Questions and answers: Commission proposes new economic governance rules fit for the future

Met dank overgenomen van Europese Commissie (EC) i, gepubliceerd op woensdag 26 april 2023.

What is the Commission presenting today?

The Commission is tabling legislative proposals to build an economic governance framework fit for the challenges ahead. The key objective of the reform is to strengthen debt sustainability and promote sustainable and inclusive growth through reforms and investment. To achieve this, the proposal will make the economic governance framework simpler and more transparent, improve national ownership and strengthen enforcement.

The proposals include the following legislative acts:

  • A proposal for replacing Regulation (EC) No 1466/97 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies (this is the Regulation that establishes the European Semester and “the preventive arm” of the Stability and Growth Pact).
  • A proposal for amending Council Regulation (EC) No 1467/97 on speeding up and clarifying the implementation of the excessive deficit procedure (known as “the corrective arm” of the Stability and Growth Pact).
  • A proposal for amending Council Directive 2011/85/EU on requirements for budgetary frameworks of the Member States.

What are the main proposed changes to the current economic governance framework?

The legislative proposals aim to strengthen public debt sustainability, taking into account the need to reduce much-increased public debt levels, and enhance sustainable and inclusive growth through investment and reforms in a way that preserves national ownership. The framework will be made simpler and take into account countries' different fiscal challenges.

The central elements of these proposals are:

  • Stronger national ownership with national medium-term fiscal-structural plans that bring together fiscal, reform and investment policies of each Member State, within a common EU framework. These reforms and investments should help build the green, digital and resilient economy of the future and make the EU more competitive.
  • Simpler and more transparent rules, with fiscal adjustment paths formulated in terms of multi-year expenditure targets which ensure public debt reduction and that deficits stay below 3% of GDP.
  • More gradual fiscal adjustment paths if matched by credible reform and investment commitments that foster sustainable and inclusive growth in line with EU priorities.
  • Enhanced enforcement and common safeguards as a counterpart to the greater leeway for Member States to set their fiscal adjustment paths.
  • New EU-wide minimum standards for independence and technical capacity and tasks for national Independent Fiscal Institutions as well as a comply-or-explain principle for national authorities regarding recommendations by those institutions.

How has the Commission engaged with Member States and the European Parliament since it adopted its Communication on reform orientations?

The Commission has had extensive discussions with Member States since presenting its reform orientations in November 2022. These discussions have resulted in a consensus emerging on some core elements of the reform orientations, as summarised in the conclusions adopted by the Council on 14 March and endorsed by EU leaders on 23 March. Since then, the Commission has continued to engage with Member States to address the issues identified by the Council as requiring further work.

The Commission has also regularly informed the European Parliament about the state of play of the economic governance review and next steps in the process.

Now that the legislative proposals have been tabled, the Commission will engage with the European Parliament and the Council to reach agreement on the legislative proposals presented today as quickly as possible, considering the urgency of having the new economic governance framework in place to adequately respond to existing challenges.

How will these proposals simplify the economic governance framework?

The proposals will simplify the framework in several ways:

  • First, fiscal surveillance will now focus on a single operational indicator, namely the Member State's multi-year expenditure targets, as endorsed by the Council. These will serve as a basis for carrying out annual fiscal surveillance over the lifetime of the Member State's medium-term fiscal-structural plan. Several provisions from the previous framework, such as the debt reduction benchmark, the benchmark for reduction in the structural balance, the significant deviation procedure and the matrix of fiscal adjustment requirements will cease to exist.
  • Second, annual monitoring by the Commission will be less burdensome for Member States. Instead of proposing annual fiscal policy recommendations, the Commission will focus on Member States' compliance with the multi-year expenditure targets. Member States will need to submit annual reports focussing on implementation instead of annual Stability or Convergence Programmes and National Reform Programmes.
  • Third, the reform will simplify enforcement procedures, which will mostly be triggered by deviations from the agreed multi-year expenditure targets for “debt-based” excessive deficit procedures, with the procedure staying unchanged in case of deficits in excess of 3% of GDP.

