The EU framework for fiscal policies

In order to ensure the stability of the Economic and Monetary Union, a robust framework is needed to prevent unsustainable public finances as far as possible. A reform (part of the ‘Six Pack’) amending the Stability and Growth Pact (SGP) entered into force at the end of 2011. Another reform in this policy area, the intergovernmental Treaty on Stability, Coordination and Governance in the Economic and Monetary Union (TSCG), including the Fiscal Compact, entered into force in early 2013. Furthermore, a regulation on assessing national draft budgetary plans (part of the ‘Two Pack’) entered into force in May 2013. On 30 April 2024, a reformed economic governance framework entered into force.

Legal basis

• Articles 3, 119-144, 136, 219 and 282-284 of the Treaty on the Functioning of the European Union (TFEU);
• Protocol No 12 (on the excessive deficit procedure) and Protocol No 13 (on the convergence criteria) to the Treaties.

Objectives

The objective of the fiscal policy architecture of the European Union is to build a robust and effective framework for the coordination and surveillance of the fiscal policies of the Member States. The 2011-2013 reforms of the legal framework were a direct response to the sovereign debt crisis, which highlighted the need for stricter rules in the light of the spillover effects from unsustainable public finances between euro area countries. The revised framework therefore draws on the experiences of the initial design failures of the European Monetary Union and attempts to reinforce the guiding principle of sound public finances, which is enshrined in Article 119(3) TFEU. The legal framework was further reformed in 2024 by building on the evolving economic governance of the EU over the past decade. The reformed norms aim to increase political ownership, simplify rules, facilitate investments for EU priorities and promote effective enforcement. The new governance architecture seeks to reconcile the sustainability of public finances with sustainable and inclusive growth, particularly in the light of the green and digital transitions.

Achievements

A. Stability and Growth Pact

Primary EU law provides the main legal foundation for the SGP in Articles 121 (multilateral surveillance) and 126 (excessive deficit procedure) TFEU and Protocol No 12 on the excessive deficit procedure. Secondary EU law sets out in more detail how the rules and procedures provided for by the TFEU have to be implemented. The first Economic Governance Package (‘Six Pack’) entered into force on 13 December 2011, reforming and amending the rules of the SGP to provide the main instruments for the surveillance of the Member States’ fiscal policies (preventive arm) and for the correction of excessive deficits (corrective arm). The preventive and corrective arms were further amended in 2024.

In its current form, the SGP consists of the following measures:

• Regulation (EU) 2024/1263 of the European Parliament and of the Council of 29 April 2024 on the effective coordination of economic policies and on multilateral budgetary surveillance and repealing Council Regulation (EC) No 1466/97. This regulation constitutes the preventive arm;
• Council Regulation (EC) No 1467/97 of 7 July 1997 on speeding up and clarifying the implementation of the excessive deficit procedure, as amended by Council Regulation (EC) No 1056/2005 of 27 June 2005, Council Regulation (EU) No 1177/2011 of 8 November 2011 and Council Regulation (EU) 2024/1264 of 29 April 2024. This regulation constitutes the corrective arm;
• Regulation (EU) No 1173/2011 of 16 November 2011 on the effective enforcement of budgetary surveillance in the euro area;
• Council Directive 2011/85/EU on requirements for budgetary frameworks of the Member States, as amended by Council Directive (EU) 2024/1265 of 29 April 2024. 

1. Preventive arm of the SGP

The aim of the preventive arm is to ensure the effective coordination of Member States’ sound economic policies, thereby supporting the achievement of the Union’s objectives of sustainable and inclusive growth and employment, based on Article 121 TFEU.

Regulation (EU) 2024/1263 specifies the rules for the content, submission, assessment and monitoring of country-specific medium-term fiscal-structural plans, outlining spending targets for Member States over an adjustment period of four or five years (depending on the length of the national legislature).

The national medium-term fiscal-structural plans outline how countries intend to integrate fiscal, reform and investment objectives, including those to address macroeconomic imbalances where necessary, into a single holistic medium-term plan. They should specifically address EU priorities in the areas of green, digital, energy security, defence as well as economic and social resilience objectives. The commitment to further investments and reforms would also allow for the fiscal adjustment period to be extended up to seven years.

At the start of the multilateral surveillance process, the Commission assesses whether the Member States comply with the Maastricht ceilings on public debt (60% of GDP) and/or government deficit (3%). Member States in compliance with the Maastricht parameters may voluntarily request technical information from the Commission on how to maintain fiscal prudence. However, should a Member State breach either of the parameters, the Commission will propose a reference trajectory for public expenditure as a way to put or keep the projected government debt ratio on a plausibly downward path or to keep it at prudent levels below 60% of GDP in the medium-term.

