Budgetary discipline and macroeconomic surveillance

Budgetary discipline in the EU member states has been laid down in the Stability and Growth Pact since 1997. In response to the economic and financial crisis, the EU adopted new policy in 2010 that came into force in 2011. The rules on budgetary discipline have been reinforced, agreements have been made on surveillance of the macroeconomic situation in the member states and the European Semester has been introduced to coordinate economic priorities, the budgetary rules and the new macroeconomic surveillance.

Budgetary discipline

Budgetary discipline in the EU is laid down in the Stability and Growth Pact (SGP). The pact consists of agreements between the member states on the maximum levels of their government deficits and government debts. It consists of a preventive arm and a corrective arm.In the Netherlands government deficits and government debts between 2009 and 2013 were higher than the agreed maximum levels. During that time the Netherlands had an excessive deficit.

The EU's budgetary rules were laid down in the SGP in 1997. They were amended for the first time in 2005. Application of the SGP since then has provided for greater differentiation for such factors as the economic diversity of the member states, their budgetary positions and the sustainability of public finances. The SGP was again amended in 2010 and the rules on budgetary discipline were reinforced. New opportunities were introduced to impose sanctions on euro countries that do not comply with the rules. These changes were introduced as part of the 'six-pack' that came into force in 2011.

In the preventive arm of the SGP, the member states commit themselves to a medium-term objective of bringing their budgets virtually into balance within the agreed term. The corrective arm of the SGP, also known as the excessive deficit procedure, contains agreements on the maximum level of the government deficit and government debt. The goverment deficit may not exceed 3% of GDP and goverment debt may not exceed 60% of GDP unless it is declining and approaching the 60% limit at an acceptable rate. Member states that exceed the agreed maximum values have an excessive deficit.

The assessment of the budget rules is political because the Council, on a recommendation of the Commission, ultimately decides whether or not a member state is complying with the standards. Sanctions can be imposed on euro countries that do not comply with the rules in both the preventive and corrective arm. The sanctions include an interest-bearing deposit or a fine of 0.2% of GDP.

Six-pack

One of the measures the EU has taken since the outbreak of the financial crisis is the adoption of the six-pack, a package of five regulations and one directive to reinforce budgetary discipline in the EU and introduce a form of macroeconomic surveillance. The six-pack came into force on 13 December 2011.

The sixpack

Name Amends Subject
Regulation 1175/2011 Regulation 1466/97 Budgetary discipline:
medium-term objective
Regulation 1177/2011 Regulation 1467/97 Budgetary discipline:
excessive deficits
Regulation 1173/2011   Budgetary discipline:
enforcements / sanctions
Regulation 1176/2011   Macroeconomic surveillance
Regulation 1174/2011  

Macro-economic surveillance:

enforcement / sanctions

Directive 2011/85   Budgetary frameworks

The economic governance package consists of two amending regulations, three new regulations and one new directive. The amending regulations amended the existing regulations of the Stability and Growth Pact. A new regulation provides for sanctions on euro countries that do not comply with the rules of the Stability and Growth Pact. The two other new regulations have created a new procedure to address harmful macroeconomic imbalances, with potential sanctions for euro countries that do not comply with the rules. The new directive provides minimum requirements for the EU member states' budgetary frameworks.

Macroeconomic surveillance

In 2010 the member states reached agreement to prevent macroeconomic imbalances as part of the six-pack. The agreements came into force in 2011. The European Commission monitors a series of macroeconomic indicators of, for example, debt, investments, house prices and unemployment to determine whether there are actual or potential harmful economic imbalances in the member states.

If a member state exceeds the agreed macroeconomic reference values, it does not automatically breach the rules. The European Commission first carries out a detailed evaluation of the economic situation in the member state, after which the Council decides whether there is an excessive imbalance that needs to be corrected.

If member states with an excessive imbalance fail to take adequate corrective measures, the Council can require them to lodge an interest-bearing deposit or impose a fine of 0.1% of GDP.

