EU Economic Governance: From the Six-Pack to the Fiscal Compact

1. EU economicgovernanceFrom the Six-Pack to the Fiscal compact 10 July 2012 Lucia Piana DG Economic and Financial Affairs http://ec.europa.eu/economy_finance/index_en.htm

2. Budgetary developments in the EU2007-2013(% of GDP) Source: Source: Commission 2012 Spring Forecast (data in % of GDP).

3. A typical legacy of a financial crisis: deteriorated public finances

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

5. Enhanced economic governancein the EU • 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 5

6. Fiscal compact national budgetary frameworks Focus on debt developments in corrective arm of SGP More effective preventive arm of SGP Crisis resolution Sound fiscal policy Structural reform strategy (Europe 2020) Prevention and correction of macro imbalances Enhanced monitoring of budgetary policies Balanced growth Regulation and supervision of financial systems Macro-prudential supervision

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

8. The Stability and Growth Pact • Detailing the Maastricht Treatyfiscal 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 8

9. The Stability and Growth Pact • Detailing the Maastricht Treatyfiscal 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 monitoreconomic 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. 9

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. Reforming the preventive arm of the SGP • 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 11

12. The Six-Pack – Key Innovations In the Preventive Arm of the SGP •  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

13. Thecorrective 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 procedure • Failure 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. 13

14. The Six-Pack –Key Innovations • 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 orthis 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

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) Thedebt criterion: taking into account the cycle

16. The Six-Pack – Key Innovations New enforcement mechanisms - euro area

17. Six-Pack: national fiscal frameworks Where 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 The 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) 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 • Council general approach agreed in February • EP Report voted in June

20. The 23 November –Key Innovations Enhanced monitoring for all euro area MS

21. Enhanced monitoring for euro area MS

22. A new calendar for the EU economic governance Annual Growth Survey: Overall guidance for the EU Produced by the Commission - Discussed by the Council - Endorsed by the Spring European Council The European Semester December Annual Growth Survey: Overall guidance for the EU European Council Policy orientations March National Reform Programmes Produced by EU member states except those under financial assistance programmes Stability or Convergence Programmes Produced by EU member states except those under financial assistance programmes April Country-specific recommendations Produced by the Commission - Adopted by the Council with endorsement of the European Council June For euro area Draft national budgets Produced by EU member states 23 November proposals October Possible Commission opinion on draft budgetary plans Produced by the Commission November

23. The latest step: the intergovernmental Treaty 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 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

24. The Fiscal Compact • Strengthens implementation of the SGP • Implementation of MTOs in national budgetary processes • Assorted with automatic correction mechanisms (triggered in case of significant deviation… except if exceptional circumstance) and monitoring by independent institutions • More stringent lower limit for MTOs (-0.5%), with a calendar for convergence • Behavioural commitment to support Commission proposals/recommendations for EDPs in the euro area • Complements the SGP's toolbox • Ex ante coordination of debt issuance plans • Economic partnership programmes for Member States in EDP Recalls main commitments of the SGP • Country-specific medium-term objectives (MTOs) • Numerical debt reduction benchmark under the EDP 24

25. The Fiscal Compact (continued) • Enforcement • 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 • 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? • Swift implementation of key elements by legislative proposals, either currently under discussion or new texts • Contracting Parties committed to incorporation of Treaty within 5 years 25

26. A strengthened framework - summary 26