Special Report No 18 // 2015#Financial assistance provided to countries in difficulties #(pursuant to Article 287(4), second subparagraph, TFEU)
Date: 2015-11-11
Institutions: European Court of Auditors
Subjects: Hungary, Ireland, Latvia, Portugal, Romania, aid programme, economic analysis, economic recession, financial aid, public debt

EN 

2015 

NO 18

Special Report  Financial assistance 

provided to countries 
in difficulties

EUROPEAN
COURT
OF AUDITORS

 
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EN 

2015 

NO 18

Special Report

Financial assistance 
provided to countries 
in difficulties

(pursuant to Article 287(4), second subparagraph, TFEU)

Audit team

02

The ECA’s special reports set out the results of its performance and compliance audits of specific budgetary areas or 
management topics. The ECA selects and designs these audit tasks to be of maximum impact by considering the risks 
to performance or compliance, the level of income or spending involved, forthcoming developments and political and 
public interest.

This performance audit was produced by Audit Chamber IV — headed by ECA Member Milan Martin Cvikl — which spe-
cialises in auditing revenue, research and internal policies, and European Union’s institutions and bodies. The audit was 
led by ECA Member Baudilio Tomé Muguruza, supported by the head of his private office, Daniel Costa de Magalhães and  
Ignacio García de Parada, attaché; Zacharias Kolias, director; Josef Jindra, team leader; Giuseppe Diana, Marco Fians,  
Daniela Hristova, Didier Lebrun, Ioanna Metaxopoulou, Adrian Savin, Kristian Sniter, auditors.

From left to right: D. Lebrun, I. García de Parada, K. Sniter, J. Jindra, G. Diana,  
B. Tomé Muguruza, A. Savin, D. Hristova, Z. Kolias, M. Fians, D. Costa de Magalhães.

Contents

03

Paragraph

Abbreviations

I-XIX 

Executive summary

1-26 

1-7 

Introduction

The sovereign debt crisis in the EU Member States

8-18 

Design and implementation

8-10 

Programme design

11-15 

Conditions

16-18 

Implementation

19-26 

Financial resources

19-23 

Programme financing

24-26 

Borrowing on the markets

27-32  Audit approach

33-47 

Part I — The Commission was unprepared for the magnitude of the crisis that 
broke out

33-44 

The Commission underestimated the extent of the fiscal imbalances in the run-up to the crisis

35-40 

The Commission estimated the public budgets to be stronger than they actually were

41-44 

Assessments underestimated the potential fiscal risks

45-47 

As a result the Commission was not ready for the programme management

 
Contents

04

48-114  Part II — Processes were generally weak

50-96 

The Commission’s processes did not always incorporate sufficient checks and balances

52-54 

The Commission was mostly thorough in obtaining the necessary information for monitoring purposes

55-70 

Programme forecasts provide for broad checks of consistency in programme design, but with many caveats 
which are not verified

71-75 

Programme features were generally soundly based, but important records were sometimes missing

76-79 

The Commission occasionally departed from Council decisions

80-92 

Countries were not treated in the same way

93-96 

Programme management weaknesses due to weak controls

97-107 

Programme documents had improved with time but still displayed shortcomings

97-99 

Improvements in the quality of programme documents

100-107  Weaknesses in compliance monitoring and reporting

108-114  Cooperation with the other partners was informal only

115-136  Part III — Borrowing met financing needs even though circumstances initially 

made it difficult to always abide by best practice

117-122  Bond issues were well subscribed

117-118  Cost of debt in line with peer levels

119-122  Pricing levels at issuance sometimes higher than initial guidance from banks

123-136  Circumstances initially made it difficult to always abide by best practices

137-178  Part IV — Programmes met their objectives

138-143  No need to increase overall funding

138-141  Funding envelopes proved sufficient, if tight in two Member States

142-143  Certain Member States received more advantageous financial terms than provided for the initial design

Contents

05

144-154  Updated deficit targets mostly but not always sustainably met

144-148  With some exceptions, revised annual deficit targets were met

149-152  All countries improved their fiscal stance, but to varying degrees

153-154  Countries used one-off measures

155-164  Compliance with the conditions was high

155-158  Member States eventually complied with at least 80 % of conditions

159-164  Programmes prompted reforms, but occasionally the desired effects did not materialise

165-178  How well did countries increase their competitiveness?

165-172  Competitiveness gains, but to varying degrees

173-174 

Internal devaluation worked through the adjustment of the wages of the newly hired

175-178  Foreign exchange loans remained a challenge

179-204  Conclusions and recommendations

179-180  Pre-crisis surveillance

181-192  Programme management processes

193-194  Borrowing operations

195-204  Programme achievements

Annex I  —  Reasons motivating the request for assistance

Annex II  —  The lending facilities for the five countries

Annex III  —  Audit methodology

Reply of the Commission

 
 
 
 
Abbreviations

06

Council: Council of the European Union — the text uses this term as a shortcut for any Member State  
decision-making body

ECB: European Central Bank

EFC: Economic and Financial Committee

EFSF: European Financial Stability Facility

EFSM: European Financial Stabilisation Mechanism

EMTNs: Euro medium-term notes

ESA: European System of Accounts

EWG: Eurogroup Working Group

IMF: International Monetary Fund

MoU: Memorandum of understanding

SGP: Stability and Growth Pact

Executive  
summary

07

I
Seven years ago, Europe faced a financial crisis which 
turned into a sovereign debt crisis. The sovereign debt 
crisis was a consequence of various factors, including 
weak banking supervision, poor fiscal policies and the 
difficulties experienced by large financial institutions 
(and the consequent bailout costs borne by the gen-
eral public). The crisis swept across EU Member States 
in two waves, first affecting the non-euro area coun-
tries in 2008-2009 and later spreading to the euro area 
itself. In total, eight EU Member States were forced to 
seek macrofinancial assistance.

IV
We found that the European Commission estimated 
the countries’ public budgets to be stronger than they 
actually turned out to be. An important weakness of 
the Commission’s assessments prior to 2009 was the 
lack of reporting on the build-up of contingent public-
sector liabilities, which often became real liabilities 
during the crisis. Nor did the Commission pay suf-
ficient attention to the link between large foreign 
financial flows, the health status of the banks and, 
ultimately, government finances.

II
But was this turmoil well resolved? We analyse the 
Commission’s management of the financial assistance 
provided to five Member States (Hungary, Latvia, 
Romania, Ireland and Portugal).

Some warning signs went unnoticed

III
It is important to remember that before the crisis there 
was already a framework geared towards monitoring 
the Member States’ budgets. Warning the Council 
about the mounting fiscal imbalances was the Com-
mission’s responsibility. The Commission was not 
prepared for the first requests for financial assistance.

V
Reforms to the Stability and Growth Pact in 2011, 
2013 and 2014 sought to address the weaknesses of 
the pre-crisis period by introducing greater macro-
economic surveillance. However, back in 2008 the 
Commission found itself unprepared to manage the 
financial assistance when countries started presenting 
their requests.

Standing up to the challenge

Playing catch-up

VI
The Commission managed to take on its new pro-
gramme management duties, which included hold-
ing talks with the national authorities, preparing 
programme forecasts, financing gap estimates and 
identifying the necessary reforms. Given the initial 
time constraints and limited relevant experience, this 
was an achievement.

Executive summary 

08

VII
The Commission was mostly thorough in obtaining the 
information it needed. It has increasingly marshalled 
internal expertise and engaged with a wide range of 
stakeholders in the countries which appealed for help.

Complex tools

VIII
The production of macroeconomic and deficit fore-
casts was not a new activity. The Commission used an 
existing and rather cumbersome spreadsheet-based 
forecasting tool. Quality control was limited mainly to 
reconciling the various parts of the forecasts, with no 
enquiry by management into the reasoning behind 
the forecasting assumptions. It was very difficult to 
assess the plausibility of key assumptions such as fiscal 
multipliers, not only in any subsequent review but 
also, by management, during the actual production of 
forecasts.

Teething problems

IX
The assistance programmes were mostly soundly 
based, given the prevailing EU-level policies and the 
economic knowledge at that time. But a common 
weakness of the Commission process was the lack of 
documentation. It was not geared towards going back 
in time to evaluate the decisions taken. We could not 
validate some of the essential information that was 
forwarded to the Council, such as the initial estimates 
of the financing gap for some programmes.

X
This can be partly explained by the crisis context, the 
initial time pressure and the novelty of programme 
management to the Commission. The availability of 
records improved with time, but even for the most 
recent programmes some key documents were 
missing.

XI
The conditions in memoranda of understanding were 
mostly justified by specific reference to the Council 
decision. However, conditions were not always suffi-
ciently focused on the general economic policy condi-
tions set by the Council.

Different approaches

XII
We found several examples of countries not being 
treated in the same way in a comparable situation. The 
conditions for assistance were managed differently 
in each programme. In some programmes they were 
less stringent overall, which made compliance easier. 
When comparing countries with similar structural 
weaknesses, it was found that the required reforms 
were not always in proportion to the problems faced 
or that they pursued widely different paths. Some, but 
not all, countries’ deficit targets were relaxed more 
than the economic situation would appear to justify.

Limited quality control

XIII
One of the reasons for these weaknesses was that the 
programme design and monitoring were largely in the 
hands of the Commission’s programme teams. Before 
reaching the Council or the Commission, the key docu-
ments resulting from a team’s work were subject to 
review, but this was insufficient in several respects. 
The underlying calculations were not reviewed by 
anyone outside the team, the work of the experts was 
not thoroughly scrutinised and the review process was 
not well documented.

Executive summary 

09

XVII
Member States complied with most conditions set out 
in their programmes, albeit with some delays. These 
were mostly incurred for reasons beyond the control 
of the Commission. Occasionally, however, the Com-
mission set unrealistically tight deadlines for wide-
ranging reforms. High compliance does not mean that 
all important conditions were complied with. In addi-
tion, we observed that Member States tended to leave 
compliance with the more important conditions until 
towards the end of the programme period.

XVIII
The programmes were successful in prompting 
reforms. Countries mostly continued with the reforms 
that were sparked by the programme conditions. 
Reversals of the reforms were rare at the time of 
our audit. They were offset by alternative reforms, 
which were often not equivalent in terms of potential 
impact.

XIX
In four of the five countries, the current account 
adjusted faster than expected. This is largely explained 
by the unexpected improvement in income balance, 
and to a lesser extent by the unexpected improve-
ment in trade balance.

Room for improvement

XIV
On the positive side, the programme documents, 
which provide the basis for the decisions that the 
Council or the Commission take, have improved 
significantly since the first request for financial assist-
ance. This was due to the allocation of additional staff 
to programme management, more experience gained 
and better preparation. However, even the more 
recent programme documents lacked some essential 
information.

XV
For monitoring, the Commission used accrual-based 
deficit targets. This ensures consistency with the 
excessive deficit procedure, but it also means that, 
when a decision on programme continuation is to be 
taken, the Commission cannot report with certainty 
whether the beneficiary Member State has complied 
with the deficit target, as accrual-based deficits can 
only be observed after a certain time has elapsed. The 
manner of reporting on compliance with conditions 
was not systematic. Many different terms were used to 
convey non-compliance, leading to confusion. Some 
conditions were not reported on. A few conditions 
were reported to have been met when this was not in 
fact the case.

Programme met their objectives

XVI
The revised deficit targets were mostly met, with some 
exceptions. As economic activity declined in 2009, 
countries suffered losses in revenue, which wiped out 
any gains from new revenue measures. Tax-neutral or 
tax-offsetting reforms caused additional short-term 
fiscal costs and some countries took additional tax 
measures to offset the declining tax-to-GDP ratios. 
Structural deficits improved but at a varying pace. Part 
of the fiscal adjustment took place in a non-lasting 
way. Countries used one-off measures to meet the 
targets.

Executive summary 

10

Our recommendations

(a)  The Commission should establish an institution-

wide framework allowing the rapid mobilisation of 
the Commission’s staff and expertise if a financial 
assistance programme emerges. The Commission 
should also develop procedures in the context of 
the ‘two-pack’ regulations.

(b)  The forecasting process should be subject to more 

systematic quality control.

(c)  To ensure the factors underlying programme deci-
sions are internally transparent, the Commission 
should enhance record-keeping and pay attention 
to it during quality reviews.

(d)  The Commission should ensure that proper 

procedures are in place for the quality review of 
programme management and of the content of  
programme documents.

(e)  For budget monitoring purposes, the Commission 
should include, in memoranda of understanding, 
variables that it can collect with short time lags.

(f)  The Commission should distinguish conditions 

by importance and target the truly important 
reforms.

(g)  For any future programmes, the Commission 
should attempt to formalise interinstitutional 
cooperation with other programme partners.

(h)  The debt management process should be more 

transparent.

(i)  The Commission should further analyse the key 

aspects of the countries’ adjustment.

Introduction

11

1  Based on Article 143 of the 

Treaty on the Functioning of 
the European Union.

2  Poland received access to IMF 

resources in May 2009 
through a flexible credit line, 
but it did not require EU 
support.

3  Depending on each 

programme, other sources of 
financing were to be provided 
by the World Bank, the 
European Bank for 
Reconstruction and 
Development, the European 
Investment Bank, the Czech 
Republic, Denmark, Finland, 
Poland, Norway and Sweden.

4 

Ireland, Greece, Spain, Italy 
and Portugal.

5  Germany and France.

6 

In the euro area, Greece, Spain 
and Cyprus also requested 
financial assistance.

The sovereign debt crisis 
in the EU Member States

01 
The financial crisis that hit Europe in 
2008 triggered the European sover-
eign debt crisis. The sovereign debt 
crisis had many causes, including weak 
banking supervision, poor fiscal pol-
icies and the difficulties experienced 
by large financial institutions (the 
bailout costs of which were borne by 
the general public). The effects of the 
crisis are still being felt as this report 
is published, and the resulting loan 
programmes have since run into the 
hundreds of billions, bringing onerous 
management responsibilities for all 
concerned.

02 
The crisis affected the EU Member 
States in two waves. In the first in-
stance, the contagion of the financial 
crisis spread through foreign credit 
and trade channels to a number of 
non-euro area Member States. The 
sharp increase in foreign capital 
outflows and decrease in exports 
revealed significant external imbal-
ances for some countries, three of 
which (Hungary, Latvia and Romania) 
sought financial assistance from the 
EU’s balance-of-payments mechanism1, 
the International Monetary Fund (IMF)2 
and other sources3.

03 
The second wave of the crisis con-
cerned euro area Member States. 
Although monetary union initially 
provided some liquidity cushioning, 
credit agencies started to downgrade 
several Member States’ sovereign 
bond ratings in 2009. Sovereign debt 
market interest rates increased sharply 
in some countries4 but decreased in 
others5. As a result of the decline in 
private funding and escalating borrow-
ing costs, the governments of Ireland 
and Portugal, among others6, applied 
for external financial assistance.

04 
The purpose of this financial assistance 
was to help countries repay or finance 
their maturing debt and deficits. It 
provided a cushion to ease implemen-
tation of the adjustment programmes 
that were necessary in each country to 
correct underlying problems. In broad 
terms, the mechanisms addressed the 
need to safeguard the stability of the 
euro area or the EU as a whole, to limit 
the risk of contagion and to prevent 
a sudden shock to the economies of 
beneficiary Member States. The objec-
tives of each programme differed in 
detail, but the overall aims of financial 
assistance were to return Member 
States to sound macroeconomic or 
financial health and restore their 
capacity to meet their public-sector 
(euro area) or balance-of-payments 
(non-euro area) obligations. Figure 1 
provides a timeline of the financial as-
sistance provided to the five Member 
States covered in our audit.

Introduction

12

1 Timeline of financial assistance
e
r
u
g
i
F

2008

2009

HU (Nov ’08 – Nov ’10)

2010

2011

2012

2013

2014

Non-euro area

LV (Jan ’09 – Jan ’12)

RO (Jun ’09 – Jun ’11)

RO 2 (Jun ’11–Mar ’13)

Euro area

IE (Dec ’10 – Dec ’13)

PT (May ’11 – May ’14)

Note: The start date of each programme is the date on which the memorandum of understanding between the Member State and the 
Commission was signed.

Source: ECA.

05 
As the crisis followed a different 
course in each country, assistance 
was requested for different reasons. 
 Annex I provides an overview of those 
reasons.

06 
A number of legal instruments were 
devised for providing financial assist-
ance. Non-euro area Member States 
could take advantage of the existing 
balance-of-payments mechanism. 
Ireland and Portugal were helped by 
the newly created European Financial 
Stabilisation Mechanism (EFSM) and 
the European Financial Stability Facil-
ity (EFSF). Only the balance-of-pay-
ments mechanism and the EFSM were 

established as EU instruments on the 
basis of the Treaty on the Functioning 
of the European Union, as the EFSF is 
an intergovernmental vehicle outside 
the EU framework. Annex II provides 
an overview of the legal basis of the 
three instruments. The five countries 
also received financial assistance from 
the IMF.

07 
Assistance to non-euro area countries 
was managed by the Commission and 
the IMF. The European Central Bank 
(ECB) — the third member of the troika 
of creditors — was involved in the 
management of financial assist ance to 
Ireland and Portugal. This text refers to 
these institutions as ‘the partners’.

 
(b)  An explanatory note to the above 
proposal, presenting the Commis-
sion’s assessment of the Member 
State’s planned economic adjust-
ment programme. The assessment 
is based on internal Commission 
forecasts, financial and macroeco-
nomic models, Eurostat data and 
information obtained from the 
negotiation visit.

(c)  A memorandum of understanding, 

which represents a more detailed 
commitment by the Member State 
and is typically signed by the 
Member State authorities and the 
Commission. The memorandum 
of understanding sets precise 
economic conditions for the dis-
bursement of each instalment and 
establishes the Member State’s 
reporting requirements.

(d)  A loan agreement, containing the 
technical and legal details of the 
loan (such as the average ma-
turity calculation, interest rates, 
disbursement and repayment 
arrangements13).

Introduction

Design and 
implementation

Programme design

08 
Requests for financial assistance from 
the EU are initiated by Member State 
authorities. Requests must be submit-
ted to the Commission and to the Eco-
nomic and Financial Committee (EFC)7 
together with a draft economic adjust-
ment programme8. Commission staff9 
prepare the macroeconomic forecasts 
underpinning each programme and 
conduct negotiations with the national 
authorities. The mandate for those 
negotiations is set out in advance in 
a policy brief10. The Commission will 
informally contact other stakehold-
ers (the IMF, the EFC and, in the case 
of euro area countries, the ECB) to 
obtain a coordinated position on the 
programme conditions that will ac-
company the financial assistance (see 
paragraph 11).

09 
The negotiation visit11 to the country 
culminates in a set of key documents, 
listed below.

(a)  A proposal for a Council decision 
on the financial assistance, set-
ting out the general economic 
policy conditions attached to the 
assistance and the broad financial 
terms of the loan (financial enve-
lope, instalment arrangements and 
maximum average maturity12).

13

7 

The EFC was set up to 
promote coordination in 
economic and financial 
policies among the Member 
States. The committee is 
composed of senior officials 
from national administrations 
and central banks, the ECB and 
the Commission.

8  Article 3(2) of Council 

Regulation (EC) No 332/2002 
of 18 February 2002 
establishing a facility 
providing medium-term 
financial assistance for 
Member States’ balances of 
payments (OJ L 53, 23.2.2002, 
p. 1) and Article 3(1) of Council 
Regulation (EU) No 407/2010 
of 11 May 2010 establishing 
a European Financial 
Stabilisation Mechanism 
(OJ L 118, 12.5.2010, p. 1). 
The economic adjustment 
programme is a set of 
adjustment policies that the 
country aims to implement to 
correct underlying problems 
and re-establish its 
macroeconomic and financial 
standing.

9 

The programme team, the 
head of the unit responsible 
for the programme country, 
the programme head and the 
director responsible for the 
programme country.

10  The policy brief analyses the 

financial and macroeconomic 
situation of the Member State 
and the potential impact of 
any proposed measures on its 
economy. It also sets out the 
framework for negotiations 
with the Member State. The 
policy brief is approved by the 
Commissioner responsible 
after having received the 
comments from the 
presidents of the EFC and 
Eurogroup Working Group 
(EWG).

11  The visits are conducted by 

senior staff from the 
Commission and the IMF, plus 
the ECB in the case of euro 
area countries. In general, 
these visits last between 2 and 
3 weeks.

12  Each disbursement of the 

financial assistance can have 
a different maturity. The 
weighted average of these 
maturities must not exceed 
the maximum average 
maturity set in the Council 
decision.

14

13  A borrowing contract is also 

signed for each instalment.

14  EFSM funding to Ireland and 
Portugal was provided in 
conjunction with EFSF 
funding, and identical 
economic conditions applied 
to both lending sources.

15  Moon, S. and Bulíř, A., Do 

IMF-supported programs help 
make fiscal adjustment more 
durable?, IMF working paper, 
2003.

16  Hernandéz de Cos, P. and 

Enrique Moral-Benito, The role 
of public wages in fiscal 
consolidation process, 
workshop ‘Government wage 
bill: determinants, interactions 
and effects’ organised by 
Directorate-General for 
Economic and Financial Affairs, 
2014.

17  Daniel, J., Davis, J., Fouad, M. 

and Van Rijckeghem, C.,’Fiscal 
adjustment for stability and 
growth’, Pamphlet Series  
No 55, 2006, International 
Monetary Fund, Washington, 
D.C.

Introduction

10 
As the IMF and the EU14 remain respon-
sible for their own lending decisions, 
two separate sets of programme 
documents are prepared, one by each 
of the two institutions. In the EU, the 
ultimate decision on granting financial 
assistance rests with the Council.

Conditions

11 
Programme conditions explicitly link 
the approval or continuation of finan-
cing to the implementation of a range 
of measures, generally those which 
are important to programme object-
ives. The programme conditions may 
also include key data targets that will 
sound warning bells if policies veer off 
track (e.g. the inflation target)15.

12 
Conditions are either quantitative (e.g. 
a limit on fiscal deficit) or structural 
(e.g. greater enforcement of competi-
tion law). They also differ by intended 
function:

13 
The conditions set effectively build on 
the Member State’s economic adjust-
ment programme and the partners’ 
analysis. Thus, each programme will 
have a different set of conditions fo-
cusing on fiscal consolidation, struc-
tural reforms to promote economic 
growth and/or financial sector reforms 
or support (see Table 1).

14 
All the assistance programmes tar-
geted fiscal consolidation through the 
adoption of fiscal policies to reduce 
government deficits and make debt 
sustainable. Apart from this primary 
objective, fiscal consolidation is im-
portant in the programme context 
because it can, inter alia:

(a)  facilitate internal adjustment 

through various channels (such 
as a direct reduction in aggregate 
demand, or the impact of public-
sector wages and employment on 
private-sector labour costs16);

(b)  facilitate external adjustment by 
reducing an excessive current-
account deficit;

(a)  to correct key imbalances (e.g. fis-

(c)  help tackle inflation by affecting 

cal deficit reduction);

(b)  to prevent imbalances from recur-
ring in the future (e.g. adoption of 
fiscal responsibility laws); and

(c)  to detect the scale of imbalances 
(e.g. a comprehensive assessment 
of public–private partnerships 
(PPPs)).

prices through a range of channels 
(such as its impact on aggregate 
demand or on demand for money);

(d)  free up resources for other sec-

tors if the economy is financially 
constrained; and

(e)  inspire confidence — under 

specific conditions — within the 
economy and thus have an expan-
sionary effect17.

Introduction

15

1 Focus of programme conditions
e
l
b
a
T

Fiscal consolidation

Programme

Hungary

Yes

No significant reforms

Structural reforms

Financial sector

Latvia

Romania I

Romania II

Ireland

Portugal

Yes

Yes

Yes

Yes

Yes

— Business environment
— Active labour market policies
— Management of EU funds

— Business environment
— Management of EU funds

— Labour market reforms
— Competitiveness within the economy

— Labour market reforms
— Competitiveness within the economy

— Labour market reforms
— Competitiveness within the economy and outside
— Education
— Health sector
— Business environment
— Judicial reforms
— Housing market

Source: ECA based on relevant Council decisions and initial programme documents.

— Strengthening of regulation and supervision

— Strengthening of regulation and supervision
— Bank resolution or consolidation plans

— Strengthening of regulation and supervision

No significant reforms

— Deleveraging
— Strengthening of regulation and supervision
— Bank resolution or consolidation plans

— Deleveraging
— Strengthening of regulation and supervision
— Bank resolution or consolidation plans

15 
The role of structural conditions is 
mainly to implement structural re-
forms aimed at enhancing the long-
term sustainability of macroeconomic 
adjustments. Financial sector condi-
tions aim to stabilise the financial sec-
tor, which often plays a key role at the 
beginning of a programme, when bank 
restructuring typically takes place.

18 

In the case of the EFSM, the 
ECB is also involved in 
monitoring.

19  A memorandum of 

understanding generally 
includes an annex with the 
indicators and data that the 
country must provide on 
a regular basis.

Implementation

16 
The Commission must verify, at regular 
intervals, whether the economic 
policy of the beneficiary Member 
State complies with its adjustment 
programme and with the programme 
conditions. The programme conditions 
are monitored by the Commission18 
in coordination with the IMF. To that 
end, the beneficiary Member States 
report regularly on the progress of 
programme implementation19, and the 
partners undertake monitoring visits. 
Both the Commission and the IMF 
prepare their own review reports after 
their visit.

 
16

20  For example if deficit targets 

are changed.

21  The Commission carried out 
36 formal reviews of the six 
audited programmes. In 16 
cases, the review was followed 
by an amendment to the 
corresponding Council 
decision.

22  The Eurosystem is the central 

banking system of the euro 
area. It consists of the 
European Central Bank and 
national central banks.

23  When a country’s debt is 

about to mature it needs to be 
‘rolled over’ into a new debt 
,which will cover repayment of 
the old. Rollover brings the risk 
that the debt may be 
refinanced at a higher interest 
rate, thus increasing interest 
expenditure, or that the 
borrowing country will not 
raise enough funds to cover 
repayment of the old debt in 
full.

24  Although the legal framework 
allows for the provision of 
loans by the EU alone, in 
recent practice assistance has 
usually been granted in 
cooperation with the IMF and 
other international institutions 
or countries.

Introduction

17 
On the basis of its review, the Commis-
sion, after consulting the EFC, decides 
on the release of further instalments 
and whether any programme con-
ditions should be modified and/or 
appended to address unforeseen 
circumstances such as a change in the 
macroeconomic situation, significant 
data revisions or political or institu-
tional factors in the Member State. 
The initial memorandum of under-
standing can be revised to account for 
these new circumstances and secure 
implementation of the adjustment 
programme.

18 
If the review results in significant 
amendments to the conditions20, the 
Council decision must be amended 
as well. The procedure for amending 
the Council decision is largely similar 
to the initial negotiation process (see 
paragraphs 8 to 10)21.

20 
The external financing of euro area 
economies goes through the Eurosys-
tem22. The financing gaps of euro area 
countries are therefore limited to the 
needs of their governments. Out-
side the euro area, the financing gap 
includes all external financing needs 
as presented in a country’s balance of 
payments.

21 
During programme negotiation, the 
partners estimate the financing gap 
using macroeconomic and fiscal pro-
jections and a set of assumptions, such 
as the rollover rates of debt23. The final 
level of programme financing is based 
on this estimate, but it is also subject 
to negotiation between the partners 
and the Member State. Each lender 
then takes a share in the programme 
financing24. The Member State’s 
internal funding sources may also be 
considered.

22 
For an overview of the key elements 
of programme financing, the rela-
tive share of each key lender and the 
amounts of financial assistance dis-
bursed, see Figure 2.

Financial resources

Programme financing

19 
The amount lent under each assistance 
programme covers the Member State’s 
‘financing gap’ — its financial needs 
until it is able to finance its govern-
ment accounts (maturing debt and 
new deficits) or its external economic 
position (balance of payments) under 
normal conditions.

Introduction

17

2 Programme financing
e
r
u
g
i
F

Overall programme ﬁnancing in euro

Hungary
20 billion

Latvia
7.5 billion

Romania
20 billion 
+ 5.4 billion1

Ireland
67.5 billion

Portugal
78 billion

… as a percentage of each country’s GDP

19 %

40 % 17 %

43 % 46 %

Financing committed by the European Union

33 %
6.5 billion

41 %
3.1 billion

25 %
5 billion

33 % (60 % with EFSF)
22.5 (40.2) billion

33 % (67%)
26 (52) billion

Disbursements
as a percentage of committed financing 

Hungary

Latvia

Romania

Ireland

Portugal

%
5
8

%
2
7

%
4
9

%
5
6

%
0
0
1

%
2
9

%
0
0
1

%
0
0
1

%
7
9

%
2
9

%
0
0
1

%
7
9

Balance of payments/EFSM

EFSF

IMF

Other lenders

1  Precautionary assistance. Not included in the other charts.

Source: ECA, data provided by the European Commission and the IMF.

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Introduction

18

23 
The five Member States used 95 % of 
the financing committed by the Euro-
pean Union, and 13 % of that amount 
had already been repaid by 31 March 
2015 (see Figure 3).

3 Financial assistance: amounts disbursed and repayments outstanding
e
r
u
g
i
F

Assistance to be provided
by the European Union

Disbursed
by country

Repayments
outstanding
by country1

63 billion euro

Amounts borrowed
and disbursed

60 billion euro

1    Data as of 31 March 2015. 

Source: ECA, data provided by the European Commission.

5.0

Romania

3.5

70 %

23.9

Portugal

23.9

100 %

2.9

Latvia

0.7

24 %

22.5

Ireland

22.5

100 %

5.5

Hungary

1.5

27 %

Total outstanding
52 billion euro

 
Introduction

19

Borrowing on the markets

24 
To provide its share of total financial 
assistance, the European Union bor-
rowed on the capital markets and lent 
the money to the Member States in 
difficulty on the same terms, i.e. for 
the same amount and with the same 
coupon and maturity date. By the end 
of 2014, the EU had made a total of 
22 bond issues with a nominal value 
of 60.1 billion euro. The Commission 
managed the borrowing on behalf of 
the EU.

25 
Borrowing generally took the form 
of euro medium-term notes (EMTNs), 
which are issued on the capital markets 
and listed on the Luxembourg stock 
exchange. EMTNs are redeemable in 
full at maturity and bear fixed annual 
interest over the duration of their ex-
istence. European investors represent 
around 80 % of all investors in EMTNs.

