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 the efforts 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 to the rules of the Stability and Growth Pact (SGP).
Tightening of rules in 2011
The financial and economic crisis has put this system under pressure. Consequently, rules have been tightened since 2011. The refined 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. Possible penalties may 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 reform in areas including employment, competitive positions, 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 economic, budgetary and employment policies of the EU member states. 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 ‘country-specific’ recommendations of the Council. It takes place in the first half of the year to enable the member states to take these recommendations to heart 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, these 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 responds to the corona-crisis can be found here
The Commission has also announced the annual macroeconomic vulnerabilities of the EU member states. In the Commission’s 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. The 2014 Audit that we performed of European economic governance revealed that between 1997 and 2012, the European rules for surveillance of the budgetary policies of member states were not fully and consistently applied.
Countries were given notice very sparingly, and financial penalties were never imposed. Since 2011, the EU has had more options for surveillance and taking countries to task on their budgetary and macro-economic policies. However, the EU has only limited options for actually changing the policies pursued by member states. The corrective measures taken as part of budget surveillance 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 powers of the Commission 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 from the Commission. The Council’s decision is excluded from judicial review by the CJEU. The macro-economic imbalance procedure has to date 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 issued by the Council of State on request of the Dutch House of Representatives about compliance with the European agreements in the area of the Economic and Monetary Union confirms the impression of uneven enforcement, also for the years following the publication of our audit report in 2014 (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.
In October 2021 the Commission gave the green light for a public debate of the direction of EU economic governance with the aim of reaching broad consensus on the desired direction well before 2023. 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 laid down 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. They included a simpler and more transparent economic governance framework to strengthen debt sustainability in the medium term. The Commission maintained the Stability and Growth Pact’s reference values of budget deficits below 3% of GDP and national debt of less than 60% of GDP but also sought greater national ownership. The Commission proposed that member states with high debt levels (such as Greece and Italy) be given more time to improve their debt situation than countries with lower debt levels. To this end, national medium-term budget plans must be prepared every year. The Commission would approve the plans and then monitor their implementation. The Commission intends to present its legislative proposals in the first quarter of 2023.