Recommendation for a COUNCIL RECOMMENDATION TO GREECE with a view to bringing an end to the situation of an excessive government deficit

(presented by the Commission)

EXPLANATORY MEMORANDUM

On 7 April 2004, the Commission published its spring 2004 forecasts. [1] According to these forecasts, which took into consideration revised data reported by Greece on 30 March 2004 but not validated by Eurostat, the general government deficit in 2003 reached 2.95% of GDP. Following contacts between Eurostat and the Greek authorities at the end of April, the latter submitted on 4 May a further revised notification with a deficit of 3.2% of GDP for 2003, thus exceeding the 3% of GDP Treaty reference value, and substantially higher than the 2002 deficit (1.5% of GDP). Moreover, at 103.0 percentage points the gross debt to GDP ratio remains well above the 60% Treaty reference value. Based on this prima facie evidence, the Commission initiated the Excessive Deficit Procedure for Greece on 19 May 2004, with the adoption of the report as foreseen in Article 104(3) of the Treaty. [2]

[1] The Commission Spring 2004 forecast is available at the following website: http://europa.eu.int/comm/economy_finance/publications/european_economy/2004/ee204en.pdf.

[2] The full text of this report is available at the following website: http://europa.eu.int/comm/economy_finance/about/activities/sgp/procedures_en.htm.

The application of the excessive deficit procedure (EDP) is governed by Article 104 of the Treaty and by Council Regulation (EC) No 1467/97 "on speeding up and clarifying the implementation of the excessive deficit procedure", which is part of the Stability and Growth Pact. [3]

[3] OJ L 209, 2.8.1997.

The Commission report according to Article 104(3) of the Treaty concluded that the excess of the 3.2% of GDP deficit in 2003 over the 3% of GDP Treaty reference value did not result, in the sense of the Stability and Growth Pact, from an unusual event outside the control of the Greek authorities, nor was it the result of a severe economic downturn, which is defined in the Pact as an annual fall of real GDP of at least 2%. On the contrary, it occurred in a context of strongly positive growth, with real GDP growth at 4.2% in 2003, and a positive output gap of around 1.5% of GDP. The outturn of general government deficit for 2003 compares with a target deficit of 0.9% of GDP set in the December 2002 updated stability programme. The significant slippage is attributed to non recurrent factors (overruns in the expenditure related to the preparation of the Olympic Games and compensation for weather damages), to higher than planned primary spending (social transfers and public sector wages) and to a shortfall of budgetary revenues (VAT, income taxes and reclassification, as a financial transaction, of a payment from the Saving Postal Bank to government). Concerning developments in 2004, the report concluded that the general government deficit would probably increase and remain above 3% of GDP, in the absence of further measures.

The Commission report, based on the Commission Spring forecasts, noted that the debt-to-GDP ratio reached 103% of GDP in 2003, well above the 60% reference value of the Treaty. Moreover, it also noted that the Commission projects the debt ratio to decline only marginally to 102.8% of GDP in 2004, which is above the 98.3% of GDP reported by the Greek authorities on 4 May 2004. The report considered that both the high level of government debt and its slow pace of reduction are a cause of concern, especially in a period of high nominal growth and a positive and widening output gap.

Article 104(4) of the Treaty states that "the Committee provided for in Article 114 (i.e. the Economic and Financial Committee) shall formulate an opinion on the report of the Commission". The Committee issued its opinion on 2 June 2004, subscribing to the assessment made by the Commission in its report. In particular, the Committee concluded that the budgetary developments in Greece in 2003 indicated the existence of an excessive deficit under both criteria foreseen by Article 104(2) for the identification of such deficits. Consideration of other relevant factors, in particular the medium-term budgetary position and public investment ratio did not change the assessment based on the criteria themselves. The Committee also considered that in the present stage of policy setting and growth prospects, the general government deficit would continue to exceed the Treaty reference value in 2004, and that the general government gross debt would continue to remain well above the Treaty reference value of 60% of GDP in 2004. The Committee also considered that both the high level of government debt and its slow pace of reduction are a cause of concern, especially in a period of high nominal growth and positive, widening gaps.

The Commission, having examined all the relevant factors taken into account in its report and having regard to the opinion of the Committee, is of the opinion that an excessive deficit exists in Greece. This opinion, adopted by the Commission on 24 June 2004, has been addressed to the Council, according to Article 104(5) of the Treaty. The Commission has recommended that the Council shall decide accordingly, in conformity with Article 104(6). In addition, the Commission is herewith submitting to the Council a recommendation for a Council recommendation to be addressed to Greece with a view to bringing the situation of an excessive deficit to an end, according to Article 104(7) of the Treaty.

