the review of EU economic governance Brussels, 19 October 2021

There has been an active policy debate about the EU’s fiscal rules for several years and several proposals have been subsequently made. Options include debt rules, spending rules and continuing the existing
focus on the structural budget balance.

To underlined the importance of comprehensively testing any new set of rules, fiscal rules should not be designed based on a priori reasoning alone, but they need to be expected to deliver reasonable outcomes across the full range of countries and circumstances. Similar rules can have very different outcomes for countries.

The euro crisis has already transformed the European Union from a voluntary association of equal states into a creditor-debtor relationship from which there is no easy escape. The creditors stand to lose large sums should a member state exit the monetary union, yet debtors are subjected to policies that deepen their depression, aggravate their debt burden, and perpetuate their subordinate position. As a result, the crisis is now threatening to destroy the EU itself. That would be a tragedy of historic proportions, which only German leadership can prevent. The EU and its Member States have taken a series of important decisions that will strengthen economic and budgetary coordination for the EU as a whole and for the euro area in particular. As a result, the EU’s interdependent economies will be better placed to chart a path to growth and job creation. The economic and financial crisis has revealed a number of weaknesses in the economic governance of the EU's economic and monetary union. The cornerstone of the EU response is the new set of rules on enhanced EU economic governance which entered into force on 13 December 2011. It has 4 main components:

Stronger preventive action through a reinforced Stability and Growth Pact (SGP - “Six Pack”) and deeper fiscal coordination: Member States are required to make significant progress towards medium-term budgetary objectives (MTO) for their budgetary balances. Expenditure benchmarks will now be used alongside the structural budget balance to assess adjustments towards the MTO. An interest-bearing deposit of 0.2% of GDP will be imposed on non-compliant euro-area countries. EU member states commit to implement a fiscal policy which aims to ensure that the national deficit does not exceed 3% of GDP and that national debt remains under 60% of GDP and will submit annual reports on their compliance with these terms which are then evaluated by both the European Commission and the Council of Ministers.

Minimum requirements for national budgetary frameworks: Member States should ensure that their fiscal frameworks are in line with minimum quality standards and cover all administrative levels. National fiscal planning should adopt a multi-annual perspective, so as to attain the MTO. Numerical fiscal rules should also promote compliance with the Treaty reference values for deficit and debt.

Preventing and correcting macroeconomic and competitiveness imbalances: the new Macroeconomic Imbalance Procedure (MIP) broadens the EU economic governance framework to include the surveillance of macroeconomic trends. The aim of the MIP is to identify potential risks early on, prevent the emergence of harmful imbalances and correct the imbalances that are already in place. In this respect the objective of the MIP is to ensure that appropriate policy responses are adopted in Member States in a timely manner to address the pressing issues raised by macroeconomic imbalances. In doing so, the MIP relies on a graduated approach that reflects the gravity of imbalances and can eventually lead to the imposition of sanctions on euro area Member States should they repeatedly fail to meet their obligations under the corrective arm of the MIP. 14 February 2012 the first Alert Mechanism Report (AMR) on macroeconomic imbalances(MIP) in Member States was published.

To give further impetus to the governance reforms, 23 Member States, including six outside the euro-area (Bulgaria, Denmark, Latvia, Lithuania, Poland and Romania), signed the Euro Plus Pact in March 2011. The Pact commits signatories to even stronger economic coordination for competitiveness and convergence, also in areas of national competence, with concrete goals agreed on and reviewed on a yearly basis by Heads of State or Government. The Euro Plus Pact is integrated into the European semester and the Commission monitors implementation of the commitments. The Pact builds on the existing framework of economic priorities agreed at EU level under the Europe 2020 strategy for 'smart, sustainable and inclusive' growth. The strategy sets targets in the fields of employment, innovation, climate/energy, education and social inclusion.

Getting Europe back on track also requires a healthy financial sector. Previously, the euro area Member States created the European Financial Stability Facility EFSF and in January 2011, the EU established a new financial supervision architecture. It includes a European Systemic Risk Board (ESRB) for macro-prudential oversight of the financial system, and three European supervisory authorities: the European Banking Authority (EBA), the European Insurance and Occupational Pensions Authority (EIOPA), and the European Securities and Markets Authority (ESMA). Rules have also been tightened on capital requirements for banks, investment firms and insurance companies, and new rules on remuneration and bonuses will reduce incentives for short-term risk-taking. Bank stress tests have been conducted and the Commission will propose a framework to allow banks to fail in an orderly manner, thus ensuring that taxpayers don’t have to pay for bailouts.

In order to complete the single market in financial services, in 2012 proposals were presented with a view to creating a Banking Union for the eurozone and other Member States desiring to participate, with a Single Supervisory Mechanism for banks as a key element.

The agreement reached February 2013, was made possible after differences between the Council and the European Parliament over the potential creation of a debt redemption fund were reconciled. The EP wanted the fund included but the compromise laid out in the agreement saw Member States win the day. The EP got a concession that commits the European Commission to establish a working group which will study the feasibility of creating a debt redemption fund for eurozone countries with excessive sovereign debt. Such a fund would seek to pool the debts from each eurozone country where they exceed the 60% of GDP threshold established under the SGP. The working group is expected to report back on its findings of this feasibility study in 2014.

