EU Economic Coordination

Member States should keep up the pace of structural reforms of their economies in order to stabilise the slow recovery in 2014, is the key message from the Commission in a communication published on 13 November.

The Annual Growth Survey 2014 outlines the general economic priorities for the EU and provides Member States with policy guidance for the coming year. It is part of the package that officially launches the 2014 “European Semester” of economic policy coordination - a governance process aimed at ensuring that Member States discuss their budgetary and economic plans with their EU partners at specific times during the year. (Although it’s an annual programme, it focuses on the first six months of the year – hence “semester”.)

The goal is the coordination of each other's economic policy in line with EU objectives and to enable the Commission to give recommendation before decisions are made at national level.

The European Commission has presented a number of documents to mark the start of the 2014 European Semester:
The Annual Growth Survey;
The Alert Mechanism Report, which provides a detailed analysis of Member States’ economies based on different indicators assessing potential imbalances;
The Joint Employment Report, which analyses employment and social trends and challenges as well as the policy responses given by Member States;
The Single Market Integration Report, which takes stock of the state of single market integration in key areas of potential growth.

Economic Priorities for Member States in 2014

The Annual Growth Survey gives a clear picture of the economic and social situation in Europe and sets out policy priorities for each Member States for 2014. Recent developments at economic level influenced this guidance:
• The slow recovery registered in 2013 which is expected to continue in 2014 and therefore needs to be sustained;
• The start of budgetary coordination at EU level: for the first time Euro-area Member States have submitted their budgets to the Commission which will assess whether they are on the right track to achieve the economic policy objectives, before those plans are adopted at national level;
• As first year of implementation of the Multi-annual Financial Framework, 2014 will see the deployment of the European Structural and Investment Funds to foster the creation of jobs and growth at national and regional level (€400 million according to the Commission). This capacity will be used to implement the reforms indicated in the Country-specific recommendations adopted in the framework of the European Semester. 

The Commission intends to maintain the policy response set up in the past years. It therefore identifies for 2014 the same five priorities listed for 2013 while adapting their implementation to the economic picture described above.

Continuing Fiscal Consolidation

The Annual Growth Survey highlights how the average budget deficit of EU Member States in the EU has been almost reduced by half in 4 years from 6.9% in 2009 to 3.5% in 2013. Despite this important progress which reduced pressure on sovereign bonds, debt levels remain high in many Member States and are expected to reach a peak in 2014 to decrease from 2015 onwards.

While this progress allows Member States to moderate the pace of reforms, fiscal consolidation should be designed so as to encourage growth through a mix of expenditure and revenue measures and the modernisation of the public administration, the Commission adds. In particular, Member States should focus on the quality of public expenditure by promoting longer term investments in education, research, innovation and climate action and avoiding budget cuts to employment services, such as training schemes for the unemployed and Youth Guarantees schemes.

Growth can be boosted also in terms of revenues by shifting taxes from labour to consumption, property and pollution, for example by reducing the grant of environmentally harmful subsidies.

Restoring Bank Lending to Businesses

Despite regained stability in the financial sector, businesses still find difficulties in accessing bank credit. Moreover, lending conditions are very different across the EU as far as interest rates for loans and financing possibilities are concerned. Interest rates can even double from one Member States to another.

The Annual Growth Survey explains that the correct functioning of the banking sector in financing the economy is fundamental to sustain the economic recovery. Therefore it is essential to proceed with the completion of the Banking Union in order to have a clear framework for restructuring and repairing banks’ balance sheets. In this respect the recent adoption of the Single Supervisory Mechanism is a first important step but needs to be followed-up with other actions, notably the Single Resolution Mechanism and Fund.

The Commission also recommends alternative options to bank financing, such as recourse to venture capital and the development of SME bonds.

As for the priorities for 2014, actions at national level will differ from country to country. In some Member States more action is needed in the short-term to reduce private debt, in order to avoid associated financial risks such as real estate bubbles. For the Commission it is also important to prepare banks for the new capital requirements rules and stress tests.

