EUROPEAN
COMMISSION

Brussels, 9.11.2022
COM(2022) 583 final

COMMUNICATION FROM THE COMMISSION TO THE EUROPEANPARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK, THE
EUROPEAN ECONOMIC AND SOCIAL COMMITTEE AND THE COMMITTEE
OF THE REGIONS
Communication on orientations for a reform of the EU economic governance framework

ENEN

1. Introduction
In October 2021, the Commission relaunched the public debate on the review of the
EU's economic governance framework, inviting other EU institutions and all key
stakeholders to engage. Through various fora, including dedicated meetings, workshops andan online survey, citizens and a wide range of participants, including national governments,
parliaments, social partners, academia and other EU institutions, have debated how today’s
and tomorrow’s economic challenges require reforms of the EU economic governanceframework. ( 1) Discussions in the Council (ECOFIN), the Eurogroup, the Economic andFinancial Committee and the Economic Policy Committee have provided Member Stateswith an opportunity to reflect and express their views on the key objectives of the governanceframework, its functioning, and new challenges to be addressed.
It is now time to move from debate to decisions. This Communication outlines theCommission’s orientations for a reform of the economic governance framework,
addressing the key economic and policy issues that will shape the EU’s economic policy
coordination and surveillance for the next decade. Taking into account the key concerns
over the current framework, these orientations aim to strengthen debt sustainability andpromote sustainable and inclusive growth in all Member States (see Figure 1), thus
“rediscovering the Maastricht spirit whereby stability and growth can only go hand in hand”,
as indicated by President Von der Leyen in her State of the Union address. ( 2) Prudent fiscal
strategies and investment and reforms that enhance sustainable growth are both indispensable
and mutually reinforcing in ensuring fiscal sustainability and in enabling the green and digitaltransition towards a resilient economy. The reformed framework should tackle the prevailingchallenges and contribute to making Europe more resilient, by sustaining strategic investment
for years to come and by reducing high public debt ratios in a realistic, gradual and sustainedmanner. Improving national ownership, simplifying the framework and moving towards agreater medium-term focus, combined with stronger and more coherent enforcement, are key
elements in the Commission’s orientations.
The objective of the reform is to facilitate effective economic surveillance, anchored in acommon framework that ensures equal treatment and multilateral policy coordination.
The framework should be robust to changing economic conditions and uncertainty, requiringa solid and predictable rule book and escape clauses for exceptional circumstances. It should
also pursue an integrated approach whereby surveillance tools complement each other, in thecontext of the European Semester. Effectively preventing and correcting macroeconomic
imbalances will require better detection of emerging risks and maintenance of reform
momentum, while placing more emphasis on EU and euro area developments, and on policy
implementation. These orientations will feed into the further debate, in particular within theCouncil and with the European Parliament, with a view to reaching a broad consensus on the
future design of the economic governance framework.
(1) In March 2022, the Commission published a summary report on the replies to the online survey. European
Commission (2022), ‘Online public consultation on the review of the EU economic governance framework:summary of responses’, SWD(2022) 104 final of 28 March 2022.
(2) State of the Union address by the President of the European Commission, 14 September 2022.

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The Communication is set out as follows. Section 2 recalls the need for an effective
governance framework, integrating the fiscal, reform and investment dimensions in order toaddress the challenges prevailing now and over the foreseeable future. Against thisbackground, the key elements of the Commission’s reform orientations are presented in
Section 3. Section 4 develops these key elements by providing more detail on practicalaspects of the proposed reforms to fiscal and macroeconomic surveillance. Section 5 outlines
the next steps and concludes.
Figure 1: A new governance architecture
Debt Sustainability AND Sustainable GrowthFiscal prudence

Reforms andinvestment

Macroeconomic
balanceA revised EU fiscal
framework

A new tool for
enforcing reforms
and investment

A revised MIP

Based on a mediumterm net expenditure
path anchored on debt
sustainability

Ensuring theenforcement of reforms
and investment
underpinning theagreed expenditure
path

More focused andforward-looking
perspective
Strengthen
effectiveness andenforcement based onpolicy commitments

2. The need for an effective economic governance framework
2.1 Towards a framework that guides Member States in addressing identified challenges
and common policy priorities
The EU’s economic governance framework has guided Member States in achieving
their economic and fiscal policy objectives. Since the Treaty of Maastricht of 1992, theframework has helped achieve macroeconomic convergence, safeguard sound public finances
and address macroeconomic imbalances. Together with a common monetary policy and acommon currency in the euro area, the framework has created conditions for economic
stability, sustainable economic growth and higher employment for EU citizens.

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The EU economic governance framework has evolved over time. Reforms have generally
been made in reaction to weaknesses in the framework that have been exposed mostly inmoments of economic crisis. In particular, the legislative packages known as the six-pack andtwo-pack responded to the lessons of the global financial crisis and the euro area sovereign
debt crisis by revamping fiscal surveillance, strengthening national budgetary frameworks,
reinforcing budgetary coordination in the euro area and broadening the scope of economic
surveillance to include macroeconomic imbalances. ( 3)
While the framework filled surveillance gaps and became more adaptable to economic
conditions, it has also become more complex and not all instruments and procedures
have stood the test of time. The February 2020 Communication on the economic
governance review and the ensuing public debate (see Annex 1) noted the mixed success ofthe fiscal surveillance framework and the growing heterogeneity of fiscal positions acrossMember States. The framework had not differentiated sufficiently between Member States
despite different fiscal positions, sustainability risks and other vulnerabilities. National fiscal
policies had often remained pro-cyclical and Member States had not used good economic
times to build fiscal buffers. The ability to steer the euro area fiscal stance was hampered by
the lack of prudent policies in good times and remained limited in the absence of a central
fiscal capacity with stabilisation features. The composition of public finances had not become
more growth-friendly and national governments had not prioritised spending that enhances
growth and economic and social resilience. The EU fiscal rules had become complex, withmultiple indicators and reliance on unobservable variables, undermining transparency andhampering ownership and predictability. Despite improvements in national fiscal
frameworks, their effectiveness varied markedly across Member States. With respect to thesurveillance of macroeconomic imbalances, the framework had been successful in raisingawareness of broader risks to macroeconomic stability but did not generate sufficient policy
responses. The Excessive Imbalance Procedure (EIP) had never been activated. Since thecreation of the Macroeconomic Imbalances Procedure (MIP), the Union had been more
successful in reducing current account deficits than in reducing persistent and large current
account surpluses. Surveillance had remained untested in preventing the accumulation of newvulnerabilities and risks and in fostering the adequate preventive policy action. Links
between various surveillance strands had not always been fully exploited.
2.2 Lessons from the recent crises
Lessons from the policy response to recent economic shocks, in particular the COVID19 crisis, have implications for the economic governance review. In March 2020, thegeneral escape clause of the Stability and Growth Pact (SGP) was activated. This allowed
Member States to react to the COVID-19 crisis by providing sizeable fiscal support to their(3) A full description of the six-pack and two-pack reforms can be found in Box 1 of European Commission(2020), ‘Economic governance review’, COM(2020) 55 final of 5 February 2020. A full list of the underlying
secondary legislation can be found in Footnote 1 (Page 1) of the Staff Working Document accompanying that
communication (European Commission (2020), 'Economic governance review’, SWD(2020) 210 final of 5
February 2020).

