Explanatory Memorandum to COM(2017)824 - Provisions for strengthening fiscal responsibility and the medium-term budgetary orientation in the Member States - Main contents
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| dossier | COM(2017)824 - Provisions for strengthening fiscal responsibility and the medium-term budgetary orientation in the Member States. |
|---|---|
| source | COM(2017)824  |
| date | 06-12-2017 |
1. CONTEXT OF THE PROPOSAL
An unprecedented financial and economic crisis hit the economies of the European Union (EU) a decade ago. While that crisis did not start in the euro area, it laid bare some of its institutional weaknesses. In response, the EU has sought to strengthen the economic governance arrangements for the Union and the euro area, particularly by means of the legislative packages known as the ‘Six-pack’ (five Regulations and a Directive adopted in 2011) and ‘Two-pack’ (two Regulations adopted in 2013). These packages helped to ensure the closer supervision of national budgets, establish sounder fiscal frameworks and pay greater attention to debt levels.
However, in seeking to remedy the root causes of the crisis, it became clear that the rules-based fiscal framework at EU level had to be complemented by binding provisions at the national level to foster sound budgetary policies in all Member States and act as a lasting mechanism against the emergence of excessive deficits.
In that context, the use of Union law to underpin such national rules was explored. The Commission was at the time strongly in favour of pursuing further economic governance reforms under the Community method. 1 However, when meeting in December 2011, the European Council failed to agree to take the steps under consideration. In reaction, the Member States that wanted to commit jointly to having such domestic rules went ahead on an intergovernmental basis, leading to the conclusion of the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union (TSCG) as a stepping stone towards incorporating its provisions as soon as possible into the Treaties.
The TSCG was signed on 2 March 2012 by 25 Contracting Parties (all Member States except the Czech Republic and United Kingdom 2 ) and entered into force on 1 January 2013. The cornerstone of the TSCG is its Title III, which sets out the so-called ‘Fiscal Compact’. Its main provision is the obligation for Contracting Parties to enshrine in binding and permanent national provisions, preferably constitutional, a balanced-budget rule in cyclically adjusted terms. The rule mirrors the requirement that is at the centre of the preventive arm of the Stability and Growth Pact (SGP), namely the medium-term budgetary objective. 22 Contracting Parties are bound by the Fiscal Compact (all euro area Member States and, on a voluntary basis, Bulgaria, Denmark and Romania). Other parts of the TSCG aim to reinforce economic policy coordination and governance of the euro area.
The intergovernmental approach used to adopt the TSCG was always understood by all stakeholders as a way to take necessary steps immediately when, at the height of the economic and financial crisis, progress was blocked within the European Council. Hence, the Contracting Parties agreed to seek integration of the core provisions of the TSCG into Union law at most within five years of the date of its entry into force, i.e. by 1 January 2018.
This political agreement is enshrined in Article 16 TSCG, according to which 'Within five years, at most, of the date of entry into force of this Treaty, on the basis of an assessment of the experience with its implementation, the necessary steps shall be taken, in accordance with the Treaty on the European Union and the Treaty on the Functioning of the European Union, with the aim of incorporating the substance of this Treaty into the legal framework of the European Union.'
The Commission’s May 2017 Reflection Paper on the Deepening of the Economic and Monetary Union 3 recalled that agreement and referred to the possible integration of the Fiscal Compact into the EU legal framework during the period 2017-2019. Furthermore, in his 2017 State of the Union address and the accompanying Letter of Intent, 4 President Jean-Claude Juncker proposed, among other things, the integration of the substance of the TSCG into EU law, taking into account the appropriate flexibility built into the SGP and identified by the Commission since January 2015.
The European Parliament has also repeatedly asked for the substance of the TSCG to be brought under the Treaties, 5 arguing that, to be effectively legitimate and democratic, the governance of a genuine Economic and Monetary Union (EMU) must be placed within the institutional framework of the Union.
