# EUR-Lex - 52015DC0012 - EN

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# 52015DC0012

**COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK, THE ECONOMIC AND SOCIAL COMMITTEE, THE COMMITTEE OF THE REGIONS AND THE EUROPEAN INVESTMENT BANK MAKING THE BEST USE OF THE FLEXIBILITY WITHIN THE EXISTING RULES OF THE STABILITY AND GROWTH PACT /* COM/2015/012 final */**

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Table of Contents

1. Introduction. 3

2.
Clarifications regarding investment. 5

3.
Clarifications regarding structural reforms. 9

4.
Clarifications regarding cyclical conditions. 14

5. Conclusion. 17

Annex 1 -
The statistical recording of contributions  in relation to 
the European Fund for Strategic Investments. 19

Annex 2 -
Matrix for specifying the annual fiscal adjustment  towards 
the Medium-Term Objective (MTO)  under the preventive arm of the Pact. 20

1.
Introduction

In its 2015 Annual Growth Survey (AGS),[1] the Commission identified investment, structural reforms and fiscal
responsibility as key elements of the European Union's economic policy strategy
to create jobs and growth. It also presented a new Investment Plan for Europe in support of this strategy.[2] Both this overall economic approach and the concrete elements of
the Investment Plan were endorsed by the European Council of 18-19 December
2014.

The Commission also announced
that, in order to strengthen the link between investment, structural reforms
and fiscal responsibility, it would provide further guidance on the best
possible use of the flexibility that is built into the existing rules of the
Stability and Growth Pact (hereafter “the Pact”),[3] without changing these rules. This follows a commitment from the
Political Guidelines for the new Commission,[4] as well as previous discussions at the European Council[5] and in the European Parliament.[6]

This interpretative Communication[7] provides this additional guidance, without changing
or replacing the existing rules. The Pact is a cornerstone of the EU's economic
governance and of decisive importance for the proper functioning of Economic
and Monetary Union. 
Its objective is to promote sound budgetary policies and to ensure
the sustainability of public finances in the Member States. Since its
inception in 1997, the Pact has been reformed by the EU legislator in 2005 and
in 2011-13 and enriched by experience. In recent years, it has operated as part
of a wider and strengthened annual cycle of economic policy coordination, known
as the European Semester.

The credibility of the agreed rules
is key for the sustainability of public finances and for financial stability in
the euro area and in the EU as a whole. The financial and sovereign debt crisis
of the past years has shown how interdependent European economies are and 
the necessity of strong economic and fiscal coordination in the EU. The
existence and respect of the rules have been essential to restore trust and
confidence. Faced with escalating deficits and debt in several countries just a
few years ago, the EU has achieved considerable progress in improving the
soundness of its public finances overall.

At the heart of the application of
the Pact must be the principle of equal treatment of all Member States. The
Pact is a rules-based system setting a framework shared and applied by all
Member States, where the Commission proposes and the Council decides. Equal
treatment, however, does not mean “one-size-fits-all”
and must be combined with the economic assessment that is required by every
situation. It is on purpose that the Pact envisages flexibility in the way its rules
should be applied, both over time and across countries. It is also on purpose
that some discretion is left, within the agreed rules, for the Commission and
the Council to assess the soundness of public finances in the light of
country-specific circumstances, in order to recommend the best course of action
based on the latest developments and information.

The flexibility
varies depending on whether a Member State is in the preventive or the corrective
arm of the Pact. The preventive arm aims at guaranteeing a sound budgetary
position in all Member States: its core is the attainment by each Member State of its medium-term sound budgetary position (so-called Medium-Term Objective
or MTO), which is set according to commonly agreed principles.[8] This MTO is
formulated in structural terms, which means that it is adjusted to take account
of the economic cycle and corrected to exclude the impact of one-off measures,
and is specific to each country. The underlying logic is that Member States should
achieve and maintain a budgetary position that will allow automatic stabilisers
to play their full role in mitigating possible economic shocks. This should
also serve to bring down debt to prudent levels, by taking account of the
demographic profile of each country and of the budgetary cost of ageing
populations. The corrective arm of the Pact deals with
situations in which the government deficit and/or the debt are above the reference
values set in the Treaty: in these cases, Member States are then subject to an
Excessive Deficit Procedure (“EDP”), which entails stricter conditions and
monitoring.[9]

The guidance presented here focuses
on the margin of interpretation which is left to the Commission, in line with the
rules of the Pact, without modifying existing legislation. 
It clarifies how three specific policy dimensions can best be taken into
account in applying the rules. These relate to: (i) investment, in particular
as regards the establishment of a new European Fund for Strategic Investments
as part of the Investment Plan for Europe; 
(ii) structural reforms; and (iii) cyclical conditions.

This interpretative Communication
is a contribution to developing a more growth-friendly fiscal stance in the
euro area.[10] It is also part of the Commission's efforts to reinforce the effectiveness
and understanding of the – sometimes necessarily complex – rules which it is
responsible for applying. Transparency and predictability are essential for
ownership of the rules by all actors.

2. Clarifications regarding investment 
2.1.
The new European Fund for Strategic Investments

A
central aspect of the Investment Plan for Europe proposed by the Commission is
the establishment of a new European Fund for Strategic Investments (EFSI) in
partnership between the Commission and the European Investment Bank (EIB).
Following endorsement by the European Council on 18-19 December 2014, the
Commission has presented a proposal for a Regulation on the EFSI.[11]

The
Fund will offer a new risk-bearing capacity which will allow the EIB to invest
in equity, subordinated debt and higher risk tranches of senior debt, and to
provide credit enhancements to eligible projects. An initial contribution to
this risk-bearing capacity will be made from the EU budget, in the form of a
new guarantee fund, and from the EIB's own resources. The use of this EU
guarantee and of EIB funds has no impact on the deficit or debt levels of
Member States.