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economies, temporarily departing from the SGP budgetary requirements. ( 4) This strong
countercyclical response, together with new EU-level measures and instruments, and social
safety nets and health systems at the national level, proved highly effective in mitigating the
economic and social damage of the crisis. Lessons from the successful EU policy response to
the crisis, including the positive interaction between reforms and investment under the
Recovery and Resilience Facility (RRF), have also been useful for the review of theeconomic governance framework. At the same time, the crisis resulted in a significant
increase in public- and private-sector debt ratios, underscoring the importance of reducing
debt ratios to prudent levels in a gradual, sustained and growth-friendly manner. Fiscal
prudence in times of sustained growth helps build fiscal buffers that governments can use toprovide counter-cyclical fiscal support in times of crisis, when discretionary fiscal policy canbe particularly effective. Investment in preparedness and resilience can also reduce theadverse economic impact of crises. Moreover, the experience before and during crisis
confirmed the difficulties associated with designing policy recommendations on the basis ofunobservable indicators that are subject to frequent revisions (such as the “output gap” andthe “structural balance”).
The green and digital transitions, the need to ensure energy security, as well as socialand economic resilience, ( 5) and to build up defence capabilities will require sustained
high levels of investment in the years to come. The COVID-19 crisis and the Russian
invasion of Ukraine have also made these common priorities more visible and urgent. Highlevels of investment will be needed to achieve a fair twin transition (green and digital),increase social and economic resilience (including through upskilling and reskilling), increase
territorial cohesion, reduce energy dependencies, and increase defence capabilities, both at
the national level and in support of Europe’s common priorities. Within its limited capacity,
the EU budget has supported these efforts given that the twin transition, resilience, energy
security and defence are common objectives for all Member States and made even morepressing by the current crisis. These objectives call for investment by corporations andhouseholds, but also for higher public investment, backed by a good composition and qualityof public finances. These policies boost potential growth, strengthen resilience and help
counter the negative shocks of the war. Finally, they reflect strategic EU priorities and aresupported by common EU-financed programmes, such as the RRF financing provided until
2026 and cohesion policy funding.
Effective policy coordination is critical for responding to crises. The policy responses to
the COVID-19 crisis, the Russian invasion of Ukraine and the ensuing energy crisis haveunderscored the value of strong policy coordination, including between different policy andfunding tools, and between the EU and national levels. The activation of the general escape(4) A more in-depth discussion of the response to the COVID-19 crisis and the implications of that crisis on theeconomic governance review can be found in European Commission (2021), ‘The EU economy after COVID19: implications for economic governance’, COM(2021) 662 final of 19 October 2021.
(5) Guidance for Member States on how best to conduct distributional impact assessments of new policies,
which are important in order to avoid an exacerbation of existing inequalities, can be found in European
Commission (2022), ‘Better assessing the distributional impact of Member States’ policies’, COM(2022) 494
final of 23 September 2022.

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clause facilitated national fiscal responses. The interplay between fiscal policy and monetary
policy was and continues to be critical for the effective macroeconomic response to the crisis.
Monetary policy, created space for undertaking the necessary national fiscal policies which,in turn, helped to cushion the effects on economic growth and social cohesion. Some
framework conditions, such as financial market prudential regulations and the EU State Aid
framework, were temporarily adjusted. Flexibilities, including those within the EU budget,were fully applied. New EU-level tools also helped, in particular the temporary Support tomitigate Unemployment Risks in an Emergency (SURE), the Coronavirus Response
Investment Initiatives (CRII) under Cohesion Policy and NextGenerationEU, including the
Recovery Assistance for Cohesion and the Territories of Europe (REACT-EU) and the RRF.
The effective implementation of reforms and investment in the Recovery and Resilience
Plans (RRPs) provides a unique opportunity for Member States to reach a higher growth path,address economic and social vulnerabilities, improve public and private debt sustainability,
strengthen resilience and accelerate the green and digital transitions, while delivering onUnion objectives. More recently, in response to the energy market disruption triggered by the
Russian invasion of Ukraine and Russia’s weaponisation of energy, the Commission put
forward a number of measures addressing high energy prices and ensuring security of supply.
The Commission has also launched a series of initiatives, including the REPowerEU plan, to
end dependence on Russian fossil fuels, by diversifying energy supplies, saving energy andaccelerating the green transition. ( 6)The reformed framework must also help Member States to address the long-term
challenges facing the EU. Long term structural trends pose a significant challenge for thesustainability of public finances and sustainable growth in EU Member States. These trends
include demographic challenges and the climate crisis, with the latter becoming increasingly
apparent in the form of increasing severity and frequency of extreme weather events. Copingwith these challenges will require Member States to take further action, including public
investment to facilitate a green and digital transition and policies focused on ensuring soundpublic finances, including through reform of pension systems.
3. Towards a simpler and more effective framework with greater ownershipThis section presents the main contours of the Commission’s orientations for reform of
the economic governance framework (see Figure 2). Specific issues related to the set-up
and implementation of the proposed reformed framework are discussed in more detail in
Section 4, which also discusses the framework for dealing with euro area Member States
experiencing, or threatened with, financial stability difficulties.
3.1 A revised governance architecture with a greater focus on the medium term
The Commission’s orientations seek to define a simpler and integrated architecture formacro-fiscal surveillance to ensure debt sustainability and promote sustainable and(6) European Commission (2022), ‘REPowerEU: Joint European Action for more affordable, secure andsustainable energy,’ COM (2022) 108 final of 8 March 2022.

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inclusive growth. In order for the framework to be consistent across its components anddeliver effective economic surveillance, there is a need to clarify the objectives of eachsurveillance strand, to better integrate macroeconomic and fiscal policies, and to add
instruments to monitor progress and meet new objectives. Therefore, in addition to revising
the EU fiscal framework and the MIP, notably by integrating fiscal, reform and investment
objectives into a single holistic medium-term plan, the Commission’s orientations call for theestablishment of a new EU enforcement tool for reforms and investment. This tool would
ensure the enforcement of Member States’ reform and investment commitments underpinninga more gradual fiscal adjustment (see Section 4.1).
The Treaty reference values of 3% of GDP budget deficit and 60% debt-to-GDP ratio
remain unchanged. These values are established in a Treaty Protocol and the focus of thereview is on making sure that those values are adhered to in a more effective manner,
especially by focusing on an appropriate and credible debt reduction path towards 60% ofGDP, while at the same time ensuring that the economic governance framework is conducive
to sustainable and inclusive growth.
Figure 2: A suggested revised fiscal framework

3.2 National medium-term fiscal-structural plans as the centrepiece of the new governancearchitecture
National medium-term fiscal-structural plans that bring together the fiscal, reform andinvestment commitments of each Member State, within a common EU framework,
would be the cornerstone of the proposed revised framework. ( 7) This would ensure
consistency and streamline processes and deliverables, while recognising that reforms andinvestments can have a positive impact on fiscal sustainability. The revised EU fiscal(7) The fiscal-structural plans would merge the current Stability and Convergence Programmes with the National
Reform Programmes.

