Communication from the Commission to the European Parliament, the European Council, the council, the European Central Bank, the economic and social committee and the Committee of the Regions Reinforcing economic policy coordination
Date: 2010-05-09
Institutions: European Commission
Subjects: budget deficit, coordination of EMU policies, economic recession, euro area, fiscal policy, stability pact

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EUROPEAN COMMISSION 

Brussels, 12.5.2010 
COM(2010) 250 final 

COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN 
PARLIAMENT, THE EUROPEAN COUNCIL, THE COUNCIL, THE EUROPEAN 
CENTRAL BANK, THE ECONOMIC AND SOCIAL COMMITTEE AND THE 
COMMITTEE OF THE REGIONS 

Reinforcing economic policy coordination 

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COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN 
PARLIAMENT, THE EUROPEAN COUNCIL, THE COUNCIL, THE EUROPEAN 
CENTRAL BANK, THE ECONOMIC AND SOCIAL COMMITTEE AND THE 
COMMITTEE OF THE REGIONS 

Reinforcing economic policy coordination 

"The euro area's governance and coordination of economic policies must be improved. This 
will  involve  both  deepening  and  broadening  economic  surveillance  arrangements  to  guide 
fiscal policy over the cycle and in the long term and, at the same time, address divergences in 
growth, inflation and competitiveness." (Commission Communication on "EMU@10: successes and challenges 
after 10 years of Economic and Monetary Union" – 7 May 2008 - IP/08/716) 

I. 

INTRODUCTION 

The  global  economic  crisis  has  challenged  the  current  mechanisms  of  economic  policy 
coordination  in  the  European  Union  and  revealed  weaknesses.  The  functioning  of  the 
Economic  and  Monetary  Union  has  been  under  particular  stress,  due  to  earlier  failures  to 
comply  with  the  underlying  rules  and  principles.  The  existing  surveillance  procedures  have 
not  been  comprehensive  enough.  This  Communication  proposes  measures  that  should  be 
taken in the short term on the basis of the Treaty of the Functioning of the European Union 
(TFEU) to remedy the situation.  

The  recent  economic  crisis  has  no  precedent  in  our  generation.  The  steady  gains  in 
economic growth and job creation witnessed over the last decade have been wiped out and the 
crisis  has  exposed  some  fundamental  weaknesses  in  our  economy.  The  fiscal  and  other 
macro-economic  imbalances  built  up  in  the  years  before  the  crisis  made  the  EU  economy 
vulnerable  when  the  global  financial  crisis  and  economic  downturn  struck.  Our  public 
finances have been severely affected, with deficits of 7% of GDP on average and debt levels 
over 80% of GDP clearly above the 3% and 60% of GDP reference values set in the Treaty. 

High levels of public debt cannot be sustained indefinitely. The pursuit of the Europe 2020 
strategy agreed by the European Council in March must be based on a credible exit strategy. 
The EU faces big challenges in the coming years – the need for fiscal consolidation and at the 
same  time  the  need  to  boost  sustainable  growth  levels.  The  Stability  and  Growth  Pact 
provides  the  right  framework  for  an  orderly  exit  from  the  crisis.  But  to  support  the  EU's 
economic  growth  potential  and  the  sustainability  of  our  social  models,  the  consolidation  of 
public finances requires setting priorities and making hard choices: coordination at EU level 
will be crucial in this task and help address spill-over effects. 

The  recent  financial  crisis  and  pressure  on  the  financial  stability  in  Europe  have 
underlined  more  clearly  than  ever  the  interdependence  of  the  EU's  economies,  in 
particular  inside  the  euro  area.  Member  States  were  supported  by  being  part  of  the  EU, 
with its 500-million-people strong internal market and common currency for sixteen Member 
States. Existing instruments and methods of co-ordination enabled the EU to pull together its 
recovery  efforts  and  to  weather  a  storm  that  no  Member  State  could  have  done  on  its  own. 
However, these recent  experiences  also showed gaps and weaknesses in the current system, 
underlining the need for stronger and earlier policy co-ordination, additional prevention and 
correction mechanisms and a crisis resolution facility for euro-area Member States. 

