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Belgium, Finland, France, Germany, Ireland, Italy

Commission assesses the updated stability programmes of Belgium, Finland, France, Germany, Ireland and Italy

Having examined their respective updated multi-annual stability programmes[1], the European Commission concludes that Finland and Ireland fully meet the requirements of the Stability and Growth Pact whereas Belgium deserves praise for keeping its high debt on a downward path and for maintaining a budget surplus. France, Germany and Italy, the other members of the euro zone to have their programmes assessed this week, must pursue budgetary consolidation in order to reach the medium-term objective of close to balance or surplus. The Commission’s recommendations on the six stability programmes as well as on five convergence programmes[2] also assessed today (see IP/05/127) will be on the agenda of the European Union finance ministers meeting on 17 February.

“Achieving and maintaining national budgets close to balance or in surplus in the medium-term is one of the key aspects of the Stability and Growth Pact which must be revived. This is good for the economy and for growth, as it creates margins for stabilisation in economic downturns, increases the efficiency of the public sector and its contribution to the economy while ensuring the sustainability of public finances,” said Economic and Monetary Affairs Commissioner Joaquín Almunia.


Belgium is one of the few EU countries to present a general government budget in balance or in surplus throughout the programme period even after servicing the country’s debt, which is the third-largest in the Union.

Its updated stability programme for the period 2004-2008 foresees a budget on balance for 2004-2006 and a surplus of 0.3% of GDP in 2007 and 0.6% in 2008. The national debt is expected to have come down to 96.6% of GDP in 2004 from 138% of GDP in 1993 and is due to fall further to 84.2% in 2008.

Overall, the Belgian programme confirms the planned adjustment against a broadly unchanged macroeconomic scenario of real GDP growth of 2.5% in 2005 and 2006, slowing down to 2.0% towards the end of the period.

On the basis of currently available information, this scenario reflects plausible growth assumptions, inflation projections that appear realistic and budgetary projection risks that also appear broadly balanced.

For 2006 it is still somewhat unclear which measures the government will take to compensate lower income from one-off measures and the impact of the final stage of the 2001 direct tax reform. There is also a risk of overruns at the level of the health care system (new measures were announced near the end of 2004 to reduce health costs, but their effectiveness is still difficult to evaluate). But it is noted that the minister of social affairs has been given a mandate to respond quickly to possible overruns and that the Belgian government has gained credibility in the last few years for stickling to its budgetary objectives

Overall, the Belgian government deserves praise for continuing to project primary budgetary surpluses at around 4.5% of GDP, which will allow for a continued decrease in the national debt, and positive cyclically-adjusted balances that create a sufficient safety margin against breaching the 3% deficit threshold.


Finland continues to maintain solid public finances with budgetary surpluses among the highest in the EU and a debt ratio clearly below the 60% of GDP reference value in the treaty. This places the country into a favourable position to meet the budgetary costs resulting from an ageing population.

The updated programme for the period 2004-2008 aims for a healthy general government surplus of about 2% of GDP throughout the programme period. This is based on a real GDP growth forecast of 3.2% in 2004 and 2.4%, on average, over the rest of the programme period – a growth scenario which appears rather cautious.

The surpluses could turn out lower as a result of the tax cuts of about 1.2% of GDP announced to supplement the two-and-half-year comprehensive wage agreement concluded at the end of November 2004. But the effects of the tax cuts coupled with wage moderation could also boost growth and job creation thereby leading to higher public revenues.

Even if budgetary results turn out lower than presented in the baseline scenario, the budgetary stance in the programme is sufficient to maintain the Stability and Growth Pact’s medium-term objective of a position of close-to-balance-or-in-surplus for 2004-2008.

The national debt was expected at 44.6% in 2004 and is set to reduce further to 41.1% in 2008.


France is one of the 10 countries currently in the so-called excessive deficit procedure. As analysed in December and confirmed at last month’s Finance Ministers meeting, the country appears to be on track for bringing its deficit below the 3% reference value in the treaty. But the budgetary situation remains vulnerable.

The primary aim of the budgetary strategy contained in the updated French stability programme for 2004-2008 is to bring the deficit to 2.9% of GDP in 2005 from 3.6% in 2004. The programme is based on a macroeconomic scenario that seems to reflect plausible growth assumptions although somewhat on the high side. The deficit is projected to decline steadily by 0.6-0.7 percentage point of GDP per year as from 2005 and reach 0.9% of GDP in 2008.

The cyclically-adjusted balance would also improve by about 0.6-0.7 percentage point per year as from 2005, and would reach -0.7% of GDP in 2008.

