Brussels tables new economic governance plans

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The European Commission yesterday (30 June) presented its latest proposal to strengthen the Stability and Growth Pact after the Greek crisis had exposed the weaknesses of the EU's budgetary surveillance system, proposing to cut EU farm payouts for countries found to breach the rules.

Under the plans, EU countries will review each others' draft annual budgets before they are adopted at national level, during a so-called 'European semester'.

Member states will be required to present their draft budgetary plans in April of each year to give the Commission time analyse them and possibly suggest "country-specific policy guidance" in early July.

On the basis of this assessment, member states in the EU Council of Ministers will then go ahead with finalising their annual budget plans.

EU economy ministers will discuss the proposals at their next meeting in Brussels on 13 July. They are likely to endorse the plans and the new measures could enter into force as early as next year.

Tougher sanctions for budget offenders

The Commission's proposals on economic governance include a detailed system of sanctions for member states which do not respect budgetary discipline requirements set out in the Stability and Growth Pact.

In its previous plan, presented in May, Brussels had threatened possible cuts to EU subsidies for budget offenders, but referred exclusively to regional funding, which primarily benefits the poorer countries of Central and Eastern Europe.

Farm aid cuts for high deficit countries

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 total EU budget for the period 2007-2013.

Commenting on the far-reaching implications of such a proposal, EU Economic Affairs Commissioner Olli Rehn said that 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 at a press conference in Brussels yesterday.

Member states will, however, have time to correct their imbalances before the Commission goes ahead with cuts.

As a complementary measure concerning eurozone members only, the Commission could propose the establishment of "an interest-bearing deposit" for countries which have not shown sufficient progress in consolidating their budgets.

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.

Member states which surpass the 3% limit in a specific year are subject to official rebukes from the European Commission. The threat of fines has had an impact on markets as well as national governments, although they were never applied because they require the approval of member states voting in the EU Council of Ministers.

However, 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 face sanctions (EURACTIV 18/06/10).

Brussels 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.

UK Liberal Democrat MEP Sharon Bowles, chair of the European Parliament's economic and monetary affairs committee, said: "The Commission communication on reinforcing economic governance is timely and now includes more precise proposals which will contribute to the urgent work in this area."

"The Parliament's economic and monetary affairs committee shares the idea of a European governance model with the Commission at its heart and insists that any enhanced governance will be toothless without fundamentally reviewed enforcement mechanisms and increased public awareness of the common objectives," Bowles continued. 

After the outbreak of the Greek debt crisis, EU finance ministers agreed in May to establish a rescue mechanism worth €750 billion to protect the euro from collapsing under the weight of debt accumulated by EU countries (EURACTIV 10/05/10).

On 12 May, the European Commission presented its first proposals to strengthen the Stability and Growth Pact, which guarantees the financial stability of the euro zone and the EU as a whole (EURACTIV 12/05/10).

At a summit in June, EU leaders broadly endorsed the Commission's suggestions, paving the way for more detailed proposals which were presented yesterday (30 June).

  • 13 July 2010: Ecofin in Brussels expected to approve proposal on European semester.
  • Jan. 2011: Expected beginning of application of European semester.

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