Erhvervsudvalget 2009-10
KOM (2010) 0367 Bilag 1
Offentligt
883752_0001.png
27 August 2010
A stronger Preventive Arm of the Stability and Growth Pact –
Realising the Medium Term Objectives
Technical contribution to the Task Force on economic governance
Experience has made evident that EU needs stronger economic policy coordina-
tion, notably a stronger implementation of the Stability and Growth Pact (SGP).
Denmark welcomes the Commission communications on reinforced economic
policy coordination and supports the orientations of the Task Force on economic
governance as well as the broad thrust of the ideas brought forward by other
Member States on reinforcing the fiscal policy framework. Focus should be on
measures that can be implemented under the terms of the Lisbon Treaty. While
supporting the overall direction in all areas of the work of the Task Force, Den-
mark hereby presents a technical contribution in the specific area of the SGP’s
preventive arm, notably the Medium-Term Objectives, which is found to be the
key to a stronger fiscal policy framework for the European Union.
The Stability and Growth Pact has no doubt contributed to much sounder public
finances since 1999 than probably would have been the case without the SGP.
The root of today’s public-finance challenges is a not lack of sound rules, but the
fact that rules have not been implemented and enforced effectively. Accordingly,
the challenge is not to fundamentally overhaul the rules, but to strengthen the
implementation of the rules.
As a guiding principle, while there could be a need for specific provisions for the
euro area, the work going forward should, however, seek not to widen the gap
between rules applied to euro area Member States and non-participating Member
States, given that rules and incentives for sound fiscal policy are relevant for all
EU Member States.
1. An “Excessive Deficit Procedure on the MTOs”
One of the main problems regarding implementation of the SGP is Member
States’ lack of progress towards the Medium-Term Objectives (MTO) of structur-
al budgets close to balance. Balanced budgets create the necessary room to ac-
commodate economic downturns without excessive deficits and reduce public
debt at a satisfactory pace and ensure rapid progress towards long-term fiscal sus-
tainability. In particular, the main problem during the current crisis has not been
the average fiscal expansions, but that expansions in many cases were based on
starting points far from balance. The key to a stronger SGP is, therefore, initia-
tives that enhance incentives for stronger preventive efforts in fiscal policy.
 PDF to HTML - Convert PDF files to HTML files
883752_0002.png
2
This non-paper presents a concrete proposal on reinforcing the preventive arm of
the SGP through the development of a procedure on MTO compliance. The idea
is to have an “Excessive Deficit Procedure on the MTOs” that would improve
incentives to consolidate public finances in economic good times and ensure pro-
gress towards the MTOs.
Deviations from the MTO and deviations from the SGP’s MTO adjustment path
rules (the 0.5 % of GDP benchmark) should be based on overall assessments of
the underlying fiscal positions, where the main indicator should be the structural
balance (the commonly agreed EU method), while applying economic judgement.
This would be in line with the methodology applied when assessing effective ac-
tion in the Excessive Deficit Procedure. The overall assessment would take into
account other indicators, including the direct revenue impact of discretionary
measures (bottom-up) and analysis of level and change in the underlying fiscal
position put forward by the Member State concerned.
The MTO deviation should be measured against the ‘minimum MTO’, i.e. the
MTO that a Member State should have according to the agreed formula, in order
not to discourage Member States from having MTOs more ambitious than their
minimum MTOs.
An “Excessive Deficit Procedure on the MTOs” could be triggered in case of
non-compliance with
two criteria
relating to the level and the change in the underly-
ing fiscal position, notably the structural balance, compared to, respectively, the
MTO and the MTO adjustment path:
 PDF to HTML - Convert PDF files to HTML files
883752_0003.png
3
“Excessive Deficit Procedure on the Medium-Term Objectives (MTOs)”
Criterion
Principle or ‘MTO
rule’
A Member State
should avoid exces-
sive deviations
from
the MTO
Concrete proposal
for a ‘trigger’
The structural bal-
ance is at least
2 %
of GDP
lower than
the MTO
Example
1
A MS with MTO=0 and a struc-
tural deficit of e.g. 3 % of GDP
will be subject to the procedure
(even if criterion 2 is fulfilled)
2
A Member State not
at its MTO should
follow the benchmark
adjustment path
towards the MTO
The structural bal-
ance does not re-
spect the MTO and
is not strengthened
by at least
0.5% of
GDP
annually (more
in good times …)
A MS with MTO=0 and a struc-
tural deficit of e.g. 1.5 % of GDP
that stays broadly constant will
be subject to the procedure
(even though criterion1 is ful-
filled)
1: MTO means the ‘minimum MTO’ that the MS should have according to the MTO rules,
and not the actual chosen MTO, in order not to create disincentives and prevent MS from
choosing more ambitious MTOs.
