Analytics, Economics, EU – Baltic States, Modern EU

The European states’ economies have been successfully moving during last decade out of financial crisis and are presently in the years of progressive growth. However, competitive prospects for the EU member states are becoming dim; uncertainty is running high often heading towards subdued growth with about 1-1,2 per cent of annual GDP (instead of previously 3-4) and threat of inflation.

The EU’s “Sustainable Growth Strategy-2020” adopted in the previous December underlined that in order to stay competitive in the world and to achieve Europe’s goal of climate neutrality, the member states “must turn to addressing the economy’s longer-term challenges”. For example, the new Commission College suggested an ambitious European Green Deal, which would use both the digital momentum and sustainability goals to strive towards a new growth model.

Reference: European Commission/Brussels, 17.12.2019; COM (2019) 650 final. Communication from the Commission “Annual Sustainable Growth Strategy 2020”; {SWD (2019) 444 final}. In: https://eur-lex.europa.eu/legal-content/EN/TXT/?qid=1578392227719&uri=CELEX%3A52019DC0650

New initiative

With this in mind, the Commission has launched a fiscal and economic surveillance framework of the member states’ governance efficiency through a public debate among the EU institutions and the member states on the governance’s perspectives.

Existing EU framework for economic surveillance has guided EU states during last decade in achieving the EU economic and fiscal policy objectives. It helped attain closer coordination of member states’ economic policies: by addressing macroeconomic imbalances, reducing public deficits and debt levels.

The EU’s surveillance (mainly through the European Semester) created optimal conditions for sustainable growth and achieving the Union's strategy for growth and jobs. However, some drawbacks remain to be seen and fiscal frameworks have grown increasingly complex; moreover, the EU’s socio-economic context has significantly changed since the rules were established.

On the occasion of surveillance framework, Valdis Dombrovskis, Executive Vice-President for “economy that works for people” direction underlined that the EU’s “shared fiscal rules are essential for the stability of economies and the euro area”. Ensuring financial stability is a precondition for economic growth and job creation. They are also vital in terms of building trust among the member States on the deepening of the Economic and Monetary union. The EU financial rules have evolved considerably and they have yielded positive results; however, they have become quite complex and difficult to perceive by the states and businesses, he added.

Therefore, the EU institutions would like to start an open discussion on how to build consensus for streamlining the rules and making them more effective.

Paolo Gentiloni, Commissioner for Economy added that the EU and the states’ economic policies have to address modern challenges which have changed during last decade. In this regard, the stability remains a key objective with the need for supporting growth and mobilizing immense investments required to tackle the climate change. He underlined that the states have to adopt more anti-cyclical fiscal policies, given the increasing constraints faced by the ECB. Finally, he noted that the complexity of the EU rules makes it harder to explain to states and the citizens “the Brussels' message”; and the perspective debate on these issues in the coming months shall change the situation to the positive.

Changing economic context: new challenges

The economic governance framework has evolved over time, with changes introduced to respond to the emergence of new economic challenges.

The six-pack and two-pack legislation was introduced to address the vulnerabilities exposed by the economic and financial crisis; but the economic context in the states has evolved materially since then. The European economy has experienced seven years of consecutive growth and all EU states are presently are within the “corrective arms” of the Stability and Growth Pact, the so-called Excessive Deficit Procedure (in 2011 there were 24 such states).  

However, the growth potential of many EU states has not recovered to pre-crisis levels and public debt levels remain high in some. Reform momentum has faded and progress has become uneven across countries and policy areas. Meanwhile, Europe is aiming to become the world's first climate-neutral continent and to seize the new opportunities of the digital age, as set out in the Annual Sustainable Growth Strategy.

An inclusive debate is needed: a high degree of consensus and trust amongst all key stakeholders is crucial for the effectiveness of economic surveillance in the EU. The Commission is inviting all stakeholders, the six other European institutions (except the Commission itself), national authorities, social partners and academia, to engage in a debate to provide their views on how the economic governance framework has functioned so far and on possible ways to enhance its effectiveness. This engagement will take place through various means including dedicated meetings, workshops and an online consultation platform. The Commission will take into consideration the views of stakeholders and the outcome of these consultations when it completes its reflections on possible future steps.

This process should be completed by the end of 2020.

Assessing the European economic governance framework

The open discussion and reviews will assist in creating an effective economic surveillance framework through analysing three key objectives:1) ensuring sustainable government finances to avoid macroeconomic imbalances; 2) enabling closer coordination of the member states economic policies; and 3) promoting convergence of the EU states' economic performance.

