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EU Economic governance review: Q&A

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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.

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Advancing the EU social market economy: adequate minimum wages for workers

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The Commission today proposes an EU Directive to ensure that the workers in the Union are protected by adequate minimum wages allowing for a decent living wherever they work. When set at adequate levels, minimum wages do not only have a positive social impact but also bring wider economic benefits as they reduce wage inequality, help sustain domestic demand and strengthen incentives to work. Adequate minimum wages can also help reduce the gender pay gap, since more women than men earn a minimum wage. The proposal also helps protect employers that pay decent wages to workers by ensuring fair competition.

The current crisis has particularly hit sectors with a higher share of low-wage workers such as cleaning, retail, health and long-term care and residential care. Ensuring a decent living for workers and reducing in-work poverty is not only important during the crisis but also essential for a sustainable and inclusive economic recovery.  

President of the European Commission Ursula von der Leyen said: “Today’s proposal for adequate minimum wages is an important signal that also in crisis times, the dignity of work must be sacred. We have seen that for too many people, work no longer pays. Workers should have access to adequate minimum wages and a decent standard of living. What we propose today is a framework for minimum wages, in full respect of national traditions and the freedom of social partners. Improving working and living conditions will not only protect our workers, but also employers that pay decent wages, and create the basis for a fair, inclusive and resilient recovery.”

Executive Vice-President for an Economy that Works for People, Valdis Dombrovskis, said: “It is important to ensure that also low wage workers benefit from the economic recovery. With this proposal we want to make sure that workers in the EU earn a decent living wherever they work. Social partners have a crucial role to play in negotiating wages nationally and locally. We support their freedom to negotiate wages autonomously, and where this is not possible, we give a framework to guide Member states in setting minimum wages.”

Nicolas Schmit, Commissioner for Jobs and Social Rights, said: “Almost 10% of workers in the EU are living in poverty: this has to change. People who have a job should not be struggling to make ends meet. Minimum wages have to play catch up with other wages which have seen growth in recent decades, leaving minimum wages lagging behind. Collective bargaining should be the gold standard across all Member States. Ensuring adequate minimum wages is written in black and white in Principle 6 of the European Pillar of Social Rights, which all Member States have endorsed, so we are counting on their continued commitment.”

A framework for minimum wages in full respect of national competences and traditions

Minimum wages exist in all EU Member States.  21 countries have statutory minimum wages and in 6 Member States (Denmark, Italy, Cyprus, Austria, Finland and Sweden) minimum wage protection is provided exclusively by collective agreements. Yet, in the majority of Member States, workers are affected by insufficient adequacy and/or gaps in the coverage of minimum wage protection. In light of this, the proposed Directive creates a framework to improve the adequacy of minimum wages and for access of workers to minimum wage protection in the EU. The Commission’s proposal fully respects the subsidiary principle: it sets a framework for minimum standards, respecting and reflecting Member States’ competences and social partners’ autonomy and contractual freedom in the field of wages. It does not oblige Member States to introduce statutory minimum wages, nor does it set a common minimum wage level.

Countries with high collective bargaining coverage tend to have a lower share of low-wage workers, lower wage inequality and higher minimum wages. Therefore, the Commission proposal aims at promoting collective bargaining on wages in all Member States.

Countries with statutory minimum wages should put in place the conditions for minimum wages to be set at adequate levels. These conditions include clear and stable criteria for minimum wage setting, indicative reference values to guide the assessment of adequacy and regular and timely updates of minimum wages. These Member States are also asked to ensure the proportionate and justified use of minimum wage variations and deductions and the effective involvement of social partners in statutory minimum wage setting and updating.

Finally, the proposal provides for improved enforcement and monitoring of the minimum wage protection established in each country. Compliance and effective enforcement is essential for workers to benefit from actual access to minimum wage protection, and for businesses to be protected against unfair competition. The proposed Directive introduces annual reporting by Member States on its minimum wage protection data to the Commission. 

Background

President von der Leyen promised to present a legal instrument to ensure that the workers in our Union have a fair minimum wage at the start of her mandate and repeated her pledge in her first State of the Union address on 16 September 2020.

The right to adequate minimum wages is in Principle 6 of the European Pillar of Social Rights, which was jointly proclaimed by the European Parliament, the Council on behalf of all Member States, and the European Commission in Gothenburg in November 2017.

Today’s proposal for a Directive is based on Article 153 (1) (b) of the Treaty on the Functioning of the EU (TFEU) on working conditions. It follows a two-stage consultation of social partners carried out in accordance with Article 154 TFEU. The Commission’s proposal will now go to the European Parliament and the Council for approval. Once adopted, Member States will have two years have to transpose the Directive into national law.

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Commission proposes new ‘Single Window’ to modernise and streamline customs controls

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The European Commission has today proposed a new initiative that will make it easier for different authorities involved in goods clearance to exchange electronic information submitted by traders, who will be able to submit the information required for import or export of goods only once. The so-called ‘EU Single Window Environment for Customs‘ aims to enhance cooperation and coordination between different authorities, in order to facilitate the automatic verification of non-customs formalities for goods entering or leaving the EU.

The Single Window aims to digitalise and streamline processes, so that businesses will ultimately no longer have to submit documents to several authorities through different portals. Today’s proposal is the first concrete deliverable of the recently adopted Action Plan on taking the Customs Union to the next level. It launches an ambitious project to modernise border controls over the coming decade, in order to facilitate trade, improve safety and compliance checks, and reduce the administrative burden for companies.

