Review EN
Reforming the EU’s
economic governance:
Opportunities with risks and
challenges
2
Contents
Paragraph
Executive summary I-XI
Introduction
01-06
Scope and approach
07-08
The EU economic governance framework since 1992
09-18
Recent socio-economic and geopolitical developments
19-24
The need to reform the EU economic governance
framework and the Commission’s proposals
25-101
EU fiscal framework 30-46
Net expenditure compared with structural budget balance as key indicator 30-34
Focusing on reducing debt 35-44
Our analysis of the main challenges and risks 45-46
National budgetary frameworks 47-60
Medium-term budgetary frameworks 48-51
Independent fiscal institutions 52-59
Our analysis of the main challenges and risks 60
National plans for national ownership 61-72
Our analysis of the main challenges and risks 70-72
Transparency and discretion 73-80
Our analysis of the main challenges and risks 78-80
Enforcement 81-90
Our analysis of the main challenges and risks 88-90
Complexity and overlaps 91-101
Our analysis of the main challenges and risks 100-101
Closing remarks: Commission’s proposals address most
of the key concerns, but risks and challenges remain
102-110
3
Annexes
Annex I – ECA audits, reviews and opinions related to EU economic
governance
Annex II – Evolution of the EU’s economic governance framework
Annex III – Evolution of deficit-to-GDP and debt-to-GDP ratios
from 2000 to 2022
Annex IV – Global public debt
Annex V – European Semester timeline
Annex VI – Key stakeholders’ concerns regarding the current
framework
Abbreviations
Glossary
ECA team
4
Executive summary
I The EU’s economic governance framework is the system of institutions and
procedures which the EU has established to achieve its economic objectives, namely to
coordinate economic policies. The framework aims to monitor, prevent and correct
economic trends that could weaken national economies or negatively affect EU
countries, and to prevent spillover to other economies, as well as supporting the
stability of the single currency, or enabling the process of the European Banking Union.
II The elements of the current framework are the EU fiscal framework (the Stability
and Growth Pact and the national budgetary frameworks), the macroeconomic
imbalance procedure, the European Semester for economic and employment policy
coordination, and the framework for member states experiencing, or threatened by,
serious difficulties regarding their financial stability or the sustainability of their public
finances, or otherwise requesting financial assistance.
III This framework builds on the EU legislation packages adopted following the
financial and sovereign debt crises. Since then, we have extensively audited the EU’s
economic governance framework, reported on its main shortcomings and made a
number of recommendations to address the:
o use of non-observable indicator (e.g. structural balance), revised frequently and
sometimes significantly, which may also affect past estimates, and focus on deficit
rather than debt;
o weaknesses in national budgetary frameworks underlying budgetary policies of
member states;
o lack of national ownership;
o poor balance between transparency and discretion;
o weak or inexistent enforcement in practice;
o complexity and overlaps in surveillance and monitoring.
5
IV Most of these shortcomings are also of concern to key stakeholders and the
Commission acknowledges the need for a reformed framework. It published backward-
looking assessments of the framework in February 2020 and October 2021 and it
launched a public consultation process that led, in November 2022, to a communication
giving “orientations” and outlining the principles for a reform of the economic
governance framework. In April 2023, the Commission presented a package of
legislative proposals revising the Stability and Growth Pact and the requirements for
budgetary frameworks of the member states. For other aspects like the macroeconomic
imbalance procedure or the post-programme surveillance, the Commission proposed
evolutions that do not need legislative changes.
V In the context of the scheduled deactivation of the Stability and Growth Pact general
escape clause (see paragraph 19) at the end of 2023, member states and the
Commission need to reach a consensus on reforming the economic governance
framework ahead of member states’ next budgetary processes. Without consensus on
the reform, these budgetary processes will be subject to the existing legislation.
VI This document is not an audit report. It is a review based mainly on previous audit
work and publicly available information or material specifically collected for this
purpose. It provides a comprehensive overview of the shortcomings identified in our
previous audits and takes into account changes in the socio-economic environment and
geopolitical developments. We identify key risks, opportunities and challenges included
in the orientations and legislative proposals presented by the Commission.
VII The Commission’s proposals are heading in the right direction as they take the
opportunity to address most of the key concerns over the current framework, including
those raised by the ECA in its previous audits and reports. However, risks and challenges
remain for a number of important aspects. The main challenge of the new framework
will be to ensure fiscal adjustments promoting debt sustainability while supporting
investment and reforms that contribute to growth.
6
VIII The Commission proposes that member states submit national medium-term
fiscal-structural plans that would bring together their fiscal, reform and investment
commitments. Each plan would set a country-specific net expenditure reference
adjustment path to put the debt ratio on a downward path or stay at prudent levels.
This country-specific approach aims to strengthen national ownership and promote debt
sustainability. The choice of the observable net expenditure indicator and the
Commission’s disclosure of its methodology and data to set the reference adjustment
path would also increase transparency. The Commission also envisages to strengthen
the capacity and widen the role of national independent fiscal institutions.
IX The Commission also aims to increase enforcement by lowering and implementing
gradually financial sanctions, and by giving them a reputational impact. The national
recovery and resilience plans of the Recovery and Resilience Facility set out specific
reforms and investments to be implemented by 2026, which need to address all or a
significant subset of the 2019-2020 country-specific recommendations under the
European Semester. The link to RRF funding could positively impact the implementation
of country-specific recommendations.
X In our view, the recent proposals do not include sufficient measures to mitigate the
risks inherent in the EU’s exercise of its discretionary power, as the system of national
medium-term fiscal-structural plans combine with dialogue between the EU and
member states allows for a higher degree of country differentiation. Thus, there is a risk
that the Commission’s margin of interpretation and discretion will expand, with
potential implications for transparency and equal treatment. In particular, the net
expenditure reference adjustment path set by member states and included in their
plans may depart from the technical trajectory set by the Commission. Notwithstanding
that member states have to justify the difference between their expenditure path and
the technical trajectory, the risk of postponing necessary fiscal adjustments persists.
XI Although the Commission also proposed to simplify the post-programme
surveillance, the EU economic governance framework still involves many actors and
layers, leaving broadly unchanged the degree of complexity and overlap in the EU’s
macroeconomic surveillance and monitoring.
7
Introduction
01 With the Treaty on European Union in 1992 (the Maastricht Treaty), the EU
established the architecture of the economic and monetary union (EMU) as a prelude to
the creation of the euro. The EU economic governance framework refers to the system
of institutions and procedures established to coordinate economic policies to achieve its
objectives in the economic field. The framework aims to monitor, prevent and correct
economic trends that could weaken national economies or negatively affect EU
countries.
02 An effective economic policy coordination and surveillance across the EU strives
towards ensuring the soundness and sustainability of public finances and should
promote sustainable economic growth and convergence. It also should address
macroeconomic imbalance and promote reforms and investments to enhance growth
and resilience.
03 The EU economic governance framework has gradually evolved over time, in
response to the financial and sovereign debt crisis, becoming more complex. Today, the
European Semester for economic and employment policy coordination aims at an
integrated approach combining the EU fiscal framework (the Stability and Growth Pact
and the national budgetary frameworks), the macroeconomic imbalance procedure, and
the framework for member states experiencing, or threatened by, serious difficulties
regarding their financial stability or to the sustainability of their public finances, or
otherwise requesting financial assistance.
04 We have produced many reports covering all elements of the EU economic
governance framework (see Annex I for an exhaustive list of our works in the area).
These reports identified a number of important shortcomings and made
recommendations to address them accordingly.
8
05 In February 2020, the newly elected Commission presented its review of
effectiveness of the EU’s economic governance, also relying on the assessment of EU
fiscal rules in ECA audits to identify areas for improvement and launched a consultation
on its future
1
. Drawing on the outcome of this process, the Commission published
“orientations” in November 2022
2
outlining the principles for a reform, followed by a
package of legislative proposals in April 2023
3
.
06 In the context of the scheduled deactivation of the Stability and Growth Pact
general escape clause (see paragraph 19) at the end of 2023, member states and the
Commission need to reach a consensus on reforming the economic governance
framework ahead of member states’ next budgetary processes. Without consensus on
the reform, these budgetary processes will be subject to the existing legislation.
1
Commission Communication, COM(2020) 55 final, Economic governance review.
2
Commission Communication, COM(2022) 583 final.
3
COM(2023) 240 final 2023/0138 (COD); COM(2023) 241 final 2023/0137 (CNS);
COM(2023) 242, final 2023/0136 (NLE).
9
Scope and approach
07 This document not an audit report. It is a review based on our own previous audit
work in the area of EU economic governance and other publicly available information,
material specifically collected for the purpose of this review. The objective of the review
is to contribute to the debate aiming at a more robust economic governance framework
for the EU. More specifically, we:
— summarise the observations, conclusions and recommendations resulting from our
past audit work;
— identify the key opportunities, risks and challenges following the recent
orientations and legislative proposals of the Commission;
— provide a comprehensive overview of the evolution of the EU economic
governance framework since 1992; and
— take into account recent socio-economic and geopolitical developments.
08 We reviewed the EU legislation and publications relevant to the review topic
issued by the European Parliament, the Commission, member states, Supreme Audit
Institutions, international organisations, academic institutions and think tanks. We
interviewed Commission officials and consulted staff from key stakeholders
4
and think
tanks
5
publishing relevant studies in the area of EU economic governance.
4
International Monetary Fund, Organisation for Economic Cooperation and Development,
European Fiscal Board, European Stability Mechanism and the Network of EU independent
fiscal institutions.
5
Centre for European Policy Studies and Bruegel.
10
The EU economic governance
framework since 1992
09 The Economic and Monetary Union established in 1992 involves the coordination
of economic and fiscal policies, a common monetary policy and a common currency, the
euro. To enter the Economic and Monetary Union, member states must comply with
convergence criteria (the “Maastricht criteria”)
6
such as a sustainable budgetary
position, which means that there is no excessive deficit. An excessive deficit is defined
as a budget deficit exceeding 3 % of GDP or a ratio of public debt to GDP that exceeds
60 %
7
.
10 For the Economic and Monetary Union to function correctly, it was necessary to
introduce a mechanism to safeguard the soundness of public finances and reduce the
risk of spillover from member states pursuing unsustainable fiscal policies. This
mechanism, the Stability and Growth Pact, was adopted in 1997 and comprises two
arms. The preventive arm aims to ensure sound medium term budgetary policies and
avoid excessive deficit. The corrective arm is the excessive deficit procedure (EDP) and
intervenes when a member state’s deficit is excessive.
11 In 2005, a first reform of the Stability and Growth Pact extended the previous
approach, for example by taking into account the economic situation whereby member
states are expected to undertake more adjustments in good times and do less in bad
times.
12 The 2008 financial crisis and the subsequent turmoil in the sovereign debt market
demonstrated that, since the launch of the euro in 1999, some member states had not
used this economically favourable decade to reduce their public debt significantly. In
other words, the Stability and Growth Pact has been partially ineffective.
