Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on the effective enforcement of budgetary surveillance in the euro area
Date: 2010-09-29
Institutions: European Commission
Subjects: Economic and Monetary Union, European accounting system, budget deficit, budget policy, budgetary control, financial regulation, multilateral surveillance, public debt, public finance

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EUROPEAN COMMISSION 

Brussels, 29.9.2010 
COM(2010) 524 final 

2010/0278 (COD) 

Proposal for a 

REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL 

on the effective enforcement of budgetary surveillance in the euro area 

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EXPLANATORY MEMORANDUM 

1. 

CONTEXT OF THE PROPOSAL 

The global economic and financial crisis has exposed and amplified the need for greater co-
ordination  and  enhanced  surveillance  of  economic  policies  in  the  economic  and  monetary 
union  (EMU).  Existing  instruments  and  methods  of  co-ordination  and  surveillance  enabled 
the  EU  to  weather  a  storm  that  no  Member  State  could  have  withstood  on  its  own.  The 
European institutions and Member States reacted quickly and are continuing to work together 
to recover from a crisis that has no precedent in our generation. 

However,  these  recent  experiences  also  revealed  remaining  gaps  and  weaknesses  in  the 
current system of coordination and in the existing surveillance procedures. There is a broad 
agreement  that  the  framework  for  EMU  should  be  urgently  strengthened  in  order  to  anchor 
macroeconomic stability and the sustainability of public finances, which are preconditions for 
durable output and employment growth. 

The  crisis  has  drastically  reversed  the  favourable  economic  and  financial  conditions  that 
prevailed until 2007 and made clear yet again that windfalls accumulated during good times 
had  not  been  sufficiently  used  to  create  room  for  manoeuvre  when  times  turn  bad.  Very 
sizeable consolidation will be necessary in most Member States to bring public debt back onto 
a downward path. This is all the more urgent as European societies and economies are facing 
the effects of ageing populations, which will put further pressure on labour supply and public 
budgets. Reducing debt levels is highly relevant for most countries in view of their negative 
effects on economic incentives and growth through higher taxes and risk premia. 

The key instrument for fiscal policy co-ordination and surveillance is the Stability and Growth 
Pact (SGP), which implements the Treaty provisions on budgetary discipline. Strengthening 
the Pact is important for both increasing the credibility of the agreed co-ordinated fiscal exit 
strategy and avoiding a repetition of past mistakes. The set of proposals now being presented 
aims to strengthen the Pact by: (i) improving its provisions in the light of experience, not least 
of  the  crisis;  (ii)  equipping  it  with  more  effective  enforcement  instruments;  and  (iii) 
complementing it with provisions on national fiscal frameworks. This set of proposals is part 
of a broader reform of economic governance under the umbrella of the Europe 2020 strategy, 
which  includes  proposals  for  addressing  macroeconomic  imbalances  through  stronger 
surveillance,  including  alert  and  sanction  mechanisms.  The  different  strands  of  economic 
policy coordination, including surveillance of structural reforms, are to be integrated in a new 
surveillance cycle, the European Semester, which will bring together existing processes under 
the  SGP  and  the  Broad  Economic  Policy  Guidelines,  including  simultaneous  submission  of 
stability and convergence programmes and national reform programmes. 

2. 

RESULTS OF CONSULTATIONS WITH INTERESTED PARTIES 

The  outlines  of  the  present  proposals  were  announced  by  the  Commission  in  two 
communications: Reinforcing economic policy coordination of 12 May 2010 and Enhancing 
economic policy coordination for stability, growth and jobs – Tools for stronger EU economic 
governance of 30 June 2010. In opting for a formal communication, the Commission wished 
to  demonstrate  its  commitment  to  fostering  dialogue  with  Member  States,  the  European 

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Parliament  and  all  stakeholders,  while  at  the  same  time  delivering  concrete  proposals  for 
action. 

In June 2010, the European Council agreed on the urgent need to reinforce the coordination of 
our  economic  policies.  The  agreement  included  first  orientations  as  regards  the  SGP  and 
budgetary surveillance. In particular, the European Council agreed on: (i) strengthening both 
the  preventive  and  corrective  parts  of  the  SGP,  including  with  sanctions  and  taking  due 
account  of  the  particular  situation  of  euro-area  Member  States;  (ii)  giving,  in  budgetary 
surveillance,  a  much  more  prominent  role  to  levels  and  evolutions  of  debt  and  overall 
sustainability; (iii) ensuring that all Member States have national budgetary rules and medium 
term budgetary frameworks in line with the SGP; (iv) ensuring the quality of statistical data. 

