Prevention and correction of macroeconomic imbalances in the EU

SUMMARY OF:

Regulation (EU) No 1174/2011 on enforcement measures to correct excessive macroeconomic imbalances in the euro area

Regulation (EU) No 1176/2011 on the prevention and correction of macroeconomic imbalances

WHAT IS THE AIM OF THESE REGULATIONS?

Regulation (EU) No 1176/2011 details the procedure to detect and correct macroeconomic imbalances. This regulation applies to all European Union (EU) countries.
Regulation (EU) No 1174/2011 lays down an enforcement mechanism. This mechanism culminates with financial sanctions for euro area countries which do not comply with the Macroeconomic Imbalance Procedure (MIP) recommendations made at EU level to remedy their excessive imbalance.

KEY POINTS

As well as closely monitoring the budgetary policies of EU countries, the EU also checks macrofinancial developments* to detect, prevent and correct potentially harmful macroeconomic imbalances* and risks that would hamper the proper functioning of the economic and monetary union.

Alert Mechanism Report

Each year, the European Commission draws up the Alert Mechanism Report (AMR) which constitutes the starting point of the annual cycle of the MIP. The AMR is based on the economic reading of a scoreboard of indicators, but also draws on other relevant economic and financial analyses. It assesses the situation of EU countries in order to detect developments that may reflect possible imbalances.
On the basis of this report, the Commission identifies those EU countries which may be affected by an imbalance and for which further analysis is needed. The Council discusses the report and adopts conclusions.

In-Depth Reviews

For each of the countries identified in the AMR, the Commission carries out an In-Depth Review (IDR). It determines whether imbalances exist, assesses their nature and gravity and highlights adjustment issues and policy challenges. The regulation allows for 3 possible outcomes from an IDR:

The country concerned is not affected by any imbalance. A country in this situation re-enters macroeconomic imbalances screening every subsequent MIP round, continuing at the same time to be subject to multilateral surveillance under the European Semester.
The country concerned is affected by an imbalance. When this is the case, the Council, acting on the Commission’s recommendation, may issue a series of country-specific recommendations (CSRs) to the country concerned to launch preventive measures.
The country concerned is affected by an excessive imbalance. The Council, acting on the Commission’s recommendation, may also issue a series of CSRs to the country concerned. In the case of excessive imbalances, the Council may undertake corrective action upon Commission’s recommendation. Corrective action turns into a separate procedure, namely the Excessive Imbalance Procedure (EIP).

In-depth reviews examine various trends in EU countries’ economies, especially developments in regard to external imbalances (such as their external accounts, changes in export shares and net investment balances) and internal imbalances (such as public and private debt, housing prices, credit flows and unemployment rate).

The results of the IDRs are taken into account by the Commission and the Council by issuing CSRs in the context of the European semester each spring.

Excessive Imbalance Procedure

The Council, upon the recommendation of the Commission, may trigger the EIP for an EU country with excessive imbalances. The Council adopts a set of policy recommendations to be followed and indicates a deadline for the EU country concerned to submit a corrective action plan.
If the measures and timetable put forward by the EU countries are satisfactory, they are endorsed by a Council recommendation which sets up a monitoring schedule.
If the plan submitted is deemed insufficient, the Council adopts a recommendation calling on the country to present a new corrective action plan within 2 months.
The Commission follows up on the recommendation. This follow-up is based on both regular progress reports submitted by the country and the results of monitoring missions. Based on the Commission’s report, implementing measures are then assessed by the Council.
The corrective arm can be triggered at any time for the EU country where excessive imbalances have been identified.

Sanctions and fines under the Excessive Imbalance Procedure

Euro area countries may be subject to financial penalties where they repeatedly submit insufficient corrective action plans or in the case of lack of corrective action. In the event of insufficient corrective action being taken, the Council may impose an interest-bearing deposit on the country. If the country still fails to implement corrective measures, this deposit can be converted into a fine. The interest-bearing deposit or fine amounts to 0.1% of the country’s GDP in the previous year.
These sanctions penalise a repeated failure to act, not the imbalances themselves. They are considered approved unless a qualified majority of euro area countries objects.
Lack of compliance with the EIP can lead to the suspension of European Structural and Investment (ESI) Funds, irrespective of their euro area membership.

European semester 2016

The in-depth reviews were published on 26 February 2016 and integrated in the Commission’s Country Reports. The results of the in-depth reviews are summarised in a Commission communication.

FROM WHEN DO THE REGULATIONS APPLY?

They have both applied since 13 December 2011.

BACKGROUND

The 6-pack, which entered into force in December 2011, introduced an economic policy surveillance system to prevent and correct macroeconomic imbalances within the EU. This surveillance is part of the European semester for economic policy coordination.

For further information, see:

Macroeconomic Imbalance Procedure on the European Commission’s website;
European Commission press release: the EU’s economic governance explained;
European Semester 2016: Commission publishes Country Reports - European Commission press release.

* KEY TERMS

Macrofinancial developments: monetary, fiscal and financial developments at macroeconomic level (i.e. within a country’s economy).

Macroeconomic imbalances: where certain aspects of a country’s economy are out of balance, for example, high levels of public or private debt, high unemployment, poor export performance, etc.

MAIN DOCUMENTS

Regulation (EU) No 1174/2011 of the European Parliament and of the Council of 16 November 2011 on enforcement measures to correct excessive macroeconomic imbalances in the euro area (OJ L 306, 23.11.2011, pp. 8–11)

Regulation (EU) No 1176/2011 of the European Parliament and of the Council of 16 November 2011 on the prevention and correction of macroeconomic imbalances (OJ L 306, 23.11.2011, pp. 25–32)