1. EU economic governance From the Six-Pack to the Fiscal compact
10 July 2012
Lucia Piana
DG Economic and Financial Affairs

2. Budgetary developments in the EU 2007-2013 (% of GDP)
Source: Source: Commission 2012 Spring Forecast (data in % of GDP).

3. A typical legacy of a financial crisis: deteriorated public finances

4. The crisis is the same but different
Big 5 = DE, FR, UK, IT, ES
Large fiscal gaps to ensure medium to long-run sustainability
Extract from: Marco Buti, Lucio R Pench, Fiscal austerity and policy credibility, 20 April 2012,

5. Enhanced economic governance in the EU
The 1st step: the Six-Pack
A major reform proposed in September 2010 and entered into force in December 2011
The 2nd step: the Two-Pack
Additional elements for the euro area proposed on
23 November 2011
The latest step, the Intergovernmental Treaty
Transposing European rules and concepts in a national setting, signed on 2 March 2012 5 5

6. Sound fiscal policy Balanced growth
Fiscal compact
national budgetary frameworks
More effective preventive arm of SGP
Focus on debt developments in corrective arm of SGP
Crisis
resolution
Sound fiscal
policy
Structural reform strategy (Europe 2020)
Enhanced monitoring of budgetary policies
Prevention and correction of macro imbalances
Balanced
growth
Regulation and supervision of financial systems
Macro-prudential supervision 6

7. Economic governance package (“six-pack”): key features
An enhanced framework for crisis prevention to ensure:
Prudent fiscal policy-making
Attention to macroeconomic imbalances
Stronger and more integrated surveillance
Tougher sanctions
Accountability, transparency & democratic legitimacy

8. The Stability and Growth Pact
Detailing the Maastricht Treaty fiscal rules (i) :
the most known....
“Member States shall avoid excessive government deficits” (Treaty Article 126 ex 104)
deficit below the reference value of 3% of GDP, unless it has declined substantially and continuously and reached a level close to the reference value or the excess is limited, exceptional and temporary
debt should not exceed the reference value of 60% of GDP, or should be on a decreasing trend and approach the reference value at a satisfactory pace 8

9. The Stability and Growth Pact
Detailing the Maastricht Treaty fiscal rules (ii):
the less known....and revised by the Lisbon Treaty
“Member States shall regard their economic policies as a matter of common concern” (Treaty Article 121 ex 99)
The Council shall monitor economic developments in each Member State, on the basis of reports submitted by the Commission;
The Commission may address a warning;
The Council, on recomendation from the Commission, may address the necessary recommendations. 9

10. The Stability and Growth Pact
RESOLUTION OF THE EUROPEAN COUNCIL on the Stability and Growth Pact Amsterdam, 17 June 1997 (97/C 236/01)
.... In stage three of EMU, Member States shall avoid excessive general government deficits: this is a clear Treaty obligation (1). The European Council underlines the importance of safeguarding sound government finances as a means to strengthening the conditions for price stability and for strong sustainable growth conducive to employment creation. It is also necessary to ensure that national budgetary policies support stability oriented monetary policies. Adherence to the objective of sound budgetary positions close to balance or in surplus will allow all Member States to deal with normal cyclical fluctuations while keeping the government deficit within the reference value of 3 % of GDP....

11. Reforming the preventive arm of the SGP
Where did we stand?
Central concept of the Stability and Growth Pact is the medium-term budgetary objective (MTO) = a numerical value for the structural deficit which ensures:
(i) a safety margin against breaching 3% of GDP;
(ii) sustainable public finances or rapid progress towards sustainability
(iii) room for stabilisation over the cycle
Adjustment path towards MTO = 0.5% of GDP; more in good, less in bad times
Central concept is based on the structural balance which is not observable
Enforcement through peer pressure
The first term on the right hand-side is the budgetary balance that would stabilise the debt ratio at 60% of GDP[1]. The second term is the budgetary adjustment that would cover a fraction of the present value of the increase in the age related expenditure at infinite horizon, where is the size of this fraction. It has been set at 33%. The third term represents a supplementary debt-reduction effort, specific to countries with gross debt above 60% of GDP. The supplementary debt effort takes the form of a linear function with a value of 0.2 at 60% and 1.4 at 110% of debt[2]. The debt level used is the last available actual debt data at the time of the revision, which should normally take place after the new projections of age related expenditures are published.
There is another way to take due account of the ageing cost which is by assessing the total cost in terms of time-horizon covered, that is the permanent budgetary adjustment that would have to be made as of today to fully cover the future increase age-related government expenditure until The formula would then be:
Countries are allowed to make a binding choice between the two alternative ways to take into account implicit liabilities.
The continuous linear function has the following parameters: supplementary debt effort = 0,024*debt-1.24.
What were the difficulties?
Central concept is based on the structural balance which is not observable  difficulties with estimates, time-lag, etc…
Enforcement through peer pressure  lacks teeth 11 11 11

