# EUR-Lex - 52012PC0275 - EN

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# 52012PC0275

**Proposal for a COUNCIL IMPLEMENTING DECISION lifting the suspension of commitments from the Cohesion Fund for Hungary /* COM/2012/0275 final - 2012/0144 (NLE) */**

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EXPLANATORY MEMORANDUM

1.           Recent
Council decision to suspend commitments from the cohesion fund

On 13 March 2012, by Implementing Decision
2012/156/EU[1],
the Council decided to suspend EUR 495.2 million of commitments from the
Cohesion Fund for Hungary, taking effect from 1 January 2013 and representing
0.5% of GDP and 29% of the country's Cohesion Fund allocation for 2013. This
decision was based on Council decision 2012/139/EU[2] of 24 January 2012,
establishing that Hungary had not taken effective action in response to the
Council Recommendation of 7 July 2009 to correct the excessive deficit in a
credible and sustainable manner by 2011.

Conditions apply to accessing Cohesion Fund
assistance and make access to this assistance conditional on the avoidance of
an excessive government deficit in line with Article 126 of the Treaty on the
Functioning of the European Union (TFEU)[3].
These conditions aim to increase the incentives for national governments to
conduct sound fiscal policies, thus helping to put in place the right
macroeconomic conditions that are needed to ensure an efficient use of Cohesion
Fund resources. Specifically, Article 4(1) of Council Regulation (EC) No 1084/2006
of 11 July 2006 establishing a Cohesion Fund and repealing Regulation (EC) No 1164/94
establishes that the Council may decide, on a proposal from the Commission, to
suspend part or the totality of commitment appropriations from the Fund for the
Member State concerned when: (i) this Member State is in an excessive deficit
procedure (EDP), and (ii) has not taken effective action in response to a
Council recommendation under Article 126(7) TFEU[4]
to correct it by the established deadline. The trigger point for suspension of
commitment appropriations is therefore a Council decision adopted on the basis
of Article 126(8) TFEU[5].

The decision on the amount of Cohesion Fund
commitments to be suspended was aimed to ensure that the suspension was both
effective and proportionate, whilst taking into account the current overall
economic situation in the European Union and the relative importance of the
Cohesion Fund for the economy of the Member State concerned.

2.           Conditions for lifting the suspension of
Cohesion Fund commitments for Hungary

According to Article 4(2) of Regulation (EC)
No 1084/2006, the Council shall decide, without delay, to lift the suspension
of the commitments concerned if it establishes that the Member State concerned
has taken the necessary corrective action.

At the time of adoption of Council
Implementing Decision 2012/156/EU, the Commission issued the following
statement: "In order to facilitate the decision of the Council, the
Commission is committed to present to the Council without delay its assessment
of whether effective action has been taken, following adoption by the Hungarian
Government of corrective measures fulfilling the Council Recommendation of 13
March 2012 under Article 126(7) TFEU.". Moreover, in response to the
commitment by the Hungarian government that the necessary correction action
would be reflected in Hungary's convergence programme due in April 2012 and in
other related publicly available documents and decisions, the Council indicated
that it would return to this matter at its meeting of 22 June 2012 with a view
to lifting the suspension if the conditions are met.

2.1.        The Council Recommendation under Article 126(7) TFEU of 13
March 2012 to durably correct the excessive government deficit by 2012

In its new (the fifth) recommendation to Hungary under Article
126(7) TFEU, the Council established a postponed deadline of 2012 for bringing
the situation of an excessive deficit to an end in a
credible and sustainable manner. Specifically, the
Council asked the Hungarian authorities to: (i) ensure
the attainment of the 2012 deficit target of 2.5% of GDP, which based on the
Commission Services' February Interim Forecast would require an additional
fiscal effort of at least 0.5% of GDP that should be reached through the
further specification and implementation of already planned as well as further
consolidation measures of a structural nature as necessary; (ii) allocate
possible windfall gains for improving the headline balance; (iii) take
necessary additional measures of a structural nature as needed to ensure that
the deficit in 2013 remains well below the 3% of GDP threshold even after the
full phasing-out of one-off revenues of close to 1% of GDP; and (iv) incorporate
sufficient reserve provisions in the forthcoming budget laws. At the same time,
the Council underlined that the budgetary adjustment should contribute to
bringing the government debt ratio onto a declining path and that it also needed
to be supported by the proposed improvements in the fiscal governance
framework.

