OPINION No 9/98 of the Court of Auditors of the European Communities on the proposal for a Council Regulation (EC, ECSC, Euratom) amending the Financial Regulation of 21 December 1977 applicable to the general budget of the European Communities (proposal submitted by the Commission in document COM(1998) 206 final of 3 April 1998) (1999/C 7/01)

THE COURT OF AUDITORS OF THE EUROPEAN COMMUNITIES,

Having regard to the Treaty establishing the European Community, and in particular Article 209 thereof,

Having regard to the Treaty establishing the European Coal and Steel Community, and in particular Article 78h thereof,

Having regard to the Treaty establishing the European Atomic Energy Community, and in particular Article 183 thereof,

Having regard to the Financial Regulation of 21 December 1977 applicable to the general budget of the European Communities (1), as last amended by Council Regulation (EC) No 2444/97 of 22 September 1997 (2), and in particular Article 140 thereof,

Having regard to the Commission proposal of 3 April 1998 (3),

Having regard to the request for an opinion on the proposal, which was sent to the Court of Auditors by the Council on 26 May 1998,

Whereas the Regulation mentioned in the fifth recital of the proposal, which had still not been adopted by the Council at the time when the proposal was published, has now been adopted (4);

Whereas the aim of the Commission's proposal is, in fact, to draw the inferences of three separate events in relation to the Financial Regulation: the introduction of the euro as the single currency of some Member States of the Communities; the abolition of the common organisational structure for the Economic and Social Committee and the Committee of the Regions; the adoption of the stability and growth pact, and in particular the excessive deficit procedure which it entails; whereas these three subjects should be treated separately,

HAS ADOPTED THE FOLLOWING OPINION:

CONSEQUENCES OF ABOLISHING THE COMMON ORGANISATIONAL STRUCTURE FOR THE ECONOMIC AND SOCIAL COMMITTEE AND THE COMMITTEE OF THE REGIONS

1. If the Treaty of Amsterdam is ratified it will have the effect of repealing Protocol 16 of the Treaty of Maastricht, which provides for a common organisational structure for the Economic and Social Committee and the Committee of the Regions. In its proposal the Commission has drawn the correct inferences regarding the repeal of the Protocol.

2. As regards the entry into force of the proposed Regulation, the date of 1 January 1999 is appropriate in terms of the introduction of the euro and the implementation of the stability and growth pact, as these both depend only on the transition to the third stage of economic and monetary union, which is to take place on that date.

On the other hand, in the case of the provisions concerning the consequences of the disappearance of the joint organisational structure, the proposed amendments are to be suspended until the Treaty of Amsterdam enters into force. It will be possible for all these provisions to enter into force on 1 January 1999, unless the Treaty of Amsterdam has not been ratified by that date, in which case it would be necessary for them to enter into force on the 1 January following its ratification.

Until the Treaty of Amsterdam is ratified, however, it does not constitute a legal base and thus cannot constitute grounds for a regulation amending the Financial Regulation. Furthermore the Commission correctly states in the explanatory memorandum that the entry into force of the amending Regulation should be timed to coincide with the entry into force of the Treaty of Amsterdam; moreover, the second recital of the proposal postulates that the legal base will exist at the time when the Council adopts the Regulation, which is not yet certain. It has not however realised the implications of this in Article 2 of the proposal.

The provisions concerning the first two matters should, therefore, be detached from those concerning the third, so as to make two proposals, since at present the Council is only in a position to adopt a regulation on the introduction of the euro and the stability pact.

THE INTRODUCTION OF THE EURO

3. Article 2(1) and (3) of Council Regulation (EC) No 1103/97 of 17 June 1997 on certain provisions relating to the introduction of the euro (5) provides,

'Every reference in a legal instrument to the ecu, as referred to in Article 109g of the Treaty shall be replaced by a reference to the euro at a rate of EUR 1 to ECU 1.

This Article shall apply as from 1 January 1999`,

the date on which the third phase of economic and monetary union begins.

The Financial Regulation is, however, a Community 'legal instrument` as defined in Article 1 of Regulation (EC) No 1103/97.

