Brussels, 29 September 2010
Economic governance package (2): Preventing and correcting macroeconomic imbalances
The global economic and financial crises, followed by the so-called debt crisis, exposed the need for reinforced economic governance in the Economic and Monetary Union (EMU). Economic policies need to be better co-ordinated and surveillance enhanced. The strategic elements of such a reinforced approach were outlined in the Commission's Communication of 12 May and a concrete toolbox was presented in a second Communication on 30 June. The Commission adopted today a package of legislative proposals transforming these policy initiatives into concrete legal instruments.
The issues to be tackled
The crisis has revealed that major macroeconomic imbalances between EU economies could potentially undermine the cohesion of our economy, with greater risks for the euro area.
Some Member States have accumulated large current account deficits and experienced losses in competitiveness. These trends were associated with a misallocation of capital and labour, unsustainable accumulation of debt and housing bubbles. Conversely, other Member States with external surpluses capitalised on their competitive export sector, but domestic demand lagged somewhat behind, amplifying the gap between deficit and surplus countries within the euro area.
For many years, the Commission has been urging Member States to broaden macroeconomic surveillance and to better integrate structural reform in overall policy coordination within EMU so that the EU growth potential could be increased. This remains our main objective for the next decade through the Europe 2020 agenda for a smart, inclusive and sustainable growth.
The Commission proposes to complement this policy agenda by an ambitious economic governance package, with a strong pillar focused on the prevention and the correction of macroeconomic imbalances.
The foreseen mechanism strives to provide the framework for identifying and addressing macroeconomic imbalances, including deteriorating competitiveness trends. The scope of this draft Regulation to the European Parliament and the Council would cover all Member States.
There are four elements to be highlighted in this proposal.
1. The Alert Mechanism through a scoreboard
Surveillance would start with an alert mechanism that aims at identifying Member States with potentially problematic levels of macroeconomic imbalances. The alert mechanism would consist of a scoreboard complemented by expert analysis.
The scoreboard would be composed of a set of indicators in order to identify timely imbalances emerging in different parts of the economy. The set of indicators should be sufficiently large to cover any possible case of major imbalance and making sure that it is sufficiently sensitive to detect imbalances early on. Possible indicators would most likely include both external (e.g. current accounts, real effective exchange rates) and internal ones (e.g. private and public sector debt).
The composition of the scoreboard may evolve over time due to changing threats to macroeconomic stability or advances in data availability.
Alert thresholds would be defined and announced for each indicator. The thresholds should be seen as indicative values which would guide the assessment but should not be interpreted in a mechanical way. They should be complemented by economic judgment and country-specific expertise.
2. Preventive surveillance based on discussions with MS and in-depth reviews
The Commission would release the results of the scoreboard on a regular basis and attach a Commission report putting it into perspective. On the basis of all available information, the Commission will draw a list of Member States deemed at risk of imbalances.
The early discussion of such a list at the Council and the Euro Group will enable the Commission to get appropriate feedback from Member States and ensure transparency of the Commission deliberations.
Following such discussions, the Commission will provide country-specific in-depth reviews. The in-depth reviews will consist of a detailed investigation of the underlying problems in the identified Member States, taking into account in particular the severity of imbalances and possible spillovers to other Member States, as well as the assessment of findings from Stability and Convergence Programmes and the National Reform Programmes.
If macroeconomic imbalances are considered unproblematic, the Commission will propose that no further steps are undertaken. If the Commission considers that macroeconomic imbalances (or the risk thereof) do exist, it will come forward with preventive recommendations for the Member State(s) concerned. Consistent with the macro-structural surveillance process and depending on the nature of the imbalance, the preventive recommendations may address policy challenges across a range of policy areas.
3. The excessive imbalance procedure (EIP) applying to EU Member States
When the alert mechanism points to severe imbalances in a Member State, the Council, on a recommendation from the Commission, may adopt recommendations in accordance with Article 121(4) of the Treaty, declaring the existence of an excessive imbalance and recommending the Member State concerned to take corrective action within a specified deadline.
Member States in excessive imbalances would be subjected to a regime of peer pressure. Depending on the nature of the imbalance, the policy prescriptions could potentially address fiscal, wage and macro-structural as well as macro-prudential policy aspects under the control of government authorities. Following the opening of an EIP, the Member State concerned will be obliged to adopt a corrective action plan to set up a roadmap of implementing policy measures.
The Council would set an appropriate deadline when issuing corrective recommendations, taking into account the nature, scale and urgency of imbalances and the capabilities of policies to remedy the situation. Unlike fiscal policy, not all policy levers are under the direct control of national governments when it comes to the resolution of imbalances. The Commission will monitor the implementation of corrective action by the Member States concerned, which would issue on a regular basis progress reports.
On the basis of a Commission recommendation, the Council will conclude by the expiration of the initial deadline whether or not the Member State concerned has taken the recommended corrective action. Three outcomes are possible:
If the Council decides that the Member State concerned has taken appropriate action and the Member State is no longer experiencing excessive imbalances, the EIP would be closed;
If the Council decides that the Member State concerned has taken appropriate action, but due the possibly long lags between adoption of corrective action and its effect on the ground, imbalances are not yet corrected, the procedure will be placed in abeyance (the Member State is making satisfactory progress with corrective action). The Member State concerned would then be subject to periodic reporting and surveillance until the EIP is effectively closed.
If the Council decides that the Member State concerned has taken insufficient action, the Council would issue revised recommendations, possibly with tighter deadlines. Repeated non-compliance with this second set of EIP recommendations may lead to sanctions for euro-area Member States.
4. An enforcement mechanism for the Euro area members.
The Commission proposes to further extend the reach of the enforcement procedure of the Excessive Imbalances Procedure (EIP) and allows for financial sanctions for the euro area Member States.
If a Member State fails repeatedly to act in compliance with the Council recommendations to address excessive macroeconomic imbalances, it will have to pay a yearly fine, until the Council establishes that corrective action has been taken.
Moreover, repeated failure of the Member State to draw up a corrective action plan to address the Council recommendations should be equally subject to a yearly fine as a rule, until the Council establishes that the Member State has provided a corrective action plan that sufficiently addresses its recommendations.
The fine should, as a rule, equal 0.1 % of the GDP of the Member State concerned in the preceding year. The fine will be adopted based on a reverse voting mechanism in the Council on proposal of the Commission. The Council may decide, on the basis of a Commission proposal, to cancel or to reduce the fine.
The Council decisions concerning the fine will be made by only those members of the Council that represent Member States whose currency is the euro. The vote of the member of the Council representing the Member State concerned by the decisions shall not be taken into account.
EMU@10 Communication and report
Commission Communication of 12 May
Commission Communication of 30 June
"Surveillance of Intra-euro area competitiveness and imbalances"; European Economy 01/2010