2: All decisions are based on overall assessments on the basis of the structural balance (cal-
culated according to the commonly agreed method) as the main indicator as well as other
indicators and economic judgement.
Applying the concrete proposal on the two criteria to actual data, as shown in the
annex, would imply that several countries would have been subject to the proce-
dure at early stages due to criterion 1 and/or criterion 2, but the point is to pre-
vent Member States from slipping into large structural deficits and especially
avoid persistent deficits.
Criterion 1: Avoiding excessive deviations from the MTO
The idea is to strengthen incentives to avoid persistent and significant deviations
from the MTO, e.g. avoiding deviations from the MTO exceeding 2 % of GDP.
A breach of the criterion would open the MTO procedure implying recommenda-
tions (see section 2 on procedure) on the correction of the excessive structural
deficit.
An MTO deviation of 2 % of GDP would imply a structural deficit of 2 % of
GDP for a Member State with an MTO of ‘balance’, or at most a structural deficit
of 3 % of GDP for euro area and ERMII Member States (that according to the
SGP cannot have MTOs below -1 % of GDP). Such a structural deficit of 2-3 %
of GDP would imply an actual deficit of around 1.5-2.5 % of GDP even in mod-
erate good times (with an output gap of e.g. 1) and would with a high probability
lead to an actual deficit above 3 % of GDP in bad times.
 PDF to HTML - Convert PDF files to HTML files
4
The choice of the trigger – e.g. 2 % of GDP – is necessarily somewhat arbitrary,
but an MTO deviation of 2 % of GDP would imply that a Member State could
reach an MTO of ‘balance’ or a small surplus within a “normal business cycle” of
5 years by respecting the 0.5 % of GDP benchmark adjustment path.
The annex (table 1) provides an example of how the criterion would have worked
on the basis of the new minimum MTOs and EU Member States’ structural bal-
ances since 2003.
Criterion 2: Respecting the 0.5 % benchmark adjustment path towards the MTO
Past experience show that while many Member States avoided excessive actual
deficits during good times, most Member States did not comply with their MTOs
or did not achieve progress towards their MTOs in line with the SGP’s 0.5 % of
GDP benchmark adjustment path. This, predictably, was leading to excessive def-
icits in subsequent bad times. Since the 2005 Reform of the SGP that introduced
the adjustment path, there has been no substantial enforcement or peer pressure
relating to the rule. Therefore, the “MTO Excessive Deficit Procedure” should be
launched when the 0.5 % of GDP benchmark for strengthening the structural
balance is not observed.
This trigger should not either be used in a mechanical way, but would have to be
complemented with economic judgement. For instance, if a Member State has an
MTO of ‘balance’, and a structural deficit that (in year t) equals 1.5 % of GDP
and (in year t+1) stays constant at 1.5 % or improves marginally, but less than 0.5
% of GDP, according to the common structural balance method, a careful analy-
sis would be made. If e.g. bottom-up measures of discretionary action indicate
that the underlying fiscal position actually has been strengthened by around 0.5 %
of GDP (but other factors had the effect that the structural balance improved by
less), the MTO procedure would not be launched. If, on the other hand, bottom-
up methods would confirm the structural balance method, the MTO procedure
would be launched.
The annex (table 2) provides an example of how the criterion would have worked
on the basis of the new minimum MTOs and EU Member States’ structural bal-
ances since 2003.
