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EU economic governance
From the Six-Pack to the Fiscal compact
10 July 2012
Lucia Piana
DG Economic and Financial Affairs
http://ec.europa.eu/economy_finance/index_en.htm
Budgetary developments in the EU
2007-2013
(% of GDP)
7
2
-3
-8
Budget balance 2007
Budget balance 2009
Budget balance 2013
-13
Source: Source: Commission 2012 Spring Forecast (data in % of GDP).
IE
EL
K
U
ES
L
SK
N
B
EU E
-2
7
SI
FR
Y
PL
C
EA Z
-1
7
H
U
M
T
LT
PT
C
AT
D
K
LV
R
O
LU
FI
D
E
IT
EE
BG
SE
-18
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A typical legacy of a financial crisis:
deteriorated public finances
% of GDP
200
180
160
140
120
2007
2013
100
80
60
40
20
0
EE BG LU
SE RO LT DK LV CZ SK
FI
PL
SI NL AT M T CY HU DE ES EU- FR EA- UK BE PT
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The crisis is the same but different
Extract from: Marco Buti, Lucio R Pench, Fiscal austerity and policy credibility, 20 April 2012, www.voxeu.org
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Enhanced economic governance
in the EU
The 1st step: the Six-Pack
• A major reform proposed in September 2010 and entered
into force in December 2011
The 2nd step: the Two-Pack
• Additional elements for the euro area proposed on
23 November 2011
The latest step, the Intergovernmental Treaty
• Transposing European rules and concepts in a national
setting, signed on 2 March 2012
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Fiscal compact
national budgetary frameworks
More effective
preventive arm of
SGP
Focus on debt
developments in
corrective arm of
SGP
Crisis
resolution
Sound fiscal
policy
Enhanced
monitoring of
budgetary policies
Prevention and
correction of macro
imbalances
Structural reform
strategy (Europe
2020)
Balanced
growth
Macro-prudential
supervision
Regulation and
supervision of
financial systems
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Economic governance package
(“six-pack”): key features
An enhanced framework for crisis prevention to
ensure:
•
•
•
•
•
Prudent fiscal policy-making
Attention to macroeconomic imbalances
Stronger and more integrated surveillance
Tougher sanctions
Accountability, transparency & democratic legitimacy
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The Stability and Growth Pact
Detailing the Maastricht Treaty fiscal rules (i) :
the most known....
“Member States shall avoid excessive government
deficits” (Treaty Article 126 ex 104)
– deficit below the reference value of 3% of GDP,
unless it has declined substantially and continuously and
reached a level close to the reference value or the
excess is limited, exceptional and temporary
– debt should not exceed the reference value of
60% of GDP, or should be on a decreasing trend and
approach the reference value at a satisfactory pace
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The Stability and Growth Pact
Detailing the Maastricht Treaty fiscal rules (ii):
the less known....and revised by the Lisbon Treaty
“Member States shall regard their economic policies as
a matter of common concern” (Treaty Article 121 ex
99)
– The Council shall monitor economic developments in
each Member State, on the basis of reports submitted
by the Commission;
– The Commission may address a warning;
– The Council, on recomendation from the Commission,
may address the necessary recommendations.
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The Stability and Growth Pact
•
RESOLUTION OF THE EUROPEAN COUNCIL on the Stability and Growth
Pact Amsterdam, 17 June 1997 (97/C 236/01)
•
.... In stage three of EMU, Member States shall avoid excessive general
government deficits: this is a clear Treaty obligation (1). The European
Council underlines the importance of safeguarding sound government
finances as a means to strengthening the conditions for price stability and
for strong sustainable growth conducive to employment creation. It is also
necessary to ensure that national budgetary policies support stability
oriented monetary policies. Adherence to the objective of sound
budgetary positions close to balance or in surplus will allow all
Member States to deal with normal cyclical fluctuations while keeping the
government deficit within the reference value of 3 % of GDP....
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Reforming the preventive arm of the SGP
Where did we stand?
 Central concept of the Stability and Growth Pact is the medium-term budgetary
objective (MTO) = a numerical value for the structural deficit which ensures:
(i) a safety margin against breaching 3% of GDP;
(ii) sustainable public finances or rapid progress towards sustainability
(iii) room for stabilisation over the cycle
MTO ILD  Balance debt  stabilizing ( 60% ofGDP)   * AgeingCostsinfinite horizon  Effortdebt  reduction
  
(i )
( ii )
( iii)
 Adjustment path towards MTO = 0.5% of GDP; more in good, less in bad times
 Central concept is based on the structural balance which is not observable
 Enforcement through peer pressure
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The Six-Pack – Key Innovations
In the Preventive Arm of the SGP
 Innovation: an expenditure rule = operational guidance for adjustment path towards
MTO
Def: expenditure growth should not exceed a reference rate of potential GDP growth
 If significant deviations from the rule = 0.5% of GDP in one or 0.25% of GDP in two
consecutive years  recommendation + interest-bearing deposit for euro area MS
 Safeguard clauses: can deviate from the rule if unusual event or severe economic
downturn for the euro area or the EU as a whole
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The corrective arm:
Excessive Deficit Procedure
Main objective: correct ‘ gross
assessed against two criteria:
errors ’ ,
-government deficit in excess of 3% of GDP
-government debt in excess of 60% of GDP not sufficiently
diminishing
In practice, EDP launched and closed
exclusively on the basis of deficit criterion

