What is the Commission adopting today?
The Commission takes the next step in the 2015 European Semester cycle by presenting today a series of country-specific documents setting out its analysis and updating its guidance where necessary.
- 27 country reports and one euro area report (staff working documents) analysing the economic policies of each Member State and the euro area as a whole. For 16 Member States identified in the Alert Mechanism Report last November, the results of in-depth reviews related to macroeconomic imbalances are integrated in the reports.
- New steps under the Macroeconomic Imbalances Procedure (MIP) and the Stability and Growth Pact (SGP) for some Member States.
- A “Chapeau” Communication summarising the main findings of the package.
The package follows the adoption of the Annual Growth Survey for 2015 (AGS) last November and sets out the analytical basis for the adoption of country-specific recommendations (CSRs) in May. As announced in its AGS, it is the first time the Commission presents the economic surveillance package in this format and publishes country reports so early in the Semester cycle. In the past the reports – which were then called Staff Working Documents – were presented together with the Country-Specific Recommendations in May/June. (Only the in-depth reviews which are now embedded in the Country Reports were published in March.)
Advancing the date of publication by three months allows more time for scrutinising the analysis and for discussions on EU and Member States level. This should also help to enhance national discussion and ownership of the European Semester process.
How does this fit in within the European Semester?
In the AGS, the Commission presented a new jobs and growth agenda based on three pillars:
- a coordinated boost to investment;
- a renewed commitment to structural reforms;
- the pursuit of fiscal responsibility, taking into account available fiscal space and growth objectives.
The package adopted today constitutes the first milestone in the European Semester process after the adoption of the last Annual Growth Survey. This package includes, for all Member States (except for Greece) and the euro area, a Country Report assessing the economic policies. For the sixteen Member States concerned, these also include the in-depth reviews that are warranted under the Macroeconomic Imbalance Procedure. On the basis of this analysis, the Commission proposes to update the status of a number of Member States under the Macroeconomic Imbalance Procedure. The Country Reports also assess how the Member States are addressing the problems identified in last year’s Country Specific Recommendations for 2014-2015.
Moreover, the package also takes stock of the fiscal situation of the Member States under the Stability and Growth Pact, based on the Commission’s latest economic forecasts. In the cases of France, Italy and Belgium, in particular, the Commission had announced last November, that it would “examine by early March 2015 its position vis-à-vis their obligations under the SGP in the light of the finalisation of the budget laws for 2015 and the expected specification of their structural reform programmes.”
Today’s package paves the way for a new set of Country Specific Recommendations (CSRs) in May. Member States are expected to take into account the main policy implications arising from the assessment when drafting their National Reform Programmes and their Stability or Convergence Programmes (to be presented by 15 April). The CSRs will take into account not only the analysis in the Country Reports, but also policy actions and plans adopted in the meantime.
ACTIONS TAKEN IN THE FRAMEWORK OF STABILITY AND GROWH PACT (SGP)
What are the main features of the SGP?
The SGP is a rules-based process established in the Treaty on the Functioning of the European Union (TFEU, Article 126) to ensure that Member States correct gross fiscal policy errors. There are two key reference values, which, when breached, constitute criteria on the basis of which the opening of an Excessive Deficit Procedure (EDP) can be warranted: one for the general government deficit (3% of Gross Domestic Product) and one for gross government debt (60% of GDP). To ensure the correction of excessive deficits, Member States in EDP are subject to recommendations that are to be respected by a certain deadline.
The various steps within the EDP are listed in the Treaty and specified further in the SGP legislation (Regulation (EC) 1467/97). While the EDP corresponds to the “corrective arm” of the SGP, it is complemented by a “preventive arm” (defined in Regulation (EC) 1466/97), which comprises procedures to promote surveillance and coordination of economic policies and ensure progress towards fiscal sustainability.
In January 2015, the Commission issued new guidance on the flexibility which applies within the existing rules of the Stability and Growth Pact.
How does today’s package link with the European Commission’s opinions on the draft budgetary plans?
On 28 November 2014, the Commission published its assessment of the draft budgetary plans presented by euro area Member States. For seven countries (Belgium, Spain, France, Italy, Malta, Austria and Portugal) the Commission’s opinions pointed to a risk of non-compliance with the requirements of the Pact.
The Commission made clear that in some cases, this had implications for possible steps under the Excessive Deficit Procedure and that it would examine the situation of France, Italy and Belgium, in particular, within a few months. This assessment was based on the Commission 2015 winter forecast, in the light of the finalisation of the budget laws for 2015 and the specification of the structural reform programmes announced by the national authorities in their letters to the Commission on 21 November. Exchanges have taken place with these countries in the meantime.What is the Commission adopting?
