Review of the economic governance framework (CWP 2023)

In “An Economy that Works for People”

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In February 2020, the European Commission launched a review of the economic governance framework, and updated it in October 2021 after the significant upheaval of the COVID pandemic. During this time, from March 2020, the European Commission and the Council activated the general escape clause, allowing Member States to undertake budgetary measures in exceptional circumstances. The clause has been extended to 2023 in light of the conflict in Ukraine and is set to be de-activated as of 2024.

On 26 April 2023, the European Commission put forward three legislative packages to reorganise the EU’s economic governance framework. Besides regulations to replace and amend the current preventive arm as well as to amend the corrective arm of the Stability and Growth Pact (SGP) respectively, the Commission proposes also to amend a directive to strengthening the role of independent fiscal institutions (IFIs). 

The kernel of the proposed framework broadly follows the orientations outlined six months earlier. Debt sustainability would be ensured through stricter fiscal surveillance by the Commission, based on a country-specific fiscal adjustment path anchored to a debt sustainability analysis (DSA) framework. The Commission would negotiate bilaterally with Member States a medium-term fiscal-structural plan with a minimum four-year horizon; an incentive to include investment and reform commitments is given through a possible extension of the fiscal adjustment path to seven years. According to the Commission, the individual design of fiscal structural plans will provide better ownership of the plan by Member States. Additionally, a higher degree of political buy-in is envisaged through an expansion of the role of independent fiscal institutions (IFIs).. Importantly, both reference values – of a 3 % deficit ratio (government deficit to gross domestic product, GDP) and a 60 % debt ratio (government debt to GDP) – would remain unchanged.

In addition to the orientations, the proposal introduces three additional safeguards that are not present in the orientations: two numerical requirements over the agreed plan's horizon and a minimum fiscal adjustment of 0.5 % of GDP per annum if a country is expected to be above the 3 % deficit ratio threshold in an excessive deficit procedure (EDP).

The proposal will be discussed by the co-legislators - the Parliament and the Council - with the aim to reach an agreement before the general escape clause of the current rules is deactivated at the end of 2023. To allow for an effective bridge to the potential new fiscal rules some elements of the Commission’s proposals could be incorporated already in the fiscal surveillance cycle that has started in spring 2023.

In the European Parliament, the package of three proposals was referred to the Economic and Monetary Affairs (ECON) Committee of the European Parliament. Esther De Lange (EPP, Netherlands) and Margarida Marques (S&D, Portugal) were appointed as co-rapporteurs and delivered a draft report on 12 October on the proposal replacing the current 'preventive arm' of the SGP by means of the ordinary legislative procedure. 

Both, the Council and the European Parliament have adopted their mandates on the preventive arm of the Stability and Growth Pact, thus interinstitutional negotiations can start. Such negotiations might revolve around three main topics: Safeguards, the role of independent fiscal institutions and transitory provisions.

Safeguards: The debt safeguard is mostly aligned between Council and the Parliament. Member States with a high debt level (above 90 % of GDP) have to decrease their debt-to-GDP ratio by 1 percentage point, while Member States with medium debt levels (between 60-90 % of GDP) need to reduce the debt ratio by 0.5 percentage points. However, while the Parliament would see such adjustment over a projection period, meaning the adjustment period plus 10 years, the Council defines the adjustment period as length of the structural fiscal plan, covering 4 to 7 years. An additional between the two positions, the Council would have the debt reduction assessed only after a Member State has reduced its deficit below the 3 % threshold.

This stands in contrast to a new 'deficit resilience safeguard' the Council agreed upon thus diverging from the Parliament's report, which would require Member States to continue reducing their 3 % deficit by half, through a safety margin of 1.5 % of GDP. If a Member State's fiscal plan and as a consequence the fiscal trajectory is 4 years, the annual adjustment to the structural primary balance would be 0.4 % of GDP. For Member States with an extended plan, the deficit adjustment would be 0.25 % of GDP.

Independent Fiscal Institutions (IFIs): national independent fiscal institutions formed a crucial element in the Commission proposal to monitor compliance and thus increase national ownership of fiscal plans. However, despite featuring significantly throughout the Parliament's report, IFIs' role would be cut significantly according to the Council mandate.

Transitory provisions: The Council mandate adds temporary provisions, for instance to take into account RRF loans and co-financed EU funds in the coming years applying to safeguards in the preventive arm. In the corrective arm, where the Parliament is only consulted, once a country is in an excessive deficit procedure, required to adjust its annual (primary) structural deficit by 0.5 % of GDP, interest payments are excluded from such adjustment until 2027. Beyond 2027, the corrective net expenditure path would need to be adjusted by 0.5 % of GDP including interest expenditures. 

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Author: Martin Höflmayr, legislative-train@europarl.europa.eu

As of 20/01/2024.