EUROPEAN COMMISSION Brussels, 5.2.2020 SWD(2020) 210 final COMMISSION STAFF WORKING DOCUMENT Report on the application of Regulations (EU) No 1173/2011, 1174/2011, 1175/2011, 1176/2011, 1177/2011, 472/2013 and 473/2013 and Council Directive 2011/85/EU Accompanying the document 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 Economic governance review























Report on the application of Regulations (EU) No 1173/2011, 1174/2011, 1175/2011, 1176/2011, 1177/2011, 472/2013 and 473/2013 and Council Directive 2011/85/EU {COM(2020) 55 final} - {SWD(2020) 211 final}



COMMISSION STAFF WORKING DOCUMENT Report on the application of Regulations (EU) No 1173/2011, 1174/2011, 1175/2011, 1176/2011, 1177/2011, 472/2013 and 473/2013 and Council Directive 2011/85/EU Accompanying the document 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 Economic governance review Report on the application of Regulations (EU) No 1173/2011, 1174/2011, 1175/2011, 1176/2011, 1177/2011, 472/2013 and 473/2013 and Council Directive 2011/85/EU





Table of Contents 1. Introduction 2. Fiscal surveillance 2.1 Objectives of the Stability and Growth Pact 2.2 Implementation of the Stability and Growth Pact 2.3 Developments at the level of national fiscal frameworks 2.4 Effectiveness of the fiscal surveillance framework 2.5 Conclusions 3. Macroeconomic Imbalance Procedure 3.1 Objectives of the Macroeconomic Imbalance Procedure 3.2 Implementation of the MIP 3.2.1 The Alert Mechanism Report 3.2.2 In-depth reviews and classification of imbalances

3.2.3 Recommendation, monitoring, and enforcement 3.3 Effectiveness of the MIP 3.3.1 Follow-up to policy recommendations 3.3.2 The development of a supportive policy environment 3.3.3 Impact on economic outcomes 3.4 Conclusions 4. Euro area Member States experiencing or threatened with serious difficulties with financial stability 4.1 Objectives 4.2 Enhanced surveillance 4.3 Financial assistance and macroeconomic adjustment programmes 4.4 Post-programme surveillance 4.5 Conclusions 5 Overall findings Annex 1: Assessing the impact of the SGP: empirical evidence Annex 2: Assessing the impact of the MIP on policy progress: an empirical assessment



1.Introduction This Staff Working Document provides evidence and analytical underpinning for the Commission Communication on the economic governance review. The review encompasses legislative packages known as the six-pack and two-pack, which were adopted with the aim of strengthening the EU’s economic governance system in response to the economic and financial crisis. The objective of the review, which is to be carried out every five years as mandated in the seven Regulations, is to assess their effectiveness, the progress in ensuring closer coordination of economic policies and sustained convergence in the economic performance of the Member States in accordance with the Treaty of the Functioning of the European Union, and where applicable the contribution of the Regulations to the achievement of the Union’s strategy for growth and jobs. All seven Regulations are equipped with a clause that the Commission shall submit to the European Parliament and to the Council a report on the application of the legislation, accompanied, where appropriate, by proposals for amendments. In the following sections, the effectiveness of the individual surveillance strands is assessed against their key objectives. Section 2 outlines the main objectives of the EU fiscal framework, its evolution over time and the way it has been implemented. It also looks at the related developments within the national fiscal frameworks. It concludes by assessing the effectiveness of both the EU and national fiscal frameworks in strengthening public finances in various respects. Section 3 presents the main objectives of the Macroeconomic Imbalance Procedure as well as the evolution in its implementation, and discusses its effectiveness in fostering policy action and favouring the correction of imbalances. Section 4 evaluates Regulation No 1173/2011 on the surveillance of Member States in the euro area experiencing or threatened with serious difficulties with respect to their financial stability. It looks at provisions regarding enhanced surveillance, and macroeconomic adjustment programmes as well as post-programme surveillance and the implementation thereof. Finally, section 5 provides the key conclusions.

2.Fiscal surveillance 2.1 Objectives of the Stability and Growth Pact The primary objective of the Pact is to ensure the sustainability of public debt. The Pact aims to prevent, and where necessary correct, excessive deficits so as to keep debt at sustainable levels. Safe levels of debt allow so-called ‘automatic stabilisers’ to operate (e.g. higher expenditure on unemployment benefits and lower tax revenues during downturns) without leading to fiscal or financial market stress. Without prejudice to the objective of sustainability, the Pact is also meant to allow for fiscal-based macroeconomic stabilisation. Differences in national preferences on the appropriate pace of debt reduction makes reconciling the sustainability and stabilisation objectives challenging. The corrective arm of the Pact aims to correct excessive deficits when they occur. The Treaty defines deficit and debt thresholds, i.e. a deficit below 3% of GDP and a debt-to-GDP ratio of below 60% of GDP, unless the ratio is sufficiently diminishing towards that level at a satisfactory pace. Breaches of those thresholds are referred to as ‘gross policy errors’ and trigger an excessive deficit procedure (EDP), as set out in Article 126 TFEU. Member States in an EDP are required to correct their excessive deficit situation by a deadline set by the Council. If a Member State fails to put in practice the recommendations of the Council, the procedure may be stepped up. Member States concerned can be subject to the suspension of payments or commitments under the European Structural and Investment Funds. Euro-area Member States can also be subject to financial sanctions under the Pact. The preventive arm of the Pact aims to prevent the occurrence of excessive deficits and ensuring sound public finances. It aims to ensure that Member States build fiscal buffers during economic good times so that they have sufficient fiscal space for economic stabilisation during downturns. It requires Member States to reach a country-specific medium-term budgetary objective (MTO), which is defined in structural terms, i.e. adjusted for the economic cycle. Meeting the MTO gives Member States scope to use fiscal policy for the purpose of macroeconomic stabilisation in bad economic times, i.e. by allowing automatic stabilisers to operate or by making policy choices that support the economy (e.g. increasing investment). The minimum level of a country’s MTO is determined based on the Member State’s debt level, the budgetary impact of population ageing, and cyclical volatility of its economy in order to ensure an appropriate safety margin with regard to the 3% of GDP deficit threshold. For euro-area Member States, the MTO cannot be lower than a structural deficit of 1% of GDP. Member States that have not reached their MTO are required to adjust towards that objective (by 0.5% of GDP per year as a benchmark). The Pact has developed considerably since its creation, largely in response to weaknesses that became apparent during periods of crisis. The conceptual underpinning of the framework has been gradually elaborated and its scope extended with a view to making the rules ‘smarter’, i.e. better adapted to the economic situation. Based on the observation that Member States fail to make necessary fiscal adjustments during economic good times, and that debt levels tend to increase considerably during recessions, successive reforms have made the preventive arm of the Pact more central and increased the focus on debt developments. In particular, the economic and financial crisis shifted the focus to risks arising from unsustainable levels of public debt, and to possible debt crises, which could threaten the financial stability of the euro area as a whole. In a context of heightened market pressure and rapidly rising debt levels, there was a need to decisively strengthen safeguards for debt sustainability. The 2011 six-pack reform reinforced the preventive arm of the Pact, in particular to ensure adequate efforts in good times. It introduced a greater emphasis on aggregate expenditure developments and revenue-increasing (or decreasing) policy measures, which are more directly under the control of governments than other fiscal indicators. Accordingly, a Member State’s adjustment towards its MTO is assessed annually on the basis of two measures: 1) the growth rate of primary expenditure developments net of discretionary revenue measures, relative to medium-term economic growth (the ‘expenditure benchmark’); and 2) the change in the cyclically-adjusted budget balance net of one-off measures (the ‘structural balance’). Member States that significantly deviate from their MTO or from the adjustment path towards it (i.e. by more than 0.5% of GDP), are required to correct the deviation within a given timeframe under the so-called ‘significant deviation procedure’. For euro-area Member States, insufficient correction (i.e. no ‘effective action’) can lead to the application of sanctions in the form of an interest-bearing deposit. Finally, reflecting the economic and financial crisis, a collective ‘escape clause’ was introduced, effectively allowing (but not prescribing) a suspension of the rules in case of ‘a severe economic downturn’ in the EU or the euro area as a whole. In the corrective arm, the six-pack reform operationalised the debt criterion and strengthened the sanction mechanism. The six-pack introduced the debt reduction benchmark, making the Treaty’s debt criterion of sufficiently diminishing towards the 60% threshold operational. For euro-area Member States, sanctions under the excessive deficit procedure are now meant to kick in at an earlier stage and be more automatic, through the application of reverse qualified majority voting for Council decisions on Commission proposals. The 2013 two-pack reform strengthened budgetary coordination in the euro area in view of potential consequences of spillovers within the Economic and Monetary Union. In particular, it established an obligation for euro-area Member States to submit their draft budgetary plans to the Commission for an opinion before their adoption by national parliaments. Furthermore, it strengthened budgetary coordination through a discussion in the Eurogroup of those Commission opinions and of the budgetary situation and prospects in the euro area as a whole. It also reinforced the surveillance for euro-area Member States with excessive deficits. After the entry into force of the six- and two-pack, various implementation decisions and approaches have been codified and endorsed by the Council, in particular the use of flexibility within the EU’s fiscal rules. The need to restore market confidence between 2010 and 2012 forced some Member States to implement large fiscal adjustments, sometimes going beyond the requirements of the Pact. Moreover, after the economic and financial crisis, the euro area experienced a second recession in 2012-2013. This was followed by a period of low growth relative to the pre-crisis period and low inflation, with monetary policy facing the zero lower bound and the European Central Bank introducing a number of non-standard monetary policy measures. In the context of a slow recovery from the economic and financial crisis, the Commission has placed an emphasis on making best use of the flexibility within the EU’s fiscal rules. That was operationalised by an interpretative Commission’s Communication on Flexibility within the SGP in January 2015 and a Commonly Agreed Position on flexibility endorsed by the Council. Namely, taking into account the need for the same highly-indebted Member States to implement reforms in labour and product markets, the Commission operationalised the so-called structural reform clause. The particular nature of investment has also been taken into account, to a limited extent, by allowing temporary deviations from the fiscal requirements to cater for investment needs. Lastly, the Flexibility Communication and Commonly Agreed Position on flexibility introduced a matrix to determine the required adjustment under the preventive arm that takes into account cyclical conditions. Concretely, the required annual fiscal adjustment towards the MTO varies depending on the position in the economic cycle (i.e. higher in good times, lower in bad times) and the level of debt (below or above 60% of GDP). Lastly, the Commission increasingly made use of the discretion available within the framework when applying the fiscal rules. It considered compliance with the preventive arm a key relevant factor when assessing compliance with the Treaty’s debt criterion. That discretion also included the use of the concept of ‘broad compliance’ with the preventive arm requirements as well as specific changes to the fiscal requirements, as recalled by the Court of Auditors. The Commission has fostered a regular dialogue with Member States and the European Parliament and has consistently sought to clarify the rationale for its decisions in a cross-country perspective. The framework has nevertheless become more complex and arguably less predictable. The increased use of discretion also reflected the fact that the six- and two-pack reforms increased the Commission’s responsibility for decisions, such as the imposition of sanctions, having far-reaching political implications in the Member States. In parallel to the evolution of the Pact, EU requirements for national fiscal frameworks have been introduced and have become increasingly precise. There has been a growing recognition of the importance of fiscal arrangements at the national level as a means of ensuring compliance with EU fiscal rules. In that respect, national frameworks are perceived as serving two goals: first, to provide the necessary setting for the implementation of fiscal policy in compliance with EU rules; and second, as a means of strengthening national ‘ownership’ of EU rules. Member States agreed on a number of requirements for their fiscal frameworks with a view to improving their quality and effectiveness in the support of fiscal discipline in the EU context. Most of those requirements took the form of EU law, while others, more intrusive, were established in the so-called ‘Fiscal Compact’ as part of the intergovernmental Treaty on Stability, Coordination and Governance in the Economic and Monetary Union. 2.2 Implementation of the Stability and Growth Pact There were no Member States in an EDP at the end of 2019. While there have frequently been breaches of the Pact’s deficit threshold of 3% of GDP since its inception, the economic and financial crisis resulted in an exceptional situation in which almost all Member States breached that threshold (see Graph 1 ). Due to the depth of the recession and bank recapitalisation needs in some Member States, the headline deficit at the aggregate EU level exceeded 6% of GDP in 2009-2010. As a consequence, 24 out of the then 27 Member States entered the EDP for breaching the Treaty’s deficit criterion. By 2018, all Member States had brought their headline deficits below 3% of GDP. Since 2015, however, headline deficits have mainly been reduced thanks to improving macroeconomic conditions, which have generated additional revenues and lowered unemployment expenditure. Some Member States have therefore been able to correct their excessive deficits without making any significant structural fiscal adjustments (the so-called ‘nominal strategy’, i.e. aiming at headline deficit targets). In addition, some Member States, including some of the largest, still have deficits that are close to the 3% of GDP threshold. Debt dynamics across Member States have been quite divergent since the economic and financial crisis. While the aggregate EU debt remained around 60% of GDP in the pre-crisis period, it increased to almost 90% between 2009 and 2014. Indeed, the crisis led to higher cyclical and structural deficits, pushing debt-to-GDP ratios substantially upwards. That was further amplified by the impact of low real and nominal economic growth (which delays the reduction in the ratio for any given debt level in absolute terms) and by direct intervention by some Member States in the financial sector. Aggregate debt ratios started to decline in 2015, on the back of lower primary deficits/higher surpluses, higher economic growth and historically low interest rates on public debt. Overall, the Commission forecasts the debt-to-GDP ratio to continue the declining path of recent years and to fall to around 79% in 2020, which is far lower than in the USA or Japan (around 114% and 237% respectively). However, debt dynamics across Member States overall have been quite divergent since the economic and financial crisis (see Graph 2 ). This reflects large differences in the pace of fiscal consolidation and the impact of the economic growth-interest rate differential, as well as in country-specific fiscal costs related to support measures for the banking sector. As a consequence, around half of the Member States now have debt levels (again) below 60% of GDP while some others have their debt around or (well) above 100% of GDP. The latter group of Member States account for half of the EU’s GDP.