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framework would set the requirements to ensure that the debt ratio is put on a downward pathor stays at prudent levels and the budget deficit is maintained below the 3% of GDP reference
value over the medium term. Member States would present medium-term plans that set out
country-specific fiscal trajectories as well as priority public investment and reform
commitments that together ensure sustained and gradual debt reduction and sustainable andinclusive growth. All Member States would be required to address the priorities identified incountry-specific recommendations (CSRs) issued in the context of the European Semester.
The medium-term plans should also put forward initiatives that are in line with strategic EU
priorities derived directly from agreed EU guidance and targets that require policy action by
Member States. Therefore, plans should also be consistent with the National Energy andClimate Plans (which are to be aligned with the targets of the EU Climate Law) as well aswith the National Digital Decade Roadmaps. During the lifetime of the RRF, cross references
to the RRPs would be needed to ensure policy consistency.
This medium-term approach would allow for differentiation between Member States,
within a revised common EU framework that has sustainable growth and risks to debt
sustainability as a common basis. Such a common EU framework would be instrumental intransparently ensuring equal treatment between Member States. Taking the objective of debt
sustainability as the starting point for EU fiscal surveillance reflects the core Treaty objectiveof fiscal rules in Economic and Monetary Union, which is to prevent so-called “gross errors”
in the conduct of fiscal policy, as those can have negative spillovers to other Member States
and to the currency union as a whole. The existing EU framework requires all Member States
to make similar adjustment efforts, in particular in the preventive arm, regardless of their debt
position and fiscal risks. However, debt-to-GDP ratios and debt developments differ widely
across Member States. Some of them have a very high debt exceeding 90% of GDP (andexceeding 150% of GDP in two cases). Others have a debt lower than 60% of GDP. Lastly,
many are in an intermediate situation, with debt between 60% and 90% of GDP.
A risk-based surveillance framework would allow to adapt the existing debt reduction
benchmark to the country-specific debt ratio, while the requirement to maintain budget
deficits credibly below 3% of GDP would be preserved. The current debt reduction
benchmark (the so-called 1/20th rule) implies, in the current circumstances of high debt ratios
post-COVID, a too demanding frontloaded fiscal effort that risks jeopardising growth and is
pro-cyclical. ( 8) It should be recognised that high-debt Member States cannot abide by theexisting 1/20th debt reduction benchmark, since reducing their debt ratios at this speed would
have a very negative impact on growth and thereby on debt sustainability itself. Therefore, itis proposed to move to a more risk-based surveillance framework that puts debt sustainability
at its core and differentiates more between countries by taking into account their public debt
challenges, while adhering to a transparent and common EU framework consistent with the
3% of GDP and 60% of GDP reference values of the Treaty.

(8) For this benchmark, see Article 2(1a) of Council Regulation (EC) No 1467/97 of 7 July 1997 on speeding up
and clarifying the implementation of the excessive deficit procedure (OJ L 209 of 2.8.1997, p.6).

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National medium-term plans should ensure a sustainable debt reduction path through a
gradual consolidation and reforms and investments. Member States should present
medium-term fiscal-structural plans that ensure debt is kept or brought onto a sustainable
path by the end of the adjustment period as well as priority public investment and reform
commitments. The framework reflects that there is no trade-off between reforms andinvestment and fiscal adjustment. Improving the quality of public finances and protecting
public investment should be central elements of medium-term fiscal-structural plans, in lightof the essential role of public investment and reforms in enhancing potential growth andaddressing major systemic challenges such as the green and digital transition.
Moreover, Member States would be able to commit to a set of reforms and investmentthat help bring debt on a sustainable path and therefore could underpin a longer
adjustment period and a more gradual adjustment path. The adjustment path, the reforms
and investments will be discussed with the Commission and, once positively assessed, will be
adopted by the Council. The plans would need to be translated in national budgets for thewhole adjustment period, with the possibility for Member States to revise the plan only after
a minimum period of four years. This minimum adjustment period could be lengthened tomatch the national legislature, if Member States so wish. The plan could be revised earlier incase of objective circumstances making the implementation of the plan infeasible, but would
have to undergo the same validation process. Frequent revisions would undermine thecredibility of the plans as an anchor for prudent policies.
A single operational indicator anchored on debt sustainability would serve as a basis forsetting the fiscal adjustment path and carrying out annual fiscal surveillance, thus
significantly simplifying the fiscal framework and increasing transparency. The use ofnationally-financed net primary expenditure, i.e. expenditure net of discretionary revenue
measures and excluding interest expenditure as well as cyclical unemployment expenditure,as the single operational indicator for surveillance would allow for the operation of automaticstabilisers, including revenue and expenditure fluctuations outside the direct control of thegovernment. This would ensure a higher degree of macroeconomic stabilisation. While
Member States could use alternative indicators for national budgetary purposes (e.g., astructural balance), the annual fiscal surveillance at the EU level would be conducted solely
using this single operational indicator and thus the expenditure path. This single operational
indicator should be defined so as to ensure debt sustainability. The agreed multiannual net
primary expenditure path should ensure that debt is put or kept on a downward path at thelatest by the end of the adjustment period or stays at prudent levels, while ensuring that thebudget deficit is maintained below 3% of GDP over the medium term. ( 9)3.3 Agreement on the national medium-term fiscal-structural plans
The national medium-term fiscal-structural plan would be at the centre of the reformed
Stability and Growth Pact and would be proposed by the Member State on the basis of
a common EU framework. The revised common EU framework would set the requirements(9) The Commission will use its debt sustainability analysis framework given that it is a well-establishedanalytical toolkit for assessing debt sustainability risks (see Box 1).

8that ensures that public debt is put onto a downward path, or remains at prudent levels, andthat the deficit is maintained below 3% of GDP. The common EU framework would alsoestablish the criteria for assessing the reforms and investment that underpin a possible
extension of the adjustment path. Member States’ medium-term plans would have to comply
with the common revised EU framework.
On the basis of a positive assessment by the Commission, the Council would adopt themedium-term fiscal-structural plan, including its fiscal trajectory. The Commission
would assess the plan against the revised common EU framework and could only provide a
positive assessment of fiscal-structural plans if debt is put on a downward path or stays atprudent levels, and the budget deficit is maintained below the 3% of GDP reference value
over the medium term. Multilateral discussions in the relevant committees of the Council
would ensure transparency and accountability, with the Council endorsing the adequacy ofthe plan. This model would strengthen national ownership. Based on a better integration of
the requirements of the revised common EU framework in domestic policy debates, it would
strengthen multilateral fiscal surveillance.
3.4 Implementation of the national medium-term plan and annual monitoring
To ensure transparency and facilitate the effective monitoring of the implementation of
the medium-term fiscal-structural plans, Member States would submit annual progress
reports. In addition to fiscal reporting, the implementation of reforms and investments
covered by the medium-term plans would be detailed in these reports. ( 10) They would be thebasis for annual surveillance by the Commission and Council, including possible enforcement
decisions.
While more scope would be given to Member States for the design of their fiscal
trajectories, a more stringent EU enforcement would underpin multilateralsurveillance. Enforcement would be enhanced compared to the current framework. The
excessive deficit procedure (EDP) would remain unchanged for breaches of the 3% of GDP
deficit reference value (the so-called ‘deficit-based EDP’). It is a well-established element ofEU fiscal surveillance that has been effective in influencing fiscal behaviour and is wellunderstood by policy makers and the general public, thanks to its simplicity. The EDP for
breaches of the debt criterion (the so-called ‘debt-based EDP’) would be strengthened forboth activation and abrogation. It would focus on departures from the agreed fiscal path,
which the Member State has committed itself to and endorsed by the Council. For Member
States with a substantial public debt challenge, departures from the agreed path would bydefault lead to the opening of an EDP. For Member States with a moderate public debt
challenge, departures could lead to the opening of an EDP, if assessed as giving rise to “grosserrors”. The range of sanctions would be broadened, for instance by adding reputationalsanctions (see Section 4.2).
A new tool would be created to ensure the implementation of reform and investmentcommitments. Under the proposed reform, Member States could request a more gradual(10) Relevant interactions with the RRPs will be taken into account during the lifetime of the RRF.

