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 Enhancing economic policy coordination for stability, growth and jobs – Tools for stronger EU economic governance
Date: 2010-06-30
Institutions: European Commission
Subjects: economic growth, economic recession, employment policy, macroeconomics, public debt, stability pact

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EUROPEAN COMMISSION 

Brussels, 30.6.2010 
COM(2010) 367 final 

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 

Enhancing economic policy coordination for stability, growth and jobs –  
Tools for stronger EU economic governance  

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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 

Enhancing economic policy coordination for stability, growth and jobs –  
Tools for stronger EU economic governance  

Europe has learned many lessons from the recent financial and economic crisis. We see very 
clearly  now  that  in  a  highly  integrated  Union,  and  even  more  so  in  a  monetary  union,  our 
economies and our successes are linked. Although the EU has a number of instruments for the 
co-ordination of economic policy the crisis has shown that they have not been used to the full 
and that there are gaps in the current governance system. There is broad political agreement 
that  this  has  to  change  and  that  the  EU  needs  to  be  equipped  with  a  broader  and  more 
effective set of policy instruments to ensure its future prosperity and standards of living. 

The  EU  has  taken  bold,  comprehensive  and  consistent  measures  to  overcome  the  crisis  and 
draw lessons for the future. The launch of the European Economic Recovery Programme in 
2008 helped cushion the shock of the downturn on our economies. Coordinated support was 
provided to EU Member States that needed it and to safeguard the stability of the Economic 
and  Monetary  Union.  A  set  of  measures  to  strengthen  the  supervision  and  regulation  of  the 
financial system is under negotiation, in the EU and beyond. Now that the framework of the 
Europe  2020  Strategy  is  in  place,  a  series  of  initiatives  will  follow,  designed  to  unlock  the 
EU's potential to boost growth and create jobs. 

What the EU needs is a well defined policy approach that supports economic recovery, puts 
public finances back on a sound footing and actively promotes sustainable growth and jobs. 
This is the policy vision set out in the Europe 2020 strategy that has just been endorsed by the 
European Council. All relevant instruments need to be brought together to ensure that future 
policy  decisions  are  coherent,  serve  these  goals  and,  once  decided,  are  implemented  and 
enforced. By strengthening its economic policy co-ordination the EU can deliver a new and 
sustainable growth agenda for its citizens.  

In this context, the purpose of this Communication is to: 

•  Develop the proposals for greater economic policy co-ordination and surveillance set out in 
the  Commission's  12  May  Communication  on  reinforcing  economic  policy  coordination 
into  concrete  proposals  by  (i)  addressing  imbalances  through  stronger  macroeconomic 
surveillance,  including  alert  and  sanction  mechanisms;  (ii)  strengthening  national  fiscal 
frameworks  by  specifying  minimum  requirements  for  domestic  fiscal  frameworks,  and 
notably  moving  from  annual  to  multi-annual  budgetary  planning;  (iii)  strengthening  the 
Stability and Growth Pact, in particular by focusing on the issue of debt dynamic as well as 
deficits. 

•  Set  out  effective  enforcement  mechanisms  to  ensure  that  Member  States  will  act  in 
compliance  with  the  EU  framework  they  have  agreed.  Where  developments  in  Member 
State economies pose a risk to the overall development of the Union, a series of preventive 
and corrective measures are proposed, including a range of sanctions that could be applied 
where breaches occur. 

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•  Establish a European semester for policy co-ordination and explain the process and timing 
that will provide a European input to national policy decisions, leading to more effective 
ex-ante  policy  co-ordination.  This  also  applies  to  the  structural  reforms  and  the  growth 
enhancing elements of the Europe 2020 strategy. 

The proposals in this Communication can all be agreed under the terms of the Lisbon Treaty. 
They are addressed to all 27 Member States although aspects of some of them will apply only 
to those Member States that are in the euro area. They are designed to bring together, at the 
same time, the country monitoring under the Stability and Growth Pact and Europe 2020 and 
to  make  sure  that  the  thematic  monitoring  of  the  Europe  2020  targets  is  anchored  in  sound 
economic and fiscal policies. These proposals develop further the policy ideas set out in the 
Commission's Communication of 12 May 20101 and build on the orientations agreed at the 17 
June 2010 European Council, reflecting the progress to date of the Task Force on economic 
governance. They respond to the invitation of the European Council to the Task Force and the 
Commission to develop its orientations further and to make them operational.  

Taken together, this combination of proposals will equip the EU and national levels to have 
confidence  in  the  quality  of  the  policy  and  decision  making  process  and  to  have  earlier 
warning of where national situations are going off track. This will enable all Member States to 
maximise  the  positive  synergies  of  belonging  to  the  same  Union.  It  will  bring  greater 
transparency and mutual confidence through a more collective process. It will also minimise 
the  negative  spillover  effects  where  Member  States  do  not  stick  to  agreed  limits  and 
ultimately,  sanction  those  who  endanger  the  common  good  through  unsustainable  national 
actions.  By  bringing  the  Stability  and  Growth  Pact  and  Europe  2020  processes  together  the 
EU  can  build  on  the  necessary  consolidation  measures  as  essential  steps  in  its  longer  term 
growth strategy, building a smarter, more sustainable and more inclusive EU for the future. 

1. 

BROADER MACROECONOMIC SURVEILLANCE  

The  EU  needs  stronger  macro-economic  country  surveillance  integrating  all  relevant 
economic  policy  areas.  Macroeconomic  imbalances  should  be  looked  at  jointly  with  fiscal 
policy  and  growth-enhancing  structural  reforms.  The  objective  is  to  ensure  macroeconomic 
stability,  prevent  occurrence  of  harmful  imbalances  and  establish  broad  macroeconomic 
framework conditions which allow for sustainable and dynamic growth. 

1.1. 

Surveillance of macroeconomic imbalances  

The  emergence  of  large  macroeconomic  imbalances,  including  large  and  persistent 
divergences in competitiveness trends, proved highly damaging to the EU and in particular to 
the  euro  when  the  crisis  struck.  It  is  therefore  important  to  develop  a  new  structured 
mechanism for the surveillance of harmful macroeconomic imbalances and their correction in 
all  Member  States.  Following  a  two-stage  approach,  the  Commission  is  proposing  a 
mechanism comprising: 

–  a  preventive  arm  with  regular  (annual)  assessments  of  the  risk  of  macroeconomic 

imbalances, including an alert mechanism, 

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–  a corrective arm, designed to enforce the implementation of remedies in case of harmful 

macroeconomic imbalances. 

Preventive arm: an alert system  

Within  the  framework  of  the  macro-structural  country  surveillance  under  Europe  2020,  the 
Commission  would  assess  macro-structural  weaknesses,  deteriorating  competitiveness  and 
emerging macro-economic imbalances on a country-by-country basis, taking into account the 
economic and financial interlinkages in particular within the euro area.  

A  scoreboard  establishing  a  set  of  indicators  revealing  external  and  internal  imbalances 
combined with qualitative expert analyses will be the basis for an alert mechanism. The use of 
indicators would provide important guidance, but there will not be a mechanical link between 
the results of the scoreboard and the policy follow up. 

For  countries  exhibiting  significant  risks,  in-depth  country  analysis  would  be  conducted. 
Where emerging risks are confirmed, the Commission will propose country-specific Council 
recommendations to tackle harmful macroeconomic imbalances. The Commission could also 
issue an early warning directly to that Member State. 

