Chapter 17: Economic and monetary policy The acquis in the area of fiscal policy Brussels, 2 December 2014 DG ECFIN, Fiscal policy and surveillance 1 European Commission
Outline I. Stability and Growth Pact as amended and complemented by the Six-Pack II.The preventive arm III. The corrective arm : the Excessive Deficit Procedure 2
Outline I. Stability and Growth Pact as amended and complemented by the Six-Pack II.The preventive arm III. The corrective arm : the Excessive Deficit Procedure 3
Preventive arm Regulation No 1466/97 Article 121 TFUE MTO The Stability and Growth Pact Treaty rules Art. 126 TFEU Corrective arm Regulation No 1467/97 Article 126 TFUE Effective action Six Pack Expenditure benchmark, overall assessment Draft budgetary plans Respect Euro area only 3% of GDP deficit limit 60% of GDP debt limit (or sufficiently diminishing ) Six Pack Debt rule Six Pack Sanctions Breach Closer monitoring, EPP Autonomous reco Two Pack Reinforcing Six-Pack Directive on National Fiscal Frameworks NEW Programme countries 4
The Stability and Growth Pact: the architecture National level Design of the budget Implementation European level (Commission and Council) Based on Art. 121 TFUE Coordination of economic policies Multilateral surveillance: possibility to issue warnings and recommendations Possibility to adopt detailed rules for surveillance procedures Based on Art. 126 TFUE Monitoring of deficit and debt levels Deficit < 3% of GDP, debt < 60% of GDP Excessive Deficit Procedure Stability and Growth Pact = preventive arm = Regulation (EU) 1466/97 + corrective arm = Regulation (EU) 1467/97 5
The Stability and Growth Pact: the timeline Born in 1997 A rules-based framework to ensure sound government finances ahead of the introduction of the single currency Two Regulations 1466 and 1467/97 + Resolution of the European Council on the SGP (Amsterdam, 1997) A first reform in 2005 To introduce more economic reasoning in the implementation of the Pact Amendments to the two Regulations + Council report on 'Improving the implementation of the SGP' (20.03.2005) The Six-Pack overhauls the framework in 2011 To respond to the crisis which evidenced the weaknesses of the framework Amendments to the two Regulations + Directive on national budgetary frameworks (to be transposed end-2013)* + Regulation 1473/2011 to strengthen financial sanctions (EA only)* The Two-Pack: proposals to complement the SGP for the euro area Taking into account enhanced spill-overs shared by the partners of a monetary union from each other's fiscal policy decisions 6 Two (proposed) Regulations based on Art. 136 TFUE => currently being discussed Source: European Commission/DG Economic and Financial Affairs * Not formally part of the SGP
The Stability and Growth Pact: the preventive arm Objective Ensure that fiscal policy leads to healthy public finances throughout the cycle Core principle Each Member State shall pursue a specific medium-term budgetary objective (MTO) for its budget balance in structural terms safety margin against breaching the 3% of GDP limit for the nominal deficit appropriate reduction of debt levels > 60% of GDP While leaving room for budgetary maneuver to the government Monitoring On the basis of Member States' Stability and Convergence Programmes = medium-term budgetary plans, updated annually ( European Semester) Enforcement In case of significant deviation from the objectives: Commission warning (Art. 121(4)), Council recommendation (Art. 121(4)), possible sanction (EA only) 7
The Stability and Growth Pact: the corrective arm Objective Ensure the corrective of gross fiscal policy errors: 3% and 60 % rules Core principle Step-wise procedure accompanying Member States' correction of their excessive deficit level, to be completed in a defined timeframe Monitoring Reporting of the Member State on action taken ('effective action' assessed) Enforcement Possibility to step-up the procedure: Council recommendation, Council decision to give notice to the MS to take measures, possible financial sanctions (EA only) 8
The Stability and Growth Pact: the crisis revealed the need for a major reform A revelation of the gaps in our surveillance framework Weaknesses in fiscal governance Public finances not in strong enough position despite overall positive performance of fiscal governance during the crisis. Narrow scope of the economic governance Insufficient focus on macro-fiscal imbalances, surveillance and coordination of macroeconomic policy. No crisis resolution mechanism No tool for financial assistance in the euro area. 9
