BACKGROU D 1 ECO OMIC and FI A CIAL AFFAIRS COU CIL Friday 21 June in Luxembourg

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1 Brussels, 19 June 2013 BACKGROU D 1 ECO OMIC and FI A CIAL AFFAIRS COU CIL Friday 21 June in Luxembourg Proceedings will start on Thursday 20 June at with a meeting of the board of governors of the European Stability Mechanism (ESM). The Eurogroup will meet on Thursday at At a breakfast meeting on Friday at 8.30, ministers will discuss the economic situation. The Council will start at It will be called on to agree on a draft framework for bank recovery and resolution -- a key element of the future banking union -- in order to allow negotiations to start with the European Parliament. It will be called on to approve country-specific recommendations to the member states on their economic and fiscal policies. The Council is expected to close excessive deficit procedures for Italy, Latvia, Lithuania, Hungary and Romania, give notice to Belgium on measures to correct its deficit, extend the deadlines for Spain, France, the etherlands, Poland, Portugal and Slovenia to correct their deficits, and reopen an excessive deficit procedure for Malta. It is expected to approve a proposal to allow Latvia to adopt the euro as its currency as from 1 January The proposal will be referred to the European Council before a decision is taken. Amongst other items, the Council is expected to approve the extension of loan maturities for Ireland and Portugal, and a package of measures to combat VAT fraud..b. The meeting is expected to continue in the afternoon and possibly into the evening. Press conferences: after the ESM meeting (Thursday at 15.00); after the Eurogroup meeting (Thursday evening); at the end of the Council (Friday afternoon and evening). Press conferences and public deliberations: Video coverage: Photo library: 1 This note has been drawn up under the responsibility of the press office Council of the European Union General Secretariat - press office press.office@consilium.europa.eu Tel.: +32 (0)

2 Bank recovery and resolution The Council will be called to agree a general approach on a draft directive establishing a framework for the recovery and resolution of credit institutions and investment firms. An agreement would enable the presidency to start negotiations with the European Parliament with the aim of adopting the directive at first reading. The proposal is aimed at providing national authorities with common powers and instruments to pre-empt bank crises and to resolve any financial institution in an orderly manner in the event of failure, whilst preserving essential bank operations and minimising taxpayers' exposure to losses. The proposed directive, issued by the Commission in June last year, is a precursor to expected further proposals for a single resolution mechanism, a key part of plans for a banking union. The directive would establish a range of instruments to tackle potential bank crises at three stages: preparatory and preventative, early intervention, and resolution. Institutions would be required to draw up recovery plans, and update them annually, setting out the measures they would take to restore their financial position in the event of significant deterioration. Resolution authorities would have to prepare resolution plans for each institution, setting out the actions they might take if an institution were to meet the conditions for resolution. Authorities would also have the power to appoint special managers to an institution if its financial situation deteriorates significantly or if there were serious violations of the law. The main resolution measures would include: - the sale of (part of a) business; - establishment of a bridge institution (the temporary transfer of good bank assets to a publicly controlled entity); - asset separation (the transfer of impaired assets to an asset management vehicle) - bail-in measures (the imposition of losses, with an order of seniority, on shareholders and unsecured creditors). Bail-in The bail-in tool would enable resolution authorities to write down or convert into equity the claims of the shareholders and creditors of institutions which are failing or likely to fail. Under a compromise proposed by the presidency, eligible deposits from natural persons and micro, small and medium-sized enterprises would have preference over the claims of ordinary unsecured, nonpreferred creditors and depositors from large corporations, while the deposit guarantee scheme (DGS), which would step in for covered deposits (i.e. deposits below 100,000), would have a higher ranking than eligible deposits. Certain types of liabilities, such as covered bonds, would be exempted from bail-in, while national resolution authorities would have the power to exclude derivatives on a discretionary basis if including them would raise losses borne by other creditors, and in order to ensure continuity of critical functions and avoid widespread contagion. Moreover, in extraordinary situations, and if not opposed by the Commission, resolution authorities would be able to exclude a share of liabilities that cannot be bailed in within a reasonable timeframe

