The management of Economic and Monetary Union involves many actors with different responsibilities. As well as the governments and central banks of the Member States, the Council, the European Commission, the European Parliament and the European Central Bank all have roles to fulfil. The management of EMU involves three main areas of macroeconomic policy-making: monetary policy, fiscal policy and economic policy coordination.
Who runs monetary policy?
The European System of Central Banks (ESCB) unites the national central banks (NCBs) of all EU Member States and the European Central Bank (ECB). Within the ESCB, the Eurosystem combines all euro-area NCBs and the ECB. Decisions on euro-area monetary policy are taken independently by the ECB’s Governing Council, which comprises the governors of the euro-area NCBs and the members of the ECB’s Executive Board. Member States outside the euro area coordinate their monetary policy with the ECB.
How is fiscal policy coordinated?
The cornerstone of fiscal policy coordination under EMU is the Stability and Growth Pact (SGP), the implementation of which involves different actors and a number of procedures:
- Member States run their fiscal policies within the limits on government deficit and debt laid down in the Stability and Growth Pact (SGP) – 3% and 60% of GDP, respectively. Euro-area Member States report their compliance to the SGP by submitting regular ‘stability programmes’, whilst non-euro-area Member States submit ‘convergence programmes’. These programmes include the medium-term budgetary objectives of each Member State and the measures foreseen to attain the objectives of the programme. They are submitted to the Council and the Commission and run for four years, but are revised annually.
- The European Commission monitors compliance with the SGP by making assessments of the Member States’ stability and convergence programmes. The Council, acting on Commission proposals, issues opinions to Member States and, if necessary, can invite them to strengthen their programme.
- The Council monitors the implementation of the programmes and, to prevent an excessive deficit situation where a Member State would be in breach of the SGP limits or significantly deviating from its medium-term objective, it can recommend adjustment measures. This is known as the 'early-warning procedure'.
- If the budgetary divergence of a Member State worsens and that Member State is found to be exceeding the SGP limits, the Council, following a Commission proposal, can start an excessive deficit procedure against the Member State in question. This requires prompt corrective actions from the Member State with, as a last resort, financial penalties in the case of euro-area Member States.
- The Council may decide to abrogate the sanctions if the Member State is found to be making significant progress along the path of correction, or if the decision on the existence of an excessive deficit is itself abrogated.
How is economic policy-making coordinated?
The Broad Economic Policy Guidelines (BEPG) are the principal instrument for economic policy coordination in the EU. They are based on the annual cycle of economic policy discussions between the European institutions and Member States. These discussions result in the European Commission recommending BEPG for each Member State and the EU as a whole, which are adopted by the Council. The BEPG are updated annually and cover the coming three years.
The Commission monitors implementation of the guidelines in each Member State and produces regular implementation reports. In the event of non-compliance, the Council can issue non-binding recommendations for corrective action to individual Member States.
Who’s who in EMU
- European Council: reunites the heads of state and government of the EU Member States, who set the main policy orientations.
- The Council of the European Union (the 'Council'): comprises representatives of Member State governments. It is the EU’s main decision-making body. ECOFIN is the Council of the European Union in its configuration of ministers of economy and finance. The Council coordinates economic policy-making and takes decisions on the operations of the Stability and Growth Pact and the application of the Treaty. It also decides whether a Member State may adopt the euro.
- Eurogroup: an informal grouping of ministers of economics and finance of the euro area, who meet to discuss matters of common concern for the euro-area countries, thus contributing to economic policy coordination.
- European Commission: monitors performance and compliance with the Treaty and the Stability and Growth Pact, and makes assessments and recommendations to the Council on decisions to be taken.
- European Central Bank: the central bank for the euro area, which sets monetary policy, with price stability as its primary objective. The ECB is part of the Eurosystem, which unites the central banks of those Member States which have adopted the euro, and is responsible for implementing monetary policy. The Eurosystem assumes the tasks of the ESCB (European System of Central Banks) as long as there are EU Member States outside the euro area.