Hungary, Latvia, Lithuania and Malta had taken effective action to correct their budget deficits to get them within EU guidelines, European Commission (EC) headquarters in Brussels said on January 27 2010.

The EC said that it had assessed the action taken by Malta, Lithuania, Latvia and Hungary in response to recommendations proposed by the Commission and endorsed by the European Council in July 2009 about the countries correcting their budget deficits.

The Commission proposes to extend the deadline for the correction in the cases of Malta and Lithuania, a media statement said.

While it concluded that Malta and Lithuania had taken effective action, the previous deadlines can no longer be deemed realistic in view of a significant worsening of the economic situation, justifying an extension by one year to 2011 for Malta and 2012 for Lithuania, the EC said.

As to Hungary and Latvia, the EC concluded that they had complied with the Council recommendations but they will need to pursue the efforts to bring their deficits below 3% by the agreed deadlines of respectively 2011 and 2012.

Economic and Monetary Affairs Commissioner Joaquín Almunia said: " I am pleased to be able to conclude that Malta, Lithuania, Hungary and Latvia have all undertaken adequate steps towards correcting their budget deficits. In the case of Malta and Lithuania, however, the worsening in the economic situation since the recommendations were made justifies extending the deadline by one year.

"Hungary and Latvia, which are benefitting from conditional balance-of-payments support, seem on track to bring their deficits to below three per cent by the agreed deadlines but they need to pursue their efforts to ensure this really happens," Almunia said.

In spring 2009, the Commission proposed to open the excessive deficit procedure (EDP) for Malta, Lithuania and Latvia, on the basis of budget deficits of more than three per cent in 2008 and recommended their correction by 2010, 2011 and 2012, respectively.

In the case of Hungary, which has been under the Excessive Deficit Procedure (EDP) since 2004, the EC said that it had proposed to revise the recommendation with a new deadline of 2011 because of the deterioration of the economic situation.

The Council endorsed the Commission's recommendations on all four countries in July 2009, setting a deadline of January 7 2010 to assess whether effective action has taken.

In cases where recommendations are complied with but the economic situation deteriorated significantly and beyond the control of the countries concerned, the Stability and Growth Pact (SGP) permits the Council to revise the recommendations, including a new deadline, on the basis of a Commission proposal.

Malta

The EC concluded that effective action had been taken by Malta in response to the July 2009 Council recommendations.

However, because of a sharper impact of the global crisis on the Maltese economy, than was expected in the spring 2009 forecast, the budgetary position has been adversely affected beyond the government’s control.

As a result, the existing deadline of 2010 for the correction of the excessive deficit has become unrealistic, the EC said.

"The Commission recommends that the deadline should be extended to 2011. To this end, the Maltese authorities should achieve the 2010 deficit target of 3.9 per cent of GDP set in the budget, if necessary by adopting additional consolidation measures, and ensure in 2011 a fiscal effort of ¾ p.p. of GDP."

Lithuania

The EC concluded that effective action had been taken in response to the July recommendations.

"However, the contraction in the economic activity in 2009 turned out to be much deeper than projected last spring and the increase in last year's deficit was bigger than expected, in spite of significant consolidation measures."

This meant, the EC said, that the deadline of 2011 was no longer realistic and the EC recommended a revised deadline of 2012 for the correction of the excessive deficit, in line with the authorities' fiscal consolidation objectives and the stability benefits implicit in the anchoring of the economy to a medium-term euro entry prospect.

The correction of the excessive deficit by the new deadline would represent an average annual fiscal effort of 2.25 per cent of GDP between 2010 and 2012.

Hungary

In the case of Hungary, the EC concluded that the authorities have acted in compliance with the most recent recommendations issued by the Council in July 2009.

"In particular, Hungary has respected the 2009 deficit target of 3.9 per cent of GDP by adopting fiscal consolidation measures amounting to 1.5 per cent of GDP in 2009. It has also adopted a central government 2010 budget in line with the deficit target of 3.8 per cent of GDP."

However, the EC said, there were considerable risks attached to Hungary's 2010 deficit target, both on the revenue and the expenditure side.

In view of already agreed non-compensated tax cuts in 2011, the required cumulative 0.5 per cent of GDP effort necessary to bring the deficit below three per cent in 2011 will have to be ensured through additional measures, the EC said.

"The Commission will continue to closely monitor budgetary developments in Hungary in accordance with the Treaty and the SGP as well as in the context of the monitoring under the balance of payments assistance."

Latvia

The Latvian authorities had taken effective action, the EC said.

"In particular, expenditure cuts have been implemented broadly as planned, so that the 2009 deficit is projected to be close to, but below, 10 per cent of GDP, in line with the target set in the Council's July 2009 recommendations."

The 2010 budget adopted by Latvia's parliament on December 1 should be sufficient to deliver the 8.5 per cent of GDP deficit target set for 2010, according to the EC.

Moreover, financial sector supervision had been strengthened satisfactorily, the EC said.

Looking beyond 2010, some measures envisaged to achieve the consolidation path had already been outlined in the context of the balance of payments assistance programme.

"The Commission will continue to closely monitor budgetary developments in Latvia in accordance with the Treaty and the SGP as well as in the context of the monitoring under the balance of payments assistance," the EC said.

The top 20 hits

The Commission said that it would in coming weeks assess whether Romania and Poland, the two other countries for which the Council adopted recommendations in July 2009, had taken effective action.

In total, 20 EU countries are in EDP.

In December 2009, the Council endorsed the EC's recommendations under Article 126.7 of the Treaty for 13 of them, setting deadlines for the correction of the deficit ranging from 2012 (for Italy and Belgium) to the 2014/15 fiscal year for the United Kingdom.

In the case of Greece, the Council agreed that the country had not taken effective action to correct the deficit by the 2010 deadline agreed at the beginning of 2009; the Commission will shortly propose stepping up the procedure with a recommendation under Art 126.9 of the Treaty, as was recalled recently by Commissioner Almunia.

"The deterioration in the public finances was inevitable as governments had to support the economy and stabilise the financial sector in the wake of the financial crisis to limit the impact of the recession on jobs and to make the recession as short as possible - in line with the recovery plan proposed by the Commission," the EC said.

"But governments in the EU and at the G20 agree that an exit strategy to restore public finances is needed when recovery materialises and EU leaders agree that the SGP is the cornerstone of that exit strategy for European countries."

They also agreed that budgetary consolidation overall should start at the latest in 2011, when growth is expected to return. According to the EC's autumn forecast, GDP growth is expected to reach 1.6 per cent in the EU that year, and 1.5 per cent for the euro area.