The Fiscal Compact was adopted as a stop-gap solution at a time of deep crisis, but its basic tenet remains entirely valid – it is in the interest of the EU and the euro area to foster responsible policies avoiding excessive deficits. The present proposal is part of a broader and ambitious set of initiatives to reform the EMU put forward by the Commission on 6 December 2017. Recognising the particular relevance for the completion of EMU, the proposal responds to the will expressed by the TSCG Contracting Parties, the calls of the European Parliament for integration into the Union framework and the call for unity, efficiency and democratic accountability made by President Juncker in his State of the Union address in September 2017.
The proposed Directive strengthens fiscal responsibility and the medium-term budgetary orientation in the Member States and so aims to achieve, along with the existing provisions of the SGP, the underlying objective of the Fiscal Compact, namely, convergence to prudent levels of public debt. Indeed, the high levels of public debt still observable today will take time to be absorbed. Further progress therefore remains imperative, in both the short and long term.
Progress toward prudent debt levels requires annual budgetary decisions to follow a steady orientation towards achieving and maintaining the medium-term budgetary objective. The budgetary path needs to be spelled out in terms of policies under the control of governments and taking into account economic conditions. However, frequent recalibrations of the path undermine the credibility and effectiveness of any strategy for debt reduction. Partly due to the exceptional economic circumstances prevailing when the Fiscal Compact entered into force, such a steady medium-term orientation of budgetary policies has not yet fully materialised. As economic conditions are normalising, the time has come to operationalise and reinforce it so that all Member States effectively converge to the agreed objectives.
As also advocated in the EMU Reflection Paper, the EMU and its completion must remain open to all Member States. What is conceived for the euro area should also be conceived for – and with – those Member States that are expected to join the euro in the foreseeable future. This is key for a well-functioning single currency. Accordingly, the proposed Directive should apply to both the Member States whose currency is the euro and other Member States wishing to participate.
Article 3 (which forms part of the Fiscal Compact) is by far the most substantive provision of the TSCG from an EMU perspective as it aims to respond to the need to maintain sound and sustainable public finances and to prevent government deficit and debt becoming excessive. Under Article 3(1), Contracting Parties commit to have their budgetary position in balance or in surplus, with a lower limit for the structural deficit of 0.5% of GDP, which can become 1.0% of GDP for Member States with a debt level significantly below 60% of GDP and with low risks for the long-term sustainability of public finances. That balanced-budget rule must be equipped with a correction mechanism automatically triggered in case of significant deviation. Article 3 i obliges Contracting Parties to internalise those rules into their domestic legal order. Other provisions of the TSCG have either been already integrated into EU law (in particular via the ‘Two-pack’, for the euro area), or would require changes to the Treaties, or do not lend themselves to incorporation for various reasons (e.g. some replicate existing EU law). Consequently, the ‘substance’ proposed for incorporation into the Union legal framework is concentrated in Article 3 TSCG.
The rationale for bringing that substance of the TSCG into the body of the EU fiscal framework is manifold. It would simplify the legal framework and ensure more effective and systematic monitoring of implementation and enforcement of fiscal rules at both EU and national level as part of the overall EU economic governance framework, compared to the current intergovernmental set-up. It diminishes the possible risks of duplications and conflicting actions inherent in the co-existence of intergovernmental arrangements alongside the mechanisms foreseen by Union law. A consolidated framework governed by EU law would also facilitate a consistent and coordinated evolution of the EU and national fiscal rules within the wider process of deepening the EMU. Above all, as argued in the Five Presidents’ Report on Completing Europe’s Economic and Monetary Union, 6 the integration into the Union legal framework of all inter-governmental instruments created during the crisis would bring greater democratic accountability and legitimacy across the Union.
The proposed Directive builds on the observation that there cannot be an effective enforcement of the EU fiscal framework if only a top-down approach is taken. The particular decentralised nature of fiscal policy-making in the EU and the general need for national ownership of fiscal rules make it essential that the objectives of the EMU budgetary coordination framework are also reflected in the fiscal frameworks of the Member States. While Council Directive (EU) No 2011/85 7 already set minimum characteristics for national fiscal frameworks, in the TSCG Contracting Parties strengthened the basis for responsible fiscal policies amongst them by setting out the obligation to enshrine a balanced-budget requirement through “[national] provisions of binding force and permanent character, preferably constitutional, or otherwise guaranteed to be fully respected and adhered to throughout the national budgetary processes”.