The  European  Council  invited  the  Task  Force  on  economic  governance  chaired  by  its 
President and established in March 2010 and the Commission to rapidly develop further and 
make  operational  these  orientations.  A  constructive  relationship  developed  between  the 
Commission and the Task Force. The Commission contributed to the work of the Task Force 
through the Communications referred to above and through ad hoc contributions. 

3. 

LEGAL ELEMENTS OF THE PROPOSAL 

The  legal  basis  for  the  SGP  is  laid  down  in  Articles  121  and  126  of  the  Treaty  on  the 
Functioning  of  the  European  Union.  The  SGP  consists  of:  Council  Regulation  (EC)  No 
1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the 
surveillance  and  coordination  of  economic  policies  (referred  to  as  preventive  part);  Council 
Regulation (EC) No 1467/97 of 7 July 1997 on speeding up and clarifying the implementation 
of  the  excessive  deficit  procedure  (referred  to  as  corrective  part);  and  the  Resolution  of  the 
European Council of 17 June 1997 on the Stability and Growth Pact. These Regulations were 
amended  in  2005  by  Regulations  (EC)  No  1055/2005  and  (EC)  No  1056/2005  and 
complemented by the Council Report of 20 March 2005 on ‘Improving the implementation of 
the Stability and Growth Pact’. The present proposals seek further amendments to Regulations 
No 1466/97 and (EC) No 1467/97. Additional enforcement instruments are proposed in a new 
Regulation  of  the  European  Parliament  and  the  Council  on  the  effective  enforcement  of 
budgetary  surveillance  in  the  euro  area,  based  on  Article  136  of  the  Treaty,  in  combination 
with Article 121(6). The requirements for the budgetary frameworks of the Member States are 
the  subject  of  a  new  Council  Directive  based  on  Article  126(14):  the  Directive  aims  in 
particular  to  specify  the  obligations  of  national  authorities  to  comply  with  the  provisions  of 
Article 3 of Protocol No 12 to the Treaties on the excessive deficit procedure. 

The preventive part of the SGP is meant to ensure that Member States follow prudent fiscal 
policies so that there is no need to adopt more stringent forms of coordination to avoid public 
finance  sustainability  being  put  at  risk,  with  potential  negative  consequences  for  EMU  as  a 
whole.  Accordingly,  Member  States  are  required  to  present  stability  and  convergence 
programmes  outlining  their  plans  to  achieve  medium-term  budgetary  objectives  (MTOs), 
which are defined as a percentage of GDP in structural terms (i.e. adjusting for the effect of 
the  cycle  and  excluding  one-off  and  temporary  measures)  and  are  differentiated  across 
countries around a close-to-balance position to reflect the level of public debt and liabilities 
related  to  ageing.  Member  States  not  having  reached  their  MTO  are  expected  to  converge 
towards it at an annual pace of 0.5% of GDP in structural terms. 

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However,  progress  towards  MTOs  has  been  generally  insufficient,  leaving  public  finances 
badly  exposed  to  the  economic  downturn.  Moreover,  the  structural  balance  has  in  practice 
proved  an  insufficient  measure  of  a  country’s  underlying  fiscal  position,  owing  to  the 
difficulty  of  assessing  the  cyclical  position  of  the  economy  in  real  time  and  to  insufficient 
account being taken of revenue windfalls and shortfalls not directly related to the economic 
cycle (in particular housing and financial market developments). As a result, in a number of 
countries,  even  apparently  sound  budgetary  positions  before  the  crisis  masked  a  strong 
reliance  on  windfall  revenues  to  finance  expenditure,  the  reversal  of  which  contributed  to 
soaring budget deficits. 