The
capacity of the EFSI can be further increased through additional financial
contributions from Member States. In its Investment Plan for Europe, the
Commission announced its intention take a “favourable
position towards (such) capital contributions to the Fund in the context of its
assessment of public finances under the Pact”. The European Council of 18-19
December 2014 took note of this intention.[12]

In
addition to contributing to the EFSI, Member States will have the possibility
to co-finance individual projects also co-financed by it. This section provides
guidance on how these various contributions will be assessed under the Pact.

2.1.1.
Financial contributions from Member States to the EFSI

Two aspects
need to be distinguished here: i) whether these contributions are recorded statistically
as deficit and/or debt, in line with the established definitions of the
European System of Account (ESA); and ii) the way in which the Commission will
take account of such contributions in its assessment of compliance with the Pact.

Statistical recording

As
regards statistical recording, this will depend on the specific nature of the
contributions and their categorisation by the European Statistical Office
(Eurostat), in full respect of its independence. Annex 1 provides more
information, based on concrete examples.

Application
of the Pact

Legal Framework The Pact provides that, in the assessment of the necessary fiscal adjustment under its preventive and corrective arms, the Council specifies targets which are set in “structural” terms. Preventive arm Article 5 of Regulation (EC) No 1466/97 provides that “Based on assessments by the Commission and the Economic and Financial Committee, the Council shall [...] assess [...] whether the measures being taken or proposed [by the Member State][...] are sufficient to achieve the medium-term budgetary objective over the cycle. The Council and the Commission, when assessing the adjustment path toward the medium-term budgetary objective, shall examine if the Member State concerned pursues an appropriate annual improvement of its cyclically-adjusted budget balance, net of one-off and other temporary measures, required to meet its medium-term budgetary objective, with 0.5 % of GDP as a benchmark [...].” Corrective arm Article 3 of Regulation (EC) No 1467/97 provides that “[...] the Commission, if it considers that an excessive deficit exists, shall address an opinion and a proposal to the Council [...] and shall inform the European Parliament thereof. The Council shall decide on the existence of an excessive deficit [...]. When it decides that an excessive deficit exists, the Council shall at the same time make recommendations to the Member State concerned [...]. The Council recommendation [...] shall establish a maximum deadline of six months for effective action to be taken by the Member State concerned [...]. The Council recommendation shall also establish a deadline for the correction of the excessive deficit, which shall be completed in the year following its identification unless there are special circumstances. In its recommendation, the Council shall request that the Member State achieve annual budgetary targets which, on the basis of the forecast underpinning the recommendation, are consistent with a minimum annual improvement of at least 0.5 % of GDP as a benchmark, in its cyclically adjusted balance net of one-off and temporary measures, in order to ensure the correction of the excessive deficit within the deadline set in the recommendation. [...]”

Without
prejudice to the statistical recording by Eurostat of contributions to the EFSI,
the Commission can already provide guidance on how the existing rules of the
Pact will apply in these cases.

In its
assessment of the necessary fiscal adjustment under the preventive and
corrective arms, the Council specifies targets
in structural terms. Such targets exclude exceptional one-off measures, which have
no bearing on the underlying fiscal position. This would typically be the case
for initial cash contributions to the Fund.[13]

Specifically,
the Commission will consider that:

§ Under
the preventive arm of the Pact, neither the attainment of the MTO nor the
required fiscal adjustment towards it would be affected, since both are set in
structural terms. The structural balance is by definition not affected by
one-off expenditures, such as the contributions to the Fund.

§ Under
the corrective arm of the Pact (the EDP), compliance with the fiscal adjustment
effort recommended by the Council would not be affected, since this is also
measured in structural terms. A contribution to the EFSI should therefore not
lead to a Member State being found non-compliant with its EDP recommendation.

§ In
case of a non-respect of the deficit reference value, when preparing the report
envisaged under Article 126(3) TFEU, the Commission will consider the
contribution to the EFSI to be a “relevant factor” in line with Article 2(3) of
Regulation (EC) No 1467/97. This means that an EDP will not be launched if this
non-respect is due to the contribution, and if the excess over the reference
value is small and is expected to be temporary.

§ In
case of a non-respect of the debt reference value, when preparing the report
envisaged under Article 126(3) TFEU, the Commission will consider the
contribution to the EFSI to be a “relevant factor” in line with Article 2(3) of
Regulation (EC) No 1467/97. This means that an EDP will not be launched if the non-respect
is due to the contribution.

2.1.2. Co-financing
by Member States of investment projects also co-financed by the EFSI

The
EFSI will contribute to a variety of investment projects and will serve to secure
additional private and/or public investments for these projects. Co-financing by
Member States of individual projects, including possible investment platforms,
will typically take the form of innovative financial instruments, such as
loans, debt instruments or equity participation. The statistical recording
varies according to the instrument (see Annex 1).

From
the point of view of the implementation of the Pact, the Commission will take into
account national co-financing of investment projects also co-financed by the
EFSI in the application of the  so-called “investment
clause”
spelled out in Section 2.2 below.

Summary regarding the European Fund for Strategic Investments National contributions to the EFSI will not be taken into account by the Commission when defining the fiscal adjustment under either the preventive or the corrective arm of the Pact. In case of an excess over the deficit reference value, the Commission will not launch an EDP if this excess is only due to the contribution and is small and expected to be temporary. When assessing an excess over the debt reference value, contributions to the EFSI will not be taken into account by the Commission.

2.2       Other
investments under the preventive arm of the Pact

Legal
Framework

Article
5 of Regulation (EC) No 1466/97 provides that “[...] the Council and the
Commission shall take into account the implementation of major structural
reforms which have direct long-term positive budgetary effects, including by
raising potential sustainable growth [...].” This Article is reproduced in
greater detail in the Legal Framework box in Section 3.1 below.