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adjustment path by putting forward a specific set of priority reforms and investments that
foster long-term sustainable growth and, therefore, help improve debt dynamics (see Section
4.1). In case of non-implementation of those commitments, a new enforcement tool would
lead to a revision of the adjustment path towards a stricter path. ( 11) Due to the particular riskof negative spillovers within a monetary union, it would be possible to apply financial
sanctions for euro area countries in case of non-implementation.
National frameworks and processes would help achieve the objectives of the mediumterm structural-fiscal plan. Independent fiscal institutions would play an important role ineach Member State in assessing the assumptions underlying the plans, providing anassessment on the adequacy of the plans with respect to debt sustainability and countryspecific medium-term goals, and monitoring compliance with the plan. This would entail
improving the set-up and performance of independent fiscal institutions. The outcome would
be a greater debate at national level and thus a higher degree of political buy-in andownership of the medium-term plan. The Commission will reconsider the mandate and roleof the European Fiscal Board in this context.
3.5 A more effective framework to detect and correct macroeconomic imbalances
The cornerstone of the Commission’s orientations for the MIP would be an enhanced
dialogue with Member States to achieve better implementation through ownership andcommitment. Greater ownership by Member States would be achieved by reaching acommon understanding between Members States and the Commission of the challenges
identified under the MIP and the policies needed to address them. This would entail adialogue, leading to a commitment from Member States to include the reforms andinvestments needed to prevent or correct macroeconomic imbalances in their medium-term
fiscal-structural plan.
Moreover, the preventive role of the MIP should be strengthened in a macroeconomic
environment characterised by new risks. Both the first screening for imbalances in theAlert Mechanism Report (AMR) and the assessment of whether imbalances exist in the indepth reviews (IDRs) would be made more forward-looking with a view to detecting andaddressing emerging imbalances early on. This could entail preparing more IDRs when flowrelated variables show adverse trends, indicating high risks of a build-up of imbalances. It
could also lead to IDRs concluding more frequently that no imbalances exist.
The reform would reduce the inertia that has characterised the MIP, by basing theassessment of imbalances more on the evolution of risks and policy implementation.
This implies putting more weight on trend developments that are expected to be sustained andon the policies that have been implemented to address macroeconomic imbalances, whenassessing whether imbalances have been corrected. This approach would lead to the deescalation of Member States from the MIP when policies to address imbalances are in placeand stock imbalances are continuously being corrected.

(11) The precise modalities and legal basis of this instrument will need to be elaborated.

10Finally, the reform would strive for an MIP that has a clear focus on macroeconomic
issues that affect Member States and, at the same time, would give more visibility to the
EU and euro area dimensions of imbalances. This could highlight vulnerabilities thatpossibly affect the EU and the euro area as a whole, and the respective contribution of thevarious Members States to those vulnerabilities. This would help internalise spillovers andfeed into euro area recommendations.
To fully exploit the synergies between the MIP and the fiscal framework, the review
foresees several links. Firstly, for Member States identified with imbalances, the mediumterm fiscal-structural plans would also have to include reforms and investments to correct
those imbalances. Secondly, in case of non-implementation of the MIP-relevant reforms andinvestment underpinning a longer adjustment period, for countries with excessive imbalances,
launching the EIP would be considered. Finally, if an EIP is launched, the Member State
would be asked to present a revised fiscal-structural plan, which would thus act as thecorrective action plan currently provided for in EU law. ( 12)
4. How would the revised economic governance framework work in practice?
Building on the main reform contours set out in the previous section, this section
addresses some specific issues related to the functioning of the revised common EU
fiscal framework. These issues relate to: setting up and agreeing on the national mediumterm fiscal-structural plans; assessing compliance of fiscal outcomes with the endorsed
expenditure path; and identifying and monitoring the correction of macroeconomic
imbalances. This section also covers the framework governing financial assistance, i.e., theframework for euro area Member States experiencing, or threatened with, serious difficulties
with respect to their financial stability.
4.1 How to set up and agree on the plan?
Submission, assessment, endorsement and revision of the national medium-term fiscalstructural planAs part of the common framework, the Commission would put forward for Member
States with a substantial or moderate public debt challenge, a reference multiannual
adjustment path in terms of net primary expenditure covering at least 4 years. The
reference adjustment path would be anchored on debt sustainability meaning that for Member
States with substantial and moderate fiscal challenges, it should ensure that, even in theabsence of further fiscal measures, debt would remain on a plausibly downward path after the
fiscal adjustment period and that the deficit would be maintained below the 3% of GDP
threshold (see Box 1 for more details). For each Member State, the multiannual expenditure
path that would put debt on a downward trajectory could thus be translated into thecorresponding level of the structural primary balance to be achieved at the end of the 4-year(12) For the corrective action plan, see Article 8 of Regulation (EU) No 1176/2011 of the European Parliamentand of the Council of 16 November 2011 on the prevention and correction of macroeconomic imbalances (OJ L
306 of 23.11.2011, p.25).

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period. The debt sustainability analysis ( 13), the reference multiannual adjustment path, andthe corresponding level of the structural primary balance at the end of the 4-year adjustment
period would be made public by the Commission. These elements would provide a common
reference for the assessment of the plans to be proposed by Member States.
In putting forward the reference adjustment path covering at least 4 years, theCommission would apply the following common framework:•

For Member States with a substantial public debt challenge, the reference net
expenditure path should ensure that by the horizon of the plan (4 years), i) the 10-year
debt trajectory at unchanged policies is on a plausibly and continuously declining pathand ii) the deficit is maintained below the 3% of GDP reference value at unchanged
policies over the same 10-year period.

•

For Member States with a moderate public debt challenge, the reference net
expenditure path should ensure that, i) at most 3 years after the horizon of the plan,
the 10-year debt trajectory is on a plausibly and continuously declining path atunchanged policies; and ii) by the horizon of the plan, the deficit is maintained below
the 3% of GDP reference value over the same 10-year period.

To assess plausibility, the Commission would use stress tests and stochastic analysis,
simulating common shocks related to short and long-term interest rates, nominal GDP
growth, the primary budget balance and nominal exchange rates. This analysis would bemade public together with the reference net expenditure path. The Commission would also
make available the methodology and underlying data.
When assessing the plan, the Commission will also evaluate whether it is credibly ensured
that the deficit is maintained below 3% of GDP over a 10-year period.
For Member States with a low public debt challenge, the deficit should be maintained belowthat reference value at unchanged policies over a 10-year period at most 3 years after thehorizon of the plan.
As a following step, each Member State would submit a medium-term fiscal-structuralplan for assessment by the Commission and endorsement by the Council. The plans
would outline the medium-term fiscal path, and reform and investment commitments. The
fiscal adjustment path would be set in terms of net primary expenditure, i.e. expenditure netof discretionary revenue measures and excluding interest expenditure as well as cyclicalunemployment expenditure. The medium-term fiscal path would be translated into
corresponding annual spending ceilings. For Member States identified with imbalances under
the MIP, the plans would also include reforms and investments to correct those imbalances.
The submission of the plan would be preceded by an in-depth technical dialogue with theCommission. The Commission would assess the medium-term plan in an integrated manner,
taking account of the interactions between the fiscal trajectory, and reforms and investments.
The assessment would take place on the basis of a common EU assessment framework and(13) The debt sustainability analysis would play a role as a risk-assessment tool only in the design and not in theimplementation of the plans.

12transparent methodologies, retaining the possibility of seeking additional information orrequesting a revised plan.
The Member State could request and be granted an extension of the adjustment period
by a maximum of 3 years, provided it underpins its plan with a set of reforms andinvestments that supports sustainable growth and debt sustainability. Member States
could propose a more gradual adjustment path, provided that this more gradual path isunderpinned by a set of priority reform and investment commitments. These commitments
would be assessed using a common EU assessment framework (see following sub-section).
They would need to support debt sustainability and respond to common EU priorities andtargets, as well as ensuring that the national fiscal-structural plan addresses all or a significant
subset of relevant CSRs. Relevant reforms and investment in the RRPs would duly be taken
into account during the lifetime of the RRF.
As a following step, the plan would be adopted by the Council on the basis of aCommission assessment. After the Commission has assessed the medium-term plan, on thebasis of a common assessment framework, the Council would either adopt the plan orrecommend that the Member State resubmit a modified plan. In case there would be no
agreement between the Member State and the Commission, the reference multiannual net
expenditure path would be used by the Commission and the Council for the purpose of fiscal
surveillance and enforcement.
As a last step, the Member State would implement the plan, with annual monitoring by
the Commission and the Council under the European Semester. The national plan asendorsed by the Council should commit the annual national budgets for a period not inferior
to four years. The agreed fiscal trajectory could be revised before this period only in the caseof objective circumstances making the implementation of the plan infeasible. Any revision
proposed by the Member State would need to be assessed by the Commission and adopted by
the Council, as is the case for the plan itself.
For Member States found to be in a situation of macroeconomic imbalances when themedium-term plan is already in place, the plan would not, as a rule, be re-opened toincorporate the policy approach to address those imbalances. A policy dialogue with theMember State would be initiated to identify the measures needed to address the imbalances.
These would be communicated by the Member State in a letter and would eventually beincorporated in the medium-term plan when updated, on the basis of the assessment andapproval process described above (Box 2).