Depending  on  the  nature  of  the  imbalances  identified  in  the  Member  State(s),  the 
recommendations  could  address  a  broad  range  of  policy  issues  covering  macroeconomic 
policies, wages and labour markets as well as the functioning of goods and services markets 
and  macro-prudential  policies.  These  will  be  incorporated  into  the  single  set  of  country-
specific  recommendations  that  the  Commission  will  propose  annually,  together  with  the 
recommendations  issued  under  the  thematic  surveillance  of  structural  reforms,  as  described 
below. 

This mechanism will be the central part of the enhanced (non-fiscal) macroeconomic country 
surveillance foreseen under Europe 2020. Together with fiscal surveillance under the Stability 
and Growth Pact, country surveillance aims at ensuring a stable macroeconomic environment 
conducive  to  growth  and  employment  creation,  taking  full  account  of  the  interdependence 
between Member States economies, particularly in the euro area. This will ensure consistency 
within  Europe  2020,  in  particular  by  identifying  the  macro/fiscal  constraints  within  which 
Member  States  are  to  implement  structural  reforms  and  can  invest  in  the  growth-enhancing 
policies of Europe 2020. 

In  particularly  serious  cases,  the  Commission  would  recommend  placing  the  Member 
State in an "excessive imbalances position". This would trigger the ‘corrective arm’ of the 
mechanism  described  below.  In  such  a  case,  the  Commission  could  also  issue  an  early 
warning directly to that Member State. 

Main features of the alert mechanism for macroeconomic imbalances 

The  alert  mechanism  will  identify  Member  States  with  potentially  problematic  levels  of 
macroeconomic imbalances and where further in-depth country-specific analysis is required. 

The  alert  mechanism  will  consist  of  a  scoreboard  of  indicators,  complemented  by  more 
qualitative  analysis.  These  indicators  would  include  measures  of  the  external  position  and  price  or 
cost  competitiveness  as  well  as  internal  indicators.  The  use  of  internal  indicators  is  justified  on  the 
ground that external imbalances necessarily have internal counterparts. For examples, indicators such 
as  current  account  balances,  net  foreign  asset  positions,  real  effective  exchange  rate  based  on  unit 

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labour  costs  and  a  GDP  deflator,  increases  in  real  house  prices,  government  debt,  and  the  ratio  of 
private sector credit to GDP could be part of this scoreboard. 

Alert  thresholds  will  be  defined  and  announced  for  each  indicator.  The  thresholds  could  be 
calculated on the basis of a simple and transparent statistical concept. A possible approach could be to 
use the 75% and 25% percentile of the statistical distributions of each variable (across countries and 
time) at the level above or below which a further analysis is warranted. It is however important to bear 
in  mind  that  absolute  threshold  levels  for  individual  variables  have  only  limited  economic  meaning 
and need to be complemented by economic reasoning as appropriate levels can vary depending on the 
economic circumstances of the country. 

A  differentiated  scoreboard  for  euro-area  and  non-euro  area  Member  States  appears 
warranted.  Due  to  differences  in  exchange  rate  regimes  and  in  key  economic  characteristics,  the 
behaviour  of  some  economic  variables  in  the  euro  area  is  quite  different  from  the  non-euro-area 
countries.  This  argues  in  favour  of  using  different  alert  thresholds  for  euro-area  and  non  euro-area 
Member States. Moreover, in the absence of nominal exchange rates within the monetary union, the 
euro area deserves also a special analysis of real effective exchange rate developments. 

Corrective action 

The  imbalances  surveillance  framework  would  include  an  enforcement  mechanism.  A 
Member  State  presenting  significant  risks  would  be  placed  by  the  Council  in  a  position  of 
"excessive imbalances" on the basis of a Commission recommendation. Risk warnings and/or 
recommendations  issued  by  the  European  Systemic  Risk  Board  on  macro-financial  stability 
would be taken into account. 

A Member State in "excessive imbalances position" would be subject to stricter surveillance. 
The Council would issue policy recommendations (based on Article 121(4) and Article 136 
TFEU  for  euro-area  Member  States)  and  the  Member  State  would  be  required  to  report 
regularly  to  the  Ecofin  Council  and  the  Eurogroup  (e.g.  within  6  months  following  the 
Council recommendation and on a quarterly basis thereafter) on progress in implementing the 
recommended reforms. 

This mechanism would apply to all Member 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. Taking account of the deep economic and financial inter-linkages within the euro area 
and  their  impact  on  the  single  currency,  specific  enforcement  mechanism  could  be 
envisaged  for  euro-area  Member  States  in  case  of  repetitive  non-respect  of  the 
recommendations to address harmful macroeconomic imbalances that risk jeopardizing 
the proper functioning of economic and monetary union. 

Insufficient  compliance  with  the  recommendations  under  the  surveillance  of  imbalances 
would  be  considered  an  aggravating  factor  in  the  fiscal  assessment  under  the  Stability  and 
Growth Pact. 

By  end-September,  the  Commission  will  make  formal  proposals  for  secondary  legislation, 
establishing  a  framework  for  dealing  with  excessive  imbalances  based  on  Articles  121  and 
136 of the Treaty on the Functioning of the European Union. These proposals will specify the 
role of the alert mechanism; the role and obligations of the Commission, Member States and 
the Council; the procedure for the adoption of recommendations; and the rules and procedures 
as well as the enforcement mechanisms for euro area Member States. 

1.2. 

Thematic surveillance of structural reforms 

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To return their economies to sustainable growth and increase competitiveness, Member States 
need  to  restore  macroeconomic  stability  and  sound  public  finances.  At  the  same  time  they 
need  to  focus  their  efforts  on  the  delivery  of  Europe  2020  objectives  and  the  five  headline 
targets  agreed  by  the  European  Council  An  integrated  approach  to  policy  design  and 
implementation is essential given the constraints on public finances. The identification of the 
bottlenecks  which  impede  or  delay  the  attainment  of  the  Europe  2020  objectives  is  a  key 
element of the thematic surveillance. 

The objective of thematic structural reform surveillance is therefore two-fold: 

(i) 

To  facilitate  the  attainment  of  the  Europe  2020  objectives,  in  particular  the  five 
headline  targets2.  This  includes  measures  in  the  areas  of  employment,  social 
inclusion, research and innovation, education, energy and climate change as well as 
measures  to  tackle  any  other  factors  that  hinder  Member  States'  economic 
development or growth. 

(ii) 

To  ensure  ambitious  implementation  of  the  structural  reforms  in  a  manner  that  is 
consistent with the macro-fiscal constraints. 

This surveillance will be carried out in accordance with Article 121 and 148 TFEU and on the 
basis  of  the  Europe  2020  Integrated  Guidelines.  Based  on  Member  States'  National  Reform 
Programmes the Commission will assess the way each country is addressing the bottlenecks it 
has identified and how it is progressing towards its national Europe 2020 targets.  

In  case  of  insufficient  progress,  or  when  policies  are  not  sufficiently  consistent  with  the 
integrated guidelines (i.e. the Integrated Guidelines for economic and employment policies), a 
country-specific or euro-area recommendation will be issued. 

In  cases  where  economic  policies  are  not  consistent  with  the  Broad  Economic  Policy 
Guidelines,  or  when  they  risk  jeopardising  the  proper  functioning  of  the  economic  and 
monetary  union,  the  Commission  will  directly  address  a  warning  to  the  relevant  Member 
State(s). 

