CELEX: 52010SC0743
Language: en
Date: 2010-06-15
Title: Proposal for a Council Decision on the existence of an excessive deficit in Denmark

EN
EN    EN
 ---pagebreak---    EUROPEAN COMMISSION
                                     Brussels, 15.6.2010
                                     SEC(2010) 743 final
                        Proposal for a
                  COUNCIL DECISION
    on the existence of an excessive deficit in Denmark
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 ---pagebreak---                                     EXPLANATORY MEMORANDUM
   1.         THE APPLICATION OF THE STABILITY AND GROWTH PACT IN THE CURRENT CRISIS
              SITUATION
   Many EU countries are presently facing general government deficits above the 3% of GDP
   reference value set in the Treaty. The often strong deterioration in the deficit as well as the
   debt positions must be seen in the context of the unprecedented global financial crisis and
   economic downturn in 2008/09. Several factors are at play. First, the economic downturn
   brings about declining tax revenue and rising social benefit expenditure (e.g. unemployment
   benefits). Second, recognising that budgetary policies have an important role to play in the
   current extraordinary economic situation, the Commission called for a fiscal stimulus in its
   November 2008 European Economic Recovery Plan (EERP), endorsed by the European
   Council in December. The Plan explicated that the stimulus should be timely, targeted and
   temporary and differentiated across Member States to reflect their different positions in terms
   of public finance sustainability and competitiveness and should be reversed when economic
   conditions improve. Finally, several countries have taken measures to stabilise the financial
   sector, some of which have impacted on the debt position or constitute a risk of higher deficits
   and debt in the future, although some of the costs of the government support could be
   recouped in the future.
   The Stability and Growth Pact requires the Commission to initiate the excessive deficit
   procedure (EDP) whenever the deficit of a Member State exceeds the 3% of GDP reference
   value. The amendments to the Stability and Growth Pact in 2005 aimed at ensuring that in
   particular the economic and budgetary background was taken into account fully in all steps in
   the EDP. In this way, the Stability and Growth Pact provides the framework supporting
   government policies for a prompt return to sound budgetary positions taking account of the
   economic situation, and thereby ensuring long-term sustainability of public finances.
   2.         PREVIOUS STEPS IN THE EXCESSIVE DEFICIT PROCEDURE
   Article 126 of the Treaty on the Functioning of the European Union lays down an excessive
   deficit procedure (EDP). This procedure is further specified in Council Regulation (EC) No
   1467/97 “on speeding up and clarifying the implementation of the excessive deficit
   procedure”1, which is part of the Stability and Growth Pact.
   According to Article 126(2) of the Treaty, the Commission has to monitor compliance with
   budgetary discipline on the basis of two criteria, namely: (a) whether the ratio of the planned
   or actual government deficit to gross domestic product (GDP) exceeds the reference value of
   3% (unless either the ratio has declined substantially and continuously and reached a level
   that comes close to the reference value; or, alternatively, the excess over the reference value is
   only exceptional and temporary and the ratio remains close to the reference value); and (b)
   whether the ratio of government debt to GDP exceeds the reference value of 60% (unless the
   ratio is sufficiently diminishing and approaching the reference value at a satisfactory pace).
   1
            OJ L 209, 2.8.1997, p. 6. The report also takes into account the “Specifications on the implementation
            of the Stability and Growth Pact and guidelines on the format and content of stability and convergence
            programmes”, endorsed by the ECOFIN Council of 10 November 2009, available at
            http://ec.europa.eu/economy_finance/sgp/legal_texts/index_en.htm.
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 ---pagebreak---    Article 126(3) stipulates that, if a Member State does not fulfil the requirements under one or
   both of these criteria, the Commission has to prepare a report. This report also has to “take
   into account whether the government deficit exceeds government investment expenditure and
   take into account all other relevant factors, including the medium-term economic and
   budgetary position of the Member State”.
   On the basis of the data notified by the Danish authorities in April 20102 and taking into
   account the Commission services’ spring 2010 forecast, the Commission adopted a report
   under Article 126(3) for Denmark on 12 May 20103.
   Subsequently, and in accordance with Article 126(4), the Economic and Financial Committee
   formulated an opinion on the Commission report on 27 May 2010.
