based property tax adopted by the Parliament. On the expenditure side, some overruns are expected due to the costs linked to the re-nationalising of the airline company MALEV and the fact that the planned reduction of the subsidy for the long distance public transport system is not fully underpinned by structural measures. The programme also foresees an additional saving at the budget chapters due to the recently established system of treasures, but this is not ensured as it is not backed by specific measures. Finally, the one-off revenue of 0,25 % of GDP in 2010 from the shift of the eligible employees and pensioners from the private pillar into the public of the pension system still has to be confirmed in the context of the notification procedure. On the other hand, there are budgetary reserves of around 0,25 % of GDP that could be frozen and contingency expenditure cuts of 0,2 % of GDP that could be made to compensate for adverse developments. Regarding 2011 and 2012, slippages compared to the programme can be expected both on the revenue and the expenditure side, on top of the base effects including from the elimination of the property tax. The speed of the recovery of the economy and the share of the private consumption expenditure in 2011 and beyond in the programme is slightly more optimistic than in the Commission services’ projection, which implies that the tax revenues in the programme might be on the high side. Regarding expenditure, the bulk of the savings measures foreseen in the programme to counterbalance the continuous fall of the revenue ratio is not yet underpinned by concrete decisions. Moreover, the programme does not take into account the central bank losses, which are expected to increase the deficit by 0,1-0,2 % of GDP in 2011 and 0,3-0,4 % in 2012 based on current estimations.
  Finally, expenditure could turn out to be higher linked to losses of state-owned companies. At the same time, budgetary reserves to compensate against slippages are only around 0,2 % of GDP in 2011 and 0,4 % in 2012, which compares with 0,8 % in 2010. Although in the recent years the targeted budget deficits have been met, the risks associated with Hungary's track record are, in light of the substantial slippages in earlier years, at best neutral. Therefore, there are considerable risks that the deficit outcomes may be worse than planned in the programme. |
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(8)

The budgetary outcomes could be worse than projected in the programme. In 2010, revenue could turn out lower than expected of 0,25 % of GDP, in particular since in view of the earlier cut-off date the programme did not take into account the Constitutional Court's decision of revoking the general value-based property tax adopted by the Parliament. On the expenditure side, some overruns are expected due to the costs linked to the re-nationalising of the airline company MALEV and the fact that the planned reduction of the subsidy for the long distance public transport system is not fully underpinned by structural measures. The programme also foresees an additional saving at the budget chapters due to the recently established system of treasures, but this is not ensured as it is not backed by specific measures. Finally, the one-off revenue of 0,25 % of GDP in 2010 from the shift of the eligible employees and pensioners from the private pillar into the public of the pension system still has to be confirmed in the context of the notification procedure. On the other hand, there are budgetary reserves of around 0,25 % of GDP that could be frozen and contingency expenditure cuts of 0,2 % of GDP that could be made to compensate for adverse developments. Regarding 2011 and 2012, slippages compared to the programme can be expected both on the revenue and the expenditure side, on top of the base effects including from the elimination of the property tax. The speed of the recovery of the economy and the share of the private consumption expenditure in 2011 and beyond in the programme is slightly more optimistic than in the Commission services’ projection, which implies that the tax revenues in the programme might be on the high side. Regarding expenditure, the bulk of the savings measures foreseen in the programme to counterbalance the continuous fall of the revenue ratio is not yet underpinned by concrete decisions. Moreover, the programme does not take into account the central bank losses, which are expected to increase the deficit by 0,1-0,2 % of GDP in 2011 and 0,3-0,4 % in 2012 based on current estimations.

Finally, expenditure could turn out to be higher linked to losses of state-owned companies. At the same time, budgetary reserves to compensate against slippages are only around 0,2 % of GDP in 2011 and 0,4 % in 2012, which compares with 0,8 % in 2010. Although in the recent years the targeted budget deficits have been met, the risks associated with Hungary's track record are, in light of the substantial slippages in earlier years, at best neutral. Therefore, there are considerable risks that the deficit outcomes may be worse than planned in the programme.

| (9) | Government gross debt is estimated at 78 % of GDP in 2009, up from around 73 % in the year before. This increase is explained by the general government deficit and the negative nominal GDP growth. According to the programme, the debt ratio is projected to remain over the Treaty reference value throughout the programme period. A further rise to 79 % of GDP in 2010 is projected before it would start declining to 77 % and 73,25 % in 2011 and 2012, respectively. The expected improvement in macroeconomic conditions and the start of the amortisation of the international economic assistance from 2011 are the main factors behind such positive developments. In view of the negative risks to the budgetary targets and the possible stock flow adjustments, the evolution of the debt ratio could be considerably less favourable than projected in the programme, especially as from 2011. From 2010 onwards, the debt ratio diminishes sufficiently towards the reference value. |
| --- | --- |

(9)

Government gross debt is estimated at 78 % of GDP in 2009, up from around 73 % in the year before. This increase is explained by the general government deficit and the negative nominal GDP growth. According to the programme, the debt ratio is projected to remain over the Treaty reference value throughout the programme period. A further rise to 79 % of GDP in 2010 is projected before it would start declining to 77 % and 73,25 % in 2011 and 2012, respectively. The expected improvement in macroeconomic conditions and the start of the amortisation of the international economic assistance from 2011 are the main factors behind such positive developments. In view of the negative risks to the budgetary targets and the possible stock flow adjustments, the evolution of the debt ratio could be considerably less favourable than projected in the programme, especially as from 2011. From 2010 onwards, the debt ratio diminishes sufficiently towards the reference value.

| (10) | Medium-term debt projections until 2020 that assume GDP growth rates will only gradually recover to the values projected before the crisis and tax ratios will return to pre-crisis levels show that the budgetary development envisaged in the programme, taken at face value, would be enough to stabilise the debt ratio by 2020. |
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(10)

Medium-term debt projections until 2020 that assume GDP growth rates will only gradually recover to the values projected before the crisis and tax ratios will return to pre-crisis levels show that the budgetary development envisaged in the programme, taken at face value, would be enough to stabilise the debt ratio by 2020.

| (11) | Pension reforms implemented in 2009 are estimated to reduce the increase in future age-related expenditure, which after this reform is projected to be clearly below the EU average. The budgetary position in 2009 as estimated in the programme improved from the starting position of the previous programme. Thus, the budgetary impact of population ageing on the sustainability gap has been largely mitigated. Ensuring high primary surpluses over the medium term and implementing the pension reform rigorously, as already foreseen in the programme, will reduce the long-term sustainability risks of public finances, which were assessed in the Commission 2009 Sustainability Report (2) as medium. After the validation of the projections based on the 2009 pension reforms by the EPC in February 2010, the updated sustainability calculations indicate that the sustainability risk is low. |
| --- | --- |

(11)

Pension reforms implemented in 2009 are estimated to reduce the increase in future age-related expenditure, which after this reform is projected to be clearly below the EU average. The budgetary position in 2009 as estimated in the programme improved from the starting position of the previous programme. Thus, the budgetary impact of population ageing on the sustainability gap has been largely mitigated. Ensuring high primary surpluses over the medium term and implementing the pension reform rigorously, as already foreseen in the programme, will reduce the long-term sustainability risks of public finances, which were assessed in the Commission 2009 Sustainability Report (2) as medium. After the validation of the projections based on the 2009 pension reforms by the EPC in February 2010, the updated sustainability calculations indicate that the sustainability risk is low.

| (12) | Regarding the institutional features of public finances, one of the most important recent developments is the implementation of the new fiscal framework, which relies on the fiscal responsibility law (FRL) and the amendment of the organic law adopted in November 2008. Overall, the new fiscal framework is expected to contribute to improving transparency and sustainability of public finances. The FRL stipulates that as a general rule the determination of the future primary balances in a medium-term framework should be consistent with a real debt rule. Based on the FRL, an independent Fiscal Council has been established and started its operation. The 2010 budget has already been prepared broadly in line with the new fiscal framework and the 2011 budget will need to be fully in compliance with all the elements of the fiscal framework. Concerning the budgetary framework, another key development is the adoption of the Act on the legal status and financial management of budgetary institutions by the Parliament in December 2009. The new legislation complements the existing rules with a number of new elements, including detailed operational and financial management rules for the various budgetary institutions and by providing a uniform framework with respect to the use of both Hungarian and EU funds. However, it is too early to assess the effectiveness of the new framework in terms of ensuring an improved budgetary execution and sound fiscal policy. |
| --- | --- |

(12)

Regarding the institutional features of public finances, one of the most important recent developments is the implementation of the new fiscal framework, which relies on the fiscal responsibility law (FRL) and the amendment of the organic law adopted in November 2008. Overall, the new fiscal framework is expected to contribute to improving transparency and sustainability of public finances. The FRL stipulates that as a general rule the determination of the future primary balances in a medium-term framework should be consistent with a real debt rule. Based on the FRL, an independent Fiscal Council has been established and started its operation. The 2010 budget has already been prepared broadly in line with the new fiscal framework and the 2011 budget will need to be fully in compliance with all the elements of the fiscal framework. Concerning the budgetary framework, another key development is the adoption of the Act on the legal status and financial management of budgetary institutions by the Parliament in December 2009. The new legislation complements the existing rules with a number of new elements, including detailed operational and financial management rules for the various budgetary institutions and by providing a uniform framework with respect to the use of both Hungarian and EU funds. However, it is too early to assess the effectiveness of the new framework in terms of ensuring an improved budgetary execution and sound fiscal policy.

| (13) | Hungary is characterised by a high overall tax burden in combination with a high level of government spending. The government has taken several measures to reform the tax system broadly in a budget neutral way, aiming at boosting the competitiveness of the economy by shifting the tax burden from labour to consumption taxes. However, recent rulings of the Constitutional Court and the income tax cut planned for 2011 imply revenue losses, which have not yet been covered by measures, although a resubmission of an amended property tax cannot be discarded either. On the expenditure side, primary expenditure growth has outpaced nominal GDP growth in the period 2000-2009. A major challenge for public expenditure reduction is the anticipated rise in public expenditure related to ageing. Past reforms of the pension system, in particular in May 2009, should lead to a slower increase in pension costs and also favour labour supply, thereby supporting potential growth. In the future, increasing the statutory retirement age in line with life expectancy would help improve the quality of public finances. The reduction of the size of government and an increase in the efficiency of public administration, e.g. in the area of education and health care, could also bring about large welfare gains and eventually make room for further tax cuts on labour. |
| --- | --- |

(13)

Hungary is characterised by a high overall tax burden in combination with a high level of government spending. The government has taken several measures to reform the tax system broadly in a budget neutral way, aiming at boosting the competitiveness of the economy by shifting the tax burden from labour to consumption taxes. However, recent rulings of the Constitutional Court and the income tax cut planned for 2011 imply revenue losses, which have not yet been covered by measures, although a resubmission of an amended property tax cannot be discarded either. On the expenditure side, primary expenditure growth has outpaced nominal GDP growth in the period 2000-2009. A major challenge for public expenditure reduction is the anticipated rise in public expenditure related to ageing. Past reforms of the pension system, in particular in May 2009, should lead to a slower increase in pension costs and also favour labour supply, thereby supporting potential growth. In the future, increasing the statutory retirement age in line with life expectancy would help improve the quality of public finances. The reduction of the size of government and an increase in the efficiency of public administration, e.g. in the area of education and health care, could also bring about large welfare gains and eventually make room for further tax cuts on labour.

| (14) | Overall, in 2010 the budgetary strategy set out in the programme seems to be broadly consistent with the Council recommendations under Article 104(7) TEC as the considerable risks associated to the outcome are at least partly matched by the possibility to freeze budgetary reserves and to adopt contingency expenditure cuts. From 2011, taking into account the risks, the budgetary strategy may not be consistent with the Council recommendations and the structural effort of a cumulative 0,5 % of GDP over 2010-2011 is not yet ensured. In particular, the expenditure saving measures underpinning the target for 2011 are only partly specified and not yet adopted, and not specified at all in 2012.
  Moreover, the tax revenues forecast for both years might turn out to be on the high side. At the same time, budgetary reserves are relatively limited compared to 2010, which suggests that the deficit outcome may turn out substantially worse and the excessive deficit may not be corrected on time unless further consolidation measures are taken. In view of these risks attached to the budgetary targets, the strategy may not be sufficient either to ensure that the government gross debt ratio is brought back onto a firm downward trajectory. To address those risks and to correct the expansionary policy stance in 2012 which is not in line with the Pact, the strategy needs to be backed up by fully specified measures as from 2011 and the consolidation efforts needs to be strengthened, especially in the outer years. |
| --- | --- |

(14)

Overall, in 2010 the budgetary strategy set out in the programme seems to be broadly consistent with the Council recommendations under Article 104(7) TEC as the considerable risks associated to the outcome are at least partly matched by the possibility to freeze budgetary reserves and to adopt contingency expenditure cuts. From 2011, taking into account the risks, the budgetary strategy may not be consistent with the Council recommendations and the structural effort of a cumulative 0,5 % of GDP over 2010-2011 is not yet ensured. In particular, the expenditure saving measures underpinning the target for 2011 are only partly specified and not yet adopted, and not specified at all in 2012.

Moreover, the tax revenues forecast for both years might turn out to be on the high side. At the same time, budgetary reserves are relatively limited compared to 2010, which suggests that the deficit outcome may turn out substantially worse and the excessive deficit may not be corrected on time unless further consolidation measures are taken. In view of these risks attached to the budgetary targets, the strategy may not be sufficient either to ensure that the government gross debt ratio is brought back onto a firm downward trajectory. To address those risks and to correct the expansionary policy stance in 2012 which is not in line with the Pact, the strategy needs to be backed up by fully specified measures as from 2011 and the consolidation efforts needs to be strengthened, especially in the outer years.

| (15) | 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 (3). In its recommendations under Article 104(7) of 7 July 2009 with a view to bring the excessive deficit situation to an end, the Council also invited Hungary to report on progress made in the implementation of the Council’s recommendations in a separate chapter in the updates of the convergence programmes. Hungary complied with this recommendation. |
| --- | --- |

(15)

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 (3). In its recommendations under Article 104(7) of 7 July 2009 with a view to bring the excessive deficit situation to an end, the Council also invited Hungary to report on progress made in the implementation of the Council’s recommendations in a separate chapter in the updates of the convergence programmes. Hungary complied with this recommendation.

The overall conclusion is that despite the sharp economic contraction in 2009 in the context of the financial crisis, the budget deficit was stabilised. Following the strongly restrictive fiscal stance in 2009 and the previous two years, the budgetary stance in Hungary turns broadly neutral in 2010 and 2011 and expansionary in 2012. According to the programme, this should lead to a correction of the excessive deficit by 2011 and attaining the MTO. The government gross debt-to-GDP ratio is expected to continue its upward movement up to 2010 and start declining again in 2011, bringing the debt back on a downward path.

However, the budgetary path only foresees a small structural improvement in 2010, none in 2011, and a deterioration in 2012. Moreover, this path is subject to considerable downside risks, especially in the outer years. In 2010, the elimination of the property tax and the downward risks notably linked to the additional financing need of the public transport could be compensated to some extent by the freezing of budgetary reserves and contingency expenditure cuts of 0,2 % of GDP. Regarding the outer years, risks are linked to the fact the macroeconomic scenario presented in the programme is slightly favourable and that the bulk of the measures underlying the budgetary path is unspecified and not adopted. Against this background, the correction of the excessive deficit in 2011 in line with the recommendation of 7 July 2009 under Article 104(7) of the TEC and the subsequent further consolidation is not ensured and it will be necessary to specify the savings measures and strengthen the consolidation efforts from 2011. The programme presents the main elements of the new fiscal framework; however, enhanced compliance needs to be ensured.

In view of the above assessment and also in the light of the recommendation under Article 104(7) TCE of 7 July 2009, Hungary is invited to:

| (i) | ensure that the 3,8 % of GDP deficit target for 2010 is achieved through tight expenditure control as well as through a possible freezing of budgetary reserves and the implementation of contingency expenditure cuts if needed; |
| --- | --- |

(i)

ensure that the 3,8 % of GDP deficit target for 2010 is achieved through tight expenditure control as well as through a possible freezing of budgetary reserves and the implementation of contingency expenditure cuts if needed;

| (ii) | specify the measures underlying the budgetary targets from 2011 onwards and stand ready to strengthen the fiscal effort in case risks related to the fact that the programme scenario is more favourable than the scenario underpinning the Article 104(7) TEC recommendation materialise to ensure that the deficit is brought below 3 % of GDP in 2011; and considerably strengthen the strategy for 2012 to ensure an adjustment towards the MTO in line with the requirements of Stability and Growth Pact; |
| --- | --- |

(ii)

specify the measures underlying the budgetary targets from 2011 onwards and stand ready to strengthen the fiscal effort in case risks related to the fact that the programme scenario is more favourable than the scenario underpinning the Article 104(7) TEC recommendation materialise to ensure that the deficit is brought below 3 % of GDP in 2011; and considerably strengthen the strategy for 2012 to ensure an adjustment towards the MTO in line with the requirements of Stability and Growth Pact;

| (iii) | improve the quality of public finances by preparing and adopting a 2011 budget in full compliance with the fiscal framework and by supporting expenditure moderation through a further reform of public administration and by addressing the situation of loss-making enterprises through structural reforms. |
| --- | --- |

(iii)

improve the quality of public finances by preparing and adopting a 2011 budget in full compliance with the fiscal framework and by supporting expenditure moderation through a further reform of public administration and by addressing the situation of loss-making enterprises through structural reforms.

Comparison of key macroeconomic and budgetary projections

| | 2008 | 2009 | 2010 | 2011 | 2012 |
| --- | --- | --- | --- | --- | --- |
| Real GDP
  (% change) | CP Jan 2010 | 0,6 | –6,7 | –0,3 | 3,7 | 3,8 |
| COM Nov 2009 | 0,6 | –6,5 | –0,5 | 3,1 | n.a. |
| CP Dec 2008 | 1,3 | –0,9 | 1,6 | 2,5 | n.a. |
| HICP inflation
  (%) | CP Jan 2010 | 6,1 | 4,2 | 4,1 | 2,3 | 2,6 |
| COM Nov 2009 | 6,0 | 4,3 | 4,0 | 2,5 | n.a. |
| CP Dec 2008 | 6,2 | 4,5 | 3,2 | 3,0 | n.a. |
| Output gap (4)

  (% of potential GDP) | CP Jan 2010 | 2,6 | –4,8 | –5,6 | –2,8 | –0,1 |
| COM Nov 2009 (5) | 2,9 | –4,0 | –4,7 | –2,0 | n.a. |
| CP Dec 2008 | 2,3 | –0,1 | 0,4 | n.a. | n.a. |
| Net lending/borrowing vis-à-vis the rest of the world
  (% of GDP) | CP Jan 2010 | –6,2 | 2,2 | 1,6 | 1,5 | 1,4 |
| COM Nov 2009 | –5,6 | 0,5 | 0,3 | 0,4 | n.a. |
| CP Dec 2008 | –5,1 | –3,7 | –2,5 | –1,6 | n.a. |
| General government revenue
  (% of GDP) | CP Jan 2010 | 45,5 | 45,9 | 45,0 | 44,2 | 43,3 |
| COM Nov 2009 | 45,5 | 45,9 | 45,1 | 45,1 | n.a. |
| CP Dec 2008 | 45,2 | 45,8 | 46,0 | 45,8 | n.a. |
| General government expenditure
  (% of GDP) | CP Jan 2010 | 49,3 | 49,8 | 48,8 | 47,0 | 45,8 |
| COM Nov 2009 | 49,3 | 50,0 | 49,4 | 49,0 | n.a. |
| CP Dec 2008 | 48,6 | 48,4 | 48,5 | 48,0 | n.a. |
| General government balance
  (% of GDP) | CP Jan 2010 | –3,8 | –3,9 | –3,8 | –2,8 | –2,5 |
| COM Nov 2009 | –3,8 | –4,1 | –4,2 | –3,9 | n.a. |
| CP Dec 2008 | –3,4 | –2,6 | –2,5 | –2,2 | n.a. |
| Primary balance
  (% of GDP) | CP Jan 2010 | 0,4 | 0,5 | 0,5 | 1,0 | 1,2 |
| COM Nov 2009 | 0,4 | 0,2 | –0,1 | –0,2 | n.a. |
| CP Dec 2008 | 0,6 | 1,9 | 2,0 | 2,2 | n.a. |
| Cyclically-adjusted balance (4)

  (% of GDP) | CP Jan 2010 | –5,0 | –1,7 | –1,3 | –1,5 | –2,5 |
| COM Nov 2009 | –5,1 | –2,2 | –2,1 | –3,0 | n.a. |
| CP Dec 2008 | –4,3 | –2,8 | –3,2 | n.a. | n.a. |
| Structural balance (6)

  (% of GDP) | CP Jan 2010 | –4,6 | –1,6 | –1,5 | –1,5 | –2,5 |
| COM Nov 2009 | –4,8 | –2,1 | –2,1 | –3,0 | n.a. |
| CP Dec 2008 | –4,0 | –2,8 | –3,2 | n.a. | n.a. |
| Government gross debt
  (% of GDP) | CP Jan 2010 | 72,9 | 78,0 | 79,0 | 76,9 | 73,6 |
| COM Nov 2009 | 72,9 | 79,1 | 79,8 | 79,1 | n.a. |
| CP Dec 2008 | 71,1 | 72,5 | 72,2 | 69,0 | n.a. |
| Convergence programme (CP); Commission services’ November 2009 forecasts (COM); Commission services’ calculations. |

2008

2009

2010

2011

2012

Real GDP

(% change)

CP Jan 2010

0,6

–6,7

–0,3

3,7

3,8

COM Nov 2009

0,6

–6,5

–0,5

3,1

n.a.

CP Dec 2008

1,3

–0,9

1,6

2,5

n.a.

HICP inflation

(%)

CP Jan 2010

6,1

4,2

4,1

2,3

2,6

COM Nov 2009

6,0

4,3

4,0

2,5

n.a.

CP Dec 2008

6,2

4,5

3,2

3,0

n.a.

Output gap (4)

(% of potential GDP)

CP Jan 2010

2,6

–4,8

–5,6

–2,8

–0,1

COM Nov 2009 (5)

2,9

–4,0

–4,7

–2,0

n.a.

CP Dec 2008

2,3

–0,1

0,4

n.a.

n.a.

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

(% of GDP)

CP Jan 2010

–6,2

2,2

1,6

1,5

1,4

COM Nov 2009

–5,6

0,5

0,3

0,4

n.a.

CP Dec 2008

–5,1

–3,7

–2,5

–1,6

n.a.

General government revenue

(% of GDP)

CP Jan 2010

45,5

45,9

45,0

44,2

43,3

COM Nov 2009

45,5

45,9

45,1

45,1

n.a.

CP Dec 2008

45,2

45,8

46,0

45,8

n.a.

General government expenditure

(% of GDP)

CP Jan 2010

49,3

49,8

48,8

47,0

45,8

COM Nov 2009

49,3

50,0

49,4

49,0

n.a.

CP Dec 2008

48,6

48,4

48,5

48,0

n.a.

General government balance

(% of GDP)

CP Jan 2010

–3,8

–3,9

–3,8

–2,8

–2,5

COM Nov 2009

–3,8

–4,1

–4,2

–3,9

n.a.

CP Dec 2008

–3,4

–2,6

–2,5

–2,2

n.a.

Primary balance

(% of GDP)

CP Jan 2010

0,4

0,5

0,5

1,0

1,2

COM Nov 2009

0,4

0,2

–0,1

–0,2

n.a.

CP Dec 2008

0,6

1,9

2,0

2,2

n.a.