How will these proposals ensure sustainable and sound public finances? What safeguards are included in the proposals to ensure sustainable debt reduction?

The reformed framework will help Member States to address medium-term fiscal challenges:

  • Following the COVID-19 pandemic and the energy crisis, public debt ratios have reached unprecedented levels in many Member States.
  • Financing conditions have recently tightened, reflecting the change in monetary policy.
  • Structural trends including climate change and demographic change pose a significant challenge for the soundness of public finances in Member States.

The proposals help to move towards a more risk-based surveillance framework that puts debt sustainability at its core and differentiates more between countries by taking into account their degree of public debt challenges.

  • For each Member State with a government deficit above 3% of GDP or public debt above 60% of GDP, the Commission will issue a country-specific “technical trajectory”. This trajectory will seek to ensure that debt is put on a plausibly downward path or stays at prudent levels, and that the deficit remains or is brought and maintained below 3% of GDP in the medium term.
  • For Member States with a government deficit below 3% of GDP and public debt below 60% of GDP, the Commission will provide technical information to Member States to ensure that the government deficit is maintained below the 3% of GDP reference value also over the medium term.
  • Member States' medium-term fiscal-structural plans should also set out reform and public investment commitments which will boost Member States' growth potential and, in turn, curb high debt levels.

Common safeguards will apply to ensure debt sustainability.

  • The 3% and 60% of GDP reference values for deficit and debt will remain unchanged.
  • The ratio of public debt to GDP will have to be lower at the end of the period covered by the plan than at the start of that period; and a minimum fiscal adjustment of 0.5% of GDP per year as a benchmark will have to be implemented so long as the deficit remains above 3% of GDP.
  • Furthermore, Member States benefitting from an extended fiscal adjustment period will have to deliver most of the adjustment during the first four years covered by the plan.

Enforcement will also be strengthened. Member States will present annual progress reports to facilitate more effective monitoring and enforcement of the implementation of the commitments taken in their plans. For Member States that face substantial public debt challenges, departures from the agreed fiscal adjustment path will by default lead to the opening of an excessive deficit procedure.

How will these proposals encourage public investment and reforms?

All Member States will be required to address the priorities identified in the country-specific recommendations issued in the context of the European Semester in their medium-term fiscal-structural plans.

Member States will be able to benefit from a more gradual fiscal adjustment path by putting forward a specific set of reform and investment commitments that comply with certain criteria. The adjustment period could be extended from four to up to seven years.

The set of reform and investment commitments will be endorsed by the Council after an assessment by the Commission against clear common criteria set out in the legislation. These criteria include whether the reform and investment commitments:

  • are growth-enhancing;
  • support debt sustainability; and
  • respond to common EU priorities and targets and relevant country-specific recommendations addressed to the Member State in the context of the European Semester.

The set of reform and investment commitments could include reforms agreed in the context of NextGenerationEU's Recovery and Resilience Facility.

Failure to deliver on the commitments justifying the extension would trigger enforcement actions.

Will there be special treatment for investment related to the green transition and defence?

The Commission's proposals recognise that high levels of investment and reforms will be needed to achieve a fair green and digital transition and increase defence capabilities, among other common EU priorities. At the same time, it remains crucial to ensure public debt sustainability and build fiscal buffers.

The proposals do not introduce a special treatment for any particular type of investment. This issue was discussed extensively as part of the public debate on the economic governance review and no consensus emerged.

The proposals seek to promote investment through a medium-fiscal adjustment path, which will give Member States scope to decide on their public expenditure priorities and provide incentives to commit to a set of reforms and investments responding to common and transparent EU criteria, subject to common debt sustainability safeguards.

What will change with the European Semester?