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Urgent action has been taken to deal with the immediate needs of the crisis culminating 
on  9  May  when  an  extraordinary  Ecofin  Council  decided,  based  on  a  proposal  of  the 
Commission, on the establishment of a European stabilisation mechanism and agreed on 
a  strong  commitment  to  accelerated  fiscal  consolidation  where  warranted.  Lessons 
should be drawn and steps taken to strengthen the EU's system of economic governance for 
the  future.  In  this  Communication,  the  Commission  sets  out  a  three  pillar  approach  to 
reinforcing  economic  policy  co-ordination.  Most  of  the  proposals  pertain  to  the  EU  as  a 
whole, but a more demanding approach is proposed for the euro area, based on Article 136 of 
the Treaty on the Functioning of the European Union. 

The Communication stresses the case for making full use of the surveillance instruments 
available under the Treaty. Where necessary, existing instruments should be modified and 
complemented.  The  Communication  calls  for  reinforcing  compliance  with  the  Stability  and 
Growth  Pact  and  extending  surveillance  to  macro-economic  imbalances.  To  do  this,  it 
proposes the establishment of a European Semester for economic policy coordination, so that 
Member States would benefit from early coordination at European level as they prepare their 
national stability and convergence programmes including their national budgets and national 
reform  programmes.  Finally,  it  sets  out  the  principles  that  should  underpin  a  robust 
framework for crisis management for euro-area Member States.  

These are ambitious and necessary ideas on which the Commission is seeking the views 
of  Member  States,  the  European  Parliament  and  stakeholders.  The  Commission  will 
come forward with legislative proposals to implement these ideas in the coming months.  

II. 

THE  GLOBAL  FINANCIAL  CRISIS  HAS  EXPOSED  AND  AMPLIFIED  THE  CHALLENGES 
FACING THE EUROPEAN ECONOMY 

Public  debt  was  not  sufficiently  reduced  over  the  past  decade.  There  was  not  enough 
commitment  to  fiscal  consolidation,  in  particular  during  good  economic  times.  In  some 
Member  States,  revenues  were  temporarily  boosted  by  tax-rich  activity,  driven  by 
unsustainable booms in housing, construction and financial services. As these macro-financial 
imbalances have unwound sharply due to the crisis, tax revenues in concerned Member States 
have  collapsed,  revealing  a  much  weaker-than-anticipated  underlying  fiscal  position. 
Government budgets in the European Union have gone from close to balance (-0.8% of GDP 
in EU and -0.6% in the Euro area) in 2007 to an expected deficit of close to 7% of GDP in 
2010.  Public  debt  continues  to  rise.  According  to  the  latest  Commission  services'  forecasts, 
public debt will reach 84% of GDP in 2011 (88% in the Euro area), wiping out the results of 
twenty  years  of  consolidation.  Sizeable  contingent  liabilities  related  to  financial  rescues, 
representing another 25 percentage points of GDP in the EU, present an additional source of 
concern, adding to the long-standing fiscal challenges related to ageing.  

Other  macroeconomic  and  financial  imbalances  aggravated  the  vulnerability  of  the 
in  particular.  Persistent  competitiveness  divergences  and 
euro-area  economy 
macroeconomic imbalances within the euro area cause a risk to the functioning of Economic 
and  Monetary  Union.  In  the  years  preceding  the  crisis,  low  financing  costs  fuelled  the 
misallocation  of  resources  to  often  low  productive  uses,  feeding  unsustainable  levels  of 
consumption,  housing  bubbles  and  the  accumulation  of  external  and  internal  debt  in  some 
Member States. The competitiveness gap reached an all-time high just before the crisis. From 
a balanced position in 1999, current account surpluses in the euro area steadily accumulated 

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and reached 7.7% of GDP in 2007, while aggregated deficits rose from 3.5% of GDP in 1999 
to  9.7%  in  20071.  The  economic  and  financial  crisis  has  triggered  a  partial  rebalancing  of 
current accounts. But this rebalancing is only partly structural. Major policy reorientation is 
needed to bring about the necessary adjustment in terms of costs and wages, structural reform 
and reallocation employment and capital.  