Cyclically-adjusted balance (4)

(% of GDP)

CP Jan 2010

–5,0

–1,7

–1,3

–1,5

–2,5

COM Nov 2009

–5,1

–2,2

–2,1

–3,0

n.a.

CP Dec 2008

–4,3

–2,8

–3,2

n.a.

n.a.

Structural balance (6)

(% of GDP)

CP Jan 2010

–4,6

–1,6

–1,5

–1,5

–2,5

COM Nov 2009

–4,8

–2,1

–2,1

–3,0

n.a.

CP Dec 2008

–4,0

–2,8

–3,2

n.a.

n.a.

Government gross debt

(% of GDP)

CP Jan 2010

72,9

78,0

79,0

76,9

73,6

COM Nov 2009

72,9

79,1

79,8

79,1

n.a.

CP Dec 2008

71,1

72,5

72,2

69,0

n.a.

Convergence programme (CP); Commission services’ November 2009 forecasts (COM); Commission services’ calculations.

---

(1)  OJ L 209, 2.8.1997, p. 1. The documents referred to in this text can be found at the following website: http://ec.europa.eu/economy_finance/sgp/index_en.htm

(2)  In the Council conclusions from 10 November 2009 on sustainability of public finances ‘the Council calls on Member States to focus attention to sustainability-oriented strategies in their upcoming stability and convergence programmes’ and further ‘invites the Commission, together with the Economic Policy Committee and the Economic and Financial Committee, to further develop methodologies for assessing the long-term sustainability of public finances in time for the next Sustainability report’, which is foreseen in 2012.

(3)  In particular, the compulsory information on the nominal effective exchange rate is missing as well as optional data including on general government expenditure by function and the breakdown of stock-flow adjustments.

(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 0,8 %, 0,3 %, 0,2 % and 0,3 % respectively in the period 2008-2011.

(6)  Cyclically-adjusted balance excluding one-off and other temporary measures. One-off and other temporary measures are 0,4 % of GDP in 2008, 0,1 % in 2009 both deficit-reducing and 0,2 % of GDP in 2010 deficit increasing according to the most recent programme and 0,3 % of GDP in 2008 and 0,1 % in 2009, all deficit-reducing, in the Commission services’ November 2009 forecast.

Source:

Convergence programme (CP); Commission services’ November 2009 forecasts (COM); Commission services’ calculations.

---

| 1.6.2010 | EN | Official Journal of the European Union | C 142/7 |
| --- | --- | --- | --- |

1.6.2010

EN

Official Journal of the European Union

C 142/7

---

COUNCIL OPINION

on the updated stability programme of Ireland, 2009-2014

2010/C 142/02

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty on the Functioning of the European Union,

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 26 April 2010 the Council examined the updated stability programme of Ireland, which covers the period 2009 to 2014. |
| --- | --- |

(1)

On 26 April 2010 the Council examined the updated stability programme of Ireland, which covers the period 2009 to 2014.

| (2) | After the period of very high growth of the second half of the 1990s, Ireland settled down to a more steady growth phase supported by buoyant domestic demand in 2001-2007. Ireland's competitive position weakened somewhat during this period, due to price and wage inflation together with declining productivity growth. The sharp correction in the housing market from the peak in 2006 led to a severe economic downturn, aggravated by the global financial crisis and the recession in Ireland's main trading partners.
  Despite five consolidation packages adopted since mid-2008, these developments have also produced a dramatic deterioration in the Irish public finances, with the general government balance moving from a surplus position in 2007 to a double-digit deficit ratio in 2009 and government debt exceeding the 60 % of GDP reference value in 2009. On 27 April 2009, the Council thus decided under Article 104(6) TEC that an excessive deficit exists in Ireland and on 2 December 2009 set a deadline for its correction by 2014. A first key challenge for the years ahead relates to implementing a broad-based and credible fiscal consolidation strategy, building on the significant efforts already made. A second is to return to sustainable growth, which will involve the re- and up-skilling of the newly-unemployed and regaining competitiveness through productivity-enhancing measures and adequate wage policies, and to foster an orderly restructuring process in the financial sector. With a view to improving the long-term sustainability of public finances, reforming the pension system is another important challenge. |
| --- | --- |

(2)

After the period of very high growth of the second half of the 1990s, Ireland settled down to a more steady growth phase supported by buoyant domestic demand in 2001-2007. Ireland's competitive position weakened somewhat during this period, due to price and wage inflation together with declining productivity growth. The sharp correction in the housing market from the peak in 2006 led to a severe economic downturn, aggravated by the global financial crisis and the recession in Ireland's main trading partners.

Despite five consolidation packages adopted since mid-2008, these developments have also produced a dramatic deterioration in the Irish public finances, with the general government balance moving from a surplus position in 2007 to a double-digit deficit ratio in 2009 and government debt exceeding the 60 % of GDP reference value in 2009. On 27 April 2009, the Council thus decided under Article 104(6) TEC that an excessive deficit exists in Ireland and on 2 December 2009 set a deadline for its correction by 2014. A first key challenge for the years ahead relates to implementing a broad-based and credible fiscal consolidation strategy, building on the significant efforts already made. A second is to return to sustainable growth, which will involve the re- and up-skilling of the newly-unemployed and regaining competitiveness through productivity-enhancing measures and adequate wage policies, and to foster an orderly restructuring process in the financial sector. With a view to improving the long-term sustainability of public finances, reforming the pension system is another important challenge.

| (3) | Although much of the observed decline in actual GDP in the context of the crisis is cyclical, the level of potential output has also been negatively affected. In addition, the crisis may also affect potential growth in the medium term through lower investment, constraints in credit availability, increasing structural unemployment and the return to net outward migration, if sustained. Moreover, the impact of the economic crisis compounds the negative effects of demographic ageing on potential output and the sustainability of public finances. Against this background it will be essential to accelerate the pace of structural reforms with the aim of supporting potential growth. In particular, for Ireland it is important to undertake reforms in the areas of human capital, competition and R&D. |
| --- | --- |

(3)

Although much of the observed decline in actual GDP in the context of the crisis is cyclical, the level of potential output has also been negatively affected. In addition, the crisis may also affect potential growth in the medium term through lower investment, constraints in credit availability, increasing structural unemployment and the return to net outward migration, if sustained. Moreover, the impact of the economic crisis compounds the negative effects of demographic ageing on potential output and the sustainability of public finances. Against this background it will be essential to accelerate the pace of structural reforms with the aim of supporting potential growth. In particular, for Ireland it is important to undertake reforms in the areas of human capital, competition and R&D.

| (4) | The macroeconomic scenario underlying the programme envisages that after declines in real GDP by 7,5 % in 2009 and 1,4 % in 2010, the economy will return to positive growth averaging 4 % over 2011-2014. Assessed against currently available information (2), this scenario appears to be based on plausible growth assumptions in 2010 and favourable growth assumptions thereafter, especially in view of the reduction in trend growth to be expected as a consequence of the current crisis in conjunction with the ongoing balance sheet adjustments. The programme's outlook for inflation appears realistic given the projected drawn-out adjustment process in the labour market. The projected return to an external surplus would appear to be contingent on a continued recuperation of competitiveness. |
| --- | --- |

(4)

The macroeconomic scenario underlying the programme envisages that after declines in real GDP by 7,5 % in 2009 and 1,4 % in 2010, the economy will return to positive growth averaging 4 % over 2011-2014. Assessed against currently available information (2), this scenario appears to be based on plausible growth assumptions in 2010 and favourable growth assumptions thereafter, especially in view of the reduction in trend growth to be expected as a consequence of the current crisis in conjunction with the ongoing balance sheet adjustments. The programme's outlook for inflation appears realistic given the projected drawn-out adjustment process in the labour market. The projected return to an external surplus would appear to be contingent on a continued recuperation of competitiveness.

| (5) | The programme estimates the general government deficit in 2009 at 11,7 % of GDP. The significant deterioration from a deficit of 7,2 % of GDP in 2008 to a large extent reflects the substantial knock-on effect that the broad-based recession has had on the public finances, including a considerable tax shortfall and a surge in unemployment-related expenditure. At the same time, the significant consolidation packages adopted since mid-2008, with a combined deficit-reducing effect estimated by the authorities at 5 % of GDP in 2009, have helped limit the fiscal deterioration. While the overall thrust of the budgetary strategy is deficit-reducing, Ireland also adopted a modest package of stimulus measures to support economic activity of 0,7 % of GDP in line with the European Economic Recovery Programme (EERP). In line with the exit strategy advocated by the Council, and with a view to correcting the excessive deficit by 2014, substantial fiscal tightening is planned to continue over the programme period. |
| --- | --- |

(5)

The programme estimates the general government deficit in 2009 at 11,7 % of GDP. The significant deterioration from a deficit of 7,2 % of GDP in 2008 to a large extent reflects the substantial knock-on effect that the broad-based recession has had on the public finances, including a considerable tax shortfall and a surge in unemployment-related expenditure. At the same time, the significant consolidation packages adopted since mid-2008, with a combined deficit-reducing effect estimated by the authorities at 5 % of GDP in 2009, have helped limit the fiscal deterioration. While the overall thrust of the budgetary strategy is deficit-reducing, Ireland also adopted a modest package of stimulus measures to support economic activity of 0,7 % of GDP in line with the European Economic Recovery Programme (EERP). In line with the exit strategy advocated by the Council, and with a view to correcting the excessive deficit by 2014, substantial fiscal tightening is planned to continue over the programme period.

| (6) | At 11,6 % of GDP, the deficit ratio in 2010 is targeted to stabilise as compared to 2009, based on a significant savings package amounting to 2,5 % of GDP, broadly in line with the Council Recommendation under Article 126(7) of 2 December 2009. Given the steep rise in the interest burden, the primary balance is targeted to improve by 0,75 pp of GDP.
  Nearly all of the adjustment effort is on the expenditure side, including public sector wage cuts, social welfare savings, other current savings and a reduction in public investment, each contributing in broadly equal measure to the overall package. On the revenue side, the effect of a new carbon tax is broadly offset by a reduction in the standard VAT rate and in excise duties on alcohol. Despite these consolidation measures, the primary expenditure-to-GDP ratio would rise marginally reflecting higher unemployment-related spending. The revenue-to-GDP ratio is expected to increase by 1 pp on the back of rising ratios of social contributions and other revenue to GDP (3), which should more than offset a further drop in the tax-to-GDP ratio. The planned fiscal stance appears to be neutral in 2010, as the structural deficit, i.e. the cyclically adjusted deficit net of one-off and other temporary measures, calculated according to the commonly agreed methodology is estimated to stay broadly unchanged as compared to 2009. However, it is important to note that, without the savings package of 2,5 % of GDP, a significant further worsening of the fiscal position would have taken place in 2010. The ongoing underlying deterioration of the fiscal position on a no-policy change basis explains the discrepancy between a bottom-up (the savings package in the budget for 2010 amounts to 2,5 % of GDP) and a top-down approach (unchanged structural deficit) to estimating the adjustment effort. |
| --- | --- |

(6)

At 11,6 % of GDP, the deficit ratio in 2010 is targeted to stabilise as compared to 2009, based on a significant savings package amounting to 2,5 % of GDP, broadly in line with the Council Recommendation under Article 126(7) of 2 December 2009. Given the steep rise in the interest burden, the primary balance is targeted to improve by 0,75 pp of GDP.

Nearly all of the adjustment effort is on the expenditure side, including public sector wage cuts, social welfare savings, other current savings and a reduction in public investment, each contributing in broadly equal measure to the overall package. On the revenue side, the effect of a new carbon tax is broadly offset by a reduction in the standard VAT rate and in excise duties on alcohol. Despite these consolidation measures, the primary expenditure-to-GDP ratio would rise marginally reflecting higher unemployment-related spending. The revenue-to-GDP ratio is expected to increase by 1 pp on the back of rising ratios of social contributions and other revenue to GDP (3), which should more than offset a further drop in the tax-to-GDP ratio. The planned fiscal stance appears to be neutral in 2010, as the structural deficit, i.e. the cyclically adjusted deficit net of one-off and other temporary measures, calculated according to the commonly agreed methodology is estimated to stay broadly unchanged as compared to 2009. However, it is important to note that, without the savings package of 2,5 % of GDP, a significant further worsening of the fiscal position would have taken place in 2010. The ongoing underlying deterioration of the fiscal position on a no-policy change basis explains the discrepancy between a bottom-up (the savings package in the budget for 2010 amounts to 2,5 % of GDP) and a top-down approach (unchanged structural deficit) to estimating the adjustment effort.

| (7) | The main aim of the programme's medium-term budgetary strategy is to pursue further consolidation efforts so as to reduce the deficit below 3 % of GDP by the end of the programme period (2014). The nominal deficit would improve by 1,75 pps of GDP in 2011, 2,75 pps in 2012, 2,25 pps in 2013 and 2 pps in 2014, when the primary balance should turn into surplus again. This strategy taken at face value is in line with the Council Recommendation under Article 126(7) of 2 December 2009.
  To reach the targets, the government envisages further, quantified consolidation efforts on the current side of the budget in conjunction with a freeze of the level of capital expenditure (after the reduction in 2011). However, these efforts are not underpinned by broad measures. The technical projections of the programme suggest a mainly expenditure-based consolidation, as the expenditure ratio would be reduced by nearly 7 percentage points of GDP over the period 2010-2014, especially in the areas of government consumption and social payments, whereas the revenue ratio would rise by close to 2 percentage points. The structural balance is projected to improve by 1 pp. of GDP in 2011 and 1,75 pps. annually in the period 2012-2014. As communicated by the authorities, the medium-term objective (MTO) for the budgetary position of Ireland is a structural deficit of 0,5 % of GDP, which the programme does not envisage to achieve within the programme period. Given the most recent projections and debt level, the MTO reflects the objectives of the Pact. |
| --- | --- |

(7)

The main aim of the programme's medium-term budgetary strategy is to pursue further consolidation efforts so as to reduce the deficit below 3 % of GDP by the end of the programme period (2014). The nominal deficit would improve by 1,75 pps of GDP in 2011, 2,75 pps in 2012, 2,25 pps in 2013 and 2 pps in 2014, when the primary balance should turn into surplus again. This strategy taken at face value is in line with the Council Recommendation under Article 126(7) of 2 December 2009.

To reach the targets, the government envisages further, quantified consolidation efforts on the current side of the budget in conjunction with a freeze of the level of capital expenditure (after the reduction in 2011). However, these efforts are not underpinned by broad measures. The technical projections of the programme suggest a mainly expenditure-based consolidation, as the expenditure ratio would be reduced by nearly 7 percentage points of GDP over the period 2010-2014, especially in the areas of government consumption and social payments, whereas the revenue ratio would rise by close to 2 percentage points. The structural balance is projected to improve by 1 pp. of GDP in 2011 and 1,75 pps. annually in the period 2012-2014. As communicated by the authorities, the medium-term objective (MTO) for the budgetary position of Ireland is a structural deficit of 0,5 % of GDP, which the programme does not envisage to achieve within the programme period. Given the most recent projections and debt level, the MTO reflects the objectives of the Pact.

| (8) | The budgetary outcomes could be worse than targeted in 2010 and considerably worse than targeted thereafter. First, the significant consolidation efforts planned from 2011 onwards are not underpinned by measures so that also the planned contribution of revenue versus expenditure measures to these efforts is not clear. This risk is compounded by the fact that even the targeted size of the consolidation packages for the different years is stated to be subject to review in the context of future budgets, notwithstanding the fact that for 2010 a savings package of the previously announced size was implemented. Second, an important downside risk is related to the economic outlook, which appears to be favourable in the outer years of the programme. Furthermore, also in view of the size of the planned consolidation, there is a risk of expenditure overruns in 2010 and also beyond, to the extent that the still to be spelled out strategy should rely on expenditure restraint. At the same time, it is noted that significant consolidation efforts have already been implemented since mid-2008. Specific additional risks relate to the government's bank guarantees to support the financial sector, which, if called, would lead to increases in deficit and debt. However, some of the cost of government support to the financial sector could also be recouped in the future. |
| --- | --- |

(8)

The budgetary outcomes could be worse than targeted in 2010 and considerably worse than targeted thereafter. First, the significant consolidation efforts planned from 2011 onwards are not underpinned by measures so that also the planned contribution of revenue versus expenditure measures to these efforts is not clear. This risk is compounded by the fact that even the targeted size of the consolidation packages for the different years is stated to be subject to review in the context of future budgets, notwithstanding the fact that for 2010 a savings package of the previously announced size was implemented. Second, an important downside risk is related to the economic outlook, which appears to be favourable in the outer years of the programme. Furthermore, also in view of the size of the planned consolidation, there is a risk of expenditure overruns in 2010 and also beyond, to the extent that the still to be spelled out strategy should rely on expenditure restraint. At the same time, it is noted that significant consolidation efforts have already been implemented since mid-2008. Specific additional risks relate to the government's bank guarantees to support the financial sector, which, if called, would lead to increases in deficit and debt. However, some of the cost of government support to the financial sector could also be recouped in the future.

| (9) | The government gross debt ratio was above the Treaty reference value in 2009 and is projected to be on an increasing trend until 2012. Specifically, according to the programme the debt-to-GDP ratio soared to nearly 66 % of GDP in 2009 from 44 % of GDP in 2008. The primary deficit was the main driver of this increase (+ 10 pps). However, a positive snowball effect (rising interest expenditure and negative nominal GDP growth) and adverse stock-flow adjustment (mainly related to the financing of capital injections into the financial sector) also made sizeable contributions. The programme projects a further steep increase in the debt ratio to a peak of nearly 84 % of GDP in 2012, followed by a gradual decline to below 81 % of GDP by the end of the programme period (2014) on the back of the improving primary balance, the anticipated return to strong nominal GDP growth and the unwinding of the cash balances currently held for precautionary purposes against the uncertainty in financial markets. In view of the likely need for significant further capital injections into banks and of the negative risks to the budgetary targets, the evolution of the debt ratio is likely to be less favourable than projected in the programme. |
| --- | --- |

(9)

The government gross debt ratio was above the Treaty reference value in 2009 and is projected to be on an increasing trend until 2012. Specifically, according to the programme the debt-to-GDP ratio soared to nearly 66 % of GDP in 2009 from 44 % of GDP in 2008. The primary deficit was the main driver of this increase (+ 10 pps). However, a positive snowball effect (rising interest expenditure and negative nominal GDP growth) and adverse stock-flow adjustment (mainly related to the financing of capital injections into the financial sector) also made sizeable contributions. The programme projects a further steep increase in the debt ratio to a peak of nearly 84 % of GDP in 2012, followed by a gradual decline to below 81 % of GDP by the end of the programme period (2014) on the back of the improving primary balance, the anticipated return to strong nominal GDP growth and the unwinding of the cash balances currently held for precautionary purposes against the uncertainty in financial markets. In view of the likely need for significant further capital injections into banks and of the negative risks to the budgetary targets, the evolution of the debt ratio is likely to be less favourable than projected in the programme.

| (10) | Medium-term debt projections that assume GDP growth rates to gradually recover to the values projected before the crisis, tax ratios to return to pre-crisis levels and include the projected increase in age-related expenditures show that the budgetary strategy envisaged in the programme, taken at face value and with no further policy change, would stabilise the debt-to-GDP ratio by 2020. |
| --- | --- |

(10)

Medium-term debt projections that assume GDP growth rates to gradually recover to the values projected before the crisis, tax ratios to return to pre-crisis levels and include the projected increase in age-related expenditures show that the budgetary strategy envisaged in the programme, taken at face value and with no further policy change, would stabilise the debt-to-GDP ratio by 2020.

| (11) | The long-term budgetary impact of ageing is clearly higher than the EU average, mainly as a result of a relatively high projected increase in pension expenditure over the coming decades. The budgetary position in 2009 as estimated in the programme compounds the budgetary impact of population ageing on the sustainability gap.
  It is noted that assets have been accumulated in the National Pension Reserve Fund in order to pre-fund part of future pension expenditure. Reducing the high primary deficit over the medium term, as already foreseen in the programme, and implementing structural reform measures including to curb the substantial increase in age-related expenditure would contribute to reducing the risks to the sustainability of public finances which were assessed in the Commission 2009 Sustainability Report (4) as high. According to the programme, a reform of the public sector pension system for new entrants to the service is to be introduced in 2010. Pension payments would thereafter be based on career average earnings rather than final salary, while the retirement age would be increased by one year to 66. It will be important to implement more broad-based reforms to address the projected increase in ageing-related expenditure. On 3 March 2010, the authorities published the ‘National Pensions Framework’ setting out their plans for pension reform, including a gradual increase in the age at which people qualify for the State pension, from 65 years currently to 68 in 2028 (5). |
| --- | --- |

(11)

The long-term budgetary impact of ageing is clearly higher than the EU average, mainly as a result of a relatively high projected increase in pension expenditure over the coming decades. The budgetary position in 2009 as estimated in the programme compounds the budgetary impact of population ageing on the sustainability gap.

It is noted that assets have been accumulated in the National Pension Reserve Fund in order to pre-fund part of future pension expenditure. Reducing the high primary deficit over the medium term, as already foreseen in the programme, and implementing structural reform measures including to curb the substantial increase in age-related expenditure would contribute to reducing the risks to the sustainability of public finances which were assessed in the Commission 2009 Sustainability Report (4) as high. According to the programme, a reform of the public sector pension system for new entrants to the service is to be introduced in 2010. Pension payments would thereafter be based on career average earnings rather than final salary, while the retirement age would be increased by one year to 66. It will be important to implement more broad-based reforms to address the projected increase in ageing-related expenditure. On 3 March 2010, the authorities published the ‘National Pensions Framework’ setting out their plans for pension reform, including a gradual increase in the age at which people qualify for the State pension, from 65 years currently to 68 in 2028 (5).

| (12) | Ireland's medium-term budgetary framework has some weaknesses. In particular, budgetary targets for the years beyond that covered by the budget, especially expenditure envelopes, can be changed in subsequent budgets. As experience has shown, this makes it more difficult for policymakers to maintain a prudent fiscal policy course in the presence of (persistent) windfall revenues. The programme acknowledges the importance of a robust budgetary framework and highlights the recent introduction of quantified targets for consolidation packages for years beyond the budget year in the supplementary budget adopted in April 2009. However, as mentioned above, the quantified targets set for the outer years in the stability programme are not underpinned by concrete measures.
  Without providing further details, the programme indicates that further reforms are under consideration, such as the introduction of binding multi-annual envelopes for current expenditure and a fiscal rule stipulating the use of future windfall profits for deficit reduction purposes. Regarding the more short-term budgetary framework, while the authorities publish monthly statements on central government revenue and expenditure developments, a regular review of budgetary plans at higher than annual frequency so as to limit the risk of deviating from the targets will be important. |
| --- | --- |

(12)

Ireland's medium-term budgetary framework has some weaknesses. In particular, budgetary targets for the years beyond that covered by the budget, especially expenditure envelopes, can be changed in subsequent budgets. As experience has shown, this makes it more difficult for policymakers to maintain a prudent fiscal policy course in the presence of (persistent) windfall revenues. The programme acknowledges the importance of a robust budgetary framework and highlights the recent introduction of quantified targets for consolidation packages for years beyond the budget year in the supplementary budget adopted in April 2009. However, as mentioned above, the quantified targets set for the outer years in the stability programme are not underpinned by concrete measures.