To  respond  to  these  shortcomings  the  reform  of  the  preventive  part  that  is  being  proposed, 
while  retaining  the  current  MTOs  and  the  0.5%  of  GDP  annual  convergence  requirement, 
makes  them  operational  in  terms  of  a  new  principle  of  prudent  fiscal  policy-making.  This 
principle implies that annual expenditure growth should not exceed – and if the MTO has not 
been  achieved  should  be  clearly  below  –  a  prudent  medium-term  rate  of  growth  of  GDP, 
unless the MTO has been significantly overachieved or the excess of expenditure growth over 
the prudent medium-term rate is matched by discretionary measures on the revenue side. The 
essential aim is to ensure that revenue windfalls are not spent but are instead allocated to debt 
reduction. The new principle will provide the benchmark against which countries’ fiscal plans 
in the stability and convergence programme will be examined. Additionally, failure to respect 
keep to the agreed rate of growth of expenditure, in conjunction with the stipulated revenue 
measures, will make the Member State concerned liable to a warning from the Commission 
and,  if  persistent  and/or  particularly  serious,  a  Council  recommendation  to  take  corrective 
action issued under Article 121 of the Treaty. Such a recommendation, while being issued in 
the  context  of  the  preventive  part,  would  be  backed,  for  the  first  time  and  for  euro-area 
countries only, by an enforcement mechanism under Article 136 of the Treaty, in the form of 
an  interest-bearing  deposit,  amounting  to  0.2%  of  GDP.  A  procedure  of  ‘reverse  voting’ 
mechanism  is  introduced  for  imposing  the  interest-bearing  deposit:  on  the  issue  of  a 
recommendation, the deposit would become due on proposal by the Commission, unless the 
Council  decides  to  the  contrary  by  qualified  majority  within  ten  days.  The  Council  could 
reduce the amount of the deposit only unanimously or based on a Commission proposal and a 
reasoned  request  from  the  Member  State  concerned.  The  deposit  will  be  returned  with  the 
accrued interest once the Council is satisfied that the situation giving rise to it has come to an 
end. 

The  corrective  part  of  the  SGP  is  meant  to  avoid  gross  errors  in  budgetary  policies,  which 
might  put  at  risk  the  sustainability  of  public  finances  and  potentially  endanger  EMU.  This 
translates into the obligation for Member States to avoid excessive government deficits, which 
are defined against a numerical threshold for deficit (3% of GDP) and debt (60% of GDP or 
sufficiently declining toward it). The excessive deficit procedure (EDP) that implements the 
ban  on  excessive  deficits  provides  for  a  sequence  of  steps,  which,  for  euro-area  countries, 
include the eventual imposition of financial sanctions. 

The  EDP  has  been  regularly  applied  in  line  with  the  relevant  provisions,  even  against  the 
background  of  the  exceptional  circumstances  of  the  financial  crisis,  thereby  contributing  to 
anchoring  expectations  of  its  orderly  resolution.  However  a  number  of  shortcomings  have 
emerged.  While  the  deficit  and  the  debt  criterion  are  in  principle  on  an  equal  footing,  and 
persistently  high  levels  of  debt  arguably  represent  a  more  serious  threat  to  public  finance 
sustainability than occasionally high deficits, in practice the ‘3% of GDP’ threshold has been 
the almost exclusive focus of the EDP, with debt playing a marginal role so far. This owes to 
the  less  straightforward  nature  of  the  debt  threshold  compared  to  the  deficit,  including  the 

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ambiguity of the notion of sufficiently diminishing pace of reduction and the greater impact 
on  the  debt  ratio  of  variables  outside  the  control  of  the  government,  notably  inflation.  The 
EDP  is  backed  in  principle  by  a  strong  enforcement  mechanism,  as  financial  sanctions  can, 
and  should  be,  imposed  in  the  event  of  persistent  failure  to  correct  an  excessive  deficit. 
However,  such  sanctions  arguably  come  into  play  too  late  in  the  process  to  represent  an 
effective deterrent against gross fiscal policy errors, not least because the financial situation of 
the  country  concerned  may  have  deteriorated  so  much  as  to  make  the  threat  of  a  fine  less 
credible at the very time when it should become real. Finally, the recent crisis has highlighted 
that if the obligation to correct excessive deficits contributes to anchoring the expectation that 
government solvency will be maintained, the timeline of the correction and the profile of the 
adjustment may have to reflect EMU-wide considerations. 

To respond to these shortcomings the following key proposals for the reform of the corrective 
part are being put forward. 

