# Official Journal C 73/2008

| | ISSN 1725-2423 |
| --- | --- |
| Official Journal
  of the European Union | C 73 |
| | |
| English edition | Information and Notices | Volume 5119 March 2008 |

ISSN 1725-2423

Official Journal

of the European Union

C 73

English edition

Information and Notices

Volume 5119 March 2008

---

| Notice No | Contents | page |
| --- | --- | --- |
| | I   Resolutions, recommendations and opinions |
| | OPINIONS |
| | Council |
| 2008/C 073/01 | Council opinion of 4 March 2008 on the updated convergence programme of Bulgaria, 2007-2010 | 1 |
| 2008/C 073/02 | Council opinion of 4 March 2008 on the updated stability programme of Portugal, 2007-2011 | 6 |
| 2008/C 073/03 | Council opinion of 4 March 2008 on the stability programme of Cyprus, 2007-2011 | 10 |
| 2008/C 073/04 | Council opinion of 4 March 2008 on the updated convergence programme of Estonia, 2007-2011 | 14 |
| 2008/C 073/05 | Council opinion of 4 March 2008 on the updated convergence programme of Latvia, 2007-2010 | 18 |

Notice No

Contents

page

I   Resolutions, recommendations and opinions

OPINIONS

Council

2008/C 073/01

Council opinion of 4 March 2008 on the updated convergence programme of Bulgaria, 2007-2010

1

2008/C 073/02

Council opinion of 4 March 2008 on the updated stability programme of Portugal, 2007-2011

6

2008/C 073/03

Council opinion of 4 March 2008 on the stability programme of Cyprus, 2007-2011

10

2008/C 073/04

Council opinion of 4 March 2008 on the updated convergence programme of Estonia, 2007-2011

14

2008/C 073/05

Council opinion of 4 March 2008 on the updated convergence programme of Latvia, 2007-2010

18

| | IV   Notices |
| --- | --- |
| | NOTICES FROM EUROPEAN UNION INSTITUTIONS AND BODIES |
| | Council |
| 2008/C 073/06 | Council Decision of 17 March 2008 appointing one member of the Management Board of the European Chemicals Agency | 23 |
| | Commission |
| 2008/C 073/07 | Euro exchange rates | 24 |

IV   Notices

NOTICES FROM EUROPEAN UNION INSTITUTIONS AND BODIES

Council

2008/C 073/06

Council Decision of 17 March 2008 appointing one member of the Management Board of the European Chemicals Agency

23

Commission

2008/C 073/07

Euro exchange rates

24

| | V   Announcements |
| --- | --- |
| | PROCEDURES RELATING TO THE IMPLEMENTATION OF THE COMPETITION POLICY |
| | Commission |
| 2008/C 073/08 | Prior notification of a concentration (Case COMP/M.5125 — Marel/SFS) (
  1
  ) | 25 |
| | OTHER ACTS |
| | Commission |
| 2008/C 073/09 | Publication of an application pursuant to Article 6(2) of Council Regulation (EC) No 510/2006 on the protection of geographical indications and designations of origin for agricultural products and foodstuffs | 26 |

V   Announcements

PROCEDURES RELATING TO THE IMPLEMENTATION OF THE COMPETITION POLICY

Commission

2008/C 073/08

Prior notification of a concentration (Case COMP/M.5125 — Marel/SFS) (
  1
  )

1

25

OTHER ACTS

Commission

2008/C 073/09

Publication of an application pursuant to Article 6(2) of Council Regulation (EC) No 510/2006 on the protection of geographical indications and designations of origin for agricultural products and foodstuffs

26

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

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(1)   Text with EEA relevance

1

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

EN

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I Resolutions, recommendations and opinions

OPINIONS

Council

| 19.3.2008 | EN | Official Journal of the European Union | C 73/1 |
| --- | --- | --- | --- |

19.3.2008

EN

Official Journal of the European Union

C 73/1

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COUNCIL OPINION

of 4 March 2008

on the updated convergence programme of Bulgaria, 2007-2010

(2008/C 73/01)

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 9(3) thereof,

Having regard to the recommendation of the Commission,

After consulting the Economic and Financial Committee,

HAS DELIVERED THIS OPINION:

| (1) | On 4 March 2008, the Council examined the updated convergence programme of Bulgaria, which covers the period 2007 to 2010. |
| --- | --- |

(1)

On 4 March 2008, the Council examined the updated convergence programme of Bulgaria, which covers the period 2007 to 2010.

| (2) | Real GDP growth has been high at over 6 % per year since 2003, while large external deficits have accumulated. Accordingly, the general government balance has been raised from a position close to zero to a surplus of over 3 % of GDP in 2006, with the fiscal stance being counter-cyclical or broadly neutral since 2003. At the same time, monetary conditions have been accommodative within the context of the currency board framework. Strong economic growth has been accompanied with signs of overheating and increasing macroeconomic imbalances reflected in a widening external deficit, re-acceleration of bank credit growth, and rising inflation.
  However, the growing external deficits in Bulgaria reflect to a large extent an investment boom driven by considerable FDI inflows. Inflation was mainly triggered by externally induced increases of food and energy prices. However, with unemployment falling sharply, the labour market has tightened and in 2007 wage growth also accelerated considerably, clearly outpacing productivity growth for the first time in several years. If these developments were to continue, they could lead to an erosion of competitiveness and call into question the sustainability of high growth, even though, thanks to moderate real wage increases until 2006 and accumulated productivity gains since 1998, the cost competitiveness has been largely preserved. Looking ahead, Bulgaria is confronted with the challenges of tackling these imbalances while strengthening the conditions for sustained catching-up through maintaining prudent fiscal policy and wage moderation, improving the quality of public finance, ensuring financial sector stability, and stepping up structural reforms. |
| --- | --- |

(2)

Real GDP growth has been high at over 6 % per year since 2003, while large external deficits have accumulated. Accordingly, the general government balance has been raised from a position close to zero to a surplus of over 3 % of GDP in 2006, with the fiscal stance being counter-cyclical or broadly neutral since 2003. At the same time, monetary conditions have been accommodative within the context of the currency board framework. Strong economic growth has been accompanied with signs of overheating and increasing macroeconomic imbalances reflected in a widening external deficit, re-acceleration of bank credit growth, and rising inflation.

However, the growing external deficits in Bulgaria reflect to a large extent an investment boom driven by considerable FDI inflows. Inflation was mainly triggered by externally induced increases of food and energy prices. However, with unemployment falling sharply, the labour market has tightened and in 2007 wage growth also accelerated considerably, clearly outpacing productivity growth for the first time in several years. If these developments were to continue, they could lead to an erosion of competitiveness and call into question the sustainability of high growth, even though, thanks to moderate real wage increases until 2006 and accumulated productivity gains since 1998, the cost competitiveness has been largely preserved. Looking ahead, Bulgaria is confronted with the challenges of tackling these imbalances while strengthening the conditions for sustained catching-up through maintaining prudent fiscal policy and wage moderation, improving the quality of public finance, ensuring financial sector stability, and stepping up structural reforms.

| (3) | The macroeconomic scenario underlying the programme envisages that real GDP growth will pick up from 6,4 % in 2007 to 6,7 % on average over the rest of the programme period. Assessed against currently available information (2), this scenario appears to be based on broadly plausible growth assumptions, although slightly favourable especially towards the end of the programme period when growth in domestic demand, in particular investments, appears to be on the high side. Against the background of high real GDP growth, the programme projects limited progress towards nominal convergence with inflation remaining relatively high. Moreover, given the projected sustained wage pressures and planned increases in excise duties on tobacco the inflation projections appear to be on the low side in 2009 and 2010. Although the composition of growth is expected to become slightly more balanced on the back of higher export growth, the external deficit would widen further and is projected to peak at 20,75 % of GDP in 2008, which appears broadly plausible in light of recent developments. |
| --- | --- |

(3)

The macroeconomic scenario underlying the programme envisages that real GDP growth will pick up from 6,4 % in 2007 to 6,7 % on average over the rest of the programme period. Assessed against currently available information (2), this scenario appears to be based on broadly plausible growth assumptions, although slightly favourable especially towards the end of the programme period when growth in domestic demand, in particular investments, appears to be on the high side. Against the background of high real GDP growth, the programme projects limited progress towards nominal convergence with inflation remaining relatively high. Moreover, given the projected sustained wage pressures and planned increases in excise duties on tobacco the inflation projections appear to be on the low side in 2009 and 2010. Although the composition of growth is expected to become slightly more balanced on the back of higher export growth, the external deficit would widen further and is projected to peak at 20,75 % of GDP in 2008, which appears broadly plausible in light of recent developments.

| (4) | For 2007, the general government surplus is estimated at 3,1 % of GDP in the most recent update of the programme, against a target of 0,8 % of GDP set in the January 2007 convergence programme. This budget over-performance is entirely due to higher than expected revenues, while expenditure control was not fully maintained. Initially envisaged savings of 10 % of budgeted non-interest current expenditures were not implemented and an additional expenditure programme, mostly on infrastructure, of around 2,25 % of GDP was adopted in December 2007. Moreover, pensions were increased twice by 10 % in 2007 and thus by more than the 8,5 % implied by the indexation formula in place. Finally, wage pressures have also started to spill over into the public sector, with a clear acceleration of public sector wage growth in the second half of the year. On balance, however, the higher-than-planned budget surplus in 2007 can be regarded as in line with the invitation in the Council opinion of 27 March 2007 on the January 2007 convergence programme (3). In view of the continued strong revenue growth, the 2007 budgetary outturn could even be better than envisaged in the programme. |
| --- | --- |

(4)

For 2007, the general government surplus is estimated at 3,1 % of GDP in the most recent update of the programme, against a target of 0,8 % of GDP set in the January 2007 convergence programme. This budget over-performance is entirely due to higher than expected revenues, while expenditure control was not fully maintained. Initially envisaged savings of 10 % of budgeted non-interest current expenditures were not implemented and an additional expenditure programme, mostly on infrastructure, of around 2,25 % of GDP was adopted in December 2007. Moreover, pensions were increased twice by 10 % in 2007 and thus by more than the 8,5 % implied by the indexation formula in place. Finally, wage pressures have also started to spill over into the public sector, with a clear acceleration of public sector wage growth in the second half of the year. On balance, however, the higher-than-planned budget surplus in 2007 can be regarded as in line with the invitation in the Council opinion of 27 March 2007 on the January 2007 convergence programme (3). In view of the continued strong revenue growth, the 2007 budgetary outturn could even be better than envisaged in the programme.

| (5) | The medium-term budgetary strategy in the programme aims at maintaining a neutral fiscal stance over the entire programme period. The medium-term objective (MTO) presented in the programme has been revised from a balanced position in structural terms (i.e. cyclically adjusted net of one-off and other temporary measures) to a surplus of 1,5 % of GDP, which would be respected throughout the programme period. Although the MTO endorsed by the Council in its opinion on the original programme was already more demanding than required by the Pact, the significant upward revision is justified in the programme by the rising external imbalances, accelerating inflation and the projected population ageing impact. Both the general government balance and the primary balance are projected to remain stable over the programme period at a surplus of around 3 % and 4 % of GDP, respectively. According to the programme, revenue- and expenditure-to-GDP ratios will increase by around 1,75 pp. each over the programme period, with the adjustment occurring mainly in 2008. On the revenue side, the programme projects an increase of ‘other revenue’ by 2,25 % of GDP, mainly reflecting an increase in EU transfers over the programme period.
  In 2008, tax revenues are expected to increase by 1,25 % of GDP due to rate hikes on certain excises, improvements in tax compliance, and a favourable composition of growth. The introduction of the flat rate personal income tax is expected to be fully financed by a further de-shadowing of the informal economy and suppression of certain tax breaks. In 2009 and 2010, tax revenues and social contributions are expected drop slightly. Also, in 2008, social contributions are projected to decrease by 1 % of GDP due to a reduction in contribution rates, which should, however, be largely off-set by an increase in the contribution base. On the expenditure side, the programme projects a considerable restructuring, with capital expenditures increasing by around 2 % of GDP, increasingly financed by EU transfers, and ‘other expenditures’ by around 1,5 % of GDP over the programme period. This increase would be partly compensated by lower interest expenditures, lower social transfers and a reduction in the government wage bill thanks to planned reductions in public sector employment. Building on the better-than-expected 2007 outturn, the current budgetary targets are significantly more ambitious than in the January 2007 programme, also against the background of a somewhat stronger economic outlook. |
| --- | --- |

(5)

The medium-term budgetary strategy in the programme aims at maintaining a neutral fiscal stance over the entire programme period. The medium-term objective (MTO) presented in the programme has been revised from a balanced position in structural terms (i.e. cyclically adjusted net of one-off and other temporary measures) to a surplus of 1,5 % of GDP, which would be respected throughout the programme period. Although the MTO endorsed by the Council in its opinion on the original programme was already more demanding than required by the Pact, the significant upward revision is justified in the programme by the rising external imbalances, accelerating inflation and the projected population ageing impact. Both the general government balance and the primary balance are projected to remain stable over the programme period at a surplus of around 3 % and 4 % of GDP, respectively. According to the programme, revenue- and expenditure-to-GDP ratios will increase by around 1,75 pp. each over the programme period, with the adjustment occurring mainly in 2008. On the revenue side, the programme projects an increase of ‘other revenue’ by 2,25 % of GDP, mainly reflecting an increase in EU transfers over the programme period.

In 2008, tax revenues are expected to increase by 1,25 % of GDP due to rate hikes on certain excises, improvements in tax compliance, and a favourable composition of growth. The introduction of the flat rate personal income tax is expected to be fully financed by a further de-shadowing of the informal economy and suppression of certain tax breaks. In 2009 and 2010, tax revenues and social contributions are expected drop slightly. Also, in 2008, social contributions are projected to decrease by 1 % of GDP due to a reduction in contribution rates, which should, however, be largely off-set by an increase in the contribution base. On the expenditure side, the programme projects a considerable restructuring, with capital expenditures increasing by around 2 % of GDP, increasingly financed by EU transfers, and ‘other expenditures’ by around 1,5 % of GDP over the programme period. This increase would be partly compensated by lower interest expenditures, lower social transfers and a reduction in the government wage bill thanks to planned reductions in public sector employment. Building on the better-than-expected 2007 outturn, the current budgetary targets are significantly more ambitious than in the January 2007 programme, also against the background of a somewhat stronger economic outlook.

| (6) | The risks to the budgetary projections in the programme appear broadly balanced. Especially in view of growing external and internal imbalances, the macroeconomic scenario could be subject to certain risks. In addition, in 2008, revenue projections are subject to some uncertainty linked to the introduction of the flat-rate personal income tax. However, these risks would be balanced by a very strong track record in meeting budgetary targets and buffers on the expenditure side thanks to the budgeting of a contingency reserve. Moreover, for 2009 and 2010, the expected drop in tax revenue is not fully consistent with the underlying growth scenario and tax revenue could therefore turn out stronger than planned. |
| --- | --- |

(6)

The risks to the budgetary projections in the programme appear broadly balanced. Especially in view of growing external and internal imbalances, the macroeconomic scenario could be subject to certain risks. In addition, in 2008, revenue projections are subject to some uncertainty linked to the introduction of the flat-rate personal income tax. However, these risks would be balanced by a very strong track record in meeting budgetary targets and buffers on the expenditure side thanks to the budgeting of a contingency reserve. Moreover, for 2009 and 2010, the expected drop in tax revenue is not fully consistent with the underlying growth scenario and tax revenue could therefore turn out stronger than planned.

| (7) | In view of this risk assessment, the budgetary stance in the programme implies that the MTO is maintained by a large margin throughout the programme period. The fiscal policy stance implied by the programme is in line with the Stability and Growth Pact throughout the period. The envisaged neutral fiscal stance would avoid adding to the existing domestic and external macroeconomic imbalances. Given the limited scope of monetary policy within the framework of the currency board, saving any revenue over-performance could help reduce them. |
| --- | --- |

(7)

In view of this risk assessment, the budgetary stance in the programme implies that the MTO is maintained by a large margin throughout the programme period. The fiscal policy stance implied by the programme is in line with the Stability and Growth Pact throughout the period. The envisaged neutral fiscal stance would avoid adding to the existing domestic and external macroeconomic imbalances. Given the limited scope of monetary policy within the framework of the currency board, saving any revenue over-performance could help reduce them.

| (8) | In the absence of the long-term projections of age-related expenditures, based on the common macroeconomic assumptions as carried out by the EPC/Commission, it is not possible to assess the impact of population ageing in Bulgaria on a comparable and robust basis as it is currently done for the 25 Member States, for which the projections on this basis are available. While a significant impact of ageing on expenditure cannot be excluded given the current demographic structure, the budgetary position in 2007, with a large structural surplus, contributes significantly to reducing the already low level of debt. Maintaining high primary surpluses over the medium-term would contribute to limiting risks to the sustainability of public finances. |
| --- | --- |

(8)

In the absence of the long-term projections of age-related expenditures, based on the common macroeconomic assumptions as carried out by the EPC/Commission, it is not possible to assess the impact of population ageing in Bulgaria on a comparable and robust basis as it is currently done for the 25 Member States, for which the projections on this basis are available. While a significant impact of ageing on expenditure cannot be excluded given the current demographic structure, the budgetary position in 2007, with a large structural surplus, contributes significantly to reducing the already low level of debt. Maintaining high primary surpluses over the medium-term would contribute to limiting risks to the sustainability of public finances.

| (9) | The convergence programme seems to be broadly consistent with the March 2007 national reform programme and the October 2007 implementation report. In particular, the budgetary strategy and the measures envisaged to promote the quality of public expenditures, including through further implementation of programme budgeting, are fully in line with the priorities identified in the national reform programme. Few concrete steps to improve the efficiency and quality of public spending on healthcare are foreseen. The update seems to reflect public finance implications of the reforms envisaged in the national reform programme. This concerns in particular the planned increase in infrastructure investment. However, the update provides relatively little information on the direct budgetary costs of key measures, such as those linked to strengthening administrative capacity or active labour market policy. |
| --- | --- |

(9)

The convergence programme seems to be broadly consistent with the March 2007 national reform programme and the October 2007 implementation report. In particular, the budgetary strategy and the measures envisaged to promote the quality of public expenditures, including through further implementation of programme budgeting, are fully in line with the priorities identified in the national reform programme. Few concrete steps to improve the efficiency and quality of public spending on healthcare are foreseen. The update seems to reflect public finance implications of the reforms envisaged in the national reform programme. This concerns in particular the planned increase in infrastructure investment. However, the update provides relatively little information on the direct budgetary costs of key measures, such as those linked to strengthening administrative capacity or active labour market policy.

| (10) | As regards the data requirements specified in the code of conduct for stability and convergence programmes, the programme provides almost all required and most of the optional data (4). |
| --- | --- |

(10)

As regards the data requirements specified in the code of conduct for stability and convergence programmes, the programme provides almost all required and most of the optional data (4).