Without providing further details, the programme indicates that further reforms are under consideration, such as the introduction of binding multi-annual envelopes for current expenditure and a fiscal rule stipulating the use of future windfall profits for deficit reduction purposes. Regarding the more short-term budgetary framework, while the authorities publish monthly statements on central government revenue and expenditure developments, a regular review of budgetary plans at higher than annual frequency so as to limit the risk of deviating from the targets will be important.

| (13) | The sharp decline in revenue recorded in the context of the housing market correction and the wider recession has revealed some vulnerabilities of the Irish tax system, such as a narrow tax base and a high reliance on taxing transactions in assets. The need to broaden the tax base in the context of a comprehensive medium-term strategy was a key message from the report published in September 2009 by the Commission on Taxation set up by the government. This report, together with the recommendations for the improvement of public expenditure programmes from the report published in July 2009 by the ‘Special Review Group on Public Service Expenditure and Numbers’, will according to the programme inform the government's further budgetary strategy. A limited number of recommendations have already been taken into account in the budget for 2010, including the introduction of a carbon tax. The above mentioned reforms relating to the public sector pension system together with the further pension reforms under consideration according to the programme would further improve the quality of Ireland's public finances. |
| --- | --- |

(13)

The sharp decline in revenue recorded in the context of the housing market correction and the wider recession has revealed some vulnerabilities of the Irish tax system, such as a narrow tax base and a high reliance on taxing transactions in assets. The need to broaden the tax base in the context of a comprehensive medium-term strategy was a key message from the report published in September 2009 by the Commission on Taxation set up by the government. This report, together with the recommendations for the improvement of public expenditure programmes from the report published in July 2009 by the ‘Special Review Group on Public Service Expenditure and Numbers’, will according to the programme inform the government's further budgetary strategy. A limited number of recommendations have already been taken into account in the budget for 2010, including the introduction of a carbon tax. The above mentioned reforms relating to the public sector pension system together with the further pension reforms under consideration according to the programme would further improve the quality of Ireland's public finances.

| (14) | Overall, in 2010 the budgetary strategy set out in the programme is broadly consistent with the Council recommendation under Article 126(7). However, from 2011 on, taking into account the risks to the deficit targets, the budgetary strategy may not be consistent with the Council recommendation. In particular, the deficit targets for 2011-2014 need to be backed up by concrete measures and the plans for the entire period need to be strengthened to address the risks from less favourable GDP growth and slippages on the expenditure side.
  The marked cyclical contribution to the consolidation in the outer years foreseen in the programme, consistent with its favourable macroeconomic scenario, implies that the average annual structural effort needed according to the programme to correct the excessive deficit by 2014 falls short of the 2 pps of GDP recommended by the Council. This reinforces the conclusion that the authorities should stand ready to take additional measures beyond the planned consolidation packages in case growth turned out to be lower than projected in the programme. Unless these risks are adequately addressed and the consolidation plans fully implemented, the budgetary strategy may not be sufficient to bring the government debt ratio back on a declining path by the end of the programme period. A rigorous implementation of the programme's consolidation strategy building on the significant efforts already made would also be appropriate given the high risks to the long-term sustainability of the public finances, driven by the expected change in age-related expenditure in the medium term as well as the rapid projected increase in debt, and the likely need for further support to the financial sector. |
| --- | --- |

(14)

Overall, in 2010 the budgetary strategy set out in the programme is broadly consistent with the Council recommendation under Article 126(7). However, from 2011 on, taking into account the risks to the deficit targets, the budgetary strategy may not be consistent with the Council recommendation. In particular, the deficit targets for 2011-2014 need to be backed up by concrete measures and the plans for the entire period need to be strengthened to address the risks from less favourable GDP growth and slippages on the expenditure side.

The marked cyclical contribution to the consolidation in the outer years foreseen in the programme, consistent with its favourable macroeconomic scenario, implies that the average annual structural effort needed according to the programme to correct the excessive deficit by 2014 falls short of the 2 pps of GDP recommended by the Council. This reinforces the conclusion that the authorities should stand ready to take additional measures beyond the planned consolidation packages in case growth turned out to be lower than projected in the programme. Unless these risks are adequately addressed and the consolidation plans fully implemented, the budgetary strategy may not be sufficient to bring the government debt ratio back on a declining path by the end of the programme period. A rigorous implementation of the programme's consolidation strategy building on the significant efforts already made would also be appropriate given the high risks to the long-term sustainability of the public finances, driven by the expected change in age-related expenditure in the medium term as well as the rapid projected increase in debt, and the likely need for further support to the financial sector.

| (15) | 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). In its recommendations under Article 126(7) of 2 December 2009 with a view to bringing the excessive deficit situation to an end, the Council also invited Ireland to report on progress made in the implementation of the Council’s recommendations in a separate chapter in the updates of the stability programmes. Ireland partly complied with this recommendation. In particular, the consolidation efforts in the outer years are not underpinned by broad measures. |
| --- | --- |

(15)

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). In its recommendations under Article 126(7) of 2 December 2009 with a view to bringing the excessive deficit situation to an end, the Council also invited Ireland to report on progress made in the implementation of the Council’s recommendations in a separate chapter in the updates of the stability programmes. Ireland partly complied with this recommendation. In particular, the consolidation efforts in the outer years are not underpinned by broad measures.

The overall conclusion is that Ireland responded swiftly and with determination to counter the widening of the government deficit. In spite of this, and due to the severe recession, the general government deficit widened further in 2009 but is planned in the programme to stabilise in 2010, at 11,6 % of GDP. From 2011 onwards, the programme envisages a reduction of the deficit to below the 3 % of GDP reference value by 2014, the deadline for the correction of the excessive deficit set by the Council. Debt would peak at around 84 % of GDP in 2012 and then decline mildly. The budgetary outcomes could be worse than targeted throughout the programme period, mainly due to (i) the fact that the consolidation efforts planned after 2010 are not underpinned by broad measures and are stated to be subject to review in the context of future budgets; (ii) the programme's favourable macroeconomic outlook after 2010; and (iii) the risk of expenditure overruns in 2010 and also beyond, to the extent that the still to be spelled out strategy should rely on expenditure restraint. This, together with the likely need for further support measures for the financial sector, implies that also the debt ratio could turn out higher than planned in the programme. While the significant size of the savings package for 2010 is broadly in line with the Council recommendation issued on 2 December 2009, it will be important to address the above mentioned risks, by spelling out the measures underlying the consolidation strategy and adopting additional consolidation measures if growth turns out weaker than projected in the programme or if the risk of expenditure slippages materialises. Building on the significant efforts already made, implementing a credible fiscal consolidation strategy, which should be facilitated by a stronger budgetary framework, should foster a return to sustainable economic growth. To help achieve this, there is also a need to regain competitiveness through measures enhancing productivity growth and adequate wage policies, and to support the re- and up-skilling of the newly unemployed to prevent them from turning into long-term unemployed. With a view to improving the long-term sustainability of public finances, further reforms to the pension system will be important in addition to the fiscal consolidation efforts. These reforms could usefully build on the March 2010 National Pensions Framework.

In view of the above assessment and also in the light of the recommendation under Article 126(7) TFEU of 2 December 2009, the Council welcomes the substantial consolidation measures which have been implemented and invites Ireland to:

| (i) | rigorously implement the budget for 2010 and back up the envisaged consolidation packages for the following years with concrete measures within a broad-based consolidation strategy in order to achieve the recommended average annual fiscal effort of 2 % of GDP in line with the Article 126(7) Recommendation, while standing ready to adopt further consolidation measures in case risks related to the fact that the macroeconomic scenario of the programme is more favourable than the scenario underpinning the Article 126(7) Recommendation materialise; seize, as prescribed in the EDP recommendation, any opportunities beyond the fiscal efforts, including from better economic conditions, to accelerate the reduction of the gross debt ratio towards the 60 % of GDP reference value; |
| --- | --- |

(i)

rigorously implement the budget for 2010 and back up the envisaged consolidation packages for the following years with concrete measures within a broad-based consolidation strategy in order to achieve the recommended average annual fiscal effort of 2 % of GDP in line with the Article 126(7) Recommendation, while standing ready to adopt further consolidation measures in case risks related to the fact that the macroeconomic scenario of the programme is more favourable than the scenario underpinning the Article 126(7) Recommendation materialise; seize, as prescribed in the EDP recommendation, any opportunities beyond the fiscal efforts, including from better economic conditions, to accelerate the reduction of the gross debt ratio towards the 60 % of GDP reference value;

| (ii) | in view of the significant projected increase in age-related expenditure, and also of the further increase in debt expected over the programme period, improve the long-term sustainability of public finances by implementing further pension reform measures; |
| --- | --- |

(ii)

in view of the significant projected increase in age-related expenditure, and also of the further increase in debt expected over the programme period, improve the long-term sustainability of public finances by implementing further pension reform measures;

| (iii) | to limit risks to the adjustment, strengthen the enforceable nature of its medium-term budgetary framework, as well as closely monitor adherence to the budgetary targets throughout the year. |
| --- | --- |

(iii)

to limit risks to the adjustment, strengthen the enforceable nature of its medium-term budgetary framework, as well as closely monitor adherence to the budgetary targets throughout the year.

Ireland is also invited to provide more information on the path and the broad measures underpinning the envisaged consolidation in the outer years in the EDP chapters of the forthcoming stability programme updates.

Comparison of key macroeconomic and budgetary projections
   (7)
   (8)

| | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 |
| --- | --- | --- | --- | --- | --- | --- | --- |
| Real GDP
  (% change) | SP Dec 2009 | n.a. | –7,5 | –1,3 | 3,3 | 4,5 | 4,3 | 4,0 |
| COM Nov 2009 | –3,0 | –7,5 | –1,4 | 2,6 | n.a. | n.a. | n.a. |
| SP Oct 2008 | –1,4 | –4,0 | –0,9 | 2,3 | 3,4 | 3,0 | n.a. |
| HICP inflation
  (%) | SP Dec 2009 | n.a. | –1,7 | –1,2 | 1,0 | 1,7 | 1,8 | 1,8 |
| COM Nov 2009 | 3,1 | –1,5 | –0,6 | 1,0 | n.a. | n.a. | n.a. |
| SP Oct 2008 | 3,1 | 0,5 | 1,5 | 1,8 | 1,8 | 1,8 | n.a. |
| Output gap (8)

  (% of potential GDP) | SP Dec 2009 | 0,0 | –7,0 | –7,6 | –4,6 | –2,2 | –0,6 | 0,1 |
| COM Nov 2009 (9) | –0,1 | –7,2 | –7,8 | –5,4 | n.a. | n.a. | n.a. |
| SP Oct 2008 | 0,5 | –3,5 | –4,1 | –3,4 | –1,6 | –0,5 | n.a. |
| Net lending/borrowing vis-à-vis the rest of the world
  (% of GDP) | SP Dec 2009 | n.a. | –2,0 | 0,6 | 1,2 | 1,6 | 1,6 | 1,3 |
| COM Nov 2009 | –5,1 | –3,1 | –1,8 | –1,4 | n.a. | n.a. | n.a. |
| SP Oct 2008 | –6,3 | –4,2 | –3,5 | –3,4 | –3,0 | –2,8 | n.a. |
| General government revenue
  (% of GDP) | SP Dec 2009 | 34,8 | 34,2 | 35,2 | 35,5 | 36,3 | 36,7 | 37,1 |
| COM Nov 2009 | 34,9 | 34,4 | 34,4 | 33,8 | n.a. | n.a. | n.a. |
| SP Oct 2008 | 33,6 | 33,7 | 34,4 | 34,6 | 33,9 | 34,4 | n.a. |
| General government expenditure
  (% of GDP) | SP Dec 2009 | 42,0 | 45,9 | 46,8 | 45,5 | 43,5 | 41,5 | 40,0 |
| COM Nov 2009 | 42,0 | 46,9 | 49,1 | 48,4 | n.a. | n.a. | n.a. |
| SP Oct 2008 | 39,9 | 43,3 | 43,4 | 41,0 | 38,7 | 37,0 | n.a. |
| General government balance
  (% of GDP) | SP Dec 2009 | –7,2 | –11,7 | –11,6 | –10,0 | –7,2 | –4,9 | –2,9 |
| COM Nov 2009 | –7,2 | –12,5 | –14,7 | –14,7 | n.a. | n.a. | n.a. |
| SP Oct 2008 | –6,3 | –9,5 | –9,0 | –6,4 | –4,8 | –2,6 | n.a. |
| Primary balance
  (% of GDP) | SP Dec 2009 | –6,1 | –9,6 | –8,8 | –6,6 | –3,4 | –1 | 1 |
| COM Nov 2009 | –6,1 | –10,2 | –11,3 | –10,6 | n.a. | n.a. | n.a. |
| SP Oct 2008 | –5,2 | –7,3 | –6,4 | –3,5 | –1,7 | 0,7 | n.a. |
| Cyclically adjusted balance (8)

  (% of GDP) | SP Dec 2009 | –7,2 | –8,9 | –8,6 | –8,2 | –6,3 | –4,7 | –2,9 |
| COM Nov 2009 | –7,1 | –9,6 | –11,5 | –12,5 | n.a. | n.a. | n.a. |
| SP Oct 2008 | –6,5 | –8,1 | –7,4 | –5,0 | –4,1 | –2,4 | n.a. |
| Structural balance (10)

  (% of GDP) | SP Dec 2009 | –6,4 | –9,3 | –9,2 | –8,2 | –6,3 | –4,7 | –2,9 |
| COM Nov 2009 | –7,1 | –10,1 | –11,5 | –12,5 | n.a. | n.a. | n.a. |
| SP Oct 2008 | –6,2 | –8,1 | –7,4 | –5,0 | –4,1 | –2,4 | n.a. |
| Government gross debt
  (% of GDP) | SP Dec 2009 | n.a. | 64,5 | 77,9 | 82,9 | 83,9 | 83,3 | 80,8 |
| COM Nov 2009 | 44,1 | 65,8 | 82,9 | 96,2 | n.a. | n.a. | n.a. |
| SP Oct 2008 | 40,6 | 52,7 | 62,3 | 65,7 | 66,2 | 64,5 | n.a. |
| Stability programme (SP); Commission services’ autumn 2009 forecasts (COM); Commission services’ calculations |

2008

2009

2010

2011

2012

2013

2014

Real GDP

(% change)

SP Dec 2009

n.a.

–7,5

–1,3

3,3

4,5

4,3

4,0

COM Nov 2009

–3,0

–7,5

–1,4

2,6

n.a.

n.a.

n.a.

SP Oct 2008

–1,4

–4,0

–0,9

2,3

3,4

3,0

n.a.

HICP inflation

(%)

SP Dec 2009

n.a.

–1,7

–1,2

1,0

1,7

1,8

1,8

COM Nov 2009

3,1

–1,5

–0,6

1,0

n.a.

n.a.

n.a.

SP Oct 2008

3,1

0,5

1,5

1,8

1,8

1,8

n.a.

Output gap (8)

(% of potential GDP)

SP Dec 2009

0,0

–7,0

–7,6

–4,6

–2,2

–0,6

0,1

COM Nov 2009 (9)

–0,1

–7,2

–7,8

–5,4

n.a.

n.a.

n.a.

SP Oct 2008

0,5

–3,5

–4,1

–3,4

–1,6

–0,5

n.a.

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

(% of GDP)

SP Dec 2009

n.a.

–2,0

0,6

1,2

1,6

1,6

1,3

COM Nov 2009

–5,1

–3,1

–1,8

–1,4

n.a.

n.a.

n.a.

SP Oct 2008

–6,3

–4,2

–3,5

–3,4

–3,0

–2,8

n.a.

General government revenue

(% of GDP)

SP Dec 2009

34,8

34,2

35,2

35,5

36,3

36,7

37,1

COM Nov 2009

34,9

34,4

34,4

33,8

n.a.

n.a.

n.a.

SP Oct 2008

33,6

33,7

34,4

34,6

33,9

34,4

n.a.

General government expenditure

(% of GDP)

SP Dec 2009

42,0

45,9

46,8

45,5

43,5

41,5

40,0

COM Nov 2009

42,0

46,9

49,1

48,4

n.a.

n.a.

n.a.

SP Oct 2008

39,9

43,3

43,4

41,0

38,7

37,0

n.a.

General government balance

(% of GDP)

SP Dec 2009

–7,2

–11,7

–11,6

–10,0

–7,2

–4,9

–2,9

COM Nov 2009

–7,2

–12,5

–14,7

–14,7

n.a.

n.a.

n.a.

SP Oct 2008

–6,3

–9,5

–9,0

–6,4

–4,8

–2,6

n.a.

Primary balance

(% of GDP)

SP Dec 2009

–6,1

–9,6

–8,8

–6,6

–3,4

–1

1

COM Nov 2009

–6,1

–10,2

–11,3

–10,6

n.a.

n.a.

n.a.

SP Oct 2008

–5,2

–7,3

–6,4

–3,5

–1,7

0,7

n.a.

Cyclically adjusted balance (8)

(% of GDP)

SP Dec 2009

–7,2

–8,9

–8,6

–8,2

–6,3

–4,7

–2,9

COM Nov 2009

–7,1

–9,6

–11,5

–12,5

n.a.

n.a.

n.a.

SP Oct 2008

–6,5

–8,1

–7,4

–5,0

–4,1

–2,4

n.a.

Structural balance (10)

(% of GDP)

SP Dec 2009

–6,4

–9,3

–9,2

–8,2

–6,3

–4,7

–2,9

COM Nov 2009

–7,1

–10,1

–11,5

–12,5

n.a.

n.a.

n.a.

SP Oct 2008

–6,2

–8,1

–7,4

–5,0

–4,1

–2,4

n.a.

Government gross debt

(% of GDP)

SP Dec 2009

n.a.

64,5

77,9

82,9

83,9

83,3

80,8

COM Nov 2009

44,1

65,8

82,9

96,2

n.a.

n.a.

n.a.

SP Oct 2008

40,6

52,7

62,3

65,7

66,2

64,5

n.a.

Stability programme (SP); Commission services’ autumn 2009 forecasts (COM); Commission services’ calculations

---

(1)  OJ L 209, 2.8.1997, p. 1. The documents referred to in this text can be found at the following website: http://ec.europa.eu/economy_finance/sgp/index_en.htm

(2)  The assessment notably takes into account the Commission services’ autumn 2009 forecast, but also other information that has become available since then.

(3)  The increase in the social contributions reflects a positive carry-over effect of the measures introduced in the April 2009 supplementary budget. The category ‘other revenue’ will increase due to the higher surplus of the Central Bank paid to the government in 2010 as compared to 2009, increased receipts from the bank guarantee schemes, as well as due to a one-off transfer of pension fund assets to the general government of 0,6 % of GDP in 2010 after a similar operation in 2009 yielding 0,4 % of GDP.

(4)  In the Council conclusions from 10 November 2009 on sustainability of public finances ‘the Council calls on Member States to focus attention to sustainability-oriented strategies in their upcoming stability and convergence programmes’ and further ‘invites the Commission, together with the Economic Policy Committee and the Economic and Financial Committee, to further develop methodologies for assessing the long-term sustainability of public finances in time for the next Sustainability report’, which is foreseen in 2012.

(5)  These reform plans are not included in the estimated impact of ageing on the public finances reported at the beginning of the paragraph.

(6)  In particular, the data on nominal effective exchange rate; EU GDP growth, and growth of relevant foreign markets are not provided. More significantly, the revenue and expenditure projections in the programme are of a technical nature rather than being targets.

(7)  The Commission services’ autumn 2009 forecast was prepared on a pre-budget basis.

(8)  The figures reported as having been taken from the October 2008 stability programme actually refer to its January 2009 addendum.

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

(10)  Based on estimated potential growth of 1,8 %, – 0,5 %, – 0,7 % and 0,0 % respectively in the period 2008-2011.

(11)  Cyclically adjusted balance excluding one-off and other temporary measures. One-off and other temporary measures are 0,4 % of GDP in 2009 and 0,6 % in 2010 (both deficit-reducing) according to the most recent programme and 0,5 % of GDP in 2009 (deficit-reducing) according to the Commission services’ autumn 2009 forecast.

Source:

Stability programme (SP); Commission services’ autumn 2009 forecasts (COM); Commission services’ calculations

---

| 1.6.2010 | EN | Official Journal of the European Union | C 142/13 |
| --- | --- | --- | --- |

1.6.2010

EN

Official Journal of the European Union

C 142/13

---

COUNCIL OPINION

on the updated stability programme of Italy, 2009-2012

2010/C 142/03

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty on the Functioning of the European Union,

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 26 April 2010 the Council examined the updated stability programme of Italy, which covers the period 2009 to 2012. |
| --- | --- |

(1)

On 26 April 2010 the Council examined the updated stability programme of Italy, which covers the period 2009 to 2012.

| (2) | While the low indebtedness of the household sector and a relatively solid financial sector have provided some shelter from the global financial crisis, deep-seated structural weaknesses giving rise to unsatisfactory productivity growth had weakened the Italian economy long before the global downturn. After having contracted for five quarters, GDP rebounded in the third quarter of 2009, but declined again slightly in the fourth quarter. The recession has taken its toll on the labour market with a lag: in 2009, its impact materialised more in terms of hours worked than of headcount employment, with many workers, in particular in the hardest hit manufacturing sector, accessing the wage supplementation fund to complement their salary for the fewer hours worked. The government's policy response to the crisis was adequate in view of the very high government debt, in a context of increased risk aversion. Since the last quarter of 2008, the government approved several measures to shore up the stability of the financial sector, restore confidence and offer relief to distressed firms and households. According to the government's estimates, the recovery measures were fully financed by redeploying existing funds and increasing revenues, with no effect on the deficit. Notwithstanding the government's prudent fiscal stance, the impact of the economic downturn on the Italian public finances has been significant. The government deficit ratio doubled between 2008 and 2009, to 5,3 % of GDP (confirmed in the statistical office's estimate released on 1 March 2010). This, in conjunction with the very high government debt ratio, led to the Council deciding that Italy was in excessive deficit on 2 December 2009, with a deadline for the correction of this situation by 2012. Besides fiscal consolidation, which is a condition to keep public finances on a sustainable path, the key challenge for Italy's economic policy in the coming years will be to foster a swift and durable recovery in productivity growth so as to restore competitiveness and raise the country's low potential GDP growth. Far-reaching structural reforms are key to addressing the productivity challenge. In addition, restoring competitiveness in the short term also requires ensuring that wage developments are better aligned with productivity developments. |
| --- | --- |

(2)

While the low indebtedness of the household sector and a relatively solid financial sector have provided some shelter from the global financial crisis, deep-seated structural weaknesses giving rise to unsatisfactory productivity growth had weakened the Italian economy long before the global downturn. After having contracted for five quarters, GDP rebounded in the third quarter of 2009, but declined again slightly in the fourth quarter. The recession has taken its toll on the labour market with a lag: in 2009, its impact materialised more in terms of hours worked than of headcount employment, with many workers, in particular in the hardest hit manufacturing sector, accessing the wage supplementation fund to complement their salary for the fewer hours worked. The government's policy response to the crisis was adequate in view of the very high government debt, in a context of increased risk aversion. Since the last quarter of 2008, the government approved several measures to shore up the stability of the financial sector, restore confidence and offer relief to distressed firms and households. According to the government's estimates, the recovery measures were fully financed by redeploying existing funds and increasing revenues, with no effect on the deficit. Notwithstanding the government's prudent fiscal stance, the impact of the economic downturn on the Italian public finances has been significant. The government deficit ratio doubled between 2008 and 2009, to 5,3 % of GDP (confirmed in the statistical office's estimate released on 1 March 2010). This, in conjunction with the very high government debt ratio, led to the Council deciding that Italy was in excessive deficit on 2 December 2009, with a deadline for the correction of this situation by 2012. Besides fiscal consolidation, which is a condition to keep public finances on a sustainable path, the key challenge for Italy's economic policy in the coming years will be to foster a swift and durable recovery in productivity growth so as to restore competitiveness and raise the country's low potential GDP growth. Far-reaching structural reforms are key to addressing the productivity challenge. In addition, restoring competitiveness in the short term also requires ensuring that wage developments are better aligned with productivity developments.

