Stricter budget surveillance: A European 'semester'
Under proposals presented by the European Commission in May, EU countries will review each others' draft annual budgets before they are adopted at national level, with an early peer-review system aimed at preventing a repeat of the Greek sovereign debt crisis.
The system – later backed by EU leaders in June – would apply as of 2011 and would introduce closer economic surveillance to the bloc.
The surveillance would be carried out in the first half of the year during a 'European semester,' before EU governments prepare their national budgets and economic reform programmes. Member states will be required to present their draft budgetary plans in April of each year to give the Commission timeto analyse them and possibly suggest "country-specific policy guidance" in early July.
Member states would then finalise their budgets in the second half of the year (see proposed timeline).
"Coordination of fiscal policy has to be conducted in advance, in order to ensure that national budgets are consistent with the European dimension [and] that they don't put at risk the stability of other member states," said Economic and Monetary Affairs Commissioner Olli Rehn.
"In case of obvious inadequacies in the budget plans for the following year, a revision of [national budget] plans could be recommended," the Commission says.
The system would be applied to all countries, but surveillance would be tighter for those which have adopted the euro. For eurozone countries, such a review mechanism should act as an early-warning system for states found to breach the Stability and Growth Pact, which sets a limit on public debt (60% of GDP) and budget deficits (3% of GDP).
The European Commission claims the system will not violate a country's national sovereignty but will provide an opportunity to check the assumptions on which draft budgets are based, such as economic growth, inflation and interest rates.
Commission President José Manuel Barroso said the system will give national parliaments the chance to better scrutinise their country's budget. "What we are doing is giving parliaments more information and therefore more power," he said.
Debt, not just deficits, in the spotlight
The Stability and Growth Pact limits public deficits to 3% of GDP and national debt to a maximum of 60% of GDP, or close to that value. But while public deficits tend to attract most attention, the debt limit has regularly been overlooked, as the Greek crisis showed.
Member states which surpass the 3% deficit limit in a specific year are subject to official rebukes from the European Commission, which can in theory be followed by financial sanctions. But although the threat of fines influenced markets as well as national governments, they were never actually applied because they required the approval of member states voting in the EU Council of Ministers.
In addition, the procedures only concerned deficits and no such measures were foreseen for countries which break the debt limit, a shortcoming that the Commission now wishes to address. "Excessive debt needs to be addressed more seriously than in the past," stressed Commissioner Rehn.
Under the proposal, countries which do not appear to be on a positive path to rebalance their public finances will now also face sanctions (EURACTIV 18/06/10).
The EU executive is proposing to establish benchmarks to assess debt trends. "Countries with a public debt beyond 60% of GDP could become subject to procedures if decline in debt falls short of this benchmark," Rehn said.
Other factors will also be taken into consideration to assess the soundness of national finances. "It is important that, as we reinforce the role of debt in the excessive deficit procedure, we have to have an intelligent way to do it," said Rehn, adding that the Commission will look into private debt, sustainability of pension systems, government assets and other elements in its overall considerations for specific countries.
In any case, Rehn made clear that "in the end it is public debt which will be taken into account to define sanctions" rather than other factors.
Sanctions: Interest-bearing deposits and EU funding cuts
To give teeth to the surveillance system, the European Commission is proposing a detailed system of sanctions for member states which do not respect the budgetary discipline set out in the Stability and Growth Pact.
First, it proposed reinforcing the preventive arm of the Pact for the euro area by including the possibility of "imposing interest-bearing deposits" in case member states make insufficient progress in consolidating their public finances in good economic times. The deposit would be released once the issue has been addressed after approval from the EU Council of Ministers.
As for incentives, countries which accumulate large surpluses during periods of economic prosperity would be allowed to spend more during downturns without being subjected to an excessive deficit procedure.
On the sanctions side, the Commission had initially threatened to cut EU subsidies for budget offenders, but referred exclusively to regional funding, which primarily benefits the poorer countries of Central and Eastern Europe.
In the updated proposal, cuts are also foreseen for funds targeted at agriculture and fisheries, of which France, Spain, Germany and the UK are among the greatest beneficiaries. In total, this represents more than three quarters of the EU's total budget for the period 2007-2013.
Commenting on the far-reaching implications of such a proposal, Rehn said the suspension of farm subsidies "would concern only transfers from the EU budget to the government concerned. The government would still be obliged to respect its commitment to the farmers. It would not hit the final beneficiaries," Rehn underlined.
