European new governance framework: reshuffling political economy’s patterns

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The new EU-wide economic governance framework is designed to assist the member states in dealing with the modern challenges and accomplishing the recovery/resilience process. Hence, the reform underlines two indispensable and mutually reinforcing directions: the prudent fiscal strategies (as well as investments) and transitional efforts that enhance sustainable and resilient political economies. Our comment below shows that the incurred problems are serious enough. 

The revised EU economic governance framework will contribute to making Europe more resilient, by enabling strategic investment and reforms and by reducing high public debt ratios in a realistic, gradual and sustained manner. European Semester will remain the central framework for economic and employment policy coordination. National reform plans will merge with the present EU wide stability and convergence programs. The new governance’s legislation was formally adopted in early April and it enters into force at the end of April 2024.

Background
The main objectives of the new economic governance framework are to strengthen debt sustainability and promote sustainable and inclusive growth in all EU member states through growth-enhancing reforms and priority investments. The framework will help make the EU more competitive and better prepared for future challenges by supporting progress towards a green, digital, inclusive and resilient economy, also bolstering Europe’s security capacity.
The reforms seek to ensure that the framework is simpler, more transparent and effective, with greater national ownership and better enforcement: they take into account the need to reduce increased public debt levels in a realistic, gradual and sustained manner. The new framework also builds on the lessons learned from the EU policy response to the financial crisis where a lack of investment hampered a swift economic recovery.
The reforms will ensure that the EU-wide fiscal rules are fit for the challenges ahead: the new economic governance framework has been designed to help tackle both existing and new challenges. E.g. the framework recognizes that prudent fiscal strategies (as well as investments and reforms that enhance sustainable growth) are not only indispensable, but also mutually reinforcing. Hence, the revised EU economic governance framework will contribute to making the states more resilient, by enabling strategic investment and reforms, and by reducing high public and government’s debt ratios in realistic, gradual and sustained manner.

More on the EU-wide economic recovery in: https://economy-finance.ec.europa.eu/economic-and-fiscal-governance_en

New economic governance: main changes
According to the Commission, the new economic governance framework aims to strengthen public debt sustainability, i.e. taking into account the need to reduce increased public debt levels. However, it intends to enhance sustainable and inclusive growth through investment and reforms in a way that preserves national ownership.
At the same time, this framework “will be simpler and take into account the member states’ different fiscal challenges”, acknowledges the Commission’s press release.
The central elements of the new framework are:
= stronger national medium-term fiscal and structural plans that bring together fiscal, reform and investment policies in view of the EU-wide priorities. These reforms and investments should help build the perspective green, digital and resilient economy while making the states (and the whole EU) more competitive.
= simpler and more transparent rules; e.g. with fiscal adjustment instruments within multi-year expenditure targets which ensure that public debt diminishes or stays at prudent levels, and that government deficits stay below 3 percent of GDP.
= fiscal adjustment paths shall be underpinned by credible reform and investment commitments that foster sustainable and inclusive growth, in line with the EU-wide priorities.
= establishing enhanced enforcement and common safeguards as a counterpart to the greater leeway for the member states in setting their fiscal adjustment instruments.
= new EU-wide minimum standards for independence and technical capacity coped with the national “independent fiscal institutions” guidelines; national political-economic authorities shall follow so-called “comply-and/or-explain principles” regarding recommendations by these institutions.
In addition to fiscal consolidation, the structural reforms and investment are crucial to promote growth and reduce debt; they are needed to address common challenges, in particular, the green and digital transition, social and economic resilience, energy security and the build-up of defense capabilities.

Socio-economic adjustments in the states
Implementing reforms and investment will depend on the present economic and fiscal conditions; these conditions are subject to the following types of adjustments:
1. Thus, for the member states with low fiscal challenges (in general, the public debt below 60 percent and government deficit below 3 percent of GDP) it will be possible to spend more than under the old framework, of course if they wish to.
The states facing fiscal challenges will have to ensure that their debt is put on a downward path or stays at prudent levels and/or that their deficit is brought or remain below 3 percent. However, they will have the option to do this in a more gradual way if they commit to implementing certain investment and reform measures that address common EU priorities and that address country-specific recommendations issued in the context of the European Semester. In that case, the adjustment period (i.e. the timeframe within which, through a combination of fiscal adjustments, reforms and investments, an EU state’s debt level is put on a sustainable downward path) can be extended from four to up to seven years. The new framework also strengthens the enforcement regime to ensure these commitments are delivered by the EU states.
2. The new framework introduces a single operational indicator, i.e. the growth rate of net expenditure, for assessing the states’ compliance with the new rules; this indicator will not be affected by fluctuations in revenues and unemployment expenditure that are due to economic circumstances.
= if, for example, the tax revenues are lower due to slower economic growth, the states do not need to cut expenditure to compensate for the lower revenues. Similarly, if unemployment rises and expenditure on unemployment benefits increases, the states will not have to spend less on other policies. Therefore, the states will be able to better support their economies during more difficult economic periods.
= on the other hand, when the revenues increase quickly due e.g. to strong economic growth, the states will have to use these revenues to build up fiscal buffers for later periods; however, they cannot use these temporary revenues to deliver an adjustment nor finance any permanent measures.
= finally, the single indicator reveals the “government expenditure net of new revenue measures”, e.g. such as new taxation measures; it means that the states can choose to spend more than the expenditure ceiling if this additional spending is financed by new revenue measures. Therefore, this system does not limit the states’ ability to increase public spending (if they so choose), as long as the increase in public spending is properly financed.
3. The new framework protects national expenditure on programs co-financed by the EU by excluding such expenditure from the main indicator of fiscal monitoring; this means: a) that national expenditure on investment projects co-financed by the EU can be increased without affecting compliance with the EU fiscal rules; and b) conversely, the states will no longer have an incentive to reduce expenditure on such investment projects to achieve their fiscal targets.
4. For the states with a government deficit above 3 percent and/or public debt above 60 percent of GDP, the Commission will issue a country-specific “reference trajectory”. This trajectory will provide guidance to the states to prepare their plans, and will ensure that debt is put on a plausibly downward path or stays at prudent levels.
5. For the member states with a government deficit below 3 and/or public debt below 60 percent of GDP, the Commission will provide technical information to ensure that the deficit is maintained below the 3 percent reference value over the medium term, according to the request of the state.