2.2.        The Commission assessment
of the action taken

Based on current information it appears
that Hungary has taken action representing adequate progress towards the
correction of the excessive deficit. In particular, despite the slight
weakening of the underlying macroeconomic environment as shown in the
Commission services' 2012 spring forecast, the budget deficit is expected to
reach 2.5% of GDP in 2012 and remain well below the 3% of GDP reference value
in 2013 as recommended by the Council in March. The new measures announced in
the context of the convergence programme imply additional structural measures
of 0.3% of GDP and an improvement of the structural balance by 1⁄4% of GDP in
2012 compared to the assessment underlying the Council's March 2012
recommendations. This is somewhat lower than the recommended additional fiscal
effort of 0.5% of GDP but can considered as broadly acceptable, taking into
account the revisions to potential GDP growth and that projected revenues are
lower than what could be usually expected based on standard tax elasticities.
The use of windfall revenues to improve on the target and the incorporation of
sufficient reserve provisions in the forthcoming budgets will yet need to be
demonstrated. Based on the Spring 2012 forecast, the general government debt is
expected to decrease to 78.5% of GDP in 2012 and slightly further in 2013.
Finally, some progress has been made on enhancing the fiscal governance
framework, but important reforms are still to be designed and adopted before
the end of the Spring session of Parliament. Against this background, and also
in light of the recent worse-than-expected first quarter growth data, the
Commission will continue to closely monitor budgetary developments in Hungary in accordance with the Treaty and the Stability and Growth Pact, in particular in
the light of the prolonged history of this excessive deficit procedure. The
bi-annual EDP reports by the government will be one of the sources of
information for this purpose.

3.           proposed lifting of the suspension of
commitments from the Cohesion Fund for Hungary

The Commission, having taken into account
its assessment of the action taken by Hungary in response of the Council
Recommendation under Article 126(7) TFEU of 13 March 2012 with a view to
bringing the situation of excessive government deficit to an end by 2012 is of
the opinion that the conditions for lifting the suspension of commitments from
the Cohesion Fund are met.

Accordingly, the Commission proposes to the
Council to lift the suspension of commitments from the Cohesion Fund laid down
in Council Implementing Decision 2012/156/EU.

The Commission will continue to closely monitor
fiscal developments in Hungary, as foreseen under Article 10 of Council
Regulation 1467/97 of 7 July 1997 on speeding up and clarifying the
implementation of the excessive deficit procedure, including on the basis of
the bi-annual EDP reports produced by the Government, and in the context of
post-programme surveillance exercise after the expiry of the financial
assistance made available pursuant to Council Decision 2009/102/EC of 4
November 2008 providing Community medium-term financial assitance for Hungary[6] or under any new Union
financial assistance programme for Hungary that the Council may approve. If at
any moment in time, before abrogation under Article 126(12) TFEU, action taken
is proving inadequate, the Commission will recommend to the Council to adopt a
new Decision under Article 126(8) and may propose to the Council to adopt a
decision to suspend Cohesion Fund commitments.

2012/0144 (NLE)

Proposal for a

COUNCIL IMPLEMENTING DECISION

lifting the suspension of commitments from
the Cohesion Fund for Hungary

THE
COUNCIL OF THE EUROPEAN UNION,

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

Having regard to
Council Regulation (EC) No 1084/2006 of 11 July 2006 establishing a Cohesion
Fund and repealing Regulation (EC) No 1164/94[7],
and in particular Article 4(2) thereof,

Having regard to the
proposal from the European Commission,

Whereas:

(1)       Article 4 of Regulation
(EC) No 1084/2006 sets out conditions applicable to Cohesion Fund assistance.
According to Paragraph 1 of this article, the Council may decide to suspend
either the totality or part of the commitments from the Fund for the Member
State concerned with effect from 1 January of the year following the decision
to suspend if it has established in accordance with Article 126(8) TFEU that
the Member State concerned has not taken effective action in response to a
Council recommendation made under Article 126(7) TFEU[8].

(2)       On
5 July 2004, by Decision 2004/918/EC[9] the
Council decided in accordance with Article 104(6) of the Treaty establishing
the European Community (TEC) that an excessive deficit existed in Hungary. The Council adopted a first recommendation on 5 July 2004,
a second recommendation on 8 March 2005 and a third recommendation on 10
October 2006 addressed to Hungary in accordance with Article 104(7) TEC. On 7
July 2009 the Council adopted its fourth recommendation to Hungary in
accordance with Article 104(7) TEC ('Council Recommendation of 7 July 2009'),
with a view to bringing an end to the situation of an excessive government
deficit by 2011 at the latest.

(3)       On 24 January 2012 the Council adopted Decision 2012/139/EU[10] in accordance with Article 126(8) TFEU, establishing that Hungary had not taken effective action to correct
the excessive government deficit in response to the Council Recommendation of 7
July 2009 within the period laid down therein.

(4)       On 13 March 2012, by
Implementing Decision 2012/156/EU[11],
the Council decided to suspend part of the commitments from the Cohesion Fund with
effect from 1 January 2013 in accordance with Article 4 of Regulation (EC) No
1084/2006. The decision on the amount of Cohesion Fund commitments to be
suspended aimed to ensure that the suspension was both effective and proportionate,
whilst taking into account the current overall economic situation in the
European Union and the relative importance of the Cohesion Fund for the economy
of the Member State concerned. The Council considered appropriate, in the case
of a first application of Article 4(1) of Regulation (EC) No 1084/2006 to a
given Member State, to set the amount at 50% of the allocation of the Cohesion
Fund for 2013, without exceeding the maximum level of 0.5% of the nominal GDP
of the Member State concerned as forecast by the Commission services.
Accordingly, the Council decided to suspend EUR 495 184 000 commitments from
the Cohesion Fund for Hungary with effect from 1 January 2013.