The Stability and Growth Pact: a reform as part of a comprehensive response to the crisis More effective prevention of gross policy errors Focus on debt developments in addition to the deficit Crisis resolution instruments (firewalls) Sound fiscal policy Better enforcement of rules Prevention and correction of macro imbalances Structural reform strategy (Europe 2020) Balanced growth Macro-prudential supervision Regulation and supervision of financial systems 10
The Stability and Growth Pact: a reform as part of a comprehensive response to the crisis The Six-Pack Entered into force on 13 December 2011 A major overhaul of economic governance in the EU Fiscal rules Prevention of gross policy errors: introducing the concept of expenditure benchmark Macroeconomic surveillance New rules for the prevention and correction of macroeconomic imbalances Focus on debt on top of deficit: explicit benchmark for a sufficiently diminishing debt ratio Strengthening the national level: Minimum requirements for budgetary frameworks of the Member States Enforcement New sanction toolbox Enforcement New enforcement measures 11 11
The Stability and Growth Pact: reforming the preventive arm Background: novelties of the 2005 reform Country-specific medium-term budgetary objectives Better account of the cycle (larger efforts required in good times ) Incentives for structural reforms, emphasis on sustainability The Six-Pack A new expenditure benchmark to complement the analysis of the adjustment path towards the MTO = more operational guidance Numerical definition of what a 'significant deviation' is (allowing action/sanctions) EA only: introduction of financial sanctions (interest-bearing deposit max. 0.2% of GDP) if no corrective action following 121(4) recommendation Complements of the Two-Pack (euro area only) Draft budgetary plans assessed by COM ahead of Parliamentary adoption (greater relevance of EU guidance), i.e. in the Autumn A common calendar for budgetary processes 12
The Stability and Growth Pact: reforming the corrective arm Background: novelties of the 2005 reform More economic analysis in applying the rules Minimum fiscal effort, possibility to extend deadlines in case of exceptional circumstances ('conditional compliance') The Six-Pack EDP can be opened also on the basis of debt on top of deficits: explicit benchmark for a sufficiently diminishing debt ratio EA only: new sanctions toolbox, earlier in the procedure and with greater 'automaticity' Complements of the Two-Pack (euro area only) Closer monitoring of EDP = more reporting from MS, COM can autonomously address recommendation if correction of the excessive deficit by the deadline is at risk Economic partnership programme 13
The Stability and Growth Pact: a reform as part of a comprehensive response to the crisis The Two-Pack Proposed on 23 November 2011 Enhancing fiscal governance for the euro area only Enhanced monitoring Common provisions for - monitoring and assessing draft budgetary plans and - ensuring the correction of excessive deficits of Member States in the euro area Enhanced surveillance for financially fragile MS Strengthening of economic and budgetary surveillance of Member States - experiencing or - threatened with serious difficulties with respect to their financial stability in the euro area 14
The Two Pack: in force since 30 May 2013 Based on Article 136 TFUE Enhanced monitoring for all Common provisions for - monitoring and assessing draft budgetary plans and - ensuring the correction of excessive deficits Enhanced surveillance for financially fragile Member States - Threatened with financial difficulties - Receiving precautionary financial assistance - Receiving loans - Exiting a programme of Member States in the euro area 15
The two-pack: the latest step in the reform of economic governance Three goals: Strengthening budgetary policy surveillance and coordination (through the submission of draft budgetary plans). Improving the monitoring of excessive deficits. Enhancing national budgetary frameworks (fiscal councils, independent forecasts underpinning fiscal plans). 16
Interactions between the national and the EU levels 15 October Full cycle of (fiscal) surveillance Draft budgetary plan sent to EC Opinion Draft budget is made public 31 December Budget Law is adopted European Semester 30 April SGP Medium-term fiscal plan is made public The EU issues CSRs Stability and Convergence Programme + National Reform Programme sent to EC The Commission proposes Country Specific Recommendations (CSRs) 17
