Communication from the Commission to the Council and the European Parliament - Public finances in EMU - 2004 {SEC(2004) 761}
Date: 2004-06-25
Institutions: European Commission
Subjects: Economic and Monetary Union, budget policy, public finance

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 24.6.2004 
COM(2004) 425 final 

COMMUNICATION FROM THE COMMISSION 
TO THE COUNCIL AND THE EUROPEAN PARLIAMENT 

Public finances in EMU – 2004 

{SEC(2004) 761} 

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COMMUNICATION FROM THE COMMISSION 
TO THE COUNCIL AND THE EUROPEAN PARLIAMENT 

Public finances in EMU – 2004 

An increasing variety of budgetary positions, with challenging overall developments 

Actual  deficits  continued  to  increase  in  2003  throughout  the  EU,  reflecting  the  protracted 
slowdown in growth and the working of automatic stabilisers. In the euro area, the deficit rose 
from 2.3% of GDP in 2002 to 2.7% of GDP in 2003. If all 25 countries which are members of 
the EU as of 1 May 2004 are taken into account, the deficit has increased from 2.1% to 2.7% 
of GDP. Cyclically-adjusted developments have started to evolve more favourably, improving 
from 2.4% of GDP in 2002 to 2.1% in 2003. However, this reflects sizeable one-off measures 
in several countries. 

With  eight  countries  in  surplus  and  eleven  with  deficits  above  3%  in  2003,  the  EU  by 
enlarging  to  25  members  sees  the  variety  of  budgetary  performances  across  Member  States 
increase. The most significant deficits are those of Germany and France, given the size both 
of the countries themselves and of their deficits, which heavily affect the overall outcome of 
the  euro  area.  The  situation  in  Italy,  where  the  deficit  stayed  below  3%  only  by  dint  of 
sizeable one-off measures, is also a matter of concern given its high government debt-to-GDP 
ratios. Outside the euro area, actual balances deteriorated in a number of countries, including 
the  UK  and  Poland.  In  contrast  with  these  developments,  Spain,  Belgium,  Ireland,  Finland 
and  Luxembourg  (in  the  euro  area)  and  Sweden,  Denmark,  Estonia  in  the  EU-25  recorded 
surpluses which were maintained throughout the slowdown, attesting to the soundness of their 
budgetary positions. Reflecting the budgetary and growth developments in large countries, the 
government debt-to-GDP ratio increased in 2003 to reach 70.4% in the euro area and 63.1% 
in the EU-25. Here too, situations are quite diverse, with Italy, Greece and Belgium having a 
government debt-to-GDP ratio above 100% and 14 countries with debt levels well below 60% 
of GDP. 

Sound public finances will not be achieved in the near future in some countries 

In spite of an improving growth outlook, budgetary prospects for 2004 and 2005 are not very 
promising. Both the actual and cyclically-adjusted budget balances of the euro area, according 
to the Commission Spring 2004 forecasts, are projected to be broadly unchanged in 2004 and, 
on  an  unchanged  policy  basis,  in  2005.  At  EU-25  level,  the  actual  balance  is  projected  to 
improve  marginally  to  2.5%  of  GDP  in  2005.  The  public  debt-to-GDP  ratio  is  projected  to 
increase slightly in 2004 to 70.9% of GDP in the euro area and to 63.4% in the EU-25, and to 
remain at the same level in both areas in 2005. At country level, the deficit is projected by the 
Commission  to  remain  above  3%  of  GDP  in  2004  in  both  France  and  Germany,.  The  two 
Member  States  are  committed  to  bring  the  deficit  below  3%  in  2005.  The  deficit  is  also 
expected to be above 3% in 2004 in Greece, the Netherlands, and, if the expiry of one-offs is 
not compensated by corrective measures, also in Portugal and Italy. The budgetary situation 
in most new Member States is expected to improve over the next two years. 

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The latest updates of the stability and convergence programmes show that a close-to-balance 
position in cyclically-adjusted terms will not be reached in several countries by 2007 (-0.7% 
of GDP for the euro area). Germany, France, Portugal and the UK in particular will still be far 
from  a  balanced  budget  at  that  point.  This  means  that  there  will  be  an  inadequate  safety 
margin  to  prevent  a  breach  of  the  3%-of-GDP  reference  value  in  the  event  of  adverse 
economic  conditions.  In  addition,  the  medium-term  objectives  of  some  euro-area  Member 
States  are  based  on  growth  assumptions  which  appear  to  be  overly  optimistic.  Even  if  the 
growth  rates  expected  in  the  updates  were  realised,  the  budgetary  targets  seem  difficult  to 
reach.  The  new  Member  States  foresee  in  their  convergence  programmes  an  ambitious 
consolidation of their public finances.  

