Opinion of the European Monetary Institute on a consultation from the Council of the European Union under Article 104c (14) of the Treaty establishing the European Community (the “Treaty”) on a draft EU Council regulation on speeding up and clarifying the implementation of the excessive deficit procedure (CON/96/14)
Date: 1996-11-28
Institutions: European Monetary Institute
Subjects: Community budget, Economic and Monetary Union, budget deficit, economic policy, price stability

28 November 1996

OPINION OF THE EUROPEAN MONETARY INSTITUTE

CON/96/14

on a consultation from the Council of the European Union under Article 104c (14) of the Treaty

establishing  the  European  Community  (the  “Treaty”)  on  a  draft  EU  Council  regulation  on

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

1.

The present consultation was initiated on 5th November 1996 by the Council of the European

Union which, for this purpose, transmitted to the EMI document COM(96) 496 containing the

text of the Draft Regulation and its explanatory memorandum. The EMI is competent for this

consultation, in accordance with Articles 104c (14) and 109f (8) of the Treaty.

2.

The objective of the Draft Regulation is to further specify the procedural provisions provided

for  in  Article  104c  of  the  Treaty  and  in  its  Protocol  n.5.  Further  implementing  provisions,

which have the scope to  complement  the  ones  of  Protocol  n.5  and  of  Council  Regulation  EC

n.3605/93, are felt to be necessary to ensure a smooth and effective application of the excessive

deficit procedure (EDP).

3.

The Treaty recognises that budgetary discipline  will  be  required  in  Stage  Three  of  Economic

and Monetary Union to ensure price stability. Starting from Stage Three, the Treaty prohibits to

all Member States1 excessive government deficits and includes provisions necessary to prevent

and  remedy  excessive  government  deficits  in  Article  104(c).  In  order  to  safeguard  the

independence of the ESCB in the conduct of its monetary policy, with the primary objective to

maintain  price  stability,  Articles  104  and  104(a)  rule  out  “monetary  financing”  of  the  public

sector  as  well  as  “privileged  access”,  and  Article  104(b)  states  that  the  Community  and  the

1 

An exception for the United Kingdom is provided for in Protocol n.11.

                                                     
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Member  States  shall  not  be  liable  for  or  assume  commitments  of  public  entities  of  another

Member State. 

4.

The  EMI  fully  endorses  the  view  that  a  lack  of  fiscal  discipline  would  negatively  affect  the

ability of the ESCB to achieve its primary objective to maintain price stability, both through a

direct  demand  effect  and  through  an  indirect  effect  on  inflation  expectations.  Directly,  fiscal

imbalances can contribute to expanding aggregate demand, thereby obliging the central bank to

offset them in order to maintain price stability. As a result, the economy may face a sub-optimal

policy mix of higher deficits and higher interest rates. Furthermore, high and persistent fiscal

imbalances  typically  raise  the  issue  of  sustainability  and  thereby  indirectly  fuel  inflationary

expectations.  In  order  to  prevent  negative  repercussions,  fiscal  policies  should  be  geared

towards achieving budgetary positions close to balance or in surplus and a convergence of high

debt ratios to the 60% reference value or below.

5.

Fiscal discipline will be all the more important given that budgetary policies will have to cope

with  major  challenges,  in  particular  those  resulting  from  high  and  persistent  levels  of

unemployment  and  unfavourable  demographic  patterns.  It  is  indeed  the  sustainability  of

government budgetary positions  which will safeguard the Monetary Union against the risk that

a situation arises in which an individual country is ultimately unable to service its debt from its

own  fiscal  revenues.  The  fiscal  convergence  criteria  are  not  to  be  seen  as  constraints  on  the

conduct  of  national  economic  policies,  but  as  an  essential  mechanism  for  preventing  the

recurrence of the experiences of several Member States in the past, when unsustainable fiscal

developments adversely affected confidence, added risk premia to interest rates and hampered

the achievement of long-term non-inflationary growth of output and employment.

6.

Against  this  background  the  EMI  endorses  the  objective  of  the  EU  Council  regulation  to

strengthen  the  credibility  and  effectiveness  of  the  EDP  under  Article  104c,  in  particular  by

establishing  clear  deadlines  for  the  consecutive  stages  of  the  excessive  deficit  procedure,

defining the “exceptional and temporary” circumstances when the 3%  reference  value  for  the

deficit can be exceeded, laying down general rules governing the imposition of sanctions, and

specifying further the  pecuniary  sanctions  to  be  imposed.  While  this  framework  should  be  as

transparent and precise as possible, and the procedures to be enshrined in the regulation should

be strong and credible and contribute decisively to a sound conduct of fiscal policies in Stage

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Three,  the  EMI  does  not  wish  to  express  an  opinion  on  the  specific  provisions  of  the  Draft

Regulation and on the institutional aspects of this question.

7

The EMI has no objection to its opinion being made public by the consulting authority.