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Revising the Stability and Growth Pact: Public Finances in EMU 2006

Revising the Stability and Growth Pact: Public Finances in EMU 2006

Outline of the Community (European Union) legislation about Revising the Stability and Growth Pact: Public Finances in EMU 2006

Topics

These categories group together and put in context the legislative and non-legislative initiatives which deal with the same topic.

Economic and monetary affairs > Stability and growth pact and economic policy coordination

Revising the Stability and Growth Pact: Public Finances in EMU 2006

Document or Iniciative

Communication from the Commission to the Council and the European Parliament: Public Finances in EMU 2006 – The first year of the revised Stability and Growth Pact [COM(2006) 304 final].

Summary

The Commission considers the implementation of the revised Stability and Growth Pact (SGP) to have been mainly positive, particularly the corrective arm of the Pact. However, there remain some concerns related to the implementation of the preventive part of the Pact. Despite the positive results, the Commission draws attention to some challenges ahead.

Consolidating public finances: positive results

The consolidation of public finances has resumed and there has been smooth and consistent implementation of the revised SGP procedures, benefiting from an increased economic rationale for decisions and recommendations. The revised SGP ensures that excessive deficits are properly identified and allows better account to be taken of country-specific economic considerations. When the deficit of a Member State exceeds 3% of gross domestic product (GDP), the Commission must prepare a report providing an overall assessment of the economic and budgetary situation in that Member State. The reports give consideration to all elements that are relevant for an evaluation of the situation, to allow a decision to be taken on the existence of an excessive deficit and deadlines set for its correction. Since the reform, all deficits in excess of 3% of GDP have been considered excessive. In the view of the Commission, this confirms that the SGP remains a rule-based framework, which is the best guarantee that commitments will be honoured and that all Member States will be treated equally.

When deficits in excess of the reference value of 3% of GDP occur, corrective measures must be adopted promptly. The consideration of economic factors is also important and permits the Council to set realistic deadlines for correcting excessive deficits when applying the excessive deficit procedure. Taking account of the economic situation has not, in the opinion of the Commission, led to a more lenient application of the rules. More account has been taken of the development of public debt when applying the excessive debt procedure.

In March 2005, when agreement was reached on the revision of the SGP, the Council stressed that improved cooperation between the Commission, the Council and Member States was important in order to strengthen national ownership of and compliance with the SGP rules. Experience has shown that, by introducing more scope for economic judgement in the budgetary surveillance process, the reform has stimulated a constructive and transparent dialogue about economic policy at EU level. This has strengthened peer support and pressure, thus contributing to the smooth operation of the Pact.

Implementation of the preventive arm of the Pact: some concerns

The 2005 reform of the SGP introduced a number of changes, strengthening the preventive arm of the Pact by increasing its economic rationale. One criticism of the original Pact was that a uniform medium-term budgetary objective of “close to balance or in surplus” imposed inappropriate budgetary policies in some countries experiencing high nominal growth. The revised SGP no longer requires Member States to converge on a uniform close-to-balance budgetary position in the medium term. Rather, an individual medium-term objective is set for each Member State, taking into account the economic and budgetary circumstances in each country, so as to provide a sufficient safety margin with respect to the reference value of 3% of GDP and ensure convergence on prudent levels of debt. The revised SGP also includes a number of simple budgetary policy principles appropriate for Member States that have not yet achieved their medium-term target and for budgetary policy during cyclical upswings. In particular, Member States in the euro zone or participating in the exchange-rate mechanism (ERM II) should aim for an annual structural adjustment in line with the benchmark of 0.5 % of GDP.

The Commission recognises that the medium-term budgetary objectives reflect economic fundamentals and national strategies. It notes that some countries have proposed medium-term targets that are more ambitious than strictly required by the revised SGP. In most cases, this is to allow consistency between the objectives set in the European context and a national strategy to ensure the sustainability of public finances, reflecting the economic situation in each country.

However, the Commission notes that planned budgetary efforts to achieve the objectives are not always sufficiently ambitious and fall short of the 0.5 % benchmark in 2006. According to the Commission Spring Forecast, on average the structural balance for the EU will not improve and for some Member States will even deteriorate. There is a risk that budgetary policy will turn expansionary and pro-cyclical. Rigorous budgetary execution and, possibly, additional consolidation measures in 2006, together with ambitious budgetary policy for 2007, are needed in order to reduce the gap between the progress already made and requirements under the SGP.

