Brussels, 9 November 2022
The European Commission has today adopted a Communication setting out orientations for a reformed EU economic governance framework. Taking into account the key concerns over the current framework, these aim to strengthen debt sustainability and enhance sustainable and inclusive growth through investment and reforms.
The orientations seek to ensure that the framework is simpler, more transparent and effective, with greater national ownership and better enforcement, while allowing for reform and investment and reducing high public debt ratios in a realistic, gradual and sustained manner. In this way, the reformed framework should help build the green, digital and resilient economy of the future, while ensuring the sustainability of public finances in all Member States, in line with President von der Leyen‘s 2022 State of the Union address. Today’s Communication follows extensive outreach to stakeholders and Member States.
National plans to ensure debt sustainability and enhance sustainable growth, anchored in a common EU framework
It is proposed to move to a transparent risk-based EU surveillance framework that differentiates between countries by taking into account their public debt challenges. National medium-term fiscal-structural plans are the cornerstone of the Commission’s proposed framework. They would integrate fiscal, reform and investment objectives, including those to address macroeconomic imbalances where necessary, into a single holistic medium-term plan, thus creating a coherent and streamlined process. Member States would have greater leeway in setting their fiscal adjustment path, strengthening the national ownership of their fiscal trajectories.
A single operational indicator – net primary expenditure, i.e. the expenditure which is in a government’s control – would serve as a basis for setting the fiscal adjustment path and carrying out annual fiscal surveillance, thereby significantly simplifying the framework.
How it would work:
- As part of the common EU framework, the Commission would present a reference fiscal adjustment path, covering a period of four years, based on its debt sustainability analysis methodology. This reference adjustment path should ensure that debt of Member States with substantial or medium debt challenges would be put on a plausible downward path, and that the deficit would remain credibly below the 3% of GDP reference value set out in the Treaty.
- Member States would then submit plans setting out their medium-term fiscal path, and priority reform and public investment commitments. Member States could propose a longer adjustment period, extending the fiscal adjustment path by up to three years when the path is underpinned by a set of reform and investment commitments that support debt sustainability and respond to common EU priorities and targets.
- As a third step, the Commission would assess the plans, providing a positive assessment if debt is placed on a downward path or stays at prudent levels, and the budget deficit remains credibly below the 3% of GDP reference value over the medium term. The Council would endorse the plans following a positive assessment from the Commission.
- Finally, the Commission would continuously monitor the implementation of the plans. Member States would submit annual progress reports on the implementation of the plans to facilitate effective monitoring and ensure transparency.
More scope would be given to Member States for the design of their fiscal trajectories. At the same time, we are also putting in place more stringent EU enforcement tools to ensure delivery. The deficit-based excessive deficit procedure (EDP) would be maintained, while the debt-based EDP would be reinforced. It would be activated when a Member State with debt above 60% of GDP deviates from the agreed expenditure path.
Enforcement mechanisms would be reinforced: the use of financial sanctions would be made more effective by lowering their amounts. There would also be stronger reputational sanctions. The macroeconomic conditionality for structural funds and for the Recovery and Resilience Facility would be applied in a similar spirit, i.e. EU financing could also be suspended when Member States have not taken effective action to correct their excessive deficit.
In addition, a new tool would ensure the implementation of reform and investment commitments underpinning a longer adjustment path. A failure to implement reform and investment commitments could result in a more restrictive adjustment path and, for euro area Member States, the imposition of financial sanctions.
More effectively preventing and correcting harmful imbalances
The Macroeconomic Imbalance Procedure (MIP) aims to identify potential macroeconomic risks early on, prevent the emergence of harmful macroeconomic imbalances and correct the imbalances that already exist. The reform proposals for the MIP centre on an enhanced dialogue between the Commission and Member States to create a better common understanding of the challenges identified under the MIP and the policies needed to address them. This would, in turn, lead to a commitment from Member States to include the reforms and investments needed to prevent or correct imbalances in their national medium-term fiscal-structural plan.
The preventive role of the MIP would be strengthened in a macroeconomic environment characterised by new and evolving risks. The assessment of whether imbalances exist would be made more forward-looking with a view to detecting and addressing emerging imbalances early on. More weight would be placed on trend developments and on whether policies have been implemented to address imbalances, when assessing whether imbalances have been corrected.
A more focused and streamlined post-programme surveillance framework
Post-programme surveillance assesses the repayment capacity of Member States that have benefited from financial assistance programmes. As part of the new framework, and while keeping the legislative text unchanged, the Commission proposes to apply it differently by setting clearer objectives, with the intensity of the framework linked to these objectives. In particular, post-programme surveillance would focus on assessing repayment capacity, monitoring the implementation of unfinished reforms, and assessing whether corrective measures are needed in the context of concerns for repayment capacity or continued market access.
The intensity of post-programme surveillance would evolve over time, along with the evolving risk assessment.
Swift agreement on revising the EU fiscal rules and other elements of the economic governance framework is a pressing priority at the current critical juncture for the EU economy. Member States and the Commission should reach a consensus on the reform of the economic governance framework ahead of Member States’ budgetary processes for 2024.
The Commission will consider tabling legislative proposals on the basis of today’s Communication and the ensuing discussions. It will again provide guidance for fiscal policy for the period ahead in the first quarter of 2023. This guidance will facilitate the coordination of fiscal policies and the preparation of Member States’ stability and convergence programmes for 2024 and beyond.
Since the Treaty of Maastricht of 1992, the EU’s economic governance framework has helped to create conditions for economic stability, sustainable economic growth and higher employment. This framework consists of the EU fiscal policy framework (the Stability and Growth Pact, the European Semester, and requirements for national fiscal frameworks), the Macroeconomic Imbalances Procedure, and the framework for macroeconomic financial assistance programmes.