3 Minimum loss absorbing capacity To ensure that institutions always have sufficient loss absorbing capacity, the compromise proposal also provides for national resolution authorities to set minimum requirements for own funds and eligible liabilities (MREL) for each institution, based on its size, risk and business model. One of the presidency proposals is for a review clause which would enable the Commission, based on recommendations by the European Banking Authority, to introduce at a later stage a harmonised MREL applicable to all banks. Resolution fund The directive would require member states to set up ex-ante resolution funds to ensure that the resolution tools can be applied effectively. It would set a target level that national funds would have to reach within a specified timeframe. Institutions would have to make annual contributions based on their liabilities, excluding own funds, and adjusted for risk. Member states would be free to choose whether to merge or keep separate their funds for resolution and deposit guarantee schemes (DGSs). In both cases, the combined target level would be the same. The Council's general approach on a proposed directive on DGSs, agreed in June 2011, sets its target level at 0.5% of covered deposits. Lending between national resolution funds would be possible on a voluntary basis. The presidency's compromise does not envisage the use of resolution funds for bank recapitalisation. Instead the funds would be able to provide temporary support to institutions under resolution via loans, guarantees, asset purchases, or capital for bridge banks. They could also be drawn on to compensate shareholders or creditors if and to the extent that their losses under bail-in exceed the losses they would have undergone under normal insolvency proceedings, in line with a "no creditor worse off principle". In cases where some classes of creditors are exempted from bailin, the funds could also substitute for their contribution. Key issues to be discussed The presidency compromise aims to achieve a balance between the MREL, the size of the resolution fund, and the degree of national flexibility with regard to bail-in. It has introduced the concept of a "resolution triangle", whereby any change to one of the three angles would have to be offset by adjusting the other two. In particular, the Council will discuss: - Design of the bail-in tool, in particular the degree of discretion for national resolution authorities to exclude some liabilities from bail-in; - Use of the resolution fund for direct solvency support; - Required size of the resolution fund and basis for its calculation (i.e. total liabilities instead of covered deposits); - Introduction of a harmonised MREL in the directive; - Earlier date of application for bail-in (2015 instead of 2018 as currently proposed)

4 The proposal is aimed at transposing into EU law commitments made at the G20 summit in Washington D.C. in November 2008, when leaders called for a review of resolution regimes and bankruptcy laws "to ensure that they permit an orderly wind-down of large complex cross-border financial institutions." Based on article 114 of the Treaty on the Functioning of the European Union, the directive requires a qualified majority for adoption by the Council, in agreement with the European Parliament. European Semester Recommendations on economic and fiscal policies The Council is due to approve, under this year's European Semester: - draft recommendations to 23 member states 2 on the economic policies set out in their national reform programmes, as well as draft opinions on each member state's fiscal policies, as presented in their stability/convergence programmes (doc /13); - a specific draft recommendation on the economic policies of the member states of the euro area (doc /13); and - draft conclusions on Croatia (which will join the EU on 1 July). The texts will be forwarded to the General Affairs Council on 25 June, with a view to the European Council meeting on 27 and 28 June. Recommendations covering both economic and employment policies are due to be adopted in July. The European Semester involves simultaneous monitoring by the Commission of the member states' economic and fiscal policies during a six-month period every year. In the light of policy guidance from the European Council in March, the member states present their national reform programmes and stability/convergence programmes annually in April. The national reform programmes contain a macroeconomic scenario for the medium term, national targets for implementing the "Europe 2020" strategy for jobs and growth, identification of the main obstacles to growth, and measures for concentrating growth-enhancing initiatives in an early period. The stability and convergence programmes 3 set out medium-term budgetary objectives, the main assumptions about expected economic developments, a description of fiscal and economic policy measures, and an analysis of how changes in assumptions will affect fiscal and debt positions. Based respectively on articles 121(2) and 148(4) of the Treaty on the Functioning of the European Union, the recommendations and opinions require a qualified majority for adoption by the Council. The draft recommendations and conclusions can be found in the following documents: - Belgium: 10623/13; Bulgaria: 10625/13; Czech Republic: 10626/13; Denmark: 10630/13; Germany: 10636/13; Estonia: 10633/13; Spain: 10656/13; France: 10635/13; Italy: 10640/13; Latvia: 10642/13; Lithuania: 10643/13; Luxembourg: 10644/13; Hungary: 10638/13; Malta: 10645/13; The Netherlands: 10658/13; Austria: 10619/13; Poland: 10648/13; Romania: 10649/13; Slovenia: 10655/13; Slovakia: 10654/13; Finland: 10634/13; Sweden: 10657/13; United Kingdom: 10660/13; 2 3 All except Cyprus, Ireland, Greece and Portugal, which are subject to macroeconomic adjustment programmes. To avoid duplication, there are no additional recommendations for these countries. Euro area member states present stability programmes, those member states that don't use the euro present convergence programmes

5 - Member states whose currency is the euro: 10666/13; - Croatia: 10959/13. Excessive deficit procedure - Closure of procedures: Italy, Latvia, Lithuania, Hungary and Romania - Extension of deadlines: Spain, France, etherlands, Poland, Portugal and Slovenia - Opening of procedure: Malta - Insufficient action taken: Belgium The Council is expected to adopt decisions closing the excessive deficit procedures for Italy, Latvia, Lithuania, Hungary and Romania. It will thus confirm that these countries have reduced their deficits below or, in the case of Italy and Lithuania, to 3% of GDP, the EU's reference value for government deficits. As regards Latvia, closure of its excessive deficit procedure is a precondition for its adoption of the euro on 1 January next year (see separate item below). The decisions will be adopted under article 126(12) of the Treaty on the Functioning of the European Union. They will abrogate the decisions the Council took in July 2004, July 2009 and December 2009, under article 126(6) of the treaty, on the existence of excessive deficits in those five countries. As a consequence, 16 of the EU's 27 member states will remain subject to the excessive deficit procedure, down from 24 during a 12 month period in A large number of procedures were opened subsequent to the global financial crisis and recession of 2008 and 2009, and the excessive deficit procedure is being used to support a return by member states to sound fiscal positions. The Council is also expected to adopt recommendations extending the deadlines set for Spain, France, Poland and Slovenia, by two years, and for the Netherlands and Portugal, by one year, for correcting their deficits. Setting 1 October 2013 as a deadline for all six countries to take corrective action, it will adopt revised recommendations under article 126(7) of the TFEU. The Council is expected to open an excessive deficit procedure for Malta. It will adopt a decision under TFEU article 126(6) on the existence of an excessive deficit and a recommendation under Article 126(7) on action to be taken in order to correct its deficit by The Council is expected to step up the excessive deficit procedure for Belgium. It will adopt a decision, under TFEU article 126(8), establishing that Belgium has not taken effective action in response to its article 126(7) recommendation of December It will also adopt a decision, under TFEU article 126(9), giving notice to Belgium to take measures to correct the excessive deficit in Adoption of these decisions and recommendations require: - for euro area countries, a qualified majority amongst 16 of the 17 member states of the euro area (the delegation concerned does not vote); - for non-euro area countries, a qualified majority amongst 26 of the 27 delegations (the member state concerned does not vote). For details country by country, see ANNEX to this background note (below)

