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EXCESSIVE DEFICIT PROCEDURE : COMMISSION TO SHINE SPOTLIGHT ON 2008 BUDGET SHORTFALLS.

Lithuania, Hungary, Latvia and Malta are to come under scrutiny at a European Commission meeting, on 27 January, for posting excessive deficits in 2008. The four countries will be judged on how effectively they have cut spending since they were brought under the corrective arm of the EU's Stability and Growth Pact last year, which is triggered when member states post deficits above 3% of gross domestic product and debt exceeds 60% of GDP.

Although there should be no surprises for the four countries, they will be looking to events in Greece, which was told in December that it had not taken "effective action" to control a deficit that ballooned to 12.7% of GDP in 2009. At the same time, under pressure from Paris, the Commission gave Ireland, France, Spain and the UK one-year extensions to correct their deficits.

First alerted to deficit problems last February, Malta was not brought under the excessive deficit procedure until May, after it revised up its 2008 shortfall to 4.7%. This is not the first time Malta has faced a slap on the wrist by the Commission. In 2004, just after joining the bloc, it was told to reduce a deficit worth 10% of GDP and government debt of just over 70%. The Council has said that the country must cut costs and bring the deficit below the 3% limit by this year at the latest.

Lithuania was brought under the excessive deficit procedure last June and given until 2011 to correct a 2008 deficit measuring 3.2% of GDP, just overshooting the EU's limit. Economic activity dropped 18% in the country in 2009, one of the worst results in the EU, and the Commission estimated in its most recent economic forecast that growth will fall by 3.9% this year. The 2009 deficit subsequently skyrocketed to 9.8% and is forecast to remain around 9%, despite pension and wage cuts. In July 2009, the Council recommended annual spending cuts worth 1.5% of GDP to bring the deficit down.

Since joining the EU in 2004, the government of Hungary has been battered by soaring expenditure, made worse by moves to stimulate economic growth in 2006, which pushed the deficit over 9% of GDP. In 2008, Budapest had managed to get it down to 3.8%, but the financial crisis left the government stranded. General government debt is on the rise, and will hover around 80% this year if borrowing is not curbed. A joint EU-IMF aid package worth 20 billion sent out last year could not stem the huge contraction in growth, which tumbled by 6.5% in 2009. The Council agreed in July that Hungary should get until 2011 to correct the deficit.

Latvia fell victim to tumbling economic growth in 2009, seeing an 18% drop in output, despite outstripping its EU counterparts in the years leading up to the financial crash. It put paid to Latvia's efforts to correct a 2008 deficit of 4.1% of GDP, which soared to 9% last year and the country was forced to seek help. A joint EU-IMF aid package of 7.5 billion has been sent out in instalments, and in July the Council gave the government in Riga until 2012 to curb its spending, saying it needed to shave over 2% off the budget every year to keep the deficit on target.

How the excessive deficit procedure works

- Twice a year governments send deficit and debt estimates to Eurostat

- The Commission puts together reports on countries that exceed the Stability and Growth pact limits of 3% of GDP for deficits, 60% of GDP for debt (Article 126 of the treaty)

- The Commission recommends that Council takes a formal decision on the deficit (after feedback from the Economic and Financial Committee)

- The Council decides if a deficit exists and recommends a deadline for correction

- After six months, the Commission reviews the actions taken to correct the deficit

- The Commission can say that no effective action has been taken, which needs to be confirmed by the Council

- If a member state consistently fails to take action, sanctions or other penalties can be imposed (Article 126.11)
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Publication:European Report
Geographic Code:4EXHU
Date:Jan 25, 2010
Words:693
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