The reference trajectory is calculated by carrying out a debt sustainability assessment (DSA) for each Member State and is anchored to a number of safeguards to:

1. Ensure consistency with adjustments under the corrective arm;
2. Ensure that debt decreases by a minimum annual average of 1 percentage point if above 90% of GDP and 0.5% if between 60% and 90%;
3. Ensure that Member States reach a deficit level that provides a common resilience margin of 1.5% of GDP through a minimum annual adjustment of 0.4 percentage points of GDP, reducible to 0.25 percentage points in case the adjustment period is extended.

The reference trajectory serves solely as a way for the Member States and the Commission to frame the discussions on the definition of the adequate net expenditure path over the adjustment period. Ultimately, the national medium-term fiscal-structural plans need to be endorsed by the Council. To ensure flexibility, Member States can also request a revision during the roll-out of the agreed plan in case of objective circumstances that prevent implementation or when a new government is appointed.

For the purposes of assessing compliance, the Commission only monitors the growth of government expenditure net of interest spending, discretionary revenues, spending on Union programmes funded by the EU or co-financed at national level as well as cyclical elements of unemployment benefit expenditure, one-offs and other temporary elements. The assessment of this single operational indicator is facilitated through the use of a control account to record deviations from the net expenditure path as well as Member States’ public annual reports.

Flexibility is also ensured through a general escape clause in the event of a severe economic downturn affecting the EU or the euro area as a whole and through a national escape clause, specific to each Member State, in the event of an unforeseen downturn in a country’s macroeconomic situation. The activation of such clauses would allow for temporary relaxation of the rules, ensuring that Member States facing exceptional circumstances beyond their control can deviate from the agreed path.

The accountability dimension of the framework has been boosted in the reform by enhancing the role of the European Parliament, notably with new information requirements and the creation of a plenary-level economic dialogue with other EU institutions. The involvement of independent fiscal institutions and the European Fiscal Board (EFB) in assessing compliance with the rules and providing advice on the fiscal stance also contributes to strengthening the transparency dimension of the reform.

2. Corrective arm of the SGP

Excessive deficit procedure (EDP)

The purpose of the EDP is to prevent excessive deficits and to ensure they are swiftly rectified, in line with Article 126 TFEU and Protocol No 12 to the Treaties.

In accordance with the amended SGP, an EDP is triggered by the deficit criterion or the debt criterion:

• Deficit criterion: a general government deficit is considered to be excessive if it is higher than the reference value of 3% of GDP at market prices;
• Debt criterion: debt is higher than 60% of GDP and the annual debt reduction target of one twentieth of the debt in excess of the 60% threshold has not been achieved over the last three years.

A number of provisions clarify when, if a deficit is higher than the stated reference value, it will be considered exceptional (resulting from an unusual event or a severe economic downturn, etc.) or temporary (when forecasts indicate that the deficit will fall below the reference value following the end of the unusual event or downturn).

Articles 126(3) to 126(6) TFEU lay down the procedure for assessing and deciding on an excessive deficit. The Commission prepares a report if a Member State does not comply with, or if there is a risk that it will not comply with, at least one of the two criteria. The EFC formulates an opinion on this report. If the Commission sees an excessive deficit as a given (or as a possible occurrence), it addresses an opinion to the Member State concerned and informs the Council. On the basis of a Commission proposal, the Council has the final decision on whether an excessive deficit exists (Article 126(6) TFEU). Subsequently, on the basis of a Commission recommendation, it adopts a recommendation addressed to the Member State concerned (Article 126(7) TFEU) to demand that effective action be taken to reduce the deficit, setting a deadline of no longer than six months. Where the Council establishes that no such action has been taken, its recommendation may be made public (Article 126(8) TFEU). After persistent failure to comply with the recommendations, the Council may give notice to the Member State concerned to take appropriate measures within a specified time limit (Article 126(9) TFEU).

The 2024 reform of the corrective arm sought to make the opening of a debt-based EDP more automatic and the sanctions regime more applicable.

In this respect, the previous ‘1/20th’ debt-reduction rule is repealed. Instead, further weight is given to the assessment of economic factors, investment levels, progress on structural reforms and government spending on defence capabilities in the assessment of the compliance with the debt and deficit criteria. Deviations from the net expenditure path would serve as a trigger for potential escalation to the EDP, whereas growth-enhancing measures may be seen as an alleviating factor when assessing if an excessive deficit exists.

The corrective arm has also been amended to ensure consistency with the new preventive arm. For this reason:

• If the EDP is opened on the basis of the deficit criterion, the corrective net expenditure path, for the years when the deficit is expected to exceed 3% of GDP, should be consistent with a minimum annual structural adjustment of at least 0.5% of GDP as a benchmark;
• If the EDP is opened on the basis of the debt criterion, the corrective net expenditure path should be at least as demanding as the one set under the preventive arm and correct the cumulated deviations in the control account.