In the same vein, the present proposal lays down an obligation for Member States to have in place a framework of binding and permanent numerical fiscal rules which, while being consistent with the fiscal rules laid down in the Union framework, can embody specificities relevant to the Member State concerned. That framework should strengthen their responsible conduct of fiscal policy and promote compliance with the budgetary obligations deriving from the Treaty on the Functioning of the European Union (TFEU). It should ensure convergence of public debt to prudent levels (namely, the reference value set out in Protocol No 12 on the excessive deficit procedure annexed to the Treaties), in particular by means of an anchoring medium-term objective in terms of structural balance that is binding on national budgetary authorities in their annual decisions. That objective-based approach reflects a shared goal, to ensure the sustainability of public finances, common to national budgetary rules and mechanisms and to the EU fiscal framework. The medium-term orientation seeks to provide a stronger basis for sound budgetary policies since most fiscal measures have budgetary implications that go well beyond the annual budgetary cycle. In the same vein, the implementation of major structural reforms with a verifiable positive impact on the long-term sustainability of public finances should be properly factored into the medium-term fiscal perspective.
If there is to be medium-term anchoring for budgeting purposes, fiscal planning must include a medium-term path for expenditure net of discretionary revenue measures and consistent with the medium-term objective or the adjustment path towards it. To ensure an enhanced sense of national ownership of fiscal policy and reflect Member States’ sovereign specificities, that path should be set for the whole term of the legislature as established by the domestic constitutional legal order, as soon as a new government takes office. Crucially, that path should be respected by the annual budgets throughout the period that it covers.
Effective means to correct non-compliance are needed for the credibility of the medium-term objective and of the associated operational target. While it is the case that exceptional circumstances may lead to a temporary deviation from the medium-term objective or the adjustment path towards it, significant observed deviations must be corrected through the automatic activation of a pre-defined correction mechanism, in particular by compensating for deviations from the medium-term expenditure path.
Long-term sound budgetary policies are jeopardised by the deficit bias and more generally the pro-cyclical policy stance which can be observed across Member States. Fiscal rules and independent fiscal institutions have emerged as complementary devices to address those challenges. Evidence shows that fiscal rules equipped with independent monitoring arrangements are associated with increased transparency, better fiscal outcomes and lower sovereign debt financing costs. For that reason, the proposed Directive foresees involving independent fiscal institutions in monitoring compliance with the framework of numerical fiscal rules, including by assessing the adequacy of the medium-term budgetary orientation, as well as in monitoring how the correction mechanism is activated and applied. When they detect significant deviations from the medium-term objective or the adjustment path towards it, the independent fiscal institutions should call upon the national budgetary authorities to activate swiftly the correction mechanism and should assess the planned corrective measures and their implementation. Public assessments prepared by the independent fiscal institutions in the performance of their tasks, accompanied by a duty for the budgetary authorities of Member States to comply-or-justify in relation to the recommendations of the independent fiscal institutions, would boost the reputational costs of non-compliance and therefore increase the credibility and enforceability of the medium-term orientation. Since the adoption of ‘Six-pack’, ‘Two-pack’ and the TSCG 8 have already led to establishing independent fiscal institutions in almost all Member States, the proposed Directive is unlikely to require new structures although amendments to the current remits of existing independent fiscal institutions coupled with improved access to information and some reinforcement of resources may be warranted.
Detailed provisions in the proposed Directive set out specific aspects of the correction mechanism and the necessary features related to the set-up of independent fiscal institutions and their specific tasks stemming from this proposal. Those elements incorporate key features of the Common principles on national fiscal correction mechanisms, 9 which were used by the Member States in their adoption of measures in compliance with Article 3 i of the TSCG.
