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European Economic Governance

E-learning course [free for personal use, licensing available]
by

Andras Baneth

on 16 June 2014

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Transcript of European Economic Governance

EUROPEAN ECONOMIC
GOVERNANCE

Chapter 1 -
Introduction

integrated system of
rules and measures

=
=
better coordination of 28 EU's national economic policies
2008
global financial crisis
Eurozone debt crisis
EUROPEAN ECONOMIC
GOVERNANCE
Economic and
Monetary
Union
1993
Maastricht Treaty
Over 20 years
1997
Stability and Growth Pact
Before any EU Member State can adopt
the euro
as their currency
framework
public finances
Maastricht convergence criteria
These were designed to be a prerequisite to the euro’s introduction
Stability and Growth Pact
the annual budget deficit of a country using the Euro
should not exceed

3% of GDP
the level of state debt should not be more than
60% of GDP
Stability and Growth Pact
1/3 Eurozone members
violated
the budget deficit and state debt ceiling rules
FAILED
cornerstone
1999
2008
2002
€ intro
coins and banknotes
crisis
Such breaches greatly eroded trust
Aggregate budget deficit Euro Area, % GDP
Public indebtedness, Euro Area, % of GDP
Financial crisis in Europe =
sovereign (Member State-related) debt crisis
The
Stability and Growth Pact
had rules in place that made bailouts legally impossible
Germany, the Netherlands and others, had to help the periphery
, otherwise Greece would have gone bankrupt
crisis
Eurozone risked
falling apart.
Greece
Ireland
Portugal
several dozens of
billions of euros
these countries had to carry out austerity programs
EU faced
severe competitiveness problems
vis-a-vis other parts of the world economy -
even before the financial crisis
EU
Lisbon strategy
make the EU the most competitive region of the world
lack of enforcement powers
poor performance of Member States
%
low interest rate
North
South
Ireland
Spain
Serious problems in the public finances of some countries, above all in Greece
EUR
USD
JPY
borrowing costs
Greece
Ireland
Spain
Germany
France
The Netherlands
EUROZONE
Actions were needed
SHORT
LONG
help!
not enough lifeboats
on board either
monetary union was not supported by a common economic policy
EU
EUROPEAN ECONOMIC
GOVERNANCE
}
Ultimate
Target
How would this objective
be reached?
?
?
?
?
?
?
Wider
Deeper
Better
Integrated
Wider
, because
reform of economic policy coordination comprises
economic policy
anomalies
Stability and Growth Pact
government deficit
breach
public debt limits
breach
macroeconomic factors
current account deficit or Eurocountry level of competitiveness
Deeper
, because
focuses not only on a snapshot,
the static budget deficit figures,
but on the sustainability of debt

and reforms that enhance growth.
Better integrated
, as instead of avoiding fragmented approaches, it systematizes economic policy coordination
Fiscal policy
Financial
markets
Growth and policy integration
Competitiveness
Stronger SGP
(6 pack, 2 pack),
fiscal compact
Banking Union
European semester &
EU2020
strategy
Macroeconomic Imbalances Procedure
(6 pack)
Now we are going to present
the measures
,
rules
and
means

of the EU’s economic governance in detail,
as it stands in January 2014.

Sixpack
After the escalation of the Eurozone sovereign debt crisis in 2009, it became obvious that the fiscal regulation framework that governed the Eurozone needed to be improved.
The European Commission therefore drafted and put forward a series of measures to address various aspects of these shortcomings, which had
six key elements
in it.