Considering  that  the  implementation  record  of  the  programmes  has,  in  several  cases,  been 
poor – which has led to a repeated postponement of the achievement of the close-to-balance 
objective – it is clear that there is no reason for complacency. It is vital for Member States to 
reach budget positions which ensure that the automatic stabilisers work freely, and decrease 
the  risk  of  unsustainable  public  finances  in  the  light  of  ageing  populations,  and  if  the 
composition of the adjustment is right, would contribute to achieving over the next few years 
the  Lisbon  objectives  of  high  growth  and  employment  rates.  Past  experience  shows  that 
significant  efforts  to  improve  the  underlying  budget  positions  should  be  undertaken  as 
economic  conditions  improve:  the  difficulties  experienced  in  respecting  the  Treaty 
requirements in 2002 and 2003 reflect also the fact that countries did not make enough fiscal 
adjustment during the good times in 1999 and 2000. 

Increasing activation of the procedures for budgetary surveillance 

By  mid-2003,  the  number  of  countries  placed  in  an  excessive  deficit  position  increased  to 
three,  with  France  joining  Portugal  and  Germany.  In  spite  of  the  measures  taken  by  France 
and  Germany,  it  soon  became  evident  that  deficits  in  these  two  countries,  in  contrast  to 
Portugal, would remain high in 2003, and that the probability of bringing them below 3% of 
GDP by the deadline of 2004 was very low in the light of the draft budgets submitted in the 
autumn 2003. The Commission therefore moved forward with the excessive deficit procedure 
with the aim of urging France and Germany to take more decisive measures in order to correct 
their  deficits  at  least  by  2005.  In  spring  2004,  following  the  notification  of  budgetary  data 
concerning 2003, the Commission started the procedures for Greece, the Netherlands and the 
United  Kingdom,  which  registered  deficits  above  3%  of  GDP  in  2003.  At  the  same  time, 
given that the deficit remained below 3% of GDP in 2003, the Commission proposed to repeal 
the decisions placing Portugal in a position of excessive deficit. On the basis of its forecasts, it 
recommended  that  an  ‘early  warning’  be  addressed  to  Italy,  given  the  substantial  risk  of 
breaching  the  3%-of-GDP  reference  value  in  2004.  The  Commission  started  the  excessive 
deficit  procedure  for  several  new  Member  States  following  their  accession  to  the  EU. 
Recommendations  will  be  made  to  these  countries  to  help  pursue  a  credible  multi-annual 
adjustment path. 

Tensions in the implementation of the fiscal framework led to uncertainty 

While the procedures foreseen by the Treaty were used smoothly in the run-up to EMU, since 
the birth of the euro their implementation has become more difficult. In February 2002, the 
Commission recommended that the Council adopt an ‘early warning’ addressed to Germany 
and  Portugal.  On  that  occasion,  the  Council  did  not  follow  the  Commission’s  proposals,  on 
account of commitments made by these countries. Similarly, but at a more advanced stage in 
the  procedures,  the  Council  at  the  end  of  November  of  2003  did  not  endorse  the 

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Commission’s  recommendations  concerning  France  and  Germany,  which  extended  by  one 
year the deadline for correcting the situation of excessive deficit and implied advancing with 
the procedures.  

The tensions which have arisen in the implementation of the procedures of the Treaty and the 
SGP,  and  the  diverging  interpretation  of  the  latter  by  the  Community  institutions,  have 
created  uncertainty  as  to  how  budgetary  surveillance  should  be  conducted.  They  have  also 
shown that certain elements of the framework should be reconsidered in order to increase both 
its effectiveness and its credibility. 

