On July 7, the Council of the European Union announced the opening of excessive deficit procedures for Latvia, Lithuania, Malta, Poland and Romania. The Council also revised its recommendations to Hungary regarding its growing deficit. Each country has exceeded the maximum 3% deficit to GDP ratio set out in Article 104 of The Treaty on European Union.
Recognizing the the Latvian economy has been under considerable strain, with the seizure last fall of Parex Banka and the need for significant financial assistance from the EU and the IMF, the Council called on Latvia to lower its deficit to GDP ratio below the 3% threshold by 2012 by ensuring an “average annual fiscal effort” of 2.75% of GDP between 2010 and 2012. For 2008, Latvia’s ratio was 4%, and the Council expects it to increase in 2009. Latvia has previously received €7.5 billion of international financial assistance, including a €3.1 billion loan from the EU and additional financing from the IMF.
The Council asked Lithuania, with a 2008 deficit to GDP ratio of 3.2% that is expected to widen further in 2009 and 2010, to ensure an average annual fiscal effort of 1.5% of GDP through 2011 in order to bring the ratio below 3% by the end of that year.
The Council called on Malta, with 4.7% deficit to GDP ratio in 2008, to “ensure that budgetary measures planned for 2009 are rigorously implemented,” while avoiding “further deterioration in public finances. The Council also asked Malta to develop consolidation measures aimed a bringing the ratio below 3% in 2010.
In Poland, which received a a $20.58 billion precautionary line of credit from the IMF in May, the 2008 deficit to GDP ratio was 4%, and the ratio is expected to grow throughout 2009. The Council has requested that Poland ensure an average annual fiscal effort of 1.25% of GDP beginning in 2010, with the objective of lowering the deficit below the 3% threshold in 2012.
Romania, with the highest 2008 deficit to GDP ratio at 5.4%, was asked to ensure an average annual fiscal effort of 10.5% beginning in 2010, and to bring the ratio below 3% in 2011. In March, the European Commission provided €5 billion in medium-term assistance to Romania, and in May, the IMF approved a $17.1 billion stand-by arrangement for the country.
The Council also revised its recommendation to Hungary, a nation which has been subject to excessive deficit procedure since 2004. The Council’s 2004 recommendation was most recently revised in October 2006, with a target of reducing Hungary’s deficit below the 3% threshold by this year. The Council found that, since 2006, Hungary “has taken effective action and that a revised timetable for correction of its deficit is justified” in light of the current financial crisis. In late 2008, the IMF approved a $15.7 billion financing package for Hungary, the European Commission issued the nation a medium-term loan of up to €6.5 billion and the European Central Bank opened a line of credit of up to €5 billion for the struggling economy. The Council’s new target is for Hungary to lower its deficit below the 3% threshold by 2011.
The Council set a deadline of January 7, 2010, for the six member states to take corrective action.