Fiscalgovernance intheeuroareaThe perspective of

the European Commission

Nicolas CarnotAdviser

European Commission, DG Economic and Financial Affairs

Monetary Commission of the European League ofEconomic Cooperation

7 May 20121

The Maastricht architecture

ECB: primarily price stability

National fiscal policies within agreed rules:No bail-out clauseReference valuesExcessive deficit procedure+ Stability and Growth Pact (1997, revised 2005,2011)

'Soft' economic coordination

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An incomplete institutional set-up

Imprudent fiscal policies by Member States

Insufficient EU capability (de facto) to enforce fiscaldiscipline of Member States (SGP)

No possibility to monitor and enforce implementation ofpolicies to address identified macroeconomic imbalances

No integrated European supervisory and regulatoryarchitecture for financial institutions despite rapid financialmarket integration

No established framework for resolving financial-sovereigncrises

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The EU response: the 5-points plan

- Financial assistance and programs

- Firewalls against contagion

- Financial repair

- Pro-growth policies

- Reforming EU governance

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The 1st step: the Six-Pack – into forcesince December 2011 - Major reform for EU27

The 2nd step: the Two-Pack – ProposedNovember 2011 and under discussion -Additional elements for the euro area

Latest step: Intergovernmental Treaty –signed March 2011, ratified? TransposingEuropean rules and concepts in a nationalsetting – 25 Contracting Parties

Enhanced economic governance in the EU

Fiscal governance reforms: overviewSix-pack Two-pack International Treaty

Better rules1) Expenditure

benchmark Independent forecasts

2) Debt criterion

EnforcementGradual and more

automatic sanctions Enhanced monitoringVoting behaviour on

EDP

Ownership Directive on nationalfiscal frameworks

National "balancedbudget" rules

Coordination European semester Ex ante examination ofbudgets

Information on debtissuance

Broadening surveillance Macroecononomicimbalance procedure

Economic partnershipprograms 6

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Innovation: an expenditure rule = operational guidance for adjustment path towardsthe medium-term objective (MTO)

Def: expenditure growth should not exceed a reference rate of potential GDP growth

Better reflection of discretionary action in the short run "Significant deviation" from the rule = 0.5% of GDP assessed with an overall assessment

of the structural balance and the expenditure benchmark

The SixThe Six--PackPack –– Key InnovationsKey InnovationsIn the Preventive Arm of the SGPIn the Preventive Arm of the SGP

Central concept of the Stability and Growth Pact is the medium-term budgetaryobjective (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%; more in good and less in bad times.

In the Corrective Arm of the SGPIn the Corrective Arm of the SGPWhere do we stand?EDP only opened on the basis of the deficit criterion since no definition of sufficientlydiminishing

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 anaverage rate of 1/20th per year or this required reduction will occur in forward-looking 2-yearhorizon.

Non-respect will not automatically result in the country being placed in EDP overall assessmentof relevant factors.

Transition period for the 23 MS currently in EDP embarked on an agreed consolidation path: 3years after correction of the EDP to avoid abrupt change in this path = no full implementation ofthe rule but sufficient progress to be made

The SixThe Six--PackPack –– Key InnovationsKey Innovations

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The SixThe Six--PackPack –– Key InnovationsKey InnovationsNew enforcement mechanisms for the euro areaNew enforcement mechanisms for the euro area

Trigger Sanction Condition

Council decision establishing failure totake action in response to a Councilrecommendation under Art. 121(4)

Interest-bearing deposit0.2% of GDP

Council decision under Art. 126(6) thatexcessive deficit exists

Non interest-bearing deposit0.2% of GDP

Only where interest-bearing deposit existsor in case of serious non-compliance withbudgetary obligations

Council decision under Art 126(8) thatno effective action to correct theexcessive deficit has been taken

Fine0.2% of GDP

Council decision under Art. 126(11) inthe case of no effective action inresponse to notice under Art. 126(9)

Fine0.2% of GDP + variablecomponent

Council decision FineEffective, dissuasive andproportionate – not exceeding0.2% of GDP

The MS intentionally or by seriousnegligence misrepresented deficit or debtdata relevant for the application of theSGP

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Fiscal surveillance: national fiscal frameworksFiscal surveillance: national fiscal frameworks

Where do we stand?

