Proposal for a COUNCIL REGULATION (EC) on the strengthening of the surveillance and coordination of budgetary positions
Date: 1996-10-16
Institutions: European Commission
Subjects: Community budget, Economic and Monetary Union, coordination of EMU policies, economic convergence, economic policy, multilateral surveillance

COMMISSION  OF THE EUROPEAN  COMMUNITIES 

Brussels,  16.10.1996 
COM(96) 496  final 

96/0247  (SYN) 
96/0248  (CNS) 

Proposal  for  a 

COUNCIL REGULATION  (EO 

on the strengthening of the surveillance and coordination of budgetary-positionr 

Proposal  for  a 

COUNCIL  REGULATION  (EC) 

on speeding up and clarifying the implementation of the excessive deficit  procedure 

(presented  by the  Commission) 

STABILITY PACT FOR ENSURING BUDGETARY DISCIPLINE IN 
STAGE THREE OF EMU 

Explanatory memorandum 

T HE  BENEFITS OF BUDGETARY DISCIPLINE FOR GROWTH AND EMPLOYMENT 

Sound  and  disciplined  public  finances  are  an  essential  condition  for  strong  and 
sustainable growth with improved employment  creation. 

Low  budget  deficits  reduce  the  public  claims  on  the  national  product  and  lessen  the 
burden put on monetary policy ; in addition they contribute to low and stable  inflationary 
expectations.  In  such  a  context,  monetary  policy  can  deliver  low  interest  rates.  This 
fosters  growth  and  employment  via  crowding-in  of  private  investment  with  beneficial 
supply  side effects.  Moreover, fiscal discipline, by curbing  public  debt  ratios  and  hence 
reducing  the  interest  burden  on  public  debt,  will  allow  government  spending  to  be 
restructured,  by  devoting  a  higher  share  of  public  money  to  political  priorities  such  as 
infrastructures  and  education  which  are  important  to  build  long-run  growth  and 
employment. 

DURABLE BUDGETARY  CONVERGENCE IN  EMU 

In  order  to  harvest  the  benefits  of  the  single  currency,  economic  and  monetary 
convergence in EMU  must  be durable.  This implies, inter alia, low budget deficits  on 
a  sustained basis. These views, which are widely shared  and enshrined  in the Treaty, led 
the German Government to present a proposal for a "stability pact for Europe" to ensure 
budgetary  discipline  in  the  final  stage  of  EMU.  The  Madrid  European  Council  in 
December  1995 confirmed  the crucial  significance  of budgetary  discipline and noted  the 
Commission's  intention  "to present  its  conclusions  on  ways  to  ensure budgetary 
discipline and coordination in the monetary union... ". 

The issue has been actively discussed  since then benefiting,  inter alia, from the progress 
report  presented  by the Commission to the European  Council  in Florence  In lune  1996, 
according to  which  any new  arrangements  should  (i) be  achieved  in the  context  of the 
Treaty  (II) the  requirements  for  participation  in  EMU  (either  In the first  group  or 
at  a later  date) should  in  no way  tie changed  and  (Hi) they  should  be agreed  at  EU 
level,  even  though  full  application  would  only  concern  the  Member  States 
participating  in the single  currency. 

During the informal Ecofin  Council in Dublin in September  1996 these basic principles 
and the main features of a future stability pact  gained wide acceptance. 

The Commission  proposals for a stability pact,  in line with its progress  report,  respect 
these  principles.  They  take  the  form  of  secondary  legislation  which  strengthens  and 
clarifies Treaty provisions related to multilateral surveillance and budgetary discipline. In 
order to be effective, this will need to be complemented by a strong political commitment 
from all  those  involved  to  apply rigorously the  procedures  of  the  Treaty,  as  further 
specified and clarified by secondary legislation. This commitment could be enshrined in a 
declaration by the European Council. 

A  PREVENTIVE AND DISSUASIVE APPROACH 

National budgetary policies in the third stage of EMU need to be set so as to create room 
for  manoeuvre  in adapting to  exceptional  and cyclical  disturbances  and  so  as  to  avoid 
excessive  deficits  .  In addition,  national  budgetary  policies  must  be  supportive  of  the 
stability  oriented  single  monetary  policy.  The  appropriate  way  for  Member  States' 
budgetary  policies  to  ensure  such  a  wide  role  is  through  pursuing  medium  term 
budgetary  objectives  of close to balance or surplus. The 3% of GDP reference value 
for the deficit is therefore to be seen as an upper limit in normal circumstances. 

