title: RECOMMENDATION FOR A DECISION OF THE COUNCIL on the conclusion of the Agreement between the European Economic Community and the Republic of India concerning cane sugar (submitted to the Council by the Commission)

text:
ARCHIVES HISTORIQUES
DE LA COMMISSION
COLLECTION RELIEE DES
DOCUMENTS "COM"
COM (75) 291
Vol. 1975/0104
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 ---pagebreak---    COMMISSION OF THE EUROPEAN COMMUNITIES
                                                       COM(75)291 final.
                                                Brussels , 12 june 1975
                       RECOMMENDATION FOR A DECISION" OF THE COUNCIL
                       on the conclusion of the Agreement "between the
                       European Economic Community and the Republic
                       of India, concerning cane sugar
                  ( submitted to the Council by the Commission)
COMC75 ) 291 final .
 ---pagebreak---                           EXPLANATORY N.T: KO R ANDUH
1.     In the Joint Declaration of Intent , appended to the Final Act of
the Treaty of Accession , on the development of tra.de relations with Ceylon ,
India , Malaysia , Pakistan a.nd Singapore , it was stated that the settlement
of the question of exports of sugar from India to the Community after the
expiry of the Commonwealth Sugar Agreement on 31 December 1974 involved
taking into account of the provisions which might be adopted as regards - imports
of sugar from the independent Commonv;ealth countries listed in Protocol No . ?2 ,
1.e . those Commonwealth countries which are now signatories to the ACP/EEC
Convention of Lom ^.
2.     The provisions adopted, in respect of cane sugar originating in the African ,
Caribbean and Pacific States which are signatories to the said Convention
are contained in Protocol No . 3 appended to the Convention .
3.     On 17 December 1974 "the Council approved a directive for an agreement
to be negotiated with India . This laid down ■ that these negotiations should
be conducted having full regard to those then in progress with the ACP States
and would concern a maximum annual eruantity of P.'j.OOO metric tons ( 1 ) of cane
sugar which the Community would guarantee to purchase at a given price . The
agreement was to be for an indefinite period , but could , after a period of
five years , be denounced by either party subject to two years' notice .
4.     A draft agreement was conveyed to the Indian authorities at the beginning
of 1975 - This is identical in substance with the text of the Protocol on sugar
appended to the Lome Convention , though it does contain purely formal adaptations
to the case of India .
       The oornpetent department was informed at the end of Kay 1975 that the
Government of India was prepared to subsoribe to the conditions proposed by the
Community .  After some hesitation on the Indian side , the eruantity of sugar
to be delivered by India for the period ending 31 Juiyi 1975 (cf . Article 3»3 of
the Agreement ) was finally settled at 22.000 metric tons .
       The two sides are now agreed on the text appended herewith .
(T) This quantity is the same as India 's quota in the former Commonwealth
     Sugar Agreement .
 ---pagebreak---                                   - 2 -
5.    In order to enable the parties to implement the clause on deliveries
to be made during the period ending 31) Jul^js 1 9T5 » it is stipulated that the
Agreement shall enter into force on the date of signature .      It appears absolutely-
essential therefore that it -should be signed with the minimum of delay and , for
this purpose , every effort should be made to accelerate to the utmost the
procedures for examination and approval of the proposed text .      Considering,
however , that it closely follows that of the Protocol on Sugar appended to the
Lome Convention, basically , the present text should pose no problems .
                                                          /'
 ---pagebreak---                          RECOXMENDATI ON FOR A DECISION
                           /    OF THE COUNCIL          .
                 conclusion of the Agreement "between the European
                Economic Community and the Republic of India
                       concerning cane sugar
 THE COUNCIL OF THE EUROPEAN COMMUNITIES ,
Having regard to the Treaty establishing the European Economic Community ,
and in particular Article 113 thereof ;
Having regard to the Recommendation from the Commission;
Whereas the ACP/EEC Convention of Lome was signed on 28 February 1 975 ? whereas
the Protocol on ACP cane sugar forms an integral part of the aforesaid Convention
whereas , pending the entry into force of the Convention , the Community and the
ACP States named in the Protocol have pledged themselves , by means of agreements
in the form of exchanges of letters dated 28 February 1 975 f "to apply as from the
same date the arrangements laid down in the aforesaid Protocol ;
Whereas , in the Joint Declaration of Intent on the development of trade relations
with Ceylon, India, Malaysia, Pakistan and Singapore , appended to the Final Act
of the Treaty concerning the accession of the Kingdbm of Denmark , Ireland,
the Kingdom of Norway and the United Kingdom of Great Britain and Northern
Ireland to the European Economic Community and to the European Atomic Energy
Community , it is stated that the question of exports of sugar from India to the
Community after the expiry of the Commonwealth Sugar Agreement on 31 December
1974 must be settled by the Community taking account in particular of the
provisions which may be adopted as regards imports of sugar from the independent
Commonwealth countries listed in Protocol No 22 on relations between the European
Economic Community and the Associated Afrioan and Malagasy States and also the
independent developing Commonwealth countries situated in Africa, the Indian
Ocean, the Pacifio Ocean and the Caribbean ;
 ---pagebreak--- Whereas the Agreement on cane sugar negotiated "between the European Economic
Community and the Republic of India should therefore be concluded ,
HAS DECIDED AS FQLLOWS :
                                Article 1
      The Agreement "between" the European Economic Community and the Republic
of India concerning cane sugar is hereby concluded on behalf of the Community
      The text of the Agreement is appended hereto .
                                Article 2
      The President of the Council is hereby authorized to designate the
person empowered to sign the Agreement and to confer upon him the powers
required in order to bind the Community.
Done at Brussels , this
                                                     For the Council
                                                     The Président
 ---pagebreak---                  AGREEMENT
"between the European Economic Community and
the Republic of India concerning cane sugar
 ---pagebreak--- THE COUNCIL OP THE EUROPEAN COMMUNITIES
of the one part , and
THE GOVERNMENT OP THE REPUBLIC OP INDIA,
of the other part ,.
DESIROUS of ensuring the maintenance on a sound and equitable basis of
the existing trade in sugar "between the Republic of India and the European
Economic Community , hereinafter referred to as "the Community",.
NOTING the Joint Declaration of Intent on the development of trade relations
with Ceylon, India , Malaysia, Pakistan and Singapore, annexed to the Final
Act of the Treaty of Accession of the Kingdom of Denmark, Ireland,' the      "•
                                                    f
Kingdom of Norway and the United Kingdom of Great Britain and Northern
Ireland to the European Economic Community and the European Atomic Energy
Community, and in particular its"provisions regarding exports of sugar
from India to the Community,
HAVING REGARD to the Commercial Cooperation Agreement between the European
Economio Community and the Republic of India,
HAVE DECIDED , in a spirit of mutual cooperation , to conclude this Agreement !
 ---pagebreak---                                 Article 1
  1.        The Community undertakes for an indefinite period                  •'
  to purchase and import , at guaranteed prices , a specific quantity of oane
  sugar , raw or white , which originates in India and which that country
  undertakes to deliver to it .
                                                                                !
  2.        The implementation of this Agreement is carried out within the frame
  work of the management of the common organisation of the sugar market and in
  acccordance with the Community 's existing rules of origin adapted for India.
                                 Article 2
  1.        Without prejudice to Article 7 » no change in the
f provisions of this Agreement may enter into force until a period of five
  years has elapsed from the date on which the Agreement enters into force .
  Thereafter , such changes as may "be agreed upon will come into force at a
                                                    /
  time to be agreed.
  2.        The conditions for implementing the guarantee referred to in Article 1 j
  shall "be re-examined before the end of the seventh year of their application,     j
                                                                                ' 1
                                 Article 3
                                                 '
                                         >,                                         i
  1.        The quantity of cane sugar referred to m Article 1 , expressed in
  metrio tons of white sugar , hereinafter referred to as "agreed quantity",
  for delivery in each delivery period, commencing 1 August 1975 » referred
   to in Article 4 > shall "be 25.000 .
                                                          I
  2.        Subject to Article 7 » "this quantity cannot "be
  reduced without the consent of the Government of India .
  3.        Nevertheless , in respect of the period up to 32) Julco 1975 "tk®
  agreed quantity , expressed in metrio tons of . white sugar, shall be 22.000 .
 ---pagebreak---                              Article 4                    -                                     ;
   1.       In the period from 1 , August 1975 "to 30 June 197" inclusive and. there
  after in each twelve-month period , from 1 July to 30 June inclusive ,
  hereinafter referred to as the " delivery period", India undertakes to deliver
- the quantity referred to in Article 3(0., subject always to any adjustments
  resulting from the application of Article 7 «     A similar undertaking shall '
  apply equally to the quantity referred to in Article 3(3 ) in respect of
  the period up to 3l> Jul$! 1 975 » which shall also "be regarded as a delivery
  period.                                                                                !
  2.        The quantity to "be delivered up to 3D July! 1 975 * referred to in
                                                            »
  Article 3(3 ). shall include supply en route from port of shipment ..
                                                                      .   '         ' '         I
  3.        Deliveries of Indian cane sugar in any delivery period may             .. . .
  benefit from the guaranteed prices applicable in the subsecruent delivery                   ,j
  period. ,             ■ ' :                                               . .. . .... . I
                                                                        ■                      !
                                                                                1
                             Article 5                                                         !■
                                                                                ■ /  !
  1.        White or raw cane sugar shall be marketed on the Community market
  at prioes freely negotiated "between buyers and sellers .
  2.        The Community shall not intervene if and when a Member State
  allows selling prioes within its borders to exceed the Community ^
  threshold prioe .
  3.        The Community undertakes to purchase , at the guaranteed prioe ,
  quantities of white or raw sugar , within the agreed quantity , whioh
  cannot be marketed in the Community at a prioe equivalent to or in excess
  of the guaranteed prioe .
  4*        The guaranteed price , expressed in units of acoount , shall refer
  to unpacked sugar , CIF European ports of the Community , and shall be fixed
  in respect of standard quality sugar . It shall be negotiated annually,
  within the price range obtaining in the Community, taking into acoount all
  relevant economic factors , and shall be deoided at the latest by 1 May
  immediately preceding the delivery period to whioh it will apply.
 ---pagebreak---                               - 4 -
5.       For "the period from                  1975 "to 30 June 197"
the guaranteed prices shall he as follows :
          (a) for raw sugar                 s 25.53 units of account per
                                                                   100 kilogrammes .
          (h ) for white sugar              : 31.72 units of account per
                                                                   100 kilogrammes .
                             Artide 6
         Purchase at the guaranteed price, referred to in Article 5\3 )
shall he assured through the medium of the intervention agencies or of
other agents ,, appointed by the Community .
                             Article 7
1.        If , during any delivery period , India fails to deliver the agreed
quantity in full for reasons of     force majeure' , the Commission of the
European Communities shall , at the request of India, allow the necessary
additional period for delivery .
2.       If, during any delivery period , India fails to deliver the agreed
quantity in full for reasons other than     force majeure , that quantity
shall he reduced in respect of each subsequent delivery period "by the
undelivered quantity .
                             Article 8
1.       At the request of India , or of the Community ,
consultations relating to all measures necessary for the application
of this Agreement shall take place within a Joint Committee hereby established
The Committee shall be composed of representatives of the Contracting Parties .
2.       The periodical reviews provided for under this Agreement shall
take place within the agreed institutional framework .
                                                                      • ♦ •/ t • •
 ---pagebreak---                                 Article 9
       This Agreement shall apply to the territories where tne
Treaty establishing the European Economic Community applies , on the
conditions established in the said Treaty , and to the territories to
which the Constitution of the Republic of India applies .
                               Article 10
      This Agreement shall enter into force on                          •
                               Article 11
      After a period of five years from the date on whioh the Agree
ment enters into force , it may be denounced by the Community , or India , ■'
after giving to the other Party two years notice in writing to that effeot
                               Article 12
      This Agreement is drawn up in two copies in the Danish , Dutch ,
English , French , German and Italian languages each of these texts" being
equally authentic.'