Building  on  this  country-specific  monitoring,  the  Commission  will  make  an  overall 
assessment of progress towards the five EU headline targets, assess performance against that 
of  main  (international)  trading  partners  and  examine  the  underlying  reasons  in  case  of 
insufficient  progress.  In  this  examination  the  Commission  will  also  assess  how  the 
implementation  of  the  Europe  2020  flagship  initiatives  is  progressing  both  at  EU  and  at 
national level as they support and complement the efforts towards these targets. 

The  Commission  will  report  to  the  Spring  European  Council  each  year,  and  will  propose 
specific  orientations  to  enhance  the  implementation  of  the  corresponding  reform  measures. 
These  orientations  will  also  feed  into  the  single  set  of  country  specific  recommendations 
which the Commission will propose in early July. 

2. 

National Fiscal Frameworks 

Resilient and effective domestic fiscal frameworks play a crucial role in strengthening fiscal 
consolidation  and  sustainable  public  finances.  While  Member  States'  specific  needs  and 

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See targets at: http://ec.europa.eu/eu2020/pdf/council_conclusion_17_june_en.pdf 

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preferences  must  be  respected,  a  number  of  features  stand  out  as  being  needed  in  terms  of 
ensuring minimum quality and complementarity with EU rules3:  

(1) 

(2) 

(3) 

(4) 

First, in order to ensure quality standards in all Member States, a consistent approach 
is  essential  regarding  accounting  (ESA95  accounting  is  required  for  EU  level  fiscal 
surveillance);  the  capacity  of  national  statistical  offices  must  be  sufficient  to  ensure 
compliance  with  EU  data  and  reporting  requirements;  and  forecasting  systems  must 
allow  for  the  provision  of  reliable  and  unbiased  growth  and  budget  projections. 
Ideally, Commission forecasts should be used as the benchmark. 

The  Commission  proposes  to  specify  clearly  the  correspondence  between  national 
cash data and ESA95 data with monthly data provision on a cash basis with translation 
in ESA95 terms on a quarterly basis. Forecasting methodologies and macroeconomic 
assumptions used for budgetary purposes should be the subject of appropriate auditing. 

Second,  Member  States  should  have  in  place  national  fiscal  rules  ensuring  that 
domestic fiscal frameworks reflect the Treaty obligations. Provisions of national fiscal 
rules should ensure the respect of the Treaty reference values on deficit and debt and 
be  consistent  with  the  Medium-Term  budgetary  Objective  (MTO).  Fiscal  rules  and 
credible enforcement mechanisms should be codified by national law.  

Third,  reforms  of  national  fiscal  frameworks  should  promote  the  switch  to  multi-
annual budgetary planning. Yearly budgetary objectives should be underpinned by 
including  a  breakdown  for  projected  revenue  and 
multi-annual  frameworks, 
expenditure and indications of where the adjustment towards the objectives is planned 
to come. 

Finally, domestic frameworks must be comprehensive and cover the whole system of 
general government finance. This is particularly important in decentralised economies. 
The  assignment  of  budgetary  responsibilities  across  levels  of  government  should  be 
clearly specified and appropriate monitoring and enforcement provisions put in place. 

The  Commission  will  make  formal  proposals  in  September  specifying  the  minimum 
requirements for the design of domestic fiscal frameworks and the procedural (reporting) 
requirements  to  allow  for  verification  of  compliance.  These  will  take  the  form  of  a  new 
regulation based on Article 126(14) TFEU, to foster the application of Treaty Protocol No 12 
on the Excessive Deficit Procedure. Infringement proceedings could be instigated in the case 
of failure to comply. 

3. 

INCREASED FOCUS ON PUBLIC DEBT AND FISCAL SUSTAINABILITY IN THE SGP 

The  Stability  and  Growth  Pact  (SGP)  should  take  greater  account  of  the  interplay  between 
debt and deficit to improve incentives to run prudent policies.  

As  regards  the  preventive  arm  of  the  SGP,  the  Commission  proposes  that  a  faster  pace  of 
progress towards a general government balance that provides a safety margin with respect to 
the 3% of GDP deficit limit and that ensures rapid progress towards sustainability, i.e. the so-

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See also Ecofin Council Conclusions of 18 May 2010 on Budgetary Frameworks. 

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called Medium-Term budgetary objective (MTO) be required for Member States with a high 
level of debt or pronounced risks in terms of future debt developments. 

As  regards  the  corrective  arm,  the  Commission  proposes  that  the  debt  criterion  of  the 
excessive  deficit  procedure  be  implemented  effectively  through  a  clear  and  simple 
numerical benchmark for defining a satisfactory pace of debt reduction: Member States with 
debt ratios in excess of 60% of GDP could become subject to the EDP if the decline of debt in 
a given preceding period falls short of this benchmark (fraction of the gap between the debt 
level and the 60% of GDP threshold). In the same vein, bringing the deficit below 3% of GDP 
may  not  be  sufficient  for  the  abrogation  of  the  EDP  if  the  debt  has  not  been  put  on  a 
sustainable declining path. The precise parameters would be set out in the Code of Conduct 
accompanying the Stability and Growth Pact.  

More  than  the  deficit,  public  debt  developments  are  subject  to  factors  outside  the  direct 
control  of  governments  (in  particular 
interest  rates  and  cyclical  growth 
developments),  therefore  judgement  is  necessary  before  deciding  whether  they  warrant 
placing  the  country  in  EDP.  An  overall  assessment  should  be  made,  taking  into  account  a 
range  of  parameters.  These  include  the  degree  of  closeness  of  the  debt  ratio  to  the  60%-of-
GDP reference value and whether the debt is temporary and/or exceptional; and other relevant 
factors reflecting risks of future debt increases and financing strains, such as: 

inflation, 

–  the maturity structure and currency denomination of debt; 

–  guarantees to corporations, financial institutions and households; 

–  accumulated reserves and other government assets; 

–  implicit liabilities, notably related to ageing; 

–  the level and change in private debt, to the extent that it may represent an implicit liability 

for the government; 

–  the factors behind debt change (primary balance, inflation, growth, interest rates, one-offs); 

and 

–  stock-flow operations. 

In case of failure to comply with recommendations, sanctions should be applied. 

In September the Commission will propose amendments to both the preventive (Regulation 
(EC) No 1466/97) and corrective arm of the SGP (Regulation (EC) No 1467/97) to make 
these principles operational. 

4. 

EFFECTIVE ENFORCEMENT OF ECONOMIC SURVEILLANCE THROUGH APPROPRIATE 
SANCTIONS AND INCENTIVES 

The common rules and co-ordination procedures enshrined in the Treaty and the Stability and 
Growth  Pact  have  not  prevented  a  number  of  Member  States  from  implementing  fiscal 
policies  in  defiance  of  the  existing  framework.  There  is  clearly  a  need  to  strengthen  the 
credibility of the EU's fiscal surveillance framework through a more rules-based application 
of  sanctions.  To  increase  their  effectiveness  in  the  future,  a  wider  range  of  sanctions  and 

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incentives  should  be  used  more  preventively  and  kick  in  at  an  earlier  stage.  The  deterrent 
effect of financial sanctions should constitute a real incentive for compliance with the rules. 

Several  types  of  sanctions  are  foreseen  in  Article  126(11)  TFEU  in  cases  where  a  Member 
States  fails  to  comply  with  EU  guidance.  These  comprise  the  requirement  to  publish 
additional  information,  an  invitation  to  the  European  Investment  Bank  to  reconsider  its 
lending policy towards the Member State concerned, the requirement to make a non-interest-
bearing  deposit  of  an  appropriate  size  until  an  excessive  deficit  has  been  corrected,  and  the 
possibility to impose fines of an appropriate size.  