| (3) | Although much of the observed decline in actual GDP in the context of the crisis is cyclical, the level of potential output has also been negatively affected. In addition, the crisis may also affect potential growth in the medium term through lower investment, constraints in credit availability and increasing structural unemployment. Moreover, the impact of the economic crisis compounds the negative effects of demographic ageing on potential output and the sustainability of public finances. Against this background it will be essential to accelerate the pace of structural reforms with the aim of supporting potential growth. In particular, for Italy it is important to undertake reforms in the areas of market competition, business environment, quality of public services and labour market functioning, including the reallocation of social expenditure towards a more comprehensive and uniform unemployment benefit system. |
| --- | --- |

(3)

Although much of the observed decline in actual GDP in the context of the crisis is cyclical, the level of potential output has also been negatively affected. In addition, the crisis may also affect potential growth in the medium term through lower investment, constraints in credit availability and increasing structural unemployment. Moreover, the impact of the economic crisis compounds the negative effects of demographic ageing on potential output and the sustainability of public finances. Against this background it will be essential to accelerate the pace of structural reforms with the aim of supporting potential growth. In particular, for Italy it is important to undertake reforms in the areas of market competition, business environment, quality of public services and labour market functioning, including the reallocation of social expenditure towards a more comprehensive and uniform unemployment benefit system.

| (4) | The macroeconomic scenario underlying the programme envisages that real GDP will return to positive growth of 1,1 % in 2010, from – 4,8 % in 2009 (– 5 % according to the statistical office's estimate released on 1 March 2010), and accelerate to a rate of 2 % over the rest of the programme period. Assessed against currently available information (2), this scenario appears to be based on favourable growth assumptions. The programme's projections for inflation appear realistic. The projections for employment growth and the unemployment rate are more favourable than in the Commission services’ autumn 2009 forecast, consistent with the programme's higher real GDP growth projections. |
| --- | --- |

(4)

The macroeconomic scenario underlying the programme envisages that real GDP will return to positive growth of 1,1 % in 2010, from – 4,8 % in 2009 (– 5 % according to the statistical office's estimate released on 1 March 2010), and accelerate to a rate of 2 % over the rest of the programme period. Assessed against currently available information (2), this scenario appears to be based on favourable growth assumptions. The programme's projections for inflation appear realistic. The projections for employment growth and the unemployment rate are more favourable than in the Commission services’ autumn 2009 forecast, consistent with the programme's higher real GDP growth projections.

| (5) | The programme estimates the general government deficit in 2009 at 5,3 % of GDP. The significant deterioration from a deficit of 2,7 % of GDP in 2008 reflects to a large extent the impact of the crisis on government finances. Several recovery packages were adopted in line with the European Economic Recovery Plan (EERP), together amounting to around 0,7 % of GDP in 2009 and, according to the authorities, fully financed by redeploying existing funds and additional revenues. According to the programme, fiscal policy is planned to turn mildly restrictive already in 2010, and more significantly so in 2011 and 2012, with a view to correcting the excessive deficit by 2012. This is broadly in line with the exit strategy advocated by the Council, also taking into account the very high government debt ratio. |
| --- | --- |

(5)

The programme estimates the general government deficit in 2009 at 5,3 % of GDP. The significant deterioration from a deficit of 2,7 % of GDP in 2008 reflects to a large extent the impact of the crisis on government finances. Several recovery packages were adopted in line with the European Economic Recovery Plan (EERP), together amounting to around 0,7 % of GDP in 2009 and, according to the authorities, fully financed by redeploying existing funds and additional revenues. According to the programme, fiscal policy is planned to turn mildly restrictive already in 2010, and more significantly so in 2011 and 2012, with a view to correcting the excessive deficit by 2012. This is broadly in line with the exit strategy advocated by the Council, also taking into account the very high government debt ratio.

| (6) | For 2010 the programme plans a 0,3 pp. of GDP reduction in the general government deficit, to 5,0 % of GDP, which taken at face value can be regarded as broadly in line with the Council recommendations under Article 126(7) of 2 December 2009. The revenue-to-GDP ratio is set to fall by 0,5 pp., also because of the expiry of the one-off revenue-increasing measures impacting on 2009. The expenditure-to-GDP ratio is planned to fall more significantly, by 0,8 pp. of GDP, mainly thanks to the expenditure restraint adopted with the fiscal package for 2009-2011 approved in summer 2008. This is visible in the slowing of primary expenditure growth, which is set to increase by just 0,6 % in 2010, also through the fall in public investment after the acceleration in 2009. The 2010 budget itself contains some measures beyond those planned in the fiscal package for 2009-2011 approved in 2008, and, according to the authorities, has a neutral impact on the budgetary position. It contains some new expansionary measures, amounting to around 0,4 % of GDP, directed at supporting low-income workers and ensuring the funding of additional health and social expenditure, as well as of military missions abroad. The main source of financing is represented by the one-off revenues from the extraordinary tax on illegally expatriated assets — ‘scudo fiscale’ — recorded in 2009 (0,35 % of GDP) as its positive outturn gave rise to the decision, made in the budget for 2010, to postpone from 2009 to 2010 the collection of some income taxes estimated at 0,25 % of GDP.
  The additional expansionary measures imply some deviation from the recommendations for 2010, although it has to be recognised that these are of a small amount and, according to the authorities’ estimate, fully financed thanks to the reshuffling of the one-off proceeds of the scudo fiscale. After worsening by 0,25 pp. of GDP in 2009, the structural balance, i.e. the cyclically-adjusted balance net of one-off and other temporary measures, according to the commonly agreed methodology is set to improve by 0,5 pp. of GDP in 2010 mainly thanks to expenditure restraint. |
| --- | --- |

(6)

For 2010 the programme plans a 0,3 pp. of GDP reduction in the general government deficit, to 5,0 % of GDP, which taken at face value can be regarded as broadly in line with the Council recommendations under Article 126(7) of 2 December 2009. The revenue-to-GDP ratio is set to fall by 0,5 pp., also because of the expiry of the one-off revenue-increasing measures impacting on 2009. The expenditure-to-GDP ratio is planned to fall more significantly, by 0,8 pp. of GDP, mainly thanks to the expenditure restraint adopted with the fiscal package for 2009-2011 approved in summer 2008. This is visible in the slowing of primary expenditure growth, which is set to increase by just 0,6 % in 2010, also through the fall in public investment after the acceleration in 2009. The 2010 budget itself contains some measures beyond those planned in the fiscal package for 2009-2011 approved in 2008, and, according to the authorities, has a neutral impact on the budgetary position. It contains some new expansionary measures, amounting to around 0,4 % of GDP, directed at supporting low-income workers and ensuring the funding of additional health and social expenditure, as well as of military missions abroad. The main source of financing is represented by the one-off revenues from the extraordinary tax on illegally expatriated assets — ‘scudo fiscale’ — recorded in 2009 (0,35 % of GDP) as its positive outturn gave rise to the decision, made in the budget for 2010, to postpone from 2009 to 2010 the collection of some income taxes estimated at 0,25 % of GDP.

The additional expansionary measures imply some deviation from the recommendations for 2010, although it has to be recognised that these are of a small amount and, according to the authorities’ estimate, fully financed thanks to the reshuffling of the one-off proceeds of the scudo fiscale. After worsening by 0,25 pp. of GDP in 2009, the structural balance, i.e. the cyclically-adjusted balance net of one-off and other temporary measures, according to the commonly agreed methodology is set to improve by 0,5 pp. of GDP in 2010 mainly thanks to expenditure restraint.

| (7) | The main aim of the programme's medium-term budgetary strategy is to reduce the deficit below the 3 % of GDP deficit reference value by 2012, the deadline for the correction of the excessive deficit set by the Council, with deficit targets set at 3,9 % of GDP in 2011 and 2,7 % of GDP in 2012. To reach the targets, the government envisages an additional consolidation effort, beyond that already adopted with the fiscal package for 2009-2011, amounting to 0,4 pp. of GDP in 2011 and a further 0,8 pp. in 2012. No information is provided on the broad measures behind this additional consolidation, which hampers the assessment of the overall composition of the planned adjustment. The primary balance is planned at 1,3 % of GDP in 2011, and 2,7 % in 2012. The planned annual consolidation amounts to 0,5 pp. of GDP in 2011 and 0,75 pp. in 2012 in structural terms. The budgetary adjustment over the programme period thus appears to be somewhat back-loaded. The programme confirms the commitment to the medium-term objective (MTO), which is a balanced budgetary position in structural terms. Given the most recent projections and debt level, the MTO reflects the objectives of the Pact; however, the programme does not envisage achieving it within the programme period. |
| --- | --- |

(7)

The main aim of the programme's medium-term budgetary strategy is to reduce the deficit below the 3 % of GDP deficit reference value by 2012, the deadline for the correction of the excessive deficit set by the Council, with deficit targets set at 3,9 % of GDP in 2011 and 2,7 % of GDP in 2012. To reach the targets, the government envisages an additional consolidation effort, beyond that already adopted with the fiscal package for 2009-2011, amounting to 0,4 pp. of GDP in 2011 and a further 0,8 pp. in 2012. No information is provided on the broad measures behind this additional consolidation, which hampers the assessment of the overall composition of the planned adjustment. The primary balance is planned at 1,3 % of GDP in 2011, and 2,7 % in 2012. The planned annual consolidation amounts to 0,5 pp. of GDP in 2011 and 0,75 pp. in 2012 in structural terms. The budgetary adjustment over the programme period thus appears to be somewhat back-loaded. The programme confirms the commitment to the medium-term objective (MTO), which is a balanced budgetary position in structural terms. Given the most recent projections and debt level, the MTO reflects the objectives of the Pact; however, the programme does not envisage achieving it within the programme period.

| (8) | Overall, the budgetary outcomes could be worse than targeted in the programme. This possibility increases in the outer years of the programme period. First, real GDP growth could be lower than assumed in the programme for the whole period 2010-2012. In this context, the sensitivity analysis carried out in the programme indicates that a 0,5 % lower annual GDP growth over the programme horizon would imply a 0,7 pp. of GDP higher headline deficit by 2012 (3,4 % of GDP vs the 2,7 % target) and, due to the implications for potential growth, a 0,5 pp. smaller overall structural adjustment over the period 2010-2012. Second, the budgetary targets for 2011 and 2012 rely on the specification and implementation of further consolidation efforts but the programme does not spell out the broad measures behind this planned additional adjustment relative to the trend scenario based on unchanged legislation presented in the programme. The latter, moreover, tends to understate actual expenditure trends and thus the size of the consolidation measures needed to achieve the budgetary targets. Third, even before considering the required additional consolidation efforts, achieving the trend projections, which incorporate the summer 2008 fiscal package for the period 2009-2011, will be challenging because they already envisage a very significant degree of expenditure restraint. In this context, the track record indicates that expenditure overruns at the central and local level cannot be ruled out, particularly in current primary expenditure, which increased by around 4,5 % on average over the last decade. Respecting the tight expenditure targets that were set in the summer 2008 fiscal package will require an intensification of efforts to cut spending, increase efficiency and improve service quality. |
| --- | --- |

(8)

Overall, the budgetary outcomes could be worse than targeted in the programme. This possibility increases in the outer years of the programme period. First, real GDP growth could be lower than assumed in the programme for the whole period 2010-2012. In this context, the sensitivity analysis carried out in the programme indicates that a 0,5 % lower annual GDP growth over the programme horizon would imply a 0,7 pp. of GDP higher headline deficit by 2012 (3,4 % of GDP vs the 2,7 % target) and, due to the implications for potential growth, a 0,5 pp. smaller overall structural adjustment over the period 2010-2012. Second, the budgetary targets for 2011 and 2012 rely on the specification and implementation of further consolidation efforts but the programme does not spell out the broad measures behind this planned additional adjustment relative to the trend scenario based on unchanged legislation presented in the programme. The latter, moreover, tends to understate actual expenditure trends and thus the size of the consolidation measures needed to achieve the budgetary targets. Third, even before considering the required additional consolidation efforts, achieving the trend projections, which incorporate the summer 2008 fiscal package for the period 2009-2011, will be challenging because they already envisage a very significant degree of expenditure restraint. In this context, the track record indicates that expenditure overruns at the central and local level cannot be ruled out, particularly in current primary expenditure, which increased by around 4,5 % on average over the last decade. Respecting the tight expenditure targets that were set in the summer 2008 fiscal package will require an intensification of efforts to cut spending, increase efficiency and improve service quality.

| (9) | The general government gross debt-to-GDP ratio is well above the Treaty reference value and is projected to be on an increasing trend until 2010. After rising in 2008, the debt ratio is estimated in the programme to have increased by 9,3 pps, to 115,1 % of GDP in 2009 (115,8 % in the statistical office's estimate released on 1 March 2010), mainly due to the high interest burden and sharp contraction in real GDP, only partially offset by the still sizeable GDP deflator effect. A negative primary balance for the first time since 1991 also increased the debt, as did the stock flow adjustment, mainly because of the Treasury's precautionary accumulation of liquid assets. For 2010 the programme projects an additional 1,8 pps rise in the debt ratio as the debt-increasing effect of the interest burden is only partly offset by the assumed positive growth of real GDP and the GDP deflator. The debt ratio is then projected to follow a declining path in 2011 and 2012, to 114,6 % of GDP, mainly thanks to the planned positive primary balances and the assumed acceleration in real GDP growth. The evolution of the debt ratio could well be less favourable than projected in the programme, especially after 2010, in view of the risks identified for budgetary consolidation compounded by the possibility of less favourable real GDP growth than assumed in the programme. |
| --- | --- |

(9)

The general government gross debt-to-GDP ratio is well above the Treaty reference value and is projected to be on an increasing trend until 2010. After rising in 2008, the debt ratio is estimated in the programme to have increased by 9,3 pps, to 115,1 % of GDP in 2009 (115,8 % in the statistical office's estimate released on 1 March 2010), mainly due to the high interest burden and sharp contraction in real GDP, only partially offset by the still sizeable GDP deflator effect. A negative primary balance for the first time since 1991 also increased the debt, as did the stock flow adjustment, mainly because of the Treasury's precautionary accumulation of liquid assets. For 2010 the programme projects an additional 1,8 pps rise in the debt ratio as the debt-increasing effect of the interest burden is only partly offset by the assumed positive growth of real GDP and the GDP deflator. The debt ratio is then projected to follow a declining path in 2011 and 2012, to 114,6 % of GDP, mainly thanks to the planned positive primary balances and the assumed acceleration in real GDP growth. The evolution of the debt ratio could well be less favourable than projected in the programme, especially after 2010, in view of the risks identified for budgetary consolidation compounded by the possibility of less favourable real GDP growth than assumed in the programme.

| (10) | Medium-term debt projections that assume GDP growth rates to gradually recover to the values projected before the crisis, tax ratios to return to pre-crisis levels and that include the projected increase in age-related expenditure show that the budgetary strategy envisaged in the programme, taken at face value and with no further policy change, would be enough to stabilise the debt-to-GDP ratio by 2020. |
| --- | --- |

(10)

Medium-term debt projections that assume GDP growth rates to gradually recover to the values projected before the crisis, tax ratios to return to pre-crisis levels and that include the projected increase in age-related expenditure show that the budgetary strategy envisaged in the programme, taken at face value and with no further policy change, would be enough to stabilise the debt-to-GDP ratio by 2020.

| (11) | The long-term budgetary impact of ageing is clearly lower than the EU average, with pension expenditure showing a more limited increase than on average in the EU through the full implementation of the adopted reforms. Yet, pension expenditure as a share of GDP remains among the highest in the EU. The budgetary position in 2009 as estimated in the programme would not be sufficient to stabilise the current debt ratio. Achieving high primary surpluses would therefore contribute to limiting the risks to the long-term sustainability of public finances which were assessed in the Commission 2009 Sustainability Report (3) as medium. |
| --- | --- |

(11)

The long-term budgetary impact of ageing is clearly lower than the EU average, with pension expenditure showing a more limited increase than on average in the EU through the full implementation of the adopted reforms. Yet, pension expenditure as a share of GDP remains among the highest in the EU. The budgetary position in 2009 as estimated in the programme would not be sufficient to stabilise the current debt ratio. Achieving high primary surpluses would therefore contribute to limiting the risks to the long-term sustainability of public finances which were assessed in the Commission 2009 Sustainability Report (3) as medium.

| (12) | Fiscal governance in Italy has considerably improved since joining the euro area, prompted by the budgetary constraints imposed by the Treaty and the Stability and Growth Pact. However, there remains scope for improvement in several dimensions of its fiscal framework. A number of initiatives have been taken recently to improve fiscal governance in Italy. First, to address the traditional short-term orientation of the budgetary plans, in summer 2008 the government adopted a three-year package spelling out not only yearly targets for single expenditure and revenue items, but also the broad measures needed to achieve them. According to the authorities, this experience was not repeated with the budget for 2010 in view of the uncertainty connected to the economic downturn. However, the framework law on the reform of the budgetary process adopted in 2009 has enshrined in legislation the three-year budget horizon. A second improvement was the simplification of the structure of the State budget, allowing for a simpler and more policy-oriented allocation of resources.
  Third, some steps have been taken to improve monitoring of expenditure through detailed spending review exercises at the level of ministries. Also the two latter improvements were taken up in the framework law to become a permanent feature of the budgetary process. It remains to be seen whether the practical implementation of this reform, which will take some years, will deliver the planned results in terms of better expenditure control and fiscal governance. Going forward, a major challenge for fiscal governance is to specify and implement the new framework for fiscal federalism so as to ensure the accountability of local governments and foster efficiency. |
| --- | --- |

(12)

Fiscal governance in Italy has considerably improved since joining the euro area, prompted by the budgetary constraints imposed by the Treaty and the Stability and Growth Pact. However, there remains scope for improvement in several dimensions of its fiscal framework. A number of initiatives have been taken recently to improve fiscal governance in Italy. First, to address the traditional short-term orientation of the budgetary plans, in summer 2008 the government adopted a three-year package spelling out not only yearly targets for single expenditure and revenue items, but also the broad measures needed to achieve them. According to the authorities, this experience was not repeated with the budget for 2010 in view of the uncertainty connected to the economic downturn. However, the framework law on the reform of the budgetary process adopted in 2009 has enshrined in legislation the three-year budget horizon. A second improvement was the simplification of the structure of the State budget, allowing for a simpler and more policy-oriented allocation of resources.

Third, some steps have been taken to improve monitoring of expenditure through detailed spending review exercises at the level of ministries. Also the two latter improvements were taken up in the framework law to become a permanent feature of the budgetary process. It remains to be seen whether the practical implementation of this reform, which will take some years, will deliver the planned results in terms of better expenditure control and fiscal governance. Going forward, a major challenge for fiscal governance is to specify and implement the new framework for fiscal federalism so as to ensure the accountability of local governments and foster efficiency.

| (13) | Although the implementation of pension reforms and the gradual increase of the retirement age for female civil servants introduced in 2009 are positive developments, the composition of social expenditure remains biased towards high pension spending. This takes its toll on other social spending and more productive expenditure aimed at supporting research and innovation, and in turn may have negative effects on growth potential. In addition, given that the consolidation strategy over the programme period relies on an expenditure-based adjustment, significant efficiency gains are needed to avoid compromising the level and quality of services provided. Recent efforts to improve the efficiency and cost-effectiveness of the public administration and to reform the organisation of upper-secondary school curricula could potentially deliver positive budgetary outcomes in the medium to long run. |
| --- | --- |

(13)

Although the implementation of pension reforms and the gradual increase of the retirement age for female civil servants introduced in 2009 are positive developments, the composition of social expenditure remains biased towards high pension spending. This takes its toll on other social spending and more productive expenditure aimed at supporting research and innovation, and in turn may have negative effects on growth potential. In addition, given that the consolidation strategy over the programme period relies on an expenditure-based adjustment, significant efficiency gains are needed to avoid compromising the level and quality of services provided. Recent efforts to improve the efficiency and cost-effectiveness of the public administration and to reform the organisation of upper-secondary school curricula could potentially deliver positive budgetary outcomes in the medium to long run.

| (14) | Overall, in 2010 the budgetary strategy set out in the programme is broadly consistent with the Council recommendations under Article 126(7). However, from 2011 on, taking into account the risks to the deficit targets, the budgetary strategy may not be consistent with the Council recommendations. In particular, the deficit targets for 2011-2012 need to be backed up by concrete measures and the plans for the entire period sufficiently strengthened to address the risks from possibly less favourable GDP growth and possible slippages on the expenditure side. The same conclusion holds for the structural effort planned in the programme, which may fall short of what was recommended by the Council. Unless these risks are adequately addressed, and the consolidation plans fully implemented, the budgetary strategy may not be sufficient to bring the very high government debt ratio back on a declining path in 2011-2012. |
| --- | --- |

(14)

Overall, in 2010 the budgetary strategy set out in the programme is broadly consistent with the Council recommendations under Article 126(7). However, from 2011 on, taking into account the risks to the deficit targets, the budgetary strategy may not be consistent with the Council recommendations. In particular, the deficit targets for 2011-2012 need to be backed up by concrete measures and the plans for the entire period sufficiently strengthened to address the risks from possibly less favourable GDP growth and possible slippages on the expenditure side. The same conclusion holds for the structural effort planned in the programme, which may fall short of what was recommended by the Council. Unless these risks are adequately addressed, and the consolidation plans fully implemented, the budgetary strategy may not be sufficient to bring the very high government debt ratio back on a declining path in 2011-2012.

| (15) | 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). In its recommendations under Article 126(7) of 2 December 2009 with a view to bringing the excessive deficit situation to an end, the Council also invited Italy to report on progress made in the implementation of the Council’s recommendations in a separate chapter in the updates of the stability programmes. Italy partly complied with this recommendation, as no information is provided on the broad measures required to achieve the additional consolidation planned in 2011-2012. |
| --- | --- |

(15)

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). In its recommendations under Article 126(7) of 2 December 2009 with a view to bringing the excessive deficit situation to an end, the Council also invited Italy to report on progress made in the implementation of the Council’s recommendations in a separate chapter in the updates of the stability programmes. Italy partly complied with this recommendation, as no information is provided on the broad measures required to achieve the additional consolidation planned in 2011-2012.

The overall conclusion is that the programme projects the deficit to narrow slightly, to 5 % of GDP in 2010, from 5,3 % in 2009, thanks to the expenditure-based adjustment adopted in summer 2008 and confirmed by the 2010 budget. Thereafter, the deficit ratio is planned to decline to below 3 % by 2012, the deadline set by the Council for the correction of the excessive deficit. The strategy is based on (i) the further implementation of the expenditure-based adjustment for the period 2009-2011 adopted in summer 2008; and (ii) an additional consolidation effort amounting to 0,4 pp. of GDP in 2011 and further 0,8 pp. in 2012, which is however not underpinned by broad measures. The gross debt ratio is set to increase from just above 115 % of GDP in 2009 to around 117 % of GDP in 2010. Thereafter, it is projected to fall towards 114,6 % of GDP in 2012, consistent with the planned budgetary targets and economic growth assumptions. However, the deficit and debt ratios could be higher than targeted. Overall, the programme's macroeconomic assumptions appear favourable. In addition, beyond the lack of broad measures underpinning the planned additional consolidation efforts, achieving the trend projections will be very challenging as they already envisage a very significant degree of expenditure restraint. In this context, the track record indicates that expenditure overruns cannot be ruled out. A major challenge for fiscal governance is the implementation of the budgetary process reform and of rules governing fiscal federalism in such a way to improve the accountability of local governments and ensure fiscal discipline. Besides fiscal consolidation, which is a condition to keep public finances on a sustainable path in view also of the very high debt ratio, a further key challenge for Italy's economic policy in the coming years will be to foster a swift and durable recovery in productivity growth so as to restore competitiveness and raise the country's low potential GDP growth.