RECOMMENDATION FOR A COUNCIL DECISION CONCERNING THE CONCLUSION OF AN ADDITIONAL PROTOCOL TO THE COOPERATION AGREEMENT BETWEEN THE EUROPEAN ECONOMIC COMMUNITY AND THE SYRIAN ARAB REPUBLIC


Important legal notice

|

52005SC1305

Recommendation for a Council Decision Establishing, in accordance with Article 104(8) of the Treaty establishing the European Community, that the action taken by Hungary in response to the Council recommendation of 8 March 2005 pursuant to Article 104(7) of the Treaty is proving to be inadequate  /* SEC/2005/1305 final */

	[pic] | COMMISSION OF THE EUROPEAN COMMUNITIES |Brussels, 20.10.2005COM(2005) 1305 finalRecommendation for aCOUNCIL DECISIONEstablishing, in accordance with Article 104(8) of the Treaty establishing the European Community, that the action taken by Hungary in response to the Council recommendation of 8 March 2005 pursuant to Article 104(7) of the Treaty is proving to be inadequate(presented by the Commission)EXPLANATORY MEMORANDUMBackgroundThe excessive deficit procedure (EDP) is governed by Article 104 of the Treaty and by Council Regulation (EC) No 1467/97 of 7 July 1997, as amended by Council Regulation (EC) No 1056/2005 of 27 June 2005, on speeding up and clarifying the implementation of the excessive deficit procedure, which is part of the Stability and Growth Pact.After the accession to the Community on 1 May 2004, on the basis of data notified by Hungary in March 2004 and taking into account the Commission services’ spring 2004 economic forecasts, the Commission initiated the excessive deficit procedure for Hungary in view of the fact that its deficit had exceeded 3% of GDP in 2003. Upon recommendation by the Commission, the Council decided on 5 July 2004 that Hungary had an excessive deficit and at the same time issued an Article 104(7) recommendation for its correction. The Council recommended that the Hungarian authorities take action in a medium-term framework in order to bring the deficit below 3% of GDP by 2008 in a credible and sustainable manner, in accordance with the path for deficit reduction specified in the Council Opinion of 5 July 2004 on Hungary’s convergence programme submitted in May 2004. In particular, the Council recommended that the Hungarian authorities take effective action by 5 November 2004 regarding the measures envisaged to achieve the 2005 deficit target.On 18 January 2005, the Council, acting pursuant to Article 104(8) of the Treaty on a recommendation by the Commission, decided that Hungary had not taken effective action in response to its recommendation and that the deficit target for 2005 was expected to be missed by a sizable margin. Hungary is a Member State with a derogation, which means that Articles 104(9) and 104(11) of the Treaty do not apply to it, although Hungary has the obligation to avoid excessive deficits. Thus further recommendations under the EDP can be addressed to the country only on the basis of Article 104(7).On 8 March 2005, the Council adopted a new recommendation for Hungary in accordance with Article 104(7), on a recommendation by the Commission[1]. The Council recommended to the Hungarian authorities to take action in a medium-term framework in order to bring the deficit below 3% of GDP by 2008 in a credible and sustainable manner. For this recommendation, it referred to the revised path for deficit reduction as specified in the Council Opinion of 8 March 2005 on the convergence programme update which was submitted in December 2004 and also stressed its contribution to debt reduction and the improvement in the external balance. The relevant annual targets for the general government deficit were 4.4%, 3.6%, 2.9%, 2.2% and 1.6% of GDP between 2004 and 2008.[2] To that end, Hungary was in particular recommended to take effective action by 8 July 2005 regarding additional measures, as far as possible of a structural nature, in order to achieve the deficit target for 2005 of 3.6% of GDP[3]. The Council recommended furthermore that the Hungarian authorities make the timing and implementation of any tax cuts conditional upon the achievement of the deficit targets of the convergence programme update submitted in December 2004. In addition, it invited the Hungarian authorities to progress with the envisaged reforms of the public administration, health and education systems as committed also with a view to improving the long-term sustainability of the public finances, and to seize every opportunity to accelerate the fiscal adjustment.On 13 July 2005, the Commission adopted a communication to the Council[4], based on the information available at the time, including corrective measures decided by the Government in March and June totalling 1½% of GDP to compensate for slippages, and the firm commitment of the Hungarian government to carry out further measures if necessary. Against this background it appeared that the targeted deficit of 3.6% of GDP for 2005 was within reach and that the Hungarian government had taken effective action in response to the Council recommendation of 8 March 2005 regarding the measures envisaged to achieve the 2005 deficit target by the deadline of 8 July 2005. The Commission concluded that no further steps under the excessive deficit procedure were necessary at that point. However, it also stressed that the budgetary situation in Hungary remained vulnerable. In particular it emphasised that the achievement of the deficit target for 2005 required (i) the effective implementation of all the measures envisaged, and (ii) additional action to which the Government had committed itself publicly, should further overruns appear later in the year. Moreover, it underlined that the achievement of the deficit target of 2.9% of GDP in 2006 would require important adjustments and decisive action, including the adoption of a prudent budget for 2006. Hence, the Communication indicated that the Commission would have to recommend to the Council to enhance the budgetary surveillance and to take the necessary action under the excessive deficit procedure, should failures in implementing the envisaged correction emerge at a later stage.Recent developments that considerably worsen the budgetary situation and outlookOn 20 September 2005 the Hungarian authorities submitted a revised September EDP notification announcing a 2005 deficit of 6.1% of GDP instead of the targeted 3.6% of GDP although no significant change in the macro-economic scenario occurred. This revised notification took into account that the planned sale of existing motorways to the state owned motorway company (AAK) including those under construction until end 2005 could not be considered as a deficit-reducing measure and that the payment of the 13th month public salary should still be recorded in the year to which it pertains despite its postponement to the beginning of the following year[5], worsening the deficit in 2005 by 1.9% and 0.1% of GDP, respectively. The notification also contained an additional slippage of 0.5% of GDP. About half of this shortfall comes from lower VAT revenues, in part due to policy action[6]. The other half of the slippage reflects an expenditure overrun. The Government informed the Commission that it had no intention to take action to correct such developments, contrary to earlier commitments. Apart from the statistical clarification and the acknowledged uncompensated slippages, it is also worth noting that compared to the March notification the contribution for 2005 to the second pillar pension scheme was increased by 0.2% of GDP (from 1.1% of GDP to 1.3% of GDP) so that the underlying deterioration of the notified deficit figure of 6.1% of GDP compared to the 3.6% of GDP target contained in the March 2005 Council recommendation actually amounts to 2.7% of GDP.[7] The outcome for 2005 will be worse if further slippages occur (not excluded particularly on the expenditure side) and are also not compensated by corrective measures. According to the September notification, the debt-to-GDP ratio in 2005 will remain below the 60% threshold, at 57.1%. However, almost one third of the debt is denominated in foreign currency and hence its ratio to GDP is sensitive to exchange rate volatility.Regarding the 2006 deficit, the Communication of July 2005 had already indicated that even if the target of 3.6% of GDP for 2005 would be met, the achievement of the 2.9% of GDP target in 2006 would be difficult, especially in view of the expiry of the above-mentioned one offs related to the motorways and the above-mentioned planned tax cuts (expected revenue loss of the latter measure estimated at 1.1% of GDP). However, at the time it was considered that corrective measures could still be taken as committed by the Government. The Government submitted on 30 September a budget proposal for 2006 which contains a deficit target of 4.7% of GDP. However, it appears that this deficit target does not fully include the recording of military aircraft which will be delivered in 2005. According to ESA95 accounting rules, this expenditure should be booked in 2005, though a large part of effective payments is postponed to later periods. The revised new deficit target of 5.2% of GDP (including full recording of military aircraft delivery) is substantially higher than the target of 2.9% of GDP referred to in the Council recommendation based on Article 104(7) of March 2005 (as endorsed by the Council in its opinion on the December 2004 update of the convergence programme and in its recommendation). The underlying difference between the original and the new target is expected to be even higher than 2.3% of GDP assuming a similar increase in the pension fund contribution as notified recently for 2005.Moreover, even the considerably higher 2006 deficit target is at risk: On top of the higher deficit level in 2005 (reflecting the decision that the sale of motorways are not considered as general government revenue in 2005) which has a base effect for 2006, and the need to record the purchase of military airplanes in the year of delivery to be compatible with ESA95 rules which therefore adds 0.5% of GDP in 2006, there are the following elements: (i) the negative revenue impact of the tax reform (of 1.1% percentage point of GDP), and (ii) the impact of the decision to raise family allowances by 0.4% of GDP in the framework of the “100 steps” reform programme. All this suggests that the deficit could increase very significantly above the revised target for 2006 unless corrective measures are taken. So far the Government has signalled that – in contrast to the plans contained in the updated convergence