Despite clear improvements, the Commission feels that some questions remain about the credibility of the medium-term budgetary adjustments planned by Member States. The Commission notes that the medium-term budgetary projections presented in the 2005 updates of stability and convergence programmes are, in most cases, based on realistic macroeconomic assumptions. Another positive development is the much less frequent use of one-off and other temporary measures within medium-term programmes. In a number of cases, however, the measures necessary to achieve the budgetary objectives are not specified in sufficient detail. The combination, in some programmes, of a concentration of efforts on the end of the period covered by programmes and a lack of detail about the measures underlying the planned reduction in the deficit is a source of concern.

Identifying the challenges ahead for the revised SGP

Experience over the year since the revision of the SGP in the summer of 2005 shows that the EU budgetary framework is regaining credibility. However, the Commission identifies a number of challenges ahead:

  • Respecting the spirit of the reform when the economic climate is favourable. The Commission stresses the importance of conducting prudent budgetary policies when the economic climate is favourable so as to contain the accumulation of debt and ensure it is reduced to sustainable levels. It considers that larger budgetary adjustments should be made in 2006 and will endeavour to ensure that the budgets set for 2007 are ambitious.
  • Putting a greater emphasis on the sustainability of public finances. Despite the progress made in reducing the government deficit, the debt ratio in the EU increased from 62.4 % of GDP in 2004 to 63.4 % of GDP in 2005. Given the long-term challenges faced by most EU Member States, such as an ageing population, large reductions in public debt are needed.
  • Improving governance as regards statistics. The effective implementation of the European budgetary framework depends on the quality, reliability and early publication of harmonised budgetary statistics in accordance with European accounting standards. The ongoing work to strengthen the European statistical system must be intensified.
  • Creating better synergies between budgetary policy and growth. An important challenge facing the EU is how to foster the implementation of reforms that allow progress towards sustainable public finances and, at the same time, enhance growth prospects. In order to support sustainable growth, increased attention should be paid to the implications of budgetary policy on macroeconomic developments.
  • Developing fiscal rules and institutions at national level. The agreement on the SGP reform stressed that national budgetary rules and institutions could play a more prominent role in domestic budgetary surveillance. The Commission welcomed the declaration of national Finance Ministers, in the context of the reform of the SGP. It considers that progress could also be made on strengthening the interaction between national budgetary procedures and the EU budgetary framework.

Stability and growth pact and economic policy coordination

Stability and growth pact and economic policy coordination

Outline of the Community (European Union) legislation about Stability and growth pact and economic policy coordination

Topics

These categories group together and put in context the legislative and non-legislative initiatives which deal with the same topic.

Economic and monetary affairs > Stability and growth pact and economic policy coordination

Stability and growth pact and economic policy coordination

The Stability and Growth Pact is intended to ensure that Member States maintain budget discipline in order to avoid excessive deficits. It therefore contributes to monetary stability. Member States coordinate their economic policies at European level.

STABILITY AND GROWTH PACT

Implementation of the pact

  • Resolution of the Amsterdam European Council on the stability and growth pact
  • Surveillance of budgetary policies
  • The corrective arm: the excessive deficit procedure
  • Requirements for budgetary frameworks of the Member States

Implementation of the pact

  • A European Economic Recovery Plan
  • Reporting of planned deficits by Member States
  • European financial stabilisation mechanism

ECONOMIC POLICY COORDINATION

Basic provisions

  • Resolution of the European Council on economic policy coordination (1997)
  • Reinforcing economic policy coordination
  • Streamlining of annual economic and employment policy coordination cycles

Council recommendations

  • Broad guidelines for economic policies
  • Broad Economic Policy Guidelines (2008- 2010)
  • Broad economic policy guidelines (2005- 2008)
  • Broad economic policy guidelines 2003-2005
  • Broad economic policy guidelines (2002)
  • Broad economic policy guidelines (2001)
  • Broad economic policy guidelines (2000)
  • Broad economic policy guidelines (1999)
  • Broad economic policy guidelines (1998)
  • Broad economic policy guidelines (1997)
  • Broad economic policy guidelines (1996)

Public finances in Member States

  • Ensuring the effectiveness of the preventive arm of the Stability and Growth Pact: Public Finances in EMU – 2007
  • Long-term sustainability of public finances in the EU
  • Revising the Stability and Growth Pact: Public Finances in EMU 2006
  • Public finances in Member States in 2005
  • Public finances in Member States in 2004

The European economy

  • The European economy: 2007 Review
  • The European economy: 2006 review – strengthening the euro area
  • The European economy: 2004 Review
  • The OECD and the examination of EC economic policies

Declaration on the Euro area

  • 2009 Annual Statement on the Euro Area
  • 2007 Annual Statement on the Euro Area

Reinforcing economic policy coordination

Reinforcing economic policy coordination

Outline of the Community (European Union) legislation about Reinforcing economic policy coordination

Topics

These categories group together and put in context the legislative and non-legislative initiatives which deal with the same topic.