12. The Six-Pack – Key Innovations In the Preventive Arm of the SGP
 Innovation: an expenditure rule = operational guidance for adjustment path towards MTO
Def: expenditure growth should not exceed a reference rate of potential GDP growth
If significant deviations from the rule = 0.5% of GDP in one or 0.25% of GDP in two consecutive years  recommendation + interest-bearing deposit for euro area MS
Safeguard clauses: can deviate from the rule if unusual event or severe economic downturn for the euro area or the EU as a whole 12 12

13. Excessive Deficit Procedure
The corrective arm:
Excessive Deficit Procedure
Main objective: correct ‘gross errors’, assessed against two criteria:
government deficit in excess of 3% of GDP
government debt in excess of 60% of GDP not sufficiently diminishing
 In practice, EDP launched and closed exclusively on the basis of deficit criterion
EDP is a step-wise procedure
Failure to comply with the initial recommendations (Art.126.7) resulted (for euro-area countries) in
more intrusive recommendations (Art.126.9),
eventually leading to sanctions (Art )
 In practice, Art step never reached. 13 13

14. In the Corrective Arm of the SGP
The Six-Pack – Key Innovations
In the Corrective Arm of the SGP
Where do we stand?
EDP only opened on the basis of the deficit criterion since no definition of sufficiently diminishing
 Innovation: Operationalization of the "debt criterion"
Numerical benchmark for sufficiently diminishing debt
= distance with respect to the 60% of GDP reference value declines over 3 preceding years at an average rate of 1/20th per year or this required reduction will occur in forward-looking 2-year horizon.
Non-respect will not automatically result in the country being placed in EDP  overall assessment of relevant factors.
Transition period for the 23 MS currently in EDP embarked on an agreed consolidation path: 3 years after correction of the EDP to avoid abrupt change in this path = no full implementation of the rule but sufficient progress to be made 14 14

15. taking into account the cycle
The debt criterion:
taking into account the cycle
Economic cycle affects debt via the deficit and the denominator (GDP)
Not adjusting for the cycle would result in undesirable pro-cyclicality
Averaging over three years already mitigates impact of cycle but not sufficiently.
Assessment will take account of cyclical effects
If the debt benchmark is breached on the sole basis of the effect of the cycle, there will be no Report under Article 126(3) 15

16. The Six-Pack – Key Innovations
New enforcement mechanisms - euro area
Trigger
Sanction
Condition
Council decision establishing failure to take action in response to a Council recommendation under Art. 121(4)
Interest-bearing deposit
0.2% of GDP
Council decision under Art. 126(6) that excessive deficit exists
Non interest-bearing deposit
Only where interest-bearing deposit exists or in case of serious non-compliance with budgetary obligations
Council decision under Art 126(8) that no effective action to correct the excessive deficit has been taken
Fine
Council decision under Art. 126(11) in the case of no effective action in response to notice under Art. 126(9)
0.2% of GDP + variable component
Council decision
Effective, dissuasive and proportionate – not exceeding 0.2% of GDP
The MS intentionally or by serious negligence misrepresented deficit or debt data relevant for the application of the SGP 16

17. Six-Pack: national fiscal frameworks
Where do we stand?
Considerable variation in the quality of national fiscal framework
Well-designed fiscal frameworks can substantially contribute to sound fiscal policies
EU budgetary framework insufficiently entrenched in national frameworks
 Need for strengthening national ownership and having uniform requirements as regards the rules and procedures forming the budgetary frameworks of the MS
 Innovation: minimum characteristics for national budgetary frameworks
Accounting and statistical reporting
Rules for preparation of the forecasts for budgetary planning
Country-specific numerical fiscal rules
Budgetary procedures
Medium-term budgetary frameworks
Independent monitoring and analysis
Regulation of fiscal relationships between public authorities across sub-sectors of general government
Implementation by end-2013 17

18. Addressing macroeconomic imbalances - a new strand in EU surveillance
The excessive imbalance procedure focuses on the prevention and correction of macroeconomic imbalances in all Member States
Preventive arm to monitor and prevent the build-up of imbalances
Commission presents a report identifying countries that may be affected by or at risk of being affected by imbalances, based on the economic reading of a scoreboard of indicators
Commission prepares in-depth country studies for the selected countries taking on board a broad range of variables and using analytical tools and country-specific information
Corrective arm to correct imbalances
The Council recommends corrective action and the Member State concerned submits a Corrective Action Plan
Backed up by financial sanctions (euro area only) 18

19. The 23 November – New proposals
Two Regulations building on the Fiscal surveillance leg of the Six-Pack
for euro area Member States (based on Art. 136 TFUE)
Enhanced monitoring
Common provisions for
monitoring and assessing draft budgetary plans and
ensuring the correction of excessive deficit
of the Member States in the euro area
Enhanced surveillance for financially fragile MS
Strengthening of economic and budgetary surveillance of Member States
- experiencing or
- threatened
with serious difficulties with respect to their financial stability in the euro area
Council general approach agreed in February
EP Report voted in June 19