The overall conclusion is that the programme aims at maintaining a sound budgetary position throughout the period, planning the continuation of high general government surpluses. The budgetary targets seem plausible. The programme proposes a significant upward revision of the MTO from a balanced structural position to a surplus of 1,5 % of GDP, which will be comfortably met throughout the programme period. Safeguarding macroeconomic stability and sustaining catching-up in a context of rising external imbalances and high inflation requires the continuation of tight fiscal policies, further improvements in the quality of public spending, including in healthcare, and fiscal institutions and a public sector wage policy that contributes to overall wage moderation in line with productivity gains.

In view of the above assessment and also given the need to ensure sustainable convergence, Bulgaria is invited to:

| (i) | continue avoiding a pro-cyclical fiscal stance with a view to help contain existing external imbalances, notably by saving any budgetary over-performance and containing expenditure growth; |
| --- | --- |

(i)

continue avoiding a pro-cyclical fiscal stance with a view to help contain existing external imbalances, notably by saving any budgetary over-performance and containing expenditure growth;

| (ii) | strengthen policies to contain inflationary pressures, including through prudent public sector wage policy contributing to wage moderation; |
| --- | --- |

(ii)

strengthen policies to contain inflationary pressures, including through prudent public sector wage policy contributing to wage moderation;

| (iii) | further strengthen the efficiency of public spending, in particular through full implementation of programme budgeting, reinforced administrative capacity and reforms in the areas of labour market, education and healthcare. |
| --- | --- |

(iii)

further strengthen the efficiency of public spending, in particular through full implementation of programme budgeting, reinforced administrative capacity and reforms in the areas of labour market, education and healthcare.

Comparison of key macroeconomic and budgetary projections

| | 2006 | 2007 | 2008 | 2009 | 2010 |
| --- | --- | --- | --- | --- | --- |
| Real GDP
  (% change) | CP Dec 2007 | 6,1 | 6,4 | 6,4 | 6,8 | 6,9 |
| COM Nov 2007 | 6,1 | 6,3 | 6,0 | 6,2 | n.a. |
| CP Jan 2007 | 5,9 | 5,9 | 6,2 | 6,1 | n.a. |
| HICP inflation
  (%) | CP Dec 2007 | 7,4 | 7,2 | 6,9 | 4,4 | 3,7 |
| COM Nov 2007 | 7,4 | 7,1 | 7,3 | 5,8 | n.a. |
| CP Jan 2007 | 7,4 | 4,0 | 3,0 | 3,0 | n.a. |
| Output gap (5)

  (% of potential GDP) | CP Dec 2007 | 0,8 | 0,6 | 0,0 | – 0,4 | – 0,2 |
| COM Nov 2007 (6) | 1,1 | 0,7 | – 0,1 | – 0,6 | n.a. |
| CP Jan 2007 | 0,1 | – 0,4 | – 0,8 | – 1,0 | n.a. |
| Net lending/borrowing vis-à-vis the rest of the world
  (% of GDP) | CP Dec 2007 | – 15,0 | – 19,9 | – 20,7 | – 19,5 | – 18,6 |
| COM Nov 2007 | – 15,0 | – 17,0 | – 16,0 | – 15,8 | n.a. |
| CP Jan 2007 | – 14,1 | – 13,6 | – 12,8 | – 12,4 | n.a. |
| General government balance
  (% of GDP) | CP Dec 2007 | 3,2 | 3,1 | 3,0 | 3,0 | 3,0 |
| COM Nov 2007 | 3,2 | 3,0 | 3,1 | 3,1 | n.a. |
| CP Jan 2007 | 3,2 | 0,8 | 1,5 | 1,5 | n.a. |
| Primary balance
  (% of GDP) | CP Dec 2007 | 4,6 | 4,3 | 4,0 | 4,0 | 4,0 |
| COM Nov 2007 | 4,6 | 4,1 | 4,1 | 4,0 | n.a. |
| CP Jan 2007 | 4,6 | 2,2 | 2,8 | 2,7 | n.a. |
| Cyclically-adjusted balance (5)

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

  (% of GDP) | CP Dec 2007 | 2,9 | 2,9 | 3,0 | 3,1 | 3,1 |
| COM Nov 2007 | 2,9 | 2,9 | 3,1 | 3,3 | n.a. |
| CP Jan 2007 | 3,2 | 1,0 | 1,9 | 2,0 | n.a. |
| Government gross debt
  (% of GDP) | CP Dec 2007 | 22,8 | 19,8 | 18,3 | 17,4 | 16,9 |
| COM Nov 2007 | 22,8 | 19,3 | 15,9 | 12,9 | n.a. |
| CP Jan 2007 | 25,3 | 22,7 | 22,3 | 21,1 | n.a. |
| Convergence programme (CP); Commission services' autumn 2007 economic forecasts (COM); Commission services' calculations. |

2006

2007

2008

2009

2010

Real GDP

(% change)

CP Dec 2007

6,1

6,4

6,4

6,8

6,9

COM Nov 2007

6,1

6,3

6,0

6,2

n.a.

CP Jan 2007

5,9

5,9

6,2

6,1

n.a.

HICP inflation

(%)

CP Dec 2007

7,4

7,2

6,9

4,4

3,7

COM Nov 2007

7,4

7,1

7,3

5,8

n.a.

CP Jan 2007

7,4

4,0

3,0

3,0

n.a.

Output gap (5)

(% of potential GDP)

CP Dec 2007

0,8

0,6

0,0

– 0,4

– 0,2

COM Nov 2007 (6)

1,1

0,7

– 0,1

– 0,6

n.a.

CP Jan 2007

0,1

– 0,4

– 0,8

– 1,0

n.a.

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

(% of GDP)

CP Dec 2007

– 15,0

– 19,9

– 20,7

– 19,5

– 18,6

COM Nov 2007

– 15,0

– 17,0

– 16,0

– 15,8

n.a.

CP Jan 2007

– 14,1

– 13,6

– 12,8

– 12,4

n.a.

General government balance

(% of GDP)

CP Dec 2007

3,2

3,1

3,0

3,0

3,0

COM Nov 2007

3,2

3,0

3,1

3,1

n.a.

CP Jan 2007

3,2

0,8

1,5

1,5

n.a.

Primary balance

(% of GDP)

CP Dec 2007

4,6

4,3

4,0

4,0

4,0

COM Nov 2007

4,6

4,1

4,1

4,0

n.a.

CP Jan 2007

4,6

2,2

2,8

2,7

n.a.

Cyclically-adjusted balance (5)

(% of GDP)

CP Dec 2007

2,9

2,9

3,0

3,1

3,1

COM Nov 2007

2,9

2,8

3,1

3,3

n.a.

CP Jan 2007

3,2

1,0

1,9

2,0

n.a.

Structural balance (7)

(% of GDP)

CP Dec 2007

2,9

2,9

3,0

3,1

3,1

COM Nov 2007

2,9

2,9

3,1

3,3

n.a.

CP Jan 2007

3,2

1,0

1,9

2,0

n.a.

Government gross debt

(% of GDP)

CP Dec 2007

22,8

19,8

18,3

17,4

16,9

COM Nov 2007

22,8

19,3

15,9

12,9

n.a.

CP Jan 2007

25,3

22,7

22,3

21,1

n.a.

Convergence programme (CP); Commission services' autumn 2007 economic 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)  The assessment takes notably into account the Commission services' autumn forecast and the Commission assessment of the October 2007 implementation report of the national reform programme.

(3)  OJ C 89, 24.4.2007, p. 11.

(4)  In particular, no information on one-off measures in 2007 is provided and some data on long-term sustainability are not provided.

(5)  Output gaps and cyclically-adjusted balances according to the programmes as recalculated by Commission services on the basis of the information in the programmes. The cyclically-adjusted balance in the Commission services' autumn forecast has been recalculated following a revision of the budgetary sensitivity for Bulgaria.

(6)  Based on estimated potential growth of 6,2 %, 6,7 %, 6,8 % and 6,8 % respectively in the period 2006-2009.

(7)  Cyclically-adjusted balance excluding one-off and other temporary measures. The most recent programme provides no information on one-off and other temporary measures; according to the Commission services' autumn forecast, they are 0,1 % of GDP (surplus-reducing) in 2007. The structural balance in the Commission services' autumn forecast has been recalculated following a revision of the budgetary sensitivity for Bulgaria.

Sources:

Convergence programme (CP); Commission services' autumn 2007 economic forecasts (COM); Commission services' calculations.

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| 19.3.2008 | EN | Official Journal of the European Union | C 73/6 |
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19.3.2008

EN

Official Journal of the European Union

C 73/6

---

COUNCIL OPINION

of 4 March 2008

on the updated stability programme of Portugal, 2007-2011

(2008/C 73/02)

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 4 March 2008, the Council examined the updated stability programme of Portugal, which covers the period 2007 to 2011. |
| --- | --- |

(1)

On 4 March 2008, the Council examined the updated stability programme of Portugal, which covers the period 2007 to 2011.

| (2) | From a phase of high economic growth in the second half of the nineties, the Portuguese economy moved to a situation of sluggish GDP growth after 2000, accompanied by rising unemployment, which all added to budgetary fragilities. This marked change in economic performance was rooted in the accumulation of large external and budgetary deficits, with pro-cyclical fiscal policies compounding the imbalances of the private sector and feeding uncertainty.
  At the beginning of this decade, private domestic demand moderated considerably reflecting the adjustment of spending to levels more in line with income patterns. At the same time, public primary expenditure had to slow down from previous unsustainable trends, while the competitive position has remained vulnerable reflecting a lasting misalignment between wages and productivity growth. Whereas recent economic growth has been led by the external sector, accompanied by considerable restructuring in some industries in the face of increased external competition, weaknesses of a more structural nature stand in the way of a lasting improvement in economic performance. In particular, overall productivity is low, mainly due to relatively low levels of human capital, and the efficiency and effectiveness of the public sector needs particular attention. In recent years, significant progress has been achieved to overcome this situation, in particular in containing public finances imbalances. In all, continuing fiscal consolidation, improving the quality of public finances, and proceeding with structural reforms with a view to improving potential GDP growth remain major challenges to put back the Portuguese economy on a sustainable and dynamic catching-up path. |
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(2)

From a phase of high economic growth in the second half of the nineties, the Portuguese economy moved to a situation of sluggish GDP growth after 2000, accompanied by rising unemployment, which all added to budgetary fragilities. This marked change in economic performance was rooted in the accumulation of large external and budgetary deficits, with pro-cyclical fiscal policies compounding the imbalances of the private sector and feeding uncertainty.

At the beginning of this decade, private domestic demand moderated considerably reflecting the adjustment of spending to levels more in line with income patterns. At the same time, public primary expenditure had to slow down from previous unsustainable trends, while the competitive position has remained vulnerable reflecting a lasting misalignment between wages and productivity growth. Whereas recent economic growth has been led by the external sector, accompanied by considerable restructuring in some industries in the face of increased external competition, weaknesses of a more structural nature stand in the way of a lasting improvement in economic performance. In particular, overall productivity is low, mainly due to relatively low levels of human capital, and the efficiency and effectiveness of the public sector needs particular attention. In recent years, significant progress has been achieved to overcome this situation, in particular in containing public finances imbalances. In all, continuing fiscal consolidation, improving the quality of public finances, and proceeding with structural reforms with a view to improving potential GDP growth remain major challenges to put back the Portuguese economy on a sustainable and dynamic catching-up path.

| (3) | The macroeconomic scenario underlying the programme envisages a continuation of the upswing in economic activity, with real GDP growth picking up from 1,8 % in 2007 to 2,2 % in 2008 and further to 2,8 % in 2009 and 3 % in 2010 and 2011. Assessed against currently available information (2), the economic outlook after 2008 appears to be based on favourable growth assumptions. In particular, growth rates for private demand components seem to be on the high side, especially for investment. The programme expects the labour market to improve gradually over the programme period, but the employment outlook appears optimistic.
  The projections for consumer inflation may be on the low side in the light of the recent surge in food and oil prices in world markets. The economy's competitiveness position is expected to improve in the coming years, with unit labour costs growing more slowly than in most of its trading partners. The programme envisages a marked decline of the sizable external deficit, from 8,8 % of GDP in 2006 and an estimated 7 % of GDP in 2007 to 4,7 % of GDP in 2011. Assessed against current information, however, the underlying improvement of the deficit in the balance of current transfers and primary income projected in the update might be difficult to achieve. |
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(3)

The macroeconomic scenario underlying the programme envisages a continuation of the upswing in economic activity, with real GDP growth picking up from 1,8 % in 2007 to 2,2 % in 2008 and further to 2,8 % in 2009 and 3 % in 2010 and 2011. Assessed against currently available information (2), the economic outlook after 2008 appears to be based on favourable growth assumptions. In particular, growth rates for private demand components seem to be on the high side, especially for investment. The programme expects the labour market to improve gradually over the programme period, but the employment outlook appears optimistic.

The projections for consumer inflation may be on the low side in the light of the recent surge in food and oil prices in world markets. The economy's competitiveness position is expected to improve in the coming years, with unit labour costs growing more slowly than in most of its trading partners. The programme envisages a marked decline of the sizable external deficit, from 8,8 % of GDP in 2006 and an estimated 7 % of GDP in 2007 to 4,7 % of GDP in 2011. Assessed against current information, however, the underlying improvement of the deficit in the balance of current transfers and primary income projected in the update might be difficult to achieve.

| (4) | For 2007, the general government deficit is estimated at 3 % of GDP in the updated programme and in the Commission services' autumn 2007 forecasts, against a target of 3,7 % of GDP set in the previous update of the stability programme. More recent and preliminary data on budgetary execution suggest that the 2007 deficit outturn is likely to be lower than 3 % of GDP. This development is in line with and goes beyond the invitation in the Council opinion of 27 February 2007 on the previous update to implement measures so as to correct the excessive deficit by 2008 (3). As the better-than-expected outcome in 2006 was used to pursue a more ambitious target in 2007, the Council notes that it is also consistent with the April 2007 Eurogroup orientations for budgetary policies. |
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(4)

For 2007, the general government deficit is estimated at 3 % of GDP in the updated programme and in the Commission services' autumn 2007 forecasts, against a target of 3,7 % of GDP set in the previous update of the stability programme. More recent and preliminary data on budgetary execution suggest that the 2007 deficit outturn is likely to be lower than 3 % of GDP. This development is in line with and goes beyond the invitation in the Council opinion of 27 February 2007 on the previous update to implement measures so as to correct the excessive deficit by 2008 (3). As the better-than-expected outcome in 2006 was used to pursue a more ambitious target in 2007, the Council notes that it is also consistent with the April 2007 Eurogroup orientations for budgetary policies.

| (5) | The update of the stability programme aims at further fiscal consolidation over the medium term, notably to achieve the medium-term objective (MTO) of a structural deficit, i.e. cyclically-adjusted deficit net of one-off and other temporary measures, of 0,5 % of GDP by 2010. The headline general government deficit is targeted to decline gradually from 3 % of GDP in 2007 to 2,4 % of GDP in 2008, 1,5 % in 2009, 0,4 % in 2010 and eventually 0,2 % of GDP in 2011. The path for the primary balance is similar, improving from a slight deficit to a surplus of 2,5 % of GDP in 2011. The structural deficit calculated according to the commonly agreed methodology is projected to narrow by around 0,5 percentage point of GDP per year on average until 2010 and to broadly stabilise at around 0,5 % of GDP in 2011. The planned fiscal consolidation is to be achieved by continued expenditure moderation thanks to corrective measures to contain the cost of public employment (in the broader context of public administration reform) and to a lesser extent social transfers. A rise in the revenue ratio is expected to also contribute to fiscal consolidation. Building on the better-than-budgeted deficit outturns in 2006 and 2007, the programme largely confirms the planned structural adjustment path outlined in the December 2006 update of the stability programme against a little changed macroeconomic scenario. Government gross debt, estimated at 64,4 % of GDP in 2007, is projected to accelerate its decline, which would amount to almost 8 percentage points of GDP over the period, falling below the 60 % of GDP Treaty reference value in 2010. |
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(5)

