Today, as part of its Winter Package for the 2016 European Semester, the Commission adopted a Communication summarising the main findings and results of the 26 country reports and 18 in-depth reviews published on 26 February. The Communication includes new steps under the macroeconomic imbalances procedure (MIP) and a simplified categorisation of imbalances in the MIP.
This lays the basis for the adoption of country-specific recommendations in spring. The early publication of the country-specific analyses and results will enable thorough discussions at EU and Member State level. This should help to guide the Member States in their policy choices for the national reform programmes and the stability or convergence programmes. It will also enhance national discussion and increase ownership of the European Semester process in general.
What is new in the European Semester this year?
The first half of the European Semester focused on the EU and euro area as a whole. The 2016 Annual Growth Survey adopted last November set out three priorities: re-launching investment, pursuing structural reforms to modernise EU economies, and responsible fiscal policies. It also put greater emphasis on upward convergence and investment. Together with the Annual Growth Survey and the Alert Mechanism Report, the Commission in November also presented recommendations for the euro area. Previously, euro area recommendations were published in spring, at the same time as
The adoption of recommendations for the euro area last November allowed for a better integration of the euro area and national dimensions of the EU economic governance and highlighted common challenges that need to guide country-specific action, in line with the Five Presidents' Report. It has also enabled thorough debates on economic and social policy priorities in the European Parliament and in the Council.
Together with the publication of country reports on 26 February, today's Communication marks the start of the national phase of the European Semester process. It paves the way for a new set of country-specific recommendations in spring. Member States are expected to take into account the main policy implications from the analysis when they draft their national reform programmes and their stability programmes (for euro area countries) or convergence programmes (for non-euro area countries) to be presented in April. The country-specific recommendations that the Commission will issue in spring will be based not only on the analysis in the country reports, but also on policy actions and plans adopted in the meantime.
How do country reports deliver on keeping a stronger focus on employment and social performance in the European Semester?
As announced last year, from this Semester cycle on, the Commission has strengthened its focus on employment and social performance in the European Semester.
As shown in the 2016 country reports, Member States continued to implement a wide spectrum of employment, education and social reforms. These reforms are expected to bring the Member States closer to the Europe 2020 targets in the employment and social areas: helping people to find jobs, providing them with the right skills and reducing poverty.
In order to better understand employment and social trends, the macroeconomic imbalances procedure scoreboard used in the Alert Mechanism Report contains three new employment indicators: the activity rate, long-term unemployment and youth unemployment. Moreover, the country reports published in February refer to a variety of employment and social indicators. The inclusion of new employment variables in the scoreboard is a concrete result of the Commission’s commitment to strengthen its analysis of macroeconomic imbalances.
STEPS UNDER THE MACROECONOMIC IMBALANCES PROCEDURE
For which countries did the Commission publish in-depth reviews?
In its 2016 Alert Mechanism Report, published in November 2015 together with the 2016 Annual Growth Survey, the Commission announced in-depth reviews of the situation of 18 Member States: Belgium, Bulgaria, Germany, Ireland, Spain, France, Croatia, Italy, Hungary, the Netherlands, Portugal, Slovenia, Finland, Sweden, Romania, the United Kingdom, Estonia and Austria.
In the Alert Mechanism Report, the Commission makes an assessment based on an economic reading of scoreboard indicators linked to developments in competitiveness, indebtedness, asset prices, adjustment and inter-linkages with the financial sector. In addition to this, the Commission takes into account a set of auxiliary indicators.
What is the outcome of the in-depth reviews for individual countries? And what is the follow-up?
The main findings can be summarised as follows:
- Bulgaria, Croatia, France and Italy and Portugal are found to be experiencing excessive imbalances.
- Finland, Germany, Ireland, the Netherlands, Spain, Sweden and Slovenia are found to be experiencing imbalances.
- Austria and Estonia, which had in-depth reviews for the first time this year, are deemed not to be experiencing imbalances. Belgium, Hungary, Romania and the United Kingdom are found not to be experiencing imbalances.
The results of the in-depth reviews will be taken into account in the next steps of the European Semester. All Member States that are found to have imbalances or excessive imbalances (without an excessive imbalance procedure) will be subject to specific monitoring, adapted to the degree and nature of the imbalances. This will enhance the surveillance of their policy response through an intensified dialogue with the national authorities, missions and progress reports.
What is the purpose of the in-depth reviews?
The in-depth reviews assess whether imbalances or excessive imbalances exist in the Member States selected in the Alert Mechanism Report. The reviews discuss issues such as the sustainability of the evolution of Member States' external accounts, savings and investment balances, effective exchange rates, export market shares, cost and non-cost competitiveness, productivity, private and public debt, housing prices, credit flows, financial systems, unemployment and other variables. The drivers of the imbalances and the risks they raise are different from one economy to another. The in-depth reviews also take account of the euro area dimension of macroeconomic imbalances and their possible impact on the euro area as a whole.
