Commission from the Communication on strengthening economic policy co-ordination within the euro area
Date: 2001-02-07
Institutions: European Commission
Subjects: EU Member State, Economic and Monetary Union, coordination of EMU policies, economic convergence, economic situation, euro area

COMMISSION OF THE EUROPEAN COMMUNITIES

Brussels, 7.2.2001
COM(2001) 82 final

Commission Communication on strengthening
economic policy co-ordination within the euro area

Commission Communication on strengthening
economic policy co-ordination within the euro area

1.
In December 1999 the Helsinki European Council adopted the conclusions of
an Ecofin Council Report on economic policy co-ordination during Stage Three of
Economic and Monetary Union (EMU). While noting in the light of the first year of
operation of EMU the promising start made as regards co-ordination,
the report
nevertheless underscored the need to press ahead with strengthening certain co-
ordination arrangements.

Economic policy co-ordination within the euro area is based on consensus.

2.
It
does not aim to impose a decision on a particular Member State but to convince it to
apply the policy deemed to be desirable.

It comprises three main elements:

- a common assessment of the economic situation;

- agreement on appropriate economic policy responses;

- acceptance of peer pressure and, where necessary, adjustment of policies being

pursued.

The general framework for implementing these three elements of economic
3.
the meetings of the
policy co-ordination has proved to be useful.
Eurogroup since June 1998 have been a forum for discussions between economic
policymakers in the euro area that would not otherwise have taken place. Similarly, the
improvements made since the summer of 2000 to the way in which this forum operates
(wider range of topics discussed, better organisation of meetings and higher visibility)
have undoubtedly helped to enhance its operational nature.

In particular,

Lastly, the reinforced procedure for the Broad Economic Policy Guidelines (report on
their
implementation, extension of their scope to cover structural policies,
their
application on a country-by-country basis and clearer
the smooth
functioning of the stability programmes procedure and the innovations introduced by
the Lisbon European Council (annual production of a synthesis report covering, in
particular, the interactions between macroeconomic policy and structural policies) bear
witness to the gradual and continuing strengthening of the substance of economic policy
co-ordination since the beginning of 1999.

formulation),

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4.
The growing interdependence of the euro-area economies, notably in the
monetary and financial fields, nevertheless calls for a regular review of the methods and
procedures for organising economic policy co-ordination. In spite of the improvements
the reliability and rapidity of the common
made since Helsinki,
assessment of the economic situation in the euro area could be further strengthened, that
the principles that must guide the possible economic policy responses would benefit
and that the visibility of such co-ordination should be
from being better defined
enhanced.

it appears that

5.
It is with this aim in mind that practical proposals are presented in this
Communication: after setting out the reasons for reinforced co-ordination, it identifies
the ways in which its content and procedures can be improved and proposes that they be
made more transparent.

I – A reinforced content

The propositions which follow aim to achieve both a finer and a more readily
6.
understandable overall view of the economic situation in the euro area and to reach in
an easier and more predictable manner an agreement on the appropriate economic
policy responses.

Improving the common assessment

It would first be necessary to improve the statistical information available on
7.
the euro area and to increase its visibility.
In addition to the progress being made by
Eurostat and the ECB with regard to the rapid availability and uniformity of statistics,
this would involve constructing activity indicators that give a synthetic view of the euro
area. The Commission has launched several studies in this connection and has
undertaken to finalise them at the earliest possible opportunity (statistical programme,
indicator on common business climate, leading indicator, establishment of a network of
forecasting institutes).

8.
The availability of a more robust assessment of the economic situation in the
euro area also involves undertaking as exact an evaluation as possible of the stance of
the policy-mix in the euro area. In this connection, the principal area is the monitoring
of budgetary policies and of their impact on the policy mix of the euro area. The
Commission therefore intends to present on a twice-yearly basis an appraisal of the
policy mix of the euro area – before and after the presentations of the stability
programmes – in order to improve their preparation and evaluation.

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9.
If the assessment of the economic situation in the euro area is to be improved,
it needs to be not only more precise but also more readily understandable. With this
aim in mind, it would be useful to have a reference document that would provide in
composite fashion and at appropriate intervals all the information necessary to make
such an assessment. The Commission also undertakes to publish a regular report,
presenting an analysis of the general situation and notes on economic policy issues;
analytical notes on current economic trends, prospects and risks; as well as articles of a
more analytical nature dealing with particular aspects of multilateral surveillance.1

Common rules of conduct

10.
In Stage Two of Economic and Monetary Union, the nominal convergence
process and the numerical criteria for multilateral surveillance produced striking results.
the Stability and Growth Pact and its associated
As regards budgetary policy,
programmes are still today functioning on the basis of this convergence "model".

it

Firstly,

implicitly assumes that

this model has two shortcomings.