Member States’ fiscal positions in relation to their MTOs also vary widely. All Member States have now moved to the preventive arm of the Pact and are thus required to maintain or make progress towards their MTOs. Around half of them have reached those objectives, with some accumulating structural surpluses (going beyond the requirements of the preventive arm) and a few others being close to their MTOs (see Graph 3 ). However, a group of Member States remains far away from their objectives and have not yet built sufficient fiscal buffers for the next downturn, notably with respect to the 3% of GDP headline deficit threshold. Most of those Member States also have the highest debt ratios in the EU. Graph 3: How far Member States were from their MTO in 2018? Expenditure dynamics now seem better controlled than before the crisis. The pre-crisis period saw government primary expenditure in most Member States grow faster than potential output. Since the crisis, the growth rate of primary expenditure has slowed down in relation to potential output, which itself was significantly affected by the crisis. Average expenditure growth since the crisis has actually been at or below the growth of potential output in nearly all Member States in spite of the concomitant slowdown in inflation (see Graph 4 ). The difference between the two periods would likely be even larger if discretionary revenue measures were also considered. Indeed, the pre-crisis period saw the majority of Member States cutting taxes, a trend that reversed in the aftermath of the economic and financial crisis (up to 2015). Graph 4: Controlling primary expenditure dynamics

Pre-crisis period Post-crisis period 2.3 Developments at the level of national fiscal frameworks EU requirements for national budgetary frameworks have evolved rapidly in terms of scope and granularity in recent years. While EU policy‑makers have paid increasingly more attention to national fiscal frameworks since the introduction of the euro, Directive 2011/85 was the first EU legislative initiative in that area. The Directive introduced a set of binding minimum requirements for the main elements of budgetary frameworks,, although the requirements themselves remained fairly general. In particular, it requires Member States to adopt numerical fiscal rules conducive to the respect of the Maastricht criteria and defines general requirements for their design and specification, while leaving the choice of specific rules to the discretion of Member States. It was soon followed by further initiatives in the area of domestic budgetary frameworks, i.e. the Fiscal Compact and the two-pack. The Fiscal Compact, though not part of EU law, has had a big impact on national frameworks: it required its euro area signatories to introduce in national legislation (preferably at constitutional level) a structural balanced budget rule – effectively reproducing the MTO - and to complement it with an automatic correction mechanism, as well as an independent fiscal institution to monitor the rule. Regulation No 473/2013, which concerns only euro-area Member States, introduced the criteria for establishing independent fiscal institutions into EU law and added requirements related to: 1) independent macroeconomic forecasts being used for budgeting; and 2) a common budgetary timeline across euro-area Member States. As a result, the current economic governance system blends various requirements for domestic budgetary frameworks, with Directive 2011/85 providing basic standards for all Member States, complemented by reinforcements in specific areas introduced by Regulation No 473/2013 for euro-area Member States and by the Fiscal Compact for euro-area and voluntarily adhering non-euro-area Member States. Since the adoption of the EU legal requirements and the Fiscal Compact, there has been significant development of national budgetary frameworks in Member States. The progress is most noticeable in Member States that had no or only rudimentary frameworks before the crisis. For those Member States, the EU requirements served as a basis for a modern fiscal framework. Numerical fiscal rules are now at the centre of fiscal frameworks in all Member States and their quality has improved markedly. The number of fiscal rules has increased significantly in the Member States in recent years. However, rather than just the mere number of rules, which (if too high) can create challenges of its own, the greater quality of rules should be emphasised (see Graph 7 ). Overall, the Member States now have sets of fiscal rules that are more specific in terms of target and scope, generally have some consequences for non-compliance and are usually monitored on the basis of independent analysis. Where they contain escape clauses, these are limited in number and generally well-defined.

