EU economic governance ››European Commission

The EU and its Member States have taken a series of important decisions that will strengthen economic and budgetary coordination for the EU as a whole and for the euro area in particular. As a result, the EU’s interdependent economies will be better placed to chart a path to growth and job creation.

Surveillance of economic and fiscal policies

The economic and financial crisis has revealed a number of weaknesses in the economic governance of the EU’s economic and monetary union. The cornerstone of the EU response is the new set of rules on enhanced EU economic governance which entered into force on 13 December 2011. It has four main components:

  • Stronger preventive action through a reinforced Stability and Growth Pact (SGP) and deeper fiscal coordination: Member States are required to make significant progress towards medium-term budgetary objectives (MTO) for their budgetary balances. Expenditure benchmarks will now be used alongside the structural budget balance to assess adjustments towards the MTO. An interest-bearing deposit of 0.2% of GDP will be imposed on non-compliant euro-area countries.
  • Stronger corrective action through a reinforced SGP: The launch of an Excessive Deficit Procedure (EDP) can now result from government debt developments as well as from government deficit. Member States with debt in excess of 60% of GDP should reduce their debt in line with a numerical benchmark. Progressive financial sanctions kick in at an earlier stage of the EDP. It is a non-interest interest bearing only deposit of 0.2% of GDP may be requested from a euro-area country which is placed in EDP on the basis of its deficit or its debt. Failure of a euro-area country to comply with recommendations for corrective action will result in a fine.
  • Minimum requirements for national budgetary frameworks: Member States should ensure that their fiscal frameworks are in line with minimum quality standards and cover all administrative levels. National fiscal planning should adopt a multi-annual perspective, so as to attain the MTO. Numerical fiscal rules should also promote compliance with the Treaty reference values for deficit and debt.
  • Preventing and correcting macroeconomic and competitiveness imbalances: Over the past decade, Member States have made economic choices which have lead to competitiveness divergences and macroeconomic imbalances within the EU. A new surveillance mechanism will aim to prevent and correct such divergences. It will rely on an alert system that uses a scoreboard of indicators and in-depth country studies, strict rules in the form of a new Excessive Imbalance Procedure (EIP) and better enforcement in the form of financial sanctions for Member States which do not follow up on recommendations.

Enforcement is strengthened by the expanded use of ‘reverse qualified majority’ voting. Under this voting system, a Commission recommendation or proposal to the Council is considered adopted unless a qualified majority of Member States vote against it.




Commission proposals on stronger budgetary surveillance in the euro area

In addition to the new rules on economic governance, the Commission on 23 November 2011 proposed two draft Regulations to enhance the coordination and surveillance of budgetary processes for all euro-area Member States, and especially for those countries that have excessive deficits, that are experiencing or are at serious risk of financial instability, or that are under a financial assistance programme.

>> 23/11/2011. Economic governance: Commission proposes two new Regulations to further strengthen budgetary surveillance in the euro area

Commission Green Paper on Stability Bonds

The Commission Green Paper on Stability Bonds, published on 23 November 2011, sets out three main options: the full substitution by Stability Bond issuance of national issuance, with joint and several guarantees; the partial substitution by Stability Bond issuance of national issuance, with joint and several guarantees; and the partial substitution by Stability Bond issuance of national issuance, with several but not joint guarantees. The objective of the Green Paper is to have a broad debate on the issues raised.

>> 23/11/2011. Green paper on stability bonds


Coordination of economic and fiscal policy planning – The European semester

The European SemesterIn the past, the EU institutions discussed economic policies in the spring and examined fiscal policies and developments separately in the autumn. But in 2010, a new approach towards economic surveillance and a new policy-making timetable was agreed. The aim is to ensure that all policies are analysed and assessed together and that policy areas which previously were not systematically covered by economic surveillance – such as macroeconomic imbalance and financial sector issues – are included.

The new approach was put into practice for the first time during the first half of 2011, the first ‘European semester’. EU-level discussions on fiscal policy, macroeconomic imbalances, financial sector issues, and growth-enhancing structural reforms will now always take place jointly during the European semester and before governments draw up their draft budgets and submit them to national parliamentary debate in the second half of the year (the ‘national semester’).

This ‘upstream’ policy coordination should make the implementation of policy guidance more effective and help embed the EU dimension in national policy-making. The annual cycle begins with the Commission’s Annual Growth Survey, which gives broad guidance on priority actions to be taken at EU and national level. Member States then submit Stability or Convergence Programmes on their fiscal plans and National Reform Programmes on structural reforms and measures to boost growth and jobs.