Under the preventive arm of the Pact, some
investments deemed to be equivalent to major structural reforms may, under
certain conditions, justify a temporary deviation from the MTO of the concerned
  Member State or from the adjustment path towards it.

The
Commission has provided first guidance in the past on how these provisions apply
to public investments with positive, direct and verifiable long-term
budgetary effects on growth and on the sustainability of public
finances.[14] This guidance (commonly
referred to as the “investment clause”) is specified and formalised through
this Communication to take better account of country-specific situations, in
line with the text and spirit of the Pact. Henceforth, a Member State will benefit from the “investment clause” if the following conditions are met:

(i) its
GDP growth is negative or GDP remains well below its potential (resulting in a
negative output gap greater than 1.5 % of GDP);

(ii) the
deviation from the MTO or the agreed fiscal adjustment path towards it does not
lead to an excess over the reference value of 3 % of GDP deficit and an
appropriate safety margin is preserved;

(iii)
the deviation is linked to national expenditure on projects co-funded by the EU
under the Structural and Cohesion policy,[15]
Trans-European Networks and Connecting Europe Facility, and to national co-financing
of investment projects also co-financed by the EFSI, which have direct
long-term positive and verifiable budgetary effects;

(iv)
co-financed expenditure should not substitute for nationally financed
investments, so that total public investments are not decreased;

(v) the
  Member State must compensate for any temporary deviations and the MTO must be
reached within the four-year horizon of its current Stability or Convergence
Programme.

Compared
to previous guidance, this means that the Commission will apply the “investment
clause” irrespective of the economic condition of the euro area or EU as a
whole, in order to link it only to the cyclical conditions faced by individual
Member States. Allowing Member States to benefit from this clause when their
own growth is negative, or output is well below its potential, will permit a
broader application of the clause than in the past, and one which better
reflects country-specific conditions.[16]

Summary for the “investment clause” under the preventive arm of the Pact Member States in the preventive arm of the Pact can deviate temporarily from their MTO or adjustment path towards it to accommodate investment, provided that: their GDP growth is negative or GDP remains well below its potential; the deviation does not lead to an excess over the 3 % deficit reference value and an appropriate safety margin is preserved; investment levels are effectively increased as a result; the deviation is compensated within the timeframe of the Member State’s Stability or Convergence Programme. Eligible investments are national expenditures on projects co-funded by the EU under the Structural and Cohesion policy, Trans-European Networks and the Connecting Europe Facility, as well as national co-financing of projects also co-financed by the European Fund for Strategic Investments.

3. Clarifications regarding structural reforms
3.1.      Structural
reforms under the preventive arm of the Pact

Legal Framework Article 5 of Regulation (EC) No 1466/97 specifies how Member States should progress towards a sound budgetary position. In particular, it provides that “[...] When defining the adjustment path to the medium-term budgetary objective for Member States that have not yet reached this objective, and in allowing a temporary deviation from this objective for Member States that have already reached it, provided that an appropriate safety margin with respect to the deficit reference value is preserved and that the budgetary position is expected to return to the medium-term budgetary objective within the programme period, the Council and the Commission shall take into account the implementation of major structural reforms which have direct long-term positive budgetary effects, including by raising potential sustainable growth, and therefore a verifiable impact on the long-term sustainability of public finances. Particular attention shall be paid to pension reforms introducing a multi-pillar system that includes a mandatory, fully funded pillar. Member States implementing such reforms shall be allowed to deviate from the adjustment path to their medium-term budgetary objective or from the objective itself, with the deviation reflecting the amount of the direct incremental impact of the reform on the general government balance, provided that an appropriate safety margin with respect to the deficit reference value is preserved.” Article 9 of the same Regulation provides for the same rule to apply to non-euro area Member States.

This section provides guidance on how structural reforms can be taken into
account under the preventive arm of the Pact, i.e. the so-called “structural
reform clause”.[17]

In
line with the existing rules of the Pact, Member States implementing major
structural reforms are allowed to deviate temporarily from their MTO or the
adjustment path towards it. This allows them to cater for the short-term costs
of implementing structural reforms that will have long-term positive budgetary
effects, including by raising potential sustainable growth.

“Structural
reforms”
which
can be taken into account under the Pact

To
be fully operational, the “structural reform clause” has to rely on
well-defined principles regarding the eligibility of such reforms. The
Commission will base its assessment on the following criteria:

(i)
The reforms must be major. While there are some individual reforms with a
major positive impact on growth and the long-term sustainability of public
finances, such as pension reforms, well-designed and comprehensive packages of
reforms addressing structural weaknesses may also have a major positive impact.
This is notably the case when the reforms reinforce each other's impact through
an appropriate choice of policy mix and sequencing of implementation.

(ii)
The reforms must have direct long-term positive budgetary effects, including
by raising potential sustainable growth, and therefore a verifiable impact on the
long-term sustainability of public finances. The sustainability effects can
stem either from direct budgetary savings from the reforms (such as in pensions
or healthcare), or from the increased revenues drawn in the medium to long-run
from a more efficient economy with a higher potential output (e.g. due to lower
structural unemployment or an increased labour force), or from a combination of
both kinds of effects.[18]

(iii)
The reforms must be fully implemented. While it is understood that all
the reforms should be adopted before being considered as eligible for the
clause, it is also true that the effective implementation of adopted reforms
may take time and may be subject to delays and setbacks. This raises the
question of introducing strong safeguards against the risk of implementation
failures. While the Pact does not provide the tools for monitoring the
enforcement of structural reforms, the legal framework in which the Pact operates
– 
notably the European Semester process and the new Excessive Imbalances
Procedure (EIP)[19]
– allows the Commission and the Council to assess challenges and imbalances
requiring structural reforms, and for monitoring action taken by the Member
States.