26 
The debt servicing of EMTNs remains 
an obligation of the European Union, 
which must ensure that all payments 
are made in a timely manner if the 
debtor Member State fails to reim-
burse the capital and/or interest due.

Audit approach

20

27 
The audit examined whether the Com-
mission’s management of financial as-
sistance programmes was appropriate. 
This was addressed by the following 
sub-questions.

(i)  Were the growing fiscal risks  

detected on time?

(ii)  Were processes sufficiently well 
designed to make a compre-
hensive input into programme 
decisions?

(iii)  Did the Commission borrow at 

the best possible rates and in ac-
cordance with best debt issuance 
practices?

(iv)  Did the financial assistance 

programmes meet their main 
objectives?

28 
The audit covered the Commission’s 
management of financial assistance 
provided under the balance-of-pay-
ments facility and the EFSM, for which 
the Commission borrowed on the 
capital markets using the EU budget as 
guarantee. The audit encompassed the 
financial assistance paid to Hungary, 
Latvia, Romania (the first two pro-
grammes), Ireland and Portugal, with 
an emphasis on the Commission’s role 
in these programmes. We also exam-
ined the Commission’s cooperation 
with its partners (the ECB and the IMF), 
but did not audit the partners.

29 
We did not audit the decisions taken 
at the EU’s political level and we 
limited the scope of the audit in sev-
eral aspects. We did not consider the 
counterfactual scenario of no financial 
assistance or the feasibility of resolv-
ing the crises by other means (e.g. the 
mutualisation of sovereign debt). Nor 
did we assess debt sustainability or the 
likelihood that the loans will be repaid. 
We also did not evaluate if the Coun-
cil had chosen the most appropriate 
deficit targets or structural conditions 
to resolve the crisis. When auditing the 
Commission’s cooperation with other 
partners, we did not assess whether 
their involvement was justified.

30 
The audit criteria were derived from 
the following sources:

(i)  regulatory requirements (Council 
regulations, Council decisions, 
memoranda of understanding 
between the Commission and the 
Member States);

(ii)  the Commission’s internal rules 

and procedures (internal control 
standards and guidelines);

(iii)  good management practices and 
evaluation criteria derived from 
evaluations of IMF programmes, 
ex post evaluations of the EU’s 
balance-of-payments assistance 
to non-EU countries, previous 
Court reports on macrofinancial 
assistance, guidelines and other 
publications from independent 
institutes and think tanks, and 
academic research; and

(iv)  best practices suggested in a num-
ber of guidelines on public debt 
management, investor relations 
and transparency in debt issuance.

21

25  The sample included 

360 unique conditions.

Audit approach

31 
Annex III provides further details of 
the audit methodology.

32 
The audit evidence was collected on 
the basis of:

(i)  a detailed review of documenta-
tion relating to the EU’s financial 
assistance programmes (pro-
gramme documents, internal 
Commission analyses, spreadsheet 
forecasts, evaluations and studies 
by other organisations);

(ii)  interviews with the staff of the 

Commission’s Directorate-General 
for Economic and Financial Affairs;

(iii)  interviews with the staff of nation-
al authorities, such as ministries of 
finance, central banks, programme 
coordination units and sector 
ministries;

(iv)  a scorecard analysis of programme 
conditions25 to classify them by 
characteristics and compliance; 
and

(v)  interviews with the staff of the IMF 

and the ECB.

Part I 
The Commission was unprepared for the 
magnitude of the crisis that broke out

22

26  This was the ‘preventive arm’ 

of the Stability and Growth 
Pact established by 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 (OJ L 209, 2.8.1997, 
p. 1). The surveillance 
framework was last reformed 
in 2005 by Council Regulation 
(EC) No 1055/2005 amending 
Regulation (EC) No 1466/97 
(OJ L 174, 7.7.2005, p. 1).

27  The financing of running fiscal 
deficits and the repayment of 
government debt.

28  European Commission, Ireland 
— Macro fiscal assessment 
— an analysis of the December 
2007 update of the stability 
programme, p. 36.

29  Compare the first estimate 

made after the year’s end (i.e. 
in spring forecast) with 
a recent estimate 
(i.e. October 2013).

The Commission 
underestimated the 
extent of the fiscal 
imbalances in the run-up 
to the crisis

33 
Warning the Council about mounting 
fiscal imbalances in the Member States 
is arguably one of the Commission’s 
most important activities in the area 
of economic and financial affairs. Prior 
to the crisis, there was already a sur-
veillance framework geared towards 
monitoring the fiscal situation in the 
Member States26.

34 
Although the financial assistance 
programmes’ macroeconomic object-
ives went beyond fiscal adjustment, 
in all five programmes budget sup-
port27 turned out to be a key part of 
how assistance was used. This raises 
a question as to whether the mount-
ing fiscal risks were detected on time 
and flagged under the surveillance 
procedures.

temporary factors, such as economic 
growth, asset prices and one-off fiscal 
measures. The second is other fiscal 
indicators (e.g. cyclically adjusted bal-
ance, structural balance) which aim to 
correct these temporary factors and 
thus provide a more accurate view of 
a country’s underlying fiscal position. 
These indicators cannot be directly 
observed but are the result of complex 
calculations.

36 
During the pre-crisis period, actual 
fiscal balances were generally correctly 
estimated no later than at the end of 
the year in question. Nevertheless, the 
emergence of high budget deficits for 
2008 in Ireland, Latvia, Portugal and 
Romania was poorly predicted in the 
Commission’s deficit forecasts. For 
example, speaking of Ireland in March 
2008, the Commission stated that ‘the 
risks attached to the budgetary projec-
tions are broadly neutral for 2008’28. 
Yet at the end of 2008 the actual fiscal 
balance was 7.2 percentage points of 
GDP lower than forecast.

The Commission estimated 
the public budgets to be 
stronger than they actually 
were

35 
There are two key types of fiscal 
indicator. The first is the actual fiscal 
balance, or the difference between 
government revenue and expenditure. 
However, this balance is sensitive to 

37 
In its cyclically adjusted balance calcu-
lations during 2005-2008, the Commis-
sion systematically overestimated the 
strength of countries’ public finances29. 
This error was mainly caused by 
changes in estimated potential GDP 
growth rates. All five countries were 
experiencing an economic boom, but 
the Commission initially estimated the 
scale of overheating to be more mod-
est than, with hindsight, we know it to 
have been.

23

30  A positive output gap is the 
amount by which the actual 
output of an economy 
exceeds its potential output.

31  For example, the long-term 

liabilities from public pensions 
or significant future fiscal 
expenditure resulting from 
the need to take measures in 
the event of a bailout. With the 
exception of the public 
pension liabilities, the 
Commission did not report on 
other contingent liabilities.

38 
The estimate of the scale of overheat-
ing (the size of a positive output gap30) 
was in line with the strong increase in 
the indicators of the overall produc-
tion capacity of the economy. How-
ever, this increase was generated by 
the housing booms, and investments 
in housing do not have the same effect 
on increasing the economy’s potential 
as other more productive investments.

39 
The Commission had focused on 
assessing the output gap in the real 
economy, without considering sector 
imbalances such as in the financial 
or construction sectors. However, it 
became clear during the crisis that in-
flation and output monitoring are not 
enough to guarantee macroeconomic 
stability and sustainable fiscal bal-
ances. The surveillance framework has 
since been significantly overhauled to 
take greater account of financial-sector 
and macroeconomic risks.

40 
The Commission identified some sec-
tor booms after the event; for instance, 
a construction boom was noted in 
Ireland, Latvia and Romania and pri-
vate credit booms in all five countries. 
However, the algorithm used to calcu-
late the output gap did not make any 
allowance for such imbalances.

Assessments underestimated 
the potential fiscal risks

41 
The Stability and Growth Pact re-
quires Member States to report recent 
fiscal developments and forecasts 
in their stability and convergence 
programmes. These programmes are 
assessed by the Commission, which 
checks the plausibility of the trajec-
tories forecast for GDP and the public 
budget.

42 
One important drawback of the Com-
mission’s assessments prior to 2009 
was the lack of reporting on the build-
up of contingent public-sector liabil-
ities31. Fiscal risks related to financial 
stability, state-owned enterprises or 
other public guarantees (e.g. PPPs) 
were not identified.

43 
The Commission’s surveillance did not 
adequately assess the implications 
of the large foreign financial inflows, 
especially in the form of debt, which 
were fuelling construction and de-
mand booms and had the potential to 
disrupt the banking sector in a subse-
quent bust phase. The Commission did 
not note this link prior to its analysis 
of Member State requests for financial 
assistance.

Part I — The Commission was unprepared for the  magnitude of the crisis that broke out24

47 
During the initial phase, IMF teams 
helped the Commission to prepare 
parts of the programme analysis. The 
practices used by the Commission 
were also developed on the basis of 
IMF practices (see paragraph 109).

32  See, for instance, ‘Fiscal 

policies and financial markets’ 
in ECB Monthly Bulletin 
02/2006, p. 71.

33  Council Decision 93/67/EEC of 

18 January 1993 concerning 
a Community loan in favour of 
the Italian Republic (OJ L 22, 
30.1.1993, p. 121).

44 
Neither did the Commission’s as-
sessments examine the sensitivity 
of  budget balances to a sudden hike 
in the interest rates applied to gov-
ernment debt, or to equally sudden 
shocks to economic growth or ex-
change rates. Yet these risks too had 
been recognised or warned against 
in various research papers published 
prior to the crisis32.

As a result the 
Commission was not 
ready for the programme 
management

45 
Prior to 2008, the balance-of-payments 
facility had last been used in 199333. By 
2008 any experience acquired in the 
first half of 1990s was lost. So, provid-
ing countries with financial assistance 
was in effect a new activity for the 
Commission.

46 
Having underestimated the fiscal im-
balances and their implications for the 
Member States, the Commission was 
unprepared for the task of programme 
management. The initial programmes 
in particular had to be set up under ex-
treme time pressure. For instance, the 
proposal for the first programme (Hun-
gary) had to be produced in just a few 
days. The Commission possessed very 
little in-house experience of designing 
and managing financial assistance pro-
grammes, and that experience could 
not be acquired at such short notice.

Part I — The Commission was unprepared for the  magnitude of the crisis that broke outPart II 
Processes were generally weak

25

48 
The regulations entrust the European 
Commission with the operational 
management of financial assistance. 
A large part of this is about arriving at 
key programme decisions concerning 
the initial granting of assistance and 
(at each review) the continuation of 
the programme. Decision-making re-
quires a sequence of steps and coord-
ination with the Council and the other 
partners (see Figure 4).

49 
We divided the analysis of programme 
management processes into the fol-
lowing three parts.

(i)  Processes within the Commis-

sion, in particular within the 
Directorate-General for Economic 
and Financial Affairs. Did the 
Commission keep control of the 
programme’s development?

(ii)  Process of providing information 
to the Council and the Commis-
sioner in charge. Did the Council 
and the Commissioner in charge 
receive programme documents of 
good quality?

(iii)  The process of interaction with 

other partners. Did the interaction 
with other partners work?

26

4 Programme decisions
e
r
u
g
i
F

Programme timeline

A

Programme
negotiation

1st 
review

2nd 
review

nth 
review

Decisions on 
granting assistance

Decisions on 
programme continuation

Decisions on 
programme continuation

What decisions are taken?

B
Not all decisions are needed at each 
review. For instance if no changes are 
necessary to the general parameters 
of assistance, the Council decision 
does not have to be amended. 

Council decision¹

Setting of
general 
programme
parameters

Overall amount and maturity
Deﬁcit targets
Broad areas of structural reforms

Drawing
up of a detailed
reform agenda

Set out in a memorandum of 
understanding signed by the 
Member State and the 
European Commission

Each decision
consists of three
separate acts

Release
of payment

Commission Decision

Typically taken by the Vice President on the Commission's behalf 

1 

In case of the Irish and Portuguese programmes, the general programme parameters were set both by the Council
and the EFSF board of directors, i.e. the Eurogroup. 
The EFSF decision-making process is separate from the EU decision-making procedure.

Part II — Processes were generally weak 
 
 
27

C

Sequence of steps

4
e
r
u
g
i
F

1

Policy brief

Deﬁnes the mandate
for the negotiation team

Depending on importance, can take different forms:

Council 
position

statement by Council  or Eurogroup if new 
programme or important amendment
discussion by EFC and EWG2
indications from chair of EFC and EWG

Negotiation
of review visit

Carried out in parallel
with IMF and ECB staﬀ

update to the

negotiation mandate

Commissioner

EFC and EWG chair

Other partners

Interaction with the other partners to align their positions
to reach a common agreement

Programme documents

Explanatory
note or review
report

+

If changes to reform
agenda are necessary

Draft MoU

+

If new programme
or Council conditions
are to be changed

Draft Council
decision

3

Internal review by the Commission

Decision by the
College of
Commissioners

Consultation in the Economic and Financial Committee
and Eurogroup Working Group 

2

Council 
decision

Signature 
of MoU

Commission
decision

Payment is made only if a new MoU
has been signed by the Member State

Payment

If requested by the Member State

Source: ECA.

Audit areas
1.  Process within the Directorate-General 
for Economic and Financial Aﬀairs
2.  Information provided to the Council 
and the Commissioner responsible

3.  Interaction with other partners

2  EFC  – Economic and Financial Committee, 

EWG – Eurogroup Working Group
MoU – memorandum of understanding

Part II — Processes were generally weak 
28

34  Commission internal control 
standards Nos 8 and 11.

35  Several studies confirm that 

this risk is real. For instance, an 
overview of relevant academic 
research can be found in 
Hakan Gunaydin, Compliance 
with the IMF conditionality: 
Selection bias and conditions on 
social policy — Prepared for the 
PEIO Annual Meeting, 2014. The 
Independent Evaluation Office 
of the IMF also provided an 
account of lack of even-
handedness that it noted in its 
evaluations. For more details, 
see IEO, Recurring issues from 
a decade of evaluation lessons 
for the IMF, 2014.

The Commission’s 
processes did not always 
incorporate sufficient 
checks and balances

The Commission was mostly 
thorough in obtaining the 
necessary information for 
monitoring purposes

The Commission extensively 
relied on internal expertise as 
well as liaising with a number of 
actors in Member States

52 
The Commission relied on the internal 
expertise available in the Directorate-
General for Economic and Financial 
Affairs. Over time, it also increasingly 
consulted specialists from other direct-
orates-general. These other experts 
provided limited input for the initial 
programmes, mainly through inter-
departmental (‘inter-service’) consul-
tation. They were more extensively 
involved in the two euro area pro-
grammes. The use of wider expertise 
allowed for a more thorough analysis 
of countries’ problems, especially in 
the area of structural reforms. The 
Commission’s human resources policy 
also did not allow greater use of ex-
ternal expertise for specific narrowly 
defined areas, a practice common in 
the IMF.

50 
The Commission’s processes should 
ensure — through sufficient checks 
and balances — that the initial pro-
gramme design and any updates meet 
the following criteria:

(i)  comprehensiveness — relevant 

information, both in relation to the 
Member State and from economic 
research, should be taken on 
board;

(ii)  consistency — different elements 
of the programme should be mu-
tually consistent, with a minimum 
of conflict between the different 
programme objectives;

(iii)  documentation — due record 

should be kept of the reasoning 
behind the decisions made on vari-
ous elements of the programme34;

(iv)  conformity — the memoranda of 

understanding should be in line 
with the Council decisions;

(v)  even-handedness — as pro-

gramme conditions are mostly 
drawn up by Commission’s ‘pro-
gramme teams’, countries should 
be treated consistently by the dif-
ferent teams, applying similar con-
ditions in similar circumstances35.

51 
The work of programme teams should 
be checked and challenged to ensure 
that teams respect these criteria.

Part II — Processes were generally weak29

36  Latvia, Ireland and Portugal.

Programme forecasts 
provide for broad checks of 
consistency in programme 
design, but with many 
caveats which are not 
verified

55 
Good forecasting is essential for pro-
gramme consistency. However, fore-
casts are unlikely to be 100 % ac curate 
all the time, as they involve many 
imponderables which cannot be pre-
dicted with any precision. Instead of 
focusing on the accuracy of forecasts, 
we assessed the quality of the fore-
casting processes and tools applied 
by the Commission in the programme 
context. In practice, the Commission 
prepares two distinct but closely re-
lated forecasts (see Figure 5):

(i)  a programme forecast (compris-
ing macroeconomic and deficit 
forecasts); and

(ii)  a financing gap estimate.

53 
The regular country visits made by the 
Commission and the other partners 
provided the main opportunity for 
obtaining the necessary information 
for monitoring. During its negotiation 
and review visits, the Commission con-
sulted a number of ministries, other 
government departments and key 
independent institutions (such as cen-
tral banks, fiscal councils and supreme 
audit institutions). It also held meet-
ings with other bodies, including em-
ployers’ associations, trade unions and 
opposition political parties. In three 
of the five countries36 the Commission 
maintained a resident representative. 
All of this enabled the Commission to 
stay informed and to identify reforms 
for inclusion in the programme.

The Commission collected 
a wide range of information

54 
In addition to the information gath-
ered from country visits, each memo-
randum of understanding specified 
monitoring reports that the country 
in question was required to provide to 
the Commission. The information to 
be collected in these reports was very 
broad and touched on many areas. The 
Commission requested similar moni-
toring information in all programmes. 
However, in a few cases key informa-
tion was not requested or only a lim-
ited amount of key information was 
collected.

Part II — Processes were generally weak30

5 Links between the programme forecast and financing gap estimate
e
r
u
g
i
F

Financing gap estimate 

Programme forecast

Covering all financing 
needs of the economy 
Only for countries outside 
the euro area

Macroeconomic forecast

Current account

External ﬁnancing gap 
estimate

If part
of forecast

Linked through
several accounting
identities

Deﬁcit forecast

Accrual-based 
government 
deﬁcit

Other balance-
of-payment 
accounts

Net repayments
of external 
government 
debt

Net repayments of 
all government debt

Government sector 
ﬁnancing gap estimate

Cash-based 
government 
deﬁcit

One-oﬀ expenditure due to 
ﬁnancial sector rescue

Cash needs due to ﬁnancial 
sector rescue

Key:

Accounting identity
Link between two  closely related variables

Note:  Only the key links are depicted.

Source: ECA.

Part II — Processes were generally weak 
31

37  A forecast is prepared in two 

to four key files, which contain 
tens of spreadsheets. These 
key forecast files are 
interlinked with multiple 
formulas and draw data and 
projections from other files, 
which were not always saved 
in the same location. This 
greatly increases the risk that 
inconsistent projections or 
data are used when a forecast 
is updated, which in 
a programme context can 
happen on a daily basis. 
Assumptions are scattered 
throughout the spreadsheets 
in the key forecasting files and 
it takes considerable effort to 
obtain a clear picture of the 
judgement applied. Moreover, 
the staff use subsidiary 
models, which are stored 
outside the spreadsheets.

It is difficult to assess the 
production of programme 
forecasts

Forecasting spreadsheets are 
a cumbersome tool which makes 
quality control problematic

56 
Forecasts can be produced using a 
variety of methods, ranging from pure 
judgement to large-scale calibrated or 
econometric estimation models com-
prising numerous behavioural equa-
tions and identities.

57 
The Commission’s tool for produ-
cing programme and deficit forecasts 
consists of a set of mainly accounting 
identities, the purpose of which is 
to ensure that forecasts of macro-
economic or budget aggregates are 
consistent with the forecasts of their 
components. The components are 
generated outside the forecasting tool 
using judgement or, at times, a mix of 
other quantitative tools. The Com-
mission does not use a theoretical or 
empirical forecasting model.

58 
The forecasts resulting from each re-
view were typically prepared in multi-
ple spreadsheet files. During the audit, 
difficulties were met in accessing all 
the relevant files. This was because 
the set of spreadsheets constitutes an 
overwhelmingly large and cumber-
some body of data37 which lacks trans-
parency and traceability. Furthermore, 
as decisions were made under extreme 
pressure, storing all forecast material 
in a systematic and easily accessible 
form was not a priority.

59 
The spreadsheet files aggregated 
information generated outside the 
tool. Data typically came from sev-
eral sources, and forecasts depended 
on judgements made by the various 
forecasters, both at the Commission 
and at the other partners and na-
tional authorities (see Figure 6). Data 
heterogeneity and the use of a range 
of judgements are normal features 
of macroeconomic forecasting, and 
there are good reasons for considering 
diverse data and judgements in the 
forecasting process. However, there 
are some risks, including that the im-
plications of any new assumption will 
not be properly reflected throughout 
all forecasts, or that new assumptions 
will not be well founded.

Part II — Processes were generally weak32

6 Macroeconomic and deficit forecasts at a glance
e
r
u
g
i
F

Historical ﬁscal data
Ministry of finance
Statistical office

Historical macro data
Eurostat
Statistical office

Deﬁcit forecast

Macro forecast

Eﬀects of budget 
on macro

Eﬀects of  macro 
on budget

Judgement on 
budget projection

Judgement on 
macro variables

New ﬁscal measures
Ministry of finance

Source: ECA.

60 
To manage these risks, quality control 
of the forecasting results was done at 
several stages during the forecasting 
process. Some consistency checks38 are 
built into the spreadsheet. The fore-
casters responsible for, respectively, 
the fiscal and the macroeconomic 
sides of the forecast discussed their 
results among themselves and, when 
required, applied additional judge-
ment in order to ensure consistency of 
the estimates39.

61 
Essentially, however, quality control 
of the forecasters’ work took the form 
of reconciliations, with no inquiry into 
the forecasting process within the 
programme team. The spreadsheet ap-
proach and the scarcity of documenta-
tion made it hard to assess the plausi-
bility of the assumptions and implicit 
parameters used in the forecasting. 
Discussion between partners was the 
only control stage at which the plausi-
bility of the assumptions and implicit 
parameters was checked.

38  For instance, accounting 
identity or ratio-based 
plausibility checks.

39 

In autumn 2013 the 
Commission introduced a new 
tool for the automatic 
detection of numerical and 
economic inconsistencies, but 
the tool was not used for the 
programme forecasts.

Part II — Processes were generally weak 
33

62 
Analysis of the forecasting sheets also 
revealed examples of errors and incon-
sistencies that were present despite 
the consistency checks (see Box 1).

1
x
o
B

Examples of errors and inconsistencies in forecasts

(i)  The amount of VAT levied on private consumption was not aligned between government revenue and 

private-sector payments, leading to a difference of 0.7 % in GDP in 1 year.

(ii)  Owing to manual formula adjustments, the amount of direct taxes levied on labour was not aligned 

 between the government and household sectors. The difference exceeded 0.5 % of GDP.

(iii)  A tax measure applicable from the middle of the year was applied to the forecast on a full-year basis. 

The corresponding deficit projection was used in the programme document supporting the decision to 
release an instalment and communicated to the EFC in June 2009.

(iv)  The impact of property prices was not factored consistently into projections of the same price index used 

in different forecasts for the same year.

64 
The forecasts of net budgetary yield 
were taken from forecasts generated 
by the national authorities, which esti-
mated them internally as part of their 
planning procedures. The national 
authorities discussed their estimates 
with the partners’ staff, whereupon 
they might be revised before being 
formally accepted and included in the 
programme forecasts.

Difficulties in assessing the 
plausibility of fiscal multipliers

63 
Fiscal variables were recorded in the 
spreadsheets in the form of the ex-
pected volume of revenue or spend-
ing, which was increased or decreased 
by the net budgetary yield of any 
new fiscal measures during the year. 
The impact of new measures on the 
economy and the knock-on effect on 
the public budget were not explicitly 
stated or recorded in the spreadsheets. 
Instead, the forecast values of ad-
ditional budgetary yield already took 
account of the knock-on effect.

Part II — Processes were generally weak 
34

40  The fiscal multiplier measures 
the magnitude of impact of 
different fiscal consolidation 
measures on key macro-
economic (consumption, 
output) and fiscal (deficit) 
variables.

41  Latvian and Romanian 

programmes.

42 

Irish programme.

43  Hungarian and Portuguese 

programmes.

Financing gap estimates were 
incomplete and inaccurate

68 
The financing gap estimate is of 
paramount importance at the negotia-
tion stage, because this is when the 
amount of financial assistance is set, 
typically to remain unchanged. If new 
funding needs emerge during the 
programme, they have to be accom-
modated within the overall financial 
envelope. Unlike the preparation of 
programme forecasts, estimating the 
financing gap was a new activity for 
the Commission.

69 
For the euro area countries, the financ-
ing gap corresponds only to the needs 
of their governments. Outside the euro 
area, the financial assistance must 
cover all external financing needs as 
presented in a country’s balance of 
payments. The Commission always 
justified its decisions to provide 
assistance by submitting the initial 
financing gap estimate to the Coun-
cil. The underlying calculations were 
prepared in spreadsheets. However, 
the shortage of documentation greatly 
limited the possibility of review. When 
requested, the Commission was only 
able to provide provisional docu-
ments41, which differed from the final 
versions submitted to the Council, 
could provide no information on 
important elements of the estimate42 
or could not provide any background 
files43.

65 
The impact of different fiscal measures 
on the real economy was accounted 
for implicitly and outside the spread-
sheets by way of several heteroge-
neous procedures. The spreadsheets 
used did not allow the source of par-
ticular assumptions, or the reasons for 
them, to be traced. The country desks 
themselves had no real knowledge 
of the models applied by national 
authorities to estimate the parameters 
for assessing the impact of different 
fiscal measures on the economy. There 
was a lack of transparency and know-
ledge about the implicit value of the 
fiscal multipliers40. Only in 2013 did the 
Commission carry out an exercise to 
estimate the implicit multipliers.

66 
The only checks made of net yields 
took the form of a judgemental plausi-
bility assessment by the partners’ staff. 
While this approach is highly likely to 
detect any substantial over- or under-
estimates, it is less amenable to iden-
tifying relatively small errors which 
may cumulatively still be of significant 
magnitude.

67 
The programme teams kept records 
of some information, but to varying 
degrees because there was no formal 
requirement to do so. As a result, we 
were unable to identify and review 
the assumptions and parameter values 
that were used. If a forecast proved 
to be wrong, (for instance if it under-
estimated the negative effect on 
GDP growth of a reduction in public 
expenditure), it was impossible or ex-
tremely difficult to identify the source 
of the error.

Part II — Processes were generally weakNo trace of some key records

44 

70 
Our review of the provisional docu-
ments revealed significant forecast-
ing errors, such as double counting 
of some variables, use of incorrect 
amounts in foreign reserves or unreal-
istically high assumptions of debt 
rollover rates. The errors in the spread-
sheets were sometimes substantial44 
and had not been detected by internal 
review. Discovery of the errors would 
not necessarily have led to an increase 
in the amount of financial assistance, 
as this also depends on the lender’s 
willingness and ability to lend, but it 
could have resulted in a different set of 
policies to close the financing gap.

Programme features were 
generally soundly based, 
but important records were 
sometimes missing

Programme features were 
supported by analysis

71 
In most cases, the Commission could 
point to a body of analysis, based 
on EU policy priorities and current 
data, that was used when setting 
programme conditions. In general, 
the depth of analysis had increased 
over time. This was mostly on account 
of improved expertise and a greater 
number of Commission staff assigned 
to programme management.

72 
Record-keeping is an important part 
of any process. Several of the Com-
mission’s internal control standards 
refer to good practices in this regard45. 
Careful record-keeping can improve an 
organisation’s internal control by help-
ing to show why certain decisions were 
made. Records are central to monitor-
ing and evaluation and a prerequisite 
for good accountability.

73 
Because the assistance programmes 
were unexpected, procedures were 
still being fine-tuned and formalised 
after initial operations had begun. 
Operations were also complicated by 
time constraints, an uncertain macro-
economic environment and the com-
plexity of programme management. 
Emphasis was therefore placed on 
sound operational procedures at the 
cost of good record-keeping.

74 
In a number of instances, the infor-
mation used to support decision-
making had been lost by the time of 
the audit, or collecting it proved to 
be a mammoth task. Certain critical 
activities were not documented at all. 
Manuals of procedures, which typically 
anchor any process, were not well de-
veloped. Box 2 illustrates the obstacles 
encountered during the audit46.

35

In assessing the Romanian 
financing gap, the intra-group 
loans of corporates were 
counted under both foreign 
direct investments and new 
debt flows under other 
investments. This double 
counting led to a financing 
needs projection that was 
1.8 billion euro too low. 
Furthermore, the initial 
amount of foreign reserves 
used in the initial projection 
differs by 0.7 billion euro from 
the figure reported now for 
the end of 2008 by the 
Romania’s central bank. In the 
Latvian programme, the 
Commission projected that in 
the first year of the 
programme both the 
corporate and banking sectors 
would be able to obtain more 
long and medium-term 
financing than they needed to 
amortise. Such an assumption 
in the spreadsheet was not 
only unlikely given the severe 
financial pressures, but was 
also in contradiction to the 
information provided in the 
explanatory note.

45  For instance, internal control 
standard No 8 requires that 
‘the DG’s main processes and 
procedures are adequately 
documented, particularly 
those associated with critical 
risks’, and standard No 11 that 
‘appropriate processes and 
procedures are in place to 
ensure that the DG’s 
document management is […] 
efficient (in particular as 
regards retrieving appropriate 
information)’.

46  The problem of obtaining the 
relevant information was not 
unique to this audit. The 
Portuguese Court of Auditors 
noted similar constraints in its 
report on the monitoring of 
the financial assistance to 
Portugal, Relatório de auditoria 
n.º 28/2013-2.ª S., 
Acompanhamento dos 
mecanismos de assistência 
financeira a Portugal, 
Dezembro de 2013.

Part II — Processes were generally weak36

2
x
o
B

Examples of difficulties in obtaining key information

Emails were used to report upwards on the progress of a visit and to seek approval for any departure from the 
negotiation mandate. They were also an important means of communication among the partners and with 
national authorities. Generally, however, these key records were not available because emails had either been 
lost or could not be retrieved.

Documentation or data submitted by national authorities during the programme was not kept by the Com-
mission or could not be consulted in its entirety because of the extensive resources required to reassemble it.

Some spreadsheets for Romania with macroeconomic programme projections were not made available to us 
during the audit.

The spreadsheets with final financing gap calculations had been lost or had not been collected from the IMF. 
The calculations underlying some key amounts were sometimes unobtainable.

Fiscal monitoring by Commission staff was not documented at all, or only very basic spreadsheets were pro-
vided in support of the Commission’s analysis of budget implementation.