programme - it would shift expenditure related to the construction of new motorway to a PPP-style framework, and thus lower government investment expenditure in 2006 by 1.2% of GDP and that this shift would be compatible with ESA rules. Even if this compatibility is confirmed (which would nevertheless raise questions about the sustainability of the adjustment), a correction of about 2% of GDP would still be required in order to meet the revised 2006 deficit target. However, the draft budget recently adopted by the Government does not contain measures of a structural nature that would support such a substantial reduction.The revision of both the 2005 and 2006 deficit targets are furthermore clearly breaching another element of the March Council recommendation, notably to make the timing and implementation of any tax cuts conditional upon the achievement of the deficit targets of the convergence programme update. Not only does the 2006 budget contain a substantial tax cut, but there has also been an advancement of the VAT cuts (on petrol) to October 2005.In conclusion:(i) the action of the Hungarian authorities in response to the March 2005 Council recommendation to meet the 2005 deficit target is proving to be inadequate since the target referred to in the Council recommendation of March 2005, will be missed by a sizeable margin. This is due to the appropriate statistical treatment of the planned sale of motorways and to slippages amounting to about ½ % of GDP. The Government has decided not to take action to correct these developments contrary to previous commitments. It should be noted that the target of 3.6% for 2005 was contained in the December 2004 update of the convergence programme[8] and endorsed by the Council in its opinion thereupon.(ii) the target for 2006 contained in the convergence programme update and March 2005 Council recommendation has been abandoned in the recent budget for 2006. Moreover, even the substantially higher new target could be missed;(iii) the planned implementation of tax cuts especially in 2006 is contrary to the Council recommendation to make the timing and implementation of any tax cuts conditional upon the achievement of the deficit targets of the convergence programme update submitted in December 2004; and(iv) the substantial deviation both in 2005 and 2006 from the planned adjustment path aiming at correcting the excessive deficit by 2008, which was set by the Hungarian government and endorsed in the Council Recommendation of March 2005, puts into question the credibility of this correction and, together with the slow progress in structural reforms, deepens the macro-economic imbalances.According to the provisions of Article 104(8) of the Treaty and of Article 4(1) of Council Regulation (EC) No 1467/97 (as amended by Council Regulation (EC) No 1056/2005), if the Council considers that no effective action has been taken in response to the recommendations addressed under Article 104(7), it must take a decision to that effect. In the light of these findings, the Commission is of the opinion that there has been no effective action in response to the March 2005 Council recommendation in accordance with Article 104(7) within the period laid down in the recommendation, and it recommends that the Council decide accordingly.Recommendation for aCOUNCIL DECISIONEstablishing, in accordance with Article 104(8) of the Treaty establishing the European Community, that the action taken by Hungary in response to the Council recommendation of 8 March 2005 pursuant to Article 104(7) of the Treaty is proving to be inadequateTHE COUNCIL OF THE EUROPEAN UNIONHaving regard to the Treaty establishing the European Community, and in particular Article 104(8) thereof,Having regard to the recommendation from the Commission,Whereas:(1) According to Article 104 of the Treaty, Member States are to avoid excessive government deficits.(2) The Stability and Growth Pact is based on the objective of sound government finances as a means of strengthening the conditions for price stability and for strong sustainable growth conducive to employment creation. The Stability and Growth Pact includes Council Regulation (EC) No 1467/97 of 7 July 1997 on speeding up and clarifying the implementation of the excessive deficit procedure[9], which was adopted in order to further the prompt correction of excessive general government deficits.(3) The Resolution of the European Council on the Stability and Growth Pact in Amsterdam of 17 June 1997[10] solemnly invites all parties, namely the Member States, the Council and the Commission, to implement the Treaty and the Stability and Growth Pact in a strict and timely manner.(4) By Council Decision 2004/918/EC of 5 July 2004, the Council decided, in accordance with Article 104(6), that an excessive deficit exists in Hungary[11].(5) In accordance with Article 104(7) of the Treaty and Article 3(4) of Council Regulation (EC) No 1467/97, on 5 July 2004 the Council also adopted a Recommendation[12] addressed to the Hungarian authorities and calling on them to bring the existence of an excessive deficit to an end as rapidly as possible and to take action in a medium-term framework to achieve the objective of bringing the deficit below 3% of GDP by 2008 in a credible and sustainable manner, in accordance with the path for deficit reduction specified in the convergence programme submitted by the authorities and endorsed in the Council Opinion of 5 July 2004[13]. That recommendation established the deadline of 5 November 2004 for the Hungarian government to take effective action regarding the measures envisaged to achieve the original 2005 deficit target of 4.1% of GDP.(6) On 18 January 2005, in accordance with Article 104(8) of the Treaty, on the basis of a recommendation by the Commission, the Council recognised that a number of measures had been taken to reduce the government deficit in 2004 and 2005 by the deadline of 5 November 2004. However, it considered that they were not sufficient to achieve the targets and would not avoid a deviation from the planned adjustment path of the Hungarian convergence programme of May 2004. Moreover, it considered that the continued commitment of the government to correct the excessive deficit by 2008 needed to be underpinned by decisive measures of further fiscal consolidation and a more determined pursuit of structural reforms. Against that background, the Council decided that Hungary had not taken effective action by 5 November 2004 in response to the recommendation of 5 July 2004.(7) In accordance with Article 104(7) of the Treaty and Article 3(4) of Council Regulation (EC) No 1467/97, on 8 March 2005 the Council adopted a second Recommendation[14] addressed to the Hungarian authorities and calling on them to bring the existence of an excessive deficit to an end as rapidly as possible and to take action in a medium-term framework to achieve the objective of bringing the deficit below 3% of GDP by 2008 in a credible and sustainable manner, in accordance with the path for deficit reduction specified in the convergence programme update submitted by the Hungarian authorities in December 2004 and endorsed in the Council Opinion of 8 March 2005. Among other things, that recommendation established the deadline of 8 July 2005 for the Hungarian government to take effective action regarding the measures envisaged to achieve the 2005 deficit target of 3.6% of GDP[15].(8) On 13 July 2005 the Commission adopted a Communication on Hungary. On the basis of the information available at the time, including corrective measures decided by the Government in March and June totalling 1½% of GDP to compensate for slippages and the firm commitment of the Hungarian government to carry out further measures if necessary, it stated that the Hungarian authorities had taken effective action by the deadline of 8 July 2005, although the situation remained fragile and further measures would be needed in the future.(9) However, the recent developments show that the action taken by the Hungarian authorities is now proving to be inadequate:-  The 2005 target of 3.6% of GDP referred to in Council recommendation (and endorsed in the Council Opinion of March 2005 December 2004 update of the convergence programme) will be missed by a sizeable margin and the Government has decided not to take new action to correct any slippages contrary to earlier commitments; this is confirmed by the revised EDP notification by the Hungarian authorities on 20 September 2005 of a deficit of 6.1% of GDP for 2005. The outcome for 2005 will be worse if further slippages occur (not excluded particularly on the expenditure side) and are also not compensated by corrective measures. According to this notification, the debt-to-GDP ratio in 2005 will remain below the 60% threshold, at 57.1%. However, almost one third of the debt is denominated in foreign currency and hence is sensitive to exchange rate volatility.-  The target for 2006 contained in the convergence programme update and the recommendation adopted by the Council on 8 March 2005 that the deficit be brought to 2.9% of GDP has been abandoned by the authorities. Even the substantially higher new target of 5.2% of GDP[16] contained in the draft budget for 2006 could be missed also since the planned tax reform is expected to reduce revenues by 1.1% of GDP and the recently adopted draft budget for 2006 does not contain measures of a structural nature that would support such a substantial reduction in expenditure-  The implementation of tax cuts in 2006 in particular is contrary to the Council recommendation that the timing and implementation of any tax cuts be made conditional upon the achievement of the deficit targets of the convergence programme update submitted in December 2004.-  The substantial deviation, both in 2005 and 2006, from Hungary’s deficit adjustment path aiming at correcting the excessive deficit by 2008, which was set by the Hungarian government and endorsed in the Council Recommendation of 8 March 2005, puts into question the credibility of this correction and, together with the slow progress in structural reforms, deepens the macro-economic imbalances.(10) In line with the Resolution of the European Council of the Stability and Growth Pact, Hungary agreed to make the Council’s recommendation of 8 March 2005 public.HAS ADOPTED THIS DECISION:Article 1The action taken by Hungary is proving to be inadequate in response to the Council Recommendation of 8 March 2005.Article 2This decision is addressed to the Republic of Hungary.Done at Brussels,For the CouncilThe President