Activation of the “structural
reform clause”

The Commission will consider that the
criterion related to the implementation of reforms is fulfilled ex ante
when:

§ The Member State presents a medium-term structural reform plan which is comprehensive and
detailed (for instance as part of the National Reform Programme published alongside
the Stability or Convergence Programme) and includes well-specified measures
and credible timelines for their adoption and delivery. 
The implementation of the reforms will be monitored closely in the context of the
European Semester.

§ In
the specific case of a Member State in the Excessive Imbalances Procedure (EIP),
it has submitted a Corrective Action Plan (CAP) providing the necessary
information. The implementation of the reforms will then be monitored through
the EIP.

In
both cases, Member States will be expected to provide in-depth and transparent
documentation, and to quantify the reforms in terms of both their medium-term
budgetary and potential growth impact. This must also include details on the
timetable of implementation of the reforms.

Application of the “structural
reform clause”

In
the specific case of pension reforms consisting in introducing a multi-pillar
system that includes a mandatory, fully-funded pillar, the methodology to allow
them to be taken into account in the preventive arm of the Pact is outlined in
Article 5 of Regulation (EC) 
No 1466/97 (see box at the beginning of this Section).[20]

For other structural reforms, the Commission will base itself
on the information contained in the dedicated structural reform plan (or
Corrective Action Plan). In this case, it will recommend granting
eligible Member States additional time to reach the MTO, hence allowing
temporary deviations from the structural adjustment path towards it, or to deviate
temporarily from the MTO for Member States that have reached it, provided that:

(i)
the reforms meet the above criteria;

(ii)
the temporary deviation does not exceed 0.5 % of GDP, and the MTO is reached
within the four year horizon of the Stability or Convergence Programme of the
year in which the clause is activated;

(iii)
an appropriate safety margin is continuously preserved so that the deviation
from the MTO or the agreed fiscal adjustment path does not lead to an excess
over the 3 % of GDP reference value for the deficit.

In
case a Member State fails to implement the agreed reforms, the temporary
deviation from the MTO, or from the adjustment path towards it, will no longer
be considered as warranted. If such a failure results in a significant
deviation from the MTO or the path towards it, the Commission will apply the procedure
envisaged in Article 6(2) and Article 10(2) of Regulation (EC) No 1466/97. This
means that the Commission will issue a warning to that Member State, followed by a proposal for a Council recommendation, to ensure that the Member State takes the appropriate policy measures within five months to address that
deviation. For euro area Member States, continued failure to comply can
ultimately lead to a requirement to lodge an interest-bearing deposit.[21]

Summary for the “structural reform clause” under the preventive arm of the Pact The Commission will take into account the positive fiscal impact of structural reforms under the preventive arm of the Pact, provided that such reforms (i) are major, (ii) have verifiable direct long-term positive budgetary effects, including by raising potential sustainable growth, and (iii) are fully implemented. For reform measures to qualify “ex ante”, Member States will be expected to present a dedicated structural reform plan providing detailed and verifiable information, as well as credible timelines for adoption and delivery. The Commission will assess the relevant reform plan before recommending allowing a temporary deviation from the MTO or the path towards it. The Commission will closely monitor the implementation of the reforms. In case of failure to implement, the Commission will take the necessary action.

3.2      Structural reforms under the
corrective arm of the Pact

Legal
Framework

Article
2 of Regulation (EC) No 1467/97 provides that “[... ] The Commission, when
preparing a report [requested] under Article 126(3) TFEU [i.e. when a Member
State does not fulfil the requirements under the deficit or the debt criterion,
or both], shall take into account all relevant factors as indicated in that
Article, in so far as they significantly affect the assessment of compliance
with the deficit and debt criteria by the Member State concerned. The report
shall reflect, as appropriate: (a) the developments in the medium-term economic
position [...]; (b) the developments in the medium-term budgetary positions,
including, in particular, the record of adjustment towards the medium-term
budgetary objective, the level of the primary balance and developments in
primary expenditure, both current and capital, the implementation of policies
in the context of the prevention and correction of excessive macroeconomic
imbalances, the implementation of policies in the context of the common growth
strategy of the Union, and the overall quality of public finances, in
particular the effectiveness of national budgetary frameworks; (c) the
developments in the medium-term government debt position [...].

The Commission shall give due and express consideration to any other factors which, in the opinion of the Member State concerned, are relevant in order to comprehensively assess compliance with deficit and debt criteria and which the Member State has put forward to the Council and the Commission.[...] The Council and the Commission shall make a balanced overall assessment of all the relevant factors [...]. When assessing compliance on the basis of the deficit criterion, if the ratio of the government debt to GDP exceeds the reference value, those factors shall be taken into account in the steps leading to the decision on the existence of an excessive deficit provided for in paragraphs 4, 5 and 6 of Article 126 TFEU only if the double condition of the overarching principle - that, before these relevant factors are taken into account, the general government deficit remains close to the reference value and its excess over the reference value is temporary - is fully met [...]. If the Council [...] decides that an excessive deficit exists in a Member State, the Council and the Commission shall, in the subsequent procedural steps of that Article of the TFEU, take into account the relevant factors referred to in paragraph 3 of this Article [...], in particular in establishing a deadline for the correction of the excessive deficit and eventually extending that deadline.[...]”

