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| 27.4.2023 | EN | Official Journal of the European Union | C 146/53 |

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Opinion of the European Economic and Social Committee on the communication from the Commission to the European Parliament, 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

(COM(2022) 583 final)

(2023/C 146/09)

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| Rapporteur: | Krister ANDERSSON |
| Co-rapporteur: | Dominika BIEGON |

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| Referral | European Commission, 19.12.2022 |
| Legal basis | Article 304 of the Treaty on the Functioning of the European Union |
| Section responsible | Economic and Monetary Union and Economic and Social Cohesion |
| Adopted in section | 1.2.2023 |
| Adopted at plenary | 23.2.2023 |
| Plenary session No | 576 |
| Outcome of vote (for/against/abstentions) | 202/3/7 |

1.   Conclusions and recommendations

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| | 1.1. | The European Economic and Social Committee (EESC) very much welcomes the Commission Communication outlining orientations for a reform of the economic governance framework. |

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| | 1.2. | The EESC agrees with the Commission on the need for a swift agreement ahead of the Member States’ budgetary processes for 2024. As pointed out by the Commission, there is an urgent need for strong budgetary and structural policy coordination as well as for effective economic and fiscal surveillance, fostering inclusive growth and helping the European Central Bank (ECB) to attain its agreed goals. |

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| | 1.3. | The EESC agrees with the Commission that there has been a lack of prudent policies by Member States in good times [(1)](#ntr1-C_2023146EN.01005301-E0001), while at the same time fiscal rules have restricted fiscal room for manoeuvre during economic downturns in some Member States. |

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| | 1.4. | The EESC acknowledges the Commission’s plan to maintain reference values. The 3 % of GDP deficit criterion has a political and market signal effect. Overall, the EESC stresses that fiscal structural plans have to ensure that debt-to-GDP ratios are put on a downward path or stay at prudent levels. |

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| | 1.5. | The EESC supports the Commission’s proposal to no longer apply the rigid 1/20th rule since it could overburden high-debt Member States, with a negative impact on growth and debt sustainability itself. The mid-term four-year evaluation period to reference fiscal adjustments, extendable for three additional years where necessary, also seems to be proportionate. |

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| | 1.6. | The EESC welcomes the Commission’s focus on net primary expenditure as the main evaluation parameter of the new economic governance. |

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| | 1.7. | The EESC points out that fiscal policy is the classic domain of parliamentary politics, since it affects the entire structure of state expenditure and revenue. For a reformed framework to be successful, ownership of the process is key. |

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| | 1.8. | The EESC maintains that a sound reform of European economic governance is urgently needed in the interest of people, firms and governments. It is therefore important to develop further measures that could be taken to enhance ownership of the rules, thereby ensuring that all governments are committed to a revised framework. |

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| | 1.9. | The EESC considers it paramount that the forthcoming legislative proposals establish minimum standards of national parliamentary oversight and organised civil society involvement with regard to the drafting of national medium-term fiscal structural plans. |

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| | 1.10. | The EESC underlines the need for proper rules ensuring strong enforcement. In the exceptional cases where sanctions are considered, they must be effective and implemented in a transparent manner. The rules must be applied equally to all Member States in order to maintain credibility. |

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| | 1.11. | The EESC welcomes the fact that increased quality and quantity of public investments is outlined as a factor for consideration in the process of achieving debt sustainability. The EESC also welcomes the extension of the adjustment path which may be granted for a maximum of three years. |

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| | 1.12. | To achieve the EU climate targets, the capital stock needs to be completely overhauled and public and private investments expanded. In the past, the EESC has called for measures to close the massive investment gap [(2)](#ntr2-C_2023146EN.01005301-E0002). The Committee underlines that further initiatives might be necessary to make sure that sufficient private and public capital is mobilised for the green transition and social cohesion. |

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| | 1.13. | To ensure transparency and facilitate effective monitoring of the implementation of the medium-term fiscal-structural plans, Member States are required to submit annual progress reports and to detail the implementation status of reforms and investments. These reports and the Commission and Council evaluations carried out in the context of annual surveillance should be made publicly available. |

2.   Background

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| | 2.1. | The European Commission Communication [(3)](#ntr3-C_2023146EN.01005301-E0003) lays down general principles for a reformed EU economic governance framework. In order to improve the current framework, the Commission initiative aims to strengthen debt sustainability and foster a sustainable and inclusive growth through investment and reforms. |

