Explanatory Memorandum to COM(2023)240 - Effective coordination of economic policies and multilateral budgetary surveillance - Main contents

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dossier	COM(2023)240 - Effective coordination of economic policies and multilateral budgetary surveillance.
source	COM(2023)240
date	26-04-2023

1. CONTEXT OF THE PROPOSAL

• Reasons for and objectives of the proposal

This proposal forms part of a package and aims to replace Council Regulation No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies ¹ (the preventive arm of the Stability and Growth Pact). It is accompanied by a proposal to amend Council Regulation (EC) No 1467/97 of 7 July 1997 on speeding up and clarifying the implementation of the excessive deficit procedure ² (the corrective arm of the Stability and Growth Pact), as well as by a proposal to amend Council Directive 2011/85/EU of 8 November 2011 on requirements for budgetary frameworks of the Member States ³. The package therefore aims at reforming the EU fiscal framework.

In 2011, to take into account the lessons of the global financial crisis and the euro area sovereign debt crisis, and as part of the package known as the “Six-pack”, Regulation (EC) No 1466/97 was amended by Regulation (EU) No 1175/2011 ⁴, Regulation (EC) No 1467/97 was amended by Regulation (EU) No 1177/2011 ⁵, and Directive 2011/85/EU was adopted.

Article 12a of Regulation No 1466/97 contains a review clause whereby every 5 years the Commission is required to publish a report on the application of the Regulation, to evaluate: (i) the effectiveness of the Regulation; (ii) the progress in ensuring closer coordination of economic policies and sustained convergence of economic performances of the Member States in accordance with the TFEU, accompanied, where appropriate, by a proposal for amendments to the Regulation. The Commission carried out a review of the Regulation as part of the review of the EU economic governance framework launched in February 2020 ⁶.

The review of the EU economic governance framework was based on an extensive consultation of a wide range of stakeholders including EU institutions, citizens, national governments and parliaments, social partners, non-governmental institutions and academia. It revealed a number of strengths, but also a series of shortcomings of the framework, in particular an increased complexity, the need to be more effective in reducing debt where it is high and build buffers for future shocks, and the need to update a number of instruments and procedures so as to integrate the lessons learned from the policy responses to recent economic shocks, including the interaction between reforms and investment under the Recovery and Resilience Facility. The proposed package including this proposal aims to address these shortcomings and integrate those lessons.

In its Communication of 9 November 2022 the Commission put forward its orientations for a reform of the EU economic governance framework ⁷ aimed at ensuring debt sustainability and promoting sustainable and inclusive growth in all Member States. The orientations envisaged a stronger national ownership, a simplified framework and a move towards a greater medium-term focus, combined with stronger and more coherent enforcement. These orientations also reflected observations that emerged from the public consultation launched in October 2021, which invited other EU institutions and all key stakeholders to engage on the topic ⁸.

Based on the findings of the economic governance review and of the public consultation launched in October 2021, and on the basis of the orientations put forward in the Communication of 9 November 2022, the legislative package aims at making the EU governance framework simpler (by using a single operational indicator in the form of a net expenditure path and by simplifying reporting requirements in particular through the introduction of a holistic, single, integrated medium-term fiscal-structural plan), more transparent and effective, with greater national ownership and better enforcement, allowing for reform and investment while reducing high public debt ratios in a realistic, gradual and sustained manner. In this way, in the context of a stronger and more effective European Semester, the reformed framework should help build the green, digital and resilient European economy of the future, while ensuring the sustainability of public finances in all Member States. The reform proposals are thus shaped by the higher and more diverse public debt levels observed over a number of years and the need to sustain high levels of investment for the green and digital transitions, the need to ensure energy security, open strategic autonomy, as well as social and economic resilience, and the implementation of a strategic compass for security and defence.

• Consistency with existing policy provisions in the policy area

Given the extent of the changes required for the implementation of the Commission’s orientations of 9 November 2022 for a reform of the EU governance framework, the proposal for a Regulation of the European Parliament and of the Council on the effective coordination of economic policies and multilateral budgetary surveillance is intended to replace Regulation (EC) No 1466/97.