Paolo Gentiloni, Commissioner for the Economy, said: “Digitalisation, globalisation and the changing nature of trade present both risks and opportunities when it comes to goods crossing the EU’s borders. To rise to these challenges, customs and other competent authorities must act as one, with a more holistic approach to the many checks and procedures needed for smooth and safe trade. Today’s proposal is the first step towards a fully paperless and integrated customs environment and better cooperation between all authorities at our external borders. I urge all Member States to play their part in making it a true success story.”

Each year, the Customs Union facilitates the trade of more than €3.5 trillion worth of goods. Efficient customs clearance and controls are essential to allow trade to flow smoothly while also protecting EU citizens, businesses and the environment. The coronavirus crisis has highlighted the importance of having agile yet robust customs processes, and this will become ever more important as trade volumes keep on increasing and new challenges related to digitalisation and e-commerce, such as new forms of fraud, emerge.

Currently, the formalities required at the EU’s external borders often involve many different authorities in charge of different policy areas, such as health and safety, the environment, agriculture, fisheries, cultural heritage and market surveillance and product compliance. As a result, businesses have to submit information to several different authorities, each with their own portal and procedures. This is cumbersome and time-consuming for traders and reduces the capacity of authorities to act in a joined-up way in combatting risks.

Today’s proposal is the first step in creating a digital framework for enhanced cooperation between all border authorities, through one Single Window. The Single Window will enable businesses and traders to provide data in one single portal in an individual Member State, thereby reducing duplication, time and costs. Customs and other authorities will then be able to collectively use this data, allowing for a fully coordinated approach to goods clearance and a clearer overview at EU level of the goods that are entering or leaving the EU. 

This is an ambitious project that will entail significant investment at both EU and Member State level, in order to be fully implemented over the next decade or so. The Commission will support Member States in this preparation, where possible, including through funding from the Recovery and Resilience Facility, to enable them to reap the full, long-term benefits of the Single Window. 

Background

The EU is the largest trading bloc in the world, accounting for 15% of the world trade. In 2018, almost 343 million customs declarations were handled by more than 2,000 EU customs offices, who collected €25.3 billion in customs duties.

The Single Window is part of the new Customs Union Action Plan, which sets out a series of measures to make EU customs smarter, more innovative and more efficient over the next four years. In her Political Guidelines, President von der Leyen announced plans for an integrated European approach to customs risk management, which supports effective controls by EU Member States. The measures will strengthen the Customs Union and enhance its ability to collect EU revenues and protect the security, health and prosperity of EU citizens and businesses.

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Commission opens infringements against Cyprus and Malta for “selling” EU citizenship

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Today, the European Commission is launching infringement procedures against Cyprus and Malta by issuing letters of formal notice regarding their investor citizenship schemes also referred to as “golden passport” schemes.

The Commission considers that the granting by these Member States of their nationality – and thereby EU citizenship – in exchange for a pre-determined payment or investment and without a genuine link with the Member States concerned, is not compatible with the principle of sincere cooperation enshrined in Article 4(3) of the Treaty on European Union. This also undermines the integrity of the status of EU citizenship provided for in Article 20 of the Treaty on the Functioning of the European Union.

Due to the nature of EU citizenship, such schemes have implications for the Union as a whole. When a Member State awards nationality, the person concerned automatically becomes an EU citizen and enjoys all rights linked to this status, such as the right to move, reside and work freely within the EU, or the right to vote in municipal elections as well as elections to the European Parliament. As a consequence, the effects of investor citizenship schemes are neither limited to the Member States operating them, nor are they neutral with regard to other Member States and the EU as a whole.

The Commission considers that the granting of EU citizenship for pre-determined payments or investments without any genuine link with the Member States concerned, undermines the essence of EU citizenship.

Next steps

The Cypriot and Maltese governments have two months to reply to the letters of formal notice. If the replies are not satisfactory, the Commission may issue a Reasoned Opinion in this matter.

Background

Investor citizenship schemes allow a person to acquire a new nationality based on payment or investment alone. These schemes are different to investor residence schemes (or “golden visas”), which allow third-country nationals, subject to certain conditions, to obtain a residence permit to live in an EU country.

The conditions for obtaining and forfeiting national citizenship are regulated by the national law of each Member State, subject to due respect for EU law. As nationality of a Member State is the only precondition for EU citizenship and access to rights conferred by the Treaties, the Commission has been closely monitoring investor schemes granting the nationality of Member States.

The Commission has frequently raised its serious concerns about investor citizenship schemes and certain risks that are inherent in such schemes. As mentioned in the Commission’s report of January 2019, those risks relate in particular to security, money laundering, tax evasion and corruption and the Commission has been monitoring wider issues of compliance with EU law raised by investor citizenship and residence schemes. In April 2020, the Commission wrote to the Member States concerned setting out its concerns and asking for further information about the schemes.

In a resolution adopted on 10 July 2020, the European Parliament reiterated its earlier calls on Member States to phase out all existing citizenship by investment (CBI) or residency by investment (RBI) schemes as soon as possible. As stated by President von der Leyen in the State of the Union Address of 16 September 2020, European values are not for sale.

The Commission is also writing again to Bulgaria to highlight its concerns regarding an investor citizenship scheme operated by that Member State and requesting further details. The Bulgarian government has one month to reply to the letter requesting further information, following which the Commission will decide on the next steps.

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