The
main purpose of the corrective arm of the Pact is to ensure the prompt
correction of excessive deficits. The relevant rules do not include detailed
provisions to take account of structural reforms (or investment) when assessing
whether a Member State has taken effective action in response to the Council
recommendations to correct the excessive deficit. However, structural reforms do
have a recognised place in the corrective arm of the Pact when deciding different
steps in the EDP.[22]

First, at the
point of examining whether an EDP needs to be opened for a given Member State, the Commission analyses carefully all relevant medium-term developments
regarding the economic, budgetary and debt positions. These “relevant factors”
include the implementation of structural reforms in the context of the European
Semester, such as within the Excessive Imbalances Procedure. The Commission
considers that a lack of implementation of structural reforms constitutes an
aggravating relevant factor.

Second, relevant
factors are also taken into account when setting the deadline for the
correction of the excessive deficit. While the correction of an excessive
deficit is expected to take place within the year following its identification,
the implementation of major structural reforms constitutes a key factor taken
into account when considering instead a multiannual path for the correction of
the excessive deficit.

To make operational
this provision for reforms not yet fully implemented, the Commission will
consider that they can be taken into account ex ante, provided that the
Member State presents a dedicated structural reform plan, adopted by the
government and/or the national Parliament, containing detailed and verifiable
information, as well as credible timelines for implementation and delivery,
under the same conditions as for the activation of the “structural
reform clause” described
in Section 3.1. This is without prejudice to the minimum annual improvement of
0.5 % of GDP as a benchmark envisaged by Article 3(4) of Regulation (EC) No 1467/97.

In case a Member State fails to implement the agreed reforms, the Commission will consider it an
aggravating factor when assessing effective action in response to the EDP
recommendation and when setting a deadline for the correction of the excessive
deficit. 
Lack of effective action will lead to a stepping up of the procedure and the
possible suspension of European Structural and Investment Funds.[23] For
euro area Member States, this means that the Commission will recommend to the
Council the imposition of a fine.[24]

Third, at the
point of closing the EDP, the Commission gives due consideration, where
relevant, to the direct cost of pension reforms introducing a multi-pillar
system that includes a mandatory fully funded pillar. Concretely, an EDP may be
closed even if the deficit is over 
3 % of GDP, provided that the excess is wholly due to the costs of implementing
the pension reform and the deficit has declined substantially and continuously
and has reached a level that comes close to the reference value.

Summary for structural reforms under the corrective arm of the Pact The Commission will take into account the existence of a dedicated structural reform plan, providing detailed and verifiable information, as well as credible timelines for adoption and delivery, when recommending a deadline for the correction of the excessive deficit or the length of any extension to that deadline. The Commission will closely monitor the implementation of the reforms. In case of failure to implement, the Commission will take the necessary action.

4.
Clarifications regarding cyclical conditions 
4.1    Modulation
of fiscal effort over the economic cycle under 
the preventive arm of the Pact

Legal Framework Article 5 of Regulation (EC) No 1466/97 specifies how the Member States should progress towards a sound budgetary position. In particular, Article 5 provides that “[...] The Council and the Commission, when assessing the adjustment path toward the medium-term budgetary objective, shall examine if the Member State concerned pursues an appropriate annual improvement of its cyclically-adjusted budget balance, net of one-off and other temporary measures, required to meet its medium-term budgetary objective, with 0.5 % of GDP as a benchmark. For Member States faced with a debt level exceeding 60 % of GDP or with pronounced risks of overall debt sustainability, the Council and the Commission shall examine whether the annual improvement of the cyclically-adjusted budget balance, net of one-off and other temporary measures is higher than 0.5 % of GDP. The Council and the Commission shall take into account whether a higher adjustment effort is made in economic good times, whereas the effort might be more limited in economic bad times. In particular, revenue windfalls and shortfalls shall be taken into account.[...]”

In order to assess
the appropriate adjustment path for each Member State towards its respective
MTO, the Pact requires that due consideration be given to the economic
situation as well as the sustainability conditions. In principle, Member States
not having yet reached their MTO are required, as a benchmark, to pursue an
annual improvement in the structural budget balance of 0.5 % of GDP. The rules
also provide that the Commission needs to take into account whether a higher
adjustment effort is made in good economic times, whereas effort may be more
limited in bad times.

The Commission
has thus designed a matrix (see Annex 2) which clarifies and specifies the fiscal
adjustment requirements under the preventive arm of the Pact. This matrix is
symmetrical, differentiating between larger fiscal effort to be undertaken
during better times and a smaller fiscal effort to be undertaken during
difficult economic conditions. This should make it possible to better capture
cyclical conditions. It should also smoothen the required fiscal effort over
time and avoid unwarranted discontinuities as economic circumstances change.

Summary for the modulation of effort over the economic cycle under the preventive arm From now on, the Commission will apply a matrix (set out in Annex 2) to specify the appropriate fiscal adjustment and take better account of the cyclical situation of individual Member States under the preventive arm of the Pact.

4.2    Accommodating an
unexpected fall in economic activity under 
the corrective arm of the Pact

Legal Framework The Pact caters for unexpected negative economic conditions at Member State level in the corrective arm of the Pact. Article 3 of Regulation (EC) No 1467/97 provides that the Council, if it considers that an excessive deficit exists, issues a recommendation for taking effective action and containing a deadline for correcting the excessive deficit and annual budgetary targets for the Member State. The Member State concerned has the obligation to take effective action to this purpose within the deadline set by the Council. In particular, Article 3 of Regulation (EC) No 1467/97 provides that “If effective action has been taken in compliance with a recommendation under Article 126(7) TFEU and unexpected adverse economic events with major unfavourable consequences for government finances occur after the adoption of that recommendation, the Council may decide, on a recommendation from the Commission, to adopt a revised recommendation under Article 126(7) TFEU. The revised recommendation, taking into account the relevant factors referred to in Article 2(3) of this Regulation may, in particular, extend the deadline for the correction of the excessive deficit by one year as a rule. [...]”

