Towards a reform of the economic governance framework
The EU continues to improve its coordination of member states’ economic policies and to strengthen its measures to prevent the occurrence of excessive government deficits.
Why do we need a reform of the EU economic governance framework?
With the recovery from the COVID-19 pandemic and the consequences of Russia’s war of aggression against Ukraine, the EU economy is facing renewed challenges. The EU is therefore working on an update of its economic governance framework to make it better suited to the economic, geopolitical, environmental and other challenges that the EU is facing. The reform takes place against the backdrop of higher debt levels and interest rates and new investment and reform goals. Issues include how to take account of this changing environment, how policy responses to new challenges can be integrated into the stability and growth pact (SGP) and how the pact’s effectiveness could be further improved.
The main objective of the reform of the economic governance framework is to ensure sound and sustainable public finances. The reform also serves to contribute to the EU’s priorities of building a digital, sustainable and more resilient future, while strengthening support for the EU’s competitiveness and strategic autonomy.
Legislative proposal and Council position
To build consensus, the European Commission initially launched a public debate on the review of the economic governance framework in February 2020. It also adopted a communication on the broader approach to delivering a reformed EU economic governance framework in November 2022. The aim is to establish a simpler and more transparent framework with better enforcement rules. This, in turn, should ensure debt sustainability and promote sustainable growth through reforms and investments.
Paving the way for a legislative proposal in this regard, the Council adopted conclusions on the economic governance review on 15 March 2023 setting out its orientations for the reform, in unanimous agreement. The conclusions highlighted areas of convergence of views among member states, but also stated where further clarification and discussions were needed.
EU leaders endorsed the Council orientations for a reform of the economic governance framework on 23 March 2023.
Commission proposal
On 26 April 2023, the Commission presented its legislative proposals for a new economic governance framework. The new rules aim to reduce public debt, bring it to sustainable levels, and promote inclusive growth and job creation through reforms and investment.
The Commission package consisted of:
- a regulation to replace the preventive arm of the stability and growth pact (SGP)
- an amending Council regulation on the corrective arm of the SGP
- an amending Council directive on requirements for budgetary frameworks of member states
The proposal on the preventive arm falls within the ordinary legislative procedure, meaning that it needs to be negotiated and adopted by the Council and the Parliament as co-legislators. The amending Council regulation and directive need to be adopted by the Council after consultation of the Parliament.
Council position
On 21 December 2023 member states’ EU ambassadors agreed on the proposed reform of the EU’s economic governance framework.
They approved a mandate for negotiations with the Parliament on the preventive arm regulation. Additionally, there was an agreement in principle with a view to consulting the Parliament on the corrective arm regulation and the directive on requirements for national budgetary frameworks.
On 29 April 2024, the Council adopted the legislation reforming the EU’s economic and fiscal governance framework.
What would change under the reform?
The main elements of the economic governance review are:
- the introduction of national medium-term fiscal-structural plans that allow for a differentiated approach towards each member state. The aim is to take account of the heterogeneity of fiscal positions, public debt and economic challenges across the EU. These plans would present national fiscal targets, measures to address macroeconomic imbalances and priority reforms and investments over a period of at least four years. The purpose is to commit to a fiscal trajectory as well as priority public investments and reforms that together ensure sustained and gradual debt reduction and sustainable and inclusive growth, while avoiding a pro-cyclical fiscal policy
- public debt sustainability as a core element, in order to bring government debt on a plausibly downward trajectory or maintain it at prudent levels below 60% over the medium-term, while maintaining government deficit below 3% of GDP
- an improved enforcement regime to ensure member states deliver on the commitments they made in their medium-term fiscal-structural plans
The revised framework aims at:
- reducing debt ratios and deficits in a gradual and realistic way
- safeguarding reforms and investment in strategic areas
- providing appropriate room for counter-cyclical policies
- addressing macroeconomic imbalances
- achieving common medium and long-term policy objectives
Preventive arm
A significant innovation of the reform is the introduction of a tailored approach for each member state under the preventive arm regulation. The cornerstone of the new economic governance framework would be multi-annual country-specific fiscal trajectories, allowing for a differentiated approach towards each member state.
This ensures the taking into account of different fiscal positions, public debt and economic challenges across the EU, while ensuring effective multilateral oversight and adherence to the principle of equitable treatment.
National medium-term fiscal-structural plans
Each member state would prepare a medium-term fiscal-structural plan, spanning four or five years. These plans commit to a fiscal trajectory as well as to key public investments and reforms. The aim is to ensure consistent, gradual debt reduction and promote sustainable, inclusive growth.
Technical trajectory
The Commission would transmit a risk-based and differentiated technical trajectory, expressed in terms of multiannual net expenditure, to member states where government debt and deficit exceed the reference values of 60% and 3% of GDP.
The trajectory would ensure that, within a four-year fiscal adjustment period, the government debt either decreases reasonably or remains at prudent levels below 60% in the medium-term. In addition, it aims to ensure that the projected government deficit is brought and maintained below 3% of GDP over the medium-term.
The Council agreed that member states may benefit from longer adjustment paths. They would be allowed to ask for an extension of the fiscal adjustment period by up to seven years if they carry out certain reforms and investments that improve growth potential and support, for instance, fiscal sustainability.
To enhance predictability and fairness, the technical trajectory would need to comply with two safeguards:
- the debt sustainability safeguard, to ensure that government debt ratio decreases by a minimum annual average
- the deficit resilience safeguard, to provide a safety margin below the Treaty deficit reference value of 3%
Net expenditure path
Once member states have submitted their national medium-term-structural plans and upon the Commission’s recommendation, the Council would adopt a recommendation setting the net expenditure path of each member state as a single indicator.
The Council would also endorse the set of reform and investment commitments underpinning a possible extension of the adjustment period.
A control account would be set up to monitor deviations from the agreed net expenditure paths.
Corrective arm
The Council agreed that the Commission would prepare a report to initiate a debt-based excessive deficit procedure, when the ratio of the government debt to GDP exceeds the reference value, the headline deficit is not close to balance or in surplus and when the deviations recorded in the control account of the member state either exceed 0.3% of GDP annually, or 0.6% of GDP cumulatively.
When evaluating a member state's compliance with the deficit and/or debt criteria, the Council and the Commission would assess various relevant factors. These include the degree of public debt challenges, deviation size, progress in implementing reforms and investments, and, if applicable, increased defence spending.
The Council maintained the rules of the excessive deficit procedure on the basis of the deficit criterion, requiring a minimum annual structural adjustment of 0.5% of GDP. Non-compliance may result in fines of up to 0.05% of GDP, accumulating every six months until corrective action is taken.