13

Figure 3: Overview of the process

Common assessment framework for the medium-term plan
In the design phase, the Commission would assess whether the multiannual fiscal
adjustment path put forward by Member States is consistent with ensuring that debt is
put or kept on a downward path by the end of the adjustment period at the latest or
remains at prudent levels and that the deficit is maintained below 3% of GDP over the
medium term. The reference adjustment path would serve as a common basis for the
discussion and for the assessment of the plans by the Commission. The reference adjustment
path should also ensure that the deficit is maintained below the 3% of GDP reference value
over the medium term. For Member States that are already in EDP when the plan issubmitted, the Commission would assess whether the plan is consistent with relevant Council
recommendations and decisions.
If a Member State has requested an extension of the adjustment period by a maximumof 3 years, such a request would be assessed positively in case the longer adjustment
path is underpinned by appropriate and timebound reform and investmentcommitments. Member States would be expected to provide in-depth and transparent
documentation, providing quantitative analysis of the short-term costs – if any – and of themedium-term budgetary and potential growth impact of the reform and investmentcommitments. When assessing such a request, the Commission would use the following
criteria to assess the set of reform and investment commitments put forward by Member
States. They should:•

be growth enhancing and support fiscal sustainability.

•

address common EU priorities, including the National Energy and Climate Plans(aligned with the targets of the EU Climate Law), the National Digital Decade
Roadmaps, ( 14) and the implementation of the European Pillar of Social Rights, andensure that the fiscal-structural plan addresses all or a significant subset of relevant
CSRs, including, where applicable, recommendations issued under the MIP.

(14) Submitted, in accordance with Article 7 of the Decision of the European Parliament and the Council
establishing the Digital Decade Policy Programme 2030, nine months after the date of its entry into force(expected in January 2023).

14

•

be sufficiently detailed, frontloaded, timebound and verifiable.

•

ensure that country-specific investment priorities can be addressed without leading toinvestment cuts elsewhere over the planning horizon.

On the basis of a positive Commission assessment, the Council would adopt the extended
adjustment path and the reform and investment commitments underpinning this path.
In practice, the following technical specifications would be important for theformulation of the Member State’s medium-term plan and the Commission’s
assessment of it:•

The plan would set out assumptions and projections of the trajectory of relevant
macro-fiscal variables. This would cover the macroeconomic and fiscal path for the
adjustment period covered by the plan and the subsequent no-policy-change extensionof the projections for the following 10 years. The debt projections at unchanged
policy to be included in the plan should be consistent with the comparable
Commission projections (see Box 1 for more details).

•

The plan of a Member State that requests a longer adjustment period would need toinclude in-depth and transparent documentation, providing evidence of how the set ofreform and investment commitments support sustainable growth and fiscal
sustainability as well as quantitative analysis of both the medium-term budgetary andpotential growth impact of the set of reforms and investment underpinning the longer
adjustment period.

•

The plan would include the projected expenditure financed by RRF grants, cohesion
policy funds and other EU transfers. Other data and reporting requirements, both forthe medium-term plan itself and the annual progress report, would need to be further
developed, starting from the current requirements for the Stability and Convergence
Programmes and National Reform Programmes, but with a longer horizon.

•

The agreed multiannual net primary expenditure path would be translated into annual
expenditure ceilings over the adjustment period to be respected in relation tonationally-financed expenditure, while the plan would include projected expenditure
financed by RRF, cohesion policy funds and other EU transfers. The path would be
set in a way to ensure that a significant part of consolidation needs are met within theadjustment period and not left to future governments. Annual and in-year fiscal
surveillance would monitor expenditure developments in order to avoid that small
annual slippages cumulatively lead to large deviations from the path.

4.2 How to assess compliance of fiscal-structural outcomes?
Principles for assessing compliance
The implementation of the medium-term fiscal-structural plans would be monitored
against the respect of the agreed multiannual net primary expenditure path endorsedby the Council. While monitoring and enforcement would continue to be based on theannual and in-year surveillance cycle, with a particular role for annual reports, the focus ofsurveillance would be to ensure adherence to the medium-term plan. Nationally-financed
15

expenditure would have to stay within the agreed multiannual net primary expenditure path.
Given that the use of net primary expenditure as single operational indicator for surveillance
would allow for the operation of automatic stabilisers, no deviation from the path due tocyclical conditions would be justified (as this would give rise to the risk of being applied
asymmetrically in bad times and thus undermine adjustment and debt sustainability).
Likewise, while the Member States would remain free to undertake additional reforms orinvestments, new policy initiatives would not imply a reopening of the agreed multiannual
net primary expenditure path.
Robust escape clauses are needed to address exceptional situations where the endorsed
adjustment path could not realistically be adhered to. Strict adherence to the agreed
multiannual net primary expenditure path would allow fiscal policy to be countercyclical,
building fiscal buffers in good times and allowing for the necessary policy response in bad
times. ( 15) However, for major shocks to the euro area or EU as a whole, a general escapeclause would be maintained to deal with a severe economic downturn allowing for a
temporary deviation from the fiscal path. In addition, an exceptional circumstances clause
would allow for temporary deviations from the medium-term fiscal path in the case of
exceptional circumstances outside the control of the government with a major impact on the
public finances of an individual Member State. This would require that the overall size of theshock exceeds a ‘normal’ range (e.g., costs of natural disasters should be anticipated withinbandwidths). The triggering and extension of general and country-specific clauses would
require the consent of the Council.
To increase ownership and transparency at the national level, independent fiscal
institutions could play a role in the monitoring of compliance with the national mediumterm fiscal-structural plans in support of the national governments. Independent fiscal
institutions could provide an ex-ante assessment of adequacy of the plans and theirunderlying forecasts, which would help national government in the design phase. This would
increase the ownership of the plans at the national level and strengthen transparency before
endorsement of the plan at the EU level. Moreover, independent fiscal institutions could
strengthen enforcement at the national level by being responsible for providing an assessmentof ex-post compliance of budgetary outturns with the agreed multiannual net primary
expenditure path and, when applicable, an assessment of the validity of explanations
regarding deviations from the path. The Commission and the Council, in charge of EU
surveillance, could take into account the assessment of independent fiscal institutions but
would necessarily retain the power to propose and adopt the final decision.
Enforcement of compliance with the medium-term fiscal path and the opening of EDPs
Stronger ex-post enforcement would be the necessary counterpart of a risk-based
surveillance framework that provides more leeway to Member States to set their(15) The complementarity between adherence to rule-based fiscal policy and the need for coordination to address
exceptional situations has been acknowledged in the eligibility criteria for the activation of the ECB’s
Transmission Protection Instrument (TPI), as Member States’ compliance with the EU fiscal framework is oneof the criteria to be considered by the Governing Council of the ECB when deciding whether to activate the TPI.