Acknowledging
the need to distinguish between fiscal consolidation actions and fiscal
consolidation outcomes, with the latter often being influenced by developments
outside the control of the authorities concerned, the rules envisage the
possibility to take into account an unexpected deterioration of the economic
situation.

If a country has
taken effective action by delivering the structural fiscal effort recommended
by the Council, it may be given additional time to correct the excessive
nominal deficit without incurring financial sanctions (euro area Member
States), or a suspension of commitments/payments of European Structural and
Investment Funds (all Member States).[25]

The Commission
has developed a systematic approach to assessing the delivery of the required structural
fiscal effort, which the Council endorsed recently.[26]This
helps to disentangle as much as possible those budgetary developments that can
be assumed to be under the control of the government from those attributable to
an unexpected fall in economic activity.

Summary for the accommodation of the economic cycle under the corrective arm The Commission will continue to assess effective action under the corrective arm of the Pact on the basis of a measurement of structural fiscal effort, excluding budgetary developments which are outside the control of governments.

4.3       Severe economic
downturn in the euro area or in the Union as a whole

Legal Framework The Pact caters for cases of unusually negative economic conditions at the EU or euro area level both in the preventive arm and in the corrective arm. Preventive arm As explained in the Legal Framework boxes in Sections 2.1.1, 3.1 and 4.1, the Council examines whether Member States in the preventive arm of the Pact take sufficient measures to achieve its medium-term budgetary objective over the cycle. In this context due account is taken of relevant factors and of structural reforms implemented. Moreover, Article 5 of Regulation (EC) No 1466/97 covers the case of negative, unusual economic conditions. In particular, Article 5 provides that “[...] in the case of an unusual event outside the control of the Member State concerned which has a major impact on the financial position of the general government or in periods of severe economic downturn for the euro area or the Union as a whole, Member States may be allowed temporarily to depart from the adjustment path towards the medium-term budgetary objective referred to in the third subparagraph, provided that this does not endanger fiscal sustainability in the medium term. [...]” Corrective arm As explained in the Legal Framework boxes in Sections 2.1. and 4.2, Article 3 of Regulation (EC) No 1467/97 provides that the Council, if it considers that an excessive deficit exists, issues a recommendation for taking effective action and containing a deadline for correcting the excessive deficit and annual budgetary targets for the Member State. The Member State concerned has the obligation to take effective action to this purpose within the deadline set by the Council. Article 3 also caters for taking into account the possibility of unusually negative economic conditions. In particular, Article 3 states that “[...] In the case of a severe economic downturn in the euro area or in the Union as a whole, the Council may also decide, on a recommendation from the Commission, to adopt a revised recommendation under Article 126(7) TFEU provided that this does not endanger fiscal sustainability in the medium term.”

Since 2011, the Pact
has provided, in cases of a severe economic downturn in the euro area or the Union as a whole, for the pace of fiscal consolidation to be adapted for all Member States,
as long as this does not endanger fiscal sustainability in the medium-term.

This provision has
so far never been applied – although it de facto reflects the logic used
at the time of the 2008 financial crisis when the adjustment paths were
re-designed for several Member States. The activation of this provision would not
mean putting on hold the fiscal adjustment, but rather re-designing the
adjustment path on a country-specific basis, both in terms of the adjustment
effort and the deadlines to achieve the targets, to take into account the
exceptional circumstances of the severe economic downturn in the euro area or
the Union as a whole. The use of this provision should remain limited to exceptional,
carefully circumscribed situations to minimise the risk of moral hazard.

Summary in the case of
severe economic downturn

The Commission
considers that the provisions of the Pact addressing a severe economic downturn
in the euro area or in the EU as a whole should be used when necessary.

5.
Conclusion

This interpretative
Communication provides additional guidance on how the Commission will apply its
margin of interpretation in implementing the existing rules of the Stability
and Growth Pact.

The
Commission will apply this guidance immediately. It will engage with Member
States and the Council to provide any necessary explanations ahead of
forthcoming milestones, notably the presentation of the Stability or
Convergence Programmes and National Reform Programmes expected in spring 2015. The
Commission will also present this Communication to the European Parliament.

This
Communication gives clarity to Member States on how to ensure that the common
fiscal framework is supportive of the EU's jobs and growth agenda, in
particular as regards investment and structural reforms, while better
reflecting the cyclical situations in individual Member States.

It
does not replace the existing rules of the Pact, nor the need for an overall
assessment by the Commission and the Council of the broader economic and fiscal
situation of each Member State, the euro area and the EU as a whole, in line
with the spirit of the Treaty and its overall objective of ensuring sound
public finances. Moreover, adequate safeguards and conditions are in place to
make sure that while the best use is made of the flexibility within the
existing rules, their credibility and effectiveness in ensuring fiscal
responsibility is maintained.

Over
and above this Communication, the Commission will also engage with stakeholders
at all levels to define further steps to ensure closer coordination of economic
policy and progress towards the deepening of the Economic and Monetary Union.

As agreed
by the European Council, the President of the Commission, in close cooperation
with the President of the Euro Summit, the President of the Eurogroup and the
President of the European Central Bank, will report on these matters to the
June 2015 European Council. As part of its Work Programme for 2015, [27]
the Commission is also committed to developing proposals on further steps
towards pooled sovereignty in economic governance.

Annex 1 - The statistical recording of contributions 
in relation to the European Fund for Strategic Investments

Below are
some illustrative examples of how various types of contributions may be
recorded from a statistical point of view by Eurostat. This statistical recording
is a separate step and without prejudice to the Commission's assessment of such
contributions under the relevant provisions of the Stability and Growth Pact.

