The economic and financial crisis has made Member States to realise that they have to harmonise their economic policies more closely in order to handle similarly severe crises in the future. Consequently, in the wake of the Greek debt crisis, they reached agreement on renewing the EU’s “economic governance”. As part of the related measures, Member States decided to draw-up such Community mechanisms, along with the enforcement of budgetary surveillance, to handle macroeconomic imbalances. It is the Hungarian Presidency’s task to conduct the debate on the package of six legislative proposals.
The crisis that erupted in 2008, has made it clear that Member States have not observed the recommendations of the Stability and Growth Pact in the favourable economic period, and they had a narrow scope of action to ease economic recession. As a result, public debts soared and reached levels that are no longer sustainable.
Europe also needs a mechanism, which not only concentrates on budgetary policies, but handles macroeconomic imbalances and underlying problems of competitiveness as well. Even more so, as one of the main lessons of the crisis was that despite a “healthy” fiscal policy, imbalances may emerge in the private sector that could carry severe financial risks (such as an anxious real estate market).
The European Commission submitted a package of six legislative proposals in September 2010, aimed at establishing the economic pillar of the Economic and Monetary Union. Shortly afterwards, a task force, lead by President of the European Council, Herman Van Rompuy, also drew up its proposals in its report.
THE SIX MONTHS OF THE HUNGARIAN PRESIDENCY
The task of the Hungarian Presidency is to align the legislative proposals of the Commission, the Ministerial task forces and the European Parliament (EP). According to the European Council’s final communication adopted in February, the legislative process has to be concluded by the end of June 2011.
At the Council meeting of Economic and Finance Ministers on 15 March 2011, the Hungarian Presidency achieved an important stage, as Member States reached an agreement (a preliminary position) on the six legislative proposals. Consequently, the Presidency received a mandate for starting discussion with the EP, the other key player in the process. It is necessary to secure the co-decision-making body’s approval, for the adoption of four of the six legislative proposals; while in the case of the other two, the Council only has to consult the EP.
The elements of the legislative six-pack
1) Regulation amending the legislative underpinning the preventive part of the Stability and Growth Pact (Regulation 1466/97/EC)
To strengthen budgetary surveillance the EU amends the rules of the Stability and Growth Pact’s preventive and corrective arms. The legislative proposal, touching the Pact’s preventive measures, sets fiscal policy requirements for those Member States whose fiscal deficit is below the threshold tolerance of 3 per cent of GDP. The reference points remain to be the medium-term budgetary objectives.
A new characteristic is that the adjustment path, determined by the Member State, would be evaluated by the EU from several different aspects. Along with keeping track of the structural budgetary balance (sometimes an unreliable indicator that is hard to measure), the EU would examine Member State’s expenditure growth rates. Therefore, Member States could use surplus tax revenues of, “good economic times” for reducing sovereign debt, instead of spending them otherwise, for additional expenses.
Another important change is that, in terms of fiscal consolidation, not only eurozone countries, but also Member States with a sovereign debt over 60 per cent of GDP would be required to go beyond 0.5 per cent annual adjustment in public balance. The effective implementation of the European Semester, a macroeconomic coordination cycle, set up in 2011 is also served by the fact that the deadline for Member States to submit their stability and convergence programmes has been moved to an earlier date, from December to April.
2) A Regulation amending the legislative underpinning of the corrective part of the Stability and Growth Pact (Regulation 1467/97/EC)
The most important change in the Pact’s corrective arm is that the debt criterion will be given more emphasis, and put on an equal footing with deficit developments. It will be possible to launch the Excessive Deficit Procedure (EDP), if the sovereign debt, exceeding the reference value, does not decrease at the required pace. In this case, the procedure could not be terminated even if the deficit was below 3 per cent of GDP. The annual pace of debt reduction is sufficient, if in the previous three years the amount of debt reduction equals to at least 1/20 of the debt proportion in excess of the reference value. The new debt criterion will come into force after a transition period has expired.