The  exceptional  combination  in  Greece  of  lax  fiscal  policy,  inadequate  reaction  to 
mounting  imbalances,  structural  weaknesses  and  statistical  misreporting  led  to  an 
unprecedented  sovereign  debt  crisis.  The  underlying  public  finance  situation  was  brutally 
revealed to be partly due to data misreporting in the past, but in fact was mainly the result of 
inappropriate fiscal policy. While this situation was in part made possible by the shortcomings 
of the existing economic surveillance framework, it clearly highlights the vital importance of 
ensuring  effective  compliance  with  rules.  Confronted  with  an  exceptional  sovereign  debt 
crisis, for which the euro area was left with no remedial instrument, the Member States agreed 
on a package of measures to preserve financial stability in Europe2. This Communication is 
intended to resolutely strengthen  our  surveillance  mechanism  in  order  to  prevent  a  Member 
State  from  slipping  into  such  a  situation  again.  But  the  crisis  also  underscores  the  need  for 
appropriate tools to manage a situation that threatens euro-area financial stability.  

III. 

ENHANCING ECONOMIC POLICY COORDINATION 

III.1.  Reinforcing  compliance  with  the  Stability  and  Growth  Pact  and  deeper  fiscal 

policy coordination  

The  rules  and  principles  of  the  Stability  and  Growth  Pact  are  relevant  and  valid.  But, 
despite the Pact, Member States failed to build up adequate buffers in good times. Reinforcing 
the  preventive  dimension  of  budgetary  surveillance  must  be  an  integral  part  of  closer 
coordination of fiscal policy. Also, compliance with the rules needs to be improved and more 
focus needs to be given to sustainability of public finances. 

The  preparation  and  assessment  of  Stability  and  Convergence  Programmes  forms  the 
core  of  the  preventive  work  under  the  Pact.  Its  impact  and  effectiveness  should  be 
decisively strengthened by increasing the ex-ante dimension of the process, and by giving it 
teeth.  The  former  is  addressed  below  (in  Section  III.3)  through  the  introduction  of  a 
"European Semester". The latter could be done, for example, by including the possibility of 
imposing interest-bearing deposits in case of inadequate fiscal policies when Member States 
make  insufficient  progress  towards  their  budgetary  Medium-Term-Objectives  in  good 
economic times. This would require a change in secondary legislation. 

National fiscal frameworks to better reflect the priorities of EU budgetary surveillance. 
Member  States  should  be  encouraged  to  integrate  the  Treaty  objective  of  sound  public 
finances in their national law. A national fiscal framework is the set of elements that form the 
basis  of  national  fiscal  governance,  i.e.  the  country-specific  institutional  policy  setting  that 
shapes  fiscal  policy-making  at  national 
the 
complementarity  between the EU and national  fiscal frameworks, the  obligation in Protocol 
Nr 12 TFEU for Member States to have in place budgetary procedures that ensure compliance 

level.  To  give  concrete  meaning 

to 

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The  current  account  surplus  ratios  reported  here  reflect  the  combined  surpluses  of  Germany, 
Luxembourg,  the  Netherlands,  Austria  and  Finland.  The  current  account  deficit  ratios  reflect  the 
combined deficits of Ireland, Greece, Spain, Cyprus, and Portugal.  
Conclusions of the Ecofin Council of 9 May 2010. 

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with  their  Treaty  obligations  on  budgetary  discipline  could  be  specified  through  legally 
binding  instruments.  Such  instruments  would  for  instance  require  national  frameworks  to 
reflect multi-annual budgeting procedures, so as to ensure the achievement of the budgetary 
Medium-Term-Objectives. 

The Excessive Deficit Procedure (EDP) forms the cornerstone of the corrective part of 
the Stability and Growth Pact. But, the corrective dimension embedded in the EDP comes 
into play too late to provide the right incentives for Member States to tackle emerging fiscal 
imbalances. The functioning of the EDP could be improved by speeding up the procedures, in 
particular  with  regard  to  Member  States  in  repeated  breach  of  the  Pact.  This  will  require 
changes in secondary legislation. 