6 Job creation and financing of the economy The Commission and the European Investment Bank will present a report on the possibilities and targeted priorities for boosting the economy, with a view to the European Council meeting on 27 and 28 June. The Council will hold an exchange of views. At its March meeting, the European Council noted that the recent 10 billion increase in the EIB's capital will allow it to lend an additional 60 billion in support of growth and employment. Together with the European Investment Fund, this will help catalyse projects worth up to 180 billion in the period. The European Council will assess implementation in June, "with a particular emphasis on measures aimed at creating jobs and on boosting the financing of the economy for fast-acting growth measures". It identified in particular infrastructure, energy and resource efficiency, the digital economy, research and innovation and SMEs. The issue of EIB activities in support of measures to fight youth unemployment will also be dealt with in this context. EFSM loans to Ireland and Portugal The Council is expected to adopt decisions extending the maturities of loans to Ireland and Portugal from the European Financial Stabilisation Mechanism (EFSM). On 12 April at an informal meeting in Dublin, ministers agreed in principle to lengthen the maturities of loans granted to Ireland and Portugal under the EFSM and the European Financial Stability Facility (EFSF). This involves increasing the weighted average maturity limit by seven years in order to smoothen their debt redemption profiles and lower their refinancing needs in the period subsequent to their economic adjustment programmes. The aim is to support the two countries' efforts to regain full access to market financing and thus to successfully exit their economic adjustment programmes. Both programmes are broadly on track, despite challenging macroeconomic circumstances, and have already been successful in addressing imbalances. Although at different stages of their respective programmes, both countries have taken successful steps in re-entering the markets. The decisions to be adopted by the Council amend decisions 2011/77/EU and 2011/344/EU on EFSM loans to Ireland and Portugal. Parallel decisions are due to be taken by the EFSF board of governors as concerns loans from the EFSF. The draft decisions authorise the Commission, at the request of the respective country, to extend the maturity of instalments and tranches, and to refinance all or part of its borrowing for that purpose. As concerns Ireland, the loans are part of a 85 billion package of financial assistance agreed by international and bilateral lenders in November EFSM loans amount to 22.5 billion. For Portugal, the loans are part of a 78 billion package agreed in May 2011, shared equally ( 26 billion each) by the EFSM, the EFSF and the IMF. Based on regulation 407/2010, the decisions require a qualified majority for adoption by the Council

7 Enlargement of the euro area Latvia The euro area member states, meeting within the Council, are expected to adopt a recommendation on a proposal for a decision to allow Latvia to join the euro area on 1 January The Council will approve the draft of a letter to the European Council, with a view to its meeting on 27 and 28 June, on the outcome of the Council's discussion. The draft recommendation draws on reports from the Commission and the European Central Bank on the fulfilment by Latvia of convergence criteria and other requirements that are a necessary precondition for joining the euro. The reports assess the compatibility of Latvia's legislation with EU treaty provisions and with the statute of the European system of central banks. They examine progress in fulfilment of the convergence criteria -- namely price stability, the government's budgetary position, exchange rate stability and long-term interest rates -- and several other factors. The Council is expected to share the Commission's assessment that Latvia has achieved a high degree of sustainable convergence and therefore fulfils the necessary conditions for adoption of the euro as its currency. It is expected to adopt the decision in July, after consulting the European Parliament and a discussion in the European Council. The reports and proposals are based on article 140 of the Treaty on the Functioning of the European Union, which requires a qualified majority of euro area member states for a decision by the Council. Climate and energy At the request of Polish delegation, the Council will discuss the follow-up to the European Council's meeting on 22 May as concerns policy options in the field of climate and energy. With reference to a Commission green paper on a 2030 framework for climate and energy policies, the European Council decided to discuss this issue in March 2014, once the Commission has presented proposals. Tax issues The Council is expected to endorse sixth-monthly reports to the European Council: - report on tax issues; and - report on tax issues by finance ministers of countries participating in the Euro Plus Pact 4. 4 Concluded in March 2011 by 23 of the 27 member states, the Euro Plus Pact is aimed at strengthening economic policy coordination with a view to improving competitiveness and enabling a greater degree of convergence