6
Article 140 of the Treaty on the Functioning of the European Union.
7
Article 126(2)(b) of and Protocol No 12 to the Treaty on the Functioning of the European
Union.
11
13 Moreover, the Stability and Growth Pact alone was insufficient to guarantee
economic stability because it was not designed to detect, prevent and correct
macroeconomic imbalances, with the consequence that some member states had to ask
for financial assistance (see Box 1). Consequently, the EU adopted a range of measures
to strengthen its economic governance and build a crisis management framework.
Box 1
The insufficiency of the Stability and Growth Pact to guarantee
economic stability
The Stability and Growth Pact was insufficient to detect and prevent the building up
of macroeconomic imbalances, as illustrated by the situation in Spain and Ireland.
In the decade preceding the 2008 crisis, Spain and Ireland experienced a strong
economic growth that allowed them to achieve a flattering fiscal position. As
illustrated by Figures A and B, both countries enjoyed fiscal surpluses and a public
debt-to-GDP ratio below 40 % before the crisis.
Figure A: Public deficit (percentage of GDP)
Source: ECA, based on AMECO database.
Euro area
Ireland
Spain
5 %
0 %
- 5 %
- 15 %
- 25 %
- 35 %
- 30 %
- 20 %
- 10 %
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
12
Figure B: Public debt (percentage of GDP)
Source: ECA, based on AMECO database.
In both cases, however, this performance was based on rapid growth, fuelled by
easy access to financing, which generated a credit boom and a surge in domestic
demand, particularly in the construction sector. This was accompanied, in the run-
up to the crisis, by several imbalances. The current account balance, which records
a country’s transactions with the rest of the world, deteriorated (see Figure C)
because of the sharp rise in internal demand and the deterioration of external
competitiveness Private debt also rose sharply, in particular because of the steep
increase in real estate investment, putting financial stability at risk.
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
2012
2013
0 %
20 %
40 %
60 %
80 %
100 %
120 %
Euro area
Spain
Ireland
13
Figure C: Current account balance (percentage of GDP)
Source: ECA, based on AMECO database.
When the housing bubble burst, the resulting banking crisis obliged governments to
adopt measures to support the banking sector, which threw public finances into
marked decline after 2009 (see Figures A and B). This in turn affected the sovereign
debt market, and eventually both Ireland and Spain were forced to seek financial
assistance.
14 In 2011, the EU adopted five regulations and one directive in a “six-pack” of
legislation reforming both the preventive and corrective arms of the Stability and
Growth Pact, adopting measures to enhance national ownership of the EU’s fiscal rules,
and introducing the macroeconomic imbalance procedure aiming to detect, prevent and
correct macroeconomic imbalances
8
. The so-called six-pack also introduced the
European Semester (an annual exercise to coordinate fiscal, economic, employment and
social policy in the EU) and strengthened sanctions against euro area member states
with poor budgetary discipline.
8
Commission press release MEMO 11/898.
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
2012
2013
0
Euro area
Spain
Ireland
1
2
3
- 1
- 2
- 3
- 4
- 5
- 6
- 7
- 8
- 9
- 10
14
15 In March 2012, 25 of the (then) 27 member states (all but the United Kingdom and
the Czech Republic
9
) signed the intergovernmental Treaty on Stability, Coordination and
Governance in the Economic and Monetary Union (TSCG). It contained clauses designed
to foster ownership and budgetary discipline. It increases the role of national
independent fiscal institutions (IFIs), which are given the task of monitoring compliance
with national fiscal rules.
16 Given the higher potential for spillover effects of budgetary policies in a common
currency area, there was a need for still stronger mechanisms specifically for the euro
area. In 2013 two further regulations (so-called “two-pack”) came into force to
strengthen euro area budgetary surveillance
10
. The first one addressed the monitoring
of budgetary policies in the context of the Stability and Growth Pact. The second
regulation contained provisions for strengthening the economic and budgetary
surveillance of euro-area member states experiencing, or threatened by, serious
difficulties regarding their financial stability or the sustainability of their public finances,
or otherwise requesting financial assistance.
17 We summarise all these legislative developments in Annex II
11
. As acknowledged
by the “Five Presidents Report
12
”, they have increased the complexity of the EU’s
economic governance framework, both because of a tendency for more technical rules
and greater reliance on Commission’s discretion and expert judgement, and because of
the co-existence/overlapping of EU, national and intergovernmental rules and
institutions.
18 Finally, in 2015 the EU established the European Fiscal Board (EFB) as an
independent advisory board to the Commission to evaluate the implementation of EU
fiscal rules, to advise the Commission on the fiscal stance appropriate for the euro area
as a whole and to cooperate with member states' national fiscal councils.
9
The Czech Republic ratified the Treaty in April 2019. In addition, Croatia joined the EU in July
2013 and ratified the Treaty in March 2018.
10
Commission press release MEMO 13/457.
11
Review 05/2020: “How the EU took account of lessons learned from the 2008-2012 financial
and sovereign debt crises’’.
12
Jean-Claude Juncker, in close cooperation with Donald Tusk, Jeroen Dijsselbloem, Mario
Draghi and Martin Schulz: “Completing Europe's Economic and Monetary Union”,
22 June 2015.
15
Recent socio-economic and geopolitical
developments
19 The COVID-19 pandemic generated new risks and challenges to EU economic
governance because it required significant economic countermeasures from the
member states and the EU
13
. In March 2020, the Council agreed for the first time to
activate the general escape clause of the Stability and Growth Pact, allowing all member
states to depart temporarily from the fiscal rules. This resulted in a general increase of
the level of public deficit and debt, often over the reference values of 3 % and 60 %,
respectively. Annex III shows the evolution of the deficit-to GDP and debt-to-GDP ratios
from 2000 to 2022.
20 In December 2020, the EU adopted NextGenerationEU (NGEU), a temporary
instrument worth around €800 billion in funding, financed by EU debt, to help repair the
immediate economic and social damage brought about by the pandemic and build a
greener, more digital and more resilient future. The centrepiece of the NGEU is the
Recovery and Resilience Facility (RRF), which provides grants and loans to support
member state reforms and investments. Member states draw up recovery and resilience
plans that had to address a significant subset of 2019 and 2020 country-specific
recommendations. The Commission assessed the plans
14
and the Council approved
them. They qualify for funding from the facility when they achieve specified milestones
and targets. Before making any payments, the Commission assesses that each milestone
and target has been reached satisfactorily. The monitoring and reporting of the
implementation of the recovery and resilience plans is fully aligned with the European
Semester, in particular regarding reporting on the implementation of measures
contributing to the country-specific recommendations.
21 In the second half of 2021, geopolitical tensions between Russia and Ukraine led to
unrest on the gas market. The situation deteriorated tremendously further in
February 2022, due to Russia’s war of aggression against Ukraine. In the following
months, Russia progressively reduced a significant part of its gas supply to the EU, which
drove gas prices to record highs. Because of the nature of the EU’s electricity pricing
13
See review 06/2020: “Risks, challenges and opportunities in the EU’s economic policy
response to the COVID-19 crisis”.
14
Special report 21/2022: The Commission’s assessment of national recovery and resilience
plans – Overall appropriate but implementation risks remain.
16
mechanism
15
, high gas prices also triggered a sharp increase in wholesale electricity
prices and a resumption of inflation. In particular, the euro area inflation was dominated
by a strong contribution from energy prices.
22 In May 2022, the Commission presented REPowerEU
16
, its roadmap towards
achieving a more resilient energy system and a true energy union by ending the EU’s
dependence on fossil fuels, diversifying energy supplies at EU level and accelerating the
clean energy transition. Among other things, REPowerEU encourages member states to
include new energy measures to their recovery and resilience plans. At the end of
June 2023, nine member states had submitted an amendment to their recovery and
resilience plan including a REPowerEU chapter.
23 Where they can afford it, member states are keen to protect their businesses and
households from rising energy costs. Depending on their duration and degree of
implementation, divergent national reactions to the crisis (massive state aid,
confinement measures) may persistently distort the level playing field in the single
market and pose challenges for economic convergence and competitiveness in the EU
17
.
In 2022, the net budgetary cost of measures to mitigate the impact of high energy prices
is estimated by the Commission at 1.2% of GDP in the EU
18
.
24 To address the pandemic and provide economic support, almost all countries have
had to increase their public debt. Annex IV provides a view of the recent evolution of
debt-to-GDP ratios around the world. In the EU, the Commission agreed to maintain the
general escape clause until the end of 2023 to allow member states to sustain their
economies and continue supporting recovery
19
. For the euro area, the overall debt-to-
GDP increase from 2019 to 2021 was moderate (11.7 %) in comparison to other
advanced economies (19.0 % in the UK, 19.3 % in the US and 26.2 % in Japan). However,
the public debt ratios of EU member states remain heterogeneous. This heterogeneity
may undermine the effectiveness of the single monetary policy, especially in a context
15
Special report 03/2023: “Internal electricity market integration”, Box 1.
16
https://commission.europa.eu/strategy-and-policy/priorities-2019-2024/european-green-
deal/repowereu-affordable-secure-and-sustainable-energy-europe_en. For our assessment
of REPowerEU, see Opinion 04/2022: “REPower EU”.
17
Review 06/2020, p. 49.
18
European Economic Forecast, Autumn 2022, see Box I.2.4, p. 51.
19
Commission Communication on the Annual Sustainable Growth Survey 2023.
17
of high inflation (see paragraph 21 and Figure 1) which led the European Central Bank to
raise its key interest rates (see Figure 2).
Figure 1 – Inflation in the EU (percentage), measured by the harmonised
index of consumer prices (2011 – 2022)
Source: ECA, based on Eurostat database.
Figure 2 – Increase in key interest rates of the European Central Bank
(April 2022 – March 2023)
Source: ECA, based on ECB database.
9.2 %
0 %
2011
1 %
2 %
3 %
4 %
5 %
6 %
7 %
8 %
9 %
10 %
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
2022
April May June July August September October November December January February March
2022 2023
3
3.5
4
2
2.5
1.5
0
1
0.5
- 0.5
- 1
Marginal lending facility Main refinancing operations Deposit facility
18
The need to reform the EU economic
governance framework and the
Commission’s proposals
25 The Commission must carry out a review of the effectiveness of the framework
every five years, as required by six-pack and two-pack regulations. Following this
review
20
, the Commission launched a public consultation on the future of the EU
economic governance in February 2020 (see paragraph 05). However, it was put on hold
because of the need to address the immediate challenges posed by the emerging
pandemic and the ensuing recession. It was reopened in October 2021
21
and the
Commission received a total of 225 contributions, mostly from academia and research
institutions, but also from citizens and trade unions
22
. The Commission engaged with
relevant stakeholders through a series of meetings and spoke to member states through
established bilateral contacts and in Council committees.
