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The corrective arm

The corrective arm of the Stability and Growth Pact (SGP) ensures that Member States adopt appropriate policy responses to correct excessive deficits by implementing the Excessive Deficit Procedure (EDP). 

The EDP operationalises the limits on the budget deficit and public debt given by the thresholds of 3% of deficit to GDP and 60% of debt to GDP not diminishing at a satisfactory pace.

These limits are enshrined in Art. 126 of the Treaty and in Protocol 12 accompanying the Treaty in order to ensure sound public finances necessary for the functioning of the Economic and Monetary Union (EMU).

Most recent updates

The concerned Member States are Czech Republic, Slovakia, Austria, Denmark, Belgium and The Netherlands

  • Report from the Commission on Finland (2 June 2014)
  • Assessment of action taken by Poland and by Croatia to bring an end to the situation of excessive government deficit (2 June 2014)

Read the Commission press release for a summary of the steps taken under the Excessive Deficit Procedure (Memo, 2 June 2014).

 

 

The Excessive Deficit Procedure

A potentially confusing peculiarity of the EDP is that the word "deficit" is used to refer both to situations where either the deficit or the debt is too high. In some cases, where the procedure is different for deficit and debt, it will be specified clearly.

Launching an EDP

The EDP follows a step-by-step procedure that is outlined in detail in Art. 126 of the Treaty (see chart below, under Legal basis and related stages).

This procedure begins with a Member State either:

  •  having breached or being in risk of breaching the deficit threshold of 3% of GDP or
  • having violated the debt rule by having a government debt level above 60% of GDP, which is not diminishing at a satisfactory pace. This means that the gap between a country's debt level and the 60% reference needs to be reduced by 1/20th annually (on average over three years).

In determining whether a numerical breach should lead to the opening of an EDP the legislation specifies how all relevant factors should be taken into account.

Special consideration can be given to countries whose fiscal positions have worsened due to exceptional events outside their control, such as in the case of natural disasters or as a result of a severe economic downturn, but under the double overarching condition that the excess over the deficit is close to the reference value and temporary.

Assessment of effective action

Countries placed in EDP are given a deadline of six months (or three for a serious breach) to comply with recommendations that provide it with a concrete path for correcting its excessive deficit within a set timeframe.

Euro area Member States that have already been sanctioned under the preventive arm or whose breach of the threshold values is especially serious, may also face a stricter sanction in the form of a non-interest-bearing deposit of 0.2% of GDP at this point.

Once the deadline has passed, the Commission and the Council assess the action the Member State has taken, with a view to either putting the procedure on hold or stepping it up if the Member State has not done enough.

A Member State which has taken effective action to address its excessive deficit, but where the impact on the public finances has been affected by exceptional events outside its control, may see an extension of its deadline for correction and a revision of the recommendations to reflect the change in circumstances.

Stepping up or abrogating the EDP

The EDP will be stepped up for Member States for whom the assessment shows that they have failed to take effective action to correct the excessive deficit in time. They will also receive revised recommendations, which may include a new timeline to address the excessive deficit.

For a euro area Member State, the stepping up of the EDP may result also in the imposition or strengthening of sanctions in the form of a fine of 0.2% of GDP, while all countries in receipt of assistance from the Cohesion Fund may face a temporary suspension of this financing.

With continued non-compliance the fine for euro area Member States may be increased to include a variable component and imposed annually as long as the country in question continues to fail to take effective action. Since the 2011 reforms, reverse qualified majority voting (RQMV) – whereby a qualified majority of Member States is needed to reject a Commission proposal for a Council decision – is used for the imposition of most sanctions.

For all Member States, the EDP is abrogated when the excessive deficit is corrected in a sustainable manner and at this moment non-interest bearing deposits are returned to the Member States.

EDP under the Two Pack

The Two Pack regulations, which entered into force on May 30, 2013, include specific provisions on closer monitoring of euro area Member States in EDP. These provisions aim to ensure that Member States take corrective action in a timely and durable manner, by increasing the scope and frequency of information to be submitted to the Commission and to the Council for their review.

Specifically, the legislation establishes a system of graduated monitoring, which includes regular reporting by the concerned Member State every 6 or 3 months, according to the stage of the procedure. This regular reporting will allow an early detection of a Member State at risk for not correcting its excessive deficit by the deadline set by the Council. If such a risk exists, the Commission may issue a recommendation to the Member State to take further or different action.

The Two Pack also requires euro area Member States entering EDP to draft economic partnership programmes (EPPs), which provide a roadmap for structural reforms considered as instrumental to an effective and lasting correction of the excessive deficit.

Legal Basis and related stages of the EDP

Legal Basis and related stages of the corrective arm and Excessive Deficit Procedure of the SGP (Reg. 1467/97). Click on image to expand. 

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