European Commission presents review of EU economic governance and launches debate on its future

The European Commission yesterday (5 February) presented a review of the effectiveness of the economic surveillance framework and launches a public debate on its future.

The EU framework for economic surveillance has guided Member States in achieving their economic and fiscal policy objectives. It helped attain closer coordination of economic policies, address macroeconomic imbalances, reduce public deficits and debt levels. It created the conditions for sustainable growth and for achieving the Union’s strategy for growth and jobs. However, some vulnerabilities remain and the fiscal framework has grown increasingly complex, hampering its buy-in.

Moreover, the EU faces an economic context that has significantly changed since the rules were established.

The start of a new political cycle in the Union is an opportune and appropriate moment to assess the effectiveness of the current framework for economic and fiscal surveillance, especially the six-pack and two-pack reforms, for which the Commission is required to report on their application.

Valdis Dombrovskis, Executive Vice-President for An Economy that Works for People said: “Our shared fiscal rules are essential for the stability of our economies and the euro area. Ensuring financial stability is a precondition for economic growth and job creation.

They are also vital in terms of building trust among Member States for further progress on the deepening of the Economic and Monetary union. Our rules have evolved considerably since they were first established and they have yielded positive results.

But they are today perceived as too complex and difficult to communicate. So we’re looking forward to an open discussion on what has worked, what has not, and how to build consensus for streamlining the rules and making them even more effective.”

A changing economic context and new challenges

The economic governance framework has evolved over time, with changes introduced to respond to the emergence of new economic challenges.

The six-pack and two-pack legislation was introduced to address the vulnerabilities exposed by the economic and financial crisis. The economic context has evolved materially since then. The European economy has experienced seven years of consecutive growth. No Member State is now subject to the corrective arm of the Stability and Growth Pact, the so-called Excessive Deficit Procedure, down from 24 Member States in 2011. However, the growth potential of many Member States has not recovered to pre-crisis levels and public debt levels remain high in some. Reform momentum has faded and progress has become uneven across countries and policy areas.

Meanwhile, Europe is aiming to become the world’s first climate-neutral continent and to seize the new opportunities of the digital age, as set out in the Annual Sustainable Growth Strategy.

Assessing the European economic governance framework

The review seeks to assess how effective the economic surveillance framework has been in achieving three key objectives:

• ensuring sustainable government finances and economic growth, as well as avoiding macroeconomic imbalances;
• enabling closer coordination of economic policies; and
• promoting convergence in Member States’ economic performance.

The review finds that the surveillance framework has supported the correction of existing macroeconomic imbalances and the reduction of public debt. This, in turn, has helped to create the conditions for sustainable growth, strengthened resilience and reduced vulnerabilities to economic shocks.

It has also promoted sustained convergence of Member States’ economic performances and closer coordination of fiscal policies within the euro area.

At the same time, public debt remains high in some Member States and the fiscal stance at Member State-level has frequently been pro-cyclical. Moreover, the composition of public finances has not become more growth-friendly, with Member States consistently opting to increase current expenditure rather than to protect investment.

The review also finds that the fiscal framework has become excessively complex as a result of the need to cater for a wide variety of evolving circumstances while pursuing multiple objectives. This complexity means that the framework has become less transparent and predictable, which hampers communication and political ownership.