Why a COM opinion on the DBP? Main recipients: National Parliaments and authorities Why an opinion? To inform national debate with an independent assessment National Parliaments can ask the Commission to present its opinion To reinforce ownership of EU rules and the relevance of EU guidance No Veto! The NP retains full sovereignity! 18
2nd implementation: Autumn 2014 package 15 October Draft budgetary plans (DBPs) for 2015 sent to COM and The Autumn Eurogroup by 16 budgetary euro area MS (all package except CY, EL) Mid-November COM adoption of the "fiscal package" Opinion on each of the 16 DBPs Communication on budgetary situation in the euro area as a whole All based on the COM autumn forecast Eurogroup discussion COM Opinions COM Communication on budgetary prospects in the euro area as a whole 19
Possible rejection Particularly serious non-compliance (MS plans breach of SGP) => COM requests the submission of another DBP (AT) the only legal obligation of the MS is to resubmit a DBP. 20
Two-pack interaction with the SGP/EDP COM opinion on DBP = vehicle to reflect the global assessment of the budgetary situation For MS in the preventive arm of the SGP, the COM opinion assesses whether the progress towards the Medium-term Objective is in line with the country-specific recommendation + compliance with debt reduction benchmark (if relevant) For MS in EDP, the COM opinion assesses whether the correction of the excessive deficit is on track 21
Implications for SGP steps assessment of DBP forward-looking (no direct links with EDP steps except for opening). Opening: aggravating in report 126(3) Effective action: for 2014 only outturn For 2015 i) 'no follow-up' => autonomous recommendation ii) stepping-up possible but risky Same for preventive arm. 22
Outline I. Stability and Growth Pact as amended and complemented by the Six-Pack II.The preventive arm III. The corrective arm : the Excessive Deficit Procedure 23
Preventive arm of the SGP - overview Aim Legal basis Objective Operationalisation Requirement Assessment Process Enforcement Avoid "gross errors" in policy Art. 121 TFEU, Regulation 1466/97 "Close to balance or in surplus" Medium-term budgetary objectives (MTO) At the MTO or on the path towards it Structural balance + expenditure European Semester; SCP Significant deviation procedure 24
What is the goal of the Preventive Arm? To ensure that MS run a prudent fiscal policy What is a prudent fiscal policy? Structurally sound Controls expenditure dynamics Builds a buffer against bad times Builds a buffer against future liabilities Builds a buffer against too high debt
The goal of the Preventive Arm All these five features are captured by two indicators in the preventive arm The medium-term budgetary objective (MTO) Country-specific numerical value for the structural balance: Structural indicator And by construction it has built-in buffers against: Debt Bad times Future liabilities The Expenditure Benchmark (EB) Expenditure rule that avoids explosive and unsustainable expenditure trends Expenditure dynamics
Adjustment requirements SGP-required adjustment towards the MTO (% of GDP) Waiver : real growth < 0 % or OG below -4% Bad times: OG between -4% and -1.5% Gross debt < 60% and low or medium sustainability risk (S1) no adjustment Gross debt > 60% or high sustainability risk (S1) > 0 0.5 'Neither good nor bad times: OG between -1.5% and 1.5% 0.5 > 0.5 'Good times: OG > 1.5% or slightly below 1.5% but rapidly moving towards values above 1.5% > 0.5 27
Assessment of compliance Both pillars taken into account: SB and the EB. MS that overachieved MTO: only structural balance. Compare observed developments with the required ones Significant deviation thresholds: Significant deviation criteria (Articles 6(3) and 10(3) of Regulation 1466/97) Year Indicator Year t (Year t + Year t-1 )/2 Deviation SB 0.5% 0.25% Deviation EB 0.5% 0.25%
SGP flexibility Overall assessment 29
SGP flexibility Flexibility : structural reform clause 1. Trigger: "major structural reforms" with "long-term positive budgetary effects" and "verifiable impact on the long-term sustainability of the public finances" 2. Conditions: - "safety margin" with respect to 3% deficit and budgetary position to return to MTO within 4 years - only adopted reforms, with prudent assessment 3. Consequence: "temporary deviation" allowed from MTO or adjustment path towards it 4. Caveat: moral hazard and implementation issues 30
If a significant deviation is observed 31
