COMMUNICATION FROM THE COMMISSION Common principles on national fiscal correction mechanisms
Date: 2012-06-20
Institutions: European Commission
Subjects: EU control, administrative transparency, budget deficit, budgetary amendment

EUROPEAN COMMISSION 

Brussels, 20.6.2012  
COM(2012) 342 final 

COMMUNICATION FROM THE COMMISSION 

Common principles on national fiscal correction mechanisms 

EN 

   EN 

 
 
 
 
  
 
COMMUNICATION FROM THE COMMISSION 

Common principles on national fiscal correction mechanisms 

Background 

The Treaty on the functioning of the European Union requires that Member States regard their 
economic policies as a matter of common concern and that their budgetary policies are guided 
by the need for sound public finances. 

The  global  economic  and  financial  crises  have  exposed  weaknesses  in  economic  and 
budgetary governance in the Economic and Monetary Union. Already, a new reform package 
–  the  so-called  Six-Pack  –  has  been  adopted  and  entered  into  force  last  December.  As  the 
difficult times continue, the extent and potential consequences of the spillovers between euro 
area Member States' economic and budgetary situations is now clearly evident.  

Based on this rationale, the Commission proposed on 23 November 2011 two further pieces 
of legislation aimed at strengthening the surveillance mechanisms in the euro area, in addition 
to  a  Green  Paper  on  euro  Stability  Bonds.  This  so-called  "Two-Pack"  comprises  two 
proposals: 

•  Regulation  of  the  European  Parliament  and  the  Council  on  common  provisions  for 
monitoring  and  assessing  draft  budgetary  plans  and  ensuring  the  correction  of 
excessive deficit of the Member States in the euro area. 

•  Regulation  of  the  European  Parliament  and  the  Council  on  the  strengthening  of 
economic  and  budgetary  surveillance  of  Member  States  experiencing  or  threatened 
with serious difficulties with respect to their financial stability in the euro area. 

In addition, building on these elements and in view of safeguarding the stability of the euro 
area as a whole, the Treaty on Stability, Coordination and Governance in the Economic and 
Monetary Union (TSCG), which was signed on 2 March 2012 by twenty-five Member States, 
includes a fiscal compact (Title III). The aim is to enshrine these commitments into EU law 
within five years of its entry into force. 

As  part  of  the  fiscal  compact,  the  Contracting  Parties  shall  introduce  in  their  national  law 
rules  on  a  correction  mechanism  to  be  triggered  automatically  in  the  event  of  significant 
observed  deviations  from  the  medium-term  objective  or  the  adjustment  path  towards  it 
(article 3, paragraphs 1(e) and 2).  

Moreover,  according  to  the  TSCG  (article 3.2),  the  correction  mechanisms  shall  be  put  in 
place  "on  the  basis  of  common  principles  to  be  proposed  by  the  European  Commission, 
concerning in particular the nature, the size, and the time-frame of the corrective action to be 
undertaken  also  in  the  case  of  exceptional  circumstances,  and  the  role  and  independence  of 
the institutions responsible at national level for monitoring the observance of the rules". 

As  part  of  the  implementation  of  the  TSCG,  this  Communication  is  adopted  in  view  of  the 
general  interest  of  the  Union  and  to  contribute  to  the  proper  functioning  of  economic  and 
monetary union 

 
 
 
This  Communication  puts  forward  common  principles  underlying  the  national  correction 
mechanisms. The seven principles are to be found in the Annex. They cover the key issues to 
be  addressed  when  designing  the  correction  mechanisms,  including  their  legal  status,  the 
consistency  with  the  EU  framework,  the  activation  of  the  mechanisms,  the  nature  of  the 
correction in terms of size and timeline, its operational instruments, the working of possible 
escape clauses, and the role and independence of monitoring institutions.  

.Article 3  of  the  TSCG  also  invites  the  Commission  to  propose  a  time-frame  for  rapid 
convergence of the Contracting Parties towards their medium-term objectives (MTO), taking 
into  consideration  country-specific  sustainability  risks.  This  timeframe  will  be  presented  by 
the Commission later this year. The consolidation plans presented by Member States in their 
latest  update  of  the  Stability  or  Convergence  Programme  would  provide  a  natural  starting 
point  to  define  the  pace  of  convergence  towards  MTOs.  These  consolidation  plans  would 
need to be reassessed against the provisions of the Stability and Growth Pact, including the 
adequacy of MTOs, and the principles of the exit strategy in the light of the macroeconomic 
outlook, notably differentiation according to fiscal vulnerability.  

1.  Legal  status  of  the  rules  on  the  correction  mechanisms  and  relation  to  the  EU 
framework 

According to the TSCG the rules on the correction mechanisms shall take effect in national 
law "through provisions of binding force and permanent character, preferably constitutional, 
or  otherwise  guaranteed  to  be  fully  respected  and  adhered  to  throughout  the  national 
budgetary processes". Thus the legal status of the correction mechanisms should be such that 
their provisions cannot be simply altered by the ordinary budgetary law. At the same time, as 
is  also  made  clear  in  the  TSCG  and  duplicated  in  principle (1),  the  correction  mechanisms 
"shall  fully  respect  the  prerogatives  of  national  Parliaments".  These  characteristics  aim  at 
ensuring  that  the  fiscal  rules  effectively  inform  national  budgetary  policies,  while 
acknowledging the fundamental parliamentary rights.  