The  debt  criterion  of  the  EDP  is  to  be  made  operational,  notably  through  the  adoption  of  a 
numerical benchmark  to  gauge  whether the debt ratio is sufficiently diminishing toward the 
60%  of  GDP  threshold.  Specifically,  a  debt-to-GDP  ratio  above  60%  is  to  be  considered 
sufficiently  diminishing  if  its  distance  with  respect  to  the  60%  of  GDP  reference  value  has 
reduced over the  previous three years at  a  rate of the  order  of one-twentieth per year. Non- 
compliance with this numerical benchmark is not, however, necessarily expected to result in 
the country concerned being placed in excessive deficit, as this decision would need to take 
into  account  all  the  factors  that  are  relevant,  in  particular  for  the  assessment  of  debt 
developments,  such  as  whether  very  low  nominal  growth  is  hampering  debt  reduction, 
together with risk factors linked to the debt structure, private sector indebtedness and implicit 
liabilities  related  to  ageing.  In  line  with  the  greater  emphasis  on  debt,  more  consideration 
should be given to relevant factors in the event of non-compliance with the deficit criterion, if 
a country has a debt below the 60% of GDP threshold. 

The more flexible approach put forward with respect to considering the relevant factors in the 
steps  of  determining  the  existence  of  an  excessive  deficit  could  also  benefit  countries 
undertaking  systemic  pension  reforms,  beyond  the  currently  foreseen  five-year  transitory 
period.  The  special  provisions  of  the  SGP  for  systemic  pension  reforms  with  regards  the 
deficit criterion are also extended to the debt criterion; through establishing the same five-year 
transitory period for considering the net costs of such reforms when assessing the compliance 
with  the  debt  criterion.  Finally,  equal  consideration  shall  be  given  to  the  partial  or  total 
reversal of previously implemented systemic pension reforms, during both the launch and the 
abrogation of an EDP. 

Enforcement  is  strengthened  by  introducing  a  new  set  of  financial  sanctions  for  euro-area 
Member  States,  which  would  apply  much  earlier  in  the  process  according  to  a  graduated 
approach.  Specifically,  a  non-interest-bearing  deposit  amounting  to  0.2%  of  GDP  would 
apply upon a decision to place a country in excessive deficit, which would be converted into a 
fine in the event of non-compliance with the initial recommendation to correct the deficit. The 
amount is equal to the fixed component of the sanctions already provided for in the final step 
of  the  EDP.  It  also  bears  a  link  with  the  EU  budget,  which  should  facilitate  the  envisaged 
move to a system of enforcement based on the EU budget as outlined in the above-mentioned 
Commission  Communication  of  30  June  2010.  Further  non-compliance  would  result  in  the 
sanction being stepped up, in line with the already existing provisions in the SGP. To reduce 
discretion in enforcement, the ‘reverse voting’ mechanism is envisaged for imposing the new 
sanctions in connection with the successive steps of the EDP. Specifically, at each step of the 

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EDP,  the  Commission  will  make  a  proposal  for  the  relevant  sanction,  and  this  will  be 
considered  adopted,  unless  the  Council  decides  to  the  contrary  by  qualified  majority  within 
ten  days.  The  size  of  the  non-interest-bearing  deposit  or  the  fine  could  only  be  reduced  or 
cancelled by the Council unanimously or based on a specific proposal from the Commission 
on  grounds  of  exceptional  economic  circumstances  or  following  a  reasoned  request  by  the 
Member State concerned. 

Moreover,  the  criteria  for  assessing  compliance  with  the  recommendations  at  each  step, 
including  the  possibility  of  allowing  an  extension  of  the  deadlines  for  the  correcting  the 
excessive deficit, are clarified by placing explicit emphasis on the fiscal variables that can be 
assumed  to  be  under  the  direct  control  of  the  government,  in  particular  expenditure,  by 
analogy  with  the  approach  proposed  for  the  preventive  part.  Beyond  these  country-specific 
circumstances, the possibility is introduced of extending the deadlines also in the event of a 
general economic crisis. 