Main take-aways 1. Why does the preventive arm exist? What is its goal? Ensure prudent fiscal policy 2. What is the MTO? A country-specific level for the structural balance that has built-in buffers against bad economic times, high debt levels and future liabilities 3. What is the EB? A rule that limits net expenditure growth rate and enriches the fiscal surveillance toolbox 4. What specifically does the preventive arm require Member States to do? Adjust towards the MTO and do not jeopardize it 5. When and how is compliance assessed? Every Spring (and Autumn for EA MS), taking into account both the SB and the EB 6. What happens when a MS breaches the preventive arm of the SGP? A significant deviation procedure is launched 32
Outline I. Stability and Growth Pact as amended and complemented by the Six-Pack II.The preventive arm III. The corrective arm : the Excessive Deficit Procedure 33
Corrective arm of the SGP - overview Aim Legal basis Objective Assessment Process Enforcement Correct excessive government deficits and debts Art. 126 TFEU and Protocol 12, Regulation 1467/97 Deficit: 3% of GDP Debt: 60% of GDP or sufficiently diminishing and approaching 60% at a satisfactory pace Effective action methodology Opening Regular monitoring - Abrogation Sanctions 34
Compliance with the deficit criterion Rule: GG deficit at/below 3% of GDP Deficit > 3% Art. 126(3) Commission report Flexibility: Deficit has declined substantially and continuously and reached a level close to 3% + the deviation is temporary Temporary = Commission forecasts show the deficit coming back to/below 3% Is the deviation exceptional? Exceptional = results from (i) unusual event outside the control of MS and with a major impact on the financial position of the general government or (ii) a severe downturn
Compliance with the debt criterion Rule: Debt < 60% of GDP or sufficiently diminishing and approaching 60% at a satisfactory pace Debt requirements operationalised with 6-pack: Definition of sufficiently diminishing = respect of the debt reduction benchmark (CoC) Debt reduction benchmark = reduction of 5% per year on average over 3 years of the gap to 60% (taking into account the cycle or met in the next two years) Transition period for 3 years after the correction of the excessive deficit: no "full" implementation of the rule but sufficient progress to be made
To open an EDP: Art. 126(7) reco debt-based EDP = deficit-based EDP No difference in formulating the recommendation i) a deadline; ii) iii) an adjustment path (intermediary and final annual targets). If followed, it ensures compliance with at least the forward looking component of the debt benchmark; annual structural fiscal efforts (at least 0.5% of GDP) No difference in monitoring assessment of effective action No difference in abrogation Deficit durably below 3% of GDP and compliance with the forward looking component of the debt benchmark
SGP flexibility Corrective arm 1: setting EDP reco's EDP deadlines and required fiscal effort in EDP recommendations. Selected Member States 2010 2011 2012 2013 2014 2015 2016 Apr'09 1.5 1.5 1.5 1.5 IE Dec'09 2 2 2 2 2 Dec'10 1.9 1.9 1.9 1.9 1.9 Apr'09 1.25 1.25 1.25 ES Dec'09 1.6 1.6 1.6 1.6 Jul'12 2.7 2.5 1.9 Jun'13 1.1 0.8 0.8 0.8 BG Jul'12 0.75 38
SGP flexibility Corrective arm 2: effective action Examination of: B and ΔS B B R and ΔS ΔS R B <B R or/and ΔS < ΔS R Abeyance CAREFUL ANALYSIS ΔS * ΔS R FE FE R ΔS * ΔS R FE < FE R or ΔS * < ΔS R FE FE R ΔS * < ΔS R FE < FE R Presumption of delivery of policy commitments No presumption Presumption of nondelivery of policy commitments Conclusion of the CAREFUL ANALYSIS Taking into account: ΔS *, FE and other considerations where relevant Definitions Observed Budget balance (deficit) = B Recommended Budget balance (deficit)= B R Top-down approach: Required change in the structural budget balance = ΔS R Observed change in the structural budget balance= ΔS Corrected observed change in the structural budget balance = ΔS * Bottom-up approach: Required new fiscal measures = FE R Observed budget impact of the new measures implemented = FE Delivery If B <B R : Effective action possibility to extend the deadline in line with SGP rules Non-delivery If B <B R : Non-effective action stepping-up the procedure (with the possibility to extend the deadline) 39
What happens when SGP rules are breached in the corrective arm? The excessive deficit procedure 40
Ending an EDP EDP should be abrogated only if correction will be lasting: Notified deficit not exceeding 3% of GDP and forecast to remain so Notified debt below 60% of GDP and forecast to remain so, or - if above 60% - complies with the forward looking element of the benchmark Only if both 1 and 2 are fulfilled any EDP can be abrogated
Thank You! Brussels, 2 December 2014 DG ECFIN, Fiscal policy and surveillance European Commission 42