In  refining  the  functioning  and  scope  of  possible  financial  incentives,  it  is  important  and 
necessary  to  seek  effectiveness  and  equal  treatment  between  Member  States.  To  ensure 
proportionality, financial sanctions linked to the EU budget could be defined as a percentage 
of the GNI or GDP of the relevant Member State up to an identical upper limit for all Member 
States.  This  upper  limit  will  ensure  that  all  Member  States  can  de  facto  be  subject  to 
sanctions.  Moreover,  the  amounts  of  commitments  and  payments  concerned  by  suspension 
and/or  cancellation  would  be  set  on  a  pro-rata  basis  for  the  eligible  funds  up  to  this  upper 
limit. 

The  new  sanctions  "toolbox"  would  therefore  contain  different  types  of  sanctions  and 
incentives, which will be activated depending on the set of circumstances and gravity of the 
situation. The proposed improvements to the existing enforcement mechanisms would require 
amending the preventive and corrective arms of the SGP (Regulations 1466/97 and 1467/97) 
as  well  as  through  an  appropriate  mechanism  based  on  the  various  legal  acts  on  which  EU 
expenditure programmes are based. 

As regards the preventive arm, (i.e. when a Member State is not making sufficient progress 
towards  its  Medium  term  budgetary  Objective)  in  good  economic  times)  two  sets  of 
incentives/sanctions will be proposed. 

First, for euro-area Member States, the incentive will consist of an interest-bearing deposit 
temporarily imposed on a Member State which is making insufficient progress with budgetary 
consolidation.  One  option  would  be  to  define  a  simple  expenditure-rule  consistent  with  the 
adjustment  towards  the  country-specific  MTO.  A  significant  deviation  from  the  agreed 
expenditure  path  would  be  judged  as  imprudent  fiscal  policy-making  and  give  rise  to  a 
warning from the Commission in line with the provisions of Article 121(4) TFEU. In case of 
persistent  violations,  an  interest-bearing  deposit  would  be  imposed  by  the  Council  until  the 
violation has been corrected. The deposit would be released once the situation giving rise to 
its imposition had come to an end.  

Second,  still  within  the  preventive  arm,  the  Commission  will  propose  to  establish  ex-ante 
conditionality 
to  structural  and 
institutional  reforms  directly  linked  to  the  operation  of  cohesion  policy  with  a  view  to 
improving its effectiveness and efficiency. 

linking  disbursement  of  cohesion  policy  support 

As regards the corrective arm, (i.e. when a Member State is subject to an excessive deficit 
procedure)  the  Commission  proposes  a  new  system  of  financial  sanctions  and  incentives  to 
complement the use of deposit and fines. This would deploy the EU budget as complementary 
leverage  in  terms  of  ensuring  respect  of  the  key  macro  economic  conditions  of  the  SGP. 
Sanctions  should  not  affect  end  beneficiaries  of  EU  funds  but  rather  payment  to  Member 
States  or  payments  for  which  Member  States  act  as  an  intermediary.  The  following  criteria 

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will  be  proposed  to  establish  which  EU  spending  categories  and  programmes  could  be 
considered:  

•  effectiveness of the funds concerned is dependent on sound fiscal policies, 

•  clearly  attributable  to  the  Member  State  found  not  to  comply  with  the  SGP  or  other 

conditions, 

•  programmed and implemented under shared management, i.e. where Member States have 
the main responsibility or representing reimbursements of EU funds to Member States, 

•  sizeable enough to create credible sanctions or incentives, 

•  with an impact (potentially) on the quality of public spending and structural adjustment. 

These criteria are met in the case of most expenditures related to cohesion policy, Common 
Agricultural  Policy  (EAGF  and  EAFRD)  spending  and  fisheries  fund  (EFF)  expenditures. 
With regard to the CAP and EFF, a situation in which a reduction of EU spending would lead 
to  a  reduction  of  farmer’s  and  fisherman's  income  would  be  excluded.  Conditionality  on 
payments  should  therefore  target  the  EU  reimbursements  to  the  national  budgets  only: 
Member States would have to continue to pay the farm subsidies, but the reimbursement of 
this expenditure by the EU budget could be (partially) suspended. 

In cases of non-compliance with the rules, incentives can therefore be created by suspending 
or cancelling part of current or future financial appropriations from the EU budget. Resources 
cancelled should remain within the EU budget.  

As a complement to the provisions of Article 126(11), two types of financial sanctions could 
be envisaged earlier in the EDP process.  

• Step 1 – the establishment of an excessive deficit (Article 126(6) TFEU) would result in the 
suspension  of  commitments  related  to  multiannual  programmes.  This  suspension  would  not 
have an immediate impact on payments and would therefore allow time for effective remedial 
action to be taken. Member States could be asked to redirect funds to improve the quality of 
public  finances.  Similarly,  for  CAP  reimbursements  (EAGF),  an  announcement  of  the 
decision  to  cancel  payments  by  a  set  deadline  would  be  made.  Re-budgeting  would  be 
foreseen as soon as the Member State meets the Council recommendations. 

•  Step  2  –  non-compliance  with  the  initial  recommendations  to  correct  the  excessive  deficit 
Article 126(8) TFEU) would result in cancellation of commitments of year n. Similarly, CAP 
reimbursements (EAGF) for year n would be cancelled. This would lead to a definitive loss of 
payments for the Member State concerned.  

Other  incentives  could  also  be  created  by  modulating  co-financing  rates  or  introducing  a 
performance Union reserve to reward sound fiscal policies. Such a reserve could be funded 
with cancelled commitments under the above-mentioned step-2-procedure. 

The financing side of the EU budget also contributes to reinforcing compliance. The present 
Own  Resources  system  provides  that  fines  paid  by  the  Member  States  in  the  context  of  the 
EDP  automatically  reduce  the  contribution  of  participating  Member  States  without  a  deficit 
that  is  excessive  to  the  budget  (according  to  their  share  in  the  total  GNI  of  the  eligible 
Member States). This system ensures that the contribution of the fined Member State to the 

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budget would effectively increases and the contribution to all other Member Sates decreases. 
The Commission will also assess whether the EU budget revenue side can be adequately used 
as an incentive for compliance.  

The required changes will be incorporated in the Commission's 2011 proposals for the next 
multi annual financial framework. In the meantime, a regulation based on Article 136TFEU 
creating  a  new  sanction  toolbox  having  similar  effects  will  be  proposed  for  the  euro-area 
Member  Sates  by  end-September.  The  Commission  will  explore  ways  of  extending  these 
sanctions and incentives toolbox to all Member States as soon as possible. 

5. 

THE CO-ORDINATION CYCLE UNDER THE EUROPEAN SEMESTER 

The setting up of a European Semester will integrate the different strands of economic policy 
coordination and allow for better and ex-ante coordination of economic policies.  

Ex ante coordination of economic policies. The core objective of the proposal is to give a 
clear ex ante-dimension to economic policy coordination in the EU and the euro area. Under 
the European Semester, complementarity of national economic policy plans will be ensured at 
European level through policy guidance before final decisions on the budget for the following 
year  are  taken  in  Member  States.  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 for the following year, a revision of the plans could be recommended. 

