Editor's note

In order to strengthen the recovery and foster convergence, the Commission recommends that the member states shall build their development strategies in economic and social policy on three main pillars: re-launching investment, pursuing structural reforms and activate responsible fiscal policies. 

European Commission has made ambitious proposals during 2015 to complete Europe's Economic and Monetary Union, including instruments to streamline the European Semester, to advance the Banking Union and the Capital Markets Union, as well as reinforcing transparency and democratic legitimacy while strengthening the social dimension of European economic governance.

A new Single Market Strategy, an Action Plan for the Digital Single Market, and a Framework Strategy for a Resilient Energy Union with a forward-looking Climate Change Policy have also been put forward to strengthen the European internal market.

All these initiatives should now be fully implemented during 2016 by the member states to deliver concrete and tangible results. To succeed, the EU institutions and the member states need to work together to ensure a bold and determined policy responses. This should be achieved by closely involving the European Parliament and national legislators as well as social partners, local, regional authorities and civil society both in drafting budgets and in practical implementation.

Economic governance instruments

Economic growth in the EU is expected to strengthen slightly from 1.9% in 2015 to 2.0% in 2016. At the same time, the states feel pressure from slowdowns in emerging markets, geopolitical tensions and security concerns.

Among the new “economic governance instruments” for 2016 are: Annual Growth Survey, Alert Mechanism Report and Joint Employment Report; they are already adopted by the European Commission and signify the launch of the first cycle of the European Semester. Thus, Annual Growth Survey starts the 2016 European Semester.

The directions of EU economic and social policy designed by the Commission for the year ahead (in its new instruments for the European Semester), are fully in line with the recommendations from the Five Presidents' Report with more emphasis on employment and social aspects; that means, more should be done to tackle the social disparities that still exist among the EU states.

The Annual Growth Survey (AGS) is vital for prioritising the right policies that can strengthen the recovery. Member states response requires more impetus into investment, decisive structural reforms and responsible fiscal policies as main “engines” that can help power convergence in the EU states.

The Alert Mechanism Report now also takes a closer look at indicators such as youth unemployment, long-term unemployment and the activity rate in states’ analysis of macroeconomic imbalances. This will help better understand employment, social impacts and challenges in the member states. The AMR is the starting point for the annual surveillance cycle under the Macroeconomic Imbalance Procedure (MIP) and is traditionally presented alongside the AGS. The AMR aims to identify risks of imbalances that require further in-depth investigation as imbalances may hinder the performance of national economies, the euro area, or the EU as a whole.

Joint Employment Report, which provides an annual overview of key employment and social developments in the member states. Figures in the report indicate trends in the employment and social situation as well as divergences among the states still persists. Several states have pursued reforms and positive effects are clearly visible, not least in increasing employment rates.

The report shows that substantial structural reforms pay off. It also analyses the potential for improving the employment and social performance of the EU as a whole.

Structural Reform Support Program. The Commission intends to progressively roll out its support for technical assistance offered by its Structural Reform Support Service. This Annual Growth Survey is thus accompanied by a proposal for funding for technical assistance to the states that can be deployed upon request.

Closer economic coordination

Closer economic coordination can benefit both the euro area and the EU as a whole. An in-depth review is needed because imbalances were identified in the previous round. The Commission has to assess whether those imbalances persist and whether they have worsened or become less acute. For 16 countries, the Commission will pay close attention to the policies implemented by the authorities to address the imbalances identified.

For example, Bulgaria, France, Croatia, Italy and Portugal are the states where excessive imbalances requiring decisive policy action and specific monitoring were identified; Belgium, Germany, Hungary, Ireland, the Netherlands, Romania, Spain, Slovenia, Finland, Sweden and the United Kingdom are countries where imbalances requiring different degree of policy action and monitoring were identified. In-depth reviews for the first time will in-depth reviews for the first time will be performed for Estonia and Austria: for Estonia, the risks and vulnerabilities linked to a renewed build-up of demand pressures will be assessed. In the case of Austria, issues related to the financial sector, notably its high exposure to developments abroad and the impact on credit provided to the private sector will be analysed.

