Fiscalgovernance inthe euroarea The perspective of the European Commission Nicolas Carnot Adviser European Commission, DG Economic and Financial Affairs Monetary Commission of the European League of Economic Cooperation 7 May 2012 1
The Maastricht architecture ECB: primarily price stability National fiscal policies within agreed rules: No bail-out clause Reference values Excessive deficit procedure + Stability and Growth Pact (1997, revised 2005, 2011) 'Soft' economic coordination 2
An incomplete institutional set-up Imprudent fiscal policies by Member States Insufficient EU capability (de facto) to enforce fiscal discipline of Member States (SGP) No possibility to monitor and enforce implementation of policies to address identified macroeconomic imbalances No integrated European supervisory and regulatory architecture for financial institutions despite rapid financial market integration No established framework for resolving financial-sovereign crises 3
The EU response: the 5-points plan - Financial assistance and programs - Firewalls against contagion - Financial repair - Pro-growth policies - Reforming EU governance 4
Enhanced economic governance in the EU The 1st step: the Six-Pack into force since December 2011 - Major reform for EU27 The 2nd step: the Two-Pack Proposed November 2011 and under discussion - Additional elements for the euro area Latest step: Intergovernmental Treaty signed March 2011, ratified? Transposing European rules and concepts in a national setting 25 Contracting Parties 5
Fiscal governance reforms: overview Six-pack Two-pack International Treaty Better rules 1) Expenditure benchmark Independent forecasts 2) Debt criterion Enforcement Gradual and more automatic sanctions Enhanced monitoring Voting behaviour on EDP Ownership Directive on national fiscal frameworks National "balanced budget" rules Coordination European semester Ex ante examination of budgets Information on debt issuance Broadening surveillance Macroecononomic imbalance procedure Economic partnership programs 6
The Six-Pack Key Innovations In the Preventive Arm of the SGP Central concept of the Stability and Growth Pact is the medium-term budgetary objective (MTO) = a numerical value for the structural deficit which ensures: (i) a safety margin against breaching 3% of GDP; (ii) sustainable public finances or rapid progress towards sustainability (iii) room for stabilisation over the cycle Adjustment path towards MTO = 0.5%; more in good and less in bad times. Innovation: an expenditure rule = operational guidance for adjustment path towards the medium-term objective (MTO) Def: expenditure growth should not exceed a reference rate of potential GDP growth Better reflection of discretionary action in the short run "Significant deviation" from the rule = 0.5% of GDP assessed with an overall assessment of the structural balance and the expenditure benchmark 7
The Six-Pack Key Innovations In the Corrective Arm of the SGP Where do we stand? EDP only opened on the basis of the deficit criterion since no definition of sufficiently diminishing Innovation: Operationalization of the "debt criterion" Numerical benchmark for sufficiently diminishing debt = distance with respect to the 60% of GDP reference value declines over 3 preceding years at an average rate of 1/20th per year or this required reduction will occur in forward-looking 2-year horizon. Non-respect will not automatically result in the country being placed in EDP overall assessment of relevant factors. Transition period for the 23 MS currently in EDP embarked on an agreed consolidation path: 3 years after correction of the EDP to avoid abrupt change in this path = no full implementation of the rule but sufficient progress to be made 8
The Six-Pack Key Innovations New enforcement mechanisms for the euro area Trigger Sanction Condition Council decision establishing failure to take action in response to a Council recommendation under Art. 121(4) Interest-bearing deposit 0.2% of GDP Council decision under Art. 126(6) that excessive deficit exists Non interest-bearing deposit 0.2% of GDP Only where interest-bearing deposit exists or in case of serious non-compliance with budgetary obligations Council decision under Art 126(8) that no effective action to correct the excessive deficit has been taken Fine 0.2% of GDP Council decision under Art. 126(11) in the case of no effective action in response to notice under Art. 126(9) Fine 0.2% of GDP + variable component Council decision Fine Effective, dissuasive and proportionate not exceeding 0.2% of GDP The MS intentionally or by serious negligence misrepresented deficit or debt data relevant for the application of the SGP 9
Fiscal surveillance: national fiscal frameworks Where do we stand? Considerable variation in the quality of national fiscal framework Well-designed fiscal frameworks can substantially contribute to sound fiscal policies EU budgetary framework insufficiently entrenched in national frameworks Need for strengthening national ownership and having uniform requirements as regards the rules and procedures forming the budgetary frameworks of the MS Innovation: minimum characteristics for national budgetary frameworks Accounting and statistical reporting Rules for preparation of the forecasts for budgetary planning Country-specific numerical fiscal rules Budgetary procedures Medium-term budgetary frameworks Independent monitoring and analysis Regulation of fiscal relationships between public authorities across sub-sectors of general government Implementation by end-2013 10