26 In November 2022, the Commission drew on the outcomes of this process to
publish a communication giving “orientations” and outlining the principles for a reform
of the economic governance framework. In April 2023, the Commission presented a
package of legislative proposals, consisting in two proposed regulations revising the
rules on the preventive and corrective arms of the Stability and Growth Pact
respectively, and one proposed directive revising the requirements for budgetary
frameworks of the member states.
27 For other aspects of the economic governance framework, like the macroeconomic
imbalance procedure or the post-programme surveillance, the Commission proposed
developments in its November 2022 orientations that do not need legislative changes,
like enhanced dialogue with member states and streamlining of procedures.
20
Commission staff working documents, SWD(2020) 210 and SWD(2020) 211.
21
Commission Communication, COM(2021) 662 final, The EU economy after COVID-19:
implications for economic governance.
22
Commission Staff Working Document, SWD(2022) 104 final, Online public consultation on the
review of the EU economic governance framework. Summary of responses. Final Report.
19
28 In the following paragraphs, we touch on the main issues that we have raised in
the past, grouped in six thematic areas based on the structure of the Commission’s
proposal:
o EU fiscal framework: use of non-observable indicator (structural balance), revised
frequently and sometimes significantly, which may also affect past estimates, and
focus on deficit rather than debt;
o weaknesses in national budgetary frameworks underlying budgetary policies of
member states;
o lack of national ownership;
o poor balance between transparency and discretion;
o weak or inexistent enforcement in practical terms;
o complexity and overlaps in surveillance and monitoring.
29 For each area, we summarise our previous observations, conclusions and
recommendations of past audit work, identify on that basis how the Commission
addresses them in its proposals and analyse the main risks and challenges.
EU fiscal framework
Net expenditure compared with structural budget balance as key
indicator
30 One weakness of the current fiscal framework is the use of non-observable
indicators for assessing compliance with the Stability and Growth Pact rules. The key
indicator in this respect is the structural budget balance, which corresponds to the
budget balance cleaned from temporary effects such as the impact of the economic
cycle and one-off budgetary measures.
31 The structural balance, which cannot be observed and must be estimated, is the
metric used to define the medium-term budgetary objective, a country-specific target
that cannot be lower than a minimum calculated by the Commission in line with a
methodology agreed with member states. For each member state, the structural
balance is considered Stability and Growth Pact-compliant if it is at least equal to the
medium-term budgetary objective. Member states that have not yet achieved their
20
medium-term budgetary objective, should improve their structural balance by 0.5 % of
GDP per year as a benchmark (more in good times and less in bad times). However, we
reported in 2018
23
that the achievement of the medium-term budgetary objective was
very poor, that various deviations were accepted.
32 The structural balance estimates are based on many assumptions and are
frequently revised. The magnitude of the revisions may be significant. As we observed in
our special report on the Excessive Deficit Procedure, and as reported by stakeholders,
this makes the assessment of compliance with the rules more complex
24
and prone to
policy errors
25
, which may undermine the credibility and enforceability of the Stability
and Growth Pact
26
and makes it inappropriate for budgetary management.
33 In the November 2022 communication on the orientations, the Commission
acknowledges the difficulties associated with designing policy recommendations based
on non-observable indicators that are subject to frequent revisions. It proposes to use
net expenditure as a single operational indicator for setting the fiscal adjustment path
and carrying out annual fiscal surveillance. The Commission claims that this will make
the fiscal framework simpler and more transparent.
34 Net expenditure covers nationally financed public primary expenditure (i.e.
excluding interest payments) net of discretionary revenue measures. It also excludes
cyclical unemployment benefit expenditure and any public expenditure matched by EU-
funded projects. Changes in policy that have a permanent impact on revenue, i.e. the
so-called discretionary revenue measures, are deducted so that member states can
choose the ratio of expenditure to GDP according to their political preferences. This
allows governments to permanently increase (or cut) expenditure as a share of GDP if
the change is offset by permanent tax increases (or cuts). Interest and cyclical
unemployment expenditure are deducted to discount expenditure fluctuations outside
direct government control. Consequently, the use of net expenditure as operational
indicator increases macroeconomic stabilisation since it allows automatic stabilisers to
operate.
23
Special report 18/2018, paragraphs 62-70.
24
Special report 10/2016, paragraphs 91-94 and Box 10.
25
IMF, staff contribution to the European Commission review of the EU economic governance
framework, 2021, p. 1.
26
ESM, EU fiscal rules: reform considerations, October 2021, p. 7.
21
Focusing on reducing debt
35 The European Monetary Union threshold for public deficit is 3 % of GDP, and for
debt it is 60 % of GDP or a ratio that is “sufficiently diminishing and approaching the
reference value at a satisfactory pace”, as set in the protocols of the Treaty on the
Functioning of the European Union. In its proposal, the Commission keeps those
thresholds. In 2022, 14 member states had a debt-to-GDP ratio below the 60 %
threshold, whereas for six member states, this ratio was above 100 %.
36 For many years, focusing on the deficit was deemed sufficient to ensure the steady
reduction of debt. Thus, it was considered unnecessary to define more precisely the
“satisfactory pace” of convergence with the 60 % reference value. The rationale is that
with a 5 % annual nominal GDP growth rate, a deficit of 3 % of GDP will eventually
stabilise the debt‑to‑GDP ratio at 60 %. Indeed, if the debt ratio is above 60 %, a 3 %
deficit will induce an annual reduction in the ratio of one twentieth of the differential
with the reference value of 60 %
27
.
37 Since the 2008 crisis and before the recent inflation rise, the 5 % assumption for
annual nominal GDP growth was clearly unrealistic
28
. Hence, a deficit of 3 % of GDP no
longer automatically meant convergence towards a debt‑to‑GDP ratio of 60 % (for
example, at an annual nominal growth rate of 3 % and a 3 % deficit, the debt‑to‑GDP
ratio will stabilise at 100 %). For this reason, a specific definition of the debt criterion
emerged in the six-pack: “the [debt‑to‑GDP ratio] shall be considered sufficiently
diminishing and approaching the reference value at a satisfactory pace […] if the
differential with respect to the reference value has decreased over the previous three
years at an average rate of one twentieth per year as a benchmark […]”
29
.
38 The debt criterion was only operationalized in 2012 and was slowly phased in. It
would have been applicable to all member states starting from 2022. However, due to
the high prevailing level of economic uncertainty and the subsequent activation of the
general escape clause, no excessive deficit procedure has so far been triggered based on
the debt rule.
27
Special report 10/2016, paragraph 68 and Box 6.
28
Special report 10/2016, Annex V.
29
Article 1(2)(b) of Council Regulation (EU) No 1177/2011 of 8 November 2011.
22
39 In 2016, we noted that the excessive deficit procedure over‑emphasised the
criterion of deficit rather than debt, and we recommended that the Commission focus
closely on the reduction of government debt, especially in heavily indebted member
states
30
. We also reported that the 1/20th rule was not credible for highly indebted
member states, since the compliance with the convergence path would require them to
follow an extremely restrictive fiscal policy, at least at the start, which could damage
growth and threaten the debt-to-GDP adjustment itself
31
.
40 The recent proposals of the Commission put the emphasis on debt sustainability
while suppressing the 1/20th rule. At the core of the new framework, national medium-
term fiscal-structural plans, submitted by member states, assessed by the Commission
and endorsed by the Council, would bring together the fiscal, reform and investment
commitments of each member state and ensure that their debt ratio is put on a
downward path or stay at prudent levels. These plans would set a net expenditure
reference adjustment path for a period of four years, extendable by up to three years to
facilitate major investments and reforms. When a deficit exceeds the 3 % of GDP
reference value, the net expenditure path shall be consistent with a minimum annual
benchmark adjustment of 0.5 % of GDP.
41 To guide member states in the design of their multi-year net expenditure targets,
the Commission proposes to provide “technical information” for each member state
with a deficit below 3 % of GDP and public debt below 60 % of GDP. This information
should ensure that the deficit remains below the 3 % of GDP over the medium term.
42 For each member state with a deficit above 3 % of GDP or public debt above 60 %
of GDP, the Commission proposes to issue a country-specific “technical trajectory”. This
trajectory should ensure that:
o the government deficit is brought and kept below the 3 % of GDP reference value
over a 10-year period after the end of the national medium-term fiscal-structural
plan;
o the public debt ratio is put or remains on a plausibly downward path or stays at
prudent levels over the same 10-year period (meaning a 14 to 17-year time horizon
when the Commission issues the technical trajectory). To assess this fundamental
point, the Commission would use its debt sustainability analysis;
30
Special report 10/2016, paragraphs 68 and 69, and recommendation 8.
31
Special report 10/2016, paragraphs 70 and 71.
23
o the debt-to-GDP ratio at the end of the plan is below its initial level;
o net expenditure growth remains below medium-term output growth, on average,
as a rule over the horizon of the plan;
o the fiscal adjustment effort is not postponed to the end of the national medium-
term fiscal-structural plans.
43 Debt sustainability analysis essentially consists in producing projections of the
debt-to-GDP ratio. These projections are based on assumptions regarding the future
evolution of the variables explaining how public debt evolves over time, in particular the
primary balance, interest rates, the growth rate and the inflation rate.
44 Alternative scenarios are computed, generally for a period of 10 years. The
baseline is a ‘no-fiscal-policy-change’ scenario. It relies on Commission’s forecasts for
the next two years, after which fiscal policy is assumed to remain unchanged from the
last forecast year until the end of the projection period. Alternative fiscal policy
scenarios are then carried out to assess the effects of variability in the key assumptions
on the projection of debt
32
. Assumptions on the revenue impacts of planned reforms
should be also considered. Moreover, the Commission uses stochastic projections to
assess whether the risk of a non-decreasing debt-to-GDP ratio in the five years following
the adjustment period is sufficiently low.
Our analysis of the main challenges and risks
45 The Commission’s logic for introducing a net expenditure indicator is that it is a
more observable indicator for assessing compliance with the Stability and Growth Pact
than the structural balance. This is in line with our previous observation that the use of
non-observable variables are not appropriate for that purpose (see paragraph 32). The
sole focus on this indicator also reduces the number of monitoring indicators to one,
aiming at providing simplification and predictability.
46 The technical trajectory of net expenditure is based on the debt sustainability
analysis methodology. Since it has a 14 to 17-year time horizon, the set of underlying
assumptions will need to be revised after four years to allow the Commission to
calculate a new technical trajectory for the next round of medium-term fiscal-structural
plans. Moreover, the net expenditure reference adjustment path set by member states
32
Commission, Debt sustainability Monitor 2022, Institutional Paper 199, April 2023. See Box 1:
Deterministic debt projection scenarios: the main assumptions, pp. 23-25.