   3.         THE EXISTENCE OF AN EXCESSIVE DEFICIT
   According to data notified by the Danish authorities in April 2010, the general government
   deficit in Denmark is planned to reach 5.4% of GDP in 2010, thus exceeding the 3% of GDP
   reference value. The Commission report under Article 126(3) considered that the planned
   deficit was not close to the 3% of GDP reference value, but that the planned excess over the
   reference value could be qualified as exceptional within the meaning of the Treaty and the
   Stability and Growth Pact. In particular, it resulted from a severe economic downturn in the
   sense of the Treaty and the Stability and Growth Pact. According to the Commission services’
   2010 spring forecast, real GDP in Denmark is projected to recover at 1.6% in 2010 after the
   sharp contraction of 4.9% in 2009. The 2009 recession reflected the abrupt decline in private
   consumption, investment and exports as a consequence of the financial crisis and the global
   recession, in particular the slump in demand from the main trading partners (Germany, United
   Kingdom, Sweden and Norway). The deficit in 2010 is a consequence of both the economic
   downturn and the stimulus measures taken in line with the EERP by the Danish authorities.
   However, the planned excess over the reference value cannot be considered temporary.
   According to the Commission services’ spring 2010 forecast, the deficit would decline to
   4.9% of GDP in 2011 on a no-policy change4 basis. The deficit criterion in the Treaty is not
   fulfilled.
   According to data notified by the Danish authorities in April 2010, the general government
   gross debt remains below the 60% of GDP reference value, at 45.1% of GDP in 2010. The
   Commission services’ spring 2010 forecast projects the debt ratio to be at 46% of GDP in
   2010 and to increase to 49.5% of GDP in 2011, still to remain below the 60% of GDP
   reference value. The debt criterion in the Treaty is fulfilled.
   In line with the provisions in the Treaty and the Stability and Growth Pact, the Commission
   also analysed in its report “relevant factors”. According to the Stability and Growth Pact,
   2
            According to Council Regulation (EC) No 479/2009, Member States have to report to the Commission,
            twice a year, their planned and actual government deficit and debt levels. The most recent notification
            of Denmark can be found at:
            http://epp.eurostat.ec.europa.eu/portal/page/portal/government_finance_statistics/excessive_deficit/edp_
            notification_tables.
   3
            All EDP-related documents for Denmark can be found at the following website:
            http://ec.europa.eu/economy_finance/sgp/deficit/countries/index_en.htm.
   4
            The no-policy change forecast takes into account the (partial) withdrawal of measures of extraordinary
            nature linked to the crisis.
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 ---pagebreak---    these can only be taken into account in the steps leading to the decision on the existence of an
   excessive deficit if the deficit satisfies the double condition of closeness and temporariness. In
   the case of Denmark, the double condition is not met. Considered on their own merit, the
   relevant factors in the current case seem to be relatively favourable.
   The opinion of the Economic and Financial Committee in accordance with Article 126(4) of
   the Treaty is consistent with the assessment in the Commission report under Article 126(3).
   The Commission, having taken into account its report under Article 126(3) and the opinion of
   the Economic and Financial Committee under Article 126(4), is of the opinion that an
   excessive deficit exists in Denmark. This opinion, adopted by the Commission on [15 June
   2010], is herewith addressed to the Council according to Article 126(5). The Commission
   proposes that the Council shall decide accordingly, in conformity with Article 126(6). In
   addition, the Commission is submitting to the Council a recommendation for a Council
   Recommendation to be addressed to Denmark with a view to bringing the situation of an
   excessive deficit to an end according to Article 126(7).
   4.       RECOMMENDATIONS TO END THE EXCESSIVE DEFICIT SITUATION
   According to Article 3(4) of Council Regulation (EC) No 1467/97, the Council
   recommendation under Article 126(7) has to establish a deadline of six months at most for
   effective action to be taken by the Member State concerned as well as a deadline for the
   correction of the excessive deficit, which “should be completed in the year following its
   identification unless there are special circumstances”. Article 2(6) of the Regulation implies
   that the “relevant factors” considered in the Commission report under Article 126(3) of the
   Treaty have to be taken into account in deciding whether special circumstances exist. Article
   3(4) of the Regulation specifies that the Council has to recommend that the Member State
   achieves a “minimum annual improvement of at least 0.5% of GDP as a benchmark, in its
   cyclically adjusted balance net of one-off and temporary measures, in order to ensure the
   correction of the excessive deficit within the deadline set in the recommendation”.
   Special circumstances, which are relevant for the greater flexibility in the application of the
   EDP introduced with the 2005 reform of the Stability and Growth Pact, are deemed to exist in
   the case of Denmark. In particular, the 2009 recession reflected the abrupt decline in private
   consumption, investment and exports as a consequence of the financial crisis and the global
   recession, in particular the slump in demand from the main trading partners (Germany, United
   Kingdom, Sweden and Norway). The deficit in 2010 is a consequence of both the economic
   downturn and the stimulus measures taken in line with the EERP by the Danish authorities.
