Surveillance of budgetary policies

SUMMARY OF:

Regulation (EC) No 1466/97 — strengthening the surveillance of budgetary positions and the surveillance and coordination of economic policies

WHAT IS THE AIM OF THE REGULATION?

It introduces the preventive arm of the stability and growth pact. These are preventive measures designed to ensure the budgetary discipline necessary for the smooth operation of the European Union (EU).
It concerns not only those EU countries that have adopted the single currency but also those not yet participating.

KEY POINTS

This regulation aims to monitor and coordinate EU countries’ budgetary policies, as a preventive measure to ensure budgetary discipline within the EU.
To do this, it provides for a European Semester at the start of each year to assist EU countries in putting in place healthy budgetary policies. EU countries submit to the European Commission stability programmes (for countries in the euro area) and convergence programmes(for countries outside the euro area) in which they adopt medium-term budgetary objectives. These programmes are assessed by the Commission and are the subject of specific Council recommendations for each country.

European Semester for economic policy coordination

The European Semester is a 6-month period during which EU countries’ budgetary policies are examined.
At the start of the Semester, the Council identifies the key economic challenges for the EU and provides EU countries with strategic policy guidelines to be followed.
Subsequently, and on the basis of these guidelines, EU countries must draw up:
- their stability or convergence programmes under this regulation;
- their national reform programmes, in line with broad guidelines for economic policy and guidelines for employment policies.
At the end of the European Semester and following an assessment of the programmes, the Council sends recommendations to each EU country. Based on the Commission’s assessment, the Council gives its opinion before EU countries draw up their final budgets for the following year.

Medium-term budgetary objectives

Each EU country has a medium-term deficit objective for its budgetary position, defined in structural terms. The objectives differ between EU countries: they are stricter where the level of debt and estimated costs of an ageing population are higher.
For the EU countries that have adopted the euro and for those participating in the exchange rate mechanism (ERM II), the objective is set between -1 % of GDP and a balance or surplus.
The objectives may be revised when a major structural reform is undertaken or every 3 years, when forecasts are published enabling the estimated costs of ageing populations to be updated.

Multilateral surveillance: stability and convergence programmes

The stability and convergence programmes serve as a basis for multilateral surveillance by the Council of the EU. This surveillance, provided for in Article 121 of the Treaty on the Functioning of the EU should prevent, at an early stage, excessive public deficits and promote the coordination of economic policies.
Each EU country must present the Council of the EU and the Commission with a stability programme (for countries in the euro area) or a convergence programme (for countries outside the euro area).
Stability or convergence programmes must include the following information:
- the medium-term budgetary objective and the planned adjustments to achieve the objective;
- government balance as a percentage of GDP, the likely trend for the government debt ratio, the planned growth for government spending and the growth of government revenue, given unchanged policy, as well as quantified discretionary revenue measures;
- information on estimated costs of ageing populations, and other possible costs (such as public guarantees) with a potentially large impact on government accounts;
- information on the consistency of the programmes with the broad economic policy guidelines and the national reform programmes;
- the main assumptions underlying the economic outlook, which are likely to influence the realisation of the stability and convergence programmes (growth, employment, inflation and other important variables);
- an assessment and a detailed analysis of the budgetary measures and other economic policy measures — taken or planned — relevant to achieving the programme’s aims;
- an analysis of how changes in the main economic assumptions would affect the budgetary and debt positions;
- where applicable, the reasons for any deviation from the planned adjustments needed to achieve the medium-term budgetary objective.
In addition, convergence programmes have to state the relationship between these objectives and price and exchange rate stability, as well as the medium-term objectives of monetary policy.

Examination of the stability and convergence programmes

On the basis of assessments by the Commission and the Economic and Financial Committee, the Council examines the medium-term budgetary objectives presented by countries in their programmes. It checks in particular:
- whether the objective is based on realistic economic assumptions;
- whether the measures taken or planned are sufficient to achieve the objective;
- whether an assessment of the planned adjustments shows that the country concerned is seeking to improve its (cyclically adjusted) budgetary balance year-on-year;
- whether annual growth in government spending by the country concerned is not too high, i.e. does not exceed a benchmark rate in the medium term.
When making its assessments, the Council must take account of the implementation of major structural reforms, especially pension reforms.
The Council is to examine the programme within 3 months of its submission. On a recommendation from the Commission and after consulting the Economic and Financial Committee, the Council delivers an opinion on the programme. Where it considers that the objectives and content of a programme should be strengthened, the Council can ask the country concerned to adjust it.

Avoiding an excessive deficit: the early warning mechanism

As part of multilateral surveillance, the Council monitors the implementation of stability and convergence programmes on the basis of information provided by the EU countries and assessments carried out by the Commission and the Economic and Financial Committee.
So, if the Commission identifies a significant divergencefrom the medium-term budgetary objective or from the planned adjustments that should lead to achieving that objective, it will give recommendationsto the country concerned to prevent an excessive deficit (early warning mechanism, Article 121(4) of the Treaty on the Functioning of the EU).
Furthermore, recommendations adopted in the Council may be made public.

European Commission guidance

In 2015, a Commission communication clarified how it intends to apply the stability and growth pact rules to strengthen the link between structural reforms, investment and fiscal responsibility so as to stimulate job creation and growth in the EU.
This guidance had 3 main objectives:
- to encourage effective implementation of structural reforms;
- to promote investment, particularly in the context of the new European Fund for Strategic Investments, which is a central element of the investment plan for Europe proposed by the Commission;
- to better reflect the economic situation of each of the EU countries.

FROM WHEN DOES THE REGULATION APPLY?

It has applied since 1 July 1998.

BACKGROUND

Under the rules of the stability and growth pact, EU countries must apply healthy budgetary policies in order to avoid excessive government deficits which might endanger the economic and financial stability of the EU.
In 2011, the stability and growth pact was the subject of extensive reforms. The new measures adopted are an important step in guaranteeing budgetary discipline, promoting the stability of the EU economy and preventing another crisis.
The stability and growth pact now includes six legislative acts (known as ‘the 6-Pack’) which entered into force on 13 December 2011 and two further acts (‘the 2-Pack’) which entered into force on 30 May 2013:
- Regulation (EU) No 1173/2011 on the effective enforcement of budgetary surveillance in the euro area;
- Regulation (EU) No 1174/2011 on enforcement measures to correct excessive macroeconomic imbalances in the euro area;
- Regulation (EU) No 1175/2011 amending this regulation on surveillance procedures for budgetary positions;
- Regulation (EU) No 1176/2011 on the prevention and correction of macroeconomic imbalances;
- Regulation (EU) No 1177/2011 amending the procedure on excessive deficits;
- Directive 2011/85/EU on requirements for budgetary frameworks of the Member States;
- Regulation (EU) No 472/2013 on surveillance of the economies and budgets of euro area countries with, or threatened with, serious difficulties with respect to their financial stability;
- Regulation (EU) No 473/2013 on common rules for monitoring and assessing draft budgetary plans and ensuring the correction of excessive deficit of countries in the euro area
For further information, see:
- ‘Stability and Growth Pact’ (European Commission).

MAIN DOCUMENT

Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies (OJ L 209, 2.8.1997, pp. 1–5)

Successive amendments to Regulation (EC) No 1466/97 have been incorporated in to the original document. This consolidated version is of documentary value only.