10 July 2012 Lucia Piana DG Economic and Financial Affairs EU economic governance From the Six-Pack to.

10 July 2012

Lucia PianaDG Economic and Financial Affairshttp://ec.europa.eu/economy_finance/index_en.htm

EU economic governance From the Six-Pack to the Fiscal compact

Budgetary developments in the EU2007-2013

(% of GDP)

2Source: Source: Commission 2012 Spring Forecast (data in % of GDP).

3

A typical legacy of a financial crisis:

deteriorated public finances

0

20

40

60

80

100

120

140

160

180

200

EE BG LU SE RO LT DK LV CZ SK FI PL SI NL AT MT CY HU DE ES EU-27

FR EA-17

UK BE PT IE IT EL

2007 2013

% of GDP

4

The crisis is the same but different

Extract from: Marco Buti, Lucio R Pench, Fiscal austerity and policy credibility, 20 April 2012, www.voxeu.org

55

The 1st step: the Six-Pack• A major reform proposed in September 2010 and entered

into force in December 2011

The 2nd step: the Two-Pack• Additional elements for the euro area proposed on

23 November 2011

The latest step, the Intergovernmental Treaty• Transposing European rules and concepts in a national

setting, signed on 2 March 2012

Enhanced economic governancein the EU

6

Prevention and correction of macro

imbalances

Enhanced monitoring of

budgetary policies

More effective preventive arm of

SGP

Focus on debt developments in corrective arm of

SGP

Sound fiscal policy

Balanced growth

Structural reform strategy (Europe

2020)

Macro-prudential supervision

Regulation and supervision of

financial systems

Crisis resolution

Fiscal compact national budgetary frameworks

7

Economic governance package (“six-pack”): key features

An enhanced framework for crisis prevention to ensure:• Prudent fiscal policy-making• Attention to macroeconomic imbalances• Stronger and more integrated surveillance• Tougher sanctions• Accountability, transparency & democratic

legitimacy

88

Detailing the Maastricht Treaty fiscal rules (i) :

the most known....

“Member States shall avoid excessive government deficits” (Treaty Article 126 ex 104)

– deficit below the reference value of 3% of GDP, unless it has declined substantially and continuously and reached a level close to the reference value or the excess is limited, exceptional and temporary

– debt should not exceed the reference value of 60% of GDP, or should be on a decreasing trend and approach the reference value at a satisfactory pace

The Stability and Growth Pact

99

Detailing the Maastricht Treaty fiscal rules (ii):

the less known....and revised by the Lisbon Treaty

“Member States shall regard their economic policies as a matter of common concern” (Treaty Article 121 ex 99)

– The Council shall monitor economic developments in each Member State, on the basis of reports submitted by the Commission;

– The Commission may address a warning;

– The Council, on recomendation from the Commission, may address the necessary recommendations.

The Stability and Growth Pact

10

The Stability and Growth Pact

• RESOLUTION OF THE EUROPEAN COUNCIL on the Stability and Growth Pact Amsterdam, 17 June 1997 (97/C 236/01)

• .... In stage three of EMU, Member States shall avoid excessive general government deficits: this is a clear Treaty obligation (1). The European Council underlines the importance of safeguarding sound government finances as a means to strengthening the conditions for price stability and for strong sustainable growth conducive to employment creation. It is also necessary to ensure that national budgetary policies support stability oriented monetary policies. Adherence to the objective of sound budgetary positions close to balance or in surplus will allow all Member States to deal with normal cyclical fluctuations while keeping the government deficit within the reference value of 3 % of GDP....

11

Where did we stand?

Central concept of the Stability and Growth Pact is the medium-term budgetary objective (MTO) = a numerical value for the structural deficit which ensures:

(i) a safety margin against breaching 3% of GDP; (ii) sustainable public finances or rapid progress towards sustainability(iii) room for stabilisation over the cycle

Adjustment path towards MTO = 0.5% of GDP; more in good, less in bad times

Central concept is based on the structural balance which is not observable

Enforcement through peer pressure

)()(

horizon infinite

)(

)%60( *iii

reductiondebt

iii

ofGDPgstabilizindebtILD EffortsAgeingCostBalanceMTO

Reforming the preventive arm of the SGP

12

Innovation: an expenditure rule = operational guidance for adjustment path towards MTO

Def: expenditure growth should not exceed a reference rate of potential GDP growth

If significant deviations from the rule = 0.5% of GDP in one or 0.25% of GDP in two consecutive years recommendation + interest-bearing deposit for euro area MS

Safeguard clauses: can deviate from the rule if unusual event or severe economic downturn for the euro area or the EU as a whole

The Six-Pack – Key InnovationsIn the Preventive Arm of the SGP

1313

The corrective arm:Excessive Deficit Procedure

Main objective: correct ‘gross errors’, assessed against two criteria:-government deficit in excess of 3% of GDP-government debt in excess of 60% of GDP not sufficiently diminishing

In practice, EDP launched and closed exclusively on the basis of deficit criterion EDP is a step-wise procedureFailure to comply with the initial recommendations (Art.126.7) resulted (for euro-area countries) in -more intrusive recommendations (Art.126.9), -eventually leading to sanctions (Art.126.11)

In practice, Art. 126.11 step never reached.

