# CE2004065EN.01020001.xml

| 13.3.2004 | EN | Official Journal of the European Union | CE 65/200 |
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13.3.2004

EN

Official Journal of the European Union

CE 65/200

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(2004/C 65 E/217)

WRITTEN QUESTION E-2720/03

by Erik Meijer (GUE/NGL) to the Commission

(11 September 2003)

Subject:   Measures to safeguard EU plans for a dynamic knowledge society in 2010 from unintended negative effects of the Stability Pact

Subject:

| 1. | Is the Commission aware that the German newspaper Handelsblatt and subsequently the Netherlands newspaper Staatscourant of 14 August 2003 report that Commissioner Diamantopoulou believes that the European Growth and Stability Pact will in future pose a serious threat to education and scientific research budgets in EU Member States as result of the 3 % ceiling on budget deficits, making it impossible to achieve the target established in Lisbon in 2000 of making the EU the world's most dynamic knowledge economy by 2010? |
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1.

Is the Commission aware that the German newspaper Handelsblatt and subsequently the Netherlands newspaper Staatscourant of 14 August 2003 report that Commissioner Diamantopoulou believes that the European Growth and Stability Pact will in future pose a serious threat to education and scientific research budgets in EU Member States as result of the 3 % ceiling on budget deficits, making it impossible to achieve the target established in Lisbon in 2000 of making the EU the world's most dynamic knowledge economy by 2010?

| 2. | Is the Commission aware that Mrs Diamantopoulou is advocating that this serious problem should be solved by no longer counting government investment in education and research for the purposes of the ceilings established in the Stability Pact? |
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2.

Is the Commission aware that Mrs Diamantopoulou is advocating that this serious problem should be solved by no longer counting government investment in education and research for the purposes of the ceilings established in the Stability Pact?

| 3. | Can the Commission confirm that a virtually insoluble situation is likely to arise now that Germany, France, Italy and Portugal no longer appear to be able to keep to the 3 % ceiling in the longer term, new Member States with a weak budget position are about to join the EU and the heavy fines that have to be imposed on those who exceed the ceiling are in danger of exacerbating the situation? |
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3.

Can the Commission confirm that a virtually insoluble situation is likely to arise now that Germany, France, Italy and Portugal no longer appear to be able to keep to the 3 % ceiling in the longer term, new Member States with a weak budget position are about to join the EU and the heavy fines that have to be imposed on those who exceed the ceiling are in danger of exacerbating the situation?

| 4. | Does the Commission agree with Commissioner Diamantopoulou that no one seems to have the courage to take the necessary steps to revise the 3 % rule which has become unworkable and that as a result Member States are resorting to unilateral action to the detriment of the EU economy? |
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4.

Does the Commission agree with Commissioner Diamantopoulou that no one seems to have the courage to take the necessary steps to revise the 3 % rule which has become unworkable and that as a result Member States are resorting to unilateral action to the detriment of the EU economy?

| 5. | Is the Commission using its own right of initiative to break this deadlock or is it waiting for the Italian Presidency or subsequent presidencies of the Council to take action? |
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5.

Is the Commission using its own right of initiative to break this deadlock or is it waiting for the Italian Presidency or subsequent presidencies of the Council to take action?

| 6. | How long does the Commission anticipate it will take before the urgently needed changes are actually made to the Stability Pact, for instance by adopting the method proposed by Commissioner Diamantopoulou? |
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6.

How long does the Commission anticipate it will take before the urgently needed changes are actually made to the Stability Pact, for instance by adopting the method proposed by Commissioner Diamantopoulou?

Answer given by Mr Solbes Mira on behalf of the Commission

(5 November 2003)

(5 November 2003)

| 1. | The Commission believes that Member States should improve the quality of their spending in order to fulfil their investment commitments in research and education within the framework of the Stability and Growth Pact. |
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1.