In order to  make  sure that excessive  deficits  are avoided,  the Commission proposes to 
have  a  twin-track  strategy:  a preventive,  early-warning  system  for  identifying  and 
correcting budgetary  slippages before they bring the deficit  above the 3% ceiling  and a 
dissuasive  set  of  rules,  with  a  sufficient  deterrent  effect  to  put  pressure  on Member 
States to avoid excessive deficits or to take measures to correct them quickly if they do 
occur. 

Improving prevention: the strengthening of budgetary surveillance 

Using the possibilities for secondary legislation provided by Article 103(5), the budgetary 
aspects  of  multilateral  surveillance  need  to  be  reinforced  so  as  to  provide  an  early 
warning  system.  This  enhanced  monitoring  would  rely  on  an  obligation  on  Member 
States  having adopted the single currency to  submit stability  programmes  setting out 
national  medium-term  budgetary  objectives  and  other  relevant  information.  National 
medium-term budgetary targets should be set close to balance or in surplus, but a certain 
differentiation  between countries would be appropriate. This would not be at odds with 
historical experience,  as a majority of the Member States had a budgetary position close 
to  balance before  the first oil  crisis. These medium term targets would  enable Member 
States  to  respect  the  3%  ceiling  in  all  circumstances,  apart  from  unusually  severe 
economic  downturns  or  other  exceptional  conditions.  Stability  programmes  should  be 
made public. 

Departures  from  the  budgetary  objectives  of close  to  balance  or surplus  set in the 
stability programmes would prompt a warning from the Commission. This could lead to 
Council  recommendations  to  the  Member  State  concerned  with  a  view  to  take  the 
necessary measures so as to avoid the risk of breaching the 3% ceiling. 

The strengthening of surveillance procedures at Community level will also allow to give 
more attention to the coordination of budgetary policies at EMU level to ensure that the 
different budgetary positions form a coherent picture. 

Enhancing dissuasion: the strengthening of the excessive deficit  procedure 

The application of the excessive deficit  procedure (including the final step of sanctions) 
needs to  be  clarified  and  accelerated  so  that  it  acts  as  a genuine  deterrent.  The main 
elements of the proposed legislation include: 

•  setting time limits for the key steps of the procedure so that sanctions would 
be  imposed,  where  appropriate,  within  the  calendar  year  following  the  year  in 
which the excessive deficit occurs; 

• 

in this context, defining the "exceptional and temporary" circumstances when 

the reference value can be breached; 

•  pre-determining the scale of the pecuniary sanctions. 

The  Commission  considers  that  the  scope  of  its  proposals  for  secondary  legislation 
requires  the  use  of  Article  104c(14),  2nd subparagraph  as  legal  basis.  Under  this 
subparagraph, which  covers  any aspect  of the  excessive  deficit  procedure,  the  Council 
must act unanimously, after consulting both the European Parliament and the ECB. The 
Commission  believes  that  the  credibility  of  the  stability  pact,  in  which  all  countries 
commit  themselves  to  budgetary  stability,  will  benefit  from  a  unanimous  vote  of  the 
Member States. Accordingly, the proposed regulation  and the provisions of Protocol n° 
5, whose present content is left unchanged, will form a new integrated set of rules. 

The excessive deficit  procedure can  be speeded  up substantially by setting time limits 
for the completion of key steps. It is suggested that in the standard scenario (see Annex 
1)  the  decision  on  the  existence  of  an  excessive  deficit  and  the  issuing  of 
recommendations  should be  completed  by May  in the year following  that in which an 
excessive deficit  emerges; in the event that the Council judges that insufficient  effective 
action  is  being  taken  by  a  Member  State  to  correct  the  excessive  deficit,  then  the 
remaining steps of the procedure and the imposition of sanctions should be completed by 
December  of  the  same year.  It  would  be  possible  to  activate  the  procedure  earlier in 
situations where planned deficits already exceed the 3% limit and/or recommendations to 
take  corrective  action have already been made by the Council  using the  early warning 
system of Article 103 procedures; however, the decision on the existence of an excessive 
deficit should normally be taken on the basis of the data reporting in March. 