14

In the Corrective Arm of the SGP

Where do we stand?EDP only opened on the basis of the deficit criterion since no definition of sufficiently diminishing

Innovation: Operationalization of the "debt criterion"

Numerical benchmark for sufficiently diminishing debt= distance with respect to the 60% of GDP reference value declines over 3 preceding years at an average rate of 1/20th per year or this required reduction will occur in forward-looking 2-year horizon.

Non-respect will not automatically result in the country being placed in EDP overall assessment of relevant factors.

Transition period for the 23 MS currently in EDP embarked on an agreed consolidation path: 3 years after correction of the EDP to avoid abrupt change in this path = no full implementation of the rule but sufficient progress to be made

The Six-Pack – Key Innovations

15

Economic cycle affects debt via the deficit and the denominator (GDP)• Not adjusting for the cycle would result in undesirable pro-

cyclicality• Averaging over three years already mitigates impact of cycle

but not sufficiently. Assessment will take account of cyclical effects

• If the debt benchmark is breached on the sole basis of the effect of the cycle, there will be no Report under Article 126(3)

The debt criterion:taking into account the cycle

16

The Six-Pack – Key InnovationsNew enforcement mechanisms - euro area

Trigger Sanction Condition

Council decision establishing failure to take action in response to a Council recommendation under Art. 121(4)

Interest-bearing deposit0.2% of GDP

Council decision under Art. 126(6) that excessive deficit exists

Non interest-bearing deposit0.2% of GDP

Only where interest-bearing deposit exists or in case of serious non-compliance with budgetary obligations

Council decision under Art 126(8) that no effective action to correct the excessive deficit has been taken

Fine0.2% of GDP

Council decision under Art. 126(11) in the case of no effective action in response to notice under Art. 126(9)

Fine0.2% of GDP + variable component

Council decision FineEffective, dissuasive and proportionate – not exceeding 0.2% of GDP

The MS intentionally or by serious negligence misrepresented deficit or debt data relevant for the application of the SGP

17

Six-Pack: national fiscal frameworksWhere do we stand?

Considerable variation in the quality of national fiscal framework

Well-designed fiscal frameworks can substantially contribute to sound fiscal policies

EU budgetary framework insufficiently entrenched in national frameworks

Need for strengthening national ownership and having uniform requirements as regards the rules and procedures forming the budgetary frameworks of the MS

Innovation: minimum characteristics for national budgetary frameworks

Accounting and statistical reporting Rules for preparation of the forecasts for budgetary planning Country-specific numerical fiscal rules Budgetary procedures Medium-term budgetary frameworks Independent monitoring and analysis Regulation of fiscal relationships between public authorities across sub-sectors of general government

Implementation by end-2013

18

Addressing macroeconomic imbalances - a new strand in EU surveillance

The excessive imbalance procedure focuses on the prevention and correction of macroeconomic imbalances in all Member States

• Preventive arm to monitor and prevent the build-up of imbalances

• Commission presents a report identifying countries that may be affected by or at risk of being affected by imbalances, based on the economic reading of a scoreboard of indicators

• Commission prepares in-depth country studies for the selected countries taking on board a broad range of variables and using analytical tools and country-specific information

• Corrective arm to correct imbalances

• The Council recommends corrective action and the Member State concerned submits a Corrective Action Plan

• Backed up by financial sanctions (euro area only)

19

Enhanced monitoring

Common provisions for- monitoring and assessing draft budgetary

plans and - ensuring the correction of excessive deficit of the Member States in the euro area

Enhanced surveillance for financially fragile MS

Strengthening of economic and budgetary surveillance of Member States

- - experiencing or - - threatened with serious difficulties with respect to their financial

stability in the euro area

The 23 November – New proposalsThe 23 November – New proposals

Two Regulations building on the Fiscal surveillance leg of the Six-Pack for euro area Member States (based on Art. 136 TFUE)

Council general approach agreed in February EP Report voted in June

20

The 23 November –The 23 November – Key InnovationsKey Innovations

Rationale Innovation Articulation with existing framework

Ensuring that Union policy recommendations in the

budgetary area are appropriately integrated in the

national budgetarypreparations

Common Budgetary Rules

-Numerical fiscal rules on budget balance implementing MTOs in national budgetary processes-Independent fiscal council-Independent macroeconomic forecast