The European Semester will remain the key channel for the Commission and the Council to monitor Member States' compliance with their reform and investment commitments.

All Member States will be required to address the priorities identified in the country-specific recommendations issued in the context of the European Semester in their medium-term fiscal-structural plans. These plans will merge the current Stability and Convergence Programmes with the National Reform Programmes. They will need to take into account Member States' Recovery and Resilience Plans during the lifetime of the Recovery and Resilience Facility to ensure policy consistency.

Member States will report annually on progress with the implementation of these commitments and on the actions taken to address the country-specific recommendations. The Commission will monitor delivery of those national commitments closely.

Will the 3% of GDP deficit threshold and the 60% of GDP debt threshold be maintained?

The Treaty reference values of 3% of GDP for the deficit and 60% of GDP for public debt remain unchanged.

If the planned or observed deficit exceeds the 3% of GDP reference value, it will trigger the preparation of a Commission report based on article 126(3) of the Treaty and an Opinion by the Economic and Financial Committee based on article 126(4) of the Treaty.

The net expenditure paths in all Member States should ensure that the government deficit is brought and maintained below the 3% of GDP reference value over the medium term.

Moreover, the legislative proposals aim to ensure a realistic, gradual and sustained debt reduction path when debt is above the 60% of GDP reference value, and at the same time ensure that the framework is credible and conducive to sustainable growth.

Therefore, for Member States with a deficit above the 3% of GDP reference value or a public debt above the 60% of GDP reference value, the Commission will issue a technical trajectory that will provide guidance for Member States when designing the net expenditure path to be included in their medium-term fiscal-structural plans.

Will the excessive deficit procedure change?

The excessive deficit procedure (EDP) for government deficit breaches of the 3% of GDP reference value remains unchanged. 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 excessive deficit procedure for public debt breaches of the 60% of GDP reference value is strengthened for both activation and abrogation. It will focus on departures by Member States with public debt above 60% of GDP from the net expenditure path that the Member State has committed itself to and which was endorsed by the Council under the preventive arm of the Stability and Growth Pact. For a Member State that faces substantial public debt challenges, a deviation from the agreed net expenditure path will by default lead to the opening of an EDP.

How will the Commission's technical trajectories take account of Member States' public debt challenges?

For Member States with public debt above the 60% of GDP reference value or a government deficit above the 3% of GDP reference value, the Commission will issue technical trajectories for the net expenditure path. This technical trajectory will cover the minimum adjustment period of four years of the national medium-term fiscal-structural plan, and its possible extension by a maximum of three years. Its purpose is to provide guidance to Member States when they design their net expenditure path that will be included in their medium-term fiscal-structural plan.

The technical trajectory will be differentiated for each Member State and will take into account its public debt challenges. In particular, it will ensure that:

  • the public debt ratio is put on a plausibly downward path or stays at prudent levels;
  • the government deficit is brought and maintained below the 3% of GDP reference value;
  • the public debt ratio is lower at the end of the period covered by the plan than at the start of that period;
  • a minimum fiscal adjustment of 0.5% of GDP per year as a benchmark will have to be implemented so long as the deficit remains above 3% of GDP;
  • the fiscal effort over the horizon of the plan is at least proportional to the total effort over the entire adjustment period.

For Member States with a government deficit below the 3% of GDP reference value and public debt below the 60% of GDP reference value, the Commission will provide technical information on the structural primary balance necessary to ensure that the government deficit is maintained below the 3% of GDP reference value.

Is the debt sustainability analysis not too complex to ensure ownership and predictability?

The debt sustainability analysis (DSA) is a well-established framework, which reflects the multiple dimensions of debt sustainability challenges over the medium term. It allows for a thorough assessment of the risks to debt trajectories in case of no further policy action, taking into account different macro-financial conditions and the expected budgetary impact of population ageing.