In the context  of the identification  of the existence of an excessive  deficit,  some of the 
definitions  of  Article  104c  can be  clarified  to  remove  uncertainty,  although  there  will 
always have to remain some room for Council discretion. In particular, the interpretation 
of the term "exceptional  and  temporary" can be clarified  to  a degree.  Although it is 
unlikely that all possible relevant situations can be covered explicitly,  an attempt is made 
to illustrate quantitatively what a severe economic downturn may mean. 

Speeding  up  the  later  steps  of  the  procedure  will  rely  crucially  on  how  "effective 
action*'  is  to  be  assessed.  The  Commission  proposes  to  consider  publicly  announced 
government  decisions  as  the  basis  for  assessing  the  appropriateness  of  the  corrective 
measures  The  association  of  national  parliaments to  the  enactment  of  such measures, 
when  required  by  national  law,  should  not  hinder  the  expeditious  application  of  the 
excessive  deficit  procedure  and detract from its urgency.  It  is  therefore  suggested  that 

there would be a relatively short period by the end of which a government  should have 
adopted  measures  (e.g.  at  most  four  months  after  the  issuing  by  the  Council  of  the 
Article  104c(7)  recommendation).  If  the  government  brought  forward  no  measures 
within  the  time  limit  or  the  measures  proposed  were  judged  by  the  Council  to  be 
insufficient,  then the next  step of the procedure would be engaged.  If,  subsequent  to a 
favourable  Council  assessment  of  a  package  of  measures  ,  a  government  withdrew 
measures or they were voted down by parliament without other sufficient  measures being 
substituted, then the Council could immediately decide to move on to the next step of the 
procedure. 

In  any  event,  the  maximum  length  of  the  overall  procedure  including  the  presumed 
decision on sanctions should not exceed ten months. While the time delays according to 
the above schedule may at first sight seem short, it should be recognised that the issuing 
of a Council recommendation or the later steps of the procedure will come as no surprise 
to  a  government,  which  will  effectively  have  had  a  much  longer  period  in  which  to 
prepare  corrective  measures.  Moreover,  the  seriousness  in  stage  three  of  moving  into 
excessive deficit should call for urgent action from all those involved. 

Further specification  of how sanctions would be applied is also necessary. To this end, 
it  is proposed  that,  as a rule,  a non-interest-bearing  deposit  will be  required whenever 
sanctions are triggered,  possibly  supplemented by the non-pecuniary  sanctions  foreseen 
by the Treaty, to be decided at the discretion of the Council. 

The  scale  of  the  deposits,  which  are  to  be  calculated  as  a  %  of  GDP,  should  be 
sufficiently  high  in  order  to  have  a  deterrent  effect,  without  however  becoming 
unbearable and thereby losing credibility or being counterproductive.  According to these 
principles,  the  Commission  proposes  that  annual  deposits  would  include  a  fixed 
component, equal to 0.2% of GDP, and a variable component equal to  one tenth of the 
excess  of the deficit  over the 3% reference  value, and would  be subject to  a ceiling  of 
0.5% of GDP. These values imply that any deficit  above 6% of GDP would not carry a 
proportionally higher sanction. The graph in annex depicts the quantitative  implications 
of the proposed rule. 

The initial deposit would be transformed  into a fine if,  after two years, sufficient  action 
to correct the excessive deficit  has not been taken. Deposits would be lodged with the 
Community  and the interest  on deposits,  and fines, would  be  resources  of the general 
budget of the European Communities. 

How the excessive deficit procedure would work beginning in March 

Annex 1 

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(1)  According to Council Regulation EC/3605/93 Member States must submit budgetary data twice a year : first until the 1st of March at the latest, afterwards until the 1st of 

September at the latest. 