The Commission believes that Member States should improve the quality of their spending in order to fulfil their investment commitments in research and education within the framework of the Stability and Growth Pact.

| 2. | The Commission is aware of the Member of the Commission responsible for Employement and Social affairs' personal views.
  However, the Commission position is that not counting any specific type of expenditure for the purpose of the ceilings established in the Pact would not be in line with existing regulations. Moreover, it would not be justified on economic grounds since in any case all expenditures need to be financed. Leaving out of the Union fiscal rules one or various expenditure items would lead to increased deficits thus putting at risk the sustainability of public finances. All Member States face huge challenges resulting from ageing population and thus ensuring the sustainability of public finances is crucial. Furthermore, any decision about possible priority expenditure items would risk to be detrimental for other expenditure that may be contributing as well to the Lisbon objectives. |
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2.

The Commission is aware of the Member of the Commission responsible for Employement and Social affairs' personal views.

However, the Commission position is that not counting any specific type of expenditure for the purpose of the ceilings established in the Pact would not be in line with existing regulations. Moreover, it would not be justified on economic grounds since in any case all expenditures need to be financed. Leaving out of the Union fiscal rules one or various expenditure items would lead to increased deficits thus putting at risk the sustainability of public finances. All Member States face huge challenges resulting from ageing population and thus ensuring the sustainability of public finances is crucial. Furthermore, any decision about possible priority expenditure items would risk to be detrimental for other expenditure that may be contributing as well to the Lisbon objectives.

| 3. | The deterioration in fiscal positions reflects to some extent the present weak economic situation. Gross domestic product (GDP) growth has been more subdued than projected in spring and several countries of the euro area have been in a technical recession. However, an important part of the slippage also derives from past policy inaction or from deficit increasing measures. The situation in the three Member States that are in the Excessive Deficit Procedure is of particular concern. The Council issued recommendations under Article 104(7) to Germany, France and Portugal, setting deadlines for taking corrective action and a deadline for the correction of the excessive deficit of 2003 for Portugal and 2004 for Germany and France. On the basis of the latest data on 2003 budgetary outcome and budgets for 2004, the Commission will have to assess the situation in Germany and Portugal. France had a deadline of 3 October 2003 to take effective corrective action according to the 104(7) Council recommendation. The Council, on the basis of the Commission recommendation of 8 October 2003, now has to decide whether France has complied with the recommendation under 104(7) Council recommendation. If the Council establishes that there has been no effective action in response to its recommendations, it may decide to give notice (Article 104(9)) to the Member State to take, within a specified time-limit, measures for the deficit reduction which is judged necessary by the Council in order to remedy the situation. In such a case, the Council may request the Member State concerned to submit reports in order to examine the adjustment efforts of that Member State. If a Member State fails to comply with the Council recommendations given under 104(9), the Council may decide to impose sanctions (Article 104(11)). In that case, the sanction will be a non-interest bearing deposit. The size of this deposit is defined in the Council Regulation (EC) No 1467/97 (1), Article 12, on speeding up and clarifying the implementation of the excessive deficit procedure. Such a deposit could not be considered in financial terms as a heavy sanction, and it would only be converted into a fine after two years if the deficit has not been corrected.
  As can be derived from the above, sanctions are not an immediate measure once a Member State experiences a deficit above 3 % of GDP. The EC Treaty foresees an interaction between the Council and the Member State concerned that gives quite a sufficient period of time to the Member State to correct the deficit. The EC Treaty provides for an increasing peer pressure being exercised by the Council in order to bring the deficit of the Member State concerned below the 3 % of GDP reference value.
  With respect to the entrance of the new Member States to the Union, it should be noted that aggregate figures tend to hide large differences in fiscal positions between individual countries. In 2001, the so-called Pre-Accession Fiscal Surveillance Procedure was established in order to prepare the candidate countries for the participation in the multilateral surveillance procedures currently in place within the Union. Most accession countries plan to reduce their budget deficits within a medium term context: the Pre-accession Economic Programmes foresee a reduction in the aggregate deficit for the accession countries from 3,8 % of GDP in 2001 to 2,7 % of GDP in 2005. It is also worthwhile to mention that on average, acceding countries have a lower debt level than current Member States, 36,9 % of GDP compared to 62,8 % of GDP respectively in 2001. |
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3.

