Fabian Demicoli

EU Economic Governance

 The EU and its Member States have taken a series of important decisions that will strengthen economic and budgetary coordination for the EU as a whole and for the euro area in particular. As a result, the EU's interdependent economies will be better placed to chart a path to growth and job creation.

 

Surveillance of economic and fiscal policies

The economic and financial crisis has revealed a number of weaknesses in the economic governance of the EU's economic and monetary union. The cornerstone of the EU response is the new set of rules on enhanced EU economic governance which entered into force on 13 December 2011. It has four main components:

Stronger preventive action through a reinforced Stability and Growth Pact (SGP) and deeper fiscal coordination: Member States are required to make significant progress towards medium-term budgetary objectives (MTO) for their budgetary balances. Expenditure benchmarks will now be used alongside the structural budget balance to assess adjustments towards the MTO. An interest-bearing deposit of 0.2% of GDP will be imposed on non-compliant euro-area countries.

Stronger corrective action through a reinforced SGP: The launch of an Excessive Deficit Procedure (EDP) can now result from government debt developments as well as from government deficit. Member States with debt in excess of 60% of GDP should reduce their debt in line with a numerical benchmark. Progressive financial sanctions kick in at an earlier stage of the EDP. A non-interest bearing deposit of 0.2% of GDP may be requested from a euro-area country which is placed in EDP on the basis of its deficit or its debt. Failure of a euro-area country to comply with recommendations for corrective action will result in a fine.

Minimum requirements for national budgetary frameworks: Member States should ensure that their fiscal frameworks are in line with minimum quality standards and cover all administrative levels. National fiscal planning should adopt a multi-annual perspective, so as to attain the MTO. Numerical fiscal rules should also promote compliance with the Treaty reference values for deficit and debt.

Preventing and correcting macroeconomic and competitiveness imbalances: Over the past decade, Member States have made economic choices which have lead to competitiveness divergences and macroeconomic imbalances within the EU. A new surveillance mechanism will aim to prevent and correct such divergences. It will rely on an alert system that uses a scoreboard of indicators and in-depth country studies, strict rules in the form of a new Excessive Imbalance Procedure (EIP) and better enforcement in the form of financial sanctions for Member States which do not follow up on recommendations.

Enforcement is strengthened by the expanded use of 'reverse qualified majority' voting. Under this voting system, a Commission recommendation or proposal to the Council is considered adopted unless a qualified majority of Member States votes against it.

 

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