[1] See http://register.consilium.eu.int/pdf/en/05/st07/st07145.en05.pdf

[2] For comparison reasons, all these figures are consistent with the decision by Eurostat of 23 September 2004 allowing a temporary classification of second pillar pension funds inside the general government of which the Hungarian authorities availed themselves, even though this is only possible until the March 2007 fiscal notification. It refers to the contributions to the second pillar pension schemes as corrected (upwards) in the March 2005 notification: 0.9% of GDP in 2004, 1.1% of GDP in 2005, and 1.2% of GDP in 2006-2008. These numbers have been revised upwards again in the September 2005 notification (see footnote 7).

[3] At the time, the Commission services expected the deficit in 2005 to reach 4.1% of GDP.

[4] Communication from the Commission to the Council concerning the action taken by Hungary in response to the Council recommendation of 8 March 2005 according to Article 104(7) under the excessive deficit procedure (SEC(2005) 951) http://europa.eu.int/comm/economy_finance/about/activities/sgp/edp/com_actkhu_en.pdf

[5] In September 2005, the Hungarian Constitutional Court declared this postponement (and the fact that public sector employees who had stopped working at the end of 2004 were not entitled to the 13th month salary) to be unconstitutional.

[6] A revenue loss of about 0.015 percentage point of GDP can be attributed due to the recent decision to advance, but only for petrol, the general VAT cuts that will be implemented starting from 1 January 2006.

[7] In line with the authorities’ decision regarding the temporary classification of second pillar pension funds referred to in footnote 2, the target of 3.6% of GDP in 2005 was calculated after taking into account the contribution to the second pillar pension scheme of 1.1% of GDP as notified in March 2005, whereas the reference deficit reduction path, including the original target of 4.7% of GDP, in the convergence programme update of December 2004 was still without this pension fund contribution. To compare the recently notified deficit with the original target contained in the convergence programme update, the higher pension fund contribution of 1.3% of GDP as notified in September has to be removed which results in a deficit of 7.4% of GDP.

[8] This includes the contribution to the second pillar pension scheme (which was notified at 1.1% of GDP in March 2005) whereas the original target set in the convergence programme update of December 2004 of 4.7% of GDP was still without this contribution.

[9] OJ N° L 209, 2.8.1997, p.6. Regulation as amended by Regulation (EC) No 1056/2005 (OJ L 174, 7.7.2005, p.5).

[10] OJ N° C 236, 2.8.1997, p.1.

[11] http://ue.eu.int/ueDocs/cms_Data/docs/pressData/en/ecofin/81342.pdf#page=8 (OJ L 389/27 of 30 December 2004, p.27).

[12] http://register.consilium.eu.int/pdf/en/04/st11/st11218.en04.pdf#page=2.

[13] http://register.consilium.eu.int/pdf/en/04/st11/st11194.en04.pdf#page=2.

[14] http://europa.eu.int/comm/economy_finance/about/activities/sgp/edp/com_ass_hu_22_dec_en.pdf

[15] The difference to the previous target of 3.8% of GDP is based on the increase in the contribution to the second pillar pension scheme by 0.2 percentage point of GDP in the March 2005 fiscal notification.

[16] This includes the standard recording of the purchase of military aircraft that add 0.5% of GDP to the announced new deficit target of 4.7% of GDP in 2006.


               EUROPEAN COMMISSION
            Brussels, 22.5.2017
            COM(2017) 530 final
            Recommendation for a
            COUNCIL DECISION
            abrogating Decision 2010/288/EU on the existence of an excessive deficit in Portugal

               Recommendation for a

               COUNCIL DECISION

               abrogating Decision 2010/288/EU on the existence of an excessive deficit in Portugal

               THE COUNCIL OF THE EUROPEAN UNION,

               Having regard to the Treaty on the Functioning of the European Union, and in particular Article 126(12) thereof,

               Having regard to the recommendation from the Commission,

               Whereas:

               (1)On 2 December 2009, following a recommendation from the Commission, the Council decided, by Decision 2010/288/EU
                  1
               , in accordance with Article 126(6) of the Treaty, that an excessive deficit existed in Portugal. The Council noted that the general government deficit planned for 2009 was 5.9% of GDP, thus above the 3%-of-GDP Treaty reference value. The general government gross debt (which had been above the 60%-of-GDP Treaty reference value since 2005) was planned to reach 74.5% of GDP in 2009.

               (2)On the same date, in accordance with Article 126(7) of the Treaty and Article 3(4) of Regulation (EC) No 1467/97,
                  2
                the Council, based on a recommendation from the Commission, addressed a recommendation to Portugal with a view to bringing the excessive deficit situation to an end by 2013 at the latest. The Council also set a deadline of 2 June 2010 for effective action to be taken.

               (3)Following the request by the Portuguese authorities for financial assistance from the Union, the Member States whose currency is the euro and the International Monetary Fund (IMF), the Council granted financial assistance to Portugal. The Memorandum of Understanding on Specific Economic Policy Conditionality between the Commission and the Portuguese authorities was signed on 17 May 2011.
                  3
                Thereafter the Council has addressed two new recommendations to Portugal on 9 October 2012 and 21 June 2013 on the basis of Article 126(7) of the Treaty, which extended the deadline for correcting the excessive deficit to 2014 and 2015, respectively. In both cases, the Council considered that Portugal had taken effective action, but unexpected adverse economic events with major unfavourable consequences for government finances had occurred. In line with Article 10(2)(a) of Regulation (EU) No 472/2013,
                  4
                Portugal was exempted from a separate reporting under the excessive deficit procedure and reported in the framework of its macroeconomic adjustment programme.
                  5

               (4)In accordance with Article 126(8) of the Treaty, the Council decided on 12 July 2016 that Portugal had not taken effective action in response to the Council Recommendation of 21 June 2013. On 8 August 2016, the Council adopted a decision in accordance with Article 126(9) of the Treaty giving notice to Portugal to take measures for the deficit reduction judged necessary in order to remedy the situation of excessive deficit, thereby setting a new deadline for correction by 2016. The Council also set a deadline of 15 October 2016 for effective action to be taken.

               (5)On 16 November 2016, the Commission concluded that Portugal had taken effective action in compliance with Council Decision of 8 August 2016 under Article 126(9) of the Treaty.

               (6)In accordance with Article 4 of the Protocol on the excessive deficit procedure annexed to the Treaties, the Commission provides the data for the implementation of the procedure. As part of the application of that Protocol, Member States are to notify data on government deficits and debt and other associated variables twice a year, namely before 1 April and before 1 October, in accordance with Article 3 of Regulation (EC) No 479/2009
                  6
               .