8 Combating tax fraud - Automatic exchange of information The Commission will present a proposal to amend directive 2011/16/EU on administrative cooperation in the field of direct taxation, by extending the scope for the mandatory automatic exchange of information (doc /13). The Council may hold a brief exchange of views. The proposal is intended to enable the member states to better combat tax fraud and tax evasion, and the Commission cites two main objectives. Firstly, increased tax revenues would provide greater scope for restructuring tax systems in a way that better promotes economic growth. Secondly, in difficult economic times, it will reduce the pressure on honest taxpayers to compensate for revenue losses incurred due to fraudsters and tax evaders. At its meeting on 22 May, the European Council called for priority to be given to the automatic exchange of information at the EU and global levels. Directive 2011/16/EU provides a framework for mutual assistance between member states, especially via the exchange of information, so as to enable them to better assess taxes due. It sets out the details to be specified in requests for information on taxpayers, and prevents requests from being refused on grounds of bank secrecy. As concerns the automatic exchange of information, the directive sets out a step-by-step approach for the categories of income and capital covered. Under the Commission's proposal, dividends, capital gains, other financial income and account balances would be brought within the scope of the automatic exchange of information; and the scope of a revision of the directive, scheduled for 2017, would be expanded. The agreements that many governments are concluding with the United States as regards the US foreign account tax compliance act (FATCA) have given further impetus to the automatic exchange of information as a means of combating tax fraud and tax evasion. In April, Germany, Spain, France, Italy and the United Kingdom announced a pilot action using the FATCA as a model. The Commission considers that its proposal will contribute to the development of an international standard for the automatic exchange of information. Based on article 115 of the Treaty on the Functioning of the European Union, the directive requires unanimity for adoption by the Council, after consulting the European Parliament. Combating VAT fraud The Council is expected to agree, without discussion, a package of measures aimed at better combating VAT fraud (docs 10541/13 ADD 1, 10150/ /13). The measures include two draft directives: o a proposal aimed at enabling immediate measures to be taken in cases of sudden and massive VAT fraud ("quick reaction mechanism"); o a proposal intended to allow member states to implement, on an optional and temporary basis, a reversal of liability for the payment of VAT on the supply of certain goods and services ("reverse charge mechanism")

9 At its meeting on 22 May, the European Council called on the Council to adopt the two directives by the end of June. Weaknesses in the VAT system, particularly in respect of cross-border transactions, leave member states vulnerable to fraud, often with serious consequences for national exchequers. Fraud schemes evolve rapidly, giving rise to situations that require a swift response. A common example is "carousel" fraud, where supplies are rapidly traded several times without payment of VAT. For instance during an 18 month period in recent years, an estimated 5 billion of VAT receipts were lost in relation to greenhouse gas emission allowances. Until now, such situations have been tackled either by amendments to the VAT directive (2006/112/EC) or through individual derogations granted to member states under that directive. Both require a proposal from the Commission and a unanimous decision by the Council, a process that can take several months. The proposed "quick reaction mechanism" would enable an accelerated procedure for allowing member states to apply a "reverse charge" (see below) to a specific sector for a short period of time, by derogation from the provisions of the VAT directive. Last December, the Council debated whether implementing powers should be conferred on the Commission for this purpose. Whilst a majority of member states could support such a measure, some were concerned that it would undermine the principle of unanimity in tax matters. The proposed "reverse charge mechanism" is aimed at closing off certain types of VAT fraud in particular carousel schemes by allowing liability for the payment of VAT to be shifted from the supplier (as normally required by EU rules) to the customer. Member states would have the option of applying it within a specified list of sectors. The measure is derived from a proposal that in 2010 was applied to greenhouse gas emission allowances 5 ; at the time, it was agreed that work would continue on other elements of the proposal. Some member states have however expressed concerns that extending the mechanism to too many sectors could potentially weaken the VAT system. The presidency prepared a compromise package covering both proposals and the Council discussed it on 5 March. A broad majority of member states expressed support. Some however maintained their reservations on the proposed implementing provisions under the "quick reaction mechanism"; others on the proposed scope of the "reverse charge mechanism". A revised package of compromise proposals and draft statements now has the support of all delegations. The main elements are as follows: - The "quick reaction mechanism" will only apply until 31 December Any renewal would require a proposal from the Commission and the unanimous consent of the Council; - When a member state wishes to introduce a specific measure under the "quick reaction mechanism", the Commission will have a short period in which to confirm whether it objects, taking into account the views of other member states. - The "reverse charge mechanism" will potentially apply to mobile phones, integrated circuit devices, supplies of gas and electricity, telecoms services, game consoles, tablet PCs and laptops, cereals and industrial crops and raw and semi-finished metals; - The two mechanisms will be temporary and exceptional, and their timeframe would be aligned (i.e. until the end of 2018); 5 Directive 2010/12/EU, see press release 6945/