In view of the above assessment and also in the light of the recommendation under Article 126(7) TFEU of 2 December 2009, Italy is invited to:

| (i) | rigorously implement the planned budgetary adjustment, in particular carry out the fiscal consolidation in 2010 as planned and back up the planned consolidation for 2011 and 2012 with concrete measures, standing ready to adopt the required consolidation measures in case the macroeconomic scenario underpinning the Article 126(7) Recommendation materialises; seize, as prescribed in the EDP recommendation, any opportunity beyond the fiscal efforts, including from better economic conditions, to accelerate the reduction of the gross debt ratio towards the 60 % of GDP reference value; |
| --- | --- |

(i)

rigorously implement the planned budgetary adjustment, in particular carry out the fiscal consolidation in 2010 as planned and back up the planned consolidation for 2011 and 2012 with concrete measures, standing ready to adopt the required consolidation measures in case the macroeconomic scenario underpinning the Article 126(7) Recommendation materialises; seize, as prescribed in the EDP recommendation, any opportunity beyond the fiscal efforts, including from better economic conditions, to accelerate the reduction of the gross debt ratio towards the 60 % of GDP reference value;

| (ii) | ensure that the implementation of the reform of the budgetary process improves the conditions for expenditure control and helps sustain the objective of sound public finances and that the rules governing fiscal federalism improve the accountability of local governments and foster efficiency. |
| --- | --- |

(ii)

ensure that the implementation of the reform of the budgetary process improves the conditions for expenditure control and helps sustain the objective of sound public finances and that the rules governing fiscal federalism improve the accountability of local governments and foster efficiency.

Italy is also invited to improve compliance with the data requirements of the code of conduct in view of the indicative nature of revenue and expenditure projections in the outer years and to provide more information on the broad measures underpinning the envisaged consolidation in these years in the EDP chapter of the forthcoming updates of the stability programme.

Comparison of key macroeconomic and budgetary projections

| | 2008 | 2009 | 2010 | 2011 | 2012 |
| --- | --- | --- | --- | --- | --- |
| Real GDP
  (% change) | SP Jan 2010 | –1,0 | –4,8 | 1,1 | 2,0 | 2,0 |
| COM Nov 2009 | –1,0 | –4,7 | 0,7 | 1,4 | n.a. |
| SP Feb 2009 | –0,6 | –2,0 | 0,3 | 1,0 | n.a. |
| HICP inflation
  (%) | SP Jan 2010 | 3,5 | 0,8 | 1,5 | 2,0 | 2,0 |
| COM Nov 2009 | 3,5 | 0,8 | 1,8 | 2,0 | n.a. |
| SP Feb 2009 | 3,5 | 1,2 | 1,7 | 2,0 | n.a. |
| Output gap (5)

  (% of potential GDP) | SP Jan 2010 | 1,1 | –4,0 | –3,5 | –2,5 | –1,6 |
| COM Nov 2009 (6) | 1,3 | –3,6 | –3,2 | –2,5 | n.a. |
| SP Feb 2009 | 0,3 | –2,3 | –2,7 | –2,5 | n.a. |
| Net lending/borrowing vis-à-vis the rest of the world
  (% of GDP) | SP Jan 2010 | –2,9 | –1,8 | –1,6 | –1,3 | –1,3 |
| COM Nov 2009 | –2,9 | –2,3 | –2,3 | –2,3 | n.a. |
| SP Feb 2009 | –1,6 | –1,3 | –1,1 | –0,9 | n.a. |
| General government revenue (7)

  (% of GDP) | SP Jan 2010 | 46,0 | 46,4 | 45,9 | 45,5 | 45,6 |
| COM Nov 2009 | 46,0 | 46,3 | 45,5 | 45,4 | n.a. |
| SP Feb 2009 | 46,4 | 46,8 | 46,8 | 46,4 | n.a. |
| General government expenditure (7)

  (% of GDP) | SP Jan 2010 | 48,8 | 51,7 | 50,9 | 49,9 | 49,5 |
| COM Nov 2009 | 48,8 | 51,6 | 50,8 | 50,5 | n.a. |
| SP Feb 2009 | 49,0 | 50,5 | 50,0 | 49,5 | n.a. |
| General government balance
  (% of GDP) | SP Jan 2010 | –2,7 | –5,3 | –5,0 | –3,9 | –2,7 |
| COM Nov 2009 | –2,7 | –5,3 | –5,3 | –5,1 | n.a. |
| SP Feb 2009 | –2,6 | –3,7 | –3,3 | –2,9 | n.a. |
| Primary balance
  (% of GDP) | SP Jan 2010 | 2,4 | –0,5 | –0,1 | 1,3 | 2,7 |
| COM Nov 2009 | 2,4 | –0,5 | –0,6 | 0,1 | n.a. |
| SP Feb 2009 | 2,5 | 1,3 | 1,9 | 2,6 | n.a. |
| Cyclically-adjusted balance (5)

  (% of GDP) | SP Jan 2010 | –3,3 | –3,2 | –3,2 | –2,7 | –1,9 |
| COM Nov 2009 | –3,4 | –3,5 | –3,7 | –3,8 | n.a. |
| SP Feb 2009 | –2,7 | –2,6 | –1,9 | –1,6 | n.a. |
| Structural balance (8)

  (% of GDP) | SP Jan 2010 | –3,5 | –3,8 | –3,3 | –2,7 | –1,9 |
| COM Nov 2009 | –3,6 | –3,7 | –3,7 | –3,7 | n.a. |
| SP Feb 2009 | –2,9 | –2,7 | –2,0 | –1,7 | n.a. |
| Government gross debt
  (% of GDP) | SP Jan 2010 | 105,8 | 115,1 | 116,9 | 116,5 | 114,6 |
| COM Nov 2009 | 105,8 | 114,6 | 116,7 | 117,8 | n.a. |
| SP Feb 2009 | 105,9 | 110,5 | 112,0 | 111,6 | n.a. |
| Stability programme (SP); Commission services’ autumn 2009 forecasts (COM); Commission services’ calculations. |

2008

2009

2010

2011

2012

Real GDP

(% change)

SP Jan 2010

–1,0

–4,8

1,1

2,0

2,0

COM Nov 2009

–1,0

–4,7

0,7

1,4

n.a.

SP Feb 2009

–0,6

–2,0

0,3

1,0

n.a.

HICP inflation

(%)

SP Jan 2010

3,5

0,8

1,5

2,0

2,0

COM Nov 2009

3,5

0,8

1,8

2,0

n.a.

SP Feb 2009

3,5

1,2

1,7

2,0

n.a.

Output gap (5)

(% of potential GDP)

SP Jan 2010

1,1

–4,0

–3,5

–2,5

–1,6

COM Nov 2009 (6)

1,3

–3,6

–3,2

–2,5

n.a.

SP Feb 2009

0,3

–2,3

–2,7

–2,5

n.a.

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

(% of GDP)

SP Jan 2010

–2,9

–1,8

–1,6

–1,3

–1,3

COM Nov 2009

–2,9

–2,3

–2,3

–2,3

n.a.

SP Feb 2009

–1,6

–1,3

–1,1

–0,9

n.a.

General government revenue (7)

(% of GDP)

SP Jan 2010

46,0

46,4

45,9

45,5

45,6

COM Nov 2009

46,0

46,3

45,5

45,4

n.a.

SP Feb 2009

46,4

46,8

46,8

46,4

n.a.

General government expenditure (7)

(% of GDP)

SP Jan 2010

48,8

51,7

50,9

49,9

49,5

COM Nov 2009

48,8

51,6

50,8

50,5

n.a.

SP Feb 2009

49,0

50,5

50,0

49,5

n.a.

General government balance

(% of GDP)

SP Jan 2010

–2,7

–5,3

–5,0

–3,9

–2,7

COM Nov 2009

–2,7

–5,3

–5,3

–5,1

n.a.

SP Feb 2009

–2,6

–3,7

–3,3

–2,9

n.a.

Primary balance

(% of GDP)

SP Jan 2010

2,4

–0,5

–0,1

1,3

2,7

COM Nov 2009

2,4

–0,5

–0,6

0,1

n.a.

SP Feb 2009

2,5

1,3

1,9

2,6

n.a.

Cyclically-adjusted balance (5)

(% of GDP)

SP Jan 2010

–3,3

–3,2

–3,2

–2,7

–1,9

COM Nov 2009

–3,4

–3,5

–3,7

–3,8

n.a.

SP Feb 2009

–2,7

–2,6

–1,9

–1,6

n.a.

Structural balance (8)

(% of GDP)

SP Jan 2010

–3,5

–3,8

–3,3

–2,7

–1,9

COM Nov 2009

–3,6

–3,7

–3,7

–3,7

n.a.

SP Feb 2009

–2,9

–2,7

–2,0

–1,7

n.a.

Government gross debt

(% of GDP)

SP Jan 2010

105,8

115,1

116,9

116,5

114,6

COM Nov 2009

105,8

114,6

116,7

117,8

n.a.

SP Feb 2009

105,9

110,5

112,0

111,6

n.a.

Stability programme (SP); Commission services’ autumn 2009 forecasts (COM); Commission services’ calculations.

---

(1)  OJ L 209, 2.8.1997, p. 1. The documents referred to in this text can be found at the following website: http://ec.europa.eu/economy_finance/sgp/index_en.htm

(2)  The assessment notably takes into account the Commission services’ autumn 2009 forecast and February 2010 interim forecast, but also other information that has become available since then.

(3)  In the Council conclusions from 10 November 2009 on sustainability of public finances ‘the Council calls on Member States to focus attention to sustainability-oriented strategies in their upcoming stability and convergence programmes’ and further ‘invites the Commission, together with the Economic Policy Committee and the Economic and Financial Committee, to further develop methodologies for assessing the long-term sustainability of public finances in time for the next Sustainability report’, which is foreseen in 2012.

(4)  In particular, the programme does not indicate the broad measures underpinning the additional planned consolidation needed to achieve the budgetary objectives in the medium term. Accordingly, the expenditure and revenue ratios presented in the programme for 2011 and 2012 are not consistent with the budgetary targets. In addition, optional data on general government expenditure by function (table 3 in Annex 2 of the code of conduct) and on liquid financial asset and net financial debt (table 4 in Annex 2 of the code of conduct) are not presented.

(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 0,4 %, 0,2 %, 0,3 % and 0,7 % respectively in the period 2008-2011.

(7)  Revenue and expenditure data provided in the programme are trends based on unchanged legislation. The targeted general government balances incorporate additional measures with a positive impact of 0,4 % of GDP in 2011 and further 0,8 % in 2012.

(8)  Cyclically-adjusted balance excluding one-off and other temporary measures. One-off and other temporary measures are 0,2 % of GDP in 2008, 0,6 % in 2009 and 0,1 % 2010; all deficit-reducing according to the most recent programme. In the Commission services’ autumn 2009 forecast one-off and other temporary measures are 0,2 % of GDP in both 2008 and 2009 deficit-reducing; 0 % in 2010, and 0,1 % of GDP in 2011, deficit-increasing.

Source:

Stability programme (SP); Commission services’ autumn 2009 forecasts (COM); Commission services’ calculations.

---

| 1.6.2010 | EN | Official Journal of the European Union | C 142/19 |
| --- | --- | --- | --- |

1.6.2010

EN

Official Journal of the European Union

C 142/19

---

COUNCIL OPINION

on the updated convergence programme of Latvia, 2009-2012

2010/C 142/04

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty on the Functioning of the European Union,

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 26 April 2010 the Council examined the updated convergence programme of Latvia, which covers the period 2009 to 2012. |
| --- | --- |

(1)

On 26 April 2010 the Council examined the updated convergence programme of Latvia, which covers the period 2009 to 2012.

| (2) | The global financial crisis amplified the shock of the reversal of Latvia's domestic lending and house price boom by tightening credit availability and conditions. The concomitant downturn in external markets hit the tradeables sector. Furthermore, the depreciation of the currencies of certain principal trading partners added to the competitiveness losses of previous years.
  Latvia's financial markets and banking sector came under significant pressure from October 2008 onwards. This prompted the Latvian authorities to seek international financial assistance, which was provided at the end of 2008 (2) and made conditional on major fiscal consolidation as well as financial system and structural reforms. Subsequently, in view of a much larger than expected deterioration in economic and budgetary conditions in the first half of 2009, the government implemented additional fiscal consolidation measures, partly underpinned by structural reforms. The above mentioned developments led the Council to decide on the existence of an excessive deficit in Latvia on 7 July 2009 and to recommend its correction in accordance with Article 104(7) TEC by 2012. In the second half of 2009, the export-oriented sector of the economy stabilised and started to show some early signs of a recovery. However, the fall of domestic demand remained very severe, due mainly to a sharp deterioration on the labour market and negative credit growth. Nevertheless, the disbursements of international financial assistance, the rigorous implementation of the 2009 budget and the successful adoption of the 2010 budget with further fiscal consolidation measures helped to stabilise confidence and improved market sentiment towards Latvia. The main challenge for economic policy remains economic stabilisation and a return to a well-founded catching-up process. Economic stabilisation depends to a great extent on anchoring long-term expectations for which the implementation of the planned fiscal consolidation path is crucial. Economic stabilisation also hinges directly on taking structurally sound and socially equitable fiscal measures and also on the progress with restructuring the economy towards the tradeable sector. In view of the significant deterioration in external competitiveness during the boom years, there appears to be some further need for domestic price adjustment and productivity improvement. The use of EU structural funds should contribute to the strengthening of the tradeable sector and cushion the recession.
  The sharp decline in domestic demand and the opening up of spare capacity helped unwind existing imbalances, reducing inflation and eliminating the external deficit, largely through a collapse in imports. The external account balance, substantially negative in the boom years and financed by capital imports associated with the banking sector, leading to a rapid increase in net external liabilities, reached in 2009 an estimated surplus of over 8 % of GDP, and is set to remain in significant surplus over the programme period. |
| --- | --- |

(2)

The global financial crisis amplified the shock of the reversal of Latvia's domestic lending and house price boom by tightening credit availability and conditions. The concomitant downturn in external markets hit the tradeables sector. Furthermore, the depreciation of the currencies of certain principal trading partners added to the competitiveness losses of previous years.

Latvia's financial markets and banking sector came under significant pressure from October 2008 onwards. This prompted the Latvian authorities to seek international financial assistance, which was provided at the end of 2008 (2) and made conditional on major fiscal consolidation as well as financial system and structural reforms. Subsequently, in view of a much larger than expected deterioration in economic and budgetary conditions in the first half of 2009, the government implemented additional fiscal consolidation measures, partly underpinned by structural reforms. The above mentioned developments led the Council to decide on the existence of an excessive deficit in Latvia on 7 July 2009 and to recommend its correction in accordance with Article 104(7) TEC by 2012. In the second half of 2009, the export-oriented sector of the economy stabilised and started to show some early signs of a recovery. However, the fall of domestic demand remained very severe, due mainly to a sharp deterioration on the labour market and negative credit growth. Nevertheless, the disbursements of international financial assistance, the rigorous implementation of the 2009 budget and the successful adoption of the 2010 budget with further fiscal consolidation measures helped to stabilise confidence and improved market sentiment towards Latvia. The main challenge for economic policy remains economic stabilisation and a return to a well-founded catching-up process. Economic stabilisation depends to a great extent on anchoring long-term expectations for which the implementation of the planned fiscal consolidation path is crucial. Economic stabilisation also hinges directly on taking structurally sound and socially equitable fiscal measures and also on the progress with restructuring the economy towards the tradeable sector. In view of the significant deterioration in external competitiveness during the boom years, there appears to be some further need for domestic price adjustment and productivity improvement. The use of EU structural funds should contribute to the strengthening of the tradeable sector and cushion the recession.

The sharp decline in domestic demand and the opening up of spare capacity helped unwind existing imbalances, reducing inflation and eliminating the external deficit, largely through a collapse in imports. The external account balance, substantially negative in the boom years and financed by capital imports associated with the banking sector, leading to a rapid increase in net external liabilities, reached in 2009 an estimated surplus of over 8 % of GDP, and is set to remain in significant surplus over the programme period.

| (3) | Although much of the observed decline in actual GDP in the context of the crisis is cyclical, the level of potential output has also been negatively affected. In addition, the crisis may also affect potential growth in the medium term through lower investment, constraints in credit availability and increasing structural unemployment. Moreover, the impact of the economic crisis compounds the negative effects of demographic ageing on potential output and the sustainability of public finances. Against this background it will be essential to accelerate the pace of structural reforms with the aim of supporting potential growth. In particular, for Latvia it is important to step up implementation of wide-ranging structural reforms in the areas of budgetary and public sector management, raise skill levels as part of the effort to raise productivity, and make efficient use of the available EU structural funds. |
| --- | --- |

(3)

Although much of the observed decline in actual GDP in the context of the crisis is cyclical, the level of potential output has also been negatively affected. In addition, the crisis may also affect potential growth in the medium term through lower investment, constraints in credit availability and increasing structural unemployment. Moreover, the impact of the economic crisis compounds the negative effects of demographic ageing on potential output and the sustainability of public finances. Against this background it will be essential to accelerate the pace of structural reforms with the aim of supporting potential growth. In particular, for Latvia it is important to step up implementation of wide-ranging structural reforms in the areas of budgetary and public sector management, raise skill levels as part of the effort to raise productivity, and make efficient use of the available EU structural funds.

| (4) | The macroeconomic scenario underlying the programme envisages that after an estimated exceptionally severe 18,0 % fall in output in 2009, real GDP will decrease by a further 4,0 % in 2010 before growing by 2,0 % in 2011 and 3,8 % in 2012. The expected transition back to positive growth is led by the external sector and more mutedly by fixed investment, with private consumption and overall domestic demand registering significant expansion only late in the programme period. Assessed against currently available information (3), this scenario appears plausible, but uncertainty remains very high due to the severity of the recession.
  The programme’s projection for marked deflation in 2010 is realistic, but the degree of continued deflation projected for 2011 may underestimate the pace of the return to stability of prices. The external balance is expected to remain in significant surplus over the programme period, which seems broadly plausible, although the size of the expected surpluses appears high. The monetary and exchange rate assumptions of the programme are consistent with the macroeconomic scenario. |
| --- | --- |

(4)

The macroeconomic scenario underlying the programme envisages that after an estimated exceptionally severe 18,0 % fall in output in 2009, real GDP will decrease by a further 4,0 % in 2010 before growing by 2,0 % in 2011 and 3,8 % in 2012. The expected transition back to positive growth is led by the external sector and more mutedly by fixed investment, with private consumption and overall domestic demand registering significant expansion only late in the programme period. Assessed against currently available information (3), this scenario appears plausible, but uncertainty remains very high due to the severity of the recession.

The programme’s projection for marked deflation in 2010 is realistic, but the degree of continued deflation projected for 2011 may underestimate the pace of the return to stability of prices. The external balance is expected to remain in significant surplus over the programme period, which seems broadly plausible, although the size of the expected surpluses appears high. The monetary and exchange rate assumptions of the programme are consistent with the macroeconomic scenario.

| (5) | The programme estimates the general government deficit in 2009 at 10,0 % of GDP. The significant deterioration from a deficit of 4,1 % of GDP in 2008 reflects the impact of the crisis on government finances, despite the adoption of a restrictive supplementary budget on 16 June 2009 in consultation with international lenders, implying a consolidation effort of 4,4 % of GDP, almost fully on spending. Tax revenue collapsed by one quarter in nominal terms compared to 2008, despite increases in VAT and excise rates at the beginning of 2009. According to the programme and in compliance with commitments made in the framework of international financial assistance, fiscal policy is planned to remain severely restrictive throughout the programme period, given the absence of room for fiscal manoeuvre and the need to correct economic imbalances. This is in line with the exit strategy advocated by the Council for Latvia, anchored on correcting the excessive deficit by 2012. |
| --- | --- |

(5)

The programme estimates the general government deficit in 2009 at 10,0 % of GDP. The significant deterioration from a deficit of 4,1 % of GDP in 2008 reflects the impact of the crisis on government finances, despite the adoption of a restrictive supplementary budget on 16 June 2009 in consultation with international lenders, implying a consolidation effort of 4,4 % of GDP, almost fully on spending. Tax revenue collapsed by one quarter in nominal terms compared to 2008, despite increases in VAT and excise rates at the beginning of 2009. According to the programme and in compliance with commitments made in the framework of international financial assistance, fiscal policy is planned to remain severely restrictive throughout the programme period, given the absence of room for fiscal manoeuvre and the need to correct economic imbalances. This is in line with the exit strategy advocated by the Council for Latvia, anchored on correcting the excessive deficit by 2012.

| (6) | The 2010 State budget adopted by Parliament on 1 December 2009 entails a further discretionary consolidation effort amounting to over 4,2 % of GDP, as set in the context of the balance of payments assistance and endorsed in the Council Recommendation to Latvia of 7 July 2009. The consolidation is distributed fairly evenly between expenditure (2,0 % of GDP) and revenue (2,2 % of GDP). The fiscal effort on the revenue side results in a substantial increase expected for the revenue ratio (+ 2,4 % of GDP; the significant denominator effect almost directly offset by the corresponding erosion of tax bases).
  However, the primary expenditure ratio is expected to decrease by only 0,2 % of GDP despite the substantial consolidation effort (including the carry-over impact of the June 2009 measures), mostly due to the sizeable denominator effect. Among the revenue measures are the increase of the personal income tax rate (+ 0,8 % of GDP), various reforms that make the personal income tax and social contribution systems more neutral (+ 0,8 % of GDP), as well as additional taxation of real estate (+ 0,3 % of GDP, including through broadening of the base to residential property with some progressivity), progressive taxation of car usage (+ 0,2 % of GDP), and increased excise duties on gas and tobacco. On the expenditure side, the 2010 State budget introduced significant expenditure cuts based to a large extent on structural reforms with a medium-term impact, notably the merger/abolition of agencies and institutions, under the responsibilities of the ministries of agriculture, culture, education, and defence, while further cuts worth 0,5 % of GDP are made in transport maintenance expenditure and subsidies. Further wage cuts in local government bring savings of 0,4 % of GDP, while cuts in sickness, unemployment, maternity and paternity allowances above a certain threshold result in savings amounting to 0,2 % of GDP. There is no significant recourse to one-off measures. According to the Commission services’ calculations on the basis of the information in the programme, the structural balance (i.e., the cyclically adjusted balance net of one-off and other temporary measures) is expected to improve by slightly more than 2 % (from – 7,6 % to – 5,5 %), which is consistent with the needed restrictive fiscal stance. The improvement is less than the amount of consolidation measures given the mechanical erosion of tax bases and the increase of interest expenditure by 1,1 % of GDP. |
| --- | --- |

(6)

The 2010 State budget adopted by Parliament on 1 December 2009 entails a further discretionary consolidation effort amounting to over 4,2 % of GDP, as set in the context of the balance of payments assistance and endorsed in the Council Recommendation to Latvia of 7 July 2009. The consolidation is distributed fairly evenly between expenditure (2,0 % of GDP) and revenue (2,2 % of GDP). The fiscal effort on the revenue side results in a substantial increase expected for the revenue ratio (+ 2,4 % of GDP; the significant denominator effect almost directly offset by the corresponding erosion of tax bases).