Better integrated surveillance. The European Semester will cover all elements of economic 
surveillance,  including  policies  to  ensure  fiscal  discipline,  macroeconomic  stability,  and  to 
foster  growth,  in  line  with  the  Europe  2020  strategy.  Existing  processes  –  e.g.  under  the 
Stability  and  Growth  Pact  and  the  Broad  Economic  Policy  Guidelines  –  will  be  aligned  in 
terms  of  timing  while  remaining  legally  separate.  Stability  and  Convergence  Programmes 
(SCPs) and National Reform Programmes (NRPs) will be submitted by Member States at the 
same time and assessed simultaneously by the Commission.  

The content of Stability and Convergence Programmes (SCPs) has to be adapted to the 
rationale of having a European semester. The intention is obviously not to require Member 
States to submit full-fledged budgets to the EU for "validation" before they present them to 
their  national  Parliaments.  However,  these  Programmes  should  include  the  necessary 
information for meaningful ex-ante discussions on fiscal policy. The minimum requirements 
should include:  

•  a full-fledged updated macroeconomic scenario; 

•  concrete indications on plans for year t+1; 

•  a description of the envisaged policies; 

•  medium-term projections for the main government finances variables;  

•  an assessment of fiscal developments in year t-1; 

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•  an update of the fiscal plans for the current year. 

The  European  Semester.  The  cycle  starts  in  January  with  an  "Annual  Growth  Survey" 
(AGS) prepared by the Commission, reviewing economic challenges for the EU and the euro 
area  as  a  whole.  By  end  February,  the  European  Council  provides  strategic  guidance  on 
policies, which is taken into account by Member States in their SCPs and NRPs which will be 
submitted  in  April.  The  Council  issues  country-specific  policy  guidance  as  mentioned  in 
section 1 in early July. In the second part of the year, Member States finalise national budgets. 
In  its  AGS  of  the  following  year,  the  Commission  assesses  how  Member  States  took  EU 
guidance into account. 

Policy  guidance  under  the  European  Semester.  Recommendations  will  be  candid  and 
concrete. In the area of fiscal policy, there will be a strong focus on year t+1, and surveillance 
will  give  clear  indications  on  whether  the  envisaged  targets  and  underpinning  policies  are 
appropriate.  Regarding  policies  to  foster  growth  and  address  macro-financial  risks, 
recommendations will focus on a limited number of key reforms and deadlines will be set for 
their implementation.  

Stronger involvement of the European Parliament. Every year in January the Commission 
will present its AGS to the European Parliament.  

National Parliaments. This enhanced economic governance of the EU would benefit from an 
early  and  strong  association  of  national  parliaments  to  the  European  semester  process  and 
from greater dialogue with the European parliament. 

Early implementation. The Commission proposes to implement the European Semester as of 
2011. Amendments to the existing Code of Conduct for SCPs4, including inter alia the new 
date  of  submission  of  SCPs  will  be  presented  to  the  ECOFIN  Council  for  endorsement. 
Immediate legislative changes do not appear to be necessary. 

Transition  to  the  European  Semester.  The  Commission  will  provide  guidance  on  the 
contents  of  the  future  National  Reform  Programmes  in  July.  It  will  also  propose  bilateral 
dialogue with Member States in autumn 2010 to discuss: 

•  A  medium  term  national  macro  economic  scenario  to  frame  policy  programmes  for  the 

period up to 2015, including growth expectations and broad budgetary orientations; 

•  Confirmation of national targets in line with the five agreed Europe 2020 targets. Member 
States  should  indicate  for  each  target  the  policies  they  will  pursue  to  meet  their  national 
targets and the public investment needed to meet them; 

•  How to remove the bottlenecks preventing Member States from meeting their targets and 

the broader "Europe 2020" objectives. 

4 

Full title is ‘Specifications on the implementation of the Stability and Growth Pact and Guidelines on 
the format and content of Stability and Convergence Programmes’. 

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6. 

CONCLUSIONS AND NEXT STEPS 

The Commission will make the necessary formal proposals contained in this Communication 
by end-September – see annex for details. 

In the meantime, the Commission invites the Ecofin Council of 13 July to confirm the launch 
of the surveillance cycle under the European Semester as of January 2011 and to endorse the 
revised  Code  of  Conduct  for  the  Stability  and  Growth  Pact  SCPs  as  annexed  to  the 
Communication. 

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Annex 1: Roadmap 

Topic 

Action 

Expected delivery date 

Broader Macroeconomic 
Surveillance 

Proposal  for  legislation  under  Art.  121(6)  and 
Art.  136  establishing  a  framework  for  dealing 
with excessive Imbalances  

End-September 

Thematic Surveillance of Structural 
Reforms 

Issue  specific  recommendations  to  enhance  the 
implementation of reform measures 

Fiscal Surveillance: national fiscal 
frameworks 

Fiscal surveillance: increased focus 
on public debt and sustainability in 
the SGP 

Enforcement of economic 
surveillance (sanctions/incentives): 
Interest-bearing deposit temporarily 
imposed on a euro area Member 
State 

Enforcement of economic 
surveillance (sanctions/incentives): 
deploy the EU budget as additional 
leverage 

Starting with the Annual Policy 
Cycle of Europe 2020: first 
report to the 2011 Spring 
European Council 

End-September 

End-September 

Proposal  for  a  Regulation  under  Art.  126(14) 
specifying  the  minimum  requirements  for  the 
design  of  domestic  fiscal  frameworks  and  the 
reporting  requirements  to  allow  for  verification 
of compliance 

Proposals  for  amending  both  the  preventive 
(Regulation  1466/97)  and  corrective  arm  of  the 
SGP  (Regulation  1467/97).  Revise  Code  of 
implementing 
Conduct  (expenditure  rule  for 
adjustment  toward  MTO;  numerical  benchmark 
for minimum pace of debt reduction) 

Proposal  for  a  Regulation  under  Art.  121(6)  and 
Art. 136(1)(a). 

End-September 

Introduce  specific  provisions  in  the  legal  acts 
underpinning 
expenditure 
programmes 

certain 

EU 

Proposal  for  a  Regulation  under  Art.  136(1)(a) 
for 
introducing 
sanctions having similar effects 

euro-area  Member  Sates 

To be included in the 
Commission's 2011 proposals 
for the next multi annual 
financial framework 

End-September 

Setting up of a European Semester 

Revise the Code of Conduct for the Stability and 
Growth Pact (SCPs) 

Launch of the surveillance cycle 
under European Semester as of 
January 2011 

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ANNEX 1 

SPECIFICATIONS ON THE IMPLEMENTATION OF THE STABILITY AND 

GROWTH PACT 

AND 

GUIDELINES  ON  THE  FORMAT  AND  CONTENT  OF  STABILITY  AND 

CONVERGENCE PROGRAMMES 

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TABLE OF CONTENTS 

SECTION I – SPECIFICATIONS ON THE IMPLEMENTATION OF THE STABILITY 
AND GROWTH PACT 

A. THE PREVENTIVE ARM OF THE STABILITY AND GROWTH PACT 

1) The Medium term budgetary objective (MTO) 

2)  The  adjustment  path  toward  the  medium-term  budgetary  objective  and  deviations 
from it 

3) Commission policy advice and warning 

B. THE EXCESSIVE DEFICIT PROCEDURE 

1) Commission report under Article 104(3)  

2) The decision on the existence of an excessive deficit  

3) The correction of an excessive deficit 

4) Abrogation of Council decisions in the context of the EDP for Member States having 
implemented multi-pillar pension reforms 