10 - The Commission will prioritise work on a new VAT system, as outlined in December 2011 in a communication on the future of VAT (doc /11), with a view to facilitating the prevention of fraud rather than having to rely on derogation arrangements. Based on article 113 of the Treaty on the Functioning of the European Union, both directives require unanimity for adoption by the Council, after consulting the European Parliament. Other issues Over breakfast ministers will discuss the economic situation. Without discussion, the Council is expected to approve: - a general approach on new draft rules relating to markets in financial instruments, enabling the presidency to start negotiations with the European Parliament (press release 11067/13); - a package of measures aimed at better combating VAT fraud (see separate item above); - a draft regulation amending VAT rules as regards as the place of supply of telecommunications, broadcasting and electronic services, real estate services and the distribution of tickets for entry to cultural, artistic, sporting, scientific, educational, entertainment and similar events (doc /13); - a report on progress on a draft directive on the taxation of energy products, with suggestions for further work (doc /13). Under other business, the Council will take stock of progress on current legislative dossiers, including a draft directive on deposit guarantee schemes. Discussions on deposit guarantee schemes are pending, subject to progress being made on the draft directive on bank recovery and resolution (see first item above)

11 Excessive deficit procedure - Closure of procedures: Italy, Latvia, Lithuania, Hungary and Romania - Extension of deadlines: Spain, France, etherlands, Poland, Portugal and Slovenia - Opening of procedure: Malta - Insufficient action taken: Belgium Belgium A EX Belgium has been subject to an excessive deficit procedure since December 2009, when the Council issued a recommendation calling for its deficit to be corrected by Its general government deficit was projected to reach 5.9% of GDP in The Council at the time accepted that Belgium's deficit be corrected in the medium term (rather than the short term) on account of special circumstances, given the impact of the global crisis on its economy. A 2.9% contraction in GDP was projected for In its December 2009 recommendation, the Council called on Belgium to ensure an average annual fiscal effort of 0.75% of GDP over the period. In June 2010, the Commission concluded that Belgium had taken effective action in compliance with the Council's recommendation and that no additional steps in the excessive deficit procedure were necessary at the time. The Council concurred with this assessment. In December 2011, the newly-constituted Belgian government agreed on a draft budget for 2012 and in January 2012 the Commission concluded that the deficit would reach 2.9% of GDP that year. It again considered that no further steps were needed. However, a new assessment by the Commission of the action taken by Belgium shows that its 2012 deficit amounted to 3.9% of GDP. This was partly due to the recapitalisation of the Dexia banking group at the end of 2012, which had an impact of 0.8% of GDP on the government deficit, but even without this operation the 2012 deadline would have been missed. Belgium's average annual fiscal effort since 2010 is estimated at 0.3% of GDP, significantly below the 0.75% of GDP recommended by the Council. After correction for the effects of revised potential output growth and revenue developments, the adjusted average fiscal effort is less than half of the recommended effort. Despite relatively favourable macroeconomic conditions in the first half of 2011 (annual GDP growth of 1.8%), the nominal balance fell only marginally that year, to 3.7% of GDP, compared to a target of 3.6% of GDP in Belgium's 2011 stability programme. The structural balance deteriorated by 0.1% in The Commission finds that Belgium failed to take advantage of relatively favourable times to reduce its deficit, partly due to the political deadlock at federal level between the June 2010 elections and December Moreover, the Commission finds that no significant progress has been made in adjusting the fiscal framework to ensure that fiscal targets are binding at both federal and sub-federal levels. In the light of this, the Council is expected to find that Belgium's response to its December 2009 recommendation has been insufficient. Belgium did not put an end to its excessive deficit by 2012 as had been required

12 The Council is expected to call on Belgium to reduce its headline deficit to 2.7% of GDP in 2013, consistent with an improvement in the structural balance of 1% of GDP in It is expected to call on Belgium to fully implement consolidation measures foreseen in its 2013 budget, as well as additional measures of a structural nature to achieve the recommended structural effort for this year. It will require Belgium to stand ready to adopt further measures if necessary, to submit a report to the Commission by 21 September on measures taken, and further quarterly reports progress made. Spain Spain has been subject to an excessive deficit procedure since April 2009, when the Council issued a recommendation calling for its deficit to be corrected by In December 2009, the Council extended this deadline to 2013, in the light of a steeper-than-expected decline in economic activity, with consequent effect on budgetary revenue. The Commission forecast that Spain's 2009 deficit would reach 11,2 % of GDP, five percentage points more than its previous estimate. In July 2012, the Council agreed to extend the deadline for a further year to 2014 on account of renewed adverse economic circumstances. Although Spain had taken effective action to comply with its recommendations, Commission projections indicated that its general government deficit was likely to reach 6.3% of GDP in 2012, compared to the 5.3% previously expected. A deepening of the economic crisis and implementation risks at regional level implied possibly an even larger deviation. And an increase in Spain's debt ratio was noted, mainly driven by higher interest payments. The Council established headline deficit targets of 6.3% of GDP for 2012, 4.5% of GDP for 2013 and 2.8% of GDP for In parallel to reviews of the recapitalisation of Spain's financial services industry, for which financial assistance is being provided by the euro area, it called for progress to be monitored on a three-monthly basis. According to the Commission's 2013 spring forecast, Spain's recession is set to continue this year. A 1.5% contraction of GDP is projected for 2013, compared to 0.3% that was expected in July 2012, with a more-subdued-than-expected recovery in The consequences for government finances are unfavourable, with revenue shortfalls and a sharp rise in unemployment, and the deficit is projected to miss the 4.5% of GDP target set for this year. However, Spain has implemented structural efforts in 2012 and 2013 which, account taken of adverse developments, the Commission considers to be in line with the Council's most recent recommendation. The Council is expected to find that Spain fulfils the conditions for extending the deadline for correcting its deficit by two years, setting a new deadline of The Council is expected set headline deficit targets of 6.5% of GDP in 2013, 5.8% of GDP in 2014, 4.2% of GDP in 2015 and 2.8% of GDP in 2016, consistent with 1.1%, 0.8%, 0.8% and 1.2% of GDP improvements in the structural balance respectively. France France has been subject to an excessive deficit procedure since April 2009, when the Council issued a recommendation calling for its deficit to be corrected by In December 2009, the Council extended this deadline to 2013, in the light of unexpected adverse economic events with major unfavourable consequences for government finances. Although France had taken effective action, the Commission forecast that France's 2009 general government deficit would reach 8.3% of GDP, nearly three percentage points higher than its previous estimate

