Cause and Effect in European Politics and Law

An excessive overacting procedure of Bulgaria

Ralitsa Kovacheva, January 31, 2011

“The European Commission is proposing to end the excessive deficit procedure of Bulgaria”. This “joyful news”, which firstly circulated in the public domain based on some anonymous sources from Brussels, was officially confirmed in a statement of the Bulgarian ruling party GERB. Moreover, regarding the "the joyful news”, Bulgarian MEP Iliana Ivanova (EPP, GERB) said that “ending the excessive deficit procedure is a proof that our country is on the correct path”.

The Government Information Service announced that Prime Minister Boyko Borissov had declared his "gratitude to European Commission President Jose Manuel Barroso and his team for the Commission's decision to end the excessive deficit procedure of Bulgaria”.

If you are still wondering why I'm telling you about this active correspondence, the denouement of the story came in a second letter, sent by GERB less than an hour after the first. There “the joyful news” was replaced by the far more modest terms: “The European Commission welcomed the actions of Bulgaria taken within the excessive deficit procedure”. Because, in fact, no one is actually speaking of an ending of the procedure.

Against this background, only the Ministry of Finance has refrained from excessive praising by announcing that, according to the Commission, “no further steps in the excessive deficit procedure of Bulgaria are needed at present”. Although the news is obviously good, there is a significant difference between "ending the procedure” and "no further steps are needed”. The excessive deficit procedure (EDP) can be ended only when the budget deficit would fall below the limit of 3% of GDP as set in the Stability and Growth Pact (SGP).

What has happened is a routine evaluation, which is being made six months after the EDP has been launched in order to assess the measures, undertaken by the countries concerned. If they are not satisfactory, the procedure provides for new actions to be taken by the European Institutions. In Bulgaria's case, however, the Commission is recommending this not to be done because “Bulgaria has taken action representing adequate progress towards the correction of the excessive deficit within the time limits set by the Council”.

There are several interesting moments in the Commission's assessment. The first is that for the first time, as far as I can tell, the previous government is officially indicated as the cause of the excessive deficit: “The impact of the economic downturn and expenditure increases stemming from sizable commitments undertaken by the outgoing government ahead of the mid-year parliamentary elections in 2009 triggered a deterioration of public finances in Bulgaria”. As you know, the country ended 2009 with a deficit of 4.7 %, against a surplus of 1.7% in 2008.

For 2010, although there is a little difference in the projected deficit of Bulgaria (according to Brussels - 3.8% of GDP and to the Bulgarian government - 3.6% of GDP), it is concluded that the budgetary outcome for 2010 was expected to be in accordance with the recommendations of the Council to achieve the deficit target of 3.8% of GDP. There is a little difference in the forecasts for 2011 (2.9% according to the Commission and 2.5% according to Bulgarian government), but the general expectation is that in 2011 Bulgaria will meet its target to reduce the deficit below 3% of GDP.

In terms of the risks to the achievement of the 2011 deficit target, the Commission pointed out one economic and one political factor. “A slower economic recovery with a less revenue-rich growth composition may lead to unexpected revenue shortfalls”. On the other hand, “local and presidential elections scheduled for the second half of 2011 may create additional spending pressures”. That’s why the Bulgarian authorities need to closely monitor budgetary developments and be ready to take corrective measures if any of these risks materialise.

According to the Commission, “certain progress has been made in the area of fiscal governance and some initiatives have been undertaken to improve the efficiency of public spending.” The necessary legislative actions are expected regarding the measures to further reform the pension system in the medium and long term, which have been agreed by the the social partners. The Commission noted that “Bulgaria needs to be more effective in strengthening the binding nature of its medium-term budgetary frameworks”, which means to follow and meet their targets.

There is a disturbing trend of increasing indebtedness, although it remains far below the limit of 60% set in the SGP. The significant difference between the forecasts of the Commission and these of the Bulgarian authorities is noteworthy too. According to the Commission, the debt level in 2010 was 18.2% of GDP, against 14.7% in 2009, and it is projected to increase in 2011 and 2012 correspondingly to 20.2% and 20.8%. According to the Bulgarian government, the debt level in 2010 was 15.9 and is expected to decrease over the next two years.

Finally, the Commission considers that “no further steps in the excessive deficit procedure of Bulgaria are needed at present”. The same conclusion applies to Cyprus, Finland and Denmark. Of all 27 EU countries, 24 are in an excessive deficit procedure - except only for Estonia, Luxembourg and Sweden. Overall, the Commission's assessment is that Member States have taken adequate measures to tackle the deficit problem.

Some countries (Germany, Holland, Finland, Bulgaria and Malta) are expected to correct their excessive deficits in the time limit set by the Council or even earlier. Austria and Denmark might even succeed in putting their deficits below the 3% limit a year before the deadline - as early as 2012. Romania (2012), Portugal, Spain and France (2013) and the Great Britain (by financial year 2014/5) are also expected to meet their deadlines. In Italy and Slovenia the deficit is higher than expected, especially in Slovenia, but according to the Commission it is still achievable both countries to correct their deficits within the deadlines – 2012 for Italy and 2013 for Slovenia.

In Slovakia, the budgetary developments in 2010 proved to be much worse than anticipated, but the 2011 Budget contains substantial consolidation measures. The Czech Republic, which had to balance its budget in 2010, is close to meet the target. Lithuania and Cyprus have taken additional measures as a result of the Council's recommendations. Belgium is expected to finish 2010 better than expected and to reduce its deficit below 4% this year. Greece, which is a special case, must balance its budget by 2014, as the most significant consolidation efforts should have been made in 2010. According to the Commission's assessment of last December, Greece is complying with the Council’s recommendations in a satisfactory way.

Hungary and Poland are also subject to special attention from Brussels. According to the Commission, although the 2011 deficit is projected at 4.7%, because of the changes in the pension system it could even fall below 3%. As you know, the Hungarian government has practically overflowed the savings from private pension funds in the government social security fund. The measure, however, will have a temporary effect, because “the structural balance continues to worsen in 2011, which would prompt the budget to rebound into deficit of about 5% of GDP in 2012 if no additional measures are taken”.

In Poland, the budget deficit for 2010 is projected at 7.9% and there is no structural improvement. The country has already announced further measures which are yet to be adopted. However, significant additional fiscal effort will be needed for Poland to reduce its deficit below 3% in 2012. The EU Economic and Monetary Affairs Commissioner Olli Rehn has urged both countries “to reconfirm their commitment to fully respect the recommendations by the Council and to soon announce permanent, concrete and specific measures necessary to underpin this commitment”.

Against this background, it is even clearer that the assessment of Bulgaria is really good. It appears that the deficit for 2010 will be about a percentage less than in 2009. How this reduction is achieved and whether it is a sustainable trend, these are issues subject of another analysis. As well as the question how will the fiscal statistics be supported by real economic development and structural reforms.

In this case, however, the numbers themselves are eloquent enough, especially compared to the overall picture in the EU. But GERB's excessive effort and Boyko Borissov's too to reap political dividends, turned a good news into a reason for criticism. Which shows how right the Commission’s warning is that the main threat to Budget 2011 are the upcoming elections.