SECTION II - GUIDELINES ON THE FORMAT AND CONTENT OF STABILITY AND 
CONVERGENCE PROGRAMMES 

1) Status of the programme and of the measures 

2) Content of Stability and Convergence Programmes 

Page 4

Page 4

Page 4

Page 5

Page 6 

Page 6

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Page 7

Page 8

Page 9

Page 10

Page 10

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ANNEX  1  -  MODEL  STRUCTURE  FOR  THE  STABILITY  AND  CONVERGENCE 
PROGRAMMES 

Page 14

ANNEX 2 - TABLES TO BE CONTAINED IN THE STABILITY AND CONVERGENCE 
PROGRAMMES 

Page 15

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In  order  to  enhance  ownership  of  the  EU  budgetary 
framework,  national  budgetary  rules  should  be 
complementary  to  the  Stability  and  Growth  Pact. 
Without  prejudice  to  the  balance  between  national 
and  Community  competences,  their  implementation 
could be discussed at European level in the context of 
the  Stability  and  Convergence  Programmes.  In  the 
same vein, governance arrangements at national level 
should  complement  the  EU  framework.  National 
institutions  could  play  a  more  prominent  role  in 
budgetary  surveillance 
to  enhance  enforcement 
through  national  public  opinion  and  complement  the 
economic  and  policy  analysis  at  EU  level.  In 
particular,  Member  States  could  establish  an 
economic  council  of  wise  people  who  would  advise 
on the main macro-economic projections. 

These  Guidelines  for  the  implementation  of  the 
Stability  and  Growth  Pact  consist  of  2  sections.  The 
first  section  elaborates  on  the  implementation  of  the 
Stability  and  Growth  Pact.  The  second  section 
consists of guidelines on the content and format of the 
stability and convergence programmes. 

__________________ 

INTRODUCTION  

This Opinion updates and replaces the opinion of the 
Economic  and  Financial  Committee  on  the  content 
the  Stability  and  Convergence 
and  format  of 
Programmes,  endorsed  by  the  Ecofin  Council  on  10 
July 2001.  

The Stability and Growth Pact fully entered into force 
on  1  January  1999  and  consists  of  a  rules-based 
framework  with  both  preventive  and  corrective 
elements. It initially consisted of Council Regulation 
(EC) No 1466/97 of 7 July 1997 on the strengthening 
of  the  surveillance  of  budgetary  positions  and  the 
surveillance  and  coordination  of  economic  policies, 
Council Regulation (EC) No 1467/97 on speeding up 
and  clarifying  the  implementation  of  the  excessive 
deficit procedure and the Resolution of 17 June 1997 
on the Stability and Growth Pact. On 20 March 2005 
the  Council  adopted  a  report entitled  “Improving  the 
implementation  of  the  Stability  and  Growth  Pact”. 
The report was endorsed by the European Council in 
its  conclusions  of  22  March  2005,  which  stated  that 
the report updates and complements the Stability and 
Growth Pact, of which it is now an integral part. On 
27  June  2005  the  Pact  was  complemented  by  two 
additional  Regulations  amending  the  Regulations 
1466/97 and 1467/97.  

The Stability and Growth Pact is an essential part of 
the  macroeconomic  framework  of  the  Economic  and 
Monetary  Union,  which  contributes  to  achieving 
macroeconomic  stability  in  the  EU  and  safeguarding 
the  sustainability  of  public  finances.  A  rules-based 
system  is  the  best  guarantee  for  commitments  to  be 
enforced  and  for  all  Member  States  to  be  treated 
equally. The two nominal anchors of the Stability and 
Growth Pact - the 3% of GDP reference value for the 
deficit ratio and the 60% of GDP reference value for 
the  debt  ratio  -  and  the  medium-term  budgetary 
objectives  are 
the  centrepiece  of  multilateral 
surveillance. 

to 

on 

their 

deliver 

Member States, the Commission and the Council are 
committed 
respective 
responsibilities, applying the Treaty and the Stability 
and  Growth  Pact  in  an  effective  and  timely  manner. 
In  addition,  since  effectiveness  of  peer  support  and 
peer  pressure  is  an  integral  part  of  the  Stability  and 
Growth  Pact,  the  Council  and  the  Commission  are 
expected to motivate and make public their positions 
and  decisions  at  all  appropriate  stages  of 
the 
procedure of the Stability and Growth Pact. Member 
States are expected to take into account guidance and 
recommendation from the Council in particular when 
preparing  national  budgets.,  and  to  properly  involve 
the  various  steps  of 
national  Parliaments 
procedures.  

in 

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SECTION II 

GUIDELINES ON THE FORMAT AND 
CONTENT OF STABILITY AND 
CONVERGENCE PROGRAMMES 

to 

submit  Stability 

The  Stability  and  Growth  Pact  requires  Member 
States 
or  Convergence 
Programmes  and  updates  thereof,  which  are  at  the 
basis  of  the  Council’s  surveillance  of  budgetary 
positions  and  its  surveillance  and  co-ordination  of 
economic  policies.  The  Council  may,  on  a 
recommendation  from  the  Commission,  and  after 
consulting  the  Economic  and  Financial  Committee, 
the  updated 
deliver  an  opinion  on  each  of 
programmes and, if it considers that its objectives and 
contents  should  be  strengthened,  invite  the  Member 
State concerned to adjust its programme.  

Member  States  are  expected  to  take  the  corrective 
action they deem necessary to meet the objectives of 
their  Stability 
or  Convergence  Programmes, 
whenever  they  have  information  indicating  actual  or 
those 
expected 
objectives.  

divergence 

significant 

from 

a 

is 

The  submission  and  assessment  of  Stability  and 
fundamental 
Convergence  Programmes 
component  of  the  "European  Semester"  of  economic 
policy  coordination  and  surveillance.  Under  the 
European semester, the Commission and the Council 
assess Stability and Convergence Programmes before 
key decisions on the national budget for the following 
year  are  taken,  to  provide  ex  ante  policy  advice  on 
timing  of  submissions  and 
fiscal  policy.  The 
assessments 
and  Convergence 
Programmes  and  National  Reform  Programmes  is 
aligned.  

Stability 

of 

Under the European Semester the policy surveillance 
and coordination cycle starts early in the year with a 
horizontal review under which the European Council, 
based  on  analytical  input  from  the  Commission, 
identifies  the  main  economic  challenges  facing  the 
EU and the euro area and give strategic guidance on 
policies.  Member  States  are  expected  to  fully  take 
into account the horizontal guidance by the European 
and 
Council  when  preparing 
Convergence 
the 
Commission  and  Council  are  expected  to  take  into 
account  guidance  from  the  European  Council  when 
assessing the programmes.  

their  Stability 

Programmes. 

Similarly, 

In  view  of  the  strengthened  role  of  the  Stability  and 
the  process  of 
Convergence  Programmes 

in 

that 

surveillance  under 

the  European 
multilateral 
Semester,  it  is  important  that  their  information 
content  is  suitable  and  allows  for  comparison  across 
Member  States.  Whilst  acknowledging 
the 
programmes  are 
responsibility  of  national 
the 
authorities  and  that  the  possibilities  and  practices 
differ  across  countries,  Council  Regulation  (EC)  No 
1466/97 as amended by Council Regulation (EC) No 
1055/05  sets  out  the  essential  elements  of  these 
programmes. In particular, Stability and Convergence 
Programmes  include  the  necessary  information  for  a 
meaningful  discussion  on  fiscal  policy  for  the  short 
and  the  medium  term,  including  a  full  fledged 
macroeconomic  scenario,  projections  for  the  main 
government 
their  main 
finances  variables  and 
components, and a description of envisaged policies.  

