Reforming the EU-wide economic governance

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New EU-wide economic governance proposals are aimed at ensuring reduction of high levels of public debt and assisting the states in implementing needed reforms. Member states’ governance has to simplify rules to ensure public debt sustainability through gradual and realistic fiscal adjustment to support stable, resilient and inclusive growth. Present proposals will make the EU’s fiscal rules more effective while being oriented towards four key areas: simplicity, ownership, safeguards and enforcement.   

     Following extensive consultation, the Commission has reached a careful balance by giving countries greater flexibility and ownership of their medium-term fiscal objectives, while putting in place safeguards to ensure transparency and equal treatment. At the same time, the EU is stepping up enforcement so that countries stick to their commitments; in this way the EU can lower public debt, keep it sustainable, ensure sound public finances and build a solid base for the EU-wide future prosperity. Now it is the time for the European Parliament and the Council to reach quick agreement on the legislative proposals to quickly respond to challenges.
As is known, the EU common fiscal rules date back to the 1990s; since then the EU went through several critical stages, including global economic and financial crises, the pandemic and, presently, the war in Ukraine. The EU states are still facing numerous global challenges which fundamentally changing national socio-economic priorities; hence, the EU-wide rules have to reflect these changes. E.g. public debt has risen sharply during last decade: in 2022, the EU’s debt-to-GDP ratio reached 84% – roughly 20% more than two decades ago; presently, in some EU countries the public debt ratios “are way above 100% of their GDP”, noted Commission’s vise president V. Dombrovskis.

The EU’s economic governance framework consists of two main components: a) the EU fiscal policy framework (the Stability and Growth Pact with the requirements for national fiscal policies), and b) the Macroeconomic Imbalance Procedure (MIP); both are implemented in the context of the European Semester for member states’ socio-economic policy coordination, coped with the framework for the EU’s macroeconomic financial assistance programs.
On MIP in:

  New legislative proposals follow debates on the EU-wide economic surveillance framework first launched in February 2020. The Commission summarized main recommendations in a report published in March 2022, which provided valuable contribution to the Commission’s present reform proposals.
In November 2022, the Commission presented orientations for a reformed EU economic governance framework; then, in March 2023, the Economic and Financial Affairs Council (ECOFIN) adopted conclusions on the Commission’s orientations which were then endorsed by the European Council.
Present economic governance proposals address two main goals: to bring about a more gradual but steadier reduction in debt levels, and to boost sustainable and inclusive growth through investment and reforms. See more information below in Commission’s websites…

States’ comprehensive medium-term plans
National medium-term fiscal-structural plans are the cornerstone of the Commission’s proposals; hence, the states will design and present plans setting out their fiscal targets, as well as measures to address macroeconomic imbalances, formulated priority reforms and investments over a period of at least four years. These plans will be assessed by the Commission and endorsed by the Council based on common existing EU policy’s criteria.
Integrating reforms’ directions in fiscal, economic and investment objectives into a single medium-term national planning is expected to assist the states in creating coherent and streamlined development processes. Besides, national plans will strengthen national ownership by providing the EU states with greater leeway in setting their own fiscal adjustment paths, in formulating national coherent reform and investment commitments.
The EU member states will present annual progress reports to Commission in view of facilitating more effective monitoring and enforcement of these commitments’ implementation.
The new fiscal surveillance process will be integrated in the European Semester, which will remain the central framework for the EU-wide economic and employment policy coordination.

Proposals’ key areas
= Simplicity: fiscal policy coordination will be based on a single indicator – government net expenditure; as soon as the process is under national governance’s control, there are no excuses for states in failing to deliver. Simplifying rules are focusing on fiscal challenges and take into account the EU-states’ different initial fiscal positions and their different public debt problems. Simplicity also means relying on a single operational indicator based on the evolution of net expenditure. By focusing on expenditure, the proposals also avoid the typical pro-cyclical bias that fiscal policy has had over the past years: namely, Commission “expanded” in good times, but it is forced “to cut” in bad times.
= Ownership: present proposals promote greater national sovereignty by providing more leeway in taking the country-specific situation into account. Each EU state should commit to a medium-term fiscal structural plan; the latter represent a fundamental departure from present one-size-fits-all approach. National pans should have clear fiscal targets to achieve a gradual and sustained reduction of public debt ratios, or to maintain debt at prudent levels for low-debt countries; generally, plans should apply for four years. If a country wants to extend this period, it must commit to structural reforms and investments that meet certain criteria: they must boost growth, improve fiscal sustainability and contribute to EU priorities.
= Safeguards: in cases when compliances are not enough, the Commission provided for safeguards as well as stronger enforcement. This added “leeway” for the EU states is constrained by a set of common EU rules to ensure transparency and equal treatment. The Treaty reference values remain in place: 3% of GDP for public deficit and 60% of GDP for public debt. For the states that exceed these two values, the Commission will issue technical trajectories to be used as the basis for each plan. The ratio of public debt to GDP must be lower at the end of the period covered by the plan than at the plan’s start. If a country’s public deficit remains above 3% of GDP, it will have to carry out a minimum fiscal adjustment of 0.5% of GDP per year, to apply as a common benchmark.
= Enforcement: the Commission believes that governance reform proposal will lead to better compliance by the EU states; however, rules are only fully effective if they go with credible enforcement. In this regard, the Commission intends to keep the deficit-based excessive deficit procedure unchanged. This excessive deficit procedure will be strengthened; it will be opened by default if countries with substantial debt challenges fail to comply with the rules. In addition, countries will face tighter fiscal requirements if they do not carry out the reforms and investments to which they have committed. Some financial sunctions could be imposed too: it would be made more effectively enforceable by lowering the amounts involved. For now, and for the years ahead, it is vital to maintain an anchor of the EU-wide macroeconomic and financial stability: this means reducing debt and keeping it sustainable, ensuring sound public finances in all EU states and building a solid base for future growth. The Commission intends to draft additional proposals for reforming the EU’s fiscal rules in the near future.
While the new proposals provide the EU member states with more control over the design of their medium-term plans, they also put in place a more stringent enforcement regime to ensure that the states deliver on the commitments they undertake in their medium-term fiscal-structural plans. For the EU states that face substantial public debt challenges, departures from the agreed fiscal adjustment path will by default lead to the opening of an excessive deficit procedure. Failure to deliver on the reform and investment commitments justifying an extension of the fiscal adjustment period could result in the adjustment period being shortened.

    Citation: Ursula von der Leyen, President of the European Commission underlined (26/04/2023) that modern EU needed: “fiscal rules fit for the challenges of this decade”. She noted that new rules will help reduce high public debt levels in a realistic, gradual and sustained manner; the rules will also improve national  ownership based on common EU guidance and strengthen enforcement. She stressed that “sound public finances enable states to invest even more in the fight against climate change, to digitise economy, to finance inclusive European social market model and make economies more competitive”. She concluded: “I look forward to a swift agreement on this crucial reform”.
Reference to:

     More information in Commission’s websites: = Questions and answers: Commission proposes new economic governance rules fit for the future; = Legislative proposals for a reformed EU economic governance framework; = Press release: Building an economic governance framework fit for the challenges ahead (November 2022); = Press release: Commission re-launches 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; and = Macroeconomic Imbalance Procedure.

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