All Member States have a medium-term budgetary framework. Extending the horizon of fiscal policy beyond the annual budget brings benefits in terms of credibility, transparency and discipline. Recognising this, Directive 2011/85 required Member States to establish credible and effective medium-term budgetary frameworks (MTBF). Currently, all Member States have a more or less developed MTBF based on multiannual objectives for the main budgetary aggregates, a noteworthy improvement over the period before the adoption of Directive 2011/85. However, as that Directive contains only general requirements on MTBFs, their design differs significantly across the Member States. Note: Each indicator ranges between 0 (non-existent) and 1 (very strong) and is averaged across all rules in force at all levels of government. Source: Commission’s Fiscal Governance Database. Source: Commission’s Fiscal Governance Database. The transparency and independent monitoring of fiscal policy have improved significantly. Independent institutions have been set up (or reinforced) in virtually all Member States (see Graph 6 ), with a mandate to monitor public finances, in particular national fiscal rules, and to provide independent assessment. New streams of fiscal statistics have been created, most notably on Member States’ contingent liabilities, which has helped to raise awareness of specific aspects of public finances among policy-makers and the general public. The requirements of Regulation (EU) No 473/2013 for the preparation or endorsement of macroeconomic forecasts by independent fiscal institutions appear to have led to slightly more prudent forecasting. 2.4 Effectiveness of the fiscal surveillance framework Sustainability of public finances The corrective arm of the Pact has been an effective tool for reducing and maintaining government deficits below the 3% of GDP threshold. As discussed above, no Member State is currently under the EDP, compared to 24 Member States in the wake of the economic and financial crisis. Furthermore, the biggest structural fiscal adjustments took place between 2011 and 2013, when most Member States were still under the EDP. This suggests that the corrective arm of the Pact has proved effective in reducing excessive headline deficits (see box 1). However, as noted above, a number of Member States have corrected their excessive deficits thanks to better-than-initially-expected macroeconomic conditions rather than structural fiscal adjustments. At the same time, government debt is now very high in some Member States, including some of the largest. While around half of Member States currently have debt ratios below the Treaty threshold of 60% of GDP, debt ratios increased substantially in some others following the economic and financial crisis, only stabilising in recent years. In particular, seven Member States (Greece, Italy, Portugal, Cyprus, Belgium, France and Spain) have debt ratios above or close to 100% of GDP, as opposed to only two in the pre-crisis period (Greece and Italy). There is also a clear inverse relationship between Member States’ debt levels and budget balances (see Graph 7 ). Member States that have met (or exceeded) their MTOs are also those with relatively low debt levels. This is the case for large Member States, such as Germany and the Netherlands, but also for Bulgaria, Czechia, Denmark, Luxembourg, Malta and Sweden. On the other hand, some of the most highly-indebted Member States (Belgium, Spain, France, Italy) still remain quite far from their MTOs and have made little progress towards them in recent years (see box 1). Graph 7: Structural balance and debt ratios across Member States

(Size of bubbles is proportional to country shares in total EU-28 GDP) On the basis of those observations, it could be argued that the reformed Pact has not been successful in bringing the level of debt down sufficiently in the most vulnerable Member States. Member States that were furthest away from their MTOs after the economic and financial crisis have not necessarily made more progress than those that were closer. This also suggests that the preventive arm has had little traction in those Member States (see box 1). As a consequence, some highly-indebted Member States remain far below their objectives, despite favourable economic conditions, and have thus not built sufficient buffers to provide themselves with a safety margin vis-à-vis the 3% of GDP deficit threshold in the case of deteriorating macroeconomic conditions. Overall, the 3% of GDP reference value appears to have only acted as a target rather than as a ceiling for a number of highly-indebted Member States. This confirms the role of the 3% headline deficit ceiling as an ‘anchor for the laggards’: it acts as a safeguard for those being far away from their MTO and not progressing sufficiently toward it. However, with economic growth now clearly lower than before the crisis, maintaining headline deficits just below 3% of GDP may no longer be sufficient for some Member States to avert unsustainable debt dynamics, forcing those Member States to adjust in bad times in a pro-cyclical manner. At the same time, there is some evidence that compliance with the preventive arm has improved relative to the period before the reform of the Pact, especially for high debt Member States. In that respect, the operationalisation of the debt criterion is likely to have had a deterrent effect. The Commission has considered compliance with the preventive arm as a key relevant factor when assessing a possible opening of an EDP for breach of the debt criterion. That approach is likely to have had a positive impact on preventive arm compliance for those Member States. A simulation exercise reveals that the use of the expenditure benchmark in the preventive arm contributes to more sustainable fiscal positions. Findings from counterfactual simulations show that public debt ratios would have been significantly lower than today, particularly in high-debt Member States, if the expenditure benchmark had been applied and complied with since 2000 (see Annex 1). The simulations show that the positive effects from a credible and more front-loaded fiscal adjustment (higher primary budget balance and lower interest payments) outweigh the negative effects of temporary lower economic growth and inflation on the public debt ratio. Lower public debt ratios will reduce the need to consolidate in downturns and allow the automatic stabilisers to operate fully, which will help avoid future protracted losses in GDP. The findings also suggest that strict compliance with the expenditure benchmark, compared to the structural balance requirement, would have promoted a more growth-friendly path, as demonstrated by the lower average loss in output. The adjustment based on the expenditure benchmark was also found to be less pro-cyclical than the one implied by the structural balance. The reason is that compliance with the expenditure benchmark would have required a larger fiscal adjustment in good times (as it is not impacted by revenue windfalls and interest windfalls). All in all, the findings confirm the relevance of the introduction of the expenditure benchmark in the fiscal framework in the context of the 2011 six-pack reform. Overall, the experience so far raises the question of the extent to which the reformed Pact has made a material difference in the cases where fiscal discipline is most necessary. While the overall fiscal situation has improved on the back of the efforts done by many Member States and while an improvement in compliance is apparent compared to the pre-crisis period, the reinforced preventive arm does not seem to have had sufficient traction in several high-debt Member States. For those Member States with small fiscal imbalances, this has led to debates about the right balance between stabilisation, investment and consolidation needs. Indeed, with the development of the preventive arm, surveillance increasingly focused on promoting sound public finances, broadening the initial focus on correcting gross policy errors. From the point of economic externalities across Member States, the preventive arm may have unnecessarily focused on Member States with low public debt. Moreover, as highlighted in section 1, the changing economic context with a structural decline in potential growth and persistently low inflation and real interest rates adds new challenges to the EU’s rules-based fiscal framework. Meanwhile, the effectiveness of the 3% deficit ceiling points to the signalling value of very simple numerical rules. They are easy to grasp, not least for the general public. It should however be borne in mind that maintaining headline deficits just below 3% of GDP is not sufficient for high debt Member States to avert unsustainable debt dynamics, and forces those Member States to implement pro-cyclical fiscal consolidation in bad times. Box 1: Performance of EU fiscal rules

