Legislative package for new EU economic governance

The economic and financial crisis that afflicts the world since 2008 has revealed the weaknesses of the economic governance of the European Union. Experience gained and mistakes made during the first decade of the economic and monetary union showed the need for a reinforcement of the economic wing of the EMU. In order to strengthen the economic governance of the Union and help face the numerous challenges of the euro area, the European Parliament and the Council, adopted, in November 2011, six interlinked and coherent legislative acts with the following objectives:

1.       prescribe minimum requirements for national budgetary frameworks, Directive 2011/85;

2.       reinforce the surveillance of budgetary positions and coordination of economic policies, Regulation 1175/2011;

3.       strengthen the prevention and correction of macroeconomic imbalances, Regulation 1176/2011;

4.       speed up and clarify the implementation of the excessive deficit procedure, Regulation 1177/2011;

5.       reinforce the effective enforcement of budgetary surveillance in the euro area through a reinforced Stability and Growth Pact (SGP), Regulation 1173/2011;

6.       correct excessive macroeconomic imbalances in the euro area through a reinforced Stability and Growth Pact (SGP), Regulation 1174/2011.

1. Minimum requirements for national budgetary frameworks [Directive 2011/85]

The availability of fiscal data is crucial to the proper functioning of the budgetary surveillance framework of the Union. The regular availability of timely and reliable fiscal data is the key to proper and well timed monitoring, which in turn allows prompt action in the event of unexpected budgetary developments. A crucial element in ensuring the quality of fiscal data is transparency, which must entail the regular public availability of such data.

Strong country-specific numerical fiscal rules that are consistent with the budgetary objectives at the level of the Union should be a cornerstone of the strengthened budgetary surveillance framework of the Union. Strong numerical fiscal rules should be equipped with well-specified target definitions together with mechanisms for effective and timely monitoring. Those rules should be based on reliable and independent analysis carried out by independent bodies or bodies endowed with functional autonomy vis-à-vis the fiscal authorities of the Member States.

The harmonised budgetary frameworks are meant to prevent excessive macroeconomic imbalances and to help the Member States to establish corrective plans before divergences become entrenched and before economic and financial developments take a durable turn in an excessively unfavourable direction.

The Directive on requirements for budgetary frameworks lays down detailed rules concerning the characteristics of the budgetary frameworks of the Member States. Those rules concern in particular: public accounting systems which include elements such as bookkeeping, internal control, financial reporting, and auditing. Complete and reliable public accounting practices for all sub-sectors of general government are a precondition for the production of high-quality statistics that are comparable across Member States. Internal control should ensure that existing rules are enforced throughout the sub-sectors of general government. Independent audits conducted by public institutions such as courts of auditors or by private auditing bodies should encourage best international practices.

With regard to statistics, Regulation 223/2009 established a legislative framework for the production of European statistics with a view to the formulation, application, monitoring and assessment of the policies of the Union [see section 10.1.1]. That Regulation also laid down the principles governing the development, production and dissemination of European statistics: professional independence, impartiality, objectivity, reliability, statistical confidentiality and cost-effectiveness, giving precise definitions of each of these principles. Regulation 479/2009 strengthened the Commission’s powers to verify statistical data used for the excessive deficit procedure [see section 7.3.2]. Directive 2011/85 builds on these foundations.

Under the European Semester the policy surveillance and coordination cycle starts early in the year with a horizontal review in which the European Council, based on input from the Commission and the Council, identifies the main challenges facing the Union and the euro area and gives strategic guidance on policies [see section 7.3]. Member States shall take due account of the guidance addressed to them in the development of their economic, employment and budgetary policies before taking key decisions on their national budgets for the succeeding years. Progress shall be monitored by the Commission.

2.       Stronger surveillance of budgetary positions and coordination of economic policies,
Regulation 1175/2011 amending Regulation 1466/97

Regulation 1466/97 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies is the preventive arm of the Stability and Growth Pact (SGP) [see section 7.3.2]. The SGP is based on the objective of sound government finances as a means of strengthening the conditions for price stability and for strong sustainable growth underpinned by financial stability, thereby supporting the achievement of the Union's objectives for sustainable growth and employment. The preventive part of the SGP requires that Member States achieve and maintain a medium-term budgetary objective and submit stability and convergence programmes to that effect. It would benefit from more stringent forms of surveillance in order to ensure Member States' consistency and compliance with the Union's budgetary coordination framework.

The content of the stability and convergence programmes as well as the procedure for their examination should further be developed both at national and at the level of the Union in the light of the experience gained with the implementation of the SGP. The budgetary targets in the stability and convergence programmes should explicitly take into account the measures adopted in line with the broad economic policy guidelines, the guidelines for the employment policies of the Member States and the Union and, in general, the national reform programmes. The submission and assessment of stability and convergence programmes should be made before key decisions on the national budgets for the succeeding years are taken.