The deterioration in fiscal positions reflects to some extent the present weak economic situation. Gross domestic product (GDP) growth has been more subdued than projected in spring and several countries of the euro area have been in a technical recession. However, an important part of the slippage also derives from past policy inaction or from deficit increasing measures. The situation in the three Member States that are in the Excessive Deficit Procedure is of particular concern. The Council issued recommendations under Article 104(7) to Germany, France and Portugal, setting deadlines for taking corrective action and a deadline for the correction of the excessive deficit of 2003 for Portugal and 2004 for Germany and France. On the basis of the latest data on 2003 budgetary outcome and budgets for 2004, the Commission will have to assess the situation in Germany and Portugal. France had a deadline of 3 October 2003 to take effective corrective action according to the 104(7) Council recommendation. The Council, on the basis of the Commission recommendation of 8 October 2003, now has to decide whether France has complied with the recommendation under 104(7) Council recommendation. If the Council establishes that there has been no effective action in response to its recommendations, it may decide to give notice (Article 104(9)) to the Member State to take, within a specified time-limit, measures for the deficit reduction which is judged necessary by the Council in order to remedy the situation. In such a case, the Council may request the Member State concerned to submit reports in order to examine the adjustment efforts of that Member State. If a Member State fails to comply with the Council recommendations given under 104(9), the Council may decide to impose sanctions (Article 104(11)). In that case, the sanction will be a non-interest bearing deposit. The size of this deposit is defined in the Council Regulation (EC) No 1467/97 (1), Article 12, on speeding up and clarifying the implementation of the excessive deficit procedure. Such a deposit could not be considered in financial terms as a heavy sanction, and it would only be converted into a fine after two years if the deficit has not been corrected.

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As can be derived from the above, sanctions are not an immediate measure once a Member State experiences a deficit above 3 % of GDP. The EC Treaty foresees an interaction between the Council and the Member State concerned that gives quite a sufficient period of time to the Member State to correct the deficit. The EC Treaty provides for an increasing peer pressure being exercised by the Council in order to bring the deficit of the Member State concerned below the 3 % of GDP reference value.

With respect to the entrance of the new Member States to the Union, it should be noted that aggregate figures tend to hide large differences in fiscal positions between individual countries. In 2001, the so-called Pre-Accession Fiscal Surveillance Procedure was established in order to prepare the candidate countries for the participation in the multilateral surveillance procedures currently in place within the Union. Most accession countries plan to reduce their budget deficits within a medium term context: the Pre-accession Economic Programmes foresee a reduction in the aggregate deficit for the accession countries from 3,8 % of GDP in 2001 to 2,7 % of GDP in 2005. It is also worthwhile to mention that on average, acceding countries have a lower debt level than current Member States, 36,9 % of GDP compared to 62,8 % of GDP respectively in 2001.

| 4. | The Commission considers that the budgetary goals and rule of the EC Treaty and the Stability and Growth Pact remain valid. A budget position of ‘close to balance or in surplus’ provides an appropriate framework for prudent budgetary management that is in the economic self-interest of all countries. The budgetary objective of ‘close to balance or in surplus’ provides ample room to allow the automatic stabilisers to operate fully in response to economic downturns and to cope with the budgetary impact of major reforms. It is also an appropriate medium and long-term goal, given high debt levels in many countries, substantial contingent liabilities and because ageing populations will lead to large increase in spending on pension and health. All these challenges can only be met if countries make sustained efforts to run down public debt in the coming decade.
  In addition, both the Commission and the Council agree that both public and private sector will have to contribute if the Lisbon goals are to be achieved. In the area of public finances, governments can contribute by spending public money as efficiently as possible, by redirecting public expenditure towards growth-enhancing cost-effective expenditure subject to overall budgetary constraints, and by seeking a higher leverage of public support on private investment. Indeed, this is the reasoning behind guideline No 14 of the Broad Economic Policy Guidelines adopted by the Council on 26 June 2003. This guideline contains several ways in which the public sector should enhance its contribution to growth, one being ‘by redirecting, i.e. while respecting overall budgetary constraints, public expenditure towards growth-enhancing cost-effective investment in physical and human capital and knowledge’ (2). |
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4.