75 
It is understandable that records 
should be lacking for the initial phase 
in 2008 and early 2009, which bore all 
the hallmarks of a crisis management 
situation. Over time, record-keeping 
clearly improved. Even so, some of the 
above examples of missing records 
relate to more recent years.

The Commission occasionally 
departed from Council 
decisions

Cases of non-compliance with 
the Council decisions

76 
We examined the consistency between 
the memoranda of understanding and 
the corresponding Council decisions 
and found that most conditions were 
justified by reference to the decisions. 
However, in a few instances the condi-
tions departed from the terms of the 
Council decision, or the memorandum 
of understanding had not been up-
dated at the correct time (see Box 3).

Part II — Processes were generally weak 
37

3
x
o
B

Examples of non-compliance with the rules

An informal visit to Romania in August 2009 revealed the Member State’s inability to meet the initial deficit 
targets. The Commission and the Romanian authorities consequently agreed to a substantial relaxation of the 
targets. This revision was communicated in a note to the EFC in August 2009. However, neither the Council 
decision nor the memorandum of understanding was modified accordingly. The targets were eventually up-
dated in the memorandum of understanding in February 2010. The legal basis — the Council decision — was 
updated even later, in March 2010. However, the Commission postponed a release of a payment in November 
2009 on account of the fact that Romania’s budget did not comply with the updated target.

In Latvia, although the Council decisions did not refer to pension reforms, the memorandum of understanding 
included specific conditions in relation to the second pillar of the pension system.

In Ireland, although the Council decisions mentioned no specific conditions with regard to banking sur-
veillance and sales of state assets and privatisation, these conditions appeared in the memorandum of 
understanding.

47  Senior management in the 
Commission and the 
vice-president signing the 
memorandum of 
understanding on behalf of 
the Commission.

79 
Programmes included conditions 
which were either of minor impor-
tance, given the programme goals, 
or whose potential effects would be 
realised long after the programme 
period — conditions such as the 
implementation of specific IT systems, 
the allocation of budgetary funds to 
a small government entity, the train-
ing of public officials and research and 
development. However, here they had 
very remote links — if any — to the 
programme goals.

Conditions were not sufficiently 
focused

77 
The purpose of the conditions in the 
memorandum of understanding is 
to establish an operational road map 
with a view to achieving satisfactory 
compliance with the general economic 
policy conditions set by the Council.

78 
For most conditions, the link with 
general economic policy was relatively 
clear because they either required 
policy change or were a stepping 
stone to major reforms. However, the 
management47 did not sufficiently 
challenge the proposals made to as-
certain whether all the conditions were 
really necessary for the achievement of 
general economic policy goals.

Part II — Processes were generally weak 
Countries were not treated in 
the same way

Differences in the Commission’s 
management of conditions

80 
Having analysed various aspects of the 
Commission’s programme manage-
ment, we found several examples of 
an inconsistent approach to differ-
ent countries where it was difficult 
to justify this by specific national 
circumstances.

81 
The Commission managed the con-
ditions for each financial assistance 
programme differently. In some pro-
grammes the conditions represented 
a relatively stable set of requirements, 
while in others they changed substan-
tially with every review. For an over-
view see Table 2.

2 Various models employed by the Commission for managing conditions
e
l
b
a
T

Romania I

Hungary

Ireland

Latvia

How were conditions set?

38

Portugal

Distinction between 
different types of 
condition

None

How were conditions monitored?

How was compliance 
monitored?

Mixed1

How were conditions updated?

None, but importance 
indicated in one of the 
review reports

Prior actions and other 
conditions

Permanent and other 
conditions

None

Mostly by condition

By subject matter

By subject matter

By condition

How were conditions 
changed?

Persistence of 
conditions2

Existing conditions 
remained valid;  
addenda contained 
new conditions only

Conditions partially 
stable over time
Conditions generally 
unchanged

Each addendum replaced 
the previous version

Frequent changes to 
conditions
Conditions were changed 
even if not matured
Difficult to trace conditions 
over time

Existing conditions 
remained valid;  
addenda contained new 
conditions only

Each addendum 
replaced the previous 
version

Each addendum replaced the 
previous version

Conditions always valid 
and unchanged unless 
made obsolete by new 
conditions

Mixed
Some conditions 
stable, others subject to 
frequent change

Conditions stable over time
Conditions valid and unchanged 
until fully complied with

In some reviews the Commission reported compliance for each condition, in others by subject matter only.

1 
2  For additional explanation see Annex III.

Source: ECA.

Part II — Processes were generally weak 
39

48 

In particular Latvia, but also 
Ireland and specific areas in 
other programmes.

49  Other examples include 

significant changes to the 
institutional landscape, such 
as the establishment of a fiscal 
council, local government 
reorganisation or privatisation. 
See Annex III.

82 
Some of these models had adverse 
implications for programme manage-
ment. In particular, frequent changes 
to conditions in some programmes48 
made it much harder to track the coun-
try’s performance. In some instances, 
reforms were gradually diluted as con-
ditions were replaced by less demand-
ing ones or completely disappeared 
from the memoranda before they were 
fully satisfied (see Box 4).

83 
Conditions also sought to bring about 
different structural effects. They might 
vary from the publication, or prepara-
tion, of a specific strategy or plan, to 
legislative changes to be adopted by 
the national parliament and affect-
ing important parts of the economy49. 
While conditions of the first type 
would not bring about any meaning-
ful economic changes by themselves, 
although they could serve as prepara-
tory steps for more significant reforms. 
Condition of the latter type would 
probably mean long-lasting changes 
to the economy.

4
x
o
B

Examples of a reform diluted over time

The initial memorandum of understanding in the Latvian programme required the ‘establishment of a single 
human resource planning and management system for public administration institutions.’ This condition was 
not complied with and did not appear in the subsequent amendments. Instead, it was replaced by several 
other conditions, the general aim being ‘the preparation of strategy on public administration’ — a condition 
that is easier to comply with.

The Portuguese programme included a condition requiring — by the end of 2011 — the preparation of an 
action plan to reform the unemployment insurance system, notably by reducing the maximum duration of 
 unemployment insurance benefits to no more than 18 months for newly unemployed persons. After the 
 reform the maximum duration of unemployment benefits was reduced from 38 to 26 months and so exceed-
ed the ceiling of 18 months that was initially agreed with the Portuguese authorities.

Part II — Processes were generally weak 
40

50  For example in the field of 

structural funds.

51  For example in the field of 
personal and corporate 
insolvency.

84 
We found significant differences 
between conditions in terms of 
stringency. Balance-of-payment pro-
gramme conditions typically required 
the enactment of certain legislative 
changes. In contrast, the euro area pro-
grammes often set only the first type 
of condition, and adoption by parlia-
ment was seldom required. As a result, 
decisions on instalments were based 
only on preparatory steps and not on 
the actual implementation of reform 
(see Box 5).

Programme targets were not 
revised in a consistent manner

86 
Revisions of deficit targets are a natu-
ral occurrence in assistance pro-
grammes. They do not automatically 
signal poor implementation on the 
part of the national authorities, as they 
may also be motivated by objective 
changes in the economic situation 
with an impact, negative or positive, 
on the public budget.

85 
Another difference lay in the number 
of conditions, which grew over time. 
Whereas Hungary was required to 
comply with fewer than 60 unique 
conditions, Portugal was faced with 
around 400. This large variation did 
not only reflect a need for more re-
forms in certain countries. We found 
instances where the opposite hap-
pened: countries that needed more 
reforms in a given field were asked to 
comply with fewer conditions than 
better-performing countries0. The con-
ditions also targeted widely different 
reform paths despite countries being 
in similar circumstances51.

5
x
o
B

Example of a condition linked to preparatory steps only

In the Irish programme, the government was required ‘to introduce legislation for the enhancement of finan-
cial regulation, expanding the supervisory and enforcement powers of the Central Bank52’. The Irish authorities 
complied with this condition with a minor delay of 1 month when the Ministry of Finance published the draft 
law. However, the enactment took an additional 2 years. There was no condition linked to the enactment and 
thus the enactment was not necessary for the release of instalments.

52  Referred to as ‘The Central Bank (Supervision and Enforcement) Bill’ in later conditions.

Part II — Processes were generally weak 
41

87 
Four of the six programmes had their 
deficit targets revised (see Table 3). 
The Commission’s records always 
explained downward revisions by a 
(significant) drop in economic activity, 
as was the case in Hungary, Romania, 
Latvia and Portugal.

88 
Depending on the country, a change 
in economic outlook can have dif-
ferent consequences for the revision 
of deficit targets. As part of its fiscal 
surveillance, the Commission calcu-
lates cyclical budget balances53. When 
the economic outlook changes, the 
cyclical balance estimate is revised 
accordingly. Hence, real-time changes 
in the cyclical balance estimate 
should approximate to the changes in 
deficit targets made necessary by the 
changed economic context54.

53  The budget balance can be 
broken down into a cyclical 
and a non-cyclical 
component. The cyclical 
component captures the 
effect of fluctuations in tax 
revenue and spending due to 
the economic cycle.

54  Assuming no significant errors 
in the forecasts of potential 
GDP, which is used as an input 
variable for calculating the 
cyclical balance.

3 Revisions of the deficit targets in ESA terms
e
l
b
a
T

2009

2008

MoU0 (Nov. 2008)

– 3.4 %

– 2.6 %

2010

2011

2012

2013

2014

Hungary

MoU1 (Mar. 2009)

Latvia

Romania I

MoU2 (Jun. 2009)

MoU0 (Jan. 2009)

MoU1 (Jul. 2009)

MoU5 (Dec. 2011)

MoU0 (Jun. 2009)

MoU1 (Feb. 2010)

MoU2 (Jul. 2010)

MoU3 (Jan. 2011)

Romania II

MoU0 (Jun. 2011)

Ireland

Portugal

MoU0 (Dec. 2010)

MoU0 (May 2011)

MoU5 (Oct. 2012)

MoU7 (Jun. 2013)

Note: N/A — not set.

Source: European Commission.

– 2.9 %

– 3.9 %

– 5.3 %

– 10.0 %

– 5.1 %

– 7.8 %

– 3.8 %

– 5.0 %

– 8.5 %

– 4.1 %

– 6.4 %

– 7.3 %

– 3.0 %

– 3.0 %

– 6.0 %

– 4.5 %

– 3.0 %

N/A

N/A

– 5.0 %

– 5.0 %

– 10.6 %

– 5.9 %

– 3.0 %

– 2.5 %

– 3.0 %

– 3.0 %

– 3.0 %

– 3.0 %

– 8.6 %

– 4.5 %

– 5.0 %

– 7.5 %

– 3.0 %

– 4.5 %

– 5.5 %

– 2.5 %

– 4.0 %

Part II — Processes were generally weak 
42

55  European Commission ‘The 
economic adjustment 
programme for Portugal’, 
European Economy, Occasional 
Papers 79, 2011, p. 16.

89 
Where the cyclical budget balance 
was not significantly revised during 
the programme, there was no need to 
revise the deficit targets. This was the 
case for Ireland. However, we found 
that not all revisions of targets were 
consistent with a revision of the cyclic-
al balance. For instance, while the 2009 
deficit target for Hungary was relaxed 
less than suggested by the revision to 
the cyclical balance, the 2012 target for 
Portugal was relaxed even though the 
cyclical balance had improved and the 
economic outlook remained the same.

90 
During the audit the Commission 
claimed that factors outside the 
government’s control could have 
triggered a target revision, such as 
changed composition of growth or 
revenue shortfalls. However, neither 
the programme documents nor the 
Commission’s internal methodology 
show a systematic approach to the 
 assessment of these other factors 
when the Commission examined the 
feasibility of deficit targets at each 
review.

91 
Another difference lay in the treatment 
of bank support measures with an im-
pact on deficits. The deficit targets in 
the Portuguese and Irish programmes 
were defined as net of such measures, 
whereas they were included in the 
Latvian programme targets.

92 
Programme documents also differed 
in the attention to the social dimen-
sion. For instance, in the Portuguese 
programme, ‘tax increases (were) 
designed in a progressive way, with 
lowest-income groups retaining 
their levels of income […] minimum 
wages and lowest pensions remain 
untouched’55. This contrasts with the 
universal 25 % cut in civil servants’ 
salaries in the Romanian programme, 
with no reference given in programme 
documents as to how this would af-
fect lower pay grades. Similarly, the 
outcome of combining a decrease in 
flat-rate personal income tax and an 
increase in VAT — which was likely to 
shift the burden of fiscal consolidation 
to the less fortunate in society — was 
not considered in the initial pro-
gramme documents for Latvia.

Programme management 
weaknesses due to weak 
controls

93 
Even though, ultimately, decisions 
about a programme rest with the 
Council and/or the Commission, it is 
the Commission’s representatives that 
negotiate with the national author-
ities and conduct programme reviews. 
The mandate for negotiation is set out 
in the policy brief. During a visit, the 
Commission’s representatives update 
management on the talks, typically 
once a day, and seek approval for any 
departure from the mandate. After the 
visit, the Commission’s representatives 
produce the programme documents 
(Council decision, memorandum of 
understanding and explanatory note). 
These are subject to review and furnish 
the basis for decisions by the Commis-
sion and the Council.

Part II — Processes were generally weak43

94 
Preparation of the policy brief and 
programme documents is an expert-
based process in which the judge-
ment of forecasters and of a num-
ber of policy experts from several 
directorates- general plays a key role. 
The documents are reviewed by the 
deputy director-general and the heads 
of the horizontal units involved in their 
preparation. The former focuses on the 
documents’ overall consistency, and 
the latter are responsible for ensur-
ing consistency with EU policy of the 
contributions made in their respective 
fields.

96 
The IMF has also set up a process of 
internal review of the key features of 
programme design and updates. In 
some respects this is similar to the 
Commission’s internal review process, 
but there are three main differences:

(i) 

the IMF has a dedicated review 
department which provides input 
to management;

(ii)  more IMF officials are involved in 

the review process; and

(iii)  the IMF process is documented.

95 
Several weaknesses were found in the 
review process:

(i)  no person outside the programme 
team reviews the underlying 
calculations and projections to 
check the consistency of the 
macroeconomic projection with 
the financing gap estimate or with 
the macroeconomic impact of the 
programme conditions;

(ii)  in a number of respects, the work 
of the Commission’s representa-
tives was not sufficiently assessed, 
with too little questioning of the 
experts’ forecasts (see paragraph 
61), financing gap estimates (see 
paragraphs 69 and 70) and choice 
of programme conditions (see 
paragraph 79); and

(iii)  internal quality control was gener-

ally not documented.

Programme documents 
had improved with time 
but still displayed 
shortcomings

Improvements in the quality 
of programme documents

97 
There were marked differences be-
tween programmes in terms of the 
analytical depth of programme docu-
ments. Many of these differences were 
due to the Commission’s improved 
analytical capacity. In the first three 
programmes, the programme docu-
ments provided limited information 
on a number of aspects, including the 
composition of the fiscal adjustment, 
analysis of slippages if deficit targets 
were not met and social impacts. The 
analysis given in the two most recent 
sets of programme documents (Ire-
land and Portugal) had significantly 
improved (see Box 6) and was, in many 
respects, very thorough.

Part II — Processes were generally weak44

6
x
o
B

Example of improved analysis in programme documents

The initial programme documents for balance-of-payment programmes broadly characterised fiscal consoli-
dation as mainly expenditure driven. However, details of the necessary budget measures were fragmentary 
(Hungary), no such measures were identified at all (Romania) or, if they were identified, there was no estimate 
of how much they would bring in (Latvia). For the same three countries, the Commission subsequently im-
proved the level of detail in the programme documents by listing and quantifying which measures had been 
agreed to achieve the deficit targets. And in the remaining programmes (Ireland and Portugal) even more 
detail was the norm.

98 
In some cases, we found that essential 
information had been omitted from 
the programme documents. For in-
stance, the Commission did not always 
communicate key assumptions under-
lying the calculation of the financing 
gap.

(i) 

In the Hungarian programme, the 
Commission did not communicate 
details supporting the estimate 
of 20 billion euro to be provided 
to Hungary over the programme 
period.

(ii)  In the Irish programme, the finan-

cing gap calculation used in the 
initial programme documents gave 
a cumulative accruals-based Euro-
pean System of Accounts (ESA) 
deficit of 44 billion euro over the 
programme period. However, the 
projected ‘exchequer cash deficit, 
incl. promissory notes’, which was 
used for the calculation of funding 
needs, stood at 58 billion euro. The 
main reasons for this significant 
difference of 14.1 billion euro (21 % 
of the initial financing gap) were 
not explained in the document.

99 
The Commission carried out some 
basic sensitivity tests to assess the 
impact of a change in one or more 
parameters on overall funding needs. 
Although they could have provided 
valuable information about the risk of 
possible adverse outcomes, the results 
were not revealed in the programme 
documents.

Weaknesses in compliance 
monitoring and reporting

100 
During each programme, the Commis-
sion should verify whether the Mem-
ber State’s economic policy is aligned 
with the conditions laid down by the 
Council. In practice this was done by 
verifying that the Member State was 
implementing the conditions in the 
memorandum of understanding.

Part II — Processes were generally weak 
45

56  The excessive deficit 
procedure is the EU’s 
step-by-step procedure for 
correcting excessive deficit 
(above 3 % of GDP) or debt 
levels (above 60 % of GDP).

57  Member states’ quarterly 

government accounts data 
based on ESA definitions are 
published with a time lag of 
90 days. Furthermore, 
estimating ESA deficit requires 
assumptions to be taken on 
future decisions on the 
statistical treatment of some 
major transactions.

58  According to the Commission, 
the revision of the 2008 deficit 
reflected changes in relation 
to the absorption of EU funds, 
as some projects had not 
received the co-financing 
which had been expected to 
replace pre-financing from the 
budget.

The unreliability of using 
overall deficit targets to 
monitor fiscal implementation

101 
Fiscal consolidation was a key feature 
of all five programmes, and fiscal 
performance was a key concern dur-
ing talks with national authorities 
and when programme decisions were 
taken. Deficit targets were typically 
defined as a deficit expressed — in 
accordance with the ESA — as a per-
centage of GDP. The choice of the 
ESA deficit as the key anchor for fiscal 
policy was motivated by commitments 
made under the excessive deficit 
procedure56.

102 
The ESA deficit cannot be directly 
monitored during the year57. Instead, 
compliance with overall targets was 
monitored primarily by estimating the 
deficit. However, using these estimates 
entails a risk that the Commission will 
be unable to report with certainty 
to the Council that a country’s fiscal 
policy complies with the adjustment 
programme. On several occasions, 
including those detailed below, the 
Commission estimates turned out to 
be wrong.

(i) 

It was reported in the spring 2009 
notification that Hungary’s deficit 
was within the programme’s 2008 
deficit target. However, the au-
tumn 2009 notification revised the 
deficit to 3.8 % of GDP, i.e. above 
the deficit target58.

(ii)  In January 2010, Romania reported 
a 2009 cash deficit of 7.3 % of GDP, 
in line with the IMF target, while 
the Commission provisionally es-
timated an ESA deficit in line with 
the target and stated that the pro-
gramme was ‘on track’. However, in 
May 2010 the Commission revised 
the ESA deficit to 8.3 %. From au-
tumn 2011, the revised deficit was 
9 %.

(iii)  In January 2013, the Commis-

sion provisionally calculated that 
Ireland’s ESA deficit for 2012 was 
8.2 %, only to revise it to 7.7 % in 
April and 8.2 % in autumn 2013. 
However, the last revision was 
mainly due to the reclassification 
of one-off revenue.

103 
Another complication was the exclu-
sion of bank support measures from 
the target definition in euro-area 
programmes. Fiscal targets defined 
in such a way should be, in principle, 
a much better anchor for fiscal policy, 
as bank support measures are size-
able one-off items which are beyond 
the direct control of the government. 
However, in the case of Ireland the 
Commission excluded only deficit-
increasing capital transfers provided 
to the banks, but allowed the inclusion 
of revenues related to bank support 
measures. Such targets provide a less 
clear signal and measure of fiscal per-
formance. For instance, had all bank-
ing related transactions been exclud-
ed, the 2012 budget deficit would have 
been higher by 1 percentage point.

Part II — Processes were generally weak46

59  For example largely met, 
broadly met, partially, 
ongoing, partly observed, not 
observed.

60  Conditions requiring 

permanent compliance at 
each review are excluded.

61  A fiscal policy anchor provides 
a structure for the govern-
ment’s decision-making on 
the appropriate size of the 
budget deficit given the state 
of the economy and some 
medium- or long-term 
objectives for government 
finances.

Unsystematic reporting on 
compliance with conditions

104 
Only for Portugal and, in part, for 
Hungary, Latvia and Ireland, did the 
Commission systematically report on 
the Member State’s compliance with 
structural conditions.

105 
Non-compliance was rarely reported. 
Only for a very small number of 
conditions (4% in the Portuguese 
programme) did the Commission 
clearly state ‘not observed’, although 
almost half of all conditions were not 
complied with on time. Many different 
terms were used to convey this59, lead-
ing to confusion.

106 
For around 30 conditions (8 % of the 
sample), either no compliance status 
was reported or the conditions were 
so vaguely written that compliance 
could not be effectively monitored (for 
examples see Box 7)60.

107 
A few conditions were reported as 
complied with but could not be veri-
fied. For example: 

(i) 

In the Irish programme (follow-
ing the autumn 2012 review), the 
Commission was still engaging 
with the Irish authorities to ensure 
that elements of the multiannual 
budgetary framework were suf-
ficiently binding and transparent 
to constitute a credible policy 
anchor61 in the post-programme 
period. However, the condition 
was reported by the Commission 
to have been fully met.

(ii)  In Portugal, the condition requir-
ing the production of monthly 
reports on budget implementa-
tion by the national government 
was progressively enlarged to 
include all state-owned enterprises 
and public–private partnerships 
at national, regional and local 
government levels. The condition 
was deemed to have been satis-
fied after specific reporting was 
introduced at regional level, even 
though the requirement for con-
solidated budget reporting was 
not met.

Part II — Processes were generally weak47

7
x
o
B

Examples of conditions for which compliance was never reported

The number of public research and development priorities should be reduced to provide more resources to 
relevant research fields (Latvia).

Strengthen the capacity of the Structural Funds and Cohesion Fund managing authority to control and decide 
on EU spending (Romania).

The government is to adopt legislation to significantly reduce the number of taxes and payments similar to 
taxes (Romania).

By July 2012, the government will develop a consolidation plan to reorganise and significantly reduce the 
number of municipalities (308). The government will implement these plans and changes will come into effect 
by the beginning of the next local election cycle (Portugal).

Establishing special chambers within the tax tribunals (Portugal).

110 
The legal basis allowed the three 
institutions to decide how cooper-
ation would be organised. In all 
programmes, the programme teams 
established informal cooperation 
arrangements. The variety of exper-
tise and experience among the three 
institutions’ staff made it possible to 
produce more thorough assessments, 
which reduced the risk of errors and 
omissions in programme design and 
updates.

Cooperation with the 
other partners was 
informal only

108 
EU financial assistance was provided 
together with IMF financial assistance 
in all programmes. Each institution 
took independent funding decisions in 
line with its own statutes and internal 
procedures. In the case of the Irish 
and Portuguese programmes, the 
ECB too was involved in programme 
management.

109 
Working with the IMF helped the Com-
mission in learning how to manage 
the programmes. We observed several 
examples of IMF practices that the 
Commission adopted after the pro-
grammes started, for example more 
detailed forecasting spreadsheets or 
the use of a resident representative in 
later programmes. Also, the Commis-
sion’s programme teams were en-
larged, matching the size of the IMF’s 
teams.

Part II — Processes were generally weak 
48

62 

In the balance-of-payments 
programmes, the actual 
spreadsheets underlying 
financing gap estimates were 
prepared by the IMF and, 
according to the Commission, 
were not at the disposal of 
Commission staff.

63  For example financial market 
information in the IMF’s 
financial sector assessments, 
information collected by the 
Directorate-General for 
Competition, ECB banking 
data.

64  Council Regulation (EU) 

No 407/2010.

65  Article 3(3)(b).

66  Article 3(6).

67  For instance, the ECB argued 

for maintaining deficit targets 
in the Portuguese programme.

The ECB’s advisory role was 
very broad

112 
In the area of programme manage-
ment, the EFSM regulation64 establish-
es an advisory relationship between 
the ECB and the Commission:

(i) 

‘(the general economic policy) con-
ditions […] will be defined by the 
Commission, in consultation with 
the ECB’65; and

(ii)  ‘the Commission shall re-examine, 
in consultation with the ECB, 
the general economic policy 
conditions’66.

113 
ECB staff advised on issues relevant to 
financial stability and to ensuring that 
money markets functioned properly. 
This included topics such as debt 
sustainability and the pace of fiscal 
consolidation67, which were seen by 
the ECB as important preconditions in 
both areas of its advisory role.

111 
The institutions did not make any for-
mal arrangements concerning coop-
eration between them on such aspects 
as the following.

(i)  Exchange of information. What 
information (e.g. negotiation 
mandates, other programme docu-
ments, underlying calculations62, 
information collected from the 
Member State) should be ex-
changed with the other partners? 
How should information received 
after the cut-off date be treated?

(ii)  Confidentiality. How should docu-
ments originally provided to an-
other institution be treated? What 
should be done if an institution 
comes into possession of confiden-
tial information not available to 
the other partners63 which could 
affect the overall programme de-
sign and internal analysis?

(iii)  Ownership of common work. Some 
electronic documents were jointly 
produced by all three partners 
(e.g. macroeconomic projections, 
financing gap calculations), but 
were not fully shared between the 
institutions.

(iv)  Mechanisms to resolve disagree-

ments about financing decisions or 
other key programme parameters.

Part II — Processes were generally weak49

68  The provision of euro liquidity 
to its counterparties, or 
suspending or objecting to 
the provision of such liquidity, 
is part of the Eurosystem’s 
Treaty role, according to which 
the Eurosystem is totally 
independent and outside the 
work of the other two 
institutions.

69 

IMF country report No 15/20 
— Ireland — Ex-post evaluation 
of exceptional access under the 
2010 extended arrangement, 
January 2015, paragraphs 
48-52.

114 
Providing advice did not mean, how-
ever, that the ECB supplied the other 
partners with the analysis underlying 
its position in programme talks. For 
instance, the ECB did not provide the 
Commission with its internal deliber-
ations on burden-sharing by senior 
debt holders in the restructuring of 
the Irish banks. Given that the amount 
of Eurosystem financing was close 
to 100 % of Ireland’s GDP, continued 
Eurosystem financing68 was essential 
for the success of the programme. 
The other Troika partners accepted no 
burden-sharing by senior debt hold-
ers. However, the IMF’s ex post evalu-
ation of the Irish programme suggests 
that alternative policy actions were 
available to contain the risks from 
higher burden-sharing69, but were not 
pursued.

Part II — Processes were generally weak50

70  The price defines the cost of 

debt.

71  Based on a sample of 12 bond 

issues.

Part III 
Borrowing met financing needs even 
though circumstances initially made it 
difficult to always abide by best practice

115 
The European Commission managed 
all borrowing on behalf of the EU 
in connection with the delivery of 
macrofinancial assistance. By the end 
of 2014, the EU had issued a total of 
22 bonds with a total nominal value 
of 60.1 billion euro, of which 8 bil -
lion euro had already been repaid by 
31 March 2015.

116 
To assess the Commission’s debt 
management:

(i)  we analysed the outcome of issu-
ance in terms of investor’s sub-
scription and cost of debt; and

(ii)  we benchmarked the Commis-

sion’s procedures to the best prac-
tices on public debt management, 
investor relations and transparency 
in debt issuance.

Bond issues were well 
subscribed

Cost of debt in line with peer 
levels

117 
The price of an issue70 depends both 
on the nature of the bond and on the 
market situation at the time it is sold. 
The Commission managed to acquire 
the necessary funding to finance the 
EU’s contribution to financial assist-
ance. All the bond issues attracted 
sufficient demand from the capital 
markets to be sold out. The bid-to-
cover ratio (amount bid in relation to 
the total amount issued) ranged from 
1.2 to over 4.271 (see Figure 7).

7 Bid-to-cover ratio for EU bond issues
e
r
u
g
i
F

4

4.2

3.1

2.5

2.9

2.0

2.1

1.5

1.5

1.6

2.3

2.2

1.2

3

2

1

0

3y, 12-2008

5y, 2-2009

5. 5y, 3-2009

7y, 7-2009

9y, 3-2010

7y, 9-2010

5y, 1-2011

10y, 9-2011

26y, 4-2012

10y, 5-2012

15y, 7-2012

10y, 3-2014

Source: European Commission.

 
51

72  For example, the first 

disbursement to Hungary was 
made 1 month after the 
Council’s decision (Council 
Decision 2009/102/EC of 
4 November 2008 providing 
Community medium-term 
financial assistance for 
Hungary (OJ L 37, 6.2.2009, 
p. 5)) to provide financial 
assistance.

73  Commission internal 
procedure manual for 
borrowing activities, 
Commission internal control 
standards Nos 8 and 11.

74  The EU made six bond issues 

in 2012.

75  This translates into 

approximately 3 million and 
1 million euro respectively of 
extra cost in debt per annum.

121 
Good practices73 recommend that 
the back office maintains borrowing 
files containing correspondence with 
financial intermediaries, including the 
requests for proposals with the banks’ 
pricing guidance. In most of the initial 
issues there were no requests for 
proposals, and none were produced 
before 2011.

122 
We examined the files for three bonds 
issued in 201274. For two issues the 
 actual pricing level was higher than 
the consensus level indicated by the 
lead banks in their initial replies to 
requests for proposals. In one case the 
difference was 11 basis points (0.11 %), 
in the other 5 basis points (0.05 %)75. In 
both cases the demand from invest-
ors was high, with bid-to-cover ratios 
above 2 and 1.6 respectively.

118 
From the very start the issues were 
made on time72. The final cost of debt 
was in line with the market and peer 
levels (see Figure 8). Over time the 
spreads to prevailing risk-free interest 
rates decreased and, especially for the 
longer-term issues made in 2011 and 
2012, the EU was often able to achieve 
a lower cost of debt than the European 
Financial Stability Facility, its only peer 
with similarly long-term issues.

Pricing levels at issuance 
sometimes higher than initial  
guidance from banks

119 
The Commission used syndicated 
transactions to issue the bonds. It 
selected lead managers — internation-
ally active banks — to underwrite each 
issue. The role of these lead banks was 
to contact investors directly and advise 
the Commission, as the bond issuer, 
on the timing and price of each issue. 
They would buy up each issue and sell 
it on to investors, having committed 
to buy any part of the issue which was 
not thus resold.

