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Presentation of a Communication providing new guidance on the Stability and Growth Pact

Vice-President Dombrovskis

Good afternoon.

Today, the Commission is presenting detailed guidance on making the best use of the flexibility within the rules of the Stability and Growth Pact.

We are delivering on the commitment made by President Juncker in his Political Guidelines to provide such guidance within the first three months of the new Commission’s mandate.

We are clarifying how we will implement the existing rules of the Pact: we are not changing or replacing those rules.

Credible rules and respect for them are essential for the proper functioning of the Economic and Monetary Union. The Pact has been strengthened over the years in response to financial and economic developments, not least in 2011 following the crisis. This has been instrumental in restoring trust and confidence in our public finances.

The Stability and Growth Pact is the cornerstone of European economic governance. We remain fully committed to ensuring that the rules and the way in which they are implemented remain credible and effective in delivering sound fiscal policies.

But these rules also need to be well understood. Today’s clarifications are part of our continued efforts to reinforce the transparency and predictability of the often complex implementing mechanisms.

Today’s guidance is also part of our overall strategy to improve the way our Economic and Monetary Union functions. This includes efforts to streamline the European Semester of economic policy coordination as we announced in the Annual Growth Survey last November. Our reflections on further deepening the EMU will be elaborated in the coming month.

Above all, we believe that using the flexibility in the existing rules of the Pact makes economic sense.

The recovery in Europe is still fragile. While all 28 EU economies are expected to grow this year, this growth will be too slow to address decisively the social consequences of the crisis, which many Europeans are still feeling.

Last November, we presented our Annual Growth Survey emphasised the need to work hard on three fronts to cement the recovery: increasing public and private investment; carrying out ambitious structural reforms to increase our competitiveness; and managing our public finances in a responsible way.

Today’s guidance will support our work to achieve these objectives. It has three key aims:

  • To encourage effective implementation of structural reforms;
  • To promote investment, also in the context of the new European Fund for Strategic Investments (EFSI)
  • And to take better account of the economic cycle in individual Member States.

We need growth as much as we need sound and sustainable public finances. We can achieve both. There is no trade-off.

While we will continue to ensure that all EU Member States are treated equally, this does not mean that all of them will benefit from the same flexibility.

The Pact is very clear on this.

First of all, the rules of the Pact offer more flexibility for countries that are not in the Excessive Deficit Procedure. In order words, those Member States that pursue prudent fiscal policies can benefit from greater flexibility.

Second, the rules of the Pact require Member States to take action on investment and structural reform.

Flexibility cannot be granted if reforms are not happening. We will monitor progress closely in the context of the European Semester or, where applicable, under the Excessive Imbalances Procedure. If reforms are not implemented, flexibility will have to be withdrawn.

Third, the rules of the Pact require that Member States save in good economic times to gain latitude for additional expenses during bad times. We will therefore require a greater fiscal effort from Member States in good economic times, while in difficult times the effort can be more moderate. Pierre will elaborate on this in a few minutes.

Now, as regards the structural reforms clause: this is an existing clause in the Stability and Growth Pact. So far this clause has only been applied to systematic pension reforms while introducing a compulsory fully funded pension scheme or a so-called second pillar pension scheme.

From now on, for countries that are not in Excessive Deficit Procedure, we will take into account the implementation of all major structural reforms with positive and verifiable long-term budgetary effects, including a positive impact on the potential growth, and not only pension reforms as in the past.

Member States will be asked to present a structural reform plan adopted by Government and/or Parliament according to the relevant national procedures with well specified measures and credible timeline well-specified measures and credible timelines for their adoption and implementation. For Member States in the Excessive Imbalances Procedure the Corrective Action Plan referred to in the procedure will suffice.

Member States will also have to provide all the necessary information on the expected budgetary impact of such reforms and their effects on the long-term sustainability of public finances. The Commission will assess on that basis the eligibility of the reforms for the application of the clause.

Member States will be allowed to make a lower fiscal effort when implementing the reforms and to compensate for this with a greater effort later. This greater effort later should be easier since the implemented reforms are expected to translate into positive growth and budgetary effects.

In technical terms we are talking here about a temporary deviation from the medium-term budgetary objective or the adjustment path towards it.

As set out in the Pact, the clause can be used only for those Member States that keep their deficit below 3% of GDP, ensure an appropriate safety margin and achieve their medium-term budgetary objective by the end of the four-year horizon of their Stability or Convergence Programme, that is to say their medium-term fiscal plan presented to the Commission each spring.

A specific application of this clause is the so-called “investment clause”. But before Pierre explains this to you, let me briefly touch upon how the structural reforms are treated under the corrective arm of the Pact.

First, if the Member State does not implement structural reforms, for example in response to the Country-Specific Recommendations, we treat it as an aggravating factor when considering whether to propose the opening of an Excessive Deficit Procedure.

Second, the correction of the deficit is expected within one year as a rule. But a multiannual path of adjustment can be set when taking into account certain relevant factors, which include the implementation of structural reforms. Also in this context, for reforms to be taken into account the Member State needs to present a detailed structural reform plan with well-specified measures and a credible timeline for their adoption and implementation.

To sum up, we will use the flexibility in the Pact to support the implementation of structural reforms and investment. Member States will be allowed to adjust their fiscal efforts provided they really implement measures that improve potential growth and the long-term sustainability of public finances.

Only through effective structural reforms, investment and fiscal responsibility can we lift our economies and get more people back into work.