legislative measures to reform
the Stability and Growth Pact
Sixpack
macroeconomic
surveillance improvement
of the Member States
5
regulations, automatically included
1
directive that needs to be ‘transposed’ into national laws
+
Sixpack
entered into force in December 2011
EU Member States
special rules
for Eurozone members
+
The reform measures that will be listed shortly have been regarded as essential steps towards the sharing of standardized fiscal rules among Member States and,
towards a
new EU Treaty
that would enable
a
real fiscal union
.
in the longer term,
Sixpack
strengthening
fiscal regulation
Stability and
Growth Pact
also covers macroeconomic surveillance
beyond fiscal discipline
Macroeconomic
Imbalance Procedure (MIP)
it has both a preventive and a corrective arm.
The first serves as a
surveillance tool,
while the second
prescribes means for sanctioning
.
First law:

strengthening the preventive arm of
the Stability and Growth Pact
budget deficit is
above 3% of GDP
additional compliance
from Member States
medium-term,
3yrs
deficit target
public spending
must not
rise
faster than
medium-term
potential GDP growth
expenditure
side of the state budget must be scrutinized
where state debt is
above 60% of GDP
should decrease their
structural budget deficit
with 0.5%
EU
disregarding
one-off measures
and
seasonal fluctuations
countries
Second law:

strengthening the corrective arm of
the Stability and Growth Pact
strengthens the launching of the
Excessive Deficit Procedure (EDP)
EDP
if
budget
deficit
3% GDP
>
before
after
CRISIS
reference value
for state debt
several
Member
States
60%
GDP
>
EDP
may be launched
debt limit
becomes
operational
60%
GDP
debt
ratio
60%
GDP
budget
deficit
3% GDP
but
or
Third law:

strengthening
the
fiscal framework
requires that
Member States
are committed to a
sustainable and disciplined fiscal policy
provides guidelines
for transparent budgetary planning and implementation
EU
has limited powers
when it comes to overseeing Member States’ fiscal policies, but due to the crisis,
this element became essential
to secure the health of European economies
Fourth law:

preventing and correct emerging
macroeconomic imbalances
excessive imbalances procedure (EIP)
financial market developments
evolution of private sector credit flow
unemployment rate
current account and net investment positions
exchange rates and export market shares

yearly report to detect imbalances that go beyond budgetary discipline
Scoreboard containing 11 economic indicators
The report identifies Member States that are affected by real or potential imbalances.
recommends corrective action
If the excessive imbalance is diagnosed in a Member State economy,
monitors its implementation
November 2013
in-depth review of
the German economy
German current
account surplus,
6.5%
exceeding the limit in the
past 3yrs
According to the new rules
GDP
6%
deficit
surplus
4%
current account deficit
Not only the
deficits
but also the
surpluse
s are closely observed by the new regulations
as both can pose a risk
to the well-functioning of the Eurozone.
Spain
Slovenia
Excessive imbalances
Germany
Fifth law:

enforcing
budgetary surveillance
This regulation sanctions non-compliance with the Stability and Growth Pact.
EDP
operative
non-compliant
Member State
harsh sanction
can be imposed
obliged to deposit
0.2%
of
its
GDP
unless
it takes the required measures to reduce its deficit
if non-compliance continues
deposit
can be turned into
fully-fledged fine
up to
0.5%

of its
GDP
fines paid to
New voting system for sanctions
reverse qualified majority voting
the proposal for sanctions
is
to be regarded as approved
unless a qualified majority of Member States
overturns or vetoes it
(highly unlikely scenario)
=
more effective sanctioning
improves fiscal discipline
Sixth law:

enforcing the correction of
macroeconomic imbalances
in the Eurozone
Foresees sanctions for Member States sharing the euro as their currency that
have not followed
the recommendations for tackling their
excessive macroeconomic imbalance
, that is, the indicators beyond the budget deficit targets.
this fine is deemed approved
Eurozone
Member State
penalty
0.1%
of
its
GDP
fail to take corrective action
based on these recommendations
reverse qualified majority voting

is applicable
if Portugal does not tackle its excessive macroeconomic imbalance
penalty
0.1%
of
its
GDP
this decision is approved unless more than 2/3 of the Member States vote against it
Twopack
came into force on 30 May, 2013
Chapter 2 -
Sixpack and Twopack

Designed to
increase fiscal discipline
of the Euro area members.