120 
The benefit of syndication is that, via 
requests for proposals, it allows op-
timum pricing levels to be identified. 
The issuer can also capitalise on the 
banks’ extensive client networks when 
issuing the bond. The issuer might 
provide details — typically 1 week in 
advance — of the upcoming issue’s 
maturity and size, and usually asks for 
quantitative and qualitative informa-
tion via a questionnaire. In response, 
banks give guidance as to how they 
believe the suggested instrument 
should be priced based on current 
market conditions.

Part III — Borrowing met financing needs even though circumstances initially made it difficult to always abide by best practice52

8 Final cost of debt similar to market and peer levels
e
r
u
g
i
F

5-year issues

4 %

10-year issues

e
t
a
r

t
s
e
r
e
t
n

I

3 %

2 %

1 %

4 %

3 %

2 %

1 %

Key:

* 9-year issues

7-year issues

20+-year issues

* 15-year issues

2009

2010

2011

2010

2011

2012

Issues made by the EU

Issues made by the peer issuers

Mid-swap rate for a given maturity

*Issues made by the EU or peer issuers with a similar 
but diﬀerent maturity than that of the swap rate curve

ð

The distance of issue yields of EU bonds from the 
prevailing risk-free interest rate at a given maturity 
decreased over time.

ð

The distance was also similar to the distance achieved 
by peer issuers. 

Source: ECA, data provided by Bloomberg, see Annex III for methodology.

Part III — Borrowing met financing needs even though circumstances initially made it difficult to always abide by best practice 
 
53

76 

IMF, 2014, Revised guidelines for 
public debt management’, 
IMF-World Bank, p. 5-6.

77  OECD, 2002, Debt 

management and government 
securities markets in the 21st 
century.

78  At the time of the first bond 
issue in December 2008, the 
unit responsible for both 
borrowing and lending was 
staffed by four people. At its 
peak, at the beginning of 2011, 
the unit still had no more than 
eight members of staff.

79  Recommendation for 

a Council decision granting 
mutual assistance for Hungary 
— Proposal for a Council 
decision providing 
Community medium-term 
financial assistance for 
Hungary COM(2008) 716 final 
of 30.10.2008, paragraph 6.

Circumstances initially 
made it difficult to always 
abide by best practices

123 
We found a number of shortcomings 
in the debt management process in 
the initial years (see Figure 9). Lack of 
documentation and other gaps did not 
have a demonstrable impact on the 
outcome of borrowing.

124 
It is accepted practice76 to issue written 
guidelines covering the organisation 
of the debt management office, the 
distribution of roles and responsibil-
ities, the establishment of maximum 
debt thresholds, the type of debt to be 
issued and rules for documenting the 
issuance process.

125 
‘In many cases, the organisational 
structure of modern debt offices is 
patterned on private-sector financial 
institutions such as banks and finance 
departments of major corporations’77. 
On this principle, the office would be 
divided into at least two main units:

(i)  a front office — typically respon-

sible for executing transactions in 
financial markets, including man-
aging auctions and other forms of 
borrowing, and all other funding 
operations; and

(ii)  a back office — responsible for 

handling the settlement of trans-
actions and maintaining financial 
records.

126 
In addition, a number of key functions, 
particularly for risk management, 
could be situated in a separate middle 
office.

127 
Limited human resources78, combined 
with the urgency of raising funding79 
in stressed financial markets, made 
it very difficult in the initial years 
to abide by best debt management 
practices.

Pre-issuance

128 
The manual of debt management pro-
cedures was drawn up at the time of 
the first issues, but was either unclear 
or lacked guidance on important ele-
ments of the process. It was progres-
sively improved through multiple up-
dates, the value of which was reflected 
in the quality of documentation for the 
bond issues since 2012.

129 
From the end of 2008 to 2011, owing 
to time constraints, the Commission 
applied an exceptional procedure for 
the selection of lead banks. It man-
dated lead banks directly, which left 
a limited audit trail of documents on 
the selection process, such as requests 
for proposals or justification letters. 
Requests for proposals were not pro-
duced until 2011, when documentation 
of the selection process became more 
precise and comprehensive.

Part III — Borrowing met financing needs even though circumstances initially made it difficult to always abide by best practice54

9 Shortcomings in debt management in the initial years
e
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Part III — Borrowing met financing needs even though circumstances initially made it difficult to always abide by best practice 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
55

Placement

130 
We did not detect any clauses in the 
agreements between the Commis-
sion and lead banks dealing with the 
sensitive issue of pre-sounding (see 
Box 8). There was no evidence that 
the Commission took any precautions 
regarding the disclosure of non-public 
information, and no audit trail with 
which to determine whether lead 
banks wall-crossed certain investors 
during each issue, or whether they 
subsequently allowed them to trade or 
participate in the transaction.

131 
An important part of any new bond 
issue is the way the bond is divided 
out among subscribing investors. One 
of the main benefits of syndication 
over auction is that the issuer has full 
control over the investor base, allow-
ing it, for example, to choose how the 
securities are allocated. Best practice 
dictates that allocation rules should 
be clear and transparent, and always 
divulged beforehand. Fair and trans-
parent allocation of an issue also helps 
in maintaining a diverse investor base.

8
x
o
B

Pre-sounding and wall-crossing

Pre-sounding is a technique employed by primary debt capital market bankers to measure investor demand. 
It is quite a common business practice80, especially in volatile markets, as it can help lead banks and  issuers 
to seek initial feedback on an upcoming issue ahead of the public announcement. This feedback is often 
 obtained by disclosing general information only. However, more specific information (potentially including 
non-public material or inside information) is likely to be imparted to market participants in other cases; there-
fore, the risk of market abuse remains.

When adding third parties to the information chain, best practice recommends an enhanced level of record-
keeping and the use of formal written procedures. When non-public material or inside information is to be 
disclosed (a process known as wall-crossing81), lead banks must inform their clients about any applicable 
restrictions under the laws and regulations relating to the possession of such information.

80 

International Capital Market Association, Primary market handbook, 'XIII. Pre-sounding, bookbuilding and allocations', 2014. Also, European 
Securities and Markets Authority, Discussion paper — ESMA’s policy orientations on possible implementing measures under the market abuse 
regulation, 2013.

81  Wall-crossing is the act of making a person an ‘insider’ by providing them with inside information.

Part III — Borrowing met financing needs even though circumstances initially made it difficult to always abide by best practice 
56

82 

Information from the order 
books and final allocations 
were available for only 7 of the 
12 bond issues sampled.

83  3.25 % coupon bond with 

a maturity date of 4 April 2018.

132 
The Commission stated that it played 
an active role in the allocation of each 
issue. According to the Commission, 
allocation was based on the following 
criteria:

(i)  category of the investor as a meas-

ure of quality (investor type: ‘real 
money’ versus trading, etc.);

(ii)  quality of the individual order (e.g. 
timeliness of the order, previous 
experience with the investor); and

(iii)  geographical distribution.

133 
An analysis of the allocation tables 
that were available82 revealed that for 
very small amounts the allocation was 
100 %, while there was little consist-
ency in the degree to which larger 
orders were satisfied. Furthermore, the 
main orders were placed by specific 
financial entities (e.g. large investment 
houses) on behalf of investors. When 
the final allocation is made, the invest-
ment houses allocate the bonds to the 
investors. We did not find evidence 
that the Commission agreed with the 
final bond allocation.

Post-issuance

134 
Defining a new bond as liquid in the 
secondary market means that it can be 
sold quickly. It is the responsibility of 
both the issuer and the lead bank to 
ensure that there is sufficient liquidity 
in the secondary market for any new 
issue. The Commission and lead banks 
should agree on secondary market 
commitments in the mandate letters 
signed for each issue. Furthermore, the 
participating lead banks are expected 
to maintain a similar low bid-offer 
spread (the difference between the 
buy and sell price) for at least the first 
few days of the secondary market.

135 
During the audit, the Commission 
stated that it examined the liquidity 
of EU bonds on a quarterly basis, with 
a more formal examination procedure 
in place since 2012. However, we found 
no evidence in the borrowing files that 
it had checked liquidity in the second-
ary market before 2012.

136 
An analysis of bid and offer prices 
showed that the closing daily bid-offer 
spread for the initial 30 days of each 
issue was relatively low. However, the 
bid-offer spread for each bond was 
found to vary widely between bro-
kers. For instance, the bid-offer spread 
ranged from 7 to 30 basis points for 
one of the bond issues83. This variation 
was observed even with brokers that 
were participating as lead banks in 
multiple EU issues and were therefore 
obligated to respect certain secondary 
market commitments.

Part III — Borrowing met financing needs even though circumstances initially made it difficult to always abide by best practicePart IV 
Programmes met their objectives

57

137 
The overall aims of financial assist-
ance were to return Member States 
to sound macroeconomic or financial 
health and restore their capacity to 
meet their public-sector (euro area) or 
balance-of-payments (non-euro area) 
obligations. The financial assistance 
provided a cushion to ease implemen-
tation of the adjustment programmes 
that were necessary in each country to 
correct underlying problems. We struc-
tured our analysis of the programme 
achievements along four dimensions:

139 
There were, nonetheless, some differ-
ences in the level of comfort provided 
by the financial assistance. The early 
programmes, designed in the wake 
of the Lehman collapse, included 
a substantial safety margin. Similarly, 
the Irish programme included a size-
able contingency reserve of 25 bil-
lion euro as part of the banking sup-
port scheme. On the whole, Ireland, 
Hun gary and Latvia benefited from 
reduced funding needs, which allowed 
them to:

(i)  analysis of how the overall funding 

(i) 

was used and factors that made it 
sufficient;

reduce reliance on their own 
 resources (Ireland);

(ii)  exceed the initial foreign exchange 
reserve projections (Hungary);

(iii)  reduce programme financing 

 (Latvia, Hungary); and

(iv)  repay (or consider repaying) the 

more expensive IMF loans before 
their due date (Hungary, Latvia, 
Ireland).

(ii)  compliance with deficit targets 
and implementation of fiscal 
adjustment;

(iii)  compliance with the conditions 

and implementation of structural 
reforms; and

(iv)  changes in countries’ 
competitiveness.

No need to increase 
overall funding

Funding envelopes proved 
sufficient, if tight in two 
Member States

138 
In no country did the financing gap 
evolve as envisaged. However, the pro-
gramme set-up was sufficiently robust 
to allow significant discrepancies to 
be offset within a programme so that 
funding remained within the initial 
envelopes (see Figure 10).

58

0 How was money used?
1
e
r
u
g
i
F

Balance-of-payment programmes

Key:

Funding gap

Current account

Other

Capital and ﬁnancial account

Increase in international reserves

Hungary
ο  Contrary to the forecast, foreign banks increased 

exposure to their subsidiaries at the peak of the crisis 
and drains from foreign exchange derivatives did not 
materialise. Therefore no ﬁnancing was required to 
cover the capital and ﬁnancial account. Instead it 
became a ﬁnancing source.

Needs

Financing

3.3

2.4

10.7

3.1

Planned

19.5

12.0

2.6

Actual

1

14.2

Latvia
ο  The current account corrected much faster than initially anticipated, 
becoming a ﬁnancing source. This was partially oﬀset by additional 
funding needs due to the capital and ﬁnancial account.

ο  Of the 4.7 billion euro in ﬁnancial assistance, 3.2 billion euro was used 
to ﬁnance ongoing government deﬁcits and repayments of public debt. 
The ﬁnancial sector rescue was less costly than anticipated.

Needs

Financing

1

2.8

3.7

Planned

7.5

0.5

6.2

Actual

1.7

4.7

Romania1
ο  The current account corrected faster than 
anticipated.  This was partially oﬀset by 
reduced ﬁnancing through the capital 
and ﬁnancial account.

Needs

5.5

25.3

Planned

20.0

Financing

10.8

5.5

16.3

Actual

18.2

4.9

1 Data cover the first Romanian programme.

Part IV — Programmes met their objectives 
59

0 Euro area programmes
1
e
r
u
g
i
F

Key:

Comparison between planned and actual needs and ﬁnancing in the government sector. 

Cash deﬁcit

Maturing debt

Financial sector needs

Funding gap

Market ﬁnancing

Own resources

Other

Ireland

Portugal

s
d
e
e
N

35

40
40

18

38
38

59

52

20

6

113

15

27

s
d
e
e
N

13

12

83

22

Planned

Actual

Planned

Actual

68

68

78

76

32

9

49

18

g
n
i
c
n
a
n
i
F

g
n
i
c
n
a
n
i
F

47

5

93

12

Other public cash needs pertaining 
to the ﬁnancing of state-owned 
enterprises, contributions to the ESM, 
the repayment of arrears, etc.

Source: ECA, data provided in programme documents, 
statistics compiled by national authorities.

Part IV — Programmes met their objectives 
60

84  Monetary relaxation also had 
a positive impact on financing 
for the Irish government.

85  EFSM loans were initially 
planned for an average 
duration of 7.5 years, with 
interest margins of 2.925 % for 
Ireland and 2.15 % for Portugal. 
In October 2011 these interest 
margins were suppressed, and 
the average maturity was 
increased to 19.5 years in June 
2013. EFSF loans were also 
extended, and the interest 
margins of 2.47 % for Ireland 
and 2.08 % for Portugal were 
likewise suppressed.

86  This decreased also the 

expected revenue of the EU 
budget by 2.2 billion euro in 
total during in the programme 
period.

87 

In its 2013 annual report, the 
ECB considered that ‘The 
liquidation of the Irish Bank 
Resolution Corporation (IBRC) 
raises serious monetary 
financing concerns. These 
concerns could be somewhat 
mitigated by the disposal 
strategy of the Central Bank of 
Ireland.’

88  European Commission, 
‘Economic adjustment 
programme for Ireland 
— Winter 2012 review’, 
European Economy, Occasional 
Papers No 131, 2013.

89  Press release of the Board of 

the National Bank of Romania 
of 16 November 2009.

143 
Ireland and Romania benefited from 
the accommodating policies of their 
central banks.

(i)  The Central Bank of Ireland agreed 
to swap non-marketable promis-
sory notes issued to the Anglo 
Irish Bank for Irish government 
bonds with longer maturities87. 
This liberated Ireland from the 
need to seek market financing for 
3.1 billion euro due in 2013. It will 
also reduce the country’s financ-
ing requirements by a total of 
30 billion euro over the 2014-2023 
period and the deficit by an aver-
age of 0.7 % of GDP88.

(ii)  In November 2009, Romania’s cen-
tral bank decided to decrease the 
foreign exchange reserves require-
ment from 30 % to 25 % (follow-
ing an earlier decrease from 35 % 
in August). This freed up around 
1.3 billion euro in banking loans 
for government financing. The 
decision was publicly justified by 
the postponement of 2009 IMF/EU 
tranches89.

140 
In contrast, Portugal faced signifi-
cantly higher financing requirements 
than initially estimated, and finan-
cing was tight during the Portuguese 
programme. To meet its additional 
requirements, Portugal had to rely on 
market financing. Monetary relaxation 
in the euro area in the second half of 
the programme helped Portugal to 
make a successful return to the finan-
cial markets84.

141 
The financial assistance to Romania 
was sufficient to cover the country’s 
balance-of-payments needs, but fi-
nancing of the Romanian public sector 
proved to be tight during the pro-
gramme. The government’s additional 
financing needs were covered in part 
by indirect support from the central 
bank.

Certain Member States 
received more advantageous 
financial terms than 
provided for the initial 
design

142 
Portugal and Ireland benefited from 
reduced interest rates and longer ma-
turities on the EU loans85. The primary 
aim was to enhance their long-term 
refinancing prospects86; however, the 
change also reduced the financial bur-
den of meeting interest payments over 
the programme period. We estimate 
that Ireland and Portugal achieved, 
over the programme period, savings of 
2.2 billion euro each.

Part IV — Programmes met their objectives61

Updated deficit targets 
mostly but not always 
sustainably met

With some exceptions, 
revised annual deficit targets 
were met

144 
Compliance with the revised targets 
was generally good, with the excep-
tion of the Hungarian programme and 
some years of the Portuguese and 
Romanian programmes (see Table 4).

145 
However, missed targets did not 
necessarily mean failure of imple-
mentation. For example, the missed 
2008 and 2009 targets in the Hungar-
ian programme can be explained by 
statistical revisions to the budget 
deficit. Furthermore, all balance-of-
payment programmes were successful 
in the sense that the Member States 
managed to exit the excessive deficit 
procedure in 2012.

4
e
l
b
a
T

Compliance with updated targets

Hungary

Latvia

Romania I

Romania II

Ireland

Portugal

2008

– 3.4 %

– 3.7 %

– 4.4 %

– 5.7 %

2009

– 3.9 %

– 4.6 %

– 10.0 %

– 9.2 %

– 7.8 %

– 9.0 %

2010

– 3.8 %

– 4.3 %

– 8.5 %

– 8.2 %

– 7.3 %

– 6.8 %

% GDP

target

actual1

target

actual1

target

actual1

target

actual1

target

actual2

headline deficit1

– 7.4 %

– 13.7 %

– 30.6 %

target

actual2

headline deficit1

– 3.6 %

– 10.2 %

– 9.8 %

2011

2012

2013

4.3 %

– 4,5 %

– 3.5 %

– 5.0 %

– 5.5 %

– 10.6 %

– 8.9 %

– 13.1 %

– 5.9 %

– 4.4 %

– 4.3 %

– 2.1 %

– 2.2 %

– 1.3 %

– 1.0 %

– 3.0 %

– 3.0 %

– 8.6 %

– 8.2 %

– 8.2 %

– 5.0 %

– 6.0 %

– 6.4 %

– 2.3 %

– 7.5 %

– 7.2 %

– 7.2 %

– 5.5 %

– 4.5 %

– 4.9 %

Note: Non-compliance with a deficit target is shown in bold. Outside programme-period data are shown in grey.

Source: European Commission.
1  Net lending or borrowing of general government for excessive deficit procedure as of spring 2014. 
2  Actual deficit as reported by the Commission and in line with the programme definition (see paragraph 91).

Part IV — Programmes met their objectives 
62

90  Accounting for the cut-off 

dates of government statistical 
data, the following 
programme periods were 
assumed: Hungary 2009-2010; 
Latvia 2009-2011; Romania 
2009-2012; Ireland and 
Portugal 2011-2013.

91  Based on the spring 2014 
forecast data, obtained in 
accordance with ESA95.

All countries improved their 
fiscal stance, but to varying 
degrees

149 
Given that the programmes resulted 
from a loss of market access, the 
restoration of fiscal sustainability was 
arguably the most important aim. 
Improvement in a country’s struc-
tural balance during the programme90 
would indicate progress towards 
more sustainable public budgets. The 
Commission calculated and published 
structural balance data91.

150 
The structural balance improved in 
all countries, at an average yearly rate 
of between 0.7 % of potential GDP in 
Hungary and 1.9 % in Portugal. Three 
factors could explain the different 
rates of change:

(i) 

the initial fiscal stance — the high-
er the initial structural deficit, the 
faster the pace of consolidation;

(ii)  the initial level of public debt — 
the higher the initial debt, the 
faster the pace of consolidation;

(iii)  differences in the recommenda-
tions made under the excessive 
deficit procedure concerning 
the need for a fiscal effort — 
the  higher the recommended 
effort, the faster the pace of 
consolidation.

146 
To achieve their deficit targets each 
programme envisaged a specific ex-
penditure–revenue mix. Consolidation 
focused on the expenditure side in 
the balance-of-payment programmes, 
but was more uniformly distributed in 
the EFSM programmes. The realised 
compositions of revenue and expend-
iture broadly correspond to what was 
initially planned — with the exception 
of Hungary, which did not achieve the 
anticipated expenditure consolidation.

147 
The erosion of tax bases, especially in 
2009 in the wake of the sharp eco-
nomic downturn, often wiped out the 
revenue gains from important new tax 
measures. For instance, in 2009 Latvia 
implemented indirect tax consolida-
tion measures with an estimated 
impact of 2.5 % of GDP. In 2013 the 
Commission estimated that these 
measures had been entirely offset by 
falling short-term elasticity. Similarly, 
the tax-neutral reform implemented 
in Hungary in mid 2009 caused an 
estimated deficit slippage of 0.7 % of 
GDP in 2010.

148 
With unchanged deficit targets, a de-
clining tax-to-GDP ratio may create an 
incentive for tax authorities to counter 
falling tax revenue by introducing 
measures other than those agreed 
in the programme negotiations. In 
 Romania, for instance, 97 changes 
were made to the tax code during 
2009-2013, with 51 legislative acts 
enforcing those amendments. The fre-
quency of change created an unstable 
economic climate for both businesses 
and individuals.

Part IV — Programmes met their objectives63

92  This is also not explained by 
the difference in changes of 
the structural balance prior to 
the programme. The 
Commission’s estimates 
indicate that the fiscal 
consolidation started in both 
countries in 2010 with a similar 
consolidation effort.

93  As a result of this transaction, 
Portugal took over the future 
pension liabilities. Although 
these liabilities are not 
recognised as public debt 
according to the statistical 
framework, they negatively 
impact the sustainability of 
public debt. Therefore, the 
measure only appeared to 
improve the debt position of 
the country.

(i) 

In 2010 and 2011 Portugal nation-
alised the private pension funds of 
both Portugal Telecom (improve-
ment of deficit by 1.7 % of GDP) 
and the banking sector (4 % of 
GDP)93.

(ii)  The one-off tax and social security 
arrears recovery scheme put in 
place in Portugal in 2013 temporar-
ily improved the deficit (0.8 % of 
GDP).

(iii)  In 2012 Romania corrected its ex-

cessive deficit by reaching the 3 % 
ceiling. However, the one-off sale 
of telecommunications licences 
had brought in a total of 0.5 % of 
GDP.

(iv)  In Ireland, banking measures 

brought a temporary increase in 
revenue (e.g. fees from the extend-
ed liability guarantee in favour 
of domestic banks, Central Bank 
dividends from one-off financing 
schemes).

154 
According to the Commission, one-
off measures were needed to handle 
short-term pressures, but for targets to 
be met sustainably temporary meas-
ures had to be replaced by permanent 
measures.

151 
An initial structural deficit was indica-
tive of the pace of fiscal consolidation 
in all the beneficiary Member States 
except Ireland. Hungary had the low-
est structural deficit at the start of 
the programme and experienced the 
slowest consolidation; Portugal had 
the highest structural deficit and the 
fastest pace of consolidation. However, 
Ireland is an outlier in this analysis. 
From a similar starting point in 2010 to 
that of Portugal, its structural consoli-
dation rate (net of banking and other 
one-off measures) was just under half 
as fast92.

152 
There was no relationship between 
the initial level of public debt and the 
average fiscal effort made. For in-
stance, Romania’s public debt was the 
lowest in the five Member States, but 
its average fiscal effort was relatively 
high. Ireland and Portugal registered 
very different average efforts despite 
a similar initial public debt.

Countries used one-off 
measures

153 
Fiscal measures that are temporary 
do not lead to a lasting improvement 
in the underlying deficit. Temporary 
measures can be implemented on 
both the revenue and the expenditure 
sides. During the programmes several 
Member States had to resort to one-off 
revenue measures in order to meet 
their deficit targets.

Part IV — Programmes met their objectives64

94  For the purpose of the audit, 
the importance of conditions 
was measured by their 
structural content: high, 
medium or low. See Annex III.

158 
Conditions with a high structural 
content were as likely to be complied 
with by the original deadline as condi-
tions where the structural content 
was lower94. We found that conditions 
with a high structural content tended 
to score most highly for end-of-
programme compliance. Initially, the 
Commission’s reviews did not ‘push’ 
countries to comply with the most im-
portant conditions on time; later, how-
ever, the focus partly shifted towards 
the most important reforms.

Programmes prompted 
reforms, but occasionally 
the desired effects did not 
materialise

159 
To determine the performance of 
a policy, it is necessary to establish 
causality between the policy and the 
effects observed. For instance, the 
impact of reforms aimed at improving 
active labour market policies may be 
delayed in a weak labour market. Our 
analysis was further complicated by 
the fact that so little time has elapsed 
since the end of some of the pro-
grammes. Finally, the conditions often 
represented only a subset of the policy 
measures implemented during the 
programme period.

Compliance with the 
conditions was high

Member States eventually 
complied with at least 80 % 
of conditions

155 
The Commission’s monitoring reports 
show that the Member States met 
the deadlines set in the memoranda 
of understanding with varying de-
grees of success. While Portugal and 
Latvia complied with fewer than half 
of programme conditions on time, 
Hungary complied with almost three 
quarters. In Ireland and Portugal there 
were also significant differences in on-
time compliance between the EU and 
IMF programmes. Although countries 
might not meet an original deadline, 
they did often comply after a certain 
lapse of time.

156 
The Commission did not report on 
time on the compliance status of ap-
proximately 30 conditions (see para-
graph 106).

157 
Where compliance was delayed, this 
was mostly for reasons beyond the 
Commission’s control: lengthy legis-
lative procedures, national authori-
ties’ failure to implement the agreed 
upon reforms, legal issues not initially 
considered, social resistance, etc. 
However, occasionally the initial time 
frame was unrealistic given the scale 
of the reform (e.g. civil service reform), 
the need for intensive cooperation by 
local or regional governments or the 
requirement for complex new IT.

Part IV — Programmes met their objectives65

Reversals were offset by alternative 
reforms, which were often not equiva-
lent in terms of their potential impact. 
For instance, this was the case of com-
pensatory measures for the return of 
the minimum wage to the initial level 
in Ireland, as well as compensatory 
measures for those declared unconsti-
tutional in Portugal (see Box 9).

162 
The programme period was too short 
for some complex reforms to be fully 
implemented before closure. Apart 
from the reversals mentioned above, 
countries continued with complex re-
forms after the end of the programme.

160 
We deemed a condition to have been 
effective if:

(i) 

the reforms were not reversed 
 after the end of the programme 
but have been actively pursued by 
the Member State concerned;

(ii)  the available policy indicators 
or evaluations point to a clear 
improvement in the relevant area; 
and

(iii)  the desired effects were achieved.

161 
The principal concern — that of reform 
reversal in the post-programme period 
— has proved unfounded. At the time 
of the audit, reversals were few and 
concerned mainly public-sector wage 
cuts (Hungary, Romania) and labour 
market reforms (Ireland and Portugal). 
However, this observation does not 
exclude further reversals in the future. 

9
x
o
B

Gradual dilution and reversal of the labour market reforms in Portugal

The most significant labour market reforms were envisaged in Portugal. During the programme Portugal 
indeed carried out a number of reforms that reduced the level of employment protection. However, the 
improvement was not significant enough in international comparison. Already at the onset of the programme 
the reforms were not designed ambitiously enough when compared with the peer countries. For instance, 
Portugal was asked to prepare a proposal to align severance payments with the EU average instead of with 
the set of countries that represent Portugal’s competitors in international trade. Then, during the programme, 
the less ambitious reforms were taken. For instance, the severance payments are now accumulated at 12 days 
per year of service, which was the higher end of the initial interval of 8-12 days per year of service.

The reform agenda was further diluted as some reforms of the dismissal rules were successfully challenged 
in the Constitutional Court. In response, Portugal enacted compensatory measures for those declared uncon-
stitutional, but the Commission did not find that these measures could achieve similar effects to the original 
ones. The programme conditions did not include compensatory measures that would be equivalent in terms 
of their potential impact on flexibility of the labour market. After the end of the programme, some labour 
market reforms already implemented were easily reversed through administrative decisions of the govern-
ment. These decisions were criticised by the Commission in post-programme surveillance reports.

Part IV — Programmes met their objectives 
66

95  We analysed the progress 

achieved by the five countries 
in three areas: labour market 
reforms, the business 
environment and fiscal 
responsibility. We relied on 
international regulatory 
indicators, input indicators 
and the assessments by the 
Commission, the IMF and 
other international 
institutions.

163 
We found95 that there were tangible 
improvements when the programmes 
targeted reforms in the specific  areas 
of active labour market policies, 
labour market reforms or the busi-
ness environment. In some areas the 
programmes helped to encourage 
new reforms (e.g. fiscal responsibility), 
while in others they provided an incen-
tive to accelerate the implementation 
of existing national plans (e.g. business 
environment).

164 
Several conditions, while met, did 
not produce the desired effects. For 
instance, budgetary savings were not 
realised to the extent intended during 
the programme period, and the fiscal 
responsibility framework did not pro-
vide a sufficiently binding anchor for 
fiscal policy (see Box 10).

0
1
x
o
B

When compliance did not deliver the desired effects

 ο In Hungary, the bank support package was largely unused because, in its final form, it was unattractive to 

banks.

 ο In line with the programme conditions, Hungary included cuts in local government expenditure in its 

budget law, but no substantial savings were achieved.

 ο Romania complied with the condition to adopt a public-sector wages framework law, but the compensa-
tion grids, which were one of key elements of this reform, were not applied owing to the lack of budget 
funds.

 ο Ireland and Romania adopted a new fiscal responsibility framework during the programme. However, 

in both cases the Commission reported several shortcomings in implementation. Most importantly, the 
framework was not effective in constraining the government’s fiscal policy in line with the medium-term 
targets.

 ο Employment in the Portuguese public sector was decreased in line with the programme milestones; how-
ever, an unspecified part of this decrease was achieved through the early retirement of civil servants, and 
the budgetary impact was therefore contained.

Part IV — Programmes met their objectives 
67

96  Countries’ competitiveness is 
a multifaceted and complex 
concept. We chose to focus on 
these two indicators because 
they were part of the 
programme projection for all 
countries. This allowed us to 
assess the reasons why 
competitiveness sometimes 
did not evolve as expected.

97  The Income balance records 
financial flows between 
residents and non-residents 
related to income from labour, 
direct investments, and 
portfolio and other 
investments. It also includes 
payments between 
government and non-
residents related to taxes and 
subsidies on products and 
production.

How well did countries 
increase their 
competitiveness?

Competitiveness gains, but 
to varying degrees

165 
One of the programmes’ key under-
lying objectives was to restore external 
balances by enhancing economic com-
petitiveness. The current-account and 
trade balances provide the broadest 
measures of that competitiveness96.

166 
All the programmes achieved a cur-
rent-account adjustment. In four of the 
five countries covered this occurred 
faster than expected. Only the Irish 
adjustment was broadly in line with 
the programme forecast.

