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The MIP framework

The Macroeconomic Imbalance Procedure (MIP) is a macroeconomic surveillance procedure established by the EU in response to the economic crisis and applied by its Member States with the aim of improving economic governance.

It endeavors to avoid unsustainable booms in good times that will bring busts with highly costly consequences in terms of economic activity, financial stability and employment both in the domestic economy as well as in partner countries. In its early years, the MIP also aimed to help Member States manage busts, even though it was not intended as a crisis-management tool.

The MIP has two arms – preventive and corrective – similarly to those in the Stability and Growth Pact (SGP).   These two arms have different objectives: the preventive arm helps Member States to adopt good policies that will lead to balanced medium-term growth, jobs and financial stability. The corrective arm aims to identify and correct policy failures or address major macroeconomic risks that are harmful for the economic developments in the Member State concerned and may generate negative spillovers to other Member States.

Legal basis

The Macroeconomic Imbalance Procedure rests on two pieces of legislation: The first regulation sets out the details of the surveillance procedure and covers all the Member States. The second regulation establishes the enforcement mechanism including the potential use of sanctions and is only applicable for the euro area Member States. The overall design follows the implicit logic of the Stability and Growth Pact with a "preventive" arm and a stronger "corrective" arm for more serious cases.

The yearly cycle of the MIP

The yearly MIP cycle starts with a comprehensive economic analysis, the Alert Mechanism Report, which covers all EU Member States not benefiting from financial assistance with a view to distinguishing those economies that warrant detailed scrutiny before concluding if there is an imbalance or an excessive imbalance.

The Alert Mechanism Report

The analysis is based on the reading of a scoreboard of fourteen headline in combination with auxiliary indicators, economic circumstances and all relevant factors available specific to the situation in the country. This ensures that there is no automaticity involved (i.e. a "flash" for an indicator does not lead to an automatic conclusion that an in-depth review is warranted).  

The conclusions of the AMR are then discussed by the Council and the Eurogroup, enabling the Commission to get appropriate feedback from Member States. On this basis, the Commission decides for which countries it will prepare country-specific in-depth reviews.

The purpose of the in-depth reviews (IDRs) is to assess whether imbalances and excessive imbalances exist in the Member States identified in the Alert Mechanism Report. The IDRs discuss issues such as the evolution of Member States' external accounts, savings and investment balances, effective exchange rates, export market shares, cost- and non-cost competitiveness, productivity, private and public debt, housing prices, credit flows, financial systems, unemployment and other variables. The drivers of the imbalances and the risks they raise are different from one economy to another. The IDRs also take account of the euro area dimension of macroeconomic imbalances and possible policy challenges for the euro area as a whole. Since 2015 the IDRs are published as a part of the respective Country Reports.

If, on the basis of an in-depth review, the situation is considered unproblematic, the Commission will not propose any further steps. If the Commission however considers that macroeconomic imbalances exist, it will come forward with proposals for policy recommendations for the Member State(s) concerned. In the preventive arm (see category 2, 3 and 4 below) these are part of the integrated package of recommendations under the European semester.

If the Commission instead considers that there are severe or excessive imbalances that may jeopardise the proper functioning of the Economic and Monetary Union (see category 5 and 6 below), it may recommend to the Council to open an Excessive Imbalance Procedure (EIP) which falls under the corrective arm of the new procedure.

So an in-depth review will lead to one of the following results:

Under the Macroeconomic Imbalance Procedure, the Commission may carry out ‘specific monitoring’ on implementation of reforms. As part of this ‘specific monitoring,’ the Commission conducts additional technical missions to the Member States and reports to the ECOFIN Council. There are typically two such exercises per year, one in the autumn and one in the winter. The reports are made public after the Council process is over.

The corrective arm and effective enforcement

In case the in-depth review points to severe or excessive imbalances in a Member State that may jeopardise the proper functioning of the Economic and Monetary Union, the Council may launch an Excessive Imbalance Procedure by adopting a recommendation asking the Member State to present corrective actions within a specified deadline. (Alternatively, the Commission can decide not to activate the corrective arm, but introduce specific monitoring for a country with excessive imbalances. However, the Commission can at any time propose to open an Excessive Imbalance Procedure for these countries, without having to carry out an in-depth review again. The findings of the specific monitoring would underpin such a decision.)

If an Excessive Imbalance Procedure is launched the Member State concerned is obliged to present a corrective action plan (CAP) setting up a roadmap to implement corrective policy actions. The CAP should be a detailed plan for corrective actions with specific policy measures and implementation timetable.

As regards the content of the CAP it is clear that the policy response to macroeconomic imbalances has to be tailored to the circumstances of the Member State concerned and where needed will cover the main policy areas, including fiscal and wage policies, labour markets, product and services markets and the financial sector. Moreover, efficiency and credibility derive from consistent approaches across policy strands. As described above, to this end the procedure is embedded into the European Semester, i.e. the annual policy cycle for country surveillance. This is particularly important since policy remedies to address imbalances to a very large extent cover policies (e.g. labour markets, product markets and fiscal) that may also be subject to other surveillance processes.

After submission of the CAP by the Member State, the Council assesses the CAP with two possible outcomes as illustrated below:

  • If the Council considers the CAP to be insufficient, the Council  adopts a recommendation to the Member State to submit a new CAP. If the new CAP is still considered to be insufficient, a fine (0.1% of GDP) can be imposed (with RQMV, see below) for having failed twice in a row to submit a sufficient CAP. Thus the Member State cannot stall the procedure by not presenting a good CAP.
  • If the Council considers the CAP to be sufficient, it will endorse the CAP through a recommendation that lists the corrective actions and their implementation deadlines.

Then, once a sufficient CAP is in place, the Council assesses whether or not the Member State concerned has taken the recommended actions according to the set deadlines. Two outcomes are possible:

  • If the Council considers that the Member State concerned has not taken the recommended corrective actions, it will adopt a first decision establishing non-compliance together with a recommendation setting new  deadlines for taking corrective action. In this case, the enforcement regime established by the regulation comes into play. It consists of a two-step approach. The first decision declaring non-compliance with the  issued recommendation allows the Council to impose an interesting-bearing deposit (0.1% of GDP). After a second decision by the Council declaring non-compliance, the Council can take the decision to convert the deposit into an annual fine. These decisions are taken with reversed qualified majority voting (RQMV). When the second Council decision confirms compliance, the Council can put the procedure in abeyance.
  • If the Council considers that the Member State concerned has taken the recommended correction actions, but imbalances are not yet corrected, the procedure will be placed in abeyance. The Member State continues to be subject to periodic reporting. If the Council considers that the Member State concerned has taken the appropriate actions and the Member State is no longer experiencing excessive imbalances, the EIP will finally be closed.

Figure 2 below provides an overview of the corrective arm, including enforcement which applies only to euro area Member States. While in principle decisions are taken by the Council by qualified majority voting, the shaded boxes in the figure indicate Council decisions that are taken by reverse qualified majority voting (RQMV), which implies that there needs to be a majority against taking the step (as opposed to the normal approach where a decision needs the backing of a qualified majority). In case of RQMV, a novelty for many of the key enforcement decisions across the six-pack, a Council decision on a Commission recommendation is deemed to be adopted by the Council unless it decides, by qualified majority, to reject the recommendation within ten days of the Commission adopting it. The aim of this voting rule is to increase the automaticity of the decision-making process.

Overview of the corrective arm

Synthetic overview of the corrective arm

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