EXPLANATORY MEMORANDUM

The Treaty on the Functioning of the European Union provides that Member States are to regard their economic policies and promoting employment as a matter of common concern and shall coordinate their action within the Council. In two distinct articles, it provides that the Council is to adopt broad economic policy guidelines (Article 121) and employment guidelines (Article 148), specifying that the latter must be consistent with the former. Given this legal basis, the guidelines for employment and economic policies are presented as two distinct – but intrinsically interconnected – legal instruments:

· A Council Recommendation on broad guidelines for the economic policies of the Member States and of the Union – Part I of the Integrated Guidelines;

· A Council Decision on guidelines for the employment policies of the Member States – Part II of the Integrated Guidelines.

The guidelines were first adopted together (‘integrated package’) in 2010, underpinning the Europe 2020 strategy. It was also decided in 2010 that the integrated guidelines should remain largely stable until 2014. Whilst the broad economic policy guidelines remain valid for any duration of time, the employment guidelines need to be drawn up each year.

The guidelines, other than framing the scope and direction for Member States’ policy coordination, also provide the basis for country specific recommendations in the respective domains.

The current set of 'integrated guidelines' are to underpin the Europe 2020 strategy within the context of the new approach to economic policy making built on investment, structural reform and fiscal responsibility as set out in the Commission's 2015 Annual Growth Survey. At the same time, the integrated guidelines are to support the achievement of smart, sustainable and inclusive growth and the aims of the European Semester of economic policy coordination.

The "Integrated Guidelines" are the following:

Guideline 1: Boosting investment

Guideline 2: Enhancing growth by the implementation of structural reforms

Guideline 3: Removing key barriers to growth and jobs at EU level

Guideline 4: Improving the sustainability and growth-friendliness of public finances

Guideline 5: Boosting demand for labour

Guideline 6: Enhancing labour supply and skills

Guideline 7: Enhancing the functioning of labour markets

Guideline 8: Ensuring fairness, combatting poverty and promoting equal opportunities

Recommendation for a

COUNCIL RECOMMENDATION

On broad guidelines for the economic policies of the Member States and of the Union

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty on the Functioning of the European Union, and in particular Article 121(2) thereof,

Having regard to the recommendation from the European Commission,

Having regard to the conclusions of the European Council,

Whereas:

(1) Member States should regard their economic policies as a matter of common concern and coordinate them within the Council. Employment guidelines and broad economic policy guidelines should be adopted by the Council to guide Member States’ and Union policies.

(2) In accordance with the Treaty provisions, the Union has developed and implemented policy coordination instruments for fiscal policy and macro-structural policies. The European Semester combines the different instruments in an overarching framework for integrated multilateral economic and budgetary surveillance. The streamlining and strengthening of the European Semester as set out in the Commission's 2015 Annual Growth Survey will further improve its functioning.

(3) The financial and economic crisis revealed and emphasised important weaknesses in the economy of the Union and its Member States. It has also underscored the close interdependence of the Member States' economies and labour markets. Moving the Union to a state of strong, sustainable and inclusive growth and job creation is the key challenge faced today. This requires coordinated and ambitious policy action both on Union and national level, in line with the provisions of the Treaty and the Union economic governance. Combining supply and demand side measures, these actions should encompass a boost to investment, a renewed commitment to structural reforms and exercising fiscal responsibility.

(4) Member States and the Union should also address the social impact of the crisis and aim at building a cohesive society in which people are empowered to anticipate and manage change, and can actively participate in society and the economy. Access and opportunities for all should be ensured and poverty and social exclusion reduced, in particular by ensuring an effective functioning of labour markets and social welfare systems and removing barriers to labour market participation. Member States should also make sure that the benefits of economic growth reach all citizens and all regions.

(5) Action in line with the guidelines is an important contribution to reaching the goals of the Europe 2020 strategy. The guidelines constitute an integrated set of European and national policies, which Member States and the Union should implement in order to achieve the positive spill-over effects of coordinated structural reforms, an appropriate overall economic policy mix and a more consistent contribution from European policies to the Europe 2020 strategy’s objectives.

(6) While these guidelines are addressed to Member States and the Union, they should be implemented in partnership with all national, regional and local authorities, closely associating parliaments, as well as social partners and representatives of civil society.

(7) The broad guidelines for economic policies give guidance to the Member States on implementing reforms, reflecting interdependence. They are in line with the Stability and Growth Pact. The guidelines should form the basis for country-specific recommendations that the Council may address to the Member States.

HAS ADOPTED THIS RECOMMENDATION:

(1) Member States and, where relevant, the Union should take into account in their economic policies the guidelines set out in the Annex. These guidelines shall form part of the ‘integrated guidelines’.

Done at Brussels,

For the Council

The President

ANNEX

Broad Guidelines for the economic policies of the Member States and of the Union Part I of the Integrated Guidelines

Guideline 1: Boosting investment

Increasing the level of productive investment in Europe is key to boost demand and improve competitiveness and long term growth potential in Europe. Efforts should focus on mobilising finance for investment, making finance reach the real economy and improving the investment environment.

The potential of EU funds, including the European Fund for Strategic Investment and structural funds, and national funds to finance growth enhancing investments in key areas should be fully exploited. The result-oriented management of funds as well as increasing the use of innovative financial instruments are crucial elements in this regard.

