08 November 2011

Economic governance: Council adopts legal texts

The measures set out to ensure the degree of coordination necessary to avoid the accumulation of excessive imbalances and to ensure sustainable public finances. This will help enable the EU's monetary union to function properly in the long term.

They consist of:

• a regulation amending regulation 1466/97 on the surveillance of Member States' budgetary and economic policies;
• a regulation amending regulation 1467/97 on the EU's excessive deficit procedure;
• a regulation on the enforcement of budgetary surveillance in the euro area;
• a regulation on the prevention and correction of macro-economic imbalances;
• a regulation on enforcement measures to correct excessive macro-economic imbalances in the euro area;
• a Directive on requirements for the Member States' budgetary frameworks.

More specifically, the measures set out to:

• enhance budgetary discipline under the EU's Stability and Growth Pact, in order to ensure a satisfactory decline of public debt in the Member States, as well as a decrease of high deficits to be followed by achieving ambitious, country-specific medium-term budgetary objectives (four proposals). This involves enhancing the surveillance of budgetary policies, introducing provisions on national fiscal frameworks, and applying enforcement for non-compliant euro area member states more consistently and at an earlier stage;
• broaden the surveillance of the Member States' economic policies, so as to cater adequately for macro-economic imbalances (two proposals). An alert mechanism is introduced for the early detection of imbalances, to be assessed using a "scoreboard" of economic indicators. An "excessive imbalance procedure" is also introduced, with enforcement for non-compliant Member States.

Reform of the Stability and Growth Pact

The Stability and Growth Pact was adopted in 1997, prior to the creation of the euro, in order to ensure that fiscal discipline is maintained in the Member States. It is aimed at ensuring that Member States respect specified criteria for their annual budget deficits and public debt, for which the following reference values are set:

• 3 per cent of GDP for annual budget deficits;
• 60 per cent of GDP for public debt.

The new solutions are aimed at strengthening the provisions set for ensuring the respect of those criteria. They affect both the preventive arm of the pact, namely the procedures that are followed to ensure that excessive deficits are avoided, and the corrective arm of the pact, i.e. the procedure followed for the correction of excessive deficits. At the same time, the reform introduces new provisions with regard to the debt criterion of the pact.

Preventive arm of the pact

To promote attainment by the Member States of their medium-term budgetary objectives (MTOs), the reform introduces an expenditure benchmark, which implies that annual expenditure growth should not exceed a reference medium-term rate of GDP growth. This is meant to ensure that revenue windfalls are not spent but instead allocated to debt reduction. If a euro area Member State has not reached its MTO, a significant deviation in expenditure development from its reference expenditure growth path could eventually lead to sanctions in the form of interest-bearing deposits amounting to 0.2 per cent of GDP.

Corrective arm of the pact (excessive deficit procedure)

Greater emphasis is to be placed on the debt criterion of the Stability and Growth Pact, with Member States whose debt exceeds 60 per cent of GDP (the EU's reference value for debt) required to take steps to reduce their debt at a pre-defined pace, even if their deficit is below 3 per cent of GDP (the EU's deficit reference value).

To determine whether the debt ratio is sufficiently diminishing toward the 60 per cent of GDP threshold, a numerical benchmark is introduced. A debt-to-GDP ratio above 60 per cent will thus be considered to be sufficiently diminishing if its distance with respect to the 60 per cent reference value has decreased over the previous three years at an annual rate of one twentieth.

However, a decision to subject a country to the excessive deficit procedure will not only be based on the numerical benchmark, but will also take into account other relevant factors.

To strengthen the corrective arm of the Stability and Growth Pact, a new set of financial sanctions are introduced for euro area Member States; these will apply earlier on in the excessive deficit procedure, and using a graduated approach. A non-interest-bearing deposit amounting to 0.2 per cent of GDP will apply once a decision has been taken to subject a country to the excessive deficit procedure, if an interest-bearing deposit has already been imposed under the preventive arm of the pact or if serious non-compliance is identified.

The deposit will be converted into a fine of 0.2 per cent of GDP if the Council's initial recommendation for correcting the deficit has not been followed. Further non-compliance will result in the sanction being stepped up, in line with the existing provisions of article 126(11) of the EU treaty (maximum fine: 0.5 per cent of GDP).

To trigger the sanctions more automatically than at present, a so-called reverse majority rule is introduced, whereby the Commission's proposal for imposing sanctions related to non-compliance with the Pact will be considered adopted unless the Council turns it down by qualified majority.

Press release

© European Council