24
may depart from the technical trajectory. Indeed, member states may use assumptions
in their medium-term fiscal-structural plans that differ from those applied by the
Commission. And even though each member state is required to justify the difference
between its expenditure path and the technical trajectory set by the Commission, using
verifiable economic arguments, there is a risk that fiscal adjustment will be postponed,
as policymakers may have reason to steer the assumptions used in the analysis towards
a certain outcome. For example, optimistic growth assumptions would reduce the
projected debt ratio and lead to a lower required fiscal adjustment.
National budgetary frameworks
47 The national budgetary frameworks are the arrangements, procedures, rules and
institutions that influence how budgetary policy is planned, approved, carried out and
monitored. They include, among other things, the medium-term budgetary frameworks
and the use of independent fiscal institutions. These are non-partisan public bodies in
charge of providing positive and/or normative analysis, assessments, and
recommendations in the area of fiscal policy, increasing thus accountability and
improved fiscal transparency.
Medium-term budgetary frameworks
48 The medium-term budgetary frameworks are the set of national budgetary rules
and procedures that oversee multiannual fiscal policymaking, including the setting of
policy priorities and medium-term budgetary objectives. Annual budget legislation
should be consistent with the frameworks
33
.
49 We reported in 2019 that several requirements in the EU legal framework
concerning medium-term budgetary frameworks
34
were less stringent than the
international standards and best practices promoted by the International Monetary
Fund and the Organisation for Economic Cooperation and Development, often despite
the views which the Commission itself had expressed in economic papers
35
.
33
Council Directive 2011/85/EU on requirements for budgetary frameworks of the Member
States, Articles 2(e) and 10.
34
Council Directive 2011/85/EU, Articles 9-11.
35
Special report 22/2019, paragraphs 30-33.
25
50 Following up on our audit on EU requirements for national budgetary frameworks,
the Commission carried out an assessment of the effectiveness of the medium-term
budgetary frameworks, building on a range of reports and studies
36
. It acknowledged
weaknesses and gaps in the provisions for such frameworks, like for example the weak
consistency between the annual budgets and the medium-term budgetary plans or the
absence of corrective procedures in case of non-compliance or deviation of the annual
targets from the medium-term plans.
51 The Commission concluded that, if medium-term budgetary plans were to play a
bigger role in the revised EU fiscal framework, measures to improve their effectiveness
would be essential. However, the Commission’s proposals from April 2023 do not
significantly improve national medium-term budgetary frameworks (see paragraph 60).
Independent fiscal institutions
52 Regarding the role played by independent fiscal institutions, we had found that EU
law fell short of international standards and best practices. The main issues for these
institutions were (i) the characteristics of the mandate of their board members (such as
the length of the term and reappointment), (ii) their inability to carry out independent
human resources policies, (iii) the difficulty to ensure a sufficient and guaranteed
budget, and (iv) their need for external review for example by peer institutions. Also as a
result of these differences, we had found that independent fiscal institutions were
heterogenous in terms of activities carried out in member states
37
.
53 In addition, as noted by the European Fiscal Board, “access to government
information by independent fiscal institutions is subject to a vast array of legal
limitations in most member states”
38
. Moreover, EU legislation
39
requires independent
36
ARES(2022)711416 of 31 January 2022.
37
Special report 22/2019: “EU requirements for national budgetary frameworks: need to
further strengthen them and to better monitor their application”, paragraph 36.
38
European Fiscal Board, Annual Report 2018, p. 47.
39
Regulation (EU) 473/2013 on common provisions for monitoring and assessing draft
budgetary plans and ensuring the correction of excessive deficit of the Member States in the
euro area.
26
fiscal institutions to produce or endorse macroeconomic forecasts, but not budgetary
forecasts (projected revenue and expenditure)
40
.
54 In 2023, the network of EU independent fiscal institutions reported on the existing
capacity of independent fiscal institutions to undertake a range of tasks. It showed that
the majority of its members were adequately equipped to assess or endorse macro and
budgetary forecast. However, this was not the case for the assessment of the trajectory
of the public finances and public debt in the medium-term
41
.
55 In its orientations document of November 2022, the Commission envisages a wider
role for independent fiscal institutions in providing an assessment on the design and
assumptions underlying the national medium-term budgetary plans. The Commission
also considers introducing the task to monitor their implementation and compliance
with the net primary expenditure path established in the medium-term fiscal structural
plan. The consequence would be more debate at national level and thus a higher degree
of political buy-in and ownership of medium-term plans.
56 According to the Commission, this would require improvements to the
organisational set-up and performance of independent fiscal institutions. To strengthen
their capacity, the EU independent fiscal institutions network called recently for
minimum standards regarding their resources, adequate safeguards to their
independence, good and timely access to information and the possibility of publishing
own-initiative reports on any matter relevant to the sustainability of public finance.
These standards would be established in EU law and applied in national law
42
.
57 In its April 2023 proposals, the Commission adds two important requirements to
the list of minimum standards for independent fiscal institutions included in the two-
pack
43
. The Commission proposes that institutions should have adequate and timely
access to the information needed to fulfil their mandate and be subject to regular
external evaluations by independent evaluators. The proposed directive also envisages
to introduce the ‘comply-or-explain’ principle which means that a member state would
40
Special report 22/2019, paragraph 37.
41
EU IFI network (2023), “EU economic governance proposal reform: issues and insights from
EU IFIs”, March 2023, p. 9, Figure 1.
42
EU IFI network, “EU Economic Governance Proposal Reform: issues and insights from EU IFIs”
– March 2023, pp. 10-11.
43
Regulation (EU) No 473/2013, Art. 2 (1a).
27
have to justify when it does not comply with the assessments of the independent fiscal
institution.
58 Regarding the European Fiscal Board, in our 2019 audit of national budgetary
frameworks, we found that its independence was limited by its weak statutory regime
and scarce resources. We also noted that independent fiscal institutions themselves
argued against coordination by the European Fiscal Board because they saw it as going
against the goal of increasing national ownership and damaging their own
independence. Consequently, we recommended reviewing its mandate to further
strengthen the Board’s independence and the enforcement of the EU’s fiscal rules
44
.
59 The Commission has only given some indications regarding the new tasks the
European Fiscal Board could perform in the explanatory memorandum of the proposal
for the preventive arm. However, the legislative proposals of April 2023 do not include
change. The Commission also stressed that any changes to the Board’s mandate and
role must not affect the institutional balance set by the Treaties
45
.
Our analysis of the main challenges and risks
60 The binding nature of the medium-term budgetary frameworks for the annual
budgetary plans remains weak, as the Commission did not include significant
improvements in its legislative proposals. In our view, there is no corrective procedure
in case of non-compliance or deviation of the annual targets from the medium-term
plans nor any specific provision requiring governments or those involved in budgetary
implementation to be held accountable for any unjustified deviations. Regarding
independent fiscal institutions, if the additional requirements are positive, it remains to
be seen how they will be implemented in practice. Unlike the Commission, we consider
that the proposals only partially address the second recommendation in our special
report 22/2019, mainly with regard to strengthening independent fiscal institutions and
to a much lesser extent with regard to medium-term budgetary frameworks
46
. Finally,
the limited independence due to a weak statutory regime of the European Fiscal Board
is unchanged.
44
Special report 22/2019, recommendation 3.
45
Commission, DG ECFIN, Economic governance review – Q&A, January 2023, p. 21.
46
2022 ECA annual report, chapter 3, Annex 3.2.
28
National plans for national ownership
61 National ownership is important to the effectiveness of EU economic governance
because it fosters member state’s compliance with the EU’s fiscal and economic rules.
Already in 2011, member states acknowledged the need for an improved economic
governance framework that would “built on stronger national ownership of commonly
agreed rules and policies and on a more robust framework at the level of the Union for
the surveillance of national economic policies”
47
.
62 Moreover, national ownership is needed for the successful implementation of
adjustment programmes, and winning buy-in from national authorities is a difficult
process that requires a solid legal base and sufficient time for negotiation
48
. In 2017, we
observed that the high level of detail of the second economic adjustment programme
for Greece jeopardised the national authorities’ ownership, as conditions were not
always sufficiently discussed and agreed at the design stage
49
.
63 In 2016, we also reported that the excessive deficit procedure had had limited
impact in terms of ensuring the implementation of structural reforms. As structural
reforms are neither binding nor enforceable, the Commission is unable to influence or
boost their implementation
50
. Consequently, where member states lacked a sense of
ownership, governments are likely to postpone important structural reforms.
47
Recital 3 to Regulation (EU) No 1173/2011 on the effective enforcement of budgetary
surveillance in the euro area.
48
Special report 18/2021: “Commission’s surveillance of Member States exiting a
macroeconomic adjustment programme: an appropriate tool in need of streamlining”,
paragraph 81. See also special report 16/2020: “The European Semester – Country Specific
Recommendations address important issues but need better implementation”, paragraph 13.
49
Special report 17/2017: “The Commission’s intervention in the Greek financial crisis”,
paragraph 28.
50
Special report 10/2016: “Further improvements needed to ensure effective implementation
of the excessive deficit procedure”, paragraph 124.
29
64 In 2018, we stressed the importance of effective communication to public
understanding and national ownership of the macroeconomic imbalance procedure. We
also observed that, to promote national ownership and encourage member states to
implement country-specific recommendations, it was essential to clarify how the
economic analysis and assessment of macroeconomic imbalances led to specific policy
recommendations
51
.
65 In 2020, we observed that in-depth regular exchanges as part of the European
Semester process could offer the Commission, national authorities, and stakeholders
the opportunity to engage in permanent dialogue, which could foster a deeper level of
national ownership
52
. We observed that, in the context of the European Semester, EU
guidance to member states should leave the choice of specific measures to national
authorities, as this could increase national political ownership.
66 In its proposals and orientations, the Commission does emphasise that increasing
national ownership of fiscal and economic policies is a key objective of the economic
governance reform
53
. To achieve this, the Commission envisages national medium-term
fiscal-structural plans as the cornerstone of the revised framework.
67 These plans would be proposed by member states based on a common
framework
54
and would have to be discussed and agreed between the EU and the
member states within the Council. They would replace the current stability and
convergence programmes and national reform programmes
55
. The Commission expects
them to be comprehensive documents combining elements of member states’ fiscal
policies, reforms, and investments. Member states would have to define country-
specific fiscal trajectories, priority public investment and reform commitments, and
address the country specific recommendations
56
.
51
Special report 03/2018, paragraphs 35, 75 and 111.
52
Special report 16/2020: “The European Semester – country Specific Recommendations
address important issues but need better implementation”, paragraphs 3 and 9.
53
COM(2023) 240 final 2023/0138 (COD), section V of the Explanatory Memorandum and
recital (32); COM(2022) 583, section 1.
54
COM(2022) 583, section 3.3.
55
COM(2023) 240 final 2023/0138 (COD), articles 9 and ff; COM(2022) 583, section 3.2.
56
COM(2023) 240 final 2023/0138 (COD), articles 11, 12 and annex II; COM(2022) 583,
section 3.2.