6 

Proposal  for a 

COUNCIL REGULATION  (EC) 

96/0247 (SYN) 

on the strengthening of the surveillance and coordination of budgetary positions 

THE COUNCIL OF THE EUROPEAN UNION, 

Having regard to the Treaty establishing the European  Community,  and  in particular  Article  103(5) 
thereof, 

Having regard to the proposal from the Commission, 

In cooperation with the European Parliament, 

(1) Whereas the maintenance of sound budgetary positions in the Member States creates the appropriate 
conditions for  the sustained  growth of output and employment; whereas budgetary  discipline  will be 
required in the third stage of economic and monetary union to ensure monetary stability, 

(2) Whereas national budgetary policies need to be set so as to create room for manoeuvre in adapting to 
exceptional and cyclical disturbances and so as to avoid excessive deficits, 

(3)  Whereas  in  the  context  of  the  single  currency  the  closer  coordination  of  budgetary  and  other 
economic policies assumes more importance, 

(4)  Whereas  the  reference  value for  the government  deficit  of  3% of  GDP  specified  in  Article  1 of 
Protocol n°  5 on the  excessive deficit  procedure  is to be seen as a  ceiling  in  normal  circumstances; 
whereas, therefore, government budgets in the medium term should aim for positions close to balance or 
in surplus, taking due account of differences in national characteristics, 

(5)  Whereas  the  multilateral  surveillance  procedure  of  Article  103 (3  and  4)should  be  developed  to 
provide an early warning system, in which the Council would alert a Member State to the need to take 
corrective  action  to  prevent  a  government  deficit  becoming  excessive;  whereas  this  multilateral 
surveillance procedure should continue to momtor the Ml  range of economic developments in each of 
the Member States and in the Community as well as the consistency of economic policies with the broad 
guidelines referred to in Article 103(2), 

(6) Whereas the present Regulation forms part of the stability pact for ensuring budgetary discipline in 
stage three of EMU; whereas the pact includes two main elements (i) strengthening the surveillance and 
coordination  of  budgetary  positions  and  (ii)  speeding  up  and  clarifying  the  implementation  of  the 
excessive  deficit  procedure;  whereas  the  second  of  these  elements  provides  time  limits  on  the 
implementation of the excessive deficit procedure and a specification of the imposition of sanctions, 

(7) Whereas the rules for such a speeding up and clarifying of the excessive deficit procedure have been 
laid down in Council Regulation [....], 

1-

(8)  Whereas  the  Member  States  which  will  adopt  the  single  currency  shall  have  been  found  in 
accordance  with  Article 109j  to  have  achieved  a  high  degree  of  sustainable  convergence  and  in 
particular  a  sustainable  government financial position;  whereas  the  maintenance of  sound  budgetary 
positions in theseMember States will be required to ensure monetary stability and to create appropriate 
conditions for the sustained growth of output and employment; whereas these Member States are to be 
referred to as Member States without a derogation in accordance with Article 109k, 

(9) Whereas there is a need to build upon the useful  experience gained during the first  two stages of 
economic and monetary union with convergence programmes as instruments for  setting objectives and 
providing  a basis for  monitoring; whereas  it  is  important  to place  a  requirement  on Member  States 
without a derogation to submit medium-term budgetary programmes (to be called stability programmes) 
and it is necessary to define the principal contents of such programmes; whereas it is necessary to lay 
down time limits for the submission of stability programmes and their updates, 

(10)  Whereas  in  the  interest  of  transparency  and  informed  public  debate  Member  States  without  s 
derogation should be required to make public their stability programmes; 

(11) Whereas there is a need to define rules for the examination of stability programmes by tlie Council, 

(12) Whereas the monitoring  of stability  programmes  should be carried  out  in  the framework of tha 
multilateral surveillance; whereas particular attention should be given to slippage from fee programme 
targets for  the  government  surplus/deficit;  whereas  in  order  to prevent  a  serious  deterioration, in the 
deficit  position  of  a  Member  State  without  a  derogation  it  would be  appropriate  far  tlie  Council  to 
recommend that the Member State take corrective action; whereas in the event of persistent budgetary 
slippage the Council should consider it appropriate to reinforce and make public its recommendation; 

(13) Whereas it will also be necessary to make similar rules covering the programmes and surveillance 
of the other Member States, 

HAS ADOPTED THIS REGULATION: 

SECTION 1 

Stability programmes 

Article J 

1.  Each Member State without a derogationshall  submit to the Council and Commission a "stability 

programmeM. 

