How does the EU ensure that its member states keep their budgets in check?
The 1992 Maastricht Treaty laid the foundation for coordination of the economic policies of the EU member states. The treaty sets out measures to establish an Economic and Monetary Union and a single currency. Under the treaty, countries are required to have annual budget deficits not exceeding 3% of gross domestic product (GDP), and government debt not exceeding 60% of GDP. The treaty also provides for supervision of these requirements.
The 1997 Stability and Growth Pact is a set of rules designed to ensure that countries in the European Union pursue sound public finances. It has a ‘preventive arm’ and a ‘corrective arm’. The preventive arm is aimed at public income and expenditure in the medium term, and the corrective arm focuses on annual maximum government deficits and national debt. Although the member states remain responsible for budgetary policy, they are bound by the rules of the Stability and Growth Pact (SGP).
Tightening of rules in 2011
The financial and economic crisis has put the system under pressure. Consequently, rules have been tightened up since 2011. The stricter rules were included in the 2011 and 2013 six-pack and two-pack schemes, which, with the exception of the rule on penalties, apply to all EU member states. Penalties can be imposed on members of the euro area only. The six-pack scheme also marked the introduction of more stringent surveillance by means of the Macroeconomic Imbalance Procedure (MIP). The MIP is intended to promote, where necessary, structural reforms in such areas as employment, competitiveness and the housing market. It constituted an addition to the (one-sided) attention given to public finances.
To learn more about the stages of budget surveillance, see:
To learn more about the stages of the Macroeconomic Imbalance Procedure, see:
The European Semester
The preventive arm of the SGP and the MIP mechanism converge in the European Semester. Since 2011, the European Commission has used the European Semester to coordinate the member states economic, budgetary and employment policies. It also includes assessment of the national reform programmes, which the member states submit as part of the Europe 2020 strategy.
The European Semester culminates in the Council making country-specific recommendations. It takes place in the first half of the year so that the member states can take the recommendations into account when preparing their budgets in the second half of the year.
To learn more about the stages of the European Semester, see
On 2 June 2021 the European Commission presented the new spring package of the European Semester. As in 2020, the recommendations pay special attention to the corona crisis. The European Commission considers the European Semester to be a crucial part of the recovery strategy, which will draw on the Recovery and Resilience Facility (RRF), the central instrument of NextGenerationEU.
- More information on how the EU is respondings to the COVID-19 crisis can be found here
The Commission has also announced which member states have macroeconomic vulnerabilities. In its opinion, 3 member states have excessive imbalances (Cyprus, Greece and Italy) and 9 others, including the Netherlands, have imbalances. In the case of the Netherlands, the imbalance is due chiefly to high private debts and the surplus on current account.
Compliance and enforcement
Compliance with and enforcement of rules and agreements show a mixed picture. Our 2014 Audit of European economic governance revealed that between 1997 and 2012, the European rules on supervisions of the budgetary policies of member states were not applied in full and consistently.
Countries were given notice very sparingly, and financial penalties were never imposed. Since 2011, the EU has had more options to supervise the member states’ budgetary and macroeconomic policies and take countries to task. However, the EU has only limited options to actually change the policies pursued by member states. The corrective measures taken for budget supervision are not enforceable at law. The Court of Justice of the European Union (CJEU) has no judicial authority in the area of budgetary policy. Formally, the Council of the European Union always has the final say, although the Commission’s powers have grown somewhat. In the end, establishing whether a member state has or has not complied with the budgetary criteria is a political decision taken by the Council, in response to a recommendation by the Commission. The Council’s decision is excluded from judicial review by the CJEU. The macroeconomic imbalance procedure has so far been limited to the detection and prevention phases (i.e. issuing recommendations, combined with a request for an action plan if appropriate). The options under the correction phase, i.e. rejecting action plans or imposing penalties have not been used to date.
An advisory report (in Dutch) issued by the Council of State at the request of the Dutch House of Representatives about compliance with EU agreements in the area of the Economic and Monetary Union confirms the impression of uneven enforcement, also in the years following the publication of our 2014 audit report (not available in English).
In response to the COVID-19 pandemic and its devastating financial and economic fallout, the European Council and the European Parliament approved a European Commission proposal of 20 March 2020 to activate the general escape clause of the Stability and Growth Pact (SGP). Under this clause, EU member states can take all financial measures they consider necessary at national level to stimulate their economies, including the provision of financial assistance for healthcare, businesses and citizens, without their contravening SGP rules.
In March 2021 the European Commission proposed that the general escape clause should be retained until the end of 2022 and de-activated as of 2023. In May 2022, it announced that the general escape clause would be maintained in 2023 and de-activated as of 2024.
Future of European economic governance
In October 2021 the Commission gave the green light for a public debate on the direction of EU economic governance. One of the debating points is whether the 3% ceiling on budget deficits and the 60% ceiling on government debt set in the Stability and Growth Pact are still appropriate.
Dutch measures to modernise the Stability and Growth Pact, as proposed in a letter from the Minister of Finance to the European Commission of 29 October 2022, are concerned with debt sustainability, upward economic convergence and effective enforcement. On 9 November 2022, the Commission presented its proposals for the desired direction of European economic governance. The Commission presented its final proposals (see also this factsheet) on 26 March 2023. Simplicity and transparency are at their heart: budget coordination is based on a single indicator, net public expenditure. National ownership will be strengthened, with each member state committing itself to a tailored, medium-term structural budget plan, in contrast to the previous one-size-fits-all approach. The four-year budget plans must have clear pathways to a gradual reduction in the debt ratio. The indicators at the centre of the Stability and Growth Pact (government deficit 3% of GDP, public debt 60% of GDP) will remain in force. Member states whose government deficit is higher than 3% of GDP must introduce a budget adjustment of at least 0.5% of GDP per annum. This may not be deferred to a later date. The moment an excessive deficit procedure is instigated under Regulation (EU) No 1176/2011, the member state must submit an adjusted medium-term structural budget plan to serve as an action plan.