Upon accession the new Member States have been brought fully into the EU framework of economic and budgetary policy cooperation and surveillance. As was the case immediately after the previous enlargement in 1995, when Austria, Finland and Sweden joined the Union, this includes an assessment of their budgetary situation. Six of the ten new Member States, namely Cyprus, the Czech Republic, Hungary, Malta, Poland and Slovakia, had a general government deficit above the 3% of GDP Treaty reference value in 2003, while two of them, namely Cyprus and Malta, recorded government debt levels above the 60% of GDP Treaty reference value. On that basis the Commission adopted today a report on each of the six countries as required by Article 104(3) of the Treaty. As regards 2004, the Commission Spring 2004 forecasts as well as the national authorities indicate that the deficit is expected to continue to exceed the 3% of GDP reference value in all six countries. In the two countries which exceeded the debt ratio threshold in 2003 (Cyprus and Malta), the debt ratio is on a rising trend and is therefore projected to remain above 60% of GDP in 2004. Within the next two weeks, the Economic and Financial Committee will prepare an opinion on each report. The Commission will then recommend further steps required by the so-called excessive deficit procedure in the next few weeks and in time for the Ecofin Council of 5 July. The timing of this procedure is determined by the acquis, obliging the Council to take action within 3 months from accession. In preparing its recommendations, the Commission will take into account the flexible position taken in the 2004 update of the Broad Economic Policy Guidelines (IP/04/467), i.e. that it would be appropriate for the new member states on a case by case basis to take into account the interaction between budgetary policy and on-going structural shifts in the economy and therefore allow for a multi-annual adjustment period when correcting the excessive deficit situation. Member States not yet participating in the euro area, are not subject to possible further steps of the excessive deficit procedure, i.e. specifically enhanced budgetary surveillance (Article 104(9)) or sanctions (Article 104(11).

The Commission reports for Cyprus, the Czech Republic, Hungary, Malta, Poland and Slovakia are adopted on the initiative of Joaquín Almunia, EU Commissioner for economic and monetary affairs. The EU budgetary framework applies to all 25 Member States alike and implies, inter alia, that excessive deficits should be avoided. The process of budgetary surveillance initiated with the adoption of the Commission reports today should be seen in the context of these Member States' preparation for euro membership. All new Member States aspire to join the euro area over the medium term and is therefore part of their strategy to reduce gradually their budget deficits and comply with all convergence criteria. The conclusions for each country are summarised below.

Cyprus's general government deficit increased to 6.3% of GDP in 2003. Although budgetary developments have been adversely affected by recent weakness in economic activity, notably due to the impact of external effects, the excess of the general government deficit over the 3% of GDP reference value does not result, in the sense of the Stability and Growth Pact, from an unusual event outside the control of the Cyprus authorities, nor is it the result of a severe economic downturn. According to the Commission Spring 2004 forecasts as well as to the Cyprus authorities, in 2004 the general government deficit will, at around 4.5% of GDP, be well above 3% of GDP. The debt-to-GDP ratio is forecast to increase by 2.3 percentage points to 74.6% of GDP in 2004, further above the 60% of GDP Treaty reference value.

The general government deficit of the Czech Republic increased to 12.9% of GDP in 2003 (including the cost of a major one-off operation estimated at 6-7% of GDP), in a context of solid economic growth. The excess of the general government deficit over the 3% of GDP reference value does not result, in the sense of the Stability and Growth Pact, from an unusual event outside the control of the Czech authorities, nor is it the result of a severe economic downturn. According to the Commission Spring 2004 forecast as well as to the Czech authorities, the general government deficit will, at around 6% of GDP, be well above 3% of GDP in 2004. The debt-to-GDP ratio is forecast to increase by some 3 percentage points to around 41% of GDP in 2004.

In 2003, the general government deficit in Hungary decreased to 5.9% of GDP, but cannot be considered close to the 3% reference value, in the sense of the Treaty. The excess of the general government deficit over the 3% of GDP reference value does not result, in the sense of the Stability and Growth Pact, from an unusual event outside the control of the Hungarian authorities, nor is it the result of a severe economic downturn. Following two years of rapid increase, the debt-to-GDP ratio in 2003 came close to the 60% reference value of the Treaty at 59.0%. According to the Commission Spring 2004 forecasts as well as to the Hungarian authorities, the general government deficit will remain above 4% of GDP in 2004 and 2005. According to the Spring 2004 Commission forecasts, the debt-to-GDP ratio will decline moderately in the next two years, and will therefore remain below 60% of GDP.

