The Commission has presented a Communication reviewing the EU’s Economic governance framework. Specifically, this includes an assessment of the application of the six- and two-pack legislation.

The Communication also sets out how the Commission plans to consult interested parties to receive their views on the functioning of the economic framework so far and the possible ways to enhance its effectiveness.

Why is the Commission presenting this review now?

The legislation in the six-pack and two-pack requires the Commission to review and report on the application of the legislation every five years.

The start of a new political cycle at European level is an opportune moment to assess the effectiveness of the current rules.

The economic context has changed considerably since these measures were introduced in response to the vulnerabilities exposed by the economic and financial crisis. Meanwhile, Europe is aiming to become the world’s first climate-neutral continent and to seize the new opportunities of the digital age, as set out in the Annual Sustainable Growth Strategy

What are the main findings of the review?

The review considers the effectiveness of the different surveillance elements as regards the achievements of the three key objectives, namely:

        ensuring sustainable government finances, growth and avoiding macroeconomic imbalances;

        enabling closer coordination of economic policies; and

        promoting convergence of economic performances of the Member States.

The review has revealed strengths as well as possible areas for improvement.

The surveillance framework has supported the correction of existing macroeconomic imbalances and the reduction of public debt. This, in turn, has helped to create the conditions for sustainable growth, strengthened resilience and reduced vulnerabilities to economic shocks.

The implementation of recommended policies by Member States has contributed to the gradual strengthening of the EU economies and to job creation.

The establishment of a common budgetary timeline and the policy guidance issued on the basis of Member States’ draft budgetary plans has led to a closer coordination of fiscal policies within the euro area.

The surveillance framework has also promoted the gradual convergence of Member States’ economic performances. All Member States have returned to growth since the economic and financial crisis and experienced declining unemployment rates. Public finances have also improved, with public deficits and debt levels falling.

At the same time, potential growth has not recovered to its pre-crisis level and there has been persistently low inflation. Public debt levels remain high in some Member States. Reform efforts are waning. Member States’ economies remain vulnerable to an economic slowdown with risks of spill-overs that would affect the functioning of the euro area as a whole.

The fiscal stance at Member State-level has frequently been pro-cyclical. The composition of public finances has not become more growth-friendly, with Member States consistently opting to increase current expenditure rather than protect investment.

The ability to steer the fiscal stance for the euro area as a whole rests exclusively on coordination of national fiscal policies in the absence of a central stabilisation capacity.

The fiscal framework has grown excessively complex. This complexity has resulted in those rules becoming less transparent, hampering predictability, communication and political ownership.

What are the review’s findings on the Macroeconomic Imbalance Procedure?

The MIP has widened and complemented the scope of economic surveillance and raised awareness about economic challenges beyond fiscal policy.

It has allowed a greater focus on macro-structural and macro-financial issues relevant to macroeconomic stability, such as external imbalances, productivity, competitiveness, the housing market and private indebtedness.

The MIP has helped to focus national debates on policy action. It has also helped to deepen the dialogue between the EU institutions and national authorities about key economic challenges and priorities. The report finds that implementation of country-specific recommendations linked to the MIP was stronger compared with other recommendations, and that imbalances accumulated during the crisis are receding. However, implementation has waned in more recent years. The review also finds that the MIP has been more successful in reducing current account deficits than it has been in reducing persistent and large current account surpluses.

The reports concludes that the MIP has complemented other surveillance instruments. In particular, it provided the basis for prioritising policies not dealt with by the SGP, but relevant to public finances. This is the case for policies helping competitiveness and the growth potential in high-debt countries. 

Will the Commission come forward with any new proposals on the basis of this review?

The next step is to engage openly with interested parties to seek their views on how to strengthen the economic governance framework.

The Commission will consider all those views and on that basis complete its internal reflections on the scope for possible future steps by the end of 2020.

When and how does the Commission plan to engage with the other institutions and interested parties on the functioning of EU fiscal rules?

The Commission looks forward to an inclusive debate, involving interested parties including the European Parliament, the Council, the European Central Bank, the European Economic and Social Committee, the Committee of the Regions, national governments and parliaments, national central banks, independent fiscal institutions, national productivity boards, social partners, as well as academic institutions.