13 In its December 2009 recommendation, the Council called for strengthened consolidation efforts as from 2011, with an average annual fiscal effort of above 1% of GDP over the period. The Commission's 2013 spring forecast projects France's GDP to decrease by 0.1% this year, with a much worse economic scenario than the one underpinning the Council's December 2009 recommendation. France's deficit is expected to reach 3.9% of GDP in 2013, thus missing the deadline set for correction. Once adjusted for downward revisions in potential output growth and revenue windfalls, average annual fiscal effort amounts to 0.9% of GDP, slightly short of the required effort of above 1% of GDP. However, a comprehensive assessment of discretionary measures implemented over the period suggests a cumulative budgetary impact of some 5.25% of GDP, i.e. 1.3% of GDP per year on average. The Council is expected to find that France fulfils the conditions for extending the deadline for correcting its deficit by two years, setting a new deadline of It is expected to set headline deficit targets of 3.9% of GDP for 2013, 3.6% of GDP for 2014 and 2.8% of GDP for 2015, consistent with 1.3%, 0.8% and 0.8% of GDP improvements in the structural balance respectively. Italy Italy has been subject to an excessive deficit procedure since December 2009, when the Council issued a recommendation calling for its deficit to be corrected by Its general government deficit was projected to reach 5.3% of GDP in The Council at the time accepted that Italy's deficit be corrected in the medium term (rather than the short term) on account of special circumstances, given the strong adverse impact of the global crisis. A 4.7% contraction in GDP was projected for In its December 2009 recommendation, the Council called on Italy to ensure an average annual fiscal effort of at least 0.5% of GDP over the period. Italy's general government deficit peaked at 5.5% of GDP in It has since been steadily brought down to reach 3.0% of GDP in 2012, in line with the deadline set by the Council. According to Italy's stability programme, its deficit will fall to 2.9% and 1.8% of GDP in 2013 and 2014 respectively. Based on a no-policy-change assumption, the Commission's 2013 spring forecast projects deficits of 2.9% of GDP in 2013 and 2.5% of GDP in 2014, thus remaining below the reference value of 3% of GDP. The Council is expected to conclude that Italy's deficit has been corrected. Latvia Latvia has been subject to an excessive deficit procedure since July 2009, when the Council issued a recommendation calling for its deficit to be corrected by Its general government deficit reached 4.0% of GDP in Latvia had requested assistance from international lenders, obtaining a 3.1 billion loan from the EU in January as part of a 7.5 billion package of assistance. The Council found that special circumstances allowed for correction of its deficit in the medium term (rather than the short term). In its July 2009 recommendation, the Council called on Latvia to ensure an annual average fiscal effort of at least 2.75% of GDP over the period

