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Fiscalgovernance intheeuroareaThe perspective of
the European Commission
Nicolas CarnotAdviser
European Commission, DG Economic and Financial Affairs
Monetary Commission of the European League ofEconomic Cooperation
7 May 20121
The Maastricht architecture
ECB: primarily price stability
National fiscal policies within agreed rules:No bail-out clauseReference valuesExcessive 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 fiscaldiscipline of Member States (SGP)
No possibility to monitor and enforce implementation ofpolicies to address identified macroeconomic imbalances
No integrated European supervisory and regulatoryarchitecture for financial institutions despite rapid financialmarket integration
No established framework for resolving financial-sovereigncrises
3
The EU response: the 5-points plan
- Financial assistance and programs
- Firewalls against contagion
- Financial repair
- Pro-growth policies
- Reforming EU governance
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The 1st step: the Six-Pack – into forcesince December 2011 - Major reform for EU27
The 2nd step: the Two-Pack – ProposedNovember 2011 and under discussion -Additional elements for the euro area
Latest step: Intergovernmental Treaty –signed March 2011, ratified? TransposingEuropean rules and concepts in a nationalsetting – 25 Contracting Parties
Enhanced economic governance in the EU
Fiscal governance reforms: overviewSix-pack Two-pack International Treaty
Better rules1) Expenditure
benchmark Independent forecasts
2) Debt criterion
EnforcementGradual and more
automatic sanctions Enhanced monitoringVoting behaviour on
EDP
Ownership Directive on nationalfiscal frameworks
National "balancedbudget" rules
Coordination European semester Ex ante examination ofbudgets
Information on debtissuance
Broadening surveillance Macroecononomicimbalance procedure
Economic partnershipprograms 6
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Innovation: an expenditure rule = operational guidance for adjustment path towardsthe 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
The SixThe Six--PackPack –– Key InnovationsKey InnovationsIn the Preventive Arm of the SGPIn the Preventive Arm of the SGP
Central concept of the Stability and Growth Pact is the medium-term budgetaryobjective (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.
In the Corrective Arm of the SGPIn the Corrective Arm of the SGPWhere do we stand?EDP only opened on the basis of the deficit criterion since no definition of sufficientlydiminishing
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 anaverage rate of 1/20th per year or this required reduction will occur in forward-looking 2-yearhorizon.
Non-respect will not automatically result in the country being placed in EDP overall assessmentof relevant factors.
Transition period for the 23 MS currently in EDP embarked on an agreed consolidation path: 3years after correction of the EDP to avoid abrupt change in this path = no full implementation ofthe rule but sufficient progress to be made
The SixThe Six--PackPack –– Key InnovationsKey Innovations
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The SixThe Six--PackPack –– Key InnovationsKey InnovationsNew enforcement mechanisms for the euro areaNew enforcement mechanisms for the euro area
Trigger Sanction Condition
Council decision establishing failure totake action in response to a Councilrecommendation under Art. 121(4)
Interest-bearing deposit0.2% of GDP
Council decision under Art. 126(6) thatexcessive deficit exists
Non interest-bearing deposit0.2% of GDP
Only where interest-bearing deposit existsor in case of serious non-compliance withbudgetary obligations
Council decision under Art 126(8) thatno effective action to correct theexcessive deficit has been taken
Fine0.2% of GDP
Council decision under Art. 126(11) inthe case of no effective action inresponse to notice under Art. 126(9)
Fine0.2% of GDP + variablecomponent
Council decision FineEffective, dissuasive andproportionate – not exceeding0.2% of GDP
The MS intentionally or by seriousnegligence misrepresented deficit or debtdata relevant for the application of theSGP
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Fiscal surveillance: national fiscal frameworksFiscal surveillance: national fiscal frameworks
Where do we stand?