Effective enforcement of the EMU budgetary coordination framework cannot be expected to 
derive  only  from  provisions  laid  down  at  EU  level.  The  particular  decentralised  nature  of 
fiscal policy-making in the EU and the general need for national ownership of EU rules make 
it essential that the objectives of the EMU budgetary coordination framework are reflected in 
the  national  budgetary  frameworks.  A  national  budgetary  framework  is  the  set  of  elements 
that form the basis of national fiscal governance, i.e. the country-specific institutional policy 
setting  that  shapes  fiscal  policy-making  at  national  level.  This  includes  public  accounting 
systems,  statistics,  forecasting  practices,  numerical  fiscal  rules,  budgetary  procedures 
governing  all  stages  of  the  budget  process  and  medium  term  budgetary  frameworks  in 
particular, and fiscal relations across government sub-sectors. While Member States’ specific 
needs and preferences must be respected, a number of features stand out as being needed in 
terms  of  ensuring  minimum  quality  and  consistency  with  the  EMU  budgetary  framework. 
These  are  the  subject  of  the  Directive  on  national  budgetary  frameworks  that  is  being 
proposed  to  complement  the  reform  of  the  SGP.  Such  features  firstly  require  that  the  most 
primary elements of national budgetary frameworks, namely accounting and statistical issues 
and  forecasting  practices,  work  in  line  with  minimum  European  standards  to  facilitate 
transparency  and  the  monitoring  of  fiscal  developments.  Domestic  budgetary  frameworks 
need also to adopt a multi-annual fiscal planning perspective so as to ensure the achievement 
of  the  medium-term  objectives  set  at  EU  level.  Additionally,  Member  States  must  have  in 
place  numerical  fiscal  rules  conducive  to  compliance  with  the  deficit  and  debt  thresholds. 
Member  States  must  ensure  that  these  features  apply  to  all  general  government  sub-sectors. 
National authorities must also guarantee the transparency of the budget process by providing 
detailed  information  on  existing  extra-budgetary  funds,  tax  expenditures  and  contingent 
liabilities. 

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2010/0278 (COD) 

Proposal for a 

REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL 

on the effective enforcement of budgetary surveillance in the euro area 

THE EUROPEAN PARLIAMENT AND THE COUNCIL OF THE EUROPEAN UNION, 

Having regard to the Treaty on the Functioning of the European Union, and in particular Article 136 , 
in combination with Article 121(6) thereof, 

Having regard to the proposal from the European Commission, 

After transmission of the draft legislative act to the national Parliaments, 

Having regard to the opinion of the European Economic and Social Committee1, 

Acting in accordance with the ordinary legislative procedure, 

Whereas: 

(1)  Member  States  whose  currency  is  the  euro  have  a  particular  interest  and  responsibility  to 
conduct  economic  policies  that  promote  the  proper  functioning  of  economic  and  monetary 
union and to avoid policies that jeopardise it. 

(2) 

(3) 

(4) 

The  Treaty  allows  the  adoption  of  specific  measures  in  the  euro  area  which  go  beyond  the 
provisions applicable to all Member States, for the purpose of ensuring the proper functioning 
of economic and monetary union.  

Additional  sanctions  are  necessary  to  make  the  enforcement  of  budgetary  surveillance  more 
effective  in  the  euro  area.  Those  sanctions  should  enhance  the  credibility  of  the  fiscal 
surveillance framework of the Union. 

The  rules  laid  down  by  this  Regulation  should  ensure  fair,  timely,  graduated  and  effective 
mechanisms  for  compliance  with  the  preventive  and  the  corrective  parts  of  the  Stability  and 
Growth Pact, in particular Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of 
the  surveillance  of  budgetary  positions  and  the  surveillance  and  coordination  of  economic 
policies2 and Council Regulation (EC) No 1467/97 of 7 July 1997 on speeding up and clarifying 
the implementation of the excessive deficit procedure3. 

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OJ C , , p. . 
OJ L 209, 2.8.1997, p. 1. 
OJ L 209, 2.8.1997, p. 6.  

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(5) 

(6) 

(7) 

(8) 

(9) 

Sanctions for Member States whose currency is the euro in the preventive part of the Stability 
and  Growth  Pact  should  provide  incentives  for  prudent  fiscal  policy-making.  Such  policy-
making should ensure that the growth rate of government expenditure does not normally exceed 
a  prudent  medium-term  growth  rate  of  gross  domestic  product  (GDP),  unless  the  excess  is 
matched  by  increases  in  government  revenues  or  discretionary  revenue  reductions  are 
compensated by reductions in expenditure. 