2.  A stability programme shall contain: 

(a)  medium-term objective and adjustment  path for  the government  surplus/deficit  as a ratio to 

GDP; expected path for the government debt ratio, 

(b)  main  assumptions  about  expected  economic  developments  such  as  real  GDP  growth, 

employment/unemployment, inflation, and other important economic variables, 

(c)  description of budgetary measures being taken to achieve the objectives of the programme, 
(d)  com nitment to take additional measures when necessary to prevent slippage from targets, 

3.  The information  about paths for the government surplus/deficit  ratio and debt ratio and the main 
economic assumptions referred to in paragraph 2(a) and (b) shall be on an annual basis and shall 
cover, as well as the current and preceding year, at least the following three years. 

x 

r 

Article  2 

1.  Stability programmes  shall  be submitted before  1  January 1999.  Thereafter,  updated programmes 
shall be  submitted each year,  not later than  two  months  after  the  presentation  of annual  budget 
proposals by a Member State government to its national parliament. A Member State for which an 
initial  derogation  is  subsequently  abrogated  according to Article 109k(2),  shall  submit  a stability 
programme within six months of the decision on abrogation. 

2.  Member States shall make public their stability programmes and updated programmes. 

SECTION 2 

Surveillance of budgetary positions and early warning system 

Article  3 

1.  Based  on  assessments  by  the  Commission  and  the  Committee  provided  for  in  Article  109c,  the 
Council shall examine whether, having regard to specific national characteristics, the medium-term 
budget objective in the stability programme is close to balance or in surplus, whether the economic 
assumptions on which the programme is based are realistic and whether the measures being taken 
and/or proposed are sufficient  to achieve  the targeted  adjustment  path towards the  medium-term 
objective. 

2.  The  Council  shall  make  the  examination  of  the  stability  programme  referred  to  in  paragraph 1 
within  at  most  two  months  of  the  submission  of  the  programme.  The  Council,  on  a 
recommendation  from  the  Commission  after  consulting  the  Committee  provided  for  in 
Article  109c, may endorse the stability programme. Where the Council considers that the objectives 
and  contents  of  a  programme  should  be  strengthened,  the  Council,  as  provided  for  by  Article 
103(4),  shall  in  general  make  a  recommendation  to  the  Member  State  concerned  to  adjust  its 
programme. 

3.  Updated stability programmes shall be examined by the Committee provided for in Article  109c on 
the  basis  of  assessments  by  the  Commission;  if  necessary,  updated  programmes  may  also  be 
examined by the Council in accordance with the procedure of paragraphs 1 and 2. 

Article  4 

1.  As  part  of  the  multilateral  surveillance  in  accordance  with  Article  103(3),  the  Council  shall 
momtor the implementation  of  stability  programmes, based  on information  provided by Member 
States and on assessments by the Commission and the Committee provided for in Article 109c,  in 
particular with a view to identifying actual or expected divergence from the medium-term objective 
(or  the  adjustment  path  towards  it)  set  in  the  stability  programme  for  the  government 
surplus/deficit. 

2. 

3. 

In  the  event  of  identified  divergence  from  the  medium-term  objective  (or  the  adjustment  path 
towards  it),  the  Council  shall  in  general,  as  provided  for  by  Article  103(4),  make  a 
recommendation to the Member State concerned to take budgetary adjustment measures. 

In the event that in subsequent monitoring the divergence from the medium-term objective (or the 
adjustment  path  towards  it)  is  seen  to  persist  or  worsen,  the  Council  shall  in  general  make  a 
recommendation to the Member State concerned to take specific corrective action and, as provided 
for by Article 103(4), may make its recommendation public. 

4.  As part of the multilateral  surveillance  in  accordance  with  Article 103(3),  the  Council  shall  also 
assess the overall actual and forecast budgetary positions for the EMU area as a whole implied by 
national stability programmes and updated programmes. 

/ 

°l 

In  their  reports  to  the  European  Parliament  in  accordance  with  the  second  sub-paragraph  of 
Article 103(4)  the  President  of  the  Council  and  the  Commission  shall  include  the  results  of  the 
surveillance carried out in the framework of this Regulation. 