Member states will, however, have time to correct their imbalances before the Commission goes ahead with cuts.
However, tougher sanctions cannot be imposed without changing the EU treaties, a tiresome process that requires risky referendums in countries like Ireland. Calls for treaty change have been spearheaded by Germany, which argued in favour of expelling eurozone members as a last resort if they repeatedly broke the Stability and Growth Pact (EURACTIV 18/03/10).
France has taken a more pragmatic stance, arguing that treaty changes would take too long to come into effect and that decisions on sanctions needed to be taken quickly based on the current treaties in order to reassure the markets. Paris's position is that there should be a wider set of sanctions, which would apply automatically and be gradually scaled up.
The two sides eventually put their heads together and Paris and Berlin came out with a joint proposal for economic governance in July (EURACTIV 22/07/10).
"The key issue is to make major progress in developing both the preventive and the corrective arms of the Stability and Growth Pact," explained French Economy Minister Christine Lagarde and her German counterpart Wolfgang Schäuble in a joint contribution to the Van Rompuy task force on economic governance.
In a concession to France, the joint statement argues in favour of "leveraging all options offered under the existing treaties" in order to "move swiftly and operationally" on reforming the governance of the euro zone. Yet, it also meets German demands by supporting "a political accord" that would enable euro-area member states to suspend the voting rights of serial budget offenders in the EU Council of Ministers.
Lagarde and Schäuble said the new sanctions could be put in place using the Lisbon Treaty's "enhanced cooperation" mechanism, whereby nine or more EU member states can choose to move forward in a specific area, leaving other EU countries the option of joining later. "If we need additional rules for the sixteen [eurozone countries], the other countries will not prevent us," Schäuble said.
The statement represents a U-turn for Germany, which has until now insisted that the same set of rules should apply across the 27 EU member states. Indeed, Schäuble again warned against creating a "schism" between eurozone countries and other EU states.
Conscious that such sanctions would require changes to the EU treaties, the joint declaration says "the legal basis for imposing such penalties must be studied in depth".
"This mechanism would have to be included in any revision of the treaty that may in future be agreed to," the statement adds, leaving open the possibility that the changes may be inserted into the accession treaty of a new EU member state, such as Croatia.
The Commission also plans to "deepen and broaden" budgetary surveillance to macro-economic policies, warning that "macro-economic imbalances can have serious consequences over time".
A "competitiveness scoreboard" would review macro-economic indicators such as productivity, unit labour costs, employment, public debt and private sector credit in order to detect asset price booms and excessive credit growth at an early stage.
For all EU member states, these macro-economic imbalances would be addressed under the draft 'Europe 2020' strategy for growth and jobs. For countries which have adopted the euro, the peer review currently carried out by the Eurogroup would be upgraded into more structured surveillance by making use of Article 136 of the EU treaty.
At their June summit, EU leaders gave "orientations" for developing a scoreboard to better monitor competitiveness developments and allow for early detection of unsustainable or dangerous trends.
Focusing not only on budgets but also on competitiveness would make it possible for the EU to have more convergence of economic policies inside the euro zone, argued Herman Van Rompuy, president of the European Council and chairman of the task force on reforming the EU's economic governance.
"We need indicators, we need a monitoring system, we even need a system of warnings and recommendations with possible sanctions if countries don't comply with what is needed for keeping their competitiveness," Van Rompuy told the audience at the 2010 European Business Summit.
EU audit powers on national budget statistics
In March 2010, the European Commission drew up plans to beef up the oversight powers of the bloc's Luxembourg-based statistics body, Eurostat, to ensure that countries report the true size of their deficits.
Under plans approved in June, Eurostat saw its role elevated to an EU statistics agency with enquiry powers to check whether countries are respecting the Stability and Growth Pact (EURACTIV 08/06/10).
Greece was found to have grossly lied about its macro-economic statistics for years, pretending that its budget deficits were lower than they really were and submitting false reports to Eurostat.
In its new role, Eurostat will be able to demand more information about countries' national accounts, including sending frequent missions to countries suspected of submitting false budget reports.
"Previously we could just carry out a technical visit to assess the accounting methodologies and there were limited number of questions we could ask," said a spokesperson for the EU executive. "Though we will not have full audit power, more like semi-audit power, we can send frequent technical missions to assess countries when there are suspicions of deviations," the spokesperson added.