applies
only to those countries
that share the common currency, the euro

Twopack
Stability and Growth
Pact
do not add further requirements to
budget policy
monitoring
strengthen
strengthen
Twopack
Eurozone
Member States
draft
budget
but
does provide its expert opinion
on these drafts
no veto rights
Twopack
The
first regulation
is to be respected by
all Member States
sharing the single currency
The second
introduces extra monitoring measures for
countries under the

EDP
OR
for countries involved in the financial assistance of
Twopack
complements the reforms
already made by the
Sixpack
.
First law

for Eurozone countries that
have no EDP
Eurozone
Member States
draft budget
for next year
submit
until 15 Octobe
r
not to start debate
on it in the
national parliament
before
receiving
the Commission’s opinion.
Eurozone
Member States
can “address concerns”
if
serious non-compliance with
the
Stability and Growth Pact
cannot veto the result of voting
after a national parliament
approves the budget
2013 was the first year
when Eurozone Member States were obliged to hand in, until 15 October,
their draft budget for the fiscal year 2014.

Second law

for members of Euro area that
are under EDP
obliged to submit
additional surveillance reports
early warnings
in order to comply with
EDP deadlines
Member State
under EDP
most extensive
surveillance
receiving financial aid from
OR
obliged to adopt measures
economic reforms
labor systems
pension systems
insufficient
administrative
capacity
must ask for technical assistance
Greece, 2011
technical assistance to Greek authorities
if non-compliance is determined
disbursement of financial aid
Chapter 3 -
European Fiscal Compact

intergovernmental treaty with
25 participating Member States

formally
not part
of the EU law

limited powers
{
Stability and Growth Pact
}
stricter version
binding to
signatory countries that share the common currency
for non-Eurozone members:
only when they adopt the Euro
non-Eurozone
can also be bound
before
if declare such
intent explicitly
Denmark
Romania
Czech Republic
United Kingdom
European
Fiscal Compact
did not sign
Croatia
may accede to it
It concerns
three general areas
of
EU regulations:
budget discipline
coordination of
economic policies
governance within the
Economic and Monetary Union
The Fiscal Compact consists of 6 titles.
First title:

purpose and scope
European
Fiscal Compact
Monetary
Union
Economic
Union
Slovenia
Finland
closer economic
policies
Second title:

consistency with the law of the Union
European
Fiscal Compact
EU
law


future
EU Treaties
to be connected
in the future
Third title:

the Fiscal compact’s main economic substance
provisions for fiscal policy
general budget shall be balanced
<
3%
of
GDP
deficit
<1%
of
GDP
structural deficit
&
debt-to-GDP
ratio <60%
/
<0.5%
of
GDP
structural deficit
debt-to-GDP
ratio >60%
/
OR
The debt brake rule
debt ratio
> 60% of GDP
last 3 yrs.
reduce with
~5% per year
Italy
debt ratio
120% of GDP
if fiscal situation
does not comply
Eurozone
Member State
individually
shaped
automatic
correction mechanism
EXCEPTIONS
extraordinary
events
severe economic
recession
EDP
active procedure
European Fiscal Compact Members
report their
state borrowing plans
=
better coordination
and planning
Fourth title:

economic policy coordination and convergence
Major commitments for coordination of policies improving
competitiveness
employment
public fiscal sustainability
financial stability
}
similar to
Euro Plus Pact
ready to use
Euro Members area measures
and
coordinate together
major economic
policy reforms
.
Fifth title:

governance of the Euro area
Euro Summit
meetings
Frequency
Participants
whenever necessary,
but
at least twice a year
all heads
of state and government
from the Eurozone
President
of the
European Commission
President
of the
European Central Bank
on special occasions
the heads
of state and Prime Ministers
outside the Euro area

Sixth title:

final provisions
European
Fiscal Compact
final clauses concerning the
process of ratification
and the
statement of further openness
towards those EU Member States that did not sign the Fiscal Compact
Chapter 4 -
Euro Plus Pact

improvement of competitiveness
Euro Plus Pact
originally
German-French

“pact for competitiveness.”
€+
Open Method of Coordination
Czech Republic
Hungary
Sweden
United Kingdom
Euro Plus Pact
did not join the pact
adopted in March 2011
The guiding rules
€+
Euro plus Pact
European
Fiscal Compact
Sixpack
Twopack
strengthen
+
commitments targeting
competitiveness and convergence