More prominence should be given to public debt and sustainability. Recent events have 
highlighted  not  only  the  vulnerability  of  Member  States  servicing  a  very  large  public  debt 
burden,  but  also  the  potentially  negative  cross-border  repercussions.  High  indebtedness 
weighs on medium- and long-term growth prospects and deprives governments of the ability 
to run credible counter-cyclical policies when they are needed most. This applies particularly 
in view of mounting threats to the sustainability of public finances, including those deriving 
from recent bank rescue packages as well as from ageing populations. 

The debt criterion of the excessive deficit procedure should effectively be implemented. 
The  EDP  should  better  take  into  account  the  interplay  between  debt  and  deficit  to  improve 
incentives to run prudent policies. Member States with debt ratios in excess of 60% of GDP 
should become subject to the EDP if the decline of debt in a given preceding period falls short 
of  an  appropriate  benchmark.  Specifically,  the  Commission  and  the  Council  would  need  to 
assess  whether  the  budget  deficit  is  consistent  with  a  continuous  and  substantial  decline  in 
public debt. Fiscal risks stemming from explicit  and implicit  liabilities should be taken into 
account  as  a  relevant  factor.  Symmetrically,  the  abrogation  of  the  EDP  for  Member  States 
with debt in excess of the 60% of GDP threshold should be conditional on an assessment of 
projected debt developments and risks.. This approach is fully consistent with Article 126 of 
the TFEU and would require some changes in secondary legislation. 

To  ensure  better  compliance  with  the  rules  of  the  Stability  and  Growth  Pact,  ,  more 
attention  should  be  paid  to  the  use  of  the  EU  budget.  Currently,  the  suspension  of  the 
Cohesion  fund,  from  which  only  a  limited  number  of  Member  States  is  eligible,  is  only 
considered at a late stage of the EDP (Article 126(8) of the TFEU).  

Broader and more timely use of EU budget expenditure as an incentive for compliance 
should  be  considered  when  decisions  on  the  next  Financial  Framework  are  prepared.  The 
aim  should  be  to  establish  fair,  timely  and  effective  incentives  for  compliance  with  the 
Stability and Growth Pact rules. Conditionality could be enhanced and Member States could 
be asked to redirect funds to improve the quality of public finances, once the existence of an 
excessive deficit is established (according to Article 126(6) of the TFEU).  

Cohesion policy should have a clearer role to play in supporting Member States actions 
to  address  structural  weaknesses  and  competitiveness  challenges.  The  forthcoming  5th 
Cohesion  Report  will  present  proposals  in  this  respect,  particularly  with  a  view  to 
strengthening institutional capacity and efficiency of public administrations.  

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During  the  current  Financial  Framework  a  more rigorous  and  rules-based  application  of  the 
existing  suspension  clause  for  Cohesion  fund  commitments  should  be  pursued  in  case  of 
recurrent breaches of the Pact. 

Improving the functioning of existing mechanisms under the Stability and Growth Pact 

•  Increase  effectiveness  of  Stability  and  Convergence  Programmes  assessments  through 

better ex-ante coordination  

•  National fiscal frameworks to better reflect the priorities of EU budgetary surveillance 

Addressing high public debt and safeguarding long-term fiscal sustainability  

•  Give new prominence to the debt criterion of the Treaty 
•  Take better account of the interplay between debt and deficit  

Better incentives and sanctions to comply with the rules of the Stability and Growth Pact 