For the states receiving financial assistance (Greece and Cyprus), surveillance of imbalances and corrective measures takes place in the context of their assistance programmes; it is a different procedure. The situation of Cyprus will be assessed in the context of the MIP after its program reaches its conclusion, which is expected by March 2016. Cyprus will move to the normal process as countries which are in post-program surveillance.

For other states, namely the Czech Republic, Denmark, Latvia, Lithuania, Luxembourg, Malta, Poland and Slovakia, the Commission has concluded that an In-Depth Review is not needed at this stage. Nonetheless, careful surveillance and policy coordination are necessary on a continuous basis for all countries to identify emerging risks and put forward the policies to support growth and jobs.

Euro area recommendation covers four areas: = reforms for growth and convergence; = modernising labour markets; = maintaining a differentiated but overall neutral fiscal stance; and = continuing with the strengthening of the banking sector in order to further improve the flow of credit to households and businesses.

Thus, the main focus of the AGS-2016 is on economic policies that can strengthen the recovery and support the process of economic and social convergence towards the best EU’s performers.

The EU’s task is to make EU economies more resilient while fostering convergence, i.e. to bring economic and social development levels across Europe closer together. In this context, the EU’s current economic policy includes the following priorities:

·         First, stepping up investment. This means building on the Investment Plan for Europe, developing projects that would have a real impact on the economy. It also means removing barriers and creating the right regulatory environment for attracting private investment. High private debt and non-performing loans are also holding back investment. It needs further streamline insolvency systems and ensure efficient judicial processes to address the overhang of debt.

·         The second policy priority is structural reforms to modernise states’ economies. This implies increased productivity through a flexible and secure labour market, coupled with efficient and sustainable social protection systems. It also implies a competitive and more integrated product and services market that can drive forward innovation and job creation. This cannot be done without efficient and modern public administrations.

·         The third focus is to continue fiscally-responsible policies. Average budget deficit in the Euro area is continuing to decline and is expected to reach 1.7% of GDP in 2016.

Public debt in many EU states is still very high and needs to be brought down in line with the rules of the Stability and Growth Pact. Debt acts as a drag on growth and makes countries vulnerable to adverse shocks. Population ageing also needs to be addressed. This means ensuring that pension, healthcare and social security systems are financially sustainable and can provide proper protection. The quality of public finances can also be improved, not least with fairer and more efficient tax systems.

The proposal for Regulation to establish a formal Program for Structural Reform Support - amounting to €143 million is to fund technical assistance to the states; for example, in order to support structural reforms, the Commission relies on technical assistance offered by the Structural Reforms Support Service (presently EU experts are working with reform teams in Greece and Cyprus). Commission’s intention is to make this technical assistance available to all EU states as any state can apply for technical assistance in the design and implementation of institutional, administrative and structural reforms.

Tasks for the euro-zone states & the Baltics

By publishing the euro area recommendations in the fall of 2015 (at the start of the new European Semester) the Commission identified common challenges and concerns before the euro states shape their national policies. Commission’s recommendations for the euro area states (all 3 Baltic States included) focus on the challenges facing Euro states and include the following elements:

First, the euro states shall pursue policies that support the recovery and convergence and address macro-economic imbalances that are still holding back stronger growth.

Second, the Commission recommends implementing a series of reforms that tackle rigidities in the labour market and that can help the jobless back into work. The EU social protection systems should support people in need, while preventing possible abuse of the system; the states need reforms to open up product and services markets. As regards tax policies, the recommendations include reduction of taxes on labour, especially low-paid labour. The Commission highlights both the need to shift taxes away from labour and to combat tax evasion: both measures shall support employment creation and fairness.

Third, broadly neutral fiscal stance is expected for the euro area in 2016: i.e. fiscal efforts in individual states should be differentiated to ensure that the rules of the Stability and Growth Pact are being respected.

Fourth recommendation aims to address large stocks of private debt and non-performing loans as well as to improve insolvency proceedings for businesses and households.  

References: http://europa.eu/rapid/press-release_SPEECH-15-6179_en.htm?locale=en.

More on governance:

= The start of the 2016 European Semester: The November European Semester package explained;

= The EU's economic governance explained;

= Annual Growth Survey 2016;

= Alert Mechanism Report 2016.