Since last November, the services of the Commission have been in close contact with experts from national authorities and stakeholders to gather latest information. The in-depth reviews are part of the respective country reports.
What are the overall economic findings of the in-depth reviews?
The adjustment of the existing imbalances is taking place in a challenging environment. In particular, subdued nominal growth related to the very low level of inflation hampers the deleveraging process, and the weakening of world demand reduces the prospects for an export-led recovery. Still, the correction of imbalances is progressing.
In countries with high external liabilities, the large current account deficits of the pre-crisis period have been considerably reduced or even turned into surpluses. In some Member States, surpluses persist and remain very large. Cost competitiveness has generally improved and there is evidence of structural adjustment in terms of resources shifting to the tradable sector.
Unemployment is declining, albeit to different degrees across the Member States. The external balance of the euro area is currently posting one of the world's largest current account surpluses. The surpluses of a few countries stand out in terms of their size and reflect subdued aggregate demand. This may indicate an excess of domestic savings over investment.
In most countries, the process of balance-sheet repairs is progressing, with deleveraging ongoing in the household and corporate sector, and bank capitalisation improving. In most countries, deleveraging is mainly linked to reduced spending, while in some countries, the relative level of debt has gone down due to robust growth. In this context, vulnerabilities associated with elevated levels of debt remain a source of concern.
How is a "macroeconomic imbalance" defined?
Regulation No 1176/2011on the prevention and correction of macroeconomic imbalances defines a macroeconomic imbalance as ‘any trend giving rise to macroeconomic developments which are adversely affecting, or have the potential to adversely affect, the proper functioning of the economy of a Member State or of the Economic and Monetary Union, or of the Union as a whole’, while excessive imbalances are ‘severe imbalances that jeopardise or risk jeopardising the proper functioning of the Economic and Monetary Union’.
In general, any deviation from a desirable level can be considered to be an imbalance. However, not all imbalances are detrimental or require policy interventions, as they may be part of the economy’s dynamic adjustment. Imbalances that require close monitoring and possible policy intervention relate to developments that could significantly impede the proper functioning of the economy of a Member State, the euro area or the EU. In practice, these are imbalances that are either at dangerous levels (e.g. high debts) or reflect unsustainable dynamics (e.g. excessive house prices or credit increases) which threaten to result in abrupt and large, and hence damaging, adjustments.
What has changed in the macroeconomic imbalances procedure?
As anticipated in the October 2015 Communication on steps towards Completing the Economic and Monetary Union, implementing the first stage of the Five Presidents' Report, the Commission has increased the transparency of the implementation of the macroeconomic imbalances procedure and simplified the categorisation of macroeconomic imbalances.
The number of macroeconomic imbalances categories has been reduced from the previous six to four.
The resulting categories are: no imbalances, imbalances, excessive imbalances andexcessive imbalances with corrective action (excessive imbalance procedure; 'EIP'). All Member States experiencing imbalances or excessive imbalances (without EIP) will be subject to specific monitoringadapted to the degree and nature of the imbalances presented. This will enhance the surveillance of their policy response through an intensified dialogue with the national authorities, missions and progress reports. The Commission expects the Member States to take into account findings from the in-depth reviews when designing their national reform programmes and the stability or convergence programmes. The Commission will follow up on these challenges when it proposes the country-specific recommendations.
What does specific monitoring mean?
Under the macroeconomic imbalances procedure, the Commission carries out specific monitoring of the reform implementation. Specific monitoring can be activated in case either imbalances or excessive imbalances are identified. As part of this specific monitoring, the Commission conducts additional technical missions to the Member States and reports to the ECOFIN Council. The reports are made public after the Council process is over.
What are the next steps?
All Member States found to have imbalances or excessive imbalances will be subject to specific monitoring adapted to the degree and nature of the imbalances. An intensified dialogue with the national authorities, missions and progress reports will enhance the surveillance of the Member States' policy response.
The Council is expected to discuss the Commission's findings emerging from the in-depth reviews carried out for 18 Member States' economies.
In March and April, the Commission will hold further bilateral meetings with the Member States. These meetings will provide an opportunity to discuss the country reports with the national authorities.
In April, the Member States are expected to present their national reform programmes and their stability programmes (for euro area countries) or convergence programmes (for non-euro area countries).
Based on all these sources, the Commission will present in spring its proposals for a new set of country-specific recommendations, targeting the key challenges to be addressed.
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