•  Interest-bearing deposits in case of inadequate fiscal policies  
•  More rigorous and conditional use of EU expenditure to ensure better compliance with the 

rules of the Stability and Growth Pact 

•  Recurrent breaches of the Pact to be subjected to more speedy treatment and more rigorous 

use of the Cohesion Fund Regulation  

III.2.  Towards  broader  surveillance  of 
competitiveness developments 

intra-euro  area  macroeconomic  and 

The  EU's  comprehensive  Europe  2020  strategy  for  growth  and  jobs  puts  the  focus  on 
macro-financial  and  structural  imbalances.  Europe  2020  sets  out  an  ambitious  and 
comprehensive strategy towards smart sustainable and inclusive growth for the EU economy. 
Against the background of the crisis it sets a new focus on addressing Europe's weaknesses in 
the  surveillance  of  macro-financial  and  structural  challenges.  Taking  account  of  the  deep 
economic  and  financial  inter-linkages  within  the  euro  area  and  their  impact  on  the  single 
currency, Europe 2020 calls for the development of a specific policy framework for the euro 
area  to  tackle  broader  macroeconomic  imbalances3.  Accordingly,  in  March  2010,  the 
European  Council  called  the  Commission  to  present  by  June  2010  proposals  to  strengthen 
coordination  within  the  euro  area,  making  use  of  the  new  instruments  for  economic 
coordination offered by Article 136 of the Treaty (TFEU).  

The accumulation of large and persistent macroeconomic imbalances among euro-area 
Member  States  has  the  potential  to  undermine  the  cohesiveness  of  the  euro  area  and 
hamper the smooth functioning of EMU. To prevent the occurrence of severe imbalances 
within  the  euro  area,  it  is  therefore  important  to  deepen  the  analysis  and  expand  economic 
surveillance  beyond  the  budgetary  dimension  to  address  other  macroeconomic  imbalances, 
including competitiveness developments and underlying structural challenges. It is proposed 
to upgrade the peer review of macroeconomic imbalances now carried out by the Eurogroup 
into  a  structured  surveillance  framework  for  euro-area  Member  States  by  making  use  of 
Article  136  TFEU.  This  framework  will  imply  deeper  surveillance,  more  demanding  policy 
co-ordination and stronger follow-up than envisaged under Europe 2020 for all EU member 

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The  Commission  made  the  case  for  deeper  and  broader  economic  coordination  in  the  euro  area 
repeatedly  in  the  past,  including  in  the  2009  Annual  Statement  on  the  Euro  Area  and  the  2008 
Communication  on  "EMU@10:  successes  and  challenges  after  10  years  of  Economic  and  Monetary 
Union". 

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States. As with the EU's fiscal framework, which also applies to all EU Member States, more 
stringent rules would apply to euro area Member States.  

The  surveillance  will  include  a  scoreboard  that  will  indicate  the  need  for  action.  A 
scoreboard, reflecting both external as well as internal developments, would be defined  and 
regularly  monitored.  It  would  encompass  a  relevant  set  of  indicators  and  reflect,  inter  alia, 
developments in current accounts, net foreign asset positions, productivity, unit labour costs, 
employment, and real effective exchange rates, as well as public debt and private sector credit 
and  asset  prices.  It  would  appear  particularly  important  to  detect  asset  price  booms  and 
excessive  credit  growth  at  an  early  stage  to  avert  costly  corrections  of  fiscal  and  external 
imbalances  at  a  later  stage.  This  analysis  would  form  the  basis  for  the  formulation  of  the 
recommendations for preventive or corrective measures in the Member State(s) concerned.  

As  regards  the  euro  area,  the  Commission  will  also  assess  macroeconomic  imbalances 
developments  and  prospects  as  a  whole.  Looking  at  the  euro  area  as  a  whole  and  on  a 
country-by-country  basis,  the  Commission  would  assess  the  risk  of  all  possible  forms  of 
macroeconomic imbalances that jeopardise the proper functioning of the euro area. In such a 
case,  the  Commission  would  conduct  a  more  in-depth  analysis  of  the  underlying  risk  of 
emerging  imbalances.  This  analysis  will  be  the  basis  for  policy  orientations.  The  Council, 
with only euro-area Members voting, would invite the Member State(s) concerned to take the 
necessary action to remedy the situation. Should the Member State(s), within a stipulated time 
frame  fail  to  take  the  appropriate  measures  to  correct  the  excessive  imbalance,  the  Council, 
with a view to ensure the proper functioning of EMU, could step up the surveillance for the 
Member  State  concerned  and  decide,  on  a  proposal  by  the  Commission,  to  issue  precise 
economic  policy  recommendations.  Where  necessary,  the  Commission  would  use  its 
possibility to issue early warnings directly to a euro-area Member State. Recommendations, if 
and when appropriate, could also be directed to the euro-area as a whole.  

