# Official Journal C 68/2009

| | ISSN 1725-2423 |
| --- | --- |
| Official Journal
  of the European Union | C 68 |
| | |
| English edition | Information and Notices | Volume 5221 March 2009 |

ISSN 1725-2423

Official Journal

of the European Union

C 68

English edition

Information and Notices

Volume 5221 March 2009

---

| Notice No | Contents | page |
| --- | --- | --- |
| | I   Resolutions, recommendations and opinions |
| | OPINIONS |
| | Council |
| 2009/C 068/01 | Council opinion of 10 March 2009 on the updated stability programme of Finland, 2008-2012 | 1 |
| 2009/C 068/02 | Council opinion of 10 March 2009 on the updated stability programme of Ireland, 2008-2013 | 6 |
| 2009/C 068/03 | Council opinion of 10 March 2009 on the updated convergence programme of Latvia, 2008-2011 | 12 |
| 2009/C 068/04 | Council opinion of 10 March 2009 on the updated stability programme of Spain, 2008-2011 | 17 |
| 2009/C 068/05 | Council opinion of 10 March 2009 on the updated convergence programme of Sweden, 2008-2011 | 23 |
| 2009/C 068/06 | Council opinion of 10 March 2009 on the updated stability programme of the Netherlands, 2008-2011 | 28 |
| 2009/C 068/07 | Council opinion of 10 March 2009 on the updated convergence programme of the United Kingdom, 2008/2009-2013/2014 | 33 |

Notice No

Contents

page

I   Resolutions, recommendations and opinions

OPINIONS

Council

2009/C 068/01

Council opinion of 10 March 2009 on the updated stability programme of Finland, 2008-2012

1

2009/C 068/02

Council opinion of 10 March 2009 on the updated stability programme of Ireland, 2008-2013

6

2009/C 068/03

Council opinion of 10 March 2009 on the updated convergence programme of Latvia, 2008-2011

12

2009/C 068/04

Council opinion of 10 March 2009 on the updated stability programme of Spain, 2008-2011

17

2009/C 068/05

Council opinion of 10 March 2009 on the updated convergence programme of Sweden, 2008-2011

23

2009/C 068/06

Council opinion of 10 March 2009 on the updated stability programme of the Netherlands, 2008-2011

28

2009/C 068/07

Council opinion of 10 March 2009 on the updated convergence programme of the United Kingdom, 2008/2009-2013/2014

33

| | II   Information |
| --- | --- |
| | INFORMATION FROM EUROPEAN UNION INSTITUTIONS AND BODIES |
| | Commission |
| 2009/C 068/08 | Non-opposition to a notified concentration (Case COMP/M.5456 — Antin Infrastructure Partners/BBEIF/BBI EUROPE/Euroports) (
  1
  ) | 39 |
| 2009/C 068/09 | Non-opposition to a notified concentration (Case COMP/M.5474 — Lagardere/Sumitomo/HFG) (
  1
  ) | 39 |

II   Information

INFORMATION FROM EUROPEAN UNION INSTITUTIONS AND BODIES

Commission

2009/C 068/08

Non-opposition to a notified concentration (Case COMP/M.5456 — Antin Infrastructure Partners/BBEIF/BBI EUROPE/Euroports) (
  1
  )

1

39

2009/C 068/09

Non-opposition to a notified concentration (Case COMP/M.5474 — Lagardere/Sumitomo/HFG) (
  1
  )

1

39

| | IV   Notices |
| --- | --- |
| | NOTICES FROM EUROPEAN UNION INSTITUTIONS AND BODIES |
| | Commission |
| 2009/C 068/10 | Euro exchange rates | 40 |
| 2009/C 068/11 | Commission notice on current State aid recovery interest rates and reference/discount rates for 27 Member States applicable as from 1 April 2009(Published in accordance with Article 10 of Commission Regulation (EC) No 794/2004 (OJ L 140, 30.4.2004, p. 1)) | 41 |

IV   Notices

NOTICES FROM EUROPEAN UNION INSTITUTIONS AND BODIES

Commission

2009/C 068/10

Euro exchange rates

40

2009/C 068/11

Commission notice on current State aid recovery interest rates and reference/discount rates for 27 Member States applicable as from 1 April 2009(Published in accordance with Article 10 of Commission Regulation (EC) No 794/2004 (OJ L 140, 30.4.2004, p. 1))

(Published in accordance with Article 10 of Commission Regulation (EC) No 794/2004 (OJ L 140, 30.4.2004, p. 1))

41

| | V   Announcements |
| --- | --- |
| | PROCEDURES RELATING TO THE IMPLEMENTATION OF THE COMPETITION POLICY |
| | Commission |
| 2009/C 068/12 | Prior notification of a concentration (Case COMP/M.5493 — RBSK/DZ Bank/RZB/RBL JV) — Candidate case for simplified procedure (
  1
  ) | 42 |
| | OTHER ACTS |
| | Commission |
| 2009/C 068/13 | Notice for the attention of the persons and entities added to the list referred to in Article 2 of Council Regulation (EC) No 1183/2005 imposing certain specific restrictive measures directed against persons acting in violation of the arms embargo with regard to the Democratic Republic of the Congo, by virtue of Commission Regulation (EC) No 242/2009 | 43 |

V   Announcements

PROCEDURES RELATING TO THE IMPLEMENTATION OF THE COMPETITION POLICY

Commission

2009/C 068/12

Prior notification of a concentration (Case COMP/M.5493 — RBSK/DZ Bank/RZB/RBL JV) — Candidate case for simplified procedure (
  1
  )

1

42

OTHER ACTS

Commission

2009/C 068/13

Notice for the attention of the persons and entities added to the list referred to in Article 2 of Council Regulation (EC) No 1183/2005 imposing certain specific restrictive measures directed against persons acting in violation of the arms embargo with regard to the Democratic Republic of the Congo, by virtue of Commission Regulation (EC) No 242/2009

43

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

---

(1)   Text with EEA relevance

1

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

EN

---

I Resolutions, recommendations and opinions

OPINIONS

Council

| 21.3.2009 | EN | Official Journal of the European Union | C 68/1 |
| --- | --- | --- | --- |

21.3.2009

EN

Official Journal of the European Union

C 68/1

---

COUNCIL OPINION

of 10 March 2009

on the updated stability programme of Finland, 2008-2012

(2009/C 68/01)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community,

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

Having regard to the recommendation of the Commission,

After consulting the Economic and Financial Committee,

HAS DELIVERED THIS OPINION:

| (1) | On 10 March 2009, the Council examined the updated stability programme of Finland, which covers the period 2008 to 2012. |
| --- | --- |

(1)

On 10 March 2009, the Council examined the updated stability programme of Finland, which covers the period 2008 to 2012.

| (2) | Whereas the fundamentals of the Finnish economy and the domestic financial sector are sound, the global crisis has cut deeply into output of the country's highly export-oriented industries. While households will benefit in 2009 and 2010 from strong wage increases, tax cuts and lower inflation, consumer and business confidence has nevertheless tumbled, holding back private consumption and investment. The Commission services' January 2009 interim forecast projects GDP to contract by over 1 % in 2009 and gradually recover over 2010 in step with the expected stabilisation of global markets. In spite of the economy rapidly entering a recession, tax revenues have remained rather firm in 2008 as a whole, reflecting the resilience of the labour market, especially in the first half of the year, and solid personal income growth. The general government surplus is expected to reach 4,5 % of GDP in 2008. Given that the economic slump in 2009 is led by a collapse of external demand and confidence, while the fundamentals of the Finnish economy are expected to remain robust overall, the programme plans for a significant fiscal stimulus in 2009, geared towards supporting domestic demand with the aim of upholding employment over the recession. |
| --- | --- |

(2)

Whereas the fundamentals of the Finnish economy and the domestic financial sector are sound, the global crisis has cut deeply into output of the country's highly export-oriented industries. While households will benefit in 2009 and 2010 from strong wage increases, tax cuts and lower inflation, consumer and business confidence has nevertheless tumbled, holding back private consumption and investment. The Commission services' January 2009 interim forecast projects GDP to contract by over 1 % in 2009 and gradually recover over 2010 in step with the expected stabilisation of global markets. In spite of the economy rapidly entering a recession, tax revenues have remained rather firm in 2008 as a whole, reflecting the resilience of the labour market, especially in the first half of the year, and solid personal income growth. The general government surplus is expected to reach 4,5 % of GDP in 2008. Given that the economic slump in 2009 is led by a collapse of external demand and confidence, while the fundamentals of the Finnish economy are expected to remain robust overall, the programme plans for a significant fiscal stimulus in 2009, geared towards supporting domestic demand with the aim of upholding employment over the recession.

| (3) | The macro-economic scenario underlying the programme envisages that real GDP growth will slow from 2,6 % in 2008 to 0,6 % in 2009 before recovering to slightly above 2 % over the rest of the programme period. In view of the rapid deterioration of the macro-economic outlook in past months, (2) this scenario, which was finalised in November 2008 (3) appears now to be based on markedly favourable growth assumptions, most notably for 2009. According to the latest Government estimates, included in the stimulus package and associated supplementary budget proposal from 30 January 2009, GDP is projected to contract by over 2 % in 2009. The programme's projections for inflation developments are realistic overall. |
| --- | --- |

(3)

The macro-economic scenario underlying the programme envisages that real GDP growth will slow from 2,6 % in 2008 to 0,6 % in 2009 before recovering to slightly above 2 % over the rest of the programme period. In view of the rapid deterioration of the macro-economic outlook in past months, (2) this scenario, which was finalised in November 2008 (3) appears now to be based on markedly favourable growth assumptions, most notably for 2009. According to the latest Government estimates, included in the stimulus package and associated supplementary budget proposal from 30 January 2009, GDP is projected to contract by over 2 % in 2009. The programme's projections for inflation developments are realistic overall.

| (4) | For 2008, the general government surplus is estimated at 4,5 % of GDP in the Commission services forecast, against a target of 3,7 % of GDP set in the previous update of the stability programme. The better-than-planned outcome is largely explained by a carry-over from the previous year when economic growth and tax revenue exceeded expectations. Also, a change in the recording of property income from social security's assets contributed to revise upwards the surplus by almost 0,4 % of GDP. |
| --- | --- |

(4)

For 2008, the general government surplus is estimated at 4,5 % of GDP in the Commission services forecast, against a target of 3,7 % of GDP set in the previous update of the stability programme. The better-than-planned outcome is largely explained by a carry-over from the previous year when economic growth and tax revenue exceeded expectations. Also, a change in the recording of property income from social security's assets contributed to revise upwards the surplus by almost 0,4 % of GDP.

| (5) | The programme projects the general government surplus in 2009 to drop by 2,3 percentage points to 2,1 % of GDP, broadly in line with the projection of the Commission services' interim forecast (2,0 % of GDP). Measured by the year-on-year decline in the structural balance, as recalculated by the Commission services on the basis of the information in the programme, the fiscal stance is estimated to be expansionary to the tune of around 1 % of GDP. The impact of the automatic stabilisers is estimated to reduce the fiscal surplus by an additional 1,5 % of GDP in 2009. The estimate of the fiscal stance broadly matches the size of the government stimulus package announced in the programme, totalling 1,2 % of GDP in 2009. Over three quarters of this is spent on tax cuts supporting consumers' purchasing power. These tax cuts also serve the government's long-term objective of reducing the presently relatively high tax burden on labour and increasing employment incentives. The size of the rest of the stimulus measures included in the programme update are relatively limited, amounting to about 0,3 % of GDP, spent on various infrastructure investments and securing financing for enterprises. On 30 January 2009, the government announced an additional stimulus package which includes a broad range of measures stimulating infrastructure and housing investment with a particular objective of upholding employment, increasing funding for education and research, and lowering labour costs by decreasing employers' social insurance contribution. The budgetary cost of the additional measures is estimated at 0,5 % of GDP in 2009, which is obviously not reflected in the programme target (4). |
| --- | --- |

(5)

The programme projects the general government surplus in 2009 to drop by 2,3 percentage points to 2,1 % of GDP, broadly in line with the projection of the Commission services' interim forecast (2,0 % of GDP). Measured by the year-on-year decline in the structural balance, as recalculated by the Commission services on the basis of the information in the programme, the fiscal stance is estimated to be expansionary to the tune of around 1 % of GDP. The impact of the automatic stabilisers is estimated to reduce the fiscal surplus by an additional 1,5 % of GDP in 2009. The estimate of the fiscal stance broadly matches the size of the government stimulus package announced in the programme, totalling 1,2 % of GDP in 2009. Over three quarters of this is spent on tax cuts supporting consumers' purchasing power. These tax cuts also serve the government's long-term objective of reducing the presently relatively high tax burden on labour and increasing employment incentives. The size of the rest of the stimulus measures included in the programme update are relatively limited, amounting to about 0,3 % of GDP, spent on various infrastructure investments and securing financing for enterprises. On 30 January 2009, the government announced an additional stimulus package which includes a broad range of measures stimulating infrastructure and housing investment with a particular objective of upholding employment, increasing funding for education and research, and lowering labour costs by decreasing employers' social insurance contribution. The budgetary cost of the additional measures is estimated at 0,5 % of GDP in 2009, which is obviously not reflected in the programme target (4).

| (6) | As in the previous programme, Finland's medium-term objective (MTO) for the budgetary position is defined as a general government surplus of 2 % of GDP in structural terms, i.e. in cyclically-adjusted terms net of one-off and other temporary measures. The programme expects the headline, primary and structural surpluses to decline steeply in 2009 and 2010, but to stabilise thereafter. The estimate for the structural surplus, calculated according to the commonly agreed methodology, is projected by the programme to remain unchanged at 1,5 % of GDP in the outer years of the programme, which is slightly below the MTO. The reduction in the headline balance over 2008-2012 is driven by a combination of a decline in the revenue ratio by about 2 % of GDP, largely reflecting the planned tax cuts, and a rise in the expenditure ratio by 1,5 % of GDP. The programme update does not include measures for fiscal retrenchment in the years after the downturn. |
| --- | --- |

(6)

As in the previous programme, Finland's medium-term objective (MTO) for the budgetary position is defined as a general government surplus of 2 % of GDP in structural terms, i.e. in cyclically-adjusted terms net of one-off and other temporary measures. The programme expects the headline, primary and structural surpluses to decline steeply in 2009 and 2010, but to stabilise thereafter. The estimate for the structural surplus, calculated according to the commonly agreed methodology, is projected by the programme to remain unchanged at 1,5 % of GDP in the outer years of the programme, which is slightly below the MTO. The reduction in the headline balance over 2008-2012 is driven by a combination of a decline in the revenue ratio by about 2 % of GDP, largely reflecting the planned tax cuts, and a rise in the expenditure ratio by 1,5 % of GDP. The programme update does not include measures for fiscal retrenchment in the years after the downturn.

| (7) | The budgetary outcomes projected in the programme are subject to downside risks since the macro-economic scenario is based on markedly favourable growth assumptions. However, the negative risks to the budgetary projections are somewhat mitigated as some of the main tax bases (namely private consumption and household income) are expected to show greater resilience in an economic contraction led by a slump in external demand. |
| --- | --- |

(7)

The budgetary outcomes projected in the programme are subject to downside risks since the macro-economic scenario is based on markedly favourable growth assumptions. However, the negative risks to the budgetary projections are somewhat mitigated as some of the main tax bases (namely private consumption and household income) are expected to show greater resilience in an economic contraction led by a slump in external demand.

| (8) | While the long-term budgetary impact of ageing is higher than the average in the EU, enacted pension reforms have helped to contain the projected increase in pension expenditure over the coming decades. The budgetary position in 2008 as estimated in the programme, with a large structural surplus, contributes significantly to offsetting the long-term budgetary impact of ageing and the large assets accumulated by the public pension schemes will help finance part of the increase in pension expenditure. However, from the budgetary developments planned in the programme, a sustainability gap would arise. Maintaining high primary surpluses over the medium term and implementing appropriate structural reforms would contribute to limiting risks to the sustainability of public finances, which are currently at a low level. |
| --- | --- |

(8)

While the long-term budgetary impact of ageing is higher than the average in the EU, enacted pension reforms have helped to contain the projected increase in pension expenditure over the coming decades. The budgetary position in 2008 as estimated in the programme, with a large structural surplus, contributes significantly to offsetting the long-term budgetary impact of ageing and the large assets accumulated by the public pension schemes will help finance part of the increase in pension expenditure. However, from the budgetary developments planned in the programme, a sustainability gap would arise. Maintaining high primary surpluses over the medium term and implementing appropriate structural reforms would contribute to limiting risks to the sustainability of public finances, which are currently at a low level.

| (9) | Over the past years, the existing budgetary framework for the central government has proven to be a reliable tool in avoiding expenditure overruns. Finland has over the past years also pursued various structural reforms to improve the quality of public finances and reduce the long-term expenditure pressures. |
| --- | --- |

(9)

Over the past years, the existing budgetary framework for the central government has proven to be a reliable tool in avoiding expenditure overruns. Finland has over the past years also pursued various structural reforms to improve the quality of public finances and reduce the long-term expenditure pressures.

| (10) | In response to the financial crisis, the Finnish government has adopted measures to stabilise the financial markets. These measures give commercial banks access to significant credit guarantees (maximum amount of about 25 % of GDP) and capital investment by the State (maximum amount of about 3 % of GDP). Also, the ceiling of the depositors' guarantee was doubled to EUR 50 000. However, given that the Finnish financial sector appears to be relatively less affected by the global crisis, the actual utilisation of State funds could turn out to be limited. |
| --- | --- |

(10)

In response to the financial crisis, the Finnish government has adopted measures to stabilise the financial markets. These measures give commercial banks access to significant credit guarantees (maximum amount of about 25 % of GDP) and capital investment by the State (maximum amount of about 3 % of GDP). Also, the ceiling of the depositors' guarantee was doubled to EUR 50 000. However, given that the Finnish financial sector appears to be relatively less affected by the global crisis, the actual utilisation of State funds could turn out to be limited.

| (11) | In line with the EERP agreed in December by the European Council, Finland has adopted several fiscal stimulus measures for 2009, which are considered to be a broadly adequate response to the economic downturn. In view of the strong budgetary starting position and solid fundamentals of the economy, the stimulus measures included in the programme and the latest measures announced in January 2009 appear appropriate, provided that action will also be taken for fiscal retrenchment in the medium term to ensure long-term sustainability. The stimulus package broadly complies with the general principles of the European Economic Recovery Plan. The measures come timely, taking largely effect from the beginning of 2009, and they appear to be targeted to address the internal economic challenges. Contrasting with the general principles, the bulk of the fiscal stimulus involves permanent tax cuts and is not planned to be reversed. This can be considered partly justified, given the sizeable leeway afforded by public finances and the long-term tax policy goals of the Government. The measures addressing the current economic crisis are focused on sustaining aggregate demand and employment, as well as strengthening competitiveness. The measures are related to the medium-term reform agenda for Finland as reviewed by the Commission on 28 January 2009. In particular, the measures stimulating investment also target improving energy efficiency, and the tax cuts stimulate both labour demand and supply. |
| --- | --- |

(11)

In line with the EERP agreed in December by the European Council, Finland has adopted several fiscal stimulus measures for 2009, which are considered to be a broadly adequate response to the economic downturn. In view of the strong budgetary starting position and solid fundamentals of the economy, the stimulus measures included in the programme and the latest measures announced in January 2009 appear appropriate, provided that action will also be taken for fiscal retrenchment in the medium term to ensure long-term sustainability. The stimulus package broadly complies with the general principles of the European Economic Recovery Plan. The measures come timely, taking largely effect from the beginning of 2009, and they appear to be targeted to address the internal economic challenges. Contrasting with the general principles, the bulk of the fiscal stimulus involves permanent tax cuts and is not planned to be reversed. This can be considered partly justified, given the sizeable leeway afforded by public finances and the long-term tax policy goals of the Government. The measures addressing the current economic crisis are focused on sustaining aggregate demand and employment, as well as strengthening competitiveness. The measures are related to the medium-term reform agenda for Finland as reviewed by the Commission on 28 January 2009. In particular, the measures stimulating investment also target improving energy efficiency, and the tax cuts stimulate both labour demand and supply.

| (12) | The fiscal stance in 2009 and 2010 appears expansionary as measured by the approximately 1 percentage point annual decline in the structural balance in both 2009 and 2010. Thereafter, the programme plans for a neutral fiscal stance. The budgetary stance in the programme appears broadly in line with the Stability and Growth Pact, appropriately allowing for a fiscal stimulus during recession and a neutral fiscal stance once the economy is forecast to have recovered to growth rates close to the estimated potential. The budgetary stance at the end of the programme period would maintain a large safety margin against breaching the 3 % deficit threshold. |
| --- | --- |

(12)

The fiscal stance in 2009 and 2010 appears expansionary as measured by the approximately 1 percentage point annual decline in the structural balance in both 2009 and 2010. Thereafter, the programme plans for a neutral fiscal stance. The budgetary stance in the programme appears broadly in line with the Stability and Growth Pact, appropriately allowing for a fiscal stimulus during recession and a neutral fiscal stance once the economy is forecast to have recovered to growth rates close to the estimated potential. The budgetary stance at the end of the programme period would maintain a large safety margin against breaching the 3 % deficit threshold.

| (13) | 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 (5). |
| --- | --- |

(13)

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 (5).

The overall conclusion is that public finances remain sound although the programme envisages the present high fiscal surpluses to decline substantially. In view of the fiscal situation, the stimulus measures of the programme update and the latest measures announced in January 2009 appear appropriate and are welcome. The stimulus package broadly complies with the general principles of the European Economic Recovery Plan. The budgetary outcomes projected in the programme are subject to downside risks and action geared to ensure long-term sustainability should be considered.

In view of the above assessment, Finland is invited to:

| (i) | implement the 2009 fiscal policy as planned in line with the EERP and within the framework of the SGP; |
| --- | --- |

(i)

implement the 2009 fiscal policy as planned in line with the EERP and within the framework of the SGP;

| (ii) | subsequently reverse the adverse budgetary impact of the fiscal stimulus measures by returning to its medium-term objective and implementing appropriate structural reforms in order to preserve the long-term sustainability of public finances. |
| --- | --- |

(ii)

subsequently reverse the adverse budgetary impact of the fiscal stimulus measures by returning to its medium-term objective and implementing appropriate structural reforms in order to preserve the long-term sustainability of public finances.

Comparison of key macro-economic and budgetary projections

| | | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 |
| --- | --- | --- | --- | --- | --- | --- | --- |
| Real GDP
  (% change) | SP Jan 2009 | 4,5 | 2,6 | 0,6 | 1,8 | 2,4 | 2,2 |
| COM Jan 2009 | 4,5 | 1,5 | – 1,2 | 1,2 | n.a. | n.a. |
| SP Nov 2007 | 4,4 | 3,3 | 3,0 | 2,5 | 2,1 | n.a. |
| HICP inflation
  (%) | SP Jan 2009 | 1,6 | 4,0 | 2,3 | 1,9 | 2,0 | 2,0 |
| COM Jan 2009 | 1,6 | 3,9 | 1,8 | 1,8 | n.a. | n.a. |
| SP Nov 2007 | 2,4 | 2,4 | 2,2 | 2,0 | 2 | n.a. |
| Output gap (6)

  (% of potential GDP) | SP Jan 2009 | 1,7 | 1,3 | – 0,6 | – 1,0 | – 1,2 | – 1,3 |
| COM Jan 2009 (7) | 2,9 | 1,7 | – 1,4 | – 2,1 | n.a. | n.a. |
| SP Nov 2007 | 0,6 | 0,7 | 0,5 | – 0,1 | – 0,7 | n.a. |
| Net lending/borrowing vis-à-vis the rest of the world
  (% of GDP) | SP Jan 2009 | 5,4 | 4,0 | 3,6 | 3,7 | 3,9 | 3,9 |
| COM Jan 2009 | 6,4 | 5,2 | 3,7 | 3,3 | n.a. | n.a. |
| SP Nov 2007 | 4,9 | 4,6 | 5,0 | 5,0 | 4,8 | n.a. |
| General government revenue
  (% of GDP) | SP Jan 2009 | 52,6 | 51,4 | 50,3 | 49,7 | 49,4 | 49,4 |
| COM Jan 2009 | 52,6 | 52,3 | 52,0 | 51,3 | n.a. | n.a. |
| SP Nov 2007 | 51,9 | 51,0 | 50,6 | 49,8 | 49,6 | n.a. |
| General government expenditure
  (% of GDP) | SP Jan 2009 | 47,3 | 47,0 | 48,2 | 48,6 | 48,4 | 48,5 |
| COM Jan 2009 | 47,3 | 47,8 | 50,1 | 50,9 | n.a. | n.a. |
| SP Nov 2007 | 47,4 | 47,3 | 47,0 | 47,0 | 47,2 | n.a. |
| General government balance
  (% of GDP) | SP Jan 2009 | 5,3 | 4,4 | 2,1 | 1,1 | 1,0 | 0,9 |
| COM Jan 2009 | 5,3 | 4,5 | 2,0 | 0,5 | n.a. | n.a. |
| SP Nov 2007 | 4,5 | 3,7 | 3,6 | 2,8 | 2,4 | n.a. |
| Primary balance
  (% of GDP) | SP Jan 2009 | 6,8 | 5,8 | 3,4 | 2,4 | 2,2 | 2,3 |
| COM Jan 2009 | 6,8 | 6,0 | 3,3 | 1,8 | n.a. | n.a. |
| SP Nov 2007 | 6,0 | 5,2 | 5,0 | 4,1 | 3,6 | n.a. |
| Cyclically-adjusted balance (6)

  (% of GDP) | SP Jan 2009 | 4,5 | 3,7 | 2,4 | 1,7 | 1,6 | 1,6 |
| COM Jan 2009 | 3,9 | 3,6 | 2,7 | 1,5 | n.a. | n.a. |
| SP Nov 2007 | 4,2 | 3,3 | 3,3 | 2,8 | 2,8 | n.a. |
| Structural balance (8)

  (% of GDP) | SP Jan 2009 | 4,5 | 3,7 | 2,4 | 1,7 | 1,6 | 1,6 |
| COM Jan 2009 | 3,9 | 3,6 | 2,7 | 1,7 | n.a. | n.a. |
| SP Nov 2007 | 4,2 | 3,3 | 3,3 | 2,8 | 2,8 | n.a. |
| Government gross debt
  (% of GDP) | SP Jan 2009 | 35,1 | 32,4 | 33,0 | 33,7 | 34,1 | 34,6 |
| COM Jan 2009 | 35,1 | 32,8 | 34,5 | 36,1 | n.a. | n.a. |
| SP Nov 2007 | 35,3 | 32,8 | 30,4 | 29,0 | 27,9 | n.a. |
| Stability programme (SP); Commission services' January 2009 interim forecasts (COM); Commission services' calculations. |

2007

2008

2009

2010

2011

2012

Real GDP

(% change)

SP Jan 2009

4,5

2,6

0,6

1,8

2,4

2,2

COM Jan 2009

4,5

1,5

– 1,2

1,2

n.a.

n.a.

SP Nov 2007

4,4

3,3

3,0

2,5

2,1

n.a.

HICP inflation

(%)

SP Jan 2009

1,6

4,0

2,3

1,9

2,0

2,0

COM Jan 2009

1,6

3,9

1,8

1,8

n.a.

n.a.

SP Nov 2007

2,4

2,4

2,2

2,0

2

n.a.

Output gap (6)

(% of potential GDP)

SP Jan 2009

1,7

1,3

– 0,6

– 1,0

– 1,2

– 1,3

COM Jan 2009 (7)

2,9

1,7

– 1,4

– 2,1

n.a.

n.a.

SP Nov 2007

0,6

0,7

0,5

– 0,1

– 0,7

n.a.

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

(% of GDP)

SP Jan 2009

5,4

4,0

3,6

3,7

3,9

3,9

COM Jan 2009

6,4

5,2

3,7

3,3

n.a.

n.a.

SP Nov 2007

4,9

4,6

5,0

5,0

4,8

n.a.

General government revenue

(% of GDP)

SP Jan 2009

52,6

51,4

50,3

49,7

49,4

49,4

COM Jan 2009

52,6

52,3

52,0

51,3

n.a.

n.a.

SP Nov 2007

51,9

51,0

50,6

49,8

49,6

n.a.

General government expenditure

(% of GDP)

SP Jan 2009

47,3

47,0

48,2

48,6

48,4

48,5

COM Jan 2009

47,3

47,8

50,1

50,9

n.a.

n.a.

SP Nov 2007

47,4

47,3

47,0

47,0

47,2

n.a.

General government balance

(% of GDP)

SP Jan 2009

5,3

4,4

2,1

1,1

1,0

0,9

COM Jan 2009

5,3

4,5

2,0

0,5

n.a.

n.a.

SP Nov 2007

4,5

3,7

3,6

2,8

2,4

n.a.

Primary balance

(% of GDP)

SP Jan 2009

6,8

5,8

3,4

2,4

2,2

2,3

COM Jan 2009

6,8

6,0

3,3

1,8

n.a.

n.a.

SP Nov 2007

6,0

5,2

5,0

4,1

3,6

n.a.

Cyclically-adjusted balance (6)

(% of GDP)

SP Jan 2009

4,5

3,7

2,4

1,7

1,6

1,6

COM Jan 2009

3,9

3,6

2,7

1,5

n.a.

n.a.

SP Nov 2007

4,2

3,3

3,3

2,8

2,8

n.a.

Structural balance (8)

(% of GDP)

SP Jan 2009

4,5

3,7

2,4

1,7

1,6

1,6

COM Jan 2009

3,9

3,6

2,7

1,7

n.a.

n.a.

SP Nov 2007

4,2

3,3

3,3

2,8

2,8

n.a.