Prudent  fiscal  policy-making  should  effectively  achieve  and  maintain  the  medium-term 
budgetary  objective.  Adherence  to  the  medium-term  objective  for  budgetary  positions  should 
allow Member States to have a safety margin with respect to the 3% of GDP reference value for 
the government deficit, to ensure rapid progress towards sustainability, and at the same time to 
have  room  for  budgetary  manoeuvre,  in  particular  taking  into  account  the  needs  for  public 
investment. 

In the preventive part of the Stability and Growth Pact, the incentive for prudent fiscal policy-
making should consist of an obligation to lodge an interest-bearing deposit temporarily imposed 
on  a  Member  State  whose  currency  is  the  euro  that  is  making  insufficient  progress  with 
budgetary  consolidation.  This  should  be  the  case  when,  following an  initial  warning  from  the 
Commission, a Member State persists in conduct which, while not amounting to a violation of 
the ban on excessive deficits, is imprudent and potentially detrimental to the smooth functioning 
of  economic  and  monetary  union,  and  the  Council  therefore  issues  a  recommendation  in 
accordance with Article 121(4) of the Treaty. 

The  interest-bearing  deposit  imposed  should  be  released  to  the  Member  State  concerned  with 
the interest accrued on it once the Council has been satisfied that the situation giving rise to the 
obligation to lodge that deposit has come to an end. 

In  the  corrective  part  of  the  Stability  and  Growth  Pact,  sanctions  for  Member  States  whose 
currency  is  the  euro  should  take  the  form  of  an  obligation  to  lodge  a  non-interest-bearing 
deposit  linked  to  a  Council  decision  establishing  the  existence  of  an  excessive  deficit  and  the 
obligation  to  pay  a  fine  in  the  event  of  non-compliance  with  a  Council  recommendation  to 
correct  an  excessive  government  deficit.  These  sanctions  should  be  imposed  irrespective  of 
whether  or  not  an  interest-bearing  deposit  has  previously  been  imposed  on  the  Member  State 
concerned. 

(10)  The  size  of  the  interest-bearing  deposit,  of  the  non-interest-bearing  deposit  and  of  the  fine 
provided  for  in  this  Regulation  should  be  set  in  such  a  way  as  to  ensure  a  graduation  of 
sanctions in the preventive and corrective parts of the Stability and Growth Pact and to provide 
sufficient incentives for the Member States whose currency is the euro to comply with the fiscal 
framework of the Union. The fine linked to Article 126(11) of the Treaty as specified in Article 
12 of Regulation (EC) No 1467/974 is composed of a fixed component that equals 0.2% of GDP 
and of a variable component. Thus, graduation and equal treatment between Member States are 
ensured if the interest-bearing deposit, the non-interest-bearing deposit and the fine specified in 
this Regulation are equal to 0.2% of GDP, the size of the fixed component of the fine linked to 
Article 126(11) of the Treaty. 

4 

OJ L 209, 2.8.1997, p. 6.  

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(11)  A possibility should be provided for the Council to reduce or to cancel the sanctions imposed on 
Member States whose currency is the euro on the basis of a Commission proposal following a 
reasoned  request  by  the  Member  State  concerned.  In  the  corrective  part  of  the  Stability  and 
Growth Pact, the Commission should also be able to propose to reduce the size of a sanction or 
to cancel it on grounds of exceptional economic circumstances. 

(12)  The  non-interest-bearing  deposit  should  be  released  upon  correction  of  the  excessive  deficit 
while the interest on such deposits and the fines collected should be distributed among Member 
States whose currency is the euro which do not have an excessive deficit and which are not the 
subject of an excessive imbalance procedure either. 

(13)  The power to adopt individual decisions implementing the sanction mechanisms set out in this 
Regulation  should  be  conferred  on  the  Council.  As  part  of  the  coordination  of  the  economic 
policies of the Member States conducted within the Council as specified in Article 121(1) of the 
Treaty,  these  individual  decisions  are  an  integral  follow-up  to  the  measures  adopted  by  the 
Council  in  accordance  with  Articles  121  and  126  of  the  Treaty  and  Regulations  (EC)  No 
1466/97 and (EC) No 1467/97. 