In Malta, the general government deficit increased to 9.7% of GDP in 2003 (including the cost of a major one-off operation estimated at 3.2% of GDP). Although budgetary developments have been adversely affected by weakness in economic activity, the excess of the general government deficit over the 3% of GDP reference value does not result, in the sense of the Stability and Growth Pact, from an unusual event outside the control of the Maltese authorities, nor is it the result of a severe economic downturn. According to the Commission Spring 2004 forecasts as well as to the Maltese authorities, the general government deficit will, at 5.9% of GDP, be well above 3% of GDP in 2004. The debt-to-GDP ratio increased to 72% of GDP in 2003 in Malta. According to the Commission Spring 2004 forecast this ratio will be 73.9% of GDP in 2004, remaining also well above the 60% of GDP Treaty reference value.

In Poland, the general government deficit increased to 4.1% of GDP in 2003, in a context of an economic recovery. The excess of the general government deficit over the 3% of GDP reference value does not result, in the sense of the Stability and Growth Pact, from an unusual event outside the control of the Polish authorities, nor is it the result of a severe economic downturn. Following three years of rapid increase, the debt-to-GDP ratio reached 45.4% of GDP at the end of 2003. According to the Commission Spring 2004 forecasts as well as to the Polish authorities, the general government deficit will, at around 6% of GDP, be well above 3% of GDP in 2004.

The debt-to-GDP ratio is expected to increase by 3.7 percentage points to around 49% of GDP in 2004.

In a context of continued robust growth, Slovakia's general government deficit decreased to 3.6% of GDP in 2003, above the 3% reference value. The excess of the general government deficit over the 3% of GDP reference value does not result, in the sense of the Stability and Growth Pact, from an unusual event outside the control of the Slovak authorities, nor is it the result of a severe economic downturn. According to the Commission Spring 2004 forecasts as well as to the Slovak authorities, the general government deficit will, at around 4% of GDP, be well above 3% of GDP in 2004. The debt-to-GDP ratio is forecast to increase by some 2½ percentage points to around 45% of GDP in 2004.

Background

The excessive deficit procedure is regulated by Article 104 of the Treaty and further clarified in Council Regulation (EC) No 1467/97, which is part of the Stability and Growth Pact. Following the adoption by the Commission of the six reports under Article 104(3), the Economic and Financial Committee has to formulate an opinion on each of them within a fortnight. Taking into account the opinion of the Committee, the Commission has to, if it considers that an excessive deficit exists, take further steps. According to Article 104, these steps are the adoption of a Commission Opinion addressed to the Council on the existence of an excessive deficit (Article 104(5)) and of Commission recommendations for a Council Decision on the existence of an excessive deficit (Article 104(6)) as well as for a Council Recommendation to the Member State concerned with a view to bringing this situation to an end within a given period (Article 104(7)).

According to Article 3(4) of the Council Regulation mentioned above, the period for the correction of the excessive deficit extends, in normal circumstances, to the year following its identification (this would be 2005 for the current exercise). However, as mentioned in the Commission recommendation for the 2004 update of the 2003-2005 Broad Economic Policy Guidelines, for the new Member States, it could be appropriate, from an economic point of view, to allow for a multi-annual adjustment period in some cases when correcting a deficit of more than 3% of GDP. Such a longer period can be prescribed if, for example, the initial level of the deficit upon accession is particularly high or if warranted by other country-specific special circumstances. An important consideration will be the new Member States' own medium-term budgetary plans as presented in the convergence programmes to be submitted by all new Member States by 15 May. The Commission intends to complete the assessment of each programme in the next few weeks so that the Council can adopt opinions on each of them on 5 July, at the same time as adopting the decisions under the excessive deficit described above.

The full text of each Commission report is available on:

http://europa.eu.int/comm/economy_finance/about/activities/sgp/procedures_en.htm