2. Procedural issues
The procedural steps in an “Excessive Deficit Procedure on the MTOs” could –
as in the Excessive Deficit Procedure – be initiated with the Commission issuing a
report on non-compliance with the criteria (some sort of “Article 126.3 report”)
including a draft “recommendation”. By including all Commission acts from the
launch of the procedure to the Commission proposal for a Council “recommen-
dation” in one document, the procedure could be relatively light and speedy com-
pared to the Excessive Deficit Procedure.
 PDF to HTML - Convert PDF files to HTML files
5
The EFC would deliver its opinion and the Council would issue a “recommenda-
tion” with specific invitations regarding achievement of the MTO. The “recom-
mendation” could include an annual structural effort (the 0.5 % of GDP bench-
mark or another adjustment path) and a deadline for achieving the MTO, aiming
at getting close to or attaining the MTO before the next downturn. Furthermore,
the “recommendation” could include invitations on structural reforms and a dead-
line for effective action to be taken, e.g. within 6 months following the Council
“recommendation”.
The Member State concerned would then have to present a plan on “effective
action” in order to achieve the MTO where details on medium-term plans, specif-
ic consolidation and reform measures, and commitments go beyond the current
standards regarding MTOs in the Stability and Convergence programmes. The
Commission would then present an assessment of the plan and the effective ac-
tion taken, and if the Member State does not comply with the “recommendation”,
the Council could issue a new Council “recommendation” with invitations for a
stronger plan in order to achieve the MTO. Further steps in the procedure could
imply steps in the new sanctions regime. The Commission should continue to
monitor the compliance with the “recommendation” on a regular basis. Abroga-
tion of the procedure would be based on compliance with criteria 1 and 2.
3. Legal aspects
The legal basis for the “MTO Excessive Deficit Procedure” could be a revised or
new regulation in the Stability and Growth Pact or TFEU Article 121 (4).
 PDF to HTML - Convert PDF files to HTML files
883752_0006.png
6
Annex
The suggested trigger thresholds are based on a simple analysis of the structural
balances in the EU countries since 2003. If a trigger of an MTO divergence larger
than 2 % of GDP and a trigger related to the 0.5 % of GDP adjustment path is
applied, a number of countries now facing significant challenges could have been
subject to the procedure at an early stage.
Table 0: The structural balances of the EU countries
2003
2004
2005
2006
2007
2008
BE
-1.0
-0.9
-1.0
-1.3
-1.3
-2.1
BG
-0.9
1.0
1.0
1.8
-1.5
0.0
CZ
-5.5
-1.3
-2.7
-3.9
-2.9
-4.5
DK
1.0
2.5
4.7
3.5
3.1
3.3
DE
-3.2
-3.0
-2.9
-2.2
-1.2
-1.1
EE
2.4
1.6
0.2
-0.9
-1.1
-4.3
IE
-0.2
2.1
1.2
2.1
-1.6
-7.0
EL
-6.4
-8.0
-5.7
-5.2
-6.8
-8.7
ES
-0.1
-0.2
1.1
1.6
1.2
-4.1
FR
-4.1
-3.8
-4.1
-3.2
-3.8
-3.8
IT
-5.1
-4.7
-5.2
-4.0
-3.2
-3.5
CY
-7.9
-4.9
-3.2
-1.3
2.5
-0.4
LV
-1.3
-0.8
-1.7
-3.2
-4.5
-6.4
LT
-1.8
-2.1
-1.8
-2.1
-3.1
-5.6
LU
1.3
-0.9
-0.4
0.1
1.1
2.0
HU
-6.7
-6.9
-8.9
-10.6
-5.5
-4.7
MT
-6.4
-4.2
-3.9
-3.1
-3.1
-5.2
NL
-2.2
-1.1
0.2
0.3
-1.0
-0.5
AT
-0.9
-3.1
-1.4
-1.9
-1.6
-1.7
PL
-5.7
-5.9
-4.4
-4.0
-2.8
-4.6
PT
-4.8
-4.9
-5.5
-3.7
-3.1
-3.8
RO
-0.6
-1.8
-1.8
-3.5
-4.7
-7.7
SI
-2.0
-1.6
-1.3
-2.6
-2.9
-4.8
SK
-1.5
-1.4
-1.8
-3.6
-3.7
-4.7
FI
3.4
2.9
2.9
2.8
2.6
2.1
SE
0.2
0.2
1.3
0.3
1.6
1.1
UK
-3.2
-3.7
-4.0
-3.5
-3.9
-5.2
Note: MTO is the minimum MTO with 33 % of the cost of ageing covered.