On 2 March 2012, 25 member states signed the Fiscal Compact. According to the terms of the ‘Treaty on stability, coordination and governance in the Economic and Monetary Union’, which is the Fiscal Compact’s full name, contracting eurozone members will be required to introduce a balanced budget rule. This debt break must have “binding force and permanent character” and implies that national budgets are to be “balanced or in surplus”. This means that the structural deficit, which strips out interest payments and one-off measures, must be kept below 0.5% of GDP at market prices. If the ratio of government debt to GDP is significantly below 60%, as defined in the Stability and Growth Pact, signatories are allowed to reach a structural deficit of 1% of GDP at most. In case of deviation from the above rules, a correction mechanism would be triggered automatically. Countries are given, however, some wriggle room to “temporarily deviate [...] in cases of unusual events outside the control of the contracting party with a major impact on the financial position of the general government or in periods of severe economic downturn.

Coercive measures such as the Six Pack, the Two Pack and the European Semester, makes budget discipline almost inevitable.

Trichet presented his vision of the Europe of tomorrow ', where he spoke of a 'quantum leap' that should be put. According to him, the internal market should be perfected and structural measures taken and he also insisted on a European Ministry of Finance.

For several years the European Union EcoFin affairs also has been focusing on solving the crisis, but now the European economy has to get back on track. The European leaders discussed this around the European Semester 2012, the monitoring of the economic policies of the member states. Due the Summit, Jacques Pelkmans and MEP Corrien Wortmann lectured 27-02-2012 on search for economic growth in Europe. The state of the global economy is in poor condition. The existing global financial architecture (Clingendael Policy Brief September 2012) is structurally flawed and puts in motion a rising demand for effective economic and financial policy governance on a global scale.

(*) There is a report of the Dutch delegation to the Bretton Woods Conference in July 1944, which summarizes about some delegations, including Belgium: "The relationship between the Dutch and Belgian delegates can only be called excellent. There was constantly a very close contact between the two delegations, which showed that their insights on every point were entirely similar. The close cooperation has undoubtedly strengthened and greatly amplified the position of Belgium and the Netherlands at the conference. By acting jointly, the delegations represented an extremely important element in the international monetary and trading system and as such they were thus recognized. The good cooperation led, among other things, to a quota system where the Netherlands and Belgium were represented both in the Bank and the Fund as executive director or alternate executive director. This opens the possibility to get an appointment with the Netherlands, for example, during the first two years a Director designated for the Fund and an alternate for the Bank and Belgium a director for the Bank and an alternate for the Fund, while for the next period 2 year roles would swapped, etc. By the close contact and exchange of information and insights both delegations retained a complete overview of the work of the conference, since either Netherlands or Belgium was represented in almost every subcommittee or special committee".

Not only competences are required for good governance, but also committment taken by Heads of States and a lift up from national policies to EU level. But how do you do that? Pick out the free areas. But it should be sure there is political impetus and evaluation.

We have gone through the crisis and all 27 countries have their difficulties. It's hard to expect too much. According to the founders of the euro, monetary policy goes together with national policies. Causes are debt overgrow in 'GIPS' and created financial market instability. Capital flows (they will disappear on their own) and restoration of competitiveness in the South needs economic cure. Merkel is right: 'it is a debt-crisis, not an euro-crisis'. The debt crisis should be fixed and that's why there should not be add another layer of policy coordination. Eurobonds for instance means nothing. They are loans.

In March 2008, it was ten years ago since the final decision to move to the third and final stage of Economic and Monetary Union (EMU), and the decision on which countries would be the first to introduce the euro. To mark this anniversary, the Commission undertook a strategic review of EMU. This paper, called 'Economic governance in an enlarged euro area' constitutes part of the research that was either conducted or financed by the Commission as source material for the review.

Globalization pushed national economies and rules in the backyard. The global and controversial discussion on the politics of the World Bank, the World Trade Organization and Global Players within the World Economic Forum as well as the discussion of global ecology and sustainability issues influences the definition of economy.

Joseph E. Stiglitz defines economy to be a global public good. Other economists are reclaiming the commons and give new definitions including new phaenomenons as freeware. Game theorists are disproving the self-interest hypothesis. A so-called gift economy is the topic for widespread activities of grassroot movements as well as of credit programs.

The Wealth of Nations Report 2006 of the World Bank for the first times tracks social and human capital. The change of definitions is to be continued. While the rescue operation is in progress, one is working on proposals to tighten up supervision on the Economic and Monetary Union. Euro countries have to abandon their budget-sovereignty. As soon as a country let run out of hand their budgets and it is damaging the SGP, intervention should be vigorous, for a weakened monetary union builds up a threat for the economic growth and with that the social securities, lectured Professor André Sapir 23 April 2010 on 'Can EMU survive without closer integration?'