 EDP is a step-wise procedure
Failure to comply with the initial recommendations (Art.126.7)
resulted (for euro-area countries) in
-more intrusive recommendations (Art.126.9),
-eventually leading to sanctions (Art.126.11)
 In practice, Art. 126.11 step never reached.
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The Six-Pack – Key Innovations
In the Corrective Arm of the SGP
Where do we stand?
EDP only opened on the basis of the deficit criterion since no definition of sufficiently
diminishing
 Innovation: Operationalization of the "debt criterion"
Numerical benchmark for sufficiently diminishing debt
= distance with respect to the 60% of GDP reference value declines over 3 preceding years at an
average rate of 1/20th per year or this required reduction will occur in forward-looking 2-year
horizon.
Non-respect will not automatically result in the country being placed in EDP  overall assessment
of relevant factors.
 Transition period for the 23 MS currently in EDP embarked on an agreed consolidation path: 3
years after correction of the EDP to avoid abrupt change in this path = no full implementation of
the rule but sufficient progress to be made
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The debt criterion:
taking into account the cycle
Economic cycle affects debt via the deficit and the denominator (GDP)
• Not adjusting for the cycle would result in undesirable procyclicality
• Averaging over three years already mitigates impact of cycle
but not sufficiently.
Assessment will take account of cyclical effects
• If the debt benchmark is breached on the sole basis of the
effect of the cycle, there will be no Report under Article
126(3)
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The Six-Pack – Key Innovations
New enforcement mechanisms - euro area
Trigger
Sanction
Council decision establishing failure to
take action in response to a Council
recommendation under Art. 121(4)
Interest-bearing deposit
0.2% of GDP
Council decision under Art. 126(6) that
excessive deficit exists
Non interest-bearing deposit
0.2% of GDP
Council decision under Art 126(8) that
no effective action to correct the
excessive deficit has been taken
Fine
0.2% of GDP
Council decision under Art. 126(11) in
the case of no effective action in
response to notice under Art. 126(9)
Fine
0.2% of GDP + variable
component
Council decision
Fine
Effective, dissuasive and
proportionate – not exceeding
0.2% of GDP
Condition
Only where interest-bearing deposit exists
or in case of serious non-compliance with
budgetary obligations
The MS intentionally or by serious
negligence misrepresented deficit or debt
data relevant for the application of the
SGP
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Six-Pack: national fiscal frameworks
Where do we stand?
Considerable variation in the
quality of national fiscal
framework
 Well-designed fiscal
frameworks can substantially
contribute to sound fiscal
policies
EU budgetary framework
insufficiently entrenched in
national frameworks
 Need for strengthening
national ownership and having
uniform requirements as
regards the rules and
procedures forming the
budgetary frameworks of the
MS
 Innovation: minimum characteristics for national
budgetary frameworks
 Accounting and statistical reporting
 Rules for preparation of the forecasts for budgetary
planning
 Country-specific numerical fiscal rules
 Budgetary procedures
 Medium-term budgetary frameworks
 Independent monitoring and analysis
 Regulation of fiscal relationships between public
authorities across sub-sectors of general government
 Implementation by end-2013
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Addressing macroeconomic imbalances
- a new strand in EU surveillance
The excessive imbalance procedure focuses on the prevention and
correction of macroeconomic imbalances in all Member States
• Preventive arm
imbalances
to
monitor
and
prevent
the
build-up
of
• Commission presents a report identifying countries that may be
affected by or at risk of being affected by imbalances, based on
the economic reading of a scoreboard of indicators
• Commission prepares in-depth country studies for the selected
countries taking on board a broad range of variables and using
analytical tools and country-specific information
• Corrective arm to correct imbalances
• The Council recommends corrective action and the Member State
concerned submits a Corrective Action Plan
• Backed up by financial sanctions (euro area only)
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The 23 November – New proposals
Two Regulations building on the Fiscal surveillance leg of the Six-Pack
for euro area Member States (based on Art. 136 TFUE)
Enhanced monitoring
Enhanced surveillance for financially fragile MS
Common provisions for
monitoring and assessing draft budgetary
plans and
ensuring the correction of excessive deficit
of the Member States in the euro area
Strengthening of economic and budgetary surveillance
of Member States
- experiencing or
- threatened
with serious difficulties with respect to their financial
stability in the euro area
Council general approach agreed in February
 EP Report voted in June
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The 23 November – Key Innovations
Enhanced monitoring for all euro area MS
Rationale
Ensuring that Union policy
recommendations in the
budgetary area are
appropriately integrated in the
national budgetary
preparations
Better synchronizing key steps
in preparation of national
budgets
Innovation
Common Budgetary Rules
-Numerical fiscal rules on budget balance
implementing MTOs in national budgetary
processes
-Independent fiscal council
-Independent macroeconomic forecast
Articulation with existing
framework
Reinforces the Directive on national