20. The 23 November – Key Innovations
Enhanced monitoring for all euro area MS
Rationale
Innovation
Articulation with existing framework
Ensuring that Union policy recommendations in the budgetary area are appropriately integrated in the national budgetary
preparations
Common Budgetary Rules
Numerical fiscal rules on budget balance implementing MTOs in national budgetary processes
Independent fiscal council
Independent macroeconomic forecast
Reinforces the Directive on national budgetary frameworks by encapsulating the core concept of the SGP in national rules
Reinforces the preventive arm of the SGP
Better synchronizing key steps in preparation of national budgets
A Common Budgetary Timeline
Complements the European semester
15 April
Medium-Term fiscal plans made public with Stability Programmes.
15 October
Draft Budget Laws for the general government made public with the independent macroeconomic forecast on which they are based.
31 December
Budget Laws for the general government adopted and made public. 20

21. Enhanced monitoring for euro area MS
Rationale
Innovations
Articulation with existing framework
Ensuring an appropriate integration of EU policy recommendations in the national budgetary preparations
Additional monitoring requirements
Draft budgetary plans for the forthcoming year submitted before 15 October
to the COM
=> might request a revision of the draft
=> possible Opinion
to the Eurogroup => discussion based on assessment by the COM
Complement the European Semester
Provide an independent opinion on the draft budget to all stakeholders in the budgetary process
Securing a timely and durable correction of excessive deficits
Closer monitoring for Member States in EDP
Initial stage: comprehensive report + audit of quality of statistics
Regular report:
- If under 126(7) every 6 months
- If under 126(9) every quarter
Any additional information on a request from the COM
Complement to the corrective arm of the SGP
Compliance with COM Opinion on draft budgetary plan taken into account
in report under 126(3)
in recommendation on a non-interest-bearing deposit
in decision under 126(6).
Reports of the closer monitoring taken into account
anytime, to assess whether correction by the deadline is at risk
can lead to a COM recommendation
compliance with such recommendation assessed when deciding on effective action (stepping up or abrogation of the EDP) 21

22. A new calendar for the EU economic governance
Annual Growth Survey: Overall guidance for the EU
Produced by the Commission - Discussed by the Council - Endorsed by the Spring European Council
The European Semester
December
Annual Growth Survey: Overall guidance for the EU
European Council Policy orientations
March
Stability or Convergence Programmes
Produced by EU member states
except those under financial assistance programmes
National Reform Programmes
Produced by EU member states
except those under financial assistance programmes
April
Country-specific recommendations
Produced by the Commission - Adopted by the Council with endorsement of the European Council
June
For euro area
Draft national budgets
Produced by EU member states
October
23 November proposals
Possible Commission opinion
on draft budgetary plans
Produced by the Commission
November 22

23. The latest step: the intergovernmental Treaty
New intensified commitments by 25 MS. To be integrated into the EU legal framework within 5 years and with an important role for the Commission and EU secondary legislation.
Economic Policy Coordination
Coordination of major economic policy reform plans in euro area MS
Reinforced Governance
Euro Summits at least twice a year
President of the Euro Summit appointed by Heads of State or Government of euro area MS
Participation in Euro Summits of Heads of State or Government of non-euro area MS having ratified treaty is foreseen for certain discussions and at least once a year
…and the FISCAL COMPACT
3 main chapters 23

24. The Fiscal Compact 24 Recalls main commitments of the SGP
Country-specific medium-term objectives (MTOs)
Numerical debt reduction benchmark under the EDP
Strengthens implementation of the SGP
Implementation of MTOs in national budgetary processes
Assorted with automatic correction mechanisms (triggered in case of significant deviation… except if exceptional circumstance) and monitoring by independent institutions
More stringent lower limit for MTOs (-0.5%), with a calendar for convergence
Behavioural commitment to support Commission proposals/recommendations for EDPs in the euro area
Complements the SGP's toolbox
Ex ante coordination of debt issuance plans
Economic partnership programmes for Member States in EDP 24 24

25. The Fiscal Compact (continued)
Enforcement
National level
MS to implement rules in national law through provisions of "binding force and permanent character, preferably constitutional"
compliance monitored level by independent national institutions
Union level
COM presents report on the transposition of the agreed provisions
Matter can be brought to the Court of Justice by a MS to verify transposition
Court of Justice can impose financial sanction of up to 0.1% of GDP
How to anchor these commitments into EU Law?
Swift implementation of key elements by legislative proposals, either currently under discussion or new texts
Contracting Parties committed to incorporation of Treaty within 5 years 25 25

26. A strengthened framework - summary
EU 27
25 Contracting Parties
Euro area
Six-Pack
In force
Reinforced preventive arm of SGP 
Debt-reduction benchmark
Financial sanctions
Directive on national fiscal frameworks
Two-Pack Proposed
Enhanced budgetary monitoring
Enhanced surveillance for vulnerable euro area MS
 (for MS with financial difficulties)
Fiscal Compact
To be ratified
National implementation of MTOs + transposition sanctions
Economic partnership programme in the EDP
Ex ante coordination of debt issuance
rQMV in EDP
Ex ante coordination of economic reforms
Reinforced governance
 (for some items) 26 26