The 3% of GDP headline deficit ceiling and fiscal outcomes in the EU Empirical analysis suggests that the EU’s fiscal governance framework has contributed to more prudent fiscal policies, although causality is difficult to establish. Member States that had large headline deficits just before the Pact was launched (in 1998) have reduced their deficits significantly, with the exception of the economic and financial crisis period. In graph A, the orange area shows the range of deficits for the quarter of Member States with the highest deficits (‘bad performers’) for each year since 1985. Before 1998, several Member States had deficits exceeding 5% of GDP. Deficits then decreased slowly until the start of the economic and financial crisis, with only three Member States having deficits exceeding 3% of GDP in 2007. In the aftermath of the crisis, Member States’ deficits rose significantly, with 24 out of the then 27 Member States entering the EDP. Since then, all Member States have corrected their excessive deficits. Overall, those developments suggest that the 3% of GDP deficit threshold has contributed to better fiscal outcomes, particularly in Member States that were characterised by high public deficits before the launch of the Pact. At the same time, the deficit threshold seems to have in some cases acted as a target rather than a ceiling. Indeed, several Member States that generally had a record of high deficits currently still have deficits close to 3% of GDP, even though macroeconomic conditions have remained favourable. Graph A: Headline balances in the EU Member States (% of GDP) Note: Headline balance figures from 1995 are based on ESA 2010 while previous figures are back-casted according to the observed change in the ratio as from the series based on ESA 1995. As a consequence of the variable composition of the groups of ‘bad performers’ and ‘good performers’, some of the fluctuations could be the result of composition effects (i.e. Member States shifting categories). Figures are based on the Commission’s spring 2018 forecast. By contrast, there seems to be no clear-cut impact of the 3% deficit criterion on Member States that typically had headline surpluses or low deficits before the introduction of the Pact. The green area in graph A depicts, for each year, the range of budget balances for the quarter of Member States with the lowest deficits or highest surpluses in that year (‘good performers’). While the composition of the group has varied, there have always been Member States recording (on average) surpluses since the launch of the Pact in 1998, with the exception of the years following the economic and financial crisis. This suggests that there has been no downward convergence of the good performers towards the 3% of GDP deficit criterion, as has recently been argued in policy papers. Structural balances and sound budgetary positions All Member States have now moved to the preventive arm of the Pact and are required to make progress towards sound budgetary positions, defined in the form of medium-term budgetary objectives (MTOs). Graph B shows developments in the structural balances of Member States, divided into three groups based on their debt ratio in 2011. The biggest structural adjustments took place between 2011 and 2013, when most Member States were still under the EDP. This partly reflected intense financial market pressure on some Member States during that period. Since 2014, the average fiscal effort of the Member States with the highest post-crisis debt levels (Italy, Portugal, Ireland, Belgium, France, Austria, the UK and Hungary) has slowed down. This is partly explained by the fact that improvements in headline balances in some Member States have been achieved by relying on better cyclical conditions, thus allowing those Member States in the corrective arm to achieve their required adjustments without making a structural fiscal effort. It also shows that the preventive arm has gained little traction in a number of Member States, despite the relatively high debt ratios of Member States in that group. On the other hand, Member States with lower debt have continued to adjust, even when a structurally balanced budget or surplus were reached. For both groups of Member States, however, one can detect an improvement in structural fiscal positions relative to the pre-crisis period. Graph B: Structural balances in Member States (% of potential GDP) Note: due to data availability, the figures up to 2009 refer to the cyclically-adjusted balance (i.e. including one-offs). Source: European Commission, based on the Commission’s autumn 2019 forecast Box 2: Experiences in selected Member States It is possible for Member States under the corrective arm to apply a ‘nominal’ strategy, i.e. reaching intermediate headline targets while delivering very little or no fiscal effort, as shown by the examples of Spain and France. Both Member States broadly met their headline targets between 2016 and 2018 (Spain) and 2015 and 2017 (France) with fiscal efforts that were 0.5-1.0% of GDP smaller than those the Council had recommended. Such a strategy is possible when macroeconomic conditions turn out better than expected at the time the adjustment path was set, which is more likely to happen in excessive deficit procedures with a long adjustment period. In the case of Spain, the excessive deficit procedure in 2018 involved a less demanding requirement than those that would have been expected under the preventive arm. Respecting the debt reduction benchmark during periods of relatively low growth and inflation has proved to be very demanding, as highlighted by the cases of Belgium and Italy. Between 2014, when it became subject to the transitional arrangements of the debt benchmark, and 2016, Belgium experienced a period of low inflation and modest real GDP growth, making it challenging to reduce its debt-to-GDP ratio. At the same time, negative inflation surprises contributed to upward revisions to required adjustments, with slippages accumulating over time. That led to the Commission giving priority to compliance with preventive arm requirements as a relevant factor in considering compliance with the debt criterion. Compliance with the preventive arm was also considered a key mitigating factor against opening debt-based excessive deficit procedures against Italy, despite non-compliance with the debt reduction benchmark. In the case of Finland, public debt hovered around the reference value of 60% of GDP between 2013 and 2017. Therefore, the Commission prepared seven consecutive reports for Finland for planned or actual breaches of the 60% threshold, even though public debt remained much lower than in many other Member States. Various flexibility clauses and allowances have been put into operation in recent years under the preventive arm, with Italy as the main beneficiary. Over the period 2015-2018, Italy benefitted from cumulated allowances of around 1.8% of GDP, thus facilitating its broad compliance with the requirements of the preventive arm despite the absence of improvement in the structural balance over that period. The Commission Communication on the 2017 European Semester also introduced the concept of the ‘margin of discretion’, which allowed the Commission to assess Italy, together with Slovenia, against a lower requirement for 2018 than the one included in the matrix of requirements. Under the preventive arm, the structural balance and expenditure benchmark can give differing indications of the fiscal effort, for example due to different underlying estimates of the growth potential of the economy. For example, both Portugal and Slovakia experienced strong downturns during the crisis period followed by strong recoveries. This led to marked falls in estimated annual potential growth rates (used in the calculation of the structural balance), followed by a rising trend. The medium-term growth rate that underlies the expenditure benchmark (i.e. an average of potential growth estimates over a period of ten-years) is less volatile. This means that, all else equal, requirements from the expenditure benchmark were less demanding than those of the structural balance in the acute phase of the crisis but, conversely, became more demanding in recent years. As a consequence, the use of the expenditure benchmark as an operational indicator for fiscal policy mitigates the risk of pro-cyclicality. Of course, other factors also contribute to differences between the two indicators, such as revenue windfalls/shortfalls and changes in interest payments, which both affect the structural balance but are excluded from the expenditure benchmark. The cases of some small open economies highlight the problems associated with basing preventive arm requirements and assessments on unobservable variables. The output gaps of Slovenia, Slovakia and Latvia, for example, are subject to sizeable revisions. This is partly due to volatility in (EU-funded) public investment, which is characteristic of those Member States. The tools put in place by the Commission to deal with such uncertainty are not fully effective. For example, while the so-called ‘constrained judgement’ approach suggested a lowering of Slovenia’s preventive arm requirement for 2019 compared to the standard ‘matrix’ requirement, there exists no clearly defined methodology for setting alternative requirements. Moreover, while the Commission has placed an emphasis on the expenditure benchmark, the output gap is still a crucial factor when setting the requirement for Member States that are close to their MTOs, as their requirement is determined by the distance of their structural balance to this objective.

The case of Romania highlights the difficulty of enforcing a Significant Deviation Procedure. Romania has been subject to repeated Significant Deviation Procedures since 2017. Even so, its structural deficit increased from 0.2% GDP in 2015 to 2.7% GDP in 2018. This calls into question the effectiveness of the Significant Deviation Procedure when a Member State decides to ignore Council recommendations. It is worth recalling that the current rules do not provide for any legal sanctions in case of non-compliance by non-euro-area Member States. As a result of Romania’s structural deterioration, the Commission 2019 autumn forecast projects that the Member State will have breached the 3% of GDP headline deficit threshold in 2019 and in subsequent years. Economic stabilisation at the level of individual Member States and the euro area The pro-cyclicality of national fiscal policies remains an issue. Fiscal policy was already pro-cyclical in the mid-2000s, as fiscal policies were expansionary when economic times were good. National fiscal policy has remained largely pro-cyclical after the adoption of the six- and two-pack reforms. Most Member States implemented sizeable fiscal adjustments in the immediate post-crisis period, reflecting a lack of fiscal buffers at the onset of the economic and financial crisis, a need to correct excessive deficits and, in some cases, heightened market pressure. Those fiscal adjustments took place in a context of very low or even negative economic growth in some Member States and were, therefore, pro-cyclical. This likely contributed to the weak economic situation in that period, even if it aimed at bringing public finances on a sustainable path and at regaining market confidence. Fiscal consolidation came to a halt in 2014, at the moment when the output gap in the euro area was still negative. However, the aggregate fiscal stance in the euro area continued to be broadly neutral after 2016, even though the euro area’s output gap had turned positive in the meantime and the recovery had strengthened. In addition, national fiscal policies were not appropriately differentiated across Member States in light of their specific sustainability and stabilisation needs, and the fact that in many Member States the recovery was stronger than initially expected. Thus, despite the reinforced preventive arm, many Member States did not use the more benign economic times to build up counter-cyclical buffers. Differing views among Member States about appropriate debt and deficit levels contributed to a pro-cyclical pattern of fiscal policy in good times. As discussed above, some Member States have remained just below the 3% of GDP deficit limit instead of moving towards their MTOs and remain with high debt levels, despite relatively favourable macro-economic conditions. This raises the issue of implementation of the preventive arm, which aims to ensure that fiscal buffers are being built in good times. In contrast, other Member States have sought to exceed their MTOs and in spite of strong fiscal positions are only gradually implementing the Council's recommendations to use fiscal and structural policies to achieve a sustained upward trend in investment. That pattern qualifies the widespread view of the pro-cyclicality of the Pact. Empirical evidence suggests that compliance with EU fiscal rules mitigates pro-cyclicality of fiscal policy in the Member States (see Graph 8 ). First, Member States that met the requirements of the preventive arm of the Pact had less pro-cyclical fiscal effort than others. Second, avoiding high headline deficits appears to reduce the pro-cyclicality of discretionary fiscal policy. Third, keeping public debt at a reasonable level mitigates the pro-cyclical pattern of the fiscal effort. Conversely, having high deficit and debt levels tends to amplify pro-cyclicality. It suggests that the design of the Pact per se is addressing, at least partly, the issue of pro-cyclicality, which is a pervasive feature of fiscal policy (both within and outside the EU). Note: For more information on the estimation technique used, see European Commission (2019), “Have EU fiscal rules mitigated pro-cyclicality?”, Report on Public Finances in EMU 2018, 121-130. The EU’s ability to coordinate the aggregate fiscal stance in the euro area remains constrained. Regulation No 473/2013 established a common budgetary timeline for the euro area, which provides for a check of the budgetary situation and prospects in the euro area on the basis Member States’ budgetary plans and their interactions across the euro area, before the budgets are adopted in national parliaments. While the legal framework allows the Commission to outline measures to reinforce the coordination of budgetary and macroeconomic policy at the euro area level, it does not allow it to enforce the appropriate fiscal stance for the euro area as a whole. While the Pact has established procedures for the correction of high public deficits in terms of nominal thresholds, it cannot compel fiscal policies in support of economic activity. In such a context and in the absence of a central fiscal capacity with stabilisation features, the ability to steer the fiscal stance for the euro area as a whole remains constrained, limiting the scope for fiscal policy to contribute to macroeconomic stabilisation at the level of the euro area as a whole in the event of large shocks that are not policy-induced. This is partly the result of a lack of effort in good times, as a result of which the Pact required consolidation in a number of Member States when economic conditions became less benign. While the issue could be considered secondary at the time when the EU fiscal rules were adopted, its salience has increased in recent years due to the changing economic circumstances. This is due to the growing perception of a risk that monetary policy may face constraints in fulfilling its mandate in an environment of unprecedented low inflation and interest rates, and hence in the event of a severe economic downturn the policy mix be unable to fully support economic activity. In the absence of a central stabilisation capacity, this is liable to place strain on the rules-based fiscal framework. Moreover, a negative interest rate, or simply a growth rate differential, risks exacerbating the relative scarcity of safe assets (see box A1 in Annex 1), which would make it even more difficult for the central bank to achieve its inflation target. At the same time, as some recent experiences show, shifts in saving behaviour and preference/aversion for risk may result in sudden reversals of the interest rate/growth rate differential, and with it of the fiscal burden of debt, especially in high-debt Member States. Above all, even in the absence of changes in fundamentals, perceptions of the safety of different national issuers can change substantially, and put in danger the sustainability of their debt. In highly-indebted Member States, this could make the burden of debt servicing unsustainable. That risk is possibly more acute within a monetary union, where governments with very different debt levels share the same currency and the central bank cannot act as government lender of last resort. This confirms the need for rules imposing constraints on debt trajectories. Quality of public finances, including the development of public investment The quality of public finances is a complex and multi-faceted issue largely outside the reach of the fiscal rules and covered by other EU instruments, such as the country-specific recommendations under the European Semester. In principle, the composition of public revenue and expenditure is a national prerogative, since the Pact primarily aims to prohibit policies endangering fiscal sustainability, while providing space for fiscal stabilisation. The European Semester, in particular the country-specific recommendations based on Article 121(2) TFEU, and specific EU initiatives have been the instruments to improve the quality of public finance while respecting national prerogatives. For instance, ageing populations are expected to confront most Member States with rising government expenditure over the next several decades. In light of that challenge, the Council addressed recommendations to those Member States to undertake fiscal structural reforms to improve fiscal sustainability and strengthen economic growth potential. Governance issues are also important for the quality of public finances: improving the functioning of national fiscal frameworks, implementing well-managed spending reviews and establishing transparent public procurement procedures can also strengthen the efficiency and effectiveness of public expenditure and the credibility of fiscal policy. A composition of public expenditure that prioritises productive spending helps strengthen potential growth in the longer term and promotes a sustainable and inclusive economy. On the revenue side, shifting taxes away from labour, combating aggressive tax planning and addressing the race to the bottom in corporate taxation can make tax systems fairer and more efficient. Regarding public investment, the EU has faced a widespread and persistent decline over the last decade (in some cases even below replacement levels keeping the stock of public capital stable). After the crisis, most Member States significantly cut public investment, probably at the expense of future growth. Public investment in the EU declined from a peak of 3.7% of GDP in 2009 to 2.7% of GDP in 2017. If not reversed, the cut in public investment could result in a substantial reduction in the public capital stock. This in turn has a negative impact on potential growth and affects debt dynamics. It has also led to criticism of the appropriateness of fiscal consolidation. While the Pact is in principle neutral regarding the composition of public revenue and expenditure, it may affect public investment decisions in specific cases. It may be politically more expedient during periods of fiscal consolidation to raise certain taxes or to cut public investment, rather than to cut current expenditure. Meanwhile, fiscal rules are conducive to macroeconomic stability and debt sustainability, which are necessary conditions for public and private investment. Fiscal rules tend to reduce policy volatility, and which makes them beneficial to investment and, more generally, to long-term growth. Moreover, when thoroughly adhered to over the business cycle, fiscal rules ensure that public debt remains sustainable, thus creating fiscal space that can be used for investment. Sound national fiscal rules appear to reduce the negative impact of public debt on public investment (see Annex 1), and empirical research does not point to the conclusion that fiscal rules have hampered public investment in Member States over the past decades. The essential role of public investment to deliver public goods and to support sustainable public finances is well recognised in the EU’s fiscal framework. First, the Treaty requires the Commission to take into account government investment spending when assessing whether a Member State has an excessive deficit. Second, the Stability and Growth Pact, both in its title and content recognises the need to consider the overall quality of public finances in terms of the growth-friendliness of the taxation system and public expenditure. Third, the definition of the medium-term budgetary objective refers to room for budgetary manoeuvre and in particular the need for public investment. This has led to provisions in the fiscal framework that seek to protect the level of public investment during downturns and to incentivise the implementation of structural reforms, which contribute to sustainable public finances, including by raising potential growth. However, recent innovations in the Pact have not significantly improved the quality and composition of public finances. This primarily reflects deliberate policy choices in the Member States. In 2015, the Commission operationalised the so-called ‘investment clause’, granting a temporary deviation from the adjustment path under the preventive arm to cater for an increase in investment. However, the investment clause can only be used if GDP growth is negative or if the output gap (which measures the amount of slack in the economy) is below -1.5% of potential GDP. The rationale is to safeguard investment during (very) bad economic times. Only Italy and Finland have so far benefited from the investment clause, both in 2016. However, in neither case was there a substantial positive impact on public investment. Similarly, the structural reform clause has had a rather mixed success in promoting reforms that improve the quality of public finances and/or increase potential growth, with only five of the eligible Member States having made use of the clause.