Government gross debt

(% of GDP)

SP Jan 2009

35,1

32,4

33,0

33,7

34,1

34,6

COM Jan 2009

35,1

32,8

34,5

36,1

n.a.

n.a.

SP Nov 2007

35,3

32,8

30,4

29,0

27,9

n.a.

Stability programme (SP); Commission services' January 2009 interim 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/about/activities/sgp/main_en.htm

(2)  The assessment notably takes into account the Commission services' January 2009 forecast, but also other information that has been provided by Finland.

(3)  After the submission of the programme, no addendum has been sent to the Commission services.

(4)  Together with the measures announced on 30 January 2009, the total level of the stimulus package amounts to 1,7 % of GDP. The Government's fiscal projections, included in the stimulus package and the associated supplementary budget proposal from 30 January 2009, predict the general government finances to drop into a deficit of 0,4 % of GDP in 2009. This figure incorporates the impact of the stimulus measures.

(5)  In particular, the programme gives a somewhat different breakdown of expenditure components which do not directly match the data standards of Table 2. Also, compulsory data on ‘one-off and other temporary measures’ are not explicitly given in the tables. The external assumptions for the outer years are not provided. Optional data ‘liquid financial assets’ specified in the Code of conduct Annex 2, Table 4, point 6 are not given for 2007-2011 in the stability programme.

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

(7)  Based on estimated potential growth of 2,8 %, 2,6 %, 2,0 % and 1,9 % respectively in the period 2007-2010.

(8)  Cyclically-adjusted balance excluding one-off and other temporary measures. There are no one-off and other temporary measures in any year over the programme period according to the most recent programme. However, according to the Commission services' January interim forecast there is one deficit-increasing one-off measure of 0,2 % of GDP in 2010, arising from a temporary loss of VAT revenue due to changes in the tax collection principles.

Source:

Stability programme (SP); Commission services' January 2009 interim forecasts (COM); Commission services' calculations.

---

| 21.3.2009 | EN | Official Journal of the European Union | C 68/6 |
| --- | --- | --- | --- |

21.3.2009

EN

Official Journal of the European Union

C 68/6

---

COUNCIL OPINION

of 10 March 2009

on the updated stability programme of Ireland, 2008-2013

(2009/C 68/02)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community,

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

Having regard to the recommendation of the Commission,

After consulting the Economic and Financial Committee,

HAS DELIVERED THIS OPINION:

| (1) | On 10 March 2009, the Council examined the updated stability programme of Ireland (2), which covers the period 2008 to 2013. |
| --- | --- |

(1)

On 10 March 2009, the Council examined the updated stability programme of Ireland (2), which covers the period 2008 to 2013.

| (2) | After more than a decade of strong economic growth which had become increasingly driven by domestic demand, Ireland is now going through a severe recession. The downturn was caused by the sharp correction in the housing market and has since spread to the wider economy, aggravated by the global financial crisis and the recession in Ireland's main trading partners.
  These developments have also led to a very sharp deterioration of the public finances (with the general government balance going from a small surplus in 2007 to a deficit of 6,3 % of GDP in 2008). Against this background, the authorities have adopted consolidation measures in different steps starting in mid-2008. In this context, measures have also been taken to strengthen purchasing power and support an orderly adjustment in the property market while refocusing public investment on key projects. The key challenge for the years ahead is the implementation of a credible and sustainable fiscal consolidation strategy with a view to restoring market confidence, while at the same time redirecting resources from construction to more productive sectors and regaining competitiveness through measures enhancing productivity growth and adequate wage policies. The continued fragility of the financial sector might hamper the adjustment process in the short run and put further strain on the public finances. With a view to improving their long-term sustainability, reforming the pension system is another important challenge. |
| --- | --- |

(2)

After more than a decade of strong economic growth which had become increasingly driven by domestic demand, Ireland is now going through a severe recession. The downturn was caused by the sharp correction in the housing market and has since spread to the wider economy, aggravated by the global financial crisis and the recession in Ireland's main trading partners.

These developments have also led to a very sharp deterioration of the public finances (with the general government balance going from a small surplus in 2007 to a deficit of 6,3 % of GDP in 2008). Against this background, the authorities have adopted consolidation measures in different steps starting in mid-2008. In this context, measures have also been taken to strengthen purchasing power and support an orderly adjustment in the property market while refocusing public investment on key projects. The key challenge for the years ahead is the implementation of a credible and sustainable fiscal consolidation strategy with a view to restoring market confidence, while at the same time redirecting resources from construction to more productive sectors and regaining competitiveness through measures enhancing productivity growth and adequate wage policies. The continued fragility of the financial sector might hamper the adjustment process in the short run and put further strain on the public finances. With a view to improving their long-term sustainability, reforming the pension system is another important challenge.

| (3) | The macro-economic scenario underlying the programme envisages that the contraction of real GDP by 1,4 % in 2008 will be followed by further declines by 4,0 % in 2009 and 0,9 % in 2010 before growth recovers to an average rate of 2,9 % over the rest of the programme period. When assessed against currently available information (3), these growth assumptions appear broadly plausible up to 2010. From 2011 onwards, the projected economic growth appears rather optimistic. The programme's projections for inflation appear realistic. The same applies to the outlook for the external deficit and competitiveness. |
| --- | --- |

(3)

The macro-economic scenario underlying the programme envisages that the contraction of real GDP by 1,4 % in 2008 will be followed by further declines by 4,0 % in 2009 and 0,9 % in 2010 before growth recovers to an average rate of 2,9 % over the rest of the programme period. When assessed against currently available information (3), these growth assumptions appear broadly plausible up to 2010. From 2011 onwards, the projected economic growth appears rather optimistic. The programme's projections for inflation appear realistic. The same applies to the outlook for the external deficit and competitiveness.

| (4) | For 2008, the general government deficit is estimated at 6,3 % of GDP in the Commission services' January 2009 interim forecast, against a target of 0,9 % of GDP set in the previous update of the stability programme (4). This significantly worse-than-expected outturn reflects both a considerable tax shortfall and some expenditure overruns (5). Tax revenue targets were not met due to the permanent loss of housing boom-related revenue and lower-than-expected economic activity more generally. While in July 2008 some measures were taken to limit the increase in expenditure, spending growth was higher than planned, especially in social transfers, interest expenditure and public investment. Social transfers are fulfilling their role as automatic stabilisers, as reflected in higher unemployment-related spending. |
| --- | --- |

(4)

For 2008, the general government deficit is estimated at 6,3 % of GDP in the Commission services' January 2009 interim forecast, against a target of 0,9 % of GDP set in the previous update of the stability programme (4). This significantly worse-than-expected outturn reflects both a considerable tax shortfall and some expenditure overruns (5). Tax revenue targets were not met due to the permanent loss of housing boom-related revenue and lower-than-expected economic activity more generally. While in July 2008 some measures were taken to limit the increase in expenditure, spending growth was higher than planned, especially in social transfers, interest expenditure and public investment. Social transfers are fulfilling their role as automatic stabilisers, as reflected in higher unemployment-related spending.

| (5) | The general government deficit is targeted to widen to 9,5 % of GDP in 2009, mainly reflecting the economic slump. The government has carried out a discretionary tightening amounting to close to 3 % of GDP. At the same time, some measures have been adopted providing support to the economy in reaction to the downturn, in the order of 0,5 % of GDP. Taken together, this implies an overall tightening of around 2,5 % of GDP. This tightening includes a package announced in the addendum without providing details and therefore not incorporated in the Commission services' interim forecast. It is assessed by the Commission to generate net savings in 2009 amounting to 0,8 % of GDP; slightly below the 1 % of GDP announced by the government (6). Despite the tightening, the structural deficit (as recalculated by the Commission services on the basis of information in the programme) is estimated to widen by 2 percentage points of GDP, due to the loss of tax revenue linked to the ongoing adjustment in the housing market, difficulties in bringing down spending growth sufficiently quickly as well as a sharp downward revision in potential growth. |
| --- | --- |

(5)

The general government deficit is targeted to widen to 9,5 % of GDP in 2009, mainly reflecting the economic slump. The government has carried out a discretionary tightening amounting to close to 3 % of GDP. At the same time, some measures have been adopted providing support to the economy in reaction to the downturn, in the order of 0,5 % of GDP. Taken together, this implies an overall tightening of around 2,5 % of GDP. This tightening includes a package announced in the addendum without providing details and therefore not incorporated in the Commission services' interim forecast. It is assessed by the Commission to generate net savings in 2009 amounting to 0,8 % of GDP; slightly below the 1 % of GDP announced by the government (6). Despite the tightening, the structural deficit (as recalculated by the Commission services on the basis of information in the programme) is estimated to widen by 2 percentage points of GDP, due to the loss of tax revenue linked to the ongoing adjustment in the housing market, difficulties in bringing down spending growth sufficiently quickly as well as a sharp downward revision in potential growth.

| (6) | The government's medium-term budgetary strategy is to bring the headline deficit below the 3 % of GDP reference value by 2013. The decline in the deficit would start in 2010 and would accelerate from 2011. The programme provides no indications as to when the medium-term objective (MTO) should be met (7). While an annual consolidation objective amounting to a cumulated effort of around 7 % of GDP in nominal terms is announced from 2010 onwards, no specific measures are set out. The indicative projections of the addendum envisage a mainly expenditure-based consolidation strategy. Over the programme period, the revenue ratio is expected to increase slightly (by 0,75 percentage point of GDP), while the primary expenditure ratio is projected to decline markedly (by around 5,25 percentage points), especially in social transfers and government consumption. Interest expenditure as a share of GDP is expected to treble over the programme period, to 3,5 % of GDP. The fast rise in the deficit, falling nominal GDP and sizeable stock-flow adjustment in 2008 linked to a deliberate build-up of liquidity contribute to a doubling of the debt ratio between 2007 and 2009 and a breach of the 60 % of GDP reference value from 2010. |
| --- | --- |

(6)

The government's medium-term budgetary strategy is to bring the headline deficit below the 3 % of GDP reference value by 2013. The decline in the deficit would start in 2010 and would accelerate from 2011. The programme provides no indications as to when the medium-term objective (MTO) should be met (7). While an annual consolidation objective amounting to a cumulated effort of around 7 % of GDP in nominal terms is announced from 2010 onwards, no specific measures are set out. The indicative projections of the addendum envisage a mainly expenditure-based consolidation strategy. Over the programme period, the revenue ratio is expected to increase slightly (by 0,75 percentage point of GDP), while the primary expenditure ratio is projected to decline markedly (by around 5,25 percentage points), especially in social transfers and government consumption. Interest expenditure as a share of GDP is expected to treble over the programme period, to 3,5 % of GDP. The fast rise in the deficit, falling nominal GDP and sizeable stock-flow adjustment in 2008 linked to a deliberate build-up of liquidity contribute to a doubling of the debt ratio between 2007 and 2009 and a breach of the 60 % of GDP reference value from 2010.

| (7) | The budgetary outcomes are subject to downside risks throughout the programme period. First, significant risks stem from the lack of information on the planned consolidation strategy after 2009, in particular as regards the trajectory for expenditure and revenue, especially in view of the importance given to expenditure restraint. (8) Second, growth projections in the economic scenario might be favourable, especially in the outer years of the programme. In view of the negative risks to the deficit targets, the evolution of the debt ratio is also likely to be less favourable than projected in the programme. In addition, specific risks relate to contingent liabilities arising from the financial crisis, in particular from possible further capital injections into banks (debt) and the government's bank guarantees (deficit and debt, if called). |
| --- | --- |

(7)

The budgetary outcomes are subject to downside risks throughout the programme period. First, significant risks stem from the lack of information on the planned consolidation strategy after 2009, in particular as regards the trajectory for expenditure and revenue, especially in view of the importance given to expenditure restraint. (8) Second, growth projections in the economic scenario might be favourable, especially in the outer years of the programme. In view of the negative risks to the deficit targets, the evolution of the debt ratio is also likely to be less favourable than projected in the programme. In addition, specific risks relate to contingent liabilities arising from the financial crisis, in particular from possible further capital injections into banks (debt) and the government's bank guarantees (deficit and debt, if called).

| (8) | The long-term budgetary impact of ageing in Ireland is well above the EU average, mainly as a result of a relatively high projected increase in pension expenditure over the coming decades. The budgetary position in 2008 as estimated in the programme, which is markedly worse than the starting position of the previous programme, compounds the budgetary impact of population ageing on the sustainability gap. If the 2009 budgetary position as projected by the Commission services' interim forecast was taken as the starting point, the sustainability gap would widen substantially. While assets have been accumulated in the National Pension Reserve Fund (NPRF) in order to pre-fund part of future pension expenditure, gross debt is projected to exceed the Treaty reference value within the programme period. Reducing the high primary deficit over the medium term, as foreseen in the programme, and implementing reform measures that curb the substantial increase in age-related expenditure would contribute to reducing the high risks to the sustainability of public finances. The above-mentioned risks from financial sector stabilisation schemes put in place by Ireland could have a potential negative impact on the long-term sustainability of public finances, primarily via their impact on government debt, if the costs of the government support are not fully recouped in the future. |
| --- | --- |

(8)

The long-term budgetary impact of ageing in Ireland is well above the EU average, mainly as a result of a relatively high projected increase in pension expenditure over the coming decades. The budgetary position in 2008 as estimated in the programme, which is markedly worse than the starting position of the previous programme, compounds the budgetary impact of population ageing on the sustainability gap. If the 2009 budgetary position as projected by the Commission services' interim forecast was taken as the starting point, the sustainability gap would widen substantially. While assets have been accumulated in the National Pension Reserve Fund (NPRF) in order to pre-fund part of future pension expenditure, gross debt is projected to exceed the Treaty reference value within the programme period. Reducing the high primary deficit over the medium term, as foreseen in the programme, and implementing reform measures that curb the substantial increase in age-related expenditure would contribute to reducing the high risks to the sustainability of public finances. The above-mentioned risks from financial sector stabilisation schemes put in place by Ireland could have a potential negative impact on the long-term sustainability of public finances, primarily via their impact on government debt, if the costs of the government support are not fully recouped in the future.

| (9) | 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 recent experience has shown, this makes it more difficult for policymakers to maintain a prudent fiscal policy course in the presence of (persistent) windfall revenues. At the same time, it might limit their ability to commit credibly to a consolidation strategy in difficult times. While these issues are not directly addressed in the programme, the government has established a Commission on Taxation and a ‘Special Review Group on Public Service Expenditure and Numbers’ to make recommendations for the improvement of the taxation system and of public expenditure programmes respectively. The reports of these groups are expected in the course of 2009 and the national authorities have indicated that the recommendations will feed into the decision-making process for the 2010 budget and subsequent budgets. |
| --- | --- |

(9)

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 recent experience has shown, this makes it more difficult for policymakers to maintain a prudent fiscal policy course in the presence of (persistent) windfall revenues. At the same time, it might limit their ability to commit credibly to a consolidation strategy in difficult times. While these issues are not directly addressed in the programme, the government has established a Commission on Taxation and a ‘Special Review Group on Public Service Expenditure and Numbers’ to make recommendations for the improvement of the taxation system and of public expenditure programmes respectively. The reports of these groups are expected in the course of 2009 and the national authorities have indicated that the recommendations will feed into the decision-making process for the 2010 budget and subsequent budgets.

| (10) | Ireland adopted several measures to safeguard the stability of the financial sector. The statutory limit for the deposit guarantee scheme was increased to EUR 100 000 per depositor. Guarantees to covered banks were put in place in an estimated amount of EUR 400 billion. A recapitalisation programme of EUR 10 billion (5 % of GDP) for three major banks, intended to be financed at least partly from the NPRF, was announced in December. However, one of the concerned banks was instead later taken into public ownership. The capital injections (EUR 7 billion announced on February 11 for the remaining two banks) are to be funded from the NPRF and future contributions to it. |
| --- | --- |

(10)

Ireland adopted several measures to safeguard the stability of the financial sector. The statutory limit for the deposit guarantee scheme was increased to EUR 100 000 per depositor. Guarantees to covered banks were put in place in an estimated amount of EUR 400 billion. A recapitalisation programme of EUR 10 billion (5 % of GDP) for three major banks, intended to be financed at least partly from the NPRF, was announced in December. However, one of the concerned banks was instead later taken into public ownership. The capital injections (EUR 7 billion announced on February 11 for the remaining two banks) are to be funded from the NPRF and future contributions to it.

| (11) | Fiscal policy in 2009 is overall consolidating the budget, which is adequate and in line with the European Economic Recovery Plan agreed in December 2008 by the European Council, in view of the high deficit and sharply increasing debt position. Moreover, in line with the EERP, Ireland adopted a number of measures to support economic activity and to enhance structural reforms. This package is an adequate response to the macro-fiscal situation. The measures taken by the Irish authorities focus on support to households' purchasing power and investment and are timely and targeted. Specific measures were taken to support the adjustment process in the housing market, where the current economic downturn started, while other measures were targeted specifically at the most vulnerable groups likely to be most affected by the crisis, including a social welfare package. The measures are of a permanent rather than temporary nature but this has to be seen in the light of the fact that the overall budgetary strategy is deficit-reducing. Furthermore, support to the recovery would come from structural measures such as continued high public investment in the framework of Ireland's multi-annual National Development Plan (around 4,5 % of GDP annually over the programme period) and tax advantages for R & D activities and small start-up companies. These measures are related to the medium-term reform agenda and the country-specific recommendations proposed by the Commission on 28 January 2009 under the Lisbon Strategy for Growth and Jobs. |
| --- | --- |

(11)

Fiscal policy in 2009 is overall consolidating the budget, which is adequate and in line with the European Economic Recovery Plan agreed in December 2008 by the European Council, in view of the high deficit and sharply increasing debt position. Moreover, in line with the EERP, Ireland adopted a number of measures to support economic activity and to enhance structural reforms. This package is an adequate response to the macro-fiscal situation. The measures taken by the Irish authorities focus on support to households' purchasing power and investment and are timely and targeted. Specific measures were taken to support the adjustment process in the housing market, where the current economic downturn started, while other measures were targeted specifically at the most vulnerable groups likely to be most affected by the crisis, including a social welfare package. The measures are of a permanent rather than temporary nature but this has to be seen in the light of the fact that the overall budgetary strategy is deficit-reducing. Furthermore, support to the recovery would come from structural measures such as continued high public investment in the framework of Ireland's multi-annual National Development Plan (around 4,5 % of GDP annually over the programme period) and tax advantages for R & D activities and small start-up companies. These measures are related to the medium-term reform agenda and the country-specific recommendations proposed by the Commission on 28 January 2009 under the Lisbon Strategy for Growth and Jobs.

| (12) | After the further deterioration in 2009, the deficit is projected to narrow progressively. However, a reduction of the headline deficit below 3 % of GDP by 2013, as envisaged in the programme, will require addressing the above-mentioned significant risks to the budgetary targets and standing ready to adopt additional measures if necessary. The fiscal consolidation plans should be backed up with measures. |
| --- | --- |

(12)

After the further deterioration in 2009, the deficit is projected to narrow progressively. However, a reduction of the headline deficit below 3 % of GDP by 2013, as envisaged in the programme, will require addressing the above-mentioned significant risks to the budgetary targets and standing ready to adopt additional measures if necessary. The fiscal consolidation plans should be backed up with measures.

| (13) | 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 (9). |
| --- | --- |

(13)

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 (9).

The overall conclusion is that, following a very sharp deterioration in 2008, the general government deficit will widen further in 2009, to 9,5 % of GDP. The fiscal consolidation measures and the measures to support the economy can be regarded as welcome and adequate given the high deficit and sharply increasing debt position and are in line with the European Economic Recovery Plan. After the budgetary deterioration in 2009, the programme envisages a reduction of the deficit below the 3 % of GDP reference value by 2013, while debt would breach the 60 % of GDP reference value from 2010. This would take place against the background of a rapid recovery of economic activity after 2010. The budgetary outcomes are subject to downside risks throughout the programme period, mainly due to (i) the lack of information on the envisaged consolidation measures after 2009; and (ii) the favourable macro-economic outlook especially in the outer years of the programme. Further risks stem from the measures in place to support the financial sector. There is a need to regain competitiveness through measures enhancing productivity growth and adequate wage policies. A reduction of the headline deficit below 3 % of GDP by 2013, as envisaged in the programme, will require addressing the significant risks to the budgetary targets and standing ready to adopt additional measures if necessary. Also with a view to improving the long-term sustainability of public finances, the fiscal consolidation plans should be backed up with measures.

In view of the above assessment Ireland is invited to:

| (i) | limit the widening of the deficit in 2009 and specify and rigorously implement substantial annual efforts within a broad-based fiscal consolidation programme for 2010 and beyond; |
| --- | --- |

(i)

limit the widening of the deficit in 2009 and specify and rigorously implement substantial annual efforts within a broad-based fiscal consolidation programme for 2010 and beyond;

| (ii) | in order to limit risks to the adjustment, strengthen the binding nature of the medium-term budgetary framework as well as closely monitor adherence to the budgetary targets throughout the year; |
| --- | --- |

(ii)

in order to limit risks to the adjustment, strengthen the binding nature of the medium-term budgetary framework as well as closely monitor adherence to the budgetary targets throughout the year;

| (iii) | in view of the significant projected increase in age-related expenditure, and also of the increase in debt, albeit from a low level, expected over the programme period, improve the long-term sustainability of public finances by implementing further pension reform measures in addition to pursuing fiscal consolidation. |
| --- | --- |

(iii)

in view of the significant projected increase in age-related expenditure, and also of the increase in debt, albeit from a low level, expected over the programme period, improve the long-term sustainability of public finances by implementing further pension reform measures in addition to pursuing fiscal consolidation.

Comparison of key macro-economic and budgetary projections

| | | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 |
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Real GDP
  (% change) | SP Jan 2009 | 6,0 | – 1,4 | – 4,0 | – 0,9 | 2,3 | 3,4 | 3,0 |
| COM Jan 2009 | 6,0 | – 2,0 | – 5,0 | 0,0 | n.a. | n.a. | n.a. |
| SP Nov 2007 | 4,8 | 3,0 | 3,5 | 4,1 | n.a. | n.a. | n.a. |
| HICP inflation
  (%) | SP Jan 2009 | 2,8 | 3,1 | 0,5 | 1,5 | 1,8 | 1,8 | 1,8 |
| COM Jan 2009 | 2,9 | 3,1 | 0,7 | 1,8 | n.a. | n.a. | n.a. |
| SP Nov 2007 | 2,8 | 2,4 | 2,0 | 1,8 | n.a. | n.a. | n.a. |
| Output gap (10)

  (% of potential GDP) | SP Jan 2009 | 4,4 | 0,5 | – 3,5 | – 4,1 | – 3,4 | – 1,6 | – 0,5 |
| COM Jan 2009 (12) | 4,4 | 0,1 | – 4,5 | – 4,2 | n.a. | n.a. | n.a. |
| SP Nov 2007 | – 0,5 | – 1,3 | – 1,5 | – 0,7 | n.a. | n.a. | n.a. |
| Net lending/borrowing vis-à-vis the rest of the world
  (% of GDP) | SP Jan 2009 | – 5,4 | – 6,3 | – 4,2 | – 3,5 | – 3,4 | – 3,0 | – 2,8 |
| COM Jan 2009 | – 5,4 | – 5,7 | – 3,3 | – 3,2 | n.a. | n.a. | n.a. |
| SP Nov 2007 | – 4,4 | – 3,9 | – 3,5 | – 3,1 | n.a. | n.a. | n.a. |
| General government revenue
  (% of GDP) | SP Jan 2009 | 35,7 | 33,6 | 33,7 | 34,4 | 34,6 | 33,9 | 34,4 |
| COM Jan 2009 | 35,7 | 33,7 | 33,7 | 33,9 | n.a. | n.a. | n.a. |
| SP Nov 2007 | 36,6 | 36,1 | 35,8 | 35,4 | n.a. | n.a. | n.a. |
| General government expenditure
  (% of GDP) | SP Jan 2009 | 35,4 | 39,9 | 43,3 | 43,4 | 41,0 | 38,7 | 37,0 |
| COM Jan 2009 | 35,4 | 40,0 | 44,7 | 46,9 | n.a. | n.a. | n.a. |
| SP Nov 2007 | 36,1 | 37,0 | 36,9 | 36,5 | n.a. | n.a. | n.a. |
| General government balance
  (% of GDP) | SP Jan 2009 (11) | 0,2 | – 6,3 | – 9,5 | – 9,0 | – 6,4 | – 4,8 | – 2,6 |
| COM Jan 2009 | 0,2 | – 6,3 | – 11,0 | – 13,0 | n.a. | n.a. | n.a. |
| SP Nov 2007 | 0,5 | – 0,9 | – 1,1 | – 1,0 | n.a. | n.a. | n.a. |
| Primary balance
  (% of GDP) | SP Jan 2009 | 1,2 | – 5,2 | – 7,3 | – 6,4 | – 3,5 | – 1,7 | 0,7 |
| COM Jan 2009 | 1,2 | – 5,2 | – 8,7 | – 10,3 | n.a. | n.a. | n.a. |
| SP Nov 2007 | 1,4 | 0,0 | – 0,1 | 0,0 | n.a. | n.a. | n.a. |
| Cyclically-adjusted balance (10)

  (% of GDP) | SP Jan 2009 | – 1,5 | – 6,5 | – 8,1 | – 7,4 | – 5,0 | – 4,1 | – 2,4 |
| COM Jan 2009 | – 1,5 | – 6,3 | – 9,1 | – 11,3 | n.a. | n.a. | n.a. |
| SP Nov 2007 | 0,7 | – 0,4 | – 0,5 | – 0,7 | n.a. | n.a. | n.a. |
| Structural balance (13)

  (% of GDP) | SP Jan 2009 | – 1,7 | – 6,2 | – 8,1 | – 7,4 | – 5,0 | – 4,1 | – 2,4 |
| COM Jan 2009 | – 1,5 | – 6,3 | – 9,4 | – 11,3 | n.a. | n.a. | n.a. |
| SP Nov 2007 | 0,5 | – 0,4 | – 0,5 | – 0,7 | n.a. | n.a. | n.a. |
| Government gross debt
  (% of GDP) | SP Jan 2009 | 24,8 | 40,6 | 52,7 | 62,3 | 65,7 | 66,2 | 64,5 |
| COM Jan 2009 | 24,8 | 40,8 | 54,8 | 68,2 | n.a. | n.a. | n.a. |
| SP Nov 2007 | 25,1 | 25,9 | 27,6 | 28,7 | n.a. | n.a. | n.a. |
| Stability programme (SP); Commission services' January 2009 interim forecasts (COM); Commission services' calculations. |

2007

2008

2009

2010

2011

2012

2013

Real GDP

(% change)

SP Jan 2009

6,0

– 1,4

– 4,0

– 0,9

2,3

3,4

3,0

COM Jan 2009

6,0

– 2,0

– 5,0

0,0

n.a.

n.a.

n.a.

SP Nov 2007

4,8

3,0

3,5

4,1

n.a.

n.a.

n.a.

HICP inflation

(%)

SP Jan 2009

2,8

3,1

0,5

1,5

1,8

1,8

1,8

COM Jan 2009

2,9

3,1

0,7

1,8

n.a.

n.a.

n.a.

SP Nov 2007

2,8

2,4

2,0

1,8

n.a.

n.a.

n.a.

Output gap (10)

(% of potential GDP)

SP Jan 2009

4,4

0,5

– 3,5

– 4,1

– 3,4

– 1,6

– 0,5

COM Jan 2009 (12)

4,4

0,1

– 4,5

– 4,2

n.a.

n.a.

n.a.

SP Nov 2007

– 0,5

– 1,3

– 1,5

– 0,7

n.a.

n.a.

n.a.

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

(% of GDP)

SP Jan 2009

– 5,4

– 6,3

– 4,2

– 3,5

– 3,4

– 3,0

– 2,8

COM Jan 2009

– 5,4

– 5,7

– 3,3

– 3,2

n.a.

n.a.

n.a.

SP Nov 2007

– 4,4

– 3,9

– 3,5

– 3,1

n.a.

n.a.

n.a.

General government revenue

(% of GDP)

SP Jan 2009

35,7

33,6

33,7

34,4

34,6

33,9

34,4

COM Jan 2009

35,7

33,7

33,7

33,9

n.a.

n.a.

n.a.

SP Nov 2007

36,6

36,1

35,8

35,4

n.a.

n.a.

n.a.

General government expenditure

(% of GDP)

SP Jan 2009

35,4

39,9

43,3

43,4

41,0

38,7

37,0

COM Jan 2009

35,4

40,0

44,7

46,9

n.a.

n.a.

n.a.

SP Nov 2007

36,1

37,0

36,9

36,5

n.a.

n.a.

n.a.

General government balance

(% of GDP)

SP Jan 2009 (11)

0,2

– 6,3

– 9,5

– 9,0

– 6,4

– 4,8

– 2,6

COM Jan 2009

0,2

– 6,3

– 11,0

– 13,0

n.a.

n.a.

n.a.

SP Nov 2007

0,5

– 0,9

– 1,1

– 1,0

n.a.

n.a.

n.a.

Primary balance

(% of GDP)

SP Jan 2009

1,2

– 5,2

– 7,3

– 6,4

– 3,5

– 1,7

0,7

COM Jan 2009

1,2

– 5,2

– 8,7

– 10,3

n.a.

n.a.

n.a.

SP Nov 2007

1,4

0,0

– 0,1

0,0

n.a.

n.a.

n.a.

Cyclically-adjusted balance (10)

(% of GDP)

SP Jan 2009

– 1,5

– 6,5

– 8,1

– 7,4

– 5,0

– 4,1

– 2,4

COM Jan 2009

– 1,5

– 6,3

– 9,1

– 11,3

n.a.

n.a.

n.a.