The update of the stability programme aims at further fiscal consolidation over the medium term, notably to achieve the medium-term objective (MTO) of a structural deficit, i.e. cyclically-adjusted deficit net of one-off and other temporary measures, of 0,5 % of GDP by 2010. The headline general government deficit is targeted to decline gradually from 3 % of GDP in 2007 to 2,4 % of GDP in 2008, 1,5 % in 2009, 0,4 % in 2010 and eventually 0,2 % of GDP in 2011. The path for the primary balance is similar, improving from a slight deficit to a surplus of 2,5 % of GDP in 2011. The structural deficit calculated according to the commonly agreed methodology is projected to narrow by around 0,5 percentage point of GDP per year on average until 2010 and to broadly stabilise at around 0,5 % of GDP in 2011. The planned fiscal consolidation is to be achieved by continued expenditure moderation thanks to corrective measures to contain the cost of public employment (in the broader context of public administration reform) and to a lesser extent social transfers. A rise in the revenue ratio is expected to also contribute to fiscal consolidation. Building on the better-than-budgeted deficit outturns in 2006 and 2007, the programme largely confirms the planned structural adjustment path outlined in the December 2006 update of the stability programme against a little changed macroeconomic scenario. Government gross debt, estimated at 64,4 % of GDP in 2007, is projected to accelerate its decline, which would amount to almost 8 percentage points of GDP over the period, falling below the 60 % of GDP Treaty reference value in 2010.

| (6) | The budgetary outcomes could be worse than projected in the programme update. In particular, as noted above, the macroeconomic scenario appears to be based on favourable GDP growth assumptions for the outer years. Also, the expenditure savings that can be generated over the medium term from recently implemented measures are still subject to some degree of uncertainty. However, some of these risks could be partially offset if the better-than-estimated outcome for 2007 is confirmed, which would create a benign base effect for 2008. In view of the negative risks to the budgetary targets, the evolution of the debt ratio could also be less favourable than projected in the programme. |
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(6)

The budgetary outcomes could be worse than projected in the programme update. In particular, as noted above, the macroeconomic scenario appears to be based on favourable GDP growth assumptions for the outer years. Also, the expenditure savings that can be generated over the medium term from recently implemented measures are still subject to some degree of uncertainty. However, some of these risks could be partially offset if the better-than-estimated outcome for 2007 is confirmed, which would create a benign base effect for 2008. In view of the negative risks to the budgetary targets, the evolution of the debt ratio could also be less favourable than projected in the programme.

| (7) | In view of this risk assessment, the budgetary stance in the programme seems consistent with a durable correction of the excessive deficit by no later than 2008 as recommended by the Council. Following the reductions in 2006 and 2007, the update targets a reduction of the structural deficit of 0,5 percentage point of GDP in 2008. The Council notes that this is consistent with the April 2007 Eurogroup orientations for budgetary policies. According to the programme, a sufficient safety margin against breaching the 3 % of GDP deficit threshold with normal macroeconomic fluctuations would be reached in 2009. However, in view of the risks to the budgetary targets, it might not be provided before 2010. In addition, the budgetary stance in the programme may not be sufficient to ensure that the MTO is achieved by 2010, as envisaged in the programme. Although the planned pace of consolidation towards the MTO is in line with the Stability and Growth Pact, the adjustment may require additional efforts in view of the risks mentioned above. Finally, taking into account the risks to the debt projections highlight before, the debt ratio may be sufficiently diminishing towards the reference value at the end of the programme period. |
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(7)

In view of this risk assessment, the budgetary stance in the programme seems consistent with a durable correction of the excessive deficit by no later than 2008 as recommended by the Council. Following the reductions in 2006 and 2007, the update targets a reduction of the structural deficit of 0,5 percentage point of GDP in 2008. The Council notes that this is consistent with the April 2007 Eurogroup orientations for budgetary policies. According to the programme, a sufficient safety margin against breaching the 3 % of GDP deficit threshold with normal macroeconomic fluctuations would be reached in 2009. However, in view of the risks to the budgetary targets, it might not be provided before 2010. In addition, the budgetary stance in the programme may not be sufficient to ensure that the MTO is achieved by 2010, as envisaged in the programme. Although the planned pace of consolidation towards the MTO is in line with the Stability and Growth Pact, the adjustment may require additional efforts in view of the risks mentioned above. Finally, taking into account the risks to the debt projections highlight before, the debt ratio may be sufficiently diminishing towards the reference value at the end of the programme period.

| (8) | The reforms of old-age pension schemes adopted by Portugal in 2006 and 2007 contribute markedly to containing the increase in age-related expenditure and allow an improvement in the rating of risks to the sustainability of public finances from high to medium risk, bringing the long-term budgetary impact of ageing in Portugal close to the EU average. However, the current level of gross debt is above the Treaty reference value. At the same time, the budgetary position in 2007 as estimated in the programme, albeit clearly improved compared with the starting position in the previous update, still constitutes a risk to sustainable public finances even before the long-term budgetary impact of an ageing population is considered. Further budgetary consolidation, as planned in the programme, would contribute to reducing risks to the sustainability of public finances. |
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(8)

The reforms of old-age pension schemes adopted by Portugal in 2006 and 2007 contribute markedly to containing the increase in age-related expenditure and allow an improvement in the rating of risks to the sustainability of public finances from high to medium risk, bringing the long-term budgetary impact of ageing in Portugal close to the EU average. However, the current level of gross debt is above the Treaty reference value. At the same time, the budgetary position in 2007 as estimated in the programme, albeit clearly improved compared with the starting position in the previous update, still constitutes a risk to sustainable public finances even before the long-term budgetary impact of an ageing population is considered. Further budgetary consolidation, as planned in the programme, would contribute to reducing risks to the sustainability of public finances.

| (9) | The stability programme is fully consistent with the October 2007 implementation report of the national reform programme. In particular, the medium-term fiscal consolidation plans have been included in the national reform programme, which considered budgetary consolidation, together with improving sustainability of public finances, as a key priority. In parallel, the stability programme elaborates on progress achieved in implementing some of the national reform programme measures and on their impact on public finances and the broader economic outlook. Indeed, the two programmes provide complementary and consistent information on common policy measures. |
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(9)

The stability programme is fully consistent with the October 2007 implementation report of the national reform programme. In particular, the medium-term fiscal consolidation plans have been included in the national reform programme, which considered budgetary consolidation, together with improving sustainability of public finances, as a key priority. In parallel, the stability programme elaborates on progress achieved in implementing some of the national reform programme measures and on their impact on public finances and the broader economic outlook. Indeed, the two programmes provide complementary and consistent information on common policy measures.

| (10) | The budgetary strategy in the programme is broadly consistent with the country-specific broad economic policy guidelines included in the integrated guidelines and the guidelines for euro area Member States in the area of budgetary policies issued in the context of the Lisbon strategy. |
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(10)

The budgetary strategy in the programme is broadly consistent with the country-specific broad economic policy guidelines included in the integrated guidelines and the guidelines for euro area Member States in the area of budgetary policies issued in the context of the Lisbon strategy.

| (11) | 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 (4). |
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(11)

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 (4).

The overall conclusion is that the programme is consistent with a correction of the excessive deficit no later than 2008. If the better than expected budgetary execution is confirmed, the deficit outturn will be below 3 % of GDP already in 2007. The programme aims at further fiscal consolidation over the medium term, including the achievement of the MTO by 2010, and foresees a declining path for the government debt ratio over the entire programme period. However, achieving these objectives is subject to an effective implementation of the measures announced in the programme and may require additional efforts, notably in the light of the risk of lower-than-projected economic growth.

Further progress with fiscal consolidation, as planned, could also help to address the external imbalances and improve the prospect of the long-term sustainability of public finances, for which Portugal is considered to be at medium risk, after the significant reform of the pension system. Finally, envisaged improvements in the quality and efficiency of public expenditure, including the public administration and the budgetary framework, can have a favourable impact on potential GDP growth and thereby help resume the catching-up process.

In view of the above assessment, and also in the light of the recommendation under Article 104(7) of 20 September 2005, Portugal is invited to:

| (i) | implement with determination the fiscal consolidation envisaged in the programme so as to secure the correction of the excessive deficit; |
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(i)

implement with determination the fiscal consolidation envisaged in the programme so as to secure the correction of the excessive deficit;

| (ii) | carry out the planned adjustment towards the MTO, backing it up with reinforced measures if necessary; and, also in view of the risks to the sustainability of public finances, ensure a rapid reduction in the debt-to-GDP ratio, notably by continuing to allocate any better-than-expected budgetary results to deficit reduction; |
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(ii)

carry out the planned adjustment towards the MTO, backing it up with reinforced measures if necessary; and, also in view of the risks to the sustainability of public finances, ensure a rapid reduction in the debt-to-GDP ratio, notably by continuing to allocate any better-than-expected budgetary results to deficit reduction;

| (iii) | maintain expenditure moderation in a permanent way and enhance the quality of public expenditure, also by pursuing the ongoing reform of public administration and further improving the budgetary framework as outlined in the programme. |
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(iii)

maintain expenditure moderation in a permanent way and enhance the quality of public expenditure, also by pursuing the ongoing reform of public administration and further improving the budgetary framework as outlined in the programme.

The Council also notes that such actions would be consistent with the April 2007 Eurogroup orientations for fiscal policies.

Comparison of key macroeconomic and budgetary projections

| | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 |
| --- | --- | --- | --- | --- | --- | --- |
| Real GDP
  (% change) | SP Dec 2007 | 1,3 | 1,8 | 2,2 | 2,8 | 3,0 | 3,0 |
| COM Nov 2007 | 1,3 | 1,8 | 2,0 | 2,1 | n.a. | n.a. |
| SP Dec 2006 | 1,4 | 1,8 | 2,4 | 3,0 | 3,0 | n.a. |
| HICP inflation (8)

  (%) | SP Dec 2007 | 3,0 | 2,3 | 2,1 | 2,1 | 2,1 | 2,1 |
| COM Nov 2007 | 3,0 | 2,4 | 2,4 | 2,3 | n.a. | n.a. |
| SP Dec 2006 | 3,2 | 2,2 | 2,2 | 2,1 | 2,1 | n.a. |
| Output gap (5)

  (% of potential GDP) | SP Dec 2007 | – 2,4 | – 2,2 | – 1,8 | – 1,1 | – 0,2 | 0,5 |
| COM Nov 2007 (6) | – 2,1 | – 1,7 | – 1,2 | – 0,8 | n.a. | n.a. |
| SP Dec 2006 | – 2,6 | – 2,4 | – 1,8 | – 0,7 | 0,2 | n.a. |
| Net lending/borrowing vis-à-vis the rest of the world
  (% of GDP) | SP Dec 2007 | – 8,8 | – 7,0 | – 5,8 | – 5,6 | – 4,9 | – 4,7 |
| COM Nov 2007 | – 8,8 | – 7,9 | – 7,7 | – 7,7 | n.a. | n.a. |
| SP Dec 2006 | – 7,5 | – 7,3 | – 6,9 | – 6,3 | – 6,0 | n.a. |
| General government balance
  (% of GDP) | SP Dec 2007 | – 3,9 | – 3,0 | – 2,4 | – 1,5 | – 0,4 | – 0,2 |
| COM Nov 2007 | – 3,9 | – 3,0 | – 2,6 | – 2,4 | n.a. | n.a. |
| SP Dec 2006 | – 4,6 | – 3,7 | – 2,6 | – 1,5 | – 0,4 | n.a. |
| Primary balance
  (% of GDP) | SP Dec 2007 | – 1,1 | – 0,1 | 0,5 | 1,3 | 2,2 | 2,5 |
| COM Nov 2007 | – 1,1 | – 0,1 | 0,3 | 0,5 | n.a. | n.a. |
| SP Dec 2006 | – 1,7 | – 0,7 | 0,4 | 1,5 | 2,5 | n.a. |
| Cyclically-adjusted balance (5)

  (% of GDP) | SP Dec 2007 | – 2,8 | – 2,0 | – 1,6 | – 1,0 | – 0,3 | – 0,4 |
| COM Nov 2007 | – 2,9 | – 2,2 | – 2,1 | – 2,1 | n.a. | n.a. |
| SP Dec 2006 | – 3,4 | – 2,6 | – 1,8 | – 1,2 | – 0,5 | n.a. |
| Structural balance (7)

  (% of GDP) | SP Dec 2007 | – 2,8 | – 2,1 | – 1,6 | – 1,0 | – 0,3 | – 0,4 |
| COM Nov 2007 | – 2,9 | – 2,3 | – 2,1 | – 2,1 | n.a. | n.a. |
| SP Dec 2006 | – 3,4 | – 2,6 | – 1,8 | – 1,2 | – 0,5 | n.a. |
| Government gross debt
  (% of GDP) | SP Dec 2007 | 64,8 | 64,4 | 64,1 | 62,5 | 59,7 | 56,7 |
| COM Nov 2007 | 64,8 | 64,4 | 64,7 | 64,5 | n.a. | n.a. |
| SP Dec 2006 | 67,4 | 68,0 | 67,3 | 65,2 | 62,2 | n.a. |
| Stability programme (SP); Commission services' autumn 2007 economic forecasts (COM); Commission services' calculations. |

2006

2007

2008

2009

2010

2011

Real GDP

(% change)

SP Dec 2007

1,3

1,8

2,2

2,8

3,0

3,0

COM Nov 2007

1,3

1,8

2,0

2,1

n.a.

n.a.

SP Dec 2006

1,4

1,8

2,4

3,0

3,0

n.a.

HICP inflation (8)

(%)

SP Dec 2007

3,0

2,3

2,1

2,1

2,1

2,1

COM Nov 2007

3,0

2,4

2,4

2,3

n.a.

n.a.

SP Dec 2006

3,2

2,2

2,2

2,1

2,1

n.a.

Output gap (5)

(% of potential GDP)

SP Dec 2007

– 2,4

– 2,2

– 1,8

– 1,1

– 0,2

0,5

COM Nov 2007 (6)

– 2,1

– 1,7

– 1,2

– 0,8

n.a.

n.a.

SP Dec 2006

– 2,6

– 2,4

– 1,8

– 0,7

0,2

n.a.

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

(% of GDP)

SP Dec 2007

– 8,8

– 7,0

– 5,8

– 5,6

– 4,9

– 4,7

COM Nov 2007

– 8,8

– 7,9

– 7,7

– 7,7

n.a.

n.a.

SP Dec 2006

– 7,5

– 7,3

– 6,9

– 6,3

– 6,0

n.a.

General government balance

(% of GDP)

SP Dec 2007

– 3,9

– 3,0

– 2,4

– 1,5

– 0,4

– 0,2

COM Nov 2007

– 3,9

– 3,0

– 2,6

– 2,4

n.a.

n.a.

SP Dec 2006

– 4,6

– 3,7

– 2,6

– 1,5

– 0,4

n.a.

Primary balance

(% of GDP)

SP Dec 2007

– 1,1

– 0,1

0,5

1,3

2,2

2,5

COM Nov 2007

– 1,1

– 0,1

0,3

0,5

n.a.

n.a.

SP Dec 2006

– 1,7

– 0,7

0,4

1,5

2,5

n.a.

Cyclically-adjusted balance (5)

(% of GDP)

SP Dec 2007

– 2,8

– 2,0

– 1,6

– 1,0

– 0,3

– 0,4

COM Nov 2007

– 2,9

– 2,2

– 2,1

– 2,1

n.a.

n.a.

SP Dec 2006

– 3,4

– 2,6

– 1,8

– 1,2

– 0,5

n.a.

Structural balance (7)

(% of GDP)

SP Dec 2007

– 2,8

– 2,1

– 1,6

– 1,0

– 0,3

– 0,4

COM Nov 2007

– 2,9

– 2,3

– 2,1

– 2,1

n.a.

n.a.

SP Dec 2006

– 3,4

– 2,6

– 1,8

– 1,2

– 0,5

n.a.

Government gross debt

(% of GDP)

SP Dec 2007

64,8

64,4

64,1

62,5

59,7

56,7

COM Nov 2007

64,8

64,4

64,7

64,5

n.a.

n.a.

SP Dec 2006

67,4

68,0

67,3

65,2

62,2

n.a.

Stability programme (SP); Commission services' autumn 2007 economic 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)  The assessment takes into account notably the Commission services' autumn forecasts and the Commission assessment of the October 2007 implementation report of the national reform programme.

(3)  OJ C 71, 28.3.2007, p. 5.

(4)  In particular, the data on public consumption and investment deflators are not provided.

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

(6)  Based on estimated potential growth of 1,5 %, 1,5 %, 1,6 % and 1,6 % respectively in the period 2006-2009.

(7)  Cyclically-adjusted balance excluding one-off and other temporary measures. One-off and other temporary measures are 0,1 % of GDP in 2007 (deficit-reducing) according to the most recent programme and the Commission services' autumn forecasts.

(8)  Private consumption deflator for the December 2006 update of the stability programme.

Sources:

Stability programme (SP); Commission services' autumn 2007 economic forecasts (COM); Commission services' calculations.

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| 19.3.2008 | EN | Official Journal of the European Union | C 73/10 |
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19.3.2008

EN

Official Journal of the European Union

C 73/10

---

COUNCIL OPINION

of 4 March 2008

on the stability programme of Cyprus, 2007-2011

(2008/C 73/03)

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 5(2) thereof,

Having regard to the recommendation of the Commission,

After consulting the Economic and Financial Committee,

HAS DELIVERED THIS OPINION:

| (1) | On 4 March 2008, the Council examined the first stability programme of Cyprus, which covers the period 2007 to 2011 (2). |
| --- | --- |

(1)

On 4 March 2008, the Council examined the first stability programme of Cyprus, which covers the period 2007 to 2011 (2).

| (2) | Over the last ten years, Cyprus has been characterised by solid economic growth, albeit with fluctuations in some years, which reflect exposure of the small open economy to external shocks.
  Fiscal policy has not always taken advantage of favourable cyclical conditions to achieve budgetary targets close-to-balance or in surplus, which would provide a safety margin to normal fluctuations, and allow automatic stabilizers to operate fully in economic downturns. This highlights the need for avoidance of pro-cyclical stance in good times. In the last four years the Cypriot authorities embarked on a successful, mainly, revenue-based fiscal consolidation, which brought the general government deficit from 6,5 % of GDP in 2003 to 1,2 % in 2006. On the back of a likely transitory tax-rich composition of growth, which brought about exceptionally high government receipts, the budget balance is currently estimated at a surplus of 1,5 % of GDP in 2007. Furthermore, debt declined from a 69 % of GDP in 2003 down to about 60 % in 2007. The limited primary current expenditure restraint and the likely transitory character of composition effects in the recent increase in tax revenues, highlight the need for further improvements in expenditure control. This would help to stabilise the economy in the new context of euro area membership. The reform of the pension system and a timely implementation of the adopted reforms in health care would also contribute to the control of primary spending, while underpinning the sustainability of public finances in the long run. |
| --- | --- |

(2)

Over the last ten years, Cyprus has been characterised by solid economic growth, albeit with fluctuations in some years, which reflect exposure of the small open economy to external shocks.

