-What is the Commission presenting today?
The Communication outlines the Commission's orientations for a reform of the economic governance framework, addressing challenges prevailing now and over the foreseeable future.
-What are the main elements of the Communication?
The Commission's orientations seek to create a more transparent, simpler and integrated architecture for macro-fiscal surveillance to better deliver on the objectives of ensuring debt sustainability and promoting sustainable growth.
The central elements of these orientations are:
-National medium-term fiscal-structural plans that bring together fiscal, reform and investment policies of each Member State, within a common EU framework;
-Greater national ownership and better enforcement of the Council-endorsed fiscal-structural plans, as a counterpart of increased ownership of those paths by Member States;
-A more effective framework to detect and correct macroeconomic imbalances; and
-A more focused and streamlined post-programme surveillance framework, the framework assessing the repayment capacity of Member States having benefited from financial assistance programmes.
-Why is the Commission presenting this Communication now?
Sound public finances that respond in a coordinated manner to the prevailing challenges and that help achieve common EU priorities have become increasingly important in the face of recent and current crises. This Communication responds to the need for a reformed framework that is fit for the challenges of this decade. Swift agreement on revising the EU economic governance framework would provide further evidence of the institutional robustness of the euro area, which rests on sustainable public finances and on preventing and addressing macroeconomic imbalances in all Member States and in the EU and the euro area as a whole. The operation of credible fiscal rules and surveillance of risks to macro-financial stability will also help the European Central Bank attain its goals, particularly as it faces the challenge of delivering on its mandate to maintain price stability while avoiding financial fragmentation in the euro area.
Reaching an agreement on the future of the economic governance framework is a pressing priority. The extension of the general escape clause until 2024 will provide Member States with the necessary flexibility to react quickly and effectively to the consequences of Russia's invasion of Ukraine and the current economic situation. At the same time, Member States and the Commission should reach a consensus on the reform of the economic governance framework ahead of Member States' budgetary processes for 2024.
-Is the Commission recommending any legal changes to the Stability and Growth Pact and/or changes to the Treaty, i.e. the 3% of GDP deficit and 60% of GDP debt reference values?
In the Commission's view, a thorough reform of the EU economic governance framework will require legislative changes, but changes to the Treaty will not be necessary. The Commission will consider tabling legislative proposals on the basis of the Communication presented today and the ensuing discussions.
-How are the findings of the public debate on the review of the EU's economic governance framework reflected in this Communication?
The Commission relaunched an important discussion on the future of the economic governance framework almost one year ago. Since then, an open and rich public debate has taken place, with contributions from citizens, EU institutions, national governments and a range of other stakeholders. The Commission has also engaged in useful technical discussions with Member States.
-How has the COVID-19 pandemic influenced the Commission's thinking on how to reform the economic governance framework?
Lessons learned from the successful EU policy response to the COVID-19 crisis, including the Recovery and Resilience Facility, have informed the review of the economic governance framework.
For example, Member States provided sizeable fiscal support in response to the COVID-19 crisis that, together with EU-level measures and instruments, and social safety nets and health systems at the national level, helped to mitigate the economic damage of the crisis. This has underlined the need for fiscal policy to act in a counter-cyclical manner, both in supporting the economy during crises and building up fiscal buffers in periods of economic growth. Investment in preparedness and resilience can also reduce the adverse economic impact of crises.
At the same time, the pandemic resulted in a significant increase in public and private sector debt ratios, underscoring the importance of reducing debt to prudent levels in a gradual, sustained and growth-friendly manner.
The crisis also confirmed that effective policy coordination is critical, including between different policy and funding tools, and between the EU and national levels.
-How have lessons learned from the operation of the Recovery and Resilience Facility fed into this Communication?
Lessons learned from the set-up of the Recovery and Resilience Facility (RRF) have provided the Commission with inspiration for the orientations presented today.
In particular, the Commission has drawn insights from the RRF's commitment-based approach to policy coordination, with strong national ownership of policy design and outcomes, based on upfront guidance to Member States on investment and reform priorities.
-How do the reforms ensure that EU fiscal rules are fit for the challenges ahead?