167 
The common factor explaining the 
more rapid current-account adjust-
ment was an unexpected improve-
ment in the income balance97. Also 
in Ireland, the evolution of the 
current-account balance in line with 
the forecast can be attributed to an 
overperforming income balance, 
which compensated for major under-
performance in the trade balance (see 
Figure 11).

1 Possible reasons for the rapid adjustment of the current-account balance
1
e
r
u
g
i
F

40

30

P
D
G
f
o
e
g
a
t
n
e
c
r
e
P

d
o
i
r
e
p
e
m
m
a
r
g
o
r
p
r
e
v
o
y
l
e
v
i
t
a
l
u
m
m
u
c

20

10

0

-10

-20

-30

-40

Latvia

Portugal

Hungary

Romania

Ireland

Net Current Transfers gap
Income balance gap
Trade balance gap
Current Account Balance gap

Note: The graph shows the cumulative differences, in percentage points of GDP, between the outcome and the baseline, i.e. the initial pro-
gramme projection. Calculated over the following programme periods: 2009-2011 for Hungary and Romania, 2009-2013 for Latvia and 2011-2015 
for Ireland and Portugal.

Source: ECA, based on European Commission data.

Part IV — Programmes met their objectives 
 
 
 
 
 
68

98  As indicated by various 

macroeconomic indicators of 
competitiveness, such as the 
real effective exchange rate, 
real unit labour costs and 
labour productivity, as well as 
composite indicators such as 
the global competitiveness 
ranking.

99  The main reason was that 
a large share of total Irish 
exports goes outside the euro 
area. Ireland therefore 
benefited from the euro’s 
depreciation against the US 
dollar, which was not part of 
the initial programme 
forecast. The euro's 
depreciation also increased 
the value of imports to Ireland. 
The import content of 
Ireland’s exports — the 
proportion of exports 
produced using imports of 
intermediate goods and 
services — is high, at around 
50 %.

100 The Commission defines 

internal devaluation as policies 
aiming ‘to reduce domestic 
prices either by affecting 
relative export-import prices 
or by lowering domestic 
production costs and thereby 
yielding a real exchange rate 
depreciation.’ Source: 
European Commission: 
Quarterly report on the euro 
area, III/2011, Volume 10, p. 22.

168 
The trade (export/import) balance 
captures more closely the effects of 
the changes in a country’s competi-
tiveness than the current account. The 
trade balance evolved in line with the 
programme forecasts in Portugal and 
Romania. It performed better than ex-
pected in Latvia (an average of 2 % per 
year). However, it was below forecast 
in Hungary (2.8 % per year) and Ireland 
(5.1 % per year).

169 
A number of variables can account for 
fluctuations in the two components 
of the trade balance. These include 
external shocks (affecting exports), an 
unexpected trend in GDP (affecting 
imports) and unexpected swings in 
competitiveness (affecting both).

170 
In Latvia and Romania, competitive-
ness gains98 were significant and ex-
plain why the trade balance had been 
above initial forecasts since 2010. The 
gains are also illustrated by these two 
countries’ increased share of global 
exports.

171 
The other three countries had lower 
than expected competitiveness gains, 
and in all three the share of global ex-
ports had fallen since 2008. Hungary’s 
and Portugal’s exports were below 
the initial forecasts, but Irish exports 
exceeded what was forecast99.

172 
In Portugal and Hungary the trade 
balance adjustment was more or less 
in line with projections, but this was 
achieved only because both exports 
and imports were below the level 
initially expected. Around 80 % of this 
unexpected contraction in imports 
can be explained by GDP underper-
formance. Nevertheless, even for these 
two countries some competitiveness 
gains are apparent; for instance the 
ratio of exports to GDP increased com-
pared with the pre-programme period.

Internal devaluation worked 
through the adjustment of 
the wages of the newly hired

173 
Internal devaluation was a key  element 
of macroeconomic strategy in three 
countries (Latvia, Ireland and Portu-
gal). This is a set of policies  designed 
to restore international competitive-
ness, mainly by reducing prices or 
labour costs100. Public-sector pay and 
job reductions are expected to be fol-
lowed by private-sector pay cuts. This 
should occur because public- sector 
adjustments free up resources, thus 
increasing labour availability for the 
private sector and depressing pay lev-
els in the economy at large.  Reduced 
aggregate demand should contribute 
to the price and wage adjustment in 
the economy. In absence of national 
currencies, internal devaluation is 
a key strategy for adjustment of price 
levels within a currency union.

Part IV — Programmes met their objectives69

174 
In Latvia, internal devaluation worked 
mainly by affecting the pay of newly 
hired workers, while the salaries of 
 incumbent workers in the private 
 sector hardly declined at all. Part of the 
wage adjustment happened through 
the adjustment of undeclared wages, 
but the magnitude was limited (see 
Box 11).

1
1
x
o
B

The impact of internal devaluation on pay levels in Latvia

Internal devaluation was regarded as a key pillar of the Latvian adjustment. One reason why internal devalu-
ation was expected to work was the belief that the labour market is particularly flexible. In practice the reduc-
tion observed in private-sector pay was relatively small101. While wage growth slowed quite rapidly in both 
the public and private sectors as the crisis developed during 2008, turning negative in 2009102, both the depth 
and the duration of negative wage growth was much smaller in the private sector. The largest year-on-year 
decline in private-sector pay was 6.6 % (in October 2009), while the largest public-sector fall was just over 26 % 
(in November 2009). The aggregate wage dynamics do not capture the underlying process of the adjustment 
or allow for the possible explanation that it was partly located in the sphere of undeclared wage payments 
(‘envelope wages’).

The analysis of data on individuals pay103 shows that the wages of workers hired during the recession were 
significantly lower than those enjoyed by incumbent workers, which hardly declined at all. This result is con-
sistent with evidence found in the relevant literature suggesting that wages at recruitment are more cyclical 
than those of incumbents and offer a mechanism for reducing costs. Job cuts and an increase in the share of 
part-time work also played a part.

The retrospective survey of employers gives evidence that the ‘true’ wage-cost decline was between 6 % and 
11 % in 2008-2009 and almost flat (below 2 %) in 2009-2010. Therefore, the decline was larger than suggested 
by official statistics (growth by 1.3 % in 2009 and decline by 2.9 % in 2010). This indicates that the private-
sector pay did respond to the recession, but the response was not sufficient to prevent a large and prolonged 
fall in employment.

Source: ECA, based on a study by Andrejs Semjonovs, Alf Vanags and Anna Zasova, What happened to wages in Latvia’s ‘internal devaluation’?, 
Baltic International Centre for Economic Policy Studies.

101  It is the private sector, and in particular the tradable sector, where wage developments determine competitiveness.

102  March 2009 in the public sector and July in the private sector.

103  Anonymised records from the Latvian State Social Insurance Agency.

Part IV — Programmes met their objectives 
70

104 This challenge was also 

recognised by the European 
Systemic Risk Board, in its 
Recommendation 2011/1, as 
the risk of ‘hindered monetary 
policy transmission channels’ 
stemming from high domestic 
lending in foreign currencies.

105 Recommendation 2011/1 of 
the European Systemic Risk 
Board.

106 For example, at the end of 
June 2013 the Hungarian 
central bank considered the 
exposure of households and 
small and medium-sized 
enterprises to foreign 
exchange rates to be very 
high.

Foreign exchange loans 
remained a challenge

175 
A common denominator in all three 
balance-of-payment countries was the 
high ratio of foreign currency loans to 
total outstanding loans.

176 
During the crisis, central banks could 
not let the domestic currency depreci-
ate to restore external competitive-
ness. The concern was that depre-
ciation might curb the capacity of 
borrowers to service their debts in for-
eign currencies and hence affect the 
stability of the financial system, which 
would offset the economic benefits of 
the policy104. Owing to the high level 
of foreign currency lending, countries 
also tended to lose more international 
reserves during the crisis105.

177 
Although these issues extensively 
affected the available policy choices, 
the EU’s financial assistance did not 
include any conditions for the national 
authorities to address the manage-
ment of domestic lending in foreign 
currencies.

178 
During the programmes, the  total 
 value of foreign currency loans 
remained a concern106. In Romania, 
foreign currency private-sector bor-
rowing overtook borrowing in the do-
mestic currency. The share of foreign 
currency borrowing started to decline 
in 2012 in Hungary, but not until 2014 
in Romania.

Part IV — Programmes met their objectivesConclusions and 
recommendations

71

Pre-crisis surveillance

Programme management 
processes

179 
Before the crisis there was already 
an EU framework geared towards 
monitoring the public budgets in the 
Member States. Warning the Council 
about mounting fiscal imbalances was 
the Commission’s responsibility. The 
Commission was not prepared for the 
first requests for financial assistance.

180 
The Commission fell short in its task 
of assessing fiscal imbalances in the 
run-up to the crisis, when it estimated 
public budgets to be stronger that 
they actually turned out to be. One key 
weakness of the Commission’s assess-
ments prior to 2009 was the lack of re-
porting on the build-up of contingent 
public-sector liabilities, which often 
became real liabilities during the crisis. 
Nor did the Commission pay sufficient 
attention to the link between large for-
eign financial flows, the health status 
of banks and, ultimately, government 
finances. These surveillance failings 
meant that the Commission found 
itself unprepared for the task of pro-
gramme management when requests 
for financial assistance started to arrive 
(see paragraphs 35 to 47).

181 
The Commission managed to take 
on its new programme management 
duties, which included holding talks 
with the national authorities, prepar-
ing programme forecasts and financ-
ing gap estimates and identifying the 
necessary reforms. Given the initial 
time constraints and lack of prior ex-
perience, this was an achievement (see 
paragraphs 45 to 50).

182 
The Commission was thorough in 
obtaining the necessary information. 
It increasingly marshalled internal 
expert ise and engaged with a wide 
range of stakeholders in the benefi-
ciary countries. However, the Commis-
sion did not mobilise the same degree 
of expertise in 2008 and 2009 as it 
did later in connection with the euro 
area programmes, nor could it easily 
acquire external expertise. The Com-
mission’s human resources policy was 
not designed to deal with such a large 
and important European project as the 
resolution of the sovereign debt crisis 
clearly was (see paragraphs 52 to 54).

Conclusions and recommendations

72

Recommendation 1

Recommendation 2

The Commission should establish an 
institution-wide framework allow-
ing rapid mobilisation of appropriate 
 human resources and expertise avail-
able in the different parts of the Com-
mission or outside the Commission 
if a financial assistance programme 
emerges.

Programme teams should be required 
to record systematically the key as-
sumptions made and work done in 
preparing forecasts. The Commission 
should put in place tools to facilitate 
documentation. This can include the 
automatic logging of changes made by 
forecasters.

In relation to Regulation (EU) 
No 472/2013 of the European Parlia-
ment and of the Council, the Commis-
sion should develop procedures for 
the enhanced surveillance and man-
agement of possible new financial as-
sistance programmes. The procedures 
should explicitly cover the scenario 
where these activities will be carried 
out by the EU institutions only.

Quality control procedures should in-
corporate more checks on the key un-
derlying assumptions and parameters 
chosen by country desks. For instance, 
a reference model-based forecast 
could be used in the quality review to 
flag areas where a judgement-based 
forecast significantly departs from 
the model-based forecast. This would 
 allow for more targeted quality checks.

183 
The production of macroeconomic and 
deficit forecasts was not a new activ-
ity. The Commission used an existing 
and rather cumbersome spreadsheet-
based forecasting tool. Quality control 
was limited mainly to reconciling the 
various parts of the forecasts, with no 
inquiry by management into the rea-
soning behind the forecasting assump-
tions. It was very difficult to assess the 
plausibility of key assumptions such as 
fiscal multipliers, not only in any sub-
sequent review but also, by manage-
ment, during the actual production of 
forecasts (see paragraphs 55 to 70).

184 
The programmes were mostly soundly 
rooted in EU policy priorities and 
current economic knowledge. How-
ever, the Commission’s procedures 
were commonly affected by a lack of 
systematic record-keeping. Proced-
ures were not geared towards the 
retrospective evaluation of decision-
making. This can be partly explained 
by the crisis context, the initial time 
constraints and the novelty, for the 
Commission, of this type of pro-
gramme management. The availability 
of records improved with time, but 
even for the most recent programmes 
some key documents were missing 
(see paragraphs 71 to 75).

Conclusions and recommendations

73

Recommendation 3

To ensure the factors underlying 
programme decisions are internally 
transparent:

(a)  staff involved in programme 
management should keep all 
necessary records in relation to the 
features of the programme design, 
the selection of conditions and 
the Commission’s monitoring of 
programme implementation; and

(b)  programme heads should be 

required to document key pro-
gramme decisions in a decision log 
so that they are easily traceable.

187 
The risk of treating different coun-
tries inconsistently or demanding 
unnecessary reforms remains a chal-
lenge to the process of programme 
management. The crisis nature of the 
programmes has made it difficult to 
develop detailed guidelines to restrict 
the room for manoeuvre of pro-
gramme teams and national author-
ities when preparing and negotiating 
documents such as Council decisions 
or memoranda of understanding. Any 
solution must therefore be based on 
strengthening supervision of the work 
of Commission staff, and must go hand 
in hand with improvements to the 
review process.

188 
The work of Commission staff cul-
minates in a set of programme docu-
ments which provide the basis for 
decisions by the Commission (or the 
Commissioner on its behalf) and the 
Council. Both the programme docu-
ments and the underlying analysis 
have improved significantly since the 
end of 2008. However, even the more 
recent programme documents lacked 
some essential information (see para-
graphs 97 to 99).

185 
The conditions in memoranda of 
understanding were mostly justified 
by specific reference to the Council 
decision. However, conditions were 
not sufficiently focused on the general 
economic policy conditions set by the 
Council (see paragraphs 76 to 79).

186 
The conditions for assistance were 
managed differently in each pro-
gramme. In some programmes they 
were less stringent overall, which 
made compliance easier. When com-
paring countries with similar structural 
weaknesses, it was found that the 
required reforms were not always in 
proportion to the problems faced or 
that they pursued widely different 
paths. Some, but not all, countries’ 
deficit targets were relaxed more than 
the economic situation would appear 
to justify (see paragraphs 80 to 91).

Conclusions and recommendations

74

189 
Common to all areas of programme 
management is a reliance on the 
judgement of experts in specific 
domains. The key documents result-
ing from expert analysis were subject 
to review, but this was insufficient in 
several respects. The underlying calcu-
lations were not reviewed by anyone 
outside the programme team, the 
work was not scrutinised and the qual-
ity control itself also suffered from the 
lack of documentation (see paragraphs 
93 to 96).

Recommendation 4

The Commission should ensure that 
proper procedures are in place for 
the review of programme manage-
ment and the content of programme 
documents, taking into account 
available resources. Horizontal review 
should function as a peer review of 
the work done by programme teams. 
It should pay particular attention to 
horizontal aspects, such as the similar 
treatment of countries, and report to 
management.

190 
The Commission is responsible for 
monitoring programme implementa-
tion. The main shortcoming in this 
area relates to the monitoring of fiscal 
implementation. Each programme’s 
deficit targets were set on the basis of 
the ESA deficit. While this ensures full 
consistency with the excessive deficit 
procedure, it also means that, when 
a decision on programme continua-
tion is to be taken, the Commission’s 
reporting concerning deficit target 
compliance is subject not only to 
measurement uncertainty, but also to 
forecast uncertainty (see paragraphs 
100 to 103).

Recommendation 5

For budget monitoring purposes the 
Commission should include, in the 
memoranda of understanding, vari-
ables that it can collect with short time 
lags, such as a quarterly cash balance 
and/or an arrears target.

Conclusions and recommendations

75

191 
The manner of reporting on compli-
ance with conditions was unsystem-
atic. Many different terms were used 
to convey non-compliance, leading 
to confusion. Some conditions were 
not reported on. A few conditions 
were reported to have been met 
when this was not in fact the case (see 
paragraphs 104 to 107). An effective 
intern al review (see recommenda-
tion 4) should reduce the risk of these 
 errors. However, our work points to 
other weaknesses in how conditions 
were used. Instalments were released 
even though on-time compliance 
varied greatly between countries (see 
paragraph 200). Programmes included 
conditions, which were unable to 
guarantee the actual implementation 
of reforms or were not truly important 
for crisis resolution and repayment of 
the loans.

Recommendation 6

The Commission should clarify the role 
of programme conditions.

(a)  Programme documents should 

set out the relative importance of 
conditions as prerequisites for the 
release of instalments.

(b)  Conditions should focus on re-

forms with high and sustainable 
impacts. If instalments are made 
conditional upon preparatory 
steps, the memorandum of under-
standing should include conditions 
that guarantee the subsequent 
adoption of reforms.

(c)  Conditions should be used spar-

ingly, and should clearly relate 
to reforms that are essential to 
crisis resolution or the repayment 
of assist ance. Programme teams 
should be obliged to justify the 
need for each and every condition. 
The selection of conditions should 
be a matter for internal review.

(d)  Conditions should be defined so 

that compliance can be monitored 
with certainty. When conditions 
are set, programme teams should 
seek to identify data that may later 
be used to assess the results of the 
programme measures.

192 
All programme teams established well-
functioning informal cooperation with 
the IMF and the ECB. The lack of formal 
cooperation arrangements was due to 
the time frame, which was expected to 
be brief, and possibly to the preferen-
ces of the institutions (see paragraphs 
108 to 114).

Recommendation 7

If the Commission has to cooperate 
with the other programme partners, 
it should aim to formalise interinsti-
tutional cooperation. The terms of 
reference should specify mechanisms 
for sharing information, handling 
confidential information and resolving 
differences in opinion.

Conclusions and recommendations

76

Borrowing operations

193 
The Commission’s issuance of debt was 
an accomplishment, as all bond issues 
attracted sufficient demand from the 
capital markets to be sold out. The 
Commission made the bond issues 
on time. The final cost of debt was in 
line with the market and peer levels. 
In terms of actual procedure, pricing 
levels were sometimes higher than the 
pricing level initially indicated by the 
lead banks (see paragraphs 115 to 122).

194 
There were a number of gaps in the 
debt management process in the 
initial years. These omissions can be 
partly explained by the limited num-
ber of Commission staff assigned to 
this activity. The gaps did not have 
a demonstrable impact on the out-
come of borrowing. The gaps were 
largely addressed in the later bond is-
sues, so the recommendation concerns 
weaknesses identified as outstanding 
during the audit (see paragraphs 123 
to 136).

Recommendation 8

In relation to the debt management 
process the Commission should:

(a)  make more transparent how issues 

are allocated;

(b)  keep systematic records of all its 

main issuance-related dealings 
with lead banks;

(c) 

insist on commitments by lead 
banks during the pre-issuance and 
post-issuance phases; and

(d)  perform regular forward market 
analysis to determine the charac-
teristics of each issue and assess 
the liquidity of the secondary 
market.

Programme achievements

195 
The analysis of achievements should 
be the subject of further economic 
research to improve understanding of 
how countries tackled the need for ad-
justment and how its impact could be 
more evenly distributed in the future.

Use of financial assistance

196 
In the five countries, the overall level 
of assistance funding remained as 
planned. However, there were some 
differences in comfort level. The early 
programmes and the Irish programme 
included a substantial safety margin. 
This allowed the countries concerned 
to repay more expensive IMF loans 
before their due date, to reduce 
programme financing or reliance on 
their own resources or to exceed their 
foreign exchange reserve targets (see 
paragraphs 138 to 139).

Conclusions and recommendations

77

197 
In contrast, Portugal faced signifi-
cantly higher financing requirements 
than initially estimated, and  financing 
was tight during the Portuguese 
programme. To meet its require-
ments, Portugal had to rely on market 
finan cing. The financial assistance to 
Romania was sufficient to cover the 
country’s balance-of-payment needs, 
but financing of the Romanian public 
sector proved to be more problematic 
(see paragraphs 140 to 143).

Fiscal adjustment

198 
With some exceptions, revised deficit 
targets were met. The actual compo-
sition of fiscal consolidation broadly 
corresponded to what was initially 
planned, but the erosion of tax bases 
wiped out the revenue gains from 
important new tax measures taken in 
2009 (see paragraphs 144 to 148).

199 
Each country’s structural deficit im-
proved, but the pace varied, largely 
because the starting points were 
different. Some fiscal consolidation 
had non-lasting results on the deficit 
because Member States used one-off 
measures to meet their targets (see 
paragraphs 149 to 154).

Structural conditions

200 
The degree of Member State compli-
ance with the deadlines set in the 
memoranda of understanding varied. 
Where compliance was delayed, this 
was mostly for reasons beyond the 
Commission’s control. Occasionally the 
initial time frame was too ambitious 
given the scale of the reform. Although 
countries might not meet an original 
deadline, they did often comply after 
a certain amount of time had elapsed 
(see paragraphs 155 to 157).

201 
Important conditions were as likely 
to be met by the original deadline 
as less important ones. At the end of 
a programme the compliance rate with 
more important conditions tended 
to be higher, which indicates that the 
Commission’s focus partly shifted 
towards the most needed reforms as 
programmes neared closure (see para-
graph 158).

202 
The programme conditions success-
fully prompted reforms, and these 
mostly continued after the end of 
the programme, with reversals being 
rare as of the time of the audit. There 
were tangible improvements where 
the programmes targeted reforms in 
certain specific areas. In some cases 
the EU helped to encourage new 
reforms, while in others the assistance 
programmes provided an incentive to 
accelerate the implementation of ex-
isting national plans. However, compli-
ance with a number of conditions still 
did not produce the effects in antici-
pation of which they were included 
in the programme (see paragraphs 
159 to 164).

Conclusions and recommendations

78

Macroeconomic achievements

203 
As well as seeking to consolidate fiscal 
accounts and stabilise the financial 
sector, the programmes aimed at 
restoring external balance by enhan-
cing economic competitiveness. In 
four of the five countries audited, 
the current-account adjustment was 
more rapid than expected. This can 
be ascribed, mainly, to an unexpected 
improvement in the income balance 
and, to a lesser extent, to a similarly 
unexpected improvement in the trade 
balance. Imports were lower than 
expected, mainly because of a fall in 
GDP. Where exports were also lower 
than expected, external factors (mainly 
a fall in the GDP of trading partners) 
were usually the cause (see paragraphs 
165 to 172).

204 
Internal devaluation was a key ele-
ment of macroeconomic strategy in 
three countries, where a set of policies 
was devised to restore international 
competitiveness by focusing mainly on 
reduced labour costs. In practice, the 
pay adjustment applied to those newly 
hired during the recession, but the 
wages of incumbent workers hardly de-
clined at all (see paragraphs 173 to 174).

Recommendation 9

The Commission should improve its 
understanding of how the countries 
adjusted so that greater attention 
can be paid to the lessons learnt from 
the programmes. Issues that could be 
further investigated include:

(a)  impact of the measures to regain 
competitiveness, such as internal 
devaluation;

(b)  social impacts and burden sharing 
of the adjustment programme; and

(c)  sequencing of adjustment 

measures.

This Report was adopted by Chamber IV, headed by Mr Milan Martin CVIKL, Member 
of the Court of Auditors, in Luxembourg at its meeting of 11 November 2015.

For the Court of Auditors

Vítor Manuel da SILVA CALDEIRA
President

 
 
 
Annexes

79

I
x
e
n
n
A

Reasons motivating the request for assistance

Each crisis situation was classified using the categories suggested in the academic literature1.

Member 
State

Type of crisis

Key reasons motivating the government request for assistance

Hungary

Balance-of-payment crisis

Latvia

Balance-of-payment crisis 
Banking crisis

Romania

Balance-of-payment crisis

The Lehman Brothers collapse generated a downward shift in investor sentiment in early October 2008. 
This led to a sell-off of government securities, a failed bond auction and sharp currency depreciation. The 
stress in foreign exchange markets prompted liquidity pressures within banks, which faced difficulties in 
rolling over foreign exchange swaps.

Hungary requested financial assistance because of the concern that the evolving panic would upset mar-
ket mechanisms to the extent a sudden disruption in Hungary’s external financing capacity would occur.

Source: Commission initial programme documents (2008); IMF ex post evaluation Hungary (2011).

During the 3 months prior to the request for assistance, deposits had fallen by 10 %. This was led by a run 
on the Parex Bank, which encountered severe liquidity problems after it lost more than a quarter of its 
deposits. In the same period, official reserves fell by almost 20 % as the central bank sold foreign currency 
to defend the currency peg. In November the government decided to step in and nationalise the Parex 
Bank. In December, the government imposed restrictions on deposit withdrawals from Parex.

According to the prime minister, Latvia was in need of financial assistance for three reasons: to manage 
the Parex Bank, to finance the budget deficit and to stabilise the financial market.

Increasing concerns regarding Latvia’s financial system and external debt resulted in the balance of pay-
ments and banking crises.

Source: Latvia’s IMF request (2009); Aslund, Anders and Valdis Dombrovskis (2011), How Latvia came 
through the financial crisis, Peterson Institute for International Economics; Blanchard, Griffiths and Gruss 
(2013), ’Boom, bust, recovery: forensics of the Latvia crisis’, final conference draft to be presented at the 
Fall 2013 Brookings Panel on Economic Activity.

With the onset of the 2008 global financial crisis, domestic financial markets and the banking system 
came under severe stress. Access to external funding was limited, leading to a spike in interest rates. The 
slowdown in capital flows led to large exchange rate depreciation of over 15 %, deteriorating asset quality 
and the further weakening of bank balance sheets.

The central bank intervened to stabilise the Romanian leu. Romania’s credit rating was downgraded to 
below investment grade, which increased both the risk premium and borrowing costs. Sovereign yields 
jumped to 9 %.

Against a background of strongly increased risk aversion, increased pressures on the exchange rate and 
increasingly restricted access to the bond market for public borrowing, the Romanian authorities made 
a request for financial assistance in March 2009.

Source: IMF, Romania: request for a stand-by arrangement (2009); IMF ex post evaluation Romania (2012); 
European Commission, ‘Overall assessment of the two balance-of-payments assistance programmes for 
Romania’, European Economy, Occasional Papers 156 (2013).

 
80

Type of crisis

Key reasons motivating the government request for assistance

Annexes

Member 
State

I
x
e
n
n
A

Ireland

Banking crisis

Portugal

Sovereign debt crisis

From late 2007, investor confidence in Ireland’s property sector had evaporated amid concerns about over-
supply and a price bubble. This left Ireland facing two problems: a sharp decline in cyclical construction-
related revenues and the sudden emergence of large losses in the domestic banking system.

In 2008-2010 Ireland had taken major measures to strengthen its banking sector. It provided government 
guarantees of domestic banks’ liabilities. It injected capital amounting more to than 20 % of its GDP 
into the banking sector. The National Asset Management Agency took over banks’ distressed land and 
property development assets.

However, the government’s obligations to the financial sector had pushed spreads on government bonds 
to historic highs and significantly reduced market access for the Member State.

Source: Ireland: letter of intent (2010); IMF, Ireland: request for an extended arrangement (2010); European 
Commission (2011).

The period before the request for financial assistance was marked by unfavourable developments in 
public finances and a worsening economic outlook. This led to a deterioration of confidence and rising 
market pressures on Portuguese debt, accentuated by the negative developments in euro area sovereign 
bond markets.

As market access tightened, the government had increasingly resorted to shorter-term security issuances 
and other types of financing (such as private placement, syndicated issue and substantial short-term 
financing from domestic banks). In early May 2011, Portuguese 10-year spreads over Bunds increased to 
650 basis points.

Amidst consecutive downgrading of its sovereign bonds by credit rating agencies, Portugal became un-
able to refinance itself at rates compatible with long-term fiscal sustainability.

Source: European Commission, ‘The economic adjustment programme for Portugal’, European Economy, 
Occasional Papers 79, (2011); IMF, Portugal: request for arrangement under the extended fund facility (2011).

1  Claessens and Kose (2013); Laeven and Valencia (2012); Kaminsky and Reinhart (1999).

 
Annexes

81

I
I
x
e
n
n
A

The lending facilities for the five countries

Balance of  
payments assistance

European Financial Stabilisation  
Mechanism (EFSM)

European Financial  
Stability Facility (EFSF)

Institutional form EU mechanism

EU mechanism

Private company owned  
by euro area countries

Capital structure

Guaranteed by the EU budget

Guaranteed by the EU budget

Guarantees from euro area countries

Lending capacity 
in euro

50 billion euro

60 billion euro

440 billion euro

Instruments

Loans, credit lines

Loans, credit lines

Loans, bond purchases on the  
primary and secondary markets

Duration

Permanent mechanism

Temporary mechanism

Temporary mechanism

Council, acting by qualified majority voting on proposal from European Commission

EFSF Board of Directors  
(i.e. members of the Eurogroup)

Article 143 TFEU

Article 122 TFEU

Intergovernmental decision

Main decision- 
making bodies

Legal basis  of 
financing

Source: ECA.

The table does not include the other two facilities — intergovernmental loans to Greece and the European Stability 
Mechanism — which were put in place to provide financial assistance to euro area Member States.

 
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Audit methodology

Identification of the audit criteria

1.  We derived the good management practices and evaluation criteria from evaluations of IMF programmes, 

ex post evaluations of the EU’s balance-of-payments assistance to non-EU countries, previous Court reports 
on macrofinancial assistance, guidelines and other publications from independent institutes and think 
tanks, and academic research. Table 1 provides the most important source documents.

Table 1 — Key sources of audit criteria

IMF and Independent Evaluation Office of the IMF

International Monetary Fund guidelines on conditionality (2002); Principles underlying the guidelines on conditionality (2006);  
2011 review of conditionality (2012)

Fiscal adjustment in IMF-supported programs (2003)

Evaluation report: The IMF and recent capital account crises: Indonesia, Korea, Brazil (2003)

Evaluation report: Structural conditionality in IMF-supported programs (2007)

Structural conditionality in IMF-supported programs: background documents (2007)

Mauro, P., Chipping away at public debt, IMF, 2011

European Commission

Guidelines on the programming, design & management of general budget support (2007)

Final report: Meta-evaluation of macro-financial assistance operations (2004-2008) (2009)

Guidelines for the ex post evaluation of macro-financial assistance and balance of payments operations (2010)

Evaluation of Directorate-General for Economic and Financial Affairs’ fiscal surveillance activities (2010)

European Court of Auditors

Special Report No 5/2001: Counterpart funds structural adjustment support earmarked for budget aid (seventh and eight EDFs)

Special Report No 2/2005: EDF budget aid to ACP countries: the Commission’s management of the public finance reform aspects

Special Report No 11/2010 : The Commission’s management of General Budget Support in ACP, Latin American and Asian countries

 
Annexes

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2. 