(14)  Since this Regulation contains general rules for the effective enforcement of Regulations (EC) 
No  1466/97  and  (EC)  No  1467/97,  it  should  be  adopted  in  accordance  with  the  ordinary 
legislative procedure referred to in Article 121(6). 

(15)  Since the objective to create a uniform sanction mechanism cannot be sufficiently achieved at 
the  level  of  the  Member  States,  the  Union  may  adopt  measures  in  accordance  with  the 
principles of subsidiarity as set out in Article 5 of the Treaty on European Union. In accordance 
with  the  principle  of  proportionality,  as  set  out  in  that  Article,  this  Regulation  does  not  go 
beyond what is necessary in order to achieve that objective, 

HAVE ADOPTED THIS REGULATION: 

Chapter I 
Subject matter 

Article 1 
Subject matter and scope 

1. This Regulation sets out a system of sanctions for enhancing the enforcement of the preventive and 
corrective parts of the Stability and Growth Pact in the euro area.  

2. This Regulation shall apply to Member States whose currency is the euro.  

For the purpose of this Regulation: 

Article 2 
Definitions 

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(1) 

(2) 

(3) 

'the preventive part of the Stability and Growth Pact' means the multilateral surveillance system 
as organised by Regulation (EC) No 1466/97 of July 1997; 

'the  corrective  part  of  the  Stability  and  Growth  Pact'  means  the  procedure  for  the  control  of 
Member States’ excessive deficit as regulated by Article 126 of the Treaty and Regulation (EC) 
No 1467/97 of 7 July 1997; 

'exceptional  economic  circumstances'  means  circumstances  where  an  excess  of  a  government 
deficit  over  the  reference  value  is  considered  exceptional  within  the  meaning  of  the  second 
indent of Article 126(2)(a) of the Treaty and as specified in Regulation (EC) No 1467/97. 

Chapter II 
Sanctions in the preventive part of the Stability and Growth Pact 

Article 3 
Interest-bearing deposit 

1. If the Council addresses to a Member State a recommendation in accordance with Article 121(4) of 
the Treaty to take the necessary adjustment measures in the event of persisting or particularly serious 
and significant deviations from prudent fiscal policy-making as laid down in Article 6(3) of Regulation 
(EC) No 1466/97, the lodging of an interest bearing deposit shall be imposed by the Council, acting on 
a proposal from the Commission. The decision shall be deemed to be adopted by the Council unless it 
decides by qualified majority to reject the proposal within ten days of the Commission adopting it. The 
Council may amend the proposal in accordance with Article 293(1) of the Treaty.  

2. The interest-bearing deposit to be proposed by the Commission shall amount to 0.2% of the gross 
domestic product (GDP) of the Member State concerned in the preceding year.  

3.  The  deposit  shall  bear  the  interest  rate  reflecting  the  Commission  credit  risk  and  the  relevant 
investment period. 

4. By derogation from paragraph 2, the Commission, following a reasoned request by the Member State 
concerned addressed to the Commission within ten days of adoption of the Council recommendation 
referred  to  on  paragraph  1,  may  propose  to  reduce  the  amount  of  the  interest-bearing  deposit  or  to 
cancel it.  

5. If the situation giving rise to the recommendation referred to in paragraph 1 no longer subsists, the 
Council, on the basis of a proposal from the Commission, shall decide that the deposit and the interest 
accrued thereon are returned to the Member State concerned. The Council may amend the Commission 
proposal in accordance with Article 293(1) of the Treaty. 

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Chapter III 
Sanctions in the corrective part of the Stability and Growth Pact 

Article 4 
Non-interest-bearing deposit 

1. If the Council decides in accordance with Article 126(6) of the Treaty that an excessive deficit exists 
in  a  Member  State,  the  lodging  of  a  non-interest-bearing  deposit  shall  be  imposed  by  the  Council, 
acting  on  a  proposal  from  the  Commission.  The  decision  shall  be  deemed  adopted  by  the  Council 
unless  it  decides  by  qualified  majority  to  reject  the  proposal  within  ten  days  of  the  Commission 
adopting it. The Council may amend the proposal in accordance with Article 293(1) of the Treaty.  

2.  The  non-interest-bearing  deposit  to  be  proposed  by  the  Commission  shall  amount  to  0.2%  of  the 
GDP of the Member State concerned in the preceding year.  