Fulfilling the ambition set by the European Green Deal to achieve a carbon-neutral continent by 2050, will require significant investment. The magnitude of the investment challenges requires mobilising both the public and private sector. Box 3 presents some considerations on green public investment in the context of the EU’s fiscal framework. As announced in the Commission’s Communication on the European Green Deal, the outcome of the debate on how to improve EU fiscal governance will form the basis for any possible future steps including how to treat green investments within the EU fiscal rules, while preserving safeguards against risks to debt sustainability. Box 3: Green investment in the EU’s fiscal framework Climate change poses important challenges to public finances. Extreme weather events may raise the risks to the sustainability of public finances and the transition to a climate neutral economy will require substantial public and private investment. While climate adaptation investments should reduce the risks and costs of climate change in the longer run, they will also weigh on government finances in the short and medium run. At present, the EU’s fiscal framework does not include specific provisions to deal with climate-related costs and risks. By promoting sound fiscal positions, the fiscal framework ensures that fiscal policy can fulfil its various roles and support emerging policy priorities, including climate change. Given the scale of the climate change challenge and the risks it poses to the long-term sustainability of public finances, a case can be made that specific provisions be incorporated into the EU’s fiscal framework. However, the public finance implications of climate change are multi-dimensional. At this stage there is no conceptual analytical framework to identify the main links involved and the possible trade-offs. For instance, as both measured fiscal sustainability risks and investment needs rise, trade-offs may arise between catering for increasing investment needs on the one hand and anticipating future costs by raising saving on the other. There are several dimensions as regards financing green public investment needs. In particular, should those investments compete with current spending priorities and not affect the overall fiscal stance? Or could additional public investment spending come on top of existing commitments and needs and thus raise public debt? While the European Green Deal underlines the key role for the EU budget, it also acknowledges that national budgets will play a significant role in the transition. There is literature on the use of fiscal rules as a means to preserve and incentivise public investment. Traditional public finance literature often refers to a ‘golden rule’ that allows for the financing of public investment through public debt. Advocates of such a rule argue that it is conducive for intergenerational fairness and economic growth. Specifically, as long as public investment increases the public and/or social capital stock that they will inherit, future generations will benefit from it and so it is justifiable that they should assume the burden of the debt related to such investment. In fact, financing the public capital stock exclusively with taxation would lead to a disproportionate burden for the present generation, with the risk of insufficient provision of public investment. The ‘golden rule’ literature refers to net investment, i.e. gross fixed capital formation minus consumption of fixed capital, as that expenditure item does not affect the net debt of the public sector (i.e. gross debt minus assets). Literature also provides more sceptical views on preferential treatment of public investment within fiscal rules. In particular, risks related to such a favourable treatment have been highlighted, as such rules may distort the allocation of public goods, incentivise creative accounting, increase the coverage of eligible expenditure over time, make fiscal surveillance more complex, etc. Some empirical work shows that, based on available information, there is only weak evidence that ‘golden rules’ support public investment and that investment is hampered by fiscal rules. Other factors than fiscal rule constraints may lead to low public investment, such as insufficient administrative capacity, poor governance, weak monitoring institutions, etc. Political-economy arguments can also explain why public resources are devoted to spending items other than investment, as it is less visible for voters than for instance social spending. Ownership and governance of EU fiscal rules The accumulation of rules, indicators and implementation procedures over time has made the Pact increasingly complex and has harmed predictability. The development of ‘smarter’ and multiple rules has come at the cost of increased complexity. In the current framework, there are multiple rules (for the headline balance, the structural balance and, since the six-pack, for expenditure growth and debt reduction), associated with different indicators for measuring compliance and various clauses allowing for deviations from the required adjustments (see box 2). Procedures for implementing those rules (preventive and corrective arm, ex ante and ex post assessments) are equally complex. While that accumulation of rules and procedures was driven by a legitimate desire to make the framework more adaptable to changing economic conditions, it has led to a blurring of key requirements and objectives, such as avoiding gross policy errors. The current framework relies heavily on variables that are not directly observable and that are frequently revised, which also hampers ownership. The output gap, which is used to estimate the structural balance, is a key variable underpinning the Pact. It enters the Commission’s assessments at different steps of the surveillance procedures, particularly in the preventive arm. Since potential growth and output gaps are unobservable, they need to be estimated from economic data. This leads to unavoidable uncertainty and revisions of the estimates, which has allowed Member States to increasingly challenge the Commission’s fiscal policy guidance and compliance assessments, for example when it comes to estimating a Member State’s precise structural balance position compared to its MTO. The use of a wider set of macroeconomic indicators for determining the cyclical position of a Member State has had limited success in addressing Member States’ concerns. Overall, the wide use of unobservable indicators has likely reduced ownership and political buy-in. To some extent, this has been addressed by ‘freezing’ the required adjustment for the following year and by increasing the focus on the expenditure benchmark, which provides more stable and operational policy guidance by focussing on budgetary items directly under the control of governments. While the strengthening of national fiscal frameworks has improved ownership of fiscal discipline, discrepancies have emerged between EU and national fiscal rules, undermining the credibility of both and adding to complexity. The objective of stronger national frameworks was to underpin fiscal policies better at national level in line with EU obligations and to increase ownership of such policies among policy-makers and stakeholders. Consequently, the Directive 2011/85 and Regulation No 473/2013 created only broad requirements for national frameworks to accommodate national specificities. On the contrary, the Fiscal Compact went to impose a specific rule modelled on the preventive arm of the Pact (as re-defined by the six-pack). This means that most Member States now have in their national law – at a constitutional level or high in the national legal order – a structural balanced-budget rule that arguably does not take into account interpretative developments in the preventive arm agreed after 2012. This has had two consequences. First, in some Member States, it has arguably hampered rather than improved ownership of fiscal rules, including those at national level. Second, it has given rise to inconsistencies between EU and national rules and encouraged some Member States to arbitrage between them. That situation creates risks of putting in doubt the value of national frameworks, and with it that of the independent fiscal institutions (IFIs) that are required to assess compliance with national rules. Given that the strengthening of national frameworks is meant to improve compliance with EU rules, weakening the former will in turn reflect on the latter as well. Furthermore, differences of views between the independent fiscal institutions and the Commission may weaken the authority of both and give the impression that the national and the EU fiscal rules work at cross-purposes. This raises the question whether complementarity between the EU and national fiscal frameworks have been utilised in an optimal way, particularly now that the national frameworks are well developed. The process for draft budgetary plans has proved useful for ex ante coordination and dialogue, but has also underlined the difficulty of influencing national fiscal policy in practice. Since Regulation No 473/2013, euro-area Member States have been required to submit their budget plans for the coming year to the Commission and the Eurogroup. They are subsequently assessed by the Commission. That process was designed to strengthen ex ante fiscal surveillance, i.e. allowing the Commission to give a view on the likely compliance of the draft annual budget with the EU’s fiscal rules (see Graph 9 ). This is meant to alleviate the burden of surveillance carried out ex post, which was perceived as more punitive and less efficient as it came too late in the process and offered less scope for timely corrective action. In practice, the process has turned out to be useful for setting up a dialogue between the EU institutions and euro-area Member States, as well as for fostering awareness of among national parliaments and the public of Member States’ obligations under the Pact. At the same time, the focus of the assessment on annual changes in the (unobservable) structural balance or annual expenditure growth imparted a certain narrowness to that dialogue. Only once has the Commission requested a Member State to submit a revised plan (Italy for its 2019 draft budgetary plan). The Commission has instead sent ‘follow-up letters’ in all rounds since 2014. The corrective action taken by Member States in response has been limited. Despite that seemingly limited impact, the mere existence of the process may have encouraged Member States to take the Pact’s requirements into account when preparing their draft budgets. Graph 9: Overall compliance of the draft budgetary plans with the Stability and Growth Pact (number of euro-area Member States) The Commission and the Council have been reluctant to launch enforcement procedures against Member States and to impose financial sanctions. That reticence has also been stressed by the European Court of Auditors. The Significant Deviation Procedure was introduced as part of the six-pack as a means to enforce the preventive arm of the Pact. However, it has so far only been applied in the clear-cut cases of Romania and Hungary, with limited effectiveness (see box 2). Similarly, the debt reduction benchmark was introduced in 2011 as an attempt to make the Treaty’s debt criterion operational. However, in a context of very low inflation, the benchmark has proved to be more demanding than foreseen and pro-cyclical. Therefore, no EDPs have been opened so far on the basis of the debt criterion alone, in spite of successive breaches of the debt reduction benchmark, e.g. by Italy and Belgium. Indeed, in those highly indebted Member States, the debt reduction benchmark required particularly high fiscal efforts that could actually have aggravated debt dynamics. Therefore, the Commission’s assessment of compliance with the debt criterion appropriately took into account all relevant factors, in line with the provisions of the six-pack, including low inflation and weak growth, and in particular compliance with the requirements of the preventive arm (see box 2). Lastly, the introduction of swifter sanctions and of reverse qualified majority voting for Council decisions on Commission proposals have increased the role of the Commission. So far, the Commission has refrained from proposing financial sanctions. The application of sanctions under the Pact is different compared to the field of statistics, where fines involve rather symbolic amounts but carry a credible reputational cost via adequate communication. Political incentives, which would also reinforce the disciplining effect of financial markets, are relatively underdeveloped under the Pact. The medium-term orientation of fiscal policy, including its multi-annual ‘track record’, is insufficiently taken into account. In principle, the Pact has a strong medium-term focus, for instance with a central role of Stability and Convergence Programmes, focus on a ‘close-to-balance or in surplus’ budgetary position in the medium term, and multi-annual targets in the EDP. In practice, however, the six- and two-packs have introduced a strong focus on an assessment of annual targets. As a result, the focus on medium-term performance (both backward- and forward-looking) has weakened in relative terms, especially given that the implementation of the debt reduction benchmark has so far relied on an assessment of compliance with the annual requirements of the preventive arm. The emphasis on annual fiscal adjustments has made it more difficult to differentiate between Member States that have markedly different overall fiscal positions and sustainability risks. It has also been argued that a more medium-term focus could help simplify the framework and be easier to reconcile with the stabilisation objective of fiscal policy. However, such an approach also has drawbacks. In particular, it could lead to procrastination or a lack of political ownership. From that perspective, past performance (not least in terms of public debt accumulation) is a key indicator.