Article  5 

This Regulation shall enter into force on 1 July 1998. 

Article 6 

This Regulation shall be binding in its entirety and directly applicable in all Member States. 

X 

lb 

Proposal  for  a 

COUNCIL REGULATION  (JEÇ) 

% / 0 2 48  (CNS) 

on speeding up and clarifying the implementation of the excessive deficit  procedure 

THE COUNCIL OF THE EUROPEAN UNION 

Having  regard  to  the  Treaty  establishing  the  European  Community,  and  in  particular  the  second 
subparagraph of Article 104c, paragraph 14, thereof, 

Having regard to the proposal from the Commission, 

Having regard to the opinion of the European Parliament, 

Having regard to the opinion of the European Monetary Institute, 

(1) Whereas the maintenance of sound budgetary positions in the Member States creates the appropriate 
conditions for  the sustained  growth  of output  and  employment;  whereas budgetary  discipline  will be 
required in the third stage of economic and monetary union to ensure monetary stability, 

(2) Whereas national budgetary policies need to be set so as to create room for manoeuvre in adapting to 
exceptional and cyclical disturbances and so as to avoid excessive deficits; whereas there is a case for 
giving a rigorous interpretation to the concept of exception and temporary circumstances which could 
involve quantifying the concept of significantly negative real growth. 

(3) Whereas the Protocol N° 5 on the excessive deficit  procedure  contains provisions  relating  to the 
implementation of the procedure foreseen in Article 104c; whereas further  implementing provisions are 
necessary; whereas, according to the second subparagraph of Article  104c(14), the Council shall adopt 
the appropriate provisions to that effect; whereas the provisions of this Regulation together with those of 
the Protocol constitute a new integrated set of rules, 

(4) Whereas, according to Article 109k(3), Articles 104c(9) and (11) only apply to those Member States 
having adopted a single currency, 

(5) Whereas there is a need to establish deadlines for the application of the excessive deficit procedure in 
order to ensure its expeditious  and  effective  application;  whereas there  is  a need  to  specify  how the 
sanctions foreseen in Article 104c of the Treaty could be imposed on Member States which persistently 
fail  to correct an excessive deficit  situation in order to ensure the effective  application of the excessive 
deficit procedure, 

(6) Whereas the present regulation forms part of the stability pact for ensuring budgetary discipline in 
stage three of EMU; whereas the pact includes two main elements (i) strengthening the surveillance and 
coordination  of  budgetary  positions  and  (ii)  speeding  up  and  clarifying  the  implementation  of  the 
excessive deficit  procedure; whereas the first  of these elements  provides an  early  warning  system in 
identified  and 
which  divergences  from  Member  States  medium-term  budgetary  paths  are 

// 

recommendations  made by the  Council to take corrective action well before  a  deficit  position  seems 
excessive, 
(7)  Whereas  the  rules  for  such  a  strengthening  of  the  surveillance  and  coordination  of  budgetary 
positions have been laid down in Council Regulation [....], 

(8) Whereas the reinforced surveillance in the terms of Régulation [...] together with the Commission's 
monitoring of budgetary positions in accordance with paragraph 2 of article  104c provide a basis for a 
rapid implementation of the excessive deficit procedure, 

(9) Whereas, in the light of the above, an overall maximum period often months from the reporting date 
or  any  other  activation  of  the  procedure  until,  if  necessary,  the  imposition  of  sanctions  seems both 
feasible  and  appropriate  in  order  to  exert  pressure  on  the  Member  State  to  implement  corrective 
measures;  in  the  event  of a procedure  starting  in March  this  could  lead  to  sanctions being imposed 
within the calendar year in which the procedure has been started, 

(10)  Whereas  the  issuing  of  a  Council  recommendation  or  the  later  steps  of  the  excessive  deficit 
procedure  will come as no surprise to a government, which  will  effectively  have had a  much longer 
period in which to prepare corrective measures. Whereas the seriousness of moving into excessive deficit 
in stage three should call for urgent action from all those involved, 

(11) Whereas when acting with a view to correct the excessive deficit  the government of the Member 
State concerned will, if required by national  law, take  measures  associating  the  national  parliament; 
whereas the national decision-making process in accordance with article 3 of the Protocol n° 5, should 
not, as such, hinder the expeditious implementation of the excessive deficit procedure, 