In  response  to  the  difficulties  in  implementing  the  fiscal  framework,  the  Commission 
announced  a  strategy  aimed  at  seeking  legal  clarity  on  the  provisions  of  the  Treaty  and  the 
SGP, continuing budgetary surveillance, and considering what steps are needed to strengthen 
economic  governance.  Accordingly,  at  the  end  of  January  2004  the  Commission  asked  the 
European  Court  of  Justice  to  annul  the  decisions  taken  by  the  Council  and  the  Conclusions 
adopted at its November meeting. The Court has decided to handle the case in an accelerated 
procedure.  

Meanwhile,  in  line  with  its  strategy,  the  Commission  continued  to  conduct  budgetary 
surveillance  in  accordance  with  the  provisions  of  the  Treaty  and  the  SGP.  This  involved 
assessing the 2003 updates of the stability and convergence programmes and preparing draft 
Opinions for the Council. The Commission also updated the BEPGs including new country-
specific budgetary recommendations for 7 countries. It also moved ahead with the procedures 
for countries not running sound budgetary policies, and also pursued its efforts to improve the 
quality of surveillance. At the same time, it started to reflect on how the framework could be 
rejuvenated in order to tackle the shortcomings which have manifested themselves in the first 
years of EMU.  

Analytical improvements made within the framework for EU budgetary surveillance 

The Report on Public Finances in EMU – 2004 highlights four areas where progress has been 
made in the analysis of budgetary developments, including on (i) the role of one-off measures 
for the assessment of budgetary positions, (ii) the use of cyclically-adjusted balances for the 
assessment  of  the  efforts  countries  have  made,  (iii)  the  assessment  of  the  long-term 
sustainability of public finances, and (iv) the surveillance of contingent liabilities. 

The increased focus of multilateral surveillance on more structural factors calls for temporary 
changes in budgetary positions to be clearly identified, particularly when they are due either 
to the implementation of budgetary measures with only temporary effects or to the economic 
cycle.  

(i)  Among  the  sources  of  temporary  changes  in  budgets,  ‘one-off’  measures  taken  by 
governments warrant particular attention because they are becoming a frequent and sizeable 
feature  in  EU  countries.  It  is  therefore  important  to  take  account  of  such  measures  and  the 
reasons behind them in the surveillance process. This calls for greater transparency of budget 
measures  and  a  clearer  reporting  of  these  measures  by  Member  States,  including  in  the 
stability and convergence programmes. 

(ii)  A  common  methodology  which  provides  figures  for  the  cyclically-adjusted  budget 
balances (CABs) is used at EU level to  disentangle changes in  the budget which reflect  the 
economic  cycle  from  those  which  do  not,  the  latter  reflecting  measures  decided  by  policy-

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makers.  The  CABs  have  proved  to  be  a  very  useful  instrument  for  assessing  the  Member 
States’ budgetary policies. However, the CABs may not reflect discretionary fiscal adjustment 
efforts entirely correctly. Unexpected changes in potential output can also have an impact on 
the results. The solution proposed is a simple correction of CABs figures, excluding the small 
component of the change attributable to unexpected changes in potential growth.  

(iii) In 2004, for the third year in a row, the EU budgetary surveillance includes an assessment 
of  the  long-term  sustainability  of  public  finances  on  the  basis  of  the  updated  stability  and 
convergence  programmes.  This  year  greater  attention  has  been  devoted  to  increase  the 
qualitative  analysis  supporting  the  interpretation  of  the  results  obtained,  which  has 
significantly  contributed  to  giving  the  assessment  a  higher  information  value.  Overall,  the 
analysis shows that risks to long-term sustainability are still present in nine countries. In five 
of them (Belgium, Greece, Italy, Germany and France) the difficulties are more serious, while 
the others face some risks due either to medium-term budgetary developments (Netherlands 
and  the  UK)  or  to  the  uncertainties  over  the  long-term  projections  of  pension  expenditures 
(Spain and Portugal). Finally, six countries (Ireland, Denmark, Finland, Austria, Luxembourg 
and Sweden) seem relatively well placed to meet the cost of an ageing society on the basis of 
current policies. 

(iv)  To  get  a  comprehensive  picture  of  the  sustainability  of  public  finances,  liabilities  other 
than those included in the Maastricht definition of gross debt should be considered. Among 
them  are  the  so-called  ‘contingent  liabilities’,  which  correspond  to  government  obligations 
that  materialise  only  when  particular  events  occur.  The  importance  of  this  issue  in  EU 
budgetary  surveillance  has  increased  over  the  last years  and  in  particular  after  enlargement. 
The stock of contingent liabilities is in fact relatively high in new Member States. Given the 
various  situations  and  trends  in  the  EU,  increasing  disclosure  and  monitoring  of  contingent 
liabilities would be a useful step towards strengthening budgetary surveillance in the EU. 