However, while the framework has evolved over time to address certain weaknesses, it has also grown increasingly complex and not all instruments and procedures have stood the test of time.
The reform proposals set out in the Communication follow a review of the effectiveness of the economic surveillance framework first launched in February 2020 (and relaunched in October 2021). The review was carried out in line with the so-called six-pack and two-pack legislative reforms, which require the Commission to review and report on the application of the legislation every five years. Today’s orientations take into account the extensive public debate and consultation process where a wide range of stakeholders expressed their views on the key objectives of the framework, its functioning, and new challenges to be addressed.
The lessons learned from the policy responses to recent economic shocks, including the interaction between reforms and investment under the Recovery and Resilience Facility, have informed the Commission’s proposal for a reformed framework. The reform proposals are also shaped by the higher and more diverse public debt levels and the need to facilitate investments for common EU priorities, notably to ensure the green and digital transitions, and energy security in the years to come.
For more information
Source – EU Commission
Brussels, 9 November 2022
Good afternoon, everyone.
Thirty years ago, the Maastricht Treaty recognised the need for sound public finances and coordinated fiscal policies.
The intention was to complement the single monetary policy and avoid economic spill-over effects between countries.
And to benefit Europe’s economy as a whole.
These objectives have stayed valid over time.
But a lot has changed since the 1990s.
Different contexts and circumstances required several revisions of our economic governance framework over the years, especially following the global financial and economic crisis.
After a slow recovery from that crisis, we were confronted with the severe economic shock caused by the COVID-19 pandemic.
Today, our economies face another test with Russia’s protracted aggression against Ukraine.
Interest rates are rising. Inflation is hitting record highs – so questions of a proper and coordinated economic policy response are very much valid.
If we look at the functioning of the economic governance framework over the past decades, there are several issues to address.
Public debt has remained stubbornly high in some Member States. Good economic times were often not used to build buffers. Almost every Member State has broken the rules at one time or another.
And the rules have also become very complex.
Since fiscal adjustment was largely achieved by reducing investment, the composition of public finances did not become more growth-friendly.
Overall, debt and deficit levels are now significantly higher than a decade ago. Some countries have public debt ratios well above 100% of their GDP.
At the same time, the challenges of the green and digital transitions, strengthening our economic and social resilience and the need to ensure our energy security, compel us to undertake major investments and reforms for years to come.
This is why we created powerful EU instruments such as the Recovery and Resilience Facility.
The orientations we are presenting today to reform the EU’s system of economic governance address these new realities and challenges.
We are aiming for a simpler system of fiscal rules, with greater country ownership and more latitude for debt reduction – but combined with stronger enforcement.
The reference values enshrined in the Treaty remain in place: 3% of GDP for the public deficit and 60% of GDP for public debt.
Above all, we aim to ensure public debt sustainability.
This will require fiscal adjustment as well as growth-enhancing reforms and investments.
Each Member State should combine these elements in a four-year fiscal structural plan, to be presented to the Commission.
It should be designed to achieve a gradual and sustained reduction in public debt ratios, or to keep debt at prudent levels for low-debt countries.
In effect, countries will ‘own’ their plans by being directly involved in their design.
That is a real departure from today’s situation.
Since there are very different fiscal sustainability situations across Member States, this combination of elements can differ according to national circumstances.
So it is not a question of whether to put debt onto a reduction path towards 60% of GDP. It is more a question of how each country gets there – and especially, how fast.
Member States would set out their paths in a more realistic way than the current 1/20th debt rule would require.
Nevertheless, countries with substantial public debt challenges would still need to reduce their debt faster than those with less pressing concerns.
The Commission will also evaluate whether it is credibly ensured that the deficit is maintained below 3% of GDP over a 10-year period.
Then, to improve the quality of public finances, countries could request a longer, more gradual adjustment path.
This would be in exchange for additional structural reforms and investments to boost fiscal sustainability and sustainable growth.
To guarantee transparency and equal treatment, the plans will need to adhere to clear and common EU requirements that we will publish.
This applies both to slower debt reduction and selecting the appropriate reforms and investments.
Each national plan must secure approval by both the European Commission and Council.
I mentioned the need for enforcement.
Once agreed, each Member State must comply with its plan for its entire period. This means full implementation. It goes hand in hand with the greater leeway allowed in designing the plan.
Here, the Commission will carry out continuous monitoring, to be made easier by using a single indicator: net primary expenditure.
If a Member State does not comply on this basis, it will become subject to stronger enforcement mechanisms.
For example, if a country with a substantial public debt challenge fails to adhere to its agreed plan, the Excessive Deficit Procedure would be triggered by default.
It would also be triggered – as the case now – if it fails to adhere to the Treaty’s deficit reference value.
The Commission would keep track of deviations so as to avoid small deviations eventually adding up to a large divergence.
We are also proposing a new way to make sure that a Member State carries out the reforms and investments to which it commits in exchange for a more gradual adjustment path.
If we see that a country does not live up to its commitments, we will be able to request a revised plan, with a more stringent fiscal path – and impose financial sanctions too.
We will lower the amounts involved – concerning financial sanctions – to make sure that they can be effectively used.
Today’s orientations go beyond fiscal rules.
They also aim to make the macroeconomic imbalances procedure more effective.
Here, the Commission will have a closer dialogue with Member States to identify challenges and policy needs.
At the same time, we will strengthen monitoring and enforcement, using the excessive imbalances procedure to enforce action in countries with excessive imbalances.
Ladies and gentlemen: we started discussing reforming the EU’s fiscal rules in early 2020.
We knew that it was not going to be easy. So we had to take the time to debate this – and we have consulted a great deal.
Although we do not want to predetermine the final outcome, we believe that we have found a good balance that all Member States could start working with. Thank you.
Source – EU Commission