National fiscal frameworks There are indications that the strengthened national fiscal frameworks have contributed to the objectives of EU fiscal rules. While it is difficult to isolate the effects of national fiscal governance on budgetary outcomes in an unambiguous way, the fiscal frameworks have been developing in a manner that has been supportive of the objective of EU fiscal rules. The Commission analysis suggests that national fiscal rules, particularly when well designed, have contributed to sound budgetary policy in the Member States. Domestic rules with a strong legal basis, binding targets, independent monitoring, a well-defined correction mechanism and high media visibility appear to be effective in reducing budget deficits. A similar role, with potentially even larger effect, can be attributed to the Member States’ MTBFs developed by the Member States. At the same time, practices concerning the design and role of medium-term planning in national budgetary processes differ significantly across Member States, with significant impact on the effectiveness of MTBFs. The analysis also shows that national expenditure rules have had a cyclical stabilisation effect, in addition to the stability-increasing effect of rules overall. Furthermore, there are indications that the development of national frameworks has strengthened national ownership of fiscal discipline and that stakeholders generally consider strong national frameworks as an effective and efficient tool to promote compliance with EU fiscal rules. The strengthening of national fiscal frameworks has been a positive development that should be seen in a broader context. That strengthening has supported Member States’ domestic institutional frameworks, thus helping to improve the overall quality of public administrations. In particular, the establishment of independent fiscal institutions in all but one Member State should be viewed as a key institutional development. Indeed, while they differ in terms of scope, competences and experience, together they are playing an increasingly important role in fiscal discussions at national and EU levels. It is also worth noting that the EU’s efforts to create robust national fiscal frameworks have been part of a worldwide trend, with wide-ranging reforms in this area also taking place outside the EU. Nevertheless, there remains scope to further improve national fiscal frameworks. The state of development of fiscal frameworks differs considerably across Member States. This is linked, on the one hand, to different constitutional settings, preferences and experience among Member States and, on the other, to the rather general nature of EU requirements for most of the components of fiscal frameworks (which leaves ample room for a variety of approaches at country level). Likewise, the implementation of national provisions, in particular compliance with national fiscal rules, differs across Member States. In this context, the European Court of Auditors has recommended strengthening EU requirements for national fiscal frameworks and improving their monitoring.,At the same time, as illustrated by experience of the Fiscal Compact, it is important to bear in mind the risk of undermining national ownership and effectiveness if requirements are too specific or do not take national specificities sufficiently into account. Furthermore, while the design of fiscal frameworks matters for their effectiveness, steadfast implementation is key. The promotion of good budgetary practices, such as 'green budgeting', could also help to improve the quality of public finances. The interaction between the national fiscal frameworks and the EU fiscal rules is key for the effectiveness of both. As the granularity of EU fiscal rules has increased in parallel with strengthened requirements for national frameworks, there has been a growing tension between ensuring national ownership and maintaining horizontal consistency. This has been more apparent in the preventive arm of the SGP, as the Fiscal Compact led most Member States to introduce in their national law substantive rules similar to those of the preventive arm. Better compliance with national fiscal rules and stronger national fiscal frameworks overall are a means of reducing the intensity of fiscal surveillance at EU level, strengthen national ownership of fiscal prudence and improve compliance with EU rules as well. Exchanges of best practices among Member States in terms of the design and implementation of their frameworks, and cooperation between the IFIs and the Commission on the design and implementation of the framework, help to improve the interaction of national frameworks with EU fiscal requirements. 2.5 Conclusions The reformed EU fiscal framework has helped to make public finances in the EU more sound. Public deficits and debt levels have been falling, and all Member States have exited the excessive deficit procedure. 13 Member States have reached their medium-term budgetary objectives, providing them with fiscal buffers for the next downturn. The process for draft budgetary plans has proved useful, allowing for an early identification of fiscal risks and a degree of ex ante coordination. The reinforcement of national fiscal frameworks has contributed to better outcomes. At the same time, the reformed Pact has not led to sufficient fiscal adjustment in highly indebted Member States in good times. Despite the return of economic growth, public debt levels remain high in several Member States, which are also far from their medium-term budgetary objectives. This implies that those Member States are more exposed to the risk of being forced to adjust in bad times in a pro-cyclical manner. Fiscal policy at Member State level has frequently been pro-cyclical, both in good and in bad times. In addition, the ability to deliver an appropriate fiscal stance for the euro area as a whole, with the appropriate differentiated fiscal effort among Member States, is hampered by the lack of prudent policies in good times. It remains inherently constrained as long as it rests exclusively on coordination of national fiscal policies in the absence of a central stabilisation capacity. The assessment of fiscal performance above points to a number of shortcomings in the EU fiscal framework. The framework has become increasingly complex, reducing predictability and undermining political ownership among Member States. It consists of multiple rules, associated with different indicators for measuring compliance, and contains various clauses allowing for deviations from the requirements, each of them with their own eligibility criteria. It does not sufficiently differentiate between Member States that have markedly different fiscal positions and debt sustainability risks, diluting the focus away from the prevention and correction of gross policy errors. It has not fostered an improvement in the quality of public finances, nor has it been able to support investment despite the limited flexibility that was introduced to that effect, although it cannot be concluded that it has hampered investment. The interplay between EU and national fiscal frameworks could be improved to ensure that they work better in tandem. An effective framework needs to ensure the sustainability of public debt where it is most necessary, while allowing for macro-economic stabilisation in both good and bad times. Fiscal policy guidance supports Member States in ensuring long-term sustainability of public finances and pursuing counter-cyclical fiscal policies to contribute to a better macroeconomic stabilisation in both good and bad times. Sufficient fiscal effort and debt reduction in good economic times helps to create the space to use fiscal policy in bad times. Medium-term fiscal policy planning and an appropriate policy anchor help in that regard. It needs to be discussed what the appropriate role of the EU surveillance framework is in helping to protect public investment in consolidation periods, promoting a growth-friendly composition of public finances and sustaining adequate levels of investment. In particular, it raises the question of the extent to which the fiscal framework could provide flexibility for the public investments needed to meet the broader ambition for a green and digital transformation of Europe, in line with the objective of the European Green Deal. Lastly, the deployment of fiscal surveillance instruments could be considered simultaneously with that of other instruments, such as the macro-economic imbalances procedure, to address low potential growth. A simpler framework and implementation could help to increase ownership, improve communication, and reduce the political costs of enforcement and compliance. Whereas the current fiscal surveillance framework has included elements of flexibility and discretion through a complex set of provisions adopted against a background of lack of trust among key stakeholders, an effective application of economic judgement within a rules-based framework needs to be done in a manner which is objective and transparent. This includes, for example, a need to consider whether a clear focus on gross policy errors as set out in the Treaty, based on clearly defined objectives and operational policy targets, could contribute to an effective implementation of the fiscal framework. Indeed, surveillance should be commensurate to the gravity of the situation, with a stronger focus on the most pressing cases and less-intrusive procedures where overall risks are low. Therefore, it could also be considered whether the surveillance framework, in order to be effective, should focus more on ‘identifying gross errors’, i.e. on Member States whose policy strategy puts public debt on a potentially unsustainable trajectory. Lastly, it has to be considered whether a stronger role for national fiscal frameworks, in particular independent fiscal institutions, would contribute to better compliance with EU fiscal rules and improve ownership of the framework at the same time. 3.Macroeconomic Imbalance Procedure 3.1 Objectives of the Macroeconomic Imbalance Procedure The Macroeconomic Imbalance Procedure (MIP) was established after the economic and financial crisis with the aim of supporting macro-financial stability. The 2008-2009 crisis was accompanied by a general reappraisal of risks in financial markets and acted as a trigger for sudden stops and reversals in current account financing and for the bursting of asset bubbles. Macro-financial and macro-structural aspects driving the accumulation of both external (e.g., large current account imbalances) and internal imbalances (e.g., excess debt accumulation or the building up of housing bubbles) revealed themselves as key factors in triggering balance of payment crises and debt crises, which spilled over to other countries and in some cases required financial assistance to Member States. Therefore, the MIP was introduced with the aim to identify, prevent and address the emergence of potentially harmful macroeconomic imbalances that could adversely affect economic stability in a particular Member State, the euro area, or the Union as a whole. Regulation No 1176/2011 therefore considers that, when assessing macroeconomic imbalances, account should be taken of their severity and their potential negative economic and financial spillover effects which aggravate the vulnerability of the Union economy and are a threat to the smooth functioning of the economic and monetary union. In particular, given vulnerabilities and the magnitude of the adjustment required, the need for policy action was mentioned to be particularly pressing in Member States showing persistently large current-account deficits and competitiveness losses. Furthermore, recital 17 to Regulation No 1176/2011 notes that, in Member States that accumulate large current account surpluses, policies should aim to identify and implement measures that help strengthen their domestic demand and growth potential. With a view to provide an integrated response to economic and social challenges, the MIP was integrated into the European Semester. The MIP legal framework consists of Regulation No 1176/2011 on the prevention and correction of macroeconomic imbalances, and Regulation No 1174/2011 on enforcement measures to correct excessive macroeconomic imbalances. Regulation No 1176/2011 outlines the procedure, while Regulation No 1174/2011 details an enforcement mechanism, including pecuniary sanctions for euro area Member States. The legal basis of Regulation No 1176/2011 is the Treaty article dealing with economic policy coordination (Article 121 of the Treaty on the Functioning of the European Union), while the legal basis of Regulation No 1174/2011 is Article 136 TFEU, which allows for economic policy measures specific to the euro area. Regulation (EU) No 1176/2011 sets a number of steps to identify imbalances in Member States, to recommend policy action, and to ensure adequate monitoring and enforcement. All Member States are screened by means of a set of indicators known as the MIP scoreboard. The Commission’s economic reading of the scoreboard is complemented by additional relevant information and published in an annual Alert Mechanism Report. The Alert Mechanism Report indicates the Member States for which the Commission will carry out in-depth reviews on the basis of prima-facie evidence suggesting the possible presence of imbalances. Based on those in-depths reviews, the Commission adopts conclusions on the existence and severity of imbalances. A difference is made between “imbalances” and “excessive imbalances” depending on the severity of the imbalances, both implying possible recommendations by the Council upon a Commission recommendation. Surveillance of Member States identified with imbalances takes place in the framework of the MIP preventive action. The identification of excessive imbalances implies a stronger surveillance process, possibly leading to corrective action under the MIP – the Excessive Imbalance Procedure (EIP) – which also can give rise to sanctions for the euro area Member States. The EIP has not been launched to date. The legal framework has provided the Commission and the Council a degree of discretion. While being relatively detailed on the steps of the annual cycle, Regulation No 1176/2011 does not specify which actions are to be taken in each contingency. This reflects the challenge of legislating on a broad, complex, evolving, and multi-faceted matter such as macroeconomic imbalances. Against this background, the Commission has exercised its discretion to apply the MIP in light of accumulated experience and in response to evolving economic conditions and thus the framework has developed over time. While the format of the surveillance process stabilised however over the first years of its application, the analytical framework has been gradually enriched. The gradual development of the approach to MIP surveillance is illustrated in the MIP Compendium. In 2018, following its audit on the implementation of the MIP, the European Court of Auditors addressed recommendations to the Commission. The Commission accepted a number of those recommendations and proposed to take them into account in this review. The remainder of this chapter is organised as follows. The next section reports on the actual application of the main steps of the procedure. Section 3.3 focuses on the actual effectiveness of the MIP in terms of direct impact on policies and in supporting the broader policy context, and looks into relevant economic developments. Section 3.4 outlines the main achievements and challenges with the current framework.