The Commission's DSA framework is in line with the state-of-the-art approaches used in other institutions, such as the ECB and the IMF, and is transparently and thoroughly documented in the regular Commission publications. It is also regularly discussed with Member States and relies on a number of assumptions commonly agreed with them. The DSA methodology is published and presented in full transparency in the Debt Sustainability Monitor 2022.

A more simplistic approach, for instance only based on the debt level, would disregard the importance of the debt trajectory and fundamental determinants of debt sustainability risks. The use of the DSA will not complicate the fiscal surveillance framework. The DSA will be used only at the moment of the preparation of the medium-term fiscal-structural plan, in the Commission's technical fiscal trajectories, in the development of the multi-year expenditure targets by the Member State and as a basis to assess the plan put forward by the Member State.

Once the expenditure targets are endorsed by the Council, they become the sole basis for fiscal surveillance. Enforcement actions are triggered if the budget execution of a Member State deviates from the targets. Transparency and predictability will therefore be ensured over the plan's implementation horizon.

What is the role of independent fiscal institutions in the reformed framework?

Independent fiscal institutions have proven to foster fiscal prudence and strengthen the credibility of Member States' public finances. While traditionally mandated to monitor compliance with the national framework, an expansion of their role to the EU economic governance framework can enhance national ownership.

The Commission's proposal requires national independent fiscal institutions to provide an assessment of compliance of the budgetary outturns reported in the national annual progress report. The opinion of independent fiscal institutions is also required in the report on effective action.

As a stronger role requires higher safeguards for independence and resources, the amended Directive proposes some new requirements aimed at strengthening the independence of the fiscal institutions, improving access to data and enhancing technical capacities and accountability.

Are these proposals intruding on the competences of national parliaments?

The proposals will not intrude on the competences of Member States' national parliaments. On the contrary, they give more flexibility to Member States in designing their fiscal adjustment and choosing their reform and investment commitments compared with the current rules.

According to the new proposals, Member States will choose the net expenditure path, as well as the reform and investment commitments that they will include in their medium-term fiscal-structural plans. The adoption of these plans by Member States is subject to their respective national adoption procedures which determine the role and competences of the national parliaments.

The EU level does not and cannot interfere in this national process as these legislative proposals concern the coordination of Member States' economic policies.

Will Member States have to implement the current requirements pending an agreement on the reform proposals?

As long as these legislative proposals are not adopted, the current legal framework continues to apply.

At the same time, to allow for an effective bridge to the operation of the future set of EU fiscal rules and to take into account the current challenges, some elements of the Commission's proposals could be incorporated into the fiscal surveillance cycle that has started in spring 2023. In this sense, on 8 March 2023, the Commission issued guidance on fiscal policy for 2024. This guidance reflects the economic situation and the specific situation of each Member State as well as those elements of the Commission reform orientations that are consistent with the spirit of the existing legal framework.

How will the medium-term fiscal-structural plans work in practice?

Governments will first define their fiscal and structural policies for the medium term, considering the technical adjustment trajectories provided by the Commission, based on the Commission's Debt Sustainability Analysis framework. The plans should ideally be defined following an extensive and in-depth political and technical debate at national level and taking into account the advice of national independent fiscal institutions.

Before the official submission of the plans, a discussion between governments and the Commission will clarify the different aspects of the draft plans, including possible reforms and investment that governments intend to implement and that could allow for an extended and more gradual fiscal adjustment path.

The plans should last four or five years, according to the electoral cycle of a country, and will be binding once approved by the Council. New governments may ask to revise the existing plans before their expiration, especially if they have different policy priorities for reforms, investment or the budget composition. However, the new fiscal adjustment path should not lead to a lower or backloaded fiscal adjustment effort.

When will Member States need to prepare their first medium-term fiscal-structural plans?

Governments should already begin considering the fiscal and structural policies for the medium-term which will be included in their medium-term fiscal-structural plans.

The Commission aims for the legislative proposal of the new EU fiscal framework to be approved by the end of 2023. Member States and the Commission may discuss draft plans in the first quarter of 2024.