Boosting Growth and Competitiveness

The crisis has resulted in a reorganisation of economies across Europe, for instance linking growth to external more than internal factors. As the debt load for families and companies decreases and internal demand rises again, growth is returning, according to the Survey. It explains that recovery now means finding new sources of growth for the longer term, focusing for instance on knowledge-intensive activities for the economy.

The priority for the Commission in view of stimulating growth and competitiveness is the further opening up of certain services markets to competition, such as energy and professions. In the energy field, the completion of the internal energy market by 2014 could reduce costs and make support schemes for renewables more competitive. Non-compliant Member States should therefore proceed to the proper transposition of the third energy package which aims at stimulating energy efficiency and improve their waste and water management systems as well as recycling programmes.

The Commission also recommends improving the implementation of the Services Directive, notably assessing whether it is appropriate to review and reduce restrictions on the access to regulated professions, eliminating barriers in order to strengthen competition in the retail services and simplifying procedures.

An important contribution to growth could come from the modernisation of national research systems, through a closer collaboration between private and public actors, in order to allow research results to be transferred to goods and services.

Reducing Unemployment

Far from improving, the social impact of the crisis is still severe, especially as far unemployment levels are concerned. The EU average of 11% (July 2013) and 23.4% for youth unemployment reflects a situation where rates greatly differ from country to country showing a gap which is not expected to improve quickly, due to the slow economic recovery.

The Annual Growth Survey identifies an immediate priority of carrying out reforms on the functioning of the labour market. This would include promoting sources of jobs in growing sectors (green economy, digital sector and health care services), maintaining the employability of work force and investing in active support for jobless people, including training and Youth Guarantee schemes.

Besides implementing active labour market measures, the Commission also considers that job creation needs to be stimulated by shifting the tax burden away from labour, especially for low paid or young workers and modernising employment protection legislation to facilitate labour mobility and fight against undeclared work. According to the Commission, it is also essential to invest in the modernisation of education and training systems, so as to promote life-long learning and vocational training.

To reduce inequalities, poverty and social exclusion the Commission also considers is necessary to improve the performance of the social protection systems, by increasing personalised services to make access to benefits simpler particularly for the most vulnerable categories of citizens.

Modernising Public Administration

The last priority identified by the Commission looks at the efficiency of national public administration. According to the Survey further improvements can be made. Modernisation can derive from a better cooperation between different layers of government, as some Member States are doing, but also through the development of the possibilities offered by new technologies. The recourse to e-government services, especially e-procurement, allows authorities to increase efficiency and reduce costs of 15-20%, the Commission notes.

Modernisation can also come from simplification of the business environment, by reducing bureaucracy (e.g. the regulatory framework for setting up businesses or the length of permit requirements) notably for SMEs and improving the quality of legislation.

Alert Mechanism Report: Screening EU Economies for Potential Imbalances

The second document accompanying the Annual Growth Survey is the Alert Mechanism Report (AMR). This is the starting point of the yearly cycle of the Macroeconomic Imbalance Procedure (MIP), which aims to identify and address budgetary imbalances that hamper the functioning of the EU economies and may jeopardise the proper functioning of the Economic and Monetary Union. The AMR identifies the Member States for which further analysis is necessary (so-called “in-depth reviews”) in order to detect imbalances in their economies. The in-depth reviews will be published in spring 2014 and will be part of next year’s country-specific recommendations in the framework of the European Semester.

In general terms, the third AMR shows that EU economies - due to structural reforms and market pressure - continue to make progress correcting their external and internal budgetary imbalances, such as large current account deficits and loss of competitiveness. The correction of imbalances is contributing to a slow but gradual recovery. However, the Commission considers it essential to reduce excessive debt and improve the net international investment position of the most indebted economies. Moreover, high current account surpluses persist in some countries, suggesting possibly inefficient levels of savings and investment and the need to strengthen domestic demand.