Preventive and corrective actions are potentially needed in a wide range of policy areas 
to  effectively  influence  the  macroeconomic  imbalances  and  their  underlying  structural 
causes. Unlike in the correction of excessive deficits, economic policies tend to have only an 
indirect and lagged impact on the development of external imbalances. Therefore, depending 
on the specific challenges of the economy concerned, policy recommendations could address 
both  the  revenue  and  expenditure  side  of  fiscal  policy  (in  the  context  of  the  Stability  and 
Growth  Pact)  as  the  crisis  has  shown  that  the  evolution  of  the  composition  of  government 
revenues  is  also  an  important  lead-indicator  of  potential  imbalances.  In  this  context, 
recommendations  could  address  the  functioning  of  labour,  product  and  services  markets  in 
line  with  the  broad  economic  policy  and  employment  guidelines.  They  should  also  cover 
macro-prudential aspects to prevent or curb excessive credit growth or exuberant asset price 
developments, in line with the future European Systemic Risk Board analysis. 

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Strengthening  and  broadening  surveillance  of  macroeconomic  developments  in  the  euro 
area 

•  Building  on  Europe  2020,  develop  a  framework  for  enhanced  and  broader 
macroeconomic  surveillance  for  euro  area  Member  States  in  form  of  a  regulation  based 
on Article 136 TFEU  

•  Develop a scoreboard of indicators to identify alert thresholds for severe imbalances  
•  Formulate country-specific recommendations 
•  Recourse to formal Council acts, by the Council voting in euro-area configuration 

III.3.  An integrated economic policy coordination for the EU: a "European Semester" 

With a view to achieving a more integrated surveillance of economic policies, it has been 
suggested  under  the  Europe  2020  initiative  to  synchronise  the  assessment  of  fiscal  and 
structural  policies  of  EU  Member  States.  The  outcome  of  broader  macroeconomic 
surveillance should be reflected also when fiscal policy recommendations under the SGP are 
being  formulated.  In  particular,  the  emergence  of  sizeable  macroeconomic  imbalances  may 
call  for  more  ambitious  budgetary  targets.  Likewise,  when  assessing  the  risk  of  severe 
imbalances and deciding on the appropriate policy response, the Commission would take into 
the  European  Systemic  Risk  Board.  Warnings  and 
account  relevant 
recommendations  from  the  European  Systemic  Risk  Board  addressed  to  one  or  several 
Member  States  would  be  considered  as  a  matter  of  common  concern,  while  applying 
appropriate peer pressure for remedial action. Synergies and consistency between the different 
strands  of  economic  surveillance  should  be  facilitated  by  an  integrated  surveillance  cycle 
under a European Semester. 

input  from 

Prevention  is  more  effective  than  correction.  The  current  cycle  of  economic  surveillance 
consists mainly of an ex-post assessment of the appropriateness of economic policies with the 
rules of the Stability and Growth Pact (SGP) and the broad economic policy guidelines. The 
currently missing ex-ante dimension of budgetary and economic surveillance would allow the 
formulation  of  genuine  guidance,  taking  into  account  the  European  dimension,  and  their 
subsequent translation into domestic policymaking. The formulation of more timely country-
specific  recommendations  would  benefit  all  aspects  of  surveillance  -  fiscal,  macro-financial 
and structural.  

A  system  of  early  peer-review  of  national  budgets  would  detect  inconsistencies  and 
emerging imbalances. To ensure true and accurate data, a prerequisite would be to strengthen 
Eurostat's mandate to audit national statistics in line with recent Commission proposals. It is 
important to bring this proposal swiftly into force as this will improve the quality of reporting 
on  public  finances.  An  earlier  tackling  of  the  building-up  of  fiscal  imbalances  would  ease 
their  reversal  and  avoid  becoming  a  serious  risk  to  macroeconomic  stability  and  fiscal 
sustainability.  The  submission  of  the  Stability  and  Convergence  Programmes  should  take 
place  in  the  first  half  of  the  year  rather  than  towards  the  end  of  the  year  as  is  the  current 
practice.  In  full  respect  of  the  prerogatives  of  national  parliaments,  the  early  peer-review 
would provide guidance for the preparation of the national budgets in the following year. 