How will the fiscal-structural plans interact with the Recovery and Resilience Plans during the lifetime of the Recovery and Resilience Facility?

The fiscal and structural policies put forward in the medium-term fiscal-structural plans should be consistent with Member States' recovery and resilience plans. In particular, the structural reforms and investment envisaged in the recovery and resilience plans up to 2026 should be an integral part of the new plans.

Will the general escape clause be maintained?

The general escape clause will be maintained and activated in case of a severe economic downturn in the EU and/or the euro area.

The clause allows Member States to undertake measures to deal adequately with a crisis, while departing from the budgetary requirements that would normally apply under the EU fiscal framework.

The general escape clause will also be strengthened thanks to the involvement of the Council. It will now be the Council deciding to activate or prolong the application of the clause and setting related time limits, on a proposal by the Commission.

How will the revised fiscal framework interact with the Fiscal Compact?

The Commission's proposals incorporate into EU law the substance of the ‘Fiscal Compact', i.e., Title III of the Treaty on Stability, Coordination and Governance (TSCG) in the Economic and Monetary Union.

The package retains the Fiscal Compact's medium-term orientation as a tool to achieve budgetary discipline and growth promotion. It also includes a strengthened country-specific dimension aimed at enhancing national ownership, including by means of a stronger role for independent fiscal institutions, which draws essentially on the Fiscal Compact's common principles.

Other elements aligned with the Fiscal Compact are the analysis of expenditure net of discretionary revenue measures, temporary deviations that are only possible under exceptional circumstances and a requirement to correct deviations over a defined period of time.

As such, the reformed economic governance framework retains the fundamental objectives of budgetary discipline and debt sustainability of the TSCG.

How will the fiscal country specific recommendations for 2024 take these proposals into account?

2023 is a transitory year when the existing Stability and Growth Pact legislation still applies, but the fiscal country-specific recommendations for 2024 will already consider some elements of the proposed reform.

The recommendations will allow for more ownership of the fiscal adjustment to be implemented for national governments, where this is consistent with the current legislation.

Why are legal changes not proposed for the Macroeconomic Imbalance Procedure?

Pursuing a more forward-looking application of the Macroeconomic Imbalance Procedure (MIP) can be accommodated within the existing legal framework.

While being relatively detailed on each step in the annual cycle of surveillance, the current MIP legal framework does not specify what specific actions the Commission and the Council must take in a particular situation. The Commission and the Council can apply discretion when applying the MIP in response to evolving economic challenges and in light of accumulated experience. This includes the criteria to be followed to decide on the existence and classification of imbalances and their correction.

What will change in practice under the Macroeconomic Imbalance Procedure?

The revised economic governance rules foster a Macroeconomic Imbalance Procedure (MIP) with a stronger forward-looking approach.

A first objective is to classify imbalances in a more dynamic way and thereby increase MIP policy traction. In practice, this means that more weight will be placed on the evolution of risks, including whether risks appear to be decreasing or increasing, and more attention will be given to policies to remedy imbalances, when deciding if imbalances exist and when assessing whether imbalances have been corrected.

The second objective is to reinforce the preventive role of the MIP by considering changing challenges to macroeconomic stability in a timely manner. In practice, both the first screening for imbalances in the Alert Mechanism Report (AMR) and the assessment of whether imbalances exist in the In-Depth Reviews (IDRs) will be made more forward-looking to detect and address emerging imbalances early on. The AMR may propose more IDRs to be carried out than what has been the case in recent years, if the first screening provided by the AMR suggests that risks of imbalances may exist.