14 Following general government deficits of 9.8% and 8.1% of GDP in 2009 and 2010 respectively, Latvia's deficit declined to 3.6% of GDP in Its economic adjustment programme, supported by the assistance from international lenders, was successfully completed in January Its deficit reached 1.2% of GDP in 2012, overachieving the target set. Latvia's 2013 convergence programme foresees a headline deficit of 1.1% of GDP in 2013, stabilising thereafter at 0.9% of GDP until The Commission's 2013 spring forecast projects that the general government deficit will reach 1.2% of GDP in 2013 and decrease to 0.9% of GDP in 2014, thus remaining well below the 3% of GDP reference value. The Council is expected to conclude that Latvia's deficit has been corrected. Closure of Latvia's excessive deficit procedure is a precondition for its adoption of the euro on 1 January next year (see separate item above). Lithuania Lithuania has been subject to an excessive deficit procedure since July 2009, when the Council issued a recommendation calling for its deficit to be corrected by Its general government deficit reached 3.2% of GDP in The Council found that special circumstances allowed for correction of Lithuania's deficit in the medium term (rather than the short term), on account of the size of the required adjustment and its very weak economic outlook. In February 2010, the Council extended the deadline for correcting Lithuania's deficit to 2012, in the light of a stronger-than-expected contraction in economic activity in The Council called for an average annual fiscal effort of at least 2.25% of GDP over the period. Having peaked at 9.4% of GDP in 2009, Lithuania's general government deficit was reduced to 7.2% of GDP in 2010, 5.5% of GDP in 2011 and 3.2% of GDP in Its 2013 convergence programme projects the deficit to fall further to 2.5% of GDP in 2013 and 1.5% of GDP in Based on a no-policy-change assumption, the Commission's 2013 spring forecast projects a slower improvement, to 2.9% of GDP in 2013 and 2.4% of GDP in The Council is expected to find that, since the 3.2% of GDP deficit in 2012 can be considered close to the 3% reference value, and Lithuania's debt-to-gdp ratio is below the EU's 60% of GDP reference value for government debt, Lithuania is eligible to specific provisions regarding systemic pension reforms. Thus, taking into account a 0.2% of GDP net cost of Lithuania's pension reform in 2012, as confirmed by Eurostat, the excess over the 3% of GDP reference value can be explained. In these conditions, the Council is expected to conclude that Lithuania's deficit has been corrected. Hungary Hungary has been subject to an excessive deficit procedure since July 2004, longer than any other member state. The Council initially called on Hungary to correct its deficit by It issued further recommendations in March 2005 and October 2006, having found in January 2005 and November 2005 that effective action had not yet been taken. In October 2006, it extended the deadline to

15 With the economic downturn however, the 2009 target could not be met, and Hungary obtained a 6.5 billion loan from the EU in November 2008 as part of a 20 billion package of assistance from international lenders. In July 2009, the Council issued a revised recommendation, setting 2011 as the target year for correcting the deficit. Although Hungary formally met that target in 2011, this was only thanks to one-off revenues amounting to almost 10% of GDP linked to the transfer of pension assets from private pension schemes to the state. The Council considered this not to be a structural and sustainable correction of the deficit. Consequently, in January 2012, it again found that Hungary's response to its recommendation had been insufficient. In a further recommendation issued in March 2012, the Council set 2012 as the target year for correcting Hungary's deficit. It called for an additional fiscal effort to meet Hungary's deficit target of 2.5% of GDP in 2012, and for additional structural measures to ensure that the deficit in 2013 remains well below the 3% of GDP threshold, even after the phasing-out of one-off measures. It also decided on the suspension of commitments under the EU's cohesion fund, as of 1 January 2013, on account of Hungary's failure to comply with its recommendations. The Council however lifted the suspension in June 2012, as Hungary had meanwhile taken measures that would enable the 2012 deadline for correcting its deficit to be met. According to Eurostat and the Commission's 2013 spring forecast, Hungary's general government deficit amounted to 1.9% of GDP in Its 2013 convergence programme projects the deficit to reach 2.7% of GDP in both 2013 and In the light of further corrective measures adopted in May 2013, the Commission projects deficits of 2.7% and 2.9% in 2013 and 2014 respectively, remaining below the 3% of GDP reference value. The Council is expected to conclude that Hungary's deficit has been corrected, closing an excessive deficit procedure that has lasted nearly nine years. Malta Malta was subject to an excessive deficit procedure from July 2009 to December The procedure was closed after general government deficits of 2.7% of GDP in 2011, an expected 2.6% of GDP in 2012 and projected to remain below the 3% of GDP reference value over the forecast horizon. According to date notified by the Maltese authorities in April 2013 however, the deficit in fact reached 3.3% of GDP in The Commission considers that the excess over the reference value cannot be qualified as exceptional or temporary within the meaning of the EU's Stability and Growth Pact. In particular, it does not result from a severe economic downturn, given that preliminary GDP data shows that Malta's economic growth slowed in 2012 but still remained positive at 0.8%. According to the Commission's 2013 spring forecast, its deficit will amount to 3.7% of GDP in 2013 and 3.6% of GDP in The Council is expected to call on Malta to bring its general government deficit back below the 3% of GDP reference value by It will set headline deficit targets of 3.4% of GDP for 2013 and 2.7% of GDP for 2014, consistent with an improvements of the structural balance of 0.7% of GDP in both years. The Council will call on Malta, following correction of its deficit, to continue progress towards its medium-term objective of a balanced budget in structural terms. It will establish the deadline of 1 October 2013 for taking effective action