               (7)The Council should take a decision to abrogate a decision on the existence of an excessive deficit on the basis of notified data. Moreover, a decision on the existence of an excessive deficit should be abrogated only if the Commission forecasts indicate that the deficit will not exceed the 3%-of-GDP Treaty reference value over the forecast horizon
                  7
               .

               (8)Based on data provided by the Commission (Eurostat) in accordance with Article 14 of Regulation (EC) No 479/2009, following the April 2017 notification by Portugal, the 2017 Stability Programme and the Commission 2017 spring forecast, the following conclusions are warranted:

               –After reaching 4.4% of GDP in 2015 (3.1% of GDP net of one-offs), the general government deficit was reduced to 2.0% of GDP in 2016 (2.3% of GDP net of one-offs). As compared to the Budget 2016 targets, the deficit reduction in 2016 was mainly driven by the containment of current expenditure (-0.9% of GDP), particularly in intermediate consumption, and under-execution of capital expenditure (-0.5% of GDP), which more than compensated the revenue shortfall (1.1% of GDP) for both tax and non-tax revenue.

               –The Stability Programme for 2017-2021, submitted by the Portuguese government on 28 April 2017, plans the general government deficit to decline to 1.5% of GDP in 2017 and 1.0% of GDP in 2018. The Commission 2017 spring forecast projects a deficit of 1.8% of GDP in 2017 and 1.9% of GDP in 2018, thus remaining below the 3%-of-GDP Treaty reference value over the forecast horizon. Those projections do not include the potential deficit-increasing impact of bank support measures
                  8
               , which should not put at risk the durable reduction of the deficit.

               –The structural balance, which is the general government balance adjusted for the economic cycle and net of one-off and other temporary measures, improved by 0.3% of GDP in 2016.

               –The gross government debt-to-GDP increased to 130.4% in 2016, from 129.2% in 2015, due to debt-increasing stock-flow adjustments. The Commission 2017 spring forecast projects the debt ratio to decrease to 128.5% in 2017 and 126.2% in 2018 due to primary surpluses.

               (9)In accordance with Article 126(12) of the Treaty, a Council Decision on the existence of an excessive deficit is to be abrogated when the excessive deficit in the Member State concerned has, in the view of the Council, been corrected.

               (10)In the view of the Council, the excessive deficit in Portugal has been corrected and Decision 2010/288/EU should therefore be abrogated.

               (11)As from 2017, the year following the correction of the excessive deficit, Portugal is subject to the preventive arm of the Stability and Growth Pact and should progress towards its medium-term budgetary objective at an appropriate pace, including respecting the expenditure benchmark, and comply with the debt criterion in accordance with Article 2(1a) of Regulation (EC) No 1467/97,

               HAS ADOPTED THIS DECISION:

               Article 1

               From an overall assessment it follows that the excessive deficit situation in Portugal has been corrected.

               Article 2

               Decision 2010/288/EU is hereby abrogated.

               Article 3

               This Decision is addressed to the Portuguese Republic.

               Done at Brussels,

                     For the Council

                     The President

                     (1)
                  Council Decision 2010/288/EU of 2 December 2009 on the existence of an excessive deficit in Portugal (OJ L 125, 21.5.2010, p. 44).

                     (2)
                  Council Regulation (EC) No 1467/97 of 7 July 1997 on speeding up and clarifying the implementation of the excessive deficit procedure (OJ L 209, 2.8.1997, p. 6).

                     (3)
                  Council Implementing Decision 2011/344/EU of 17 May 2011 on granting Union financial assistance to Portugal (OJ L 159, 17.6.2011, p. 88).

                     (4)
                  Regulation (EU) No 473/2013 of the European Parliament and of the Council of 21 May 2013 on common provisions for monitoring and assessing draft budgetary plans and ensuring the correction of excessive deficit of the Member States in the euro area (OJ L 140, 27.5.2013, p. 11).

                     (5)
                  All documents related to excessive deficit procedures can be found at:

                     https://ec.europa.eu/info/business-economy-euro/economic-and-fiscal-policy-coordination/eu-economic-governance-monitoring-prevention-correction/stability-and-growth-pact/corrective-arm-excessive-deficit-procedure/excessive-deficit-procedures-overview_en

                     (6)
                  Council Regulation (EC) No 479/2009 of 25 May 2009 on the application of the Protocol on the excessive deficit procedure annexed to the Treaty establishing the European Community (OJ L 145, 10.6.2009, p. 1).

                     (7)
                  In line with the “Specifications on the implementation of the Stability and Growth Pact and guidelines on the format and content of stability and convergence programmes”, adopted by the Economic and Financial Committee on 5 July 2016, available at:

                     http://ec.europa.eu/economy_finance/economic_governance/sgp/legal_texts/index_en.htm

                  .

                     (8)
                  Commission Decision of 10 March 2017 – SA.47178 – Portugal – Recapitalisation of Caixa Geral de Depósitos, S.A.,

                     http://europa.eu/rapid/press-release_IP-17-556_en.htm


title: Recommendation for a COUNCIL DECISION Granting mutual assistance for Romania�EXPLANATORY MEMORANDUM Recommendation for a COUNCIL DECISION Granting mutual assistance for Romania

text:
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52011PC0183

Recommendation for a COUNCIL DECISION Granting mutual assistance for Romania& - xc;EXPLANATORY MEMORANDUM Recommendation for a COUNCIL DECISION Granting mutual assistance for Romania  /* COM/2011/0183 final */