3.2 Implementation of the MIP 3.2.1 The Alert Mechanism Report The Alert Mechanism Report is the initial step in the annual MIP cycle. The Alert Mechanism Report serves to select Member States for which prima-facie evidence indicates the possible presence of macroeconomic imbalances. This subset of Member States is thereafter subject to an in-depth review. The analysis takes into account a scoreboard of indicators and other additional information. Regulation No 1176/2011 provides that “the scoreboard shall be used as a tool to facilitate early identification and monitoring of imbalances” (Article 4(1)). Scoreboard indicators are assessed, inter-alia, against their respective thresholds. The regulation also specifies that, in the reading of the scoreboard, the Commission shall use economic judgement (Article 3(2)). The assessment also draws on other relevant economic and financial indicators not included in the scoreboard (Article 3(2)). In practice, the Alert Mechanism Report has taken the form of an annual Commission Communication to the European Parliament, the Council, the European Central Bank, and the European Economic and Social Committee. The scoreboard has a number of purposes. Although the MIP scoreboard is not intended to predict the occurrence of crises, it allows for tracking the evolution of indicators suggestive of the building up of risks. The Alert Mechanism Report also helps tracking the evolution of existing imbalances. The MIP came into force in a particular context, when most Member States were still running large current account imbalances and were accumulating large stocks of net foreign liabilities and of public and private debt. The Alert Mechanism Report has proved useful in tracking the unwinding of those imbalances in a comparative perspective. The scoreboard has also contributed to define the scope of MIP surveillance, by providing an anchor for its remit, and it has facilitated the communication on the surveillance of macroeconomic imbalances. The MIP scoreboard currently includes 14 headline indicators and 28 auxiliary indicators. All indicators are based on ‘hard’ and published data to ensure the required high statistical quality. The headline indicators have indicative thresholds to serve as alert levels in line with the requirements of Regulation No 1176/2011 (Article 4(4)). The headline scoreboard has been expanded to incorporate indicators on financial conditions and employment developments, in 2012 and 2015 respectively. As outlined in the 2016 Alert Mechanism Report, which first included additional employment indicators in the headline scoreboard, the inclusion of these variables into the scoreboard does not have legal implications nor changes the focus of the MIP and consequently cannot trigger further steps under the MIP. Auxiliary indicators have also been adjusted over time. The scoreboard has been found to perform satisfactorily in capturing macroeconomic risks. The scoreboard has sometimes been criticised to be backward looking. Criticisms in this respect were notably raised by the European Court of Auditors. Data included in the scoreboard comes with lags because, in line with the principle enshrined in Regulation No 1176/2011, it should include only variables of high quality statistical data, not forecasts. The fact that some flow variables (e.g., current account balances, and unit labour costs growth) are averaged over past years introduces a backward-looking bias, but also helps avoiding that the scoreboard values for these volatile variables are fully driven by temporary developments. At the same time, analyses show that the scoreboard would have warned about the building of risks ahead of the economic and financial crisis. The scoreboard has been fine-tuned with timely, targeted, and parsimonious revisions. Regulation No 1176/2011 calls on the Commission to “assess on a regular basis the appropriateness of the scoreboard, including the composition of indicators, the thresholds set and the methodology used, and it shall adjust or modify them where necessary” (Article 4(7)). The Commission has revised the scoreboard to factor in improved availability of published statistics relevant for macroeconomic stability and to add variables that help qualifying imbalances and the adjustment process. The Commission has fostered a regular dialogue on the scoreboard with the European Parliament and the Council. While Regulation No 1176/2011 leaves revisions of the scoreboard to the discretion of the Commission, it calls for interaction with the European Parliament and the Council on possible adjustments to the scoreboard. The Commission has maintained a regular dialogue with Member States on the adequacy of the scoreboard and on possible improvements to it, mainly through the Economic Policy Committee (EPC) and its LIME working group. Likewise, the Commission has consulted the European Parliament on changes to the scoreboard. The Parliament and the Council have generally been supportive of the revisions. The scoreboard reading has not been mechanical. This is in line with the spirit of the regulation. The overall number of indicators beyond the respective thresholds and the severity of those breaches have been taken into account as a starting point. However, that information has always been put in context and there has been no automaticity in the conclusions of the Alert Mechanism Reports. Likewise, a low number of indicators beyond the thresholds has not always precluded selection for an in-depth review if risks appeared sufficiently worrisome. The MIP Compendium reports a number of principles that have been followed in the economic reading of the scoreboard. The Commission’s analysis has made use of information beyond the scoreboard indicators. That covers forecast figures, existing analyses, including analytical findings under previous MIP cycles, including in-depth reviews, and other relevant research. At the same time, the country-specific analyses have accounted for relevant additional information, including policy settings or governance issues, which have macroeconomic relevance and thereby need to be taken into account when selecting a Member State for an in-depth review. In addition, the Alert Mechanism Report analyses have benefited from the use of a common set of analytical tools with country-specific benchmarks, which allow to gauge risks and to assess adjustment needs. These tools have been developed in cooperation with the EPC and its LIME working group and are described in section 3.2.2. The Commission has followed the prudential practice of selecting for in-depth reviews the Member States that were already identified with imbalances in the previous annual cycle. That practice has allowed to continuously monitor how existing imbalances evolved, whether they were corrected or aggravated, with a view to timely adapt the categorisation of imbalances and the modulation of MIP surveillance. The approach to the Alert Mechanism Report has left room for appropriate economic judgment and the advisable flexibility. Such an approach has allowed considering also risks that were not fully or not yet reflected in the scoreboard. The selection of Member States for an in-depth review has been broadly consensual. The Council has always endorsed the selection of Member States for an in-depth review proposed by the Commission. 3.2.2 In-depth reviews and classification of imbalances Identification of imbalances Regulation No 1176/2011 defines imbalances in a general and comprehensive manner, leaving ample room for economic interpretation. As compared with the rules-based surveillance framework of the Stability and Growth Pact, MIP surveillance is intentionally not driven by automatic triggers. Drivers of macro-financial instability can be diverse and multi-dimensional phenomena that need to be assessed taking into account also country-specific features, including those linked to the adjustment capacity of the economy. Therefore, the Commission carries out in-depth reviews that provide the basis for the identification of imbalances. Regulation No 1176/2011 distinguishes between “imbalances” and “excessive imbalances”. That distinction depends only on the severity of the imbalances. The latter implies a stronger activation of surveillance, possibly leading to the launch of corrective action, i.e. the EIP, which also can five rise to possible sanctions for euro area Member States. The severity of macroeconomic imbalances is determined not only by considerations relating to the Member State concerned, but also critically by the existence or risk of negative spillovers to other euro area Member States. In particular, the risks of large negative spillovers are considerably larger for current account deficits, and are especially worrying when combined with sustained losses of cost competitiveness and export market shares. At the same time, large and sustained current account surpluses, while not creating immediate risks to national economic stability, affect the smooth functioning of the euro area. There have been calls for more transparency and predictability. Such calls should be seen in light of the substantial role for the Commission in exercising economic judgement in the implementation of the MIP. In its conclusions on the in-depth reviews, the Council has voiced the importance of transparency for what concerns the reasons underlying the identification and classification of macroeconomic imbalances and the activation of MIP surveillance, notably the launch of the EIP once excessive imbalances are identified. Policy makers and experts have criticised that the scope of the MIP was sometimes unclear and, for instance, that the MIP should focus on key issues of macroeconomic and cross-border relevance. The Five Presidents' Report recommends an effective and transparent implementation of the MIP and using the MIP at full potential, including the use of the EIP "as soon as excessive imbalances are identified". The Commission in its October 2015 Communication took steps to enhance the transparency of the MIP (see below). The MIP Compendium reports principles followed by the Commission in the identification and assessment of imbalances.