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| | 2.2. | Net primary expenditure, meaning the expenditure under government control, will qualify as the main indicator considered by the Commission. Net primary expenditure will also be the basis for setting the fiscal adjustment paths and for carrying out annual fiscal surveillance, with the aim of simplifying the current rules. |

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| | 2.3. | Moreover, the Commission will develop a reference fiscal adjustment path for each Member State over a four-year period, based on a methodology established to analyse and assess debt sustainability. The adjustment path should ensure that the debt ratios of Member States with specific debt challenges will be on a downward path, ensuring that the deficit remains below the 3 % of GDP laid down in the Treaty rules. |

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| | 2.4. | The Commission will constantly monitor the implementation of the plans, requiring Member States to submit annual progress reports concerning the application of their plans in order to make the monitoring activity more effective and transparent. The excessive deficit procedure (EDP) will remain, while the debt-based EDP will be reinforced and triggered when a Member State with debt above 60 % of GDP deviates from the agreed expenditure path. |

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| | 2.5. | The medium-term approach embraced by the Commission will allow to differentiate between Member States based on their debt sustainability challenges. Considering the burden on Member States with high debt, the current debt ratio reduction benchmark (the so called 1/20th rule) will be replaced by a more risk-based surveillance to avoid adverse consequences on growth and debt sustainability itself. |

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| | 2.6. | The Commission intends to reinforce enforcement mechanisms as a necessary counterpart of a risk-based surveillance. Enforcement tools will include: (i) effective financial sanctions, which will be de-constrained and made more likely by lowering their amount; (ii) reputational sanctions in case of EDP or other deviations; (iii) macroeconomic conditionality for EU financing. |

3.   General comments

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| | 3.1. | The EESC very much welcomes the Commission Communication outlining orientations for a reform of the economic governance framework. At the same time, the EESC notes that many details still have to be defined, which only allows for a preliminary assessment. |

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| | 3.2. | The EESC agrees with the Commission on the need for a swift agreement ahead of the Member States’ budgetary processes for 2024. As pointed out by the Commission, there is an urgent need for strong budgetary and structural policy coordination as well as for effective economic and fiscal surveillance, fostering inclusive growth and reducing social and economic imbalances in coordination with the institutional action of the European Central Bank to attain its agreed goals. |

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| | 3.3. | The EESC appreciates the Commission’s holistic approach centred on national medium-term fiscal-structural plans covering fiscal, reform and investment objectives within a single venue. Such plans give Member States more flexibility in a fair manner and within a risk-based framework to be evaluated in the mid-term. |

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| | 3.4. | The EESC supports the ambition and key elements of the Commission initiative aimed at improving national ownership, simplifying the framework, moving towards a greater medium-term focus, combined with stronger and more coherent enforcement [(4)](#ntr4-C_2023146EN.01005301-E0004). |

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| | 3.5. | The EESC agrees with the Commission that there has been a lack of prudent policies by Member States in good times [(5)](#ntr5-C_2023146EN.01005301-E0005), while at the same time fiscal rules have restricted fiscal room for manoeuvre during economic downturns in some Member States. The EESC observes that years presenting positive growth performance should be associated with a reduction of the debt-to-GDP ratio, creating room for fiscal flexibility to be used in recession years. At the same time, when Member States face stagnation or deep recessions, fiscal leeway is needed. The EESC considers that the Commission’s proposal is a step in the right direction enabling Member States to conduct credible counter cyclical policies in the future. |

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| | 3.6. | The EESC acknowledges the Commission’s plan to maintain reference values, since clear numerical goalposts have a political and market signal effect. The 3 % of GDP deficit threshold is indeed firmly established in the Treaty, is well known, and is uniformly applicable to all EU countries. The EESC agrees with the Commission that fiscal-structural plans have to ensure that debt-to-GDP ratios are put on a downward path or stay at prudent levels. |

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| | 3.7. | According to the EESC, short-term deviations from the threshold may be required in order to meet massive investment needs currently associated with the green and digital transition or in order to allow for an adjustment path that does not jeopardise growth. |

