Oh, this day has been very, very hectic on both sides of the Atlantic--and it's not over just yet. As labour demonstrations across Europe protest the current political mood for tightening--Yahoo! has a nifty set of photos--the EC literally intends to lay down the law.I just wanted to post the legislative proposals the European Commission has come up with regarding economic governance to (hopefully) prevent the recurrence of future Greek or Irish episodes. As they are just proposals to, among other things, tweak the stability and growth pact, we have to see if there are some not-so-conscientious objectors out there who did not reveal themselves just yet. Remember, these proposals must now clear the European Council (the "upper house") and the European Parliament (the "lower house"). Aside from budgetary considerations, there's also new stuff being proposed that deal with "macroeconomic imbalances." Without further ado, here they are:
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EU economic governance: the Commission delivers a comprehensive package of legislative measures
The European Commission today adopted a legislative package containing the most comprehensive reinforcement of economic governance in the EU and the euro area since the launch of the Economic and Monetary Union. Broader and enhanced surveillance of fiscal policies, but also macroeconomic policies and structural reforms is sought in the light of the shortcomings of the existing legislation. New enforcement mechanisms are foreseen for non-compliant Member States. The recently agreed "European semester" will integrate all revised and new surveillance processes into a comprehensive and effective economic policy framework.
The proposals submitted today are the concrete translation of the recent Commission communications on economic governance dated 12 May and 30 June (see IP/10/561 and IP/10/859) into legislative proposals. Following intense preparatory work and consultations with a broad range of stakeholders, including the Task Force on the Economic Governance chaired by President of the European Council Herman Van Rompuy, these policy proposals underline the Commission's strong will to process diligently with the necessary reforms.
All these reforms are compatible with the existing Treaty of Lisbon and should ensure that the EU and the euro area benefit from more effective economic policy coordination. That should give the EU and the euro area the necessary capacity and strength to conduct sound economic policies, thereby contributing to more sustainable growth and jobs, in line with the Europe 2020 strategy.
The legislative package is made up of six pieces of legislation: four proposals deal with fiscal issues, including a wide-ranging reform of the Stability and Growth Pact (SGP), while two new regulations aims at detecting and addressing effectively emerging macroeconomic imbalances within the EU and the euro area.
For Member States of the euro area, changes will give teeth to enforcement mechanism and limit discretion in the application of sanctions. In other words, the SGP will become more "rules based" and sanctions will be the normal consequence to expect for countries in breach of their commitments.
1) A Regulation amending the legislative underpinning of the preventive part of the Stability and Growth Pact (Regulation 1466/97):
The preventive part of the SGP is meant to ensure that EU Member States follow prudent fiscal policies in good times to build up the necessary buffer for bad times. To break off with past complacency in good economic times, the monitoring of public finances will be based on the new concept of prudent fiscal policy-making that should ensure convergence towards the Medium-Term Objective . The Commission may issue a warning in case of significant deviation from prudent fiscal policy for the euro area Member States.
2) A Regulation amending the legislative underpinning of the corrective part of the Stability and Growth Pact (Regulation 1467/97):
The corrective part of the SGP, is meant to avoid gross errors in budgetary policies. The regulation is amended so that debt developments are followed more closely and put on an equal footing with deficit developments as regards decisions linked to the excessive deficit procedure. Member States whose debt exceed 60% of GDP should take steps to reduce it at a satisfactory pace, defined as a reduction of 1/20th of the difference with the 60% threshold over the last three years.
3) A Regulation on the effective enforcement of budgetary surveillance in the euro area:
Changes in both the preventive and corrective part of the SGP are backed up by a new set of gradual financial sanctions for euro-area Member States. As to the preventive part, an interest-bearing deposit should be the consequence of significant deviations from prudent fiscal policy making. In the corrective part, a non-interest bearing deposit amounting to 0.2% of GDP would apply upon a decision to place a country in excessive deficit. This would be converted into a fine in the event of non-compliance with the recommendation to correct the excessive deficit.
To ensure enforcement, a "reverse voting mechanism" is envisaged when imposing these sanctions: this means that the Commission's proposal for a sanction will be considered adopted unless the Council turns it down by qualified majority. Interests earned on deposits and fines will be distributed among euro-area Member States neither in excessive deficit nor in excessive imbalance.
The changes are devised so that they should facilitate the eventual move to a system of enforcement linked to the EU budget as foreseen in the Commission communication of 30 June.
4) A New Directive on requirements for the budgetary framework of the Member States:
Since fiscal policy-making is decentralised, it is essential that the objectives of the SGP are reflected in the national budgetary frameworks, i.e. the set of elements that form the basis of national fiscal governance (accounting systems, statistics, forecasting practices, fiscal rules, budgetary procedures and fiscal relations with other entities such as local or regional authorities). The directive sets out minimum requirements to be followed by Member States.
5) 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. It comprises a regular assessment of the risks of imbalances based on a scoreboard composed of economic indicators. On this basis, the Commission may launch in-depth reviews for Member States at risk that will identify the underlying problems. For Member States with severe imbalances or imbalances that put at risk the functioning of EMU, the Council may adopt recommendations and open an "excessive imbalance procedure (EIP)".
A Member State under EIP would have to present a corrective action plan that will be vetted by the Council, which will set deadline for corrective action. Repeated failure to take corrective action will expose the euro area Member State concerned to sanctions (see next point).
6) A Regulation on enforcement measures to correct excessive macroeconomic imbalances in the euro area:
Like in the fiscal field, if a euro-area Member State repeatedly fails to act on Council EIP recommendations to address excessive imbalances, it will have to pay a yearly fine equal to 0.1% of its GDP. The fine can only be stopped by a qualified majority vote ("reverse voting", see above), with only euro-area Member States voting.
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What's interesting to me is that reverse majority voting made it as part of the proposals. That is, Germany and the ECB (via Trichet) got their wish that sanctions would automatically kick in and need to be overridden via qualified majority voting instead of the present procedure where a similar majority would need to vote for sanctions. We'll see how chronic offenders react to such legislation; let's just say they likely won't go down without a fight.
Also interesting are the last two bits of legislation concerning macroeconomic imbalances (read: gaping current account deficits) aside from the ones on the budget / stability and growth pact. Again, there is talk of a mechanism for dealing with these imbalances but no hard and fast thresholds alike those for fiscal deficits. Talk about asking for a political quarrel. If you will recall, the likes of Spain and Greece experienced ballooning external imbalances prior to the current phase of readjustment, so that's probably what they had in mind.