	[pic] | EUROPEAN COMMISSION |Brussels, 7.4.2011COM(2011) 183 finalRecommendation for aCOUNCIL DECISIONGranting mutual assistance for Romania  EXPLANATORY MEMORANDUMINTRODUCTIONOn 6 March 2009, against a background of strongly increased risk aversion during the global economic crisis leading to reduced capital inflows, pressures on the exchange rate and an increasingly restricted access to the bond market for public borrowing, the Romanian authorities made a request for EU medium-term financial assistance and also approached the International Monetary Fund (IMF) and the World Bank for additional complementary assistance. On 9 March 2009, the European Commission (Commission) together with the Council Presidency declared that the EU was ready to participate with the IMF in a coordinated financing package to underpin the sustainability of Romania's balance of payments. However, it was stressed that the financial assistance would be contingent upon the implementation of a supportive policy programme. This programme, sent in the form of a Letter of Intent to the EC and the IMF on 28 April 2009, had its focus on cushioning the effects of the sharp drop in private capital inflows while implementing policy measures to address the external and fiscal imbalances and strengthening the financial sector. Against the background of the coordinated financing package underpinned by this programme, in the context of the European Bank Coordination Initiative, the parent institutions of the nine largest foreign-owned banks incorporated in Romania committed to maintain their overall exposure to Romania at a high level. On 6 May 2009, in conjunction with an IMF Stand-by Agreement (SBA) in the amount of SDR 11.4 billion approved on 4 May 2009 and additional support from the World Bank, EIB and EBRD of up to EUR 2 billion, the Council of the European Union decided to grant mutual assistance for Romania and to provide EU medium-term financial assistance of up to EUR 5 billion for Romania.[1] On 23 June 2009, a Memorandum of Understanding (MoU) between the European Union and Romania was concluded, specifying the concrete policy measures to be implemented over the programme period and ahead of each disbursement of the five instalments of the EU loan.Between October 2009 and February 2011, Commission services carried out review missions to assess progress regarding conditions attached to the EU medium-term financial assistance. Based on the findings of these missions, the Commission concluded that the conditions for disbursement of the five instalments of the EU loan had been broadly fulfilled. Between the first and the fifth instalment, a total of four addendums were joined to the MoU, reflecting the effects of changes in the economic environment as well as additional structural reform measures.On 17 February 2011, after comprehensive discussions with Commission services and IMF staff during a mission from 25 January to 8 February 2011 in Bucharest, the Romanian authorities made a request for precautionary EU medium-term financial assistance of up to EUR 1.4 billion that would continue to support the government's economic reform programme. Similarly to the previous one, the new assistance would be provided in conjunction with an IMF SBA in the amount of SDR 3.09 billion that Romania would also treat as precautionary, and loans from the World Bank. Thereby, the jointly provided precautionary assistance would appropriately address the remaining serious threats to Romania's balance of payments and the related risks for economic and financial stability for Romania and its main trading partners in the EU.MACROECONOMIC DEVELOPMENT AND OUTLOOKFollowing a fall of 7.1% in GDP and a further 1.3% fall in 2010, positive signs pointing to a pickup in sentiment and activity accumulate. Latest survey data confirm the improving trend in economic sentiment. Industrial production recovered by 5.5% in 2010. Likewise, industrial new orders in the second half of 2010 increased by around 25% y-o-y on average. Exports continued to grow healthily (by 27.3% in 2010 in RON value terms). While construction activity recovered strongly in December 2010, retail trade is still feeling the effects of the VAT hike and the reduction in public sector wages. Modest wage growth (the average net monthly salary in December rose by 1.3% y-o-y) signals improvements in the labour market and will provide support to consumption. While registered unemployment continued to fall in January 2011, the unemployment rate is likely to increase in the first half of the year, reflecting the impact of new registration obligations for unemployed.The economy is expected to turn around in 2011, with real GDP forecasted to increase by 1.5%. After falling severely in 2009 and 2010, corporate investment should pick up as external demand is growing and capacity utilisation rates in the manufacturing sector are close to their historical highs of 2008. Strong exports and the jump in industrial orders are expected to reassure companies to invest even if risk spreads remain somewhat elevated. Residential construction will likely remain subdued as credit activity remains low and house prices are projected to stabilise further. After having declined considerably in 2009 and 2010, household consumption is expected to pick up slowly this year, supported by an upward adjustment in wages in the public sector (+15%, after the 25% cut in July 2010), as well as in industry, where activity has recovered strongly. A stronger rebound is impeded by the continuing fiscal retrenchment, the high debt-service-to-income ratio, and limited increase in household credit due to a high ratio of NPLs in retail banking. Real economic growth in 2012 is forecasted to be around 4%. Growth is expected to gradually become more broad-based, with domestic demand playing a decisive role in uplifting the economy. Private consumption expenditure will likely increase at a faster pace due to improvements in household balance sheets, driven by further increases in wages and employment.Inflation peaked in December 2010 at 8.0% (y-o-y) on the back of significant hikes in indirect taxation. This was well-above the 3.5% ±1 percentage point inflation target set for end-2010 by the National Bank of Romania (NBR). In the first half of 2010, inflation was primarily kept up by increases in tobacco excise duties and higher fuel prices – annual inflation averaged 4.5%, while HICP inflation at constant taxes hovered at just around 2%. Inflation increased to 7.5% in the third quarter on the back of the VAT hike and increases in food prices. In the second half of 2011, inflation is expected to gradually return – as the price effects related to indirect tax hikes taper off – to the NBR's target band (3.0% ± 1 percentage point).The NBR has kept the key rate stable since May 2010. Nonetheless, abundant liquidity at the interbank market kept short-term rates at much lower levels than the NBR's key policy rate in recent months. Despite the decline in money market rates, credit growth to the private sector remains stubbornly weak on the back of unfavourable cyclical conditions and tightened bank lending standards. Monetary policy continues to face difficult challenges. Repeated overshooting of the inflation targets may put a strain on the NBR's credibility – although a large part of recent price increases was beyond its direct control. The NBR's cautious approach to monetary easing in the second half of 2010 was warranted because of possible second-round effects from the VAT-related spike in inflation. In order to better anchor inflation expectations, the NBR will continue with active communication policy.PUBLIC FINANCESThe 2010 budget deficit was 6.5% of GDP in cash terms, better then the 6.8% of GDP deficit target. Revenue increased by 7.2% in 2010, reflecting extra income from the increase in the VAT rate to 24%, as well as from excise taxes and non-tax revenue which grew by 28.2%. In contrast, profit tax revenue fell by 17.4% in 2010 as a result of the lagged effect of the crisis. In addition, social security contributions and the income tax also fell by 4.5% and 3.2% respectively. Nominal expenditure grew by 4.2% in 2010 due to increases in other transfers, social assistance and goods and services. The latter is partly explained by the repayment of arrears in the health sector of RON 2 billion in September. The main expenditure cuts were in capital spending which decreased by 11.7% in 2010, followed by personnel spending which fell by 8.6% and subsidies which were 6.7% lower.Commission staff projects that Romania has also met the ESA deficit target for 2010, but this needs to be confirmed in the next months. It should, however, be noted that the reclassification of a number of SOEs into the general government sector by Eurostat in September 2010 and April 2011 would have a deficit-increasing impact of at least 0.5% of GDP until the relevant SOE deficits have been eliminated. Depending on budgetary performance in 2011, this may necessitate an adjustment in the deficit target for 2011 to take this development into account. Additional efforts on this account might then be needed to ensure that a deficit below 3% of GDP in ESA terms will be achieved in 2012 in line with applicable Council Recommendations under the Excessive Deficit Procedure.Domestic payment arrears were reduced by end 2010 and the authorities committed to keeping them down throughout 2011. The stock of domestic payment arrears (older then 90 days) stood at RON 1.1 billion (0.2% of GDP) at end 2010, down from RON 1.6 billion (0.3% of GDP) at end 2009. The arrears are predominantly at local government level (around 84% of the total stock of arrears at end 2010), and to a lesser extent in the health sector, including hospitals. While local government arrears are more difficult to control, a new law with effect from 1 January 2011 on local government finances should help. Following payments of health-sector arrears of RON 2 billion (0.4% of GDP) in September 2010, health-sector arrears have been kept down except for hospitals.Further health sector reform will be key to prevent a re-emergence of arrears in this area on a durable basis. The objective is to have an efficient health system that functions within its budgetary allocations. The measures that are being and will be taken include the introduction of a means tested co-payment system, the elimination of mandatory contracting with all hospitals by the Health Fund, and the reform of the package of benefits insured by the government to exclude coverage of non essential health services. The World Bank is, and will be, providing technical assistance on these matters. Furthermore, the Ministry of Finance will monitor the aggregate figures for hospital budgets in order to ensure that they are consistent with the programmed expenditure of the general government. If this is not the case, then it will take action together with the Health Ministry to prevent a re-accumulation of arrears at hospital level.The authorities remain committed to reaching a 4.4% of GDP budget deficit in 2011 in cash terms (below 5% of GDP in ESA terms). They have adopted and enacted the 2011 budget, as well as the Medium-Term Budgetary Strategy for 2011-13. On the revenue side, all major taxes will remain unchanged so as to ensure predictability. On the expenditure side, the budget keeps the wage bill capped at RON 39 billion, excluding the social security contributions for the military (RON 1.6 billion) which will be paid by the State starting from this year as a result of the new pension law. Following a temporary emergency 25% cut in public wages in mid-2010 to bring the budget deficit back on track, public wages have been increased by 15% compared to their December 2010 level. However, this increase was offset by the elimination of the 13th salary and of the holiday bonus. Furthermore the number of employees in the public sector was reduced by an extra 20000 compared to what was necessary to fit into the overall wage bill. Other measures included in the 2011 budget consist of maintaining a freeze in pensions, continuing reductions in public employment with the policy of replacing only 1 of 7 departing workers, and eliminating heating subsidies. Moreover, the reform of the pension system, together with the unified wage law and the restructuring of the health sector, should generate significant savings.For 2012 the authorities remain committed to reducing their deficit below 3% of GDP in ESA terms, but additional measures will be needed. The Commission's autumn 2010 economic forecast based on a no-policy change assumption already indicated the need for an additional effort of 0.5% of GDP. However, even more important measures may be necessary due to the reclassification of loss-making SOEs into the general government sector, bringing the total additional adjustment effort probably to around 1% of GDP. Continued expenditure