European Commission’s handling of Portugal's financial crisis was “generally weak”

The European Commission was not prepared for the request for financial assistance from Portugal and other countries during the 2008 financial crisis because warning signs had passed unnoticed, according to a new report from the European Court of Auditors.

The auditors found that the Commission did succeed in managing assistance programmes which brought about reform, despite its lack of experience, and they point to a number of positive outcomes, but they also identify several areas of concern relating to the Commission’s “generally weak” handling of the crisis: countries treated differently, limited quality control, weak monitoring of implementation and shortcomings in documentation.

“The effects of the crisis are still being felt today, and the resulting loan programmes have since run into billions of euros,” said Mr Baudilio Tomé Muguruza, the Member of the European Court of Auditors responsible for the report. “So it is imperative that we learn from the mistakes which were made”.

The auditors analysed the Commission’s management of the financial assistance provided to five Member States - Hungary, Latvia, Romania, Ireland and Portugal. They found that the Commission was successful in taking on its new management duties; given the time constraints, they say, this was an achievement. As the crisis unfolded, the Commission increasingly marshalled internal expertise and engaged with a wide range of stakeholders in the countries concerned. Later reforms also introduced better macroeconomic surveillance.

While pointing to a number of important positive outcomes, the detailed audit report identifies four main areas of concern about the Commission’s handling of the crisis: the different approaches used, limited quality control, weak monitoring and shortcomings in documentation.

Important positive outcomes: the auditors noted that the programmes did meet their objectives. The revised deficit targets were mostly met. Structural deficits improved, although at a varying pace. Member States complied with most conditions set in their programmes, albeit with some delays. The programmes were successful in prompting reforms. Countries mostly continued with the reforms required by the programme conditions and in four of the five countries, the current account adjusted faster than expected.

Different approaches: the auditors found several examples of countries not being treated in the same way in a comparable situation. In some programmes, the conditions for assistance were less stringent, which made compliance easier. The structural reforms required were not always in proportion to the problems faced, or they pursued widely different paths. Some countries’ deficit targets were relaxed more than the economic situation would appear to justify.

Limited quality control: the review of key documents by the Commission’s programme teams was insufficient in several respects. The underlying calculations were not reviewed outside the team, the work of the experts was not thoroughly scrutinised and the review process was not well documented.

Weak monitoring: the Commission used accrual-based deficit targets. Their achievement can only be observed after a certain time has elapsed. They ensure consistency with the excessive deficit procedure, but when a decision on programme continuation is to be taken, the Commission cannot report with certainty whether the Member State has actually met the target.

Shortcomings in documentation: the Commission used an existing and rather cumbersome spreadsheet-based forecasting tool. Documentation was not geared towards going back in time to evaluate the decisions taken. The availability of records improved, but even for the most recent programmes some key documents were missing. The conditions in memoranda of understanding were not always sufficiently focused on the general economic policy conditions set by the Council.

The European Court of Auditors recommends that the European Commission should:

• establish an institution-wide framework allowing rapid mobilisation of staff and expertise if a financial assistance programme emerges
• subject its forecasting process to more systematic quality control
• enhance record keeping and pay attention to it in the quality review
• ensure proper procedures for the quality review of programme management and content
• include variables in the memoranda of understanding which it can collect with short time-lags
• distinguish conditions by importance and target the truly important reforms
• formalise interinstitutional cooperation with other programme partners
• make the debt management process more transparent
• further analyse the key aspects of the countries’ adjustment after programme closure.

The Court also recommends that the Community executive who focuses "on the truly important reforms."

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