Commission proposes to step up the excessive deficit procedure on Germany - Main contents
The European Commission today recommended to the Council to give notice to Germany, under Article 104(9) of the Treaty, to bring the public deficit below 3% of GDP by 2007 at the latest. This follows the announcement, last week, of a deficit of 3.3% in 2005. In addition, the deficit is expected to remain above 3% in 2006. Having assessed Germany's stability programme for 2005-2009, which was adopted by the government last week, the Commission believes that, if duly implemented, the measures set out should reduce the deficit well below 3% ceiling by 2007.
" Although the Commission welcomes the renewed priority attached by the German government to budgetary consolidation, it is clear that the procedure needs to be stepped up to guarantee a lasting correction of the deficit," said Joaquín Almunia i, Commissioner for Economic and Monetary Affairs.
Excessive deficit procedure
The German statistics office announced last week that the public deficit in 2005 was 3.3% of GDP. This is down from 3.7% in 2004 but above the 3.0% reference value set in the Treaty for the fourth consecutive year. In addition, the deficit is expected to remain above the 3% of GDP threshold in 2006.
The Commission, therefore, recommends to the Council to give notice to Germany, according to Article 104(9) of the Treaty, to correct the excessive deficit by 2007 at the latest and to ensure that the budget balance in structural terms (i.e. disregarding cyclical effects) improves by at least one percentage point cumulatively in 2006 and 2007. The Commission further recommends that Germany submits within four months of the Council decision a report outlining the measures taken or planned to reduce its deficit.
The Commission acknowledges that the German government that took office in November 2005 has adopted a comprehensive budgetary consolidation strategy in a context of still fragile economic recovery to bring the deficit below the 3% reference value by 2007. The adoption process of this strategy is well advanced, which reduces uncertainty regarding the effectiveness of the consolidation. Therefore, the Commission considers that, on the basis of currently available information, the fiscal effort implied in the strategy until 2007 would be sufficient under the rules of the Stability and Growth Pact.
Background on German EDP procedure
In January 2003, the Council decided that an excessive deficit existed in Germany and recommended, in accordance with Article 104(7) of the Treaty, that it be corrected by 2004. In its Communication to the Council of December 2004, which followed the European Court of Justice ruling of July 2004 on the excessive deficit procedure (EDP), the Commission reached the conclusion, with which the Council concurred, that 2005 should be considered the relevant deadline for the correction.
Stability Programme 2005-2009
Germany submitted an update of its stability programme for the period 2005-2009 last week. The update outlines the strategy to bring the deficit below 3% of GDP by 2007 and to aim at a balanced budget in the medium-term, which is not to be reached within the programme period.
According to the programme, Germany would reduce the deficit to 2½% of GDP in 2007 and it would continue to drop progressively to 1½% of GDP in 2009. In view of the risk assessment, a sufficient safety margin against breaching the Treaty reference value would be created only by 2008.
The budgetary adjustment strategy is based on revenue increases and expenditure cuts. Besides the reduction in tax allowances and the increase in the standard VAT rate from 16% to 19%, it identifies the restraint in social spending as a key element of the budgetary adjustment, the result of which depends crucially on its rigorous implementation.
At 67½ % of GDP, the debt level exceeds the Treaty reference value in 2005 and continues to increase to 69% in 2006 before coming down to 67% in 2009. Germany is at medium risk compared with other countries as regards its long-term fiscal sustainability, which means that it needs to pursue further reforms to its social security systems to cope with the budgetary cost of an ageing population.
Whilst welcoming the fact that the government has made budgetary consolidation a key priority and in addition to the EDP recommendation, the Commission recommends that the medium-term objective is rapidly achieved through a reduction in the structural balance of at least 0.5 percentage point per year after the excessive deficit has been corrected, notably by implementing the planned expenditure restraint rigorously so as to be able to provide the planned relief on social contributions, and by ensuring that the announced reform on corporate taxation does not jeopardise the planned fiscal consolidation. Furthermore, Germany should implement the plans to strengthen national budgetary institutions to ensure that budgetary targets are achieved at all levels of government.
