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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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Von der Leyen Outlines Vision for Stronger Europe

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Ursula von der Leyen, President of the European Commission, outlined a vision for a stronger and more independent Europe based on trust and the values of liberal democracy in a special address on Thursday to business, government and civil society leaders taking part in the World Economic Forum’s virtual event, the Davos Agenda.

In the face of the COVID-19 crisis, she spoke of European democracies showing their strengths. “The pandemic has demonstrated that democracies are the more powerful, resilient and sustainable form of government,” she said.

Democracy means liberty of research, freedom of science and independent choices for investors, she added. Europe has delivered over 1.2 billion doses of vaccines to its citizens, with more than 80% of the European population double vaccinated.

She also pointed to Europe’s leadership in discovering the mRNA vaccine technology and exporting it to the world. “Europe is the only region in the world to export or donate vaccines to other countries throughout the crisis, with 1.6 billion vaccine doses made in Europe having been delivered to 150 countries.”

On the path to recovery, Europe’s most valuable asset is trust, said von der Leyen. “Trust in science, for our health. Trust among countries, for cooperation. Trust in functioning societies, for competitiveness. Trust will be essential to build the world of tomorrow.”

Trust will also be essential for European citizens to embrace the European Green Deal, a set of policy initiatives with the overarching aim of making the European Union climate-neutral by 2050. The EC has issued the first NextGenerationEU bond for green and sustainable investments in the EU. This represents, she said, the world’s largest green bond issuance, adding that it was heavily oversubscribed.

“These developments demonstrate a clear sign of international confidence and trust in Europe,” she said.

Although von der Leyen said Europe is well positioned, it must do more to build supply chains we can trust and avoid single points of failure. Issues range from dependence on non-renewable energy to lack of local manufacturing of microchips and semiconductors to Europe’s gas crisis.

“Europe’s global semiconductor market share is only 10%. And today, most of our supply comes from a handful of producers outside Europe. This is a dependency and uncertainty we simply cannot afford. We have no time to lose. And this is why I announce here today that we will propose our European Chips Act in early February,” she said.

She emphasized that trust is also essential in the international arena: “At this moment in time, the world needs trust in democracy as much as trust between democracies.” Referring to intense dialogue with Russia, she stressed that Europe will not go back to the old logic of competition and spheres of interest, where entire countries were treated as possessions or backyards.

“We want this dialogue. We want conflicts to be solved in the bodies that have been formed for this purpose. But if the situation deteriorates, if there are any further attacks on the territorial integrity of Ukraine, we will respond with massive economic and financial sanctions.”

“And what I want us never to forget is the following. Russia and Europe share geography, culture and history. We also want a common future,” she added.

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Commission approves 2022-2027 regional aid map for Greece

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The European Commission has approved under EU State aid rules Greece’s map for granting regional aid from 1 January 2022 to 31 December 2027 within the framework of the revised Regional aid Guidelines (‘RAG’).

The revised RAG, adopted by the Commission on 19 April 2021 and entering into force on 1 January 2022, enable Member States to support the least favoured European regions in catching up and to reduce disparities in terms of economic well-being, income and unemployment – cohesion objectives that are at the heart of the Union. They also provide increased possibilities for Member States to support regions facing transition or structural challenges such as depopulation, to contribute fully to the green and digital transitions.

At the same time, the revised RAG maintain strong safeguards to prevent Member States from using public money to trigger the relocation of jobs from one EU Member State to another, which is essential for fair competition in the Single Market.

Greece’s regional map defines the Greek regions eligible for regional investment aid. The map also establishes the maximum aid intensities in the eligible regions. The aid intensity is the maximum amount of State aid that can be granted per beneficiary, expressed as a percentage of eligible investment costs.