Example 1. Member States' cash contributions at the
level of the EFSI

Whether Member States' cash
contributions to the EFSI have a statistical impact on their deficit cannot be
established with full certainty until the detailed legal and governance
arrangements of the Fund are in place. If a Member State does not have the
funds available for such contributions and will borrow them, this will increase
the government debt.

Example 2. Use of guarantees by the Member States at
the level of the EFSI

In the
case Member States provide guarantees to the EFSI, there should be no immediate
impact on deficit or debt until the moment the guarantee is called, for the
amount called, if it is called.

Example 3. Member States’ co-financing to individual projects

Direct
contributions from Member States to projects, including investment platforms,
may take several forms, such as equity participation, loans, guarantees etc.
The statistical recording will vary according to the form of the instrument:

§ 
For
guarantees, the statistical recording will follow the same principles as in
example 2.

§ For equity participation, this
will depend on whether a market rate of return can be expected (similar to that
of a private investor). If this is the case, it will not have an impact on the
deficit. It may have an impact on debt levels if financed through government
borrowing.

§ For loans, this will not have an
impact on the deficit unless there will be evidence that the loan will not be
returned. It may have an impact on debt levels if financed through government
borrowing.

§ For grants, this will have a
direct impact on the deficit and an indirect impact on the debt, if financed
via government borrowing.

§ 
If
the Member States use resources from the European Structural and Investment
Funds, the national co-financing part will have an impact on the deficit. It
may have an impact on debt levels if financed through government borrowing. The
European co-financing part is recorded as a financial transaction and thus has
no impact on the accounts of governments.

Example 4. Contributions via National Promotional
Banks

A Member State may consider contributions via a National Promotional Bank (NPB), both at the
level of the EFSI and at the level of individual projects, including investment
platforms. The impact will depend first and foremost on whether the National
Promotional Banks are classified inside or outside government. If the banks are
classified inside government, the impact will be exactly the same as if the
government itself carries out the investment. If the banks are classified
outside government, the recording will depend on whether the National
Promotional Banks will be undertaking the investment or will contribute to the
project on behalf of government. If it is concluded that this is the case, the
operation will be counted as part of government accounts, which means that the
money spent on behalf of the government will be treated as government
expenditure, and the liabilities incurred for obtaining this money will be
treated as government debt.

Annex 2 - Matrix for specifying the annual fiscal
adjustment 
towards the Medium-Term Objective (MTO) 
under the preventive arm of the Pact

|| || Required annual fiscal adjustment*

|| Condition || Debt below 60 % and no sustainability risk || Debt above 60 % or sustainability risk

Exceptionally bad times || Real growth <0 or output gap <-4 || No adjustment needed

Very bad times || -4 ≤ output gap <-3 || 0 || 0.25

Bad times || -3 ≤ output gap < -1.5 || 0 if growth below potential, 0.25 if growth above potential || 0.25 if growth below potential, 0.5 if growth above potential

Normal times || -1.5 ≤ output gap < 1.5 || 0.5 || > 0.5

Good times || output gap ≥ 1.5 % || > 0.5 if growth below potential, ≥ 0.75 if growth above potential || ≥ 0.75 if growth below potential, ≥ 1 if  growth above potential

*
all figures are in percentage points of GDP

Definitions:

Fiscal
  adjustment: improvement in the general government fiscal balance measured 
  in structural terms (i.e. cyclically adjusted and without one-off
  measures).
 Growth
  potential: estimated rate of growth if the economy is at its potential
  output.
 Output
  gap: difference between the level of actual and potential output
  (expressed 
  in percentage points compared to the potential output). 
 Potential
  output: a summary indicator of the economy's capacity to generate
  sustainable, 
  non-inflationary output.

Explanations:

The matrix ensures that Member States can adapt their
fiscal adjustments over the economic cycle while taking into account their
fiscal consolidation needs.

The larger the positive (negative) output gap, the
greater (lower) the required adjustment effort. 
The matrix takes into account the direction into which the economy is moving,
i.e. whether the economic situation is improving or deteriorating, by
distinguishing whether the real GDP exceeds or falls short of a
country-specific potential growth rate.

The required effort is also greater for Member States
with unfavourable overall fiscal positions, 
i.e. where fiscal sustainability is at risk or the debt-to-GDP ratio is above
the 60 % of GDP reference value of the Treaty.

All Member States are expected to accumulate savings
in good times so as to be able to have sufficient latitude for the operation of
the so-called automatic stabilisers (e.g. higher welfare spending and lower tax
revenues) during the downturns. In good times, the revenues of the state
increase due to more vigorous economic activity and expenditure related to the
unemployment falls. Therefore, the matrix envisages a higher fiscal adjustment
for the Member States identified as experiencing good times, i.e. when their
output gap is estimated to be ≥ 1.5 %. This is particularly important for
the Member States with fiscal sustainability risks or debt-to-GDP ratios
exceeding the 60 % and therefore such Member States would be required to
provide a structural fiscal adjustment of ≥ 0.75 % of GDP or ≥1 % of
GDP, depending on whether their good economic situation continues to improve
further or not.

In normal times, interpreted as an output gap between
-1.5 % and +1.5 %, all Member States with a debt-to-GDP ratio below 60 % would
be required to make an effort of 0.5 % of GDP, whereas the Member States with
debt levels above 60 % of GDP would need to make an adjustment greater than 0.5
% of GDP.

In bad times, interpreted as an output gap between -3 %
and -1.5 %, the required adjustment would be lower. All EU Member States with
the debt-to-GDP ratio below 60 % would be required to ensure a budgetary effort
of 0.25 % of GDP when their economies grow above the potential, and a fiscal
adjustment of zero would be temporarily allowed when their economies grow below
the potential.