The review will find the ways the surveillance framework has supported the correction of existing macroeconomic imbalances and the reduction of public debt. This, in turn, will help to create proper conditions for sustainable growth, strengthening resilience and reduce vulnerabilities to economic shocks.

It can also promote sustained convergence of the EU states' economic performances and assist in closer coordination of fiscal policies within the euro area.

However, the public debt remains high in some states and the fiscal situation there has been often pro-cyclical; moreover, the composition of public finances has not become more growth-friendly, and the states have been consistently opting to increase current expenditure rather than protecting investment.

The review will show also how complicated and excessively complex –if at all- the fiscal framework has become with the need to cater for a wide variety of evolving circumstances while pursuing multiple objectives. This complexity means that the framework has become less transparent and predictable, which hampers communication and political ownership.

The EU’s legislation on strengthening budgetary surveillance under the Stability and Growth Pact (SGP) introduced requirements for national fiscal frameworks and broadened the scope of surveillance to include macroeconomic imbalances. The revamped macroeconomic and budgetary surveillance was integrated into the European Semester, the framework for coordination of the economic policies, which was established in the same context.

The Union’s legislation on economic governance requires the Commission to review and report on the application of the legislation every five years. Thus, the start of a new political cycle with the new Commission College provides an opportunity to assess the effectiveness of the current rules. The economic context has changed considerably since these measures were introduced in response to the vulnerabilities exposed by the economic and financial crisis. Meanwhile, the European Union is aimed at becoming the world's first climate-neutral continent and grasping new opportunities of the digital age, as set out in the Annual Sustainable Growth Strategy.

The Commission’s review considers the effectiveness of three surveillance elements in achieving optimal governance objectives: a) ensuring sustainable growth and public finances to avoid macroeconomic imbalances; b) enabling closer of sectoral economic policies’ coordination; and c) promoting convergence of member states’ economic performance.

The surveillance framework has supported the correction of existing macroeconomic imbalances and the reduction of public debt. This, in turn, has helped to create the conditions for sustainable growth, strengthened resilience and reduced vulnerabilities to economic shocks. The implementation of recommended policies by the EU states has contributed to the gradual strengthening of the EU economies and to job creation.

The establishment of a common budgetary timeline and the policy guidance issued on the basis of the member states' draft budgetary plans has led already to a closer coordination of fiscal policies within the euro area.

Discussions’ connection with the European Green Deal

In the context of the EU ambitious plan to conclude the European Green Deal which is aimed at making Europe the world's first climate-neutral continent, the discussions will assess the appropriateness of the current level of investment while preserving debt sustainability.  

‘Green budgeting' could also play a role in improving the quality of public finances and helping to deliver on the objectives of the European Green Deal; however, it is too soon to say whether the review will lead to the development of such tools.

The EU's fiscal rules aim at ensuring the credibility and sustainability of public finances; existing economic governance would facilitate green investments while ensuring financial stability and smooth access to financial markets at low interest rates. These are necessary factors to ensure sustainable public investment over the medium term. In principle, the Stability and Growth Pact (SGP) is neutral as regards to the composition of public revenue and expenditure, focusing on deficit and debt. 

Therefore the EU states are free to prioritise their public expenditures in favour of investment as the EU rules recognise the importance of protecting investment. They also provide support for investment through the so-called “investment clause” and other flexibility provisions provided for in the Commonly Agreed Position on Flexibility contained within the SGP.

Recommendations to reduce the complexity of the EU's fiscal rules

In general, the discussions and reviews in the member states are not supposed to include any recommendations; however, the assessment of how the rules have worked so far would be welcomed. Current EU fiscal governance framework has grown excessively complex, which resulted from the framework pursuing multiple objectives and the need to cater for a wide variety of evolving circumstances, including by the use of flexibility, in a context of divergences of views among the EU states.

This framework is reflected in a very detailed codification, encompassing several operational indicators and a variety of escape clauses. As a result, the fiscal rules have become less transparent, hampering predictability, communication and political ownership.

General reference: https://ec.europa.eu/commission/presscorner/detail/en/QANDA_20_171

More information in the following websites: 

=Economic governance review: Questions and answers; 

= Communication on the economic governance review; 

= Online consultation platform; 

= Annual Sustainable Growth Strategy; 

= The European Semester; = Stability and Growth Pact; 

= Macroeconomic Imbalance Procedure; 

= Vade Mecum on the Stability and Growth Pact; 

= The Macroeconomic Imbalance Procedure Compendium.

General reference: https://ec.europa.eu/commission/presscorner/detail/en/IP_20_170