SP Nov 2007

0,7

– 0,4

– 0,5

– 0,7

n.a.

n.a.

n.a.

Structural balance (13)

(% of GDP)

SP Jan 2009

– 1,7

– 6,2

– 8,1

– 7,4

– 5,0

– 4,1

– 2,4

COM Jan 2009

– 1,5

– 6,3

– 9,4

– 11,3

n.a.

n.a.

n.a.

SP Nov 2007

0,5

– 0,4

– 0,5

– 0,7

n.a.

n.a.

n.a.

Government gross debt

(% of GDP)

SP Jan 2009

24,8

40,6

52,7

62,3

65,7

66,2

64,5

COM Jan 2009

24,8

40,8

54,8

68,2

n.a.

n.a.

n.a.

SP Nov 2007

25,1

25,9

27,6

28,7

n.a.

n.a.

n.a.

Stability programme (SP); Commission services' January 2009 interim 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/about/activities/sgp/main_en.htm

(2)  Including the addendum submitted on 9 January 2009.

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

(4)  The addendum estimates the deficit outcome for 2008 at 6,3 % of GDP. In view of the reported breach of the Treaty reference value, the Commission prepared on 18 February 2009 a report under Article 104(3) of the Treaty.

(5)  The higher-than-expected expenditure is explained by (i) higher-than-planned social transfers; (ii) increased interest expenditure; and (iii) unbudgeted capital investment, including the purchase of the Westlink toll bridge at a cost of 0,3 % of GDP.

(6)  In early February, the government specified the package, which consists of a pension levy on public sector wages (tentatively estimated at 0,5 % of GDP on a full-year basis, taking into account the levy's tax deductibility), further cuts in public investment (0,2 % of GDP) and other smaller expenditure-saving measures (adding up to 0,2 % of GDP on a full-year basis).

(7)  The programme contains for the first time a quantification of the MTO, which should be a structural balance (i.e. a cyclically-adjusted balance net of one-off and other temporary measures) in the range of – 0,5 % to 0 % of GDP, compared to the previous indication of a position of ‘close to balance’.

(8)  The national authorities have announced that policy decisions in relation to the allocation between expenditure and revenue measures of the planned consolidation will be announced in subsequent budgets.

(9)  In particular, where required data are concerned, only nominal effective exchange rate, EU GDP growth and growth of relevant foreign markets were not provided. On the optional data side, gaps include sectoral balances and government expenditure by function.

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

(11)  The targets for the general government balance include as yet unspecified additional annual consolidation measures of 2,25% of GDP in 2010, 2 % in 2011, 1,75% in 2012, and 1,5% in 2013. The additional consolidation measures for 2009 (1 % of GDP) are in the process of being specified.

(12)  Based on estimated potential growth of 4,0 %, 2,2 %, – 0,4 % and – 0,4 % respectively in the period 2007-2010.

(13)  Cyclically-adjusted balance excluding one-off and other temporary measures. One-off and other temporary measures are 0,3 % of GDP in 2008 (deficit-increasing) according to the most recent programme and 0,3 % in 2009 (deficit-reducing) according to the Commission services' January interim forecast.

Source:

Stability programme (SP); Commission services' January 2009 interim forecasts (COM); Commission services' calculations.

---

| 21.3.2009 | EN | Official Journal of the European Union | C 68/12 |
| --- | --- | --- | --- |

21.3.2009

EN

Official Journal of the European Union

C 68/12

---

COUNCIL OPINION

of 10 March 2009

on the updated convergence programme of Latvia, 2008-2011

(2009/C 68/03)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community,

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

Having regard to the recommendation of the Commission,

After consulting the Economic and Financial Committee,

HAS DELIVERED THIS OPINION:

| (1) | On 10 March 2009, the Council examined the updated convergence programme of Latvia, which covers the period 2008 to 2011. |
| --- | --- |

(1)

On 10 March 2009, the Council examined the updated convergence programme of Latvia, which covers the period 2008 to 2011.

| (2) | Following a sustained period of high growth since the end-1990s, largely based on domestic demand, Latvia's real GDP increased at double-digit rates in 2005-2007, well over potential. Growth was primarily driven by a powerful credit expansion boosting private consumption and real estate investment, but this ended by mid-2007, as overvalued real estate prices could no longer be sustained. During these years, the high domestic demand created serious overheating pressures and the structure of the economy shifted from the tradable sector to non-tradable, undermining the external sustainability of the economy. The global financial crisis amplified the shock of the reversal of Latvia's own lending and house price boom by further tightening credit availability and conditions, reinforcing the steep decline of domestic demand over the course of 2008. In the context of the exchange rate peg, monetary and credit conditions tightened in 2008 amid higher country risk perceptions and a continued appreciation of the real effective exchange rate. The concomitant downturn on export markets has hit the relatively small tradable sector, already weakened by extremely large domestic cost increases over the previous years. Reflecting the rapid economic downturn, budget revenues sharply deteriorated in 2008, entailing an estimated 4 percentage point of GDP impact on the budget balance. As market sentiment increasingly turned against emerging markets, funding constraints led to the government's decision to turn to international institutional financing. Subject to the implementation of an agreed policy programme, Latvia has been granted very substantial international financial assistance from the EU, the IMF and other lenders (in total, up to EUR 7,5 billion over the period to the first quarter of 2011) (2). In line with the commitments made to the providers of international assistance, Latvia's fiscal policy is geared towards supporting the adjustment needed in view of the country's high imbalances. |
| --- | --- |

(2)

Following a sustained period of high growth since the end-1990s, largely based on domestic demand, Latvia's real GDP increased at double-digit rates in 2005-2007, well over potential. Growth was primarily driven by a powerful credit expansion boosting private consumption and real estate investment, but this ended by mid-2007, as overvalued real estate prices could no longer be sustained. During these years, the high domestic demand created serious overheating pressures and the structure of the economy shifted from the tradable sector to non-tradable, undermining the external sustainability of the economy. The global financial crisis amplified the shock of the reversal of Latvia's own lending and house price boom by further tightening credit availability and conditions, reinforcing the steep decline of domestic demand over the course of 2008. In the context of the exchange rate peg, monetary and credit conditions tightened in 2008 amid higher country risk perceptions and a continued appreciation of the real effective exchange rate. The concomitant downturn on export markets has hit the relatively small tradable sector, already weakened by extremely large domestic cost increases over the previous years. Reflecting the rapid economic downturn, budget revenues sharply deteriorated in 2008, entailing an estimated 4 percentage point of GDP impact on the budget balance. As market sentiment increasingly turned against emerging markets, funding constraints led to the government's decision to turn to international institutional financing. Subject to the implementation of an agreed policy programme, Latvia has been granted very substantial international financial assistance from the EU, the IMF and other lenders (in total, up to EUR 7,5 billion over the period to the first quarter of 2011) (2). In line with the commitments made to the providers of international assistance, Latvia's fiscal policy is geared towards supporting the adjustment needed in view of the country's high imbalances.

| (3) | The macro-economic scenario underlying the programme envisages that real GDP, after an estimated fall of 2 % in 2008, will contract by 5 % in 2009 and a further 3 % in 2010, before a very weak recovery to a growth rate of 1,5 % in 2011. Assessed against currently available information (3), the macro-economic scenario is based on favourable growth assumptions in 2009, but thereafter the demand and output scenario is plausible. The programme's projections for inflation appear realistic. Net external borrowing projections of the programme are slightly cautious, but appear consistent with the programme's outlook for demand and output. |
| --- | --- |

(3)

The macro-economic scenario underlying the programme envisages that real GDP, after an estimated fall of 2 % in 2008, will contract by 5 % in 2009 and a further 3 % in 2010, before a very weak recovery to a growth rate of 1,5 % in 2011. Assessed against currently available information (3), the macro-economic scenario is based on favourable growth assumptions in 2009, but thereafter the demand and output scenario is plausible. The programme's projections for inflation appear realistic. Net external borrowing projections of the programme are slightly cautious, but appear consistent with the programme's outlook for demand and output.

| (4) | For 2008, the general government deficit is estimated at 3,5 % of GDP in the Commission services' January 2009 interim forecast, against a target of a surplus of 0,7 % of GDP set in the previous update of the convergence programme (4). This significantly worse-than-expected outturn essentially reflects a considerable tax shortfall. Tax payments of businesses and private individuals declined towards the end of the year, due to acute liquidity problems in the economy. |
| --- | --- |

(4)

For 2008, the general government deficit is estimated at 3,5 % of GDP in the Commission services' January 2009 interim forecast, against a target of a surplus of 0,7 % of GDP set in the previous update of the convergence programme (4). This significantly worse-than-expected outturn essentially reflects a considerable tax shortfall. Tax payments of businesses and private individuals declined towards the end of the year, due to acute liquidity problems in the economy.

| (5) | On 12 December 2008, the Latvian Parliament adopted an amended budget for 2009, which was in line with the conditionality of the EU balance-of-payments assistance and with the requirements of other international lenders. This budget included amended consolidation measures estimated to amount to 7 % of GDP. However, as the original budget was expansionary, the overall fiscal consolidation for 2009 is of a smaller magnitude. The consolidation effort in 2009 is not reflected in the structural balance due to important changes in volatile revenues. The main measures include VAT and excise duty increases and a significant cut in total expenditures, notably public sector wages, relative to the original 2009 budget adopted on 14 November 2008. This will be followed by a detailed supplementary budget by the end of March 2009 and by action on the local government level to revise their budgets, in order to achieve the 2009 general government deficit target. Automatic stabilisers have a generally small impact in Latvia, but during the current recession tax receipts are particularly affected. |
| --- | --- |

(5)

On 12 December 2008, the Latvian Parliament adopted an amended budget for 2009, which was in line with the conditionality of the EU balance-of-payments assistance and with the requirements of other international lenders. This budget included amended consolidation measures estimated to amount to 7 % of GDP. However, as the original budget was expansionary, the overall fiscal consolidation for 2009 is of a smaller magnitude. The consolidation effort in 2009 is not reflected in the structural balance due to important changes in volatile revenues. The main measures include VAT and excise duty increases and a significant cut in total expenditures, notably public sector wages, relative to the original 2009 budget adopted on 14 November 2008. This will be followed by a detailed supplementary budget by the end of March 2009 and by action on the local government level to revise their budgets, in order to achieve the 2009 general government deficit target. Automatic stabilisers have a generally small impact in Latvia, but during the current recession tax receipts are particularly affected.

| (6) | The main goal of the medium-term budgetary strategy in the programme is to reduce the government deficit in 2011 to below the Maastricht Treaty budget deficit reference value of 3 % of GDP, in order to achieve a successful transition to euro adoption. The latest programme update does not envisage achieving the medium-term objective (MTO), set as a structural deficit of 1 % of GDP, during the programme period. The headline deficit is projected to improve from 5,3 % of GDP in 2009 to 4,9 % of GDP in 2010 and to 2,9 % of GDP in 2011. This consolidation is to be achieved by increasing revenue from 32,5 % of GDP in 2009 to 37,7 % of GDP in 2011, supported by significant increases in indirect tax revenues to GDP in 2011 and large increases in other revenue ratios in 2010 and 2011. At the same time, the level of expenditure to GDP is planned to increase, but to a lesser extent, from 37,7 % of GDP in 2009 to 39,9 % in 2010 and 40,7 % in 2011. General government gross debt stood at 19,4 % of GDP in 2008, well below the 60 % of GDP reference value, but on a growing trend. The debt projections for 2009-2010 assume full drawdown of the international financial assistance, as scheduled by the involved parties. |
| --- | --- |

(6)

The main goal of the medium-term budgetary strategy in the programme is to reduce the government deficit in 2011 to below the Maastricht Treaty budget deficit reference value of 3 % of GDP, in order to achieve a successful transition to euro adoption. The latest programme update does not envisage achieving the medium-term objective (MTO), set as a structural deficit of 1 % of GDP, during the programme period. The headline deficit is projected to improve from 5,3 % of GDP in 2009 to 4,9 % of GDP in 2010 and to 2,9 % of GDP in 2011. This consolidation is to be achieved by increasing revenue from 32,5 % of GDP in 2009 to 37,7 % of GDP in 2011, supported by significant increases in indirect tax revenues to GDP in 2011 and large increases in other revenue ratios in 2010 and 2011. At the same time, the level of expenditure to GDP is planned to increase, but to a lesser extent, from 37,7 % of GDP in 2009 to 39,9 % in 2010 and 40,7 % in 2011. General government gross debt stood at 19,4 % of GDP in 2008, well below the 60 % of GDP reference value, but on a growing trend. The debt projections for 2009-2010 assume full drawdown of the international financial assistance, as scheduled by the involved parties.

| (7) | The budgetary outcomes in the programme are subject to downside risks. This concerns all programme years: in 2009 the chief risk is that GDP could be lower than projected in the programme. The amended budget will be detailed in proposals due to be presented to Parliament by end-March. In 2010 and 2011 the planned fiscal consolidation is not underpinned by detailed measures. Furthermore, financial sector stabilisation operations might become necessary over the programme horizon with a potentially significant impact on public finances. |
| --- | --- |

(7)

The budgetary outcomes in the programme are subject to downside risks. This concerns all programme years: in 2009 the chief risk is that GDP could be lower than projected in the programme. The amended budget will be detailed in proposals due to be presented to Parliament by end-March. In 2010 and 2011 the planned fiscal consolidation is not underpinned by detailed measures. Furthermore, financial sector stabilisation operations might become necessary over the programme horizon with a potentially significant impact on public finances.

| (8) | The long-term budgetary impact of ageing is lower than the EU average, as a result of the pension reforms already enacted. However, the budgetary position in 2008, as estimated in the programme, has worsened considerably compared with the starting position of the previous programme and 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 medium risks to the sustainability of public finances and would be important to improve the market view on Latvia. Measures to support financial sector stabilisation in Latvia could have a negative impact on the long-term sustainability of public finances, primarily via their impact on government debt. |
| --- | --- |

(8)

The long-term budgetary impact of ageing is lower than the EU average, as a result of the pension reforms already enacted. However, the budgetary position in 2008, as estimated in the programme, has worsened considerably compared with the starting position of the previous programme and 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 medium risks to the sustainability of public finances and would be important to improve the market view on Latvia. Measures to support financial sector stabilisation in Latvia could have a negative impact on the long-term sustainability of public finances, primarily via their impact on government debt.

| (9) | The fiscal outturns posted by Latvia over the past few years can partly be explained by the institutional weaknesses of its fiscal framework. In the context of the international financial assistance, measures are planned to be taken in the first half of 2009 to strengthen fiscal governance, increase transparency and improve public financial management, inter alia by strengthening the budget formulation process, reinforcing the Ministry of Finance's spending controls, and making operational the medium-term budget framework. Moreover, the Budget and Financial Management Law will be amended to strengthen the design and implementation of budgetary procedures. The revenue administration system will be reviewed with support from international technical assistance in the first quarter of 2009, to be followed by a comprehensive public financial management review. |
| --- | --- |

(9)

The fiscal outturns posted by Latvia over the past few years can partly be explained by the institutional weaknesses of its fiscal framework. In the context of the international financial assistance, measures are planned to be taken in the first half of 2009 to strengthen fiscal governance, increase transparency and improve public financial management, inter alia by strengthening the budget formulation process, reinforcing the Ministry of Finance's spending controls, and making operational the medium-term budget framework. Moreover, the Budget and Financial Management Law will be amended to strengthen the design and implementation of budgetary procedures. The revenue administration system will be reviewed with support from international technical assistance in the first quarter of 2009, to be followed by a comprehensive public financial management review.

| (10) | With a view to stabilising the financial sector, Latvia raised the deposit guarantee coverage from the lats equivalent of EUR 20 000 to EUR 50 000. In November 2008, the government took a controlling share of Parex Bank and provided liquidity support to the bank. Latvia is currently developing the legal framework for using public financial resources to support financial institutions. |
| --- | --- |

(10)

With a view to stabilising the financial sector, Latvia raised the deposit guarantee coverage from the lats equivalent of EUR 20 000 to EUR 50 000. In November 2008, the government took a controlling share of Parex Bank and provided liquidity support to the bank. Latvia is currently developing the legal framework for using public financial resources to support financial institutions.

| (11) | In line with the European Economic Recovery Plan agreed in December 2008 by the European Council, Latvia, as a country facing significant external and internal imbalances, has aimed its budgetary policy at correcting such imbalances. Taking into account the absence of scope for fiscal manoeuvre and the need to correct economic imbalances, the planned restrictive fiscal stance from 2009 until 2011 appears to be an adequate response to the economic situation. Specific measures have been taken to support the adjustment process in the tradable sector of economy. A significant cut in public sector wages, which should contribute to overall wage adjustment and to correcting external imbalances, has been implemented. The Latvian authorities are planning to adopt a package of measures to support the business sector through reducing administrative burdens and improving access to finance.
  Further support to the recovery would come from continued public and private investment in the framework of EU Structural Funds' projects. The authorities have committed to ensuring a timely and determined implementation of Structural Fund programmes. The measures are related to the medium-term reform agenda and the country-specific recommendations proposed by the Commission on 28 January 2009 under the Lisbon Strategy for Growth and Jobs. |
| --- | --- |

(11)

In line with the European Economic Recovery Plan agreed in December 2008 by the European Council, Latvia, as a country facing significant external and internal imbalances, has aimed its budgetary policy at correcting such imbalances. Taking into account the absence of scope for fiscal manoeuvre and the need to correct economic imbalances, the planned restrictive fiscal stance from 2009 until 2011 appears to be an adequate response to the economic situation. Specific measures have been taken to support the adjustment process in the tradable sector of economy. A significant cut in public sector wages, which should contribute to overall wage adjustment and to correcting external imbalances, has been implemented. The Latvian authorities are planning to adopt a package of measures to support the business sector through reducing administrative burdens and improving access to finance.

Further support to the recovery would come from continued public and private investment in the framework of EU Structural Funds' projects. The authorities have committed to ensuring a timely and determined implementation of Structural Fund programmes. The measures are related to the medium-term reform agenda and the country-specific recommendations proposed by the Commission on 28 January 2009 under the Lisbon Strategy for Growth and Jobs.

| (12) | Latvia has adopted a consolidation programme in line with the aim of reducing external and internal imbalances and with the requirements of the EU balance-of-payments assistance and the conditions of the other international lenders. The change in structural balance, using the commonly agreed methodology, does not reflect the very strong fiscal consolidation effort in 2009 mainly due to unusually volatile revenues. According to the convergence programme the fiscal stance is estimated to be restrictive thereafter. Considering the absence of space for fiscal manoeuvre and the need to correct economic imbalances, this appears appropriate, although the fiscal stance in 2009 could be more restrictive if needed to reach the targeted headline deficit. In the context of Latvia's ERM II membership and the need to improve the economy's cost competitiveness, the authorities have facilitated the alignment of private sector wages with productivity by reducing public sector compensation levels and are also reducing public employee headcounts. The budgetary scenario in the programme appears to be consistent, though subject to risks, with the commitments made in the context of EU balance-of-payments assistance of bringing the deficit under 3 % by 2011. However, the programme does not provide sufficiently detailed information on the measures needed to achieve the targeted figures in 2010 and 2011. |
| --- | --- |

(12)

Latvia has adopted a consolidation programme in line with the aim of reducing external and internal imbalances and with the requirements of the EU balance-of-payments assistance and the conditions of the other international lenders. The change in structural balance, using the commonly agreed methodology, does not reflect the very strong fiscal consolidation effort in 2009 mainly due to unusually volatile revenues. According to the convergence programme the fiscal stance is estimated to be restrictive thereafter. Considering the absence of space for fiscal manoeuvre and the need to correct economic imbalances, this appears appropriate, although the fiscal stance in 2009 could be more restrictive if needed to reach the targeted headline deficit. In the context of Latvia's ERM II membership and the need to improve the economy's cost competitiveness, the authorities have facilitated the alignment of private sector wages with productivity by reducing public sector compensation levels and are also reducing public employee headcounts. The budgetary scenario in the programme appears to be consistent, though subject to risks, with the commitments made in the context of EU balance-of-payments assistance of bringing the deficit under 3 % by 2011. However, the programme does not provide sufficiently detailed information on the measures needed to achieve the targeted figures in 2010 and 2011.

| (13) | As regards the data requirements specified in the code of conduct for stability and convergence programmes, the programme provides all compulsory and most of the optional data (5). |
| --- | --- |

(13)

As regards the data requirements specified in the code of conduct for stability and convergence programmes, the programme provides all compulsory and most of the optional data (5).

The overall conclusion is that Latvia, while facing a severe economic downturn following years of above-potential economic growth, is planning a restrictive fiscal stance in 2009 and until 2011, which is an adequate response to the economic situation considering the absence of scope for fiscal manoeuvre and the need to correct economic imbalances. The global financial crisis has amplified the shock of the reversal of Latvia's own lending and house price boom by tightening credit availability and conditions, reinforcing the steep decline of domestic demand over the course of 2008. The concomitant downturn on export markets has hit the relatively small tradable sector, already weakened by huge domestic cost increases over the previous years. The headline deficit exceeded the 3 % of GDP Maastricht Treaty reference value in 2008. This was the result of having followed expansionary fiscal policy during the years of above-potential growth and of the very sharp slowdown in 2008. The programme targets general government deficits of around 5 % of GDP in 2009 and 2010 and below 3 % in 2011. Taking into account risks of lower demand and output in 2009 and lack of information underpinning the revenue-based consolidation in 2010 and 2011, the budgetary outcome could be worse than projected in the programme.

In view of the above assessment, the commitments made in the framework of international financial assistance, and also given the need to ensure sustainable convergence and a smooth participation in ERM II, Latvia is invited to:

| (i) | implement fully the planned consolidation in the supplementary budget adopted on 12 December 2008; submit to Parliament by the end of March 2009 the details of the supplementary budget; take sufficient further measures to achieve the targeted general government deficit in 2009 and continue the targeted fiscal consolidation thereafter; |
| --- | --- |

(i)

implement fully the planned consolidation in the supplementary budget adopted on 12 December 2008; submit to Parliament by the end of March 2009 the details of the supplementary budget; take sufficient further measures to achieve the targeted general government deficit in 2009 and continue the targeted fiscal consolidation thereafter;

| (ii) | rigorously implement public sector nominal wage reductions to facilitate the alignment of whole-economy wages with productivity, thereby improving cost competitiveness; |
| --- | --- |

(ii)

rigorously implement public sector nominal wage reductions to facilitate the alignment of whole-economy wages with productivity, thereby improving cost competitiveness;

| (iii) | strengthen fiscal governance and transparency, by improving the medium-term budgetary framework and reinforcing Ministry of Finance spending controls, and strengthen financial market regulation and supervision; |
| --- | --- |

(iii)

strengthen fiscal governance and transparency, by improving the medium-term budgetary framework and reinforcing Ministry of Finance spending controls, and strengthen financial market regulation and supervision;

| (iv) | strengthen the supply side of the economy by wide-ranging structural reforms and by making efficient use of available EU structural funds. |
| --- | --- |

(iv)

strengthen the supply side of the economy by wide-ranging structural reforms and by making efficient use of available EU structural funds.

Comparison of key macro-economic and budgetary projections

| | | 2007 | 2008 | 2009 | 2010 | 2011 |
| --- | --- | --- | --- | --- | --- | --- |
| Real GDP
  (% change) | CP Jan 2009 | 10,3 | – 2,0 | – 5,0 | – 3,0 | 1,5 |
| COM Jan 2009 | 10,3 | – 2,3 | – 6,9 | – 2,4 | n.a. |
| CP Nov 2007 | 10,5 | 7,5 | 7,0 | 6,8 | n.a. |
| HICP inflation
  (%) | CP Jan 2009 | 10,1 | 15,4 | 5,9 | 2,2 | 1,3 |
| COM Jan 2009 | 10,1 | 15,3 | 6,8 | 2,4 | n.a. |
| CP Nov 2007 | 10,1 | 12,5 | 7,2 | 4,9 | n.a. |
| Output gap (6)

  (% of potential GDP) | CP Jan 2009 | 12,2 | 5,9 | – 1,6 | – 5,7 | – 5,3 |
| COM Jan 2009 (7) | 13,2 | 7,0 | – 1,8 | – 4,7 | n.a. |
| CP Nov 2007 | 2,8 | 1,3 | – 0,3 | – 1,7 | n.a. |
| Net lending/borrowing vis-à-vis the rest of the world
  (% of GDP) | CP Jan 2009 | – 21,8 | – 13,4 | – 5,4 | – 2,6 | – 2,3 |
| COM Jan 2009 | – 20,8 | – 13,0 | – 4,6 | – 3,4 | n.a. |
| CP Nov 2007 | – 23,5 | – 20,3 | – 18,3 | – 16,4 | n.a. |
| General government revenue
  (% of GDP) | CP Jan 2009 | 37,7 | 35,1 | 32,5 | 35,0 | 37,7 |
| COM Jan 2009 | 37,6 | 36,0 | 34,1 | 34,7 | n.a. |
| CP Nov 2007 | 37,3 | 37,4 | 37,7 | 37,9 | n.a. |
| General government expenditure
  (% of GDP) | CP Jan 2009 | 37,7 | 38,6 | 37,7 | 39,9 | 40,7 |
| COM Jan 2009 | 37,6 | 39,5 | 40,4 | 42,1 | n.a. |
| CP Nov 2007 | 37,0 | 36,8 | 36,7 | 36,7 | n.a. |
| General government balance
  (% of GDP) | CP Jan 2009 | 0,1 | – 3,5 | – 5,3 | – 4,9 | – 2,9 |
| COM Jan 2009 | 0,1 | – 3,5 | – 6,3 | – 7,4 | n.a. |
| CP Nov 2007 | 0,3 | 0,7 | 1,0 | 1,2 | n.a. |
| Primary balance
  (% of GDP) | CP Jan 2009 | 0,5 | – 2,9 | – 3,7 | – 3,5 | – 1,4 |
| COM Jan 2009 | 0,6 | – 2,9 | – 5,1 | – 5,5 | n.a. |
| CP Nov 2007 | 0,7 | 1,0 | 1,2 | 1,5 | n.a. |
| Cyclically-adjusted balance (6)

  (% of GDP) | CP Jan 2009 | – 3,3 | – 5,1 | – 4,9 | – 3,3 | – 1,4 |
| COM Jan 2009 | – 3,6 | – 5,4 | – 5,8 | – 6,1 | n.a. |
| CP Nov 2007 | – 0,5 | 0,4 | 1,1 | 1,7 | n.a. |
| Structural balance (8)

  (% of GDP) | CP Jan 2009 | – 3,3 | – 5,1 | – 4,9 | – 3,3 | – 1,4 |
| COM Jan 2009 | – 3,6 | – 5,4 | – 5,8 | – 6,1 | n.a. |
| CP Nov 2007 | – 0,5 | 0,4 | 1,1 | 1,7 | n.a. |
| Government gross debt
  (% of GDP) | CP Jan 2009 | 9,5 | 19,4 | 32,4 | 45,4 | 47,3 |
| COM Jan 2009 | 9,5 | 16,0 | 30,4 | 42,9 | n.a. |
| CP Nov 2007 | 9,4 | 8,3 | 7,2 | 6,4 | n.a. |
| Convergence programme (CP); Commission services' January 2009 interim forecasts (COM); Commission services' calculations. |

2007

2008

2009

2010

2011

Real GDP

(% change)

CP Jan 2009

10,3

– 2,0

– 5,0

– 3,0

1,5

COM Jan 2009

10,3

– 2,3

– 6,9

– 2,4

n.a.

CP Nov 2007

10,5

7,5

7,0

6,8

n.a.

HICP inflation

(%)

CP Jan 2009

10,1

15,4

5,9

2,2

1,3

COM Jan 2009

10,1

15,3

6,8

2,4

n.a.

CP Nov 2007

10,1

12,5

7,2

4,9

n.a.

Output gap (6)

(% of potential GDP)

CP Jan 2009

12,2

5,9

– 1,6

– 5,7

– 5,3

COM Jan 2009 (7)

13,2

7,0

– 1,8

– 4,7

n.a.

CP Nov 2007

2,8

1,3

– 0,3

– 1,7

n.a.

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

(% of GDP)

CP Jan 2009

– 21,8

– 13,4

– 5,4

– 2,6

– 2,3

COM Jan 2009

– 20,8

– 13,0

– 4,6

– 3,4

n.a.

CP Nov 2007

– 23,5

– 20,3

– 18,3

– 16,4

n.a.

General government revenue

(% of GDP)

CP Jan 2009

37,7

35,1

32,5

35,0

37,7

COM Jan 2009

37,6

36,0

34,1

34,7

n.a.

CP Nov 2007

37,3

37,4

37,7

37,9

n.a.

General government expenditure

(% of GDP)

CP Jan 2009

37,7

38,6

37,7

39,9

40,7

COM Jan 2009

37,6

39,5

40,4

42,1

n.a.

CP Nov 2007

37,0

36,8

36,7

36,7

n.a.

General government balance

(% of GDP)

CP Jan 2009

0,1

– 3,5

– 5,3

– 4,9

– 2,9

COM Jan 2009

0,1

– 3,5

– 6,3

– 7,4

n.a.

CP Nov 2007

0,3

0,7

1,0

1,2

n.a.

Primary balance

(% of GDP)

CP Jan 2009

0,5

– 2,9

– 3,7

– 3,5

– 1,4

COM Jan 2009

0,6

– 2,9

– 5,1

– 5,5

n.a.

CP Nov 2007

0,7

1,0

1,2

1,5

n.a.

Cyclically-adjusted balance (6)

(% of GDP)

CP Jan 2009

– 3,3

– 5,1

– 4,9

– 3,3

– 1,4

COM Jan 2009

– 3,6

– 5,4

– 5,8

– 6,1

n.a.