However, the primary expenditure ratio is expected to decrease by only 0,2 % of GDP despite the substantial consolidation effort (including the carry-over impact of the June 2009 measures), mostly due to the sizeable denominator effect. Among the revenue measures are the increase of the personal income tax rate (+ 0,8 % of GDP), various reforms that make the personal income tax and social contribution systems more neutral (+ 0,8 % of GDP), as well as additional taxation of real estate (+ 0,3 % of GDP, including through broadening of the base to residential property with some progressivity), progressive taxation of car usage (+ 0,2 % of GDP), and increased excise duties on gas and tobacco. On the expenditure side, the 2010 State budget introduced significant expenditure cuts based to a large extent on structural reforms with a medium-term impact, notably the merger/abolition of agencies and institutions, under the responsibilities of the ministries of agriculture, culture, education, and defence, while further cuts worth 0,5 % of GDP are made in transport maintenance expenditure and subsidies. Further wage cuts in local government bring savings of 0,4 % of GDP, while cuts in sickness, unemployment, maternity and paternity allowances above a certain threshold result in savings amounting to 0,2 % of GDP. There is no significant recourse to one-off measures. According to the Commission services’ calculations on the basis of the information in the programme, the structural balance (i.e., the cyclically adjusted balance net of one-off and other temporary measures) is expected to improve by slightly more than 2 % (from – 7,6 % to – 5,5 %), which is consistent with the needed restrictive fiscal stance. The improvement is less than the amount of consolidation measures given the mechanical erosion of tax bases and the increase of interest expenditure by 1,1 % of GDP.

| (7) | Taken at face value, the fiscal path presented in the programme matches that agreed in the framework of balance of payments assistance, namely deficits limited to 6 % and 3 % of GDP in 2011 and 2012 and consistent with the Council Recommendation of 7 July 2009 of correcting the excessive deficit by 2012 at the latest.
  These fiscal targets require additional consolidation measures, as recommended by the Council and in line with the February 2010 supplemental memorandum of understanding. According to the Commission services’ recalculation of the structural balance based on the information provided in the programme according to the commonly agreed methodology, the updated convergence programme does not achieve the medium-term budgetary objective (MTO) of a structural deficit of 1 % of GDP within the programme period (4). Given the most recent projections and debt level, the MTO itself nevertheless reflects the objectives of the Stability and Growth Pact. According to the structural balance as calculated by the Commission services, the corresponding fiscal effort amounts to 3,75 % over two years, with some frontloading in 2011. The scenario for 2011 and 2012 is already backed by several measures on both the revenue and the expenditure side, which have been outlined by the Latvian authorities, and to which they have committed in the context of the balance of payment assistance. On the expenditure side, the Latvian authorities intend notably to carry out a broad review of social insurance benefits and pension systems, the goal for the latter being to preserve the future sustainability and adequacy of the three pillars of the pension system. |
| --- | --- |

(7)

Taken at face value, the fiscal path presented in the programme matches that agreed in the framework of balance of payments assistance, namely deficits limited to 6 % and 3 % of GDP in 2011 and 2012 and consistent with the Council Recommendation of 7 July 2009 of correcting the excessive deficit by 2012 at the latest.

These fiscal targets require additional consolidation measures, as recommended by the Council and in line with the February 2010 supplemental memorandum of understanding. According to the Commission services’ recalculation of the structural balance based on the information provided in the programme according to the commonly agreed methodology, the updated convergence programme does not achieve the medium-term budgetary objective (MTO) of a structural deficit of 1 % of GDP within the programme period (4). Given the most recent projections and debt level, the MTO itself nevertheless reflects the objectives of the Stability and Growth Pact. According to the structural balance as calculated by the Commission services, the corresponding fiscal effort amounts to 3,75 % over two years, with some frontloading in 2011. The scenario for 2011 and 2012 is already backed by several measures on both the revenue and the expenditure side, which have been outlined by the Latvian authorities, and to which they have committed in the context of the balance of payment assistance. On the expenditure side, the Latvian authorities intend notably to carry out a broad review of social insurance benefits and pension systems, the goal for the latter being to preserve the future sustainability and adequacy of the three pillars of the pension system.

| (8) | Looking forward, the developments could turn out worse than projected in the programme given the size of the remaining adjustment in the context of a sluggish economy, uncertainty on future revenue trends and on the measures which should back the consolidation, and the scope of the reforms which still need to be undertaken to underpin a sustainable recovery. As recognised by the programme, ensuring the stability of the financial sector is an important precondition for economic recovery. Regarding political and implementation risks, the extent of fiscal steps to be undertaken could expose the government to legal challenges, while, in the context of forthcoming elections, and given the major consolidation to date, it may prove difficult to find additional measures needed to match the programme targets for 2011 and 2012, on top of the extensive measures already adopted.
  On the other hand, there is a very strong incentive for the Latvian authorities to meet the binding commitments made under the balance of payments assistance agreements. Moreover, the Latvian authorities have given convincing evidence in the consolidation undertaken to date of being able to implement satisfactorily a very sizeable consolidation effort. The risks to the budgetary projections and the macroeconomic scenario thus appear broadly balanced over the whole programme period. |
| --- | --- |

(8)

Looking forward, the developments could turn out worse than projected in the programme given the size of the remaining adjustment in the context of a sluggish economy, uncertainty on future revenue trends and on the measures which should back the consolidation, and the scope of the reforms which still need to be undertaken to underpin a sustainable recovery. As recognised by the programme, ensuring the stability of the financial sector is an important precondition for economic recovery. Regarding political and implementation risks, the extent of fiscal steps to be undertaken could expose the government to legal challenges, while, in the context of forthcoming elections, and given the major consolidation to date, it may prove difficult to find additional measures needed to match the programme targets for 2011 and 2012, on top of the extensive measures already adopted.

On the other hand, there is a very strong incentive for the Latvian authorities to meet the binding commitments made under the balance of payments assistance agreements. Moreover, the Latvian authorities have given convincing evidence in the consolidation undertaken to date of being able to implement satisfactorily a very sizeable consolidation effort. The risks to the budgetary projections and the macroeconomic scenario thus appear broadly balanced over the whole programme period.

| (9) | Government gross debt is estimated at 34,8 % of GDP in 2009, up from 19,5 % in the year before. The debt ratio is projected to increase sharply by a further 22 pps over the programme period, driven by significant fiscal deficits, but also due to a substantial positive stock-flow adjustment amounting to 8 % of GDP in 2010, as disbursements of around 15 % of GDP from various international lenders are expected to more than cover strict budgetary needs. However, the final cost of banking sector support measures represents a risk in 2011 and 2012. Consequently, there are risks surrounding the programme projection showing the debt ratio peaking at slightly below 60 % in 2011. The projection for the final programme year of 2012 is 56,8 % of GDP. While the debt ratio is projected to remain below the Treaty reference value throughout the programme period, it is on a rapidly increasing trend up to 2011. |
| --- | --- |

(9)

Government gross debt is estimated at 34,8 % of GDP in 2009, up from 19,5 % in the year before. The debt ratio is projected to increase sharply by a further 22 pps over the programme period, driven by significant fiscal deficits, but also due to a substantial positive stock-flow adjustment amounting to 8 % of GDP in 2010, as disbursements of around 15 % of GDP from various international lenders are expected to more than cover strict budgetary needs. However, the final cost of banking sector support measures represents a risk in 2011 and 2012. Consequently, there are risks surrounding the programme projection showing the debt ratio peaking at slightly below 60 % in 2011. The projection for the final programme year of 2012 is 56,8 % of GDP. While the debt ratio is projected to remain below the Treaty reference value throughout the programme period, it is on a rapidly increasing trend up to 2011.

| (10) | Medium-term debt projections that assume GDP growth rates to only gradually recover to the values projected before the crisis and tax ratios to return to pre-crisis levels show that the budgetary strategy envisaged in the programme, taken at face value, would almost stabilise the debt-to-GDP ratio by 2020. |
| --- | --- |

(10)

Medium-term debt projections that assume GDP growth rates to only gradually recover to the values projected before the crisis and tax ratios to return to pre-crisis levels show that the budgetary strategy envisaged in the programme, taken at face value, would almost stabilise the debt-to-GDP ratio by 2020.

| (11) | The long-term budgetary impact of ageing is clearly lower than the EU average, as a result of the pension reforms already enacted. However, the budgetary position in 2009, as estimated in the programme, compounds the budgetary impact of population ageing on the sustainability gap.
  Reducing the primary deficit over the medium term, as foreseen in the programme, would contribute to reducing the risks to the sustainability of public finances, which were assessed in the Commission 2009 Sustainability Report (5) as high. |
| --- | --- |

(11)

The long-term budgetary impact of ageing is clearly lower than the EU average, as a result of the pension reforms already enacted. However, the budgetary position in 2009, as estimated in the programme, compounds the budgetary impact of population ageing on the sustainability gap.

Reducing the primary deficit over the medium term, as foreseen in the programme, would contribute to reducing the risks to the sustainability of public finances, which were assessed in the Commission 2009 Sustainability Report (5) as high.

| (12) | The pro-cyclical fiscal policy implemented during the years preceding the crisis calls for a radical strengthening of the budgetary framework and public finance management system. Some progress has already been made, and more initiatives are planned. The need to remove unnecessary rigidities in the budget to improve spending flexibility has been addressed in a Cabinet Regulation of 3 November 2009, giving the Minister of Finance the ability to reallocate appropriations for one budget entity across programmes, sub-programmes and expenditure economic categories. Monitoring of EU structural funds-related expenditure has been strengthened by changes in the state budget law made with the 2010 budget. Going forward, the Ministry of Finance is committed to develop and submit a draft fiscal discipline law, in collaboration with other relevant institutions, in order to ensure counter-cyclical fiscal discipline at all public administration levels. Some broad reviews are likely to improve the prioritisation and decision-making process prior to the design of next budgets: an analysis is planned of all services provided by public institutions, aimed at assessing whether such services need to be continued, suspended or outsourced, and a review of all public companies is to take place with a view to their possible restructuring. To support fiscal consolidation, there also is a need to put in place effective sanction procedures for individuals’ misuse of public funds, to improve the collection and processing of general government data, and to strengthen the monitoring of outstanding and planned commitments. |
| --- | --- |

(12)

The pro-cyclical fiscal policy implemented during the years preceding the crisis calls for a radical strengthening of the budgetary framework and public finance management system. Some progress has already been made, and more initiatives are planned. The need to remove unnecessary rigidities in the budget to improve spending flexibility has been addressed in a Cabinet Regulation of 3 November 2009, giving the Minister of Finance the ability to reallocate appropriations for one budget entity across programmes, sub-programmes and expenditure economic categories. Monitoring of EU structural funds-related expenditure has been strengthened by changes in the state budget law made with the 2010 budget. Going forward, the Ministry of Finance is committed to develop and submit a draft fiscal discipline law, in collaboration with other relevant institutions, in order to ensure counter-cyclical fiscal discipline at all public administration levels. Some broad reviews are likely to improve the prioritisation and decision-making process prior to the design of next budgets: an analysis is planned of all services provided by public institutions, aimed at assessing whether such services need to be continued, suspended or outsourced, and a review of all public companies is to take place with a view to their possible restructuring. To support fiscal consolidation, there also is a need to put in place effective sanction procedures for individuals’ misuse of public funds, to improve the collection and processing of general government data, and to strengthen the monitoring of outstanding and planned commitments.

| (13) | The quality of public finances is likely to benefit from substantial changes impacting the revenue structure, including an increased focus on more efficient and equitable taxation of wealth. However, the tax wedge on labour will remain high, following the increase of the personal income tax rate. A consistent longer-term tax strategy would help in optimising the impact of the taxation structure on growth. The design of appropriate administrative and legal devices to tackle the grey economy also seems necessary to ensure the success of the ongoing fiscal consolidation. As consolidation needs have squeezed resources, several significant steps have been taken to strengthen the efficiency of public spending. Strengthening the capacities of the State Employment Agency could improve the efficiency of the labour market activation measures. In more general terms, using EU structural funds-related financing in a timely and well-targeted manner is likely to prove helpful in mitigating the impact of the economic crisis. The law regulating the remuneration of civil servants and employees of central and local government institutions, adopted on 1 December 2009, merges all regulations for public sector employees and creates additional incentives for these employees by strengthening the transparency of the remuneration system, while for the budgetary authorities at different levels of government it tightens expenditure control and underpins the consolidation process. |
| --- | --- |

(13)

The quality of public finances is likely to benefit from substantial changes impacting the revenue structure, including an increased focus on more efficient and equitable taxation of wealth. However, the tax wedge on labour will remain high, following the increase of the personal income tax rate. A consistent longer-term tax strategy would help in optimising the impact of the taxation structure on growth. The design of appropriate administrative and legal devices to tackle the grey economy also seems necessary to ensure the success of the ongoing fiscal consolidation. As consolidation needs have squeezed resources, several significant steps have been taken to strengthen the efficiency of public spending. Strengthening the capacities of the State Employment Agency could improve the efficiency of the labour market activation measures. In more general terms, using EU structural funds-related financing in a timely and well-targeted manner is likely to prove helpful in mitigating the impact of the economic crisis. The law regulating the remuneration of civil servants and employees of central and local government institutions, adopted on 1 December 2009, merges all regulations for public sector employees and creates additional incentives for these employees by strengthening the transparency of the remuneration system, while for the budgetary authorities at different levels of government it tightens expenditure control and underpins the consolidation process.

| (14) | Latvia has been hit very severely by the crisis and has had to have recourse to international financial assistance. Weakness of the labour market, financial deleveraging and the need for fiscal consolidation will hold back economic recovery, although there are positive signs that competitiveness indicators have started to improve. Financial market pressures have subsided significantly since summer 2009, but the situation remains highly dependent on further action to address the remaining challenges. Financial sector supervision has been strengthened, including better cooperation with foreign supervisory bodies, and steps have been taken to ensure adequate capitalisation in the banking system. Latvia has taken bold measures to address the deterioration of public finances.
  Achieving a sustainable improvement in the public finances while ensuring a fair burden-sharing and supporting the competitiveness of the economy could be supported by a further strengthening of the absorption and governance of EU structural funds, a focus on actions supporting FDI and export-generating businesses, relevant training and education for the labour force as well as by clearer priorities for competitiveness and R&D policy. |
| --- | --- |

(14)

Latvia has been hit very severely by the crisis and has had to have recourse to international financial assistance. Weakness of the labour market, financial deleveraging and the need for fiscal consolidation will hold back economic recovery, although there are positive signs that competitiveness indicators have started to improve. Financial market pressures have subsided significantly since summer 2009, but the situation remains highly dependent on further action to address the remaining challenges. Financial sector supervision has been strengthened, including better cooperation with foreign supervisory bodies, and steps have been taken to ensure adequate capitalisation in the banking system. Latvia has taken bold measures to address the deterioration of public finances.

Achieving a sustainable improvement in the public finances while ensuring a fair burden-sharing and supporting the competitiveness of the economy could be supported by a further strengthening of the absorption and governance of EU structural funds, a focus on actions supporting FDI and export-generating businesses, relevant training and education for the labour force as well as by clearer priorities for competitiveness and R&D policy.

| (15) | Overall, in 2010 the budgetary strategy set out in the programme is consistent with the Council recommendations under Article 104(7) TEC and the deficit targets set in the framework of balance of payments assistance. From 2011 on, taking into account the risks, the budgetary strategy also appears broadly consistent with the deficit targets set in both frameworks, and reflects the authorities’ ambition to comply with the Maastricht criteria in 2012 and join the euro area by 2014. Fiscal policy now seems appropriate to ensure a smooth participation in ERM II, responding to the challenges posed by the severe recession through the ambitious correction of the significant structural deficit now underway. However, the average annual improvement in the structural balance of around 2 % of GDP is less than an average annual fiscal effort of at least 2,75 % over the period 2010-2012 recommended by the Council in July 2009, notably given the increase of interest expenditure by almost 2 % of GDP, and the mechanical erosion of tax bases at the beginning of the period. However, cyclically-adjusted and structural balances need to be interpreted with caution, taking into account significant uncertainties around potential growth and output gap estimates for Latvia and that the exceptionally volatile economic environment from 2008 may lead to standard elasticities not sufficiently capturing the impact on the budget of the extreme downturn experienced by Latvia. Overall, in view of the balanced risks and taking into account the amount of discretionary measures already taken or outlined, the discretionary fiscal effort as planned in the programme appears broadly consistent with the July Council recommendations.
  However, given the amount of remaining fiscal adjustment to be undertaken and not yet backed by fully defined measures, there is a risk of budgetary outcomes worse than planned, although this risk is counterbalanced by the binding commitments given under the international financial assistance agreements and the authorities’ record to date in meeting these. This reinforces the need for the Latvian authorities to improve the budgetary framework and decision-making processes, as planned in the course of 2010. |
| --- | --- |

(15)

Overall, in 2010 the budgetary strategy set out in the programme is consistent with the Council recommendations under Article 104(7) TEC and the deficit targets set in the framework of balance of payments assistance. From 2011 on, taking into account the risks, the budgetary strategy also appears broadly consistent with the deficit targets set in both frameworks, and reflects the authorities’ ambition to comply with the Maastricht criteria in 2012 and join the euro area by 2014. Fiscal policy now seems appropriate to ensure a smooth participation in ERM II, responding to the challenges posed by the severe recession through the ambitious correction of the significant structural deficit now underway. However, the average annual improvement in the structural balance of around 2 % of GDP is less than an average annual fiscal effort of at least 2,75 % over the period 2010-2012 recommended by the Council in July 2009, notably given the increase of interest expenditure by almost 2 % of GDP, and the mechanical erosion of tax bases at the beginning of the period. However, cyclically-adjusted and structural balances need to be interpreted with caution, taking into account significant uncertainties around potential growth and output gap estimates for Latvia and that the exceptionally volatile economic environment from 2008 may lead to standard elasticities not sufficiently capturing the impact on the budget of the extreme downturn experienced by Latvia. Overall, in view of the balanced risks and taking into account the amount of discretionary measures already taken or outlined, the discretionary fiscal effort as planned in the programme appears broadly consistent with the July Council recommendations.

However, given the amount of remaining fiscal adjustment to be undertaken and not yet backed by fully defined measures, there is a risk of budgetary outcomes worse than planned, although this risk is counterbalanced by the binding commitments given under the international financial assistance agreements and the authorities’ record to date in meeting these. This reinforces the need for the Latvian authorities to improve the budgetary framework and decision-making processes, as planned in the course of 2010.

| (16) | 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. In its recommendations under Article 104(7) TEC of 7 July 2009 with a view to bring the excessive deficit situation to an end, the Council also invited Latvia to report on progress made in the implementation of the Council recommendations in a separate chapter in the updates of the convergence programmes. Latvia has fully complied with this recommendation. |
| --- | --- |

(16)

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. In its recommendations under Article 104(7) TEC of 7 July 2009 with a view to bring the excessive deficit situation to an end, the Council also invited Latvia to report on progress made in the implementation of the Council recommendations in a separate chapter in the updates of the convergence programmes. Latvia has fully complied with this recommendation.

The overall conclusion is that Latvia is undertaking a significant fiscal consolidation and economic adjustment in line with the Council recommendations, supported by the adoption of a 2010 budget based on high-quality measures, wide-ranging reforms in the public sector, an improved absorption of EU structural funds, targeted labour market policies, and action to strengthen the financial sector. Looking forward, risks pertain to the size of the remaining adjustment in the context of a sluggish economy, uncertainty on future revenue trends and on the measures which should back the consolidation, and the scope of the reforms which still need to be undertaken to underpin a sustainable recovery. Further improvements in the budget framework could facilitate the identification and implementation of the necessary measures, reducing the risk that the budgetary outcome is worse than planned.

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

| (i) | fully implement the 2010 budget as adopted on 1 December 2009; prepare a menu of budgetary options producing savings or additional revenues allowing the adoption of a 2011 budget in accordance with the consolidation needs; adopt a 2012 budget also consistent with the targeted fiscal path, in line with the Council Recommendation under Article 104(7); |
| --- | --- |

(i)

fully implement the 2010 budget as adopted on 1 December 2009; prepare a menu of budgetary options producing savings or additional revenues allowing the adoption of a 2011 budget in accordance with the consolidation needs; adopt a 2012 budget also consistent with the targeted fiscal path, in line with the Council Recommendation under Article 104(7);

| (ii) | carry out the thorough and forward-looking analysis needed for a wide-ranging social benefits reform, with a view to implement such a reform in the course of 2011 together with further measures on the revenue side; |
| --- | --- |

(ii)

carry out the thorough and forward-looking analysis needed for a wide-ranging social benefits reform, with a view to implement such a reform in the course of 2011 together with further measures on the revenue side;

| (iii) | improve fiscal governance and transparency, inter alia by adopting the draft fiscal discipline law, by strengthening the binding nature of the medium-term budgetary framework, and by putting in place effective sanction procedures for individuals’ misuses of public funds; strengthen control, coordination and sanction mechanisms aiming at tackling the grey economy; |
| --- | --- |

(iii)

improve fiscal governance and transparency, inter alia by adopting the draft fiscal discipline law, by strengthening the binding nature of the medium-term budgetary framework, and by putting in place effective sanction procedures for individuals’ misuses of public funds; strengthen control, coordination and sanction mechanisms aiming at tackling the grey economy;

| (iv) | foster economic growth by promoting the shift towards the tradeable sector and productivity improvements, including by ensuring that the available EU structural funds reach the real economy, and restructuring state-owned banks in a timely manner, within a medium-term strategy. |
| --- | --- |

(iv)

foster economic growth by promoting the shift towards the tradeable sector and productivity improvements, including by ensuring that the available EU structural funds reach the real economy, and restructuring state-owned banks in a timely manner, within a medium-term strategy.