Under the revised RAG, regions covering 82.34% of the population of Greece will be eligible for regional investment aid:

Twelve regions (Βόρειο Αιγαίο / Voreio Aigaio, Νότιο Αιγαίο / Notio Aigaio, Κρήτη / Kriti, Aνατολική Μακεδονία, Θράκη / Anatoliki Makedonia, Thraki, Κεντρική Μακεδονία / Kentriki Makedonia, Δυτική Μακεδονία / Dytiki Makedonia, Ήπειρος / Ipeiros, Θεσσαλία / Thessalia, Ιόνια Νησιά / Ionia Nisia, Δυτική Ελλάδα / Dytiki Elláda, Στερεά Ελλάδα / Sterea Elláda and Πελοπόννησος / Peloponnisos) are among the most disadvantaged regions in the EU, with a GDP per capita below 75% of EU average. These regions are eligible for aid under Article 107(3)(a) TFEU (so-called ‘a’ areas), with maximum aid intensities for large enterprises between 30% and 50%, depending on the GDP per capita of the respective ‘a’ area. The region Ευρυτανία / Evrytania, which is part of Στερεά Ελλάδα / Sterea Elláda, also qualifies as a sparsely populated area having fewer than 12,5 inhabitants per km². In sparsely populated areas, Member States can use operating aid schemes to prevent or reduce depopulation.

In order to address regional disparities, Greece has designated as so-called non-predefined ‘c’ areas the regions of Δυτικός Τομέας Αθηνών / Dytikos Tomeas Athinon, Ανατολική Αττική / Anatoliki Attiki, Δυτική Αττική / Dytiki Attiki and Πειραιάς, Νήσοι / Peiraias, Nisoi. The maximum aid intensities for large enterprises in Δυτικός Τομέας Αθηνών / Dytikos Tomeas Athinon is 15%. The other ‘c’ areas mentioned above border with ‘a’ areas. For this reason, the aid intensity in these regions has been increased to 25%, so that the difference in aid intensity with the bordering ‘a’ areas is limited to 15 percentage points.

Greece has the possibility to designate further so-called non-predefined ‘c’ areas (up to a maximum of 1.16% of the national population). The specific designation of these areas can take place in the future and would result in one or more amendments to the regional aid map approved today.

In all the above areas, the maximum aid intensities can be increased by 10 percentage points for investments made by medium-sized enterprises and by 20 percentage points for investments made by small enterprises, for their initial investments with eligible costs up to €50 million.

Once a future territorial Just Transition plan in the context of the Just Transition Fund Regulation will be in place, Greece has the possibility to notify the Commission an amendment to the regional aid map approved today, in order to apply a potential increase of the maximum aid intensity in the future Just Transition areas, as specified in the revised RAG for ‘a’ areas.

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20 years of the euro in your pocket

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Twenty years ago, on 1 January 2002, twelve EU countries changed their national currency banknotes and coins for the euro in the largest currency changeover in history. In these two decades, the euro has contributed to the stability, competitiveness and prosperity of European economies. Most importantly, it has improved the lives of citizens and made it easier to do business across Europe and beyond. With the euro in your pocket, saving, investing, travelling and doing business became much easier.

The euro is a symbol of EU integration and identity. Today, more than 340 million people use it across 19 EU countries, with 27.6 billion euro banknotes in circulation for a value of about €1.5 trillion. The euro is currently the second most widely used currency in the world behind the US dollar.

As it celebrates this 20th anniversary, the EU continues the work to strengthen the international role of the euro and adapt it to new challenges, including the rapid digitalisation of the economy and the development of virtual currencies. As a complement to cash, a digital euro would support a well-integrated payments sector and would offer greater choice to consumers and businesses.

Ursula von der Leyen, President of the European Commission, said: “It is now twenty years that we, European people, can carry Europe in our pockets. The euro is not just one of the most powerful currencies in the world. It is, first and foremost, a symbol of European unity. Euro banknotes have bridges on one side and a door on the other – because this is what the euro stands for. The euro is also the currency of the future, and in the coming years it will become a digital currency too. The euro also reflects our values. The world we want to live in. It is the global currency for sustainable investments. We can all be proud of that.”

David Sassoli, President of the European Parliament, said: “The euro is the embodiment of an ambitious political project to promote peace and integration within the European Union. But the euro is also a condition for protecting and relaunching the European economic, social, and political model in the face of the transformations of our time. The euro is a symbol, the coming to fruition of a historic political vision, an ancient vision of a united continent with a single currency for a single market.”