   Against this background, it is appropriate to consider the correction of the excessive deficit in
   a medium-term framework with a deadline for the correction of 2013. Recognising that the
   Danish budgetary position in 2010 resulted from measures taken in response to the crisis and
   amounting to 2.2% of GDP in 2009 and 1.3% in 2010, which was an appropriate response in
   line with the European Economic Recovery Plan, and the free play of automatic stabilisers,
   the Danish authorities should implement the fiscal measures in 2010 as envisaged. In
   particular, in view of the absence of major economic imbalances, a credible and sustainable
   adjustment path would require the Danish authorities to ensure an average annual structural
   adjustment of ½% of GDP over the period 2011-2013 and specify the measures that are
   necessary to achieve the correction of the excessive deficit by 2013, cyclical conditions
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 ---pagebreak---    permitting, and accelerate the reduction of the deficit if economic or budgetary conditions
   turn out better than currently expected.
   Enhanced surveillance under the EDP, which seems necessary in view of the deadline for the
   correction of the excessive deficit, will require regular and timely monitoring of the progress
   made in the implementation of the fiscal consolidation strategy to ensure the correction of the
   excessive deficit. In this context, a separate chapter in the updates of Denmark's convergence
   programme which will be prepared between 2010 and 2013 could usefully be devoted to this
   issue.
                      Comparison of key macroeconomic and budgetary projections
                                                                     2007      2008      2009      2010     2011    2012     2013
                 Real GDP                    COM spring 2010          1,7      -0,9       -4,9       1,6     1,8     n.a.     n.a.
                (% change)                  CP February 2010          n.a.     -0,9       -4,3       1,3     1,6      2.0     2,3
               Output gap1                   COM spring 2010          2,6       0,2       -5,1      -3,9    -2,7     n.a.     n.a.
          (% of potential GDP)              CP February 20103         n.a.      0.3       -4.5      -3.9    -3.1     -2.0    -0.9
      General government balance             COM spring 2010          4,8       3,4       -2,7      -5,5    -4,9     n.a.     n.a.
               (% of GDP)                   CP February 2010          n.a.      3,4       -2,9      -5,3    -4,1     -3,1    -1,8
             Primary balance                 COM spring 2010          6,3       4,8       -0,7      -3,4    -2,7     n.a.     n.a.
               (% of GDP)                   CP February 2010          n.a.      4,8       -1,3      -3,7    -2,3     -1,2     0,3
      Cyclically-adjusted balance1           COM spring 2010          3,1       3,3        0,6      -3,0    -3,1     n.a.     n.a.
               (% of GDP)                   CP February 2010          n.a.      3.2        0.0      -2.8    -2.1     -1.7    -1.1
            Structural balance4              COM spring 2010          3,1       3,3        0,6      -2,7    -3,1     n.a.     n.a.
               (% of GDP)                   CP February 2010          n.a.      3.2        1.4      -1.1    -1.0     -0.8    -0.3
         Government gross debt               COM spring 2010         27,4      34,2       41,6     46,0     49,5     n.a.     n.a.
               (% of GDP)                   CP February 2010          n.a.     33,4       38,5     41,8     46,2     48,3    48,1
    Notes:
    1
      Output gaps and cyclically-adjusted balances from the programmes as recalculated by Commission services on the basis
    of the information in the programmes.
    2
      Based on estimated potential growth of 1.4%, 0.6%, 0.5% and 0.9% respectively in the period 2008-2011.
    3
      Based on estimated potential growth of 1.4%, 0.6%, 0.5% and 0.9% respectively in the period 2008-2011.
    4
      Cyclically-adjusted balance excluding one-off and other temporary measures. One-off and other temporary measures are
    1.4% of GDP in 2009, 1.7% in 2010, 1.1% in 2011, 0.9% in 2012, 0.8% in 2013 and 0.0% in 2015; all deficit-reducing
    according to the most recent programme and 0.2% of GDP in 2010 deficit-reducing according to the Commission
    services' spring 2010 forecast. Due to differences in methodology, the one-offs reported in the programme do not qualify
    as one-offs according to the Commission services' definition. Using this definition, the one-offs would be 0.2%-of-GDP
    deficit reducing in 2010 and zero in the remaining years.
    Source:
    Convergence programme (CP); Commission services’ spring 2010 forecasts (COM); Commission services’ calculations.
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 ---pagebreak---                                               Proposal for a
                                        COUNCIL DECISION
                          on the existence of an excessive deficit in Denmark
   THE COUNCIL OF THE EUROPEAN UNION,
   Having regard to the Treaty on the Functioning of the European Union, and in particular
   Article 126(6) thereof,
   Having regard to the proposal from the European Commission,
   Having regard to the observations made by Denmark,
   Whereas:
   (1)     According to Article 126 of the Treaty on the Functioning of the European Union
           Member States shall avoid excessive government deficits.