There will be a strengthened dialogue between the Commission and Member States on macroeconomic challenges. This dialogue will aim to foster greater national ownership through a better common understanding between Members States and the Commission of the challenges identified under the MIP and the policies needed to address them. That should lead to a firm commitment from Member States to include the reforms and investments to prevent or correct imbalances in their medium-term fiscal-structural plan. Thanks to a comprehensive medium-term fiscal-structural plan, MIP enforcement and fiscal surveillance will be better coordinated. The Excessive Imbalance Procedure will be opened in two cases:

  • non-implementation of policy commitments to address excessive imbalances, including those in the national medium-term fiscal-structural plan, or
  • new and major excessive imbalances calling for an adjustment of fiscal policy.

Finally, the revised rules give more visibility to the EU and euro area dimensions of imbalances. A first visible change will be the inclusion of the readings for the EU and the euro area for all MIP scoreboard indicators. Stronger EU and euro area dimensions of imbalances will highlight vulnerabilities affecting the EU and the euro area as a whole, and the respective contribution of the various Members States to those issues. This will also provide the context to check whether the challenges observed at Member State level are country-specific or shared. This approach will also help internalise spillovers and feed into the euro area recommendations.

How will the national medium-term fiscal-structural plans help correct macroeconomic imbalances?

The medium-term fiscal-structural plans will include reforms and investments needed to prevent or correct macroeconomic imbalances.

The plans will follow a technical dialogue with the Commission based on the Commission's In-Depth Review and, where relevant, the country-specific recommendations issued under the European Semester. That should result in enhanced ownership of Member States' policy agenda and lead to the implementation of comprehensive and ambitious medium-term fiscal-structural plans that include policy actions needed to address imbalances.

The effective implementation of the medium-term fiscal-structural plans will be the key element to assess the policy response by the Member States in addressing macroeconomic imbalances. The policy response to imbalances, and the role of policies in the evolution of imbalances, will be a major criterion to decide on the classification of imbalances.

If a new source of imbalances is found while a plan is already in place, a dialogue with Member States will be initiated to reach a common understanding of the measures needed to address them. In such cases, the plan in place will, as a rule, not be reopened as too many re-openings of the plans would dilute their intended medium-term focus. Instead, the policy approach to address imbalances will be communicated by the Member State through a letter to the Commission and the Council, which will then be discussed by the Council.

What changes will the Commission make to post-programme surveillance?

The Commission proposes that post-programme surveillance should focus on the following objectives:

  • Assessing the repayment capacity of Member States through considering the economic, fiscal and financial situation;
  • Monitoring the implementation of unfinished reforms that begun under the adjustment programme; and
  • Assessing whether corrective measures are needed in the context of concerns for repayment capacity or continued market access.

In light of these objectives, the intensity of post-programme surveillance should evolve over time and with the assessment of risks:

  • Initial years of surveillance would be more intense, notably to monitor the implementation of unfinished reforms agreed within the adjustment programme, with the intensity decreasing once reforms are implemented.
  • In ‘normal' times, post-programme surveillance would focus on assessing repayment capacity and could be streamlined where repayment risks are assessed to be low, also through a better integration with other surveillance tools.
  • In case the economic, fiscal or financial situation were to deteriorate, post-programme surveillance would again increase in intensity and assess whether corrective measures were needed.

This new approach does not require any legislative changes.

What are the next steps?

Time is of the essence. Swift agreement on revising the EU fiscal rules and other elements of the economic governance framework is a pressing priority at the current critical juncture for the EU economy.

The Council has called for the legislative work to be concluded in 2023. The Commission invites the European Parliament and the Council to agree on the legislative proposals presented today as quickly as possible to enable a swift and adequate response to the current challenges.

For more information

Press release: Commission proposes new economic governance rules fit for the future


Legislative proposals for a reformed EU economic governance framework

Press release: Building an economic governance framework fit for the challenges ahead (November 2022)

Press release: Commission relaunches the review of EU economic governance (October 2021)

Press release: Commission presents review of EU economic governance and launches debate on its future (February 2020)

Recovery and Resilience Facility

The European Semester

Stability and Growth Pact

Macroeconomic Imbalance Procedure