Economy
Hungary progress towards deficit correction insufficient - European Commission
“Subject to this Council decision (under Article 126(8) of the EU Treaty), the Commission will then propose to the Council new recommendations addressed to Hungary (under Article 126(7) of the Treaty) with a view to bringing to an end its excessive government deficit," the EC said in a statement today.
Two possible scenarios
Moving EDP against Hungary to the next stage means Hungary has failed to implement the pledges it made in mid-2009, i.e. to improve the structural balance of the budget by 0.5% every year. If the Commission's assessment is approved by a qualified majority in the Ecofin, the case is referred back to the EC which can take one of two optional policy lines.
One possible course of EC action is to propose that the Ecofin make new recommendations, the other scenario would be sanctions against Hungary in the form of freezing payments from the Cohesion Fund.
As Hungary is not a eurozone member it is not subject to the more automatic sanctions for member states exceeding fiscal targets.
No precedent for freezing funds
The harshest possible sanction is a temporary freeze of Cohesion Fund payments to Hungary. However, the European Commission has never actually resorted to such stringent measures against any member state.
Considering the stringent penalties in place against defaulting eurozone members, the EU is unlikely to take a lenient course of action against Hungary either, sources have told Bruxinfo.
"It is not like the EU's patience knows no bounds when it comes to applying the sanctions which are currently the only way to penalize member states outside the eurozone. In theory, Ecofin affirmative action could be followed by a EC proposal to suspend part of Cohesion Fund payments to Hungary; in contrast, eurozone countries face immediate EC sanctions in an excessive deficit procedure. However, this is clearly a very robust political move and the Commission will definitely think twice before doing so. Therefore, this remains no more than a theoretical possibility."Belgium, Cyprus, Malta and Poland - the other countries that were at risk of not meeting their deadlines of 2011 or 2012 to correct their excessive deficit - have taken effective action, the EC added.
“Therefore, the Commission considers that no further steps in the excessive deficit procedure are necessary for these four countries, though it will continue to monitor budgetary developments closely."
This is the first time the European Commission has applied the new rules of the strengthened Stability and Growth Pact (SGP), which are part of the so-called "sick-pack" on economic governance, which entered into force on 13 December 2011.
“Today's report shows that the six-pack is already delivering. It has given the European Commission teeth to act when countries fail to bring their deficits under control and reduce their debt. Fiscal discipline is crucial to reinforce confidence in our public finances. I stand by my word: I am determined to fully use this new powerful set of tools from Day One," commented Olli Rehn ,the European Commission Vice-President for Economic and Monetary Affairs and the Euro.
Background
For Belgium, Cyprus, Hungary, Malta and Poland, the Commission's Autumn Forecast of 10 November 2011 showed that these countries were at clear risk of not meeting their obligations to correct their excessive deficits.
The next day, Vice-President Rehn sent letters to the Finance Ministers concerned making clear that, in the absence of corrective measures, further steps under the EDP, with the possibility of prompting sanctions, would become unavoidable. All four countries have since taken measures that appear sufficient to ensure a sustainable correction of the excessive deficit.
The budget balance in Hungary, in contrast, is “heavily influenced by one-off revenues that do not result in a sustainable deficit correction. Although in 2011, Hungary formally respected the 3% of GDP reference value, this is only thanks to one-off measures worth some 10% of GPD, this budgetary outcome masks, however, a severe deterioration in the underlying structural balance."
“In fact, the structural budgetary position deteriorated in 2010 and 2011 by an estimated cumulative 2.75% of GDP in stark contrast to the recommended cumulative fiscal improvement of 0.5% of GDP. Also, in 2012, the general government deficit would remain below 3% of GDP only thanks to one-off revenues."
“Consequently, in 2013, the deficit is projected to reach 3.25% of GDP, even without taking into account possible negative effects of a worsening in the macroeconomic scenario and rising bond yields, thus breaching the reference value of the Treaty. In sum, the correction of the excessive deficit in 2011 is not of a sustainable nature. This leads to the conclusion that Hungary has not taken effective action in response to the Council Recommendation of July 2009."