The Two-pack Key Innovations Enhanced monitoring for all euro area MS Rationale Innovation Common Budgetary Rules Ensuring that Union policy recommendations in the budgetary area are appropriately integrated in the national budgetary preparations Better synchronizing key steps in preparation of national budgets -Numerical fiscal rules on budget balance implementing MTOs in national budgetary processes -Independent fiscal council -Independent macroeconomic forecast A Common Budgetary Timeline Articulation with existing framework Reinforces the Directive on national budgetary frameworks by encapsulating the core concept of the SGP in national rules Reinforces the preventive arm of the SGP Complements the European semester 11
The Two-pack Key Innovations Enhanced monitoring for all euro area MS Rationale Ensuring an appropriate integration of EU policy recommendatio ns in the national budgetary preparations Securing a timely and durable correction of excessive deficits Innovations Articulation with existing framework Additional monitoring requirements Draft budgetary plans for the forthcoming year submitted before 15 October Complement the European Semester to the COM => might request a revision of the draft => possible Opinion to the Eurogroup => discussion based on assessment by the COM Provide an independent opinion on the draft budget to all stakeholders in the budgetary process Closer monitoring for Member States in EDP Complement to the corrective arm of the SGP Initial stage: comprehensive report + audit of quality of statistics Regular report: - If under 126(7) every 6 months - If under 126(9) every quarter Any additional information on a request from the COM Compliance with COM Opinion on draft budgetary plan taken into account in report under 126(3) in recommendation on a non-interest-bearing deposit in decision under 126(6). Reports of the closer monitoring taken into account anytime, to assess whether correction by the deadline is at risk can lead to a COM recommendation compliance with such recommendation assessed 12up or when deciding on effective action (stepping abrogation of the EDP).
April June Annual Growth Survey: Overall guidance for the EU Produced by the Commission - Discussed by the Council - Endorsed by the Spring European Council Annual Growth Survey: Overall guidance for the EU European Council Policy orientations Stability or Convergence Programmes National Reform Programmes Produced by EU member states except those under financial assistance programmes Produced by EU member states except those under financial assistance programmes Country-specific recommendations Produced by the Commission - Adopted by the Council with endorsement of the European Council November Draft national budgets Produced by EU member states 23 November proposals October For euro area Possible Commission opinion on draft budgetary plans Produced by the Commission The European Semester March December A new calendar for the EU economic governance
The latest step: the intergovernmental Treaty New intensified commitments by 25 MS. The "missing part of the puzzle of the Stability and Growth Pact". To be integrated into the EU legal framework within 5 years and with an important role for the Commission and EU secondary legislation. Economic Policy Coordination Coordination of major economic policy reform plans in euro area MS Reinforced Governance 3 main chapters Euro Summits at least twice a year President of the Euro Summit appointed by Heads of State or Government of euro area MS Participation in Euro Summits of Heads of State or Government of non-euro area MS having ratified treaty is foreseen for certain discussions and at least once a year and the FISCAL COMPACT 14
The Fiscal Compact Recalls main commitments of the SGP ocountry-specific medium-term objectives (MTOs) onumerical debt reduction benchmark under the EDP (= Six-Pack) Complements the SGP's toolbox oex ante coordination of debt issuance plans oeconomic partnership programmes for Member States in EDP Strengthens implementation of the SGP oimplementation of MTOs at constitutional (or equivalent) level oassorted with automatic correction mechanisms (triggered in case of significant deviation except if exceptional circumstance) and monitoring by independent institutions omore stringent lower limit for MTOs (-0.5%), with a calendar for convergence obehavioural commitment to support Commission proposals/recommendations for EDPs in the euro area 15
The Fiscal Compact (continued) Enforcement - National level MS to implement rules in national law through provisions of "binding force and permanent character, preferably constitutional" compliance monitored level by independent national institutions o - Union level COM presents report on the transposition of the agreed provisions Matter can be brought to the Court of Justice by a MS to verify transposition Court of Justice can impose financial sanction of up to 0.1% of GDP o - How to anchor these commitments into EU Law? o o Swift implementation of key elements by legislative proposals, either currently under discussion or new texts Contracting Parties committed to incorporation of Treaty within 5 years 16
How effective will all this be? Two-pack and Treaty still under discussion Changes represent quite significant deepening of the Maastricht logic Fine for the 'long-term' but other actions needed to get out of the crisis Fiscal policy remains essentially in national hands Debates will continue : fiscal policy coordination, insurance mechanisms, common debt issuance 17