These three pieces of legislation aim at establishing a reformed framework that relies on medium-term orientation and national ownership aiming at a credible and substantial reduction of high debt levels and at promoting sustainable and inclusive growth. The reformed economic governance framework, thus, retains the fundamental objectives of budgetary discipline and growth promotion of the Stability and Growth Pact (SGP) and its founding provisions in the Treaty on the Functioning of the European Union.

At the same time, by aiming at sound and sustainable public finances as well as growth promotion, the reformed framework also meets the main objectives of the Fiscal Compact which forms Title III of the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union (TSCG)⁹. In addition, other elements of the proposed legislation retain the substance of the Fiscal Compact. With a medium-term orientation anchored on country-specific debt challenges, this Regulation reflects in part the Fiscal Compact’s requirement of convergence to medium-term positions to be proposed taking into account country-specific public debt challenges (Article 3.(1) point b of the TSCG). While emphasising the structural balance, the Fiscal Compact also requires an analysis of expenditure net of discretionary revenue measures for the overall assessment of compliance (Article 3 i point b, of the TSCG), and this analysis is upheld in this Regulation. The Fiscal Compact allows for temporary deviations from the medium-term objective or adjustment path towards it only in exceptional circumstances (Article 3 i, point c of the TSCG), as envisaged in this Regulation. The Fiscal Compact stipulates that in case of significant observed deviations from the medium-term objective or the adjustment path towards it, measures have to be implemented to correct the deviations over a defined period of time (Article 3 i point e of the TSCG). In the same vein, the reformed framework requires corrections of deviations from the net expenditure path set by the Council. Moreover, when deviations result in a deficit in excess of 3% of GDP, the Member State could be placed under the excessive deficit procedure. For a Member State with debt above 60% of GDP, the debt-based EDP would be strengthened: it would focus on departures from the net expenditure path, replacing the current debt reduction benchmark (the so-called “1/20th rule”), which imposed a too demanding fiscal effort. The Fiscal Compact assigns a monitoring role of the compliance with its rules to national independent fiscal institutions, and the provisions on the role and independence of those monitoring institutions, which had to be detailed in common principles proposed by the Commission ¹⁰ in accordance with Article 3 i of the TSCG, are now fully integrated in the proposal amending Directive 2011/85. The Fiscal Compact provides that the Commission and the Council play a role in the enforcement process (Article 5 of the TSCG), as stated in the proposal for a Council Regulation amending Council Regulation (EC) No 1467/97.

Commonalities between the Fiscal Compact and the reformed economic governance framework also stem from the implementation of the Fiscal Compact into the national legal orders. Most Contracting Parties to the TSCG have transposed the TSCG provisions into national laws inserting a direct link with corresponding EU laws¹¹. This applies to the medium-term objective and convergence path as well as the assessment of a significant deviation or provisions requiring to follow the recommendations adopted by the Council (all drawn from Regulation (EC) No 1466/97).

Considering these commonalities, the proposed reformed economic governance framework can be considered as incorporating the substance of the fiscal provisions of the TSCG into the legal framework of the EU, as per Article 16 of the TSCG.

• Consistency with other Union policies

The proposal is part of a package that aims at moving to a risk-based common EU surveillance framework that differentiates between Member States by taking into account their public debt challenges. It revises the EU fiscal framework by integrating fiscal, reform and investment objectives into a single, holistic medium-term fiscal-structural plan which will be the cornerstone of the new framework. The plan will include all reform and investment commitments taken by Member States to address the challenges identified in the context of the European Semester including the country-specific recommendations. A set of these reform and investment commitments could allow an extension of the fiscal adjustment horizon provided that they meet, taken altogether, certain criteria such as being growth-enhancing (examples of such reforms include addressing the challenges of population ageing, improving the functioning of the labour market and increasing labour supply, encouraging innovation and strengthening skills, improving the business environment ¹², removing barriers to the Single Market and addressing strategic dependencies), supporting fiscal sustainability (examples of such reforms include pension reforms, reforms improving the cost-effectiveness of public expenditure, or reforms increasing tax collection) and being consistent with common priorities of the Union defined in Annex VI of the proposed Regulation.