European Semester

In 2010 the EU decided to establish the European Semester to coordinate reporting and monitoring of the EU's economic priorities (as laid down in the Europe 2020 Strategy and the Euro Plus Pact) and surveillance of the budgets and macroeconomic situations in the member states. The European Semester is held in the first half the year so that the member states can take account of the EU's recommendations when preparing their definitive budgets in the second half of the year.

Twopack

On 23 November 2011, the European Commission proposed two new regulations for the eurozone, together known as the ‘twopack’. The twopack is designed to complement the preventive arm of the SGP, inter alia by introducing a more comprehensive system for monitoring the way in which member states deal with excessive deficits. The twopack came into force on 30 May 2013 in all the eurozone member states.

On 12 March 2013, the Ecofin Council and the European Parliament reached a political agreement on the twopack. Following its adoption in 2013 – which means that the new measures already apply to the national budgets for 2014 – a common budgetary timeline and common budgetary rules for eurozone countries have now been added to the European Semester. The national budgets of eurozone countries are now subject to the following timeline:

  • By 30 April of each year, the eurozone countries must present and publish their medium-term fiscal plans together with their stability programmes.
  • By 15 October, the eurozone countries must present their draft budgets for the following year to the Commission and the Eurogroup.
  • By 31 December, the eurozone countries must adopt or decide on their budgets for the following year. Within this period, and by 30 November at the latest, the European Commission is entitled to issue an opinion on the draft budget. If the Commission detects severe non-compliance with a member state’s obligations under the Stability and Growth Pact, it will ask the member state concerned to submit a revised budget.

According to article 14 of Regulation 472/2013 a Member State shall be under post-programme surveillance as long as a minimum of 75% of the financial assistance received from the EFSM, the ESM, the EFSF or one or several Member States has not been repaid. The Council, on a proposal from the Commission, may extend the duration of the post-programme surveillance in the event of a persistent risk to the financial stability of fiscal sustainability of the Member Sate concerned. The Commission conducts, in liaison with the ECB, regular review missions in the Member State under post-programme surveillance to assess its economic, fiscal and financial situation. Every six months, the Commission communicates its assessment to the competent committee of the European Parliament, to the EFC and to the parliament of the Member State concerned and assesses, in particular, whether corrective measures are needed. Article 14 is operational in Spain and Ireland as of 2014. In the period March-May 2014 the first post-programme missions in Spain and Ireland were executed.
For the results see Press release European Commission Statement and European Commission Memo.

Fiscal compact

The Treaty on Stability, Coordination and Governance in the Economic and Monetary Union (also known as the fiscal compact) came into force on 1 January 2013. All EU member states except the United Kingdom take part in the fiscal compact. The compact includes the following elements:

A new budget rule will enter into force that has to be incorporated into national law. The rule states that structural budget deficits may not exceed 0.5% of GDP. The member states must include an automatic correction mechanism in their national law that is triggered if significant deviations are observed from the rule or the adjustment path towards it as laid down in the Stability and Growth Pact. The European Court of Justice has the power to verify the incorporation of this rule into national law.

The excessive deficit procedure will be reinforced for the members of the eurozone. If the European Commission observes that a country has exceeded the 3% reference value for the excessive deficit procedure, the euro countries will adopt the European Commission's proposals and recommendations directed at that member state, unless a qualified majority of euro countries – not including the country concerned – are opposed.

Countries will be eligible for financial assistance from the European stability mechanism only if they have ratified the fiscal compact.

Act on the sustainability of public finances entered into force

On January 1 2014 the ‘Act on the sustainability of public finances’ entered into force. The act lays down - among others – the European rules and reference values for government debt and budgetary deficit, as well as the national implementation of the ‘automatic correction mechanism’. This is an obligation which follows from the Stability Treaty (TSCG). The Act also legally enforces the Dutch budgetary policy system, which uses fixed ‘expenditure ceilings’ for each policy item.