Fiscal policy has not always taken advantage of favourable cyclical conditions to achieve budgetary targets close-to-balance or in surplus, which would provide a safety margin to normal fluctuations, and allow automatic stabilizers to operate fully in economic downturns. This highlights the need for avoidance of pro-cyclical stance in good times. In the last four years the Cypriot authorities embarked on a successful, mainly, revenue-based fiscal consolidation, which brought the general government deficit from 6,5 % of GDP in 2003 to 1,2 % in 2006. On the back of a likely transitory tax-rich composition of growth, which brought about exceptionally high government receipts, the budget balance is currently estimated at a surplus of 1,5 % of GDP in 2007. Furthermore, debt declined from a 69 % of GDP in 2003 down to about 60 % in 2007. The limited primary current expenditure restraint and the likely transitory character of composition effects in the recent increase in tax revenues, highlight the need for further improvements in expenditure control. This would help to stabilise the economy in the new context of euro area membership. The reform of the pension system and a timely implementation of the adopted reforms in health care would also contribute to the control of primary spending, while underpinning the sustainability of public finances in the long run.

| (3) | The macroeconomic scenario underlying the programme envisages that real GDP growth will moderate slightly from 4,2 % in 2007 to some 4 % on average over the rest of the programme period. Assessed against currently available information (3), this scenario appears to be based on plausible growth assumptions until 2009, while they appear to be slightly on the high side thereafter. The programme's projections for inflation appear realistic but on the backdrop of the latest developments in oil and food prices at international level, the balance of risks is somewhat tilted on the upside. |
| --- | --- |

(3)

The macroeconomic scenario underlying the programme envisages that real GDP growth will moderate slightly from 4,2 % in 2007 to some 4 % on average over the rest of the programme period. Assessed against currently available information (3), this scenario appears to be based on plausible growth assumptions until 2009, while they appear to be slightly on the high side thereafter. The programme's projections for inflation appear realistic but on the backdrop of the latest developments in oil and food prices at international level, the balance of risks is somewhat tilted on the upside.

| (4) | For 2007, the stability programme estimates the general government surplus at 1,5 % of GDP, more than 3 percentage points of GDP better than the target of a deficit of 1,6 % of GDP set in the last update of the convergence programme. The marked turnaround in 2007 is attributed to exceptional rise in total revenues, due to especially high tax receipts brought by the strong profitability of the financial sector and the booming investment in real estate. Part of the increase in tax bases and in the associated revenues does not appear to be permanent. The 2007 estimated outturn respects the invitation in the Council opinion of 27 February 2007 on the last update of the convergence programme (4) to ‘implement the fiscal consolidation path as foreseen in the programme’. |
| --- | --- |

(4)

For 2007, the stability programme estimates the general government surplus at 1,5 % of GDP, more than 3 percentage points of GDP better than the target of a deficit of 1,6 % of GDP set in the last update of the convergence programme. The marked turnaround in 2007 is attributed to exceptional rise in total revenues, due to especially high tax receipts brought by the strong profitability of the financial sector and the booming investment in real estate. Part of the increase in tax bases and in the associated revenues does not appear to be permanent. The 2007 estimated outturn respects the invitation in the Council opinion of 27 February 2007 on the last update of the convergence programme (4) to ‘implement the fiscal consolidation path as foreseen in the programme’.

| (5) | In view of the better-than-expected 2007 outturn, the budgetary targets presented in the stability programme are much improved compared to those in the last update of the convergence programme against a broadly unchanged macroeconomic background. The stability programme puts forward a more ambitious medium-term objective (MTO) of a balanced position in structural terms (i.e. in cyclically-adjusted terms net of one-off and other temporary measures), compared to a structural deficit of 0,5 % of GDP previously. The budgetary strategy in the stability programme aims at maintaining this new MTO, which has already been over-achieved in 2007, over the programme period. The general government surplus is planned to decline to 0,7 % of GDP by 2011, from 1,5 % in 2007; in primary terms, the drop is more pronounced, to 2,8 % of GDP in 2011 from 4,7 %. The narrowing of the surplus mainly reflects a fall in the share of total revenues in GDP by 1,25 percentage points as total expenditure is planned to decline by just 0,25 of a percentage point of GDP.
  The latter mainly reflects important savings on interest expenditure as primary expenditure is set to increase by 0,25 of a percentage point, as a containment of expenditure on compensation of employees, subsidies and public investment is more than offset by increases in social payments and other expenditure. The fall in total revenues is concentrated in 2008 (1,5 percentage points of GDP), as half of the extraordinary increase of revenues in 2007, amounting to 1,5 % of GDP, is not expected to continue in 2008. Government gross debt, estimated at 60 % of GDP in 2007, is projected to decline by 11,5 percentage points of GDP in 2008 to 48,5 % of GDP. This is mainly due to a high primary surplus and a large debt-decreasing stock-flow adjustment, resulting from a large decumulation of financial assets associated with the sinking funds. Thereafter, debt-to-GDP ratio is projected to decline further by 8 percentage points of GDP over the programme period to 40,5 % by 2011. |
| --- | --- |

(5)

In view of the better-than-expected 2007 outturn, the budgetary targets presented in the stability programme are much improved compared to those in the last update of the convergence programme against a broadly unchanged macroeconomic background. The stability programme puts forward a more ambitious medium-term objective (MTO) of a balanced position in structural terms (i.e. in cyclically-adjusted terms net of one-off and other temporary measures), compared to a structural deficit of 0,5 % of GDP previously. The budgetary strategy in the stability programme aims at maintaining this new MTO, which has already been over-achieved in 2007, over the programme period. The general government surplus is planned to decline to 0,7 % of GDP by 2011, from 1,5 % in 2007; in primary terms, the drop is more pronounced, to 2,8 % of GDP in 2011 from 4,7 %. The narrowing of the surplus mainly reflects a fall in the share of total revenues in GDP by 1,25 percentage points as total expenditure is planned to decline by just 0,25 of a percentage point of GDP.

The latter mainly reflects important savings on interest expenditure as primary expenditure is set to increase by 0,25 of a percentage point, as a containment of expenditure on compensation of employees, subsidies and public investment is more than offset by increases in social payments and other expenditure. The fall in total revenues is concentrated in 2008 (1,5 percentage points of GDP), as half of the extraordinary increase of revenues in 2007, amounting to 1,5 % of GDP, is not expected to continue in 2008. Government gross debt, estimated at 60 % of GDP in 2007, is projected to decline by 11,5 percentage points of GDP in 2008 to 48,5 % of GDP. This is mainly due to a high primary surplus and a large debt-decreasing stock-flow adjustment, resulting from a large decumulation of financial assets associated with the sinking funds. Thereafter, debt-to-GDP ratio is projected to decline further by 8 percentage points of GDP over the programme period to 40,5 % by 2011.

| (6) | The budgetary outcomes in 2008 and 2009 could be better than projected in the programme but worse thereafter. The programme assumes that only part of the better-than-expected revenues in 2007 is carried over to subsequent years. Although uncertain in the absence of more detailed data, there seems to be scope for a higher degree of carryover, especially in 2008 and 2009. A negative risk to revenues stems from the fact that the macroeconomic scenario embodies favourable projections for private consumption growth in the outer programme years. The reliance on expenditure ceilings, which were introduced as recently as 2006, constitutes a further risk as their coverage is not complete and in particular enforcement mechanisms are not fully specified. |
| --- | --- |

(6)

The budgetary outcomes in 2008 and 2009 could be better than projected in the programme but worse thereafter. The programme assumes that only part of the better-than-expected revenues in 2007 is carried over to subsequent years. Although uncertain in the absence of more detailed data, there seems to be scope for a higher degree of carryover, especially in 2008 and 2009. A negative risk to revenues stems from the fact that the macroeconomic scenario embodies favourable projections for private consumption growth in the outer programme years. The reliance on expenditure ceilings, which were introduced as recently as 2006, constitutes a further risk as their coverage is not complete and in particular enforcement mechanisms are not fully specified.

| (7) | In view of this risk assessment, the budgetary stance in the programme seems sufficient to maintain the new MTO throughout the programme period, as envisaged in the programme. The 1,5 % of GDP in revenues considered by the programme as temporary, although likely transitory in nature, does not qualify as a one-off and it is not considered as such by the Commission services. Given the good times, the structural surplus reduction by more than 1 percentage points of GDP in 2008, from 1,75 % of GDP the previous year, may imply a pro-cyclical fiscal stance, which would not be in line with the Stability and Growth Pact. However, the consideration by the Government that the rise in revenues in 2007 may be only partially permanent reflects a prudent budgetary approach, according to which revenues from a particularly tax-intensive composition of growth should not trigger additional permanent expenditure. Although the planned deterioration of the budgetary position compared to 2007 reflects to a large extent an expected normalisation of tax revenues, there is a risk that the stance in 2008 may turn out to be pro-cyclical, given the risks associated to the enforcement of the expenditure ceilings. |
| --- | --- |

(7)

In view of this risk assessment, the budgetary stance in the programme seems sufficient to maintain the new MTO throughout the programme period, as envisaged in the programme. The 1,5 % of GDP in revenues considered by the programme as temporary, although likely transitory in nature, does not qualify as a one-off and it is not considered as such by the Commission services. Given the good times, the structural surplus reduction by more than 1 percentage points of GDP in 2008, from 1,75 % of GDP the previous year, may imply a pro-cyclical fiscal stance, which would not be in line with the Stability and Growth Pact. However, the consideration by the Government that the rise in revenues in 2007 may be only partially permanent reflects a prudent budgetary approach, according to which revenues from a particularly tax-intensive composition of growth should not trigger additional permanent expenditure. Although the planned deterioration of the budgetary position compared to 2007 reflects to a large extent an expected normalisation of tax revenues, there is a risk that the stance in 2008 may turn out to be pro-cyclical, given the risks associated to the enforcement of the expenditure ceilings.

| (8) | Cyprus appears to be at high risk with regard to the sustainability of public finances. The long-term budgetary impact of ageing is among the highest in the EU, influenced notably by a very large increase in pension expenditure as a share of GDP. The budgetary position in 2007 as estimated in the programme contributes to offsetting part of the projected considerable long-term budgetary impact of an ageing population but it is not sufficient to cover it. Maintaining high primary surpluses and adopting pension reform measures aimed at containing the significant increase in age-related expenditures, as currently envisaged, would contribute to reducing risks to the sustainability of public finances. |
| --- | --- |

(8)

Cyprus appears to be at high risk with regard to the sustainability of public finances. The long-term budgetary impact of ageing is among the highest in the EU, influenced notably by a very large increase in pension expenditure as a share of GDP. The budgetary position in 2007 as estimated in the programme contributes to offsetting part of the projected considerable long-term budgetary impact of an ageing population but it is not sufficient to cover it. Maintaining high primary surpluses and adopting pension reform measures aimed at containing the significant increase in age-related expenditures, as currently envisaged, would contribute to reducing risks to the sustainability of public finances.

| (9) | The stability programme is fully consistent with the October 2007 implementation report of the national reform programme. In particular, the budgetary projections incorporate the budgetary cost of the various projects and measures included in the national reform programme, for example to foster a knowledge-based economy, to promote R&D, to enhance human capital development. |
| --- | --- |

(9)

The stability programme is fully consistent with the October 2007 implementation report of the national reform programme. In particular, the budgetary projections incorporate the budgetary cost of the various projects and measures included in the national reform programme, for example to foster a knowledge-based economy, to promote R&D, to enhance human capital development.

| (10) | The budgetary strategy in the programme is broadly consistent with the country-specific broad economic policy guidelines included in the integrated guidelines and the guidelines for euro area Member States in the area of budgetary policies issued in the context of the Lisbon strategy. |
| --- | --- |

(10)

The budgetary strategy in the programme is broadly consistent with the country-specific broad economic policy guidelines included in the integrated guidelines and the guidelines for euro area Member States in the area of budgetary policies issued in the context of the Lisbon strategy.

| (11) | 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 (5). |
| --- | --- |

(11)

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 (5).

The overall conclusion is that the budgetary strategy in the programme should be sufficient to maintain a sound budgetary position and macroeconomic stability throughout the period. The programme puts forward a more ambitious MTO of a balanced position in structural terms (compared to a deficit of 0,5 % of GDP previously), which has already been over-achieved in 2007. This is the result of an unexpected increase in total revenues by over 3 percentage points of GDP, largely explained by composition effects associated to the strong profitability of the financial sector and the buoyant investment in real estate, which are projected by the programme to return to historical trends in the coming years. The budgetary targets, which are significantly better than in the previous programme, could be overachieved in 2008 and 2009 given the better 2007 base.

Thereafter, they could be worse given the favourable growth assumptions. Although the planned reduction of the budgetary surplus compared to 2007 reflects to a large extent an expected normalisation of tax revenues, there is a risk that the stance in 2008 may turn out to be pro-cyclical. The level of debt is projected to decline significantly, especially in 2008. Given the projected increase in age-related spending, the reform of the pension system and a timely implementation of adopted reforms in health care, would have a positive effect on the long-term sustainability of public finances, which appears to be at high risk.

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

| (i) | avoid pro-cyclical fiscal policies by further improving the control of current expenditures, while using revenue windfalls to further reduce debt; |
| --- | --- |

(i)

avoid pro-cyclical fiscal policies by further improving the control of current expenditures, while using revenue windfalls to further reduce debt;

| (ii) | contain public expenditure, notably by reforming the pension system and timely implementing the adopted reforms in health care in order to improve the long-term sustainability of the public finances. |
| --- | --- |

(ii)

contain public expenditure, notably by reforming the pension system and timely implementing the adopted reforms in health care in order to improve the long-term sustainability of the public finances.

Comparison of key macroeconomic and budgetary projections

| | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 |
| --- | --- | --- | --- | --- | --- | --- |
| Real GDP
  (% change) | SP Dec 2007 | 3,8 | 4,2 | 4,1 | 4,0 | 4,0 | 4,0 |
| COM Nov 2007 | 3,8 | 3,8 | 3,9 | 3,9 | n.a. | n.a. |
| CP Dec 2006 | 3,7 | 3,9 | 4,1 | 4,1 | 4,1 | n.a. |
| HICP inflation
  (%) | SP Dec 2007 | 2,2 | 2,2 | 2,5 | 2,0 | 2,0 | 2,0 |
| COM Nov 2007 | 2,2 | 2,0 | 2,3 | 2,1 | n.a. | n.a. |
| CP Dec 2006 | 2,4 | 2,5 | 2,4 | 2,0 | 2,0 | n.a. |
| Output gap (6)

  (% of potential GDP) | SP Dec 2007 | – 1,0 | – 0,7 | – 0,6 | – 0,6 | – 0,4 | 0,0 |
| COM Nov 2007 (7) | – 1,4 | – 1,1 | – 0,8 | – 0,6 | n.a. | n.a. |
| CP Dec 2006 | – 1,0 | – 1,1 | – 1,1 | – 1,1 | – 1,1 | n.a. |
| Net lending/borrowing vis-à-vis the rest of the world
  (% of GDP) | SP Dec 2007 | – 5,9 | – 6,6 | – 6,5 | – 6,3 | – 5,9 | – 5,6 |
| COM Nov 2007 | – 5,7 | – 5,8 | – 5,7 | – 5,5 | n.a. | n.a. |
| CP Dec 2006 | – 6,4 | – 5,8 | – 5,4 | – 4,8 | – 4,2 | n.a. |
| General government balance
  (% of GDP) | SP Dec 2007 | – 1,2 | 1,5 | 0,5 | 0,5 | 0,7 | 0,7 |
| COM Nov 2007 | – 1,2 | – 1,0 | – 0,8 | – 0,6 | n.a. | n.a. |
| CP Dec 2006 | – 1,9 | – 1,6 | – 0,7 | – 0,4 | – 0,1 | n.a. |
| Primary balance
  (% of GDP) | SP Dec 2007 | 2,1 | 4,7 | 3,4 | 2,9 | 2,9 | 2,8 |
| COM Nov 2007 | 2,1 | 2,2 | 2,2 | 2,2 | n.a. | n.a. |
| CP Dec 2006 | 1,4 | 1,4 | 2,1 | 2,1 | 2,2 | n.a. |
| Cyclically-adjusted balance (6)

  (% of GDP) | SP Dec 2007 | – 0,8 | 1,8 | 0,7 | 0,7 | 0,8 | 0,7 |
| COM Nov 2007 | – 0,7 | – 0,6 | – 0,5 | – 0,4 | n.a. | n.a. |
| CP Dec 2006 | – 1,5 | – 1,2 | – 0,3 | 0,0 | 0,3 | n.a. |
| Structural balance (8)

  (% of GDP) | SP Dec 2007 | – 0,8 | 0,3 | 0,7 | 0,7 | 0,8 | 0,7 |
| COM Nov 2007 | – 0,7 | – 0,6 | – 0,5 | – 0,4 | n.a. | n.a. |
| CP Dec 2006 | – 1,9 | – 1,2 | – 0,3 | 0,0 | 0,3 | n.a. |
| Government gross debt
  (% of GDP) | SP Dec 2007 | 65,2 | 60,0 | 48,5 | 45,3 | 43,8 | 40,5 |
| COM Nov 2007 | 65,2 | 60,5 | 53,3 | 49,6 | n.a. | n.a. |
| CP Dec 2006 | 64,7 | 60,5 | 52,5 | 49,0 | 46,1 | n.a. |
| Convergence programme (CP); Stability programme (SP); Commission services' autumn 2007 economic forecasts (COM); Commission services' calculations. |

2006

2007

2008

2009

2010

2011

Real GDP

(% change)

SP Dec 2007

3,8

4,2

4,1

4,0

4,0

4,0

COM Nov 2007

3,8

3,8

3,9

3,9

n.a.

n.a.

