New EU Economic Governance?

As a result of the worst economic crisis Europe has experienced for well over a generation, the EU embarked on what is billed as a major overhaul of its economic structures. As a part of this, the Commission has published a new policy paper (a “Communication”) on the needed changes to the EU’s Economic Governance has been released.

It aims to allow for the EU to have a bigger say over Member States’ economies and might lead to a two-tier system between Eurozone and non-Eurozone members since it opens up for the possibility to have different rules being applied to them.   

Another, less detailed, Communication on the EU’s Economic Governance was released earlier this year. The Council was swift to endorse that one and invited the Commission to come up with concrete proposals. 

The Commission subsequently released the current and more detailed Communication on the EU’s Economic Governance on 30th June. The new paper includes proposals for the creation of a range of new economic tools that the EU would be able to use. These include allowing the EU to penalise Member States that do not reign in excessive debts and deficits to ensuring that Member States provide information about their fiscal policies to the EU before they are adopted at the national level. The Communication also sets out to launch a European Semester that would allow the EU to issue specific policies (relating to the Member States’ economies) and to assess how these policies are taken into account by the Member States.

The proposals made in the Communication will be turned into legislative proposals that will be proposed by the Commission this autumn. All of the proposals can be agreed to under the terms of the Lisbon Treaty (hence no Treaty revision is needed, which would have been a political impossibility).

Background

The recent economic crisis has made evident how interlinked the EU economies (and especially the Eurozone economies) are and that there are salient gaps in the EU’s current economic structure. Hence there have been many voices calling for equipping the EU with a broader and more effective set of policy instruments that would make it possible for the EU to achieve a sustainable economic recovery. This would translate into putting public finances back on a sound footing and actively promoting growth and jobs so as to ensure that the EU becomes more sustainable and more inclusive.

It is within this context that the newly released Communication aims to develop greater economic policy and co-ordination and surveillance within the EU. It focuses on making certain that the EU and Member State governments have confidence in the quality of the policy decision making process. It also sets out to create a warning system that will alert them if national situations are going off track. It aims to promote greater transparency, confidence and a stronger sense of being part of a collective process. It will also make possible to penalise Member States that do not adhere to the common policies and thus minimise negative spillover effects from Member States that defy the rules. 

Upcoming Legislative Proposals

The Communication aims to bring together the country monitoring under the Stability and Growth Pact with the thematic monitoring of EU 2020 targets and ensure that they anchored in sound economic policies. It also sets out a number of policies that will be proposed in September. These include:

Broader Macroeconomic Surveillance - The EU recognises that the macroeconomic imbalances between the Member States have been highly damaging for the EU economy as a whole. Thus this proposal includes creating a framework for dealing with excessive imbalances by having a preventive mechanism (which would include an alert mechanism) that will allow for annual assessments of macroeconomic risks and a corrective mechanism that would enforce the implementation of remedies in case of harmful economic imbalances. The areas focused on would include competiveness, macro-structural weaknesses and macro-economic imbalances on a country-by-country basis (i.e. wages, labour markets, the functioning of goods and services markets etc). Although this would apply to all Member States, more stringent economic rules and a possible enforcement mechanism could be applied to Members of the Eurozone than what would be the case for non-members.   

Fiscal Surveillance: national fiscal frameworks - Specifies the minimum requirements for the design of domestic fiscal frameworks and the reporting requirements to allow for verification of compliance. This includes, amongst other things, making sure that Member States take a consistent approach in terms of accounting procedures, ensure that their fiscal frameworks cover all government finance, switch to multi-annual budgetary planning and implement national fiscal rules to ensure that domestic fiscal frameworks reflect Treaty obligations.

Fiscal Surveillance: increased focus on public debt and sustainability in the SGP – Proposal for amending current legislation on the SGP to ensure that it takes greater account of the interplay between debt and deficit in order to improve incentives to run prudent policies. In order to achieve this, the proposal includes amending the SGP’s preventative and corrective mechanisms.

Enforcement of economic surveillance (sanctions/incentives): interest bearing deposit temporarily imposed on a euro area Member State – This proposal would allow for the EU to demand that Member States within the Eurozone, which it deem are not making sufficient progress in lowering their annual deficits and overall debts, deposit some of their money with the EU institutions. The money would not be given back until the Member State(s) in question starts behaving according to the EU’s demands.

Enforcement of economic surveillance (sanctions/incentives): deploy the EU budget as additional leverage – The proposal’s aim is to act as a compliment to the other penalty mechanisms described above. Countries defiant of the key macroeconomic conditions of the SGP would have their EU funds cut. Sanctions should not affect end beneficiaries of EU funds but rather payment to Member States or payments for which Member States act as intermediaries. The money not given to Member States will remain within the EU budget.

Setting up of a European Semester
– This entails allowing for better coordination of economic policies before they have been set by the Member States, both within the Eurozone and within the EU. The EU will provide policy guidance concerning the Member States’ budgets and should therefore be seen as a complement to national economic policies. The procedure (set to start in January 2011) would include the Council issuing country-specific policy guidance to Member States with the Commission assessing how the Member States take the Council’s guidance into account by reviewing their economic policies.

Thematic Surveillance of Structural Reforms
- This proposal includes issuing recommendations, in combination with the macroeconomic recommendations that the EU will propose, so as to ensure a stable macroeconomic environment that will be conducive to growth and job creation. This is done in order to make it consistent with EU2020 so that Member States implement the needed structural reforms and invest in the growth enhancing policies outlined in the EU2020. It will start with the Annual Policy Cycle of the EU2020 and its first report is expected to the 2011 Spring European Council.

In addition to these proposals a number of proposed amendments have been made to the existing Code of Conduct for the ‘Specifications on the implementation of the Stability and Growth Pact and Guidelines on the format and content of Stability and Convergence Programmes’. These amendments stipulate, amongst other things, that Member States are expected to take into account guidance and recommendations from the Council (in particular when preparing their national budgets) and the complete procedure for the European Semester. 

Next steps

Olli Rehn (European Commissioner for Economic and Financial Affairs) said on the day of the release of the Communication that, regarding the follow-up of the Communication, he expects the Economic and Financial Affairs Council (ECOFIN) to confirm the launch of the European Semester on July 13th and to endorse the revision of the Code of Conduct for the Stability and Growth Pact. He also reconfirmed that the Commission intends to make all the necessary formal proposals (described above) in late September and October.