16

adjustment paths. Assessment of compliance and enforcement would be carried out on acontinuous basis, in particular based on the annual progress reports and EDP data
notifications. For euro area Member States, the Commission would also assess compliance ofthe draft budgetary plans with the agreed multiannual net primary expenditure path in theautumn. There would no longer be a need for annual fiscal recommendations for Member
States that comply with their medium-term plans. At the same time, the Commission/Council
could issue recommendations with early warnings before the conditions for opening an EDP
are reached, namely, if they see strong risks of breaching the 3% of GDP threshold or in caseof deviations from the agreed multiannual net primary expenditure path that do not lead to the
opening of an EDP.
The deficit-based EDP would be maintained, while the debt-based EDP would be
reinforced and become a key tool for enforcing continued compliance with the agreed
multiannual net primary expenditure path. The existing rules for the opening and closingof a deficit-based EDP would remain unchanged. The process for launching a debt-based
EDP under the reformed rules would be activated when a Member State with debt above 60%
of GDP deviates from the agreed multiannual net primary expenditure path set out in themedium-term fiscal plan endorsed by the Council. In such a case, the Commission would
prepare a so-called ‘Article 126(3) report’ that assesses relevant factors, as foreseen in theTreaty. For a Member State with a substantial public debt challenge, a deviation from theagreed path would result by default in the opening of an EDP. The path under the EDP would
in principle be the one originally endorsed by the Council. In case this original path is nolonger feasible, due to objective circumstances, the Commission could propose to the Council
an amended path under the EDP. Also, in case of non-implementation of the reforms andinvestment underpinning a more gradual adjustment path, a new enforcement tool would leadto a revision of the adjustment path in a more restrictive sense. The Commission would use
notional control accounts for each Member State to keep track cumulative deviations fromthe agreed multiannual net primary expenditure path over time. This would strengthen themedium-term memory of the system and avoid that small deviations eventually add up tolarge deviations.
Enforcement mechanisms would be reinforced:•

The effective use of financial sanctions would be de-constrained by lowering theiramounts.

•

Reputational sanctions would be enhanced. For example, Ministers of Member Statesin EDP could also be required to present in the European Parliament the measures tocomply with the EDP recommendations.

•

Macroeconomic conditionality exists for structural funds and for the RRF and would
be applied in a similar spirit. EU financing could also be suspended when Member
States have not taken effective action to correct their excessive deficit.

Clear conditions would need to be fulfilled for abrogation of EDPs. Abrogation would
require the deficit to remain credibly below 3% of GDP (in line with current provisions) and,for debt-based EDPs, that the Member State demonstrates durable compliance with the17agreed multiannual net primary expenditure path for 3 years, ensuring that debt is credibly
put on a downward trajectory at the end of the adjustment period.
Enforcement of compliance with reform and investment commitments
Compliance with the endorsed reform and investment commitments that underpin amore gradual fiscal path would be monitored annually in the context of the European
Semester. To ensure proper monitoring, the national medium-term plan should include
sufficient detail as well as a timeline for the implementation of reform and investmentcommitments. Member States would report on progress with the implementation of thesecommitments in their annual progress reports together with a report on the policy action taken
to address CSRs.
A new tool would be created to enforce the reform and investment commitments
underpinning a more gradual adjustment path. If a Member State were to fail to
implement its reform and investment commitments, the tool would empower the EU torequest a revised multiannual net primary expenditure path (in a more restrictive sense while
ensuring a high quality of public finances) and (for euro area Member States) to also impose
financial sanctions.
4.3 How to better identify and assess the evolution of macroeconomic imbalances?
The cornerstone of the reformed MIP would be the joint determination of a policy
strategy to address imbalances, through enhanced dialogue and commitment.
•

Similarly to the fiscal adjustment path, the policy approach to prevent and correct
macroeconomic imbalances would be based on improved ownership, following a
dialogue with the Commission on the basis of the Commission’s IDR and, whereapplicable, CSRs. This would result in commitments in the medium-term fiscalstructural plan, whose implementation will be taken into account in the analysis of theevolution of imbalances.

•

As under fiscal surveillance, a strengthened monitoring and enforcement process
would be envisaged for the MIP. Therefore, the EIP would remain the tool to enforce
policy action in Member States with excessive macroeconomic imbalances, including
imbalances that jeopardise or risk jeopardising the proper functioning of the economic
and monetary union, when those Member States are not taking appropriate policy
action.

•To ensure overall consistency with the commitments taken in the medium-term fiscalstructural plan, if an EIP were launched, this would lead to the re-opening of the
fiscal-structural plan on the basis of a revised plan submitted by the Member State,
which would act as the corrective action plan under the EIP. Such a single plan
would allow for a more coherent and integrated macro-fiscal monitoring process.

•To reinforce the macroeconomic focus and the EU/euro area dimension, the MIP
scoreboard would be complemented with the inclusion of values for the EU and theeuro area for all indicators. Systemic challenges, notably related to climate change,
environment and the energy transition, will be covered in the context of the European
18Semester, and referred to in the AMR and IDR when they have a clear link tomacroeconomic imbalances.
•

To allow for a more forward looking and early risk detection, a reformed MIP needs
to pay more attention to flow-related variables, throughout the main stages of MIP
surveillance. The AMR would put more emphasis on whether trends are projected tocontinue and their expected impact in the Member States selected for an IDR. This
would allow for more frequent IDRs when adverse trend developments are observed,
even if not fully reflected in stock imbalances. The assessment of whether imbalances
exist would remain based on the three criteria of gravity, evolution and the policy
response. However, the criteria of evolution and the policy response by the Member
State concerned would be given more weight in the assessment. That could help
reduce the perceived inertia around the classification of imbalances.

•

To increase the dynamics of the MIP, the de-escalation of Member States in MIP
would be based on clear criteria. Such criteria could include, for instance, thatimbalances have narrowed for at least two years and that flows support the
expectation of sufficient further reduction; forecasts should show continued
improvements and the policy commitments, including those specified in the national
fiscal-structural plan, have to be implemented. Shorter IDRs could be prepared when
imbalances are being corrected, while fully-fledged reports would be foreseen every
three years, as a rule, unless the Commission sees a need for such an analysis in themeantime.

4.4 Focused and streamlined post-programme surveillance
The economic governance review also comprised an assessment of post-programme
surveillance. The February 2020 Communication considered that the framework forsurveillance of Member States experiencing, or threatened with, serious difficulties withfinancial stability had led to a number of improvements and generally worked well.
Nonetheless, the importance of retaining adequate national ownership of programmes was
highlighted, as well as that issues of transparency and accountability also persist. ( 16)The flexibility of enhanced surveillance as a crisis resolution tool should be preserved.
Enhanced surveillance has proven itself to be a flexible instrument, having been successfully
utilised at the end of a Macroeconomic Adjustment Programme for Greece, from 2018 until
2022. It allowed for an effective follow-up of reform commitments, enabling a subsequenttransition towards post-programme surveillance. However, the value of enhanced
surveillance as an early intervention measure remains equally important for preventing asituation in a euro area Member State deteriorating to the point of a need for a
Macroeconomic Adjustment Programme.

(16) Since that time, the European Court of Auditors found that while post-programme surveillance was an
appropriate tool, its efficiency was hampered by unclear objectives and insufficient streamlining and focus in
implementation, and it made several recommendations to the Commission to consider addressing such
shortcomings in the context of the economic governance review.