(12) Whereas it is considered that, in order to ensure that the excessive deficit procedure has a sufficient 
deterrent effect, a non interest bearing deposit of appropriate size should be required from the Member 
State concerned when the Council decides to impose a sanction, 

(13) Whereas the definition  of sanctions on a prescribed  scale removes uncertainties  and would thus 
allow those involved in the procedure to have full information about it; whereas it is appropriate to relate 
the amount of the deposit to the GDP of the Member State concerned; whereas it is appropriate that the 
deposit should consist of a fixed component due in all cases when pecuniary sanctions are imposed and a 
variable  component  proportional  to  the  excess  of  the  deficit  over  the  3% of  GDP  reference  value; 
whereas it is also appropriate to fix a maximum amount, as a percent of GDP, to the sanctions for the 
latter not to have counterproductive effects, 

(14) Whereas in the event that  the constitution  of a non-interest-bearing  deposit  does not induce the 
Member State concerned to correct its excessive deficit  then it is appropriate to intensify  the sanctions; 
whereas it is therefore appropriate to transform the deposit into a fine in such an event and require the 
Member State concerned to constitute a new non-interest-bearing deposit. 

(15) Whereas action by the Member State concerned with a view to correcting its excessive deficit is the 
first step towards abrogation of sanctions; whereas significant progress in correcting the excessive deficit 
should allow for some lifting of sanctions in accordance with paragraph  12 of article  104c; whereas the 
abrogation of all outstanding sanctions should only occur once the excessive deficit has been corrected; 

(16) Whereas Council Regulation EC n° 3605/93 on the application  of the Protocol  on the excessive 
deficit procedure annexed to the Treaty establishing the European Community1 sets detailed rules for the 
reporting of budgetary data by the Member States, 

t  n i l .» OJn°L 332, 31.12.93, p.7. 

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(17)  Whereas, according to Article 109f(8),  where the  Treaty provides for  a  consultative  role for  the 
European  Central  Bank  (ECB),  references  to  the  ECB  shall  be  read  as  referring  to  the  European 
Monetary Institute before the establishment of the ECB, 

HAS ADOPTED THIS REGULATION: 

SECTION 1 

Speeding up the excessive deficit procedure 

Article 1 

1.  The Council shall decide on the existence of an excessive deficit in accordance with Article 104c(6), 
within three months of the reporting dates established in Articles 4.2 and 4.3 of Council Regulation 
EC/3605/93.  Where  it  decides  on  the  existence  of  an  excessive  deficit  in  accordance  with 
Article 104c(6)  the  Council  shall  issue  recommendations  to  the  Member  State  concerned  in 
accordance with Article 104c(7) at the same  time. 

2.  The excess of a  government  deficit  over  the  reference  value  shall be considered  exceptional  and 
temporary, in accordance with Article  104c(2a) 2nd indent, when resulting from an unusual event 
outside the  control  of the  relevant  Member  State and which  has  a  major  impact  on  the  financial 
position  of  the  general  government,  or  when  resulting  from  a  severe  economic  downturn,  in 
particular in the case of significantly negative annual real growth. In addition, if the unusual event or 
the severe economic downturn has come to an end or if it is forecast that it will come to an end in the 
calendar year following the year in which the deficit exceeds the reference value, budgetary forecasts 
provided by the Commission must indicate that the deficit  would fall below the reference  value in 
this same following year. 

Article 2 

1.  Any Council decision to make its recommendations public having established that no effective  action 
has been taken in accordance with Article 104c(8) shall be taken within four months of the decision 
on the existence of an excessive deficit  taken in accordance with Article  104c(6) and the issuing of 
recommendations in accordance with Article 104c(7). 

2.  The  Council,  when  considering  whether  effective  action  has  been  taken  in  response  to  its 
recommendations issued in accordance with Article 104c(7), may base its decision on official  public 
decisions by the Government of the Member State concerned.  If these official  public decisions are 
not, if necessary, enacted by national legislatures within a time limit to be defined by the Council in 
its  recommendations  issued  in  accordance  with  Article  104c(7),  or  if  the  decisions  are  modified 
substantially during the adoption process, then the Council shall reconsider whether effective  action 
has been taken. 