Today's Communication outlines orientations for reforming the economic governance framework, addressing the key economic and policy issues that will shape the EU's economic policy coordination and surveillance for the foreseeable future. This includes a thorough reform of the EU fiscal rules to make them simpler and more transparent, and to improve their enforcement.
The reform proposal recognises that both prudent fiscal strategies and investment and reforms that enhance sustainable growth are indispensable and mutually reinforcing in ensuring fiscal sustainability, while also making progress towards a green, digital, inclusive and resilient economy.
The revised EU economic governance framework should tackle the prevailing challenges that will contribute to making Europe more resilient, by enabling strategic investment and reforms, and by reducing high public debt ratios in a realistic, gradual and sustained manner.
-Will the reform lead to adequate levels of public investment in the EU, in particular the investment needed to secure the green and digital transitions and the objectives of REPowerEU?
The Commission's orientations on reform of the economic governance framework aim to ensure a gradual and sustained debt reduction and the implementation of reforms and investment that enhance sustainable growth. The framework reflects that there is no trade-off between reforms and investment and fiscal adjustment. Improving the quality of public finances and protecting public investment should be central elements of medium-term fiscal-structural plans.
Member States would set out investment priorities in medium-term fiscal-structural plans. Moreover, Member States would be able to commit to a set of reforms and investment that help bring debt on a sustainable path and therefore could underpin a longer adjustment period and a more gradual adjustment path. These investment commitments will need to respect common and transparent EU criteria, such as responding to common EU priorities and targets and relevant country-specific recommendations.
-Does the Commission propose a “golden rule” to exclude investments from EU fiscal rules?
The Commission's reform orientations recognise that it is essential to reduce high public debt and to promote sustainable growth. High levels of investment will be needed to achieve a fair twin transition (green and digital), increase social and economic resilience (including through upskilling and reskilling), increase territorial cohesion, reduce energy dependencies, and increase defence capabilities, both at the national level and in support of Europe's common priorities. At the same time, it remains crucial to ensure debt sustainability and build fiscal buffers.
The orientations do not propose a ‘golden rule' to exclude investment from EU fiscal rules. This issue was discussed extensively as part of the public debate on the economic governance review and no consensus emerged.
These orientations seek to promote investment through an all-encompassing medium-term net expenditure path, which will give Member States scope to decide on their public expenditure priorities and provide incentives to commit to a set of reforms and investment responding to common and transparent EU criteria. These investment and reform commitments will also be explicitly set out in medium-term fiscal-structural plans. The Commission will ensure additional enforcement of those commitments underpinning a more gradual fiscal adjustment on the part of a Member State.
-Does the Commission propose changes to the debt reduction rule in EU fiscal rules?
In the current circumstances of high levels of debt post-COVID, the current debt reduction benchmark (the so-called 1/20th rule) implies a fiscal adjustment that is too demanding, pro-cyclical and frontloaded. This would have a very negative impact on growth and thereby on debt sustainability itself.
The orientations therefore propose to move towards a more risk-based surveillance framework that puts debt sustainability at its core and differentiates more between countries by taking into account their public debt challenges. At the same time, this would mean adhering to a transparent and common EU framework consistent with the 3% of GDP and 60% of GDP reference values of the Treaty.
National medium-term plans for Member States with high and medium debt challenges should ensure a sustainable debt reduction path through a gradual consolidation, together with reforms and investments. Member States should present medium-term fiscal-structural plans that ensure debt is brought onto a sustainable path by the end of the adjustment period, which would be four years as a rule.
-How do the reforms simplify the economic governance framework?
The Commission's reform orientations would simplify the framework in several ways:
-First, fiscal surveillance would focus on a single operational indicator, namely the Member State's agreed net expenditure path. It would serve as a basis for carrying out annual fiscal surveillance over the lifetime of the Member State's medium-term plan. The debt reduction benchmark, the benchmark for reduction in the structural balance, the significant deviation procedure and the matrix of requirements would no longer exist.
-Second, annual monitoring by the Commission would be less onerous for Member States. Instead of issuing annual recommendations, the Commission would focus on Member States' compliance with a medium-term net expenditure path that has been endorsed by the Council. Member States would need to submit annual implementation reports instead of annual Stability or Convergence Programmes.
