Presently, the European Commission seeks to create a more transparent, simpler and integrated architecture for macro-fiscal and structural policy’s surveillance in the states to better deliver on the objectives of ensuring debt sustainability and promoting perspective growth.
European-wide socio-economic governance has, principally, two sides: from the EU side, there are political guidance and legal measures, and from the member states political economy, practical financial and structural implementation; both are subject to reforms while addressing modern challenges and national resilience efforts.
Basically, the EU Treaties envisage the need for sound public finances in the member states and the EU-wide efforts in coordinated economic and fiscal (for states in the eurozone) policies. The final idea has been to complement the single monetary policy with sustainable socio-economic strategies in the states. However, challenges abound: interest rates are rising, inflation is hitting record highs, public debt remains high (in several member states public debt ratios are well above 100% of their GDPs), reasonable “economic buffers” were often not built and almost all states broke fiscal rules at one time or another.
Modern global challenges, as well as the EU strategies concerning green and digital transitions, strengthening national socio-economic recovery and resilience, the need to ensure energy security, etc. compel the EU institutions to undertake reforms and active measures for proper and coordinated economic policy responses.
Guidelines for national planning
The legal requirements for the member states in the EU basic law are still valid: i.e. 3 percent of GDP for the public deficit and 60 percent of GDP for public debt; besides, the states have to ensure public debt sustainability. To sustain this will require fiscal adjustment as well as growth-enhancing reforms and investments.
Therefore, all EU states should combine these elements in a four-year “fiscally-structured” national development plans to be presented to the Commission.
During last year, the EU institutions have been involved in discussions and consultations with numerous stakeholders on the future of the European and the states’ perspective economic governance: some elements of convergence have emerged during these consultations, which formed the background of the macro-fiscal surveillance. This new reformed-approach has underlined the need for the national fiscal policy (involving, generally, EU states in the euro-zone, the rest can actively use monetary policies as well) to act in a counter-cyclical manner, both in supporting growth during crises and building up fiscal buffers in the positive growth periods. Besides, streamlined investment in recovery and resilience programs can also reduce the adverse economic impact of crises. Present crises also confirmed the necessity of effective policy coordination among the states, both among different sectoral policies (and funding tools) and between the EU institutions and the national governance.
Reforming EU-wide economic governance
There are some focal elements in the EU’s macro-fiscal surveillance:
= the member states’ medium-term fiscal-structural plans that bring together fiscal, reform and investment of EU-27 states, within a common EU framework;
= better national enforcement of the EU-wide fiscal and structural plans as a counterpart of increased specific priorities in the member states growth patterns;
= more effective framework to detect and correct macro-economic imbalances; and
= streamlined post-program surveillance framework to assess the states’ repayment capacity benefiting from the EU’s financial assistance programs.
Thus, it is not only the fiscal rules that are in the core of the Commission’s new reform package: it outlines orientations for reforming the national economic governance framework, addressing the key economic and policy issues that will shape the EU’s economic policy coordination and surveillance for the foreseeable future. Additionally, these measures include a thorough reform of the EU-wide fiscal rules to make them simpler and more transparent, while improving their enforcement.
The governance’s reform proposal recognises that prudent fiscal strategies and investment as well as enhanced sustainable growth are indispensable and mutually reinforcing national fiscal sustainability, while progressing towards green, digital, inclusive and resilient economic growth.
EU-wide economic governance reform
The Commission’s idea of simplifying governance includes three following steps:
= First, fiscal surveillance would focus on a single operational indicator: each state is supposed to agree on the net-expenditure path, which would serve as a basis for carrying out annual fiscal surveillance during states’ medium-term plans. Therefore, several previously valid requirements will be abandoned, such as debt reduction benchmark, the benchmark for reduction in the structural balance and other significant deviation procedures.
= Second, annual monitoring by the Commission would be less onerous for the member states; instead of issuing annual recommendations, the Commission would focus on the states’ compliance with a medium-term net expenditure path that has been endorsed by the Council. Hence, the states would only need to submit annual implementation reports instead of annual Stability or Convergence Programs.
= Third, the reform would simplify enforcement procedures, which would predominantly be triggered by deviations from the agreed and Council-endorsed medium-term expenditure path.
However, the member states would still retain their independence in economic governance; the Commission mentioned the following two main states’ competences:
= First, the states would hold the right to come forward with their medium-term fiscal-structural plans, which include a common EU framework. Besides, a risk-based surveillance framework would give more leeway to the states to set their adjustment paths.
= Second, independent fiscal institutions could play an important role in the monitoring of compliance with the national medium-term fiscal-structural plans in support of the national governments. This would also trigger a greater debate at national level and a higher degree of political buy-in and ownership, underlined the Commission.
Reference to: https://ec.europa.eu/commission/presscorner/detail/en/QANDA_22_6563
National medium-term national plans
The Commission’s orientations on reform of the economic governance framework aim to ensure a gradual and sustained debt reduction and the implementation of reforms and investment that enhance sustainable growth in the member states. The reform package includes active measures for “uniting” investment and fiscal adjustment: thus, improving the quality of public finances and protecting public investment is in the center of national medium-term fiscal-structural plans.
The EU states are forced to elaborate investment priorities in medium-term fiscal-structural plans, which include “reformed investment” that can help bringing public debt on a sustainable path and therefore underpin the adjustment period for gradual recovery-resilience path. These national investment commitments will have to respect common and transparent EU criteria, such as responding to common EU priorities and targets and relevant EU Semester’s country-specific recommendations.
Present EU “orientations” seek to promote investment through an all-encompassing medium-term net expenditure path, which will give each member state free-way to decide on public expenditure priorities and provide incentives for reforms and investment responding to common and transparent EU criteria. These investment and reform commitments will form an integral part of the national medium-term fiscal-structural plans. The Commission will only ensure additional enforcement of those commitments underpinning more gradual national fiscal adjustments.
The medium-term plans taking into account their public debt challenges. At the same time, this would mean adhering to a transparent and common EU framework consistent with the 3% of GDP and 60% of GDP reference indications in the Treaty.
National medium-term plans should ensure a sustainable debt reduction path through a gradual consolidation, together with reforms and investments. Therefore, the states should present their fiscal-structural plans in the way that ensures that public debt is brought onto a sustainable path by the end of the adjustment period, which would be four years as a rule.
More information in the following Commission’s websites: = Press release: Building an economic governance framework fit for the challenges ahead; = Communication on orientations for a reform of the EU economic governance framework; = Press release: Commission relaunches the review of EU economic governance (October 2021); = Press release: Commission presents review of EU economic governance and launches debate on its future (February 2020); = Recovery and Resilience Facility; = The European Semester; = Stability and Growth Pact; = Macroeconomic Imbalance Procedure.