There are also changes to the rules concerning the consideration of the net costs of implementation of pension reforms. According to the political agreement reached by the Council on 15 March, a restricted part of these expenses could always be taken into account, but only in deficit rate evaluation, and in the case of countries whose debt is below the 60 per cent threshold.
In the spirit of fiscal severity, a new set of financial and non-financial sanctions will be introduced in the earlier stages of the process in both arms of the Pact.
3) A New Directive on the requirements for the budgetary framework of Member States
The aim of the new directive is to ensure that Member States commit themselves to sustainable and disciplined budgetary policies, and to achieve that the Pact’s objectives are reflected in the national budgetary frameworks. It contains minimum requirements for budgetary planning, transparency and implementation that have to appear in national fiscal procedural practices by the end of 2013 at the latest. Such requirements include the provision of statistical data, numerical fiscal rules, which facilitates the reaching of the EU deficit and debt targets, the publicity of macroeconomic forecasts, which form the basis of budgetary planning, and multi-annual budgetary planning.
4) A New Regulation on the prevention and correction of macroeconomic imbalances
The Excessive Imbalance Procedure (EIP) is a new element of the EU’s economic surveillance framework, established in line with the EDP. For the earlier detection of macroeconomic imbalances jeopardising the Economic and Monetary Union’s operation, the Commission would set up a so-called scoreboard which is expected to comprise of 8-10 indicators, and whose threshold values would vary between Member States, within and outside the eurozone.
Threshold values would serve as a referential point only, so exceeding them would not necessarily mean the occurrence of an imbalance. However, should the forecasting system and the Commission’s attached qualitative analysis indicate the risk of imbalance, after thorough examination, the affected Member State may be declared to be in an “excessive imbalance position”.
In the course of the process, the Council would put forward recommendations for the subjected Member State, which would have to present a corrective action plan. Subsequently, the Council would examine the plan and set a deadline for the implementation of corrective actions.
In the above procedures (EDP and EIP) the multi-stage sanctions applicable to eurozone would be governed by two Regulations.
5) A Regulation on the effective enforcement of budgetary surveillance in the euro area
In the course of implementing the Pact, sanctions would be applied as early as during the preventive phase:
Should the country deviate from the expected adjustment rate, it will receive a Council recommendation. If it fails to comply, this would result in an interest-bearing deposit.
In the case of an excessive deficit (in the corrective arm), the interest-bearing deposit would be converted into a non-interest bearing deposit amounting to 0.2 percent of GDP.
In the event of non-compliance with the Council’s recommendation to correct the excessive deficit, this non-interest bearing deposit would be converted into a fine.
In the case of further non-compliance with the recommendations, the amount of fine could be increased, but may not exceed 0.5 percent of GDP.
To ensure the effective enforcement of these sanctions, the draft regulation would introduce a “reverse voting mechanism,” whereby the Commission’s proposal for imposing a deposit or a fine, would be considered as adopted, unless it would be turned down by the Council’s qualified majority. Interests earned on deposits and fines will be transferred to the temporary European Financial Stability Facility (EFSF), and later to the European Stability Mechanism (ESM), a permanent mechanism to be established later on.
6) A Regulation on enforcement measures to correct excessive macroeconomic imbalances in the euro area
In the case of an Excessive Imbalance Procedure, the Council (more precisely, the Eurogroup) can only impose a fine on the eurozone country subjected to the procedure (equal to 0.1 percent of its GDP), if it repeatedly fails to adopt the corrective measures by the set deadline. Like in the case of the Pact’s sanctions, the Commission proposes the application of the “reverse voting mechanism” in Excessive Imbalance Procedures.
The Hungarian Presidency considers it a key priority to successfully conclude the debate on the package of six legislative proposals, aiming to enhance economic governance, and enabling the Council to adopt them – as part of the comprehensive crisis management package – at its meeting in June.