-Third, the reform would simplify enforcement procedures, which would predominantly be triggered by deviations from the agreed and Council-endorsed medium-term expenditure path.
-How do the reforms enhance national ownership of the economic governance framework?
In her 2022 State of the Union address, President von der Leyen highlighted the importance of ensuring more ownership for Member States in a reformed economic governance framework. The proposal outlined today would enhance ownership in several ways:
-First, Member States themselves would come forward with medium-term fiscal-structural plans, within a common EU framework. A risk-based surveillance framework would give more leeway to Member States to set their adjustment paths.
-Second, independent fiscal institutions could play an important role in the monitoring of compliance with the national medium-term fiscal-structural plans in support of the national governments. This would also trigger a greater debate at national level and a higher degree of political buy-in and ownership.
-How will the reforms lead to better results for citizens?
Building a simpler and more effective framework to promote debt sustainability and growth is a means to an end. Ultimately, the Commission's orientations are designed to support jobs, growth, investment, social fairness and macroeconomic stability.
A governance framework that helps create a green, digital and resilient economy offers protection and opportunities for all EU citizens. These orientations ultimately aim at incentivising reforms and investment, in light of the high levels of investment that will be needed - among other things - to achieve a fair twin transition (green and digital), increase social and economic resilience (including through upskilling and reskilling), increase territorial cohesion, reduce energy dependencies and increase defence capabilities. Finally, sound public finances help to keep financing costs low, facilitating private investment and consumption.
-What will the reform mean for high-debt and low-debt Member States?
The Commission proposes to move towards a risk-based system of fiscal surveillance that focuses on those Member States with the greatest public debt challenges:
-Member States with substantial or moderate public debt challenges would have to set an adjustment path that ensures that debt is put on a plausibly and continually declining path.
-Member States with low public debt challenges would have more leeway to set their fiscals path as they keep their fiscal deficit credibly below the 3% of GDP threshold.
-How will the medium-term fiscal-structural plans contained in the Communication work in practice?
As part of the common EU framework, the Commission would put forward for each Member State with a substantial or moderate public debt challenge a reference multiannual adjustment path in terms of net primary expenditure covering four years:
-For Member States with a substantial debt challenge, the reference net expenditure path should ensure that by the horizon of the plan (four years), the 10-year debt trajectory at unchanged policies is on a plausibly and continuously declining path and that the deficit remains below the 3% of GDP reference value over the same 10-year period.
-For Member States with a moderate debt challenge, the reference net expenditure path should ensure that at most three years after the horizon of the plan, the 10-year debt trajectory is on a plausibly and continuously declining path at unchanged policies and that by the horizon of the plan, the deficit remains below the 3% of GDP reference value over the same 10-year period.
To assess plausibility, the Commission would use stress tests and analysis, simulating common shocks related to short and long-term interest rates, nominal GDP-growth, the primary balance and nominal exchange rates. This analysis would be made public together with the reference net expenditure path. The Commission would also make available the methodology and underlying data.
When assessing the plan, the Commission will also evaluate whether it is credibly ensured that the deficit is maintained below 3% of GDP over a 10-year period.
For Member States with a low public debt challenge, the deficit should be maintained below the 3% of GDP reference value at unchanged policies over a 10-year period, at most 3 years after the horizon of the plan.
The classification of countries in these three categories will be based on the Commission's debt sustainability analysis framework.
Each Member State would submit a medium-term fiscal-structural plan for assessment by the Commission and endorsement by the Council. The plans would outline the medium-term fiscal path, and reform and investment commitments. The fiscal adjustment path would be set in terms of net primary expenditure, i.e. expenditure net of discretionary revenue measures and excluding interest expenditure as well as cyclical unemployment expenditure. The medium-term path would be translated into corresponding annual spending ceilings. For Member States identified with imbalances under the Macroeconomic Imbalances Procedure, the plans would also include reforms and investments to correct those imbalances. The submission of the plan would be preceded by an in-depth technical dialogue with the Commission. The Commission would assess the medium-term plan in an integrated manner, taking account of the interactions between the fiscal trajectory, and reforms and investments. The assessment would take place on the basis of a common EU assessment framework and transparent methodologies, retaining the possibility of seeking additional information or requesting a revised plan.