The reform also introduced provisions to enhance the dialogue and monitoring by the Commission, including through regular surveillance missions and further involvement of national independent fiscal institutions.

The EDP also provides for sanctions in cases of non-compliance (Article 126(11) TFEU). For euro area Member States, the Council may impose a fine of up to 0.05% of the latest estimate of the previous year’s GDP for a six-month period. This fine will be paid every six months until the Council determines that the Member State concerned has taken effective action in response to the notice issued under Article 126(9) TFEU.

Provision is made for additional sanctions for euro area Member States in Regulation (EU) No 1173/2011 on the effective enforcement of budgetary surveillance in the euro area. The sanctions are imposed at different stages of the EDP and entail non-interest-bearing deposits of 0.2% and a fine of 0.2% of previous years’ GDP. Under the same regulation, provision is also made for sanctions for statistical manipulation.

B. Fiscal Compact

At the European Council meeting in March 2012, the TSCG, the fiscal component of which is the Fiscal Compact, was signed by all Member States except the UK and Czechia (Croatia also did not sign this Treaty, neither before nor after its EU accession on 1 July 2013). The Fiscal Compact provides for the balanced budget ‘golden rule’, with a lower limit of structural deficit of 0.5% of GDP (if public debt is lower than 60% of GDP, this lower limit is set at 1% of GDP), to be enshrined in national law, preferably at constitutional level (the ‘debt brake’). Member States may bring proceedings against other Member States before the Court of Justice of the European Union in cases where this rule has not been properly implemented. Additional provisions include, inter alia, automatic triggering of the correction mechanism and enforced rules for countries under the EDP. In addition, financial assistance from the European Stability Mechanism will only be provided to Member States that have signed the Fiscal Compact.

C. Further reforms strengthening economic governance in the euro area

The 2011-2013 reforms of the economic governance of the Union and of the fiscal policy framework includes, in addition to the revised SGP rules and the intergovernmental TSCG, two regulations whose purpose is to further strengthen economic governance in the euro area (the ‘Two Pack’):

• Regulation (EU) No 473/2013 of 21 May 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; and
• Regulation (EU) No 472/2013 of 21 May 2013 on the strengthening of economic and budgetary surveillance of Member States in the euro area experiencing or threatened with serious difficulties with respect to their financial stability.

The main elements of the first regulation are to provide for common budgetary timelines for all euro area Member States and for rules on the monitoring and assessment by the Commission of Member States’ budgetary plans. In cases of serious non-compliance with the SGP rules, the Commission can request that the plans be revised. Furthermore, the regulation stipulates that euro area Member States which are subject to an EDP must present an economic partnership programme detailing the policy measures and structural reforms needed to ensure an effective and lasting correction of the excessive deficit. The Council, acting on a proposal from the Commission, adopts opinions on the economic partnership programmes.

The second regulation concerns Member States experiencing or threatened with serious difficulties with respect to their financial stability. It sets out rules for enhanced surveillance, financial assistance and post-programme surveillance (as long as a minimum of 75% of the financial assistance received has not been repaid).

Role of the European Parliament

The European Parliament is co-legislator as regards the setting of detailed rules for multilateral surveillance (Article 121(6) TFEU), and is consulted on secondary legislation implementing the EDP (Article 126(14) TFEU).

The SGP gives Parliament a prominent role in the current fiscal policy framework through the Economic Dialogue, which entitles Parliament’s competent committee to invite the Commission, the Council and, when appropriate, the President of the European Council, the President of the Eurogroup and a Member State, for an exchange of views on their actions in the implementation of the framework. According to the reformed framework, Parliament’s competent committee can also invite the Commission to present and discuss changes to the DSA methodology. Under the preventive arm, a plenary-level Economic Dialogue will allow for the oversight of the presidents of the EU institutions to be strengthened (the Commission, the Council and, where appropriate, the European Council and the Eurogroup). As regards euro area developments in multilateral reporting, the preventive arm also encompasses annual reporting to Parliament.

Parliament is also kept regularly informed about the application of the regulations. Under the new preventive arm, the Commission is obliged to provide information transmitted to the Council to Parliament without undue delay.

The revised rules also enable the Commission to appoint the Chair and the Members of the EFB, only upon consultation with Parliament. The EFB must also report annually on its activities to Parliament, the Commission and the Council.

Furthermore, the Commission’s powers to impose extra reporting requirements, within the framework of the new regulation on monitoring and assessing draft budgetary plans and ensuring the correction of excessive deficit of the Member States in the euro area, have to be renewed every three years, with Parliament or the Council having the power to revoke them.

 

Giacomo Loi / Samuel De Lemos Peixoto

06-2024