Besides reforming supervision of EU financial markets, a 'European semester' is to ensure from 2011 that national economic and fiscal policies are assessed in Brussels first before they are adopted by member states. 'What does this mean exactly?' asks Nicolaus Heinen, an analyst at Deutsche Bank (DB) Research, in a September analysis.
This analysis was authored by Nicolaus Heinen for DB Research.
''The EU has created an additional instrument for preventive surveillance of the economic and fiscal policies of its member states: the 'European semester' – a cycle of economic policy coordination. The main new aspect is that the enforcement of economic policy coordination is now being extended right through to the budgetary process of every member state.
The European semester is based on a coordination process lasting several months with fixed calendar deadlines.
- In March, the European Council (heads of state and government in the EU) will set economic policy priorities on the basis of a European Commission report (entitled: 'Annual Growth Survey'). This will provide the foundation to derive recommendations on budget policy (stability and convergence programmes) and economic policy (national reform programmes).
- In April, member states will submit to the Commission their medium-term budgetary and economic strategies along the lines of these target recommendations. The Commission will assess the plans of the member countries and propose how the Council should vote on them.
- In June and July, the European Council and the Council will provide country-specific policy advice on general economic policy and budget policy. The Commission's reports in the following year will assess how well these recommendations have been implemented.
Following the European Commission's proposal of 10 May and the political agreement of 7 September the Commission will already table its amendment proposal for the relevant regulation 1466/97 on 29 September.
The first cycle is to begin in 2011. In the short term this will necessitate changes in the budget processes of member states that are required to submit a financial outlook for the following year by April.
The rules of the stability pact will not be changed. Increased monitoring of national budgetary and economic policies will make its implementation more effective, however. Notwithstanding that the Commission has merely a consultative function and neither the Commission nor the Council has a veto power nor can they for the time being impose any sanctions, national budget committees will soon have to factor the assessments from Brussels into their policies.
The European semester does not only provide terms of reference for policymakers. The annual assessments will also make the European semester interesting as a source of information for the bond markets. Ecofin peer pressure would be compounded by investor pressure. A look at the spreads of other members' 10Y bonds over German Bunds shows the undiminished intensity of this pressure.
The markets have sharpened their focus on several countries. This will hold for the coming weeks in particular when the budget debates for 2011 are set to begin – for instance in Spain and Portugal (September), Greece and Ireland (October).
Against this backdrop the European semester could additionally spur several countries to step up their consolidation efforts. Greater transparency and a higher concentration of information going forward give reason to hope that the peripheral states will have a better chance of demonstrating their vigour in consolidating their finances – and of selling this in terms of lower risk premiums.
This resolution is likely to be followed by others. The task force set up by European Council President [Herman] Van Rompuy will propose further steps come autumn to achieve closer coordination of economic and budgetary policies in the EU and the euro zone. The proposals from the Commission,the ECB, France and Germany show how this can be done without a cross-border harmonisation drive.
- The member states could anchor the medium-term fiscal objectives of the stability pact in their national budget legislation via constitutional amendments. This would be a further chance for individual countries to give consumers and investors a clear signal that their efforts on budget consolidation are not merely lip service. Germany is a role model with its debt brake.
- The sanctions of the Stability and Growth Pact could be extended to the preventive arm of the pact. Conceivable options are to attach strings to disbursements from the structural and cohesion funds in future, to require mandatory deposits of funds with EU authorities or to temporarily suspend voting rights in Ecofin.
- Last but not least, the burden of proof in the excessive deficit procedure could theoretically be reversed: quasi-automatic sanctions would be triggered directly if the deficit threshold were overstepped and could only be lifted by a qualified majority of member votes.
The European semester is a first step in a raft of reforms that will substantially change the face of European economic policy. As long as the Commission and the Council maintain their current thrust and policymaking tempo in the coming years, the subsequent steps could also prove successful. Of course, for some countries this will not make life any easier.''