The amending Regulation 1175/2011 sets out the rules covering the content, the submission, the examination and the monitoring of stability programmes and convergence programmes as part of multilateral surveillance by the Council and the Commission so as to prevent, at an early stage, the occurrence of excessive general government deficits and to promote the surveillance and coordination of economic policies thereby supporting the achievement of the Union's objectives for growth and employment.

In order to ensure closer coordination of economic policies and sustained convergence of the economic performance of the Member States, the Council shall conduct multilateral surveillance as an integral part of  the European Semester for economic policy coordination in accordance with the objectives and requirements set out in the Treaty on the Functioning of the European Union (TFEU) [see section 7.3].

3.       Stronger prevention and correction of macroeconomic imbalances [Regulation 1176/2011]

One lesson learned from the crisis is that fiscal policy should not be looked at in isolation. In particular, surveillance of the economic policies of the Member States should be broadened beyond budgetary surveillance to include a more detailed and formal framework to prevent excessive macroeconomic imbalances and to help the Member States affected to establish corrective plans before divergences become entrenched. Such broadening of the surveillance of economic policies should take place in parallel with a deepening of fiscal surveillance.

Regulation 1176/2011 supplements the multilateral surveillance procedure referred to in paragraphs 3 and 4 of Article 121 TFEU. It sets out detailed rules for the detection, prevention and correction of excessive macroeconomic imbalances within the Union. This Regulation shall be applied in the context of the European Semester as set out in Regulation 1175/2011 [see point 2 above and section 7.3].

Regulation 1176/2011 establishes an alert mechanism for the early detection of emerging macroeconomic imbalances. The mechanism is based on the use of an indicative and transparent "scoreboard" comprising indicative thresholds, combined with economic judgement, taking into account, inter alia, nominal and real convergence inside and outside the euro area. The scoreboard consists of a limited set of economic, financial and structural indicators relevant to the detection of macroeconomic imbalances, with corresponding indicative thresholds. The indicators and thresholds should be adjusted when necessary, in order to adapt to the changing nature of macroeconomic imbalances

4.       Stronger implementation of the excessive deficit procedure [Regulation 1177/2011, amending Regulation 1467/97

The purpose of Regulation 1467/97 (corrective arm of the Stability and Growth Pact (SGP)) is to speed up and clarify the implementation of the excessive deficit procedure, in particular as regards the sanctions to be imposed on Member States which fail to take appropriate measures to correct an excessive deficit, and it lays down the deadlines which must be observed for the different stages of the procedure [see section 7.3.2]. The SGP is based on the objective of sound and sustainable government finances as a means of strengthening the conditions for price stability and for strong sustainable growth underpinned by financial stability, thereby supporting the achievement of the Union’s objectives for sustainable growth and employment.

Experience gained and mistakes made during the first decade of the economic and monetary union showed the need of strengthening; on the one hand, the rules on budgetary discipline, in particular by giving a more prominent role to the level and evolution of debt and to overall sustainability and, on the other hand, the mechanisms to ensure compliance with, and enforcement of, those rules.

Regulation 1177/2011 lays down the provisions for speeding up and clarifying the excessive deficit procedure. The objective of the excessive deficit procedure is to deter excessive government deficits and, if they occur, to further prompt their correction, where compliance with the budgetary discipline is examined on the basis of the government deficit and government debt criteria.

Implementing the excessive deficit procedure on the basis of both the deficit criterion and the debt criterion requires a numerical benchmark, which takes into account the business cycle, against which to assess whether the ratio of the government debt to gross domestic product (GDP) is sufficiently diminishing and is approaching the reference value at a satisfactory pace.

Therefore, the new Regulation decrees that when it exceeds the reference value, the ratio of the government debt to gross domestic product (GDP) shall be considered sufficiently diminishing and approaching the reference value at a satisfactory pace in accordance with point (b) of Article 126 § 2 TFEU if the differential with respect to the reference value has decreased over the previous three years at an average rate of one twentieth per year as a benchmark, based on changes over the last three years for which the data are available.

The requirement under the debt criterion shall also be considered to be fulfilled if the budgetary forecasts of the Commission indicate that the required reduction in the differential will occur over the three-year period encompassing the two years following the final year for which the data is available. For a Member State that is subject to an excessive deficit procedure on 8 November 2011 and for a period of three years from the correction of the excessive deficit, the requirement under the debt criterion shall be considered fulfilled if the Member State concerned makes sufficient progress towards compliance as assessed in the opinion adopted by the Council on its stability or convergence programme.

The Commission’s report under Article 126 § 3 TFEU should consider appropriately the quality of the national budgetary framework, as that plays a crucial role in supporting fiscal consolidation and sustainable public finances. That consideration should include the minimum requirements as laid down in Directive 2011/85 on requirements for budgetary frameworks of the Member States and other agreed desirable requirements for fiscal discipline.