Subsequently, the plan would be adopted by the Council on the basis of a positive Commission assessment. After the Commission has assessed the medium-term plan, on the basis of a common EU framework, the Council would either adopt the plan or recommend that the Member State resubmit a modified plan. In case there is no agreement between the Member State and the Commission, the reference net expenditure path would be used by the Commission and the Council for the purpose of fiscal surveillance and enforcement.
As a last step, the Member State would implement the plan with annual monitoring by the Commission and the Council under the European Semester. Once the plan has been endorsed by the Council, it should commit the annual national budgets for a period not inferior to four years.
-How will the medium-term fiscal-structural plans be agreed and can they be rejected? What will be the role of the Council?
Before the submission of the plan, there will be an in-depth technical dialogue with the Commission. The Commission will also put forward for each Member State with a substantial or moderate public debt challenge a reference multiannual adjustment path in terms of net primary expenditure covering four years.
Once the plan is submitted, the Commission will assess it on the basis of common, transparent methodologies. The Commission will retain the possibility of seeking additional information or requesting a revised plan. After the Commission has assessed the medium-term plan, the Council can either endorse it or recommend that the Member State resubmit the plan.
Once the plan has been endorsed by the Council, it should be respected for annual national budgets for the whole adjustment period, with the possibility for Member States to revise the plan only after a minimum period of four years. This minimum adjustment period could be lengthened to match the national legislature, if Member States so wish.
-Will it be possible for Member States to revise their fiscal paths during the lifetime of the medium-term fiscal-structural plan?
As a general principle, it will not be possible for Member States to revise their plans. However, in the event of objective circumstances that make compliance with the plan unfeasible, a new medium-term plan could be proposed, which would have to undergo the same validation process.
When assessing such a request, the Commission would use the following criteria to assess the set of reform and investment commitments put forward by Member States. They should:
-Be growth enhancing and support fiscal sustainability;
-Address common EU priorities, including the National Energy and Climate Plans (aligned with the targets of the EU Climate Law), the National Digital Decade Roadmaps, and the implementation of the European Pillar of Social Rights, and ensure that the fiscal-structural plan addresses all or a significant subset of relevant country-specific recommendations, including, where applicable, recommendations issued under the Macroeconomic Imbalance Procedure;
-Be sufficiently detailed, frontloaded, time-bound and verifiable; and
-Ensure that country-specific investment priorities can be addressed without leading to investment cuts elsewhere over the planning horizon.
-How will the medium-term fiscal-structural plans interact with the Recovery and Resilience Plans during the lifetime of the Recovery and Resilience Facility?
Member States' recovery and resilience plans (RRPs) set out investments and reforms that make EU economies more sustainable, resilient and better prepared for the challenges and opportunities of the green and digital transitions. They have been endorsed by the Council, based on an assessment by the Commission, in the context of the Recovery and Resilience Facility (RRF) to support the EU's recovery after the COVID-19 pandemic.
Under the proposed reform of the economic governance framework, Member States would have to submit medium-term fiscal-structural plans that bring together their fiscal, reform and investment commitments.
These fiscal-structural plans would need to be consistent with the existing RRPs. During the lifetime of the RRF, cross references in the medium-term fiscal-structural plans to measures included in the RRPs will be needed to ensure policy consistency.
-Will the excessive deficit procedure be retained?
Yes, the excessive deficit procedure (EDP) would be retained.
The EDP would remain unchanged for breaches of the 3% of GDP deficit reference value (the so-called ‘deficit-based EDP'). This is a well-established element of EU fiscal surveillance that has been effective in influencing fiscal behaviour and is well understood by policy makers and the general public.
The so-called ‘debt-based EDP' would be strengthened. For Member States with debt above 60% of GDP, the debt-based EDP would focus on departures from the agreed fiscal path. The Commission would prepare a so-called ‘Article 126(3) report' that assesses relevant factors and:
-For those Member States with a substantial public debt challenge, departures from the agreed fiscal path would by default result in the opening of the EDP.