To identify the best practices in the area of public debt management, investor relations and transparency in 
debt issuance, we drew on the relevant work and guidelines of the following organisations:

(a) 

the IMF and the World Bank, in particular the various versions of the guidelines on public debt man-
agement (2001, 2003, 2007 and 2014) and on the use of syndications (2010 and 2013);

(b)  the Organisation for Economic Cooperation and Development, in particular the cross-country analysis 

of government debt issuance procedures (2009);

(c) 

the Bank for International Settlements; and

(d)  private-sector associations such as the International Capital Market Association, the Association for 

Financial Markets in Europe and the Institute of International Finance.

Analysis of structural conditions

3. 

The analysis of structural conditions was sample based (see Table 2). The areas were selected after evaluat-
ing their relative importance for each programme.

Table 2 — Sample overview

Number of analysed conditions

Approximate coverage  
(estimate by extrapolation from the sample)

Thematic coverage

Public financial management  
(e.g. fiscal responsibility, public procurement)

Public service reform and/or wage bill

Pension

Structural funds

State-owned enterprises,  
privatisation, public–private partnerships

Business environment

Labour market (wage setting,  
active labour market policies, unemployment support)

Financial sector (capital adequacy ratios, banking surveillance)

Hungary

Latvia

Romania

Ireland

Portugal

44

73 %1

56

38 %

67

39 %

59

15 %

135

34 %

x

x

x

x

x

x

x

x

x

x

x

x

x

x

x

x

x

x

x

x

x

x

x

x

x

x

x

x

1  73 % of conditions represent all structural conditions. The remaining 27 % were only fiscal-related conditions.

Source: ECA.

 
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4. 

Similar conditions in the different versions of the memoranda of understanding were grouped to avoid 
unnecessary repetitions. The share of the grouped conditions to the number of conditions in the different 
memoranda of understanding was used to measure the persistence of conditions.

5. 

The grouped conditions were classified in three categories of structural content:

(i)  Low structural content: this category covers conditions that would not bring about any meaningful 

economic changes by themselves. However, these conditions can serve as preparatory steps for more 
significant reforms. Examples include: (i) one-off discovery activities such as a single evaluation; (ii) 
preparation and publication of plans or strategies; and (iii) continuation of given activity.

(ii)  Medium structural content: this category covers conditions that can potentially have an immediate 

significant effect on the behaviour of some group of economic agents (e.g. public officials, enterprises, 
consumers, employees, and holders of licences). However, for these effects to be long lasting, addi-
tional follow-up measures would be required. This category includes four types of conditions. Firstly: 
conditions requiring that the executive branch of the government take actions that are likely to have 
an immediate effect. Such conditions can even have extremely significant macroeconomic effects 
(for instance, if the government decides to reduce the minimum wage), but such conditions are easily 
reversible. Secondly: conditions that require the government to repeatedly carry out some activity (e.g. 
regular budgetary monitoring). Thirdly: conditions requiring implementation of various administrative 
measures such as reorganisation within the central government, or measures leading to the implemen-
tation of existing legislation. Fourthly: all one-off actions.

(iii)  High structural content: this category covers conditions that would bring long-lasting changes in the 
economy by themselves. Such conditions can have very broad and significant effects, but the effects 
can also be concentrated on a few economic actors. Typical conditions in this category require legisla-
tive changes by the national Parliament. This category also includes significant changes in the insti-
tutional landscape, such as establishment of fiscal council or reorganisation of local government, and 
privatisation1.

6.  Compliance was assessed against the original deadline and against the implementation status at the time 

of the audit. The assessment was usually based on the available monitoring reports. The following types of 
conditions were not considered in the analysis of compliance:

(i)  vague conditions — i.e. conditions that did not allow for proper classification by the structural content;

(ii)  permanent conditions — i.e. conditions that require that certain activities be performed at each quar-

ter; and

(iii)  conditions with no clear deadlines.

1  Nationalisation or banking support measures are not included in this category.

 
Annexes

85

7. 

To account for situations of unobtainable compliance status, all statistical tests were always performed at 
least twice: (i) on the basis of data records without those where compliance status could not be obtained; 
and (ii) on the basis of all data records with missing values treated as non-compliance.

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Cost of the debt

8.  Concerning the pricing of the borrowings, the swap asset rates were used as the indicator of what markets 

considered as the prevailing risk-free yield of a given maturity at the time of issuance. The average of bid 
and ask swap rates (i.e. mid-swap level) was used as the benchmark for the issue yield achieved by the EU 
and peer issuers2. The data was obtained from Bloomberg or, if not available, calculated as the difference 
between the issue yield and the mid-swap level on the announcement date.

2 

The EIB, the EFSF, Kreditanstalt für Wiederaufbau.

 
Reply of the  
Commission

86

Executive summary

I
The Commission welcomes this ECA performance 
audit of the programmes supported by balance-
of-payments (BoP) and European Financial Stabil-
ity Mechanism (EFSM) financial assistance. These 
programmes achieved their core economic objec-
tives, which were for countries to return to financial 
markets, achieve sustainable public finances and 
return to growth leading to a fall in unemployment.

The impact and evolution of the crisis was unpre-
cedented, both in Europe and globally. Predicting 
the full consequences of the rapid unwinding of 
imbalances in advance was very difficult. In such 
crisis conditions, standard economic reaction func-
tions lose their ability to adequately describe the 
interrelationships between a number of economic 
variables. The Commission, and the EU, had to act 
quickly in the face of very high uncertainty and sys-
temic sovereign and liquidity risks that challenged 
the stability of the whole financial system and the 
solvency of sovereigns.

At the onset of the crisis, a multilateral surveil-
lance framework was already in place, but it did not 
prove fully adequate. Although the Commission 
had limited experience of the type and scale of 
intervention needed, it quickly developed a toolkit 
for crisis resolution. The BoP financial assistance 
programmes for EU Member States were put in 
place urgently and under difficult conditions. The 
EFSM programmes faced the same urgency due 
to the higher risk of spillovers to other euro area 
countries and the additional difficulty of being 
financed through financial instruments that had 
just been created. The Commission faced acute 
staff resource constraints, and had a steep learning 
curve. The programmes were complex instruments 
that addressed unpredictable crisis situations.

The input of the recipient countries in the pro-
gramme design and evolution was critical. It reflects 
not just their different circumstances but also differ-
ent political preferences, and is the most important 
factor in ensuring that they retain ownership over 
the reform programme. Without ownership, the 
probability of a programme succeeding is substan-
tially reduced.

In comparing the programmes, it is also important 
to take into account recipient countries’ different 
underlying circumstances and political, adminis-
trative and institutional constraints, and how they 
changed over time. Countries may have structural 
weaknesses that appear similar on the surface but 
that nevertheless are best addressed through dif-
ferent sets of policies. The flexibility to tailor and 
adjust the programmes to the needs and con-
straints of individual countries is critical to their suc-
cess. The quality of a programme cannot be evalu-
ated on the basis of benchmarking the number of 
structural conditions.

The Commission has already made substantial pro-
gress during the programmes under consideration 
in this audit and since they ended. This includes the 
mobilisation of additional expertise and financial 
resources, as well as the strengthening of EU eco-
nomic governance and financial assistance mech-
anisms. The Commission intends to build on these 
changes and effect further improvements, as set 
out in its response to the audit recommendations.

III
A well-established fiscal surveillance framework 
was already in place in the pre-crisis period. The 
magnitude and nature of the 2007-2008 global 
financial crisis was unprecedented. This determined 
the abrupt and disorderly materialisation of imbal-
ances in several EU countries.

The crisis showed that the pre-crisis surveillance 
framework was not fully adequate in identifying 
the risk in the underlying fiscal positions in times of 
unprecedented economic crisis. It also highlighted 
the extent of spillovers between countries and the 
need to take a wider approach to surveillance in 
the banking sector and wider macroeconomy. The 
reaction of financial markets — which was critical 
in the acceleration of the crisis — was, however, 
a new and particularly difficult effect to predict. 
At the point when countries applied for assistance, 
behind-the-scenes monitoring of a deteriorating 
situation had been under way and the Commission 
was in close contact with the national authorities.

Reply of the Commission 

87

It is for the recipient Member State, not the Com-
mission, to make a request for a financial assistance 
programme. Also, the normal surveillance frame-
work entails a more limited role for the Commission 
in terms of monitoring national economic and fiscal 
policy decisions and providing policy recommenda-
tions than under programme conditions.

The response to the crisis was immediate and com-
prehensive. It included the further strengthening 
of the EU’s overall economic governance with an 
integrated system of European financial supervi-
sory authorities (the European Systemic Risk Board 
(ESRB), the European Banking Authority (EBA), the 
European Securities and Markets Authority (ESMA) 
and the European Insurance and Occupational 
Pensions Authority (EIOPA)) and regulatory archi-
tecture for financial institutions (i.e. banking union). 
The ‘six-pack’ and ‘two-pack’ were also introduced, 
addressing the surveillance weaknesses that the cri-
sis unveiled. More specifically, the six-pack included 
the macroeconomic imbalances procedure, mak-
ing the monitoring of macroeconomic and finan-
cial imbalances a key part of the EU’s economic 
surveillance.

The fact that the actions of the Commission were 
not undertaken in a vacuum but are framed by com-
plex institutional settings is not adequately taken 
into account in the assessment of the Commission’s 
performance. The role of the International Mon-
etary Fund (IMF) and — for the euro area countries 
— the European Central Bank (ECB) in the prepar-
ation and monitoring of the programmes is under-
played. Nor is the role of the Council as the primary 
decision-making body given due prominence.

IV
Macroeconomic and budgetary out-turns for 2008 
have in general differed considerably from initial 
projections in the forecasts of a very large number 
of institutions, including the Commission. This is 
linked with the abrupt unwinding of imbalances 
and the unprecedented nature of the crisis, today 
generally accepted to have been a tail event, i.e. 
a very unlikely outcome in the distribution of pos-
sible outcomes. Furthermore, forecasts are always 
based on the information available at a certain 
point in time, therefore subsequent developments 
and data revisions naturally change the situation 
and outlook.

It must be recognised that forecasting is not an 
exact science. The Commission’s forecasts have 
a good track record of accuracy.

The pre-crisis EU economic governance framework 
focussed primarily on fiscal policy, leaving the 
monitoring of financial risk, in particular, to cen-
tral banks and national supervisory authorities. As 
a result of the absence of an integrated European 
supervisory and regulatory architecture for financial 
institutions, key risks were not flagged in a sys-
tematic way. Notable progress in addressing these 
institutional and governance shortcomings has 
been made since the crisis. The supervisory frame-
work has been overhauled and closer contact has 
been established between the Commission and the 
newly established ESRB and the European supervi-
sory authorities.

Nevertheless, the fact that, as a consequence of the 
unprecedented nature and magnitude of the finan-
cial crisis, governments took measures in support of 
the financial sector which had a sometimes sub-
stantial impact on public finances could not easily 
have been foreseen in advance.

V
The macroeconomic surveillance framework is 
a complementary process which does not form 
part of the Stability and Growth Pact (SGP). The SGP 
consists of a set of legal and political acts relating to 
fiscal surveillance. At the onset of the crisis the SGP 
was 10 years old, and had just been revised in 2005 
in order to give a more prominent role to the under-
lying fiscal stance. The Commission is committed to 
learning from the shortcomings that became appar-
ent, and revised it further in 2011, 2013 and 2014.

Making the link between the SGP and the Com-
mission’s preparedness to administer programmes 
does not take into account the point that both the 
reforms to the SGP and introduction of macro-
economic surveillance served to address the 
shortcomings in surveillance mechanisms. This 
allows imbalances to be identified in time to take 
the policy decisions needed to make countries 
better prepared to face a crisis. The management 
of financial assistance is a separate point from the 
identification of risks.

Reply of the Commission 

88

VIII
The report rightly points to the use of several 
spreadsheets and initial problems with documen-
tation. The Commission’s forecasting tools are not 
more complex than required.

Forecasting an economy is not an exercise that 
can be undertaken using a simple application. The 
Commission’s forecasts have to cover a large set of 
variables. This necessarily leads to a large and rather 
complex set of data that country desk officers have 
to handle when preparing a forecast. Using the 
spreadsheets requires expertise and professional 
judgement. The Commission’s forecasting method 
is in line with the practice of other organisations 
engaging in economic forecasts.

The Commission disagrees with the Court’s state-
ment related to the difficulty of assessing the 
assumptions in the forecast. The assumptions 
underlying the forecasts are described in the posi-
tion paper that is produced at the beginning of 
each forecast round. The assumptions are then 
updated ahead of each subsequent forecast stor-
age, and they are published in each forecast. Sev-
eral meetings during the preparation of the Com-
mission’s regular forecasts bring together country 
desk officers, experts from horizontal units and 
top management. The discussion of the assump-
tions underlying the forecasts is a key part of these 
meetings. Moreover, horizontal units systematically 
check the mathematical and economic consistency 
of the forecasts prepared by the country desks.

In particular, the Commission has carefully 
explained its assessment of fiscal multipliers under-
lying the forecast (see for instance Box I.5 on page 
41 of the 2012 autumn forecast). In 2013 DG Eco-
nomic and Financial Affairs carried out an exercise 
to assess the implicit fiscal multiplier. The multi-
pliers lie well within the range found in the empir-
ical and theoretical literature.

IX
The Commission would like to underline the impor-
tance of properly distinguishing between providing 
the information needed to make a well-informed 
decision at the time and whether complete records 
could be retrieved at a later date.

In the early phase of the programmes the Commis-
sion was operating under severe time pressure and 
needed to put in place sound and effective crisis 
management procedures. The Commission accepts 
that there were weaknesses in document manage-
ment in the early part of the programme processes, 
and that there was a process of ‘learning by doing’.

The Commission provided the Court with a substan-
tial amount of information, including spreadsheets, 
on the data and assumptions behind the initial 
calculations of the finance gap. Background docu-
ments were provided on all programme countries 
concerned.

X
The Commission does not agree that the most 
recent programme documents lacked essential 
information. The programme documents for Portu-
gal and Ireland were very thorough.

XI
The Commission does not agree that there were 
conditions in the memoranda of understanding 
(MoUs) that were not focused on the general eco-
nomic policy conditions set by the Council.

The general economic policy conditions set by the 
Council are ‘general’ and not intended to provide 
an exhaustive list of conditionality. Their attain-
ment — particularly in relation to structural issues 
— often necessitates a broad range of measures in 
the MoU to strengthen the underlying position of 
an economy.

Furthermore, MoUs are the result of negotiations 
with the political authorities of the Member State 
concerned, whose input is crucial to the success of 
the programme.

Reply of the Commission 

89

Different approaches
In the Commission’s view it was appropriate that 
each programme reflected country-specific eco-
nomic conditions, institutional settings, circum-
stances and preferences.

XII
Though the Commission agrees that the risk of 
treating different countries inconsistently or 
requesting unnecessary reforms remains a chal-
lenge to the process of programme management, it 
is of the view that it was appropriate and necessary 
that the programmes were managed in a country-
specific way. This flexibility was desirable given the 
diverse set of economic, political and administrative 
conditions in the different countries, and the impor-
tant role of the recipient country in programme 
design and evolution. Countries may have structural 
weaknesses that appear similar on the surface but 
that nevertheless are best addressed through differ-
ent sets of policies.

The input of the recipient countries in the pro-
gramme design and evolution, which reflects not 
just their different circumstances but also their dif-
ferent political preferences, is the most import ant 
factor in ensuring that they retain ownership over 
the reform programme.

The Commission accepts that there is room for 
improvement in the consistency with which the 
conditions were categorised.

In the Commission’s view the concept of ‘structural 
content’ used by the Court is not a meaningful 
metric for analysing policy measures and drawing 
conclusions about their importance. It is also the 
case that conditionality evolves through the lifetime 
of a programme. A structural reform that the Court 
would ultimately class as ‘high content’ may require 
several ‘low content’ preliminary steps in order to 
be assessed and prepared properly. The relaxation 
of some deficit targets was based on an overall view 
of whether the initial targets remained appropri-
ate. This was done on the basis of a careful analysis, 
taking several country-specific developments into 
account and not only GDP growth.

XIII
Within the Commission, calculations underlying 
programme decisions are reviewed by officials 
outside the main programme team, including senior 
management and the heads of horizontal units. 
Review reports were subject to consultations pro-
cedures with relevant directorates-general.

In addition, the Commission worked in close 
co operation with the IMF and ECB on EFSM pro-
grammes. Drafts of programme documents were 
consistently exchanged and cross-checked between 
partner institutions, all of whom were working 
actively with the domestic authorities.

Finally, negotiation outcomes were reported in 
detail to the Economic and Financial Committee 
(EFC) and Eurogroup Working Group (EWG), provid-
ing transparency on the outcome.

XIV
See Commission reply to paragraph X.

XV
The use of accrual-based deficit targets is sup-
ported by the legal framework underpinning EU 
economic surveillance and ensures cross-country 
consistency. All EU Member States, including those 
under an economic adjustment programme, are 
subject to the common EU fiscal rules. As per 
Protocol 12 of the Treaty on the Functioning of the 
European Union, which defines the reference values 
for the excessive deficit procedure, the deficit is 
measured according to the European System of 
Accounts (ESA), which is accrual based. Hence, the 
use of national accounts data to define the fiscal 
targets and for monitoring seems more than justi-
fied in a common European setting.

Conceptually, the principle of accrual account-
ing introduced with ESA95 was a key innovation, 
motivated at the time by the shortcomings of cash 
accounts. One of these shortcomings is that cash 
accounts are much more susceptible to manipula-
tion and offer a less reliable economic picture.

Reply of the Commission 

90

However, the definition of the targets in line with 
the ESA does not preclude the Commission from 
using other available sources of information and 
data in its monitoring, where necessary. This may 
include fiscal cash-based data, especially given their 
faster availability compared to accrual data. Cash-
based data must be interpreted with due considera-
tion of their different conceptual underpinnings.

Overall, the proper use of more sources of data with 
different conceptual underpinnings and availability 
can only help to improve the monitoring of the pro-
gramme targets and to support decision-making, 
where necessary.

XVI
The programmes set fiscal adjustment paths con-
sistent with SGP requirements, taking into account 
country specific conditions and programme objec-
tives. However, while the programmes take account 
of the appropriate factors in designing the pace of 
structural improvement, the eventual out-turn may 
be affected by a wider range of factors relating to 
the external environment. These include excep-
tional circumstances (e.g. deeper recessions than 
initially foreseen), inflation rates, the composition of 
growth and market sentiment affecting borrowing 
costs, as well as ex post data revisions.

Therefore, flexibility in adjusting to new conditions 
is necessary. This is also recognised under the EU’s 
fiscal surveillance framework.

One-off measures may not be avoidable in some 
situations (Court decisions, bank rescue operations), 
but their classification as such ensures that they are 
recognised as temporary. They are not included in 
the structural balance precisely to avoid govern-
ments resorting excessively to such measures. More-
over, it is only natural that the structural balances of 
different countries change at different paces.

XVII 
Tight deadlines to implement reforms could some-
times be characterised as unrealistic ex post, but 
they were set very ambitiously to encourage faster 
action.

The Commission does not agree that implementa-
tion of the most important conditions was left for 
the latter part of the programmes. The crisis condi-
tions and political momentum for reform meant 
that important and difficult reforms were concen-
trated early on in the programme.

Recommendations
The Commission accepts recommendation (a).

The Commission improved its mobilisation of 
expertise over the years of the crisis. It was able 
to mobilise more expertise in the euro area pro-
grammes, which started later than the non-euro 
area programmes. The Structural Reform and Sup-
port Service (SRSS) has recently been set up within 
the Commission. The Commission will examine 
how some key principles for rapid mobilisation of 
the expertise needed could be further strength-
ened into an institution-wide framework where 
appropriate.

The Commission will take on board the need to 
develop procedures for the enhanced surveillance 
and management of possible new financial assis-
tance programmes for euro area countries, in the 
context of the two-pack.

The Commission accepts recommendation (b), while 
highlighting the need to ensure that recording 
activity does not place a disproportionate burden 
on forecasters, particularly in a programme context.

The Commission has already improved procedures 
and document management since the first pro-
grammes were put into place. It will seek to further 
improve the implementation of its document- 
management and quality-control policy.

Reply of the Commission 

91

The Commission accepts recommendation (c).

The Commission has already improved record-
keeping since the inception of the programmes. It 
will focus on ensuring that the new procedures are 
fully implemented, without undermining the ability 
of programme teams to meet tight timelines.

The Commission will examine how to further ensure 
the recording of key decisions without slowing 
down the decision-making process, in line with its 
document-management and quality-control policy.

The Commission accepts recommendation (d).

The Commission accepts recommendation (e). It 
will aim to include additional variables that it can 
collect with short time lags, such as a quarterly cash 
balance and/or an arrears target, in the MoUs, to 
assist in the monitoring of fiscal targets.

The Commission accepts recommendation (f). The 
Commission points out that what matters most 
is that there is a coherent and integrated set of 
reforms to address key economic challenges. Within 
that programme, there may often be choices to 
be made as to which reform package to choose. 
Hence, conditions should not be considered in 
isolation. The selection of conditions is a matter for 
negotiation with the recipient country. It should 
support countries’ ability to set the agenda for their 
programmes. This is a prerequisite for them taking 
ownership of the reform process, which is an impor-
tant determinant of programme success.

The Commission partially accepts recommen-
dation (g). It has already set out guidelines for 
co operation with the IMF and the ECB, and is taking 
other steps to facilitate interinstitutional cooper-
ation during programmes. However, the Com-
mission considers that clarifying this cooperation 
should avoid formalisation, making the decision-
making process burdensome, especially given the 
time pressures involved. Flexibility should be kept 
in resolving differences of opinion as attempting 
to formally codify the dispute resolution process 
would be both difficult and of little value.

The Commission accepts recommendation (h). The 
Commission considers that the debt management 
process was always transparent and documentation 
has further improved over time.

The Commission accepts recommendation (i). It will 
seek to further improve its understanding of the 
adjustment process under the programmes through 
the current series of comprehensive ex post assess-
ments and to draw lessons from them. The assess-
ments cover all aspects of the economic adjustment 
under the programmes, including the three sugges-
tions raised by the Court. An ex post assessment of 
the economic adjustment programme of Ireland has 
already been published.

Reply of the Commission 

92

36
As discussed in more detail in the Commission reply 
to paragraph IV, the forecaster cannot anticipate 
country-specific policy decisions in advance. Actual 
outcomes can also be affected by ex post data revi-
sions. Therefore this should be taken into account 
when comparing forecast and outcomes.

In the case of Ireland, the projected fiscal deficit 
was consistent with the central macroeconomic 
 scenario, including for economic growth, contained 
in the Commission’s spring 2008 forecast for Ireland. 
The discrepancy between the projected deficit and 
the out-turn is largely attributable to the revisions 
of the GDP forecast and other key macroeconomic 
variables that impact on the general government 
budget. The central scenario of the Commission’s 
2008 spring forecast did not anticipate the sharp 
economic slowdown that eventually materialised 
in the second half of the year. The Commission 
was not alone: domestic and international institu-
tions, as well as private-sector forecasters, did not 
anticipate the severity of the downturn observed in 
Ireland in 2008.

37
The structural balance is a central indicator for 
policy surveillance since the 2005 reform of the SGP. 
While it is a fully relevant indicator for fiscal policy 
surveillance, the Commission accepts that it is not 
a fully accurate indicator and therefore interprets it 
with the necessary caution.

The estimation of the structural balance is concep-
tually affected by the same uncertainty that sur-
rounds the forecast of other macroeconomic vari-
ables. This is an inherent characteristic, not due to 
the weakness of one method compared to another.

Part I 

34
As outlined in the Commission reply to para-
graph III, the crisis showed that the existing sur-
veillance framework was not fully adequate in 
identifying the underlying risks in some Member 
States’ fiscal positions in times of unprecedented 
economic crisis.

The primary objective of financial assistance was 
to provide financing to the recipient countries to 
enable them to introduce the measures necessary 
to restore financial market confidence in a gradual 
manner. It is clear that for countries that required 
assistance due to being unable to fund their deficits 
on the financial markets, financial assistance would 
be used for budget support.

The Commission acknowledges that in the pre-crisis 
period it was difficult to fully detect the rising risk 
of fiscal imbalances, which were rapidly worsen ed 
by the unexpected materialisation of severe 
macrofinancial imbalances. However, there were 
concrete cases, such as Ireland and Spain, where the 
Commission indicated in its official documents that 
because of the macroeconomic and financial risks 
the countries concerned should run a budgetary 
surplus.

The need to activate the programmes for Member 
States was also determined by the unpredictable 
nature of the crisis, its unprecedented length and 
size.

35
While debt and deficit ratios are observable vari-
ables, the structural balance is not. By definition 
it relies on the calculation of the output gap, an 
unobservable variable. However, the calculation 
of potential output, from which the output gap 
derives, follows a methodology commonly agreed 
with the Council (hereafter ‘the EU commonly 
agreed methodology’). This is rather complex but 
ensures a consistent framework across countries.

Reply of the Commission 

93

The calculation of the structural balance by def-
inition depends on the calculation of the potential 
output, output gaps and headline balances and 
the impact of one-off measures. The calcula-
tion of potential output follows an EU commonly 
agreed methodology. It is regularly discussed and 
improved (when deemed necessary) within the 
Output Gap Working Group, a working group of 
the Economic Policy Committee (EPC). The method 
ensures cross-country consistency in terms of 
the quality and robustness of the estimation, as 
opposed to an à la carte method.

The commonly agreed approach used at the EU 
level to estimate the potential output and the out-
put gap is not a pure statistical method. It relies on 
a large number of variables that determine a coun-
try’s supply-side potential. Output gap estimates 
include as a crucial input forecasts of all relevant 
macroeconomic variables. Both output gaps and 
headline balances turned out to be more volatile 
than in previous periods, affecting the structural 
balance. This reflects the exceptionality of the situa-
tion and the nature of any forecast exercise.

Moreover, forecasts of small open economies (most 
programme Member States are such economies) are 
generally more volatile because they are exposed to 
a larger number of shocks and the impact of shocks 
is also stronger.

In several cases, in its assessments in the run-up 
to 2008, the Commission stressed risks related to 
the uncertainty regarding the cyclical position. 
For instance, the Commission recommendation for 
a Council opinion on the Irish stability programme 
2006-2009 stated, ‘In any case, it would be prudent 
to maintain room for manoeuvre against any rever-
sal of the current growth pattern which has been 
led by strong housing sector developments.’

Therefore, the Commission is fully aware of the 
weaknesses of the structural balance indicator 
and factors these into its assessments. The fiscal 
surveillance framework has also been consistently 
improved, so that it now builds on a comprehensive 
set of tools, not only the structural balance.

For Member States in the excessive deficit proce-
dure (EDP), since 2013 the structural balance has 
been corrected to control for forecast errors in 
potential output and windfalls/shortfalls of rev-
enues. The methodology for assessing effective 
action under the EDP, endorsed by the Council in 
June 2014, also includes a second indicator of the 
fiscal effort based on the yield of the individual 
measures taken since the EDP recommendation. 
A careful qualitative analysis based on these two 
indicators is used to assess compliance.

For the SGP preventive arm, as part of the six-pack 
an expenditure benchmark was introduced at 
the end of 2011. This serves as a second indicator 
(alongside the structural balance) to assess compli-
ance with the required adjustment towards the 
medium-term objective. An overall assessment of 
the two indicators is made to assess compliance 
with the rules.

These indicators are certainly complex and based 
on unobservable variables. However, when it comes 
to determining the fiscal effort implemented by 
a Member State and to give recommendations for 
the future, indicators like the structural balance are 
preferable to the simple deficit or debt ratios, as the 
latter are much more prone to being pro-cyclical.

See also Commission reply to paragraph IV.

38
The Commission acknowledges that the EU com-
monly agreed methodology did not fully correct for 
the impact of the housing booms which emerged 
over this period (see the cases of Romania and Ire-
land), which in turn resulted in very strong increases 
in the stock of capital. However, the stock of capital, 
which can be considered as an indicator of overall 
capacity in an economy, is not smoothed in the EU 
commonly agreed methodology. As a result it did 
not correct for these cyclical deviations (i.e. capital 
gaps) triggered by the asset bubble. In addition, 
investment in housing does not have the same 
effect on an economy’s potential as gross fixed 
capital formation by firms. As a result, the housing 
boom overstated overall production capacity.

Reply of the Commission 

94

Work is ongoing to try to ensure that the EU com-
monly agreed methodology takes the influence of 
financial sector variables more into account in the 
future. In particular, a workshop organised by the 
Commission on September 28 2015 discussed the 
options for improving the EU commonly agreed 
methodology with the relevant stakeholders from 
the Member States and international institutions. 
This strand of work will be taken forward with the 
involvement of the Member States in the Economic 
Policy Committee. Specifically it will be under the 
auspices of the Output Growth Working Group, 
whose mandate is mainly to ensure technically 
robust and transparent potential output and output 
gap indicators, and cyclically adjusted budget bal-
ances in the context of the SGP.

In spite of the problems with the method that 
emerged in the pre-crisis period, it is generally 
recognised that the current methodology has done 
a very good job since 2009, relative to both the 
OECD’s equivalent methodology and other method-
ologies such as the HP filter.

39
Sectoral imbalances have not been taken into 
account in the calculation of potential output. 
However, it is important to stress that: (i) currently 
there are no output gap calculations available at 
a sectoral level; and (ii) sectoral estimates would 
further complicate an already complicated calcula-
tion process.

As for real estate prices, the EU commonly agreed 
methodology did not fully correct for the impact 
of the housing booms which emerged over 
this period. See also the Commission reply to 
paragraph 38.

40
The existence of sectoral imbalances and risks asso-
ciated with housing booms were not ignored in the 
Commission’s assessments. For example, in the case 
of Ireland, risks related to the housing boom were 
already highlighted in the Commission assessment 
of the 2005 update of the stability programme.

42
The situation on the monitoring of contingent 
public-sector liabilities has significantly improved 
since 2009.

The supervisory framework has been overhauled 
and closer contact has been established between 
the Commission and the newly established ESRB 
and the European supervisory authorities.

The six-pack also introduced the macroeconomic 
imbalances procedure, making the monitoring of 
economic imbalances, including sectorial ones, 
a key part of EU economic surveillance.

In 2015, for the first time, the Commission produced 
series on contingent public-sector liabilities that are 
comparable across Member States.