CP Nov 2007

– 0,5

0,4

1,1

1,7

n.a.

Structural balance (8)

(% of GDP)

CP Jan 2009

– 3,3

– 5,1

– 4,9

– 3,3

– 1,4

COM Jan 2009

– 3,6

– 5,4

– 5,8

– 6,1

n.a.

CP Nov 2007

– 0,5

0,4

1,1

1,7

n.a.

Government gross debt

(% of GDP)

CP Jan 2009

9,5

19,4

32,4

45,4

47,3

COM Jan 2009

9,5

16,0

30,4

42,9

n.a.

CP Nov 2007

9,4

8,3

7,2

6,4

n.a.

Convergence programme (CP); Commission services' January 2009 interim forecasts (COM); Commission services' calculations.

---

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

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

(2)  See Council Decision of 20 January 2009 providing Community medium-term financial assistance for Latvia.

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

(4)  The programme update estimates the deficit outcome for 2008 at 3,5 % of GDP. In view of this, the Commission prepared a report under Article 104(3) of the Treaty.

(5)  In particular the data on the subcomponents of the stock-flow adjustment and some elements of the long-term sustainability of public finances table are missing.

(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 5,5 %, 3,4 %, 1,4 % and 0,5 % respectively in the period 2007-2010.

(8)  Cyclically-adjusted balance excluding one-off and other temporary measures. There are no one-off and other temporary measures in the most recent programme or in the Commission services' January interim forecast.

Source:

Convergence programme (CP); Commission services' January 2009 interim forecasts (COM); Commission services' calculations.

---

| 21.3.2009 | EN | Official Journal of the European Union | C 68/17 |
| --- | --- | --- | --- |

21.3.2009

EN

Official Journal of the European Union

C 68/17

---

COUNCIL OPINION

of 10 March 2009

on the updated stability programme of Spain, 2008-2011

(2009/C 68/04)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community,

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

Having regard to the recommendation of the Commission,

After consulting the Economic and Financial Committee,

HAS DELIVERED THIS OPINION:

| (1) | On 10 March 2009, the Council examined the updated stability programme of Spain, which covers the period 2008 to 2011. |
| --- | --- |

(1)

On 10 March 2009, the Council examined the updated stability programme of Spain, which covers the period 2008 to 2011.

| (2) | According to the Commission services' January 2009 interim forecast, Spanish GDP growth would have decelerated in 2008 to 1,25 % in real terms. Spain is facing domestic and external adjustment challenges. Domestically, the housing sector is contracting, while the price of dwellings is falling. Externally, the persistent current account deficit gap has lead to rapidly growing indebtedness, resulting in rising interest payments abroad. Since the first half of 2008, the Spanish authorities have adopted various measures to stimulate economic activity. They include temporary and permanent tax cuts and investment projects, amounting to around 2 % of GDP in 2009, as well as a series of structural reforms. In addition to these discretionary measures, public finances are severely affected by the economic downturn, which limits the space for further fiscal impulses without jeopardising a sound long-term budgetary position. Therefore, Spain is facing the challenge of enhancing potential growth in a protracted downturn, while facilitating the ongoing correction of the existing macroeconomic imbalances. |
| --- | --- |

(2)

According to the Commission services' January 2009 interim forecast, Spanish GDP growth would have decelerated in 2008 to 1,25 % in real terms. Spain is facing domestic and external adjustment challenges. Domestically, the housing sector is contracting, while the price of dwellings is falling. Externally, the persistent current account deficit gap has lead to rapidly growing indebtedness, resulting in rising interest payments abroad. Since the first half of 2008, the Spanish authorities have adopted various measures to stimulate economic activity. They include temporary and permanent tax cuts and investment projects, amounting to around 2 % of GDP in 2009, as well as a series of structural reforms. In addition to these discretionary measures, public finances are severely affected by the economic downturn, which limits the space for further fiscal impulses without jeopardising a sound long-term budgetary position. Therefore, Spain is facing the challenge of enhancing potential growth in a protracted downturn, while facilitating the ongoing correction of the existing macroeconomic imbalances.

| (3) | The macroeconomic scenario underlying the programme envisages that GDP will contract by 1,6 % in real terms in 2009 and recover in 2010 and 2011 with real GDP growth at 1,2 % and 2,6 % respectively. The acceleration would mainly be driven by domestic demand, while the external deficit is projected to decline from above 9 % of GDP in 2008 to 5,5 % in 2011. The programme takes into account the stimulus measures adopted in response to the economic downturn, but does not present explicit estimates of their impact on real GDP growth. Assessed against currently available information (2), this scenario appears to be based on slightly favourable growth assumptions for 2009 and markedly favourable thereafter. On the back of a reduction in the balance of goods and services deficit, the programme envisages a decline of the external deficit from 9,2 % of GDP in 2008 to 5,4 % of GDP in 2011. |
| --- | --- |

(3)

The macroeconomic scenario underlying the programme envisages that GDP will contract by 1,6 % in real terms in 2009 and recover in 2010 and 2011 with real GDP growth at 1,2 % and 2,6 % respectively. The acceleration would mainly be driven by domestic demand, while the external deficit is projected to decline from above 9 % of GDP in 2008 to 5,5 % in 2011. The programme takes into account the stimulus measures adopted in response to the economic downturn, but does not present explicit estimates of their impact on real GDP growth. Assessed against currently available information (2), this scenario appears to be based on slightly favourable growth assumptions for 2009 and markedly favourable thereafter. On the back of a reduction in the balance of goods and services deficit, the programme envisages a decline of the external deficit from 9,2 % of GDP in 2008 to 5,4 % of GDP in 2011.

| (4) | For 2008, general government deficit is estimated at 3,4 % of GDP (3) in the Commission services' January 2009 interim forecast, in line with the figure contained in the updated stability programme. However, this is much lower than the target of a surplus of 1,2 % of GDP set in the previous update. The budgetary deterioration results from both discretionary measures and a much weaker economic activity. The fall of direct tax revenue reflects a combination of personal and corporate tax cuts and a significant fall in corporate profits, linked to feeble asset markets, including real estate.
  Indirect tax revenue fell due to the deceleration in consumer spending and particularly to the contraction of transactions in dwellings, as well as revenue-reducing measures of a one-off nature, such as changes to VAT payments and returns. Expenditure overruns reflect in particular the working of automatic stabilisers through higher social transfers, including unemployment benefits. |
| --- | --- |

(4)

For 2008, general government deficit is estimated at 3,4 % of GDP (3) in the Commission services' January 2009 interim forecast, in line with the figure contained in the updated stability programme. However, this is much lower than the target of a surplus of 1,2 % of GDP set in the previous update. The budgetary deterioration results from both discretionary measures and a much weaker economic activity. The fall of direct tax revenue reflects a combination of personal and corporate tax cuts and a significant fall in corporate profits, linked to feeble asset markets, including real estate.

Indirect tax revenue fell due to the deceleration in consumer spending and particularly to the contraction of transactions in dwellings, as well as revenue-reducing measures of a one-off nature, such as changes to VAT payments and returns. Expenditure overruns reflect in particular the working of automatic stabilisers through higher social transfers, including unemployment benefits.

| (5) | The update plans a budget deficit of 5,8 % of GDP in 2009, against a projection of 6,2 % in the Commission services' interim forecast. The worsening of the budget balance is explained by the adoption of a number of discretionary measures amounting to around 2 % of GDP, but also by the working of automatic stabilisers in response to the economic downturn (estimated at around 1 % of GDP). The discretionary measures include the November 2008 stimulus package (slightly above 1 % of GDP). The package foresees the creation of a Central Government Fund for Local Public Investment, endowed with 0,75 % of GDP, with the aim of carrying out new public works. Revenue-reducing one-off measures amount to around 0,75 % of GDP, including the modification of the system for VAT returns and the reduction in personal income withholding tax for tax payers with mortgages. Overall, the stance of fiscal policy will be expansionary in 2009 and in line with the recommendation of the EERP. |
| --- | --- |

(5)

The update plans a budget deficit of 5,8 % of GDP in 2009, against a projection of 6,2 % in the Commission services' interim forecast. The worsening of the budget balance is explained by the adoption of a number of discretionary measures amounting to around 2 % of GDP, but also by the working of automatic stabilisers in response to the economic downturn (estimated at around 1 % of GDP). The discretionary measures include the November 2008 stimulus package (slightly above 1 % of GDP). The package foresees the creation of a Central Government Fund for Local Public Investment, endowed with 0,75 % of GDP, with the aim of carrying out new public works. Revenue-reducing one-off measures amount to around 0,75 % of GDP, including the modification of the system for VAT returns and the reduction in personal income withholding tax for tax payers with mortgages. Overall, the stance of fiscal policy will be expansionary in 2009 and in line with the recommendation of the EERP.

| (6) | After peaking in 2009, the headline deficit is expected to fall to below 4 % of GDP in 2011. Similarly, the primary balance will reach a deficit of 1,9 % of GDP by 2011, which compares with a deficit of 4,1 % in 2009. In structural terms, the government deficit will increase from 3,5 % of GDP in 2008 to 4,75 % in 2009 reflecting the budgetary impact of discretionary measures, but also the fall in revenue related to the on-going adjustment in the real estate sector. This excludes the 0,75 percentage points of GDP of one-off revenue-reducing measures included in the 2009 budget.
  The update sets up a fiscal adjustment path, projecting improvements in the structural balance of 1,25 % and slightly above 0,5 % of GDP in 2010 and 2011 respectively. As a result, the programme envisages a reduction in the structural deficit to 2,75 % in 2011 (4). According to the programme, the goal of this adjustment is to regain the medium-term budgetary objective (MTO) of a balanced position, but it is not expected to be met within the programme period. The improvement in 2010 can partly be explained by the temporary nature of the stimulus package adopted in November 2008. Apart from this, the programme does not spell out measures underpinning the projected decline in the structural balance. Government gross debt, estimated at 39,5 % of GDP in 2008, is projected to increase by approximately 14 points over the programme period. In addition to the rise in the deficit and the decline in GDP growth, the acquisition of assets from banks within the framework of the financial rescue package contributes to the rise in the debt ratio, mainly in 2009. |
| --- | --- |

(6)

After peaking in 2009, the headline deficit is expected to fall to below 4 % of GDP in 2011. Similarly, the primary balance will reach a deficit of 1,9 % of GDP by 2011, which compares with a deficit of 4,1 % in 2009. In structural terms, the government deficit will increase from 3,5 % of GDP in 2008 to 4,75 % in 2009 reflecting the budgetary impact of discretionary measures, but also the fall in revenue related to the on-going adjustment in the real estate sector. This excludes the 0,75 percentage points of GDP of one-off revenue-reducing measures included in the 2009 budget.

The update sets up a fiscal adjustment path, projecting improvements in the structural balance of 1,25 % and slightly above 0,5 % of GDP in 2010 and 2011 respectively. As a result, the programme envisages a reduction in the structural deficit to 2,75 % in 2011 (4). According to the programme, the goal of this adjustment is to regain the medium-term budgetary objective (MTO) of a balanced position, but it is not expected to be met within the programme period. The improvement in 2010 can partly be explained by the temporary nature of the stimulus package adopted in November 2008. Apart from this, the programme does not spell out measures underpinning the projected decline in the structural balance. Government gross debt, estimated at 39,5 % of GDP in 2008, is projected to increase by approximately 14 points over the programme period. In addition to the rise in the deficit and the decline in GDP growth, the acquisition of assets from banks within the framework of the financial rescue package contributes to the rise in the debt ratio, mainly in 2009.

| (7) | The budgetary outcomes are subject to downside risks throughout the programme period. First, the macroeconomic scenario projected in the update appears to be based on favourable growth assumptions, particularly for the outer years of the programme. Second, budgetary targets for 2010 and 2011 are not backed up by measures, other than the announced discontinuation of the November 2008 package. Moreover, regional and local governments are allowed to incur deficits in 2009 without the usual obligation of presenting a rebalancing plan, in line with the Budgetary Stability Act which allows for this exemption when real economy activity departs substantially from the initial forecasts. The evolution of the debt ratio may be less favourable than projected in the update, given the risks to the macroeconomic scenario and the budgetary targets, and the uncertainty about the impact of the guarantees granted in the context of the financial rescue package. However, the increase in debt linked to the measures taken in support of the financial sector would be reversed if the support scheme and the financial operations linked to it are successful. |
| --- | --- |

(7)

The budgetary outcomes are subject to downside risks throughout the programme period. First, the macroeconomic scenario projected in the update appears to be based on favourable growth assumptions, particularly for the outer years of the programme. Second, budgetary targets for 2010 and 2011 are not backed up by measures, other than the announced discontinuation of the November 2008 package. Moreover, regional and local governments are allowed to incur deficits in 2009 without the usual obligation of presenting a rebalancing plan, in line with the Budgetary Stability Act which allows for this exemption when real economy activity departs substantially from the initial forecasts. The evolution of the debt ratio may be less favourable than projected in the update, given the risks to the macroeconomic scenario and the budgetary targets, and the uncertainty about the impact of the guarantees granted in the context of the financial rescue package. However, the increase in debt linked to the measures taken in support of the financial sector would be reversed if the support scheme and the financial operations linked to it are successful.

| (8) | The long-term budgetary impact of ageing is well above the EU average, mainly as a result of a relatively high increase in pension expenditure as a share of GDP over the coming decades. While the strong budgetary position until 2007 contributed to partly offsetting the projected long-term budgetary impact of ageing populations, the contrary would result from the budgetary developments projected in the programme. Also, if the 2009 budgetary position as projected by the Commission services' interim forecast is to be taken as the starting point, the sustainability gap would widen substantially in relation to the last update. Improving the primary balance over the medium term and implementing further structural measures aimed at curbing the substantial increase in age-related expenditures would contribute to reducing the high risks to the long-term sustainability of public finances. |
| --- | --- |

(8)

The long-term budgetary impact of ageing is well above the EU average, mainly as a result of a relatively high increase in pension expenditure as a share of GDP over the coming decades. While the strong budgetary position until 2007 contributed to partly offsetting the projected long-term budgetary impact of ageing populations, the contrary would result from the budgetary developments projected in the programme. Also, if the 2009 budgetary position as projected by the Commission services' interim forecast is to be taken as the starting point, the sustainability gap would widen substantially in relation to the last update. Improving the primary balance over the medium term and implementing further structural measures aimed at curbing the substantial increase in age-related expenditures would contribute to reducing the high risks to the long-term sustainability of public finances.

| (9) | The medium-term budgetary framework has been instrumental in promoting an appropriate fiscal planning and shows an overall good track record, although the latter has worsened since 2008. No reforms to this framework are planned. However, the programme outlines several reforms aimed at improving the quality of public finances. On the revenue side, these include a reduction in the tax burden on earned income through a personal income tax credit of up to EUR 400 per taxpayer, a mechanism for advancing the tax credit for mortgage payments, the elimination of wealth tax and the second phase of the corporate income tax reform, as well as measures aimed at improving the functioning of the tax system, such as the possibility of obtaining VAT refunds on a monthly basis. On the expenditure side, priority is being given to productive expenditure along with the need to rein in intermediate public consumption. The programme underlines the role of the State Agency for the Assessment of Public Policy and Service Quality as a step forward in the promotion of a culture of assessment, which should enhance the efficiency and quality of public services. |
| --- | --- |

(9)

The medium-term budgetary framework has been instrumental in promoting an appropriate fiscal planning and shows an overall good track record, although the latter has worsened since 2008. No reforms to this framework are planned. However, the programme outlines several reforms aimed at improving the quality of public finances. On the revenue side, these include a reduction in the tax burden on earned income through a personal income tax credit of up to EUR 400 per taxpayer, a mechanism for advancing the tax credit for mortgage payments, the elimination of wealth tax and the second phase of the corporate income tax reform, as well as measures aimed at improving the functioning of the tax system, such as the possibility of obtaining VAT refunds on a monthly basis. On the expenditure side, priority is being given to productive expenditure along with the need to rein in intermediate public consumption. The programme underlines the role of the State Agency for the Assessment of Public Policy and Service Quality as a step forward in the promotion of a culture of assessment, which should enhance the efficiency and quality of public services.

| (10) | The Spanish authorities have adopted a range of measures to stabilise the financial sector. This includes an increase of the amount of the Deposit and Investment Guarantee Fund (from EUR 20 000 to EUR 100 000 per account holder and bank) and the creation of the Financial Asset Acquisition Fund in order to promote lending to companies and individuals, endowed with EUR 30 billion (close to 3 % of GDP), including the possibility of an expansion up to EUR 50 billion. Moreover, the authorities decided to grant exceptional authorisations to the Ministry of Economy and Finance to award State guarantees for new funding transactions by Spanish-resident banks in 2009 up to EUR 100 billion (10 % of GDP), maturing between three months and three years, and to acquire securities issued by Spanish-resident banks in order to strengthen their own funds. |
| --- | --- |

(10)

The Spanish authorities have adopted a range of measures to stabilise the financial sector. This includes an increase of the amount of the Deposit and Investment Guarantee Fund (from EUR 20 000 to EUR 100 000 per account holder and bank) and the creation of the Financial Asset Acquisition Fund in order to promote lending to companies and individuals, endowed with EUR 30 billion (close to 3 % of GDP), including the possibility of an expansion up to EUR 50 billion. Moreover, the authorities decided to grant exceptional authorisations to the Ministry of Economy and Finance to award State guarantees for new funding transactions by Spanish-resident banks in 2009 up to EUR 100 billion (10 % of GDP), maturing between three months and three years, and to acquire securities issued by Spanish-resident banks in order to strengthen their own funds.

| (11) | The Spanish government adopted significant discretionary fiscal measures in response to the economic downturn. The stimulus package for 2009 is in line with the EERP agreed in December 2008 by the European Council and represents an adequate response to the economic downturn, yielding a temporary support to economic activity in 2009. It mainly focuses on investment, household purchasing power, and business and SMEs. Measures amounting to around 1 % of GDP were already planned in specific packages in April and August 2008, while the rest includes new actions adopted in a fiscal impulse package presented in November 2008 (slightly above 1 % of GDP). This November 2008 package is timely, targeted and temporary. They broadly respond to the main policy objectives in terms of the short-term outlook. The update also includes a series of structural measures, which are part of the longer-term policy reform agenda, but help address the current challenges posed by the downturn. These measures are related to the medium-term reform agenda and the country-specific recommendations proposed by the Commission on 28 January 2009 under the Lisbon Strategy for Growth and Jobs. They aim at enhancing the growth potential, strengthen competitiveness and employment as well as supporting incomes of disadvantaged groups, and include the transposition of the services directive. |
| --- | --- |

(11)

The Spanish government adopted significant discretionary fiscal measures in response to the economic downturn. The stimulus package for 2009 is in line with the EERP agreed in December 2008 by the European Council and represents an adequate response to the economic downturn, yielding a temporary support to economic activity in 2009. It mainly focuses on investment, household purchasing power, and business and SMEs. Measures amounting to around 1 % of GDP were already planned in specific packages in April and August 2008, while the rest includes new actions adopted in a fiscal impulse package presented in November 2008 (slightly above 1 % of GDP). This November 2008 package is timely, targeted and temporary. They broadly respond to the main policy objectives in terms of the short-term outlook. The update also includes a series of structural measures, which are part of the longer-term policy reform agenda, but help address the current challenges posed by the downturn. These measures are related to the medium-term reform agenda and the country-specific recommendations proposed by the Commission on 28 January 2009 under the Lisbon Strategy for Growth and Jobs. They aim at enhancing the growth potential, strengthen competitiveness and employment as well as supporting incomes of disadvantaged groups, and include the transposition of the services directive.

| (12) | The overall fiscal stance in the programme is expansionary in 2009 and mildly restrictive in 2010. More specifically, the programme targets for 2010 a reversal of the 2009 fiscal expansion and a further structural improvement in 2011. However, taking into account risks to the budgetary plans, the reversal in 2010 requires further action to be effective. The programme projects the headline deficit to remain above the 3 % of GDP reference value. The deficit reduction envisaged in the programme for 2010 and beyond is not backed up by measures. |
| --- | --- |

(12)

The overall fiscal stance in the programme is expansionary in 2009 and mildly restrictive in 2010. More specifically, the programme targets for 2010 a reversal of the 2009 fiscal expansion and a further structural improvement in 2011. However, taking into account risks to the budgetary plans, the reversal in 2010 requires further action to be effective. The programme projects the headline deficit to remain above the 3 % of GDP reference value. The deficit reduction envisaged in the programme for 2010 and beyond is not backed up by measures.

| (13) | As regards the data requirements specified in the code of conduct for stability and convergence programmes, the programme contains gaps in the required and optional data (5). |
| --- | --- |

(13)

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

The overall conclusion is that the sharp slowdown of economic activity and some discretionary measures led to a deficit above 3 % of GDP in 2008, after a prolonged period in which the Spanish public finances were close to balance or in surplus. The updated stability programme aims at a significant fiscal impulse in 2009 in line with the EERP to counteract the continued slowdown in economic activity. This will lead to a widening of the government deficit, while the debt ratio remains comfortably below 60 % of GDP. Improving long-term fiscal sustainability should be a priority. The favourable macroeconomic assumptions may imply a lower contribution of economic growth to fiscal consolidation than envisaged in the programme, while the adjustment path is not fully backed up with concrete measures. In addition, fostering the quality of public finances is important also with a view to underpinning a smooth adjustment of the economy in the light of the imbalances it is faced with.

In view of the above assessment, Spain is invited to:

| (i) | implement the 2009 fiscal policy as planned in line with the EERP and within the framework of the SGP, while avoiding a further deterioration of public finances in 2009, and carry out with determination significant structural consolidation in 2010 and beyond, backing it up with measures; |
| --- | --- |

(i)

implement the 2009 fiscal policy as planned in line with the EERP and within the framework of the SGP, while avoiding a further deterioration of public finances in 2009, and carry out with determination significant structural consolidation in 2010 and beyond, backing it up with measures;

| (ii) | improve the long-term sustainability of public finances by implementing further measures aimed at curbing the increase in age-related expenditure; |
| --- | --- |

(ii)

improve the long-term sustainability of public finances by implementing further measures aimed at curbing the increase in age-related expenditure;

| (iii) | ensure that fiscal consolidation measures are also geared towards enhancing the quality of the public finances as planned in the light of the needed adjustment of existing imbalances. |
| --- | --- |

(iii)

ensure that fiscal consolidation measures are also geared towards enhancing the quality of the public finances as planned in the light of the needed adjustment of existing imbalances.

Comparison of key macroeconomic and budgetary projections

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

  (% of potential GDP) | SP Jan 2009 | 1,4 | 0,3 | – 2,6 | – 3,2 | – 2,7 |
| COM Jan 2009 (7) | 1,5 | 0,8 | – 2,3 | – 3,4 | n.a. |
| SP Dec 2007 | – 0,9 | – 1,4 | – 1,9 | – 1,6 | n.a |
| Net lending/borrowing vis-à-vis the rest of the world
  (% of GDP) | SP Jan 2009 | – 9,7 | – 9,2 | – 6,6 | – 5,8 | – 5,4 |
| COM Jan 2009 | – 9,7 | – 9,0 | – 6,7 | – 6,2 | n.a. |
| SP Dec 2007 | – 9,0 | – 8,9 | – 8,8 | – 8,7 | n.a |
| General government revenue
  (% of GDP) | SP Jan 2009 | 41,0 | 37,0 | 37,5 | 38,3 | 38,7 |
| COM Jan 2009 | 41,0 | 36,8 | 36,4 | 36,9 | n.a. |
| SP Dec 2007 | 40,800 | 40,4 | 40,4 | 40,3 | n.a |
| General government expenditure
  (% of GDP) | SP Jan 2009 | 38,8 | 40,4 | 43,3 | 43,1 | 42,6 |
| COM Jan 2009 | 38,8 | 40,2 | 42,6 | 42,5 | n.a. |
| SP Dec 2007 | 39,0 | 39,2 | 39,2 | 39,1 | n.a |
| General government balance
  (% of GDP) | SP Jan 2009 | 2,2 | – 3,4 | – 5,8 | – 4,8 | – 3,9 |
| COM Jan 2009 | 2,2 | – 3,4 | – 6,2 | – 5,7 | n.a. |
| SP Dec 2007 | 1,8 | 1,2 | 1,2 | 1,2 | n.a |
| Primary balance
  (% of GDP) | SP Jan 2009 | 3,8 | – 1,9 | – 4,1 | – 2,9 | – 1,9 |
| COM Jan 2009 | 3,8 | – 1,8 | – 4,6 | – 4,0 | n.a. |
| SP Dec 2007 | 3,4 | 2,7 | 2,6 | 2,6 | n.a |
| Cyclically-adjusted balance (6)

  (% of GDP) | SP Jan 2009 | 1,6 | – 3,5 | – 4,7 | – 3,4 | – 2,8 |
| COM Jan 2009 | 1,6 | – 3,7 | – 5,2 | – 4,2 | n.a. |
| SP Dec 2007 | 2,2 | 1,8 | 2,0 | 1,9 | n.a |
| Structural balance (8)
   (9)

  (% of GDP) | SP Jan 2009 | 1,6 | – 3,5 | – 4,7 | – 3,4 | – 2,8 |
| COM Jan 2009 | 1,6 | – 3,3 | – 4,6 | – 4,2 | n.a. |
| SP Dec 2007 | 2,2 | 1,8 | 2,0 | 1,9 | n.a |
| Government gross debt
  (% of GDP) | SP Jan 2009 | 36,2 | 39,5 | 47,3 | 51,6 | 53,7 |
| COM Jan 2009 | 36,2 | 39,8 | 46,9 | 53,0 | n.a. |
| SP Dec 2007 | 36,2 | 34,0 | 32,0 | 30,0 | n.a |
| Stability programme (SP); Commission services' January 2009 interim forecast (COM); Commission services' calculations. |

2007

2008

2009

2010

2011

Real GDP

(% change)

SP Jan 2009

3,7

1,2

– 1,6

1,2

2,6

COM Jan 2009

3,7

1,2

– 2,0

– 0,2

n.a.

SP Dec 2007

3,8

3,1

3,0

3,2

n.a

HICP inflation

(%)

SP Jan 2009

n.a.

n.a.

n.a.

n.a.

n.a.

COM Jan 2009

2,8

4,1

0,6

2,4

n.a.

SP Dec 2007

2,7

3,3

2,7

2,8

n.a

Output gap (6)

(% of potential GDP)

SP Jan 2009

1,4

0,3

– 2,6

– 3,2

– 2,7

COM Jan 2009 (7)

1,5

0,8

– 2,3

– 3,4

n.a.

SP Dec 2007

– 0,9

– 1,4

– 1,9

– 1,6

n.a

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

(% of GDP)

SP Jan 2009

– 9,7

– 9,2

– 6,6

– 5,8

– 5,4

COM Jan 2009

– 9,7

– 9,0

– 6,7

– 6,2

n.a.

SP Dec 2007

– 9,0

– 8,9

– 8,8

– 8,7

n.a

General government revenue

(% of GDP)

SP Jan 2009

41,0

37,0

37,5

38,3

38,7

COM Jan 2009

41,0

36,8

36,4

36,9

n.a.

SP Dec 2007

40,800

40,4

40,4

40,3

n.a

General government expenditure

(% of GDP)

SP Jan 2009

38,8

40,4

43,3

43,1

42,6

COM Jan 2009

38,8

40,2

42,6

42,5

n.a.

SP Dec 2007

39,0

39,2

39,2

39,1

n.a

General government balance

(% of GDP)

SP Jan 2009

2,2

– 3,4

– 5,8

– 4,8

– 3,9

COM Jan 2009

2,2

– 3,4

– 6,2

– 5,7

n.a.

SP Dec 2007

1,8

1,2

1,2

1,2

n.a

Primary balance

(% of GDP)

SP Jan 2009

3,8

– 1,9

– 4,1

– 2,9

– 1,9

COM Jan 2009

3,8

– 1,8

– 4,6

– 4,0

n.a.

SP Dec 2007

3,4

2,7

2,6

2,6

n.a

Cyclically-adjusted balance (6)

(% of GDP)

SP Jan 2009

1,6

– 3,5

– 4,7

– 3,4

– 2,8

COM Jan 2009

1,6

– 3,7

– 5,2

– 4,2

n.a.

SP Dec 2007

2,2

1,8

2,0

1,9

n.a

Structural balance (8)
   (9)

(% of GDP)

SP Jan 2009

1,6

– 3,5

– 4,7

– 3,4

– 2,8

COM Jan 2009

1,6

– 3,3

– 4,6

– 4,2

n.a.

SP Dec 2007

2,2

1,8

2,0

1,9

n.a

Government gross debt

(% of GDP)

SP Jan 2009

36,2

39,5

47,3

51,6

53,7

COM Jan 2009

36,2

39,8

46,9

53,0

n.a.

SP Dec 2007

36,2

34,0

32,0

30,0

n.a

Stability programme (SP); Commission services' January 2009 interim forecast (COM); Commission services' calculations.

---

(1)  OJ L 209, 2.8.1997, p. 1. The documents referred to in this text are available at:

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

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

(3)  In view of the reported breach of the Treaty reference value, the Commission prepared on 18 February 2009 a report under Article 104(3) of the Treaty.

(4)  Using the recalculated cyclically-adjusted balance, based on the information in the programme, and the definition of one-offs and other temporary measures applied by the Commission services, the structural balance would be – 3,1 % of GDP in 2008, – 4,1 in 2009, and – 3,4 in 2010.

(5)  In particular, compulsory data on one-offs and other temporary measures (table 2), and optional data on HICP (table 1b), labour productivity per hour worked (table 1c), general government expenditure by function (table 3), structural balance (table 5) and detailed information on debt developments (table 4) — such as differences between cash and accruals in the general government debt developments, net accumulation of financial assets, privatisation proceeds, valuation effects and others, liquid financial assets, net financial debt — are not provided.