1) Reports on the fiscal situation of some countries under article 126(3) TFEU
The Commission will adopt reports on the fiscal situation of Belgium, Italy and Finland under Article 126(3) TFEU, providing an overall assessment of whether the launch of an EDP is warranted at this stage.
2) A recommendation for a Council recommendation concerning France to correct its deficit by 2017.
What is a report in accordance with Article 126(3)?
The first step of a possible EDP usually follows the identification by the Commission of prima facie non-compliance with the deficit and/or debt criterion. A Member State is prima facie non-compliant with the deficit requirement if its general government deficit is above 3% of GDP. As regards debt, the criterion for prima facie non-compliance is a general government debt greater than 60% of GDP and not declining at a satisfactory pace. A satisfactory pace is defined as a reduction of the gap between a country’s debt ratio and the 60% of GDP reference value of the Treaty by 1/20th annually on average over three years. In these cases, the Commission provides a report under Article 126(3) TFEU which considers all the relevant factors and on that basis concludes whether or not the deficit and/or the debt criterion are complied with.
What exactly is the Commission recommending for France?
The new recommendation includes strict milestones for the fiscal adjustment path that will need to be respected and will be assessed regularly, starting with a first assessment in May 2015.
France should also implement ambitious structural reforms. First elements of a structural reform plan were adopted and made public by the French Government on 18 February 2015.
STEPS UNDER THE MACROECONOMIC IMBALANCE PROCEDURE (MIP)
For which countries is the Commission publishing In-Depth Reviews?
In its Alert Mechanism Report 2015, published on 28 November 2014 (MEMO/14/2231), the Commission announced In-Depth Reviews (IDRs) of the situation of 16 Member States: Belgium, Bulgaria, Germany, Ireland, Spain, France, Croatia, Italy, Hungary, the Netherlands, Portugal, Slovenia, Finland, Sweden, Romania and the United Kingdom.
In the Alert Mechanism Report, the Commission made an assessment based on an economic reading of scoreboard indicators linked to developments in competitiveness, indebtedness, asset prices, adjustment and inter-linkages with the financial sector. Moreover, the Commission takes into account a set of auxiliary indicators, inter alia relating to social developments.
What is the purpose of the In-Depth Reviews?
The purpose of the In-Depth Reviews (IDRs) is to assess whether imbalances and excessive imbalances exist in the Member States identified in the Alert Mechanism Report. The IDRs discuss issues such as the evolution of Member States’ external accounts, savings and investment balances, effective exchange rates, export market shares, cost- and non-cost competitiveness, productivity, private and public debt, housing prices, credit flows, financial systems, unemployment and other variables. The drivers of the imbalances and the risks they raise are different from one economy to another. The IDRs also take account of the euro area dimension of macroeconomic imbalances and possible policy challenges for the euro area as a whole.
Since last November, the services of the Commission have been in close contact with experts from national administrations to review the latest evidence. The IDRs are published as a part of the respective Country Reports. As outlined above, it is the first time IDRs are published together with the analysis underpinning the EU Semester Country-Specific Recommendations in a single, analytical Country Report.
What are the overall findings of the In-Depth Reviews?
In the aftermath of the economic and financial crisis, a number of macro-economic imbalances are being corrected. There are still high risks in certain Member States. In particular, large external liabilities make debtor countries vulnerable, and adjustments of the current account are not always sufficient to stabilise the stock of external debt. Although losses in price competitiveness compared to pre-crisis levels have been partly corrected in a number of debtor countries, consolidating export growth remains an urgent priority to strengthen potential growth. At the same time, current account surpluses remain high in some other countries; these reflect persistently weak domestic demand, which can be seen notably in low levels of private and public sector investment.
Several countries are vulnerable because of high levels of private and public debt. Debt deleveraging reduces growth while it is happening and low inflation makes it harder to bring down the debt-to-GDP ratio. Unemployment, in particular youth and long term unemployment, remains high and together with rising poverty levels in several countries has implied a costly adjustment and very negative social developments. This also has a negative effect on growth prospects. In countries with high deleveraging needs, structural reforms are needed to enhance growth potential.
What needs to be done to address these challenges?
In the euro area in particular, low inflation and low demand risk are holding back the recovery. What happens in the largest economies of the euro area will have an important impact on all parts of the EU. In particular, France and Italy need to address growth bottlenecks by stepping up structural reforms. At the same time, Germany has a largely positive saving balance which could support much needed investment in infrastructure modernisation and development. An appropriate mix of policies is thus needed in the euro area to boost confidence, contribute to rebalancing and put its recovery on a more stable footing. Such a mix would also support the monetary policy action of the ECB and help to restore price stability in a very low inflation environment.