The proposed Regulation interacts with Regulation (EU) No 1176/2011 of the European Parliament and of the Council of 16 November 2011 on the prevention and correction of macroeconomic imbalances ¹³ in that the Council may adopt a recommendation establishing the existence of an excessive imbalance in case a Member State fails to implement the reform and investment commitments included in its medium-term fiscal-structural plan to address the country-specific recommendations that are relevant for the Macroeconomic Imbalances Procedure. Moreover, if a Member State is under an excessive imbalance procedure, it has to submit a revised medium-term fiscal-structural plan under the proposed Regulation which will serve as the corrective action plan under Regulation (EU) No 1176/2011.

The proposed Regulation also interacts with Regulation (EU) No 472/2013 of the European Parliament and of the Council of 21 May 2013 on the strengthening of economic and budgetary surveillance of Member States in the euro area experiencing or threatened with serious difficulties with respect to their financial stability ¹⁴. Euro-area Member States under a macroeconomic adjustment programme under Regulation (EU) No 472/2013 will be exempt from submitting national medium-term fiscal-structural plans and annual progress reports under the proposed Regulation for the duration of the programme. Moreover, euro-area Member States under enhanced surveillance under Regulation (EU) No 472/2013 will have to take into account the recommendations addressed by the Council in accordance with Article 121 i TFEU in case of a deviation from the net expenditure path.

2. LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY

• Legal basis

The legal basis for this instrument is Article 121(6) of the Treaty on the Functioning of the European Union (TFEU).

This provision allows the European Parliament and the Council, acting by means of regulations in accordance with the ordinary legislative procedure, to adopt detailed rules for the multilateral surveillance of Member States, including the establishment of a multilateral procedure according to which Member States policies are assessed. The main purpose behind Article 121 TFEU is the co-ordination of the economic policies of the Member States given the interdependencies between them.

Article 121(6) TFEU has been used as the legal basis for Regulation (EC) No 1466/97, which would be replaced by the current proposal. The objective of this proposal remains similar to the one of Regulation (EC) No 1466/97, namely to ensure the coordination of the economic policies of Member States and their multilateral budgetary surveillance with the objective of ensuring compliance with the guiding principles of stable prices, sound public finances and monetary conditions and a sustainable balance of payments.

• Subsidiarity (for non-exclusive competence)

The proposal aims at moving to a risk-based EU surveillance framework that differentiates between Member States by taking into account their public debt challenges. National medium-term fiscal-structural plans are the cornerstone of the proposed framework. They would integrate fiscal, reform and investment objectives, including those to address macroeconomic imbalances where necessary, and to implement the European Pillar of Social Rights, into a single holistic medium-term plan, thus creating a coherent and streamlined process. Member States would have greater leeway in setting their fiscal net expenditure trajectory, strengthening the national ownership of their fiscal trajectories. At the same time, it is crucial that those plans are anchored in a common Union framework in the European Semester context in order to ensure multilateral surveillance of Member States given the potential spillovers that exist among the members of an economic and monetary union. This also ensures equal treatment of Member States and consistency with common priorities of the Union.

The proposal is in conformity with the subsidiarity principle set out in Article 5 of the Treaty on the European Union. Its objective, namely ensuring the coordination of the economic policies of Member States and their multilateral budgetary surveillance as required by the TFEU, cannot be sufficiently achieved by the Member States and can be better achieved at Union level.

• Proportionality

The proposal respects the proportionality principle set out in Article 5 of the Treaty on the European Union. It does not go beyond what is necessary to achieve the objectives sought by the instrument.

• Choice of the instrument

Article 121(6) TFEU provides for regulations.