Budgetary discipline and increased growth potential are consistent objectives 

The EU budgetary rules aim at promoting medium- and long-term budgetary discipline so as 
to  ensure  sound  budgetary  positions.  However,  the  EU  framework  has  been  criticised  for 
focusing  too  much  on  disciplinary  aspects,  thereby  not  being  growth-friendly.  Against  this 
background,  the  Report  on  Public  Finances  in  EMU  -  2004  looks  at  the  questions  of  how 
fiscal discipline and the quality of public finances contribute to growth.  

The benefits of fiscal discipline 

During  the  tense  debate  which  took  place  last  year  about  the  implementation  of  the  EU 
framework for fiscal surveillance, many critics stressed that it imposes an excessive focus on 
fiscal  discipline  and  that  this  has  been  detrimental  to  growth.  However,  these  criticisms  are 
ill-founded.  Without  the  progress  towards  fiscal  discipline  accomplished  in  the  past  decade 
thanks  to  the  rules-based  framework,  the  European  economy  would  probably  have  an  even 
more  disappointing  growth  performance.  The  Report  on  Public  Finance  in  EMU  –  2004 
shows  that,  rather  than  being  at  the  expense  of  growth,  fiscal  discipline  and  sound  public 
finances  contribute  to  a  macroeconomic  environment  that  fosters  potential  growth.  A  fiscal 
framework,  by  preventing  protracted  fiscal  deficits,  avoids  the  negative  impact  which  such 
deficits have on future income. 

The mechanism at work is quite straightforward. When deficits are protracted, a reduction in 
national  savings  will  follow.  In  turn,  this  translates  either  into  a  reduction  in  private 

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investment,  or  into  a  worsening  of  the  current  account,  or  both.  The  extent  of  private 
investment crowding-out will depend upon the sensitivity of national savings to interest rates 
and  the  degree  of  international  capital  mobility,  while  the  behaviour  of  government 
investment  will  mainly  depend  upon  the  allocation  of  total  expenditure  and  the  extent  to 
which deficits are used to finance current or capital expenditure. The real issue, then, is not 
whether  a  loss  of  fiscal  discipline  will  translate  over  the  medium  term  into  lower  future 
incomes but by how much and through which channels. 

Protracted  budget  deficits  primarily  reduce  capital  accumulation  and  income  prospects, 
mainly via higher interest rates. The Report on Public Finance in EMU – 2004 shows, in line 
with  empirical  evidence,  that  an  additional  deficit  of  one  percentage  point  of  GDP  in  euro-
area  countries  is  on  average  associated  with  an  increase  in  the  spread  in  the  interest  rate 
between  long  and  short-term  government  bonds  of  15-20  basis  points.  Although  small,  this 
increase  is  likely  to  have  negative  effects  on  investment,  which  is  influenced  by  long-term 
interest rates, among other factors.  

In  addition,  the  analysis  suggests  that  protracted  large  budget  imbalances  in  countries  with 
high current account deficits may be a cause of delay in the external adjustment. This concern 
is  of  especial  importance  for  new  Member  States,  most  of  which  have  in  recent  years  been 
recording relatively large budget deficits coupled with external imbalances. Though the latter 
may  be  explained  by  catching-up  dynamics,  keeping  budget  deficits  under  control  will  be 
essential  in  order  to  maintain  stable  currencies  within  ERM-II  as  a  necessary  step  towards 
joining EMU. 

In  the  debate  about  the  EU  fiscal  framework,  little  analysis  has  been  conducted  on  the 
quantitative impact that the presence of the framework has exerted on budget balances in EU 
countries. Simulations with the European Commission QUEST II model indicate that, in the 
absence  of  the  EU  fiscal  framework,  primary  budget  deficits  for  the  euro  area  would  have 
been higher by almost 0.9 GDP points per year over the 1994-2003 period. This suggests that 
the  EU  fiscal  framework  has  contributed  to  avoiding  a  sizeable  build-up  of  euro-area 
government debt, which in 2003 would have been about 8 GDP percentage points higher than 
now.  Furthermore,  the  simulations  suggest  that  higher  deficits  in  the  euro  area  would  have 
initially increased the income level by at most half a percentage point of GDP, but this small 
effect  would  have  faded  away  quickly.  However,  taking  into  account  the  impact  of  debt  on 
risk  premia,  results  indicate  that  the  gains  from  an  absence  of  fiscal  discipline  would  have 
been even smaller in the short run and negative in the medium term.  