The Commission assesses these reports based on an integrated analysis covering fiscal, macroeconomic, and structural policies and on that basis proposes concrete policy recommendations for each country. The June European Council discusses the recommendations and the Council adopts them.


2011 Annual Growth Survey (AGS)

Commission 2011 country-specific recommendations

Setting of economic priorities – The Euro+ Pact

To give further impetus to the governance reforms, 23 Member States, including six outside the euro-area (Bulgaria, Denmark, Latvia, Lithuania, Poland and Romania), signed the Euro Plus Pact in March 2011. The Pact commits signatories to even stronger economic coordination for competitiveness and convergence, also in areas of national competence, with concrete goals agreed on and reviewed on a yearly basis by Heads of State or Government. The Euro Plus Pact is integrated into the European semester and the Commission monitors implementation of the commitments.

>> Conclusions of the Heads of State or Government of the euro area of 11 March 2011. A Pact for the euro. Stronger economic policy coordination for competitiveness and convergence.

Europe 2020

The Euro Plus Pact builds on the existing framework of economic priorities agreed at EU level under the Europe 2020 strategy for ‘smart, sustainable and inclusive’ growth. The strategy sets targets in the fields of employment, innovation, climate/energy, education and social inclusion.

>> Europe 2020 – The EU strategy for smart, sustainable and inclusive growth

Repair and safeguard measures – Financial sector repair

Getting Europe back on track also requires a healthy financial sector. The EU, therefore, established a new financial supervision architecture in January 2011. It includes a European Systemic Risk Board (ESRB) for macro-prudential oversight of the financial system, and three European supervisory authorities: the European Banking Authority, the European Insurance and Occupational Pensions Authority, and the European Securities and Markets Authority. Rules have also been tightened on capital requirements for banks, investment firms and insurance companies, and new rules on remuneration and bonuses will reduce incentives for short-term risk-taking. Bank stress tests have been conducted and the Commission will propose a framework to allow banks to fail in an orderly manner, thus ensuring that taxpayers don’t have to pay for bailouts.

>> European Systemic Risk Board (ESRB)
>> European Financial Stability Facility EFSF
>> European Banking Authority (EBA)
>> European Securities and Markets Authority (ESMA)
>> European Insurance and Occupational Pensions Authority (EIOPA)
>> Directorate-General Internal Market. Information on financial services (banking, insurance, securities, etc.

Stability mechanisms

To guarantee the stability of the euro area as a whole and assist individual Member States in financial difficulties and/or under serious market pressure, temporary mechanisms have been set up as a backstop of last resort. A permanent mechanism is scheduled to be in place as of 1 July 2012 subject to pending ratification.

Financial assistance to Greece: Responding to the imminent threat of Greek insolvency, euro-area Member States set up an ad hoc mechanism on 2 May 2010 to provide, together with the IMF, €110bn of financial assistance to Greece in the form of bilateral loans. On 21 July 2011, the Heads of State or Government of the 17 euro-area countries announced a raft of additional measures designed to alleviate the Greek debt crisis and ensure the financial stability of the euro area as a whole. The summit saw agreement on a new financial support programme for Greece worth some €109 billion, a voluntary contribution from the private sector, the extension of maturities, and lowering of lending rates.
>> Financial and economic support package for Greece – detailed information

  • Temporary financial backstop mechanisms: The European Financial Stabilisation Mechanism (EFSM) is based on guarantees from the Community budget up to €60bn, while the European Financial Stability Facility (EFSF) is an inter-governmental body providing up to €440bn in guarantees from the euro area Member States. The IMF decided to complement these mechanisms with a potential financial support to euro area countries of up to €250bn.
    Ireland and Portugal have been granted €85bn and €78bn in assistance respectively from these funding mechanisms. The 21 July 2011 summit statement covered improving the effectiveness of the current European Financial Stability Mechanism (EFSF) and of the future European Stability Mechanism (ESM), adhering to fiscal consolidation and growth in the euro area, and strengthening EU economic governance.
    >> Financial assistance package for Ireland
    >> Financial assistance for Portugal
    >> European Financial Stability Facility (EFSF)
    >> European Financial Stabilisation Mechanism (EFSM)
  • European Stability Mechanism (ESM): The ESM is scheduled to become operational on 1 July 2012 subject to pending ratification. It will supersede both the EFSF and the EFSM. It will have an effective lending capacity of €500bn.
    >> 11 July 2011. Signing of the Treaty on the European Stability Mechanism

via EU economic governance – European Commission.


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