Mark Wednesday in your European Sovereign Struggle calendars.
For that’s the day, February 3, that the European Commission is expected to publish its review of Greece’s Stability Programme. EU members are required to submit these programmes to the Commission every January for review, but, given recent Hellenic tribulations, it’s no surprise that Greece’s will attract extra attention this year.
So, with that in mind, here’s some background info on past Stability Programmes, courtesy of Mark Wall, part of Deutsche Bank’s excellent fixed income team:
The Stability Programme reviews are detailed documents and the conclusions are not binary (pass/fail). However, to help judge a review we can do a comparative analysis of last year’s Stability Programme reviews for the main euro area member states and look at the kinds of conclusions that are drawn and what member states are ‘invited’ to do in light of those conclusions.
Word count is informative. Those deemed to have “sound” public finances (Netherlands and Finland) have the shortest conclusions; those facing risks have much more detailed conclusions (Figure 1). It is likely Greece’s review will be on the lengthier side.
More important is the tone of language used. There is clear gradation in the language used in the reviews of the Stability Programmes, more so than in the Excessive Deficit Procedure recommendations. Reviews of those member states facing the greatest risks or offering the least credible policy solutions have the gravest tone. Examples of the grading of the language used in last year’s reviews are:
- Most positive language: “sound budgetary position” (Netherlands), “public finances are sound” (Finland), “measures adopted…regarded as welcome and adequate” (Ireland), “sizeable fiscal stimulus…welcome as it is commensurate with the scale of the economic downturn” (Germany).
- Common complaints: the most frequent criticisms in the Stability Programme reviews are (1) a “favourable macroeconomic outlook”, i.e., that the growth assumptions are too optimistic and will underpin the consolidation less than is assumed and (2) a “lack of information” regarding the consolidation measures.
- Most negative language: “restoring fiscal sustainability…an absolute priority” (Spain), “adjustment path is not fully backed up with concrete measures” (Spain), “absence of crucial information…severely hampered the possibility to assess the credibility of the deficit” (Belgium), “not backed by a well-founded medium-term budgetary strategy” (Belgium), “clearly subject to considerable downside risk” (Belgium), “lacks ambition” (Belgium).
. . . What can we expect from this year’s review of the Greek Stability Programme? Given the seriousness of the situation in Greece, we would expect use of the most negative language. Indeed, this was already the case in last year’s review of Greece’s Stability Programme (see a copy of last year’s review in the Appendix to this article). Perhaps we should expect harsher language still.
There is no clear failure grade in the review of Stability Programmes, just degrees of criticism and levels of requests. Looking back at the reviews from a year ago, the most that the Commission asked was for Belgium to re-submit its Stability Programme. The Commission may not ask Greece to re-submit per se, but if the Commission judges, with the help of its review of the Stability Programme, that Greece has not yet taken sufficient action to correct its deficit, Greece may decide to re-work its Programme or do similar to prevent an escalation into sanctions in the middle of this year.
Along with its review of the Stability Programme, the EC will also publish a timeframe for its Excessive Deficit Procedure against Greece. These procedures are aimed at getting deficits back below Maastricht limits (3 per cent of GDP) by setting various targets and deadlines.
Greece is currently aiming to correct its excessive deficit by 2012, a year earlier than its previous pledge of 2013. Most other member states with excessive deficits have been set a target of 2013, with a deadline of June 2 2010 to “take effective action.”
In December, the EC already concluded that Greece had not taken effective action to fix its deficit. If it determines, this time around, that Greece has still not taken effective action, it could issue a Notice to take such action. And this, is where things get tricky.
Back to Wall:
The question is not so much the harshness of the review or but whether the Commission asks for a ‘Notice’ to take effective action to be issued to Greece. Having concluded in December that Greece had not taken effective action to correct its excessive deficit, the Commission is due to decide whether or not to issue a ‘Notice’, the next step in the escalation of the Excessive Deficit Procedure. If a ‘Notice’ were issued, it would represent an escalation of the Excessive Deficit Procedure and put Greece one step closer to sanctions.
Given that “escalation” isn’t quite what the European Commission is going for, in terms of the Greek situation, at the moment, it’s worth asking whether they really would issue such a Notice.
The DB analyst, for one, thinks yes — potentially:
… the Commission is obliged to apply EU law. Not issuing a Notice when it is deemed necessary would undermine its credibility.
The initial response to a Notice would likely be negative. But the issuance of a Notice has two positives. First, it would demonstrate the credibility of the Stability and Growth Pact and its ‘corrective’ arm, the Excessive Deficit Procedure (it was at the Notice stage that the Pact failed in 2003). Second, if the Notice results in more detailed consolidation plans from Greece, it could lead to selfreinforcing positives, with perceptions of a better, more sustainable consolidation and increased market confidence.
However, issuing a Notice puts Greece one step closer to sanctions. After a Notice is issued, Greece would have four months to demonstrate that effective action has been taken. Otherwise, the Commission will recommend moving into sanctions (i.e., a non-interest bearing deposit of up to 0.5% of GDP).
Related links:
Greece to outline plan for economic stability – FT
What’s next for Greece under EU budget rules? – Reuters
Greek tragedy - FT Alphaville
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