·The Compendium explains MIP-relevant macroeconomic imbalances as unsustainable trends (e.g., buoyant house price growth that could lead to the burst of a housing bubble with implications for the banking sector) or vulnerabilities (e.g., high private debt, which makes the economy more vulnerable to shocks) that could have harmful implications for macroeconomic stability for the country itself, the euro area or the EU. ·In assessing imbalances, the Commission therefore takes account of potential spill-overs to other Member States, the euro area, or the EU as a whole. ·The Commission highlights the sources of imbalances and also adjustment issues, i.e. factors that hamper a successful correction of existing imbalances. Adjustment issues also include challenges that have resulted from the unwinding of existing imbalances (e.g., the impact of demand compression following current account reversals on the labour market, or the impact of deleveraging on investment). The identification and assessment of imbalances has taken into account the gravity of the challenges, their evolution and policy responses. The Commission assessment has been based on three main criteria: ·The gravity of imbalances, i.e., the likely magnitude of the risks involved; ·Their evolution, to distinguish if the identified imbalances exhibit any tendency to further aggravate or to correct; ·The policy response, with a view to assess to what extent already enacted or planned policies are adequately tackling the identified issues. Hence, in its assessment of imbalances the Commission has taken a forward-looking approach, factoring in also the extent to which policies contribute to the correction of risks. Challenges linked to low productivity or potential growth have been considered among sources of imbalances when relevant for macroeconomic stability. Over time, the Commission has clarified the principles for deciding which issues are dealt with under MIP surveillance and why. These clarifications are relevant especially for those issues that are already dealt with in other surveillance streams. Notably, this concerns government debt, which is the object of surveillance under the Stability and Growth Pact, and economic growth, being the subject of the Commission’s growth strategy organised under the European Semester. The MIP Compendium has clarified that MIP surveillance is not aimed at directly enhancing the growth performance of Member States. In fact, there are instances where buoyant growth comes together with harmful trends (e.g., unsustainably widening external imbalances). However, in some cases, low potential GDP growth can pose macroeconomic risks if left unaddressed: this is especially the case for Member States burdened by high debt levels, as an insufficient growth potential also implies lack of the resources needed to finance high stocks of debt going forward. Government debt is object of MIP surveillance to the extent that it contributes to overall macroeconomic imbalances and has potentially harmful implications for macroeconomic stability. The Commission’s identification and assessment of imbalances have concerned the overall situation of the economy. The assessment has not referred to the identified issues separately, but to the overall combination of factors contributing to risks to macroeconomic stability. Thus, Commission conclusions on imbalances have concerned whether imbalances exist in a certain Member State and whether they are excessive or not. Commission analysis in the in-depth reviews The in-depth reviews identify the sources of imbalances that need to be monitored. While the assessment of the existence and severity of imbalances concern the overall economy, the main sources of imbalances have been spelled out. The introduction of the MIP Assessment Matrix in 2016 has made that identification more transparent and came in the spirit of enhanced transparency announced in the October 2015 Commission Communication (see next section). The Commission has developed a broad spectrum of analytical tools in its MIP analysis. Those tools help qualifying selected developments and assessing their drivers, going beyond the one-size-fits-all approach of the scoreboard thresholds and taking into account country specificities. The tools are mainly used to assess the evolution of a number of variables, including their sustainability, also with a view to inferring about underlying vulnerabilities and adjustment needs. Areas covered currently include: ·External sustainability: cyclically-adjusted current account balances, current account balances based on the economy’s fundamentals ("norms"), and balances taking into account the implications for the net international investment positions (NIIP); NIIP levels predicted on the basis of fundamentals and levels suggested by prudential concerns; ·Private debt (households and non-financial corporations): levels predicted on the basis of fundamentals and levels suggested by prudential concerns and subsequent implications for estimated deleveraging needs; ·Housing prices: benchmarks are used to infer about possible over/undervaluation of housing; ·Spill-overs, with general equilibrium modelling approaches being followed for the five largest euro area Member States. The use of a common set of analytical tools allows a deeper analysis while maintaining consistency across Member States. Before being app