Commission’s strictures and the whole incident boded ill for both the procedures and the
status of the BEPGs.
When judging the lack of fiscal consolidation during these years, we should keep in mind that
the underlying rate of economic growth was generally perceived to be significantly higher
than it actually turned out to be.7 Towards the end of spring 2001 a decisive shift occurred
when the economic cycle took a sudden turn for the worse, which give way to a protracted
period of slow growth.
2.3. Hitting heavy weather and finally running aground: second half 2001-March 2005
Signs of procedural alarm started to show early in 2002 as the first steps were taken to
implement the SGP’s corrective arm. Early that year the Commission proposed that the
Council should issue an ‘early warning’ to Germany and Portugal that their deficits were fast
approaching the 3 % of GDP reference value.8 The Council of the European Union, however,
decided not to follow the Commission’s suggestion. Minor as this may have appeared, this
was the first clear signal that there was some substance to the fear that the SGP would not
prove seaworthy in bad weather. This minor conflict contained already most of the key
elements showing in the forthcoming reform debate: the Council versus the Commission,
small versus large Member States, acting early on indications versus waiting for outcomes,
sticking to agreed rules versus not forcing fiscal consolidations in unfavourable economic
conditions.
Already by autumn 2002 it was clear that both Germany and Portugal would breach the 3 %
of GDP reference value, while the situation in France was also deteriorating rapidly. After
this, things moved quickly.9 Towards the autumn of 2003, it was clear that the German efforts
had not had the desired effect. Moreover, the 2004 budget laws showed that Germany and
France would fail to bring their deficits below the 3 % of GDP reference value in 2004 as
7 For example, in 2001 the real time estimate of potential output growth in the euro area (as given in the
Commission’s Public Finance Report of 2000, presented in spring 2000), was 2 1/2% of GDP as opposed to the
current estimate of around 2%.
8 The early warning is part of the preventive arm of the SGP.
9 An excessive deficit was established for Portugal in November 2002 and for Germany in January 2003. France
received an ‘early warning’ in January 2003 and an excessive deficit was deemed to exist in June. All three
countries were told by the Council to take action to bring the deficit below the 3% threshold (in 2003 for
Portugal and in 2004 for Germany and France). Germany did take action and presented measures worth some
1% of GDP in spring 2003.
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