30
68 Another compulsory aspect of the plans would be a statement of commitment to
named reforms; as we indicated in previous reports
57
, increasing national ownership in
this way would probably help ensure that member states implement reforms timelier
and coherently.
69 The Commission suggests improving national commitment and ownership within
the macroeconomic imbalance procedure framework by intensifying dialogue with the
member state. It also proposes an enhanced role for national independent fiscal
institutions in the development and definition of fiscal policies. This could nurture
debate and be yet another factor contributing to increased ownership of the plans
58
(see paragraphs 52 to 57). In 2019 we had reported that national independent fiscal
institutions considered that their assessment of the compliance of member states’
budgets with the EU fiscal framework could foster national ownership of EU fiscal
rules
59
.
Our analysis of the main challenges and risks
70 In terms of national ownership, the Commission’s proposals address our
observations as they envisage that national medium-term fiscal-structural plans would
be proposed by member states. The provision of a technical trajectory
60
, calculated on
the basis of a common methodology, could contribute to the equal treatment of
member states and facilitate a transparent assessment of their net expenditure path.
This path, not the technical trajectory, will become the sole basis of fiscal surveillance,
after its adoption by the Council.
71 However, the proposals do not address the issue of involving local and regional
authorities in the European Semester to increase national ownership. In 2020, we had
found that a significant share of the country-specific recommendations cannot be fully
implemented without local and regional authorities playing an active role
61
.
57
Special report 10/2016, paragraph 124; Special report 18/2021, paragraph 80.
58
COM(2023) 240 final 2023/0138 (COD), recitals (27) and (32); COM(2022) 583, section 3.4.
59
Special report 22/2019, paragraph 48.
60
COM(2023) 240 final 2023/0138 (COD), article 5; COM(2022) 583, section 4.1.
61
Special report 16/2020, paragraph 54.
31
72 Finally, national ownership is a necessary factor for the successful implementation
of the national medium-term fiscal-structural plans. However, it cannot be regarded as
the only one. In particular, there must be adequate monitoring and enforcement.
Transparency and discretion
73 A necessary feature of the EU’s economic governance framework is transparency:
the public disclosure of information, data, analyses, policies and methodologies with a
view to allowing the public to critically scrutinise the action and decisions of EU
institutions and other bodies. The EU institutions have themselves repeatedly
emphasised the importance of increasing the transparency of the decision-making
process and underlying analyses and democratic accountability, including by properly
involving all relevant stakeholders
62
.
74 The notion of transparency is closely tied to that of discretion, which refers to the
possibility for EU institutions to make use of their professional judgement and, in this
case, mould the application of EU economic governance rules to the specificities of each
member state. Exercising discretion means allowing flexibility to avoid the downsides of
applying the rules strictly in a one-size-fits-all approach. To mitigate any concerns of
unequal treatment and undue leniency, EU institutions are expected to exercise the
discretion provided by the framework in a transparent manner, disclosing their criteria
for their decisions and the reasons for acting in a certain way.
75 In recent years, we reported on several notable shortcomings in the Commission’s
exercise of transparency and discretion:
o In the context of the excessive deficit procedure, we found in 2016 that the
Commission had not made available much information regarding its data
assumptions and parameters and its understanding of key concepts. In this regard,
we recommended maximising transparency by making public all advice and
62
European Parliament resolution of 8 July 2021 on the review of the macroeconomic
legislative framework for a better impact on Europe’s real economy and improved
transparency of decision-making and democratic accountability (2020/2075(INI)); Opinion of
the European Economic and Social Committee on ‘Communication from the Commission to
the European Parliament, the Council, the European Central Bank, the European Economic
and Social Committee and the Committee of the Regions – Economic governance review –
Report on the application of Regulations (EU) No 1173/2011, 1174/2011, 1175/2011,
1176/2011, 1177/2011, 472/2013 and 473/2013 and on the suitability of Council
Directive 2011/85/EU’ (COM(2020) 55 final).
32
guidance to member states, applying clear definitions, disclosing all data,
calculation and assessment, and promoting the involvement of independent fiscal
institutions. The Commission made extensive use of discretion afforded by the
Stability and Growth Pact in its assessments of member states. The increased
complexity of the rules for assessing the effectiveness of member state action
broadened even more the Commission’s margin of interpretation and discretion,
resulting in a less transparent system
63
.
o We also observed in 2018 that more transparency about the measures included in
the Commission’s forecasts was necessary to determine the credibility of stability
and convergence programmes. In other areas transparency was lacking, such as on
the use of the structural reforms clause of the Stability and Growth Pact
64
.
o We also noted in 2018 that the use of the “margin of discretion” lacked
transparency. The Commission can use this margin of discretion when it thinks that
the impact of a large fiscal adjustment on growth and employment would be
particularly significant. In that case, the margin of discretion allows the Commission
to assess a member state as compliant with the fiscal rules, even if it deviates
significantly from its fiscal adjustment path
65
.
o In assessing compliance with the adjustment requirements for member states that
had not yet reached their medium-term objectives, we reported in 2016 that the
Commission had made full and extensive use of the discretion granted to it by EU
law
66
. Consequently, the Commission was unable to ensure there was convergence
towards the medium-term objectives within a reasonable period
67
.
o In 2018, we found that the Commission’s system of classifying macroeconomic
imbalances by severity was based on criteria which lacked transparency and
weakened the macroeconomic imbalance procedure. We recommended that the
Commission should enhance transparency by adopting, publishing, and applying
clear criteria for classifying macroeconomic imbalances, and that, in its in-depth
reviews, it clearly characterises the severity of member states’ imbalances
68
.
63
Special report 10/2016, paragraphs VI, IX, 83 and 95.
64
Special report 18/2018, paragraphs 53 and 143.
65
Special report 18/2018, paragraph 31.
66
Special report 22/2019, paragraph 100.
67
Special report 18/2018, paragraphs 128-129.
68
Special report 03/2018, paragraphs VII and IX.
33
o In 2018, we also found that the Commission had never recommended activating
the excessive imbalance procedure , without making public clearly its reasons, even
though several member states had experienced excessive imbalances for an
extended period of time
69
.
69
Special report 03/2018, paragraphs VIII and IX, and recommendation 2.
34
76 According to the recent Commission proposals and orientations, a key objective of
the reform will be to increase the transparency of EU economic governance. The
Commission proposes using a single operational indicator, anchored in debt
sustainability, as a basis for fiscal adjustments and fiscal surveillance as this would allow
greater transparency and simplify the governance framework.
77 To set the technical trajectory for net expenditure to ensure that debt is put on a
plausible downward path or stays at prudent levels, the Commission proposes to apply a
common methodology based on its debt sustainability analysis risk framework. For
greater transparency, it proposes to make public the reports to the Economic and
Financial Committee, where the technical trajectories for net expenditure are put
forward
70
.
Our analysis of the main challenges and risks
78 The Commission’s proposals respond to a large extent to our observations in our
2016 report
71
, when we recommended that the Commission publishes advice and
guidance to member states and requires full disclosure of calculations, underlying data,
and methodologies.
79 In our view, however, the recent proposals do not include sufficient measures to
mitigate the risks that are linked to the EU’s exercise of its discretionary power, as the
system of national medium-term fiscal-structural plans combined with dialogue
between the EU and member states allows for a higher degree of country
differentiation
72
.
80 While the RRF Regulation contains the criteria for assessing the recovery and
resilience plans
73
, the Commission’s proposal does not define in the same detail the
methodology for assessing the medium-term fiscal-structural plans. Therefore, there is a
risk that the Commission’s margin of interpretation and discretion will expand, with
potential implications for transparency and equal treatment. The same risk also extends
70
COM(2023) 240 final 2023/0138 (COD), recital (12).
71
Special report 10/2016, paragraphs VI and IX.
72
COM(2022) 583, section 3.2.
73
Regulation (EU) 2021/241, article 19.
35
to the assessment of member state reforms and investments underpinning an extension
of the adjustment period
74
.
Enforcement
81 Enforcement, particularly the eventual use of financial sanctions, has been a
persistent and controversial topic within the European and Monetary Union. Although
sanctions for non-compliance with the fiscal rules have always been part of the EU's
fiscal surveillance framework, the Commission has never applied them.
82 Like the Stability and Growth Pact, the macroeconomic imbalance procedure can
lead to sanctions, but for euro area member states only. Indeed, if the Commission
considers that a euro area member state experiences excessive macroeconomic
imbalances, it should propose to the Council the activation of an excessive imbalance
procedure, exposing the member state to stricter requirements and monitoring.
Ultimately, if the member state concerned does not take the corrective action
recommended by the Council, financial sanctions can be imposed. However, in 2018 we
found that the systematic non-activation of the excessive imbalance procedure reduced
the credibility and effectiveness of the macroeconomic imbalance procedure and
undermined its ability to address imbalances. Several stakeholders shared this view
75
.
83 The systematic absence of any financial sanctions could lead member states to
assume that they are unlikely, which undermines the effectiveness and credibility of the
Stability and Growth Pact and macroeconomic imbalance procedure. Although these
procedures do not primarily aim at imposing sanctions, a system in which no sanctions
are ever applied will inevitably prove a somewhat vain exercise.
84 Based on several audits that we undertook between 2016 and 2021, we concluded
that rule enforcement is not an easy matter, since it relies on a high degree of discretion
and expert judgement, first by the Commission and subsequently by the Council, and
depends on the political considerations that come into play
76
.
74
COM(2023) 240 final 2023/0138 (COD), article 15; COM(2022) 583, section 4.1.
75
Special report 03/2018, paragraph 64.
76
Review 05/2020, paragraphs 89-90.
36
85 We also observed in 2021 that in the context of the European Semester the
Commission proposed to the Council to address country-specific recommendations to
member states. However, these recommendations are not binding on the member
states
77
. We noted in the report that the lack of incentives and limited enforcement
meant that there was not much evidence that the Commission’s surveillance had a
significant impact on fostering reforms
78
. Since some important aspects of the country
specific recommendations remained unaddressed in member states’ recovery and
resilience plans
79
, it remains to be seen if the new requirement of the RRF that national
recovery and resilience plans must address all or a significant subset of
recommendations from 2019 and 2020 will better foster reforms.
86 In its recent proposals and orientations
80
and the accompanying questions and
answers
81
, the Commission proposes that the enforcement triggers are simplified and
clarified by focusing on member states’ deviations from the medium-term fiscal
adjustment paths agreed between the Commission and the member states. The
Commission also proposes to reinforce enforcement in several ways:
o Clarifying the conditions for opening and abrogating a debt-based excessive deficit
procedure in order to strengthen the credibility of the procedure.
o Lowering and implementing gradually financial sanctions to make them more
effective, realistic and credible.
o Strengthening the reputational sanctions. For example, ministers of member states
under excessive deficit procedure could be required to present to the European
Parliament their measures to comply with the procedure’s recommendations.
o Suspending EU financing if a member state does not take effective action to
address its excessive deficit.
77
Special report 18/2021, paragraph 44.
