The global economic and financial crises have exposed shortcomings in the governance of the Economic and Monetary Union. A reform package - the so-called Six Pack - will enter into force by the end of the year. It amends and strengthens the Stability and Growth Pact (SGP), introduces a new Excessive Imbalances Procedure and lays down new requirements for Member States' national budgetary frameworks. While it will be a game changer, more should be done specifically for the euro area. Today, the Commission is unveiling two new Regulations aimed at further strengthening the surveillance mechanisms in the euro area, as well as a Green Paper on presenting options for euro Stability Bonds.
Why two new Regulations?
There is a need for euro area Member States to go beyond the Six Pack, so as to strengthen the economic pillar of the Economic and Monetary Union.
The extent and potential consequences of the spillovers between euro area Member States' economic and budgetary situations is clearly evident. In good times, this interdependence brings increased prosperity. But it also means that the sharing of risk should be accompanied by a sharing of responsibility and a seamless procedure covering all eventualities, including the use of financial backstops.
To which countries do the Regulations apply?
The first Regulation will apply to all euro area Member States, with special provisions made for those which are subject to an Excessive Deficit Procedure (EDP).
The second Regulation sets out explicit rules for enhanced surveillance for those euro area Member States facing severe difficulties with regard to their financial stability; those in receipt of financial assistance on either a precautionary basis or as part of a full-scale assistance programme; and those in the process of exiting such assistance. For the first time, there will be a common and graduated framework that will set out the surveillance requirements made in such cases.
Taken together, the Regulations put in place for the euro area Member States an enhanced monitoring procedure that builds on and complements the Stability and Growth Pact, ensuring a seamless continuity of policy monitoring in all budgetary situations.
What new monitoring requirements will the Regulation strengthening surveillance of budgetary policies bring about in euro area Member States?
The new monitoring requirements include the introduction of a common budgetary timeline and common budgetary rules, such as independent macroeconomic forecasts and independent fiscal councils monitoring the implementation of national rules.
Euro area Member States will be required to submit their draft budgetary plans for the following year to the Commission and the Council in the autumn. The Commission will examine them and will address an opinion to a Member State if these plans do not appear to be in line with the obligations under the Stability and Growth Pact and the recommendations from the European semester in the budgetary area.
What is the purpose of such an assessment?
This procedure will allow Member States' plans to be assessed by both the Commission and the other euro area Member States in the Eurogroup before they become law. In doing so, it will enhance the coordination and surveillance of Member States' policies and will help inform any subsequent decisions about whether Member States should be placed in an Excessive Deficit Procedure.
What about euro area Member States in Excessive Deficit Procedure?
For euro area Member States in EDP, the new Regulations introduce a new system of graduated monitoring. This will operate alongside - and effectively as part of - the Stability & Growth Pact requirements.
Depending on which step in the EDP a Member State is at, the new monitoring provisions will regularly provide the Commission with the information needed to judge whether a risk of non-compliance with the deadline to correct the excessive deficit exists, at any point in time.
If such a risk exists, the Commission will address a recommendation to the Member State in question. This recommendation, together with the Member State's response, will inform the Commission's assessments to the Council as to whether a Member State has taken effective action with regards to their EDP recommendations. As such, it forms an integrated part of the decision-making relating to the Stability and Growth Pact.
What does the second Regulation add to this?
The second Regulation strengthens the monitoring and surveillance procedures even further for Member States experiencing severe difficulties with regard to their financial stability or for those in receipt of financial assistance.
The strength and intrusiveness of the provisions will depend on the severity of the situation.
Member States experiencing severe difficulties with regard to their financial stability or receiving financial assistance on a precautionary basis will be subject to tighter monitoring ("enhanced surveillance") by the Commission - in liaison with the ECB - which will go further than the requirements for EDP Member States. They are based on an obligation to communicate information to the Commission and allow assessments to be made about the content and direction of fiscal policy at any point.
On the basis of this monitoring, the Commission may conclude that further measures are required by a Member State and that its financial situation has significant adverse effects on the financial stability of the euro area. In that case, the Commission may propose that the Council recommend that the Member State concerned seek financial assistance and that a macro-economic adjustment programme be prepared.
What happens if financial assistance is granted?
The Regulation also introduces a new procedure that will apply to the preparation and adoption of any future macroeconomic adjustment procedures. It sets out how financial assistance granted outside the framework of the Union (such as through the EFSF and IMF), fits with the Treaty. This new framework will supersede existing provisions. In this way, the implementation of the SGP, the Excessive Imbalance Procedure and the European Semester will be adapted with a view to avoiding a duplication of reporting obligations.
What happens when a Member States emerges from an adjustment programme or precautionary assistance?
A new system of post-programme surveillance is set out for Member States emerging from adjustment programmes or precautionary assistance. Until they have paid back a minimum of 75% of the assistance received, they will remain subject to a number of the new enhanced surveillance provisions.
How does this new legislation link with the Stability and Growth Pact (SGP) and the European Semester?
The proposals unveiled today are designed to fit seamlessly into the structure of the Stability & Growth Pact and complement its operation.
Under the recently reformed SGP, Member States present the main characteristics of their public finance plans to the Commission and Council in the spring of every year, as part of the European Semester. Today's proposal adds a new requirement: Member States should publish and present to the Commission their draft budgetary plans in advance of their adoption by the national parliaments.
Moreover, the exercise of the common budgetary timeline in the autumn will be a follow-up to the exercise in the spring and provide preparatory grounds for the following spring's assessment.