Now,
the
externalities between Member States' economic policies and between those policies and
the single monetary policy are weak and tend to balance out and that, therefore, there is
no major need for co-ordination. In the light of the first two years of operation of EMU,
is based essentially on numerical
this model
this seems questionable.
thresholds that, generally speaking, represent upper limits that do not vary in line with
the cyclical situation and that do not, therefore, take account of the need to adjust
policies according to the phase of the cycle.

Secondly,

11.
In this context, a set of rules of conduct could be elaborated by the Commission
after consultation with the ECB, and be discussed and endorsed by the Eurogroup.
These rules of conduct would lay down the principles on the basis of which the different
economic policy instruments could be activated to increase the area's economic growth
potential and to cope with shocks affecting the area or some of its Member States. They
would deal with the general principles that should govern the conduct of economic
the instruments
policies;
necessary for implementing these behavioural rules by the Member States.

the policy responses to a particular shock; and, finally,

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It would be an abridged version of the regular reports presented by the Commission to the Economic
and Financial Committee on particular aspects of the economic situation in the euro area, such as the
regular reports on inflation, exchange-rate surveillance, competitiveness, public finances and cyclical
differences within the area.

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This collection of rules of conduct would take into account the diversity of economic
policies within the euro area while at the same time making the area's economic policy
more predictable and hence more credible. They would be addressed in the first place
to budgetary policies, but should also be developed in the domain of structural policies.
These rules of conduct will be updated when manifestly needed, without the updating
necessary being linked to an annual periodicity. They should become the reference
framework that would inspire the Broad Economic Policy Guidelines that the Council
adopts each year.

II – More effective co-ordination instruments

Apart

12.
from the obligations laid down in the Treaty and in secondary
legislation, economic policy co-ordination within the euro area is, for the moment,
centred on the search for consensus within an informal body,
the Eurogroup.
Procedural
improvements should make it easier to achieve an agreement on the
appropriate response of economic policy and its implementation. Such arrangements
would have to remain compatible with the role assigned by the Treaty to the Council
(Ecofin) in the field of economic policy co-ordination.

The Treaty assigns to the Commission a central role in economic policy co-
13.
ordination (preparation of the Broad Economic Policy Guidelines, recommendations,
multilateral surveillance, …). But above all, by virtue of its analytical capacity, it is
well suited to proposing the common assessment of the economic situation in the euro
area and to suggesting appropriate responses. As guardian of the Treaty and in
accordance with the principle of equality of treatment for Member States, it has a duty
of neutrality. Lastly, as the body for gathering and compiling the information necessary
to exercise multilateral surveillance (cf. Article 99(3)), it fulfils the role of synthesising
common economic developments. The contribution of the Commission to the work of
the Eurogroup is, and will continue to be, based on this threefold capacity of analysis,
neutrality and synopsis.

14.
Thus, the Commission intends to present systematically to the Eurogroup not
only an assessment of the economic situation but also, where necessary, suggestions for
economic policy. Similarly, it wishes to be associated with the preparation of the
six-monthly work programme of this forum in order, in particular, to contribute to
focusing these programmes on the issues of direct concern to the euro area as a whole.

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A strengthening of transparency and ex-ante co-ordination

15.
The idea that national policies should be analysed in the light of the economic
situation of the euro area as a whole should be better established. Thus, the principle of
informing beforehand other members of the euro area and the Commission, before
adopting an economic policy measure should form part of the rules of conduct outlined
above.

This pre-informing should take place at
the Eurogroup (in a meeting or by
videoconference) or at the Eurogroup working party of the Economic and Financial
Committee, and should provide the authorities of the Member State concerned with the
reactions or the messages even before the finalisation of the measure at hand.

Similarly, the main points of the stability programmes should be transmitted to the
Commission before their adoption by the Member States. The Eurogroup, which would
then be notified of the Commission's observations, would thus be in a position to
communicate any suggestions to the country concerned, which could take them into
account in the final version of its programme.

the stability programmes could be submitted well ahead of

Subsequently,
the
finalisation of the national budget laws in order that the Eurogroup could, applying the
same procedure, suggest possible amendments to a particular aspect of that country's
budgetary policy and in order that the country concerned could take them into account
in its budget law.