3. If the Member State has an interest-bearing deposit lodged with the Commission in accordance with 
Article 3, the interest-bearing deposit shall be converted into a non-interest-bearing deposit.  

If the size of the previously lodged interest-bearing deposit and of the interest accrued exceeds the size 
of the required non-interest-bearing deposit, the outstanding amount shall be returned to the Member 
State.  

If  the  size  of  the  required  non-interest-bearing  deposit  exceeds  the  size  of  the  previously  lodged 
interest-bearing  deposit  and  the  interest  accrued  thereon,  the  Member  State  shall  make  up  the 
outstanding amount when it lodges the non-interest-bearing deposit.  

4.  By  derogation  from  paragraph  2  of  this  Article,  the  Commission  may,  on  grounds  of  exceptional 
economic circumstances or following a reasoned request by the Member State concerned addressed to 
the Commission within ten days of adoption of the Council decision in accordance with Article 126(6) 
of the Treaty, propose to reduce the amount of the non-interest-bearing deposit or to cancel it.  

Article 5 
Fine 

1. If the Council decides in accordance with Article 126(8) of the Treaty that the Member State has not 
taken  effective  action  in  response  to  a  Council  recommendation  within  the  period  laid  down,  the 
Council,  acting  on  a  proposal  from  the  Commission,  shall  decide  that  the  Member  State  shall  pay  a 
fine. The decision shall be deemed adopted by the Council unless it decides by qualified majority to 
reject  the  proposal  within  ten  days  of  the  Commission  adopting  it.  The  Council  may  amend  the 
proposal in accordance with Article 293(1) of the Treaty.  

2. The fine to be proposed by the Commission shall amount to 0.2% of the GDP of the Member State 
concerned in the preceding year.  

3. If the Member State has a non-interest-bearing deposit lodged with the Commission in accordance 
with Article 4, the non-interest-bearing deposit shall be converted into the fine.  

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If the size of the previously lodged non-interest-bearing deposit exceeds the size of the required fine, 
the outstanding amount shall be returned to the Member State.  

If the size of the required fine exceeds the size of the previously lodged non-interest-bearing deposit, or 
if  no  non-interest-bearing  deposit  has  been  previously  lodged,  the  Member  State  shall  make  up  the 
outstanding amount when it pays the fine.  

4.  By  derogation  from  paragraph  2  of  this  Article,  the  Commission  may,  on  grounds  of  exceptional 
economic circumstances or following a reasoned request by the Member State concerned addressed to 
the Commission within ten days of adoption of the Council decision in accordance with Article 126(8) 
of the Treaty, propose to cancel or to reduce the amount of the fine. 

Article 6 
Return of the non-interest-bearing deposit 

If the Council decides in accordance with Article 126(12) of the Treaty to abrogate some or all of its 
decisions, any non-interest-bearing deposit lodged by the Member State with the Commission shall be 
returned to the Member State concerned.  

Article 7 
Distribution of the interest and fines 

The interest earned by the Commission on deposits lodged in accordance with Article 4 and the fines 
collected in accordance with Article 5 shall constitute other revenue referred to in Article 311 of the 
Treaty, and shall be distributed, in proportion to their share in the gross national income of the eligible 
Member  States,  among  Member  States  whose  currency  is  the  euro  which  do  not  have  an  excessive 
deficit as determined in accordance with Article 126(6) of the Treaty and which are not the subject of 
an excessive imbalance procedure within the meaning of Regulation (EU) No […/…].  

Chapter IV 
GENERAL PROVISIONS 

Article 8 
Voting within the Council 

For the measures referred to in Articles 3, 4 and 5, only members of the Council representing Member 
States whose currency is the euro shall vote and the Council shall act without taking into account the 
vote of the member of the Council representing the Member State concerned.  

A  qualified  majority  of  the  members  of  the  Council  mentioned  in  the  previous  paragraph  shall  be 
defined in accordance with Article 238(3)(a) of the Treaty.  

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Article 9 
Entry into force 

This Regulation shall enter into force on the [xx] day following that of its publication in the Official 
Journal of the European Union. 

This  Regulation  shall  be  binding  in  its  entirety  and  directly  applicable  in  the  Member  States  in 
accordance with the Treaties. 

Done at Brussels, 

For the European Parliament 
The President 

For the Council 
The President 

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