restraint, including on wages and bonuses will also have to be observed.The proposed precautionary programme will also aim to further strengthen the budget management system. The implementation of the Fiscal Responsibility Law and the adoption of the Medium-Term Fiscal Strategy should help improve the budget planning process. Furthermore, the budgeting of capital expenditure requires strengthening at the central government level. Even though Romania's public capital spending budgets tend to be sizeable (for 2011 7.2% of GDP is reserved), there is very little output to show for it, suggesting that capital spending has been rather inefficient. Moreover, a very large number of investment projects were started in previous years without ensuring the necessary resources for their completion. As a result, the resources currently available for capital spending are spread out thinly over a (too) large set of unfinished projects. A working group under the Prime Minister will establish a list of priority investment projects for which financing will be available over the next 3-5 years within the envelope defined in the updated fiscal strategy for 2011-2014. In addition, the monitoring and evaluation of investment projects at the central government level will be improved by strengthening the public investment monitoring unit in the MoPF and by improving the database on capital investment managed by the Ministry. Possible technical assistance from EU Member States may also be required. The MoPF will produce quarterly reports to the government on the status of ongoing and planned investment projects and the government will discuss this report and take measures to eliminate any potential fiscal slippages or other problems related to budget execution. Finally, capital spending will be gradually reoriented from entirely domestically financed investment to EU co-financed investment, which should also contribute to improve the absorption of EU funds.FINANCIAL MARKETSRomanian financial markets showed a solid performance since mid-2010, although the situation remains fragile. The continued turbulences in the euro-area periphery appear to have had little direct impact on Romanian markets. Financial stress eased in tandem with an upswing in global market sentiment and, to some extent, the anticipation of the EU/IMF follow-up programme for Romania. The exchange rate was stable and remained close to RON 4.20-4.30/EUR in recent months. After peaking at just above 400 basis points by mid-2010, CDS spreads on sovereign debt hovered at around 300 basis points since October 2010 (lower than in Greece, Ireland, Portugal and Hungary). The stock market index BET remained broadly flat in the fourth quarter 2010, but picked up again in January. Yields on domestic one-year T-bill auctions eased well below 7% p.a. in January and February 2011, implying lower refinancing costs for the budget than in most of 2010. Banking sector profitability suffered due to asset quality deterioration. Non-performing loans (NPLs) increased to 11.9% by end 2010 compared to 7.9% at end 2009. Given these trends in impaired assets, banking sector profitability suffered culminating in a net loss by year end (i.e. the return on equity was negative at -1%). However, banks have maintained sufficient capital buffers, with the capital adequacy ratio for the system remaining above 14%. In spite of the reduction in the exposure commitment to 95% of the March 2009 benchmark level as of October 2010, the parent banks involved in the European Bank Co-ordination "Vienna" Initiative have maintained their exposure close to the March 2009 level (98% as of end January 2011).BALANCE OF PAYMENT AND EXTERNAL FINANCING REQUIREMENTSThe current account balance posted at a deficit of 4.2% of GDP in 2010. Private capital inflows have gradually increased. This has allowed a faster-than-expected accumulation of foreign exchange reserves which are now at comfortable levels (at around 130% of short-term debt). On current projections under the macro-economic baseline scenario, external debt sustainability would not be at stake over the programme horizon.In case of a negative shock, Romania might need additional financing of up to EUR 5 billion. In such an alternative adverse scenario, Romania would not be able to fully cover its external financing needs from available funding resources, largely due to decreased inflows of foreign direct investment and lower roll-over rates for amortising debt, notably from banks. In this alternative set-up, the residual financing needs would have to be covered from activating the precautionary EU financial assistance (in conjunction with the IMF assistance). The alternative scenario has been developed in close co-operation with IMF staff and underpins the additional financing needs of around EUR 5 billion to be covered from international financial assistance.While the economic crisis has helped to reverse the accumulation of imbalances in the economy, the imbalances still exist. The current account has been reduced from 11.4% of GDP in 2008 to around 4.2% in 2010. Credit growth has stalled and construction activity fell by double digit rates in the past two years. Inflation remains high. However, the sharp fall in wages, especially those in the public sector, and the further depreciation of the currency in 2010, have helped Romania gain price competitiveness. The measures adopted by the authorities have been successful in reducing the fiscal deficit below the agreed target for 2010. However, the current account and the government deficit (twin deficits) are still relatively high. Moreover, the continuous increase in foreign borrowing may pose a risk. This means that harmful macro imbalances still exist, seriously threatening the sustainability of Romania's balance of payments.EU SUPPORT UNDER THE BALANCE OF PAYMENTS FACILITY COMES AS PART OF AN INTERNATIONAL EFFORTIn the light of the still elevated risk to encounter balance of payments difficulties and conditional on the Romanian authorities' firm commitment to implement a major programme of fiscal, financial and structural adjustment, the Commission, after having consulted the Economic and Financial Committee (EFC) on 3 March 2011, recommends to the Council to adopt a Decision as to continue the granting of mutual assistance foreseen by Article 143 of the Treaty (TFEU). The Romanian government shall implement its economic programme in order to address the remaining serious threats to the sustainability of its balance of payments.Furthermore, the Commission, after consultation of the EFC, proposes to the Council to adopt a Decision providing precautionary EU medium-term financial assistance of up to EUR 1.4 billion for Romania to underpin the sustainability of Romania's balance of payments.[2] The proposed precautionary assistance would be available for activation until 31 March 2013.A precautionary medium-term financial assistance for Romania under the balance of payments facility for Member States appears to be appropriate under the current circumstances of still reduced capital inflows and remaining elevated fiscal and external imbalances. While under present market conditions Romania does not intend to request a disbursement of funds made available from either the IMF or the EU, the precautionary assistance will facilitate a continued orderly adjustment of the fiscal and the external deficits.The assistance will provide credibility to the government's economic programme, including the continued fiscal adjustment, the consolidation of financial market reform, and an increased focus on product and labour market reforms and the increased absorption of EU structural funds. The implementation of the economic programme will enhance Romania's growth potential which should positively impact on the external value of Romania's currency RON and thereby reduce the likelihood of negative balance sheet effects in the corporate and household sectors. In turn, the economic recovery should be more sustainable and asset quality in the banking sector should improve, which again frees up resources for new investment.Whereas the precautionary assistance reflects the fact that under normal market conditions, Romania can cover its financing needs without further official assistance, the negative risks up to the first quarter of 2013, seriously threatening the sustainability of Romania's balance of payments, are considered to be adequately addressed by the envisaged total of up to EUR 5 billion in precautionary loans, as the proposed precautionary EU assistance for Romania of up to EUR 1.4 billion would come in conjunction with IMF support through a precautionary Stand-by-Arrangement (SBA) in the amount of SDR 3.09 billion (300% of Romania's IMF quota; about EUR 3.6 billion). The World Bank will continue providing earlier committed support of EUR 400 million under its development loan programme (DPL3) and EUR 750 million under results based financing for social assistance and health reforms.The precautionary EU financial assistance is provided in support of the continued strong commitment by the Romanian authorities to implement a comprehensive economic programme. The programme will be fully reflected in an update of the Romanian Convergence Programme as well as in Romania's National Reform Programme (NRP). The specific economic policy conditionality attached to the disbursement of instalments under the EU loan will be set out in a MoU to be concluded by the Commission with the Romanian authorities; the principal elements of this conditionality are the following:A: Fiscal consolidationFiscal consolidation remains a crucial element in the reform programme which foresees a reduction of the fiscal deficit to 4.4% of GDP deficit for 2011 on a cash basis (below 5% of GDP in ESA terms) and to below 3% of GDP deficit for 2012 in ESA terms, thereby putting an end to the excessive deficit. Furthermore, the programme will step up efforts to reduce government payment arrears, both at central government and local government levels. The financial reporting system of those state-owned enterprises (SOEs) that are, or risk being, classified within general government needs to be enhanced in order to allow a monthly monitoring of their financial situation, including the stock of payments arrears, with a view to gradually reduce the latter. The public sector wage bill will remain capped at RON 39 billion (excluding 1574 million RON in social security contributions for the military as a result of the application of the new pension law) in 2011 and will need to respect the relevant limits set in the Medium-Term Fiscal Strategy over the 2012-2014 period.B: Fiscal governance and structural fiscal reformFiscal governance will strongly benefit from the ongoing Technical Assistance provided by the IMF and the World Bank in the area of Public Financial Management and Control. This also includes training of staff and the refurbishing of the entire IT infrastructure in the central government's budget and expenditure management. The economic programme caters for the fact that public investment needs to be better prioritized and the planning, monitoring and evaluation of public investment projects have to be improved. The economic programme contains several measures to this end, including the creation of a project database, increased capital investment planning and monitoring capacity in the Office of the Prime Minister and in the Ministry of Finance, respectively. Hospital budgets under the subordination of the Ministry of Health will be closely monitored by the Ministry of Finance in order to avoid a re-accumulation of payment arrears. The Romanian authorities will continue to review and update the debt management strategy on an annual basis, i.e. under this programme by end-December 2011 and end-December 2012.C: Financial sector regulation and supervisionIn the financial sector, authorities will ensure that the prudential treatment of debt-for-equity swaps will not lead to a weakening of the financial positions of credit institutions. To prepare the introduction of IFRS as of 2012, authorities will develop proposals for prudential filters aiming at preserving the prudent approach to loan-loss provisioning, solvency and reserves. Preserving credit discipline and avoiding moral hazard among debtors contributes significantly towards enhancing financial stability. Therefore, the government will continue refraining from adopting legislative initiatives (such as the personal insolvency law) and promoting provisions in the debt collection law, which would undermine credit discipline. Moreover, authorities will make the necessary amendments to correlate the provisions of the law on the bankruptcy of insurance undertakings with the general law on insolvency and the law on insurance business and insurance supervision.D: Monetary PolicyMonetary policy will remain geared towards price stability and the achievement of the National