3. RESULTS OF EX-POST EVALUATIONS, STAKEHOLDER CONSULTATIONS AND IMPACT ASSESSMENTS

• Ex-post evaluations/fitness checks of existing legislation

Backward looking assessments of the EU economic governance framework were published in February 2020 ¹⁵ and October 2021 ¹⁶.

• Stakeholder consultations

1. Extensive consultations with stakeholders have taken place. They consisted in:

- Online consultation to gather the views of stakeholders, civil society and citizens. A summary report of the outcome of this consultation was published in March 2022.

- In-depth thematic discussions with Member States took place in the Council (ECOFIN), the Eurogroup, the Economic and Financial Committee and the Economic Policy Committee.

The results have been taken into account in the Communication of 9 November 2022 of the Commission on orientations for a reform of the economic governance framework ¹⁷, and in the present proposal.

After the adoption of the Communication of 9 November 2022, the Commission has provided additional material to Member States on the impact of the proposed reform and further discussions took place with Member States in the Council and with the European Parliament, which have been taken into account in the present proposal:

- The European Parliament adopted its annual reports on the European Semester on 15 March 2023 which also focused on the reform of the EU economic governance framework and the future of the European Semester.

- The Council (ECOFIN) adopted Conclusions on the orientations for a reform of the EU economic governance framework on 14 March 2023, which were endorsed by the European Council of 23-24 March 2023.

• Impact assessment

The proposal has been granted a derogation from an impact assessment on the grounds of (i) lack of options as the EU fiscal framework sets the boundaries of the revision and (ii) focus on targeted changes that (iii) do not result in an increase in reporting requirements for Member States and (iv) are informed by evidence-gathering activities undertaken in the recent past published as staff working documents and Communications drafted between 2020 and 2022.

• Fundamental rights

The proposal does not have consequences on rights.

4. BUDGETARY IMPLICATIONS

The proposal does not have implications for the EU budget.

5. OTHER ELEMENTS

• Implementation plans and monitoring, evaluation and reporting arrangements

The proposed Regulation does not require measures to facilitate its implementation. The subject of this legislative action does not pose implementation challenges for Member States.

The proposed Regulation simplifies reporting requirements for Member States by using a single operational indicator in the form of a net expenditure path and by introducing a holistic, single, integrated national medium-term fiscal-structural plan that replaces the Stability or Convergence Programmes and the National Reform Programmes of the Member States.

The proposed Regulation contains a review clause under Article 36 whereby every 5 years the Commission will publish a report on the application of this Regulation. The report will review: (i) the effectiveness of the Regulation, particularly whether the provisions governing decision-making have proved sufficiently robust in ensuring a downward path for public debt or maintaining it at prudent levels; (ii) the progress in ensuring closer coordination of economic policies and sustained convergence of economic performances of the Member States in accordance with the TFEU.

To ensure that the revised EU governance framework is implemented by the Member States, increasing national ownership will be a key element of the reform. This will be done by better integrating the requirements of the common Union framework into the national policy debates and expanding the role of independent fiscal institutions by including them in the monitoring of the implementation by the Member States of their national medium-term fiscal-structural plans. In addition, the Commission will explore how to strengthen the role of the European Fiscal Board ¹⁸, while preserving the surveillance role conferred on the Commission by the EU Treaties. Currently, the European Fiscal Board is tasked to evaluate the implementation of the EU fiscal framework, in particular its horizontal consistency, possible cases of serious non-compliance and the appropriateness of the fiscal stance. It advises the Commission on these issues and points to policy options available under the Stability and Growth Pact if it identifies risks for the proper functioning of EMU. It also cooperates with national independent fiscal institutions to exchange best practice and facilitate common understanding. New tasks for the European Fiscal Board could include informing the periodic evaluation of the reformed framework and providing assessments on the implementation of central elements of the reformed governance system. The Board could also provide an opinion to inform the Council decision on activating (or extending) the general escape clause.

• Detailed explanation of the specific provisions of the proposal

Chapter 1 (Articles 1 and 2) of the proposed Regulation presents the purpose of the Regulation which is in particular to lay down detailed rules concerning the content, submission, assessment and monitoring of national medium-term fiscal-structural plans. It also defines the main terms used in the Regulation.