(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 3,0 %, 1,8 %, 1,0 % and 0,9 % respectively in the period 2007-2010.

(8)  Cyclically-adjusted balance excluding one-off and other temporary measures. No one-offs are included in the most recent programme. One-off and other temporary measures are below 0,5 % of GDP in 2008 and above 0,5 % in 2009, all deficit-increasing, are included in the Commission services' January 2009 interim forecast.

(9)  Using the recalculated cyclically-adjusted balance, based on the information in the programme, and the definition of one-offs and other temporary measures applied by the Commission services, the structural balance would be – 3,1 % of GDP in 2008, – 4,1 % in 2009, and – 3,4 % of GDP in 2010.

Source:

Stability programme (SP); Commission services' January 2009 interim forecast (COM); Commission services' calculations.

---

| 21.3.2009 | EN | Official Journal of the European Union | C 68/23 |
| --- | --- | --- | --- |

21.3.2009

EN

Official Journal of the European Union

C 68/23

---

COUNCIL OPINION

of 10 March 2009

on the updated convergence programme of Sweden, 2008-2011

(2009/C 68/05)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community,

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

Having regard to the recommendation of the Commission,

After consulting the Economic and Financial Committee,

HAS DELIVERED THIS OPINION:

| (1) | On 10 March 2009, the Council examined the updated convergence programme of Sweden, which covers the period 2008 to 2011. |
| --- | --- |

(1)

On 10 March 2009, the Council examined the updated convergence programme of Sweden, which covers the period 2008 to 2011.

| (2) | After many years of relatively strong economic growth, the Swedish economy decelerated significantly in 2008 as a result of the global slowdown dampening external demand. Domestic demand kept up rather well until the summer, but has since weakened markedly as business and consumer confidence have fallen sharply along with major stock market indices. The slowdown appears to have worsened in the last months of 2008 and unemployment has started to increase. Partly thanks to a generally sound macro-economic framework, Sweden entered the downturn with public finances in a relatively strong position and therefore has scope for letting automatic stabilisers play fully and taking discretionary stimulus measures without jeopardising long-term fiscal sustainability. As Swedish public finances have historically been relatively sensitive to the cycle and labour market developments, the main challenge in the coming years will be to ensure a return to full employment so that the expected rapid rise in unemployment does not have a permanent negative impact on public finances. Following several interest rate hikes until September 2008 on account of inflation concerns, the Riksbank has eased monetary policy via successive interest rate reductions (from 4,75 % to currently 1,00 %). The nominal effective exchange rate of the krona depreciated by around 10 % during 2008. |
| --- | --- |

(2)

After many years of relatively strong economic growth, the Swedish economy decelerated significantly in 2008 as a result of the global slowdown dampening external demand. Domestic demand kept up rather well until the summer, but has since weakened markedly as business and consumer confidence have fallen sharply along with major stock market indices. The slowdown appears to have worsened in the last months of 2008 and unemployment has started to increase. Partly thanks to a generally sound macro-economic framework, Sweden entered the downturn with public finances in a relatively strong position and therefore has scope for letting automatic stabilisers play fully and taking discretionary stimulus measures without jeopardising long-term fiscal sustainability. As Swedish public finances have historically been relatively sensitive to the cycle and labour market developments, the main challenge in the coming years will be to ensure a return to full employment so that the expected rapid rise in unemployment does not have a permanent negative impact on public finances. Following several interest rate hikes until September 2008 on account of inflation concerns, the Riksbank has eased monetary policy via successive interest rate reductions (from 4,75 % to currently 1,00 %). The nominal effective exchange rate of the krona depreciated by around 10 % during 2008.

| (3) | The programme contains three different scenarios for the macro-economic and budgetary projections: a ‘base scenario’ and two ‘alternative scenarios’, the latter two depicting more cautious macro-economic and budgetary developments. The base scenario is considered the reference scenario for assessing budgetary projections, as it is the only fully-developed scenario containing sufficiently detailed projections. The reference scenario, which takes most of the planned stimulus measures for 2009 into account, envisages that real GDP growth will fall from 1,5 % in 2008 to 1,3 % in 2009, before recovering to an average rate of 3,3 % over the rest of the programme period. In view of the rapid deterioration of the macro-economic outlook in past months (2) this scenario, which was finalised in September, appears to be based on markedly favourable growth assumptions, in particular for the years 2009 and 2010. This is also reflected in markedly favourable projections for unemployment. The composition of growth is more plausible than the overall GDP growth outlook and the programme's projections for inflation appear realistic. Inflation is expected to fall well below the Riksbank's 2 %-target in 2009 as a result of lower commodity prices and a widening output gap dampening price pressures from the demand side. |
| --- | --- |

(3)

The programme contains three different scenarios for the macro-economic and budgetary projections: a ‘base scenario’ and two ‘alternative scenarios’, the latter two depicting more cautious macro-economic and budgetary developments. The base scenario is considered the reference scenario for assessing budgetary projections, as it is the only fully-developed scenario containing sufficiently detailed projections. The reference scenario, which takes most of the planned stimulus measures for 2009 into account, envisages that real GDP growth will fall from 1,5 % in 2008 to 1,3 % in 2009, before recovering to an average rate of 3,3 % over the rest of the programme period. In view of the rapid deterioration of the macro-economic outlook in past months (2) this scenario, which was finalised in September, appears to be based on markedly favourable growth assumptions, in particular for the years 2009 and 2010. This is also reflected in markedly favourable projections for unemployment. The composition of growth is more plausible than the overall GDP growth outlook and the programme's projections for inflation appear realistic. Inflation is expected to fall well below the Riksbank's 2 %-target in 2009 as a result of lower commodity prices and a widening output gap dampening price pressures from the demand side.

| (4) | For 2008, the general government surplus is estimated at 2,3 % of GDP in the Commission services' January 2009 interim forecast, against a target of 2,8 % of GDP set in the previous update of the convergence programme. Despite a positive base effect (reflecting a stronger outturn in 2007 than anticipated in the previous programme), the worse-than-planned outcome in 2008 is to a large extent explained by revenue from taxes on consumption and capital income falling short of expectations, which more than offset the positive impact from lower-than-anticipated expenditure growth. This is a reflection of the slower growth of consumption and investment and the significant fall in stock market indices in the second half of 2008. |
| --- | --- |

(4)

For 2008, the general government surplus is estimated at 2,3 % of GDP in the Commission services' January 2009 interim forecast, against a target of 2,8 % of GDP set in the previous update of the convergence programme. Despite a positive base effect (reflecting a stronger outturn in 2007 than anticipated in the previous programme), the worse-than-planned outcome in 2008 is to a large extent explained by revenue from taxes on consumption and capital income falling short of expectations, which more than offset the positive impact from lower-than-anticipated expenditure growth. This is a reflection of the slower growth of consumption and investment and the significant fall in stock market indices in the second half of 2008.

| (5) | In the updated programme, the general government surplus in 2009 is foreseen to narrow by 1,7 percentage points to 1,1 % of GDP, which compares with a projection of a deficit of 1,3 % of GDP in the Commission services' interim forecast. The 2009 target in the programme update includes the fiscal stimulus measures contained in the 2009 Budget Bill amounting to about 1 % of GDP, consisting mainly of tax cuts on earned income and a reduction in social contributions. The estimated impact of the automatic stabilisers on the general government balance is a reduction of the surplus by 0,6 % of GDP. The fiscal stance is foreseen to turn expansionary in 2009, with the structural balance decreasing by about 1 percentage point of GDP. The relatively stronger deterioration of the structural balance in the Commission forecast of around 2 percentage points of GDP is mainly due to measures announced after the adoption of the convergence programme and the loss of tax revenues. |
| --- | --- |

(5)

In the updated programme, the general government surplus in 2009 is foreseen to narrow by 1,7 percentage points to 1,1 % of GDP, which compares with a projection of a deficit of 1,3 % of GDP in the Commission services' interim forecast. The 2009 target in the programme update includes the fiscal stimulus measures contained in the 2009 Budget Bill amounting to about 1 % of GDP, consisting mainly of tax cuts on earned income and a reduction in social contributions. The estimated impact of the automatic stabilisers on the general government balance is a reduction of the surplus by 0,6 % of GDP. The fiscal stance is foreseen to turn expansionary in 2009, with the structural balance decreasing by about 1 percentage point of GDP. The relatively stronger deterioration of the structural balance in the Commission forecast of around 2 percentage points of GDP is mainly due to measures announced after the adoption of the convergence programme and the loss of tax revenues.

| (6) | The main goal of the medium-term budgetary strategy in the programme is to achieve a budget surplus of 1 % of GDP on average over the business cycle, supported by multi-annual expenditure ceilings for the central government and a balanced budget requirement for local governments. This surplus target corresponds to Sweden's medium-term objective (MTO) of a structural surplus of 1 % of GDP. Despite the significant deterioration in the government balance in 2009, the programme foresees to respect the MTO with a good margin throughout the programme period. This is based on a no-policy-change assumption for 2010 and 2011. Both the headline and the primary balance are projected in the programme to strengthen as from 2010, with the headline surplus increasing to 1,6 % of GDP and 2,5 % of GDP in 2010 and 2011, respectively. |
| --- | --- |

(6)

The main goal of the medium-term budgetary strategy in the programme is to achieve a budget surplus of 1 % of GDP on average over the business cycle, supported by multi-annual expenditure ceilings for the central government and a balanced budget requirement for local governments. This surplus target corresponds to Sweden's medium-term objective (MTO) of a structural surplus of 1 % of GDP. Despite the significant deterioration in the government balance in 2009, the programme foresees to respect the MTO with a good margin throughout the programme period. This is based on a no-policy-change assumption for 2010 and 2011. Both the headline and the primary balance are projected in the programme to strengthen as from 2010, with the headline surplus increasing to 1,6 % of GDP and 2,5 % of GDP in 2010 and 2011, respectively.

| (7) | The budgetary outcomes are subject to downside risks. The main risk to the programme's budgetary projections stems from the macro-economic scenario. In recognition of this risk, the programme contains two alternative scenarios, both with less favourable growth assumptions based on the international financial crisis proving deeper and more protracted than assumed in the reference scenario. From the information available, it would seem, however, that even the least favourable of the two alternative scenarios might underestimate the impact on the general government balance of the economic downturn projected in that scenario. This confirms that there is substantial uncertainty as to the degree of sensitivity of the government balance to changes in economic activity at the current juncture. While the uncertainty concerns both the revenue and the expenditure side, it is probably larger on the revenue side, given the recent volatility of some revenue components, notably revenues from capital income taxes. On the expenditure side, there is uncertainty about the impact of recent reforms of the sickness and unemployment insurance systems on government expenditure and about potential consequences for public finances of explicit and implicit guarantees to the financial sector. |
| --- | --- |

(7)

The budgetary outcomes are subject to downside risks. The main risk to the programme's budgetary projections stems from the macro-economic scenario. In recognition of this risk, the programme contains two alternative scenarios, both with less favourable growth assumptions based on the international financial crisis proving deeper and more protracted than assumed in the reference scenario. From the information available, it would seem, however, that even the least favourable of the two alternative scenarios might underestimate the impact on the general government balance of the economic downturn projected in that scenario. This confirms that there is substantial uncertainty as to the degree of sensitivity of the government balance to changes in economic activity at the current juncture. While the uncertainty concerns both the revenue and the expenditure side, it is probably larger on the revenue side, given the recent volatility of some revenue components, notably revenues from capital income taxes. On the expenditure side, there is uncertainty about the impact of recent reforms of the sickness and unemployment insurance systems on government expenditure and about potential consequences for public finances of explicit and implicit guarantees to the financial sector.

| (8) | The long-term budgetary impact of ageing is lower than the EU average. The budgetary position in 2008 as estimated in the programme with a high primary surplus contributes to the reduction of gross debt and the large assets accumulated by the public pension schemes will help finance part of the increase in pension expenditure. However, if the 2009 budgetary position as projected by the Commission services' interim forecast was taken as the starting point, a small sustainability gap would arise. Maintaining high primary surpluses over the medium term would contribute to limiting the risks to the sustainability of public finances, which are currently at a low level. |
| --- | --- |

(8)

The long-term budgetary impact of ageing is lower than the EU average. The budgetary position in 2008 as estimated in the programme with a high primary surplus contributes to the reduction of gross debt and the large assets accumulated by the public pension schemes will help finance part of the increase in pension expenditure. However, if the 2009 budgetary position as projected by the Commission services' interim forecast was taken as the starting point, a small sustainability gap would arise. Maintaining high primary surpluses over the medium term would contribute to limiting the risks to the sustainability of public finances, which are currently at a low level.

| (9) | The Swedish budgetary framework can overall be considered as strong and has contributed to the significant debt reduction observed since its introduction. To increase transparency, the government has in recent years taken a number of steps to refine the framework and is committed to continue reviewing the performance of the framework to address remaining weaknesses. In the context of the recent review, a Fiscal Council was set up with the task of evaluating how well the government has implemented its fiscal policy objectives. This Council presented its first annual report in 2008. Remaining weaknesses relate to the risk of the framework not being sufficiently able to prevent expansionary policies in good times, when the surplus target or balanced budget requirement at the local level are not binding. This may limit the room for manoeuvre in downturns. The government has recently also strengthened the rules regarding the expenditure ceiling and has the explicit ambition of gradually lowering the tax burden on the economy. |
| --- | --- |

(9)

The Swedish budgetary framework can overall be considered as strong and has contributed to the significant debt reduction observed since its introduction. To increase transparency, the government has in recent years taken a number of steps to refine the framework and is committed to continue reviewing the performance of the framework to address remaining weaknesses. In the context of the recent review, a Fiscal Council was set up with the task of evaluating how well the government has implemented its fiscal policy objectives. This Council presented its first annual report in 2008. Remaining weaknesses relate to the risk of the framework not being sufficiently able to prevent expansionary policies in good times, when the surplus target or balanced budget requirement at the local level are not binding. This may limit the room for manoeuvre in downturns. The government has recently also strengthened the rules regarding the expenditure ceiling and has the explicit ambition of gradually lowering the tax burden on the economy.

| (10) | With a view to stabilising the financial sector, the Swedish authorities have adopted a range of measures, including a doubling of the ceiling of the depositors' guarantee (to SEK 500 000 per account), a system of credit guarantees for banks' medium-term borrowing (maximum amount of SEK 1 500 billion or almost 50 % of GDP) and a scheme to facilitate the recapitalisation of solvent banks (maximum amount of SEK 50 billion or about 1,5 % of GDP). |
| --- | --- |

(10)

With a view to stabilising the financial sector, the Swedish authorities have adopted a range of measures, including a doubling of the ceiling of the depositors' guarantee (to SEK 500 000 per account), a system of credit guarantees for banks' medium-term borrowing (maximum amount of SEK 1 500 billion or almost 50 % of GDP) and a scheme to facilitate the recapitalisation of solvent banks (maximum amount of SEK 50 billion or about 1,5 % of GDP).

| (11) | In line with the EERP agreed in December by the European Council, Sweden adopted a number of fiscal stimulus and structural reforms measures. The fiscal stimulus packages for 2009 adopted by Sweden are an adequate response to the economic downturn. While the measures implemented or proposed are timely and reasonably well targeted, they are principally permanent in nature. This is notably the case for the lowering of income taxes and social contributions, which forms part of the government's structural agenda to improve incentives to go from inactivity to employment. The measures are related to the Lisbon structural reform agenda for Sweden as reviewed by the Commission on 28 January 2009. The measures proposed in the Supplementary Bill, on the contrary, are mostly temporary in nature and were proposed as a direct response to the downturn. |
| --- | --- |

(11)

In line with the EERP agreed in December by the European Council, Sweden adopted a number of fiscal stimulus and structural reforms measures. The fiscal stimulus packages for 2009 adopted by Sweden are an adequate response to the economic downturn. While the measures implemented or proposed are timely and reasonably well targeted, they are principally permanent in nature. This is notably the case for the lowering of income taxes and social contributions, which forms part of the government's structural agenda to improve incentives to go from inactivity to employment. The measures are related to the Lisbon structural reform agenda for Sweden as reviewed by the Commission on 28 January 2009. The measures proposed in the Supplementary Bill, on the contrary, are mostly temporary in nature and were proposed as a direct response to the downturn.

| (12) | Based on the fiscal measures contained in the updated programme, the structural balance is expected to decrease by about 1 % of GDP, implying an expansionary fiscal stance. Taking into account the additional measures proposed in the Supplementary Bill, the expansionary stance is somewhat more pronounced. This is appropriate given the worsening of the economic outlook that has occurred in recent months. Under a no-policy-change assumption, the updated programme foresees that the structural balance increases only slightly in 2010 and by about

  percentage point in 2011, implying a mildly restrictive policy stance in that period. |
| --- | --- |

(12)

Formula

| (13) | 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). |
| --- | --- |

(13)

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).

The overall conclusion is that the medium-term budgetary position is sound. Large surpluses in good times allow fiscal policy to play an active role in the current downturn, not only by boosting demand in the short term but also by strengthening the economy's long-term growth potential. The fiscal stance has appropriately become expansionary in 2009. However, there are short-term risks to the fiscal balance, and there is a need to strengthen the fiscal framework to ensure that the government balance improves once the economy picks up again.

In view of the above assessment, Sweden is invited to implement the planned fiscal policy, including stimulus measures, in 2009, in line with the EERP and within the framework of the SGP, and subsequently ensure returning to the MTO.

Comparison of key macro-economic and budgetary projections

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

  (% of potential GDP) | CP Dec 2008 | 1,0 | – 0,5 | – 1,6 | – 1,0 | – 0,2 |
| COM Jan 2009 (5) | 2,5 | 0,7 | – 1,9 | – 2,0 | n.a. |
| CP Nov 2007 | 0,6 | 0,9 | 0,6 | 0,0 | n.a. |
| Net lending/borrowing vis-à-vis the rest of the world
  (% of GDP) | CP Dec 2008 | 8,4 | 8,2 | 8,2 | 8,3 | 8,1 |
| COM Jan 2009 | 8,3 | 6,1 | 6,5 | 6,6 | n.a. |
| CP Nov 2007 | 7,1 | 7,2 | 7,4 | 7,7 | n.a. |
| General government revenue
  (% of GDP) | CP Dec 2008 | 56,2 | 55,4 | 54,1 | 53,8 | 53,3 |
| COM Jan 2009 | 56,4 | 55,1 | 53,0 | 52,7 | n.a. |
| CP Nov 2007 | 56,300 | 55,5 | 54,9 | 54,6 | n.a. |
| General government expenditure
  (% of GDP) | CP Dec 2008 | 52,6 | 52,5 | 53,1 | 52,2 | 50,8 |
| COM Jan 2009 | 52,8 | 52,8 | 54,3 | 54,1 | n.a. |
| CP Nov 2007 | 53,3 | 52,6 | 51,8 | 51,1 | n.a. |
| General government balance
  (% of GDP) | CP Dec 2008 | 3,6 | 2,8 | 1,1 | 1,6 | 2,5 |
| COM Jan 2009 | 3,6 | 2,3 | – 1,3 | – 1,4 | n.a. |
| CP Nov 2007 | 3,0 | 2,8 | 3,1 | 3,6 | n.a. |
| Primary balance
  (% of GDP) | CP Dec 2008 | 5,4 | 4,7 | 2,6 | 3,0 | 3,8 |
| COM Jan 2009 | 5,4 | 4,1 | 0,2 | 0,1 | n.a. |
| CP Nov 2007 | 4,6 | 4,4 | 4,5 | 4,8 | n.a. |
| Cyclically-adjusted balance (4)

  (% of GDP) | CP Dec 2008 | 3,0 | 3,1 | 2,0 | 2,2 | 2,6 |
| COM Jan 2009 | 2,1 | 1,9 | – 0,2 | – 0,2 | n.a. |
| CP Nov 2007 | 2,7 | 2,3 | 2,8 | 3,6 | n.a. |
| Structural balance (6)

  (% of GDP) | CP Dec 2008 | 2,2 | 2,8 | 1,9 | 2,1 | 2,5 |
| COM Jan 2009 | 2,1 | 1,6 | – 0,3 | – 0,2 | n.a. |
| CP Nov 2007 | 2,3 | 2,0 | 2,8 | 3,6 | n.a. |
| Government gross debt
  (% of GDP) | CP Dec 2008 | 40,6 | 35,5 | 32,2 | 28,3 | 23,8 |
| COM Jan 2009 | 40,6 | 34,8 | 36,2 | 36,0 | n.a. |
| CP Nov 2007 | 39,7 | 34,8 | 29,8 | 24,5 | n.a. |
| Convergence programme (CP); Commission services' January 2009 interim forecasts (COM); Commission services' calculations. |

2007

2008

2009

2010

2011

Real GDP

(% change)

CP Dec 2008

2,7

1,5

1,3

3,1

3,5

COM Jan 2009

2,5

0,5

– 1,4

1,2

n.a.

CP Nov 2007

3,2

3,2

2,5

2,2

n.a.

HICP inflation

(%)

CP Dec 2008

2,5

3,6

1,5

n.a.

n.a.

COM Jan 2009

1,7

3,3

0,7

1,0

n.a.

CP Nov 2007

1,7

2,7

2,5

2,1

n.a.

Output gap (4)

(% of potential GDP)

CP Dec 2008

1,0

– 0,5

– 1,6

– 1,0

– 0,2

COM Jan 2009 (5)

2,5

0,7

– 1,9

– 2,0

n.a.

CP Nov 2007

0,6

0,9

0,6

0,0

n.a.

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

(% of GDP)

CP Dec 2008

8,4

8,2

8,2

8,3

8,1

COM Jan 2009

8,3

6,1

6,5

6,6

n.a.

CP Nov 2007

7,1

7,2

7,4

7,7

n.a.

General government revenue

(% of GDP)

CP Dec 2008

56,2

55,4

54,1

53,8

53,3

COM Jan 2009

56,4

55,1

53,0

52,7

n.a.

CP Nov 2007

56,300

55,5

54,9

54,6

n.a.

General government expenditure

(% of GDP)

CP Dec 2008

52,6

52,5

53,1

52,2

50,8

COM Jan 2009

52,8

52,8

54,3

54,1

n.a.

CP Nov 2007

53,3

52,6

51,8

51,1

n.a.

General government balance

(% of GDP)

CP Dec 2008

3,6

2,8

1,1

1,6

2,5

COM Jan 2009

3,6

2,3

– 1,3

– 1,4

n.a.

CP Nov 2007

3,0

2,8

3,1

3,6

n.a.

Primary balance

(% of GDP)

CP Dec 2008

5,4

4,7

2,6

3,0

3,8

COM Jan 2009

5,4

4,1

0,2

0,1

n.a.

CP Nov 2007

4,6

4,4

4,5

4,8

n.a.

Cyclically-adjusted balance (4)

(% of GDP)

CP Dec 2008

3,0

3,1

2,0

2,2

2,6

COM Jan 2009

2,1

1,9

– 0,2

– 0,2

n.a.

CP Nov 2007

2,7

2,3

2,8

3,6

n.a.

Structural balance (6)

(% of GDP)

CP Dec 2008

2,2

2,8

1,9

2,1

2,5

COM Jan 2009

2,1

1,6

– 0,3

– 0,2

n.a.

CP Nov 2007

2,3

2,0

2,8

3,6

n.a.

Government gross debt

(% of GDP)

CP Dec 2008

40,6

35,5

32,2

28,3

23,8

COM Jan 2009

40,6

34,8

36,2

36,0

n.a.

CP Nov 2007

39,7

34,8

29,8

24,5

n.a.

Convergence programme (CP); Commission services' January 2009 interim 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/about/activities/sgp/main_en.htm

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

(3)  In particular, the data on nominal GDP growth and privatisation proceeds are not provided.

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

(5)  Based on estimated potential growth of 2,6 %, 2,3 %, 1,3 % and 1,2 % respectively in the period 2007-2010.

(6)  Cyclically-adjusted balance excluding one-off and other temporary measures. One-off and other temporary measures are 0,3 % of GDP in 2008 and 0,1 % in 2009-2011 all deficit-reducing 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' January interim forecast.

Source:

Convergence programme (CP); Commission services' January 2009 interim forecasts (COM); Commission services' calculations.

---

| 21.3.2009 | EN | Official Journal of the European Union | C 68/28 |
| --- | --- | --- | --- |

21.3.2009

EN

Official Journal of the European Union

C 68/28

---

COUNCIL OPINION

of 10 March 2009

on the updated stability programme of the Netherlands, 2008-2011

(2009/C 68/06)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community,

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

Having regard to the recommendation of the Commission,

After consulting the Economic and Financial Committee,

HAS DELIVERED THIS OPINION:

| (1) | On 10 March 2009, the Council examined the updated stability programme of the Netherlands, which covers the period 2008 to 2011. |
| --- | --- |

(1)

On 10 March 2009, the Council examined the updated stability programme of the Netherlands, which covers the period 2008 to 2011.

| (2) | In 2008, economic activity slowed down considerably as the global economic downturn and the financial crisis hit both external and domestic demand. While annual growth still reached 1,9 %, this was largely due a significant carry-over effect from strong domestic demand in the second half of 2007, resulting from high private consumption growth. In 2009, economic activity is expected to contract sharply by 2 % according to the Commission services' January 2009 interim forecast. The very open Dutch economy will be relatively hard hit by the expected fall in world trade. The main policy challenges in the downturn are related to both the financial sector, by addressing the very low confidence and falling asset positions of pension funds, and to the real economy, by supporting investment and competitiveness. The downturn will have a significant impact on public finances, as a projected surplus in 2008 is expected to turn into a deficit in 2009, which will further increase in 2010. This also takes into account the impact of the support package as presented in November, which among others provides support for private investment. |
| --- | --- |

(2)

In 2008, economic activity slowed down considerably as the global economic downturn and the financial crisis hit both external and domestic demand. While annual growth still reached 1,9 %, this was largely due a significant carry-over effect from strong domestic demand in the second half of 2007, resulting from high private consumption growth. In 2009, economic activity is expected to contract sharply by 2 % according to the Commission services' January 2009 interim forecast. The very open Dutch economy will be relatively hard hit by the expected fall in world trade. The main policy challenges in the downturn are related to both the financial sector, by addressing the very low confidence and falling asset positions of pension funds, and to the real economy, by supporting investment and competitiveness. The downturn will have a significant impact on public finances, as a projected surplus in 2008 is expected to turn into a deficit in 2009, which will further increase in 2010. This also takes into account the impact of the support package as presented in November, which among others provides support for private investment.

| (3) | On 19 December 2008 the Netherlands submitted an addendum to the Stability programme, containing a recovery plan and a partial update of the macro-economic scenario. This addendum shows much less optimistic figures than the programme, with GDP growth of – 0,75 % in 2009 and 1 % in 2010 and the general government deficit at 1,2 % and 2,4 % of GDP. However, the new figures will not be used as the baseline for the assessment, as the macro-economic scenario was not fully-fledged and public finance data have been presented for information purposes rather than with official endorsement by the Ministry of Finance. |
| --- | --- |

(3)

On 19 December 2008 the Netherlands submitted an addendum to the Stability programme, containing a recovery plan and a partial update of the macro-economic scenario. This addendum shows much less optimistic figures than the programme, with GDP growth of – 0,75 % in 2009 and 1 % in 2010 and the general government deficit at 1,2 % and 2,4 % of GDP. However, the new figures will not be used as the baseline for the assessment, as the macro-economic scenario was not fully-fledged and public finance data have been presented for information purposes rather than with official endorsement by the Ministry of Finance.

| (4) | The macro-economic scenario underlying the programme envisages that real GDP will decelerate from 2,25 % in 2008 to 1,25 % in 2009 before recovering to an average rate of 2 % over the rest of the programme period. In view of the rapid deterioration of the macro-economic outlook in the past months, this scenario, which was finalised in September (2), appears to be based on markedly favourable growth assumptions, when compared to the Commission services' January interim forecast. Even the GDP growth figure for 2009 as presented in the addendum (– 0,75 %) is still favourable compared to the Commission services' forecast reflecting a very rapid deterioration of the economic outlook. Specifically, the most recent available information points to a sharp contraction of investment on the back of tighter credit conditions, as well as a rapid fall of exports given the weak external demand. Both the (limited) budgetary and economic impact of the support package are not reflected in the macro-economic scenario. The programme's projections for inflation appear to be on the high side for 2009, but seem to be realistic for the period thereafter. |
| --- | --- |

(4)

The macro-economic scenario underlying the programme envisages that real GDP will decelerate from 2,25 % in 2008 to 1,25 % in 2009 before recovering to an average rate of 2 % over the rest of the programme period. In view of the rapid deterioration of the macro-economic outlook in the past months, this scenario, which was finalised in September (2), appears to be based on markedly favourable growth assumptions, when compared to the Commission services' January interim forecast. Even the GDP growth figure for 2009 as presented in the addendum (– 0,75 %) is still favourable compared to the Commission services' forecast reflecting a very rapid deterioration of the economic outlook. Specifically, the most recent available information points to a sharp contraction of investment on the back of tighter credit conditions, as well as a rapid fall of exports given the weak external demand. Both the (limited) budgetary and economic impact of the support package are not reflected in the macro-economic scenario. The programme's projections for inflation appear to be on the high side for 2009, but seem to be realistic for the period thereafter.

| (5) | For 2008, the general government balance is estimated at a surplus of 1,1 % of GDP in the Commission services' January 2009 interim forecast, against a surplus target of 0,5 % of GDP set in the previous update of the stability programme. The improvement is mainly due to a better-than-expected outcome in 2007. Furthermore, revenue growth in 2008 was somewhat higher than expected, as higher gas revenues were only partly compensated by lower tax revenues resulting from the financial crisis. Expenditure growth in 2008 was also slightly higher, largely reflecting higher-than-expected interest payments and child care expenditure. |
| --- | --- |