   (2)     The Stability and Growth Pact is based on the objective of sound government finances
           as a means of strengthening the conditions for price stability and for strong sustainable
           growth conducive to employment creation.
   (3)     The excessive deficit procedure (EDP) under Article 126 of the Treaty, as clarified by
           Council Regulation (EC) No 1467/97 on speeding up and clarifying the
           implementation of the excessive deficit procedure5 (which is part of the Stability and
           Growth Pact), provides for a decision on the existence of an excessive deficit. The
           Protocol on the excessive deficit procedure annexed to the Treaty sets out further
           provisions relating to the implementation of the EDP. Council Regulation (EC) No
           479/20096 lays down detailed rules and definitions for the application of the provision
           of the said Protocol.
   (4)     The 2005 reform of the Stability and Growth Pact sought to strengthen its
           effectiveness and economic underpinnings as well as to safeguard the sustainability of
           the public finances in the long run. It aimed at ensuring that in particular the economic
           and budgetary background was taken into account fully in all steps in the EDP. In this
           way, the Stability and Growth Pact provides the framework supporting government
           policies for a prompt return to sound budgetary positions taking account of the
           economic situation.
   (5)     Article 126(5) of the Treaty requires the Commission to address an opinion to the
           Council if the Commission considers that an excessive deficit in a Member State exists
           or may occur. Having taken into account its report in accordance with Article 126(3)
   5
           OJ L 209, 2.8.1997, p. 6.
   6
           OJ L 145, 10.6.2009, p. 1.
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 ---pagebreak---        and having regard to the opinion of the Economic and Financial Committee in
       accordance with Article 126(4), the Commission concluded that an excessive deficit
       exists in Denmark. The Commission therefore addressed such an opinion to the
       Council in respect of Denmark on [15 June 2010]7.
   (6) Article 126(6) of the Treaty states that the Council should consider any observations
       which the Member State concerned may wish to make before deciding, after an overall
       assessment, whether an excessive deficit exists. In the case of Denmark, this overall
       assessment leads to the following conclusions.
   (7) According to data notified by the Danish authorities in April 2010, the general
       government deficit in Denmark is planned to reach 5.4% of GDP in 2010, thus
       exceeding the 3% of GDP reference value. The planned deficit is not close to the 3%
       of GDP reference value, but that the planned excess over the reference value can be
       qualified as exceptional within the meaning of the Treaty and the Stability and Growth
       Pact. In particular, it resulted from a severe economic downturn in the sense of the
       Treaty and the Stability and Growth Pact. According to the Commission services’
       2010 spring forecast, real GDP in Denmark contracted by 4.9% in 2009 and is
       projected to recover at 1.6% in 2010. The deficit in 2010 is a consequence of both the
       economic downturn and the stimulus measures taken in line with the EERP by the
       Danish authorities. However, the planned excess over the reference value cannot be
       considered temporary. According to the Commission services’ spring 2010 forecast,
       the deficit would decline to 4.9% of GDP in 2011 on a no-policy change8 basis. The
       deficit criterion in the Treaty is not fulfilled.
   (8) According to data notified by the Danish authorities in April 2010, the general
       government gross debt remains below the 60% of GDP reference value, at 45.1% of
       GDP in 2010. The Commission services’ spring 2010 forecast projects the debt ratio to
       be at 46% of GDP in 2010 and to increase to 49.5% of GDP in 2011, still to remain
       below the 60% of GDP reference value. The debt criterion in the Treaty is fulfilled.
   (9) According to Article 2(4) of Council Regulation (EC) No 1467/97, “relevant factors”
       can only be taken into account in the steps leading to the Council decision on the
       existence of an excessive deficit in accordance with Article 126(6) if the double
       condition - that the deficit remains close to the reference value and that its excess over
       the reference value is temporary - is fully met. In the case of Denmark, this double
       condition is not met. Therefore, relevant factors are not taken into account in the steps
       leading to this decision.
   7
       All EDP-related documents for Denmark can be found at the following website:
       http://ec.europa.eu/economy_finance/sgp/deficit/countries/index_en.htm.
   8
       The no-policy change forecast takes into account the (partial) withdrawal of measures of extraordinary
       nature linked to the crisis.
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 ---pagebreak---    HAS ADOPTED THIS DECISION:
                                              Article 1
   From an overall assessment it follows that an excessive deficit exists in Denmark.
                                              Article 2
   This decision is addressed to The Kingdom of Denmark.
   Done at Brussels, 15.6.2010
                                               For the Council
                                               The President
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