19

Post-programme surveillance should be given clear objectives with its intensity linked tothose objectives. Post-programme surveillance would focus on: (i) assessing repayment
capacity through considering the economic, fiscal and financial situation; (ii) monitoring theimplementation of unfinished reforms that begun under the adjustment programme; and(iii) assessing whether corrective measures are needed in the context of concerns for
repayment capacity or continued market access. The intensity of post-programme
surveillance would evolve with time along with the change in focus and with the assessmentof risks. Whilst the initial years would be more intense as there is also the monitoring of theimplementation of unfinished reforms that begun under the adjustment programme, over time
this element would decrease as reforms are implemented. As such, in “normal” times, postprogramme surveillance would focus on assessing repayment capacity through considering
the economic, fiscal and financial situation and could be streamlined where repayment risks
are assessed to be low, also through a better integration with other surveillance tools. Should
the economic, fiscal or financial situation deteriorate, such an approach would allow for arenewed increase in the intensity of post-programme surveillance that would take up the workof assessing whether corrective measures are needed.
5. Conclusions
This Communication sets out the main features of a reformed EU economic governanceframework. The main elements outlined in this Communication respond to the need for areformed framework that is fit for the challenges of this decade. The necessary financing forthe just transition to a digital and green, climate-neutral economy and higher debt-to-GDP
ratios call for fiscal rules that allow for strategic investment, while safeguarding fiscal
sustainability.
Swift agreement on revising the EU fiscal rules and other elements of the economic
governance framework is a pressing priority at the current critical juncture for theEuropean economy. Member States and the Commission should reach a consensus onreform of the economic governance framework ahead of Member States’ budgetary processes
for 2024. In light of the mounting challenges that the EU is facing, there is a need for strong
budgetary and structural policy coordination and effective economic and fiscal surveillance.
Sound public finances that can respond in a coordinated manner to the prevailing challenges
and to the achievement of common EU priorities have become increasingly important in theface of recent and current crises. This would also reassure financial markets on theinstitutional robustness of the euro area, which rests on sustainable public finances and on
preventing and addressing macroeconomic imbalances in all Member States. The operation of
credible fiscal rules and surveillance of risks to macro-financial stability will also help the
ECB attain its goals, particularly as it faces the challenge of delivering on its mandate tomaintain price stability while avoiding financial fragmentation in the euro area.
A thorough reform of the EU economic governance framework would requirelegislative change. Amending the underlying legislation would allow for clarification andsimplification of the framework. It would provide a high degree of legal certainty for the20

operation of a reformed framework, with the necessary involvement of the Council and theEuropean Parliament. Agreeing on necessary legislative change would follow the ordinary
legislative procedure, involving on most aspects the Council and the European Parliament on
an equal footing.
Most of the objectives of the proposed reform to the MIP could be pursued within theexisting legal provisions. In particular, pursuing a more forward-looking approach to better
assess risks and the adjustment of the criteria followed to decide on the existence andclassification of imbalances and their correction could be accommodated within the current
legal framework.
On the basis of these orientations and the ensuing discussion, the Commission willconsider tabling legislative proposals. It will again provide guidance for fiscal policy forthe period ahead in the first quarter of 2023. This guidance will facilitate the coordinationof fiscal policies and the preparation of Member States’ stability and convergenceprogrammes for 2024 and beyond. The guidance will reflect the economic situation, thespecific situation of each Member State and the orientations laid down in thisCommunication provided a sufficient degree of convergence across Member States isachieved by that time. In spring 2023, guidance will materialise through CSRs.

21

Box 1: The debt sustainability criterion
To determine the reference adjustment path ensuring the convergence of debt to prudent levels, theCommission would use a well-established and transparent methodology, drawing from its debt
sustainability analysis (DSA) framework, and agreed with Member States. For Member States with asubstantial public debt challenge, the Commission would put forward a reference adjustment path ensuringthat in each Member State, after fully implementing the plan, debt would remain on a plausibly downward
path after the adjustment period, on the basis of a 10-year trajectory and assuming unchanged policies after
the adjustment period. This reference adjustment path is associated with a level of the structural primarybalance at the end of the adjustment period that ensures that debt is on a plausibly downward path. For
Member States with a moderate debt challenge, the reference path would be less demanding.
The Commission’s DSA framework is a well-established analytical toolkit for assessing debt
sustainability risks. It includes a baseline projection for the debt trajectory over 10 years, along withadditional deterministic debt projections underpinned by alternative assumptions for fiscal, macroeconomic
and financial variables, as well as stochastic analysis capturing broad macroeconomic uncertainty. The DSA
baseline rests on a no-fiscal policy change assumption where no additional fiscal measures are incorporated
beyond the horizon of the plan, and primary spending is only affected by changes in ageing-related costs as
projected in the latest joint Commission-Council Ageing Report. Real GDP growth is in line with the latest
Commission medium-term projections using the EU commonly agreed methodology, taking into account the
impact of investment under the NextGenerationEU package. Inflation and interest rates converge to marketbased expectations. For the deterministic projections, the risk assessment relies on the projected debt level,
the debt trajectory and the plausibility of the targeted fiscal position (and room for corrective action if
needed). For the stochastic projections, the risk assessment is based on the probability that debt will notstabilise over five years and on the size of macroeconomic uncertainty. (1) On this basis, this analysis
classifies countries into three overall risk categories: low, medium and high. A high risk category indicatessubstantial public debt (sustainability) challenges that need to be addressed by fiscal and macroeconomic
policies.
An adjustment path consistent with the convergence of debt to prudent levels should ensure that for a
Member State with a substantial or moderate public debt challenge, debt would be put on a plausibly
downward path on the basis of a 10-year trajectory beyond the plan’s horizon. For Member States witha substantial public debt challenge, this would be the case if the 10–year debt trajectory beyond the plan’shorizon were on a plausibly and continuously declining path. For Member States with a moderate public debt
challenge, this would be the case if, at most 3 years after the horizon of the plan, the 10-year debt trajectorywere on a plausibly and continuously declining path. These conditions should be met at unchanged policies
after implementing the medium-term plan, i.e. in the absence of new fiscal policy measures beyond theadjustment period, and, to account for realistic risks, under a standard set of adverse scenarios such as thoseconsidered in the Commission’s DSA framework. Finally, there should be a sufficiently low probability thatdebt increases in the five years following the plan’s horizon.
Assumptions and projections of the trajectory of relevant macro-fiscal variables would be set out inthe plan for a period of 10 years after the period covered by the plan. This would cover themacroeconomic and fiscal path for the period covered by the plan and the subsequent no-policy-change
extension of the projections for the following 10 years (see Table 1).
Table 1: Time horizon of the projections and of the assessment criterion
Time horizon
Projections andassessment
criterionT
Last outturn year

T+[X]
Plans’ projections(including binding
period)Base year to run the
DSA…
Plans’ projections
based on a no-fiscal
policy change
extension

T+[X]+10
DSA end date

Note: The adjustment period of 4 years could be exceptionally extended up to 7 years in order to facilitate major investments andreforms.
2021 Fiscal Sustainability Report.
(1) Further details on the methodology can be found in the22Box 2: The policy response to new imbalances under the MIP
Agreement of the national medium-term plan and the MIP
Immediately following the identification of imbalances in an IDR (and possible publication of
MIP-specific CSRs to serve as guidance), the reformed MIP would envisage a dialogue with theMember State. This would take place over the summer and autumn. The aim would be to build acommon understanding of the challenges and to identify the reforms and investments that would lead tothe correction of imbalances (Figure 1).
On the basis of this dialogue, the Commission and the Member State would jointly agree a policy
approach to correct imbalances, in line with the RRP approach. The agreed set of reforms andinvestments would be incorporated in the national medium-term plan when the plan is agreed. The
national medium-term plan could also include cross references to measures already included in the RRP
as well as relevant investments financed by Cohesion Policy programmes, to give a comprehensive
overview of the policy commitments of the Member States.
Figure 1: Timeline for the policy response to a finding of imbalance with new national mediumterm plan
Spring t-2:
Identification of
imbalances in
IDRs• MIP-specific CSRs:
recommendations toaddress the related
to vulnerabilities
identified in IDR canbe proposed toframe discussions

Summer andAutumn t-2:
Dialogue with MSs

Jan – April t-1:
Policy commitments
included in mediumterm plan and plansubmitted• Development ofpolicy responses toimbalances

Spring t: IDRs

• Joint preparation of plan, toensure prior agreement with MS
on content• Approach based on
RRP lessons:working with MSs
enhances relevanceand ownership• MS subsequently submits plan
• Assessment through committees• If a plan in place: as a rule, do
not reopen• But if imbalances excessive andrequire change in fiscal and/or
new crucial reforms: EIP.