For the euro area  a  horizontal  assessment of fiscal stance should be carried out on the 
basis  of  the  national  Stability  Programmes  and  the  Commission  forecasts.  Special 
consideration to the aggregate stance should be given in the cases of serious economic stress 
in the euro area, when sizeable fiscal policy measures taken by individual Member States are 
likely  to  produce  important  spill-overs.  In  case  of  obvious  inadequacies  in  the  budget  plans 

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for the following year, a revision of the plans could be recommended. The Eurogroup should 
have  a  crucial  role  to  play  in  this  new  system  of  enhanced  coordination  and,  where 
appropriate, have recourse to formal decision making as provided by the Lisbon Treaty.  

A  European  Semester  should  encapsulate  the  surveillance  cycle  of  budgetary  and 
structural policies. It would start early in the year with a horizontal review under which the 
European Council, based on analytical input from the Commission, would identify the main 
economic challenges facing the EU and the euro area and give strategic guidance on policies. 
Member  States  would  take  conclusions  of  this  horizontal  discussion  into  account  when 
preparing  their  Stability  and  Convergence  Programmes  (SCPs)  and  National  Reform 
Programmes (NRPs). SCPs and NRPs would be issued simultaneously, allowing the growth 
and  fiscal  impact  of  reforms  to  be  reflected  in  the  budgetary  strategy  and  targets.  Member 
States would also be encouraged, in full respect of national rules and procedures, to involve 
their  national  parliaments  in  this  process  before  submission  of  the  SCPs  and  NRPs  for 
multilateral surveillance at the EU-level. The Council, based on the Commission's assessment, 
would subsequently provide its assessment and guidance at a time when important budgetary 
decisions were still in a preparatory phase at the national level. In this context, the European 
Parliament should be appropriately engaged.  

A "European Semester" for better ex-ante integrated fiscal policy coordination 

•  Align  submission  and  discussions  of  SCPs  and  NRPs  to  assess  the  overall  economic 

situation and improve timing with national budgetary cycles 

•  Ensure  effective  and  timely  policy  advice  from  the  European  Council  and  the  Council 

based on the Commission assessment 

(cid:198)More effective integrated surveillance, reaping the full benefits of peer review 

III.4.  Towards  a  robust  framework  for  crisis  management  for  euro  area  Member 

States 

The  unravelling  of  the  Greek  crisis  showed  that  a  robust  framework  for  crisis 
management for euro area Member States is needed. 

Indeed,  financial  distress  in  one  Member  State  can  jeopardize  the  macro-financial 
stability of the euro area as a whole. The crisis has demonstrated that a robust framework 
for  crisis  management  is  a  necessary  complement  to  the  instruments  for  surveillance, 
prevention  and  adjustment  discussed  above.  The  EU's  balance-of-payments  assistance 
provided crucial support to non-euro-area Member States in financial distress. The uncertainty 
related  to  the  availability  and  modalities  of  financial  assistance  to  Greece  aggravated 
contagion to other Member States and put at risk the overall financial stability within the euro 
area.  

A clear and credible set of procedures for the provision of financial support to euro-area 
Member States in serious financial distress is necessary to preserve the financial stability 
of the euro area in the medium and long term.  

A framework for well-designed conditional financial assistance should strengthen euro-
area  financial  stability  while  avoiding  moral  hazard.  At  the  heart  of  this  euro-area  crisis 
resolution mechanism are strict conditionality and interest rates that create incentives to return 
to  market-based  financing  while  ensuring  the  effectiveness  of  the  financial  support.  When 
crisis prevention fails, and this is evidenced by an objective financing need, assistance would 

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be  activated  as  a  last  resort,  to  safeguard  financial  stability  in  the  euro  area  as  a  whole.  It 
would  be  accompanied  by  a  detailed  and  demanding  programme  of  policy  conditionality 
which would ensure that the assistance period is used to implement the necessary adjustments 
(fiscal and structural) to ensure solvency in the long run and so facilitate the swiftest possible 
return to market-based financing. 

