Excessive Deficit Procedure: the Council fines a Member State for the first time
On 13 July 2015, the Council of the European Union (‘Council’) imposed a fine of Euro 18.93 million on Spain for the manipulation of deficit and debt data concerning the accounting, recording and reporting of the expenditure of the Comunidad Autonoma Valenciana.
This is the first investigation launched by the Commission on the basis of Regulation (EU) No 1173/2011 concerning the effective enforcement of budgetary surveillance in the Euro area.
The significance of the case is that both the Commission and the Council are serious about implementing the new legal framework on economic governance in the Eurozone.
National governments, regions, provinces and local authorities will not be able to hide from the full glare of transparent and complete accounting.
The legal framework
Regulation (EU) No 1173/2011 is part of the so-called ‘Six-Pack’ of laws (five Regulations and one Directive) designed to improve economic governance in the EU. Some of these measures implement Article 121 TFEU concerning the multilateral surveillance procedure, other measures concern the Excessive Deficit Procedure (EDP) within the meaning of Article 126 TFEU. The Six-Pack legislative provisions entered into force on 13 December 2011.
The Six-Pack amends the Stability and Growth Pact (SGP), and its aim is to ensure that countries in the EU pursue sound public finances and coordinate their fiscal policies. The new provisions strengthen both the preventive and the corrective arm, especially those that provide for enforcement measures in the Euro area.
The preventive arm provides for multilateral surveillance based on Article 121 TFEU in order to ensure sound public finances. When a Member State of the Euro area does not take appropriate adjustment actions, the Council may impose sanctions amounting up to 0.2% of that Member State’s GDP for the previous year. The new rules also provide for sanctions in case of manipulation of debt or deficit data.
The Excessive Deficit Procedure (EDP) is designed to prevent excessive deficits and to ensure prompt correction where they occur. The EDP is based on Article 126 TFEU and Protocol (No 12), annexed to the Treaty, the amended Regulation (EC) No 1467/97 and the new Regulation (EU) No 1173/2011.
Article 6(1) of Regulation (EU) 1173/2011 provides that if a Member State ‘has not taken effective action to correct its excessive deficit, the Commission shall, within 20 days of that decision, recommend that the Council, by a further decision, impose a fine, amounting to 0,2 % of the Member State’s GDP in the preceding year’.
Any ‘decision imposing a fine shall be deemed to be adopted by the Council unless it decides by a qualified majority to reject the Commission’s recommendation within 10 days of the Commission’s adoption thereof’.
In addition, Regulation (EU) No 472/2013 (part of the so-called Two-Pack) introduces additional surveillance and monitoring procedures for Euro Area Member States including the possibility for the Commission to submit autonomous recommendations to Member States with excessive deficits.
Regulation (EU) No 1173/2011 on the effective enforcement of budgetary surveillance in the Eurozone provides, that:
The Council, acting on a recommendation by the Commission, may decide to impose a fine on a Member State that intentionally or by serious negligence misrepresents deficit and debt data relevant for the application of Articles 121 or 126 TFEU, or for the application of the Protocol on the excessive deficit procedure annexed to the TEU and to the TFEU.
Regulation (EU) No 1173/2011 empowers the Commission to look deeper into the quality of Member States’ statistics for EDP purposes. On the basis of this Regulation, the Commission is entitled to launch specific investigations if there are serious indications of a misrepresentation.
Member States are obliged to report their annual deficit and debt data to the Commission in full compliance with European statistical rules and procedures (European System of Accounts, ESA).
Article 16 of Regulation (EC) No 479/2009 on the application of protocol on the excessive deficit procedure provides:
Member States shall ensure that the actual data reported to the Commission (Eurostat) are provided in accordance with principles established by Article 2 of Regulation (EC) 223/2009. In this regard, the responsibility of the national statistical authorities is to ensure the compliance of reported data with the Article 1 of this Regulation and the underlying ESA 2010 accounting rules.
On the basis of Article 8(4) of Regulation (EU) No 1173/2011, the Commission adopted Decision 2012/678 laying down the legal framework for investigations of misrepresentation of general government deficit and debt data that are the result of intentional or serious negligence, and sets out the rules on the right of defence and confidentiality, in addition to specifying the procedure leading to the adoption of the fine.
Decision 2012/678 provides that the Commission shall present its findings and the observations submitted by the Member States concerned in a Report. This Report is then transmitted to the Council which may impose a fine in the basis of a Commission recommendation.
On the basis of Article 8 of Regulation (EU) No 1173/2011, the Commission (through Eurostat) can request information from the Member State, interview officials, carry out inspections and access government accounts.
Following the investigation, and before submitting any proposal to the Council, the Member State has to be given the opportunity of being heard by the Commission and to comment on any proposal.
Article 8(2) of Regulation (EU) No 1173/2011 establishes that fines imposed by the Council shall be effective, dissuasive and proportionate to the nature, seriousness and duration of the misrepresentation. A maximum level of fine of 0.2% of GDP of the Member State concerned may be imposed.
