Analytics, Budget, EU – Baltic States, Financial Services, Legislation, Modern EU

Economic growth in Europe is accelerating strongly, with the euro area economy on track to grow at its fastest pace in a decade this year. The good performance is propelled by resilient private consumption, robust growth around the world and falling unemployment rates. 

Commission’s opinion is that the member states’ economies are expanding and their labour markets improving, but wages are rising only slowly. Investment is also picking up on the back of favourable financing conditions and considerably brightened economic sentiment as uncertainty has faded. The public finances of the euro area countries have improved considerably.

Present Semester’s package is based on the Commission's autumn 2017 Economic Forecast and builds on the priorities of President Juncker's 2017 State of the Union address. It also reflects the recent proclamation of the European Pillar of Social Rights at the Gothenburg Social Summit.

However, the EU states are still on the different stages of the economic cycle. Hence, present 2018-guidance stresses the need to strike the right balance between supporting the economic expansion and ensuring the sustainability of public finances, in particularly through reducing high debt levels.

Commission’s opinion

The 2018 European Semester cycle of economic, fiscal and social policy coordination starts with the acknowledgment of robust economic activity in the euro area and the EU states in general; with recorded high employment levels and unemployment rates declining towards pre-crisis levels. As all EU states contribute to this strong growth momentum, the EU priority now is to make sure that this momentum lasts and brings benefits to all EU states.

Alongside responsible fiscal policies, the pursuit of structural reforms should focus on creating the conditions to boost investment further and to increase real wage growth to support domestic demand.

Commission Vice-President for the Euro and Social Dialogue, Valdis Dombrovskis said that still the European Economic and Monetary Union (EMU) remained uncompleted. Thus the Commission needs to strengthen the EMU and make member states’ economies more resilient and inclusive. He promised to come forward with proposals to reinforce the EMU and strengthen its architecture in order to provide for sound budgetary, economic and social policies at national level. This task, he added is fully combined with the main aims of the European Semester. Therefore, the Commission publishes in November its opinions on member states’ draft budgetary plans and call on those states that were at risk of non-compliance with the Stability and Growth Pact to take the necessary measures to adjust their budgetary plans.

Commissioner Marianne Thyssen, in charge of Employment, Social Affairs, Skills and Labour Mobility, welcomed the agreement and said that from now on the European Pillar of Social Rights will be included into European Semester to reach a renewed convergence towards better working and living conditions among the EU member states.

Commissioner for Economic and Financial Affairs, Taxation and Customs Pierre Moscovici, added that euro area economy was growing at fastest pace in ten years and its average deficit was below 1% of GDP in 2017 (from over 6% in 2010). However, he argued, several EU states continue to have high levels of public debt, which constrained their investment ability. Hence, these countries should further strengthen their public finances through structural reforms; while those with fiscal space should use it to support social investment.

2018 Annual Growth Survey

Building on previous guidance, and taking account of the EU states' different situations in the economic cycle, the Annual Growth Survey (AGS) calls on the member states to boost investment as a way to support the expansion and to increase productivity and long-term growth.

The Commission also recommends further structural reforms that are needed to make Europe's economy more stable, inclusive, productive and resilient. Fiscal policies should strike the appropriate balance between ensuring the sustainability of public finances and supporting the economic expansion. Reducing high levels of debt and re-building fiscal buffers must continue to be a priority. Closing tax loopholes, improving the quality of the composition of public finances and better targeted spending can help in this effort. Social fairness remains a cross-cutting priority ; principles and rights of the European Pillar of Social Rights will be mainstreamed in the European Semester in the years to come.

2018 Alert Mechanism Report

The Alert Mechanism Report (AMR) is an integral tool of the European Semester, which aims to prevent or address imbalances that hinder the smooth functioning of the euro-states' economies and the EU as a whole.

On the basis of the analyses in the Alert Mechanism Report, 12 countries have been proposed to be covered by an in-depth review in 2018. These are the same countries identified as having imbalances in the previous round of the Macroeconomic Imbalances Procedure (MIP), i.e. Bulgaria, Croatia, Cyprus, France, Germany, Ireland, Italy, the Netherlands, Portugal, Slovenia, Spain and Sweden. The Commission will present the in-depth reviews as part of its Country Reports in February 2018.

Draft Joint Employment Report, JEP

This year's draft Joint Employment Report is the first edition to bring into practice the Social Scoreboard, launched as one of the tools to implement the European Pillar of Social Rights. The performance of Member States is assessed on the basis of 14 headline indicators. The Joint Employment Report (JER) also takes into account the national policy reforms vis-à-vis the ambitions set by the Pillar.

The JER points to continued improvements in the labour market: around 8 million additional jobs have been created since the current Commission took office. The unemployment rate continues to fall and stood at 7.5% (8.9% in the euro area) in September 2017, the lowest level since 2008. However, the labour market recovery is not reflected in wage growth. In a number of Member States disposable incomes are still below pre-crisis levels.

Proposal for employment guidelines

The employment guidelines present common priorities and targets for the national employment policies and provide the basis for country-specific recommendations (CSRs). This year's proposal aligns the text with the principles of the European Pillar of Social Rights, with a view to improving Europe's competitiveness and making it a better place to invest, create quality jobs and foster social cohesion.

