Tuesday, July 10, 2012

Extending the Excessive Deficit Deadline

One of the few concrete decisions discussed at last night’s Eurogroup meeting and made at today’s European Council meeting was that which extended the deadline for Spain to meet the 3% of GDP deficit limit. 

The decision is relatively insignificant in the overall scheme of things and pushes the timeline for Spain to end its “excessive” deficit from 2013 to 2014.  At the start of the EDP it was 2012.  This is really only catching up with reality as there was little chance of Spain having a deficit below 3% of GDP next year anyway. Ireland’s experience in the Excessive Deficit Procedure has seen also this extension happen twice. 

The first Council Recommendation to Ireland under the EDP was adopted on the 27th April 2009 and said that:

On the basis of the macroeconomic outlook of the Commission services' January 2009 interim forecast, the Irish authorities should put an end to the present excessive deficit situation by 2013.

This was revised later that year by a subsequent Council Recommendation to Ireland which was adopted on the 2nd of December 2009:

Recognising that Ireland’s budgetary position in 2009 resulted from the interplay of the severe recession and the free play of automatic stabilisers on the one hand and significant consolidation efforts on the other (as part of which some moderate recovery measures were taken), which is an appropriate response to the European Economic Recovery Plan, the Irish authorities should put an end to the present excessive deficit situation by 2014.

This lasted a year and the current Council Recommendation to Ireland under the EDP was adopted on the 7th of December 2010:

Recognising that Ireland's worsening budgetary position in 2010 resulted from the impact of the financial crisis on government revenue and the financial sector, requiring the implementation of very large financial sector support measures, the Irish authorities should put an end to the present excessive deficit situation by 2015.

This Council Recommendation laid out the deficit limits to apply each year to 2015

Specifically, to this end, the Irish authorities should:

(a) implement measures such that the general government deficit does not exceed 10,6 % of projected GDP in 2011, 8,6 % of GDP in 2012, 7,5 % of GDP in 2013, 5,1 % of GDP in 2014 and 2,9 % of GDP in 2015, where the projected annual deficit path does not incorporate the possible direct effect of potential bank support measures

Today the Council also released their latest opinion on how they think we are doing.  The opinion, such that it is, is below the fold.

Overall, Ireland has implemented the conditions of the financial assistance programme specified in the Memorandum of Understanding. In particular, the fiscal deficit target for 2011 (10,6 %) was achieved by a significant margin and the budget for 2012 targets a fiscal deficit of 8,6 % of GDP, in line with the financial assistance programme ceiling. Medium-term fiscal consolidation plans are consistent with the financial assistance programme's deficit ceilings and a deficit below 3 % of GDP by 2015. The recapitalisation of domestic banks envisaged by the 2011 Prudential Capital Assessment Review of the Central Bank of Ireland has been substantively completed and domestic banks' deleveraging exceeded the financial assistance programme's targets for 2011 as a whole. Structural reforms to enhance competitiveness and allow stronger job creation are significantly advanced.

Based on the assessment of the Stability Programme pursuant to Article 5(1) of Regulation (EC) No 1466/97, the Council is of the opinion that the macroeconomic scenario underpinning the budgetary projections of the Programme is plausible. Economic growth projections in the Stability Programme are similar to the Commission services 2012 spring forecast. The objective of the budgetary strategy of the Stability Programme is to reduce the general government deficit below the 3 % of GDP threshold by end 2015, which is in line with the deadline set by the Council for correcting the excessive deficit. The Stability Programme currently projects a deficit of 8,3 % of GDP (below the programme target of 8,6 % of GDP) in 2012, 7,5 % of GDP in 2013, 4,8 % of GDP in 2014 and 2,8 % of GDP by the end of the programme period in 2015. This path is underpinned by consolidation measures of 2,7 % of GDP implemented in the budget for 2012, and broad consolidation measures of 3,9 % of GDP in 2013-2014 and a further partly specified consolidation effort of 1,1 % of GDP in 2015. The Stability Programme restates the medium-term budgetary objective (MTO) of a structural general government deficit of 0,5 % of GDP, which is not reached within the programme period. The MTO adequately reflects the requirement of the Stability and Growth Pact. General government debt is above 60 % of GDP and is projected to increase from 108 % of GDP in 2011 to 120 % in 2013 before starting to decline. For the duration of the excessive deficit procedure until 2015 and in the three years thereafter, Ireland will be in a transitional period and the budgetary plans would ensure sufficient progress towards compliance with the debt reduction benchmark of the Stability and Growth Pact.

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