(5)

For 2008, the general government balance is estimated at a surplus of 1,1 % of GDP in the Commission services' January 2009 interim forecast, against a surplus target of 0,5 % of GDP set in the previous update of the stability programme. The improvement is mainly due to a better-than-expected outcome in 2007. Furthermore, revenue growth in 2008 was somewhat higher than expected, as higher gas revenues were only partly compensated by lower tax revenues resulting from the financial crisis. Expenditure growth in 2008 was also slightly higher, largely reflecting higher-than-expected interest payments and child care expenditure.

| (6) | The budgetary target for 2009 in the update is a surplus of 1,2 % of GDP, which compares with a projected deficit of 1,4 % of GDP in the Commission services' interim forecast. The structural balance, according to the information provided in the update of the stability programme and recalculated by the Commission services, is projected to attain a surplus of some 1 % of GDP in 2009, compared to a surplus of around 0,75 % in 2008. The fiscal stance as presented in the programme can be considered as slightly restrictive. However, the Commission services' interim forecast foresees an expansionary fiscal stance in 2009 with a deterioration of the structural balance of 1 percentage point of GDP, due to the budgetary impact from discretionary measures taken in response to the economic slowdown (which could add up to 0,5 % of the GDP) as well as losses in gas revenues and tax revenues linked to the lower growth and higher tax elasticities. |
| --- | --- |

(6)

The budgetary target for 2009 in the update is a surplus of 1,2 % of GDP, which compares with a projected deficit of 1,4 % of GDP in the Commission services' interim forecast. The structural balance, according to the information provided in the update of the stability programme and recalculated by the Commission services, is projected to attain a surplus of some 1 % of GDP in 2009, compared to a surplus of around 0,75 % in 2008. The fiscal stance as presented in the programme can be considered as slightly restrictive. However, the Commission services' interim forecast foresees an expansionary fiscal stance in 2009 with a deterioration of the structural balance of 1 percentage point of GDP, due to the budgetary impact from discretionary measures taken in response to the economic slowdown (which could add up to 0,5 % of the GDP) as well as losses in gas revenues and tax revenues linked to the lower growth and higher tax elasticities.

| (7) | The main goal of the programme's budgetary strategy is to attain a structural surplus, that is, a cyclically adjusted surplus net of one-off and other temporary measures, of 1 % of GDP at the end of the programme period. Thereby, the Netherlands would respect, throughout the programme period, its medium-term objective (MTO) for the budgetary position, which is a structural deficit ranging from 0,5 % to 1 % of GDP. The programme expects the headline budget surplus to fall from 1,2 % in 2009 to 0,8 % of GDP in 2010 and to rise again to 1,1 % of GDP in 2011. The primary balance is expected to follow a similar pattern. Government gross debt, estimated in the programme at 42,1 % of GDP in 2008, is projected to decline by 6 percentage points over the programme period. However, these projections were finalised before the government operations to stabilise the financial markets and therefore do not take them into account. These operations, such as the purchase of Fortis Bank Netherlands and bank recapitalisations, led to an increase of about 15 percentage points in the debt-to-GDP ratio of 2008. Specifically, according to the Commission services' interim forecast, the debt ratio reached 57,3 % in 2008, declining to 53,2 % in 2009 due to a loan repayment, before increasing again to 55,2 % in 2010. According to the indications provided in the December 2008 addendum, the expected headline balance in 2009 and 2010 is now considered to be markedly below the targets set in the programme (indicating a deficit of 1,2 % and 2,4 % respectively). This suggests that the planned balance for 2011 may also be outdated. |
| --- | --- |

(7)

The main goal of the programme's budgetary strategy is to attain a structural surplus, that is, a cyclically adjusted surplus net of one-off and other temporary measures, of 1 % of GDP at the end of the programme period. Thereby, the Netherlands would respect, throughout the programme period, its medium-term objective (MTO) for the budgetary position, which is a structural deficit ranging from 0,5 % to 1 % of GDP. The programme expects the headline budget surplus to fall from 1,2 % in 2009 to 0,8 % of GDP in 2010 and to rise again to 1,1 % of GDP in 2011. The primary balance is expected to follow a similar pattern. Government gross debt, estimated in the programme at 42,1 % of GDP in 2008, is projected to decline by 6 percentage points over the programme period. However, these projections were finalised before the government operations to stabilise the financial markets and therefore do not take them into account. These operations, such as the purchase of Fortis Bank Netherlands and bank recapitalisations, led to an increase of about 15 percentage points in the debt-to-GDP ratio of 2008. Specifically, according to the Commission services' interim forecast, the debt ratio reached 57,3 % in 2008, declining to 53,2 % in 2009 due to a loan repayment, before increasing again to 55,2 % in 2010. According to the indications provided in the December 2008 addendum, the expected headline balance in 2009 and 2010 is now considered to be markedly below the targets set in the programme (indicating a deficit of 1,2 % and 2,4 % respectively). This suggests that the planned balance for 2011 may also be outdated.

| (8) | The budgetary outcomes projected in the programme are subject to (significant) downward risks. Most importantly, the macro-economic outlook is based on markedly favourable growth assumptions, as evidenced by recent weak economic data for example on industrial production. The economic growth difference with the Commission services' interim forecast amounts to 3,25 % of GDP in 2009, which implies substantial budgetary risks and which is also reflected in the worsening government balance referred to in the addendum. Furthermore, the fiscal stimulus measures have not yet been taken into account in the budgetary targets of the programme although their impact is very small. Besides the direct budgetary impact, the measures involving guarantees pose a significant indirect risk, if these are extensively called upon. Finally, gas revenues can pose a risk for the budgetary outcome as they are based in the programme on a more optimistic oil price hypothesis than in the Commission services' interim forecast. In view of the negative risks to the budgetary targets and the sizeable guarantees given to the banking sector, there is a high risk that the evolution of the debt ratio will turn out less favourable than projected in the programme. |
| --- | --- |

(8)

The budgetary outcomes projected in the programme are subject to (significant) downward risks. Most importantly, the macro-economic outlook is based on markedly favourable growth assumptions, as evidenced by recent weak economic data for example on industrial production. The economic growth difference with the Commission services' interim forecast amounts to 3,25 % of GDP in 2009, which implies substantial budgetary risks and which is also reflected in the worsening government balance referred to in the addendum. Furthermore, the fiscal stimulus measures have not yet been taken into account in the budgetary targets of the programme although their impact is very small. Besides the direct budgetary impact, the measures involving guarantees pose a significant indirect risk, if these are extensively called upon. Finally, gas revenues can pose a risk for the budgetary outcome as they are based in the programme on a more optimistic oil price hypothesis than in the Commission services' interim forecast. In view of the negative risks to the budgetary targets and the sizeable guarantees given to the banking sector, there is a high risk that the evolution of the debt ratio will turn out less favourable than projected in the programme.

| (9) | The long-term budgetary impact of ageing is higher in the Netherlands than the EU average. The projected future rise of tax revenues as a share of GDP, due to the deferred taxation of private pensions, would partly compensate the increase in public expenditure over the long-term. The budgetary position in 2008 as estimated in the programme, which is better than the starting position of the previous programme, contributes to offsetting the projected long-term budgetary impact of an ageing population but is not sufficient to fully cover future spending pressures. Higher primary surpluses over the medium term, and implementing reform measures that curb the projected increase in age-related expenditure would contribute to reducing the medium risks to the sustainability of public finances. The financial crisis can also have a negative impact on the long-term sustainability of public finances through the financial sector stabilisation schemes (e.g. recapitalisation, guarantees) put in place by the Netherlands, primarily via their impact on government debt, if the costs of the government support are not fully recouped in the future. |
| --- | --- |

(9)

The long-term budgetary impact of ageing is higher in the Netherlands than the EU average. The projected future rise of tax revenues as a share of GDP, due to the deferred taxation of private pensions, would partly compensate the increase in public expenditure over the long-term. The budgetary position in 2008 as estimated in the programme, which is better than the starting position of the previous programme, contributes to offsetting the projected long-term budgetary impact of an ageing population but is not sufficient to fully cover future spending pressures. Higher primary surpluses over the medium term, and implementing reform measures that curb the projected increase in age-related expenditure would contribute to reducing the medium risks to the sustainability of public finances. The financial crisis can also have a negative impact on the long-term sustainability of public finances through the financial sector stabilisation schemes (e.g. recapitalisation, guarantees) put in place by the Netherlands, primarily via their impact on government debt, if the costs of the government support are not fully recouped in the future.

| (10) | In 1994, the Netherlands introduced a trend-based budgetary framework, which has proved to be very successful (3). While this framework was reaffirmed by the current government, some minor adjustments were made at the start of the government term in 2007 (4). More recently, in November 2008, the fiscal rule was modified in a way that all possible expenditures and non-tax revenues resulting from the interventions in the financial sector will not be part of the expenditure ceiling (5). Furthermore, if, as a consequence of these government operations, the signal value (6) for the deficit of 2 % of GDP is reached, no corrective measures will be taken. This additional budgetary rule is meant to minimise the impact on normal budgetary decision-making of the measures taken in response to the financial crisis. There is no end-date mentioned for this change in rules. The government also announced a reform of the methodology with respect to the budgetary treatment of non-tax gas revenues starting from 2012. For the period 2008-2011, the maximum amount of gas revenues that can be used for spending is fixed. |
| --- | --- |

(10)

In 1994, the Netherlands introduced a trend-based budgetary framework, which has proved to be very successful (3). While this framework was reaffirmed by the current government, some minor adjustments were made at the start of the government term in 2007 (4). More recently, in November 2008, the fiscal rule was modified in a way that all possible expenditures and non-tax revenues resulting from the interventions in the financial sector will not be part of the expenditure ceiling (5). Furthermore, if, as a consequence of these government operations, the signal value (6) for the deficit of 2 % of GDP is reached, no corrective measures will be taken. This additional budgetary rule is meant to minimise the impact on normal budgetary decision-making of the measures taken in response to the financial crisis. There is no end-date mentioned for this change in rules. The government also announced a reform of the methodology with respect to the budgetary treatment of non-tax gas revenues starting from 2012. For the period 2008-2011, the maximum amount of gas revenues that can be used for spending is fixed.

| (11) | With a view to stabilising the financial sector, the Dutch government has adopted a number of measures. First, it increased the amount covered by the deposit guarantee scheme to EUR 100 000. Second, a credit guarantee scheme amounting to EUR 200 billion (33 % of GDP) for medium-term debt instruments by banks was introduced. The scheme is aimed at improving their access to finance. Third, a fund of EUR 20 billion (3,3 % of GDP) was created to be used for recapitalisation of financial institutions. Finally, the government nationalised a major bank and provided a back-up facility to a large financial institution. |
| --- | --- |

(11)

With a view to stabilising the financial sector, the Dutch government has adopted a number of measures. First, it increased the amount covered by the deposit guarantee scheme to EUR 100 000. Second, a credit guarantee scheme amounting to EUR 200 billion (33 % of GDP) for medium-term debt instruments by banks was introduced. The scheme is aimed at improving their access to finance. Third, a fund of EUR 20 billion (3,3 % of GDP) was created to be used for recapitalisation of financial institutions. Finally, the government nationalised a major bank and provided a back-up facility to a large financial institution.

| (12) | In line with the European Economic Recovery Plan agreed in December by the European Council, the Netherlands adopted measures aimed at fostering private investment through tax cuts and loan guarantees, protecting employment through the possibility of a temporarily lowering of hours worked, improving the credit supply through guarantees and lowering of social contributions. These measures are timely and targeted, in line with the EERP, and partially temporary. They should therefore not have a major impact on the long-term sustainability of public finances. Relative to the large commitments on the financial rescue packages and given the favourable starting position of the public balance and debt and the projected severity of the downturn, the size of the fiscal support package is modest (0,5 % of GDP). The update of the stability programme also includes a series of structural measures, which boost demand, but are also compatible with the longer-term policy reform agenda. The lowering of social contributions aims at boosting demand, while increasing labour supply at the same time. Furthermore, in order to reduce labour shedding and to ease the transition in the labour market, mobility centres are set up, which are based on public-private partnerships. The measures are related to the medium-term reform agenda and the country-specific recommendation proposed by the Commission on 28 January 2009 under the Lisbon Strategy for Growth and Jobs. |
| --- | --- |

(12)

In line with the European Economic Recovery Plan agreed in December by the European Council, the Netherlands adopted measures aimed at fostering private investment through tax cuts and loan guarantees, protecting employment through the possibility of a temporarily lowering of hours worked, improving the credit supply through guarantees and lowering of social contributions. These measures are timely and targeted, in line with the EERP, and partially temporary. They should therefore not have a major impact on the long-term sustainability of public finances. Relative to the large commitments on the financial rescue packages and given the favourable starting position of the public balance and debt and the projected severity of the downturn, the size of the fiscal support package is modest (0,5 % of GDP). The update of the stability programme also includes a series of structural measures, which boost demand, but are also compatible with the longer-term policy reform agenda. The lowering of social contributions aims at boosting demand, while increasing labour supply at the same time. Furthermore, in order to reduce labour shedding and to ease the transition in the labour market, mobility centres are set up, which are based on public-private partnerships. The measures are related to the medium-term reform agenda and the country-specific recommendation proposed by the Commission on 28 January 2009 under the Lisbon Strategy for Growth and Jobs.

| (13) | The fiscal stance, as measured by the change in the structural balance and taking into account the risks to the budgetary projections, is expansionary in 2009. This is broadly in line with the Stability and Growth Pact, which specifies that the adjustment should be higher in good economic times and could be lower in bad economic times. However, in light of the significant risks concerning the evolution of the government balance and debt, there is a risk that the deterioration in the public finances affects negatively their long-term sustainability. On the other hand, long-term sustainability is expected to benefit somewhat from planned measures to further increase labour participation, such as the phasing out of the transferability of the general tax credit and the introduction of an earned income tax credit aimed at making work pay for the low-skilled. Finally, taking into account the risks to the debt projections mentioned above, the debt ratio may not stay within the reference value over the programme period. |
| --- | --- |

(13)

The fiscal stance, as measured by the change in the structural balance and taking into account the risks to the budgetary projections, is expansionary in 2009. This is broadly in line with the Stability and Growth Pact, which specifies that the adjustment should be higher in good economic times and could be lower in bad economic times. However, in light of the significant risks concerning the evolution of the government balance and debt, there is a risk that the deterioration in the public finances affects negatively their long-term sustainability. On the other hand, long-term sustainability is expected to benefit somewhat from planned measures to further increase labour participation, such as the phasing out of the transferability of the general tax credit and the introduction of an earned income tax credit aimed at making work pay for the low-skilled. Finally, taking into account the risks to the debt projections mentioned above, the debt ratio may not stay within the reference value over the programme period.

| (14) | 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. |
| --- | --- |

(14)

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

The overall conclusion is that the Netherlands has a sound starting budgetary position. However, due to the projected sharp economic downturn, the government balance will again enter negative territory, after several years in surplus. The government gross debt ratio increased significantly, as a result of measures taken to support the financial sector. There are important downward risks to the budgetary targets in the programme from 2009 onwards, largely due to the underlying markedly favourable economic scenario, which is already evidenced by recent data (7).

In view of the above assessment, the Netherlands is invited to implement the 2009 fiscal policy as planned in line with the EERP and within the framework of the SGP, to limit the risk of a substantial further deterioration of the fiscal balance in 2010 relative to the most recent projections, and subsequently to move towards its medium term objective starting in 2011.

Comparison of key macro-economic and budgetary projections

| | | 2007 | 2008 | 2009 | 2010 | 2011 |
| --- | --- | --- | --- | --- | --- | --- |
| Real GDP
  (% change) | SP Dec 2008 | 3,5 | 2,25 | 1,25 | 2 | 2 |
| COM Jan 2009 | 3,5 | 1,9 | – 2,0 | 0,2 | n.a. |
| SP Nov 2007 | 2,75 | 2,5 | 1,75 | 1,75 | n.a. |
| HICP inflation
  (%) | SP Dec 2008 | 1,6 | 2,5 | 3,25 | 2 | 2 |
| COM Jan 2009 | 1,6 | 2,2 | 1,9 | 1,8 | n.a. |
| SP Nov 2007 | 1,5 | 2,25 | 2 | 2 | n.a. |
| Output gap (8)

  (% of potential GDP) | SP Dec 2008 | 0,9 | 0,7 | – 0,1 | – 0,5 | – 0,6 |
| COM Jan 2009 (9) | 2,1 | 2,1 | – 1,2 | – 2,2 | n.a. |
| SP Nov 2007 | 1,6 | 2,3 | 2,7 | n.a. | n.a. |
| Net lending/borrowing vis-à-vis the rest of the world
  (% of GDP) | SP Dec 2008 | 9,5 | 8,5 | 9,5 | 7,5 | 8,0 |
| COM Jan 2009 | 9,4 | 7,7 | 5,9 | 5,4 | n.a. |
| SP Nov 2007 | 6,6 | 6,5 | 7,2 | 7,5 | n.a. |
| General government revenue
  (% of GDP) | SP Dec 2008 | 45,6 | 46,6 | 46,3 | 46,1 | 46,3 |
| COM Jan 2009 | 45,6 | 46,8 | 46,1 | 45,6 | n.a. |
| SP Nov 2007 | 45,9 | 46,9 | 46,9 | 47,2 | n.a. |
| General government expenditure
  (% of GDP) | SP Dec 2008 | 45,3 | 45,4 | 45,1 | 45,3 | 45,2 |
| COM Jan 2009 | 45,3 | 45,7 | 47,4 | 48,3 | n.a. |
| SP Nov 2007 | 46,3 | 46,4 | 46,3 | 46,5 | n.a. |
| General government balance
  (% of GDP) | SP Dec 2008 | 0,3 | 1,2 | 1,2 | 0,8 | 1,1 |
| COM Jan 2009 | 0,3 | 1,1 | – 1,4 | – 2,7 | n.a. |
| SP Nov 2007 | – 0,4 | 0,5 | 0,6 | 0,7 | n.a. |
| Primary balance
  (% of GDP) | SP Dec 2008 | 2,6 | 3,4 | 3,30 | 2,9 | 3,1 |
| COM Jan 2009 | 2,6 | 3,5 | 1,2 | – 0,2 | n.a. |
| SP Nov 2007 | 1,8 | 2,7 | 2,7 | 2,7 | n.a. |
| Cyclically-adjusted balance (8)

  (% of GDP) | SP Dec 2008 | – 0,1 | 0,8 | 1,3 | 1,1 | 1,5 |
| COM Jan 2009 | – 0,8 | 0,0 | – 0,7 | – 1,5 | n.a. |
| SP Nov 2007 | – 0,2 | 0,5 | 1,1 | n.a. | n.a. |
| Structural balance (10)

  (% of GDP) | SP Dec 2008 | – 0,1 | 0,8 | 1,0 | 1,1 | 1,5 |
| COM Jan 2009 | – 0,8 | 0,0 | – 1,0 | – 1,5 | n.a. |
| SP Nov 2007 | – 0,2 | 0,5 | 0,7 | n.a. | n.a. |
| Government gross debt
  (% of GDP) | SP Dec 2008 | 45,7 | 42,1 | 39,6 | 38,0 | 36,2 |
| COM Jan 2009 | 45,7 | 57,3 | 53,2 | 55,2 | n.a. |
| SP Nov 2007 | 46,8 | 45 | 43 | 41,2 | n.a. |
| Stability programme (SP); Commission services' January 2009 interim forecasts (COM); Commission services' calculations. |

2007

2008

2009

2010

2011

Real GDP

(% change)

SP Dec 2008

3,5

2,25

1,25

2

2

COM Jan 2009

3,5

1,9

– 2,0

0,2

n.a.

SP Nov 2007

2,75

2,5

1,75

1,75

n.a.

HICP inflation

(%)

SP Dec 2008

1,6

2,5

3,25

2

2

COM Jan 2009

1,6

2,2

1,9

1,8

n.a.

SP Nov 2007

1,5

2,25

2

2

n.a.

Output gap (8)

(% of potential GDP)

SP Dec 2008

0,9

0,7

– 0,1

– 0,5

– 0,6

COM Jan 2009 (9)

2,1

2,1

– 1,2

– 2,2

n.a.

SP Nov 2007

1,6

2,3

2,7

n.a.

n.a.

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

(% of GDP)

SP Dec 2008

9,5

8,5

9,5

7,5

8,0

COM Jan 2009

9,4

7,7

5,9

5,4

n.a.

SP Nov 2007

6,6

6,5

7,2

7,5

n.a.

General government revenue

(% of GDP)

SP Dec 2008

45,6

46,6

46,3

46,1

46,3

COM Jan 2009

45,6

46,8

46,1

45,6

n.a.

SP Nov 2007

45,9

46,9

46,9

47,2

n.a.

General government expenditure

(% of GDP)

SP Dec 2008

45,3

45,4

45,1

45,3

45,2

COM Jan 2009

45,3

45,7

47,4

48,3

n.a.

SP Nov 2007

46,3

46,4

46,3

46,5

n.a.

General government balance

(% of GDP)

SP Dec 2008

0,3

1,2

1,2

0,8

1,1

COM Jan 2009

0,3

1,1

– 1,4

– 2,7

n.a.

SP Nov 2007

– 0,4

0,5

0,6

0,7

n.a.

Primary balance

(% of GDP)

SP Dec 2008

2,6

3,4

3,30

2,9

3,1

COM Jan 2009

2,6

3,5

1,2

– 0,2

n.a.

SP Nov 2007

1,8

2,7

2,7

2,7

n.a.

Cyclically-adjusted balance (8)

(% of GDP)

SP Dec 2008

– 0,1

0,8

1,3

1,1

1,5

COM Jan 2009

– 0,8

0,0

– 0,7

– 1,5

n.a.

SP Nov 2007

– 0,2

0,5

1,1

n.a.

n.a.

Structural balance (10)

(% of GDP)

SP Dec 2008

– 0,1

0,8

1,0

1,1

1,5

COM Jan 2009

– 0,8

0,0

– 1,0

– 1,5

n.a.

SP Nov 2007

– 0,2

0,5

0,7

n.a.

n.a.

Government gross debt

(% of GDP)

SP Dec 2008

45,7

42,1

39,6

38,0

36,2

COM Jan 2009

45,7

57,3

53,2

55,2

n.a.

SP Nov 2007

46,8

45

43

41,2

n.a.

Stability programme (SP); Commission services' January 2009 interim 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/about/activities/sgp/main_en.htm

(2)  The assessment notably takes into account the Commission Service's January 2009 interim forecast, but also other information that has become available since then.

(3)  This is evidenced by the fact that since 1994 the average budget deficit was 1,1 % of GDP, outperforming the euro area deficit average of 2,3 % of GDP. Furthermore, the budgetary target as set out in respective budget memorandums was only missed in three years.

(4)  For a description of these measures, see the Macro-Fiscal assessment of the Stability Programme of the Netherlands (Update of November 2007), Section 6.

(5)  Expenditure ceilings in the Netherlands consist of expenditure and non-tax revenues.

(6)  The signal value for the government balance is meant to avoid the breach of the 3 % of GDP deficit threshold. When the budgetary deficit is expected to surpass that value, corrective measures have to be taken in order to prevent an excessive deficit from occurring. It was introduced in 2004 in reaction to the 2003 excessive deficit. Initially the signal value was set at a deficit of 2,5 % of GDP. In 2007 this was tightened to 2,0 % of GDP.

(7)  The National Bureau for Economic Policy Analysis (CPB) published on 17 February 2009 a new forecast projecting a deterioration of economic growth to – 3,5 % in 2009 and – 0,25 % in 2010 and of the government balance to – 2,9 % of GDP in 2009 and – 5,4 % of GDP in 2010.

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

(9)  Based on estimated potential growth of 1,7 %, 1,8 %, 1,3 % and 1,2 % respectively in the period 2007-2010.

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

Source:

Stability programme (SP); Commission services' January 2009 interim forecasts (COM); Commission services' calculations.

---

| 21.3.2009 | EN | Official Journal of the European Union | C 68/33 |
| --- | --- | --- | --- |

21.3.2009

EN

Official Journal of the European Union

C 68/33

---

COUNCIL OPINION

of 10 March 2009

on the updated convergence programme of the United Kingdom, 2008/2009-2013/2014

(2009/C 68/07)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community,

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

Having regard to the recommendation of the Commission,

After consulting the Economic and Financial Committee,

HAS DELIVERED THIS OPINION:

| (1) | On 10 March 2009, the Council examined the updated convergence programme of the United Kingdom, which covers the period 2008/2009 to 2013/2014. |
| --- | --- |

(1)

On 10 March 2009, the Council examined the updated convergence programme of the United Kingdom, which covers the period 2008/2009 to 2013/2014.

| (2) | Following several years of robust growth driven by domestic demand, economic activity in the UK slowed sharply over the course of 2008. The fallout from the global financial crisis and a sharp correction in the domestic housing market had a mutually reinforcing recessionary impact on the economy. In response to the economic and financial crisis, the United Kingdom's government adopted a number of measures to ensure the stability of the financial sector, and to increase credit provision to households and companies. In November 2008, in line with the European Economic Recovery Plan agreed in December 2008 by the European Council, the government also launched a fiscal stimulus package, totalling about 0,25 % of GDP in 2008 and 1,5 % in 2009, in addition to allowing the automatic stabilisers to operate in full. The Bank of England has eased monetary policy via successive interest rate reductions (from 5,75 % in July 2007 to currently 1,00 %) and an expansion of its balance sheet. The nominal effective exchange rate of the pound sterling depreciated by more than 20 % during 2008. The combined effect of the economic downturn, falls in asset prices, and the expansionary fiscal stance have led to a pronounced deterioration in UK public finances. The rapid weakening in the government's primary balance, which was already in deficit in the period leading up to the crisis, has affected the UK's scope to pursue fiscal loosening and ensure budgetary sustainability. In its March 2008 Budget the UK reported a planned budget deficit in 2008/2009 in excess of the 3 % of GDP reference value, which led to the opening of an excessive deficit procedure in June 2008. |
| --- | --- |

(2)

Following several years of robust growth driven by domestic demand, economic activity in the UK slowed sharply over the course of 2008. The fallout from the global financial crisis and a sharp correction in the domestic housing market had a mutually reinforcing recessionary impact on the economy. In response to the economic and financial crisis, the United Kingdom's government adopted a number of measures to ensure the stability of the financial sector, and to increase credit provision to households and companies. In November 2008, in line with the European Economic Recovery Plan agreed in December 2008 by the European Council, the government also launched a fiscal stimulus package, totalling about 0,25 % of GDP in 2008 and 1,5 % in 2009, in addition to allowing the automatic stabilisers to operate in full. The Bank of England has eased monetary policy via successive interest rate reductions (from 5,75 % in July 2007 to currently 1,00 %) and an expansion of its balance sheet. The nominal effective exchange rate of the pound sterling depreciated by more than 20 % during 2008. The combined effect of the economic downturn, falls in asset prices, and the expansionary fiscal stance have led to a pronounced deterioration in UK public finances. The rapid weakening in the government's primary balance, which was already in deficit in the period leading up to the crisis, has affected the UK's scope to pursue fiscal loosening and ensure budgetary sustainability. In its March 2008 Budget the UK reported a planned budget deficit in 2008/2009 in excess of the 3 % of GDP reference value, which led to the opening of an excessive deficit procedure in June 2008.

| (3) | The programme contains two macro-economic scenarios: a central scenario and a more cautious alternative scenario based on trend growth one quarter of a percentage point lower than the central view. The public finances projections are based on the alternative scenario, which is considered the reference scenario in the assessment of the updated programme. This scenario shows the recession that began in the second half of 2008 continuing into the first half of 2009, such that real GDP is forecast by the programme to fall by 0,25 % in 2008/2009 and a further 0,5 % in 2009/2010. This is followed by a recovery in GDP growth to 2 % in 2010/2011 and to 3 % per annum from 2011/2012 onwards. In view of the rapid deterioration of the macro-economic outlook in recent months, even this more cautious scenario, finalised in November 2008, now appears to be based on favourable growth assumptions, notably for the years 2009/2010 and 2010/2011 (2). The Programme's estimate of a positive impact on GDP growth from the fiscal stimulus package of around 0,5 percentage point in 2009 is in line with estimates made by the Commission services. The projections for inflation are somewhat higher than in the Commission services' January 2009 interim forecast. |
| --- | --- |

(3)

The programme contains two macro-economic scenarios: a central scenario and a more cautious alternative scenario based on trend growth one quarter of a percentage point lower than the central view. The public finances projections are based on the alternative scenario, which is considered the reference scenario in the assessment of the updated programme. This scenario shows the recession that began in the second half of 2008 continuing into the first half of 2009, such that real GDP is forecast by the programme to fall by 0,25 % in 2008/2009 and a further 0,5 % in 2009/2010. This is followed by a recovery in GDP growth to 2 % in 2010/2011 and to 3 % per annum from 2011/2012 onwards. In view of the rapid deterioration of the macro-economic outlook in recent months, even this more cautious scenario, finalised in November 2008, now appears to be based on favourable growth assumptions, notably for the years 2009/2010 and 2010/2011 (2). The Programme's estimate of a positive impact on GDP growth from the fiscal stimulus package of around 0,5 percentage point in 2009 is in line with estimates made by the Commission services. The projections for inflation are somewhat higher than in the Commission services' January 2009 interim forecast.