Excessive deficit procedure
The excessive deficit procedure, EDP for government deficit breaches of the 3 percent of GDP reference value remains unchanged; the Commission will propose to open deficit-based excessive deficit procedures this spring. As a first step, in the context of the European Semester Spring Package scheduled for 19 June 2024, the Commission will prepare a report for these member states.
Within the EDP for public debt breaches of the 60 percent of GDP, the “actions” will be in terms of “activation and abrogation”: e.g. by focusing on the “departure path” by the states with public debt above 60 percent from the net expenditure path that the state has committed to under the preventive arm of the Stability and Growth Pact. When the balance of the control account exceeds certain numerical thresholds and the member state’s debt is above 60 percent of GDP, the Commission will prepare a report to assess whether a debt-based EDP should be opened, unless the budgetary position is close to balance or in surplus. Therefore, the substantial public debt challenges would be a key relevant factor in such a report.

Simplifying economic governance framework
The new economic governance framework will simplify processes and procedures in several ways:
= First, fiscal surveillance will now focus on a single operational indicator, which is the member state’s multi-year net expenditure path: this path will serve as a basis for carrying out annual fiscal surveillance over the lifetime of the state’s medium-term fiscal-structural plan. Several provisions from the previous framework, such as the debt reduction benchmark, the medium-term budgetary objective and the significant deviation procedure are repealed.
= Second, annual monitoring by the Commission will be less burdensome for the states: i.e. instead of proposing annual fiscal policy recommendations, the Commission will focus on the states’ compliance with the multi-year net expenditure path. Thus, the states will need to submit annual reports focusing on implementation instead of annual Stability or Convergence Programs and National Reform Programs.
= Third, the reform will simplify enforcement procedures, which will mostly be triggered by deviations from the agreed net expenditure paths for “debt-based” excessive deficit procedures, with the procedure staying unchanged in case of deficits in excess of 3 percent of GDP.
Reference to: https://commission.europa.eu/strategy-and-policy/priorities-2019-2024/economy-works-people_en

Perspectives
New fiscal surveillance process will be embedded in the existing European Semester, which will remain the central framework for the EU-wide economic and employment policy coordination: i.e. all member states will be required to address the priorities identified in the country-specific recommendations issued in the context of the European Semester in their medium-term fiscal-structural plans. These plans will merge the current EU Stability and Convergence Programs with the national reform programs: i.e. they will need to take into account the member states’ recovery and resilience plans according to the EU Recovery and Resilience Facility.

More on European Semester in: https://commission.europa.eu/business-economy-euro/economic-and-fiscal-policy-coordination/european-semester_en

The member states will report annually on progress concerning implementation of these commitments and on the governments’ actions to address country-specific recommendations; the Commission will, accordingly, monitor delivery of those national commitments.
The Commission will present the European Semester Spring 2024 package at the end of June; as part of this package, the Commission will prepare a report indicating those states for which the Commission will suggest opening deficit-based excessive deficit procedures. It will also provide guidance to the states on the content of their medium-term fiscal-structural plans and the annual progress reports that they will need to submit; technical dialogues with the states will begin after the Commission has provided these inputs.
The EU-27 authorities must prepare and present their medium-term plans by 20 September 2024, which will need to be implemented as of 2025. The Commission will assess the plans after the submission and publish its assessment within six weeks; the deadline can be extended by a further two weeks if necessary.

General reference and source: Commission press release at: https://ec.europa.eu/commission/presscorner/detail/da/qanda_24_2391

Our comment
The problems concerning the national public debt and the government budget’s deficit are really vital for the EU member states’ socio-economic development; here is some statistics:
= The highest public debt among the EU member states is in Greece with about 165 percent (it was 207 percent of GDP in 2020); public debt in six EU member states (Italy, France, Spain, Belgium and Portugal) is over 100 percent, i.e. greater than their national GDPs.
= Generally (in about half of the EU states), government debt is higher than 60 percent: with the highest in Greece – over 160 percent (the country appears to be the most severely affected EU state), Italy -137, France -110, Spain – 106, and Belgium -105 percent.
More in: https://www.statista.com/statistics/756923/public-debt-members-eu/#statisticContainer

In some states the government debt is held by resident financial corporations, i.e. by 75 % in Denmark and Sweden and 65 % in Italy and Croatia. In euro area (i.e. EU 20 states), the government debt to GDP is at about 89 percent.
The EU’s economy, however, is quite strong at the moment with about €20 trillion which is about one-sixth of the global. But even in Denmark, the government debt is over 10 percent of GDP; in the Baltic States, the government debt is rather small: 18 percent in Estonia (the smallest among the EU states), 37 in Lithuania and 41 percent in Latvia.
On government debt in the EU: https://www.statista.com/statistics/269684/national-debt-in-eu-countries-in-relation-to-gross-domestic-product-gdp/

 

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