Source: Commission Forecasts 2005-2010.
2009
-3.9
-2.8
-5.4
0.6
-1.7
-0.6
-9.4
-13.0
-8.9
-6.2
-4.0
-5.8
-6.9
-7.1
1.2
-2.2
-3.8
-3.6
-2.4
-7.2
-8.1
-8.3
-3.7
-6.6
0.4
1.9
-9.5
2010
-3.8
-1.1
-4.9
-2.7
-3.6
-2.1
-9.3
-8.5
-7.8
-6.2
-3.7
-6.3
-6.7
-6.8
-1.4
-2.3
-4.0
-4.9
-3.6
-6.3
-7.7
-7.1
-4.4
-5.4
-1.3
-0.2
-10.4
MTO
0.50
-1.75
-1.00
-0.50
-0.50
-1.00
-0.50
0.75
-0.50
-1.00
-0.25
-0.25
-1.00
-1.00
1.50
-1.25
0.00
-0.50
-1.00
-1.50
-1.00
-0.75
0.75
-1.00
-0.75
-1.00
-1.25
 PDF to HTML - Convert PDF files to HTML files
883752_0007.png
7
Table 1: Figures show structural balance deviations from minimum MTO
Trigger 1 - Structural balance more than 2 % weaker than the minimum MTO
2003
BE
BG
CZ
DK
DE
EE
IE
EL
ES
FR
IT
CY
LV
LT
LU
HU
MT
NL
AT
PL
PT
RO
SI
SK
FI
SE
UK
-1.50
0.85
-4.50
1.50
-2.70
3.40
0.30
-7.15
0.40
-3.10
-4.85
-7.65
-0.30
-0.80
-0.20
-5.45
-6.40
-1.70
0.10
-4.20
-3.80
0.15
-2.75
-0.50
4.15
1.20
-1.95
2004
-1.40
2.75
-0.30
3.00
-2.50
2.60
2.60
-8.75
0.30
-2.80
-4.45
-4.65
0.20
-1.10
-2.40
-5.65
-4.20
-0.60
-2.10
-4.40
-3.90
-1.05
-2.35
-0.40
3.65
1.20
-2.45
2005
-1.50
2.75
-1.70
5.20
-2.40
1.20
1.70
-6.45
1.60
-3.10
-4.95
-2.95
-0.70
-0.80
-1.90
-7.65
-3.90
0.70
-0.40
-2.90
-4.50
-1.05
-2.05
-0.80
3.65
2.30
-2.75
2006
-1.80
3.55
-2.90
4.00
-1.70
0.10
2.60
-5.95
2.10
-2.20
-3.75
-1.05
-2.20
-1.10
-1.40
-9.35
-3.10
0.80
-0.90
-2.50
-2.70
-2.75
-3.35
-2.60
3.55
1.30
-2.25
2007
-1.80
0.25
-1.90
3.60
-0.70
-0.10
-1.10
-7.55
1.70
-2.80
-2.95
2.75
-3.50
-2.10
-0.40
-4.25
-3.10
-0.50
-0.60
-1.30
-2.10
-3.95
-3.65
-2.70
3.35
2.60
-2.65
2008
-2.60
1.75
-3.50
3.80
-0.60
-3.30
-6.50
-9.45
-3.60
-2.80
-3.25
-0.15
-5.40
-4.60
0.50
-3.45
-5.20
0.00
-0.70
-3.10
-2.80
-6.95
-5.55
-3.70
2.85
2.10
-3.95
2009
-4.40
-1.05
-4.40
1.10
-1.20
0.40
-8.90
-13.75
-8.40
-5.20
-3.75
-5.55
-5.90
-6.10
-0.30
-0.95
-3.80
-3.10
-1.40
-5.70
-7.10
-7.55
-4.45
-5.60
1.15
2.90
-8.25
2010
-4.30
0.65
-3.90
-2.20
-3.10
-1.10
-8.80
-9.25
-7.30
-5.20
-3.45
-6.05
-5.70
-5.80
-2.90
-1.05
-4.00
-4.40
-2.60
-4.80
-6.70
-6.35
-5.15
-4.40
-0.55
0.80
-9.15
Note: Red coloured cells indicate that the structural balance is at least 2 % weaker than the mini-
mum MTO and that the MS is therefore captured by trigger 1.