Overall, the analysis suggests that the budgetary adjustment in the 1990s induced by the EU 
fiscal framework implied a reduction in growth of limited magnitude and duration but laid the 
foundations  for  better  growth  prospects.  In  the  absence  of  the  framework,  higher  deficits 
would  have  crowded  out  private  investment  and  further  reduced  potential  growth  compared 
with current figures. 

Improving the quality of public finances 

In view of the importance attached by the Lisbon strategy  to the quality of public  finances, 
reflected in the Broad Economic Policy Guidelines (BEPGs) as well as in other process such 
as the Employment Guidelines and the Open Method of Coordination, the Report on Public 
Finances  in  EMU  –  2004  endeavours  to  clarify  the  role  of  the  quality  of  public  finances 
within the EU framework for economic policy co-ordination and investigate possibilities for 
improving the quality of public finances in practice.  

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Generally accepted definitions of quality are not available. The Report uses a broad concept, 
whereby quality of public finances concerns the allocation of resources and the efficient and 
effective  use  of  those  resources  in  relation  to  identified  strategic  priorities.  Regarding  the 
latter,  for  instance  the  EU  Lisbon  strategy  identifies  sustainable  growth,  full  employment, 
social  cohesion  and  competitiveness  as  strategic  priorities.  A  full  discussion  addressing  the 
quality  of  public  finances  with  respect  to  all  these  aims  is  beyond  the  scope  of  the  Report. 
Therefore,  as  a  starting  point  for  further  and  more  complete  analysis  and  while  recognising 
the  partial  nature  of  such  exercise,  it  mainly  focuses  on  the  link  between  fiscal  policy  and 
long term growth. Accordingly, the Report starts by reviewing the recent literature on the link 
between the composition of expenditure and revenue and long-term growth. The findings of 
existing  studies  confirm  the  importance  of  taking  into  account  both  the  costs  (i.e.  higher 
taxation)  and  benefits  (i.e.  reaching  policy  objectives)  of  public  spending.  The  major 
difficulties  that  empirical  studies  have  encountered  concern  the  distinction  between 
‘productive’ and ‘unproductive’ expenditure. Although there is a certain degree of agreement 
that a few categories of public expenditure can quite safely be included among ‘productive’ 
public expenditures because they are directly aimed at productivity improvements (e.g. R&D, 
education and infrastructure investment) there is no consensus among researchers concerning 
the  impact  of  most  expenditure  items  on  long-term  growth  and  its  timing.  This  lack  of 
consensus is reflected by the fact that available estimates of ‘productive’ expenditure in the 
EU range between 5% and 44% of total public expenditure. 

In the light of these difficulties, the analysis of the composition of public expenditure across 
EU  countries  focuses  on  what  the  changes  in  the  compositions  have  been  and  what  factors 
drive  these  changes.  Generally,  over  the  last  decade  social  protection  and  health  care 
expenditure increased their share in total expenditure, while the latter expressed as a share of 
GDP has gone down. This suggests that the main drivers of expenditure recomposition over 
the  medium-/long-term  are  related  to  underlying  upward  pressures  such  as  those  resulting 
from ageing and that any framework for the definition of strategic expenditure priorities must 
take such long-term trends into account.  

In  recent  years,  several  Member  States  have  introduced  medium-term  frameworks  for 
expenditure  control  and  reforms  to  the  budgetary  process  that  aim  at  achieving  priorities  in 
the  most  efficient  and  effective  way  by  linking  public  expenditure  to  policy  outcomes 
(performance budgeting). The analysis shows that, in countries with more effective control of 
public  expenditure,  fiscal  consolidation  in  the  run-up  to  EMU  has  been  mainly  based  on 
containing expenditure, rather than on raising revenues, thereby contributing to a better long-
run growth performance.  