Recommendation for a

COUNCIL RECOMMENDATION TO GREECE with a view to bringing an end to the situation of an excessive government deficit

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community, and in particular Article 104(7) thereof;

Having regard to the recommendation from the Commission;

Whereas:

(1) According to Article 104 of the Treaty, Member States are to avoid excessive government deficits;

(2) The Stability and Growth Pact is based on the objective of sound government finances as a means of strengthening the conditions for price stability and for strong sustainable growth conducive to employment creation;

(3) The Amsterdam Resolution of the European Council on the Stability and Growth Pact of 17 June 1997 solemnly invites all parties, namely the Member States, the Council and the Commission, to implement the Treaty and the Stability and Growth Pact in a strict and timely manner;

(4) The Council has decided on (5 July 2004), in accordance with Article 104(6), that an excessive deficit exists in Greece;

(5) Having decided on the existence of an excessive deficit in Greece, the Council, in accordance with Article 104(7) of the Treaty and Article 3 of Council Regulation (EC) No 1467/97, is required to make at the same time recommendations to the Member State concerned with a view to bringing that situation to an end within a given period. The Council recommendation has to establish a deadline of four months at the most for effective action to be taken by Greece to correct the excessive deficit as well as a deadline for the correction of the excessive deficit, which should be completed in the year following its identification unless there are special circumstances;

(6) In the view of the Council, budgetary consolidation measures should secure a lasting improvement in the general government balance, while being geared towards enhancing the quality of the public finances and reinforcing the growth potential of the economy;

(7) When defining the recommendations to correct the excessive deficit, the following factors should be taken into account: i) The Commission, in its spring 2004 forecasts, projects that the general government deficit will be 3.2% in 2004 and 2.8% in 2005. However, the Commission forecast for 2005 was based on the assumption of no policy changes and on a general government deficit for 2003 of 2.95% of GDP, which had been notified on 30 March 2004, while this figure was revised to 3.2% of GDP on 4 May 2004; ii) Real GDP growth is projected to reach 4% in 2004, which is comparable to the rate of 4.2% in 2003, and to slow down to 3.3% in 2005, as works associated with the Olympic Games wind down in the first half of 2004. The current influence of temporary growth-boosting factors suggests a slowdown in economic activity in the near future; iii) In a context of strong economic growth and a positive output gap, the cyclically-adjusted deficit is projected to increase in 2004, indicating the persisting pro-cyclical nature of the Greek fiscal policy; iv) According to the Commission spring 2004 forecasts, the general government gross debt is projected to decline only marginally from 103.0% of GDP in 2003 to 102.8% of GDP in 2004 and to 101.7% of GDP in 2005, thus still well above the Treaty reference value of 60% of GDP. The high level of government debt and its slow pace of reduction are a cause of concern, especially in a period of high nominal growth and positive, widening output gaps; v) Following the new government's initiative for a far-reaching auditing of public finances, the Greek authorities are committed to resolve pending issues on the quality of the public finance data promptly in close collaboration with Eurostat. There are indications that there will be further significant upwards revisions of the deficit of 2003 and of earlier years, when a customary notification is made in September 2004. Such revisions are likely to affect the deficit projections for 2004 and 2005, and hence the extent of the action required to correct the excessive deficit;

(8) If the macro-economic outturn is in line with the Commission Spring 2004 forecast, corrective measures of a mainly structural nature amounting to at least one percentage point of GDP, cumulated over 2004-2005, would lead to a deficit below the 3% of GDP Treaty reference value from 2005 onward, also taking into account risks associated with expected revisions of the deficit figures. Should such expected revisions not lead to significant base effects, taking corrective measures amounting to 0.5% of GDP in 2004 would lower the deficit below the 3% reference value already this year;

HEREBY RECOMMENDS

- The Greek authorities should put an end to the present excessive deficit situation as rapidly as possible and by 2005 at the latest in accordance with Article 3(4) of Council Regulation (EC) No 1467/97. The Council establishes the deadline of 5 November 2004 for the Greek government to take effective action to this end;

- In order to ensure that the excessive deficit is effectively corrected by 2005 at the latest, the Greek authorities should take corrective measures mainly of a structural nature amounting to at least 1% of GDP, cumulated over 2004 and 2005, preferably equally distributed between the two years;

- The Greek authorities should also ensure that the government gross debt ratio diminishes sufficiently and approaches the reference value at a satisfactory pace; particular attention should be paid to factors other than net borrowing which contribute to the change in debt levels;

- The Greek authorities should improve the collection and processing of general government data in order to correct the serious deficiencies revealed in this regard;

In addition, the Council invites the Greek authorities to ensure that budgetary consolidation towards the medium term position of government finances close to balance or in surplus is sustained through a reduction in the cyclically-adjusted deficit by at least 0.5% of GDP per year after the excessive deficit has been corrected.

This recommendation is addressed to the Hellenic Republic.

Done at Brussels, (5 July 2004).

For the Council

The President

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