Bank of Romania’s inflation targets (3.0% ± 1 percentage point at end-2011 and end-2012).E: Structural reformsThe economic programme of the Romanian Government has a strong focus on product and labour market reform with a view to improve the functioning of these markets and thereby make the Romanian economy more resilient when faced with external shocks and to strengthen its long-run growth potential. The structural reform agenda of this program shall be included in Romania's forthcoming National Reform Programme and will help Romania achieve its national goals set out in the framework of the Europe 2020 growth strategy.In the energy sector, the programme foresees the deregulation of the price-setting and the trade with electricity and gas with the aim to increase market access and transport capacity and to contribute to build a fully functioning, integrated and interconnected internal market in electricity and gas as recalled by the European Council of 4 February 2011. The programme foresees the creation of a strong and independent energy regulator, able to fulfil its tasks and responsibilities as defined in the third energy package. The restructuring plan for the coal sector will be notified to the Commission. The programme contains a comprehensive reform of the railway sector aiming at increased efficiency for the provision of passenger transport services and the planning of railway infrastructure, while making the sector more attractive for non-passenger transport (cargo). The reform will be helped by a strong and independent regulatory body for the railway sector.The Romanian legal framework on public-private partnerships needs to be reviewed in order to ensure full compliance with EU public procurement Directives. Further, a review of the public procurement environment shall be completed. The programme foresees the establishment of an operational Point of Single Contact (PSC), provided for in the Services Directive, to help businesses with all administrative procedures involved for the establishment in Romania or for the cross-border service provision and will remove restrictions for the setting up of retail shops.The programme continues the reform of the labour market through the amendment of the Labour Code expected to be approved in 2011, and streamlining wage setting institutions. The labour market rigidity shall be addressed through a wider use of fixed-term labour contracts, through the reduction in the generosity of compensation for overtime, and extending the probationary period of permanent contracts. The Romanian Government will seek with the relevant stakeholders how to rationalise wage bargaining in the private sector. Finally, the policy programme contains measures to increase labour supply incentives while reducing undeclared labour. The reforms shall be in compliance with EU Directives and core labour standards and shall take due account of the need to have an integrated approach to flexicurity.Authorities will take measures to strengthen corporate governance of State Owned Enterprises, including in the financial sector.On the much needed increase in the absorption of EU funds, the programme foresees the implementation of the Government's Action Plan which is currently being finalized by the Romanian authorities in reply to the letter by the President of the Commission of 13 December 2010. The programme sets specific targets for the cumulative aggregate level of certified expenditures until the end of 2012, including the insurance that adequate national resources for co-financing are being secured in the annual budgets in order to avoid the situation where Romania loses a substantial part of the structural funds made available for its economic development.Recommendation for aCOUNCIL DECISIONGranting mutual assistance for RomaniaTHE COUNCIL OF THE EUROPEAN UNION,Having regard to the Treaty on the Functioning of the European Union, and in particular Article 143 thereof,Having regard to the recommendation from the Commission made after consulting the Economic and Financial Committee,Whereas:1.  Romania has implemented a substantial reform programme since 2009. Public finances have been brought back onto a more sustainable path and the government's access to market-based financing has improved markedly. As the fiscal adjustment continues and the exchange rate of Romania's national currency (RON) with the currencies of major trading partners has become more stable and as parent institutions of foreign-owned banks have kept their exposure to Romania, the banking sector has remained stable and well capitalized, and Romania's external deficit has been contained.2.  Continued fiscal consolidation needs to be pursued in order to further stabilize the debt to GDP ratio and to ensure the long-run sustainability of public finances in a rapidly ageing society. Romania has begun to build a yield curve, but for the time being the financing of the budget deficit as well as of the refinancing of maturing debt remain expensive, and Romania continues to rely on debt instruments with predominantly short maturities. While the stability of the banking sector has been maintained, the increase in impaired assets may continue putting strain on the system.3.  Against this background, it is crucial that the Romanian authorities pursue sound and credible macroeconomic policies to avoid any resurgence of major financial market stress. A cornerstone of the economic programme remains the reduction of the fiscal deficit in line with the Council recommendations to Romania adopted under the excessive deficit procedure. In order to render the achievement of lower budgetary deficits sustainable, Romania needs to continue the reform of its public financial management and control environment.4.  The Council is reviewing on a regular basis the economic policies implemented by Romania, in particular in the context of the annual reviews of Romania's update of the Convergence Programme and implementation of the National Reform Programme and the regular review of progress made by Romania in the context of the Convergence Report.5.  While in the baseline scenario of the economic programme, total gross financing needs until the first quarter of 2013 are fully covered, and the government continues to consolidate its access to market-based financing, the unfinished reform agenda and substantial risks surrounding the baseline scenario support Romania's request for a financial assistance of a precautionary nature as a follow up to the assistance granted under Council Decision 2009/458/EC.[3]6.  The Romanian authorities have requested financial assistance from the EU and other international financial institutions to support balance of payments sustainability and to ensure that international currency reserves can be kept at a prudent level even in the case of adverse economic developments.7.  Romania remains seriously threatened with difficulties as regards its balance of payments, a threat which continues to justify the granting of mutual assistance by the European Union,HAS ADOPTED THIS DECISION:Article 1The European Union shall continue to grant mutual assistance to Romania, therewith continuing the assistance which has been provided in Council Decision 2009/458/EC of 6 May 2009.Article 2This Decision is addressed to the Member States.Article 3This Decision shall take effect on the day of its notification.Article 4This Decision shall be published in the Official Journal of the European Union .Done at Brussels, [date].For the CouncilThe PresidentBUDGETARY IMPACT STATEMENT(cf. Article 16 of the Internal Rules)POLICY AREA: TITLE 01 – ECONOMIC AND FINANCIAL AFFAIRSACTIVITY: FINANCIAL OPERATIONS AND INSTRUMENTS1. NAME OF THE PROPOSAL, BUDGET LINE CONCERNED AND TITLERecommendation for a Council Decision granting mutual assistance for Romania in conjunction with the Proposal for a Council Decision providing precautionary EU medium-term financial assistance for Romania.01 04 01 01 European Union guarantee for EU loans raised for balance-of-payments support.2. LEGAL BASIS:Art. 143 TFEU, Art 352 TFEU, Council Regulation N° 332/2002.3. OVERALL FIGURES FOR THE FINANCIAL YEAR (IN EUROS)This item constitutes the structure for the guarantee provided by the European Union. It will enable the Commission to service the debt (principal, interest and other costs) should the debtor (Romania) default.The budget entry ("p.m.") reflecting the budget guarantee will be activated only in the case of an effective call on the guarantee. It is expected that normally the budget guarantee will not be called.3a – Current yearNot applicableCA |Initial appropriation for the financial year (budget) |Transfers |Additional appropriation |Total appropriation |Appropriations already set aside by another work programme |Balance available |Amount for the action proposed |3b – Carry oversNot applicableCA |Carry-overs |Appropriations already set aside by another work programme |Balance available |Amount for the action proposed |3c – Next financial yearNot applicableCA |Initial appropriation for the financial year (budget) | p.m. |Transfers |Additional appropriation |Total appropriation |Appropriations already set aside by another work programme |Balance available |Amount for the action proposed | p.m. |4. DESCRIPTION OF THE ACTIONThe proposed precautionary EU medium-term financial assistance to Romania, if activated, consists of an EU loan (to be financed by EU borrowings in the international capital markets) in the amount of up to EUR 1.4 billion. It will be provided in the context of an international financing package, and in particular by an IMF loan of SDR 3.09 billion (around EUR 3.6 billion) supported by the stand-by facility. The World Bank has committed a total of EUR 1.15 billion, EUR 400 million of which had already been committed under the preceding international financing package. The precautionary EU medium-term financial support to Romania is intended to address the still elevated risks attached to the balance of payments sustainability of Romania which has been seriously threatened since 2009. The precautionary assistance also continues to provide support to the economic programme of the government aiming, among other things, at consolidating regained investor confidence and to decrease the likelihood of further peaks of stress in financial markets. The newly provided precautionary assistance is expected to make a contribution to financial stability that goes beyond the beneficiary country in view of the important international (including interbank) links. The government's economic package hereby supported includes a continued deficit reduction in the period 2011-2013, which would decrease the government's financing need. Finally, the assistance managed by the Commission, in consultation with the Economic and Financial Committee, is a way to ensure that the EU remains closely involved in the shaping of economic policies in Romania and that those policies are consistent with Romania's undertakings in the EU context and recommendations by the Council, in particular as concerns the implementation of the National Reform Programme as well as of the Convergence Programme.The EU borrowings raised on the capital markets or from financial institutions for the purpose of extending the loan to Romania, in case of a request by Romania and a positive evaluation of such a request by the Commission and the EFC, are covered by the EU guarantee. The loan is raised on the capital markets or from financial institutions. The amount in principal of loans which could be granted to Romania would amount to up to EUR 1.4 billion.The structure for the guarantee provided by the EU will enable the Commission to service the debt should Romania default.In order to honour its obligations, the Commission may draw on its cash resources to service the debt provisionally. In this case, Article 12 of Council Regulation (EC, Euratom) No 1150/2000 of 22 May 2000 implementing Decision 2007/436/EC, Euratom on the system of the European Communities' own resources (OJ L 130, 31.5.2000, p. 1) will apply.5. METHOD OF CALCULATION ADOPTEDNot applicable.6. PAYMENT SCHEDULE (IN EURO)Not applicable.Heading | Appropriations | Payments |Year n | Year n+1 | Year n+2 | Year n+3 | Subsequent financial years |Year n |Year n+1 |Year n |Year n+1 |Total |[1] Council Decision of 6 May 2009 granting mutual assistance for Romania (2009/458/EC) (OJ L 1150, 13.6.2009) and Council Decision of the same date providing EU medium-term financial assistance for Romania (2009/459/EC) (OJ L 150, 13.6.2011, p. 8). On 16 February 2010, the Council amended this Decision to address the impact on programme targets of the larger than expected recession (2010/183/EU) (OJ L 83, 30.3.2010, p. 19).[2] The proposed assistance would be provided under the EU facility for Member States which have not yet adopted the euro, as governed by Council Regulation (EC) No 332/2002.[3] OJ L 150, 13.6.2009, p. 6.