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Economic governance

A hand stopping a line of dominoes from falling © iStockphoto

The crisis exposed fundamental problems and unsustainable trends in many European countries. It also made clear just how interdependent the EU's economies are. Greater economic policy coordination across the EU will help us to address these problems and boost growth and job creation in future.

Emerging stronger from the crisis: the European vision

More united than ever: how the EU has found solutions to tackle the financial crisis, how it is reinforcing its economic and monetary union and how this is paving the way towards a strong political union.

The new EU economic governance is based on three main blocks:

  • A reinforced economic agenda with closer EU surveillance. This includes agreed policy priorities and targets as part of the Europe 2020 strategy; additional commitments taken by Member States participating in the Euro Plus Pact; tighter EU surveillance of economic and fiscal policies as part of the Stability and Growth Pact and through new tools to tackle macro-economic imbalances; and a new working method – the European semester – to discuss economic and budgetary priorities at the same time every year.
  • Action to safeguard the stability of the euro area. In 2010, the EU responded to the sovereign debt crisis by setting up temporary support mechanisms for its Member States, which will be replaced by the permanent European Stability Mechanism (ESM) in 2013. These support measures are conditional on rigorous fiscal consolidation and reform programmes, and are developed in close cooperation with the IMF.
  • Action to repair the financial sector, as presented below.

The following focuses on some key aspects of this new EU economic governance.


 

The European Semester

The European semester is a six-month period each year when Member States' budgetary, macro-economic and structural policies are coordinated effectively so as to allow Member States to take EU considerations into account at an early stage of their national budgetary processes and in other aspects of economic policymaking.

The key stages in the European semester are as follows:

In January, the Commission issues its Annual Growth Survey, which sets out EU priorities for the coming year to boost growth and job creation.

In March, EU Heads of State and Government issue EU guidance for national policies on the basis of the Annual Growth Survey.

In April, Member States submit their plans for sound public finances (Stability or Convergence Programmes) and reforms and measures to make progress towards smart, sustainable and inclusive growth (National Reform Programmes).

In June, the Commission assesses these programmes and provides country-specific recommendations as appropriate. The Council discusses and the European Council endorses the recommendations.

Finally, end of June or in early July, the Council formally adopts the country-specific recommendations.



 

The Stability and Growth Pact

The Stability and Growth Pact (SGP) is a set of rules that encourages Member States to maintain sound public finances.

The SGP has two 'arms':

  • The Preventive Arm calls for Member States to submit an annual Stability (for euro area countries) or Convergence (for other Member States) Programme, which is submitted along with the National Reform Programme. This programme sets out how the Member State intends to achieve and maintain sound public finances in the medium term. The Commission can then offer policy recommendations (in June, as part of the European Semester), or, if necessary, make a proposal to the Council to issue an early warning of an excessive deficit
  • The Corrective Arm governs the Excessive Deficit Procedure (EDP). Under the EDP, if a Member State breaches the 3% budget deficit as described in the Treaty, the Council will issue recommendations on how to address this problem. Non-compliance with these recommendations may lead to sanctions for euro area Member States.

The SGP is currently being reinforced with a range of proposed changes designed to:

  • Allow the corrective arm of the SGP to take greater account of the interplay between debt and deficit, specifically in high debt countries (where public debt exceeds 60% of GDP)
  • Speed up the EDP and make the imposition of sanctions on Member States semi-automatic, by requiring a qualified majority in the Council to reject a sanctions proposal from the Commission, rather than to approve it
  • Improve national budgetary frameworks, addressing accounting and statistical issues as well as forecasting practices

 

Addressing macro-economic imbalances

Over the past decade, Member States have experienced divergent economic trends, which have , exacerbated competitiveness gaps and led to macro-economic imbalances within the EU. To avoid this happening in the future, the Commission has proposed a new surveillance mechanism to identify and correct such issues much earlier. Through this mechanism, Member States' economies will be monitored for emerging macroeconomic imbalances (e.g. property bubbles, growing current account deficits or surpluses or falls in competitiveness). Where Member States breach the "alert thresholds", the Commission will carry out in-depth studies to analyse whether the imbalances are harmful and if necessary it will issue recommendations.


 

The Euro Plus Pact

A complementary agenda with additional reforms – called the Euro Plus Pact – has been agreed among euro area Member States, as a reflection of their deeper interdependence, as well as six non euro area countries that have chosen to sign up: Bulgaria, Denmark, Latvia, Lithuania, Poland and Romania. It focuses on four areas: competitiveness, employment, sustainability of public finances and reinforcing financial stability.

The Pact was endorsed by EU leaders in March 2011. All 23 signatories are committed to implementing the reforms in details. The remaining four Member States are free to sign up if they wish. It is fully embedded in the new economic governance framework and the commitments taken therein are included in the National Reform Programmes of the concerned Member States.


 

Repairing the financial sector

The EU has established new rules and agencies to prevent any problems earlier and make sure all financial players are properly regulated and supervised. Further work is underway, in particular to ensure Europe's banks have sufficient capital reserves to enable them to withstand any future shocks to the financial system, so that they can continue functioning and providing credit to households and businesses.

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