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| | 3.8. | The EESC considers the medium-term framework presented by the Commission to be reasonable and able to distinguish between the Member States’ very different debt ratio levels, allowing modular approaches targeted at heterogenous national situations where debt-to-GDP ratios might vary from under 60 % to over 150 %. In this respect, the EESC supports the Commission’s proposal to no longer apply the rigid 1/20th rule since it could overburden high-debt Member States, with a negative impact on growth and debt sustainability itself. The mid-term four-year evaluation period to reference fiscal adjustments, extendable for three additional years where necessary, also seems to be proportionate considering the current and foreseeable economic and international conditions. |

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| | 3.9. | The EESC welcomes the Commission’s focus on net primary expenditure as the main evaluation parameter of the new economic governance. In this respect, the EESC calls for national medium-term fiscal-structural plans to embrace targeted, strategic and well-devised public investments in line with EU priorities. Such investments should form a larger share of government spending, encouraging inclusive and sustainable growth. |

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| | 3.10. | The EESC agrees with the Commission that the quality of public spending needs to be improved. Growth enhancing reforms and investments should be favoured at national level, while pursuing a credible debt reduction pathway after the pandemic and in times of international tensions. |

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| | 3.11. | The EESC supports the Commission’s proposal that 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, demonstrating decreasing debt-to-GDP ratios in good times and allowing for the necessary policy response in hard times [(6)](#ntr6-C_2023146EN.01005301-E0006), enabling protection of the most vulnerable. |

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| | 3.12. | The EESC points out that fiscal policy is the classic domain of parliamentary politics, since it affects the entire structure of state expenditure and revenue. For a reformed framework to be successful, ownership of the process is key. The EESC considers it paramount that the forthcoming legislative proposals establish minimum standards of national parliamentary oversight and organised civil society involvement with regard to the drafting of national medium-term fiscal-structural plans. Parliaments and organised civil society as well as regional and local authorities should be effectively involved since ownership of the medium-term fiscal-structural reform plans will be strong only if all relevant stakeholders are adequately engaged [(7)](#ntr7-C_2023146EN.01005301-E0007). National parliaments should hold governments accountable for the fiscal and reform policies they pursue. |

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| | 3.13. | In the event of a change of government, amendments to the medium-term structural plans must be possible as long as medium-term stability is not jeopardised. If governments introduce new discretionary revenue measures, while at the same time preserving overall debt sustainability an adaptation of the expenditure path should be possible without having to go through the whole validation process of the structural-fiscal plans again. |

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| | 3.14. | The EESC notes that if the Commission’s proposals were implemented, the Commission itself would have more influence on Member States’ fiscal policy [(8)](#ntr8-C_2023146EN.01005301-E0008). At the same time, country-specific recommendations become more binding, since lack of implementation could lead to cuts in EU funding and a more restrictive adjustment path. The importance of the European Semester would also increase. It is therefore important to boost the engagement of national parliaments and civil society organisations, so that the ownership of the rule-based system is enhanced. The oversight and scrutiny function of the European Parliament is important, especially for enforcement and corrective measures. At the same time, the principle of subsidiarity and the division of competences in the Treaties must be respected. |

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| | 3.15. | The EESC supports the Commission’s initiative to make financial and reputational enforcement mechanisms more effective in case of deviations. Given the increased flexibility Member States would enjoy in implementing their fiscal, investment and structural reforms within national fiscal-structural plans, the applicable rules should be effectively enforced in case of non-compliance. Thus, the consolidation of public finances in good time would be encouraged, making debt more sustainable. |

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| | 3.16. | The EESC underlines the need for proper rules ensuring strong enforcement. In the exceptional cases when sanctions are considered, they must be effective and implemented in a transparent manner. The rules must be applied equally to all Member States in order to maintain credibility. Possible social consequences and effects on debt sustainability developments should be part of the enforcement analysis. |

4.   Specific comments

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| | 4.1. | Since net primary expenditure plans are proposed to become the main evaluation parameter, the EESC underlines the need to have clear and transparent rules for calculating primary expenditures. Discretionary revenue measures, as well as cyclical unemployment expenditures, must therefore be objectively and clearly defined, and agreed by all Member States. |

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| | 4.2. | While the exclusion of cyclical unemployment expenditures in the expenditure plans may be understandable, it must not prevent Member States from addressing any need to improve the functioning of the labour market in order to reduce structural unemployment since such costs, even though not excluded, may add substantially to higher growth and employment in the medium term, thereby improving debt sustainability. At the same time, good medium-term working conditions have to be promoted. It is important that the rules are clear and robust, making sure that any kind of ‘creative accounting’ is not pursued by Member States. |