budgetary frameworks by
encapsulating the core concept of
the SGP in national rules
Reinforces the preventive arm of
the SGP
A Common Budgetary Timeline
Complements the European
semester
• Medium-Term fiscal plans made public with Stability Programmes.
15 April
15
October
31
Decembe
r
• Draft Budget Laws for the general government made public with the independent
macroeconomic forecast on which they are based.
• Budget Laws for the general government adopted and made public.
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Enhanced monitoring for euro area MS
Rationale
Innovations
Ensuring an
appropriate
integration of
EU policy
recommendatio
ns in the
national
budgetary
preparations
Additional monitoring requirements
Securing a
timely and
durable
correction of
excessive
deficits
Draft budgetary plans for the forthcoming year
submitted before 15 October
Articulation with existing
framework
Complement the European Semester
•to the COM
=> might request a revision of the draft
=> possible Opinion
•to the Eurogroup => discussion based on
assessment by the COM
Provide an independent opinion on the draft
budget to all stakeholders in the budgetary
process
Closer monitoring for Member States in EDP
Complement to the corrective arm of the SGP
•Initial stage: comprehensive report + audit of
quality of statistics
•Regular report:
- If under 126(7) every 6 months
- If under 126(9) every quarter
•Any additional information on a request from the
COM
Compliance with COM Opinion on draft budgetary
plan taken into account
•in report under 126(3)
•in recommendation on a non-interest-bearing
deposit
•in decision under 126(6).
Reports of the closer monitoring taken into account
•anytime, to assess whether correction by the
deadline is at risk
•can lead to a COM recommendation
•compliance with such recommendation assessed
when deciding on effective action (stepping up or
abrogation of the EDP)
April
June
Annual Growth Survey: Overall guidance for the EU
Produced by the Commission - Discussed by the Council - Endorsed by the Spring European Council
Annual Growth Survey: Overall guidance for the EU
European Council Policy orientations
Stability or Convergence Programmes
National Reform Programmes
Produced by EU member states
except those under financial assistance programmes
Produced by EU member states
except those under financial assistance programmes
The European Semester
March
December
A new calendar for the EU economic governance
Country-specific recommendations
Produced by the Commission - Adopted by the Council with endorsement of the European Council
November
Draft national budgets
Produced by EU member states
Possible Commission opinion
on draft budgetary plans
Produced by the Commission
23 November
proposals
October
For euro area
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The latest step: the intergovernmental
Treaty
New intensified commitments by 25 MS. To be integrated into the EU legal framework within 5
years and with an important role for the Commission and EU secondary legislation.
Economic Policy Coordination
•
Coordination of major economic policy reform plans in euro area MS
Reinforced Governance
3 main chapters
•
Euro Summits at least twice a year
•
President of the Euro Summit appointed by Heads of State or
Government of euro area MS
•
Participation in Euro Summits of Heads of State or Government of
non-euro area MS having ratified treaty is foreseen for certain
discussions and at least once a year
…and the
FISCAL COMPACT
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The Fiscal Compact
Recalls main commitments of the SGP
oCountry-specific medium-term objectives
(MTOs)
oNumerical debt reduction benchmark under
the EDP
Complements the SGP's toolbox
oEx ante coordination of debt issuance
plans
oEconomic partnership programmes for
Member States in EDP
Strengthens implementation of the SGP
oImplementation of MTOs in national budgetary
processes
oAssorted with automatic correction mechanisms
(triggered in case of significant deviation… except if
exceptional circumstance) and monitoring by
independent institutions
oMore stringent lower limit for MTOs (-0.5%), with
a calendar for convergence
oBehavioural commitment to support Commission
proposals/recommendations for EDPs in the euro area
•
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The Fiscal Compact (continued)
• Enforcement
-
National level
MS to implement rules in national law through provisions of "binding force and
permanent character, preferably constitutional"
compliance monitored level by independent national institutions
o
-
Union level
COM presents report on the transposition of the agreed provisions
Matter can be brought to the Court of Justice by a MS to verify transposition
Court of Justice can impose financial sanction of up to 0.1% of GDP
o
-
• How to anchor these commitments into EU Law?
o
o
Swift implementation of key elements by legislative proposals, either currently under
discussion or new texts
Contracting Parties committed to incorporation of Treaty within 5 years
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A strengthened framework
EU 27
SixPack
In force
Reinforced preventive arm of
SGP

Debt-reduction benchmark

Proposed
Fiscal
Compact
To be
ratified
summary
25 Contracting
Parties

Enhanced budgetary
monitoring

Enhanced surveillance for
vulnerable euro area MS
 (for MS with financial difficulties)
National implementation of
MTOs + transposition
sanctions

Economic partnership
programme in the EDP

Ex ante coordination of debt
issuance


rQMV in EDP
Ex ante coordination of
economic reforms
Euro area

Financial sanctions
Directive on national fiscal
frameworks
TwoPack
-

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