| (4) | For 2008/2009, the general government deficit is estimated at 5,7 % of GDP in the Commission services' January 2009 interim forecast and 5,5 % in the programme, against 2,9 % of GDP projected in the previous update of the convergence programme. The unexpected increase in the government deficit primarily reflects a downward revision in revenue growth projections due to the dramatic worsening in the macro-economic context and the operation of the automatic stabilisers. The sharp drop in residential property transactions and falling residential property prices contribute to an undershoot in estimated stamp duty revenues by about 0,5 percent of GDP in 2008/2009, while revenue from corporate taxation, which accounted for a quarter of tax revenue increases over the five years to 2007/2008, has fallen sharply due to the deterioration in financial sector profitability. On the expenditure side, the update estimates an increase in government capital spending by 0,2 % of GDP compared to the previous programme, reflecting the action being taken to support the economy, while interest payments are set to exceed projections due to the effect of higher inflation on the debt servicing costs of index-linked gilts. In addition, the discretionary measures announced by the UK government since the 2007 update contribute to an increase in the estimated deficit in 2008/2009 by about 0,5 percentage point, including through a cut in personal income taxation announced in May 2008, a reduction in the standard VAT rate and additional payments to pensioners. Government gross debt in 2008/2009 is estimated to increase by almost 10 percentage points, to around 53 % of GDP, half of which reflects government financial sector interventions not directly affecting the deficit. |
| --- | --- |

(4)

For 2008/2009, the general government deficit is estimated at 5,7 % of GDP in the Commission services' January 2009 interim forecast and 5,5 % in the programme, against 2,9 % of GDP projected in the previous update of the convergence programme. The unexpected increase in the government deficit primarily reflects a downward revision in revenue growth projections due to the dramatic worsening in the macro-economic context and the operation of the automatic stabilisers. The sharp drop in residential property transactions and falling residential property prices contribute to an undershoot in estimated stamp duty revenues by about 0,5 percent of GDP in 2008/2009, while revenue from corporate taxation, which accounted for a quarter of tax revenue increases over the five years to 2007/2008, has fallen sharply due to the deterioration in financial sector profitability. On the expenditure side, the update estimates an increase in government capital spending by 0,2 % of GDP compared to the previous programme, reflecting the action being taken to support the economy, while interest payments are set to exceed projections due to the effect of higher inflation on the debt servicing costs of index-linked gilts. In addition, the discretionary measures announced by the UK government since the 2007 update contribute to an increase in the estimated deficit in 2008/2009 by about 0,5 percentage point, including through a cut in personal income taxation announced in May 2008, a reduction in the standard VAT rate and additional payments to pensioners. Government gross debt in 2008/2009 is estimated to increase by almost 10 percentage points, to around 53 % of GDP, half of which reflects government financial sector interventions not directly affecting the deficit.

| (5) | The latest update projects the general government deficit in 2009/2010 to increase by 2,75 percentage points to 8,2 % of GDP, compared to a projection of 9,5 % of GDP in the Commission services' interim forecast. Government revenue is forecast to drop in nominal terms by 2 %, while expenditure is set to increase by almost 5 %. The programme estimates that the fall in financial sector and housing market activity will reduce government revenue, including from personal income tax on financial sector earnings, by a total of 1,5 percentage points of GDP between 2007/2008 and 2009/2010. The budgetary projections also include fiscal stimulus measures of around 1 % of GDP in 2009/2010, including a temporary reduction in the standard VAT rate, which accounts for half the November 2008 stimulus package, and the frontloading of investment spending. The structural deficit in 2009/2010, defined as the cyclically-adjusted budget balance calculated according to the commonly agreed methodology, net of one-off and other temporary measures, is estimated to deteriorate by about 2 percentage points. The fall reflects in almost equal shares the combined effects of the expansionary fiscal measures and an effect from tax elasticities due to the contraction in financial sector and housing market activities, which until the downturn yielded high tax revenues. |
| --- | --- |

(5)

The latest update projects the general government deficit in 2009/2010 to increase by 2,75 percentage points to 8,2 % of GDP, compared to a projection of 9,5 % of GDP in the Commission services' interim forecast. Government revenue is forecast to drop in nominal terms by 2 %, while expenditure is set to increase by almost 5 %. The programme estimates that the fall in financial sector and housing market activity will reduce government revenue, including from personal income tax on financial sector earnings, by a total of 1,5 percentage points of GDP between 2007/2008 and 2009/2010. The budgetary projections also include fiscal stimulus measures of around 1 % of GDP in 2009/2010, including a temporary reduction in the standard VAT rate, which accounts for half the November 2008 stimulus package, and the frontloading of investment spending. The structural deficit in 2009/2010, defined as the cyclically-adjusted budget balance calculated according to the commonly agreed methodology, net of one-off and other temporary measures, is estimated to deteriorate by about 2 percentage points. The fall reflects in almost equal shares the combined effects of the expansionary fiscal measures and an effect from tax elasticities due to the contraction in financial sector and housing market activities, which until the downturn yielded high tax revenues.

| (6) | The update does not present a medium-term objective (MTO) for the budgetary position. The fiscal projections in the programme imply a narrowing in the structural deficit averaging close to 1 percentage point per annum between 2010/2011 and 2013/2014. The programme presents medium-term projections on a no-policy-change basis and envisages a sustained reduction in the general government deficit. According to the programme, the headline deficit between 2010/2011 and 2013/2014 is forecast to improve by an average of around 1,25 percentage points of GDP per annum, to 3,4 % of GDP by the end of the programme period. Around three-fifths of the targeted adjustment in the nominal balance between 2010/2011 and 2013/2014 reflects a drop in the expenditure ratio. The annual nominal rate of increase in expenditure between 2011/2012 and 2013/2014 is assumed to decelerate to 4 % from an average of 5,25 % in the preceding three-year period, although the sharp slowdown in spending growth is not yet backed by detailed departmental spending plans, reflecting the established three-year spending review process. The government has announced tax rises and an increase in social security contributions, as well as an increase in planned efficiency savings in public services from 2010/2011 onwards. Government gross debt is projected to increase by 15,5 percentage points over the programme period, to 68,5 % of GDP in 2013/2014. The intention of the programme is for debt as a share of GDP to fall after the end of the programme period, by 2015/2016. |
| --- | --- |

(6)

The update does not present a medium-term objective (MTO) for the budgetary position. The fiscal projections in the programme imply a narrowing in the structural deficit averaging close to 1 percentage point per annum between 2010/2011 and 2013/2014. The programme presents medium-term projections on a no-policy-change basis and envisages a sustained reduction in the general government deficit. According to the programme, the headline deficit between 2010/2011 and 2013/2014 is forecast to improve by an average of around 1,25 percentage points of GDP per annum, to 3,4 % of GDP by the end of the programme period. Around three-fifths of the targeted adjustment in the nominal balance between 2010/2011 and 2013/2014 reflects a drop in the expenditure ratio. The annual nominal rate of increase in expenditure between 2011/2012 and 2013/2014 is assumed to decelerate to 4 % from an average of 5,25 % in the preceding three-year period, although the sharp slowdown in spending growth is not yet backed by detailed departmental spending plans, reflecting the established three-year spending review process. The government has announced tax rises and an increase in social security contributions, as well as an increase in planned efficiency savings in public services from 2010/2011 onwards. Government gross debt is projected to increase by 15,5 percentage points over the programme period, to 68,5 % of GDP in 2013/2014. The intention of the programme is for debt as a share of GDP to fall after the end of the programme period, by 2015/2016.

| (7) | The budgetary outcomes are subject to downside risks. The Commission services' January 2009 economic growth forecast for 2009/2010 and 2010/2011 is significantly weaker than envisaged in the programme, which would raise the deficit in 2010/2011 by about 2 percentage points compared to the programme. Moreover, the likelihood that economic activity in 2010 will be weaker than envisaged in the programme carries a risk that the stimulus measures, planned to be temporary, will not be withdrawn in 2010. The programme recognises that over the medium term the contribution of the financial sector to economic activity will be lower than previously forecast and the composition of aggregate demand is likely to be less tax-rich. However, the revenue elasticity implied in the programme after 2010/2011 appears favourable and the composition of aggregate demand could even be less tax-rich than the programme acknowledges. In view of these negative risks, the evolution of the debt ratio is also likely to be less favourable than projected in the programme from 2009/2010 onwards, carrying a risk of higher debt servicing. Moreover, the government financial sector interventions also carry a risk of higher deficit and/or debt levels than foreseen in the programme (3). However, the greater part of the increase in government debt as a result of financial sector support operations, which in the programme amounts to about 5 percentage points of GDP, is not expected to be permanent. Once the economy recovers and financial sector conditions stabilise, the UK authorities would be expected to unwind, at least in part, the increase in debt due to financial sector interventions through the proceeds from selling equity stakes in financial institutions back to the private sector and by calling in loans. |
| --- | --- |

(7)

The budgetary outcomes are subject to downside risks. The Commission services' January 2009 economic growth forecast for 2009/2010 and 2010/2011 is significantly weaker than envisaged in the programme, which would raise the deficit in 2010/2011 by about 2 percentage points compared to the programme. Moreover, the likelihood that economic activity in 2010 will be weaker than envisaged in the programme carries a risk that the stimulus measures, planned to be temporary, will not be withdrawn in 2010. The programme recognises that over the medium term the contribution of the financial sector to economic activity will be lower than previously forecast and the composition of aggregate demand is likely to be less tax-rich. However, the revenue elasticity implied in the programme after 2010/2011 appears favourable and the composition of aggregate demand could even be less tax-rich than the programme acknowledges. In view of these negative risks, the evolution of the debt ratio is also likely to be less favourable than projected in the programme from 2009/2010 onwards, carrying a risk of higher debt servicing. Moreover, the government financial sector interventions also carry a risk of higher deficit and/or debt levels than foreseen in the programme (3). However, the greater part of the increase in government debt as a result of financial sector support operations, which in the programme amounts to about 5 percentage points of GDP, is not expected to be permanent. Once the economy recovers and financial sector conditions stabilise, the UK authorities would be expected to unwind, at least in part, the increase in debt due to financial sector interventions through the proceeds from selling equity stakes in financial institutions back to the private sector and by calling in loans.

| (8) | Whereas the UK is starting from a position of relatively low public debt and the long-term budgetary impact of ageing in the UK is close to the EU average, the budgetary position in 2008 as estimated in the programme, which is significantly worse than the starting position of the previous programme, constitutes an increased risk to sustainable public finances even before the long-term budgetary impact of an ageing population is considered. The financial crisis can also have a negative impact on the long-term sustainability of public finances if the costs of the government support are not fully recouped. If the 2009 budgetary position as projected by the Commission services' interim forecast were taken as the starting point, the sustainability gap would worsen substantially. Moreover, the gross debt ratio is projected to exceed the Treaty reference value before the end of the programme period. Reducing the primary deficit would contribute to reducing the risks to the long-term sustainability of public finances, which, on the basis of the commonly agreed methodology are assessed as high, stemming from the current high structural deficit. |
| --- | --- |

(8)

Whereas the UK is starting from a position of relatively low public debt and the long-term budgetary impact of ageing in the UK is close to the EU average, the budgetary position in 2008 as estimated in the programme, which is significantly worse than the starting position of the previous programme, constitutes an increased risk to sustainable public finances even before the long-term budgetary impact of an ageing population is considered. The financial crisis can also have a negative impact on the long-term sustainability of public finances if the costs of the government support are not fully recouped. If the 2009 budgetary position as projected by the Commission services' interim forecast were taken as the starting point, the sustainability gap would worsen substantially. Moreover, the gross debt ratio is projected to exceed the Treaty reference value before the end of the programme period. Reducing the primary deficit would contribute to reducing the risks to the long-term sustainability of public finances, which, on the basis of the commonly agreed methodology are assessed as high, stemming from the current high structural deficit.

| (9) | The recent marked deterioration of the UK's public finances has put the domestic fiscal framework under intense pressure. In the 2008 Pre-Budget Report the two existing fiscal rules were suspended and replaced with a temporary operating rule. The aim of the new rule, to be applied once the economy emerges from the downturn, is to improve the cyclically-adjusted current budget each year so that it reaches balance and the debt-to-GDP ratio is reduced. It is designed to accommodate higher government borrowing to support the economy in the short term, although once the UK economy emerges from the current recession it would impose a quantitatively unspecified constraint in terms of minimum fiscal consolidation. A new framework is expected to be put in place before 2015/2016, but the exact timing is uncertain. An effective and credible revised fiscal framework will be an important element for the UK in order to deliver the needed fiscal consolidation in the medium term. The new efficiency programme, which was introduced as part of the 2007 Comprehensive Spending Review and expanded in the 2008 Budget and Pre-Budget Report, demonstrates the authorities' intentions to keep up the momentum of the UK's focus on value-for-money issues in the public sector, including by setting an ambitious efficiency savings target as well as introducing a new monitoring and reporting framework. The update outlines some concrete supportive measures, but it remains unclear to what extent different departments and policy areas will be affected. |
| --- | --- |

(9)

The recent marked deterioration of the UK's public finances has put the domestic fiscal framework under intense pressure. In the 2008 Pre-Budget Report the two existing fiscal rules were suspended and replaced with a temporary operating rule. The aim of the new rule, to be applied once the economy emerges from the downturn, is to improve the cyclically-adjusted current budget each year so that it reaches balance and the debt-to-GDP ratio is reduced. It is designed to accommodate higher government borrowing to support the economy in the short term, although once the UK economy emerges from the current recession it would impose a quantitatively unspecified constraint in terms of minimum fiscal consolidation. A new framework is expected to be put in place before 2015/2016, but the exact timing is uncertain. An effective and credible revised fiscal framework will be an important element for the UK in order to deliver the needed fiscal consolidation in the medium term. The new efficiency programme, which was introduced as part of the 2007 Comprehensive Spending Review and expanded in the 2008 Budget and Pre-Budget Report, demonstrates the authorities' intentions to keep up the momentum of the UK's focus on value-for-money issues in the public sector, including by setting an ambitious efficiency savings target as well as introducing a new monitoring and reporting framework. The update outlines some concrete supportive measures, but it remains unclear to what extent different departments and policy areas will be affected.

| (10) | In response to the financial crisis, the UK authorities have adopted a series of policy measures aimed at stabilising the financial sector and supporting credit provision. A credit guarantee scheme guarantees commercial paper issued by banks to refinance their maturing wholesale debt. Furthermore, the special liquidity scheme operated by the Bank of England until January 2009 allowed participating banks to swap illiquid assets for UK treasury bills. This scheme has been succeeded by the Bank of England's discount window facility, which continues to give banks access to long-term liquidity, but using a wider range of collateral. In addition to the nationalisation of two financial institutions, Northern Rock in February 2008 and Bradford & Bingley in September 2008, the government injected State capital equivalent to GBP 37 billion (2,5 % of GDP) into a number of banks. From February 2009, the Bank of England will also be authorised by the Treasury to purchase up to GBP 50 billion (3,5 % of GDP) of private sector securities. In January 2009 the government also announced a scheme that would offer banks insurance against losses on assets that have been mostly affected by the current economic slowdown, while a statement by the Financial Services Authority (FSA) on the regulation of capital requirements clarified that banks were able to draw down on capital buffers during economic downturns, thereby facilitating continued lending. |
| --- | --- |

(10)

In response to the financial crisis, the UK authorities have adopted a series of policy measures aimed at stabilising the financial sector and supporting credit provision. A credit guarantee scheme guarantees commercial paper issued by banks to refinance their maturing wholesale debt. Furthermore, the special liquidity scheme operated by the Bank of England until January 2009 allowed participating banks to swap illiquid assets for UK treasury bills. This scheme has been succeeded by the Bank of England's discount window facility, which continues to give banks access to long-term liquidity, but using a wider range of collateral. In addition to the nationalisation of two financial institutions, Northern Rock in February 2008 and Bradford & Bingley in September 2008, the government injected State capital equivalent to GBP 37 billion (2,5 % of GDP) into a number of banks. From February 2009, the Bank of England will also be authorised by the Treasury to purchase up to GBP 50 billion (3,5 % of GDP) of private sector securities. In January 2009 the government also announced a scheme that would offer banks insurance against losses on assets that have been mostly affected by the current economic slowdown, while a statement by the Financial Services Authority (FSA) on the regulation of capital requirements clarified that banks were able to draw down on capital buffers during economic downturns, thereby facilitating continued lending.

| (11) | In line with the European Economic Recovery Plan agreed in December 2008 by the European Council, the United Kingdom announced in November 2008 fiscal stimulus measures, amounting to around 1,5 % of GDP in 2009, that are expected to cushion the contraction in GDP in 2009 by around 0,5 percentage point. The package is temporary and timely, as measures are targeted towards supporting domestic demand in 2009. However, the forecast increase in the government deficit, coupled with limited initial room for fiscal manoeuvre and the absence of a credible fiscal framework in the medium term, implies that it is crucial to reverse the stimulus through sustained consolidation over the medium term. Most fiscal stimulus measures aim at supporting household purchasing power and tend to favour individuals with a relatively higher propensity to consume. Other measures, including of a structural nature, are intended to support business and investment activities and increase the capacity of public employment services and training opportunities for the unemployed. Finally, building on the September 2008 Homeowners Support Package, further measures to support the adjustment process in the housing market have been announced. These measures correspond to the policy objective of short-term output stabilisation and are related to the UK Lisbon structural reform agenda. |
| --- | --- |

(11)

In line with the European Economic Recovery Plan agreed in December 2008 by the European Council, the United Kingdom announced in November 2008 fiscal stimulus measures, amounting to around 1,5 % of GDP in 2009, that are expected to cushion the contraction in GDP in 2009 by around 0,5 percentage point. The package is temporary and timely, as measures are targeted towards supporting domestic demand in 2009. However, the forecast increase in the government deficit, coupled with limited initial room for fiscal manoeuvre and the absence of a credible fiscal framework in the medium term, implies that it is crucial to reverse the stimulus through sustained consolidation over the medium term. Most fiscal stimulus measures aim at supporting household purchasing power and tend to favour individuals with a relatively higher propensity to consume. Other measures, including of a structural nature, are intended to support business and investment activities and increase the capacity of public employment services and training opportunities for the unemployed. Finally, building on the September 2008 Homeowners Support Package, further measures to support the adjustment process in the housing market have been announced. These measures correspond to the policy objective of short-term output stabilisation and are related to the UK Lisbon structural reform agenda.

| (12) | Following the expansionary fiscal stance of recent years during predominantly good economic times and the stimulus package for 2009, the UK authorities plan to pursue fiscal consolidation equivalent to an improvement in the structural balance of around 1 percentage point per annum in the medium term. Consistent with this consolidation strategy, stimulus measures are planned to be temporary. However, there is a risk that the stimulus measures, planned to be temporary, will not be withdrawn in 2010 if, as projected in the Commission services interim forecast, the economic recovery envisaged by the UK authorities in 2010 does not materialise. Finally, the debt ratio is expected to increase substantially over the programme period and to exceed the reference value of 60 % of GDP from 2009/2010 onwards. |
| --- | --- |

(12)

Following the expansionary fiscal stance of recent years during predominantly good economic times and the stimulus package for 2009, the UK authorities plan to pursue fiscal consolidation equivalent to an improvement in the structural balance of around 1 percentage point per annum in the medium term. Consistent with this consolidation strategy, stimulus measures are planned to be temporary. However, there is a risk that the stimulus measures, planned to be temporary, will not be withdrawn in 2010 if, as projected in the Commission services interim forecast, the economic recovery envisaged by the UK authorities in 2010 does not materialise. Finally, the debt ratio is expected to increase substantially over the programme period and to exceed the reference value of 60 % of GDP from 2009/2010 onwards.

| (13) | As regards the data requirements specified in the code of conduct for stability and convergence programmes, the programme has significant gaps in the provision of required and optional data (4). |
| --- | --- |

(13)

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

The overall conclusion is that the programme confirms a rapid deterioration in the United Kingdom's budgetary position, which has strained the sustainability of UK public finances. The probably significantly weaker-than-envisaged macro-economic context in the near term carries the risk of a higher government deficit throughout the programme period. After the expansionary fiscal measures in 2009/2010 the programme envisages sustained fiscal tightening from 2010/2011 onwards, but there are risks to the achievement of this consolidation. These reflect the possibility of an extension of the stimulus measures to 2010 in the absence of a significant economic recovery, weaker revenue elasticities, and risks to the achievement of spending targets. Taking into account the probability of a worse-than-expected deterioration in the UK's budgetary position in the near term and the heightened risks to fiscal sustainability, there is a need for a more ambitious consolidation effort in the medium term. The debt ratio is projected to increase from 43,25 % of GDP in 2007/2008 to 65 % in 2010/2011, stabilising at close to 70 % at the end of the programme period.

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

| (i) | implement the fiscal plans, including the stimulus measures in line with the EERP and within the framework of the SGP, while avoiding any further deterioration of public finances; |
| --- | --- |

(i)

implement the fiscal plans, including the stimulus measures in line with the EERP and within the framework of the SGP, while avoiding any further deterioration of public finances;

| (ii) | implement a significant budgetary consolidation in 2010/2011 and beyond, and further specify measures underpinning the adjustment, to ensure that the deficit is rapidly brought below the reference value; |
| --- | --- |

(ii)

implement a significant budgetary consolidation in 2010/2011 and beyond, and further specify measures underpinning the adjustment, to ensure that the deficit is rapidly brought below the reference value;

| (iii) | set out how the fiscal framework will be applied in the future, consistent with an improvement of the long-term sustainability of its public finances. |
| --- | --- |

(iii)

set out how the fiscal framework will be applied in the future, consistent with an improvement of the long-term sustainability of its public finances.

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

Overview of key macro-economic and budgetary projections

| | | 2007/2008 | 2008/2009 | 2009/2010 | 2010/2011 | 2011/2012 | 2012/2013 | 2013/2014 |
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Real GDP
  (% change) | CP Dec 2008 | 3 | – 0,25 | – 0,5 | 2 | 3 | 3 | 3 |
| COM Jan 2009 | 3,0 | – 0,6 | – 2,3 | 0,9 | n.a. | n.a. | n.a. |
| CP Nov 2007 | 3 | 3 | 2 | 2,75 | 2,5 | 2,5 | n.a. |
| HICP inflation
  (%) | CP Dec 2008 | 2,25 | 3,75 | 1 | 2 | 2 | 2 | 2 |
| COM Jan 2009 | 2,2 | 3,4 | – 0,3 | 1,3 | n.a. | n.a. | n.a. |
| CP Nov 2007 | 2,25 | 2 | 2 | 2 | 2 | 2 | n.a. |
| Output gap (5)

  (% of potential GDP) | CP Dec 2008 | 1,0 | – 0,5 | – 2,4 | – 2,1 | – 1,2 | – 0,4 | 0,2 |
| COM Jan 2009 | 2,0 | 0,5 | – 2,4 | – 2,8 | n.a. | n.a. | n.a. |
| CP Nov 2007 | 0,0 | – 0,5 | – 0,3 | – 0,4 | – 0,4 | – 0,3 | n.a. |
| Net lending/borrowing vis-à-vis the rest of the world
  (% of GDP) (6) | CP Dec 2008 | n.a. | n.a. | n.a. | n.a. | n.a. | n.a. | n.a. |
| COM Jan 2009 | – 2,6 | – 2,0 | – 5,5 | – 5,7 | n.a. | n.a. | n.a. |
| CP Nov 2007 | n.a. | n.a. | n.a. | n.a. | n.a. | n.a. | n.a. |
| General government revenue (7)

  (% of GDP) | CP Dec 2008 | 37,9 | 36,7 | 35,5 | 36,6 | 37,3 | 37,7 | 38,0 |
| COM Jan 2009 | 42,1 | 41,4 | 41,2 | 41,6 | n.a. | n.a. | n.a. |
| CP Nov 2007 | 38,6 | 38,8 | 39,0 | 39,2 | 39,3 | 39,5 | n.a. |
| General government expenditure (7)

  (% of GDP) | CP Dec 2008 | 40,7 | 42,2 | 43,7 | 43,7 | 42,9 | 42,1 | 41,4 |
| COM Jan 2009 | 44,9 | 47,2 | 50,8 | 50,8 | n.a. | n.a. | n.a. |
| CP Nov 2007 | 41,6 | 41,7 | 41,4 | 41,3 | 41,1 | 41,1 | n.a. |
| General government balance
  (% of GDP) | CP Dec 2008 | – 2,8 | – 5,5 | – 8,2 | – 7,1 | – 5,6 | – 4,4 | – 3,4 |
| COM Jan 2009 | – 2,8 | – 5,7 | – 9,5 | – 9,2 | n.a. | n.a. | n.a. |
| CP Nov 2007 | – 3,0 | – 2,9 | – 2,4 | – 2,1 | – 1,8 | – 1,6 | n.a. |
| Primary balance
  (% of GDP) | CP Dec 2008 | – 0,6 | – 3,4 | – 6,4 | – 4,5 | – 2,6 | – 1,4 | – 0,3 |
| COM Jan 2009 | – 0,6 | – 3,5 | – 7,1 | – 6,4 | n.a. | n.a. | n.a. |
| CP Nov 2007 | – 0,8 | – 0,9 | – 0,3 | 0,0 | 0,3 | 0,5 | n.a. |
| Cyclically-adjusted balance (5)

  (% of GDP) | CP Dec 2008 | – 3,2 | – 5,3 | – 7,2 | – 6,2 | – 5,1 | – 4,2 | – 3,5 |
| COM Jan 2009 | – 3,7 | – 5,9 | – 8,5 | – 8,0 | n.a. | n.a. | n.a. |
| CP Nov 2007 | – 3,0 | – 2,7 | – 2,3 | – 1,9 | – 1,6 | – 1,5 | n.a. |
| Structural balance (8)

  (% of GDP) | CP Dec 2008 | – 3,2 | – 5,3 | – 7,2 | – 6,2 | – 5,1 | – 4,2 | – 3,5 |
| COM Jan 2009 | – 3,7 | – 5,9 | – 8,5 | – 8,0 | n.a. | n.a. | n.a. |
| CP Nov 2007 | – 3 | – 2,7 | – 2,3 | – 1,9 | – 1,6 | – 1,5 | n.a. |
| Government gross debt
  (% of GDP) | CP Dec 2008 | 43,2 | 52,9 | 60,5 | 65,1 | 67,5 | 68,6 | 68,5 |
| COM Jan 2009 | 43,2 | 53,7 | 64,6 | 71,9 | n.a. | n.a. | n.a. |
| CP Nov 2007 | 43,9 | 44,8 | 45,1 | 45,3 | 45,2 | 44,9 | n.a. |
| Convergence programme (CP); Commission services' January 2009 Interim economic forecasts (COM); Commission services' calculations. |

2007/2008

2008/2009

2009/2010

2010/2011

2011/2012

2012/2013

2013/2014

Real GDP

(% change)

CP Dec 2008

3

– 0,25

– 0,5

2

3

3

3

COM Jan 2009

3,0

– 0,6

– 2,3

0,9

n.a.

n.a.

n.a.

CP Nov 2007

3

3

2

2,75

2,5

2,5

n.a.

HICP inflation

(%)

CP Dec 2008

2,25

3,75

1

2

2

2

2

COM Jan 2009

2,2

3,4

– 0,3

1,3

n.a.

n.a.

n.a.

CP Nov 2007

2,25

2

2

2

2

2

n.a.

Output gap (5)

(% of potential GDP)

CP Dec 2008

1,0

– 0,5

– 2,4

– 2,1

– 1,2

– 0,4

0,2

COM Jan 2009

2,0

0,5

– 2,4

– 2,8

n.a.

n.a.

n.a.

CP Nov 2007

0,0

– 0,5

– 0,3

– 0,4

– 0,4

– 0,3

n.a.

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

(% of GDP) (6)

CP Dec 2008

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

COM Jan 2009

– 2,6

– 2,0

– 5,5

– 5,7

n.a.

n.a.

n.a.

CP Nov 2007

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

General government revenue (7)

(% of GDP)

CP Dec 2008

37,9

36,7

35,5

36,6

37,3

37,7

38,0

COM Jan 2009

42,1

41,4

41,2

41,6

n.a.

n.a.

n.a.

CP Nov 2007

38,6

38,8

39,0

39,2

39,3

39,5

n.a.

General government expenditure (7)

(% of GDP)

CP Dec 2008

40,7

42,2

43,7

43,7

42,9

42,1

41,4

COM Jan 2009

44,9

47,2

50,8

50,8

n.a.

n.a.

n.a.

CP Nov 2007

41,6

41,7

41,4

41,3

41,1

41,1

n.a.

General government balance

(% of GDP)

CP Dec 2008

– 2,8

– 5,5

– 8,2

– 7,1

– 5,6

– 4,4

– 3,4

COM Jan 2009

– 2,8

– 5,7

– 9,5

– 9,2

n.a.

n.a.

n.a.

CP Nov 2007

– 3,0

– 2,9

– 2,4

– 2,1

– 1,8

– 1,6

n.a.

Primary balance

(% of GDP)

CP Dec 2008

– 0,6

– 3,4

– 6,4

– 4,5

– 2,6

– 1,4

– 0,3

COM Jan 2009

– 0,6

– 3,5

– 7,1

– 6,4

n.a.

n.a.

n.a.

CP Nov 2007

– 0,8

– 0,9

– 0,3

0,0

0,3

0,5

n.a.

Cyclically-adjusted balance (5)

(% of GDP)

CP Dec 2008

– 3,2

– 5,3

– 7,2

– 6,2

– 5,1

– 4,2

– 3,5

COM Jan 2009

– 3,7

– 5,9

– 8,5

– 8,0

n.a.

n.a.

n.a.

CP Nov 2007

– 3,0

– 2,7

– 2,3

– 1,9

– 1,6

– 1,5

n.a.