With today’s initiatives the Commission is delivering on its commitments. The implementation now lies with the Member States. And that is where our results will be judged.

I trust that everybody will do their job. We owe this to our citizens.

Now I give the floor to Pierre who will explain the investment clause and adjustment of fiscal targets in response to country-specific cyclical conditions.

Commissioner Moscovici

Merci Valdis.

Je vais maintenant traiter de la façon dont nous considérons l’investissement au regard des règles du pacte et de la flexibilité.

L’investissement a chuté de près de 20% depuis 10 ans en Europe, parfois plus dans certains Etats membres. Nous avons décidé de mettre la priorité sur le soutien à l’investissement dans le cadre des règles du Pacte. C’est pour cela qu’il est essentiel de nous assurer que ces deux priorités – la consolidation budgétaire, priorité maintenue, et l’investissement, priorité nouvelle qui peuvent parfois perçues comme contradictoires, s’appliquent de manière cohérente.

La Commission avait déjà indiqué en novembre dernier qu’elle prendrait une position favorable dans le cadre du Pacte s’agissant des contributions nationales directes au nouveau Fonds européen d’investissement stratégique. Aujourd’hui, nous mettons en application cet engagement. C’est un message clair et positif à la fois aux Etats membres et aux investisseurs.

Nous disons très clairement que les contributions nationales à l’EFSI ne seront pas comptabilisées quand nous fixerons l’ajustement budgétaire sous les bras préventif et correctif du Pacte, autrement dit pour tous les Etats-membres.

En clair, cela signifie que si la valeur de référence de 3% est dépassée du fait de la contribution directe à l’EFSI, alors la Commission ne lancerait pas dans cette hypothèse, une procédure de déficit excessif, à condition bien sûr que cette déviation soit limitée et temporaire.

De la même manière quand nous examinerons le critère de la dette, les contributions directes au fonds ne seront pas davantage comptabilisées.

Cette interprétation de la Commission se veut une incitation puissante pour encourager les Etats membres à investir dans le nouveau Fonds et ainsi soutenir l’investissement et la relance économique. Autrement dit, les Etats-membres ne pourront pas utiliser l’excuse des règles trop contraignantes du Pacte pour ne pas investir. C’est logique car nous souhaitons que le fonds soit abondé, ce qui permet d’avoir plus d’investissement, que nous ne dissuadions personne d’y contribuer. Au contraire, l’implication des Etats-membres sera facilitée.

We are also providing new guidance today that will make the so-called “investment clause” more accessible, and thus a more meaningful and useful tool to support growth, while remaining prudent and comfortably within the rules of the Pact.

The Commission provided its first guidance in 2013 on how the Pact can support public investments with positive, direct and verifiable long-term effects on growth and on the sustainability of public finances. Today we are specifying and formalising that guidance.

Member States, which are in the preventive arm of the Pact can deviate temporarily from their medium-term objective or from the agreed fiscal adjustment path towards it, in order to accommodate investment, under five conditions:

  1. Their GDP growth must be negative or their GDP must be at least 1.5% below its potential. The previous requirement that the EU as a whole needed to be in this situation has been lifted.
  2. The deviation must not lead to a breach of the 3% deficit reference value and an appropriate safety margin must be preserved. Again we are talking about the preventive arm of the Pact.
  3. Overall investment levels must be effectively increased as a result of the use of the clause. This clause is meant for investing nothing else.
  4. The investment must take the form of national co-financing of projects funded by the EU under the Structural and Cohesion policy (including projects co-funded under the Youth Employment Initiative), Trans-European Networks and the Connecting Europe Facility, and, last but not least, the co-financing of projects also part-funded by the European Fund for Strategic Investments.
  5. Finally, the deviation must be compensated within the four-year timeframe of the Member State’s Stability or Convergence Programmes.

Lastly, the Commission will from now on use a matrix to ensure that the fiscal adjustment expected from countries under the preventive arm more closely reflects current cyclical economic conditions.

Adjustment requirements under the new matrix are symmetrical, meaning that Member States make a larger fiscal effort during better times and a smaller effort during difficult economic times.

The five categories, ranging from “exceptionally bad times” to “good times” are set out in the Communication we have just adopted, along with the required fiscal adjustment in each case. Again the adjustment is higher when the situation is better and the adjustment is smaller when the situation is worse.

Ladies and Gentlemen,

The Stability and Growth Pact remains the essential foundation of European economic governance.

As Valdis has said, we are not changing our commonly agreed rules.

Yet while fiscal responsibility is a necessary condition for jobs and growth, it is not a sufficient one.

We also need to pursue structural reforms and step up investment. And this is what this Communication and this Commission stand for. The smarter application of the Stability and Growth Pact that we are announcing today will help us to make more decisive progress on all three fronts: investment, structural reforms, fiscal responsibility.

Importantly, it will also help to develop a more growth-friendly fiscal stance in the euro area as a whole. It is a necessary support to growth.

Because the Commission is not proposing any changes to the existing rules, no legislative steps are needed and the Commission will apply the new guidance immediately.

Nonetheless, we will provide Member States and the Council with any necessary explanations ahead of forthcoming milestones, notably the presentation of the Stability and Convergence Programmes and the National Reform Programmes that will be presented in the spring.

We will also involve stakeholders at all levels to define further steps towards the deepening of our Economic and Monetary Union and pooled sovereignty in economic governance.

Thank you for your attention.

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