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Olli Rehn

European Commissioner for Economic and Monetary Policy

Tools for enhanced EU economic governance

Figures and graphics available in PDF and WORD PROCESSED

Press Conference

Brussels, 30 June 2010

Following our Communication of 12 May on "reinforcing economic governance in Europe", the European Council of 17 June at the insistence of President Barroso endorsed the Commission initiative and requested that we make concrete proposals. Subsequently, today the Commission adopted a concrete toolbox to substantiate our earlier initiatives and to set out a roadmap for their introduction.

By using these tools, we can close the gaps in our economic governance system which were so dramatically exposed by the crisis. We can create one single and integrated surveillance system for fiscal, economic and structural performance, by launching the European economic semester next January. By doing so, we will also contribute decisively to re-establish the confidence in Europe's economy. So the time to act is now. We don't have the luxury of time.

We want to reinforce economic pillar of the EMU and the economic governance in Europe in order to create solid and lasting foundations for sustainable growth and job creation. Without determined fiscal consolidation, structural reform and sustainable growth, our model of social market economy is at serious risk. It is a matter of future welfare and security of children and grandchildren.

Let me briefly present these tools which can all be agreed under and in the frame of the provisions of the Lisbon Treaty.

First of all, we want to safeguard macroeconomic stability and to prevent harmful macroeconomic imbalances in the EU. We propose to reinforce the surveillance and correction of macroeconomic imbalances, with an alert mechanism and a corrective arm. Divergences in competitiveness and emerging macroeconomic imbalances will be reflected in a scoreboard, with alert threshold that would trigger in-depth analysis and action when flashing.

In most serious and confirmed cases, the Commission would make country-specific recommendations and could also propose placing a Member State in an “excessive imbalances position”. For euro-area countries, an enforcement mechanism in the case of serious and repetitive breach of recommendation could be envisaged.

We also propose today to have an effective surveillance of structural reform. This is important to identify bottlenecks of growth and to attain the Europe 2020 objectives and the five headline targets (employment, social inclusion, research and innovation, education, energy and climate change). In case of insufficient progress, country-specific recommendations could again be issued.

To integrate all these strands of surveillance, the key tool is the European semester. It would allow for prior coordination of economic policies, so that final decisions on the budget for the following year are taken by Member States. Let me stress that this is not interference in Member States’ sovereignty; it is about making sure that national budgets are consistent with EU commitments and they will not put at risk financial stability in Europe.

All Member States would submit their Stability and Convergence Programs and their National Reform Programs at the same time in April to allow the Council to have meaningful ex-ante discussions and issue country-specific policy guidance in July, based on the Commission recommendations. Then, in the second part of the year, Member States would finalize their budgets. Commission proposes to launch this European semester as of January 2011.

In order to strengthen the Stability and Growth Pact, excessive debt needs to be addressed more seriously than in the past. We propose to set a clear benchmark for defining a satisfactory pace of debt reduction. Member States with debt ratios in excess of 60% of GDP could become subject to the Excessive Deficit Procedure if the decline of debt falls short of this benchmark.

Also national fiscal framework should better reflect the SGP objectives. National fiscal rules should also warrant the respect of the Treaty reference values on deficit and debt. Multi-annual budgetary planning and expenditure ceilings should be included too.

Finally, on sanctions and incentives. There is clearly a need to strengthen the credibility of EU’s fiscal framework through a better enforced and more rules-based Stability and Growth Pact. That means having a wider range of sanctions and incentives, which are used preventively and invoked at an earlier stage.

Concretely, for the euro area member States, the incentive would consist of an interest-bearing deposit temporarily imposed to countries in persistent violation of their obligations under the pact, until this is corrected.

As regards the corrective arm, we propose for all MS to use the EU budget as additional leverage to ensure respect of the Stability and Growth Pact. This means, for instance, expenditures under structural funds, agriculture spending, fisheries fund. In case of non-compliance with the rules, we foresee two early steps. First, suspension of commitments: this doesn’t affect immediately on payments and allows time for correction. Second, if non-compliance with recommendations, it would imply the cancellation of suspended commitments (loss of payments).

On sanctions affecting agricultural payments: suspension would concern only transfers from the EU budget to the Government concerned. The Government would still be obliged to respect its commitment to the farmers. It would not hit the final beneficiaries.

The follow-up of this Communication: we expect the Ecofin Council to already confirm next 13 July the launch of the European semester in 2011 and to endorse the revision of the Code of Conduct for the Stability and Growth Pact. Then we intend to make the necessary formal proposals on all these issues in late September and October.

Our proposals respect and reinforce the Community method, which is the key that makes the EU work and deliver.

It is high time to reinforce the economic union in the EMU and create a genuine economic and monetary union.

That's what these concrete proposals are about.

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