The  experience  gathered  during  the  first  years  of 
implementation  of  the  Pact  with  the  Stability  and 
Convergence  Programmes  shows  that  guidelines  on 
the  content  and  format  of  the  programmes  not  only 
assist 
their 
programmes,  but  also  facilitate  their  examination  by 
the  Commission, 
the  Economic  and  Financial 
Committee and the Council.  

the  Member  States 

in  drawing  up 

The guidelines set out below should be considered as 
a  code  of  good  practice  and  checklist  to  be  used  by 
Member States in preparing Stability or Convergence 
Programmes.  Member  States  are  expected  to  follow 
the  guidelines  as  far  as  possible,  and  to  justify  any 
departure from them.  

1)  Status  of  the  programme  and  of  the 
measures 

Each programme mentions its status in the context of 
national  procedures,  notably  with  respect  to  the 
national  Parliament.  The  programme  also  indicates 
the  previous 
whether 
programme  has  been  presented 
the  national 
Parliament. 

the  Council  opinion  on 
to 

The state of implementation of the measures (enacted 
versus  planned)  presented  in  the  programme  should 
be specified.  

2)  Content  of  Stability  and  Convergence 
Programmes 

In  order  to  facilitate  comparison  across  countries, 
Member  States  are  expected,  as  far  as  possible,  to 
follow  the  model  structure  for  the  programmes  in 
Annex  1.  The  standardisation  of  the  format  and 
content  of  the programmes  along  the  lines  set  below 
will substantially improve the conditions for equality 
of treatment. 

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The  quantitative  information  should  be  presented 
following  a  standardised  set  of  tables  (Annex  2). 
Member  States  should  endeavour  to  supply  all  the 
information  in  these  tables.  The  tables  could  be 
complemented  by 
information  wherever 
deemed useful by Member States. 

further 

information  on 

In  addition  to  the  guidelines  set  out  below,  the 
programmes  should  provide 
the 
the  broad  economic  policy 
consistency  with 
guidelines  of 
the 
measures to achieve them, as well as on the measures 
to  enhance  the  quality  of  public  finances  and  to 
achieve long-term sustainability. 

the  budgetary  objectives  and 

Objectives and their implementation 

Member  States  will  present  in  their  Stability  and 
Convergence  Programmes  budgetary  targets  for  the 
general  government  balance  in  relation  to  the  MTO, 
and the projected path for the debt ratio. Convergence 
programmes  shall  also  present  the  medium-term 
monetary  policy  objectives  and  their  relationship  to 
price and exchange rate stability. 

Member  States,  when  preparing  the  first  update  of 
their Stability or Convergence Programme after a new 
government  has  taken  office,  are  invited  to  show 
continuity  with  respect  to  the  budgetary  targets 
endorsed by the Council on the basis of the previous 
update of the Stability/Convergence Programme and - 
with an outlook for the whole legislature - to provide 
information  on  the  means  and  instruments  envisaged 
to  reach  these  targets  by  setting  out  its  budgetary 
strategy. 

Member  States  will  provide  in  their  Stability  or 
Convergence Programme an update of the fiscal plans 
for  the  year  of  submission  of  the  programme,  based 
on 
the  April  notification.  The  Stability  or 
Convergence  Programme  will  explain  revisions  of 
fiscal targets set in the programmes submitted in year 
in 
t-1  (with  a  special  focus  on  developments 
government expenditure). 

information 

To  permit  a  fuller  understanding  of  the  path  of  the 
government  balance  and  of  the budgetary  strategy  in 
should  be  provided  on 
general, 
expenditure  and  revenue  ratios  and  on  their  main 
components,  as  well  as  on  one-off  and  other 
temporary measures. To permit a fuller understanding 
of  the  path  of  the  debt  ratio,  information  should  be 
provided, to the extent possible, on components of the 
stock-flow  adjustment,  such  as  privatisation  receipts 
and other financial operations. 

The budget balances should be broken down by sub-
sector  of  general  government  (central  government, 

state  government  for  Member  States  with  federal  or 
quasi-federal 
local 
government and, social security). 

arrangements, 

institutional 

Assumptions and data 

Stability  and  Convergence  programmes  should  be 
based  on  realistic  and  cautious  macroeconomic 
forecasts.  The  Commission  forecasts  can  provide  an 
important  contribution 
the  coordination  of 
for 
economic and fiscal policies. Member States are free 
to  base  their  Stability/Convergence  Programmes  on 
significant 
projections.  However, 
own 
their 
divergences 
the 
and 
national 
the 
between 
Commission  services’  forecasts  should  be  explained 
in  some  detail.  This  explanation  will  serve  as  a 
reference when forecast errors are assessed ex post.  

present 

programmes 

The 
the  main 
should 
assumptions  about  expected  economic  developments 
and important economic variables that are relevant to 
the  realisation  of  their  budgetary  plans,  such  as 
government 
real  GDP 
investment  expenditure, 
growth,  employment  and  inflation.  The  assumptions 
on  real  GDP  growth  should  be  underpinned  by  an 
indication  of  the  expected  demand  contributions  to 
growth. The possible upside and downside risks to the 
outlook should be brought out.  

the  programmes 

should  provide 
Furthermore, 
sufficient  information  about  GDP  developments  to 
allow  an  analysis  of  the  cyclical  position  of  the 
economy  and  the  sources  of  potential  growth.  The 
outlook  for  sectoral  balances  and,  especially  for 
countries  with  a  high  external  deficit,  the  external 
balance should be analysed.  

As  regards  external  macroeconomic  developments, 
euro  area  Member  States  and  Member  States 
participating  in  ERM  II  in  particular  should  use  the 
“common  external  assumptions”  on  the  main  extra-
EU  variables  used  by  the  Commission  in  its  spring 
reasons,  present 
forecast  or, 
sensitivity 
common 
based 
assumptions  for  these variables  when  the differences 
are significant. The assumptions are to be provided in 
due 
(after 
consultation with national experts), on the basis of the 
final table in Annex 2, for discussion by the EFC.  

the  Commission  services 

for  comparability 

time  by 

analysis 

the 

on 

Assumptions about interest rates and exchange rates, 
if  not  presented  in  the  programme,  should  be 
provided to the Commission services to allow for the 
technical assessment of the programmes. 

In order to facilitate the assessment, the concepts used 
shall  be  in  line  with  the  standards  established  at 
the 
European 

the  context  of 

level,  notably 

in 

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of 

system 

accounts 

(ESA).  The 
European 
programmes should ensure the formal and substantial 
consistency of the required information on budgetary 
aggregates  and  economic  assumptions  with  ESA 
concepts. This information may be complemented by 
a presentation of specific accounting concepts that are 
of particular importance to the country concerned. 

Measures, 
sustainability 

structural 

reforms  and 

long-term 

to  achieve 

the  objectives  of 

The  programmes  should  describe  the  budgetary  and 
other  economic  policy  measures  being  taken  or 
envisaged 
the 
programme,  and,  in  the  case  of  the  main  budgetary 
measures,  an  assessment  of  their  quantitative  effects 
on the general government balance. Measures having 
significant  ‘one-off’  effects  should  be  explicitly 
identified.  The  further  forward  the  year  of  the 
programme,  the  less  detailed  the  information  could 
be.  For  instance,  the  outer  years  of  the  programmes 
the  authorities  may  provide  a  menu  of  possible 
measures  considered  to  reach  the  targets  in  the 
programme, with an estimation of their impact. 