Charles Michel, President of the European Council, said: “The euro has come a long way — it’s a true European achievement. I would even say the euro has become part of who we are. And how we see ourselves as Europeans. Part of our mind-set. And part of our European spirit. The euro belongs to all of us all European citizens. But it isn’t just a success within our EU borders. It has also anchored itself on the international stage. Despite the crises, the euro has proven to be resilient — a symbol of European unity and stability. And never has that been truer than during COVID-19. The euro has served as a bedrock of stability. A stable asset for the Union. The euro also fuels our recovery. Unlocking the full potential of sustainable development, quality jobs, and innovation.”

Christine Lagarde, President of the European Central Bank, said: “The euros we hold in our hands have become a beacon of stability and solidity around the world. Hundreds of millions of Europeans trust it and transact with it every day. It is the second most international currency in the world. As European Central Bank President, I commit we will continue to work hard to make sure that we maintain price stability. And I also pledge that we will renew the face of those banknotes and that we will give them the digital dimension as well.”

Paschal Donohoe, President of the Eurogroup, said: “The euro has proven its mettle in dealing with great economic challenges. In particular, our response to the COVID 19 pandemic demonstrated that by sharing the euro we can achieve more collectively than we can individually. The euro has strengthened its foundations over the last 20 years. Now, we need to build on those foundations to make the euro the global currency for transitioning to a lower carbon future.”

A long journey

The euro has come a long way from the early discussions on an Economic and Monetary Union in the late 1960s. Specific steps towards a single currency were first approached in 1988 by the Delors Committee. In 1992, the Maastricht Treaty marked a decisive moment in the move towards the euro, as political leaders signed on the criteria that Member States had to meet to adopt the single currency. Two years later, the European Monetary Institute (EMI) started its preparatory work in Frankfurt for the European Central Bank (ECB) to assume its responsibility for monetary policy in the euro area. As a result, on 1 June 1998, the ECB became operational.

In 1999, the euro was launched in 11 Member States as an accounting currency on financial markets and used for electronic payments. It was finally on 1 January 2002 when Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain swapped their national notes and coins for euros. Slovenia joined the euro area in 2007, followed by Cyprus and Malta (2008), Slovakia (2009), Estonia (2011), Latvia (2014) and Lithuania (2015). Currently, Croatia is taking the preparatory steps to join the euro area, which it plans to do on 1 January 2023, provided it fulfils all the convergence criteria.

Twenty years of benefits for citizens and businesses

The euro has brought many benefits to Europe, especially to its citizens and businesses. The single currency has helped to keep prices stable and protected the euro area economies from exchange rate volatility. This has made it easier for European home buyers, businesses and governments to borrow money and has encouraged trade within Europe and beyond. The euro has also eliminated the need for currency exchange and has lowered the costs of transferring money, making travelling and moving to another country to work, study or retire simpler.

A large majority of Europeans support the single currency. According to the latest Eurobarometer, 78% of citizens across the euro area believe the euro is good for the EU.

A strengthened international role

The euro is the second most important currency in the international monetary system. Its stability and credibility has made it an international invoicing currency, a store of value and a reserve currency, accounting for around 20% of foreign exchange reserves. Sixty other countries and territories around the world, home to some 175 million people, have chosen to use the euro as their currency or to peg their own currency to it. Today, the euro is used for almost 40% of global cross-border payments and for more than half the EU’s exports.

Since the global financial crisis of 2008 and the subsequent sovereign debt crisis, the EU has continued to strengthen and deepen the Economic and Monetary Union. The EU’s unprecedented recovery plan NextGenerationEU will further improve the euro-area’s economic resilience and enhance economic convergence. The issuance of high-quality-denominated bonds under NextGenerationEU will add significant depth and liquidity to the EU’s capital markets and make them and the euro more attractive for investors. The euro is also now the leading currency for green investment: half of the world’s green bonds are denominated in euros, and this figure is rising thanks to the new green bonds issued to finance NextGenerationEU.

To further develop the international role of the euro, the Commission has launched outreach initiatives to promote euro denominated investments, facilitate the use of the euro as an invoicing and denomination currency, and foster a better understanding of the obstacles for its wider use. This outreach will take the form of dialogues, workshops and surveys with the public and private sector, financial regulatory agencies, and institutional investors in regional and global partner countries of the EU.

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