• IDR reviews evolution of
imbalances.
• MIP specific CSR
focused on
implementation of plansor asks additional
aspects• Assessment and follow
up in the context of theEuropean Semester.
• Discussion incommittees

A new source of imbalance is found during the life of the national medium-term plan
If a new source of imbalances is found while the national medium-term plan is already in place,following the identification of these vulnerabilities in an IDR under the European Semester cycle, themedium-term plan in place will, as a rule, not be reopened but a policy dialogue with Member States
would be initiated to reach a common understanding of imbalances and of the measures needed toaddress them. The agreed policy approach to address imbalances, including reforms and investments,
will be communicated by the Member State through a letter to the Commission and the Council anddiscussed in the committees. The agreed policy agenda may subsequently be included: (i) in a newnational medium-term plan (if not resolved in the lifetime of the original plan); OR (ii) in an amended
medium-term plan (if the previous plan is no longer feasible). If the imbalances are excessive andrequire an immediate change of fiscal policy and new crucial reforms, the EIP would be launched, theplan re-opened and act as a corrective action plan.

23

Annex 1: Timing of EU surveillance

Note: The timetables for submission of new plans (after the initial start of the revised SGP) may deviate
depending on the Member States’ political cycles.
* In Autumn T, there will be an ex ante assessment of the Draft Budgetary Plan (DBP) for year T+1.
** In Spring T, there cannot yet be a full ex post assessment of fiscal outcomes as year T marks the start of theimplementation of the plan.

24

Annex 2 – Outcome of the public debate ( 17)
Following the relaunch of the economic governance review in October 2021, ( 18)stakeholders contributed to the debate through an online public survey. Stakeholders
responded to eleven open questions on different aspects of EU economic governance. The
survey received 225 valid contributions from respondents in 25 countries. The Commission
summarised its main takeaways in a report published in March 2022. ( 19) The characteristicsof the survey participants did not mirror those of the EU population and, as such, the replies
cannot be interpreted as representative of the prevailing view of all EU citizens andstakeholders. However, the variety and depth of the contributions provide valuable input.
Many respondents expressed the view that the governance framework should become more
growth-friendly, more mindful of social issues, and that it should support the policy priorities
for the green and digital transitions. Most respondents acknowledged the need for the fiscal
framework to support the resilience of EU economies to shocks and that debt sustainability
should remain a central objective of the EU fiscal rules, while the adjustment path towards
lower government debt should be realistic and gradual. Many respondents stressed the needto incentivise investment as a necessary feature of the economic governance framework.
Green investment was identified as deserving special attention due to global climate andenvironmental challenges, while a few respondents cautioned against giving preferential
treatment to investment expenditure in fiscal surveillance. Participants also called forsimplification, transparency and stronger national ownership. Many respondents viewed the
RRF as a good inspiration for the governance framework, in terms of fostering national
ownership and promoting reforms through positive incentives. Several respondents support
stronger compliance and enforcement of the surveillance framework. Several respondents
called for further synergies between the SGP and the MIP, as it could help improve thegrowth-friendliness of public finances and the simultaneous achievement of various policy
objectives.
Several contributors to the public debate have called for a permanent central fiscal
capacity. ( 20) Such a tool could address longer-term challenges through the provision ofcommon public goods that would boost sustainable growth and help stem inflation and/or
improve macroeconomic stabilisation. The Five Presidents report in 2015 identified sound(17) Other EU institutions have made a number of useful contributions to the public debate on the economic
governance framework. For example, in response to a dedicated request from former Commission President
Jean-Claude Juncker, the European Fiscal Board in September 2019 published its ‘Assessment of the EU fiscal
rules with a focus on the six- and two-pack legislation’. On 8 July 2021, the European Parliament (with MEPMargarida Marques acting as rapporteur) adopted a Resolution ‘on the review of the macroeconomic legislative
framework for a better impact on Europe’s real economy and improved transparency of decision-making anddemocratic accountability’. Both the European Economic and Social Committee and the European Committeeof the Regions have published opinions on the economic governance review, in December 2020 and February
2021 respectively.
(18) European Commission (2021), ‘The EU economy after COVID-19: implications for economic governance’,COM(2021) 662 final of 19 October 2021.
(19) European Commission (2022), ‘Economic Governance Review – Summary report of the public
consultation’, SWD(2022) 104 final of 28 March 2022.
(20) European Fiscal Board 2020; ECB Occasional Paper 273, September 2021; OECD Economic surveys Euroarea, September 2021; IMF Departmental Paper No 2022/014, September 2022.

25

guiding principles for its design, notably that such a capacity should not lead to permanenttransfers between countries, it should maintain the incentives for sound fiscal policy-making
at the national level, and it should be developed within the framework of the European
Union. As suggested in the public debate, a central fiscal capacity for the EU or euro area
could take into account the examples of recent years’ successes (i.e., the European Fund for
Strategic Investments, SURE, and the RRF).
The debate also included a series of thematic discussions with Member States at the
Economic and Financial Committee and the Economic Policy Committee. These
discussions focused on the sustainability of public debt, the need to promote investment, thepro-cyclicality of fiscal policy, enforcement and governance of the EU fiscal rules, theinteraction between EU and national fiscal frameworks, the relevance and effectiveness of the
MIP and the need to maintain it focused on macroeconomic challenges, and the lessons to belearned from the RRF. The potential long-term implications of the Russian invasion of
Ukraine for resilience and security were also discussed. The euro area dimension of theeconomic governance, and the MIP in particular, was discussed at the Eurogroup Working
Group.
Discussions have centred on identifying key issues to be addressed in a reformed
economic governance framework. Some elements of consensus have emerged, in particularin the discussions with Member States. Some of these, in particular those regarding the fiscal
framework, have already been outlined in the Commission Communication of 2 March
2022. ( 21) They are as follows:•

Ensuring public debt sustainability and promoting sustainable growth throughinvestment and reforms are two sides of the same coin and key to the success of theEU fiscal framework.

•

More attention to the medium term in the EU fiscal surveillance appears as apromising avenue.

•

Insights can be drawn from the design, governance and operation of the RRF.

•

Simplification, stronger national ownership and better enforcement are key
objectives.

Discussions have also highlighted key issues that could be addressed in a reformed
economic governance framework regarding the MIP:•

Increasing the MIP’s effectiveness should be a key priority. This can be achievedby increasing the focus on its core objective, which is to prevent risks to macrofinancial stability from turning into imbalances and to foster policy action, taking into
account the functioning of the EU and the euro area as a whole. A clearer focus would
facilitate communication regarding the identification of macroeconomic imbalances
and the necessary policy response, and enhance the visibility of the procedure.

(21) European Commission (2022), ‘Fiscal policy guidance for 2023’, COM(2022) 85 final of 2 March 2022.

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•

Recent crises and the heightened level of uncertainty highlight the need toenhance the ability of the MIP to identify emerging risks. This could be achieved
through the use of a more forward-looking approach that is able to trigger policy
response early on.

•

Ensuring ownership is crucial to increase the traction of the MIP. This calls foran enhanced dialogue with Member States, which may build on the experience of the
RRF. Making the EIP more operational would also support increased traction.

In parallel, the Conference on the Future of Europe also reflected on how to build astronger EU economy, social justice and jobs. ( 22) It proposed that the EU strengthens its
competitiveness and resilience and promotes future-oriented investments focused on thegreen and digital transitions with a strong social and gender dimension, taking also into
account the examples of the Next Generation EU and the SURE instrument. According to theConference, the EU needs to take into account the social and economic impact of the war
against Ukraine and the link between the EU economic governance with the new geopoliticalcontext.

(22) European Commission (2022), ‘Conference on the future of Europe’, COM(2022) 404 final of 17 June
2022.

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