Making finance reach the real economy calls for increasing transparency and information provision, in particular through the implementation of an European investment advisory hub under the auspices of the European Investment Bank and the establishment of a transparent pipeline of projects, both at European and national level. Close co-operation with all relevant stakeholders is key, in order to ensure smooth carrying out of operations, adequate risk taking and maximum value added.

Macroeconomic and financial stability, as well as regulatory predictability and openness and transparency of its financial sector, are critical elements for keeping the Union an attractive host for foreign financial investment.

Guideline 2: Enhancing growth by the Member States implementation of structural reforms

Ambitious implementation of structural reforms by the Member States in both product and labour markets and social welfare systems is crucial to strengthen and sustain the economic recovery, correct harmful macro-economic imbalances and unleash the potential of the Union economies. This would also help in achieving economic and social cohesion. Competition-enhancing reforms, notably in the non-tradable sector, a better functioning of the labour markets, and an improved business environment contribute to removing obstacles to growth and investment and increasing the adjustment capacity of the economy. Member States should coordinate closely such reforms and regard their economic policies as a matter of common concern in order to maximise positive spillovers and minimise negative ones.

Labour market and social system reforms need to be pursued to promote growth and employment, while ensuring access for all to high quality, affordable and sustainable social services and benefits. Action in the area of labour market reforms, including wage setting mechanisms, should be pursued in line with the more detailed guidance in the employment guidelines[1]. Actions on legal migration should make the Union an attractive destination for talent and skills.

Reforming and further integrating product markets should be continued to ensure that Union consumers and business benefit from lower prices and a wider choice of goods and services. Better-integrated markets give companies access to a substantially larger market than their own domestic market, thus providing them with more opportunities for expansion. More competitive and better-integrated product markets can also help increase the speed of adjustment and resilience to economic shocks.

Efforts should continue to streamline the regulatory environment in which enterprises operate, and should include modernisation of public administration, greater transparency, the fight against corruption, tax evasion and undeclared work, the improvement of the independence, quality and efficiency of judicial systems, alongside with contract enforcement and well-functioning insolvency frameworks.

Information and communication technologies and the digital economy are important drivers of productivity, innovation and growth in all sectors of the economy. Promoting private investment in research and innovation should be accompanied by in-depth reforms to modernise the research and innovation systems, to enhance cooperation between public institutions and the private sector and to improve the broader framework conditions for companies to become more knowledge-intensive. Raising the quality of public investments in research and innovation will continue improving the quality of public finances.

Guideline 3: Removing key barriers to growth and jobs at Union level

Further integrating the Single Market, increasing competition and improving the business environment is key to keep Europe an attractive location for businesses both domestic and foreign. To move Europe's productivity frontier, it is necessary to increase innovation and human capital and to ensure an integrated well-functioning Digital Single Market. Increasing the uptake of information and communication technologies by both consumers and business can contribute to creating a borderless digital Europe and increasing productivity.

A well-functioning financial sector is key to a smooth functioning of the economy. The strengthened regulatory and supervisory provisions and consumer protection in the area of financial markets and financial institutions should be fully implemented. Measures need to be taken to build a sustainable market for securitisation in Europe, which will improve the effective funding capacity of Union banks. Building on the achievements of the single market for financial services and capital, a genuine Capital Markets Union needs to be established.

Delivering a strong Energy Union should ensure affordable, secure and sustainable energy for businesses and households. Implementation of the 2030 climate and energy framework and transition to a resource efficient low carbon economy should be pursued including demand and supply side reforms. In this regard, the energy and transport sector require particular attention.

Union legislation should focus on those issues that are best dealt with at European level, and designed taking into account their economic, environmental and social impact. Creating a level playing field across the borders with greater regulatory predictability and in full compliance with competition rules will further attract investment. A better and more predictable business environment is particularly important in network industries characterised by long investment horizons and large-scale initial investments. The external dimension of the internal market should be further developed.

Guideline 4: Improving the sustainability and growth-friendliness of public finances

Stable public finances are key for growth and job creation. Fiscal sustainability is vital to secure investor confidence and the fiscal space necessary to counter unexpected developments and maximise the positive contribution of public finances to the economy. Member States should secure long term control over the deficit and debt levels. Fiscal policies must be conducted within the Union rules-based framework complemented by sound national budgetary arrangements. Fiscal policies should reflect the economic conditions and sustainability risks at Member State level, while ensuring a good co-ordination of economic policies and a coherent fiscal stance across the Union and the euro area, making use of fiscal space where available to support growth and investment.

In designing and implementing budgetary consolidation, strategies should prioritise growth-enhancing expenditure items within areas such as education, skills and employability, research and development and innovation and investment in networks with positive impacts on productivity, for example high-speed Internet, energy and transport interconnections and infrastructure. Expenditure reforms should target efficiency gains in public administration;such reforms can be prepared notably by spending reviews,with a view to secure long term sustainability.

Expenditure reforms that promote efficient resource allocation to support growth and employment while preserving equity should be complemented by modersnising revenue systems. Common consolidated corporate tax base should be pursued. Reducing taxation on labour, while ensuring budget neutrality by shifting it towards consumption taxes, recurrent taxes on immovable property and environmental taxes can help correcting market inefficiencies and lay foundations for a sustained rates of growth and job creation.The efficiency of the tax system can be enhanced by broadening tax bases, such as removing or reducing the use and generosity of exemptions and preferential regimes, and by strengthening the tax administration, simplifying the tax system, and combatting tax fraud and aggressive tax planning.

[1] Insert cross reference to EG