Commission Decision 2012/678 sets out a two-step methodology for determining the fine. First, the Commission determines the reference amount that shall be equal to 5% of the larger impact of the misrepresentation on the level of either the general government deficit or debt of the Member State for the relevant years covered by the notification opening the context of the excessive deficit procedure. Second, the Commission may modulate that reference amount upwards or downwards taking into account the specific circumstances of the case.
The factual background
The formal investigation into the possible manipulation of statistics in the Comunidad Autonoma de Valencia was launched on the basis of Article 8(3) of Regulation (EU) No 1173/2011, which provides that:
The Commission may conduct all investigations necessary to establish the existence of the misrepresentations referred to in paragraph 1. It may decide to initiate an investigation when it finds that there are serious indications of the existence of facts liable to constitute such a misrepresentation. The Commission shall investigate the putative misrepresentations taking into account any comments submitted by the Member State concerned.
In May 2012, the Spanish national statistical authorities informed Eurostat that the general government deficit for 2011 would have to be revised beyond 0.4% of the GDP. This modification amended the figures reported for the Excessive Deficit Procedure (EDP) notification a few weeks earlier, and it was explained in light of unrecorded expenditures in the Comunidad Autonoma Valenciana and in the Comunidad Autonoma de Madrid. Following a formal investigation, Eurostat officers found that, while the case of Madrid could be considered as an exceptional adjustment, the case of Valencia needed to be examined deeper.
The Eurostat investigation sought to assess whether the Valencia case could be deemed as ‘deliberate intent of manipulation’ or ‘serious negligence’ within the meaning of Regulation (EU) No 1173/2011. After technical visits and further analysis, Eurostat concluded that there were serious indications of misrepresentation of statistics which justified the initiation of an investigation within the meaning in Article 8 of Regulation (EU) No 1173/2011. On this basis, it recommended the Commission to open an investigation into the misrepresentation of EDP data in Spain. On 11 July 2014, the formal investigation was launched.
The Commission published a Report on 7 May 2015. The Report concluded that the IGGV (Intervención General de la Generalitat Valenciana, the entity responsible of complying the public accounts of the Region) had been seriously negligent as regards the non-recording of health expenditure in national accounts, leading to an incorrect reporting of deficit data to Eurostat in 2012.
According to the Commission, the investigation showed that there were severe irregularities in the accounting, recording and reporting of expenditure of the Comunidad Autonoma Valenciana over a significant period of time. The accuracy principle was not respected, extra-budgetary accounts were used improperly, expenditure was sometimes left unrecorded for years.
The Commission thus found a series of elements to be taken into considerations in order to determine the reference amount of the fine that recommended to be imposed. The revision to the expenditure reported by Spain for the April 2012 EDP notification, corresponding to the unpaid (mainly) health expenditure, amounted to Euro 1.893 billion. The Commission calculated the reference amount as Euro 94.65 million.
On the basis of the Report and the Commission’s recommendation, the Council adopted Decision 10297/15 imposing a fine of Euro 18.93 million on Spain for the manipulation of deficit data in the Comunidad Autonoma Valenciana.
The Commission’s investigation powers under Regulation (EU) No 1173/2011 are different from those exercised under Articles 258 to 260 TFEU concerning infringement proceedings for failure to fulfil EU obligations.
In the context of the ‘regular’ infringement proceedings, when the Commission finds that a Member State has failed to fulfil its obligations under EU law, it delivers a reasoned opinion after giving the State concerned the opportunity to submit its observations.
If the Member State concerned does not address the concerns expressed in the reasoned opinion within a given period of time, the Commission may bring the case before the Court of Justice of the European Union.
Article 258 TFEU does not grant the Commission investigative powers including inspections and interviews in the Member State concerned. Furthermore, it is only if the Court of Justice finds that the Member State has failed to fulfilled its obligations that a lump sum or penalty payment may be imposed. A recent example of infringement procedure under Articles 258 to 260 TFEU is Case C-653/13 Commission v Italy where the Court of Justice found that Italy failed to fulfil its obligations in relation to the so-called ‘garbage crisis’.
The example from Italy shows that, while Article 260(3) TFEU provides for ‘lump sum or penalty’ imposed by the Court of Justice, Article 8(2) of Regulation (EU) No 1173/2011 provides for a proper fine to be imposed by the Council on the basis of the Commission’s investigation and proposal.
Decisions of the Council pursuant Article 8(5) of Regulation (EU) 1173/2011 are subject to the unlimited judicial review in the context of action of annulment within the scope of Article 263 TFEU.
The Commission’s investigative powers under Regulation (EU) No 1173/2011 can be compared with the Commission’ competences under Regulation (EC) No 1/2003 on implementation of the EU competition policy.
Even though Regulation (EU) No 1173/2011 does not provide for cooperation between the Commission and national authorities, there are some similarities in the strength of powers of the Commission in the two way of performing investigations.
Article 20 of Regulation (EC) No 1/2003, provides for the kind of inspection that Commission officials can perform on undertakings and associations of undertakings.
