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EU economic governance

The European Union’s economic governance framework aims to detect, prevent, and correct problematic economic trends such as excessive government deficits or public debt levels, which can stunt growth and put economies at risk.

Monitoring

The European Commission monitors economic developments in the EU’s Member States and in the global economy in detail. It monitors for potential problems, such as risky or unsustainable policies or declining competitiveness, through

In addition, the European Commission produces two key economic reports that help to identify and address economic problems every year:

Published towards the end of each year, the Annual Growth Survey analyses the progress that the EU has made towards its long-term, strategic priorities, and provides an in-depth assessment of employment and macroeconomic trends. In this way, the Annual Growth Survey sets the priorities of the EU for the year to come.

The Alert Mechanism Report identifies countries that may experience imbalances, such as declining competitiveness or asset bubbles, which could prove harmful to individual Member States or the EU’s Economic and Monetary Union if not corrected.

These diagnoses are discussed among EU governments. Following that, an in-depth review is carried out for each of these Member States to analyse if an imbalance exists and to examine its origin, nature and severity.

Prevention

To prevent economic problems from getting worse and affecting other EU members, EU governments have agreed on a wide range of rules to ensure the quality and appropriateness of their economic policies.

The Stability and Growth Pact

All EU Member States are committed under rules known as the Stability and Growth Pact (SGP) to pursuing sound public finances because they are an essential pre-requisite for sustainable economic growth and financial stability.

To keep national fiscal policies on track, EU Member States set budgetary targets, known as Medium-Term Objectives (MTO) calibrated to ensure the long-term sustainability of public finances and the national debt burden.

In April, all EU Member States present to the Commission the budgetary measures that they intend to implement in order to fulfil their commitments. Those that use the euro as their currency do this through ‘Stability Programmes,’ while the rest submit ‘Convergence Programmes.’ 

At the same time, all EU Member States also submit details of the structural reforms they are planning to boost growth and jobs in ‘National Reform Programmes’. The Commission analyses the two programmes of every country and then makes specific policy recommendations to each of them. Governments discuss these recommendations with the Commission and with each other and then integrate them into their national policies with their parliaments.

EU Member States base their budgets on a set of commonly agreed priorities to address economic risks and challenges detected by the European Commission.

This coordination and monitoring is even more demanding for euro area Member States: they present draft budgetary plans for the following year to the Commission and to their partners in the euro area. In case these budgetary policies are unrealistic and/or pose serious threats, they can be asked to submit a revised draft budgetary plan.

Reliable data are essential for sound economic policy decisions and to win the confidence of international partners, investors, companies and market participants. EU rules ensure that governments collect reliable statistics by setting high standards of methodology, quality, transparency and independence.

The Treaty on Stability, Coordination and Governance

The Treaty on Stability, Coordination and Governance (TSCG or the ‘fiscal compact’), signed by the vast majority of EU Member States, enshrines the goal of balancing the national budgets. It limits the size of the deficit that any government can run per year to 0.5% of GDP and calls for the establishment of automatic policies to correct significant deviations.

The Macroeconomic Imbalances Procedure (MIP)

The EU also has rules to encourage economic stability by preventing the development of risky macroeconomic imbalances. The MIP ensures that governments tackle any national economic trends that could pose a threat to other EU economies and discuss these with the Commission and other Member States.

Correction

The EU’s system of economic rules is further strengthened by provisions to ensure that they are enforced and that governments take effective action to correct economic problems.

The Excessive Deficit Procedure

Member States which run excessive budget deficits of more than 3% of GDP, or which fail to reduce their excessive debts (above 60% of GDP) at a sufficient pace, follow a particular set of rules known as the Excessive Deficit Procedure (EDP).

Under the EDP, Member States commit to targets to bring their excessive deficits or debts back to safe levels. They also face the possibility of warnings and ultimately sanctions, such as fines that can reach 0.2% of their GDP, if they persistently fail to take adequate action to address their deficits or debts. Regional subsidies from the EU’s ‘cohesion fund’ may also be withheld.

Recommendations to national governments can be made by the EU whenever they are warranted by the circumstances.

The Excessive Imbalance Procedure

Under the Excessive Imbalance Procedure of the EU’s Macroeconomic Imbalances Procedure, Member States with excessive imbalances have to submit corrective action plans with a clear roadmap and deadlines.

Euro area Member States can also be fined 0.1% of GDP for failing to address serious macroeconomic imbalances, such as extreme, persistent trade deficits or surpluses, if these are determined to be harmful and a threat to other Member States. The decision to fine a Member State is proposed by the Commission and can only be blocked if a large majority of governments oppose the measure.

Implementation, updates and legal basis

Implementation of the EU’s economic governance framework is organised in an annual cycle, which is divided into two parts, known as the European Semester and the National Semester.

The European Union’s economic rules have evolved over time and have been considerably strengthened.

The legal basis of the Stability and Growth Pact, the Macroeconomic Imbalances Procedure and all other regulations is the Treaty on the Functioning of the European Union (TFEU).