How does this early assessment add to the current system?
If the Commission issues an opinion stating that the plans are not in line with the SGP and the Member State does not take corrective action, the Commission can use this when deciding whether to place the Member State in an EDP. While this opinion is not a requirement before a Member State is placed in an EDP, it adds to the toolbox at the disposal of the Commission when making its recommendation to the Council.
This is also the case for the further requirements when a Member State finds itself in an EDP. The new monitoring requirements - based on an obligation to communicate information to the Commission - allow assessments to be made about the content and direction of fiscal policy at any point while a Member State is in an EDP. Steps away from the correction needed from an excessive deficit may therefore be highlighted at any point. This creates the possibility to follow policy more closely and to back up their recommendations in the context of the SGP through a greater scrutiny of Member States' policies.
The Commission will now be allowed to take action well before the deadline for correcting an excessive deficit if its assessment concludes that it is likely that the Member State will not comply by its deadline.
Is the Commission asking for the right to veto national budgets?
No. The presentation of a Member State's draft budgetary plans will allow the Commission to issue an opinion about whether they are in line with both the requirements of the SGP and the recommendations from the European semester before the budget is adopted. It does not give the Commission the power to change the plans. This monitoring at an earlier stage in the budgetary procedure will equip all stakeholders in the national budgetary process with the necessary information to make an informed decision.
This is important since such early assessment can be used as part of the evidence in deciding whether to place the Member State in an EDP.
What is the legal basis for the new legislation?
The new procedures are being proposed under Article 136 of the Treaty on the Functioning of the European Union. This Article was introduced by the Lisbon Treaty and allows euro area Member States to strengthen the coordination and surveillance of their budgetary discipline in order to ensure the proper functioning of economic and monetary union. The new legislation therefore only applies to the euro area.
The new Regulation seems to add to the reporting obligations of Member States in an EDP. Will this not increase the administrative burden?
Insofar as the new Regulation creates new reporting obligations for Member States in an excessive deficit, it has been designed to avoid the duplication of existing requirements. The aim is to provide the Commission and the Council with details more frequently on the budgetary situation of Member States concerned. This will ensure a closer monitoring of Member States which have been making gross errors in their debt or deficits while in an EDP.
Careful attention has been paid to avoid over-burdening national administrations. Reports and monitoring already envisaged throughout the EDP, as described in the corresponding Regulation of the Pact, are included and combined with the requirements set out in the new text. In addition, Member States which are subject to a macroeconomic adjustment programme are also exempted from the reporting requirements of this new Regulation on monitoring and assessment.
How do the changes affect national parliaments and Member States' sovereignty in the budgetary field?
The changes leave national parliaments better informed in terms of appropriateness of the draft budget plans, without affecting their role in the budgetary procedure. They will be kept informed at all the stages of the new budgetary monitoring process and of the assessments made as part of the new legislation.
In terms of the procedure, once the draft budgetary plan is presented to the Commission, it may request that an alternative plan be presented within 2 weeks if it identifies particularly serious non-compliance with the obligations laid down in the Stability and Growth Pact, and it may issue an opinion on the draft. This opinion will be presented to the parliament of the Member State concerned. Equipped with this extra information, the national parliament remains sovereign in amending and voting the actual budget. In the case of Member States under an EDP, whether the Commission identifies risks to a timely correction of the excessive deficit, the recommendation it issues will be presented to the parliament.
There is thus no transfer of sovereignty away from the Member States. The new role of the Commission is one of information and monitoring. Member States will need to respect European requirements in their public finances when setting their budgetary plans; but these requirements are already set out in the Treaty and the SGP. Today's proposals add to the scrutiny of Member States' policymaking but do not place additional requirements on the policy itself.
How do the new proposals fit in with the Green Paper on the euro Stability Bonds?
Today's proposals form part of the basis on which Stability Bonds can be constructed. It is clear that any move towards the joint issuance of debt is premised on strong budgetary governance and a watertight system of monitoring and surveillance. The sharing of risk under a regime of Stability Bonds would require a coordination and mutual surveillance of budgetary policy that goes beyond what is outlined in today's proposals. The new proposals should therefore be seen as a necessary but not sufficient stepping stone on the path towards Stability Bonds.
Why create enhanced surveillance on top of the normal surveillance process? Do you assume that the latter will not work?
The surveillance process has been considerably improved with the Six-Pack. The new Regulation on the draft budgetary plans and the correction of excessive deficits will be a further important step. This enhanced surveillance will allow a closer monitoring of countries experiencing financial difficulties and will give the Commission the powers needed to this effect.
Why adapt the implementation of the SGP, the EIP and the European Semester for programme countries? Doesn't it weaken the surveillance?
Macro-economic adjustment programme are very broad in scope. They go well beyond fiscal issues. In practice, the country concerned is asked to do whatever is identified as needed to improve the situation. The suspension of the EIP and the adaptation of the SGP and European Semester will help avoiding an unnecessary duplication of reporting obligations.
Is the enhanced surveillance contained in the Regulation consistent with the one foreseen in the EFSF guidelines for countries under precautionary financial assistance?
Yes. The Commission services prepared the relevant EFSF guidelines and discussed them with the Member States with the future draft Regulation in mind, thus ensuring a natural consistency between the two texts.
For more information:
IP/11/1381 New action for growth, governance and stability
MEMO/11/820 European Commission Green Paper "Feasibility of introducing Stability Bonds"
MEMO/11/821 The 2012 Annual Growth Survey: Frequently Asked Questions