Overview of key macroeconomic and budgetary projections

| | 2008 | 2009 | 2010 | 2011 | 2012 |
| --- | --- | --- | --- | --- | --- |
| Real GDP
  (% change) | CP Jan 2010 | –4,6 | –18,0 | –4,0 | 2,0 | 3,8 |
| COM Nov 2009 | –4,6 | –18,0 | –4,0 | 2,0 | n.a. |
| CP Jan 2009 | –2,0 | –5,0 | –3,0 | 1,5 | n.a. |
| HICP inflation
  (%) | CP Jan 2010 | 15,4 | 3,5 | –3,7 | –2,8 | 0,0 |
| COM Nov 2009 | 15,3 | 3,5 | –3,7 | –1,2 | n.a. |
| CP Jan 2009 | 15,4 | 5,9 | 2,2 | 1,3 | n.a. |
| Output gap (6)

  (% of potential GDP) | CP Jan 2010 | 9,5 | –8,8 | –10,7 | –7,8 | –3,8 |
| COM Nov 2009 (7) | 9,2 | –9,1 | –10,7 | –7,0 | n.a. |
| CP Jan 2009 | 5,9 | –1,6 | –5,7 | –5,3 | n.a. |
| Net lending/borrowing vis-à-vis the rest of the world
  (% of GDP) | CP Jan 2010 | –10,8 | 8,2 | 10,7 | 10,4 | 8,0 |
| COM Nov 2009 | –11,5 | 8,9 | 8,0 | 6,1 | n.a. |
| CP Jan 2009 | –13,4 | –5,4 | –2,6 | –2,3 | n.a. |
| General government revenue
  (% of GDP) | CP Jan 2010 | 34,7 | 33,8 | 36,2 | 38,6 | 39,4 |
| COM Nov 2009 | 34,6 | 34,9 | 33,4 | 32,9 | n.a. |
| CP Jan 2009 | 35,1 | 32,5 | 35,0 | 37,7 | n.a. |
| General government expenditure
  (% of GDP) | CP Jan 2010 | 38,8 | 43,8 | 44,7 | 44,6 | 42,4 |
| COM Nov 2009 | 38,8 | 43,8 | 45,7 | 45,1 | n.a. |
| CP Jan 2009 | 38,6 | 37,7 | 39,9 | 40,7 | n.a. |
| General government balance
  (% of GDP) | CP Jan 2010 | –4,1 | –10,0 | –8,5 | –6,0 | –2,9 |
| COM Nov 2009 | –4,1 | –9,0 | –12,3 | –12,2 | n.a. |
| CP Jan 2009 | –3,5 | –5,3 | –4,9 | –2,9 | n.a. |
| Primary balance
  (% of GDP) | CP Jan 2010 | –3,4 | –8,7 | –6,1 | –2,7 | 0,3 |
| COM Nov 2009 | –3,4 | –7,6 | –9,9 | –8,3 | n.a. |
| CP Jan 2009 | –2,9 | –3,7 | –3,5 | –1,4 | n.a. |
| Cyclically adjusted balance (6)

  (% of GDP) | CP Jan 2010 | –6,7 | –7,6 | –5,5 | –3,9 | –1,8 |
| COM Nov 2009 | –6,7 | –6,4 | –9,3 | –10,2 | n.a. |
| CP Jan 2009 | –5,1 | –4,9 | –3,3 | –1,4 | n.a. |
| Structural balance (8)

  (% of GDP) | CP Jan 2010 | –6,7 | –7,6 | –5,5 | –3,9 | –1,8 |
| COM Nov 2009 | –6,7 | –7,0 | –10,2 | –10,2 | n.a. |
| CP Jan 2009 | –5,1 | –4,9 | –3,3 | –1,4 | n.a. |
| Government gross debt
  (% of GDP) | CP Jan 2010 | 19,5 | 34,8 | 55,1 | 59,1 | 56,8 |
| COM Nov 2009 | 19,5 | 33,2 | 48,6 | 60,4 | n.a. |
| CP Jan 2009 | 19,4 | 32,4 | 45,4 | 47,3 | n.a. |
| Convergence programme (CP); Commission services’ autumn 2009 forecasts (COM); Commission services’ calculations |

2008

2009

2010

2011

2012

Real GDP

(% change)

CP Jan 2010

–4,6

–18,0

–4,0

2,0

3,8

COM Nov 2009

–4,6

–18,0

–4,0

2,0

n.a.

CP Jan 2009

–2,0

–5,0

–3,0

1,5

n.a.

HICP inflation

(%)

CP Jan 2010

15,4

3,5

–3,7

–2,8

0,0

COM Nov 2009

15,3

3,5

–3,7

–1,2

n.a.

CP Jan 2009

15,4

5,9

2,2

1,3

n.a.

Output gap (6)

(% of potential GDP)

CP Jan 2010

9,5

–8,8

–10,7

–7,8

–3,8

COM Nov 2009 (7)

9,2

–9,1

–10,7

–7,0

n.a.

CP Jan 2009

5,9

–1,6

–5,7

–5,3

n.a.

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

(% of GDP)

CP Jan 2010

–10,8

8,2

10,7

10,4

8,0

COM Nov 2009

–11,5

8,9

8,0

6,1

n.a.

CP Jan 2009

–13,4

–5,4

–2,6

–2,3

n.a.

General government revenue

(% of GDP)

CP Jan 2010

34,7

33,8

36,2

38,6

39,4

COM Nov 2009

34,6

34,9

33,4

32,9

n.a.

CP Jan 2009

35,1

32,5

35,0

37,7

n.a.

General government expenditure

(% of GDP)

CP Jan 2010

38,8

43,8

44,7

44,6

42,4

COM Nov 2009

38,8

43,8

45,7

45,1

n.a.

CP Jan 2009

38,6

37,7

39,9

40,7

n.a.

General government balance

(% of GDP)

CP Jan 2010

–4,1

–10,0

–8,5

–6,0

–2,9

COM Nov 2009

–4,1

–9,0

–12,3

–12,2

n.a.

CP Jan 2009

–3,5

–5,3

–4,9

–2,9

n.a.

Primary balance

(% of GDP)

CP Jan 2010

–3,4

–8,7

–6,1

–2,7

0,3

COM Nov 2009

–3,4

–7,6

–9,9

–8,3

n.a.

CP Jan 2009

–2,9

–3,7

–3,5

–1,4

n.a.

Cyclically adjusted balance (6)

(% of GDP)

CP Jan 2010

–6,7

–7,6

–5,5

–3,9

–1,8

COM Nov 2009

–6,7

–6,4

–9,3

–10,2

n.a.

CP Jan 2009

–5,1

–4,9

–3,3

–1,4

n.a.

Structural balance (8)

(% of GDP)

CP Jan 2010

–6,7

–7,6

–5,5

–3,9

–1,8

COM Nov 2009

–6,7

–7,0

–10,2

–10,2

n.a.

CP Jan 2009

–5,1

–4,9

–3,3

–1,4

n.a.

Government gross debt

(% of GDP)

CP Jan 2010

19,5

34,8

55,1

59,1

56,8

COM Nov 2009

19,5

33,2

48,6

60,4

n.a.

CP Jan 2009

19,4

32,4

45,4

47,3

n.a.

Convergence programme (CP); Commission services’ autumn 2009 forecasts (COM); Commission services’ calculations

---

(1)  OJ L 209, 2.8.1997, p. 1. The documents referred to in this text can be found at the following website: http://ec.europa.eu/economy_finance/sgp/index_en.htm

(2)  The up to EUR 7,5 bilion financing package is jointly funded by the EU, IMF, World Bank, EBRD, Nordic countries, Czech Republic, Estonia and Poland and is provided to Latvia in several instalments up to end-2011, in a front-loaded manner.

(3)  The assessment notably takes into account the Commission services’ autumn 2009 forecast, but also other information that has become available since then.

(4)  While the programme itself presents the structural deficit in 2012 as declining to 0,5 % of GDP, the Commission services’ recalculation is a structural deficit of 1,8 % of GDP.

(5)  In the Council conclusions of 10 November 2009 on sustainability of public finances ‘the Council calls on Member States to focus attention to sustainability-oriented strategies in their upcoming stability and convergence programmes’ and further ‘invites the Commission, together with the Economic Policy Committee and the Economic and Financial Committee, to further develop methodologies for assessing the long-term sustainability of public finances in time for the next Sustainability report’, which is foreseen in 2012.

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

(7)  Based on estimated potential growth of 1,6 %, – 1,4 %, – 2,3 % and – 2,1 % respectively in the period 2008-2011.

(8)  Cyclically adjusted balance excluding one-off and other temporary measures.

Source:

Convergence programme (CP); Commission services’ autumn 2009 forecasts (COM); Commission services’ calculations

---

IV Notices

NOTICES FROM EUROPEAN UNION INSTITUTIONS, BODIES, OFFICES AND AGENCIES

European Commission

| 1.6.2010 | EN | Official Journal of the European Union | C 142/25 |
| --- | --- | --- | --- |

1.6.2010

EN

Official Journal of the European Union

C 142/25

---

Euro exchange rates (1)

31 May 2010

2010/C 142/05

1 euro =

| | Currency | Exchange rate |
| --- | --- | --- |
| USD | US dollar | 1,2307 |
| JPY | Japanese yen | 112,62 |
| DKK | Danish krone | 7,4395 |
| GBP | Pound sterling | 0,84863 |
| SEK | Swedish krona | 9,6230 |
| CHF | Swiss franc | 1,4230 |
| ISK | Iceland króna | |
| NOK | Norwegian krone | 7,9390 |
| BGN | Bulgarian lev | 1,9558 |
| CZK | Czech koruna | 25,505 |
| EEK | Estonian kroon | 15,6466 |
| HUF | Hungarian forint | 275,53 |
| LTL | Lithuanian litas | 3,4528 |
| LVL | Latvian lats | 0,7090 |
| PLN | Polish zloty | 4,0791 |
| RON | Romanian leu | 4,1855 |
| TRY | Turkish lira | 1,9360 |
| AUD | Australian dollar | 1,4576 |
| CAD | Canadian dollar | 1,2894 |
| HKD | Hong Kong dollar | 9,5905 |
| NZD | New Zealand dollar | 1,8120 |
| SGD | Singapore dollar | 1,7225 |
| KRW | South Korean won | 1 479,42 |
| ZAR | South African rand | 9,4552 |
| CNY | Chinese yuan renminbi | 8,4031 |
| HRK | Croatian kuna | 7,2635 |
| IDR | Indonesian rupiah | 11 276,14 |
| MYR | Malaysian ringgit | 4,0139 |
| PHP | Philippine peso | 56,918 |
| RUB | Russian rouble | 38,0340 |
| THB | Thai baht | 40,070 |
| BRL | Brazilian real | 2,2343 |
| MXN | Mexican peso | 15,8822 |
| INR | Indian rupee | 57,0550 |

Currency

Exchange rate

USD

US dollar

1,2307

JPY

Japanese yen

112,62

DKK

Danish krone

7,4395

GBP

Pound sterling

0,84863

SEK

Swedish krona

9,6230

CHF

Swiss franc

1,4230

ISK

Iceland króna

NOK

Norwegian krone

7,9390

BGN

Bulgarian lev

1,9558

CZK

Czech koruna

25,505

EEK

Estonian kroon

15,6466

HUF

Hungarian forint

275,53

LTL

Lithuanian litas

3,4528

LVL

Latvian lats

0,7090

PLN

Polish zloty

4,0791

RON

Romanian leu

4,1855

TRY

Turkish lira

1,9360

AUD

Australian dollar

1,4576

CAD

Canadian dollar

1,2894

HKD

Hong Kong dollar

9,5905

NZD

New Zealand dollar

1,8120

SGD

Singapore dollar

1,7225

KRW

South Korean won

1 479,42

ZAR

South African rand

9,4552

CNY

Chinese yuan renminbi

8,4031

HRK

Croatian kuna

7,2635

IDR

Indonesian rupiah

11 276,14

MYR

Malaysian ringgit

4,0139

PHP

Philippine peso

56,918

RUB

Russian rouble

38,0340

THB

Thai baht

40,070

BRL

Brazilian real

2,2343

MXN

Mexican peso

15,8822

INR

Indian rupee

57,0550

---

(1)  Source: reference exchange rate published by the ECB.

---

| 1.6.2010 | EN | Official Journal of the European Union | C 142/26 |
| --- | --- | --- | --- |

1.6.2010

EN

Official Journal of the European Union

C 142/26

---

Opinion of the Advisory Committee on restrictive agreements and dominant position given at its meeting of 15 March 2010 regarding a draft decision relating to Case COMP/39.351 — Swedish Interconnectors

Rapporteur: Romania

2010/C 142/06

| 1. | The Advisory Committee shares the Commission's concerns expressed in its preliminary assessment under Article 102 Treaty on the Functioning of the European Union and Article 54 of the EEA Agreement in June 2009. |
| --- | --- |

1.

The Advisory Committee shares the Commission's concerns expressed in its preliminary assessment under Article 102 Treaty on the Functioning of the European Union and Article 54 of the EEA Agreement in June 2009.

| 2. | The Advisory Committee agrees with the Commission that the proceedings can be concluded by means of a decision pursuant to Article 9(1) of EC Regulation No 1/2003. |
| --- | --- |

2.

The Advisory Committee agrees with the Commission that the proceedings can be concluded by means of a decision pursuant to Article 9(1) of EC Regulation No 1/2003.

| 3. | The Advisory Committee agrees with the Commission that the commitments offered by Svenska Kraftnät are sufficient and proportionate to address the concerns expressed by the Commission in its preliminary assessment. |
| --- | --- |

3.

The Advisory Committee agrees with the Commission that the commitments offered by Svenska Kraftnät are sufficient and proportionate to address the concerns expressed by the Commission in its preliminary assessment.

| 4. | The Advisory Committee agrees with the Commission that, in light of the commitments offered by Svenska Kraftnät, there are no longer grounds for action by the Commission, without prejudice to Article 9(2) of Regulation (EC) No 1/2003. |
| --- | --- |

4.

The Advisory Committee agrees with the Commission that, in light of the commitments offered by Svenska Kraftnät, there are no longer grounds for action by the Commission, without prejudice to Article 9(2) of Regulation (EC) No 1/2003.

| 5. | The Advisory Committee asks the Commission to take into account any other points raised during the discussion. |
| --- | --- |

5.

The Advisory Committee asks the Commission to take into account any other points raised during the discussion.

| 6. | The Advisory Committee intends to recommend the publication of its opinion in the Official Journal of the European Union. |
| --- | --- |

6.

The Advisory Committee intends to recommend the publication of its opinion in the Official Journal of the European Union.

---

| 1.6.2010 | EN | Official Journal of the European Union | C 142/27 |
| --- | --- | --- | --- |

1.6.2010

EN

Official Journal of the European Union

C 142/27

---

Final Report of the Hearing Officer (1)

Case COMP/39.351 — Swedish Interconnectors

2010/C 142/07

The draft decision presented to the Commission relates to the alleged breach of Article 102 TFEU by Svenska Kraftnät (hereafter referred to as ‘SvK’), the Swedish Transmission System Operator.

It expresses the concerns that SvK may have abused its dominant position on the Swedish electricity transmission market by curtailing capacity on Swedish interconnectors when it anticipated internal congestion within the Swedish transmission system. By treating requests for transmission for the purpose of consumption within Sweden differently from requests for transmission for the purpose of export, SvK may have artificially segmented the market and prevented industrial and other users located outside Sweden from reaping the benefits of the internal market.

The investigation was triggered in July 2006 by the complaint of Dansk Energi, an organisation of Danish energy companies. The Commission opened proceedings on 1 April 2009 and adopted a preliminary assessment under Article 9(1) of Regulation (EC) No 1/2003 (2) on 25 June 2009. In response to the preliminary assessment, SvK submitted commitments on 4 September 2009.

SvK primarily committed to subdivide the Swedish transmission system into two or more bidding zones by 1 July 2011 at the latest. From the date the bidding zones are operative, SvK will manage congestion in the Swedish transmission system without limiting trading capacity on interconnectors. This principle will be applied with the exception of West-Coast-Corridor where SvK commits to build and operate a new 400 kV transmission line. During the interim period (between the notification of the commitment decision and the date when the bidding zones become operative) SvK commits to manage any congestion by taking into account regulating resources suitable for counter-trade. The commitments will be binding on SvK for a period of 10 years from the effective date of the decision.

On 6 October 2009, the Commission published a notice pursuant to Article 27(4), summarising the concerns and the commitments whilst inviting interested third parties to submit observations on this notification within one month of its publication. A total of 57 responses were received from interested parties. The Commission informed SvK of the result of the market test. SvK reacted by submitting an amended proposal of commitments.

The Commission has now come to the conclusion that, in view of the latter commitments, and without prejudice to Article 9(2), the proceedings should be brought to an end.

SvK has declared to the Commission that it has received sufficient access to the information it considered necessary to propose commitments in order to meet the concerns expressed by the Commission. No additional queries or submissions have been made to the Hearing Officer in connection with the present case by SvK or any third parties.

In the light of the above, I consider that the right to be heard has been respected in this case.

Brussels, 25 March 2010.

Michael ALBERS

---

(1)  Pursuant to Articles 15 and 16 of Commission Decision (2001/462/EC, ECSC) of 23 May 2001 on the terms of reference of Hearing Officers in certain competition proceedings (OJ L 162, 19.6.2001, p. 21).

1

(2)  In the following, all Articles referred to relate to Regulation (EC) No 1/2003.

2

---

| 1.6.2010 | EN | Official Journal of the European Union | C 142/28 |
| --- | --- | --- | --- |

1.6.2010

EN

Official Journal of the European Union

C 142/28

---

Summary of Commission Decision

of 14 April 2010

relating to a proceeding under Article 102 of the Treaty on the Functioning of the European Union and Article 54 of the EEA Agreement

(Case COMP/39.351 — Swedish Interconnectors)

(Only the English text is authentic)

(Text with EEA relevance)

2010/C 142/08

On 14 April 2010, the Commission adopted a decision relating to a proceeding under Article 102 of the Treaty on the Functioning of the European Union (TFEU). In accordance with the provisions of Article 30 of Council Regulation (EC) No 1/2003
   (1), the Commission herewith publishes the names of the parties and the main content of the decision, including any penalties imposed, having regard to the legitimate interest of undertakings in the protection of their business secrets. A non-confidential version of the decision is available on the Directorate-General for Competition's website at the following address:

http://ec.europa.eu/competition/antitrust/cases/

1.   INTRODUCTION

| (1) | This Decision is addressed to Svenska Kraftnät (hereinafter: ‘SvK’). It makes binding on the undertaking commitments that SvK offered in order to address the competition concerns arising from investigations of the Commission in the Swedish electricity transmission market. |
| --- | --- |

(1)

This Decision is addressed to Svenska Kraftnät (hereinafter: ‘SvK’). It makes binding on the undertaking commitments that SvK offered in order to address the competition concerns arising from investigations of the Commission in the Swedish electricity transmission market.

2.   PROCEDURE

| (2) | On 1 April 2009, the Commission opened proceedings with a view to adopting a decision under Chapter III of Regulation (EC) No 1/2003 and adopted on 25 June 2009 a Preliminary Assessment as referred to in Article 9(1) of Regulation (EC) No 1/2003 which set out the Commission’s competition concerns. On 4 September 2009, SvK submitted commitments to the Commission in response to the Preliminary Assessment. On 6 October 2009, a notice (2) was published in the Official Journal of the European Union pursuant to Article 27(4) of Regulation (EC) No 1/2003, summarising the case and the commitments and inviting interested third parties to give their observations on the commitments within one month following publication. On 26 January 2010, SvK submitted an amended proposal for commitments taking into account relevant comments received from third parties. The Advisory Committee on Restrictive Practices and Dominant Positions issued a favourable opinion on 15 March 2010. The Hearing Officer provided a favourable opinion on the proceedings in his final report of 25 March 2010. |
| --- | --- |

(2)

On 1 April 2009, the Commission opened proceedings with a view to adopting a decision under Chapter III of Regulation (EC) No 1/2003 and adopted on 25 June 2009 a Preliminary Assessment as referred to in Article 9(1) of Regulation (EC) No 1/2003 which set out the Commission’s competition concerns. On 4 September 2009, SvK submitted commitments to the Commission in response to the Preliminary Assessment. On 6 October 2009, a notice (2) was published in the Official Journal of the European Union pursuant to Article 27(4) of Regulation (EC) No 1/2003, summarising the case and the commitments and inviting interested third parties to give their observations on the commitments within one month following publication. On 26 January 2010, SvK submitted an amended proposal for commitments taking into account relevant comments received from third parties. The Advisory Committee on Restrictive Practices and Dominant Positions issued a favourable opinion on 15 March 2010. The Hearing Officer provided a favourable opinion on the proceedings in his final report of 25 March 2010.

3.   THE CONCERNS IDENTIFIED IN THE PRELIMINARY ASSESSMENT

| (3) | In a preliminary assessment of 25 June 2009 the Commission raised competition concerns that SvK may have abused its dominant position on the Swedish electricity transmission market. SvK may have curtailed export capacity on the Swedish interconnectors when it anticipated internal congestion within the Swedish transmission system, thereby discriminating between different network users and segmenting the internal market. |
| --- | --- |

(3)

In a preliminary assessment of 25 June 2009 the Commission raised competition concerns that SvK may have abused its dominant position on the Swedish electricity transmission market. SvK may have curtailed export capacity on the Swedish interconnectors when it anticipated internal congestion within the Swedish transmission system, thereby discriminating between different network users and segmenting the internal market.

4.   THE COMMITMENTS

| (4) | SvK made commitments to meet the Commission's competition concerns in the Swedish transmission market. First, SvK will subdivide the Swedish transmission system into two or more bidding zones and operate the Swedish transmission system on this basis by 1 November 2011 at the latest. The configuration of the bidding zones will be flexible enough so that it can be modified to adapt to foreseen and unforeseen changes in the future flow patterns on the Swedish transmission system. From the date the bidding zones are operative, SvK will manage congestion in the Swedish transmission system without limiting trading capacity on interconnectors. The only exception to this principle is one section in the network in Sweden, the so-called West-Coast-Corridor. In this section there are insufficient suitable generation resources to sustain a separate bidding zone. Secondly, in the West-Coast-Corridor SvK commits to reinforce the network by building and operating a new 400 kV transmission line by 30 November 2011. Thirdly, between the date of the notification of the commitment decision and the date on which the bidding zones become operative, SvK will increase the use of counter-trade in order to reduce interconnector curtailments due to internal congestion. |
| --- | --- |

(4)

SvK made commitments to meet the Commission's competition concerns in the Swedish transmission market. First, SvK will subdivide the Swedish transmission system into two or more bidding zones and operate the Swedish transmission system on this basis by 1 November 2011 at the latest. The configuration of the bidding zones will be flexible enough so that it can be modified to adapt to foreseen and unforeseen changes in the future flow patterns on the Swedish transmission system. From the date the bidding zones are operative, SvK will manage congestion in the Swedish transmission system without limiting trading capacity on interconnectors. The only exception to this principle is one section in the network in Sweden, the so-called West-Coast-Corridor. In this section there are insufficient suitable generation resources to sustain a separate bidding zone. Secondly, in the West-Coast-Corridor SvK commits to reinforce the network by building and operating a new 400 kV transmission line by 30 November 2011. Thirdly, between the date of the notification of the commitment decision and the date on which the bidding zones become operative, SvK will increase the use of counter-trade in order to reduce interconnector curtailments due to internal congestion.

| (5) | The commitments made by SvK are suitable remedies to accommodate the Commission's concerns. The subdivision of the network in Sweden addresses the concern in that it removes the need to curtail available interconnector capacity due to internal congestion on the identified bottlenecks in the network in Sweden, with the exception of the West-Coast-Corridor. As regards the latter a new 400 kV line, which SvK commits to build and operate by 30 November 2011 at the latest, near to Gothenburg in western Sweden will be sufficient to relieve the transmission bottleneck on the West-Coast-Corridor. The remedies are neither disproportionate for SvK nor for third parties. |
| --- | --- |

(5)

The commitments made by SvK are suitable remedies to accommodate the Commission's concerns. The subdivision of the network in Sweden addresses the concern in that it removes the need to curtail available interconnector capacity due to internal congestion on the identified bottlenecks in the network in Sweden, with the exception of the West-Coast-Corridor. As regards the latter a new 400 kV line, which SvK commits to build and operate by 30 November 2011 at the latest, near to Gothenburg in western Sweden will be sufficient to relieve the transmission bottleneck on the West-Coast-Corridor. The remedies are neither disproportionate for SvK nor for third parties.

5.   CONCLUSION

| (6) | The Decision makes the commitments binding for 10 years from the notification. The Decision finds that there are no longer grounds for action on the part of the Commission and that, without prejudice to Article 9(2) of Regulation (EC) No 1/2003, the proceedings in this case should therefore be brought to an end. |
| --- | --- |

(6)

The Decision makes the commitments binding for 10 years from the notification. The Decision finds that there are no longer grounds for action on the part of the Commission and that, without prejudice to Article 9(2) of Regulation (EC) No 1/2003, the proceedings in this case should therefore be brought to an end.

---

(1)  OJ L 1, 4.1.2003, p. 1.

(2)  OJ C 239, 6.10.2009, p. 9.