Source: Commission forecasts 2005-2010.
 PDF to HTML - Convert PDF files to HTML files
883752_0008.png
8
Table 2: Figures show structural balance changes
Trigger 2 - Structural balance weaker than the minimum MTO combined with an
improvement in the structural balance less than 0.5 % in the given year
2004
BE
BG
CZ
DK
DE
EE
IE
EL
ES
FR
IT
CY
LV
LT
LU
HU
MT
NL
AT
PL
PT
RO
SI
SK
FI
SE
UK
0.10
1.90
4.20
1.50
0.20
-0.80
2.30
-1.60
-0.10
0.30
0.40
3.00
0.50
-0.30
-2.20
-0.20
2.20
1.10
-2.20
-0.20
-0.10
-1.20
0.40
0.10
-0.50
0.00
-0.50
2005
-0.10
0.00
-1.40
2.20
0.10
-1.40
-0.90
2.30
1.30
-0.30
-0.50
1.70
-0.90
0.30
0.50
-2.00
0.30
1.30
1.70
1.50
-0.60
0.00
0.30
-0.40
0.00
1.10
-0.30
2006
-0.30
0.80
-1.20
-1.20
0.70
-1.10
0.90
0.50
0.50
0.90
1.20
1.90
-1.50
-0.30
0.50
-1.70
0.80
0.10
-0.50
0.40
1.80
-1.70
-1.30
-1.80
-0.10
-1.00
0.50
2007
0.00
-3.30
1.00
-0.40
1.00
-0.20
-3.70
-1.60
-0.40
-0.60
0.80
3.80
-1.30
-1.00
1.00
5.10
0.00
-1.30
0.30
1.20
0.60
-1.20
-0.30
-0.10
-0.20
1.30
-0.40
2008
-0.80
1.50
-1.60
0.20
0.10
-3.20
-5.40
-1.90
-5.30
0.00
-0.30
-2.90
-1.90
-2.50
0.90
0.80
-2.10
0.50
-0.10
-1.80
-0.70
-3.00
-1.90
-1.00
-0.50
-0.50
-1.30
2009
-1.80
-2.80
-0.90
-2.70
-0.60
3.70
-2.40
-4.30
-4.80
-2.40
-0.50
-5.40
-0.50
-1.50
-0.80
2.50
1.40
-3.10
-0.70
-2.60
-4.30
-0.60
1.10
-1.90
-1.70
0.80
-4.30
2010
0.10
1.70
0.50
-3.30
-1.90
-1.50
0.10
4.50
1.10
0.00
0.30
-0.50
0.20
0.30
-2.60
-0.10
-0.20
-1.30
-1.20
0.90
0.40
1.20
-0.70
1.20
-1.70
-2.10
-0.90
Note: Turquoise coloured cells indicate that the structural balance is weaker than the minimum
MTO and the annual structural improvement less than 0.5 %.
Source: Commission forecasts 2005-2010.
 PDF to HTML - Convert PDF files to HTML files
883752_0009.png
9
Table 3: Combination of trigger 1 and 2
2003
BE
BG
CZ
DK
DE
EE
IE
EL
ES
FR
IT
CY
LV
LT
LU
HU
MT
NL
AT
PL
PT
RO
SI
SK
FI
SE
UK
2004
2005
2006
2007
2008
2009
2010
Note: Red coloured cells indicate that the MS is solely captured by trigger 1, turquoise coloured cells indi-
cate that the MS is solely captured by trigger 2 and red and turquoise striped cells indicate that the MS is
captured by both trigger 1 and 2.