Any reference to the ecu in the Financial Regulation must therefore be replaced by a reference to the euro.

4. However, in view of the fact that some Member States will not adopt the euro; since it will also be necessary to continue to take account of the currencies of non-member countries, separate provisions should be drafted in relation to:

- the euro;

- the national currencies of Member States that are not participating in the euro,

- the currencies of non-member countries.

For this reason the proposed Article 111(3) needs to be slightly reworked.

The proposed Article 11(4), which deals with the procedures for conversion from one currency to another, omits to consider the currencies of non-member countries. In reality a much simpler formulation of this paragraph would make it possible to cover all eventualities.

5. Similarly, the proposed wording of Article 35 omits to mention the euro and to provide for Member States that have adopted the euro to be informed about transfers between the euro and the national currencies of the non-participant States. Moreover, rather than providing a Member State with information about transfers which concern only its own currency, it would be preferable for all the Member States to be informed about all the transfers effected by the European Union.

6. Out of a similar desire to provide good information and since the use of daily exchange rates will continue to be the rule and the use of monthly rates the exception, the introduction of the euro makes daily publication of the exchange rates recorded each day on the foreign exchange markets no less necessary than before. The provisions of the current second and third subparagraphs of Article 11(3) should, therefore, be modified and restored.

7. The proposed Article 11(4) institutes the principle that conversions between the euro and the national currencies of the Member States that have not adopted the euro will be made at the exchange rate applicable on the day of the operation and adds that derogations will be permitted only 'in exceptional cases`, which are listed in the rules for implementing the Financial Regulation. However, the current text of the implementing rules does not mention own resources among the derogations, even though in their case the exchange rates used will continue to be monthly rates. It is difficult to accept that a derogation concerning the own resources as a whole is an exceptional case. For this reason it would be better to rectify this omission in the Financial Regulation itself, rather than supplementing the implementing rules.

CONSEQUENCES OF THE STABILITY AND GROWTH PACT

8. In accordance with the stability and growth pact (SGP), which was outlined by the Dublin European Council of 13 and 14 December 1996 and explained in more detail by the Amsterdam European Council of 16 and 17 June 1997, when the Council of Ministers has decided that there is an excessive deficit in a Member State it makes recommendations to the Member State concerned and then, if no effective action is taken, it gives the Member State notice that it should take measures to reduce the deficit. In the absence of such measures the Council of Ministers may impose sanctions on the Member State in question, including requiring it to make one or more successive non-interest-bearing deposits which may then be converted by the Council of Ministers into fines, pure and simple, if the excessive deficit has not been corrected within a certain period. If, on the other hand, there has been progress towards the correction of the excessive deficit the Council of Ministers abrogates the sanctions that were imposed previously (with the exception of fines, which are non-repayable).

The provisions concerning the giving of notice and sanctions apply only to the Member States that are part of the euro zone.

9. The Commission's proposal for amending the Financial Regulation seeks to specify an exact technique for financial and budgetary implementation of the SGP. The system set out in the proposal can be summarised as follows:

- as soon as a sanction has become final and can no longer be reversed by the Court of Justice, it is entered as revenue under a special heading in the statement of revenue,

- expenditure appropriations (both commitment and payment appropriations) for an equal amount are opened under a special heading in the statement of expenditure.

This revenue and expenditure is thus simply incorporated into the general budget. It is a system of expenditure against earmarked revenue.

10. Some of the arguments expounded by the Commission in its explanatory memorandum have been taken into account in the regulation in slightly unsatisfactory ways:

(a) the proposed solution lacks transparency in certain respects, in as far as full and separate identification of all flows of funds and values arising from implementation of the SGP cannot be achieved by budget entries alone;

(b) under the proposed system there is likewise some uncertainty as to budgetary neutrality, that is to say, the exact matching of revenue and expenditure (expenditure, rather than appropriations, which is what the Commission stipulates), mainly because of the problems presented by the interest that will accrue on the deposits (see Sections 15 and 16).

11. The solution that has been advocated is difficult to reconcile with some financial principles and considerations of a general nature.

(a) The general budget is the budget of 'the European Union`, which is made up of all the Member States. The financial arrangements of the SGP, on the other hand, concern only the Member States that are part of the euro area.