Chapter 2 (Articles 3 and 4) of the proposed Regulation contains the rules governing the European Semester. They introduce the EU fiscal framework into the European Semester surveillance cycle. They also provide that the Member States have to take into account the guidance given by the Council, and list the legal instruments in which a failure to do so by Member States could result in.

Chapter 3 (Articles 5 to 8) of the proposed Regulation focuses on the technical trajectory to be issued by the Commission for Member States with public debt above 60% of GDP or a government deficit above 3% of GDP.

Chapter 4 (Articles 9 to 19) of the proposed Regulation sets out the process for the medium-term fiscal-structural plans. They establish the obligation for each Member State to submit a medium-term fiscal-structural plan, the objectives of the technical dialogue between the Commission and the Member State prior to the submission of the plans, the content and requirements of the plans, the conditions and criteria for an extension of the adjustment period, assessment process of the plan by the Commission and the endorsement process by the Council. They also set out the conditions under which the Council can request that a Member State submit a revised plan and under which the Council can propose a revision of the net expenditure path endorsed by the Council in case of failure by the Member State to comply with the required conditions regarding the submission of a revised plan or to implement the reform and investment commitments that led to an extension of the adjustment period.

Chapter 5 (Articles 20 to 25) of the proposed Regulation establishes the monitoring process for the national medium-term fiscal-structural plans and what happens in case of significant risk of deviation from the net expenditure path. Member States have to submit annual progress reports and the Commission will monitor the implementation of the net expenditure paths including through the set-up of a control account. The articles also establish the role of national independent fiscal institutions in the monitoring process and put in place the conditions under which a general escape clause or a country-specific escape clause could be activated.

Chapter 6 (Articles 26 to 29) of the proposed Regulation lays down the conditions under which the economic dialogue takes place between the institutions and Member States, including the necessity to inform the European Parliament on the application of the Regulation, the “comply or explain” rule, and the possibility for the European Parliament to have an exchange of views with a Member State where there is a significant risk of deviation from the net expenditure path.

Chapter 7 (Article 30) of the proposed Regulation establishes the interaction with Regulation (EU) No 1176/2011 requiring that consideration be given to the launch of the Excessive Imbalance Procedure in the event in which Member States do not implement the reform and investment commitments relevant to the Macroeconomic Imbalances Procedure that are included in its medium-term fiscal-structural plan. It also provides that when the Excessive Imbalance Procedure is launched under Regulation (EU) No 1176/2011, the Member State will have to submit a revised medium-term fiscal-structural plan which will act as the corrective action plan under the latter Regulation.

Chapter 8 (Article 31) of the proposed Regulation sets out the interaction with Regulation (EU) No 472/2013. It exempts euro-area Member States subject to a macroeconomic adjustment programme from submitting a medium-term fiscal-structural plan and an annual progress report and it requires that euro-area Member States under enhanced surveillance take into account recommendations addressed by the Council in accordance with Article 121 i TFEU in case of a deviation from the net expenditure path.

Chapter 9 (Articles 32 and 33) of the proposed Regulation empowers the Commission to make changes to the annexes (except for Annex I) through delegated acts and sets out the conditions under which the Commission can exercise this delegation.

Chapter 10 (Articles 34 to 38) of the proposed Regulation establishes the common provisions applicable to the proposed Regulation regarding dialogue with Member States and missions to Member States, the review clause, the repeal of Regulation (EC) No 1466/97 and the entry into force.

Annexes I to VII of the proposed Regulation contain the following elements: the criteria for setting the medium-term technical trajectory for Member States with public debt above 60% of GDP or government deficit above 3% of GDP; the information to be provided by Member States in the medium-term fiscal-structural plans; the information to be provided by Member States in the annual progress reports; the functioning of the control account; the methodology to assess plausibility by the Commission; the list of common priorities of the Union; and the assessment framework for the set of reform and investment commitments underpinning an extension of the fiscal adjustment period.