However,  to  allow  a  meaningful  discussion  the 
programmes  should  provide  concrete  indications  on 
policy  intentions  for  year  t+1,  including  preliminary 
projections and/or targets for the general government 
balance,  expenditure  and  revenue  and  their  main 
components,  and  a  description  of 
the  policies 
envisaged  to  reach  the  fiscal  targets.  Should  this  not 
be  the  case,  the  Member  State  concerned  should  be 
invited  to  submit  a  revised  programme,  in  line  with 
the provisions of Articles 5(2) and 8(2) of regulation 
1466/97.  

to 

to  contribute 

they  are  envisaged 

Structural  reforms  should  be  specifically  analysed 
the 
when 
achievement  of  the  objectives  of  the  programme.  In 
particular,  given  the  relevance  of  ‘major  structural 
reforms’  in  defining  the  adjustment  path  to  the 
medium-term  objective  for  Member  States  that  have 
not yet reached it and allowing a temporary deviation 
from  the  MTO  for  Member  States  that  have  already 
reached  it  (see  Section  I),  the  programmes  should 
include  comprehensive  information  on  the  budgetary 
and  economic  effects  of  such  reforms.  Programmes 
should  notably  include  a  detailed  quantitative  cost-
benefit analysis of the short-term costs – if any – and 
of  the  long-term  benefits  of  the  reforms  from  the 
budgetary point of view. They should also analyse the 
projected impact of the reforms on economic growth 
over time while explaining the used methodology. 

The programmes  should  also  provide  information  on 
measures  envisaged  to  improve  the  quality  of  public 
finances  on  both  the  revenue  and  expenditure  side 

tax 

initiatives, 
reform,  value-for-money 
(e.g. 
measures  to  improve  tax  collection  efficiency  and 
expenditure control).  

The programmes could further include information on 
the  implementation  of  existing  national  budgetary 
rules  (expenditure  rules,  etc.)  as  well  as  on  other 
institutional  features  of 
in 
particular  budgetary  procedures  and  public  finance 
statistical governance.  

the  public  finances, 

Finally, the programmes should outline the countries 
strategies  to  ensure  the  sustainability  of  public 
finances,  especially  in  light  of  the  economic  and 
budgetary impact of ageing populations.  

The  Working  Group  on  Ageing  (AWG)  attached  to 
the Economic Policy Committee (EPC) is responsible 
for  producing  common  budgetary  projections  on: 
public  spending  on  pensions;  health-care;  long-term 
care;  education;  unemployment  transfers;  and  where 
possible  and  relevant,  age-related  revenues,  such  as 
pension  contributions.  These  common  projections 
will  provide  the  basis  for  the  assessment  by  the 
Commission  and  the  Council  of  sustainability  of  the 
Member States’ public finances within the context of 
the SGP. They should be included in the programmes.  

this  end, 
should 

The  programmes  should  include  all  the  necessary 
additional 
information,  both  of  qualitative  and 
quantitative  nature,  so  as  to  enable  the  Commission 
and  the  Council  to  assess  the  sustainability  of 
Member  States  of  public  finances  based  on  current 
in 
policies.  To 
programmes 
relevant 
information  that  is  not  fully  reflected  in  the  latest 
common  EPC  projections.  For  example,  Member 
States might want to include information on the latest 
demographic  trends  and  major  policy  changes  in 
pension and health-care systems. Programmes should 
clearly  distinguish  between  measures  that  have  been 
enacted and measures that are envisaged.  

information 
focus  on  new 

included 

surrounding 

the  uncertainty 

Given 
long-term 
projections,  the  assessment  by  the  Commission  and 
the Council should include stress tests that provide an 
indication of the risks to public finance sustainability 
in  the  event  of  adverse  demographic,  economic  or 
budgetary developments.  

In  addition  to  the  requirements  mentioned  above, 
Member  States  may  present  different  projections, 
based  on  national  calculations.  In  such  a  case, 
Member States should explain in detail the underlying 
assumptions  of 
the  used 
methodology, the policies implemented or planned to 
meet  the  assumptions,  and  the  divergences  between 
the  national  projections  and  the  common  projections 

these  projections, 

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produced by the Working Group on Ageing attached 
to the Economic Policy Committee. 

These  national  projections  and  their  assumptions, 
including their plausibility, will enter the basis for the 
assessment  by  the  Commission  and  the  Council  of 
sustainability  of  the  Member  States’  public  finances 
within the context of the SGP. 

Sensitivity analysis 

Given the inevitability of forecast errors, Stability and 
Convergence  Programmes  include  comprehensive 
sensitivity  analyses  and/or  develop  alternative 
scenarios, in order to enable the Commission and the 
Council  to  consider  the  complete  range  of  possible 
fiscal outcomes. 

In  order  to  ensure  proper  ex  ante  coordination  and 
surveillance  of  economic  policies,  submissions  of 
SCP  updates  should  take  place  each  year  in  the  first 
15  days  of  April.  567The  whole  process  should  be 
completed with the adoption of Council Opinions on 
the programmes as a rule before the end of July each 
year. 

Annual  updates  of  Stability  and  Convergence 
Programmes  should  show  how  developments  have 
compared  with  the  budgetary  targets  in  the  previous 
programme  or  update.  When  applicable,  they  should 
explain  in  detail  the  reasons  for  the  deviations  from 
these  targets.  When  substantial  deviations  occur,  the 
update should mention whether measures are taken to 
rectify the situation, and provide information on these 
measures. 

__________________

In  particular,  the  programmes  shall  provide  an 
analysis  of  how  changes  in  the  main  economic 
assumptions  would  affect  the  budgetary  and  debt 
position  and  indicate  the  underlying  assumptions 
about how revenues and expenditures are projected to 
react to variations in economic variables. This should 
include 
rate 
impact  of  different 
assumptions  and,  for  non-participating  Member 
States, of different exchange rate assumptions, on the 
budgetary and debt position. Countries that do not use 
the  common  external  assumptions  should  endeavour 
to  provide  a  sensitivity  analysis  also  on  main  extra-
EU variables when the differences are significant. 

interest 

the 

In the case of ‘major structural reforms’ (see section 
I),  the  programmes  shall  also  provide  an  analysis  of 
how  changes  in  the  assumptions  would  affect  the 
effects on the budget and potential growth.  

Time horizon 

for 

information  about  paths 

The 
the  general 
government surplus/ deficit ratio, the expenditure and 
revenue  ratios  and  their  components  as  well  as  for 
debt ratio and the main economic assumptions should 
be on an annual basis and should cover, as well as the 
current  and  preceding  year,  at 
three 
following  years  (Article  3(3)  and  Article  7(3)), 
leaving  it  open  to  Member  States  to  cover  a  longer 
period if they so wish.  

least 

the 

The  horizon  for  the  long-term  projections  on  the 
budgetary  implications  of  ageing  should  cover  the 
same period as the EPC projections. 

Updating of programmes 

5 

6 

7 

In the case of the UK, which has a different fiscal year, 
submission  should  be  as  close  as  possible  to  the 
presentation of the autumn pre-Budget report. 
Austria  and  Portugal  cannot  comply  at  this  stage  with 
this  schedule,  but  they  will  submit  their  Stability 
Programmes no later than 15 December. 
Ireland will be regarded as meeting this commitment by 
submitting its Stability Programme update on its annual 
Budget day, which traditionally takes place on the first 
Wednesday of December. 

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ANNEX 2 

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