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European Commission - Fact Sheet

The EU's economic governance explained

Brussels, 26 November 2015

An explanation of the EU's economic governance

The economic and financial crisis revealed weaknesses in the EU's economic governance. The EU responded by taking a wide range of measures to strengthen its governance and to facilitate a return to sustainable economic growth, job creation, financial stability and sound public finances. Central pillars of these efforts are: the legislative packages to strengthen the Stability and Growth Pact known as the "Six Pack" and "Two Pack", and the Intergovernmental Agreement (IGA) known as the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union. All EU Member States except the UK, the Czech Republic and Croatia have now signed this Treaty. The "Six Pack" strengthened the Stability and Growth Pact and also introduced a new macroeconomic surveillance tool: the Macroeconomic Imbalance Procedure. The "Two Pack" requests that euro area Member States present Draft Budgetary Plans for the following year in mid-October, ensuring that fiscal policy is discussed early in the budgetary process and that Commission's guidance can be taken into account before national budgets are adopted.

The rules are applied in the context of the European Semester, an annual cycle of coordination and surveillance of the EU's economic policies. This integrated system ensures that there are clearer rules, better follow-up and improved implementation by Member States of the commonly agreed policies throughout the year. It also allows for regular monitoring, and the possibility of swifter response ahead or in case of problems. This helps Member States deliver their reform and budgetary commitments, while making the Economic and Monetary Union more robust. By allowing more time for dialogue, the revamped European Semester, initiated in 2015 and confirmed for 2016, allows for greater involvement of the European Parliament and national legislatures, as well as social partners and stakeholders at all levels.



Before the crisis, economic and budgetary policy planning took place essentially at the national level, with only a limited coordinated overview at EU level of the national efforts. Member States hardly needed to discuss a collective strategy for the EU economy, or indeed the euro area, as a whole.


Coordination and guidance

The European Semester, introduced in 2010, ensures that Member States discuss their economic and budgetary plans with their EU partners at specific times throughout the year. This allows them to comment on each other's plans and monitor progress collectively. It also allows them to take better account of common challenges. Each year, the Commission analyses in detail the EU Member States' plans for macroeconomic, budgetary and structural reforms and issues recommendations for the next 12-18 months. The Commission also monitors Member States' efforts in working towards "Europe 2020", the EU's targets for its long-term growth strategy in the fields of employment, education, innovation, climate and the fight against poverty.


A clear timeline

The European Semester cycle starts in November with the publication of the Commission's Annual Growth Survey (AGS), the Alert Mechanism Report,the draft Joint Employment Report and, for the first time this year, a recommendation for the euro area. The Annual Growth Survey sets out general economic and social priorities for the EU and provides Member States with generic policy guidance for the following year. The Alert Mechanism Report is the starting point of the annual Macroeconomic Imbalance Procedure (MIP). The MIP aims to identify potential risks early on, prevent the emergence of harmful macroeconomic imbalances and correct the imbalances already in place in the economies of Member States, the EU, or the euro area. The recommendation for the euro area addresses key issues for the functioning of the euro area and provides orientation on concrete actions for their implementation. It accompanies the AGS for the first time to allow forbetter integration of the euro area and national dimensions of EU economic governance in the 2016 cycle. The draft Joint Employment Report analyses the employment and social situation in Europe and the policy responses by Member States.

Each year, prior to the publication of the Annual Growth Survey, the President of the European Commission outlines political, economic and social priorities in his State of the Union speech to the European Parliament. The ensuing debate provides input to the Annual Growth Survey for the following year.

EU leaders then consider the Annual Growth Survey (AGS), the Alert Mechanism Report,the euro area recommendation and the draft Joint Employment Report and provide guidance on a common direction for the EU and euro area as a whole. In February, the Commission publishes a Country Report for each Member State analysing their economic situation, progress with implementing the Member State's reform agenda and, for those selected in the Alert Mechanism Report, the findings of the so-called "in-depth review" of possible imbalances the Member State faces.

In April, Member States present their National Reform Programmes and their Stability or Convergence Programmes (three-year budget plans, the former for euro area countries, the latter for other EU Member States) to the Commission. In these programmes, countries report on the specific policies they are implementing and intend to adopt in order to boost jobs and growth, prevent or correct macroeconomic imbalances, and on their concrete plans to ensure compliance with the EU's Country-Specific Recommendations and fiscal rules.

The Commission then assesses the plans of the Member States and presents a series of Country-Specific Recommendations to each of them in May. These policy recommendations are discussed between Member States in the Council. EU leaders endorse them in June before Finance Ministers adopt them in the Council in July. Governments then incorporate the recommendations into their reform plans and national budgets for the following year.

Budgetary monitoring intensifies in the autumn for euro area Member States: they must submit Draft Budgetary Plans for the following year by 15 October. The Commission then assesses the Plans against the requirements of the Stability and Growth Pact and issues an Opinion on each of them in November, so that this guidance is taken into account when national budgets are finalised. Euro area Finance and/or Economy Ministers then discuss the Commission's assessment of the Draft Budgetary Plans in the ECOFIN Council.