In very bad times, interpreted as
an output gap between -4 % and -3 %, all Member States with the debt-to-GDP
ratio below 60 % would be temporarily allowed zero adjustment, meaning that no
fiscal effort would be required, whereas Member States with debt-ratios
exceeding 60 % would need to provide the annual adjustment of 0.25 % of GDP.

In exceptionally bad times,
interpreted as an output gap below -4 % or when real GDP contracts, all Member
States, irrespective of their debt levels, would be temporarily exempted from making
any fiscal effort.

The output gap thresholds set at -3
% and -4 % are supported by past data: since the 1980s, output gaps in EU
countries have been below -4 % in only one year out of twenty, while they
reached -3 % in one year out of ten, hence these two values are truly
indicating very bad and exceptionally bad times.

[1] COM(2014) 902 of 28
November 2014.

[2] COM(2014) 903 of 26
November 2014.

[3] The Pact is anchored
in the Treaty on the Functioning of the EU (TFEU) and consists of Council
Regulation (EC) No 1466/97 (the "preventive arm", based on Art. 121
TFEU) and Council Regulation (EC) No 1467/97 
(the "corrective arm", based on Art. 126 TFEU), as well as their
subsequent amendments and related legislation. 
To access documents, see: http://ec.europa.eu/economy_finance/economic_governance/sgp/index_en.htm

[4] "As regards
the use of national budgets for growth and investment, we must – as reaffirmed
by the European Council on 27 June 2014 – respect the Stability and Growth
Pact, while making the best possible use of the flexibility that is built into
the existing rules of the Pact, as reformed in 2005 and 2011. I intend to issue
concrete guidance on this as part of my ambitious Jobs, Growth and Investment
Package."
Jean-Claude Juncker,  A New Start for Europe: My Agenda for Jobs, Growth,
Fairness and Democratic Change Political Guidelines for the next European
Commission, 15 July 2014. Available at: http://ec.europa.eu/priorities/docs/pg_en.pdf

[5]
"We
respect the Stability and Growth Pact. All our economies need to continue to
pursue structural reforms. Very clearly, our common strength hinges upon each
and every country's success. That is why the Union needs bold steps to foster
growth, increase investments, create more and better jobs and encourage reforms
for competitiveness. This also requires making best use of the flexibility that
is built into the existing Stability and Growth Pact rules."
Conclusions of the European Council of 27 June 2014. Available at: http://www.consilium.europa.eu/uedocs/cms_Data/docs/pressdata/en/ec/143478.pdf

[6] See in particular the
resolution from the European Parliament on "the European Semester for
economic policy coordination: implementation of 2014 priorities"
(A8-0019/2014) of 22 October 2014.

[7] For
another example of an interpretative Communication, see Commission
interpretative Communication on certain aspects of the provisions on televised
advertising in the ‘Television without frontiers’ Directive, 
OJC 101, 28.4.2004, p. 2.

[8] The MTO is calculated
as a function of potential growth, general government debt and the cost of
ageing.

[9] There are currently
11 Member States in the corrective arm of the Pact ("in EDP"), down
from 24 in 2011.

[10] On this, see ECB
President Mario Draghi's speech in Jackson Hole on 22 August 2014: "[I]t
may be useful to have a discussion on the overall fiscal stance of the euro
area. Unlike in other major advanced economies, our fiscal stance is not based
on a single budget voted for by a single parliament, but on the aggregation of
eighteen [as of 1 January 2015: 19] national budgets and the EU budget.
Stronger coordination among the different national fiscal stances should in
principle allow us to achieve a more growth-friendly overall fiscal stance for
the euro area."

[11] COM(2015) 10 of 13
January 2015.

[12] "The European
Council takes note of the favourable position the Commission has indicated
towards such capital contributions in the context of the assessment of public
finances under the Stability and Growth Pact, necessarily in line with the
flexibility that is built into its existing rules". Conclusions of the
European Council of 18-19 December 2014 at: http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/146411.pdf

[13] The same treatment
will apply to guarantees to the extent they have an impact on deficit and/or
debt.

[14] Letter of 3 July 2013 by former
Commission Vice-President Olli Rehn to EU Finance Ministers on the implementation
of Art. 5(1) of Regulation (EC) No 1466/97. This approach was applied in 2013
for Bulgaria and in 2014 for Bulgaria, Romania and Slovakia.

[15] Including projects
co-financed through the Youth Employment Initiative.

[16] See also Section 4
below.

[17] On this, see ECB President Mario Draghi's
speech in Jackson Hole on 22 August 2014: "[T]he existing flexibility
within the rules could be used to better address the weak recovery and to make
room for the cost of needed structural reforms."

[18] For a discussion of
the effect of reforms, see European Economy, Economic Papers 541, December
2014: "The potential growth impact of structural reforms in the EU – a
benchmarking exercise", published by the Directorate General for Economic
and Financial Affairs, European Commission.

[19]
 See
Regulation (EU) No 1176/2011.

[20] This methodology has
been applied for instance to take account of the pension reform introduced in Latvia 
in 2013.

[21] Article 4 of
Regulation (EU) No 1173/2011.

[22] Moreover, when placed
in an Excessive Deficit Procedure, all euro area Member States shall present 
an economic partnership programme describing the policy measures and structural
reforms that are needed 
to ensure an effective and lasting correction of the excessive deficit. See
Article 9 of Regulation (EU) 
No 473/2013.

[23] Article 23 of Regulation
(EU) No 1303/2013.

[24] Article 6 of
Regulation (EU) No 1173/2011.

[25] Article 23 of
Regulation (EU) No 1303/2013.

[26] See
conclusions of the 20 June 2014 ECOFIN Council at: http://www.consilium.europa.eu/uedocs/cms_Data/docs/pressdata/en/ecofin/143293.pdf

[27] COM(2014) 910 of 16
December 2014.