Economic and monetary affairs > Stability and growth pact and economic policy coordination

Reinforcing economic policy coordination

Document or Iniciative

Communication from the Commission to the European Parliament, the European Council, the Council, the European Central Bank, the European Economic and Social Committee and the Committee of the Regions of 12 May 2010 – Reinforcing economic policy coordination [COM(2010) 250 – Not published in the Official Journal].

Summary

In this Communication, the Commission assesses the consequences of the global economic crisis of 2009. It considers that it has become fundamentally important for the European Union (EU) to reinforce the coordination of Member States’ economic policies.

The global economic crisis has highlighted certain weaknesses of Economic and Monetary Union:

  • the fiscal imbalances of Member States, in particular the high level of their public debt, which can quickly lead to crisis situations;
  • the interdependence of Member States’ economies;
  • the lack of policy coordination at EU level;
  • the macroeconomic and financial imbalances specific to the euro area which have aggravated the latter’s economic situation.

Faced with these problems, the Commission intends to improve Member States’ economic surveillance in order to avoid excessive budget deficits. It also proposes to broaden surveillance of macroeconomic developments and to reinforce the economic governance of the euro area.

This Communication therefore sets out three main objectives:

  • reinforcing compliance with the Stability and Growth Pact;
  • creating a European Semester;
  • establishing a framework for crisis management in the euro area.

Stability and Growth Pact

The Stability and Growth Pact is a pact by which Member States undertake to control their public deficit in order to avoid fiscal imbalances. The Pact has:

  • a preventive part which is based on the Stability and Convergence Programmes: every year, Member States submit these programmes to the Commission and the Council. The Stability and Convergence Programmes establish the budgetary objectives and economic prospects of each Member State;
  • a corrective part which is based on the excessive deficit procedure: recommendations, or indeed sanctions, may be addressed to a Member State if it does not comply with the Stability and Growth Pact.

The Commission therefore proposes to reinforce the preventive and corrective parts of the Pact by placing a greater focus on debt. For example, the Stability and Convergence Programmes might incorporate new objectives concerning the sustainability of public finances. The Commission also proposes to take better account of the interplay between public debt and budget deficits in the excessive deficit procedure.

In addition, the excessive deficit procedures should be accelerated in order to provide Member States with recommendations as soon as possible, thus enabling them to tackle emerging fiscal imbalances.

European Semester

The Commission proposes to establish an economic European Semester at the start of each year. The aim of the European Semester would be to reinforce Member States’ policy coordination and economic surveillance.

At the start of the European Semester, the European Council shall identify the main economic challenges and provide Member States with strategic guidance on policies. This information will then be used by Member States as a basis for preparing their Stability and Convergence Programmes and their National Reform Programmes.

In full respect of national parliaments’ schedules, the European Semester would allow these programmes to be presented and examined at a time when important budgetary decisions are still in a preparatory phase at the national level.

Measures specific to the euro area

The interdependence of Member States’ economies is even more important in the euro area on account of the single currency. The Commission therefore proposes increased economic surveillance for Member States which have adopted the euro.

A scoreboard might be established for each Member State. It would encompass a set of indicators such as the level of public debt, credit prices, developments in current accounts, productivity and employment. These scoreboards would be accompanied by a qualitative assessment. They would then be used as the basis for recommendations concerning:

  • the field of revenue and expenditure;
  • the functioning of labour, products, services and financial markets.

Finally, the Commission proposes to establish a framework for crisis management to guarantee financial stability in the euro area. Such a framework would take the form of lending to euro-area countries in financial difficulties. The loans would be subject to compliance with a programme setting out the measures to be taken by Member States in order to consolidate their budgets.

Next steps

The Commission will submit several legislative proposals in order to implement the reforms presented in this Communication.

Related Acts

Regulation (EU) No 407/2010 of the Council of 11 May 2010 establishing a European financial stabilisation mechanism. [Official Journal L 118 of 12.5.2010].

Communication from the Commission to the European Parliament, the European Council, the Council, the European Central Bank, the European Economic and Social Committee and the Committee of the Regions of 30 June 2010 – Enhancing economic policy coordination for stability, growth and jobs – Tools for stronger EU economic governance [COM(2010) 367 – Not published in the Official Journal].
This Communication takes up the proposals set out in the Communication on Reinforcing economic policy coordination. It develops these policy ideas into specific, more detailed proposals. In particular, the Communication gives details of the preventive and corrective measures envisaged in order to reinforce compliance with the Stability and Growth Pact. It also describes the cycles of the European Semester.