Article 3 

Any Council decision to give notice to the Member State to take measures for the deficit  reduction in 
accordance  with  Article  104c(9)  shall  be  taken  within  one  month  of  the  Council  decision  that  no 
effective action has been taken in accordance with Article 104c(8). 

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n 

Article  4 

Where the conditions to apply Article 104c(ll)  are met,  the  Council  will,  as a  rule,  decide  to  impose 
sanctions  in  accordance  with  Article 104c(ll).  Any  such  decision  shall  be  taken  no  later  than  two 
months after the Council decision  to  give  notice  to the Member  State to take  measures in  accordance 
with Article 104c(9). 

Article  5 

The  total  time  between  the  reporting  dates  referred  to  in  Article 1 of  this  Regulation  and a  Council 
decision on the imposition of sanctions referred to in Article 4  of this Regulation  shall  not exceed  ten 
months. 

Article  6 

Any Council decision to intensify sanctions (other than the imposition of fines dealt with in Article 9 of 
this  Regulation)  in  accordance  with  Article  104c(ll),  or  to  abrogate  some  or  all  of  its  decisions  in 
accordance  with  Article  104c(12),  shall  be  taken  no  later  than two  months  after  the  reporting  dates 
pursuant to Council Regulation EC/3605/93. 

SECTION 2 

Sanctions 

Article  7 

Whenever  the  Council  decides  to  apply  sanctions  to  a  Member  State  in  accordance  with  Article 
104c(ll),  a  non-interest-bearing  deposit  would,  as  a  rule,  be  required.  The  Council  may  decide  to 
supplement this deposit by the measures foreseen in the first and second indents of Article  104c(l 1). 

Article  8 

When the excessive  deficit  results from non-compliance  with the  criterion  relating to the  government 
deficit ratio in Article  104c(2a), the amount of the deposit shall comprise of a fixed component equal to 
0.2% of GDP, and a variable component  equal to one tenth of the difference  between the deficit  as a 
percentage of GDP of the year in which such deficit was deemed excessive and the reference value.  An 
upper limit of 0.5% of GDP is set for the annual amount of deposits. 

When  the  excessive  deficit  results  only  from  non-compliance  with  the  criterion  relating  to  the 
government debt ratio in Article  104c(2b),the amount of the deposit shall comprise of a fixed component 
equal to 0.2% of GDP. 

Article  9 

The  initial  deposit  will,  as  a  rule,  be  converted  into  a  fine  if  within  the  two  subsequent  years  the 
excessive  deficit  has,  in  the  view  of  the  Council,  not  been  corrected.  The  Council  may  decide  to 
supplement this fine by the measures foreseen  in the first  and second indents of Article  104c(ll)  if the 
latter had not been applied at the moment of imposing  sanctions.  At the same time the Member State 
should be required to make a new non-interest-bearing deposit calculated according to the rule set out in 
Article 8 of this Regulation. 

Article  10 

In  accordance  with  Article  104c(12),  the  Council  may  decide  to  abrogate  some  or  all  the  sanctions 
defined in the first and second indents of Article 104c(l 1) to the extent that the Member State is making 
significant, though not yet sufficient progress in correcting the excessive deficit. 

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Article  11 

In accordance with Article  104c(12), the Council shall abrogate all outstanding sanctions if the decision 
on the existence of an excessive deficit is abrogated. Fines imposed in accordance with Article 9 of this 
Regulation will not be returned to the Member State concerned. 

Article 12 

Deposits as specified in Article 8 of this Regulation shall be lodged with the Commission. Interest on the 
deposits, and fines specified  in Article 9 of this Regulation constitute resources of the general budget of 
the European Communities. 

This Regulation shall enter into force on 1 January 1999. 

Article  13 

This Regulation shall be binding in its entirety and directly applicable in all Member States. 

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ISSN 0254-1475 

COM(96) 496 final 

DOCUMENTS 

EN 

09  01  10 

Catalogue number  : CB-CO-96-523-EN-C 

ISBN 92-78-10367-5 

Office  for Official  Publications of the European Communities 

L-2985 Luxembourg 

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