mast image

Special Report

Impact investing

Sections

Deficits in focus

The EU has now made a significant concession to accommodate the demands made by eight CEE member states and Sweden in August last year for the incorporation of future pension funding shortfalls into national annual budget statistics. Their governments claimed current rules effectively punish them for having made reforms to their pension systems that involved channelling some contributions away from the state system and into private funds.

Although these assets will eventually offset future obligations, under existing rules they cannot be included in national accounts as they reside with private companies. Conversely, the reserve funds of Belgium or Spain count on the national balance sheet, even though these countries have done little to reform pensions and their funds invest heavily in domestic government debt.

The European Commission originally proposed a five-year leniency period, with a one percentage-point increase in permissible debt, at 4% of GDP rather than 3%. Poland’s finance minister Jan Vincent-Rostowski described the proposal as “inadequate”.

But legislative moves are afoot that would reform deficit rules wholesale. These would take the form of a series of rules on EU economic governance, and are expected to be operational by June.

While the economic threat posed by excessive budget deficits is of a lower magnitude than the Greek and Irish crises, it is not insignificant. It is notable that a number of member states broke their own rules under the stability and growth pact (SGP).

The August 2010 letter to Herman Van Rompuy, president of the Council of the EU, and Olli Rehn, economic and monetary affairs commissioner, points to unfairness that, under pressure, the mainly CEE states had to declare funding shortfalls in funding mandatory schemes in their national statistics. They referred to “a strong disincentive for introducing such reforms”. The contents of the letter have not been made public.

The implications are that non-declaration could be massaging some national annual budget deficits by as much as one percentage point. Against this background, the latest move consists of a letter by Commissioner Rehn, advising that any action by the Commission to bring defaulting old member states into line is “not appropriate”.

However, Rehn noted that if a member state were held to account because of its excessive deficit, the Commission could take the hidden pension deficit into account. But it seems Rehn accepts that the Commission is powerless and will remain so until there is new legislation.

But the scandal surrounding Greece’s blatantly falsified economic data, means that attention is now focused on the accuracy and relevance of statistical data. Not insignificant is an upgrade of a Council regulation (679/2010) relevant to Eurostat and effective from July 2010, which includes the following reference: “Recent developments have… clearly demonstrated that the current governance framework for fiscal statistics still does not mitigate, to the extent necessary, the risk of incorrect or inaccurate data being notified to the Commission.”

Eurostat is likely to get greater control over the accuracy of figures provided from national level. Article 16 of 679/2010 includes the words: “Member states shall ensure that the national statistical authorities are provided with access to all relevant information necessary to perform these tasks.”

The Commission also foresees new enforcement mechanisms for non-compliant member states. The ‘European Semester’ will integrate all revised and new surveillance processes into a comprehensive and effective economic policy framework. An excessive imbalance procedure (EIP) could finally result in a member state having to pay a yearly fine equal to 0.1% of its GDP. The fine can only be stopped by a qualified majority vote (reverse voting), with only euro-area member states voting.

The reforms, divided up into six components, have now reached the European Parliament.
 

Have your say

You must sign in to make a comment

IPE QUEST

Your first step in manager selection...

IPE Quest is a manager search facility that connects institutional investors and asset managers.

  • QN-2558

    Asset class: Private Equity.
    Asset region: Global or Swiss.
    Size: USD $5-10m.
    Closing date: 2019-08-20.

  • QN-2559

    Asset class: Multi Assets.
    Asset region: -.
    Size: EUR 15m (may be split into two mandates EUR 7.5m).
    Closing date: 2019-09-06.

  • QN-2560

    Asset class: Private Equity.
    Asset region: Global.
    Size: $40m.
    Closing date: 2019-08-30.

  • QN-2561

    Asset class: Infrastructure.
    Asset region: Global.
    Size: $40m.
    Closing date: 2019-08-30.

Begin Your Search Here
<