The Commission considers that the budgetary goals and rule of the EC Treaty and the Stability and Growth Pact remain valid. A budget position of ‘close to balance or in surplus’ provides an appropriate framework for prudent budgetary management that is in the economic self-interest of all countries. The budgetary objective of ‘close to balance or in surplus’ provides ample room to allow the automatic stabilisers to operate fully in response to economic downturns and to cope with the budgetary impact of major reforms. It is also an appropriate medium and long-term goal, given high debt levels in many countries, substantial contingent liabilities and because ageing populations will lead to large increase in spending on pension and health. All these challenges can only be met if countries make sustained efforts to run down public debt in the coming decade.

In addition, both the Commission and the Council agree that both public and private sector will have to contribute if the Lisbon goals are to be achieved. In the area of public finances, governments can contribute by spending public money as efficiently as possible, by redirecting public expenditure towards growth-enhancing cost-effective expenditure subject to overall budgetary constraints, and by seeking a higher leverage of public support on private investment. Indeed, this is the reasoning behind guideline No 14 of the Broad Economic Policy Guidelines adopted by the Council on 26 June 2003. This guideline contains several ways in which the public sector should enhance its contribution to growth, one being ‘by redirecting, i.e. while respecting overall budgetary constraints, public expenditure towards growth-enhancing cost-effective investment in physical and human capital and knowledge’ (2).

2

| 5. | The Commission has taken action to improve the Economic and Monetary Union (EMU) fiscal framework in the light of the experience of the first four years of EMU. On 27 November 2002, it adopted a Communication on strengthening the co-ordination of budgetary policies (3). This Communication contains concrete proposals to better take into account the economic cycle when assessing budgetary positions, to avoid pro-cyclical policies in good times, to ensure the sustainability of public finances, to enhance the contribution of public finances to growth and employment, and to improve the enforcement of the rules. The Ecofin Council broadly shared the view of the Commission and agreed with the Commission that there was no need to change the current legal framework and that improvements could be made to ensure an effective application of the rules. Both the Commission and the Council are now implementing the agreed approach. |
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5.

The Commission has taken action to improve the Economic and Monetary Union (EMU) fiscal framework in the light of the experience of the first four years of EMU. On 27 November 2002, it adopted a Communication on strengthening the co-ordination of budgetary policies (3). This Communication contains concrete proposals to better take into account the economic cycle when assessing budgetary positions, to avoid pro-cyclical policies in good times, to ensure the sustainability of public finances, to enhance the contribution of public finances to growth and employment, and to improve the enforcement of the rules. The Ecofin Council broadly shared the view of the Commission and agreed with the Commission that there was no need to change the current legal framework and that improvements could be made to ensure an effective application of the rules. Both the Commission and the Council are now implementing the agreed approach.

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| 6. | The Commission refers the Honourable Member to the answers given above. |
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6.

The Commission refers the Honourable Member to the answers given above.

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(1)  Council Regulation (EC) No 1467/97 of 7 July 1997 on speeding up and clarifying the implementation of the excessive deficit procedure, OJ L 209, 2.8.1997.

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(2)  This message has been particularly stressed in the Commission Communication of 10 January 2003 on ‘Investing efficiently in education and training: an imperative for Europe’.

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(3)  COM(2002) 668 final.

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