Throughout the year, the Commission is in dialogue with stakeholders and Member States' authorities to closely monitor policy implementation.



The Stability and Growth Pact was established at the same time as the single currency in order to ensure sound public finances. However, as shown during the crisis, its enforcement did not prevent the emergence of serious fiscal imbalances in some Member States.

It was therefore reformed through the "Six Pack" (which became law in December 2011) and the "Two Pack" (which entered into force in May 2013), and reinforced by the Intergovernmental Treaty, the Treaty on Stability, Coordination and Governance (which entered into force in January 2013 in its 25 signatory countries). In January 2015, the Commission issued a Communication on making the best use of the flexibility within the existing rules of the Stability and Growth Pact, to strengthen the link between structural reforms, investment and fiscal responsibility in support of jobs and growth.

Better rules

  • Headline deficit and debt limits: the Stability and Growth Pact sets limits of 3% of GDP for deficits and 60% of GDP for debt. They remain valid.
  • A stronger focus on debt: the new rules make the existing 60% of GDP debt limit operational. This means that Member States can be placed in the Excessive Deficit Procedure if they have debt ratios above 60% of GDP that are not being sufficiently reduced (i.e. the excess over 60% is not being reduced by at least 5% a year on average over three years).
  • A new expenditure benchmark: under the new rules, public spending must not rise faster than medium-term potential GDP growth, unless it is matched by adequate revenue increases.
  • The importance of the underlying budgetary position: the Stability and Growth Pact focuses more on improving public finances in structural terms (taking into account the effects of an economic downturn or one-off measures on the deficit). Member States set their own medium-term budgetary objectives, updated at least every three years, with the goal of improving their structural balance by 0.5% of GDP a year as a benchmark. This provides a safety margin against breaching the 3% headline deficit target, with Member States, particularly those with debt levels over 60% of GDP, urged to do more in economically good times and less in bad times.
  • A fiscal pact for 25 Member States: since January 2014, signatories to the TSCG must have legally binding, medium-term budgetary objectives enshrined in national law. They must also limit structural deficits to 0.5% of GDP (or to 1%, if their debt-to-GDP ratio is well below 60%). All Members States but the UK, the Czech Republic and Croatia have signed this Treaty.

The Treaty also says that automatic correction mechanisms should be triggered if the structural deficit limit (or the adjustment path towards it) is breached, which would require Member States to set out in national law how and when they would rectify the breach over the course of future budgets.

  • Flexibility during a crisis: by focusing on the underlying budgetary position over the medium term, the Stability and Growth Pact can be flexible during a crisis. If growth deteriorates unexpectedly, Member States with budget deficits over 3% of GDP may receive extra time to correct those deficits, as long as the Member States have made the necessary structural effort.
  • Incentives for structural reforms and investment: the guidance provided by the Commission in January 2015 sets out ways, within the existing rules of the Pact, to encourage effective implementation of structural reforms, promote investment, and take better account of the economic cycle in individual Member States.

Better enforcement of the rules

  • Better prevention: The Commission and the Council assess whether Member States meet their medium-term budgetary targets, as set out in their Stability or Convergence Programmes presented each April. The assessments feed into the Commission's Country-Specific Recommendations each spring. This comes on top of the opinions on the draft budgetary plans delivered annually to euro area Member States in autumn (see below).
  • Early warning: in addition to the Country-Specific Recommendations and dedicated fiscal recommendations, if there is a significant deviation from the medium-term target or the adjustment path towards it, the Commission addresses a warning to the Member State, to be endorsed by the Council. This warning can be made public. The situation is then monitored throughout the year, and if it is not rectified, the Commission can propose an interest-bearing deposit of 0.2% of GDP (euro area only), which must be approved by the Council. This can be returned to the Member State if it corrects the deviation.
  • Excessive Deficit Procedure (EDP): if Member States breach either the deficit or debt criteria, they are placed in an Excessive Deficit Procedure, where they are subject to additional monitoring (usually every three or six months) and are set a deadline for correcting their excessive deficit. The Commission monitors compliance throughout the year, based on regular economic forecasts and on Eurostat data. The Commission can request more information or recommend further action from those at risk of missing their deficit deadlines.
  • Swifter sanctions: for euro area Member States in the Excessive Deficit Procedure, financial penalties kick in earlier and can be gradually stepped up. Failure to reduce the deficit adequately can result in fines of 0.2% of GDP. Fines can rise to a maximum of 0.5% if statistical fraud is detected. Penalties can include a suspension of EU regional funding, even for non-euro area countries. In parallel, the 25 Member States that signed the TSCG can be fined 0.1% of GDP for failing to properly integrate its provisions into national law.
  • Transparency and automaticity: the adoption of the annual Country-Specific Recommendations follows a "comply-or-explain" principle, whereby Member States must justify changes to the original proposals from the Commission. Moreover, decisions on most sanctions under the Excessive Deficit Procedure are now taken by reverse qualified majority voting (RQMV), which means that fines are deemed to be approved by the Council unless a qualified majority of Member States overturns them. This was not possible before the "Six Pack" entered into force. In addition, the 25 Member States that have signed the Fiscal Compact have agreed to replicate the RQMV mechanism even earlier in the process, for example, when deciding whether to place a Member State in the Excessive Deficit Procedure.