Overall,  this  analysis  implies  that  the  allocation  of  resources  and  the  monitoring  of  action 
undertaken  to  pursue  identified  priorities  should  have  a  greater  role  in  the  analysis  and 
conduct of fiscal policy. To this end, the BEPGs should contribute more effectively, as well as 
other EU processes, to improve the quality of public finances.  

Progress  should  include,  first,  the  exchange  of  information  on  how  strategic  priorities  have 
been fixed with respect to national budgets and what the experiences with implementing them 
have  been.  Second,  further  improvements  in  data  availability  are  needed  –  in  particular 
regarding the functional classification of government expenditure – since this is a necessary 
condition  for  an  appropriate  analysis  of  the  contribution  of  public  finances  to  agreed 
priorities.  Third,  a  proper  design  and  implementation  of  medium-term  expenditure 
frameworks  and  progress  in  cost-benefit  analysis  and  performance  budgeting  would  help  to 
improve both the control and allocation of existing funds.  

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Finally, a contribution to the quality of public finances can be given by the Union’s Initiative 
for  Growth,  through  which  the  European  Council  has  established  a  roadmap  for  increased 
investment  at  EU  scale  in  physical  and  human  capital  to  complement  structural  reform. 
Serious engagement by the EU institutions and Member States is required in order to ensure 
that  financially  and  economically  viable  projects  of  major  relevance  are  undertaken  in  a 
sustained and timely way. 

Strengthening the EU framework for economic governance 

In 2003, the need for further and more decisive progress in the EU framework for economic 
governance was highlighted by the difficulties in maintaining budgetary discipline and by the 
persistently  low  growth.  In  spite  of  important  advances  made  in  budgetary  surveillance, 
further  efforts  are  needed  to  improve  the  quality  of  public  finances  and  ensure  fiscal 
discipline. In particular, a number of  issues  that have arisen  with the implementation  of  the 
EU framework for economic coordination and fiscal surveillance deserve further attention as 
dealing  with  them  may  strengthen  the  contribution  of  public  finances  to  growth  and 
employment.  

First, the processes underlying the coordination of economic policies in the EU have proven 
ineffective  at  times  and  the  EU  coordination  framework  for  economic  policy  has  been 
perceived  as  focusing  almost  exclusively  on  achieving  and  maintaining  balanced  budgets. 
This may be due to the weak link between the guidelines provided on economic policies and 
those  on  fiscal  policy  (i.e.  the  links  between  the  BEPGs  and  the  Pact)  and  to  the  different 
levels of stringency of the two processes. This weak link between the two processes makes it 
more difficult to look at fiscal policy in terms simultaneously of fiscal discipline (budgetary 
balances) and of the contribution of fiscal policy to growth and employment (composition of 
the budget). In addition, it often appears that the policy guidelines have a limited influence on 
national budgets or on the priorities for the EU budget. 

Second,  the  procedural  and  numerical  rules  which  aim  at  ensuring  fiscal  discipline  as  an 
instrument  for  higher  growth  and  stability  have  shown  shortcomings.  The  framework  lacks 
both  incentives  for  prudent  behaviour  in  good  times  and  rewards  for  countries  with  sound 
underlying budgetary positions. In some cases, the framework has not been stringent enough. 
As a consequence, some countries have not reduced their debt level as fast as expected at the 
start  of  EMU,  while  others  have  moved  back  to  deficit  levels  above  those  required  for 
adopting the euro. The strict timetable and conditions spelled out by the SGP concerning the 
excessive deficit procedure have proven to be complex to implement.  

These developments showed that both the framework which applies to the conduct of national 
fiscal policies and the processes underlying the coordination of economic policies in the EU 
need  to  be  reassessed.  Making  the  EMU  macroeconomic  framework  more  effective  would 
contribute  to  progress  towards  the  objective  of  higher  growth.  In  this  endeavour,  the  right 
balance has to be found between the need to keep the economic governance framework stable 
and predictable and to improve the system on the basis of past experience.  

Various parts of the Report on Public Finances in EMU - 2004 deal with these issues, without 
being either conclusive or exhaustive.  

First, the economic arguments presented above show that, by fostering discipline and quality 
in  public  finances,  the  Treaty  –  with  its  numerical  and  procedural  rules  –  does  make  an 

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important  contribution  to  growth  while  allowing  room  for  a  proper  implementation  of  the 
Lisbon strategy.  