CP Dec 2006

3,7

3,9

4,1

4,1

4,1

n.a.

HICP inflation

(%)

SP Dec 2007

2,2

2,2

2,5

2,0

2,0

2,0

COM Nov 2007

2,2

2,0

2,3

2,1

n.a.

n.a.

CP Dec 2006

2,4

2,5

2,4

2,0

2,0

n.a.

Output gap (6)

(% of potential GDP)

SP Dec 2007

– 1,0

– 0,7

– 0,6

– 0,6

– 0,4

0,0

COM Nov 2007 (7)

– 1,4

– 1,1

– 0,8

– 0,6

n.a.

n.a.

CP Dec 2006

– 1,0

– 1,1

– 1,1

– 1,1

– 1,1

n.a.

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

(% of GDP)

SP Dec 2007

– 5,9

– 6,6

– 6,5

– 6,3

– 5,9

– 5,6

COM Nov 2007

– 5,7

– 5,8

– 5,7

– 5,5

n.a.

n.a.

CP Dec 2006

– 6,4

– 5,8

– 5,4

– 4,8

– 4,2

n.a.

General government balance

(% of GDP)

SP Dec 2007

– 1,2

1,5

0,5

0,5

0,7

0,7

COM Nov 2007

– 1,2

– 1,0

– 0,8

– 0,6

n.a.

n.a.

CP Dec 2006

– 1,9

– 1,6

– 0,7

– 0,4

– 0,1

n.a.

Primary balance

(% of GDP)

SP Dec 2007

2,1

4,7

3,4

2,9

2,9

2,8

COM Nov 2007

2,1

2,2

2,2

2,2

n.a.

n.a.

CP Dec 2006

1,4

1,4

2,1

2,1

2,2

n.a.

Cyclically-adjusted balance (6)

(% of GDP)

SP Dec 2007

– 0,8

1,8

0,7

0,7

0,8

0,7

COM Nov 2007

– 0,7

– 0,6

– 0,5

– 0,4

n.a.

n.a.

CP Dec 2006

– 1,5

– 1,2

– 0,3

0,0

0,3

n.a.

Structural balance (8)

(% of GDP)

SP Dec 2007

– 0,8

0,3

0,7

0,7

0,8

0,7

COM Nov 2007

– 0,7

– 0,6

– 0,5

– 0,4

n.a.

n.a.

CP Dec 2006

– 1,9

– 1,2

– 0,3

0,0

0,3

n.a.

Government gross debt

(% of GDP)

SP Dec 2007

65,2

60,0

48,5

45,3

43,8

40,5

COM Nov 2007

65,2

60,5

53,3

49,6

n.a.

n.a.

CP Dec 2006

64,7

60,5

52,5

49,0

46,1

n.a.

Convergence programme (CP); Stability programme (SP); Commission services' autumn 2007 economic 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)  The update was submitted 1 week beyond the 1 December deadline set in the code of conduct.

(3)  The assessment takes into account notably the Commission services' autumn 2007 forecast and the Commission assessment of the October implementation report of the national reform programme.

(4)  OJ C 71, 28.3.2007, p. 16.

(5)  In particular, the capital account data for the years 2007-2011 in the table of sectoral balances are not provided, which have the effect of making the assessment more difficult.

(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 3,5 %, 3,5 %, 3,6 % and 3,7 % respectively in the period 2006-2009.

(8)  Cyclically-adjusted balance excluding one-off and other temporary measures. There are no one-off and other temporary measures according to the Commission services' autumn forecast. The stability programme considers revenues in 2007 amounting to 1,5 % of GDP as one-offs. Although transitory in nature, this amount of revenues does not qualify as a one-off according to the Commission services.

Sources:

Convergence programme (CP); Stability programme (SP); Commission services' autumn 2007 economic forecasts (COM); Commission services' calculations.

---

| 19.3.2008 | EN | Official Journal of the European Union | C 73/14 |
| --- | --- | --- | --- |

19.3.2008

EN

Official Journal of the European Union

C 73/14

---

COUNCIL OPINION

of 4 March 2008

on the updated convergence programme of Estonia, 2007-2011

(2008/C 73/04)

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 9(3) thereof,

Having regard to the recommendation of the Commission,

After consulting the Economic and Financial Committee,

HAS DELIVERED THIS OPINION:

| (1) | On 4 March 2008, the Council examined the updated convergence programme of Estonia, which covers the period 2007 to 2011. |
| --- | --- |

(1)

On 4 March 2008, the Council examined the updated convergence programme of Estonia, which covers the period 2007 to 2011.

| (2) | The Estonian economy is slowing after a period of very rapid growth related to, inter alia, high credit growth and overall accommodative monetary conditions that fuelled a consumption and housing boom. During this period significant macroeconomic imbalances have emerged, with labour shortages having recently contributed to the emergence of a wage-price spiral and wage growth having outpaced that of productivity, leading to worsening cost competitiveness.
  Estonia's fiscal policy, which has particular importance given the constraints of the monetary policy regime, has been overall sound with budget surpluses since 2002 and low government debt. However, a tighter fiscal stance could have done more to counter the overheating tendencies of the economy and to correct the macroeconomic imbalances. These imbalances are expected to moderate only gradually in coming years, with continuing tight labour market conditions, wage growth in excess of productivity growth, price pressures and persistent, albeit somewhat diminishing, external imbalances. The deceleration path is thus surrounded by downward risks, though these are mitigated by the high degree of flexibility that the economy has hitherto demonstrated. |
| --- | --- |

(2)

The Estonian economy is slowing after a period of very rapid growth related to, inter alia, high credit growth and overall accommodative monetary conditions that fuelled a consumption and housing boom. During this period significant macroeconomic imbalances have emerged, with labour shortages having recently contributed to the emergence of a wage-price spiral and wage growth having outpaced that of productivity, leading to worsening cost competitiveness.

Estonia's fiscal policy, which has particular importance given the constraints of the monetary policy regime, has been overall sound with budget surpluses since 2002 and low government debt. However, a tighter fiscal stance could have done more to counter the overheating tendencies of the economy and to correct the macroeconomic imbalances. These imbalances are expected to moderate only gradually in coming years, with continuing tight labour market conditions, wage growth in excess of productivity growth, price pressures and persistent, albeit somewhat diminishing, external imbalances. The deceleration path is thus surrounded by downward risks, though these are mitigated by the high degree of flexibility that the economy has hitherto demonstrated.

| (3) | The macroeconomic scenario underlying the programme envisages that real GDP growth will moderate from 7,5 % in 2007 to 5,25 % in 2008 and 6,5 % on average over the rest of the programme period. Assessed against currently available information (2), this scenario appears to be based on cautious growth assumptions for 2008 and plausible growth assumptions thereafter. The programme projects inflation to rise to 8,5 % in 2008 and remain high at 5,5 % in 2009, which appears realistic in the light of the recent surge in food prices and likely administered price increases. These projections show that Estonia will be making only limited progress towards nominal convergence. The external deficit is expected to narrow in line with the weakening of domestic demand growth from 14 % of GDP in 2007 to around 10 % in 2009 and around 8 % thereafter; this is plausible, but subject to the risk that worsening cost competitiveness hampers this improvement. |
| --- | --- |

(3)

The macroeconomic scenario underlying the programme envisages that real GDP growth will moderate from 7,5 % in 2007 to 5,25 % in 2008 and 6,5 % on average over the rest of the programme period. Assessed against currently available information (2), this scenario appears to be based on cautious growth assumptions for 2008 and plausible growth assumptions thereafter. The programme projects inflation to rise to 8,5 % in 2008 and remain high at 5,5 % in 2009, which appears realistic in the light of the recent surge in food prices and likely administered price increases. These projections show that Estonia will be making only limited progress towards nominal convergence. The external deficit is expected to narrow in line with the weakening of domestic demand growth from 14 % of GDP in 2007 to around 10 % in 2009 and around 8 % thereafter; this is plausible, but subject to the risk that worsening cost competitiveness hampers this improvement.

| (4) | For 2007, the general government surplus is estimated at 2,6 % of GDP in the most recent update of the convergence programme, against a target of 1,2 % of GDP set in the previous update. The better outcome, expected also in the Commission services' autumn forecast, is largely determined by the carry-over of the better-than-expected outcome in 2006 and to a lesser extent by significantly higher-than-expected revenue growth more than offsetting markedly higher-than-budgeted expenditure growth. Budgetary implementation in 2007 was partly in line with the invitation in the Council opinion of 27 February 2007 on the previous update of the convergence programme (3). Although the budgetary surplus appears to be higher than planned, the structural balance (i.e. the cyclically-adjusted balance net of one-off and other temporary measures) is expected to have deteriorated compared with the previous year by above 0,5 percentage point of GDP, implying a pro-cyclical stance in good times. Moreover, the increase of expenditure via the supplementary budget adopted in December 2007 was inconsistent with fostering macroeconomic stability and the correction of the external imbalance. |
| --- | --- |

(4)

For 2007, the general government surplus is estimated at 2,6 % of GDP in the most recent update of the convergence programme, against a target of 1,2 % of GDP set in the previous update. The better outcome, expected also in the Commission services' autumn forecast, is largely determined by the carry-over of the better-than-expected outcome in 2006 and to a lesser extent by significantly higher-than-expected revenue growth more than offsetting markedly higher-than-budgeted expenditure growth. Budgetary implementation in 2007 was partly in line with the invitation in the Council opinion of 27 February 2007 on the previous update of the convergence programme (3). Although the budgetary surplus appears to be higher than planned, the structural balance (i.e. the cyclically-adjusted balance net of one-off and other temporary measures) is expected to have deteriorated compared with the previous year by above 0,5 percentage point of GDP, implying a pro-cyclical stance in good times. Moreover, the increase of expenditure via the supplementary budget adopted in December 2007 was inconsistent with fostering macroeconomic stability and the correction of the external imbalance.

| (5) | The main goal of the programme's medium-term budgetary strategy is to foster macroeconomic stability and long-term sustainability of public finances by keeping the fiscal position in surplus and thus overachieving the medium-term objective (MTO), defined as structural balance. The general government headline surplus is expected to decline from 2,6 % of GDP in 2007 to 1,3 % in 2008 and subsequently to around and just below 1 % in the outer years of the programme. The structural balance calculated according to the commonly agreed methodology will decrease from 1,25 % of GDP in 2007 to 0,75 % in 2008 and increase again to 1,25-1,5 % of GDP beyond 2008.
  Compared to the previous update of the convergence programme, fiscal targets have been confirmed for 2008 and lowered by around 0,5 percentage points of GDP for subsequent years, against the background of a downward revision of economic projections and an upward revision of the inflation forecast. General government revenues relative to GDP are expected to decline by about 1 percentage point over the programme period, driven primarily by a lower share of taxes on income and wealth due to gradual reductions in the income tax rate. Expenditures are expected to increase by about 1 percentage point over the programme period, with the largest impact arising from an increase in social payments, in particular pensions due to the adoption of a more generous indexation rule. |
| --- | --- |

(5)

The main goal of the programme's medium-term budgetary strategy is to foster macroeconomic stability and long-term sustainability of public finances by keeping the fiscal position in surplus and thus overachieving the medium-term objective (MTO), defined as structural balance. The general government headline surplus is expected to decline from 2,6 % of GDP in 2007 to 1,3 % in 2008 and subsequently to around and just below 1 % in the outer years of the programme. The structural balance calculated according to the commonly agreed methodology will decrease from 1,25 % of GDP in 2007 to 0,75 % in 2008 and increase again to 1,25-1,5 % of GDP beyond 2008.

Compared to the previous update of the convergence programme, fiscal targets have been confirmed for 2008 and lowered by around 0,5 percentage points of GDP for subsequent years, against the background of a downward revision of economic projections and an upward revision of the inflation forecast. General government revenues relative to GDP are expected to decline by about 1 percentage point over the programme period, driven primarily by a lower share of taxes on income and wealth due to gradual reductions in the income tax rate. Expenditures are expected to increase by about 1 percentage point over the programme period, with the largest impact arising from an increase in social payments, in particular pensions due to the adoption of a more generous indexation rule.

| (6) | The risks to the budgetary projections in the programme appear broadly balanced. On the one hand, the programme's macroeconomic assumptions are cautious for 2008, with the possibility that the budgetary outcome proves better than expected in the programme. The programme provides detailed information on envisaged revenue measures and tax projections seem plausible. On the other hand, despite an overall strong track record, there has been a practice in recent years to direct part of higher-than-expected revenues to increasing expenditures through supplementary budgets, thus not respecting set expenditure targets. If the economic slowdown proves to be more severe and/or protracted than in the programme scenario, this would also lead to less favourable public finances. In particular, were the credit-financed, domestically driven rapid growth of the Estonian economy to slow abruptly, or the composition of growth to change considerably towards a less tax-intensive growth pattern, the budget could come under pressure. |
| --- | --- |

(6)

The risks to the budgetary projections in the programme appear broadly balanced. On the one hand, the programme's macroeconomic assumptions are cautious for 2008, with the possibility that the budgetary outcome proves better than expected in the programme. The programme provides detailed information on envisaged revenue measures and tax projections seem plausible. On the other hand, despite an overall strong track record, there has been a practice in recent years to direct part of higher-than-expected revenues to increasing expenditures through supplementary budgets, thus not respecting set expenditure targets. If the economic slowdown proves to be more severe and/or protracted than in the programme scenario, this would also lead to less favourable public finances. In particular, were the credit-financed, domestically driven rapid growth of the Estonian economy to slow abruptly, or the composition of growth to change considerably towards a less tax-intensive growth pattern, the budget could come under pressure.

| (7) | In view of this risk assessment, the budgetary stance in the programme seems sufficient to maintain the MTO with a good margin throughout the programme period, as envisaged in the programme. However, the deterioration of the structural surplus in 2008 amounts to a fiscal expansion, which carries a risk that the fiscal policy stance implied by the programme may turn out to be pro-cyclical if the economy continues to grow at high rates. This would not be in line with the Stability and Growth Pact. Furthermore, at this stage of the cycle, when the economy has started to decelerate but substantial macroeconomic imbalances still persist, fiscal policy should avoid aggravating those imbalances. |
| --- | --- |

(7)

In view of this risk assessment, the budgetary stance in the programme seems sufficient to maintain the MTO with a good margin throughout the programme period, as envisaged in the programme. However, the deterioration of the structural surplus in 2008 amounts to a fiscal expansion, which carries a risk that the fiscal policy stance implied by the programme may turn out to be pro-cyclical if the economy continues to grow at high rates. This would not be in line with the Stability and Growth Pact. Furthermore, at this stage of the cycle, when the economy has started to decelerate but substantial macroeconomic imbalances still persist, fiscal policy should avoid aggravating those imbalances.

| (8) | Estonia appears to be at low risk with regard to the sustainability of public finances. The long-term budgetary impact of ageing is among the lowest in the EU and should remain so according to the programme, even taking into account the effect of the recent change in the pension indexation rule. The current level of gross debt is very low in Estonia and maintaining sound government finances, in line with the budgetary plans over the programme period, would contribute to limiting the risks to the long-term sustainability of public finances. |
| --- | --- |

(8)

Estonia appears to be at low risk with regard to the sustainability of public finances. The long-term budgetary impact of ageing is among the lowest in the EU and should remain so according to the programme, even taking into account the effect of the recent change in the pension indexation rule. The current level of gross debt is very low in Estonia and maintaining sound government finances, in line with the budgetary plans over the programme period, would contribute to limiting the risks to the long-term sustainability of public finances.

| (9) | The convergence programme seems to be consistent to some extent with the October 2007 implementation report of the national reform programme. In particular, the fiscal policy measures and the revision of the pension system, which have been announced in the NRP, are comprehensively assessed in the update convergence programme. However, a qualitative assessment of the overall impact of the national reform programme within the medium-term fiscal strategy is lacking. In addition, information on the direct budgetary costs and savings as well as projections associated with the main reforms envisaged in the NRP appear only partly provided, notably those on measures with a more microeconomic or employment-related character like R&D expenditure, lifelong learning, vocational education and active labour market policies. |
| --- | --- |

(9)

The convergence programme seems to be consistent to some extent with the October 2007 implementation report of the national reform programme. In particular, the fiscal policy measures and the revision of the pension system, which have been announced in the NRP, are comprehensively assessed in the update convergence programme. However, a qualitative assessment of the overall impact of the national reform programme within the medium-term fiscal strategy is lacking. In addition, information on the direct budgetary costs and savings as well as projections associated with the main reforms envisaged in the NRP appear only partly provided, notably those on measures with a more microeconomic or employment-related character like R&D expenditure, lifelong learning, vocational education and active labour market policies.

| (10) | Securing an orderly return to a balanced convergence path and ensuring continued smooth participation in ERM II requires determined policy efforts. Upon entry into the mechanism, Estonia undertook commitments related to fiscal, financial sector and structural policies. Fiscal performance has been overall strong in the ERM II period, although the recent fiscal stance was not particularly ambitious given the initial position and stage of economic cycle, possibly having resulted in pro-cyclicality in 2007. Reserve and prudential requirements have been tightened to help contain rapid credit growth, but the direct impact on lending growth appears to be limited. Wage growth has picked up strongly in the private sector and was followed by the public sector in the context of rapid economic growth and a tight labour market and currently represents the main challenge for the Estonian economy. Estonia planned measures to increase labour market flexibility in the NRP and has recently committed itself to introduce further measures to improve economy-wide productivity. |
| --- | --- |

(10)

Securing an orderly return to a balanced convergence path and ensuring continued smooth participation in ERM II requires determined policy efforts. Upon entry into the mechanism, Estonia undertook commitments related to fiscal, financial sector and structural policies. Fiscal performance has been overall strong in the ERM II period, although the recent fiscal stance was not particularly ambitious given the initial position and stage of economic cycle, possibly having resulted in pro-cyclicality in 2007. Reserve and prudential requirements have been tightened to help contain rapid credit growth, but the direct impact on lending growth appears to be limited. Wage growth has picked up strongly in the private sector and was followed by the public sector in the context of rapid economic growth and a tight labour market and currently represents the main challenge for the Estonian economy. Estonia planned measures to increase labour market flexibility in the NRP and has recently committed itself to introduce further measures to improve economy-wide productivity.

| (11) | As regards the data requirements specified in the code of conduct for stability and convergence programmes, the programme has some gaps in the required and optional data (4). |
| --- | --- |

(11)

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

The overall conclusion is that the programme aims at maintaining a sound budgetary position throughout the period with continued, albeit somewhat declining, surpluses above the MTO. The budgetary targets seem plausible. Macroeconomic imbalances that have accumulated in the economy during the years of high growth, notably wage growth exceeding that of productivity, price pressures and high net borrowing vis-à-vis the rest of the world, are expected to moderate only gradually and the deceleration path of the economy is surrounded by downwards risks. Setting budgetary strategy that aims at overachieving the MTO is a step forward in addressing these macroeconomic challenges. Nevertheless, fiscal policy in 2007 appears to have been pro-cyclical and risks remaining so also in 2008 if the Estonian economy continues to grow at high rates. It would be desirable to maintain a broadly neutral fiscal stance in 2008, as it would support adjustment in the current phase of the cycle when imbalances accumulated during the period of very high growth still persist. The long-term sustainability of public finances is assessed to be at low risk.