Documents on the excessive deficit procedure on Germany can be found at:
http://europa.eu.int/comm/economy_finance/about/activities/sgp/edp/edpde_en.htm
Documents on the stability programme assessment can be found at:
http://europa.eu.int/comm/economy_finance/about/activities/sgp/year/year20052006_en.htm
Comparison of key macroeconomic and budgetary projections
|
2004 |
2005 |
2006 |
2007 |
2008 |
2009 |
||
|---|---|---|---|---|---|---|---|---|
Real GDP (% change) |
SP Feb 2006 |
1.6 |
0.9 |
1 ½ |
1 |
1 _ |
1 _ |
|
COM Nov 20056 |
1.6 |
0.8 |
1.2 |
1.6 |
-- |
-- |
||
SP Dec 2004 |
1.8 |
1.7 |
1 _ |
2 |
2 |
-- |
||
HICP inflation (%) |
SP Feb 2006 |
-- |
-- |
-- |
-- |
-- |
-- |
|
COM Nov 2005 |
1.8 |
2.0 |
1.6 |
1.1 |
-- |
-- |
||
SP Dec 2004 |
-- |
-- |
-- |
-- |
-- |
-- |
||
Output gap (% of potential GDP) |
SP Feb 20061 |
-0.6 |
-0.9 |
-0.7 |
-1.1 |
-0.7 |
-0.4 |
|
COM Nov 20055 |
-0.6 |
-0.9 |
-0.8 |
-0.4 |
-- |
-- |
||
SP Dec 20041 |
-1.2 |
-0.9 |
-0.7 |
-0.3 |
-0.0 |
-- |
||
General government balance (% of GDP) |
SP Feb 2006 |
-3.7 |
-3.3 |
-3.3 |
-2 ½ |
-2 |
-1 ½ |
|
COM Nov 2005 |
-3.7 |
-3.9 |
-3.7 |
-3.3 |
-- |
-- |
||
SP Dec 2004 |
-3 _ |
-2.9 |
-2 ½ |
-2 |
-1 ½ |
-- |
||
Primary balance (% of GDP) |
SP Feb 2006 |
-0.8 |
-0.5 |
|
|
½ |
1 ¼ |
1 ½ |
COM Nov 2005 |
-0.8 |
-0.9 |
-0.9 |
-0.4 |
-- |
-- |
||
SP Dec 2004 |
|
0 |
½ |
1 ½ |
2 |
-- |
||
Cyclically-adjusted balance (% of GDP) |
SP Feb 20061 |
-3.4 |
-2.9 |
-2.9 |
-1.8 |
-1.5 |
-1.1 |
|
COM Nov 2005 |
-3.3 |
-3.2 |
-3.2 |
-3.0 |
-- |
-- |
||
SP Dec 2004 1 |
-3.0 |
-2.4 |
-1.9 |
-1.6 |
-1.3 |
-- |
||
Structural balance2 (% of GDP) |
SP Feb 20063 |
-3.4 |
-3.0 |
-2.9 |
-1.8 |
-1.5 |
-1.1 |
|
COM Nov 20054 |
-3.3 |
-3.2 |
-3.2 |
-3.0 |
-- |
-- |
||
SP Dec 2004 |
-- . |
-- |
-- |
-- |
-- |
-- |
||
Government gross debt (% of GDP) |
SP Feb 2006 |
65.5 |
67 ½ |
69 |
68 ½ |
68 |
67 |
|
COM Nov 20057 |
66.4 |
68.6 |
70.0 |
71.4 |
-- |
-- |
||
SP Dec 20047 |
65 ½ |
66 |
66 |
65 ½ |
65 |
-- |
||
Notes: 1Commission services calculations on the basis of the information in the programme 2Cyclically-adjusted balance (as in the previous rows) excluding one-off and other temporary measures 3One-off and other temporary measures taken from the programme (0.1% of GDP in 2005) 4One-off and other temporary measures taken from the Commission services' autumn 2005 forecast 5Based on estimated potential growth of 1.1%, 1.1%, 1.1% and 1.2% respectively in the period 2004-2007. 6According to first estimates, growth was 0.9% in 2005. The Commission services' interim forecast of 21 February 2006 projects growth at 1.5% in 2006. 7The ratio was calculated using the GDP series with the old method of allocating FISIM (financial intermediation services indirectly measured) to users, so data are not directly comparable. Source: Stability programme (SP); Commission services' autumn 2005 economic forecasts (COM) on the basis of unchanged policies before the new government took office in November 2005; Commission services' calculations |
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