78
Special report 18/2021, paragraphs VIII and 88.
79
Special report 21/2022, paragraphs 45-53.
80
COM(2022) 583, section 4.2, p. 17.
81
Commission, Economic governance review – Q&A, January 2023, pp. 18-19.
37
87 The Council agreed in March 2023 that enforcement needs to be improved,
including through greater transparency, and asked for initial financial sanctions to be
reduced so they are more likely to be used
82
.
Our analysis of the main challenges and risks
88 Enforcement remains a complex issue where discretion, expert judgement and
political considerations come into play. Increasing transparency and establishing
sanctions that, because they are more realistic and graduated over time, are actually
implemented, could have a positive effect on enforcement. Other aspects could improve
enforcement, such as access to funding subject to respecting conditions, as it is the case
for European Structural and Investment Funds or the RRF
83
. Peer pressure is also a
factor likely to play a role.
89 The centrepiece of the EU’s response to the economic and social impacts of the
COVID-19 pandemic is the RRF. Under the RRF, national recovery and resilience plans set
out specific reforms and investments to be implemented by 2026, which need to
address all or a significant subset of the 2019-2020 country-specific recommendations
under the European Semester. The link to RRF funding could positively impact the
implementation of country-specific recommendations.
90 In July 2022, the European Central Bank approved the establishment of a new tool,
the transmission protection instrument, to purchase sovereign bonds issued by
countries experiencing sharp interest rate movements that are unjustified, given their
economic situation. Only member states which are not under an excessive deficit
procedure are eligible to benefit from this instrument and this therefore serves as an
incentive for member states to comply with the established fiscal rules.
82
Council of the EU, Press release – Economic governance framework: Council agrees its
orientations for a reform, 14 March 2023.
83
Article 23 of Regulation (EU) No 1303/2013 and the RRF (Article 10 Regulation (EU)
2021/241).
38
Complexity and overlaps
91 The EU has developed a complex system of economic governance and surveillance
that comprises many institutions and bodies – notably the Commission, the European
Council and Council of the EU, the member states, and the European Parliament, as well
as advisory bodies such as the European Fiscal Board, and the national independent
fiscal institutions. Furthermore, national governments and finance ministers are
accountable to national parliaments given that budgetary sovereignty lies with the
parliaments. In the euro area, the Eurogroup and the European Central Bank are also
involved in the economic governance. Moreover, if needed, financial assistance is
provided by the European Stability Mechanism. Each of these institutions has its own
mandate, objectives, responsibilities, and decision-making processes, which can
sometimes overlap or conflict. The resulting systems of checks and balances is also due
to the fact that many new rules or bodies have been established in an ad hoc manner
over time and often in response to emergencies
84
.
92 In 2015, when presenting its proposals to implement the “Five Presidents’ Report”
for completing the Europe’s Economic and Monetary Union, the Commission had
acknowledged that the framework of EU economic governance “has deepened and
widened in scope over the past years, but has also gained in complexity”, and that a first
review of the strengthened framework had “identified some areas for improvement,
notably concerning transparency, complexity, and predictability of policy-making, which
are relevant to the effectiveness of the tools”. The Commission had expressed a
commitment to pursuing “the full and transparent application of the available
instruments and tools”, and to improving clarity and reducing complexity, with the aim
of making the existing rules more effective. In 2016, we had reported on this as a
positive but challenging development
85
.
93 However, in our audits on economic and fiscal policy coordination between 2016
and 2019
86
, we found that the rules and procedures governing EU economic governance
were becoming increasingly complex. The Commission also acknowledged this as a valid
concern in 2017 and 2018
87
.
84
Commission, COM(2017) 291, Reflection paper on the deepening of the economic and
monetary union, p. 17.
85
Special report 10/2016, paragraph 126.
86
Special reports 10/2016, 03/2018, 18/2018 and 22/2019.
87
E.g. Commission reply to paragraph I of ECA special report 18/2018; Commission Reflection
Paper COM(2017) 291.
39
94 Our 2016 audit of the excessive deficit procedure reported that reforms had
increased the complexity of the analytical process, making it difficult in some cases to
establish a clear link between an analysis and the conclusions drawn. We concluded that
the increased complexity and wider scope for economic judgement should be balanced
by enhancing transparency to facilitate public scrutiny
88
.
95 Our 2019 audit of national budgetary frameworks showed that the complexity and
overlaps inherent in EU surveillance increased the risk of inconsistency between
Commission and independent fiscal institutions’ assessments of compliance with the
EU’s fiscal rules
89
.
96 In 2020, we observed that the European Semester brings together several
procedures from different policy areas involving multiple coordination arrangements:
the preventive arm of the Stability and Growth Pact, the macroeconomic imbalance
procedure, and the Europe 2020 strategy for growth and jobs
90
. The resulting
architecture is far from simple, and to illustrate this, Annex V shows the timeline of the
European Semester as it was before the COVID-19 pandemic and the establishment of
the RRF.
97 This complexity often leads to overlaps and redundancies, overburdening the
Commission and the member states. In our 2021 audit on post-programme surveillance,
we concluded that there was overlap with the Commission’s work in the context of the
European Semester. Indeed, as the objectives of post-programme surveillance were only
broadly defined and not sufficiently focused on repayment capacity, we found that the
Commission had expanded its scope to assess compliance with the policy
recommendations covered by country-specific recommendations. This resulted in a
number of overlaps
91
.
98 Overall, our previous audit work over the years has consistently drawn attention to
the overlaps in surveillance and monitoring that result from the many layers of EU
economic governance and we have highlighted the need to streamline the framework
for greater effectiveness.
88
Special report 10/2016, paragraphs 140 and 141.
89
Special report 22/2019, paragraph 49 and box 3.
90
Special report 16/2020, paragraph 2.
91
Special report 18/2021, paragraphs 29, 31, 62, 66 and 68-70.
40
99 The RRF increases that complexity. The Commission’s Secretariat-General (which
hosts RECOVER, the Recovery and Resilience Task Force) and the Directorate-General for
Economic and Financial Affairs are both responsible for work on the European Semester
and the RRF (see paragraph 20), meaning they have to assess the implementations of
policy recommendations and the achievement of milestones and targets of the national
recovery and resilience plans.
Our analysis of the main challenges and risks
100 The recent orientations and proposals communicated by the Commission can
potentially simplify the EU’s economic governance framework in several ways
92
as it
proposed that:
o Fiscal surveillance would focus on a single operational indicator, net primary
expenditure.
o Annual monitoring by the Commission would focus on member states' compliance
with a medium-term net expenditure path and member states would submit a
single annual implementation report.
o Post-programme surveillance would be streamlined, with a sharper focus on
member states’ repayment capacity, although it remains to be seen how this would
be implemented.
101 However, the recent Commission proposals do not significantly alter the number
of surveillance layers, nor the complexity and overlaps included in the EU surveillance. In
addition, medium-term fiscal-structural plans may also induce some complexity for both
member states and the Commission. Member states would have to take account of
interactions between the fiscal trajectory, reforms, and investments in their plans. And
the Commission will need to evaluate their consistency and compliance with the rules of
the Stability and Growth Pact, the macroeconomic imbalance procedure, the country-
specific recommendations and the objectives of the RRF.
92
Commission, Questions and answers: Building an economic governance framework fit for the
challenges ahead, 9 November 2022.
41
Closing remarks: Commission’s
proposals address most of the key
concerns, but risks and challenges
remain
102 The EU’s economic governance framework, as laid down in the six-pack and two-
pack, yields a picture of mixed success. In the decade before the COVID-19 pandemic,
the number of member states under procedures for excessive deficit and
macroeconomic imbalances decreased substantially. However, just before the COVID-19
outbreak the level of public debt in three member states was above 100 %, and in nine
of them it was between 60 % and 100 %. At the same time, 10 member states
experienced macroeconomic imbalances and three others had excessive
macroeconomic imbalances.
103 These figures reveal some significant shortcomings in the economic governance
framework and its implementation. The use of a non-observable indicator based on
output gap estimates has led to regular revisions, which have reduced predictability.
Deficit rules have been emphasised over debt reduction. The one-size-fits-all criterion
for debt reduction did not work as intended, especially for highly indebted member
states as member states rarely adhered to paths to sustainable debt. The number of
member states with a level of public debt over the 60% increased over the years as the
average debt-ratio of the EU. Despite this, no excessive deficit has been triggered so far
based on the debt rule (see paragraph 38). Not enough has been done to ensure
national ownership. A lack of transparency and effective enforcement, coupled with the
Commission’s discretionary power, has undermined the framework’s credibility.
Complexity has increased substantially, due in part to the more holistic approach
adopted through the European Semester.
104 Most of the shortcomings of the current framework that have been the subject
of our observations and recommendations in previous reports and reviews are also of
concern to key stakeholders. Table 1 summarises their concerns. More details are
reported in some of the sections of this report and in Annex VI.
42
Table 1 – Key stakeholders’ concerns regarding the current framework
International
Monetary Fund
Organisation for
Economic
Cooperation
and
Development
European
Stability
Mechanism
European Fiscal
Board
Use of non-
observable
indicators
Over-emphasis
on deficit
rather than
debt
Weaknesses of
independent
fiscal
institutions
Insufficient
national
ownership
Discretion &
lack of
transparency
Lack of
incentives and
weak
enforcement
Complex
surveillance
framework
Weaknesses in
medium-term
budgetary
frameworks
Source: ECA, based on IMF, Reforming the EU fiscal framework – strengthening the fiscal rules and
institutions, 2022; IMF, Staff contribution to the European Commission review of the EU economic
governance framework, 2021; IMF, Staff discussion note: Second-generation fiscal rules – balancing
simplicity, flexibility, and enforceability, 2018; OECD, Economic surveys for the euro area,
September 2021; ESM, EU fiscal rules: reform considerations, October 2021; EFB, Annual report, 2022;
EFB, Assessment of EU fiscal rules with a focus on the six and two-pack legislation, August 2019.
43
105 The Commission has proposed to set country-specific debt reduction paths using
only net expenditure, an observable indicator that is subject to government control,
when setting fiscal adjustment paths and carrying out annual fiscal surveillance. Even
though the Commission calculates the technical trajectory for net expenditure, in each
case the net expenditure reference adjustment path is set by the member state, and
may depart from the technical trajectory if it is based on different assumptions to those
used by the Commission. And although any deviation must be justified, there is a risk
that fiscal adjustment will be postponed.
106 The Commission’s proposals strengthen national budgetary frameworks by
additional requirements for independent fiscal institutions but do not fully address the
weaknesses regarding the alignment of budgets with the medium-term budgetary
frameworks nor the weak statutory regime and limited independence of the European
Fiscal Board.