The crisis has shown that difficulties in one euro area Member State can have contagion effects in others. Therefore, extra surveillance is warranted to contain problems before they spread.

The "Two Pack" introduced an additional cycle of monitoring for the euro area, as well as tighter surveillance of those facing more serious difficulties.

  • Draft Budgetary Plans: euro area Member States (except for those Member States under macroeconomic adjustment programmes) must present their Draft Budgetary Plans for the following year by 15 October. The Commission then issues an Opinion on these DBPs.
  • Economic Partnership Programmes: euro area Member States must present such programmes when entering the EDP or receiving a new EDP deadline. These Economic Partnership Programmes contain detailed fiscal and structural reforms (for example, on pension systems, taxation or public healthcare) that will correct Member States' deficits in a lasting way.
  • Enhanced surveillance: Member States experiencing financial difficulties or under precautionary assistance programmes from the European Stability Mechanism are put under "enhanced surveillance", which means they are subject to regular review missions by the Commission and must provide additional data, for example, on their financial sectors.
  • Financial assistance programmes: Member States experiencing or threatened with serious difficulties in respect to their financial stability, which could have significant adverse effects on the rest of the euro area, can be asked to prepare full macroeconomic adjustment programmes. This decision is taken by the Council, acting by a qualified majority, on a proposal from the Commission. These programmes are subject to quarterly review missions and strict conditionality in exchange for any financial assistance.
  • Post-programme surveillance: Member States will undergo post-programme surveillance as long as 75% of any financial assistance drawn remains outstanding.



Drawing on the experience of the crisis, the "Six Pack" reforms introduced a system to monitor broader economic policies to detect problems that could, for instance, lead to real estate bubbles, banking crises or falling competitiveness much earlier in the process. This is called the Macroeconomic Imbalance Procedure and contains a number of sequential steps:

  • Better prevention: all Member States continue to submit National Reform Programmes. This is now done in April every year. The Commission publishes these programmes and examines them to ensure that any planned reforms are in line with the EU's jobs and growth priorities, including the Europe 2020 strategy for long-term growth.
  • Early warning: Member States are screened for potential imbalances using a scoreboard, as well as auxiliary indicators and other information, to measure economic developments over time. Each November, the Commission publishes its Alert Mechanism Report (see MEMO/12/912). The report identifies Member States that require further analysis (an in-depth review), but does not draw any conclusions.
  • In-depth reviews: the Commission undertakes an in-depth review of those Member States identified in the AMR that are potentially at risk of imbalances. The in-depth review is published in the spring and verifies the existence of imbalances and whether they are excessive or not. Member States are requested to take the findings of the in-depth review into account in their reform plans for the following year. Any follow-up is integrated into the advice the Commission gives to each Member State in the Country-Specific Recommendations in May.
  • Excessive Imbalance Procedure: if the Commission concludes that excessive imbalances exist in a Member State, it may recommend that the Member State draw up a corrective action plan, including deadlines for new measures. This recommendation is adopted by the Council. The Commission checks throughout the year whether the policies in the plan are being implemented.
  • Fines for euro area Member States: fines apply only as a last resort under the Excessive Imbalance Procedure and are levied for repeated failure to take action, not for the existence of the imbalances themselves. For example, if the Commission repeatedly concludes that a corrective action plan is unsatisfactory, it can propose that the Council levy a fine of 0.1% of GDP (euro area only). Penalties also apply if Member States fail to take action based on the plan (starting with an interest-bearing deposit of 0.1% of GDP, which can be converted to a fine if there is repeated non-compliance). The sanctions are approved unless a qualified majority of Member States opposes them.


Europe's Economic and Monetary Union (EMU) is much stronger today than it was before the economic and financial crisis. However, despite progress, particularly as regards reinforcement of the economic governance and the launch of the Banking Union, the EMU remains incomplete.

In June 2015, the President of the European Commission, in close cooperation with the President of the Euro Summit, the President of the Eurogroup, the President of the European Central Bank and the President of the European Parliament, presented a report on an ambitious yet pragmatic roadmap for completing the Economic and Monetary Union (EMU). The Five Presidents also agreed on a roadmap for implementation that should consolidate the euro area by early 2017 (Stage 1, or "Deepening by Doing"), as a stepping-stone towards more fundamental reforms in Stage 2, or "Completing EMU".

The first concrete steps of putting the vision of the Five Presidents' Report into action were announced on 1 July and an initial set of measures was taken on 21 October, when the Commission adopted proposals to initiate the implementation of the ambitious plan to deepen EMU. These entail a revised approach to the European Semester, including enhanced democratic dialogue, and further improved economic governance through the introduction of national Competitiveness Boards and an advisory European Fiscal Board. The Commission also proposed a more unified representation of the euro area in international financial institutions, especially the International Monetary Fund. It also specified the steps needed to complete the Banking Union, including a European Deposit Insurance Guarantee Scheme and measures to further reduce risk in the banking system.

The 2016 European Semester was launched on 26 November with the presentation of the 2016 Annual Growth Survey and related documents.


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