16 Netherlands The Netherlands have been subject to an excessive deficit procedure since December 2009, when the Council issued a recommendation calling for the deficit to be corrected by The Netherlands' general government deficit was projected to reach 4.7% of GDP in 2009 and 6.1% and The Council at the time accepted that the deficit be corrected in the medium term (rather than the short term) on account of special circumstances, given the impact of the global crisis on the Dutch economy. A 4.5% contraction in GDP was projected in In its December 2009 recommendation, the Council called on the Netherlands to ensure an average annual fiscal effort of 0.75% of GDP over the period. After a recovery in 2010, economic growth slowed and the Dutch economy slipped back into recession in 2012, contracting by 1%. The general government deficit amounted to 4.5% of GDP in 2011 and 4.1% of GDP in The Commission's 2013 spring forecast projects real GDP to drop again by 0.8% in 2013, although with a gradual return to positive territory as from the second half of the year. The deficit is expected to improve further to 3.6% of GDP in 2013, thanks to sizeable consolidation measures, but the Netherlands will miss the deadline set for correcting their deficit. Over the period, the Netherlands' average fiscal effort is expected to have been close to the required 0.75% of GDP. Once adjusted for the significant downward revision in potential output growth, the expected 1.1% of GDP average annual structural effort exceeds the recommended annual fiscal effort by a substantial margin. The Council is expected to find that the Netherlands have taken effective action and fulfil the conditions for extending the deadline for correcting the deficit by one year, to It is expected to set headline deficit targets of 3.6% of GDP for 2013 and 2.8% of GDP for 2014, consistent with 0.6% and 0.7% of GDP improvements in the structural balance respectively. Poland Poland has been subject to an excessive deficit procedure since July 2009, when the Council issued a recommendation calling for its deficit to be corrected by Its general government deficit reached 3.7% of GDP in 2008 and 7.4% of GDP in The Council at the time accepted that the deficit be corrected in the medium term (rather than the short term) on account of special circumstances, given a likely recession and fast rising unemployment rates. In its July 2009 recommendation, the Council called on Poland to ensure an average annual structural budgetary effort of at least 1.25% of GDP, starting in Poland's GDP in fact increased by 1.6% in 2009 and by 3.9% and 4.5% respectively in 2010 and However, it slowed thereafter with real GDP growth of 1.9% in 2012, mainly as a result of the economic crisis. The Commission's 2013 spring forecast projects growth of 1.1% for Despite consolidation measures amounting to 0.6% of GDP, Poland's headline deficit increased to 7.9% of GDP in 2010 before falling back to 5% of GDP in According to Eurostat, the general government deficit amounted to 3.9% of GDP in 2012, thus missing the deadline set for correction. Budgetary consolidation measures amounted to 2.1% of GDP in 2011 and 1.6% of GDP in The average annual fiscal effort over the period is estimated at 1.5% of GDP, exceeding the level recommended by the Council

17 The Council is expected to find that Poland fulfils the conditions for extending the deadline for correcting its deficit by two years, to It is expected to set headline deficit targets of 3.6% of GDP in 2013 and 3.0% of GDP in 2014, consistent with 0.8% and 1.3% of GDP improvements in the structural balance respectively. Portugal Portugal has been subject to an excessive deficit procedure since December 2009, when the Council issued a recommendation calling for its deficit to be corrected by Portugal's general government deficit was projected to reach 8% of GDP in 2009 and 2010 and to increase further to 8.7% in The Council at the time accepted that the deficit be corrected in the medium term (rather than the short term) on account of special circumstances, given the severity of the economic downturn in the country. A 2.9% contraction in GDP was projected in In its December 2009 recommendation, the Council called on Portugal to ensure an average annual fiscal effort of 1.25% of GDP over the period. In April 2011 however, after several months of market pressure on its sovereign bonds, Portugal requested assistance from international lenders. It obtained a 78 billion package of loans from the EU, the euro area and the IMF. In October 2012, the Council extended the deadline for correcting Portugal's deficit by one year to 2014, in the light of an expected 3 % contraction in GDP in It set deficit targets of 5,0 % of GDP for 2012, 4,5 % of GDP for 2013 and 2,5 % of GDP for Economic prospects have deteriorated further since then, with a 3.2% contraction observed in 2012 and the Commission foreseeing a 2.3% contraction in The general government deficit reached 6.4% of GDP in 2012, affected by a number of one-off operations; according to the Commission's 2013 spring forecast, the improvement in its structural balance in 2012 amounted to 2.4% of GDP. Portugal adopted budgetary consolidation measures amounting to nearly 6% of GDP in 2012 and 3.5% of GDP in Its structural effort was well above the required level in 2012, and is expected to fall short in 2013 before again surpassing the required level in The Council is expected to find that Portugal fulfils the conditions for extending the deadline for correcting its deficit by another year, to It is expected to set headline deficit targets of 5.5% of GDP in 2013, 4.0% of GDP in 2014 and 2.5% of GDP in 2015, consistent with 0.6%, 1.4% and 0.5% of GDP improvements in the structural balance respectively. Romania Romania has been subject to an excessive deficit procedure since July 2009, when the Council issued a recommendation calling for its deficit to be corrected by Its general government deficit reached 5.4% of GDP in Romania had requested assistance from international lenders in March 2009, obtaining a 5 billion loan from the EU as part of a 20 billion package of assistance. The Council accepted that its deficit be corrected in the medium term (rather than the short term). In February 2010 however, the Council extended the deadline for correcting Romania's deficit to 2012, in the light of a stronger-than-expected contraction in GDP in