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)
Date: 1998-10-22
Institutions: European Court of Auditors
Subjects: European Committee of the Regions, European Economic and Social Committee, economic growth, economic stabilisation, euro, general budget (EU)

11.1.1999

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I

(Information)

COURT  OF  AUDITORS

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,

Council  at  the  time  when  the  proposal  was  published,
has  now  been  adopted (4);

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,

to 

regard 

Having 
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

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; 
common
abolition 
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 
treated
separately,

should  be 

subjects 

these 

three 

the 

the 

of 

HAS  ADOPTED  THE  FOLLOWING  OPINION:

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

If  the  Treaty  of  Amsterdam  is  ratified  it  will  have
1.
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
the
Committee  of 

the  Regions. 

its  proposal 

In 

(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).

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Commission  has  drawn  the  correct  inferences  regarding
the  repeal  of  the  Protocol.

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

the 

2.
As  regards  the  entry  into  force  of  the  proposed
Regulation,  the  date  of  1  January  1999  is  appropriate  in
terms  of 
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.

introduction  of 

the  euro  and 

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.

for  a  regulation  amending 

Until  the  Treaty  of  Amsterdam  is  ratified,  however,  it
legal  base  and  thus  cannot
does  not  constitute  a 
constitute  grounds 
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

Article 2(1) and (3) of Council Regulation (EC) No
3.
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.

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

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.

to  consider 

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

it  possible 

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
than
the  non-participant  States.  Moreover, 
rather 
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

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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.

(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;

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.

Some  of 

the  arguments  expounded  by 

the
10.
Commission  in  its  explanatory  memorandum  have  been
taken 
in  slightly
unsatisfactory ways:

the  regulation 

into  account 

in 

(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).

The solution that has been advocated is difficult to
and

11.
reconcile  with 
considerations  of  a  general  nature.

principles 

financial 

some 

(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.

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In  the  statement  of  revenue  mentioned  in  the
13.
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.

The  flows  of  funds  occasioned  by  the  SGP  system
17.
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