# CE2004078EN.01043601.xml

| 27.3.2004 | EN | Official Journal of the European Union | CE 78/436 |
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27.3.2004

EN

Official Journal of the European Union

CE 78/436

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(2004/C 78 E/0458)

WRITTEN QUESTION E-2832/03

by Camilo Nogueira Román (Verts/ALE) to the Commission

(23 September 2003)

Subject:   Compliance with of the Stability and Growth Pact

Subject:

What is the overall situation regarding compliance by the Member States with the Stability and Growth Pact, given the difficulties experienced by large economies like France and Germany in keeping within the 3 % budget deficit limit? How does the Commission view the fact that some countries are succeeding in keeping their deficits within these limits by externalising a significant proportion of state investments through public companies or introducing drastic cuts in welfare spending?

Answer given by Mr Solbes Mira on behalf of the Commission

(12 January 2004)

(12 January 2004)

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) of the EC Treaty 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 Portugal. In the second half of this year it has become clear that the action taken by Germany and France would not be sufficient to correct the excessive deficit by 2004- as required by the respective Council recommendations of January 2003 and June 2003 — although Germany complied with the recommendation for 2003. This was due to a large part to a more prolonged slowdown than expected, but also to additional measures taken by governments worsening the situation. That has prompted the Commission to go ahead with the procedures foreseen by the Treaty (Article 104.8 and 104.9) in order to request France and Germany to take the necessary measures. The Commission has taken the latest developments carefully into consideration, and come forward with new recommendations which were based on a balanced view of the actual circumstances. It has therefore recommended to the Council to give an additional year to Germany and France to correct the deficit, while suggesting a credible consolidation step in 2004 in order to bring the deficit below 3 % of GDP in 2005. However, the majority required for the adoption of the Commission recommendations was not reached in the Ecofin Council meeting of 25 November 2003. After this event, the Council decided to take an unprecedented step by finding an agreement outside the Treaty. The Commission has clearly expressed its disagreement with the Council, in particular with the procedure adopted by the Council.

The Commission will continue to apply the Treaty and the Regulations of the Pact. Doing so is the best guarantee that all member States are treated equally and to ensure sound public finances in all countries. The Commission will make sure that procedures are applied in a non-partisan fashion and enforced appropriately.

The interaction between the Union's budgetary rules and public investment has been investigated in detail in the report ‘Public Finances in the Economic and Monetary Union (EMU) 2003’, and its conclusions are reflected in the accompanying Communication from the Commission to the Council and the Parliament (1). It shows that the decline in public investment rates is a long-run tendency that started already in the 1970s, and affected all industrial countries and not just Member States. Declining levels of public investment as a share of GDP have been attributed to several factors, including changing boundaries between public and private investment which is in part linked to the process of privatisation. Some of the decline in public investment appears to be related to efforts to consolidate public finances, which was necessary irrespective of EMU due to high and increasing debt levels. A careful analysis of the data, however, fails to show any clear-cut link between change in investment ratio and the provisions of the Union's framework for fiscal surveillance. Indeed public investment expenditures in many Member States have stopped falling after the beginning of monetary union.

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Alternative forms of funding traditional investment might be appropriate, from fully private to mixed forms with the involvement of the public sector. The most known are Public Private Partnerships (PPPs) that have a sound microeconomic rationale as they can shape incentives in such a way as to achieve cost efficiency without compromising public objectives relating to the quality and characteristics of the services provided by the investment. It is important that Member States select projects on the basis of their micro-economic rationale and not solely on their possible implications for public finances.

The choice regarding the composition of public finances (including both investment and welfare spending) is in the hands of the Member States.

However, the Union provides guidance through Union policy co-ordination instruments, in particular through the Broad Economic Policy Guidelines.

The last ones adopted by the Council on 26 June 2003 address the need to:

| (i) | redirect public expenditure towards growth — enhancing cost — effective investment in physical and human capital and knowledge; |
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(i)

redirect public expenditure towards growth — enhancing cost — effective investment in physical and human capital and knowledge;

| (ii) | ensure long-run sustainability of public finances; and |
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(ii)

ensure long-run sustainability of public finances; and

| (iii) | ensure social sustainability. |
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(iii)

ensure social sustainability.

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(1)  COM(2003) 283 final.

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