Update with Government’s reaction shown below: The European Commission is recommending that the Council open an Excessive Deficit Procedure (EDP) for Malta. It said that since accession to the EU, Malta has been subject to two Excessive Deficit Procedures (EDP). The first was launched in July 2004 and was abrogated in June 2007. The second was launched in July 2009 and abrogated in December 2012.
According to data notified by the Maltese authorities in April 2013, the general government deficit in Malta reached 3.3% of GDP in 2012, thus exceeding the 3%-of-GDP reference value of the Treaty. The Commission report under Article 126(3), which represents the first step in the EDP, considers that the deficit was close to the 3%-of-GDP reference value, but the excess over the reference value could not be qualified as exceptional nor temporary within the meaning of the Treaty and the Stability and Growth Pact.
The Commission services’ 2013 Spring Forecast projects that the deficit will continue to be above the reference value in 2013 and 2014, respectively at 3.7% and 3.6% of GDP. In addition, in 2012 the debt ratio was above the 60%-of-GDP reference value and Malta did not make sufficient progress towards compliance with the debt reduction benchmark, in line with the requirements of the transition period.
In light of the above the Commission recommends that the Council decides on the existence of an excessive deficit in accordance with Article 126(6) of the Treaty.
When should Malta correct its excessive deficit?
The Commission recommends that the Council should address recommendations to Malta under Article 126(7) in order to put an end to the present excessive deficit situation by 2014. Specifically, Malta should reach a headline deficit target of 3.4% of GDP for 2013 and 2.7% of GDP in 2014, which is consistent with an annual improvement of the structural balance of 0.7% of GDP in 2013, and 0.7% of GDP in 2014.
This adjustment path would allow bringing the deficit below the 3% of GDP reference value by 2014 while at the same time ensuring that the debt ratio will approach the 60%-of-GDP reference value at a satisfactory pace.
Finance Ministers will discuss today’s Recommendation at the ECOFIN Council meeting on 21 June in Luxembourg.
What are the main features of the Excessive Deficit Procedure (EDP)?
The Excessive Deficit Procedure (EDP) is a rule-based process established in the Treaty on the Functioning of the European Union (TFEU, Article 126) to ensure that Member States correct gross fiscal policy errors. There are two key reference values, which, when breached, constitute criteria on the basis of which the opening of an EDP can be warranted: one for the general government deficit (3% of GDP) and one for gross government debt (60% of GDP). To ensure the correction of excessive deficits, Member States in EDP are subject to recommendations that are to be respected by a certain deadline.
The various steps within the EDP are listed in the Treaty and specified further in the Stability and Growth Pact (SGP) legislation (Regulation (EC) 1467/97). While the EDP corresponds to the “corrective arm” of the SGP, it is complemented by a “preventive arm” (defined in Regulation (EC) 1466/97), which comprises procedures to promote surveillance and coordination of economic policies and ensure progress towards fiscal sustainability.
The EDP has recently been reinforced as part of the overhaul of the economic governance architecture in the EU, partly in response to the economic crisis. In particular, the legislative package known as the “Six Pack” has largely reformed economic and budgetary surveillance in the EU.
Update: The Ministry for Finance notes the European Commission’s recommendation published yesterday, and welcomes its decision to hold back from imposing any additional measures on the country’s budget.
“The European Commission’s decision to not impose specific additional measures shows that it recognises the new Government’s resolve to returning the deficit to below 3% by the end of the year, and continue with its fiscal consolidation until necessary,” said Finance Minister Prof. Edward Scicluna.
“The new Government’s argument in seeking to avoid the imposition of specific spending cuts was primarily to ensure that the growth momentum which the economy enjoys at present is not stalled by negative economic shocks or austerity programmes which some other EU member states had to endure.
“Despite the fiscal situation which it has inherited, however, the new Government remains committed to closing 2013 with a deficit below the 3% threshold, and is confident that it can achieve this through several initiatives,” the Finance Minister said.
Firstly, the Government will be closely monitoring the fiscal situation on a month-by-month basis, and be ready to intervene when and as required.
Secondly, a Spending Review Unit has already been set up within the Ministry for Finance, and is assisting each Government Ministry to identify cost savings through the elimination of waste and other inefficiencies, as well as facilitating the exchange of good practices and incentives to ensure that the country’s revenues are enhanced.
Thirdly, the budgetary process is being re-evaluated to ensure that the Government’s functions are achieved in the most efficient manner. Expenditures must respect the fiscal framework set by the Government and be integrated in a holistic manner.
Fourthly, the new Government is also committed to addressing the issues as set out in the Country Specific Recommendations made by the Commission, and which will be brought for the approval of the Council in the near future.
“These measures are in line with the Government’s commitment to working towards enhancing Malta’s economic growth potential while maintaining responsible fiscal governance, an approach that we pledged before the election, and that we remain committed to living up to,” Prof. Scicluna concluded.