For the economic policy in the euro area states, the Commission recommends a broadly neutral fiscal stance and a balanced policy mix for the euro area as a whole. This should contribute to supporting investment and improving the quality and composition of public finances. In line with the Commission's priorities, the states are also asked to step up their efforts to implement measures to fight aggressive tax planning.

The recommendation also calls for policies that support sustainable and inclusive growth, and improve resilience, rebalancing and convergence. Priority should be given to reforms that increase productivity, improve the institutional and business environment, facilitate investment, support the creation of quality jobs and reduce inequality. The Commission urges Member States to achieve significant progress towards completing the Single Market, particularly in services. The states with current account deficits or high external debt should seek to raise productivity, while the states with current account surpluses should promote wage growth and foster investment and domestic demand.

The Commission advocates the implementation of reforms that promote equal opportunities and access to the labour market, fair working conditions, social protection and inclusion. It also calls on euro area states to shift taxes away from labour, in particular for low-income and second earners.

The recommendation calls for continued work to complete the Banking Union, with regard to risk reduction and risk sharing, including a European Deposit Insurance Scheme and making the common backstop for the Single Resolution Fund operational. European supervision of financial institutions should be strengthened to prevent the accumulation of risks. The reduction of the levels of non-performing loans should also be accelerated and EU capital markets further integrated and developed to facilitate access to finance, especially for SMEs.

Finally, the Commission recommends swift progress on completing the Economic and Monetary Union in full respect of the Union's internal market and in an open and transparent manner towards non-euro area states.

Draft Budgetary Plans for the euro-area: good positions for the Baltic States

The Commission has completed assessment of the 2018 Draft Budgetary Plans (DBP) of euro area states in view of complying with the provisions of the Stability and Growth Pact (SGP). It adopted 18 opinions for all euro area states except Greece.

Regarding the sixteen countries in the preventive arm of the Stability and Growth Pact: for six countries (Germany, Lithuania, Latvia, Luxembourg, Finland and the Netherlands), the DBPs are found to be compliant with the requirements for 2018 under the SGP.

For five countries (Estonia, Ireland, Cyprus, Malta, and Slovakia), the DBPs are found to be broadly compliant with the requirements for 2018 under the SGP. For these countries, the plans might result in some deviation from each country's medium-term objective (MTO) or the adjustment path towards it.

For five countries (Belgium, Italy, Austria, Portugal, and Slovenia), the DBPs pose a risk of non-compliance with the requirements for 2018 under the SGP. The DBPs of these Member States might result in a significant deviation from the adjustment paths towards the respective MTO. For Belgium and Italy, non-compliance with the debt reduction benchmark is also projected. In the case of Italy, the persisting high government debt is a reason of concern. In a letter to the Italian authorities, Vice-President Dombrovskis and Commissioner Moscovici informed that the Commission intends to reassess Italy's compliance with the debt reduction benchmark in spring 2018.

Two countries remained in the corrective arm of the Stability and Growth Pact, i.e. being subject to the Excessive Deficit Procedure. For France, which could become subject to the preventive arm from 2018 onwards if a timely and sustainable correction of the excessive deficit is achieved, the DBP is found to be at risk of a non-compliance with the requirements for 2018 under the SGP, as the Commission Autumn 2017 Economic Forecast projects a significant deviation from the required adjustment path towards the MTO and non-compliance with the debt reduction benchmark in 2018.

For Spain, the DBP is found to be broadly compliant with the requirements for 2018 under the SGP, as the Commission Autumn 2017 Economic Forecast projects that the headline deficit will be below the Treaty reference value of 3% of GDP in 2018, although the headline deficit target is not projected to be met and there is a significant shortfall in fiscal effort compared to the recommended level.

The Commission has also taken a number of steps under the Stability and Growth Pact for the UK: the Commission recommends that the Excessive Deficit Procedure (EDP) be closed for the United Kingdom. In case of Romania, the Commission established that no effective action was taken in response to the Council recommendation of June and proposes that the Council adopts a revised recommendation to Romania to correct its significant deviation from the adjustment path towards the medium-term budgetary objective. In June 2017, the Council had issued a recommendation of an annual structural adjustment of 0.5% of GDP to Romania under the Significant Deviation Procedure (SDP). On the back of developments since and following the lack of effective action by Romania to correct its significant deviation, the Commission now proposes a revised recommendation of an annual structural adjustment of at least 0.8% of GDP in 2018.

More information: = Annual Growth Survey 2018; = Alert Mechanism Report 2018; = Euro area recommendation 2018; = Draft Joint Employment Report 2018; = Proposal for the Amendment of Employment Guidelines; = Communication on the Draft Budgetary Plans of the euro area.

Reference: Commission press release “European semester’s autumn package: striving for sustainable and inclusive growth”, Brussels, 22 November 2017. In:

http://europa.eu/rapid/press-release_IP-17-4681_en.htm?locale=en; Latvian version: http://europa.eu/rapid/press-release_IP-17-4681_lv.htm; Lithuanian version: http://europa.eu/rapid/press-release_IP-17-4681_lt.htm