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 put the system under pressure. Consequently, the 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 only on members of the euro area.

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.

At a national level, the Council of State, as the national budgetary authority, is responsible for monitoring compliance with European budget rules. This is provided for in the Stability Treaty signed by the EU member states in 2012.

More information:

• Budget Surveillance in the EU, Netherlands Court of Audit
• EU macroeconomic surveillance: macroeconomic imbalances procedure, Netherlands Court of Audit

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.

The European Commission presented the new European Semester spring package on 24 May 2023. This focused explicitly on Russia’s invasion of Ukraine and the consequences of the corona pandemic. 

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. 

The Commission’s proposals for country-specific recommendations for 2023 provide member states with guidelines for dealing with major economic and social challenges that are not, or not wholly, dealt with in the recovery and resilience plans.

The European Commission has also issued its annual assessment of macroeconomic vulnerabilities in the member states. According to the Commission, imbalances have been identified in 10 member states, including the Netherlands, while 2 member states (Greece and Italy) have excessive imbalances. 

As for many years in the past, the vulnerabilities identified for the Netherlands continue to be the high levels of private debt and the large current account surplus.

More information:

• The European Semester, Netherlands Court of Audit (25-03-2020)
• How has the EU responded to the COVID-19 crisis and what is the impact on the Netherlands?, Netherlands Court of Audit regarding COVID-19 crisis and EU measures
• Policy guidance under the European Semester: Sustaining reforms and investments to secure the EU's long-term prosperity, competitiveness, fairness and resilience Press release European Commission concerning spring package European Semester (24-05-2023)
• In depth review for The Netherlands (PDF) - European Commission on macro-economic imbalances Netherlands (24-05-2023)

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. An advisory report (2017) issued by the Council of State about compliance with EU agreements in the area of the Economic and Monetary Union confirms the impression of uneven enforcement.

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. 

The Council of the European Union (comprising national government ministers from the member states) always has the final say. 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. 

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 deactivated as of 2023. 

After a further extension in 2022, the Commission announced in its Fiscal policy guidance for 2024, published on 8 May 2023, that the escape clause in the Stability and Growth Pact would be deactivated as of 2024.

More information:

• European Economic Governance - Report Netherlands Court of Audit (2014)
• Voorlichting over verbetering van de naleving van Europese afspraken en over de voor- en nadelen van verschillende opties voor de toekomst van de Economische en Monetaire Unie (EMU) - Opinion Council of State regarding compliance EMU-agreements (07-11-2017) (Dutch only)
• Mededeling van de commissie aan de raad over de activering van de algemene ontsnappingsclausule van het stabiliteits- en groeipact - European Commission proposal to retain the general escape clause of the Stability and Growth Pact (03-03-2021) (Dutch only)
• Fiscal policy guidance for 2024: Promoting debt sustainability and sustainable and inclusive growth - Press release European Commission (08-03-2023)

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 on 26 March 2023. Simplicity and transparency are at their heart and in the new approach the circumstances of a member state are taken into account. 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.

On 20 December 2023 the finance ministers of the 27 EU member states reached agreement on the proposals. This included agreeing that member states with government debt levels above 60% of GDP would aim for a structural budget deficit of no more than 1.5% of GDP. Countries with higher levels of debt would also have to reduce their debt ratios by a higher percentage. From now on, member states whose government debt exceeds 90% will have to reduce their debts by an annual average of at least 1% point, while member states with government debt between 60% and 90% of GDP will have to reduce it by at least 0.5% points. Negotiations aimed at reaching joint agreement between the member states and the European Parliament will start in 2024.

More information:

• Economic governance review: increasing compliance and oversight (PDF) - Letter Dutch Minister of Finance to the European Commission about the modernization of the Stability and Growth Pact (29-10-2022)
• Building an economic governance framework fit for the challenges ahead - Press release European Commission concerning a future economic governance framework (09-11-2022)
• Commission proposes new economic governance rules fit for the future - Press release European Commission concerning a final proposition for a future economic governance framework (26-04-2023)
• Commission proposes new economic governance rules fit for the future - Factsheet European Commission concerning a future economic governance framework (26-04-2023)
• Agenda Eurogroep en Ecofinraad 7-8 december 2023 Annotated agenda Euro group and Ecofin 7 en 8 December 2023 (28-11-2023) (Dutch only)

European Court of Auditors

• Review 05/2023: Reforming the EU’s economic governance: Opportunities with risks and challenges (2023)
• The European Semester – Country Specific Recommendations address important issues but need better implementation (PDF) (2020)
• Is the main objective of the preventive arm of the Stability and Growth Pact delivered? (PDF) (2018)