In the context of competition proceedings, Commission officers are empowered to (i) enter any premises, land and means of transport of undertakings and associations of undertakings; (ii) to examine the books and other records related to the business, irrespective of the medium on which they are stored; (iii) to take or obtain in any form copies of or extracts from such books or records; (iv) to seal any business premises and books or records for the period and to the extent necessary for the inspection; (v) to ask any representative or member of staff of the undertaking or association of undertakings for explanations on facts or documents relating to the subject-matter and purpose of the inspection and to record the answers.
Similarly, in investigations under Article 8 of Regulation (EU) No 1173/2011 the Commission may request the Member State to provide information, may conduct inspections and accede to the accounts of all government entities at central, state, local and social-security level.
As far as we are aware there are no on-going investigations on the basis of Regulation (EU) No 1173/2011. Nonetheless, it cannot be excluded that, in light of the case against Spain and its effectiveness, the Commission may start using this instrument more often.
 Regulation (EU) No 1175/2011 of 16 November 2011, amending Council Regulation (EC) No 1466/97 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies (OJ L 306, 23.11.2011, p.12); Regulation (EU) No 1176/2011 of 16 November 2011 on the prevention and correction of macroeconomic imbalances (OJ L 306, 23.11.2011, p.25); Regulation (EU) No 1174/2011 of 16 November 2011, on enforcement measures to correct excessive macroeconomic imbalances in the euro area (OJ L 306, 23. 11. 2011, p.8); Regulation (EU) No 1173/2011 of 16 November 2011, on the effective enforcement of budgetary surveillance in the euro area (OJ L 306, 23.11.2011, p.1); Council Regulation (EU) No 1177/2011 of 8 November 2011, amending Regulation (EC) No 1467/97 on speeding up and clarifying the implementation of the excessive deficit procedure (OJ L 306, 23.11.2011, p.33), and Council Directive 2011/85/EU of 8 November 2011 on requirements for budgetary frameworks of the Member States (OJ L 306, 23.11.2011, p.41).
 Sanctions are established by Regulation (EC) No 1173/2011 is the legislative act that provides for sanctions for those Members.
 The amended Regulation No 1466/97 and the new Regulation (EU) No 1173/2011 are the secondary legislation foundation. The country specific medium-term budgetary objective (MTO) is the key concept of the preventive arm: Member States’ budgetary balance shall converge towards the country-specific medium-term objective (MTO).
 Article 4 of Regulation (EC) No 1173/2011.
 Article 8 of Regulation (EC) No 1173/2011.
 According to these provisions, the general government deficit must not exceed 3% of GDP and public debt must not exceed 60% of GDP (or at least diminish sufficiently towards the 60% threshold).
 Article 6(2) of Regulation (EU) No 1173/2011.
 Article 8(1) of Regulation (EU) No 1173/2011.
 Regulation (EC) No 479/2009 of 25 May 2009 on the application of the Protocol on the excessive deficit procedure annexed to the Treaty establishing the European Community, OJ L 145, 10.6.2009, p.1.
 Article 8(4) of Regulation (EU) No 1173/2011, provides that: ‘The Commission shall be empowered to adopt delegated acts in accordance with Article 11 concerning: a) detailed criteria establishing the amount of the fine referred to in paragraph 1; b) detailed rules concerning the procedures for the investigations referred to in paragraph 3, the associated measures and the reporting on the investigations; c) detailed rules of procedure aimed at guaranteeing the rights of the defence, access to the file, legal representation, confidentiality and provisions as to timing and the collection of the fines referred to in paragraph 1’.
 European Commission Press Release of 7 May 2015.
 The circumstances that justified a reduction of the amount of the fine were: a) the misrepresentation of data had no significant impact on the functioning of the strengthened economic governance of the Union, due to the limited impact on the deficit of the Kingdom of Spain as a whole; b) the misrepresentation of data was essentially the work of one entity within the general government sector of the Spain; c) the Spanish statistical authorities and all entities concerned have shown a high degree of cooperation in the course of the investigation.
 Case C-653/13, Commission v. Italy, judgment of 16 July 2015, not yet published. In March 2010, the Commission asked Italian Authorities to provide information concerning the implementation of the ruling of the Court of Justice in Case C-297/08 that declared that Italy failed to fulfil its obligations under Articles 4 and 5 of Directive 2006/12/EC on waste insofar as it failed to adopt, for the Campania Region, all the necessary measures to ensure that waste is recovered and disposed of without endangering human health and without harming the environment and, in particular, by failing to establish an integrated and adequate network of disposal installations. After a more than one year of exchange of letters and proposals concerning a garbage management plan as requested under Directive 2006/12/EC, in September 2011 the Commission sent to Italy a reasoned opinion asking Italy to submit its observations. On 10 December 2013, the Commission considered that Italy did not take the necessary measures to comply with the judgment of the Court, and thereby brought the case before the Court of Justice under 260 TFEU. On 16 July 2015, the Court of Justice upheld Commission action and imposed to Italy a lump sum of 20 million Euro to address to “Risorse proprie dell’Unione Europea” for failing to properly address garbage crisis.