43
In 2008 the Commission pointed out the need to 
broaden surveillance to address macroeconomic 
imbalances, beyond budgetary surveillance. (For 
details see pages 247-48 of the publication EMU@10: 
successes and challenges after 10 years of economic 
and monetary union).

The relevant institutional and legislative changes 
and significant improvements achieved since 
2011 include the setting-up of the ESRB and the 
European supervisory authorities (EBA, EIOPIA 
and ESMA) and the adoption of the six-pack and 
the two-pack (see the Commission reply to para-
graph 39 for further details).

More specifically, the six-pack introduced the mac-
roeconomic imbalance procedure. This made inter 
alia the monitoring of financial imbalances (namely, 
the net international investment position private 
credit flow, private debt and financial sector liabili-
ties) a key part of EU economic surveillance.

Reply of the Commission 

95

44
The sensitivity to various shocks was part of the 
surveillance activity of the Commission. The regular 
Commission forecasts provide specific exchange- 
and interest-rate assumptions, underpinning the 
economic and fiscal projections of each Member 
State and the EU as a whole. The main develop-
ments and impact channels on the economic and 
fiscal variables are explained in the horizontal chap-
ters of the forecast publications, while such details 
might be omitted from the forecast commentaries 
for each Member State.

The Commission’s assessment of the stability and 
convergence programmes (SCPs) for all countries 
usually included a specific section on risk assess-
ment, the purpose of which was to discuss the plau-
sibility of the programme’s budgetary projections 
by analysing various risk factors. Similar content 
was also included in the SCP assessments prior to 
2007 under the heading ‘sensitivity analysis’ or ‘risk 
assessment’. For further information please see the 
SCP assessments:

http://ec.europa.eu/economy_finance/economic_ 
governance/sgp/convergence/programmes/
index_en.htm

46
Given the unprecedented characteristics of the 
crisis, there was a need to prepare an adequate 
and effective response as soon as possible. This 
meant, especially for the initial programmes such as 
Hungary, a need to work under very stringent time 
constraints.

The Commission had some in-house experience 
from the implementation of macrofinancial assis-
tance to non-EU countries (including a number of 
western Balkan countries after the Kosovo crisis). It 
was familiar with negotiating and monitoring the 
implementation of MoUs that included structural 
reform conditions, as well as macro-conditionality 
for which the IMF was in the lead. It was also 
familiar with borrowing the necessary funds in the 
markets and lending them on to non-EU countries. 
This expertise enabled the Commission to make 
a proposal within a very short time period.

On some aspects, for example fiscal surveillance, 
the Commission had more in-depth knowledge of 
the country than the IMF. In other areas, for exam-
ple banking supervision, the IMF initially had more 
experienced staff.

Part II 

Programmes were mostly soundly based but there 
were weaknesses in record-keeping.

48
The Commission is mandated to analyse the eco-
nomic and financial situation and help prepare 
programme decisions. For this purpose, the Com-
mission coordinated closely with other programme 
partners and provided detailed programme docu-
ments to the relevant political decision-makers.

The Commission’s processes did not 
always incorporate sufficient checks 
and balances
The Commission considers that its processes always 
incorporated sufficient checks and balances.

50 (v) 
Programme countries should be treated consist-
ently when targeting similar problems. This was 
a key concern throughout the programmes.

The input of the recipient countries in programme 
design and evolution is the most import ant factor 
in ensuring they retain ownership over the reform 
programme. This should be fully taken into account.

In addition, when assessing whether countries are 
in a similar (or comparable) situation in a given area, 
it is important not just to look at a static assessment 
of their performance in that policy area, but also 
to consider their capacity for effecting meaningful 
change. Equally a ‘similar set of conditions’ needs to 
be understood in terms of the overall content of the 
requirements, not the number of conditions.

Reply of the Commission 

96

52
The Commission collects a wide range of informa-
tion coming from different sources (including out-
side the Commission). Therefore the assessments 
were informed by internal reports and surveillance 
material, by any relevant publicly available external 
publications (reports from academia, government, 
think tanks, stakeholders and other independ-
ent institutions) and by wide consultations with 
stakeholders.

54
The Commission requested key information when 
needed. Data was selected on the basis of its rele-
vance for monitoring programme implementation, 
bearing in mind country and programme-specific 
needs, at the same time paying attention to not 
overburdening national administrations with 
reporting requirements.

57
The checks of the numerical consistency of fore-
casts include, for example, elaborate checks of the 
consistency of international trade forecasts. More-
over, the economic consistency of the forecasts is 
checked at several levels, including at the forecast 
meetings referred to in the Commission reply to 
paragraph VIII.

It is a conscious decision by the Commission to 
base the forecasts on the judgement of economists 
who are experts on the countries on which they 
produce forecasts. Other international institutions 
follow similar approaches. There is no evidence in 
the related literature that model-based forecasts 
perform consistently better than expert-based 
forecasts in general. Even in normal circumstances, 
structural relationships are not stable over time, 
and expert judgement is needed to adapt model 
relationships derived from econometric estimates 
to the specifics of the prevailing economic condi-
tions. By contrast, judgmental forecasts surely per-
form better than forecast models during economic 
and financial crises.

Forecasting spreadsheets are 
a cumbersome tool which makes 
quality control problematic
Forecasting is by definition complex and the Com-
mission has put in place a system to ensure ade-
quate quality control.

58
Forecasting an economy is not an exercise that 
can be undertaken using a simple application. The 
Commission’s forecasts have to cover a large set of 
variables. This necessarily leads to a large and rather 
complex set of data that country desk officers have 
to handle when preparing a forecast. Using the 
spreadsheets requires expertise and professional 
judgement. The Commission’s forecasting method 
is in line with the practice of other organisations 
engaging in economic forecasts.

59
The forecast uses historical data compiled and 
validated by Eurostat whenever available. Only 
data not available internally in the Commission are 
taken from other sources (typically national central 
banks and statistical offices). For historical data, the 
forecaster’s judgement is not involved. The single 
source of forecast data is by definition the fore-
caster (i.e. the country desk officer).

The Commission considers that the examples given 
by the Court do not provide evidence that there is 
a risk. On the contrary, the process for deriving the 
external assumptions to the forecast is clear and 
well documented (e.g. in the technical box con-
tained in each forecast publication). These external 
assumptions are derived centrally and applied by all 
forecasters. There is also an extensive body of writ-
ten guidance to the desk officers on how to identify 
and assess fiscal measures (in the context of apply-
ing the no-policy-change assumption).

Common Commission reply to 
paragraphs 60 and 61
The checks of the numerical and economic con-
sistency of the forecasts go well beyond what is 
described in the report.

Reply of the Commission 

97

62
The Commission disagrees with the examples 
provided in Box 1 (see detailed comments). The 
Commission does not consider that these examples 
point to a general problem.

Box 1 (i)
The Commission disagrees with this assessment 
related to VAT in Romania. The forecast file provides 
the possibility to forecast in detail the other taxes 
on production by sector (households, corporations, 
government). The Commission did not project 
growth rates for these detailed variables and greyed 
out the relevant cells. As a result, the formulas still 
present in the greyed out cells kept the values for 
forecast years at a constant level. The discrepancy 
of 3.8 billion RON stems from a comparison of these 
unused cells with the desk forecast for government 
revenue from taxes on production and imports.

Box 1 (ii)
The Commission disagrees with this assessment. 
While ‘civil servants’ remuneration’ was not a sep-
arate forecast line, a close proxy of this variable 
appeared as a separate item, which made the 
public-sector wage bill projection explicit in the file.

At the time under audit by the Court (2008-2010), 
the lack of timely data on household and corporate 
sectors (a 2-year lag) rendered it practically use-
less for the forecasting of such volatile, small, open 
economies. Accordingly, it was also not possible 
to use these data for projecting other sectors (on 
which more reliable and recent data was available) 
or for consistency checking with the whole econ-
omy data. Therefore, household and corporate sec-
tor projections were never published and appeared 
only as memo items in the forecast sheet, having no 
impact on other variables. In effect, the mathemati-
cal inaccuracy spotted by the auditors refers only 
to the breakdown of households and corporates 
that were intentionally excluded from the forecast 
exercise for Latvia due to the aforementioned data-
quality issues.

In the Commission’s view the decision to exclude 
untimely data from the analysis reflects a strength 
of the forecast process rather than a weakness.

Box 1 (iii)
The Commission disagrees with this assessment. 
The Court refers to an error in a document (June 
2009 forecast) which was work in progress and not 
final. In the subsequent final forecast (September 
2009) the measure was correctly incorporated.

Box 1 (iv)
The Commission disagrees with the Court’s assess-
ment concerning inconsistencies in the forecast of 
price indices for Latvia. The Court argues that the 
increase in value added tax in 2009 was not fully 
reflected in the forecast for consumer prices. This 
finding omits a multitude of other factors that also 
have a bearing on consumer prices. In 2009 and 
2010 the consumer price index (CPI) turned out to 
be significantly lower than the Commission had 
forecast, suggesting the impact of the tax increase 
was not underestimated.

Data also show that the actual difference between 
the CPI and private consumption prices was larger 
than in the Commission’s forecast. The items 
 covered in the two indices are different. The major 
difference is the coverage of imputed rents in pri-
vate consumption. The steep drop in house prices 
and rents during the crisis therefore had a much 
bigger impact on private consumption prices than 
on the CPI. This example underlines how economic 
relationships are different in times of severe crisis.

65
Country desk officers make their own assessment 
of the impact of fiscal measures. Whether coun-
try desk officers have detailed knowledge of the 
methods used in national authorities’ assessment is 
therefore irrelevant.

The Commission also disagrees with the last sen-
tence (on implicit fiscal multipliers). There is more 
knowledge of (implicit) fiscal multiplies than the 
report suggests. In 2013 DG Economic and Financial 
Affairs carried out an exercise to assess the implicit 
fiscal multiplier. The spring and autumn 2012 
economic forecasts also included dedicated boxes 
which dealt with fiscal multipliers. The multipliers 
lie well within the range found in the empirical and 
theoretical literature.

Reply of the Commission 

98

QUEST model simulations were carried out at criti-
cal stages of some programmes (mostly the negoti-
ation phase) to inform the definition of baseline and 
policy scenarios. For the Portuguese programme 
specific fiscal measures have been assessed on the 
basis of the country-specific version of the QUEST 
model. The relevant information, including the 
measure-specific multipliers, has been shared with 
the Court.

66
The Commission disagrees with this assessment. 
The conjecture that small errors could have gone 
undetected and might have led to significant cumu-
lative errors is purely speculative.

67
The Commission acknowledges that there was 
a lack of comprehensive documentation, in particu-
lar in the early phase of programmes.

A partial forecast error decomposition exercise was 
carried out in 2013. A more comprehensive exercise 
is under preparation in the context of a reassess-
ment of forecast accuracy. Also, during several fore-
cast exercises country desks have decomposed the 
revision of the general government budget balance 
and real GDP growth compared to the previous 
forecast round. Decompositions of the changes in 
the forecast of the general government balance can 
be found in the programme review reports.

Financing gap estimates were 
incomplete and inaccurate
Some of the documentation with regard to finan-
cing gap estimates available at the time of the audit 
was incomplete. However, the heading does not 
adequately reflect the fact that the shortcomings 
primarily concern the documentation rather than 
the estimation.

69
The Commission disagrees with the Court’s general-
ised statement on the availability of financing gap 
estimates.

The Commission provided the Court with a substan-
tial amount of information, including spreadsheets, 
on the data and assumptions behind the initial 
calculations of the financing gap. Background docu-
ments were provided on all programme countries 
concerned.

The Commission accepts that there were weak-
nesses in document management in the early part 
of the programme processes. It is correct that for 
Hungary the relevant documentation for the initial 
financing gap is not available.

See also the Commission reply to paragraph IX.

70
The Commission considers that there were no 
significant errors in the financing gap calculations. 
In the case of Romania there was an error regard-
ing the double-counting of intra-group loans of 
corporates.

The Commission disputes other claimed errors 
on which the Court has based its assessment. The 
Commission does not consider that these examples 
point to a general problem.

The Commission would like to stress that the estima-
tion of financing needs over a programme horizon 
entails a range of calculations and assumptions which 
are subject to a large degree of uncertainty and can 
only be reliably quantified within a certain range. The 
lenders’ willingness and capacity to provide funding 
also constrains the financial envelope, and the pro-
gramme design needs to respect this constraint.

It is unrealistic to expect the estimates to be exactly 
right. What matters is that in practice any minor 
inaccuracies should not have negative conse-
quences for the success of the programmes. In 
hindsight the projections proved accurate, since in 
no case under scrutiny did the financing envelope 
prove inadequate and have to be revised.

Alleged errors in the financing gap calculations did 
not affect the policy content of programmes.

Reply of the Commission 

99

No trace of some key records
Record-keeping clearly improved over time and 
some decisions are taken through non-written 
procedures.

Box 2 – Second indent
The Portuguese authorities created a web-based 
database of implemented programme measures, to 
which the Court has not been granted access. This 
is why it was difficult for the Commission to easily 
provide all the documents required.

In the case of Hungary, as the Commission 
explained to the Court that the adoption of decrees 
or laws has typically been monitored and verified 
based on the reliable web-based legal repository of 
the parliament and the Hungarian Official Journal 
(accessible free of charge). This is the main reason 
why paper copies of adopted legal acts were not 
archived systematically by the Commission.

Box 2 – Fifth indent
The forecasting process uses a standardised set of 
Excel files. It also relies on a clear process of docu-
mentation, quality checks and reviews by horizon-
tal units, discussion with Member State experts 
and internal consultations. The standardised Excel 
files, which contain a fiscal sheet, are also used by 
country desks to monitor developments between 
forecast vintages. Country desks — in particular 
those working on programme countries — also use 
additional tools for the monitoring of fiscal varia-
bles. These depend on programme design, country- 
specifics and the granularity of the data available.

75
The Commission does not agree that the most 
recent programme documents lacked essential 
information. The programme documents for Portu-
gal and Ireland were very thorough.

Box 3
The Commission does not agree that there were 
‘examples of non-compliance with the rules’. As 
set out in the Commission reply to paragraph XI 
the general economic policy conditions set by the 
Council are ‘general’ and are not intended to pro-
vide an exhaustive list of conditionality.

Box 3 – First indent
In case of Romania, the Commission pursued bi-
annual formal reviews under the BoP programme 
whereas the IMF pursued quarterly reviews under 
the SBA. Under the joint EU/IMF programme, the 
Commission participated fully in all quarterly mis-
sions. However, the MoU/SMoU conditions can 
only be updated after a formal Commission review 
mission. During an informal review mission, only 
the LoI/MEFP is updated on the basis of agreement 
between Commission staff and the other pro-
gramme partners.

Box 3 – Third indent
In the case of Ireland, the sale of assets and privatisa-
tion were not included in the Council implementing 
decision. The Irish programme never included formal 
conditions to privatise a given number of state-owned 
companies or a given amount of assets. In Ireland the 
number of state-owned enterprises is very limited. 
Nevertheless, over the course of the programme the 
authorities agreed to identify a number of assets that 
could be privatised. In addition they agreed that, in 
case the Irish authorities decided to privatise, half of 
the proceeds would be used for growth enhancing 
measures. During the course of the programme no 
privatisation proceeds were accrued.

Conditions were not sufficiently 
focused
The Commission considers that the conditions were 
sufficiently focused.

78
The Commission does not agree that the manage-
ment did not sufficiently challenge the proposals 
to ascertain whether all the conditions were really 
ne cessary for the achievement of the general eco-
nomic policy goals. The Commission reply to para-
graph 79 addresses the link between the reform 
and economic policy objectives.

79
All reforms had close links with the programme 
objectives and need to be seen in the context of 
a broader set of policy reforms to improve the 
budgetary situation, the efficiency of public admin-
istration or the business environment. See also the 
Commission reply to paragraph XII.

Reply of the Commission 

100

80
Though the Commission agrees that the risk of 
treating different countries inconsistently or 
requesting unnecessary reforms remains a chal-
lenge to the process of programme management, it 
is of the view that it was appropriate and necessary 
that the programmes were managed in a country-
specific way. This flexibility is desirable given the 
diverse set of economic, political and administra-
tive conditions in the different countries. Countries 
may have structural weaknesses that appear similar 
on the surface, but that nevertheless are best 
addressed through different sets of policies.

See also the Commission reply to paragraph XII.

81
The revision or update of certain policy condi-
tions should be viewed as a reasoned response to 
chan ging circumstances over the course of a pro-
gramme. The initial MoU cannot be a complete con-
tract that provides for all sorts of contingencies that 
may arise during programme implementation. The 
MoUs are living documents that need to be flexibly 
adapted to the new economic or implementation 
challenges.

82
It was appropriate and necessary that the pro-
grammes were managed in a country-specific way. 
This flexibility is desirable given the diverse set of 
economic, political and administrative conditions 
in the different countries. See also the Commission 
replies to paragraph XII and Box 4.

Box 4 – Second indent
The reduction of the duration of unemployment 
benefits aimed to reduce the risk of unemployment 
traps, and was a step in the right direction even if it 
fell short of what was required by programme con-
ditionality. It was assessed in the context of being 
part of wider set of reforms. Keeping social dialogue 
open was seen as an important factor in delivering 
a strong reform package.

84
The Commission agrees that the definition of MoU 
conditions differed across programmes with respect 
to whether they included a requirement to ‘draft’ 
or ‘adopt’ legislation. This reflected the fact that, 
in some cases, national governments requesting 
financial assistance did not feel that it was appro-
priate to make commitments which bound their 
parliaments, given the principle of the separation of 
powers.

As noted in the Commission reply to paragraph XII, 
the input of the recipient countries in the design 
and evolution of programmes reflects their differ-
ent circumstances as well as their different political 
preferences. Both are important factors in ensur-
ing that they retain ownership over the reform 
programme.

Box 5
While this reform of the supervisory framework in 
Ireland was very important — given the failings 
in the run-up to the crisis — other reforms that 
were more critical to the success of the programme 
were addressed by the Oireachtas first, amid a very 
busy legislative agenda required by the financial 
sector component of the programme. It was also 
important to take the time to adequately calibrate 
the enhanced supervisory powers to be conferred 
on the Central Bank of Irland via the Central Bank 
Supervision and Enforcement Act. This act was 
enacted in 2013, providing extensive investigative 
powers to source information and conduct on-
site inspections, issue regulations and take direct 
re medial and enforcement actions to address 
breaches of regulation, as well as to request inde-
pendent auditor evaluations of banks’ financial 
accounts.

85
In the case of Portugal, the number of conditions 
was commensurate with the structural problems 
the country was facing.

In addition, countries did not find themselves in 
similar circumstances with regard to structural 
problems. This justifies the variation in the struc-
tural component of the programmes.

Reply of the Commission 

101

The final number of conditions has little meaning. 
An ultimately ‘high content’ structural reform may 
require several ‘low content’ preliminary steps in 
order to be assessed and prepared properly.

Also, as set out in the Commission reply to para-
graph 50, when assessing whether countries are in 
a similar situation in a given area, it is import ant to 
look not just at a static assessment of their perfor-
mance in that policy area, but also to consider their 
capacity for effecting meaningful change. A ‘similar 
set of conditions’ needs to be understood in terms 
of the overall content of the requirements, not in 
terms of the numbers of conditions.

88
The Commission calculates and publishes the 
cyclically adjusted balance as well as the structural 
balance and other variables with every forecast 
vintage. If the economic conditions (or forecast 
thereof) have changed, this may affect the cyclic al 
balance. However, there may be changes to the 
economic outlook with implications for the fiscal 
position without changes to the cyclical balance, for 
instance through changes in inflation projections.

On the other hand, when changes to the cyclic al 
fiscal position (or forecast thereof) occur from 
one forecast vintage to another, this does not 
automatic ally imply a revision in the deficit targets 
under the EDP or under the programme. Revi-
sions to the targets may be related to other factors 
besides the changed outlook for the economic 
cycle, such as a different composition of growth, 
revenue shortfalls/windfalls, changes in potential 
growth or other factors outside the control of the 
government. These different elements are duly 
considered by the Commission when deciding on 
revisions of targets.

89
Revisions in the cyclically adjusted balance do not 
— and should not — automatically translate into 
(similar) revisions of targets, as set out in the Com-
mission reply to paragraph 88. Therefore no direct 
link should be established between changes in 
projected cyclical balances and the need to revise 
targets.

In the case of Hungary, the revision of the  fiscal 
adjustment path agreed in May 2009, which 
extended the deadline for the correction of 
the excessive deficit by an exceptional 2 years 
from 2009 to 2011, was also partially justified by 
a sharper–than-expected downturn. Additional 
consolidation measures were also taken, which 
represented a clear shift towards improving the 
long-term sustainability of the public finances. 
The revision implied a less pro-cyclical fiscal policy 
stance for 2009, helping to avoid a vicious down-
ward spiral in the economy.

For Portugal, the fiscal target was revised twice, 
at the fifth and seventh reviews. In both cases the 
targets were revised following a substantial unex-
pected deterioration in the economic outlook, as 
well as growth being less tax-rich than expected. 
This is discussed in the compliance reports of both 
reviews (Sections II and III). Moreover, both revi-
sions were preceded by Constitutional Court rulings 
which triggered substantial gaps in the budget. 
These factors were not fully under the control of the 
government.

90
The SGP allows the fiscal adjustment path to be 
redesigned under certain circumstances. In accord-
ance with Article 3(5) of Regulation (EC) No 1467/97, 
effective action has to be taken, but unexpected 
adverse economic events with major unfavourable 
consequences for government finances may occur.

While there is no pre-established algorithm 
for re designing budget targets, the situation is 
assessed on a case-by-case basis. Where warranted 
the fiscal path may be redesigned, in line with the 
legislation and based on specific factors. When-
ever various factors negatively affected the deficit 
targets, or when they were not met, this was duly 
explained in the country-specific programme docu-
ments such as programme reviews or notes to the 
EFC.

92
The absence of reference to particular issues in 
programme documents does not imply that they 
were not considered. For example, in the case of the 
Romanian programme, the particular structure of 
wages in the Romanian civil service was specifically 
considered when the wage cut was designed.

Reply of the Commission 

102

Programme management weaknesses 
due to weak controls
The Commission disagrees that controls were weak. 
The Commission considers that programme man-
agement was appropriate.

95 (i) 
The Commission disagrees that no person outside 
the programme team reviews the underlying cal-
culations and the projections. The discussions and 
facts were cross-checked with the IMF (and the ECB 
for EFSM programme countries) and the hierarchical 
line in DG Economic and Financial Affairs looked at 
the projections and overall consistency.

95 (ii) 
The work of the Commission representatives was 
assessed by hierarchical superiors, though admit-
tedly under intense time constraints. See also the 
Commission reply to paragraphs 61, 69, 70 and 79.

Financing gap estimates, and hence the size of the 
financial envelope of a programme, is an important 
issue which is heavily scrutinised by EU/euro area 
Member States.

95 (iii) 
See Commission reply to paragraphs IX and X. The 
Commission agrees that there were weaknesses 
in document management in the early part of the 
programme processes. The Commission was operat-
ing under severe time pressure and needed to put 
in place sound and effective crisis management 
procedures. The crisis circumstances did not allow 
for thorough record keeping.

Box 6
The Commission disagrees that in the case of 
Romania no such measures were identified at all. 
The measures in the amended budget for 2009, 
adopted on 28 April 2009 by the Romanian parlia-
ment, were not included as conditions in the MoU 
due to the time lag between the mission and the 
signing of the MoU. The MoU, signed on 23 June 
2009, stipulates for the further gradual deficit 
reduction in 2009-2010 that ‘The adjustment will be 
mainly expenditure driven, by reducing the public-
sector wage bill, cutting expenditure on goods and 
services, lowering subsidies to public entities and 
through reductions of capital spending on items 
like vehicles and office equipment. Priority will be 
given to investment projects co-financed by EU 
funds.’ The Council Decision of 6 May 2009 provid-
ing Community medium-term financial assistance 
to Romania (2009/459/EC) includes these measures 
under Article 3 paragraph 5(c)-(g).

In the case of Hungary, all fiscal consolidation 
measures contained in the 2009 and 2010 budget 
bills with verifiable deficit-improving impacts were 
incorporated in the original MoU or subsequent 
revised MoUs.

98
The Commission provided several files containing 
underlying data used for constructing the financing 
gap tables that were published by the Commission. 
Sometimes assumptions underlying the financing 
gap calculation were presented in a rather succinct 
manner, so one cannot replicate the calculation 
based on this information only.

In one case (Hungary) the funding gap was calcu-
lated by the IMF only and the Commission acknow-
ledges that it was not able to provide a copy of the 
underlying calculations. The Commission built up 
its capacity to calculate funding gaps as the crisis 
evolved.

Reply of the Commission 

103

98 (i) 
The size of the Hungary programme was entirely 
based on IMF calculations. With the sudden erup-
tion of the crisis in Hungary, which was the first 
country to ask for assistance, the ability of the 
programme team to rely on the expertise of the 
IMF was considered a key advantage. However, the 
numbers were scrutinised by the EU Member States 
before setting the financing envelope.

98 (ii) 
For Ireland the Court makes the comparison 
between two different public finance indicators — 
the accruals-based ESA deficit and the cash-based 
Exchequer deficit. While they both reflect the 
state of the public finances there can be signifi-
cant differences in their size and composition. The 
reconcili ation between the two indicators requires 
detailed knowledge of the public finance accounts 
under both systems. It is usually done by the statis-
tical authorities during the biannual EDP notifica-
tion to the Eurostat.

For the forecast period, assumptions are applied for 
the major financial transactions that are expected 
to be recorded by the national authorities in the 
Exchequer balance, constituting a difference from 
the accruals-based ESA balance. Among such major 
transactions were repayments of the promissory 
notes, accounting for some 9.3 billion euro of the 
gap. Moreover, the National Treasury Management 
Agency used to include additional contingency 
buffers in addition to the baseline Exchequer 
financing needs calculations, thus increasing the 
financing needs, while such buffers were excluded 
from the ESA deficit and debt estimates. At a time 
of extreme market sensitivity, the absence of the 
specific details was motivated by unwillingness by 
the Irish authorities and the programme partners to 
disclose specific borrowing plans. Other elements 
of the difference are related to the fact that there 
were some divergences in the fiscal deficit esti-
mates by different institutions. The most conserva-
tive estimate was included in the financing needs 
calculations.

The programme documents include the main ele-
ments of the fiscal projections and the financing 
needs calculations, and also mention in a footnote 
some differences between the two.

Projections for the aggregate Exchequer cash 
deficit have however been included in The economic 
adjustment programme for Ireland and subsequent 
programme documents.

There are always differences between cash- and 
accruals-based estimates. However, there was no 
need to explain deviations between cash- and 
accruals-based estimates as the latter were the 
most relevant indicators for the purposes of the 
programme, particularly as they are the indicators 
required by EU fiscal surveillance and the EDP.

99
The Commission partially agrees with the Court’s 
assessment. The Commission carried out extensive 
sensitivity tests but kept them confidential in order 
not to trigger adverse scenarios. This information 
was highly sensitive and it may not have been 
appropriate to release it in a context of very volatile 
financial markets.

For Ireland specifically, the sensitivity to exchange 
and interest rates shocks has always been consid-
ered in the economic and fiscal projections. The 
‘pernicious feedback loops between the growth, fis-
cal and financial crises’ were well understood when 
the financial assistance programme for Ireland was 
designed (see Occasional Paper No 76). The purpose 
of the EU-IMF programme was to break this feed-
back loop, including by removing the interest rate 
shock on public finances through external financial 
assistance and thus providing certainty for the pri-
vate sector (reducing margins).

100
If ‘conditions laid out by the Council’ refers to the 
policy conditions agreed under the programme, 
then this was clearly done by the Commission. If 
‘conditions laid out by the Council’ refers to policy 
guidance issued by the Council under the regular 
EU economic surveillance frameworks, the Com-
mission also complied with the existing legal 
provisions.

Reply of the Commission 

104

101
Please see Commission reply to paragraph XV.

The choice of the ESA deficit is not only motivated 
by the EDP. It might be useful to complement the 
Court’s observation with an explanation about the 
merits of national accounts and the ESA deficit 
versus cash data in the context of fiscal surveillance. 
Working with a cash balance only would increase 
uncertainty, rather than reducing it, as this would 
open the door for governments to play with the 
timing of payments for certain transactions in order 
to reach deficit targets.

102
The existence of the possibility of statistical revi-
sions should not serve as an argument for switching 
to cash-flow budgetary targets. A cash-flow regime 
would imply other types of uncertainties with even 
larger adverse implications for the reliability of the 
fiscal conditionality.

Please see also Commission reply to paragraph XV.

102 (i) 
The statement on Hungary is factually correct and 
refers to an ex post statistical revision (see Commis-
sion reply to paragraph 90).

102 (ii) 
The statement on Romania is factually correct and 
refers to an ex post data revision validated by Euro-
stat, outside the control of the forecaster. In addi-
tion, the EFC note of 23 August 2010 reporting on 
the mission of 26 July-5 August contains a box on 
page 13 explaining the gap between the cash and 
ESA95 deficit in the case of Romania.

102 (iii) 
The revision in Ireland was due to a reclassification 
(as validated by Eurostat) of revenues from the sale 
of mobile telephone licences from 2012 to 2013, 
which is not under the control of the forecaster.

103
Countries with programmes also had to comply 
with the rules of the EDP, which sets out a frame-
work of fiscal targets. These fiscal targets have to be 
defined in line with the ESA definition.

Where bank rescue operations could have a con-
siderable yet difficult-to-forecast impact on the 
 budgetary outcomes, these operations were 
excluded from the programme fiscal targets.

In the case of Ireland, the Commission has been 
clear about the definition of the underlying deficit, 
which had to be — and was — consistent with the 
system of national accounts. The definition of the 
fiscal target therefore excluded the impact of the 
direct support for banks.

The Commission calculated the underlying deficit 
as: headline deficit minus deficit-increasing capital 
transfers provided to banks as a part of the financial 
sector rescue measures. The amount of financial 
sector support measures is included in the ‘Supple-
mentary table for the financial crisis’ published by 
Eurostat, in the line ‘Capital injections recorded as 
deficit-increasing (capital transfer)’. However, some-
times this line also includes capital transfers that are 
not treated as financial support measures for EDP 
purposes. In particular, receipts of the dividend pay-
ments from Anglo Irish Bank in the form of ordinary 
shares were treated as capital transfers.