The current report recommends an in-depth review of economic developments in 16 EU Member States, which face different challenges and potential risks for neighbouring Member States. 
Spain and Slovenia were found to still be experiencing excessive economic imbalances identified in the previous round of the process, notably high domestic and external debt levels and fragile corporate balance sheets, rigidities in labour and capital markets and high state ownership. Therefore, the in-depth reviews of these countries would assess the persistence or unwinding of the excessive imbalances, and the contribution of the policies implemented by these Member States to overcome them.
• For France, Italy and Hungary the next in-depth review will evaluate the persistence of imbalances previously identified (excessive deficit, high unemployment levels, negative net international investment position) and whether decisive policy actions have been taken.
• For the other Member States previously identified as experiencing imbalances (Belgium, Bulgaria, Denmark, Malta, the Netherlands, Finland, Sweden and the United Kingdom), the in-depth review will help to assess the extent to which imbalances persist or have been overcome. 
• In-depth reviews are also planned for Germany in order to analyse its external position and internal developments. Indicators seem to show macroeconomic imbalances concerning the trade surplus (7% in 2013, beyond the 6% threshold of the scoreboard set in the AMR each year since 2007).
• Finally, an in-depth review is also planned for Croatia in order to understand the nature and potential risks related to its external position, trade performance and competitiveness, as well as internal developments.

Draft Joint Employment Report

As with the Alert Mechanism Report, the draft Joint Employment Report is an Annex to the Annual Growth Survey 2014. It contains an analysis of employment and social trends and the policy responses of Member States, in the context of the European semester. This year the Report includes a scoreboard of key employment and social indicators which will be used for the first time to give the Commission further elements for the preparation of 2014 Country-Specific Recommendations.

The Report finds that not only are unemployment levels (especially youth unemployment) unacceptably high across the EU  but also that long-term unemployment is rising, resulting in an increase of poverty and inequality in many Member States. The good news is that unemployment rates have stopped rising in the course of 2013. However, the picture is worsened by the fact that great discrepancies exist between countries at the "core" and the "periphery" of the euro area in regards to unemployment, income, inequality and poverty levels.

Against this  background, the Commission calls upon the Member States to improve the resilience of labour markets by reinforcing public employment services' capacities and to promote the creation of job in fast growing sectors such as ICT, green economy and health sector, as highlighted by the Annual Growth Survey, as priorities for 2014.

Report on Single Market Integration

The last document included in the package published by the Commission on 13 November is the Report on Single Market Integration. It takes stock of the progress made in terms of market integration and aims to identify remaining bottlenecks hindering full market integration and providing policy guidance in this respect. The report for 2014 focuses on market integration in key areas where growth potential is the biggest, such as services (including finance), networks (energy, transport, TLC) and the digital economy.

As far as services and energy networks are concerned, the conclusions of the report repeat the Commission’s position referred to under the priority “Growth and competitiveness” of the Annual Growth Survey. Concerning the digital sector, the Commission recommends that Member States should focus on the proper functioning of the electronic communications markets by reinforcing their national regulatory authorities and supporting the development of high speed broadband, promoting the use of ICT by SMEs and increasing the availability of on-line public services (including e-procurement and e-invoicing).

Next Steps

The Annual Growth Survey will be discussed by Eurogroup ministers and in the Economic and Financial Affairs Council in December and endorsed by EU leaders at their March 2014 summit. The Commission is also expecting the European Parliament will officially respond to this and the other documents of the package.

The Alert Mechanism Report will be discussed by finance ministers and EU leaders in December, who will agree on the main areas for further coordination of economic policies and reforms. In the meantime, the Commission will prepare in-depth reviews for the 16 countries identified in the Alert Mechanism Report, which will be published in spring 2014.

The draft Joint Employment Report will be endorsed by the EU's Council of Employment and Social Affairs Ministers and will be then presented to the European Council in order to feed into the European Semester process and surveillance.