Considerable variation in thequality of national fiscalframework
Well-designed fiscalframeworks can substantiallycontribute to sound fiscalpolicies
EU budgetary frameworkinsufficiently entrenched innational frameworks
Need for strengtheningnational ownership and havinguniform requirements asregards the rules andprocedures forming thebudgetary frameworks of theMS
Innovation: minimum characteristics for nationalbudgetary frameworks
Accounting and statistical reportingRules for preparation of the forecasts for budgetaryplanningCountry-specific numerical fiscal rulesBudgetary proceduresMedium-term budgetary frameworksIndependent monitoring and analysisRegulation of fiscal relationships between publicauthorities across sub-sectors of general government
Implementation by end-2013
The Two-pack – Key Innovations
Rationale Innovation Articulation with existingframework
Ensuring that Union policyrecommendations in the
budgetary area areappropriately integrated in the
national budgetarypreparations
Common Budgetary Rules
-Numerical fiscal rules on budget balanceimplementing MTOs in national budgetaryprocesses-Independent fiscal council-Independent macroeconomic forecast
Reinforces the Directive on nationalbudgetary frameworks by
encapsulating the core concept ofthe SGP in national rules
Reinforces the preventive arm ofthe SGP
Better synchronizing key stepsin preparation of national
budgetsA Common Budgetary Timeline Complements the European
semester
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Enhanced monitoring for all euro area MS
Rationale Innovations Articulation with existingframework
Ensuring anappropriate
integration ofEU policy
recommendations in thenational
budgetarypreparations
Additional monitoring requirements
Draft budgetary plans for the forthcoming yearsubmitted before 15 October
•to the COM=> might request a revision of the draft=> possible Opinion•to the Eurogroup => discussion based onassessment by the COM
Complement the European Semester
Provide an independent opinion on the draftbudget to all stakeholders in the budgetary
process
Securing atimely and
durablecorrection of
excessivedeficits
Closer monitoring for Member States in EDP
•Initial stage: comprehensive report + audit ofquality of statistics
•Regular report:- If under 126(7) every 6 months- If under 126(9) every quarter
•Any additional information on a request from theCOM
Complement to the corrective arm of the SGP
Compliance with COM Opinion on draft budgetaryplan taken into account•in report under 126(3)•in recommendation on a non-interest-bearingdeposit•in decision under 126(6).
Reports of the closer monitoring taken into account•anytime, to assess whether correction by thedeadline is at risk•can lead to a COM recommendation•compliance with such recommendation assessedwhen deciding on effective action (stepping up orabrogation of the EDP).
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The Two-pack – Key InnovationsEnhanced monitoring for all euro area MS
Annual Growth Survey: Overall guidance for the EUProduced by the Commission - Discussed by the Council - Endorsed by the Spring European Council
National Reform ProgrammesProduced by EU member states
except those under financial assistance programmes
Country-specific recommendationsProduced by the Commission - Adopted by the Council with endorsement of the European Council
Draft national budgetsProduced by EU member states
June
Possible Commission opinionon draft budgetary plans
Produced by the Commission
23
Nov
ember
pro
posa
ls
April
Dece
mbe
r
Stability or Convergence ProgrammesProduced by EU member states
except those under financial assistance programmes
Oct
ober
Nov
embe
r
Annual Growth Survey: Overall guidance for the EUEuropean Council Policy orientationsM
arch
The
Euro
pean
Sem
este
r
For euro area
A new calendar for the EU economic governanceA new calendar for the EU economic governance
The latest step: the intergovernmentalTreaty
Economic Policy Coordination
• Coordination of major economic policy reform plans in euro area MS
Reinforced Governance
• 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 COMPACT14
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.
3 main chapters
Recalls main commitments of the SGP
oCountry-specific medium-term objectives(MTOs)
oNumerical debt reduction benchmark underthe EDP (= Six-Pack)
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The Fiscal Compact
Strengthens implementation of the SGP
oImplementation of MTOs at constitutional (orequivalent) level
oAssorted with automatic correction mechanisms(triggered in case of significant deviation… except ifexceptional circumstance) and monitoring byindependent institutions
oMore stringent lower limit for MTOs (-0.5%),with a calendar for convergence
oBehavioural commitment to support Commissionproposals/recommendations for EDPs in the euro area
Complements the SGP's toolbox
oEx ante coordination of debt issuanceplans
oEconomic partnership programmes forMember States in EDP
•
The Fiscal Compact (continued)
• Enforcemento 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
• How to anchor these commitments into EU Law?o Swift implementation of key elements by legislative proposals, either currently under
discussion or new textso Contracting Parties committed to incorporation of Treaty within 5 years
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How effective will all this be ?
Two-pack and Treaty still under discussion …
Changes represent quite significant deepening ofthe Maastricht logic
Fine for the 'long-term' but other actions neededto get out of the crisis
Fiscal policy remains essentially in national hands
Debates will continue : fiscal policy coordination,insurance mechanisms, common debt issuance …
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