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The preventive arm

Under the provisions of the preventive arm, Member States have to submit annual stability (convergence) programmes, showing how they intend to achieve or safeguard sound fiscal positions in the medium term taking into account the impending budgetary impact of population aging. The Commission assesses these programmes and the Council gives its Opinion on them. The preventive arm includes two policy instruments.

• The Council, on the basis of a proposal by the Commission, can address an early warning to prevent the occurrence of an excessive deficit.
• Using the policy advice, the Commission can directly address policy recommendations to a Member State as regards the broad implications of its fiscal policies

The dissuasive arm

• The dissuasive part of the Pact governs the excessive deficit procedure (EDP). The EDP is triggered by the deficit breaching the 3% of GDP threshold of the Treaty. If it is decided that the deficit is excessive in the meaning of the Treaty, the Council issues recommendations to the Member States concerned to correct the excessive deficit and gives a time frame for doing so. Non compliance with the recommendations triggers further steps in the procedures, including for euro area Member States the possibility of sanctions.

Long-term sustainability of public finances

With the European population getting older as people live longer and have fewer children, EU Member States face the challenge of ensuring the long-term sustainability of public finances owing to the impending budgetary impact. To meet this challenge and taking into account the focus on long-term sustainability of the 2005 reform of the Pact, common long-term budgetary projections are established at EU level and the individual Member States' situations assessed and monitored. A comprehensive analysis can be found in the sustainability report. The long-term sustainability of public finances is also taken into consideration in the assessment of the stability and convergence programmes.