Finally, the establishment of guidelines and priorities in the EU budget should
16.
be embedded in a global vision encompassing both the guidelines and priorities in the
budgets of the Member States and the criteria established in the Broad Economic Policy
Guidelines in order to enable Member States to take them into account in their budget
laws.

Adequate co-ordination instruments

17.
When the circumstances allow, the strengthening of co-ordination implies the
effective use of available co-ordination instruments. For example, as indicated by the
Helsinki European Council and as just done by the Commission, the recommendation
procedure provided for in Article 99(4) of the Treaty will have to be applied where there
is manifest inconsistency between a Member State's economic policies and the Broad
Economic Policy Guidelines.

18.
Lastly, other co-ordination instruments could be put into place, in particular on
the basis of Article 99(5) of the Treaty, for the Member States of the euro area. If the
case arises, they could be introduced by way of the reinforced co-operation procedures
laid down in Articles 43, 44 and 45 of the Treaty of the Union and Article 11 of the EC
Treaty.

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More efficient functioning of the Eurogroup

19.
The strengthening of co-ordination, and in particular the effective increase in
peer pressure, requires firstly that economic policies are analysed in terms of the overall
situation of the euro area. Such an adjustment of the vision of economic policies
requires a certain formalisation of the functioning of the Eurogroup, which could be
done in several stages.

20.
Firstly, within the Economic and Financial Committee a Eurogroup working
party could be set up. The working party's composition would take account of the need
to formulate economic policies from a more euro-area viewpoint. The working party
would have to meet at short notice in order to respond to any emergencies. This
arrangement would also mean that the sensitivities of all the euro-area participants could
be taken into consideration and optimum use made of the Commission's preparatory
work.

In addition, as with meetings of the ECB Council,

21.
the
Eurogroup's meetings could be stepped up. The availability of a videoconference
facility would also permit rapid consultations in case of emergency.

the frequency of

Institutionalising the dialogue between different actors

22.
frequent a dialogue as possible between the various actors of the policy mix.

Effective co-ordination within the euro area calls for the setting up of as

To this end, regular meetings would be held between the ECB President, the President
of the Eurogroup and the representative of the Commission in the Council of Governors
of the ECB. Within a framework of strict confidentiality and with respect for the
independence of each of the parties, these meetings would have the advantage of
organising more efficiently and making more visible the dialogue between those
responsible for the monetary and budgetary policies of the euro area. Together with the
aforementioned assessment of the overall orientation of the policy mix, such a dialogue
would also help to strengthen the European view of the assessment of national policies.
This reinforced dialogue at political
level would be assisted by more in-depth
discussions at technical level.

23.
The quality and effectiveness of co-ordination also depend on the organization
of its external expression. In this respect, the current situation is clearly insufficient. The
Commission recalls the proposition which it has already advanced in November 1997,
according to which the common position on issues of particular relevance to EMU
would have to be presented by a triumvirate made up of the President of the Eurogroup,
the ECB President and a representative of the Commission. This arrangement would be
valid not only for the formal bodies (International Monetary and Financial Committee
of the IMF) but also for the more informal bodies (G7).

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III – Increasing transparency

24.
In order to strengthen co-ordination, the right balance needs to be struck
between the publicity given to a particular view on a particular policy, which tends to
strengthen peer pressure, and the confidentiality of discussions, which ensures
maximum candidness.
This need to strike a balance concerns both internal
communication, i.e. between the economic policy actors, and external communication,
i.e. vis-à-vis public opinion, the other Member States and the markets.

25.
Some of the criticisms regarding the inadequacy of the economic assessment of
the euro area stem from a lack of visibility of the analytical work already undertaken by
the Commission and also from a failure to view this work in its proper perspective. In
this connection, three improvements could be made:

-

-

-

the regular report on the euro area would be published in order to improve the
quality of the public debate surrounding the area's economic policy;

similarly, the press conference following Eurogroup meetings would deal with
issues raised in the regular report and any reactions to them;

finally, when the Eurogroup wishes to express an opinion or give an orientation to
economic policy, the publication of a communiqué would enhance the visibility of
its message and reinforce its impact.

IV – Institutional and organisational observations

26.
These detailed organisational rules for multilateral surveillance could be
formalised in a decision by the Council (Article 99(5) of the Treaty), or if the case arises
by way of the reinforced co-operation procedures laid down in Articles 43, 44 and 45 of
the Treaty of the Union and Article 11 of the EC Treaty.

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