Reinforces the Directive on national budgetary frameworks by

encapsulating the core concept of the SGP in national rules

Reinforces the preventive arm of the SGP

Better synchronizing key steps in preparation of national

budgetsA Common Budgetary Timeline

Complements the European semester

Enhanced monitoring for all euro area MSEnhanced monitoring for all euro area MS

Rationale Innovations Articulation with existing framework

Ensuring an appropriate

integration of EU policy

recommendations in the national

budgetary preparations

Additional monitoring requirements

Draft budgetary plans for the forthcoming year submitted before 15 October

•to the COM => might request a revision of the draft => possible Opinion•to the Eurogroup => discussion based on assessment by the COM

Complement the European Semester

Provide an independent opinion on the draft budget to all stakeholders in the budgetary

process

Securing a timely and

durable correction of

excessive deficits

Closer monitoring for Member States in EDP

•Initial stage: comprehensive report + audit of quality of statistics

•Regular report: - If under 126(7) every 6 months

- If under 126(9) every quarter

•Any additional information on a request from the COM

Complement to the corrective arm of the SGP

Compliance with COM Opinion on draft budgetary plan taken into account •in report under 126(3)•in recommendation on a non-interest-bearing deposit•in decision under 126(6).

Reports of the closer monitoring taken into account•anytime, to assess whether correction by the deadline is at risk•can lead to a COM recommendation •compliance with such recommendation assessed when deciding on effective action (stepping up or abrogation of the EDP)

Enhanced monitoring for euro area MSEnhanced monitoring for euro area MS

22

Annual Growth Survey: Overall guidance for the EUProduced by the Commission - Discussed by the Council - Endorsed by the Spring European Council

National Reform Programmes Produced by EU member states

except those under financial assistance programmes

Country-specific recommendationsProduced by the Commission - Adopted by the Council with endorsement of the European Council

Draft national budgetsProduced by EU member states

June

Possible Commission opinion on draft budgetary plans

Produced by the Commission

23 Novem

ber proposals

April

Dec

embe

r

Stability or Convergence Programmes Produced by EU member states

except those under financial assistance programmes

Oct

ober

Nov

embe

r

Annual Growth Survey: Overall guidance for the EUEuropean Council Policy orientationsM

arch

The European Semester

For euro area

A new calendar for the EU economic governanceA new calendar for the EU economic governance

23

The latest step: the intergovernmental Treaty

Economic Policy Coordination

• Coordination of major economic policy reform plans in euro area MS

Reinforced Governance

• Euro Summits at least twice a year

• President of the Euro Summit appointed by Heads of State or

Government of euro area MS

• Participation in Euro Summits of Heads of State or Government of

non-euro area MS having ratified treaty is foreseen for certain

discussions and at least once a year

…and the FISCAL COMPACT

New intensified commitments by 25 MS. To be integrated into the EU legal framework within 5

years and with an important role for the Commission and EU secondary legislation.

3 main chapters

24

Recalls main commitments of the SGP

oCountry-specific medium-term objectives (MTOs)

oNumerical debt reduction benchmark under the EDP

24

The Fiscal Compact

Strengthens implementation of the SGP

oImplementation of MTOs in national budgetary processes

oAssorted with automatic correction mechanisms (triggered in case of significant deviation… except if exceptional circumstance) and monitoring by independent institutions

oMore stringent lower limit for MTOs (-0.5%), with a calendar for convergence

oBehavioural commitment to support Commission proposals/recommendations for EDPs in the euro area

Complements the SGP's toolbox

oEx ante coordination of debt issuance plans

oEconomic partnership programmes for Member States in EDP

• 

25

The Fiscal Compact (continued)

• Enforcement o National level- MS to implement rules in national law through provisions of "binding force and permanent

character, preferably constitutional"- compliance monitored level by independent national institutions

o Union level- COM presents report on the transposition of the agreed provisions- Matter can be brought to the Court of Justice by a MS to verify transposition- Court of Justice can impose financial sanction of up to 0.1% of GDP

• How to anchor these commitments into EU Law?o Swift implementation of key elements by legislative proposals, either currently under

discussion or new textso Contracting Parties committed to incorporation of Treaty within 5 years

25

26

A strengthened framework - summary

26

EU 2725 Contracting

Parties Euro area

Six-Pack

In force

Reinforced preventive arm of SGP

Debt-reduction benchmark

Financial sanctions

Directive on national fiscal frameworks

Two-Pack

Proposed

Enhanced budgetary monitoring

Enhanced surveillance for vulnerable euro area MS (for MS with financial difficulties)

Fiscal Compact

To be ratified

National implementation of MTOs + transposition sanctions

Economic partnership programme in the EDP

Ex ante coordination of debt issuance

rQMV in EDP

Ex ante coordination of economic reforms

Reinforced governance (for some items)