Structural balance (8)

(% of GDP)

CP Dec 2008

– 3,2

– 5,3

– 7,2

– 6,2

– 5,1

– 4,2

– 3,5

COM Jan 2009

– 3,7

– 5,9

– 8,5

– 8,0

n.a.

n.a.

n.a.

CP Nov 2007

– 3

– 2,7

– 2,3

– 1,9

– 1,6

– 1,5

n.a.

Government gross debt

(% of GDP)

CP Dec 2008

43,2

52,9

60,5

65,1

67,5

68,6

68,5

COM Jan 2009

43,2

53,7

64,6

71,9

n.a.

n.a.

n.a.

CP Nov 2007

43,9

44,8

45,1

45,3

45,2

44,9

n.a.

Convergence programme (CP); Commission services' January 2009 Interim economic 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/about/activities/sgp/main_en.htm.

(2)  The assessment notably takes into account the Commission Service's January 2009 interim forecast, but also other information that has become available since then.

(3)  The acquisition of shareholding in financial institutions could lead to a one-off increase in the general government deficit, depending on the share purchase price relative to the prevailing market price or fair value. The statistical treatment of government debt securities issued to finance the special liquidity scheme and the asset purchase facility, which are not treated as government debt in the programme, is currently being examined by Eurostat.

(4)  In particular, the lack of labour market data has significantly complicated the recalculation of output gaps according to the commonly agreed methodology.

(5)  Output gaps and cyclically-adjusted balances from the programmes as recalculated by Commission services on the basis of the information in the programmes using the commonly agreed methodology. COM Jan 2009 figures are based on estimated potential growth of 1,5 %, 0,9 %, and 1,0 % respectively in the period 2008-2010.

(6)  Data refers to calendar years.

(7)  Data for total revenues and expenditure are not presented in the programme on a harmonised ESA95 basis. Therefore, they are not directly comparable with the projections made in the Commission services' January 2009 interim forecast. For 2012/2013 and 2013/2014, general government revenue and expenditure figures are extrapolated from public sector projections.

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

Source:

Convergence programme (CP); Commission services' January 2009 Interim economic forecasts (COM); Commission services' calculations.

---

II Information

INFORMATION FROM EUROPEAN UNION INSTITUTIONS AND BODIES

Commission

| 21.3.2009 | EN | Official Journal of the European Union | C 68/39 |
| --- | --- | --- | --- |

21.3.2009

EN

Official Journal of the European Union

C 68/39

---

Non-opposition to a notified concentration

(Case COMP/M.5456 — Antin Infrastructure Partners/BBEIF/BBI EUROPE/Euroports)

(Text with EEA relevance)

(2009/C 68/08)

On 16 March 2009, the Commission decided not to oppose the above notified concentration and to declare it compatible with the common market. This decision is based on Article 6(1)(b) of Council Regulation (EC) No 139/2004. The full text of the decision is available only in English and will be made public after it is cleared of any business secrets it may contain. It will be available:

| — | from the Europa competition website (http://ec.europa.eu/comm/competition/mergers/cases/). This website provides various facilities to help locate individual merger decisions, including company, case number, date and sectoral indexes, |
| --- | --- |

—

from the Europa competition website (http://ec.europa.eu/comm/competition/mergers/cases/). This website provides various facilities to help locate individual merger decisions, including company, case number, date and sectoral indexes,

| — | in electronic form on the EUR-Lex website under document number 32009M5456. EUR-Lex is the on-line access to European law (http://eur-lex.europa.eu). |
| --- | --- |

—

in electronic form on the EUR-Lex website under document number 32009M5456. EUR-Lex is the on-line access to European law (http://eur-lex.europa.eu).

---

| 21.3.2009 | EN | Official Journal of the European Union | C 68/39 |
| --- | --- | --- | --- |

21.3.2009

EN

Official Journal of the European Union

C 68/39

---

Non-opposition to a notified concentration

(Case COMP/M.5474 — Lagardere/Sumitomo/HFG)

(Text with EEA relevance)

(2009/C 68/09)

On 16 March 2009, the Commission decided not to oppose the above notified concentration and to declare it compatible with the common market. This decision is based on Article 6(1)(b) of Council Regulation (EC) No 139/2004. The full text of the decision is available only in English and will be made public after it is cleared of any business secrets it may contain. It will be available:

| — | from the Europa competition website (http://ec.europa.eu/comm/competition/mergers/cases/). This website provides various facilities to help locate individual merger decisions, including company, case number, date and sectoral indexes, |
| --- | --- |

—

from the Europa competition website (http://ec.europa.eu/comm/competition/mergers/cases/). This website provides various facilities to help locate individual merger decisions, including company, case number, date and sectoral indexes,

| — | in electronic form on the EUR-Lex website under document number 32009M5474. EUR-Lex is the on-line access to European law (http://eur-lex.europa.eu). |
| --- | --- |

—

in electronic form on the EUR-Lex website under document number 32009M5474. EUR-Lex is the on-line access to European law (http://eur-lex.europa.eu).

---

IV Notices

NOTICES FROM EUROPEAN UNION INSTITUTIONS AND BODIES

Commission

| 21.3.2009 | EN | Official Journal of the European Union | C 68/40 |
| --- | --- | --- | --- |

21.3.2009

EN

Official Journal of the European Union

C 68/40

---

Euro exchange rates (1)

19 March 2009

(2009/C 68/10)

1 euro=

| | Currency | Exchange rate |
| --- | --- | --- |
| USD | US dollar | 1,3549 |
| JPY | Japanese yen | 129,87 |
| DKK | Danish krone | 7,4515 |
| GBP | Pound sterling | 0,93950 |
| SEK | Swedish krona | 11,0560 |
| CHF | Swiss franc | 1,5291 |
| ISK | Iceland króna | |
| NOK | Norwegian krone | 8,6500 |
| BGN | Bulgarian lev | 1,9558 |
| CZK | Czech koruna | 26,628 |
| EEK | Estonian kroon | 15,6466 |
| HUF | Hungarian forint | 298,36 |
| LTL | Lithuanian litas | 3,4528 |
| LVL | Latvian lats | 0,7083 |
| PLN | Polish zloty | 4,5662 |
| RON | Romanian leu | 4,2972 |
| TRY | Turkish lira | 2,2872 |
| AUD | Australian dollar | 1,9685 |
| CAD | Canadian dollar | 1,6770 |
| HKD | Hong Kong dollar | 10,5008 |
| NZD | New Zealand dollar | 2,4240 |
| SGD | Singapore dollar | 2,0535 |
| KRW | South Korean won | 1 901,81 |
| ZAR | South African rand | 13,0680 |
| CNY | Chinese yuan renminbi | 9,2509 |
| HRK | Croatian kuna | 7,4511 |
| IDR | Indonesian rupiah | 15 974,27 |
| MYR | Malaysian ringgit | 4,9352 |
| PHP | Philippine peso | 65,360 |
| RUB | Russian rouble | 45,4920 |
| THB | Thai baht | 47,848 |
| BRL | Brazilian real | 3,0519 |
| MXN | Mexican peso | 19,1995 |
| INR | Indian rupee | 68,5170 |

Currency

Exchange rate

USD

US dollar

1,3549

JPY

Japanese yen

129,87

DKK

Danish krone

7,4515

GBP

Pound sterling

0,93950

SEK

Swedish krona

11,0560

CHF

Swiss franc

1,5291

ISK

Iceland króna

NOK

Norwegian krone

8,6500

BGN

Bulgarian lev

1,9558

CZK

Czech koruna

26,628

EEK

Estonian kroon

15,6466

HUF

Hungarian forint

298,36

LTL

Lithuanian litas

3,4528

LVL

Latvian lats

0,7083

PLN

Polish zloty

4,5662

RON

Romanian leu

4,2972

TRY

Turkish lira

2,2872

AUD

Australian dollar

1,9685

CAD

Canadian dollar

1,6770

HKD

Hong Kong dollar

10,5008

NZD

New Zealand dollar

2,4240

SGD

Singapore dollar

2,0535

KRW

South Korean won

1 901,81

ZAR

South African rand

13,0680

CNY

Chinese yuan renminbi

9,2509

HRK

Croatian kuna

7,4511

IDR

Indonesian rupiah

15 974,27

MYR

Malaysian ringgit

4,9352

PHP

Philippine peso

65,360

RUB

Russian rouble

45,4920

THB

Thai baht

47,848

BRL

Brazilian real

3,0519

MXN

Mexican peso

19,1995

INR

Indian rupee

68,5170

---

(1)

Source: reference exchange rate published by the ECB.

---

| 21.3.2009 | EN | Official Journal of the European Union | C 68/41 |
| --- | --- | --- | --- |

21.3.2009

EN

Official Journal of the European Union

C 68/41

---

Commission notice on current State aid recovery interest rates and reference/discount rates for 27 Member States applicable as from 1 April 2009

(Published in accordance with Article 10 of Commission Regulation (EC) No 794/2004 (OJ L 140, 30.4.2004, p. 1))

(2009/C 68/11)

Base rates calculated in accordance with the Communication from the Commission on the revision of the method for setting the reference and discount rates (OJ C 14, 19.1.2008, p. 6). Depending on the use of the reference rate, the appropriate margins have still to be added as defined in this communication. For the discount rate this means that a margin of 100 basis points has to be added. The Commission Regulation (EC) No 271/2008 of 30 January 2008 amending the implementing Regulation (EC) No 794/2004 foresees that, unless otherwise provided for in a specific decision, the recovery rate will also be calculated by adding 100 basis points to the base rate.

| From | To | AT | BE | BG | CY | CZ | DE | DK | EE | EL | ES | FI | FR | HU | IE | IT | LT | LU | LV | MT | NL | PL | PT | RO | SE | SI | SK | UK |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| 1.4.2009 | ... | 2,74 | 2,74 | 7,63 | 2,74 | 2,96 | 2,74 | 4,57 | 7,34 | 2,74 | 2,74 | 2,74 | 2,74 | 10,01 | 2,74 | 2,74 | 9,53 | 2,74 | 13,20 | 2,74 | 2,74 | 5,62 | 2,74 | 17,29 | 2,30 | 2,74 | 2,74 | 2,84 |
| 1.3.2009 | 31.3.2009 | 3,47 | 3,47 | 7,63 | 3,47 | 3,74 | 3,47 | 6,00 | 7,34 | 3,47 | 3,47 | 3,47 | 3,47 | 10,01 | 3,47 | 3,47 | 9,53 | 3,47 | 13,20 | 3,47 | 3,47 | 6,78 | 3,47 | 17,29 | 3,31 | 3,47 | 3,47 | 3,58 |
| 1.2.2009 | 28.2.2009 | 4,99 | 4,99 | 7,63 | 4,99 | 4,53 | 4,99 | 6,00 | 7,34 | 4,99 | 4,99 | 4,99 | 4,99 | 10,01 | 4,99 | 4,99 | 7,81 | 4,99 | 13,20 | 4,99 | 4,99 | 6,78 | 4,99 | 17,29 | 4,31 | 4,99 | 4,99 | 4,81 |
| 1.1.2009 | 31.1.2009 | 4,99 | 4,99 | 7,63 | 4,99 | 4,53 | 4,99 | 6,00 | 7,34 | 4,99 | 4,99 | 4,99 | 4,99 | 10,01 | 4,99 | 4,99 | 7,81 | 4,99 | 11,05 | 4,99 | 4,99 | 6,78 | 4,99 | 17,29 | 5,18 | 4,99 | 4,99 | 5,70 |
| 1.12.2008 | 31.12.2008 | 5,36 | 5,36 | 6,70 | 5,36 | 4,20 | 5,36 | 5,55 | 6,43 | 5,36 | 5,36 | 5,36 | 5,36 | 8,58 | 5,36 | 5,36 | 7,10 | 5,36 | 9,44 | 5,36 | 5,36 | 6,42 | 5,36 | 15,87 | 5,49 | 5,36 | 5,00 | 5,66 |
| 1.11.2008 | 30.11.2008 | 5,36 | 5,36 | 6,70 | 5,36 | 4,20 | 5,36 | 5,55 | 6,43 | 5,36 | 5,36 | 5,36 | 5,36 | 8,58 | 5,36 | 5,36 | 6,10 | 5,36 | 9,44 | 5,36 | 5,36 | 6,42 | 5,36 | 11,02 | 5,49 | 5,36 | 5,00 | 5,66 |
| 1.10.2008 | 31.10.2008 | 5,36 | 5,36 | 6,70 | 5,36 | 4,20 | 5,36 | 5,55 | 6,43 | 5,36 | 5,36 | 5,36 | 5,36 | 8,58 | 5,36 | 5,36 | 6,10 | 5,36 | 9,44 | 5,36 | 5,36 | 6,42 | 5,36 | 11,02 | 5,49 | 5,36 | 4,34 | 5,66 |
| 1.9.2008 | 30.9.2008 | 4,59 | 4,59 | 6,70 | 4,59 | 4,20 | 4,59 | 5,55 | 6,43 | 4,59 | 4,59 | 4,59 | 4,59 | 8,58 | 4,59 | 4,59 | 6,10 | 4,59 | 9,44 | 4,59 | 4,59 | 6,42 | 4,59 | 11,02 | 5,49 | 4,59 | 4,34 | 5,66 |
| 1.7.2008 | 31.8.2008 | 4,59 | 4,59 | 6,70 | 4,59 | 4,20 | 4,59 | 4,81 | 6,43 | 4,59 | 4,59 | 4,59 | 4,59 | 8,58 | 4,59 | 4,59 | 6,10 | 4,59 | 9,44 | 4,59 | 4,59 | 6,42 | 4,59 | 11,02 | 4,75 | 4,59 | 4,34 | 5,66 |

From

To

AT

BE

BG

CY

CZ

DE

DK

EE

EL

ES

FI

FR

HU

IE

IT

LT

LU

LV

MT

NL

PL

PT

RO

SE

SI

SK

UK

1.4.2009

...

2,74

2,74

7,63

2,74

2,96

2,74

4,57

7,34

2,74

2,74

2,74

2,74

10,01

2,74

2,74

9,53

2,74

13,20

2,74

2,74

5,62

2,74

17,29

2,30

2,74

2,74

2,84

1.3.2009

31.3.2009

3,47

3,47

7,63

3,47

3,74

3,47

6,00

7,34

3,47

3,47

3,47

3,47

10,01

3,47

3,47

9,53

3,47

13,20

3,47

3,47

6,78

3,47

17,29

3,31

3,47

3,47

3,58

1.2.2009

28.2.2009

4,99

4,99

7,63

4,99

4,53

4,99

6,00

7,34

4,99

4,99

4,99

4,99

10,01

4,99

4,99

7,81

4,99

13,20

4,99

4,99

6,78

4,99

17,29

4,31

4,99

4,99

4,81

1.1.2009

31.1.2009

4,99

4,99

7,63

4,99

4,53

4,99

6,00

7,34

4,99

4,99

4,99

4,99

10,01

4,99

4,99

7,81

4,99

11,05

4,99

4,99

6,78

4,99

17,29

5,18

4,99

4,99

5,70

1.12.2008

31.12.2008

5,36

5,36

6,70

5,36

4,20

5,36

5,55

6,43

5,36

5,36

5,36

5,36

8,58

5,36

5,36

7,10

5,36

9,44

5,36

5,36

6,42

5,36

15,87

5,49

5,36

5,00

5,66

1.11.2008

30.11.2008

5,36

5,36

6,70

5,36

4,20

5,36

5,55

6,43

5,36

5,36

5,36

5,36

8,58

5,36

5,36

6,10

5,36

9,44

5,36

5,36

6,42

5,36

11,02

5,49

5,36

5,00

5,66

1.10.2008

31.10.2008

5,36

5,36

6,70

5,36

4,20

5,36

5,55

6,43

5,36

5,36

5,36

5,36

8,58

5,36

5,36

6,10

5,36

9,44

5,36

5,36

6,42

5,36

11,02

5,49

5,36

4,34

5,66

1.9.2008

30.9.2008

4,59

4,59

6,70

4,59

4,20

4,59

5,55

6,43

4,59

4,59

4,59

4,59

8,58

4,59

4,59

6,10

4,59

9,44

4,59

4,59

6,42

4,59

11,02

5,49

4,59

4,34

5,66

1.7.2008

31.8.2008

4,59

4,59

6,70

4,59

4,20

4,59

4,81

6,43

4,59

4,59

4,59

4,59

8,58

4,59

4,59

6,10

4,59

9,44

4,59

4,59

6,42

4,59

11,02

4,75

4,59

4,34

5,66

---

V Announcements

PROCEDURES RELATING TO THE IMPLEMENTATION OF THE COMPETITION POLICY

Commission

| 21.3.2009 | EN | Official Journal of the European Union | C 68/42 |
| --- | --- | --- | --- |

21.3.2009

EN

Official Journal of the European Union

C 68/42

---

Prior notification of a concentration

(Case COMP/M.5493 — RBSK/DZ Bank/RZB/RBL JV)

Candidate case for simplified procedure

(Text with EEA relevance)

(2009/C 68/12)

| 1. | On 16 March 2009, the Commission received a notification of a concentration pursuant to Article 4 of Council Regulation (EC) No 139/2004 (1) by which the undertakings Raiffeisen Bausparkasse G.m.b.H, belonging to the RBSK Group (‘RBSK’, Austria), Bausparkasse Schwäbisch Hall A.G., controlled by the Deutsche Zentral-Genossenschaftsbank bank group (‘DZ’, Germany), and Raiffeisen Bank S.A. (‘RBRO’, Romania), controlled by the Raiffeisen Zentralbank Österreich Aktiengesellschaft group (‘RZB’, Austria), acquired within the meaning of Article 3(1)(b) of the Council Regulation joint control of the undertaking Raiffeisen Banca pentru Locuinte S.A. (‘RBL’, Romania) by way of purchase of shares in a newly created company constituting a joint venture. |
| --- | --- |

1.

On 16 March 2009, the Commission received a notification of a concentration pursuant to Article 4 of Council Regulation (EC) No 139/2004 (1) by which the undertakings Raiffeisen Bausparkasse G.m.b.H, belonging to the RBSK Group (‘RBSK’, Austria), Bausparkasse Schwäbisch Hall A.G., controlled by the Deutsche Zentral-Genossenschaftsbank bank group (‘DZ’, Germany), and Raiffeisen Bank S.A. (‘RBRO’, Romania), controlled by the Raiffeisen Zentralbank Österreich Aktiengesellschaft group (‘RZB’, Austria), acquired within the meaning of Article 3(1)(b) of the Council Regulation joint control of the undertaking Raiffeisen Banca pentru Locuinte S.A. (‘RBL’, Romania) by way of purchase of shares in a newly created company constituting a joint venture.

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






  — | for RBSK: saving and lending business for housing purposes, |
| --- | --- | --- |

2.

The business activities of the undertakings concerned are:

—

for RBSK: saving and lending business for housing purposes,

| — | for DZ: banking, insurance and asset management services, |
| --- | --- |

—

for DZ: banking, insurance and asset management services,

| — | for RZB: commercial and investment bank, |
| --- | --- |

—

for RZB: commercial and investment bank,

| — | for RBRO: universal bank in Romania, belonging to RZB, |
| --- | --- |

—

for RBRO: universal bank in Romania, belonging to RZB,

| — | for RBL: saving and lending business for housing purposes in Romania. |
| --- | --- |

—

for RBL: saving and lending business for housing purposes in Romania.

| 3. | On preliminary examination, the Commission finds that the notified transaction could fall within the scope of Regulation (EC) No 139/2004. However, the final decision on this point is reserved. Pursuant to the Commission Notice on a simplified procedure for treatment of certain concentrations under Council Regulation (EC) No 139/2004 (2) it should be noted that this case is a candidate for treatment under the procedure set out in the Notice. |
| --- | --- |

3.

On preliminary examination, the Commission finds that the notified transaction could fall within the scope of Regulation (EC) No 139/2004. However, the final decision on this point is reserved. Pursuant to the Commission Notice on a simplified procedure for treatment of certain concentrations under Council Regulation (EC) No 139/2004 (2) it should be noted that this case is a candidate for treatment under the procedure set out in the Notice.

| 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 ((32-2) 296 43 01 or 296 72 44) or by post, under reference number COMP/M.5493 — RBSK/DZ Bank/RZB/RBL JV, to the following address:





  European Commission |
| --- | --- |
| Directorate-General for Competition |
| Merger Registry |
| J-70 |
| B-1049 Brussels |

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 ((32-2) 296 43 01 or 296 72 44) or by post, under reference number COMP/M.5493 — RBSK/DZ Bank/RZB/RBL JV, to the following address:

European Commission

Directorate-General for Competition

Merger Registry

J-70

B-1049 Brussels

---

(1)  OJ L 24, 29.1.2004, p. 1.

(2)  OJ C 56, 5.3.2005, p. 32.

---

OTHER ACTS

Commission

| 21.3.2009 | EN | Official Journal of the European Union | C 68/43 |
| --- | --- | --- | --- |

21.3.2009

EN

Official Journal of the European Union

C 68/43

---

Notice for the attention of the persons and entities added to the list referred to in Article 2 of Council Regulation (EC) No 1183/2005 imposing certain specific restrictive measures directed against persons acting in violation of the arms embargo with regard to the Democratic Republic of the Congo, by virtue of Commission Regulation (EC) No 242/2009

(2009/C 68/13)

| 1. | Common Position 2008/369/CFSP (1) calls upon the Community to freeze the funds and economic resources of natural or legal persons, entities or bodies acting in violation of the arms embargo with regard to the Democratic Republic of the Congo, as referred to in the list drawn up pursuant to UNSR 1533(2004), 1596(2005), 1807(2008) and 1857(2008) to be updated regularly by the UN Committee established pursuant to UNSCR 1533(2004).
  The list drawn up by this UN Committee comprises:






  — | persons or entities acting in violation of the arms embargo and related measures as referred to in Article 1, |
| --- | --- | --- |

1.

Common Position 2008/369/CFSP (1) calls upon the Community to freeze the funds and economic resources of natural or legal persons, entities or bodies acting in violation of the arms embargo with regard to the Democratic Republic of the Congo, as referred to in the list drawn up pursuant to UNSR 1533(2004), 1596(2005), 1807(2008) and 1857(2008) to be updated regularly by the UN Committee established pursuant to UNSCR 1533(2004).

The list drawn up by this UN Committee comprises:

—

persons or entities acting in violation of the arms embargo and related measures as referred to in Article 1,

| — | political and military leaders of foreign armed groups operating in the DRC who impede the disarmament and the voluntary repatriation or resettlement of combatants belonging to those groups, |
| --- | --- |

—

political and military leaders of foreign armed groups operating in the DRC who impede the disarmament and the voluntary repatriation or resettlement of combatants belonging to those groups,

| — | political and military leaders of Congolese militias receiving support from outside the DRC, who impede the participation of their combatants in disarmament, demobilization and reintegration processes, |
| --- | --- |

—

political and military leaders of Congolese militias receiving support from outside the DRC, who impede the participation of their combatants in disarmament, demobilization and reintegration processes,

| — | political and military leaders operating in the DRC and recruiting or using children in armed conflicts in violation of applicable international law, |
| --- | --- |

—

political and military leaders operating in the DRC and recruiting or using children in armed conflicts in violation of applicable international law,

| — | individuals operating in the DRC and committing serious violations of international law involving the targeting of children or women in situations of armed conflict, including killing and maiming, sexual violence, abduction and forced displacement, |
| --- | --- |

—

individuals operating in the DRC and committing serious violations of international law involving the targeting of children or women in situations of armed conflict, including killing and maiming, sexual violence, abduction and forced displacement,

| — | individuals obstructing the access to or the distribution of humanitarian assistance in the eastern part of the DRC, |
| --- | --- |

—

individuals obstructing the access to or the distribution of humanitarian assistance in the eastern part of the DRC,

| — | individuals or entities supporting the illegal armed groups in the eastern part of the DRC through illicit trade of natural resources. |
| --- | --- |

—

individuals or entities supporting the illegal armed groups in the eastern part of the DRC through illicit trade of natural resources.

| 2. | The UN Committee decided on 3 March 2009 to add four natural persons to the relevant list. The natural persons concerned may submit at any time a request to the UN Committee, together with any supporting documentation, for the decision to include them in the UN list referred to above, to be reconsidered. Such request should be sent to the following address:





  United Nations — Focal point for delisting |
| --- | --- |
| Security Council Subsidiary Organs Branch |
| Room S-3055 E |
| New York, NY 10017 |
| United States of America |

2.

The UN Committee decided on 3 March 2009 to add four natural persons to the relevant list. The natural persons concerned may submit at any time a request to the UN Committee, together with any supporting documentation, for the decision to include them in the UN list referred to above, to be reconsidered. Such request should be sent to the following address:

United Nations — Focal point for delisting

Security Council Subsidiary Organs Branch

Room S-3055 E

New York, NY 10017

United States of America

See for information at: http://www.un.org/sc/committees/dfp.shtml

| 3. | Further to the UN decisions referred to at point 2, the Commission has adopted Regulation (EC) No 242/2009 (2), which amends Annex I to Council Regulation (EC) No 1183/2005 imposing certain specific restrictive measures directed against persons acting in violation of the arms embargo with regard to the Democratic Republic of the Congo (3).
  Therefore, the following measures of Regulation (EC) No 1183/2005 apply to the natural persons concerned:






  (a) | the freezing of funds and economic resources belonging to them, or owned or held by them, and prohibition to make funds and economic resources available to them or for their benefit, whether directly or indirectly (Article 2); and |
| --- | --- | --- |

3.

Further to the UN decisions referred to at point 2, the Commission has adopted Regulation (EC) No 242/2009 (2), which amends Annex I to Council Regulation (EC) No 1183/2005 imposing certain specific restrictive measures directed against persons acting in violation of the arms embargo with regard to the Democratic Republic of the Congo (3).

Therefore, the following measures of Regulation (EC) No 1183/2005 apply to the natural persons concerned:

(a)

the freezing of funds and economic resources belonging to them, or owned or held by them, and prohibition to make funds and economic resources available to them or for their benefit, whether directly or indirectly (Article 2); and

| (b) | the prohibition to participate, knowingly and intentionally, in activities the object or effect of which is, directly or indirectly, to circumvent the measures referred to at point (a) above. |
| --- | --- |

(b)

the prohibition to participate, knowingly and intentionally, in activities the object or effect of which is, directly or indirectly, to circumvent the measures referred to at point (a) above.

| 4. | The natural persons added to Annex I to Council Regulation (EC) No 1183/2005, by means of Regulation (EC) No 242/2009, and further to the UN decision of 3 March 2009, may make their views on their listing known to the Commission. This communication should be sent to:





  European Commission |
| --- | --- |
| DG External Relations |
| Directorate A Crisis Platform — Policy Coordination in Common Foreign and Security Policy |
| Unit A2 — CHAR 12/45 |
| Rue de la Loi/Wetstraat 200 |
| 1049 Bruxelles/Brussel |
| BELGIQUE/BELGIË |

4.

The natural persons added to Annex I to Council Regulation (EC) No 1183/2005, by means of Regulation (EC) No 242/2009, and further to the UN decision of 3 March 2009, may make their views on their listing known to the Commission. This communication should be sent to:

European Commission

DG External Relations

Directorate A Crisis Platform — Policy Coordination in Common Foreign and Security Policy

Unit A2 — CHAR 12/45

Rue de la Loi/Wetstraat 200

1049 Bruxelles/Brussel

BELGIQUE/BELGIË

| 5. | The attention of the natural persons concerned is also drawn to the possibility of challenging Regulation (EC) No 242/2009 before the Court of First Instance of the European Communities, in accordance with the conditions laid down in Article 230(4) and (5) of the Treaty establishing the European Community. |
| --- | --- |

5.

The attention of the natural persons concerned is also drawn to the possibility of challenging Regulation (EC) No 242/2009 before the Court of First Instance of the European Communities, in accordance with the conditions laid down in Article 230(4) and (5) of the Treaty establishing the European Community.

| 6. | Personal data of the natural persons concerned by the listings of Regulation (EC) No 242/2009 will be handled in accordance with the rules of Regulation (EC) No 45/2001 on the protection of individuals with regard to the processing of personal data by the Community institutions and bodies and on the free movement of such data (4). Any request, e.g. for further information or in order to exercise the rights under Regulation (EC) No 45/2001 (e.g. access or rectification of personal data), should be sent to the Commission, under the same address mentioned under point 4 above. |
| --- | --- |

6.

Personal data of the natural persons concerned by the listings of Regulation (EC) No 242/2009 will be handled in accordance with the rules of Regulation (EC) No 45/2001 on the protection of individuals with regard to the processing of personal data by the Community institutions and bodies and on the free movement of such data (4). Any request, e.g. for further information or in order to exercise the rights under Regulation (EC) No 45/2001 (e.g. access or rectification of personal data), should be sent to the Commission, under the same address mentioned under point 4 above.

| 7. | For good order, the attention of the natural persons listed in Annex I is drawn to the possibility of making an application to the competent authorities of the relevant Member State(s), as listed in Annex II to Regulation (EC) No 1183/2005, in order to obtain an authorisation to use frozen funds and economic resources for basic expenses or specific payments in accordance with Article 3 of that Regulation. |
| --- | --- |

7.

For good order, the attention of the natural persons listed in Annex I is drawn to the possibility of making an application to the competent authorities of the relevant Member State(s), as listed in Annex II to Regulation (EC) No 1183/2005, in order to obtain an authorisation to use frozen funds and economic resources for basic expenses or specific payments in accordance with Article 3 of that Regulation.

---

(1)  OJ L 127, 15.5.2008, p. 84.

(2)  OJ L 75, 21.3.2009.

(3)  OJ L 193, 23.7.2005, p. 1.

(4)  OJ L 8, 12.1.2001, p. 1.

---