104
In the case of Ireland, a ‘Programme monitor-
ing’ table was provided as an annex to the MoU 
throughout the programme period. This detailed 
the compliance status of the various requirements. 
The detail contained within this table increased 
over the course of the programme.

In the case of Romania, progress on structural 
reforms was reported by topic, rather than condi-
tion by condition. The Commission agrees that this 
could make it difficult for the reader to fully assess 
the state of compliance.

Reply of the Commission 

105

105
The Commission disclosed how far conditions had 
been complied with. Typically, ‘Not observed’ was 
only used in circumstances where it became clear 
that the condition would not be respected soon. The 
deadlines were often set very ambitiously to encour-
age faster action. If reform action had advanced, 
an intermediate term between ‘Observed’ and ‘Not 
observed’ appeared more appropriate.

In the specific case of Ireland, a ‘Programme 
monitoring’ table was provided as an annex, which 
detailed the compliance status of the various 
requirements. These were described as ‘Observed’ 
or ‘Non-observed’.

106
In many cases the detailed results of the monitor-
ing were set out in the main text of the review 
report, rather than in the monitoring table itself. 
This was particularly the case for conditions that 
were  ‘ongoing’ or ‘delayed’. In addition, as the pro-
grammes progressed, some conditions and accom-
panying monitoring merged with other conditions 
or moved to different sections of the programmes.

Box 7 – Second indent
Progress in strengthening administrative capacity 
and other measures to increase the absorption of 
EU funds in Romania are reported upon in mission 
reports. See for example paragraph 37 on p. 17 of 
the EFC note of 23 August 2010, reporting on the 
26 July-5 August mission.

Box 7 – Third indent
The Commission agrees that progress on this spe-
cific measure in Romania is not reported. This was 
because attention shifted to the improvement of 
tax collection and the reduction of tax evasion and 
fraud, with technical assistance provided by the 
IMF and missions by the Commission’s DG Taxation 
and Customs Union (see paragraph 27 on p. 14 of 
the EFC note of 23 August 2010, reporting on the 
26 July-5 August mission).

Box 7 – Fourth indent
The condition on reorganising local government 
in the Portuguese programme was not just about 
municipalities. The condition in the original MoU 
stated ‘Reorganise local government administra-
tion. There are currently 308 municipalities and 
4 259 parishes. By July 2012, the government will 
develop a consolidation plan to reorganise and 
 significantly reduce the number of such entities.’

Compliance with this condition was reported in 
various programme review documents. Policy 
conditionality on this matter evolved over time, 
taking into account strong political opposition. 
The number of parishes (freguesias) was reduced to 
2 882 after the local elections in September 2013. 
While there was no reduction in the number of 
municipalities, a new legal provision for creating 
intermunicipal communities was put in place.

107 (i) 
The example provided for Ireland indicates that con-
ditionality on multiannual budgetary framework was 
considered as fully complied with. The Commission 
has, however, repeatedly made clear in its quarterly 
reviews that it had concerns about specific elements 
regarding the framework. It again raised the issue in 
the context of the European emester 2014.

107 (ii) 
In view of the high degree of autonomy of the two 
regions and the 308 municipalities in Portugal, the 
Commission had to accept that consolidated regular 
reporting on regional and local public-private part-
nerships and state-owned enterprises was not fea-
sible and would require a disproportionate amount 
of administrative resources.

109
The Commission agrees that working with the IMF 
helped it to manage the programmes as it gained 
experience in crisis management. However, the 
Commission does not agree that the practices 
noted by the Court were only introduced in the 
course of the programmes. The Commission’s fore-
casting spreadsheets were already more detailed 
than the IMF ones. The Commission teams for 
programme missions tended to be larger than those 
of the IMF from the start, due to the participation of 
DGs other than DG Economic and Financial Affairs.

Reply of the Commission 

106

111
Informal arrangements worked well. The exchange 
of information was very thorough and there is no 
evidence that the absence of more formal arrange-
ments proved to be a problem.

111 (iv) 
The institutions have different decision making 
procedures and it appears unrealistic to formalise ex 
ante a disagreement resolution that would actually 
facilitate the resolution of potential disagreements.

114
In Ireland the ECB, as an independent institution 
concerned with monetary policy, did not pro-
vide internal information to the Commission. This 
includes information on or related to its internal 
deliberations on the matter of burden sharing. As 
a result of the ECB’s independent status, the Com-
mission is not in a position to demand such infor-
mation from the ECB. Given that the amount of ECB 
financing was close to annual Irish GDP, continued 
ECB financing was essential for the success of the 
programme. Hence the Commission, as well as the 
IMF, accepted such a condition. Developments since 
then have justified the choice not to bail in senior 
bond holders. Irish debt is clearly sustainable, credit 
default swap spreads are down to the levels of 
France, Belgium and Slovakia, Ireland’s credit rating 
was upgraded and Irish banks repaid most of the 
ECB funding.

Moreover the decision to not bail in senior bond 
holders needs to be considered in its context. There 
existed a blanket guarantee for deposits which was 
devised by the Irish authorities. The benefits of such 
an action also had to be weighed against the costs 
in terms of the spillovers to other banks and the 
litigation risks.

Part III 

Pricing levels at issuance sometimes 
higher than initial guidance from 
banks
These differences are inherent to the process of 
bond issuance.

121
While formal ‘requests for presentations/propos-
als’ were sent to banks as from 2011 (i.e. for all 
EFSM transactions), until 2010 proposals had been 
collected from banks via meetings and conference 
calls and documented in the ‘bank selection notes’. 
These were produced as from the very first crisis-
related BOP transaction in December 2008 and 
were made available to the Court.

122
The Court considered whether the level of pricing 
on the trade date was justified simply by compar-
ing it to the initial price guidance given by banks in 
their proposals, without taking due account of the 
market developments in between these two dates. 
The two cases referred to by the Court refer to one 
single request for proposals. There was a time span 
of 14 and 23 days, respectively, between the initial 
price guidance and the trade dates. Deviations from 
the initial price guidance are inherent to the process 
in general, and in particular in case of such a long 
time span.

This observation should be seen in light of the 
Court’s observation in paragraph 118 that ‘The final 
cost of debt was in line with the market and peer 
levels’.

123
The Commission points out that the weaknesses 
identified referred to the period until 2010 only and 
were limited to documentation issues. They did not 
refer to the debt management process itself.

Reply of the Commission 

107

The Commission recognises that there were some 
shortcomings in the documentation of the borrow-
ing process in the initial years, but the process was 
properly managed and did not impact the outcome.

The Commission considers that in the initial years 
the selection of lead banks was competitive, even 
though not fully documented. With regard to pre-
cautions against the disclosure of non-public mater-
ial or insider information, the Commission complies 
with existing rules and regulations and with market 
practice when carrying out funding operations. 
Furthermore, the banks involved in funding trans-
actions are subject to national securities regula-
tions, including rules on the prevention of insider 
trading, which provides additional assurance to the 
Commission.

The allocation strategy is discussed with the lead 
managing banks beforehand and a standard 
approach is applied, in line with market practice. 
The allocation rules are therefore entirely clear to all 
parties involved. The final allocation is decided by 
the Commission.

The monitoring of the secondary market activities 
was formalised by the Commission in 2012.

The level of bid-offer spreads depends on a number 
of different parameters.

127
The Commission had to perform the borrowing 
operations under exceptionally difficult circum-
stances. Despite this, it successfully managed the 
debt issuances in accordance with market practices.

128
While the Commission acknowledges that the 
procedure manual was updated over time, the 
process was clearly documented from the start in 
separate notes. The Commission points out that the 
improved quality of documentation applies as from 
January 2011. At the time of drafting of the Court’s 
report it had been in place for more than 4 years 
and was used for all EFSM transactions, which repre-
sent the majority of operations both in number and 
amount.

129
The Commission stresses that the selection of lead 
banks was at all times in line with the existing 
procedures and appropriately documented. Initially 
this was based on ‘bank selection notes’, and as 
from January 2011 the process was further formal-
ised based on a ‘request for proposal’ procedure.

130
The Commission considers that it complied with 
existing rules and regulations and with market prac-
tice in this respect. Furthermore, banks are subject 
to national securities regulations, including rules 
on pre-sounding and prevention of insider trading, 
which provides additional assurance.

In addition, Article 6(2)(a) of Regulation (EU) 
No 596/2014 of the European Parliament and of the 
Council of 16 April 2014 on market abuse (OJ L 173, 
12.6.2014, p. 1), which will apply to issuers as from 
3 July 2016, expressly exempts the transactions, 
orders or behaviour of the EU.

133
The allocation strategy is discussed with the lead 
managing banks beforehand and a standard 
approach is applied in line with market practice. 
The allocation is done in close cooperation with 
the syndicate and all orders are made transpar-
ent to the Commission, which has full control over 
the process and gives its agreement on the final 
allocation. All allocation tables are available at the 
Commission.

134
A formal ‘secondary market commitment’ was intro-
duced as a standard feature of the EU’s mandate 
letter for the EFSM, i.e. from January 2011 onwards.

135
While the Commission has been formally checking 
secondary market liquidity since 2012, it should be 
noted that it is not common practice that issuers 
generally check secondary market liquidity.

Reply of the Commission 

108

136
The fact that bid-offer spreads vary between banks 
is normal, especially considering the number of 
market participants.

138
The financing gap estimated at programme incep-
tion is not a plan. It represents an estimate of the 
financing needs to be met during the programme, 
with a buffer built in — in some cases explicitly 
— reflecting the inherent uncertainty in these 
estimates. The buffer serves to ensure that there 
is sufficient financing under worse than expected 
outcomes and to generate investor confidence and 
support the economic recovery process.

139
The safety margins included in early programmes, 
designed in the wake of the Lehman collapse, 
reflect the scale of the perceived uncertainty at the 
time and the need to ensure that the funding enve-
lope would turn out to be sufficient. Banking sector 
needs are particularly difficult to predict, leading 
to a need for a substantial contingency reserve for 
countries like Ireland with significant banking sec-
tor difficulties. The financing envelope needed to 
be large enough to account for this uncertainty and 
to reassure markets that all needs were  covered. It is 
therefore to be expected that, unless adverse devel-
opments materialise, funding needs should come in 
below the envelope.

139 (iv) 
The repayment of the IMF loans before their due 
date relates to the success of the countries — and 
by extension the programmes — in being able to 
access the markets at cheap enough rates to make 
the early repayment politically and financially 
advantageous. Linking the early repayment to lower 
financing needs requires a number of assumptions 
which may or may not hold. Moreover, as indicated 
elsewhere, programme funding included safety 
margins as a signal to markets and were instrumen-
tal to the success of the programmes.

140
It should be noted that Portugal did not fully use all 
the financial assistance available under the pro-
gramme, and that it ended the programme with 
a substantial Treasury buffer.

The easing of monetary conditions is also true for 
the Irish programme.

141
During the programme the IMF disbursements 
were normally made to the central bank to consti-
tute foreign currency reserves, while the Commis-
sion disbursements were made to the Ministry of 
Finance to finance the budget. In 2010 some IMF 
disbursements were also made to the Ministry of 
Finance for the budget. The reason was that the 
budget deficit was higher than originally expected 
because of lower growth and policy slippages, 
while the reserves at the central bank were at an 
adequate level. From this, however, one cannot 
infer that the central bank indirectly covered some 
of the government’s additional financing needs. 
The government managed to service and refinance 
all of its debt obligations during the programme. 
Monetary policy, which is an exclusive competence 
of the independent central bank, naturally also 
affects domestic financing conditions. This, how-
ever, should not be seen as indirect support.

146
The statement on Hungary does not take into 
account the increased absorption of EU funds.

147
It is important to separate out conceptually the 
revenue increasing impact of new measures from 
the reduction in revenues due to falls in economic 
activity. The actual impact of a tax reform cannot 
be judged by looking at the overall performance of 
revenues in an economy. Estimation of the counter-
factual in the absence of the reform is needed.

Reply of the Commission 

109

148
Not all legislative acts referred to introduced 
changes which affect the tax-to-GDP ratio and not 
all of them relate to the BoP programme condition-
ality. The motivations for their introduction were 
complex.

Common Commission reply to 
paragraphs 150 and 151
The change in the structural balance is affected not 
just by the targets set and the policy choices made 
to meet these targets, but also by a wider range 
of factors outside the control of the government 
relating to the external environment. These include 
inflation rates, the composition of growth and mar-
ket sentiment affecting borrowing costs, as well as 
ex post data revisions. In addition, in setting the tar-
gets, country-specific considerations going beyond 
the relationships set out below were taken into 
consideration. Therefore, the relationships between 
the variables mentioned in paragraphs 150 and 151 
are of a complex nature. As a consequence, country 
benchmarking on the basis of these relationships 
may not be revealing in terms of challenges faced 
before the programme or outcomes afterward.

While in general a weaker initial fiscal position 
warrants a faster pace of consolidation, this factor 
should not be seen in isolation from other, some-
times country-specific, factors affecting the fiscal 
imbalances which needed to be corrected. It is also 
to be noted that the period of time granted by the 
Council for the correction of the excessive deficit 
(with the underlying recommended structural effort) 
may not coincide with the programme period.

152
The fiscal effort set out in the programmes was 
determined on the basis of a wide range of factors. 
The initial level of debt was taken into account, but 
other country-specific factors were also important.

As a middle-income non-euro area economy, Roma-
nia is more vulnerable to its public debt level than 
higher-income euro area countries. At the time of 
programme approval, interest rates on Romania’s 
public debt had increased by 300 bps, suggesting 
doubts in international financial markets about the 
country’s sovereign financing position.

153
While temporary fiscal measures do not represent 
a permanent change in the underlying fiscal bal-
ance, they can have a permanent impact on the 
level of the debt stock and thereby improve or 
deteriorate its long-run sustainability.

Not all temporary measures in the programme 
years were introduced to meet deficit targets. In 
some instances temporary or one-off measures 
were necessary (such as bank support measures), or 
were beyond the control of the government (such 
as Court decisions). Temporary measures eventually 
had to be replaced by structural measures to ensure 
that targets continue to be met.

The fiscal surveillance framework in the EU makes 
the important distinction between the headline fis-
cal balance (which includes one-off measures) and 
the structural balance, which measures the perman-
ent fiscal effort (excluding one-off measures). This 
is the reason why countries with an excessive deficit 
are not only recommended to correct it in nomi-
nal terms (i.e. to bring the deficit below the treaty 
threshold of 3 % of GDP), but are also recommended 
a specific structural effort consistent with reaching 
the nominal target.

Therefore, the mere existence of one-off and tem-
porary measures is not automatically contradictory 
to a sustainable correction of the excessive deficit.

153 (i)
It should be added that Portugal also faced one-off 
expenditure-increasing measures amounting to 
2.8% of GDP in 2010 and to 0.6% of GDP in 2011.

Reply of the Commission 

110

153 (iii) 
The excessive deficit procedure for Romania was 
abrogated in June 2013, based on 2012 out-turn 
data. An important condition for the abrogation of 
any excessive deficit procedure is the sustainability 
of the correction, meaning that the deficit has to 
remain credibly below the 3 % of GDP threshold 
during the forecast horizon of the relevant Com-
mission forecast. In turn, the forecast is based on 
measures credibly announced by the government 
and specified in sufficient detail.

153 (iv) 
The primary motivation for the liability guarantee in 
Ireland was not as a revenue-generating measure.

155
The Commission considers that it is not meaningful 
to compare IMF and Commission figures on compli-
ance with conditions at the end of the programme, 
because the two institutions assess them against 
different benchmarks.

Some deadlines were initially set very ambitiously 
to encourage implementation, but were later 
adjusted to be as the programme evolved.

158
In the Commission’s view the concept used by the 
Court of ‘structural content’ is not a meaningful 
metric for analysing policy measures and drawing 
conclusions about their importance. Conditions that 
require more intermediate steps (and are therefore 
classified by the Court as having ‘low structural 
content’) may be at least as important as conditions 
that are more straightforward to implement.

The classification used regarding the structural con-
tent of the conditions does not capture the essence 
and the importance of individual conditions. Many 
of the most critical structural reforms will require 
intermediate stages such as reviews or consulta-
tions (classed as ‘low structural content’) before 
the reform is finally put into law and implemented. 
The classification used by the Court of ‘high struc-
tural content’ is therefore not synonymous with 
‘important’.

160 (iii) 
For certain reforms, the desired effect will only 
materialise in the longer run, after the end of the 
programme.

161
The reference to the Hungarian case for reform 
reversal (public-sector wage cut) seems to be inap-
propriate as the most significant savings measure 
in this field (abolition of the 13th month wage) 
remained intact. Explicit reversals were observ-
able in the areas of child allowances and fiscal 
governance.

164
See Commission reply to Box 10.

Box 10 First alinea
In Hungary the low interest from the banking sector 
side was also explained by the eventual success of 
the coordination efforts with western European par-
ent banks, which could not be known at the time 
of the launch of the programme and the design of 
the bank support package. Specifically, the  largest 
foreign-owned commercial banks committed to 
maintain their overall exposure to Hungary, first 
on a bilateral basis with the central bank, and later 
in the multilateral framework of the European 
Banking Coordination Initiative. This combined 
action helped to improve financial stability and 
invest or confidence, including in a broader regional 
perspective.

Box 10 Fifth alinea
Public-sector employment in Portugal decreased 
by close to 10 % between 2011 and 2014, more than 
the 2 % annual reduction required by the MoU. As 
civil servants cannot be laid off, a substantial part of 
the reduction had to be achieved by not replacing 
employees who left. Early retirement was a specified 
part of the personnel reduction. It turned out to be 
significant, but this does not mean the budgetary 
impact was limited. In addition, further measures 
were introduced by the government to reduce head-
count, such as the mutual agreement redundancy 
scheme. As an overall result of reductions in staffing 
and wage levels, the public wage bill was reduced 
by close to 17 % between 2010 and 2014.

Reply of the Commission 

111

Common Commission reply to 
paragraphs 176, 177 and 178
In Hungary, households’ foreign exchange indebt-
edness (predominantly in Swiss francs) was not 
a particularly burning policy issue during the pro-
gramme period (i.e. until Q1 2010).

Domestic lending in foreign currencies was not 
an issue in the euro area programmes or in Latvia, 
which had a programme policy objective of main-
taining the peg with the euro.

In Romania, conditions were included to curb/limit 
lending in foreign currency through regulations 
addressed and closely monitored in the financial 
sector. A permanent dialogue was maintained with 
the National Bank. To address the vulnerabilities 
associated with foreign currency-denominated 
lending, the National Bank of Romania adopted 
measures aimed at further discouraging unhedged 
consumer borrowing in foreign exchange in 2011. 
Some of these measures were also extended later 
to unhedged small and medium-sized enterprises, 
in line with the ESRB’s recommendations. Moreover, 
as part of the programme conditions, in the frame-
work of ‘First home — Prima casa’, the Romanian 
government stopped providing state guarantees for 
mortgage loans denominated in foreign exchange 
in August 2013.

165
Euro area programmes focused on restoring fiscal 
and financial stability as well as enhancing com-
petitiveness by addressing structural deficiencies. 
Restoring the external balance was an implicit part 
of conditionality for euro area programmes, but was 
not the immediate key concern.

The current-account and trade balances should not 
be used as competitiveness indicators in isolation, 
since external balances can be driven by both struc-
tural change and cyclical factors. This suggests that 
part of the improvement may unwind when cyclical 
conditions improve. By exclusively looking at the 
current-account/trade balance without analysing 
the underlying drivers it is not possible to identify 
improvements in competitiveness.

167
As a euro area Member State, Ireland was not in 
a balance of payment assistance programme. As 
such the external financing gap was not central to 
the programme as was the case in the non-euro 
area Member States. It should be noted that Ireland 
consistently ran a substantial trade surplus, with 
considerable volatility. In this context, the presenta-
tion of cumulative data on forecast errors may be 
misleading. Moreover, the trade balance improved 
slightly between 2011 and 2014, making a positive 
contribution to current-account adjustment. Fore-
casting the Irish external balance is complicated 
considerably by the activities of large multinational 
enterprises, which dominate Ireland’s traded sector.

The Commission considers that no lessons can be 
drawn from Figure 11.

168
It is debatable whether ‘The trade balance captures 
more closely the effects of changes in a country’s 
competitiveness than the current account.’

Reply of the Commission 

112

Conclusions and recommendations

179
See Commission reply to paragraph III.

180
See Commission reply to paragraph IV.

182
The Commission increased its ability to mobilise 
expertise after 2009 in connection with the euro 
area programmes, and was better able to acquire 
external expertise.

Recommendation 1
The Commission accepts recommendation 1.

The Commission improved its mobilisation of 
expert ise over the years of the crisis, as evidenced 
by the fact that it was able to mobilise more expert-
ise in the euro area programmes, which came after 
the non-euro area programmes. The SRSS has 
recently been set up within the Commission. The 
Commission will examine how some key principles 
for rapid mobilisation of the expertise needed 
could be further strengthened into an institution-
wide framework where appropriate.

The Commission will take on board, where appro-
priate, the need to develop procedures for the 
enhanced surveillance and management of possible 
new financial assistance programmes for euro area 
Member States.

183
See Commission reply to paragraph VIII.

It was very difficult to assess ex post the plausibility 
of key assumptions in subsequent reviews.

Recommendation 2
The Commission accepts recommendation 2, while 
highlighting the need to ensure that recording 
activities do not place a disproportionate burden 
on forecasters, particularly in a programme context 
and given resource constraints.

The Commission has already improved procedures 
and document management since the first pro-
grammes were put into place. It will seek to further 
improve the implementation of its document- 
management and quality-control policy.

The Commission is developing a pilot forecast 
model, initially for the euro area as a whole with 
country-specific modules. The aim is not to replace 
the existing judgement-based forecast, but to 
examine how this can be used by the Commis-
sion to deliver quality checks that complement its 
judgement-based forecasts. However, the Commis-
sion notes that a model is unlikely to be particularly 
useful in times of unusual economic events.

184
See Commission reply to paragraphs IX and X.

Recommendation 3 (a) 
The Commission accepts recommendation 3 (a).

The Commission has already improved record-
keeping since the inception of the programmes. It 
will focus on ensuring that the new procedures are 
fully implemented in line with the Commission’s 
document-management policy, without undermin-
ing the ability of programme teams to meet tight 
timelines.

Recommendation 3 (b) 
The Commission accepts recommendation 3 (b) and 
will examine how to further improve the record-
ing of key decisions in line with the Commission’s 
document-management policy without slowing 
down the decision-making process.

Reply of the Commission 

113

185
See Commission reply to paragraph XI.

186
See Commission reply to paragraph XII.

187
See Commission reply to paragraph XII.

188
See Commission reply to paragraph XIV.

189
See Commission reply to paragraph XIII.

The key documents resulting from expert analysis 
were subject to review by officials outside the main 
programme team, including senior management 
and the heads of horizontal units. Review reports 
were subject to consultation procedures with rele-
vant directorates-general. Draft documents were 
exchanged and cross-checked with partner institu-
tions and the negotiation outcomes reported in 
detail to the EFC and EWG.

Recommendation 4
The Commission accepts recommendation 4. The 
Commission will enhance the procedures for the 
review of programme management and the con-
tent of programme documents, within the existing 
resource constraints and without causing undue 
delays.

190
The Commission reply to paragraph XV sets out the 
reasons why accruals-based data are used.

Recommendation 5
The Commission accepts recommendation 5. It will 
aim to include additional variables that it can col-
lect with short time lags, such as a quarterly cash 
balance and/or an arrears target in the MoUs, to 
assist in the monitoring of fiscal targets.

191
See Commission reply to paragraphs XV 
and 104-107.

Instalments were released on the basis of an in-
depth assessment of whether countries had com-
plied with conditionality. Any delays in compliance 
were assessed on a case-by-case basis. More over, 
conditions that are ‘not truly important for crisis res-
olution and repayment of the loans’ may nonethe-
less be appropriate insofar as they support growth 
and reduce the risk of loans not being repaid under 
unexpected circumstances. The audit does not pro-
vide evidence that irrelevant reforms were included.

Recommendation 6 (a)
The Commission accepts recommendation 6 (a).

Recommendation 6 (b)
The Commission accepts recommendation 6 (b), 
but points out that in some cases guaranteeing the 
adoption of reforms would not make sense until the 
preparatory steps have identified the scale of the 
issue to be addressed or the possible responses.

Recommendation 6 (c)
The Commission partially accepts recommenda-
tion 6 (c). The Commission does not accept the 
obligation for programme teams to justify the need 
for each and every condition because of the crucial 
role of the recipient country in setting out its own 
vision for the reform programme.

Reply of the Commission 

114

The Commission points out that what matters most 
is that there is a coherent and integrated set of 
reforms to address key economic challenges. Within 
that programme there may often be choices to be 
made as to which reform package to choose. Hence, 
conditions should not be considered in isolation. 
The Commission also points out that reforms that 
increase medium-term growth are also important 
for improving the fiscal position and reducing the 
risk of non-repayment of financial assistance. EU 
assistance often has very long maturities, making 
strong growth an important factor in underpinning 
a country’s ability to pay back its loans.

Finally, the selection of conditions is a matter for 
negotiation with the recipient country. It should 
support countries’ ability to set the agenda for 
their programmes. This is a prerequisite for them 
taking ownership of the reform process, which is 
an important determinant of programme success. 
Conditionality is checked by management and also 
at the political level.

Recommendation 6 (d) 
The Commission accepts recommendation 6 (d). 
For the conditions that are set it will seek to reply 
on measurable data to the largest extent possible. 
It emphasises, however, that the impact of condi-
tions is not equally measurable, some results are of 
a qualitative rather than a quantitative nature and 
not all conditions have readily available data for 
assessment.

Recommendation 7
The Commission partially accepts recommenda-
tion 7. It has already set out guidelines for cooper-
ation with the IMF and ECB and is taking other steps 
to facilitate interinstitutional cooperation during 
programmes. However, the Commission  considers 
that clarifying this cooperation should avoid for-
malisation making the decision-making process 
burdensome, especially given the time pressures 
involved. Flexibility should be kept in resolving dif-
ferences of opinion as attempting to formally codify 
a dispute resolution process would be both difficult 
and of little value.

193
The Court considered whether the level of pricing 
on the trade date was justified simply by compar-
ing it to the initial price guidance given by banks in 
their proposals, without taking due account of the 
market developments in between the date of the 
initial pricing guidance and the actual issue date. 
Deviations from the initial price guidance are inher-
ent to the process in general, and in particular in 
case of a long time span.

194
The Commission considers that there were no gaps 
in the debt management process but only some 
gaps in the documentation regarding the initial 
transactions.

Recommendation 8 (a) 
The Commission accepts recommendation 8 (a).

The recommendation has already been imple-
mented. The allocation is done in close cooperation 
with the syndicate and all orders are made transpar-
ent to the Commission, which has full control over 
the process.

Recommendation 8 (b) 
The Commission accepts recommendation 8 (b).

The recommendation has already been imple-
mented. Since January 2011, the processes for send-
ing ‘requests for proposals’, for receiving banks’ 
proposals and for mandating lead banks have been 
well documented.

Recommendation 8 (c) 
The Commission accepts recommendation 8 (c).

The recommendation has already been imple-
mented. Lead managers formally accept ‘under-
writing commitments’ in case the order book does 
not reach the target size (pre-issuance), as well as 
‘secondary market commitments’ to provide for an 
active secondary market trading (post-issuance).

Reply of the Commission 

115

Recommendation 8 (d) 
The Commission accepts recommendation 8 (d).

200
See Commission reply to paragraph XVII.

The recommendation has already been imple-
mented. A regular assessment of markets is docu-
mented in the Treasury Management Committee 
reports. A more specific assessment is carried out 
prior to each bond issue and is also documented ex 
post in a post-deal note. Moreover, the turnover of 
purchase and sale transactions of EU bonds is pro-
vided by banks on a quarterly basis and monitored 
by the Commission.

195
See Commission reply to recommendation 9.

196
See Commission reply to paragraph 139.

197
It should be noted that Portugal did not fully use 
all the financial assistance available under the 
programme and that it ended the programme with 
a substantial Treasury buffer.

198
This statement mixes the impact of new policy 
measures with the fiscal impact of economic 
conditions. See also the Commission reply to 
paragraph 147.

199
As set out in the Commission reply to para-
graph 150 (i), the effect of the starting point on the 
pace of consolidation should not be seen in isola-
tion from other, sometimes country-specific, factors 
affecting the fiscal imbalances which needed to be 
corrected. The Commission reply to paragraph 153 
explains why one-off measures may be necessary 
and cannot be described as having unsustainable 
results.

201
The Commission reply to paragraph 158 sets out 
why the Commission does not consider the Court’s 
metric for classifying the structural conditions as 
being representative of their importance.

202
The fact that conditions were included in the pro-
gramme and did not yield observable results within 
the time frame of the programme does not mean 
that they failed, or that their effects were expected 
within the time frame of the programme. Structural 
reforms take time to materialise, and in most cases 
their impact can only be observed in the long-run.

203
See Commission reply to paragraph 165.

Recommendation 9
The Commission accepts recommendation 9. It will 
seek to further improve its understanding of the 
adjustment process under the programmes through 
the current series of comprehensive ex post assess-
ments and to draw lessons from them. The assess-
ments cover all aspects of the economic adjustment 
under the programmes, including the three sugges-
tions raised by the Court. An ex post assessment of 
the economic adjustment programme of Ireland has 
already been published.

Recommendation 9 (a) 
The Commission accepts recommendation 9 (a).

Reply of the Commission 

116

Recommendation 9 (b) 
The Commission accepts recommendation 9 (b). 
In line with the political guidelines of President 
Juncker, the Commission has recently performed 
an ex ante assessment of the social impacts of the 
new adjustment for Greece. For any other new pro-
gramme, such an assessment will be performed.

Recommendation 9 (c) 
The Commission accepts recommendation 9 (c).

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When the 2008 financial crisis triggered a European 
sovereign debt crisis, some Member States were forced to 
seek macrofinancial assistance. This report examines how 
well the European Commission managed the assistance 
provided to five countries — Hungary, Latvia, Romania, 
Ireland and Portugal. We found that the Commission was 
unprepared for the magnitude of the crisis, which largely 
explains the significant initial weaknesses in its 
management processes. A number of the weaknesses we 
identified still persist, and the main message of the report 
is that the Commission has to strengthen its procedures 
for the management of financial assistance.

EUROPEAN
COURT
OF AUDITORS