In view of the above assessment and also given the need to ensure sustainable convergence and a smooth participation in ERM II, Estonia is invited to contribute to reducing risks to macroeconomic stability by:

| (i) | aiming for a neutral fiscal stance in 2008 and beyond so as to contribute to an orderly adjustment towards a balanced convergence path; |
| --- | --- |

(i)

aiming for a neutral fiscal stance in 2008 and beyond so as to contribute to an orderly adjustment towards a balanced convergence path;

| (ii) | complementing the recommended fiscal stance with ensuring appropriate public wage policy and further labour market reforms as well as sustaining rapid productivity growth so as to contain inflationary pressures. |
| --- | --- |

(ii)

complementing the recommended fiscal stance with ensuring appropriate public wage policy and further labour market reforms as well as sustaining rapid productivity growth so as to contain inflationary pressures.

Comparison of key macroeconomic and budgetary projections

| | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 |
| --- | --- | --- | --- | --- | --- | --- |
| Real GDP
  (% change) | CP Nov 2007 | 11,2 | 7,4 | 5,2 | 6,1 | 6,7 | 7,0 |
| COM Nov 2007 | 11,2 | 7,8 | 6,4 | 6,2 | n.a. | n.a. |
| CP Dec 2006 | 11,0 | 8,3 | 7,7 | 7,6 | 7,5 | n.a. |
| HICP inflation
  (%) | CP Nov 2007 | 4,4 | 6,6 | 8,6 | 5,6 | 3,6 | 3,5 |
| COM Nov 2007 | 4,4 | 6,3 | 7,3 | 4,8 | n.a. | n.a. |
| CP Dec 2006 | 4,4 | 4,3 | 4,4 | 3,5 | 3,2 | n.a. |
| Output gap (5)

  (% of potential GDP) | CP Nov 2007 | 3,6 | 2,7 | 0,1 | – 1,2 | – 1,5 | – 1,3 |
| COM Nov 2007 (6) | 2,9 | 2,1 | 0,1 | – 1,7 | n.a. | n.a. |
| CP Dec 2006 | 2,0 | 1,2 | 0,2 | – 0,3 | – 0,7 | n.a. |
| Net lending/borrowing vis-à-vis the rest of the world
  (% of GDP) | CP Nov 2007 | – 13,2 | – 14,0 | – 9,9 | – 8,2 | – 7,8 | – 7,4 |
| COM Nov 2007 | – 11,9 | – 13,6 | – 11,2 | – 9,6 | n.a. | n.a. |
| CP Dec 2006 | – 10,2 | – 11,5 | – 9,9 | – 8,9 | – 7,2 | n.a. |
| General government balance
  (% of GDP) | CP Nov 2007 | 3,6 | 2,6 | 1,3 | 1,0 | 0,9 | 0,8 |
| COM Nov 2007 | 3,6 | 3,0 | 1,9 | 1,0 | n.a. | n.a. |
| CP Dec 2006 | 2,6 | 1,2 | 1,3 | 1,6 | 1,5 | n.a. |
| Primary balance
  (% of GDP) | CP Nov 2007 | 3,7 | 2,7 | 1,4 | 1,1 | 1,0 | 0,8 |
| COM Nov 2007 | 3,7 | 3,1 | 2,1 | 1,1 | n.a. | n.a. |
| CP Dec 2006 | 2,8 | 1,4 | 1,3 | 1,7 | 1,6 | n.a. |
| Cyclically-adjusted balance (5)

  (% of GDP) | CP Nov 2007 | 2,5 | 1,8 | 1,3 | 1,4 | 1,3 | 1,2 |
| COM Nov 2007 | 2,7 | 2,4 | 1,9 | 1,5 | n.a. | n.a. |
| CP Dec 2006 | 2,0 | 0,8 | 1,2 | 1,7 | 1,7 | n.a. |
| Structural balance (7)

  (% of GDP) | CP Nov 2007 | 1,8 | 1,2 | 0,8 | 1,4 | 1,3 | 1,2 |
| COM Nov 2007 | 2,2 | 1,8 | 1,4 | 1,5 | n.a. | n.a. |
| CP Dec 2006 | 1,4 | 0,4 | 1,2 | 1,7 | 1,7 | n.a. |
| Government gross debt
  (% of GDP) | CP Nov 2007 | 4,0 | 2,7 | 2,3 | 2,0 | 1,8 | 1,6 |
| COM Nov 2007 | 4,0 | 2,8 | 2,3 | 2,0 | n.a. | n.a. |
| CP Dec 2006 | 3,7 | 2,6 | 2,3 | 2,1 | 1,9 | n.a. |
| Convergence programme (CP); Commission services' autumn 2007 economic forecasts (COM); Commission services' calculations. |

2006

2007

2008

2009

2010

2011

Real GDP

(% change)

CP Nov 2007

11,2

7,4

5,2

6,1

6,7

7,0

COM Nov 2007

11,2

7,8

6,4

6,2

n.a.

n.a.

CP Dec 2006

11,0

8,3

7,7

7,6

7,5

n.a.

HICP inflation

(%)

CP Nov 2007

4,4

6,6

8,6

5,6

3,6

3,5

COM Nov 2007

4,4

6,3

7,3

4,8

n.a.

n.a.

CP Dec 2006

4,4

4,3

4,4

3,5

3,2

n.a.

Output gap (5)

(% of potential GDP)

CP Nov 2007

3,6

2,7

0,1

– 1,2

– 1,5

– 1,3

COM Nov 2007 (6)

2,9

2,1

0,1

– 1,7

n.a.

n.a.

CP Dec 2006

2,0

1,2

0,2

– 0,3

– 0,7

n.a.

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

(% of GDP)

CP Nov 2007

– 13,2

– 14,0

– 9,9

– 8,2

– 7,8

– 7,4

COM Nov 2007

– 11,9

– 13,6

– 11,2

– 9,6

n.a.

n.a.

CP Dec 2006

– 10,2

– 11,5

– 9,9

– 8,9

– 7,2

n.a.

General government balance

(% of GDP)

CP Nov 2007

3,6

2,6

1,3

1,0

0,9

0,8

COM Nov 2007

3,6

3,0

1,9

1,0

n.a.

n.a.

CP Dec 2006

2,6

1,2

1,3

1,6

1,5

n.a.

Primary balance

(% of GDP)

CP Nov 2007

3,7

2,7

1,4

1,1

1,0

0,8

COM Nov 2007

3,7

3,1

2,1

1,1

n.a.

n.a.

CP Dec 2006

2,8

1,4

1,3

1,7

1,6

n.a.

Cyclically-adjusted balance (5)

(% of GDP)

CP Nov 2007

2,5

1,8

1,3

1,4

1,3

1,2

COM Nov 2007

2,7

2,4

1,9

1,5

n.a.

n.a.

CP Dec 2006

2,0

0,8

1,2

1,7

1,7

n.a.

Structural balance (7)

(% of GDP)

CP Nov 2007

1,8

1,2

0,8

1,4

1,3

1,2

COM Nov 2007

2,2

1,8

1,4

1,5

n.a.

n.a.

CP Dec 2006

1,4

0,4

1,2

1,7

1,7

n.a.

Government gross debt

(% of GDP)

CP Nov 2007

4,0

2,7

2,3

2,0

1,8

1,6

COM Nov 2007

4,0

2,8

2,3

2,0

n.a.

n.a.

CP Dec 2006

3,7

2,6

2,3

2,1

1,9

n.a.

Convergence programme (CP); Commission services' autumn 2007 economic 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)  The assessment takes into account notably the Commission services' autumn forecast and the Commission assessment of the October 2007 implementation report of the national reform programme.

(3)  OJ C 72, 29.3.2007, p. 5.

(4)  In particular, nominal effective exchange rate assumptions are missing. In addition, assumptions for euro area interest rates are used, although this can be justified by the absence of sufficiently representative EEK interest rate indicators in Estonia.

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

(6)  Based on estimated potential growth of 8,8 %, 8,7 %, 8,4 % and 8,1 % respectively in the period 2006-2009.

(7)  Cyclically-adjusted balance excluding one-offs and other temporary measures. One-offs and other temporary measures are 0,7 % of GDP in 2006, 0,6 % in 2007 and 0,5 % in 2008; all surplus-increasing according to the most recent programme, of which the Commission services consider 0,2 % of GDP in 2006 not to be of a one-off nature.

Sources:

Convergence programme (CP); Commission services' autumn 2007 economic forecasts (COM); Commission services' calculations.

---

| 19.3.2008 | EN | Official Journal of the European Union | C 73/18 |
| --- | --- | --- | --- |

19.3.2008

EN

Official Journal of the European Union

C 73/18

---

COUNCIL OPINION

of 4 March 2008

on the updated convergence programme of Latvia, 2007-2010

(2008/C 73/05)

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 4 March 2008, the Council examined the updated convergence programme of Latvia, which covers the period 2007 to 2010. |
| --- | --- |

(1)

On 4 March 2008, the Council examined the updated convergence programme of Latvia, which covers the period 2007 to 2010.

| (2) | Following a sustained period of high growth since the mid-nineties, Latvia's real GDP increased at double-digit rates in 2005-2007. Growth has primarily been driven by a powerful credit boom boosting private consumption and real estate investment, with net external borrowing surpassing 20 % of GDP since 2006.
  Monetary conditions have been accommodative, given a high degree of euroisation in the framework of a narrowly pegged exchange rate within ERM II. Adding to the overheating from the demand side, labour shortages have contributed to the emergence of a wage-price spiral, with very high wage growth outstripping productivity, leading to the highest inflation in the EU and rapidly worsening cost competitiveness. Helped by a set of measures adopted by the authorities in spring 2007 some slowdown has become visible in the housing market and in domestic consumption, but further steps in this direction are necessary to achieve a smooth adjustment towards a sustainable growth path. In this context fiscal policy has insufficiently tackled the emerging vulnerabilities. Key to addressing internal and external imbalances will be a more ambitious fiscal stance; adherence to an appropriate medium-term budgetary framework; prioritizing public expenditure and re-examining taxation instruments to avoid demand stimulus in sectors which do not significantly strengthen the economy's medium- and long-term supply potential; and a more responsible public sector wage growth. To foster the catching-up process, structural reforms and removal of bottlenecks directed towards strengthening the supply side of the economy are needed. |
| --- | --- |

(2)

Following a sustained period of high growth since the mid-nineties, Latvia's real GDP increased at double-digit rates in 2005-2007. Growth has primarily been driven by a powerful credit boom boosting private consumption and real estate investment, with net external borrowing surpassing 20 % of GDP since 2006.

Monetary conditions have been accommodative, given a high degree of euroisation in the framework of a narrowly pegged exchange rate within ERM II. Adding to the overheating from the demand side, labour shortages have contributed to the emergence of a wage-price spiral, with very high wage growth outstripping productivity, leading to the highest inflation in the EU and rapidly worsening cost competitiveness. Helped by a set of measures adopted by the authorities in spring 2007 some slowdown has become visible in the housing market and in domestic consumption, but further steps in this direction are necessary to achieve a smooth adjustment towards a sustainable growth path. In this context fiscal policy has insufficiently tackled the emerging vulnerabilities. Key to addressing internal and external imbalances will be a more ambitious fiscal stance; adherence to an appropriate medium-term budgetary framework; prioritizing public expenditure and re-examining taxation instruments to avoid demand stimulus in sectors which do not significantly strengthen the economy's medium- and long-term supply potential; and a more responsible public sector wage growth. To foster the catching-up process, structural reforms and removal of bottlenecks directed towards strengthening the supply side of the economy are needed.

| (3) | The macroeconomic scenario underlying the programme envisages a soft landing with real GDP growth gradually decreasing from 10,5 % in 2007 to 6,8 % by 2010. According to the programme, domestic demand will remain the main growth contribution, although it is expected to slow significantly from 2007 to 2008. Assessed against currently available information (2), this scenario appears to be based on plausible growth assumptions. However, the envisaged deceleration of domestic demand is far from assured, and the programme's economic scenario is attended by very high risks to macroeconomic stability, including continued overheating with a substantial risk of an abrupt slowdown at a later stage. Furthermore, without a larger adjustment of aggregate demand and supply than depicted in the programme, the country's external position would not be sustainable in the longer run.
  The programme's projections for inflation, which appear to be plausible, show that Latvia will be moving further away from nominal convergence at least until 2008. Moreover, uncertainties remain large due — inter alia — to ongoing volatility in energy and other commodity prices and to how the current wage-price spiral may evolve. Restraining public sector compensation is critically important for achieving a reduction in whole-economy wage growth which would be necessary to break the current cost-price dynamics and rapidly worsening cost competitiveness. |
| --- | --- |

(3)

The macroeconomic scenario underlying the programme envisages a soft landing with real GDP growth gradually decreasing from 10,5 % in 2007 to 6,8 % by 2010. According to the programme, domestic demand will remain the main growth contribution, although it is expected to slow significantly from 2007 to 2008. Assessed against currently available information (2), this scenario appears to be based on plausible growth assumptions. However, the envisaged deceleration of domestic demand is far from assured, and the programme's economic scenario is attended by very high risks to macroeconomic stability, including continued overheating with a substantial risk of an abrupt slowdown at a later stage. Furthermore, without a larger adjustment of aggregate demand and supply than depicted in the programme, the country's external position would not be sustainable in the longer run.