Two possible scenarios
Moving EDP against Hungary to the next stage means Hungary has failed to implement the pledges it made in mid-2009, i.e. to improve the structural balance of the budget by 0.5% every year. If the Commission's assessment is approved by a qualified majority in the Ecofin, the case is referred back to the EC which can take one of two optional policy lines.
One possible course of EC action is to propose that the Ecofin make new recommendations, the other scenario would be sanctions against Hungary in the form of freezing payments from the Cohesion Fund.
As Hungary is not a eurozone member it is not subject to the more automatic sanctions for member states exceeding fiscal targets.
No precedent for freezing funds
The harshest possible sanction is a temporary freeze of Cohesion Fund payments to Hungary. However, the European Commission has never actually resorted to such stringent measures against any member state.
Considering the stringent penalties in place against defaulting eurozone members, the EU is unlikely to take a lenient course of action against Hungary either, sources have told Bruxinfo.
"It is not like the EU's patience knows no bounds when it comes to applying the sanctions which are currently the only way to penalize member states outside the eurozone. In theory, Ecofin affirmative action could be followed by a EC proposal to suspend part of Cohesion Fund payments to Hungary; in contrast, eurozone countries face immediate EC sanctions in an excessive deficit procedure. However, this is clearly a very robust political move and the Commission will definitely think twice before doing so. Therefore, this remains no more than a theoretical possibility."Belgium, Cyprus, Malta and Poland - the other countries that were at risk of not meeting their deadlines of 2011 or 2012 to correct their excessive deficit - have taken effective action, the EC added.
“Therefore, the Commission considers that no further steps in the excessive deficit procedure are necessary for these four countries, though it will continue to monitor budgetary developments closely."
This is the first time the European Commission has applied the new rules of the strengthened Stability and Growth Pact (SGP), which are part of the so-called "sick-pack" on economic governance, which entered into force on 13 December 2011.
“Today's report shows that the six-pack is already delivering. It has given the European Commission teeth to act when countries fail to bring their deficits under control and reduce their debt. Fiscal discipline is crucial to reinforce confidence in our public finances. I stand by my word: I am determined to fully use this new powerful set of tools from Day One," commented Olli Rehn ,the European Commission Vice-President for Economic and Monetary Affairs and the Euro.
Background
For Belgium, Cyprus, Hungary, Malta and Poland, the Commission's Autumn Forecast of 10 November 2011 showed that these countries were at clear risk of not meeting their obligations to correct their excessive deficits.
The next day, Vice-President Rehn sent letters to the Finance Ministers concerned making clear that, in the absence of corrective measures, further steps under the EDP, with the possibility of prompting sanctions, would become unavoidable. All four countries have since taken measures that appear sufficient to ensure a sustainable correction of the excessive deficit.
The budget balance in Hungary, in contrast, is “heavily influenced by one-off revenues that do not result in a sustainable deficit correction. Although in 2011, Hungary formally respected the 3% of GDP reference value, this is only thanks to one-off measures worth some 10% of GPD, this budgetary outcome masks, however, a severe deterioration in the underlying structural balance."
“In fact, the structural budgetary position deteriorated in 2010 and 2011 by an estimated cumulative 2.75% of GDP in stark contrast to the recommended cumulative fiscal improvement of 0.5% of GDP. Also, in 2012, the general government deficit would remain below 3% of GDP only thanks to one-off revenues."
“Consequently, in 2013, the deficit is projected to reach 3.25% of GDP, even without taking into account possible negative effects of a worsening in the macroeconomic scenario and rising bond yields, thus breaching the reference value of the Treaty. In sum, the correction of the excessive deficit in 2011 is not of a sustainable nature. This leads to the conclusion that Hungary has not taken effective action in response to the Council Recommendation of July 2009."