This engagement will take place through various means including dedicated meetings, workshops and an online consultation platform.

These consultations will take place over the first half of 2020.

The debate will consider, among others, the following questions:

How can the framework be improved to ensure sustainable public finances in all Member States and to help eliminate existing macroeconomic imbalances and avoid new ones arising?

How to ensure responsible fiscal policies that safeguard long-term sustainability, while allowing for short-term stabilisation?

What is the appropriate role for the EU surveillance framework in incentivising Member States to undertake key reforms and investments needed to help tackle today and tomorrow’s economic, social, and environmental challenges while preserving safeguards against risks to debt sustainability?

How can one simplify the EU framework and improve the transparency of its implementation?

How can surveillance focus on the Member States with more pressing policy challenges and ensure quality dialogue and engagement?

How can the framework ensure effective enforcement? What should be the role of pecuniary sanctions, reputational costs and positive incentives?

Is there scope to strengthen national fiscal frameworks and improve their interaction with the EU fiscal framework?

How should the framework take into consideration the euro area dimension and the agenda towards deepening the Economic and Monetary Union?

Within the context of the European Semester, how can the SGP and the MIP interact and work better together, so as to improve economic policy coordination among Member States?

What is the link between the review and the European Green Deal?

This review was conducted in the context of the ambitions set out in the European Green Deal to make Europe the world’s first climate-neutral continent.

This includes re-assessing the appropriateness of the current flexibility clauses in terms of their scope and eligibility, in order to facilitate the right type and level of investment while preserving debt sustainability.  

‘Green budgeting’ could also play a role in improving the quality of public finances and helping to deliver on the objectives of the European Green Deal. However, it is too soon to say whether the review will lead to the development of such tools.

The Commission will consider the input from interested parties in its reflections on the scope of any possible future steps in this regard. 

Does the existing economic governance framework facilitate green investments?

The EU’s fiscal rules aim to ensure the credibility and sustainability of public finances, thereby ensuring financial stability and smooth access to financial markets at low interest rates. These are necessary factors to ensure sustainable public investment over the medium term.

In principle, the Stability and Growth Pact (SGP) is neutral as regards to the composition of public revenue and expenditure, focusing on deficit and debt. Member States are therefore free to prioritise their public expenditures in favour of investment. The rules recognise in several instances the importance of protecting investment. They also provide support for investment through the so-called “investment clause” and other flexibility provisions provided for in the Commonly Agreed Position on Flexibility contained within the SGP.

What is the link between the review and the Commission’s agenda to further deepen Europe’s Economic and Monetary Union (EMU)?

Our deep economic links and interdependence mean that sound economic and fiscal governance are critically important to the Economic and Monetary Union. The governance framework needs to ensure the sustainability of public finances, support the strength and resilience of Member State economies and promote effective policy coordination. 

At the same time, further EMU reforms such as the introduction of a stabilisation capacity of appropriate size would allow fiscal policy to contribute more to macroeconomic stabilisation at the level of the euro area as a whole.

The completion of the financial union (Banking Union and Capital Markets Union) could facilitate market discipline and allow to simplify the design of an effective fiscal surveillance framework.

Does the review include any recommendations on how to reduce the complexity of the EU’s fiscal rules?

In general the review does not include any recommendations as it is an assessment  of how the rules have worked so far.

The review acknowledges that the current EU fiscal governance framework has grown excessively complex. This complexity results from the framework pursuing multiple objectives and the need to cater for a wide variety of evolving circumstances, including by the use of flexibility, in a context of divergences of views among Member States. It is reflected in a very detailed codification, encompassing several operational indicators of which a number are non-observable and frequently revised, as well as a variety of escape clauses.

As a result, the fiscal rules have become less transparent, hampering predictability, communication and political ownership.

To what extent does the review take on board the recent reports from the European Court of Auditors and the European Fiscal Board?

This reviewdraws on the assessment of the EU fiscal rules by the European Fiscal Board, as well as on existing reports and views of other interested parties, such as Member States, the European Parliament, the European Court of Auditors on the SGP and the MIP, and academia.

Those references are made explicit in the accompanying staff working documents.