How is “macroeconomic imbalance” defined?
Regulation No 1176/2011 on the prevention and correction of macroeconomic imbalances defines a macroeconomic imbalance as ‘any trend giving rise to macroeconomic developments which are adversely affecting, or have the potential to adversely affect, the proper functioning of the economy of a Member State or of the Economic and Monetary Union, or of the Union as a whole’, while excessive imbalances are ‘severe imbalances that jeopardise or risk jeopardising the proper functioning of the Economic and Monetary Union’.
In general, any deviation from a desirable level can be considered as an imbalance. However, not all imbalances are detrimental or require policy interventions as they may be part of the economy’s dynamic adjustment. Imbalances that require close monitoring and possible policy intervention relate to developments that could significantly impede the proper functioning of the economy of a Member State, the euro area or the EU. In practice, these are imbalances that are either at dangerous levels (e.g. high debts) or reflect unsustainable dynamics (e.g. excessive house price or credit increases) that threaten to result in abrupt and large, and hence damaging, adjustments. For example, having a large and persistent current account deficit is considered an imbalance if it runs the risk of leading to a ‘sudden stop’ and ensuing large welfare costs.
What is the outcome of the In-Depth-Reviews for individual countries? And what is the follow up?
The main findings can be summarised as follows:
- Croatia, Bulgaria, France, Italy and Portugal are considered to be in a situation of excessive imbalance requiring decisive policy action and specific monitoring, including regular reviews of progress by all Member States in the relevant committees at EU level:
o For Croatia and France, risks of imbalances have significantly increased. For France, this represents a stepping-up of the status under the procedure compared to last year. The Commission will consider in May, taking into account the level of ambition of National Reform Programmes and other commitments presented by that date whether to recommend to the Council to launch an Excessive Imbalance Procedure.
o For Italy, imbalances remain excessive, requiring decisive policy and specific monitoring of the ongoing and planned reforms.
o For Bulgaria and Portugal the IDRs also point to excessive imbalances. In light of this situation, the Commission will carry out specific monitoring of the policies recommended by the Council.
- Ireland, Spain and Sloveniaare considered to be in a situation of imbalance requiring decisive policy action, with specific monitoring:
o For Ireland and Spain, this monitoring will rely on post-programme surveillance.
o For Slovenia, the Commission considers that a significant adjustment has taken place over the last year; while this is the basis to conclude that imbalances are no longer excessive, the Commission stresses that important risks are still present.
- Germany and Hungary are considered to be in a situation of imbalance requiring decisive policy action and monitoring. For Germany, the Commission considers that there is no tangible improvement in the trends of imbalances identified last time and that the policy response has been insufficient so far. For Hungary, the Commission considers that there is no tangible improvement.
- Belgium, the Netherlands, Romania, Finland, Sweden and the United Kingdomare considered to be in a situation of imbalance requiring policy action and monitoring.
The results of the IDRs will be taken into account in the next steps of the European Semester of economic policy coordination.
What does specific monitoring mean?
Under the MIP, the Commission carries out ‘specific monitoring’ on implementation of reforms. As part of this ‘specific monitoring,’ the Commission conducts additional technical missions to the Member States and reports to the Council (via the “Ecofin filière” committees). There are typically two such exercises per year, one in the autumn and one in the winter. The reports are made public after the Council process is over.
It should be noted that in cases were excessive imbalances were found to exist, the Commission can at any time propose to open an Excessive Imbalance Procedure for the countries concerned, without having to carry out an in-depth review again. The findings of the specific monitoring would underpin such a decision.
What are the next steps?
In the case of France, the Commission will issue shortly a Recommendation for a Council Recommendation setting a new deadline to correct its excessive deficit. This recommendation is set to be adopted at the next ECOFIN Council meeting.
In the case of Italy and Belgium, reports will be submitted to Economic and Financial Committee which has 2 weeks following the adoption by the Commission to formulate an opinion under Article 126(4).
The Council is also expected to discuss and adopt conclusions on the Commission’s findings emerging from the In-Depth Reviews (IDR) carried out into 16 Member States’ economies.
In March, the Commission will organise another round of bilateral meetings with the Member States to provide an opportunity to discuss the Country Reports.
By mid-April, the Member States are expected to present their National Reform Programmes and their Stability or Convergence Programmes.
Based on all these sources, the Commission will present a new, focussed set of Country Specific Recommendations for 2015-2016 in May, targeting the most important priorities to be tackled.
For further information:
Press release: College decisions
The Communication and country reports
Macroeconomic Imbalance Procedure
Press release: Alert Mechanism Reports
Memo: Alert Mechanism Report