5.       Effective enforcement of budgetary surveillance in the euro area, Regulation 1173/2011

Regulation 1173/2011 sets out a system of sanctions for enhancing the enforcement of both the preventive and corrective parts of the Stability and Growth Pact (SGP) in the euro area.

In respect of the preventive part of the SGP, adjustment and adherence to the medium-term budgetary objective should be ensured through an obligation imposed on a Member State whose currency is the euro that is making insufficient progress with budgetary consolidation to lodge temporarily an interest-bearing deposit. This should be the case when a Member State, including a Member State with a deficit below the 3% of Gross Domestic Product (GDP) reference value, deviates significantly from the medium-term budgetary objective or the appropriate adjustment path towards that objective and fails to correct the deviation. The interest-bearing deposit imposed should be released to the Member State concerned together with the interest accrued on it once the Council has been satisfied that the situation giving rise to the obligation to lodge that deposit has come to an end.

In respect of the corrective part of the SGP, sanctions for Member States whose currency is the euro should take the form of an obligation to lodge a non-interest-bearing deposit linked to a Council decision establishing the existence of an excessive deficit if an interest-bearing deposit has already been imposed on the Member State concerned in the preventive part of the SGP or in cases of particularly serious non-compliance with the budgetary policy obligations laid down in the SGP, or the obligation to pay a fine in the event of non-compliance with a Council recommendation to correct an excessive government deficit.

The amount of the interest-bearing deposits, of the non-interest-bearing deposits and of the fines provided for in Regulation 1173/2011 should be set in such a way as to ensure a fair graduation of sanctions in the preventive and corrective parts of the SGP and to provide sufficient incentives for the Member States whose currency is the euro to comply with the fiscal framework of the Union. Fines under Article 126 § 11 of the TFEU and as specified in Article 12 of Regulation 1467/97 are composed of a fixed component that equals 0.2% of GDP and of a variable component. Thus, graduation and equal treatment between Member States are ensured since the interest-bearing deposit, the non-interest-bearing deposit and the fine specified in Regulation 1173/2011 are equal to 0.2% of GDP, that being the amount of the fixed component of the fine under Article 126 § 11 of the TFEU.

The non-interest-bearing deposit should be released upon correction of the excessive deficit, while the interest on such deposits and the fines collected should be assigned to stability mechanisms to provide financial assistance, created by Member States whose currency is the euro in order to safeguard the stability of the euro area as a whole.

The Commission plays a stronger role in the enhanced surveillance procedure as regards assessments that are specific to each Member State, monitoring, on-site missions, recommendations and warnings. When taking decisions on sanctions, the role of the Council is limited, and reversed qualified majority voting is used, i.e. the decision requiring a lodgement of an interest-bearing deposit 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.

6.       Enforcement measures to correct excessive macroeconomic imbalances in the euro area, Regulation 1174/2011

Regulation 1174/2011 lays down a system of sanctions for the effective correction of excessive macroeconomic imbalances in the euro area through a reinforced Stability and Growth Pact (SGP). This Regulation shall apply to Member States whose currency is the euro.

Enforcement of Regulation 1176/2011 [see the point 3 above] should be strengthened by establishing interest-bearing deposits in case of non-compliance with the recommendation to take corrective action. Such deposits should be converted into an annual fine in the case of continued non-compliance with the recommendation to address excessive macroeconomic imbalances within the same imbalances procedure. In the case of failure to comply with Council recommendations, the interest-bearing deposit or the fine should be imposed until the Council establishes that the Member State has taken corrective action to comply with its recommendations. Moreover, repeated failure of the Member State to draw up a corrective action plan to address the Council recommendation should also be subject to an annual fine as a rule, until the Council establishes that the Member State has provided a corrective action plan that sufficiently addresses its recommendation.

To ensure equal treatment between Member States, the interest-bearing deposit and the fine should be identical for all Member States whose currency is the euro and equal to 0.1% of the gross domestic product (GDP) of the Member State concerned in the preceding year. The Commission should be able to recommend reducing the amount of a sanction or cancelling it on grounds of exceptional economic circumstances. The procedure for applying sanctions to those Member States which fail to take effective measures to correct excessive macroeconomic imbalances should be construed in such a way that the application of the sanctions to those Member States would be the rule and not the exception. Fines referred to in this Regulation should constitute other revenue, as referred to in Article 311 TFEU, and should be assigned to stability mechanisms to provide financial assistance, created by Member States whose currency is the euro in order to safeguard the stability of the euro area as a whole.

As in the case of Regulation 1173/2011 [see the point 5 above], the recommendations of the Commission for the imposition of sanctions shall be deemed adopted by the Council unless it decides, by qualified majority, to reject the recommendation within 10 days of its adoption by the Commission. The Council may decide, by qualified majority, to amend the recommendation.

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