Considerable variation in thequality of national fiscalframework

Well-designed fiscalframeworks can substantiallycontribute to sound fiscalpolicies

EU budgetary frameworkinsufficiently entrenched innational frameworks

Need for strengtheningnational ownership and havinguniform requirements asregards the rules andprocedures forming thebudgetary frameworks of theMS

Innovation: minimum characteristics for nationalbudgetary frameworks

Accounting and statistical reportingRules for preparation of the forecasts for budgetaryplanningCountry-specific numerical fiscal rulesBudgetary proceduresMedium-term budgetary frameworksIndependent monitoring and analysisRegulation of fiscal relationships between publicauthorities across sub-sectors of general government

Implementation by end-2013

The Two-pack – Key Innovations

Rationale Innovation Articulation with existingframework

Ensuring that Union policyrecommendations in the

budgetary area areappropriately integrated in the

national budgetarypreparations

Common Budgetary Rules

-Numerical fiscal rules on budget balanceimplementing MTOs in national budgetaryprocesses-Independent fiscal council-Independent macroeconomic forecast

Reinforces the Directive on nationalbudgetary frameworks by

encapsulating the core concept ofthe SGP in national rules

Reinforces the preventive arm ofthe SGP

Better synchronizing key stepsin preparation of national

budgetsA Common Budgetary Timeline Complements the European

semester

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Enhanced monitoring for all euro area MS

Rationale Innovations Articulation with existingframework

Ensuring anappropriate

integration ofEU policy

recommendations in thenational

budgetarypreparations

Additional monitoring requirements

Draft budgetary plans for the forthcoming yearsubmitted before 15 October

•to the COM=> might request a revision of the draft=> possible Opinion•to the Eurogroup => discussion based onassessment by the COM

Complement the European Semester

Provide an independent opinion on the draftbudget to all stakeholders in the budgetary

process

Securing atimely and

durablecorrection of

excessivedeficits

Closer monitoring for Member States in EDP

•Initial stage: comprehensive report + audit ofquality of statistics

•Regular report:- If under 126(7) every 6 months- If under 126(9) every quarter

•Any additional information on a request from theCOM

Complement to the corrective arm of the SGP

Compliance with COM Opinion on draft budgetaryplan taken into account•in report under 126(3)•in recommendation on a non-interest-bearingdeposit•in decision under 126(6).

Reports of the closer monitoring taken into account•anytime, to assess whether correction by thedeadline is at risk•can lead to a COM recommendation•compliance with such recommendation assessedwhen deciding on effective action (stepping up orabrogation of the EDP).

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The Two-pack – Key InnovationsEnhanced monitoring for all euro area MS

Annual Growth Survey: Overall guidance for the EUProduced by the Commission - Discussed by the Council - Endorsed by the Spring European Council

National Reform ProgrammesProduced by EU member states

except those under financial assistance programmes

Country-specific recommendationsProduced by the Commission - Adopted by the Council with endorsement of the European Council

Draft national budgetsProduced by EU member states

June

Possible Commission opinionon draft budgetary plans

Produced by the Commission

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Nov

ember

pro

posa

ls

April

Dece

mbe

r

Stability or Convergence ProgrammesProduced by EU member states

except those under financial assistance programmes

Oct

ober

Nov

embe

r

Annual Growth Survey: Overall guidance for the EUEuropean Council Policy orientationsM

arch

The

Euro

pean

Sem

este

r

For euro area

A new calendar for the EU economic governanceA new calendar for the EU economic governance

The latest step: the intergovernmentalTreaty

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 COMPACT14

New intensified commitments by 25 MS. The "missing part of the puzzle of the Stability and

Growth Pact". To be integrated into the EU legal framework within 5 years and with an important

role for the Commission and EU secondary legislation.

3 main chapters

Recalls main commitments of the SGP

oCountry-specific medium-term objectives(MTOs)

oNumerical debt reduction benchmark underthe EDP (= Six-Pack)

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The Fiscal Compact

Strengthens implementation of the SGP

oImplementation of MTOs at constitutional (orequivalent) level

oAssorted with automatic correction mechanisms(triggered in case of significant deviation… except ifexceptional circumstance) and monitoring byindependent institutions

oMore stringent lower limit for MTOs (-0.5%),with a calendar for convergence

oBehavioural commitment to support Commissionproposals/recommendations for EDPs in the euro area

Complements the SGP's toolbox

oEx ante coordination of debt issuanceplans

oEconomic partnership programmes forMember States in EDP

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The Fiscal Compact (continued)

• Enforcemento 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

o 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?o Swift implementation of key elements by legislative proposals, either currently under

discussion or new textso Contracting Parties committed to incorporation of Treaty within 5 years

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How effective will all this be ?

Two-pack and Treaty still under discussion …

Changes represent quite significant deepening ofthe Maastricht logic

Fine for the 'long-term' but other actions neededto get out of the crisis

Fiscal policy remains essentially in national hands

Debates will continue : fiscal policy coordination,insurance mechanisms, common debt issuance …

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