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Economic governance rules introduced after the financial and...

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Economic governance rules introduced after the financial and economic crisis — a review

SUMMARY OF:

Communication (COM(2014) 905 final) — Economic governance review

WHAT IS THE AIM OF THE COMMUNICATION?

It reviews the various legislative texts known as the ‘6-Pack’ and the ‘2-Pack’. These aim to strengthen economic governance in the European Union (EU).
It analyses how the new rules have achieved the objective of ensuring closer economic policy coordination.

KEY POINTS

Since the economic and financial crisis, the system of economic governance in the EU has changed significantly. The changes have played an important role in ensuring sustained convergence, economic growth and the creation of more jobs.

The objectives of the Packs

The 7 regulations under review seek to:

strengthen fiscal surveillance under the Stability and Growth Pact (SGP), introduce additional budgetary surveillance for euro area countries and strengthen national fiscal frameworks,
introduce a new procedure for the detection, prevention and correction of macroeconomic imbalances,
establish a framework for euro area countries facing difficulties in terms of financial stability,
provide a binding legal basis for the European Semester which, until these regulations were adopted, had none.

Budgetary surveillance

The economic and financial crisis resulted in increased government deficits and debts in the EU and revealed loopholes in the surveillance of fiscal policies. The legislation has reformed the 2 arms of the SGP, the preventive and corrective arms:

The preventive arm of the Stability and Growth Pact (designed to avoid the occurrence of excessive public deficits) has been strengthened and made more stringent) by the introduction of the expenditure benchmark and the significant deviation procedure.
The corrective arm has been improved by bringing into effect the debt criterion set in the Treaty (a limit of 60 % of GDP for public debt) and by increasing the penalties imposed on countries in the euro area which do not meet the recommendations under the excessive deficit procedure
The SGP may be applied in a flexible manner in the event of a crisis under both the corrective and the preventive arms. In January 2015, in order to strengthen the link between investment, structural reforms and budgetary responsibility, the European Commission proposed new guidelines for EU countries on making the best use of the flexibility within the existing rules of the Stability and Growth Pact.
The first 2-Pack regulation (Regulation (EU) No 473/2013) introduces additional aspects that reinforce the budgetary surveillance and national budgetary frameworks of euro area countries. It provides for Commission's assessment of their draft budgetary plans and strengthens further the excessive deficit procedure. For instance, this gives the Commission the possibility to provide autonomous recommendations to countries with excessive deficits.

Procedure for macroeconomic imbalances

The 6-pack introduced a broader surveillance of economic policies by creating a macroeconomic imbalances procedure to detect, prevent and correct macroeconomic imbalances. This procedure involves several steps:

Alert Mechanism Report (AMR): this analyses the situation in EU countries using a variety of economic indicators to detect potential imbalances. It highlights the EU countries for which further detailed analysis (in-depth review) is needed.
In-depth reviews: the Commission conducts a thorough assessment of the situation in the countries identified in the AMR as being at risk of imbalance. This report proves or disproves the existence of imbalances and whether they are excessive or not.
Excessive imbalance procedure (EIP): if the imbalance is considered excessive, the country concerned may become subject to an excessive imbalances procedure and must adopt a corrective action plan with a timetable and specific deadlines.
Fines : if euro area countries’ corrective action plans are not appropriate or if they are badly implemented.

Euro area countries experiencing financial stability issues

The second 2-Pack regulation (Regulation (EU) No 472/2013) aims to strengthen the control and surveillance of EU countries experiencing or threatened with serious financial stability issues. It aims to establish a monitoring process for EU countries that are subject to enhanced surveillance, a macroeconomic adjustment programme or a post-programme surveillance.

Evaluation of the effectiveness of the regulations

The above laws governing this economic governance system have clearly strengthened the current governance structure.
- Although only recently set in place, the reformed framework of budgetary surveillance has already played a role in correcting excessive deficits. The average budget deficit in the EU-28 (1) fell from 4.5 % of GDP in 2011 to an estimated percentage of about 3 % for 2014. The number of countries subject to an excessive deficit procedure has fallen, from 23 of 27 to 11 of 28 by the end of 2014.
- The MIP has contributed to a common understanding of the strategic challenges facing EU countries and the imbalances are being corrected.
- The new rules have increased transparency, predictability, feasibility and efficiency of surveillance and monitoring of those countries experiencing or likely to experience serious financial difficulties.
However, given the recent entry into force of this new system of economic governance and hence limited experience in its regard, it is difficult to draw conclusions on the effectiveness of the regulations at this stage.
So far, the system has been applied in the context of a severe financial and economic crisis. However, the system’s effectiveness depends to a large extent on the proper functioning of its preventive arm, which remains to be seen in a more favourable economic environment.
While the regulations have strengthened the EU’s economic governance framework, the review also reveals that there are aspects that need to be improved. These include the transparency and the complexity of the rules-based framework and its impact on growth and imbalances.

BACKGROUND

In response to weaknesses in its economic governance system revealed by the economic and financial crisis, the EU has taken a wide range of measures to strengthen economic governance and to achieve sustained convergence, economic growth and jobs. Central to these efforts have been the legislative packages known as the 6-pack (which entered into force in December 2011) and 2-pack (which entered into force in May 2013).
Although part of the 6-pack, Directive 2011/85/EU on the requirements for EU countries’ budgetary frameworks is not part of this review exercise. It follows a separate timeline with a review deadline of 14 December 2018.
For more information, see:
- the European Commission’s website on economic governance;
- the European Commission’s press release.

MAIN DOCUMENT

Communication from the Commission to the European Parliament, the Council, the European Central Bank, the European Economic and Social Committee and the Committee of the Regions — Economic governance review: Report on the application of Regulations (EU) Nos 1173/2011, 1174/2011, 1175/2011, 1176/2011, 1177/2011, 472/2013 and 473/2013 (COM(2014) 905 final, 28.11.2014)