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New economic governance framework aimed “fitting for the future” has been adopted recently: the EU-wide governance system is the answer to vital politico-economic and geopolitical challenges. Hence, the new system addressed modern realities by creating perspective fiscal policies in the states, e.g. by improving sustainability of public finances the states will promote growth, provide incentives for reforms, support long-term competitiveness and further strengthen the EU economic and monetary structures.
Background
The EU’s economic governance framework consists of the EU fiscal policy framework (the Stability and Growth Pact and requirements for national fiscal frameworks) and the Macroeconomic Imbalance Procedure, which are implemented in the context of the European Semester for policy coordination, as well as the framework for macroeconomic financial assistance programs.
In line with the Commission’s political guidelines, a review of the effectiveness of the economic surveillance framework has been undertaken in February 2020, while launching public debates on the governance’s future. This extensive public debate and consultation process allowed stakeholders to express their views on the key objectives of the framework, its functioning and address new challenges; these views fed into the Commission’s legislative reform proposals which were presented in April 2023.
In December 2023, the Council adopted a general approach; i.e. the European Parliament endorsed the Committee on Economic and Monetary Affairs’ mandate to enter into negotiations in January 2024. The European Parliament and the Council then reached a political agreement on the issue in mid-February 2024.
More on negotiations in: https://ec.europa.eu/commission/presscorner/detail/en/ip_24_711
Promoting inclusive growth
At the end of April 2024, the new economic governance framework entered into force. This came after the Commission had proposed in April 2023 the most ambitious and comprehensive reform of the EU’s economic governance rules since the aftermath of the economic and financial crisis.
The main objectives of the new framework are to strengthen the EU member states’ debt sustainability, and promote EU-wide sustainable and inclusive growth through growth-enhancing reforms and priority investments.
This governance’s framework is expected to make the while Union more competitive and better prepared for future challenges by supporting progress towards a green, digital, inclusive and resilient economy.
Stronger national ownership with medium-term plans
The new medium-term fiscal structural plans are at the centre of the new framework: thus the EU member states are both designing and then presenting national plans, which are supposed to set the national fiscal targets, priority reforms and investments. The plans shall evaluate measures and address any possible macroeconomic imbalances during a fiscal adjustment period.
The deadline for the member states to submit their plans to the Commission is the end of 2024.
However there is a sort of “adjustment period” in national planning, which refers to the time-frame within which, through a combination of fiscal adjustments, reforms and investments, some member state’s public debt level would be put on a sustainable downward path.
Simpler rules taking account of different fiscal challenges
The new framework introduced risk-based surveillance which differentiates among the EU member states based on their individual fiscal situations.
This approach adheres to a transparent common EU framework underpinned by safeguards to ensure that debt is put on a downward path (so-called “debt sustainability safeguard”) or provide a safety margin below the Treaty deficit reference value of 3% of GDP in order to create fiscal buffers (the deficit resilience safeguard). .
The new framework –by introducing the risk-based surveillance structures- will both improve the states’ individual fiscal situations and put the public debt on downward paths. In this regard, a single operational indicator – called “net primary expenditure” – will serve as a basis for fiscal surveillance, thereby simplifying fiscal rules.
For some EU member states with a government deficit above 3% of GDP or public debt above 60% of GDP, the Commission will issue a country-specific “reference trajectory”. This trajectory will provide guidance to these member states to prepare their plans, and will ensure that debt is put on a plausibly downward path or stays at prudent levels.
Besides, the member states with a government deficit below 3% of GDP and public debt below 60% of GDP will be assisted by the Commission’s technical support to ensure that the deficit is maintained below the 3% of GDP reference value over the medium term; however, such support will be done at the request of the member states.
Promoting reforms and investment
Both reforms and investment are needed to face new and existing challenges; besides, they are also essential components of credible debt-reduction plans.
The new governance’s framework facilitates and encourages the EU member states to implement the measures needed to secure the green and digital transitions, strengthen economic and social resilience and bolster Europe’s security capacity.
Enhancing enforcement
It is evident that the rules require enforcement: while the new framework provides the member states with more leeway over the design of their plans, the new governance system also establishes a strengthened enforcement regime to ensure that all EU member states deliver on their commitments.
Thus, the member states will present annually their progress reports focusing on the implementation of commitments laid out in their plans for assessment by the Commission.
More on the governance in: https://economy-finance.ec.europa.eu/economic-and-fiscal-governance/evolution-eu-economic-governance/new-economic-governance-framework_en
Our comment
We are recommending our readers to apprehend the new European economic governance scheme in view of the recent twin reports by the Italian high-ranking politicians (Draghi and Letta) which include some critical points in European competitiveness.
More in our articles: https://www.integrin.dk/2024/10/02/european-growth-strategy-facing-eu-us-competition-challenges/; and https://www.integrin.dk/2024/09/27/challenging-european-priorities-alternative-commissions-features/.