-For Member States with a moderate public debt challenge, departures could still lead to the opening of an EDP, if assessed as giving rise to ‘gross errors'.
Enforcement mechanisms would be reinforced: the use of financial sanctions would be made effective by lowering their amounts. There would also be stronger reputational sanctions. The macroeconomic conditionality for structural funds and for the Recovery and Resilience Facility would be applied in a similar spirit, i.e. EU financing could also be suspended when Member States have not taken effective action to correct their excessive deficit.
-What changes to the Macroeconomic Imbalance Procedure are contained in the Communication?
The cornerstone of the Commission's orientations for the Macroeconomic Imbalance Procedure (MIP) would be an enhanced dialogue with Member States to achieve higher policy traction through ownership and commitment. Greater ownership by Member States would be achieved by reaching a better common understanding between Members States and the Commission of the challenges identified under the MIP and the policies needed to address them. That should lead to a commitment from Member States to include the reforms and investments to prevent or correct imbalances in their medium-term fiscal-structural plan.
In addition, the preventive role of the MIP should be strengthened in an environment characterised by new risks. Both the first screening for imbalances in the Alert Mechanism Report (AMR) and the assessment of whether imbalances exist in the In-Depth Reviews (IDRs) would be made more forward-looking to detect and address emerging imbalances early on.
The reform would put more weight on trend developments that are expected to be sustained and on the policies that have been implemented to address imbalances, when assessing whether imbalances have been corrected.
Finally, the reform would strive for a MIP with a clear focus on macroeconomic issues affecting Member States, and at the same time, the reform would also give more visibility to EU and euro area dimensions of imbalances. This could highlight vulnerabilities affecting the EU and the euro area as a whole, and the respective contribution of the various Members States to these concerns, providing also the context to check whether the challenges observed at Member State level are country-specific or shared. It would also help internalise spillovers and feed into the euro area recommendations.
-What changes to post-programme surveillance are contained in the Communication?
Post-programme surveillance assesses the repayment capacity of Member States that have benefited from financial assistance programmes. Today's Communication proposes to conduct post-programme surveillance with clearer objectives, with the intensity of the framework linked to those objectives. In particular, the Commission proposes that post-programme surveillance should focus on:
-Assessing the repayment capacity of Member States through considering the economic, fiscal and financial situation;
-Monitoring the implementation of unfinished reforms that begun under the adjustment programme; and
-Assessing whether corrective measures are needed in the context of concerns for repayment capacity or continued market access.
In light of these objectives, the intensity of post-programme surveillance would evolve over time and with the assessment of risks:
-Initial years of surveillance would be more intense, notably to monitor the implementation of unfinished reforms agreed within the adjustment programme, with the intensity decreasing once reforms are implemented.
-In ‘normal' times, post-programme surveillance would focus on assessing repayment capacity and could be streamlined where repayment risks are assessed to be low, also through a better integration with other surveillance tools.
-In case the economic, fiscal or financial situation were to deteriorate, post-programme surveillance would again increase in intensity and assess if corrective measures are needed.
Under the revised framework, robust escape clauses would still be needed to address exceptional situations where rule-based policy cannot realistically be adhered to.
For major shocks to the euro area or the EU as a whole, a general escape clause would be maintained to deal with a severe economic downturn.
An exceptional circumstances clause would allow for temporary deviations from the medium-term fiscal path to deal with extraordinary circumstances outside the control of a Member State's government and with a major impact on the public finances of an individual Member State.
-What are the next steps?
The Commission will consider tabling legislative proposals on the basis of today's Communication and the ensuing discussions.
The Commission will again provide guidance for fiscal policy for the period ahead in the first quarter of 2023. This guidance will facilitate the coordination of fiscal policies and the preparation of Member States' stability and convergence programmes for 2024 and beyond. The guidance will reflect the economic situation, the specific situation of each Member State and the orientations laid down in this Communication, provided a sufficient degree of convergence across Member States is achieved by that time. In spring 2023, guidance will materialise through country-specific recommendations.
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