The programme's projections for inflation, which appear to be plausible, show that Latvia will be moving further away from nominal convergence at least until 2008. Moreover, uncertainties remain large due — inter alia — to ongoing volatility in energy and other commodity prices and to how the current wage-price spiral may evolve. Restraining public sector compensation is critically important for achieving a reduction in whole-economy wage growth which would be necessary to break the current cost-price dynamics and rapidly worsening cost competitiveness.

| (4) | For 2007, the previous programme initially targeted a budget deficit of 1,3 % of GDP, while the new update estimated a 0,3 % of GDP budget surplus. The autumn forecast projected a budget surplus of 0,9 % of GDP for 2007, which is very close to the provisional result of a 0,8 % of GDP fiscal surplus. The structural deficit, calculated according to the commonly agreed methodology, is estimated to have decreased from 1 % of GDP in 2006 to 0,5 % in 2007. The difference between the autumn forecast headline figure and the previous programme's target reflects higher revenues, which however were partly offset by higher-than-budgeted expenditure growth. Even based on a surplus close to 0,8 % of GDP, the budgetary policy in 2007 was only partly in line with the invitation in the Council opinion of 27 March 2007 on the previous update of the convergence programme (3), as the background of continuing high demand and risks to stability shows that fiscal policy remained short of that required. Nevertheless, there has been some progress in limiting the previously usual surge in end-of-year spending by public institutions, following guidelines to this end adopted by the government in November 2007. |
| --- | --- |

(4)

For 2007, the previous programme initially targeted a budget deficit of 1,3 % of GDP, while the new update estimated a 0,3 % of GDP budget surplus. The autumn forecast projected a budget surplus of 0,9 % of GDP for 2007, which is very close to the provisional result of a 0,8 % of GDP fiscal surplus. The structural deficit, calculated according to the commonly agreed methodology, is estimated to have decreased from 1 % of GDP in 2006 to 0,5 % in 2007. The difference between the autumn forecast headline figure and the previous programme's target reflects higher revenues, which however were partly offset by higher-than-budgeted expenditure growth. Even based on a surplus close to 0,8 % of GDP, the budgetary policy in 2007 was only partly in line with the invitation in the Council opinion of 27 March 2007 on the previous update of the convergence programme (3), as the background of continuing high demand and risks to stability shows that fiscal policy remained short of that required. Nevertheless, there has been some progress in limiting the previously usual surge in end-of-year spending by public institutions, following guidelines to this end adopted by the government in November 2007.

| (5) | The main goal of the budgetary strategy is to foster macroeconomic stability by continuing to respect the medium-term objective (MTO) of a structural deficit of 1 % of GDP — achieved since 2006 — by a growing margin over the programme period. Compared to the previous programme, which planned to achieve the MTO only from 2008 onwards, the new update broadly confirms the envisaged consolidation path but from a much better budgetary starting position against a broadly unchanged macroeconomic scenario. According to Commission services' calculations on the basis of information in the programme, the structural balance is projected to improve from a deficit of 0,5 % of GDP in 2007 to a surplus of 0,5 % of GDP in 2008 and by 0,5 percentage point per year in 2009-2010. Two-thirds of the rise in the headline surplus by almost 1 percentage point of GDP owes to an increase in the revenue-to-GDP ratio and the remaining third from a fall in the expenditure-to-GDP ratio. On the revenue side, the projected rise in indirect taxes and ‘other revenues’ as a share of GDP more than offsets a projected decline in social contributions due to the ongoing pension reform. Restraint in expenditure on public consumption and compensation of employees relative to GDP (which is not assured by measures described in the programme) is assumed to provide budgetary room for proposed increases in social payments, including in the areas of pensions and parent benefit, and public investment. |
| --- | --- |

(5)

The main goal of the budgetary strategy is to foster macroeconomic stability by continuing to respect the medium-term objective (MTO) of a structural deficit of 1 % of GDP — achieved since 2006 — by a growing margin over the programme period. Compared to the previous programme, which planned to achieve the MTO only from 2008 onwards, the new update broadly confirms the envisaged consolidation path but from a much better budgetary starting position against a broadly unchanged macroeconomic scenario. According to Commission services' calculations on the basis of information in the programme, the structural balance is projected to improve from a deficit of 0,5 % of GDP in 2007 to a surplus of 0,5 % of GDP in 2008 and by 0,5 percentage point per year in 2009-2010. Two-thirds of the rise in the headline surplus by almost 1 percentage point of GDP owes to an increase in the revenue-to-GDP ratio and the remaining third from a fall in the expenditure-to-GDP ratio. On the revenue side, the projected rise in indirect taxes and ‘other revenues’ as a share of GDP more than offsets a projected decline in social contributions due to the ongoing pension reform. Restraint in expenditure on public consumption and compensation of employees relative to GDP (which is not assured by measures described in the programme) is assumed to provide budgetary room for proposed increases in social payments, including in the areas of pensions and parent benefit, and public investment.

| (6) | The budgetary outcomes could be much worse than projected in the programme. There are significant risks to the overall macroeconomic stability stemming from the wide external imbalance and the currently overheated state of the economy. Were the credit-financed, domestically-driven growth to slow abruptly, the budget could come under strong pressure, as the programme's revenue projections are based on the assumption of continuing high consumption and favourable labour market conditions.
  The projected reduction in the expenditure ratio seems difficult to achieve in the absence of underpinning measures. As medium-term expenditure ceilings for ministries and public institutions were introduced only in 2007, it is not yet possible to judge their effectiveness. The track record of recent years rather points to overruns as high nominal growth has created the opportunity each year to spend extra revenues in the framework of a supplementary budget. Finally, the programme counts on substantial revenues related to privatization (amounting to a total of 0,5 % of GDP according to the programme), which are surrounded by uncertainties. |
| --- | --- |

(6)

The budgetary outcomes could be much worse than projected in the programme. There are significant risks to the overall macroeconomic stability stemming from the wide external imbalance and the currently overheated state of the economy. Were the credit-financed, domestically-driven growth to slow abruptly, the budget could come under strong pressure, as the programme's revenue projections are based on the assumption of continuing high consumption and favourable labour market conditions.

The projected reduction in the expenditure ratio seems difficult to achieve in the absence of underpinning measures. As medium-term expenditure ceilings for ministries and public institutions were introduced only in 2007, it is not yet possible to judge their effectiveness. The track record of recent years rather points to overruns as high nominal growth has created the opportunity each year to spend extra revenues in the framework of a supplementary budget. Finally, the programme counts on substantial revenues related to privatization (amounting to a total of 0,5 % of GDP according to the programme), which are surrounded by uncertainties.

| (7) | In view of this risk assessment, the budgetary stance in the programme seems sufficient to maintain the MTO throughout the programme period, as envisaged in the programme. The fiscal policy stance implied by the programme is in line with the Stability and Growth Pact, but it should be tightened given the size of the economic imbalances and the heightened responsibility of fiscal policy due to the limited scope of monetary policy under a quasi-fixed exchange rate regime within ERM II. The likelihood of a better-than-estimated 2007 outturn should be used to aim for a much higher surplus position in 2008. |
| --- | --- |

(7)

In view of this risk assessment, the budgetary stance in the programme seems sufficient to maintain the MTO throughout the programme period, as envisaged in the programme. The fiscal policy stance implied by the programme is in line with the Stability and Growth Pact, but it should be tightened given the size of the economic imbalances and the heightened responsibility of fiscal policy due to the limited scope of monetary policy under a quasi-fixed exchange rate regime within ERM II. The likelihood of a better-than-estimated 2007 outturn should be used to aim for a much higher surplus position in 2008.

| (8) | Latvia appears to be at low risk with regard to the sustainability of public finances. The long-term budgetary impact of ageing is lower than the EU average, with age-related expenditure projected to fall as a share of GDP over the coming decades, influenced by the expenditure-reducing impact of the reform of the pension system. The current level of gross debt is very low and improving the budgetary position as planned in the convergence programme update would contribute to limiting the risks to the long-term sustainability of public finances. |
| --- | --- |

(8)

Latvia appears to be at low risk with regard to the sustainability of public finances. The long-term budgetary impact of ageing is lower than the EU average, with age-related expenditure projected to fall as a share of GDP over the coming decades, influenced by the expenditure-reducing impact of the reform of the pension system. The current level of gross debt is very low and improving the budgetary position as planned in the convergence programme update would contribute to limiting the risks to the long-term sustainability of public finances.

| (9) | The convergence programme seems to be consistent with the October 2007 implementation report of the national reform programme. In particular, the implementation report identifies securing macroeconomic stability as the main challenge with implications for public finances and to that end allots a major role to the strengthening of fiscal discipline and budgetary planning procedures. While the programme contains a qualitative assessment of the overall impact of the national reform programme within the medium-term fiscal strategy, it does not provide detailed information on the direct budgetary costs/savings associated with the main reforms envisaged in the national reform programme. |
| --- | --- |

(9)

The convergence programme seems to be consistent with the October 2007 implementation report of the national reform programme. In particular, the implementation report identifies securing macroeconomic stability as the main challenge with implications for public finances and to that end allots a major role to the strengthening of fiscal discipline and budgetary planning procedures. While the programme contains a qualitative assessment of the overall impact of the national reform programme within the medium-term fiscal strategy, it does not provide detailed information on the direct budgetary costs/savings associated with the main reforms envisaged in the national reform programme.

| (10) | The budgetary strategy in the programme is partly consistent with the country-specific broad economic policy guidelines in the area of budgetary policies issued in the context of the Lisbon strategy. However, the projected fiscal stance does not contribute adequately to countering overheating and promoting economic sustainability. |
| --- | --- |

(10)

The budgetary strategy in the programme is partly consistent with the country-specific broad economic policy guidelines in the area of budgetary policies issued in the context of the Lisbon strategy. However, the projected fiscal stance does not contribute adequately to countering overheating and promoting economic sustainability.

| (11) | In terms of progress in implementing its ERM II commitments, the authorities have taken certain steps but more are needed to strengthen the fiscal stance and restrain domestic demand. Some measures have been implemented to curb credit growth but with limited impact. The March 2007 anti-inflation plan was a step in the right direction, albeit with limited immediate effect, but fell short of the stronger measures needed to stabilise the economy and to achieve a sustainable reduction in inflation. Further structural reforms are needed to address the weak supply-side of the economy and worsening competitiveness. The economic stabilization plan currently under consideration by the Latvian authorities is likely to include further fiscal and tax measures, as well as steps to improve the business environment and competitiveness. |
| --- | --- |

(11)

In terms of progress in implementing its ERM II commitments, the authorities have taken certain steps but more are needed to strengthen the fiscal stance and restrain domestic demand. Some measures have been implemented to curb credit growth but with limited impact. The March 2007 anti-inflation plan was a step in the right direction, albeit with limited immediate effect, but fell short of the stronger measures needed to stabilise the economy and to achieve a sustainable reduction in inflation. Further structural reforms are needed to address the weak supply-side of the economy and worsening competitiveness. The economic stabilization plan currently under consideration by the Latvian authorities is likely to include further fiscal and tax measures, as well as steps to improve the business environment and competitiveness.

| (12) | As regards the data requirements specified in the code of conduct for stability and convergence programmes, the programme has a small gap in compulsory data and provides most of the optional data (4). |
| --- | --- |

(12)

As regards the data requirements specified in the code of conduct for stability and convergence programmes, the programme has a small gap in compulsory data and provides most of the optional data (4).

The overall conclusion is that the programme aims to reduce economic imbalances and excessive demand pressure by setting slightly increasing but overall modest surplus target for 2008-2010, in excess of the MTO. However, the risks to the achievement of the budgetary targets are high, primarily due to large macroeconomic uncertainty and a track record of slippages from expenditure plans. Moreover, a considerably tighter stance of fiscal policy is urgently needed to meet the programme's aims in a context of an economy subject to risks to stability — stemming from inflationary pressures, deteriorating cost competitiveness and sharply increasing net foreign liabilities. While medium-term expenditure ceilings have been introduced, they remain to be tested. As regards the long-term sustainability of public finances Latvia is assessed to be at low risk.

In view of the above assessment and given the need to ensure sustainable convergence and a smooth participation in ERM II, Latvia is invited to contribute to reducing overheating pressures and risks to macroeconomic instability by:

| (i) | aiming for significantly more ambitious budgetary targets in 2008 and beyond than foreseen in the programme, notably by fully saving any revenue overperformance and respecting the expenditure ceilings; |
| --- | --- |

(i)

aiming for significantly more ambitious budgetary targets in 2008 and beyond than foreseen in the programme, notably by fully saving any revenue overperformance and respecting the expenditure ceilings;

| (ii) | within the overall public sector expenditure limits set within the medium-term budget planning framework, carefully prioritizing public expenditure and re-examining taxation instruments to avoid demand stimulus in sectors which do not significantly strengthen the economy's medium- and long-term supply potential; |
| --- | --- |

(ii)

within the overall public sector expenditure limits set within the medium-term budget planning framework, carefully prioritizing public expenditure and re-examining taxation instruments to avoid demand stimulus in sectors which do not significantly strengthen the economy's medium- and long-term supply potential;

| (iii) | adopt further policies to contain inflationary pressures, including through a responsible public sector wage-setting, thus contributing to the sharp reduction in whole-economy wage growth necessary to break the current cost-price dynamics and rapidly worsening cost competitiveness. |
| --- | --- |

(iii)

adopt further policies to contain inflationary pressures, including through a responsible public sector wage-setting, thus contributing to the sharp reduction in whole-economy wage growth necessary to break the current cost-price dynamics and rapidly worsening cost competitiveness.

Comparison of key macroeconomic and budgetary projections

| | 2006 | 2007 | 2008 | 2009 | 2010 |
| --- | --- | --- | --- | --- | --- |
| Real GDP
  (% change) | CP Nov 2007 | 11,9 | 10,5 | 7,5 | 7,0 | 6,8 |
| COM Nov 2007 | 11,9 | 10,5 | 7,2 | 6,2 | n.a. |
| CP Jan 2007 | 11,5 | 9,0 | 7,5 | 7,5 | n.a. |
| HICP inflation
  (%) | CP Nov 2007 | 6,6 | 10,1 | 12,5 | 7,2 | 4,9 |
| COM Nov 2007 | 6,6 | 9,6 | 9,8 | 6,0 | n.a. |
| CP Jan 2007 | 6,6 | 6,4 | 5,2 | 4,2 | n.a. |
| Output gap (5)

  (% of potential GDP) | CP Nov 2007 | 2,0 | 2,8 | 1,3 | – 0,3 | – 1,7 |
| COM Nov 2007 (6) | 2,1 | 2,7 | 0,8 | – 1,7 | n.a. |
| CP Jan 2007 | 1,8 | 1,3 | – 0,5 | – 2,0 | n.a. |
| Net lending/borrowing vis-à-vis the rest of the world
  (% of GDP) | CP Nov 2007 | – 21,1 | – 23,5 | – 20,3 | – 18,3 | – 16,4 |
| COM Nov 2007 | – 19,9 | – 22,2 | – 18,9 | – 18,0 | n.a. |
| CP Jan 2007 | – 17,4 | – 17,2 | – 16,3 | – 15,8 | n.a. |
| General government balance
  (% of GDP) | CP Nov 2007 | – 0,3 | 0,3 | 0,7 | 1,0 | 1,2 |
| COM Nov 2007 | – 0,3 | 0,9 | 0,8 | 0,5 | n.a. |
| CP Jan 2007 | – 0,4 | – 1,3 | – 0,9 | – 0,4 | n.a. |
| Primary balance
  (% of GDP) | CP Nov 2007 | 0,2 | 0,7 | 1,0 | 1,2 | 1,5 |
| COM Nov 2007 | 0,2 | 1,3 | 1,2 | 0,9 | n.a. |
| CP Jan 2007 | 0,2 | – 0,8 | – 0,4 | 0,1 | n.a. |
| Cyclically-adjusted balance (5)

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

  (% of GDP) | CP Nov 2007 | – 0,9 | – 0,5 | 0,4 | 1,1 | 1,7 |
| COM Nov 2007 | – 0,8 | 0,2 | 0,5 | 1,0 | n.a. |
| CP Jan 2007 | – 0,9 | – 1,7 | – 0,8 | 0,2 | n.a. |
| Government gross debt
  (% of GDP) | CP Nov 2007 | 10,6 | 9,4 | 8,3 | 7,2 | 6,4 |
| COM Nov 2007 | 10,6 | 10,2 | 7,8 | 6,4 | n.a. |
| CP Jan 2007 | 10,7 | 10,5 | 10,6 | 9,4 | n.a. |
| Convergence programme (CP); Commission services' autumn 2007 economic forecasts (COM); Commission services' calculations. |

2006

2007

2008

2009

2010

Real GDP

(% change)

CP Nov 2007

11,9

10,5

7,5

7,0

6,8

COM Nov 2007

11,9

10,5

7,2

6,2

n.a.

CP Jan 2007

11,5

9,0

7,5

7,5

n.a.

HICP inflation

(%)

CP Nov 2007

6,6

10,1

12,5

7,2

4,9

COM Nov 2007

6,6

9,6

9,8

6,0

n.a.

CP Jan 2007

6,6

6,4

5,2

4,2

n.a.

Output gap (5)

(% of potential GDP)

CP Nov 2007

2,0

2,8

1,3

– 0,3

– 1,7

COM Nov 2007 (6)

2,1

2,7

0,8

– 1,7

n.a.

CP Jan 2007

1,8

1,3

– 0,5

– 2,0

n.a.

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

(% of GDP)

CP Nov 2007

– 21,1

– 23,5

– 20,3

– 18,3

– 16,4

COM Nov 2007

– 19,9

– 22,2

– 18,9

– 18,0

n.a.

CP Jan 2007

– 17,4

– 17,2

– 16,3

– 15,8

n.a.

General government balance

(% of GDP)

CP Nov 2007

– 0,3

0,3

0,7

1,0

1,2

COM Nov 2007

– 0,3

0,9

0,8

0,5

n.a.

CP Jan 2007

– 0,4

– 1,3

– 0,9

– 0,4

n.a.

Primary balance

(% of GDP)

CP Nov 2007

0,2

0,7

1,0

1,2

1,5

COM Nov 2007

0,2

1,3

1,2

0,9

n.a.

CP Jan 2007

0,2

– 0,8

– 0,4

0,1

n.a.

Cyclically-adjusted balance (5)

(% of GDP)

CP Nov 2007

– 0,9

– 0,5

0,4

1,1

1,7

COM Nov 2007

– 0,8

0,2

0,5

1,0

n.a.

CP Jan 2007

– 0,9

– 1,7

– 0,8

0,2

n.a.

Structural balance (7)

(% of GDP)

CP Nov 2007

– 0,9

– 0,5

0,4

1,1

1,7

COM Nov 2007

– 0,8

0,2

0,5

1,0

n.a.

CP Jan 2007

– 0,9

– 1,7

– 0,8

0,2

n.a.

Government gross debt

(% of GDP)

CP Nov 2007

10,6

9,4

8,3

7,2

6,4

COM Nov 2007

10,6

10,2

7,8

6,4

n.a.

CP Jan 2007

10,7

10,5

10,6

9,4

n.a.

Convergence programme (CP); Commission services' autumn 2007 economic 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)  The assessment takes into account notably the Commission services' autumn forecast and the Commission assessment of the October 2007 implementation report of the national reform programme.

(3)  OJ C 89, 24.4.2007, p. 15.

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

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

(6)  Based on estimated potential growth of 9,8 %, 9,8 %, 9,3 % and 8,9 % respectively in the period 2006-2009.

(7)  Cyclically-adjusted balance excluding one-off and other temporary measures. There are no one-off and other temporary measures according to the most recent programme and the autumn forecast.

Sources:

Convergence programme (CP); Commission services' autumn 2007 economic forecasts (COM); Commission services' calculations.