The proposed Directive does not affect the commitments made in Article 7 of the TSCG by those of the Contracting Parties whose currency is the euro to coordinate their views prior to the voting within the Council on proposals and recommendations made by the Commission in the context of the excessive deficit procedure. Equally, it preserves the practice under Article 13 of the TSCG of discussions in the framework of inter-parliamentary meetings held by the European Parliament and the national Parliaments of the Contracting Parties. Such discussions contribute to enhancing democratic accountability in the context of the Union's economic governance.
·Consistency with existing policy provisions in the EU
The key instrument for fiscal policy co-ordination and surveillance in the EU and the euro area is the SGP, which implements the Treaty provisions on budgetary discipline. The Fiscal Compact corresponds in many aspects to the preventive arm of the SGP. Indeed, the balanced-budget rule in structural terms mirrors to a very large extent the medium-term budgetary objective established under Article 2a of Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies. 10
The proposed Directive puts forward a framework of numerical fiscal rules and accompanying specifications which is not only compatible with the SGP but is specifically meant to complement it. That framework must effectively promote compliance with the Member State's obligations deriving from the TFEU in the area of budgetary policy, meaning, among others, that the medium-term objective envisaged to play within the national budgetary processes the role of an anchor for ensuring sustainable debt levels must be consistent with the medium-term budgetary objective laid down under Article 2a of Council Regulation (EC) No 1466/97. To take into account the appropriate flexibility that is built into the rules of the SGP and in line with its procedural requirements, the proposal includes specific provisions allowing account to be taken of the implementation by Member States of structural reforms that have a positive impact on the long-term sustainability of public finances.
2. RESULTS OF CONSULTATIONS WITH INTERESTED PARTIES
Article 16 of the TSCG and its supporting recital express the firm, unambiguous will of the Contracting Parties to incorporate as soon as possible the substance of that Treaty into the Union legal framework.
The Commission has followed up on that commitment of the 25 Member States who are Contracting Parties by putting forward this proposal. The Commission first announced its intention to take the initiative and act upon that commitment in the Reflection Paper on the Deepening of the Economic and Monetary Union, which recalled the agreement among the Contracting Parties to integrate the substance of the TSCG into Union law. In his 2017 State of the Union address and the accompanying Letter of Intent, President Juncker announced a proposal on incorporation as part of the 6 December 2017 package on EMU deepening.
The proposed Directive builds on the Commission’s in-depth knowledge of the architecture of the Fiscal Compact (including in particular its interactions with the Union fiscal framework) and of how it has been enshrined by the Member States concerned into their domestic legal orders. With a view to preparing its February 2017 report assessing the compliance of national provisions adopted by the Contracting Parties bound by the Fiscal Compact, the Commission engaged in extensive consultations with those Member States. Those bilateral exchanges gave the Commission a thorough and accurate understanding of how the legislative and institutional arrangements put in place by them give effect to the rules enshrined in Article 3 of the TSCG.
Discussions held among the Member States in the ECOFIN Council and its preparatory committees in relation to the Fiscal Compact, notably on assessing the compliance of national transposing provisions, also included the issue of incorporating the Fiscal Compact in Union law and recalled the need to take steps in that direction by 1 January 2018.
3. LEGAL ELEMENTS OF THE PROPOSAL
·Legal basis
The legal basis for the proposed Directive is the second subparagraph of Article 126(14) TFEU. Strengthening fiscal responsibility and the medium-term budgetary orientation in the Member States aims to complement and reinforce the available policy framework to avoid excessive deficits as established under Article 126 TFEU. While the proposed Directive does not alter the substantive and procedural rules set out in the SGP, it increases the effectiveness of those provisions. The proposal applies to all euro area Member States and includes ‘opt-in’ provisions for non-euro area Member States.
·Subsidiarity and proportionality
The proposal is in conformity with the subsidiarity and proportionality principles set out in Article 5 of the Treaty on the European Union. Its objective cannot be sufficiently achieved by the Member States and can be better achieved at Union level. The proposed Directive does not go beyond what is necessary in order to achieve that objective.