National Reform and Stability Programs
}
}
submitted each year
€+
Euro plus Pact
actions to Member States
to adopt laws
national
commitments
monitored yearly
A full commitment to the completion of the
Single Market
is also a
requirement
that signatory Member States that joined the Pact have signed up to.
The goals
€+
Euro plus Pact goals
fostering
competitiveness
promoting
employment efforts
sound public
finances
banking
resolution
tax policy
coordination
€+
€+
€+
€+
€+
wages
productivity
Labor cost &
competitiveness
labor market reforms;

lifelong learning;

tax reforms;

second earners
sustainability of pension
health care
social benefit
+
adaptation of EU fiscal rules
into national legislation
national legislation,
in accordance with
EU law
strict and regular
bank stress tests
common corporate tax base
resistance in some
Member States
caused controversy
structured discussions
on tax policy, avoiding harmful practices, fight against fraud and tax evasion
Euro Plus Pact Members
European
Semester

Chapter 5
- European Semester

annual cycle
macroeconomic
coordination

budgetary
coordination

structural
coordination

European Semester
introduced in 2011
Europe 2020 strategy
10 years, adopted 2010
2010
2020
2000
Lisbon strategy
10 years, started 2000
Employment rate:

75% (20-64)
Research & Development expenses:
3% of GDP

Greenhouse gas emissions:

-20%
Energy efficiency:

+20%
Renewables in energy:
20%

School drop-out rate:
10% (currently 15%)

Europeans escaped poverty:
20 million
}
translated into
national parameters

do not imply any
modifications
to regulations or directives
European Semester
scheduled,
periodical checkup
measures in
targets
key innovation
fiscal and economic policy surveillance
boosting competitiveness
macro-level surveillance
&
competitiveness issues
Sixpack
Fiscal
Compact
Europe 2020
Country-specific
recommendations
National
Reform Programs
targets of
Economic governance
fiscal &
economic policy device
Key stages
Chapter 6
- Additional Institutions Supporting the Economic Governance

Banking
Union

international organization;
intergovernmental financial support mechanism
inaugural meeting
October 2012

European Financial
Stability Mechanism (EFSM)
difficulties in financing sovereign debt;

financial system is in urgent need of recapitalization
~
financial
assistance

bailout programs
precondition
has to be a member of, and must have ratified
European
Fiscal Compact
Treaty on the Functioning of the European Union (TFEU)
Intergovernmental agreement signed by the 17 Eurozone Member States
legal
background
loan programs
economic policy based on austerity
supervised by EU institutions
subscribed capital
700 billion euros

of which

paid-in capital
80 billion euros
pay directly to financial institutions
supervision
unit
The "clients"
of
ESM
Spain
Cyprus
European Financial
Stability Mechanism (EFSM)
bailouts
Greece
Portugal
Ireland
Banking Union
break the vicious
feedback loops
protects taxpayers from banking system drifts
Single Supervisory
Mechanism
Single Resolution
Mechanism
Deposit Guarantee
Directive
detecting
potential risks
coordination of troubled banks’ resolution
depositors may be indemnified from European sources
Banking Union
three pillars
takes over the task
of supervision
from 2014

150 banks
non-Eurozone countries = no vote
Four crucial aims of the EU’s reformed economic rules
Fiscal policy
Financial
markets

Growth and policy integration
Competitiveness
Stronger SGP
(6 pack, 2 pack),
fiscal compact

Banking Union
European semester &
EU2020
strategy

Macroeconomic Imbalances Procedure
(6 pack)

banking union
single budgetary
framework

common framework
of the economic policies

legitimacy and accountability
In summary, the blueprint for a deep and genuine Economic and Monetary Union that the European Council, the summit of the heads of state and government of the 28 EU Member States, approved in 2012, implies

four stages

Example
&
Full transcript