Explanatory Memorandum to COM(2023)241 - Amendment of Regulation (EC) No 1467/97 on speeding up and clarifying the implementation of the excessive deficit procedure - Main contents

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dossier	COM(2023)241 - Amendment of Regulation (EC) No 1467/97 on speeding up and clarifying the implementation of the excessive deficit procedure.
source	COM(2023)241
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 amend Council Regulation (EC) No 1467/97 of 7 July 1997 on speeding up and clarifying the implementation of the excessive deficit procedure ¹ (the corrective arm of the Stability and Growth Pact). It is accompanied by a proposal 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 ² (the preventive 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 States³. 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 17a of Regulation No 1467/97 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 (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 framework⁷ 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 topic⁸.

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 package including this legislative proposal aims at making the EU governance framework simpler, more transparent and effective, with greater national ownership and better enforcement, while allowing for reform and investment and reducing high public debt ratios in a realistic, gradual and sustained manner. In this way, in the context of the European Semester, the reformed framework should help build the green, digital and resilient economy of the future, while ensuring the sustainability of public finances in all Member States. Stronger ex-post enforcement would be the necessary counterpart of a risk-based surveillance framework that provides more leeway to Member States to set their adjustment paths.

The reform proposals are thus shaped by the higher and more diverse public debt levels, the need to sustain high levels of investment for a fair twin transition (green and digital), the need to ensure energy security, open strategic autonomy, as well as social and economic resilience, and the need for a strategic compass for security and defence.

In particular, as the current debt reduction benchmark provided in Article 2(1) of Regulation No 1467/97 for Member States with a debt ratio exceeding the reference value of 60 % of gross domestic product (GDP) (the so-called “1/20th rule”) would likely imply, in the current circumstances of high deficit and debt ratios post-COVID, a too demanding frontloaded fiscal effort that would have a very negative impact on growth and thereby on debt sustainability itself, it is proposed to move to a more risk-based surveillance framework that puts debt sustainability at its core and differentiates more between Member States by taking into account their public debt challenges, while adhering to a transparent and common EU framework consistent with the 3% of GDP and 60% of GDP reference values of the Protocol No 12 on the excessive deficit procedure annexed to the Treaties.

The rules for the opening and closing of an excessive deficit procedure (EDP) for breaches of the 3% of GDP deficit reference value (the so-called ‘deficit-based EDP’) would remain unchanged, with some adjustments to ensure consistency with the EDP for breaches of the debt criterion, to recognise the role of independent fiscal institutions and to clarify cases of severe economic downturn in the Union or the euro area as a whole. It is a well-established element of EU fiscal surveillance that has been effective in influencing fiscal behaviour and is well understood by policy makers and the general public, thanks to its simplicity.

The EDP for breaches of the debt criterion (the so-called ‘debt-based EDP’) would be strengthened for both activation and abrogation. It would focus on departures by Member States with debt above 60% of GDP from the fiscal path that the Member State has committed itself to and has been endorsed by the Council under the proposed Regulation replacing the preventive arm of the Stability and Growth Pact (SGP).

A substantial public debt challenge established according to the most recent Debt Sustainability Monitor should be considered a key factor leading to the opening of an EDP as a rule. The path under the EDP would in principle be the one originally endorsed by the Council. In case this original path is no longer feasible, due to objective circumstances, the Commission could propose to the Council an amended path under the EDP.

• Consistency with existing policy provisions in the policy area

The proposal is part of a broader package of proposals following the Commission’s orientations of 9 November 2022 for a reform of the EU economic governance framework. This package also includes a proposal for a Regulation replacing the preventive arm of the SGP and a proposal amending Council Directive 2011/85/EU. The package aims 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 SGP and its founding provisions in the Treaty on the Functioning of the European Union (TFEU).

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, the proposal for a Regulation replacing the preventive arm of the SGP reflects in part the Fiscal Compact’s requirement of convergence to medium-term positions to be proposed taking into account country-specific sustainability risks (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(1), point b, of the TSCG), and this analysis is upheld in the proposal for a Regulation replacing the preventive arm of the SGP. The Fiscal Compact allows for temporary deviations from the medium-term objective or adjustment path towards it only in exceptional circumstances (Article 3(1), point c, of the TSCG), as envisaged in the proposal for a Regulation replacing the preventive arm of the SGP. 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(1), 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 “1/20th rule”, which imposed a too demanding fiscal effort for some Member States. The Fiscal Compact assigns a monitoring role of the compliances 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 Commission¹⁰ 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 present 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 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 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 reforms 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 would allow for an extension of the fiscal adjustment horizon provided that they meet 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), ensuring fiscal sustainability and being consistent with common priorities of the Union.

2. LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY

• Legal basis

The legal basis for this instrument is the second subparagraph of Article 126(14) TFEU, as for the amended regulation.

• Subsidiarity

The corrective arm of the SGP is meant to avoid gross errors in budgetary policies, which might put at risk the sustainability of public finances and potentially endanger EMU. This translates into the Treaty obligation for Member States to avoid excessive government deficits, which are defined against a numerical threshold for deficit (3% of GDP) and debt (60% of GDP or sufficiently declining toward it). The excessive deficit procedure that implements the ban on excessive deficits provides for a sequence of steps, which, for euro-area countries, include the eventual imposition of financial sanctions. The excessive deficit procedure has been regularly applied in line with the relevant provisions, thereby contributing to anchoring expectations of its orderly resolution.