---

IV Notices

NOTICES FROM EUROPEAN UNION INSTITUTIONS AND BODIES

Council

| 19.3.2008 | EN | Official Journal of the European Union | C 73/23 |
| --- | --- | --- | --- |

19.3.2008

EN

Official Journal of the European Union

C 73/23

---

COUNCIL DECISION

of 17 March 2008

appointing one member of the Management Board of the European Chemicals Agency

(2008/C 73/06)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community,

Having regard to Regulation (EC) No 1907/2006 of the European Parliament and of the Council of 18 December 2006 concerning the Registration, Evaluation, Authorisation and Restriction of Chemicals (REACH) and establishing a European Chemicals Agency (1), and in particular Article 79 thereof,

Whereas:

| (1) | Article 79 of Regulation (EC) No 1907/2006 provides that the Council should appoint as Members of the Management Board of the European Chemicals Agency one representative from each Member State. |
| --- | --- |

(1)

Article 79 of Regulation (EC) No 1907/2006 provides that the Council should appoint as Members of the Management Board of the European Chemicals Agency one representative from each Member State.

| (2) | By Decision of 7 June 2007 (2) the Council appointed 27 members of the Management Board of the European Chemicals Agency. |
| --- | --- |

(2)

By Decision of 7 June 2007 (2) the Council appointed 27 members of the Management Board of the European Chemicals Agency.

| (3) | The Romanian Government has informed the Council of its intention to replace the Romanian representative on the Management Board and has submitted a nomination for a new representative, who should be appointed for a period which runs until 31 May 2011, |
| --- | --- |

(3)

The Romanian Government has informed the Council of its intention to replace the Romanian representative on the Management Board and has submitted a nomination for a new representative, who should be appointed for a period which runs until 31 May 2011,

HAS DECIDED AS FOLLOWS:

Article 1

Mr Teodor OGNEAN of Romanian nationality, born on 21 February 1947, shall be appointed member of the Management Board of the European Chemicals Agency in place of Ms Rodica MOROHOI for the period from 20 March 2008 to 31 May 2011.

Article 2

This Decision shall be published in the Official Journal of the European Union.

Done at Brussels, 17 March 2008.

For the Council

The President

I. JARC

---

(1)  OJ L 396, 30.12.2006, p. 1. Corrected by OJ L 136, 29.5.2007, p. 3.

1

(2)  OJ C 134, 16.6.2007, p. 6.

2

---

Commission

| 19.3.2008 | EN | Official Journal of the European Union | C 73/24 |
| --- | --- | --- | --- |

19.3.2008

EN

Official Journal of the European Union

C 73/24

---

Euro exchange rates (1)

18 March 2008

(2008/C 73/07)

1 euro=

| | Currency | Exchange rate |
| --- | --- | --- |
| USD | US dollar | 1,5771 |
| JPY | Japanese yen | 154,42 |
| DKK | Danish krone | 7,4595 |
| GBP | Pound sterling | 0,7817 |
| SEK | Swedish krona | 9,455 |
| CHF | Swiss franc | 1,561 |
| ISK | Iceland króna | 121,79 |
| NOK | Norwegian krone | 8,0675 |
| BGN | Bulgarian lev | 1,9558 |
| CZK | Czech koruna | 25,25 |
| EEK | Estonian kroon | 15,6466 |
| HUF | Hungarian forint | 257,51 |
| LTL | Lithuanian litas | 3,4528 |
| LVL | Latvian lats | 0,6971 |
| PLN | Polish zloty | 3,5297 |
| RON | Romanian leu | 3,7285 |
| SKK | Slovak koruna | 32,408 |
| TRY | Turkish lira | 1,9505 |
| AUD | Australian dollar | 1,6974 |
| CAD | Canadian dollar | 1,5674 |
| HKD | Hong Kong dollar | 12,2535 |
| NZD | New Zealand dollar | 1,9509 |
| SGD | Singapore dollar | 2,1708 |
| KRW | South Korean won | 1 600,91 |
| ZAR | South African rand | 12,6424 |
| CNY | Chinese yuan renminbi | 11,1675 |
| HRK | Croatian kuna | 7,255 |
| IDR | Indonesian rupiah | 14 509,32 |
| MYR | Malaysian ringgit | 4,9951 |
| PHP | Philippine peso | 65,134 |
| RUB | Russian rouble | 37,079 |
| THB | Thai baht | 49,218 |
| BRL | Brazilian real | 2,6861 |
| MXN | Mexican peso | 16,9262 |

Currency

Exchange rate

USD

US dollar

1,5771

JPY

Japanese yen

154,42

DKK

Danish krone

7,4595

GBP

Pound sterling

0,7817

SEK

Swedish krona

9,455

CHF

Swiss franc

1,561

ISK

Iceland króna

121,79

NOK

Norwegian krone

8,0675

BGN

Bulgarian lev

1,9558

CZK

Czech koruna

25,25

EEK

Estonian kroon

15,6466

HUF

Hungarian forint

257,51

LTL

Lithuanian litas

3,4528

LVL

Latvian lats

0,6971

PLN

Polish zloty

3,5297

RON

Romanian leu

3,7285

SKK

Slovak koruna

32,408

TRY

Turkish lira

1,9505

AUD

Australian dollar

1,6974

CAD

Canadian dollar

1,5674

HKD

Hong Kong dollar

12,2535

NZD

New Zealand dollar

1,9509

SGD

Singapore dollar

2,1708

KRW

South Korean won

1 600,91

ZAR

South African rand

12,6424

CNY

Chinese yuan renminbi

11,1675

HRK

Croatian kuna

7,255

IDR

Indonesian rupiah

14 509,32

MYR

Malaysian ringgit

4,9951

PHP

Philippine peso

65,134

RUB

Russian rouble

37,079

THB

Thai baht

49,218

BRL

Brazilian real

2,6861

MXN

Mexican peso

16,9262

---

(1)

Source: reference exchange rate published by the ECB.

---

V Announcements

PROCEDURES RELATING TO THE IMPLEMENTATION OF THE COMPETITION POLICY

Commission

| 19.3.2008 | EN | Official Journal of the European Union | C 73/25 |
| --- | --- | --- | --- |

19.3.2008

EN

Official Journal of the European Union

C 73/25

---

Prior notification of a concentration

(Case COMP/M.5125 — Marel/SFS)

(Text with EEA relevance)

(2008/C 73/08)

| 1. | On 12 March 2008, the Commission received a notification of a proposed concentration pursuant to Article 4 and following a referral pursuant to Article 4(5) of Council Regulation (EC) No 139/2004 (1) by which the undertaking Marel Food Systems hf. (‘Marel’, Iceland) acquires within the meaning of Article 3(1)(b) of the Council Regulation control of the whole of the undertaking Stork Food Systems (‘SFS’, Netherlands) by way of purchase of shares and assets. |
| --- | --- |

1.

On 12 March 2008, the Commission received a notification of a proposed concentration pursuant to Article 4 and following a referral pursuant to Article 4(5) of Council Regulation (EC) No 139/2004 (1) by which the undertaking Marel Food Systems hf. (‘Marel’, Iceland) acquires within the meaning of Article 3(1)(b) of the Council Regulation control of the whole of the undertaking Stork Food Systems (‘SFS’, Netherlands) by way of purchase of shares and assets.

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






  — | for Marel: development, manufacture, sale and servicing of machinery and systems for primary processing of fish and poultry, as well as the further processing of fish, red meat and poultry, |
| --- | --- | --- |

2.

The business activities of the undertakings concerned are:

—

for Marel: development, manufacture, sale and servicing of machinery and systems for primary processing of fish and poultry, as well as the further processing of fish, red meat and poultry,

| — | for SFS: development, manufacture, sale and servicing of machinery and equipment for primary processing of poultry, as well as the further processing of fish, red meat and poultry. |
| --- | --- |

—

for SFS: development, manufacture, sale and servicing of machinery and equipment for primary processing of poultry, as well as the further processing of fish, red meat and poultry.

| 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. |
| --- | --- |

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.

| 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.5125 — Marel/SFS, to the following address:





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

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.5125 — Marel/SFS, to the following address:

European Commission

Directorate-General for Competition

Merger Registry

J-70

B-1049 Bruxelles/Brussel

---

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

---

OTHER ACTS

Commission

| 19.3.2008 | EN | Official Journal of the European Union | C 73/26 |
| --- | --- | --- | --- |

19.3.2008

EN

Official Journal of the European Union

C 73/26

---

Publication of an application pursuant to Article 6(2) of Council Regulation (EC) No 510/2006 on the protection of geographical indications and designations of origin for agricultural products and foodstuffs

(2008/C 73/09)

This publication confers the right to object to the application pursuant to Article 7 of Council Regulation (EC) No 510/2006 (1). Statements of objection must reach the Commission within six months from the date of this publication.

SUMMARY

COUNCIL REGULATION (EC) No 510/2006

‘BŒUF DE BAZAS’

EC No: FR/PDO/005/0344/21.04.2004

PDO ( ) PGI ( X )

This summary sets out the main elements of the product specification for information purposes.

1.   Responsible department in the Member State:

| Name: | Institut National de l'Origine et de la Qualité (I.N.A.O.) |
| --- | --- |
| Address: | 51, rue d'Anjou |
| F-75008 Paris |

Name:

Institut National de l'Origine et de la Qualité (I.N.A.O.)

Address:

51, rue d'Anjou

F-75008 Paris

Tel.

(33) 153 89 80 00

Fax

(33) 142 25 57 97

E-mail:

info@inao.gouv.fr

2.   Group:

| Name: | Association pour la Défense du Bœuf de Bazas |
| --- | --- |
| Address: | 3, Lagrange Est |
| F-33430 Bazas |

Name:

Association pour la Défense du Bœuf de Bazas

Address:

3, Lagrange Est

F-33430 Bazas

Tel.

(33) 556 25 03 32

Fax

(33) 556 25 23 80

E-mail:

bazas.elevage@expalliance.fr

Composition:

Producers/processors ( X ) Other ( )

3.   Type of product:

Class 1.1: Fresh meat (and offal)

4.   Specification:

(Summary of requirements under Article 4(2) of Regulation (EC) No 510/2006)

4.1.   Name: ‘Bœuf de Bazas’

4.2.   Description: Bazadais or Blonde d'Aquitaine cattle or crosses between these two breeds.

Fresh meat: whole carcasses, sides, quarters, cuts.

Age at slaughter:

Heifers: no less than 30 months — no more than 48 months

Cows: no less than 36 months — no more than 108 months

Steers: no less than 36 months — no more than 60 months.

Carcass characteristics:

Minimum weight:

| — | 300 kg for heifers and cows, |
| --- | --- |

—

300 kg for heifers and cows,

| — | 380 kg for steers |
| --- | --- |

—

380 kg for steers

Conformation classes E, U, R

Fat score 3 or 4

No trimming of external fat for carcasses with a fat score of 3 and partial trimming for those with a fat score of 4

Meat colour: bright red.

4.3.   Geographical area: The cattle must have been born, raised, fattened and slaughtered in the ‘Bazas’ production area, which includes:

the department of the Gironde,

the following cantons in the department of Landes: Aire sur Adour, Gabarret, Geaune, Grenade sur Adour, Labrit, Mimizan, Morcenx, Parentis-en-Born, Pissos, Roquefort, Sabres, Sore, Villeneuve-de-Marsan, Mont-de-Marsan and Tartas,

the cantons bordering the Gironde and Landes in the neighbouring departments of Lot et Garonne and Gers, i.e.:

the cantons of Bouglon, Casteljaloux, Duras, Houeilles, Marmande, Meilhan-sur-Garonne, Mézin and Seyches in Lot et Garonne, which border the Gironde and Landes,

the cantons of Cazaubon, Nogaro, Riscle and Eauze in Gers, which border Landes.

To minimise the effects of transportation on the quality of the meat (animal welfare, stress limitation) and to ensure better traceability of carcasses and better monitoring of the specific method of trimming, the abattoirs registered to slaughter Bœufs de Bazas are located within the production area. This makes it possible to preserve the organoleptic qualities of the carcasses.

4.4.   Proof of origin: Before it is seven days old, at the latest, the animal is marked on both ears with an approved mark bearing a unique national identification number.

An identification document (passport) containing the animal's details (date of birth, breed code, national identification number, etc.) accompanies it to the abattoir.

This passport also makes it possible to identify the holdings the animal has passed through, as a movement label is affixed by each one of the animal's owners, and each holding is identified by a unique number (the first five figures correspond to the INSEE code for the department and commune in which the holding is located). The geographical origin of the animal is therefore known.

At the abattoir, the carcass is marked with a slaughter number, thereby establishing a link with the national identification number. The carcass is also stamped with the ‘Bœuf de Bazas’ logo in food-grade ink. A numbered guarantee certificate showing the animal's national identification number and slaughter number accompanies each carcass, side or quarter of beef sold to a butcher. Butchers selling ‘Bœuf de Bazas’ may do so either exclusively or alongside other meat products. Checks are also carried out on stock records.

4.5.   Method of production: Heifers are reared to the age of at least 30 months, while cows and steers are reared to at least 36 months.

Calves are reared in a suckler herd (suckled by their mothers).

The cattle spend at least seven months of the year at pasture, unless weather conditions are exceptionally bad.

They are fed on grass or fodder produced mainly on the holding itself, supplemented with feed approved by the Association pour la Défense du Bœuf de Bazas (Association for the defence of Bœuf de Bazas).

Feed used during the fattening (finishing) period: during the fattening period, which lasts at least four months, the aim is to finish fattening the animals so as to enable the carcass and meat to reach optimum quality.

During the finishing period, or at least for the last two months, the animal must be fattened indoors or in groups.

Grains or millers' offals (maize, wheat, barley, triticale, oats, rye, etc.) supplemented with coarse fodder (grass, hay) and/or roots and tubers are used for finishing.

The stockbreeder/fattener must adjust the animal's feed rations according to its biological condition and appetite. In this context, in addition to the grains that are to form the basic energy source in their feed, cattle may be given maize silage and/or grass silage as long as they do not exceed 50 % of the dry-matter intake.

As well as grains, oilcakes (mainly soya and linseed) may also be used.

Traditionally, over 70 % of the feed and more than 90 % of the animal's total food intake during its lifetime are produced on the farm itself.

Meat maturation: at least 10 days.

4.6.   Link:

Distinctive characteristic:

The area's oceanic climate (mild winters, frequent rainfall spread throughout the year and plenty of sunshine) allows farmers to use the grassland as natural or temporary meadows and to graze their herds for more than half the year.

The breeds used to produce ‘Bœuf de Bazas’ are those traditionally farmed in the area, and both the Bazadais and the Blonde d'Aquitaine are local breeds.

Reputation:

The term ‘Bœuf de Bazas’ goes back as far as the 13th century, when it was used to refer to the best local beef breeds reared in the area around the town of Bazas.

The fête des bœufs gras, the traditional procession of Bazadais cattle on carnival Thursday, has kept the reputation of ‘Bœuf de Bazas’ alive since the 13th century. The festival has an unbroken history and continued to be held even when its existence was under threat (under the ancien régime). The working cattle were then fattened and sold, mainly at the market in Bazas.

Today, the reputation of ‘Bœuf de Bazas’ remains as strong as ever:

At local level:

| — | every year, at carnival time, the fête des bœufs gras draws crowds of spectators to Bazas, and participating butchers see a 30 % increase in sales during this period. The festival is built on the unique qualities and renown of ‘Bœuf de Bazas’ and, in turn, helps maintain its reputation over time, |
| --- | --- |

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every year, at carnival time, the fête des bœufs gras draws crowds of spectators to Bazas, and participating butchers see a 30 % increase in sales during this period. The festival is built on the unique qualities and renown of ‘Bœuf de Bazas’ and, in turn, helps maintain its reputation over time,

| — | other communes in the area covered by the PGI have also set up similar events. |
| --- | --- |

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other communes in the area covered by the PGI have also set up similar events.

At national level:

The product's reputation extends far beyond the local area. This can be illustrated by some recent examples:

| — | the Article in Le Figaro on 16 February 2003 entitled ‘le bœuf gras fait son carnaval’ (the fatted ox celebrates carnival), |
| --- | --- |

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the Article in Le Figaro on 16 February 2003 entitled ‘le bœuf gras fait son carnaval’ (the fatted ox celebrates carnival),

| — | the recipe for ‘croustillant de queue de bœuf de Bazas au foie gras de canard poêlé des landes’ (crispy ‘Bœuf de Bazas’ oxtail with fried Landes duck foie gras) featured on ‘Les escapades de Petitrenaud’ broadcast on France 5. |
| --- | --- |

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the recipe for ‘croustillant de queue de bœuf de Bazas au foie gras de canard poêlé des landes’ (crispy ‘Bœuf de Bazas’ oxtail with fried Landes duck foie gras) featured on ‘Les escapades de Petitrenaud’ broadcast on France 5.

4.7.   Inspection body:

| Name: | Qualisud |
| --- | --- |
| Address: | Agropole, BP 102 |
| F-47000 Agen |

Name:

Qualisud

Address:

Agropole, BP 102

F-47000 Agen

Tel.

(33) 558 06 15 21

Fax

(33) 558 75 13 36

E-mail:

qualisud@wanadoo.fr

This inspection body is EN 45011 approved and accredited.

4.8.   Labelling: Name under which the product is sold: ‘Bœuf de Bazas’.

The label must include an information field providing the consumer with information about the product:

type of animal (male or female),

the animal's identification number,

the carcass identification number (abattoir No), where appropriate,

date of birth,

breed,

name and address of the farmer,

date of slaughter,

carcass weight,

grade,

recipient name.

This certificate accompanies the carcass, side or quarter until it is sold to the consumer.

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(1)  OJ L 93, 31.3.2006, p. 12.

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