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| | 4.3. | The EESC welcomes the fact that increased quality and quantity of public investments is outlined as a factor for consideration in the process of achieving debt sustainability. The EESC also welcomes the extension of the adjustment path, which may be granted for a maximum of three years, provided Member States underpin their plans with a set of reforms and investments that support sustainable growth and debt sustainability. |

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| | 4.4. | To achieve the EU climate targets, the capital stock needs to be completely overhauled and public and private investments expanded. In the past, the EESC has called for the introduction of a golden rule of public investments to make sure that the massive investment gap is closed. This is not part of the Commission proposal. Still, the Commission’s proposal entails important elements to strengthen public investments. However, it is not really possible to quantify the public investments that will be created since much will depend on the negotiations between the Commission and the Member States on the fiscal-structural plans. Therefore, the EESC underlines that further initiatives might be necessary to make sure that sufficient private and public capital is mobilised for the green transition and social cohesion. |

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| | 4.5. | Because of the risk-based approach proposed by the European Commission, the debt sustainability analysis (DSA) will become crucial in the future EU economic governance framework. The EESC points out that calibrating the details of the debt sustainability analysis, including whether or not climate-related risks are included in the DSA, is a highly political question and should be debated thoroughly with competent stakeholders. The final parameters of the DSA must be decided in a democratic and transparent manner. Independent fiscal institutions could play an important role in assessing the appropriateness of underlying assumptions by participating in the debate and giving information to national parliaments. |

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| | 4.6. | To ensure transparency and facilitate effective monitoring of the implementation of the medium-term fiscal-structural plans, Member States are required to submit annual progress reports and to detail the implementation status of reforms and investments. These reports and the evaluations carried out by the Commission and Council in the context of annual surveillance should be made publicly available. |

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| | 4.7. | The EESC deems that the envisaged increased attention to flow-related variables in the Macroeconomic Imbalance Procedure (MIP) needs to be specified and quantified during the next steps of the economic governance reform, making it symmetric, operational and transparent. |

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| | 4.8. | The EESC underlines the importance of establishing and developing an appropriate process for the first screening of imbalances in the Alert Mechanism Report (AMR) and to determine whether imbalances exist in the in-depth reviews (IDRs). Recommendations should be assessed with respect to European growth drivers and their impacts on economic development. The meaning of the need for more forward-looking surveillance with a view to swiftly detecting and addressing emerging imbalances need to be spelled out in detail. |

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| | 4.9. | The EESC emphasises the importance of robust rules, which are able to function in changing economic conditions, and the need for commitment and ownership by Member States. In order to increase investments and productivity levels across the EU, the fiscal framework reform must not be delayed. |

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| | 4.10. | The EESC maintains that a sound reform of the European economic governance is urgently needed in the interest of people, firms and governments. It is therefore important to develop further measures that could be taken to enhance ownership of the rules, thereby ensuring that all governments are committed to a revised framework. |

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| | 4.11. | The EESC notes that many of the procedures envisaged in the Commission’s proposal need to be worked out in detail. The EESC hence looks forward to expressing its views and advising on more detailed proposals during 2023. |

Brussels, 23 February 2023.

The President of the European Economic and Social Committee

Christa SCHWENG

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[(1)](#ntc1-C_2023146EN.01005301-E0001)  COM(2022) 583 final, page 3.

[(2)](#ntc2-C_2023146EN.01005301-E0002)  EESC opinion on reshaping the EU fiscal framework for a sustainable recovery and a just transition ([OJ C 105, 4.3.2022, p. 11](http://publications.europa.eu/resource/oj/JOC_2022_105_R_TOC)).

[(3)](#ntc3-C_2023146EN.01005301-E0003)  COM(2022) 583 final.

[(4)](#ntc4-C_2023146EN.01005301-E0004)  COM(2022) 583 final, page 1.

[(5)](#ntc5-C_2023146EN.01005301-E0005)  COM(2022) 583 final, page 3.

[(6)](#ntc6-C_2023146EN.01005301-E0006)  COM(2022) 583 final, page 16.

[(7)](#ntc7-C_2023146EN.01005301-E0007)  The EESC notes the criticism of poor involvement of civil society in the regulation on the Recovery and Resilience Facility.

[(8)](#ntc8-C_2023146EN.01005301-E0008)  The EESC recognises that for a monetary union to be viable, certain fiscal conditions and stability are required.

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