Based on current information, the measures taken by the French authorities seem to be sufficient to reduce the deficit to 3% of GDP this year. However, the budgetary situation remains vulnerable and correcting the excessive deficit this year does not only require effective implementation of all the measures envisaged, but also the implementation of additional measures in case of adverse developments.

There are also concerns about the plausibility of the budgetary projections after 2005. The reduction of the deficit to 2.2% in 2006 appears at risk under current policies given the tax cuts announced for that year. In addition, the expenditure target set for the period 2006-2008 appears difficult to achieve under current policies, even though the structural reforms implemented in the recent years constitute clear steps in the right direction. The projected adjustment contributes to bringing the budgetary position closer to the Stability and Growth Pact’s medium-term objective of close to balance, although this objective is not reached within the programme period.

The French debt is estimated to have reached 64.8% of GDP in 2004. It is forecast to decline to 62% of GDP in 2008, which is still above the 60% Treaty reference value, and its evolution is subject to the same risks as the deficit targets.


Also included in the excessive deficit procedure, Germany aims to reduce its general government deficit from 3.9% of GDP in 2004 to 2.9% in 2005 in its updated programme for 2004-2008. The deficit is expected to reduce further thereafter from 2.5% in 2006 to 1.5% in 2008.

The projections are based on government growth forecasts of 1.7% in 2005 and 2% in the last two years of the programme that appear plausible for the years after 2005 but could turn out lower this year. Fulfilling this year’s budget target also hinges on the accounting classification of a one-off measure still being examined by Eurostat.

The adjustment effort remains quite small in the later years of the programme despite economic growth above potential and the implementation of remarkable structural reforms that are likely to reduce medium-term expenditures, although probably with a smaller effect on the social security balance than estimated by the government..

The projected budgetary adjustment only leads to the creation of a sufficient safety margin with respect to the 3% of GDP limit at the end of the period, and is not sufficient to achieve the medium-term objective of close to balance or in surplus.

As a consequence of the on-going high deficits, Germany’s debt-to-GDP ratio will remain above 60% throughout the programme period (66% in 2005-2006) and is projected to fall for the first time only by 2007, reaching 65% in 2008.

Overall, the budgetary strategy outlined in the programme puts Germany in a relatively favourable position with regard to long-term sustainability of the public finances. However, long-term sustainability hinges on the achievement of budgetary consolidation in the medium-term.


The updated stability programme of Ireland for the period 2004-2007 meets the requirements of the Growth and Stability Pact. The government estimates a general government surplus of 0.9% of GDP in 2004, which represents a remarkable improvement on the previous estimate made in December 2003 (-1.1%). This is explained by higher than expected tax receipts, including the impact of one-off factors. The government envisages a deficit of 0.8% in 2005 and of 0.6% in the final two years of the programme.

The programme is based on a real GDP growth forecast of 5.3% in 2004, revised from 3.3% in the previous programme, and around 5.2% on average over the period 2005 to 2007. Overall, this is a plausible macroeconomic scenario, though the projection for HICP inflation seems on the low side.

In the light of this assessment, the budgetary stance in the programme seems sufficient to maintain the close-to-balance-or-surplus requirement of the Pact throughout the programme period. It also provides a sufficient safety margin against breaching the 3% of GDP deficit threshold.

The gross debt ratio is estimated at close to 30% of GDP over the period, well below the 60% of GDP treaty reference value. Ireland also appears to be in a relatively favourable position with regard to the long-term sustainability of its finances.


The Italian stability programme for the period 2004-2008 expects the deficit to be at 2.9% of GDP in 2004, to decrease slightly to 2.7% in 2005 and to be at 0.9% in 2008. These figures are based on growth assumptions of 2.1% in 2005 and 2.3% in the last two years of the programme which appear somewhat optimistic.

On top of the downside risks to the macroeconomic scenario, the Commission’s assessment also highlights risks attached to the implementation of the budgetary strategy. These are related, among others, to uncertainties regarding the impact on revenues of budgeted one-off measures and the size of the adjustment needed and the precise measures to be taken for the years after 2005.

Overall, the budgetary targets in the programme do not provide a sufficient safety margin against breaching the 3% of GDP reference value at least until 2006.

The debt-to-GDP ratio, which in 2004 is estimated to have been close 106% of GDP, is expected to fall below the 100% threshold in 2007 to reach 98% in 2008. To achieve a faster pace of debt reduction the government should make more efforts to achieve a budgetary position of close to balance by the end of the period and pay closer attention to factors other than net borrowing that affect debt developments. Pursuing such budgetary strategy and implementing the pension reform recently adopted would also help Italy move on a sustainable path as concerns long-term developments of public finances.

The Commission individual assessments are available on:

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