---

V Announcements

ADMINISTRATIVE PROCEDURES

European Investment Bank

| 1.6.2010 | EN | Official Journal of the European Union | C 142/30 |
| --- | --- | --- | --- |

1.6.2010

EN

Official Journal of the European Union

C 142/30

---

Call for proposals — The European Investment Bank proposes three new EIBURS sponsorships within its EIB-Universities Research Action

2010/C 142/09

The European Investment Bank channels most of its institutional relations with universities through an EIB-Universities Research Action consisting of three different programmes:

| — | EIBURS, the EIB University Research Sponsorship Programme, |
| --- | --- |

—

EIBURS, the EIB University Research Sponsorship Programme,

| — | STAREBEI (STAges de REcherche BEI), a programme for financing young researchers working on joint EIB-University projects, and |
| --- | --- |

—

STAREBEI (STAges de REcherche BEI), a programme for financing young researchers working on joint EIB-University projects, and

| — | EIB University Networks, a cooperation mechanism for university networks showing characteristics that are of particular relevance to supporting the objectives of the EIB Group. |
| --- | --- |

—

EIB University Networks, a cooperation mechanism for university networks showing characteristics that are of particular relevance to supporting the objectives of the EIB Group.

EIBURS provides grants to University Research Centres working on research topics and themes of major interest to the Bank. EIB sponsorships, of up to EUR 100 000 per year for a period of 3 years, are awarded through a competitive process to interested university departments or research centres, associated with universities of EU, accession or acceding countries, with recognised expertise in EIB-selected areas, so they can expand their activities in these areas. The successful proposal will entail the delivery of a variety of outputs (research, organisation of courses and seminars, networking, dissemination of results, etc.) that will be the subject of a contractual agreement with the Bank.

For the academic year 2010/2011, the EIBURS programme has selected three new lines of research:

—   Benchmarking European SME Credit Performance

There is a limited understanding amongst practitioners of the relationship between SME credit performance on a micro level and the macroeconomic situation they are faced with. The university research centre receiving support under the EIBURS would be expected to set up a research programme focussed on analysing the impact of changes in macroeconomic drivers on key credit performance indicators of SMEs within Europe. Among others, the impact of changes in economic growth locally and globally, interest rates and exchange rates on the delinquency, default, loss and prepayment rates would be investigated also allowing for measurement of contagion between regions, countries and effects of operations in different industries.

The EIB Group, through its EIF subsidiary archives comprehensive data on the performance of SME pools and individual loans. This data could be available for researchers use but proposals should include additional sources of information/databases that will be used.

The project may involve any additional activity that the University Centre would be ready to undertake with the sponsorship in the line of research, including:

| — | organisation of courses and seminars |
| --- | --- |

—

organisation of courses and seminars

| — | creation of additional databases |
| --- | --- |

—

creation of additional databases

| — | surveys. |
| --- | --- |

—

surveys.

—   The History of European Infrastructure Finance

Faced with large fiscal deficits, many European governments are looking to forms of public private partnership (PPP) contracts as the way to deliver on promises to improve infrastructure providing public services whilst avoiding excessive public sector debt. In many countries, privatisation and regulation models have been applied to network industries for several years.

Long-term cycles of public and private ownership and investment in infrastructure can be seen across different European nations. Concession contracts can be traced back to the ancient Greeks, were widely used by the Romans, and given a modern form under the Napoleonic code. Most 18th and 19th century infrastructure (canals, railways, telegraphs, water supply, gas, electricity) was built using private capital, frequently with explicit or implicit public subsidies or other support. Many were subsequently taken into public ownership. The history of different infrastructure services illustrates how the nexus between technological innovation, infrastructure services and finance may develop in a variety of contexts. The debates at the time, alternative solutions and the long-term outcomes for the various actors involved, all have a resonance today.

In this context, the EIB invites research proposals which seek to:

| — | explore the longer term macro trends in infrastructure finance, the outcomes in terms of sustainable public service improvements, and their relevance to contemporary policy debates |
| --- | --- |

—

explore the longer term macro trends in infrastructure finance, the outcomes in terms of sustainable public service improvements, and their relevance to contemporary policy debates

| — | develop case studies of technological and financial innovation in specific infrastructure projects and sectors, particularly those of a pan-European nature |
| --- | --- |

—

develop case studies of technological and financial innovation in specific infrastructure projects and sectors, particularly those of a pan-European nature

| — | catalogue and analyse the history of different public, private and mixed financing schemes for infrastructure construction and operation across different sectors and within different legal and national policy frameworks. |
| --- | --- |

—

catalogue and analyse the history of different public, private and mixed financing schemes for infrastructure construction and operation across different sectors and within different legal and national policy frameworks.

Applications are invited from European Universities, either alone or in partnership, proposing a research programme on the above topic. Under the EIBURS programme, the successful applicant(s) will be eligible for a grant of up to EUR 300 000 over a 3-year period to fund new research on areas of European infrastructure finance history relevant to current policy debates. Research proposals that take a quantitative and qualitative, cross-disciplinary approach (e.g. history, engineering, economics, finance) and involve collaboration between academics from different European countries are particularly encouraged.

The majority of funds should be used to employ new young researchers at PhD level to work on specific topics. Where relevant, the researchers may have an opportunity to collaborate with infrastructure sector experts at the European Investment Bank in Luxembourg. In addition, some funds should be used for dissemination events and to establish a network to connect experts on the history of particular infrastructure sectors in different countries.

—   The Economic Impact of Law: An Economic Assessment of the Impact of the Packaging and Packaging Waste Directive

One of the key components of solid waste management projects is the infrastructure required to recycle and/or recover packaging waste. According to the Packaging and Packaging Waste Directive, the packaging industry has to recycle and recover the packaging that it puts on the market, but the countries are responsible for meeting the recycling and recovery targets listed in the Directive.

The research topic is to examine the economic impact that the legal obligations arising from the above mentioned Directive has had on the various actors involved: public authorities, market participants and citizens.

The economic efficiency of the measures imposed by the Directive from the perspective of cost/benefit analysis should be assessed. Issues such as the economic rate of return measured in terms of enhanced environmental protection and distribution of costs should be tackled (do EU citizens pay for the implementation of the Directive through higher prices of packaged goods, higher waste management tariffs and taxes or both? are the economic benefits in terms of environmental protection satisfactory when compared to alternative strategies? have the legal rules adopted proved effective in achieving the set aims?).

The research should target a representative sample of EU Member States.

The project may involve any additional activity that the University Centre would be ready to undertake with the sponsorship in the line of research, including:

| — | organisation of courses and seminars |
| --- | --- |

—

organisation of courses and seminars

| — | creation of databases |
| --- | --- |

—

creation of databases

| — | surveys |
| --- | --- |

—

surveys

The deadline for presentation of proposals is 10 September 2010. Proposals submitted after this date will not be considered. Proposals should be sent to:

Electronic copy:

universities@eib.org

and

Hard copy:

| EIB-Universities Research Action |
| --- |
| 100, boulevard Konrad Adenauer |
| 2950 Luxembourg |
| LUXEMBOURG |

EIB-Universities Research Action

100, boulevard Konrad Adenauer

2950 Luxembourg

LUXEMBOURG

To the attention of Ms Luísa Ferreira, Co-ordinator.

For more exhaustive information on the EIBURS selection process and on the other programmes and mechanisms, please visit: www.eib.org/universities

---

PROCEDURES RELATING TO THE IMPLEMENTATION OF COMPETITION POLICY

European Commission

| 1.6.2010 | EN | Official Journal of the European Union | C 142/33 |
| --- | --- | --- | --- |

1.6.2010

EN

Official Journal of the European Union

C 142/33

---

Prior notification of a concentration

(Case COMP/M.5906 — One Equity Partners/Constantia)

(Text with EEA relevance)

2010/C 142/10

| 1. | On 21 May 2010, the Commission received a notification of a proposed concentration pursuant to Article 4 of Council Regulation (EC) No 139/2004 (1) by which the undertaking SulipoBeteiligungsverwaltungs GmbH, an acquisition company based in Vienna, controlled by One Equity Partners advised funds (‘OEP’; controlled by J.P. Morgan Chase & Co.) will acquire sole control of Constantia Packaging AG (‘CPAG’) and its affiliated companies including Belisce d.d. (‘Belisce’) within the meaning of Article 3(1)(b) of the Merger Regulation, by way of purchase of shares. |
| --- | --- |

1.

On 21 May 2010, the Commission received a notification of a proposed concentration pursuant to Article 4 of Council Regulation (EC) No 139/2004 (1) by which the undertaking SulipoBeteiligungsverwaltungs GmbH, an acquisition company based in Vienna, controlled by One Equity Partners advised funds (‘OEP’; controlled by J.P. Morgan Chase & Co.) will acquire sole control of Constantia Packaging AG (‘CPAG’) and its affiliated companies including Belisce d.d. (‘Belisce’) within the meaning of Article 3(1)(b) of the Merger Regulation, by way of purchase of shares.

| 2. | The business activities of the undertakings concerned are:






  — | OEP: private equity funds, |
| --- | --- | --- |

2.

The business activities of the undertakings concerned are:

—

OEP: private equity funds,

| — | CPAG: aluminium, corrugated board and flexible packaging. |
| --- | --- |

—

CPAG: aluminium, corrugated board and flexible packaging.

| 3. | On preliminary examination, the Commission finds that the notified transaction could fall within the scope the EC Merger Regulation. However, the final decision on this point is reserved. |
| --- | --- |

3.

On preliminary examination, the Commission finds that the notified transaction could fall within the scope the EC Merger Regulation. However, the final decision on this point is reserved.

| 4. | The Commission invites interested third parties to submit their possible observations on the proposed operation to the Commission.
  Observations must reach the Commission not later than 10 days following the date of this publication. Observations can be sent to the Commission by fax (+32 22964301), by e-mail to COMP-MERGER-REGISTRY@ec.europa.eu or by post, under reference number COMP/M.5906 — One Equity Partners/Constantia, to the following address:





  European Commission |
| --- | --- |
| Directorate-General for Competition |
| Merger Registry |
| J-70 |
| 1049 Bruxelles/Brussel |
| BELGIQUE/BELGIË |

4.

The Commission invites interested third parties to submit their possible observations on the proposed operation to the Commission.

Observations must reach the Commission not later than 10 days following the date of this publication. Observations can be sent to the Commission by fax (+32 22964301), by e-mail to COMP-MERGER-REGISTRY@ec.europa.eu or by post, under reference number COMP/M.5906 — One Equity Partners/Constantia, to the following address:

European Commission

Directorate-General for Competition

Merger Registry

J-70

1049 Bruxelles/Brussel

BELGIQUE/BELGIË

---

(1)  OJ L 24, 29.1.2004, p. 1 (the ‘EC Merger Regulation’).

---

| 1.6.2010 | EN | Official Journal of the European Union | C 142/34 |
| --- | --- | --- | --- |

1.6.2010

EN

Official Journal of the European Union

C 142/34

---

Prior notification of a concentration

(Case COMP/M.5862 — Mahle/Behr/Behr Industry)

(Text with EEA relevance)

2010/C 142/11

| 1. | On 21 May 2010, the Commission received a notification of a proposed concentration pursuant to Article 4 of Council Regulation (EC) No 139/2004 (1) by which the undertakings Mahle GmbH (‘Mahle’, Germany) and Behr GmbH & Co KG (‘Behr’, Germany) acquire within the meaning of Article 3(1)(b) of the Merger Regulation joint control of the undertaking Behr Industry GmbH & Co KG (‘Behr Industry’, Germany) by way of purchase of shares. |
| --- | --- |

1.

On 21 May 2010, the Commission received a notification of a proposed concentration pursuant to Article 4 of Council Regulation (EC) No 139/2004 (1) by which the undertakings Mahle GmbH (‘Mahle’, Germany) and Behr GmbH & Co KG (‘Behr’, Germany) acquire within the meaning of Article 3(1)(b) of the Merger Regulation joint control of the undertaking Behr Industry GmbH & Co KG (‘Behr Industry’, Germany) by way of purchase of shares.

| 2. | The business activities of the undertakings concerned are:






  — | for Mahle: development, manufacturing and sale of components and systems for automotive and motor vehicles, |
| --- | --- | --- |

2.

The business activities of the undertakings concerned are:

—

for Mahle: development, manufacturing and sale of components and systems for automotive and motor vehicles,

| — | for Behr: development and manufacturing of components and complete systems of motor cooling and air-conditioning for automotive vehicles, |
| --- | --- |

—

for Behr: development and manufacturing of components and complete systems of motor cooling and air-conditioning for automotive vehicles,

| — | for Behr Industry: development and manufacturing of cooling and air-conditioning systems for off-highway applications. |
| --- | --- |

—

for Behr Industry: development and manufacturing of cooling and air-conditioning systems for off-highway applications.

| 3. | On preliminary examination, the Commission finds that the notified transaction could fall within the scope the EC Merger Regulation. However, the final decision on this point is reserved. |
| --- | --- |

3.

On preliminary examination, the Commission finds that the notified transaction could fall within the scope the EC Merger Regulation. However, the final decision on this point is reserved.

| 4. | The Commission invites interested third parties to submit their possible observations on the proposed operation to the Commission.
  Observations must reach the Commission not later than 10 days following the date of this publication. Observations can be sent to the Commission by fax (+32 22964301), by e-mail to COMP-MERGER-REGISTRY@ec.europa.eu or by post, under reference number COMP/M.5862 — Mahle/Behr/Behr Industry, to the following address:





  European Commission |
| --- | --- |
| Directorate-General for Competition |
| Merger Registry |
| J-70 |
| 1049 Bruxelles/Brussel |
| BELGIQUE/BELGIË |

4.

The Commission invites interested third parties to submit their possible observations on the proposed operation to the Commission.

Observations must reach the Commission not later than 10 days following the date of this publication. Observations can be sent to the Commission by fax (+32 22964301), by e-mail to COMP-MERGER-REGISTRY@ec.europa.eu or by post, under reference number COMP/M.5862 — Mahle/Behr/Behr Industry, to the following address:

European Commission

Directorate-General for Competition

Merger Registry

J-70

1049 Bruxelles/Brussel

BELGIQUE/BELGIË

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(1)  OJ L 24, 29.1.2004, p. 1 (the ‘EC Merger Regulation’).

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| 1.6.2010 | EN | Official Journal of the European Union | C 142/35 |
| --- | --- | --- | --- |

1.6.2010

EN

Official Journal of the European Union

C 142/35

---

Communication from the French Government concerning Directive 94/22/EC of the European Parliament and of the Council on the conditions for granting and using authorisations for the prospection, exploration and production of hydrocarbons (1)

(Notice regarding applications for exclusive licences to prospect for oil and gas, designated the ‘Langlade Licence’ and the ‘Hermine Licence’)

(Text with EEA relevance)

2010/C 142/12

On 29 June 2009, ConocoPhillips Canada Resources Corp., a company with registered offices at PO Box 130, 401, 9th Ave S.W., Calgary, Alberta T2P 2H7, CANADA and BHP Billiton Petroleum Corp., a company with registered offices at 1360 Post Oak Blvd, Suite 150, Houston, TX 77056-3030, UNITED STATES OF AMERICA, applied for an exclusive five-year licence, designated the ‘Langlade Licence’, to prospect for oil and gas in an area of seabed totalling approximately 547 km2 off Saint Pierre-et-Miquelon.

On 9 December 2009, Bardoil Energy SAS, a company with registered offices at 42 rue de l’Abbé Pierre Gervain, Boite Postale 4353, 97500 Saint-Pierre-et-Miquelon, FRANCE applied for an exclusive five-year licence, designated the ‘Hermine Licence’, to prospect for oil and gas in an area of seabed totalling approximately 1 312 km2 off Saint-Pierre-et-Miquelon.

The perimeter of the area covered by these applications for licences consists of the meridian and parallel arcs connecting in turn the points defined below by their geographical coordinates, the meridian of origin being the Greenwich meridian.

| Point | Longitude Degrees West | Latitude Degrees North |
| --- | --- | --- |
| A | 56° 24′ 01,7" | 44° 35′ 33,1" |
| B | 56° 15′ 00,6" | 44° 35′ 32,0" |
| C | 56° 15′ 02,1" | 44° 47′ 17,8" |
| D | 56° 09′ 16,2" | 44° 47′ 16,6" |
| E | 56° 09′ 21,0" | 43° 50′ 00,2" |
| F | 56° 23′ 53,3" | 43° 50′ 00,2" |

Point

Longitude Degrees West

Latitude Degrees North

A

56° 24′ 01,7"

44° 35′ 33,1"

B

56° 15′ 00,6"

44° 35′ 32,0"

C

56° 15′ 02,1"

44° 47′ 17,8"

D

56° 09′ 16,2"

44° 47′ 16,6"

E

56° 09′ 21,0"

43° 50′ 00,2"

F

56° 23′ 53,3"

43° 50′ 00,2"

Submission of applications and criteria for awarding rights

The initial applicants and competing applicants must prove that they meet the requirements for obtaining the licence, as specified in Articles 4 and 5 of Decree No 2006-648 of 2 June 2006 concerning mining rights and underground storage rights (Journal officiel de la République française, 3 June 2006).

Interested companies may, within 90 days of the publication of this notice, submit a competing application in accordance with the procedure summarised in the ‘Notice regarding the granting of mining rights for hydrocarbons in France’ published in
  Official Journal of the European Communities C 374 of 30 December 1994, p. 11, and established by Decree No 2006-648 of 2 June 2006 concerning mining rights and underground storage rights (Journal officiel de la République française, 3 June 2006).

Competing applications should be sent to the Minister responsible for mines at the address below. The decisions on the initial application and any competing applications will be taken within two years of the date on which the French authorities received the initial application, i.e. by 31 August 2011 at the latest.

Conditions and requirements regarding performance of the activity and cessation thereof

Applicants are referred to Article 79 and Article 79-1 of the French Mining Code and to Decree No 2006-649 of 2 June 2006 on mining and underground storage operations and the regulations governing mining and underground storage (Journal officiel de la République française, 3 June 2006).

Further information can be obtained from the Ministry responsible, at the following address: ministère de l'Écologie, de l’Énergie, du Développement durable et de la Mer, Direction générale de l'énergie et du climat, Direction de l’énergie, Sous-direction de la sécurité d’approvisionnement et nouveaux produits énergétiques, Grande Arche de la Défense, Paroi Nord, 92055 La Défense Cedex, FRANCE, Tél. +33 140819529.

The above mentioned legislation can be consulted on the Légifrance website: http://www.legifrance.gouv.fr

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(1)  OJ L 164, 30.6.1994, p. 3.

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| 1.6.2010 | EN | Official Journal of the European Union | C 142/37 |
| --- | --- | --- | --- |

1.6.2010

EN

Official Journal of the European Union

C 142/37

---

Communication from the French Government concerning Directive 94/22/EC of the European Parliament and of the Council on the conditions for granting and using authorisations for the prospection, exploration and production of hydrocarbons (1)

(Notice regarding applications for exclusive licences to prospect for oil and gas, entitled the ‘Sézanne Licences’, one submitted by Concorde Energy LLC and the other by Realm Energy International)

(Text with EEA relevance)

2010/C 142/13

On 8 September 2009, Concorde Energy LLC, a company with registered offices at 1537 Bull Lea Road, Suite 200, Lexington KY 40511 UNITED STATES OF AMERICA, applied for an exclusive four-year licence, designated the ‘Sézanne Licence’, to prospect for oil and gas in an area of approximately 273 km2 in the department of Marne.

On 11 December 2009, Realm Energy International, a company with registered offices at 2nd Floor, Berkeley Square, London W1J 6BD, UNITED KINGDOM, applied for an exclusive five-year licence, designated the ‘Sézanne Licence’, to prospect for oil and gas in an area of approximately 870 km2 covering part of the departments of Aube and Marne.

The perimeter of the area covered by these applications for licences consists of the meridian and parallel arcs connecting in turn the points defined below by their geographical coordinates, the meridian of origin being the Greenwich meridian.

| Point | Longitude
  grad east | Latitude
  grad north |
| --- | --- | --- |
| A | 1,40 | 54,20 |
| B | 1,60 | 54,20 |
| C | 1,60 | 54,10 |
| D | 1,64 | 54,10 |
| E | 1,64 | 54,13 |
| F | 1,68 | 54,13 |
| G | 1,68 | 54,10 |
| H | 1,80 | 54,10 |
| I | 1,80 | 54,20 |
| J | 2,00 | 54,20 |
| K | 2,00 | 54,21 |
| L | 2,09 | 54,21 |
| M | 2,09 | 54,19 |
| N | 2,08 | 54,19 |
| O | 2,08 | 54,18 |
| P | 2,09 | 54,18 |
| Q | 2,09 | 54,17 |
| R | 2,10 | 54,17 |
| S | 2,10 | 54,02 |
| T | 2,08 | 54,02 |
| U | 2,08 | 54,01 |
| V | 2,05 | 54,01 |
| W | 2,05 | 54,00 |
| X | 1,90 | 54,00 |
| Y | 1,90 | 53,90 |
| Z | 1,70 | 53,90 |
| AA | 1,70 | 54,00 |
| BB | 1,50 | 54,00 |
| CC | 1,50 | 54,10 |
| DD | 1,40 | 54,10 |

Point

Longitude

grad east

Latitude

grad north

A

1,40

54,20

B

1,60

54,20

C

1,60

54,10

D

1,64

54,10

E

1,64

54,13

F

1,68

54,13

G

1,68

54,10

H

1,80

54,10

I

1,80

54,20

J

2,00

54,20

K

2,00

54,21

L

2,09

54,21

M

2,09

54,19

N

2,08

54,19

O

2,08

54,18

P

2,09

54,18

Q

2,09

54,17

R

2,10

54,17

S

2,10

54,02

T

2,08

54,02

U

2,08

54,01

V

2,05

54,01

W

2,05

54,00

X

1,90

54,00

Y

1,90

53,90

Z

1,70

53,90

AA

1,70

54,00

BB

1,50

54,00

CC

1,50

54,10

DD

1,40

54,10

Submission of applications and criteria for awarding rights

The initial applicants and competing applicants must prove that they meet the requirements for obtaining the licence, as specified in Articles 4 and 5 of Decree No 2006-648 of 2 June 2006 concerning mining rights and underground storage rights (Journal officiel de la République française, 3 June 2006).

Interested companies may, within 90 days of the publication of this notice, submit a competing application in accordance with the procedure summarised in the ‘Notice regarding the granting of mining rights for hydrocarbons in France’ published in
  Official Journal of the European Communities C 374 of 30 December 1994, p. 11, and established by Decree No 2006-648 of 2 June 2006 on mining rights and underground storage rights (Journal officiel de la République française, 3 June 2006).

Competing applications must be sent to the Minister responsible for mines at the address below. The decisions on the initial application and competing applications will be taken within two years of the date on which the French authorities received the initial application, i.e. by 9 October 2011 at the latest.

Conditions and requirements regarding performance of the activity and cessation thereof

Applicants are referred to Articles 79 and 79.1 of the French Mining Code and to Decree No 2006-649 of 2 June 2006 on mining and underground storage operations and the regulations governing mining and underground storage (Journal officiel de la République française, 3 June 2006).

Further information can be obtained from the Ministry of Ecology, Energy, Sustainable Development and Marine Affairs, Direction générale de l'énergie et du climat, Direction de l’énergie, Sous-direction de la sécurité d’approvisionnement et nouveaux produits énergétiques, Grande Arche, Paroi Nord — 92055 La Défense Cedex, FRANCE, Tel. +33 140819529.

The above mentioned legislation can be consulted on the Légifrance website: http://www.legifrance.gouv.fr

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(1)  OJ L 164, 30.6.1994, p. 3.

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