107 National ownership, which is a necessary, but not a sufficient condition for the
successful implementation of the plans (see paragraph 72), would be increased by the
Commission’s proposals since it is based on medium-term fiscal-structural plans
proposed by member states, tailored to their specific situation, and negotiated with the
Commission. The Commission’s proposals also promote transparency by disclosing data,
methodology and analysis used for setting the fiscal adjustment path. However, these
positive evolutions induce the risk of higher discretionary power for the Commission
without accompanying measures to mitigate sufficiently the risks that are associated
with such discretion.
108 Establishing sanctions that can be actually implemented, as proposed by the
Commission, could play a positive role on enforcement. However, expert judgement and
political considerations will continue to play the more significant role on the decision to
trigger financial sanctions.
109 Finally, the Commission’s proposals contribute to simplifying the EU economic
governance framework. Increased transparency and a focus on net primary expenditure
to assess compliance with the fiscal rules are positive developments in this respect.
However, even if the Commission proposes a streamlined post-programme surveillance,
EU macroeconomic surveillance still involves many actors and layers, leaving broadly
unchanged the degree of complexity and overlap.
44
110 Overall, the Commission’s proposals for a reform of the economic governance
are heading in the right direction as they take the opportunity to address most of the
key concerns over the current framework. However, risks and challenges remain for a
number of important aspects. The main challenge of the new framework will be to
ensure fiscal adjustments that promote debt sustainability.
This review was adopted by Chamber IV, headed by Mr Mihails Kozlovs, Member of the
Court of Auditors, in Luxembourg at its meeting of 26 September 2023.
For the Court of Auditors
Tony Murphy
President
45
Annexes
Annex I – ECA audits, reviews and opinions related to EU
economic governance
Special report 18/2015: Financial assistance provided to countries in difficulties
Special report 19/2015: More attention to results needed to improve the delivery of
technical assistance to Greece
Special report 10/2016: Further improvements needed to ensure effective
implementation of the excessive deficit procedure
Special report 17/2017: The Commission´s intervention in the Greek financial crisis
Special report 03/2018: Audit of the Macroeconomic Imbalance Procedure (MIP)
Special report 18/2018: Is the main objective of the preventive arm of the Stability and
Growth Pact delivered?
Special report 22/2019: EU requirements for national budgetary frameworks: need to
further strengthen them and to better monitor their application
Opinion 06/2020 concerning the proposal for a regulation of the European Parliament
and of the Council establishing a Recovery and Resilience Facility
Review 05/2020: How the EU took account of lessons learned from the 2008-2012
financial and sovereign debt crises
Review 06/2020: Risks, challenges and opportunities in the EU’s economic policy
response to the COVID-19 crisis
Special report 16/2020: The European Semester – Country Specific Recommendations
address important issues but need better implementation
Special report 18/2021: Commission’s surveillance of Member States exiting a
macroeconomic adjustment programme: an appropriate tool in need of streamlining
Opinion 04/2022 concerning the proposal for a Regulation of the European Parliament
and of the Council amending Regulation (EU) 2021/241 as regards REPowerEU chapters
in recovery and resilience plans and amending Regulation (EU) 2021/1060,
Regulation (EU) 2021/2115, Directive 2003/87/EC and Decision (EU) 2015/1814
[2022/0164 (COD)]
47
Annex II – Evolution of the EU’s economic governance
framework
Treaty of Maastricht
•
Establishes economic and monetary union
• Member States must coordinate their economic policies and submit to multilateral
surveillance in this regard (Article 121 TFEU)
•
Member States undertake to observe financial and budgetary discipline and may be placed
under the EDP if in an excessive deficit situation (Article 126 TFEU)
Stability and Growth Pact (SGP)
• Member States must submit stability or convergence programmes (SCPs) disclosing their
medium-term budgetary plans
•
Member States must pursue a nominal medium
-term objective (MTO) for their budgetary
position
•
Definition of temporary and exceptional excess deficit compared with a reference value
•
Rules to speed up the EDP
• Sanctions (for euro-area Member States only) in the form of a non-interest bearing deposit
Reform of SGP
•
MTO is redefined in structural terms (cyclically adjusted balance net of one
-off and
temporary measures) and made country
-specific
• Deviations from the MTO or adjustment path are allowed in the event of major structural
reforms
• Structural effort
• New definition of "severe economic downturn"
• Non-exhaustive list of "other relevant factors", including pension reforms
• Extension of deadlines for the correction of excessive deficits
"Six-pack"
• European semester for economic policy coordination
• More detailed requirements on the content of SCPs; new expenditure benchmark:
expenditure to grow less than potential GDP
• Requirements for budgetary frameworks in the Member States
• Macroeconomic imbalance procedure and sanctions
• Operationalisation of the debt criterion (average annual reduction of 1/20th of the excess
over 60% for three years); three-year transitional period from the end of the EDP for the 23
Member States under an EDP as of November 2011
• Structural effort to be adjusted annually
• Reports on action taken
• Sanctions in the form of fines, to be approved by the Council
Treaty on Stability, Coordination and Governance (Fiscal Compact)
• "Golden rule" of a structural deficit rule not exceeding the MTO, with a national
automatic correction mechanism in the event of deviation. To be enshrined in
national constitutions, national fiscal councils to monitor compliance.
"Two-pack" (euro-area Member States only)
• Assessment of draft budgetary plans by national fiscal councils
• Enhanced surveillance of Member States experiencing or likely to experience serious
financial stability difficulties; macroeconomic adjustment programmes; post-programme
surveillance
• Road map for structural reforms: economic partnership programmes
• Closer monitoring of Member States under an EDP: regular reporting (in-year budgetary
execution report)
• Early-warning mechanism against risk of non-correction of the excessive deficit by the EDP
deadline: autonomous Commission recommendations
• Swifter sanctions
1992
1997
2005
2011
2012
2013
48
Annex III – Evolution of deficit-to-GDP and debt-to-GDP ratios
from 2000 to 2022
Note: Def > 3 % shows the number of years the deficit exceeded 3 % of GDP
Source: ECA based on AMECO database.
2000 2010 2020 2000 2010 2020 2000 2010 2020 2000 2010 2020 2000 2010 2020
0 %
200 %
0 %
200 %
0 %
200 %
0 %
200 %
0 %
200 %
0 %
200 %
- 30 %
0 %
30 %
60 %
- 30 %
0 %
30 %
60 %
- 30 %
0 %
30 %
60 %
- 30 %
0 %
30 %
60 %
- 30 %
0 %
30 %
60 %
- 30 %
0 %
30 %
60 %
deficit > 3 %: 6 deficit > 3 %: 9
1
deficit > 3 %: 5
1
deficit > 3 %: 13
1
deficit > 3 %: 11
1
Czechia
deficit > 3 %: 10
1
Denmark
deficit > 3 %: 1
1
deficit > 3 %: 1
1
Finland
deficit > 3 %: 1
1
France
deficit > 3 %: 17
1
Germany
deficit > 3 %: 8
1
Greece
deficit > 3 %: 18
1
Hungary
deficit > 3 %: 14
1
Ireland
deficit
> 3 %: 8
1
Italy
deficit > 3 %: 11
1
Latvia
deficit > 3 %: 7
1
Lithuania
deficit > 3 %: 8
1
Luxembourg
deficit > 3 %: 1
1
Malta
deficit > 3 %: 11
1
Netherlands
deficit > 3 %: 6
1
Poland
deficit > 3 %: 16
1
Portugal
deficit > 3 %: 16
1
Romania
deficit > 3 %: 11
1
Slovakia
deficit > 3 %: 12
1
Slovenia
deficit > 3 %: 10
1
Spain
deficit > 3 %: 14
1
Sweden
deficit > 3 %: 0
1
60 %
100 %
60 %
100 %
60 %
100 %
60 %
100 %
60 %
100 %
60 %
100 %
DEBT YEAR DEFICIT
surplus deficit = < 3% deficit 3-6% deficit > 6%
blank
Deficit Legend:
Austria Belgium Bulgaria
Croatia
Cyprus
Estonia
49
Annex IV – Global public debt
Global public debt (percentage of GDP, weighted averages)
2007 2008 2009 2010
Average
2011-18
2019 2020 2021
Change
2007-21
Change
2019-21
World 61.2 64.1 74.8 76.9 80.9 84.1 99.8 95.7 + 34.5 + 11.6
Advanced
economies
71.8 78.5 91.8 98.2 105.2 105.3 124.6 119.5 + 47.7 + 14.2
Euro area 66.0 69.7 80.4 86.0 92.1 85.8 99.0 97.5 + 31.5 + 11.7
United
States
64.6 73.4 86.6 95.1 104.7 108.8 134.5 128.1 + 63.5 + 19.3
United
Kingdom
43.0 50.7 64.6 75.7 85.2 84.8 103.6 103.8 + 60.8 + 19.0
Japan 172.8 180.7 198.7 205.7 229.1 236.3 259.4 262.5 + 89.7 + 26.2
Emerging
market
economies
35.0 32.9 38.4 37.4 43.3 54.2 64.5 64.0 + 29.0 + 9.8
China 29.2 27.2 34.6 33.9 42.6 57.2 68.1 71.5 + 42.3 + 14.3
Low-income
developing
countries
29.2 27.3 29.6 28.0 34.8 42.9 48.6 48.7 + 19.5 + 5.8
Source: IMF, Global Debt Database, 2022.
50
Annex V – European Semester timeline
Source: European Commission; translation: European Court of Auditors.
Annual Growth
Survey (AGS)
European
Commission
Autumn Economic
Forecast
Bilateral meetings
with Member
States
Alert Mechanism
Report (AMR)
Draft Joint Employ-
ment Report (JER)
Commission
recommendation for
the euro area
Commission opinions
on draft budgetary
plans
Bilateral meetings
with Member
States
Country Report per
Member State
(reform agenda and
imbalances)
Commission
proposes country-
specific
recommendations
(CSRs)
Annual Growth Survey: identifies the economic and social priorities for the
European Union and its Member States for the year ahead.
Alert Mechanism Report: identifies countries that may be affected by economic
imbalances and for which the Commission should undertake further analysis.
Draft Joint Employment Report: analyses the employment and social situation
in Europe and the policy responses of national governments.
The recommendation addresses issues critical to the functioning of the single currency area and
suggests concrete measures national governments can implement.
Winter Economic
Forecast
(interim)
Spring Economic
Forecast
Summer Economic
Forecast (interim)
Country reports: analyse the overall
economic and social developments in
each EU country; assess the progress
made by each EU country in
addressing the issues identified the
previous year’s recommendations.
Country-specific recommendations
: provide policy guidance
tailored to each EU country on how to boost jobs and growth,
while maintaining sound public finances.