Financial  assistance  should  be  provided  in  the  form  of  lending.  Lending  to  a  euro-area 
Member  State  –  as  opposed  to  assuming  its  debt  -  is  not  in  contradiction  with  Article  125 
TFEU. The policy programme and conditionality should be set within Article 136 TFEU. The 
experience  with  the  EU's  balance-of-payments  assistance  for  non-euro  area  Member  States 
has  demonstrated  that  a  single  framework,  with  the  EU  issuing  debt  to  finance  emergency 
loans,  provides  a  good  combination  of  relative  efficiency  of  management  with  political 
oversight by the Council.  

Policy conditionality must aim first at tackling the underlying imbalances in the affected 
Member  State  to  ensure  a  smooth  functioning  of  EMU.  Conditionality  would  typically 
involve an appropriate mix of fiscal consolidation and the strengthening of fiscal governance 
including tax policies; financial sector stabilisation to the extent that financial sector distress 
is  at  the  root  of  the  public  finances  problems;  and  broader  policy  interventions  to  restore 
macroeconomic  stability  and  external  viability.  Beyond  the  budgetary  dimension  priority 
should  be  given  to  addressing  macroeconomic  imbalances,  including  competitiveness 
developments and underlying structural challenges. This will imply closer surveillance, more 
demanding  policy  co-ordination  and  stronger  follow-up  to  ensure  that  necessary  structural 
reforms are implemented swiftly. 

On  9  May,  based  on  a  proposal  of  the  Commission,  the  ECOFIN  decided  on  the 
establishment  of  a  temporary  European  stabilisation  mechanism  to  deal  with  the 
immediate  needs  of  the  crisis.  This  was  part  of  a  wider  package,  including  strong 
commitments to fiscal consolidation where warranted and involvement of the IMF through its 
usual facilities in line with the recent European programmes.  

This  mechanism  was  created  to  respond  to  the  current  exceptional  circumstances  and 
entails  an  overall  financial  support  of  up  to  EUR  500  billion.  Financial  assistance  will  be 
subject to strong conditionality, in the context of a joint EU/IMF support, and will be on terms 
and  conditions  similar  to  the  IMF.  This  mechanism  will  be  financed  through  two 
complementary sources. The first, building-on a Council Regulation based on Article 122(2), 
can  mobilize  up  to  EUR  60  billion.  In  addition,  the  euro-area  Member  States  stand  ready 
through  an  intergovernmental  agreement  to  complement  such  resources  through  a  Special 
Purpose  Vehicle.  This  SPV  would  borrow  using  financial  guarantees  of  the  participating 
Member Sates up to EUR 440bn. 

This  mechanism  largely  respects  the  basic  principles  for  a  permanent  robust  crisis 
resolution mechanism. Therefore, the Commission considers that the first priority must now 
be  to  make  this  mechanism  fully  operational.  Based  on  this  experience,  the  Commission 
intends  in  the  medium-to-long  term    to  make  a  proposal  for  a  permanent  crisis  resolution 
mechanism.. 

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IV. 

NEXT STEPS 

The Commission will develop the reform proposals presented in this Communication, in 
line  with  its  responsibilities  under  the  Treaty.  It  considers  it  important  to  make  swift 
progress on the reform agenda laid out in this Communication: the present economic situation 
requires  urgent  action  to  implement  the  measures  proposed  to  improve  the  economic 
governance  of  the  EU  and  the  euro  area.  The  first  European  Semester  should  start  with  the 
beginning of 2011. 

The  Commission  stands  ready  to  follow-up  swiftly  with  legislative  proposals,  including 
amending  the  regulations  underpinning  the  Stability  and  Growth  Pact,  to  enhance  the 
prevention and correction of macroeconomic imbalances within the euro area, and to establish 
a more permanent framework for crisis management.  

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