(5)       On the same day, the
Council issued a revised recommendation to Hungary in accordance with Article
126(7) TFEU ('Council Recommendation of 13 March 2012'), setting 2012 as
deadline for bringing the situation of an excessive government deficit to an
end. Specifically, Hungary was recommended to: (i) undertake an additional
fiscal effort of at least 1⁄2% of GDP, based on the further specification and
implementation of consolidation measures of a structural nature, to ensure the
attainment of the 2012 deficit target of 2.5% of GDP; (ii) allocate possible
windfall gains for improving the headline balance; (iii) take necessary
additional measures of a structural nature as needed to ensure that the deficit
in 2013 remains well below the 3% of GDP threshold; and (iv) incorporate
sufficient reserve provisions in the forthcoming budget laws. At the same time,
the Council underlined that the budgetary adjustment should contribute to
bringing the government debt ratio onto a declining path and that it also needed
to be supported by the proposed improvements in the fiscal governance framework.

(6)       On 23 April 2012, Hungary submitted the annual update of its convergence programme outlining its budgetary
strategy to ensure the sustainable correction of the excessive deficit by the
2012 deadline. The official deficit targets and the planned fiscal efforts
comply with the Council Recommendation under Article 126(7) TFEU of 13 March
2012. The programme confirms the previous medium-term objective of 1.5% of GDP,
which it plans to achieve by 2013. According to the update, the public debt is
continuously reduced throughout the programme period to 77% of GDP in 2013 and
below 73% of GDP in 2015. As regards fiscal governance reform, the authorities
announced that they will submit to the Parliament the necessary amendments
during the spring session.

(7)       Based on publicly
available information, the Commission concluded in its Communication of 30 May
2012[12]
that Hungary has taken the necessary corrective action, representing adequate
progress towards the correction of the excessive deficit. In particular, the
budget deficit is expected to reach 2.5% of GDP in 2012 and remain well below
the 3% of GDP reference value in 2013, as recommended by the Council in March.
Specifically, taking also into account all publicly available information
provided by the government since mid-March, the 2013 deficit is foreseen by the
Commission services to reach 2.7% of GDP. Considering also the effect of
revisions to potential GDP growth and the projected deviation from standard tax
elasticities, the fiscal effort in 2012 can be considered to be broadly in line
with what was required. The use of windfall revenues and the incorporation of
sufficient reserve provisions in the forthcoming budgets will yet need to be
demonstrated. Based on the Spring 2012 forecast, the general government debt is
expected to decrease to 78.5% of GDP in 2012 and slightly further in 2013.
Finally, some progress has been made on enhancing the fiscal governance
framework, but important reforms are still to be designed and adopted before
the end of the Spring session of Parliament. Against this background and also
in light of the recent worse-than-expected first quarter growth data, the
Commission will continue to closely monitor budgetary developments in Hungary.

(8)       Overall, Hungary has taken the necessary corrective action in response to the Council Recommendation of 13
March 2012 to correct the excessive deficit by the deadline set by the Council.
Therefore, Council Implementing Decision 2012/156/EU suspending part of the
commitments from the Cohesion Fund should be abrogated.

(9)       If at any moment in time,
before the abrogation of the decision on the existence of an excessive deficit in
accordance with Article 126(12) TFEU, action taken is proving inadequate, the
Council will, based on a recommendation by the Commission, adopt a new Decision
under Article 126(8) TFEU. It may, on a proposal by the Commission, adopt a
decision to suspend Cohesion Fund commitments,

HAS ADOPTED THIS DECISION:

Article 1

The partial suspension of commitments from
the Cohesion Fund for Hungary laid down in Council Implementing Decision No
2012/156/EU is hereby lifted.

Article 2

This Decision is addressed to Hungary.

Done at Brussels,

For
the Council

The
President

[1]               OJ L 78, 17.03.2012, p. 19.

[2]               OJ L 66, 6.3.2012, p. 6.

[3]               Replacing Article 104 of the Treaty establishing the
European Community (TEC) as referred to in Article 4 of Regulation (EC) No
1084/2006.

[4]               Replacing Article 104(7) TEC as referred to in
Article 4 of Regulation (EC) No 1084/2006.

[5]               Replacing Article 104(8) TEC as referred to in
Article 4 of Regulation (EC) No 1084/2006.

[6]               OJ L 37, 6.2.2009, p. 5.

[7]               OJ L 210, 31.7.2006, p. 79.

[8]               Replacing Article 104 of the Treaty establishing the
European Community (TEC) as referred to in Article 4 of Regulation (EC) No
1084/2006.

[9]               OJ L 389, 30.12.2004, p. 27.

[10]             OJ L 66, 6.3.2012, p. 6.

[11]             OJ L 78, 17.3.2012, p. 19.

[12]             COM(2012) XXXLINK TO BE
INSERTED HERE AFTER THE 30TH OF MAY