Council discusses
Commission opinions
on draft budgetary
plans
Council adopts euro
area
recommendations
and conclusions on
AGS and AMR
Europan Council
adopts economic
priorities based on
AGS
Member
States present
National Reform
Programmes (on
economic policies)
and Stability or
Convergence
Programmes (on
budgetary policies)
Member States adopt
budgets
Council discusses
the CSRs
European Council
endorses final CSRs
Member States
present draft
budgetary plans
Debate / resolution
on the European
Semester
Dialogue on
the Annual Growth
Survey
© European commission 2017
Dialogue on
the Annual Growth
Survey
Resolution on
the Annual Growth
Survey
Dialogue on the
proposals for CSRs
National Reform Programme – all countries, and
Stability Programme – 3-year budget plan, for euro area countries, or
Convergence Programme – 3-year budget plan, for non-euro area countries. The
programmes detail the specific policies each country will implement to boost jobs and
growth and prevent/correct imbalances, and their concrete plans to comply with the
EU’s country-specific recommendations and fiscal rules.
European
Commission
European
Council/
Council
European
Parliament
Member
States
November December/January February March April May June July September October
€
AREA
€
AREA
€
AREA
€
AREA
European Semester timeline
51
Annex VI – Key stakeholders’ concerns regarding the current framework
International Monetary
Fund
Organisation for Economic
Cooperation and Development
European Stability Mechanism European Fiscal Board
Use of non-
observable
variables
Using a non-observable
variable like the output
gap estimate necessitates
significant ex-post revision
and thus is prone to policy
errors
(2021, p. 1)
Main problem with cyclically
adjusted fiscal balance is use
of different estimation
methods yielding varying
results and, possibly, error-
prone forecasts requiring
significant revision
(2021, p. 39)
It is hard to estimate potential
GDP and the growth needed to
compute structural balance;
frequent revisions undermined
credibility and enforceability
(2021, p. 7)
Metric for structural balance
hinges on output gap
estimates that largely failed to
capture the economy’s
overheating in the run-up to
the global financial crisis
(2019, p. 12)
Over-emphasis
on deficit rather
than debt
While existing fiscal
framework has
contributed to fiscal
discipline, it lacks
incentives for sufficient
debt reduction in relatively
good times to buffer
shocks in bad times
(2022, p. 4)
“[D]ebt sustainability should
be assessed in a longer run
perspective, while the current
European fiscal settings tend
to be primarily driven by
shorter-term objectives”
(2021, p. 43)
Original link between deficit
and debt anchor is no longer
valid; debt criterion came into
operation only in 2011;
excessive deficit procedure
never applied on the basis of
the debt rule
(2021, pp. 9, 24)
Role of 3 % of GDP deficit
value as a debt-stabilising
indicator has become less
important; given the changed
economic environment, that
reference value is effectively
no longer a constraint on debt
development
(2019, p. 92)
Weaknesses of
independent
fiscal
institutions
IFIs increase likelihood of
compliance with fiscal
rules, yet coupled with
other second-generation
reforms they have
complicated the rules
system
(2018, p. 4)
IFIs have varying degrees of
independence; most do not
provide costing of fiscal
measures for short and
medium term
(2021 p. 46)
IFIs lack appropriate mandates
and resources
(2021, p. 29)
Persistent risk that even when
an IFI is in line with best
practice, it can be weakened
by the government (degree of
independence, resources,
mandate)
(2019, p. 50)
52
International Monetary
Fund
Organisation for Economic
Cooperation and Development
European Stability Mechanism European Fiscal Board
Insufficient
national
ownership
Weak national
implementation is main
reason for failure to
contain debt risks
(2022, pp. 1, 10)
Poor track record of
compliance with increasingly
prescriptive rules due to
insufficient ownership of rules
at the national political and
citizens’ level
(2021, pp. 43, 46)
Fiscal rules alone may be
ineffective in correcting policy
biases, especially when
countries’ fiscal frameworks
lack ownership
(2019, p. 50)
Discretion &
lack of
transparency
Monitoring fiscal imbalances is
too complex and contentious,
resulting in dissatisfaction
among Member States and
weakened capacity to predict
fiscal dynamics
(2021, p. 39)
Increasingly political role of
the Commission made
assessments subject to
political considerations and
judgement, while technical
discussions diverted attention
from key policy issues
(2021, pp. 8-9)
Low transparency and
compliance due to weak or
unclear link between the
economic analysis, MIP and
European Semester
(2019, p. 54)
Lack of
incentives and
weak
enforcement
Continued debt
accumulation as result of
lack of implementation,
focus on short-term
(annual) budgets and weak
enforcement
(2022, pp. 4, 15)
Ineffective sanctions in a highly
prescriptive setting lacked
complementary incentives
rewarding the achievement of
fiscal targets
(2021, p. 46)
Fiscal rules had limited
effectiveness when faced with
higher spending needs and
weak enforcement
mechanisms based on peer
pressure
(2021, p. 6)
53
International Monetary
Fund
Organisation for Economic
Cooperation and Development
European Stability Mechanism European Fiscal Board
Overly complex
surveillance
Current rules aimed at
being less procyclical and
more flexible, but are too
complex, making them
difficult to communicate,
monitor, comply with and
enforce
(2021, p. 1)
Added complexity through a
proliferation of different
numerical targets, procedures,
contingency provisions and
compliance indicators
(2021, p. 39)
Current framework has
become highly complex and
more difficult to operate,
undermining compliance and
credibility
(2021, p. 2)
Complexity and opacity of
Stability and Growth Pact rules
outweigh expected benefits
(2019, p. 18)
Weaknesses in
National
budgetary
frameworks
Medium-term fiscal
frameworks are not
sufficiently robust and
clearly articulated to guide
the annual budget process
(2022, p. 17)
National medium-term budget
frameworks differ quite
significantly between countries
in terms of political
commitment, planning
horizon, coverage and detail,
formulation of targets and
their binding nature
(2021, p. 45)
Source: ECA, based on IMF, Reforming the EU fiscal framework – strengthening the fiscal rules and institutions, 2022; IMF, Staff contribution to the European Commission
review of the EU economic governance framework, 2021; IMF, Staff discussion note: Second-generation fiscal rules – balancing simplicity, flexibility, and enforceability,
2018; OECD, Economic surveys for the euro area, September 2021; ESM, EU fiscal rules: reform considerations, October 2021; EFB, Annual report, 2022; EFB, Assessment of
EU fiscal rules with a focus on the six and two-pack legislation, August 2019.
Abbreviations
CSR: Country-specific recommendation
DSA: Debt sustainability analysis
ECB: European Central Bank
EDP: Excessive deficit procedure
EFB: European Fiscal Board
EMU: Economic and monetary union
ESM: European Stability Mechanism
GDP: Gross domestic product
IDR: In-depth review
IFI: Independent fiscal institution
IMF: International Monetary Fund
MIP: Macroeconomic imbalance procedure
MTO: Medium-term objective
NGEU: NextGenerationEU
PPS: Post-programme surveillance
RRF: Recovery and Resilience Facility
SGP: Stability and Growth Pact
TSCG: Treaty on Stability, Coordination and Governance in the EMU
55
Glossary
Budget deficit: Situation where government spending exceeds income in a financial
year.
Economic and monetary union: Union of EU member states that adopted the euro as
a common currency. It involves the coordination of economic and fiscal policies and a
common monetary policy.
European Fiscal Board: Advisory body to the European Commission that is responsible
for evaluating the implementation of EU fiscal rules, proposing changes to the fiscal
framework and performing economic assessments.
European Semester: Annual cycle which provides a framework for coordinating the
economic policies of EU member states and monitoring progress.
Excessive deficit procedure: Corrective mechanism applied when an EU member state
has a budget deficit of more than 3 % of GDP and/or government debt of more than
60 % of GDP.
Fiscal Compact: A chapter of the intergovernmental Treaty on Stability, Coordination
and Governance in the Economic and Monetary Union, in which the signatory EU
member states agreed to improve their budgetary discipline and management.
Fiscal stance: Annual change in the structural primary budget balance. It is an estimate
of the direction and extent of the voluntary impulse induced by fiscal policy. When the
change is positive (negative) the fiscal stance is said to be restrictive (expansionary).
Macroeconomic imbalance procedure: Surveillance mechanism which aims to detect,
prevent and correct macroeconomic imbalances that affect, or could affect, the proper
functioning of a member state’s economy, the euro area or the EU as a whole.
National medium-term fiscal-structural plan: Document setting out a member state’s
fiscal, reform and investment commitments.
National medium-term budgetary plan: Medium-term fiscal planning document that
includes projections for each major expenditure and revenue item for the current
budget year and beyond.
National recovery and resilience plan: Document setting out a member state’s
intended reforms and investments under the Recovery and Resilience Facility.
56
NextGenerationEU: Funding package to help EU member states recover from the
economic and social impact of the COVID-19 pandemic.
Public debt: Cumulative amount of outstanding government borrowing.
Recovery and Resilience Facility: The EU’s financial support mechanism to mitigate the
economic and social impact of the COVID-19 pandemic and stimulate recovery, while
promoting green and digital transformation.
Six-pack: EU economic governance package introduced in 2011, in response to the
2008 financial crisis, comprising five regulations and a directive.
Stability and Growth Pact: Set of rules designed to safeguard financial stability in the
EU by ensuring that member states pursue sound public finances and coordinate their
fiscal policies.
Structural budget balance: Budget balance adjusted for cyclical fluctuations and one-
off and other temporary measures.
Treaty on Stability, Coordination and Governance in the Economic and Monetary
Union: Intergovernmental agreement among EU member states, building on the
Stability and Growth Pact, to further strengthening their budgetary discipline
following the 2010 sovereign debt crisis.
Two-pack: EU economic governance package introduced in 2013 comprising two
regulations that extend the six-pack and are applicable in the euro area only.
57
ECA team
This report was adopted by Chamber IV Regulation of markets and competitive
economy, headed by ECA Member Mihails Kozlovs. The task was led by ECA Member
François-Roger Cazala, supported by Dirk Pauwels, Head of Private Office and
Stéphanie Girard, Private Office Attaché; Juan Ignacio Gonzalez Bastero, Principal
Manager; Giuseppe Diana, Head of Task; Stefano Sturaro, Athanasios Koustoulidis,
Alexander Kleibrink and Eduardo Muratori, Auditors. Thomas Everett provided
linguistic support.
Giuseppe Diana
François-Roger Cazala
Stefano Sturaro
Juan Ignacio
Gonzalez Bastero
Alexander KleibrinkAthanasios Koustoulidis
Eduardo Muratori
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PDF
ISBN 978-92-849-1057-1
ISSN 2811-8197
doi:10.2865/24347
QJ-AN-23-005-EN-N
59
The EU’s economic governance framework is
the system of institutions and procedures
established to coordinate member states’
economic policies, monitor, prevent and
correct economic trends that could weaken
national economies or negatively affect EU
countries, and prevent economic spillover.
Over the years we have extensively audited
this framework, reported on its main
shortcomings, and made recommendations to
address them. The Commission recently made
proposals to reform the framework. These are
a step in the right direction, as they address
most of the key concerns we have reported,
e.g. in relation to transparency and ownership.
However, risks and challenges remain in a
number of key areas, in particular the need to
ensure timely and effective fiscal adjustments
that promote debt sustainability.
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