(b) The general budget is laid down and implemented and its implementation registered in the accounts on a yearly basis. It is not, however, possible for the deposits, fines and payments to Member States that are not in deficit to be laid down, implemented and registered in the accounts on that basis.

(c) Community expenditure is linked to policies which involve the execution of programmes and measures. Even though the budget is adopted annually, it is circumscribed by ongoing objectives which usually extend beyond the annual framework. Conversely, the financial flows engendered by implementation of the SGP are not linked to any sustained expenditure policy and would represent peaks that would swell the budget total in an erratic and exceptional way. These intermittent increases would cloud the view of changes in overall budget totals.

12. In the explanatory memorandum the Commission states that the system is neutral as far as the budget is concerned, because when the amounts paid by way of penalties by Member States in deficit are entered in the statement of revenue, appropriations for an equal amount are made available in the statement of expenditure. The proposed new Article 126a is intended to incorporate this matching of amounts in the legislation. In the statement of expenditure appropriations would be opened to finance 'the repayments provided for in Article 16 of Council Regulation (EC) No 1467/97`, i.e. the fines and interest paid over to Member States that are not in deficit. However, the statement of revenue would 'receive the amounts of each sanction imposed by the Council`, that is to say, according to Section 4 of Regulation (EC) No 1467/97, the deposits and fines.

13. In the statement of revenue mentioned in the proposed Article 126a the phrase 'of each sanction` should thus be replaced by the phrase 'of the fines and interest on the deposits and fines`.

14. Although a deposit under Article 16 of Regulation (EC) No 1467/97 is not to be regarded as revenue and its possible repayment to the 'rehabilitated` Member State must not be treated as expenditure, there are still flows of funds that must be registered and clearly and separately identifiable as pertaining to the SGP.

15. What would become of the interest generated by a deposit or a fine if it were to be annulled by the Court of Justice by virtue of the proposed Article 28a? The Article in question provides that, 'Revenue received by way of fines, periodic penalty payments and other penalties imposed by the Commission or the Council . . . and any accrued interest` are not to be recorded as revenue as long as there is any possibility of their being cancelled by the Court of Justice. It must be concluded from this that if the sanction is revoked by the Court of Justice the interest is not to be entered as revenue, because it is paid to the Member State that has been unduly sanctioned. A specific provision would remove the doubt on this point.

16. With a view to improving the proposed wording the Court of Auditors recommends a solution which, in its view, might improve transparency:

- create a budget annex, which would also figure in the revenue and expenditure account and would record all the flows of funds occasioned by the SGP. The annex would record, on the one hand, revenue and expenditure and, on the other, flows of funds that do not constitute budget expenditure or revenue,

- the interest accruing on deposits and fines would also be included in the system but would be treated differently for accounting purposes according to the nature of the financial flows.

17. The flows of funds occasioned by the SGP system would be included in the accounts in the consolidated balance sheet of the Union. They should be clearly presented on the balance sheet.

18. The Commission proposes to insert in a new Section Ia under Title XI of the Financial Regulation provisions on the budgetary structure for the proceeds of the sanctions. The nature of the sanctions imposed under Regulation (EC) No 1467/97 cannot be equated with the operations covered by Title XI, which contains special provisions applicable to financial participation by third parties and outside bodies in Community activities. The Court accordingly recommends that the provisions in question be inserted as Article 132a under a new Title XIa headed 'Special provisions applicable to the sanctions referred to in Section 4 of Council Regulation (EC) No 1467/97`.

This Opinion was adopted by the Court of Auditors in Luxembourg at its meeting of 22 October 1998.

For the Court of Auditors

Bernhard FRIEDMANN

President

(1) OJ L 356, 31.12.1977, p. 1.

(2) OJ L 340, 11.12.1997, p. 1.

(3) Doc. COM(1998) 206 final (OJ C 149, 15.5.1998, p. 21).

(4) Council Regulation (EC) No 974/98 of 3 May 1998 on the introduction of the euro (OJ L 139, 11.5.1998, p. 1).

(5) OJ L 162, 19.6.1997, p. 1.