The proposal is in conformity with the subsidiarity principle set out in Article 5 of the Treaty on the European Union. Its objective, namely uniform compliance with budgetary discipline 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

The proposals aims to amend a Council Regulation, and therefore takes the form of a proposal for a Council Regulation.

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 ¹ and October 2021 ².

• 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 2022³.

- 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 ⁴, and in the present proposal.

After the adoption of the Communication of 9 November 2022, 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 (staff working document and Commission Communications drafted between 2020 and 2022).

4. BUDGETARY IMPLICATIONS

If fines are imposed on Member States by the Council, the corresponding revenue will go to the EU budget as other revenue. An amendment of Article 21 i of the Financial Regulation will also be necessary to that effect ¹.

5. OTHER ELEMENTS

• Implementation plans and monitoring, evaluation and reporting arrangements

The amended Regulation contains a review clause whereby every 5 years the Commission will publish a report on the application of the Regulation. The report will review: (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.

6. DETAILED EXPLANATION OF THE SPECIFIC PROVISIONS OF THE PROPOSAL

Article 1 of the proposal contains the proposed modifications to Regulation No 1467/97.

Paragraph (1) adds new definitions to Article 1 of Regulation No 1467/97 in line with the proposed Regulation replacing the preventive arm of the SGP. It changes the wording of Article 2 on unusual events into exceptional circumstances and adds cross-references to the proposed Regulation replacing the preventive arm of the SGP. It changes the operationalisation of the Treaty debt criterion, abandoning the “1/20th rule” and focusing on the respect of the net expenditure path set by the Council under the proposed Regulation replacing the preventive arm of the SGP. It removes the reference to a quantitative description of a severe economic downturn and refers instead to the proposed Regulation replacing the preventive arm of the SGP. It streamlines the list of relevant factors to decide on the existence of an excessive deficit. The degree of a Member State’s debt challenges will be a key relevant factor when preparing a report under Article 126 i TFEU. In particular, a substantial public debt challenge established according to the most recent Debt Sustainability Monitor shall be considered a key factor leading to the opening of an excessive deficit procedure as a rule. In case of a severe economic downturn, the Commission and the Council, in their assessment, may decide not to conclude on the existence of an excessive deficit, in line with the approach followed during the activation of the general escape clause during the COVID-19 crisis. Lastly, the provisions referring to the introduction of multi-pillar pension systems are removed.

Paragraph i makes the opinion of the Economic and Financial Committee in accordance with Article 126 i TFEU, and decisions and recommendations by the Council in accordance with Article 126(6) and Article 126(7) TFEU public. It sets out the requirements of the corrective net expenditure path set in a Council recommendation in accordance with Article 126(7) TFEU, to have the deficit remaining or brought and maintained below the 3% of GDP reference value and to put debt on a plausibly downward path or keep it at a prudent level. For the years where the general government deficit is expected to exceed the reference value, a minimum annual adjustment of at least 0,5% of GDP as a benchmark is maintained. It adds an obligation for Member States to include in their report on effective action the opinion of their independent fiscal institution. Lastly, it stipulates that exceptional circumstances and a severe economic downturn in the euro area or the Union as a whole allow the Council to extend the deadline for correction.

Paragraph i removes the provisions regarding possible publication of the Council recommendations under Article 126(7) TFEU, as, in accordance with paragraph i, this publication becomes automatic. It adds that decisions by the government should not only be publicly announced but also sufficiently detailed in order to be included in the assessment of effective action.

Paragraph i sets out the requirements of the corrective net expenditure path set in a Council Decision to give Notice in accordance with Article 126(9) TFEU, to have the deficit remaining or brought and maintained below the 3% of GDP reference value and to put debt on a plausibly downward path or keep it at a prudent level. For the years where the general government deficit is expected to exceed the reference value, a minimum annual adjustment of at least 0,5% of GDP as a benchmark is maintained. It also stipulates that exceptional circumstances and a severe economic downturn in the euro area or the Union as a whole allow the Council to extend the deadline for correction.

Paragraph (5) adds that decisions by the government should not only be publicly announced but also sufficiently detailed in order to be included in the assessment of effective action following a notice given by the Council under Article 126(9) TFEU.

Paragraph (6) adds the conditions for the Council to abrogate the excessive deficit procedure under Article 126(12) TFEU. Under the current fiscal framework, those are only stipulated in a Code of Conduct.

Paragraph (7) and (8) complete the existing references to the relevant articles of the TFEU.

Paragraph (9) provides that the missions undertaken by the Commission in Member States allow an exchange also with relevant stakeholders other than the national authorities, including independent fiscal institutions. It also requires the Commission to carry out dedicated surveillance missions to Member States which were given a notice by the Council under Article 126(9) TFEU, and provides that, in that context and upon invitation by the parliament of the Member State concerned, the Commission may present its assessment of the economic and fiscal situation in the Member State.

Paragraph (10) removes the minimum amount for fines and proposes that they accumulate every six months until effective action is taken, up to a maximum of 0.5% of GDP.

Paragraph (11) completes the existing references to the relevant articles of the TFEU.

Paragraph (12) removes the article that assigns the revenues of fines to the European Financial Stability Facility. If fines are imposed, their revenues will go to the EU budget, as other revenue. An amendment of Article 21 i of the Financial Regulation will also be necessary to that effect. Paragraph (12) also removes provisions related to the United Kingdom following the withdrawal of the United Kingdom from the European Union.

Paragraph (13) amends the review clause.

Paragraph (14) adds transitional provisions.

Paragraph (15) removes the annex with provisions related to the United Kingdom.

Article 2 stipulates the entry into force and applicability of the amending Regulation.