Second, as the Commission has put forward in its communication on Financial Perspectives, 
the  BEPGs  could  assume  a  more  prominent  role  in  economic  policy  coordination  by 
providing  better  fiscal  guidance  to  Member  States,  therefore  supporting  the  conduct  of 
national policies and the definition of budgets. One possibility could be to bring the national 
budgetary policy coordination  calendars more into  line with the general policy coordination 
cycle,  for  example  by  having  an  EU  six-month  period  in  which  policy  guidance  would  be 
formulated and issued followed by a national six-month period during which Member States 
would follow up. This would also make it possible to set fiscal policy in the broader context 
of increasing growth potential and addressing the quality and sustainability of public finances. 

Third,  in  its  Communication  of  November  2002,  the  Commission  already  expressed  the 
importance  of  improving  the  interpretation  of  the  fiscal  rules,  in  order  to  take  debt 
developments  and  country-specific  circumstances  more  into  account.  The  Report  on  Public 
Finances  in  EMU  -  2004  examines  several  options  such  as:  taking  more  account  of  growth 
developments, in particular of protracted slowdowns, in the implementation of the procedures, 
including in the application of the deficit criterion and in setting the deadlines for correcting 
the  excessive  deficit;  and  increasing  the  focus  on  debt  in  the  surveillance  of  budgetary 
developments. The Report also elaborates on the concept, put forward in the Public Finances 
Report  2001,  of  reworking  the  definition  of  the  medium-term  objective  for  fiscal  policy,  to 
cater  for  other  (country-specific)  circumstances  and  consider  debt  levels  and  the  overall 
sustainability  of  public  finances  while  ensuring  that  deficits  remain  below  3%  of  GDP  in 
normal circumstances. It reviews other options to improve the functioning of the SGP such as 
strengthening  the  incentives  to  conduct  prudent  and  symmetric-over-the-cycle  policies  and 
achieve surpluses in good times, or ensuring early action to correct inadequate developments. 
The  report  indicates  that  improving  the  knowledge  of  government  budgetary  positions  – 
through  the  analysis  of  all  elements  which  underlie  borrowing  requirements  and  balance 
sheets  and  through  a  reinforcement  of  the  statistical  framework  –  also  appears  to  be 
important. For the credibility and smooth operation of the fiscal framework, the reliability of 
fiscal statistics is crucial. To this end, it highlights the importance of strong monitoring of the 
quality  of  reported  fiscal  data  and  of  consistency  between  the  status  and  prerogatives  of 
national  statistical  authorities  and  their  task  of  ensuring  the  reliability  and  timeliness  of 
statistics. To this end the Council Conclusions of 2 June 2004 lay down minimum European 
standards for the institutional set-up of statistical authorities. Full transparency will allow the 
financial markets to better assess the creditworthiness of the different Member States. 

Finally, the Report addresses issues of enforcement at both Community and national level. At 
Community  level,  it  recalls  the  advantages  of  clarifying  the  authority  and  the  instruments 
entrusted  respectively  to  the  Commission  and  to  the  Council.  The  Commission’s  role  in 
assessing developments and determining policy recommendations contributes to efficiency. A 
better  articulation  and  differentiation  of  roles  in  the  application  of  the  SGP  resulting  from 
changes agreed in the European Constitution (such as the capacity of the Commission to issue 
formal  “early  warning”  directly  and  to  adopt  proposals  for  the  Council  decisions  launching 
the excessive deficit procedure) is an important first step. The report recalls the merits of the 
Community’s,  and  in  particular  the  Commission’s,  power  to  effectively  monitor  the 
application of the fiscal rules by Member States, especially concerning the preventive element 
of the framework. At national level, it underlines the importance that Member States ensure 
that  institutions  are  appropriate  to  the  task  of  ensuring  sustainable  public  finances.  This 
involves  both  improving  budgetary  procedures  and  favouring  the  dialogue  among  all  actors 

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concerned. In this context the role played in some Member States by national counterparts for 
the monitoring function fulfilled by the Commission at EU level appears relevant. 

The  Commission  will  build  on  the  analysis  presented  in  this  Report  and  proceed  with 
consultations, with the objective to moving towards specific formal proposals for rejuvenating 
the SGP and strengthening economic governance. 

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