Principle (2)  asserts  the  necessary  consistency  with  the  EU  budgetary  rules  of  the  national 
correction  mechanisms.  The  requirements  of  the  fiscal  compact  are  part  of  a  broader  move, 
already  initiated  with  the  recent  reform  of  the  Stability  and  Growth  Pact  (the  "Six-Pack"), 
increasing  the  national  ownership  of  the  Union  surveillance  framework.  Accordingly  the 
TSCG  itself  refers  to  already  existing  notions  of  budgetary  surveillance,  including  "the 
medium-term objective" and "adjustment path towards it", the "significant deviation", and the 
"exceptional circumstances". Principle (2) specifies that EU concepts and rules shall be relied 
on closely in devising the national mechanisms, although some degree of flexibility may be 
allowed  as  regards  the  precise  national  methodologies  to  account  for  country-specific 
features.  

2.  The  substance  of  correction  mechanisms:  activation,  nature  of  the  correction, 
operational instruments, escape clauses 

As established by principle (3), the activation of the correction mechanisms should occur in 
well-defined  circumstances  characterising  a  significant  deviation  from  the  MTO,  or  the 
adjustment  path  towards  it.  This  entails  the  existence  of  provisions  determining  beforehand 
the  criteria  for  assessing  the  occurrence  of  a  significant  deviation.  Principle (3)  also 
acknowledges  that  subject  to  these  conditions,  a  variety  of  mechanisms  and  criteria  can  be 
used by Contracting Parties. In particular, trigger points may rely on either EU-level criteria, 

 
 
country-specific  criteria,  or  both.  EU-level  decisions  establishing  the  occurrence  of  a 
significant deviation would be a natural trigger for corrections mechanisms. At the same time, 
country-specific criteria, to the extent that they embody the concept of a significant deviation, 
may act as relevant triggers with the possible additional benefit of occurring earlier in time.  

The nature of the correction in terms of size and timeframe is the object of principle (4). The 
proposed  principle  provides  concrete  operational  guidance  while  avoiding  an  overly  rigid 
approach.  

Accordingly principle (4) comprises five sub-principles: 

-  First,  it  is  asked  that  pre-determined  rules  frame  the  size  and  timeline  of  the  correction, 
thereby  limiting,  though  not  entirely  ruling  out,  the  scope  for  discretion  in  devising  the 
response to a significant budgetary deviation.  

-  Second,  larger  deviations  should  lead  to  larger  corrections,  in  line  with  a  common-sense 

norm of proportionality.  

-  Third,  the  reference  point  for  determining  the  correction  would  be  adherence  with  the 
MTO and the adjustment path towards it, thereby echoing the spirit of the fiscal compact, 
which  at  its  core  is  about  respecting  the  MTO  and  the  adjustment  path  towards  it. 
Specifically,  when  on  its  adjustment  path,  a  Member  State  that  deviates  would  thus 
generally  be  expected  to  keep  unchanged  the  timeline  for  returning  to  the  MTO.  When 
initially at the MTO and deviating therefrom, a Member State would be expected to restore 
the MTO as fast as reasonable, which generally would mean either the year immediately 
following  the  occurrence  of  the  deviation  or  the  subsequent  year.  Acting  as  a  reference 
scenario does not however entirely precludes room for flexibility depending on the precise 
circumstances.  

-  Fourth, the correction mechanisms should be instrumental in providing critical elements of 
stability  in  the  budgetary  framework,  so  as  to  prevent  the  "moving-target  syndrome" 
typically  associated  in  response  to  budgetary  slippages.  To  that  aim  the  correction 
mechanisms should ensure adherence to key fiscal targets as set before the occurrence of 
the significant deviation.  

-  Fifth, at the onset of the correction a corrective plan would need to be adopted and would 
be  binding  on  the  subsequent  budgets  covering  the  period  of  the  correction,  thereby 
strengthening the credibility of the mechanisms.  

The  operational  working  of  the  correction  mechanisms  is  also  an  important  aspect  of  the 
design  of  correction  mechanisms.  Principle (5)  acknowledges  the  key  role  that  rules  over 
public  expenditure  and  discretionary  revenue  measures  can  play  in  this  respect,  bearing  in 
mind that these aggregates are a more immediate reflection of the discretionary decisions of 
fiscal  authorities  than  eventual  fiscal  outcomes  or  cyclically-adjusted  balances.  Another 
crucial  element  for  Member  States  to  consider  in  designing  their  systems  pertains  to  the 
coordination  across  some  or  all  of  the  sub-levels  of  general  governments  in  response  to  a 
significant  budgetary  deviation,  thereby  strengthening  the  credibility  of  their  mechanisms. 
These coordination mechanisms would not necessarily entail a predetermined distribution of 
the correction between the central government and the subnational elements. But there must 
be  strong  safeguards  that  the  achievement  of  the  general  government  budgetary  targets,  for 

 
 
which the central government is responsible vis-à-vis the EU level, is not put at risk by the 
behaviour of sub-sectors.  

The notion that budgetary rules should be able to react to particularly adverse circumstances 
has long been acknowledged in the EU surveillance framework and is also recognised by the 
TSCG. Principle (6) requests that possible escape clauses rely closely on EU agreed notions, 
so  as  to  promote  consistency  and  prevent  overly  permissive  definitions  of  exceptional 
circumstances. It is also demanded that the possible suspension of the correction mechanism 
offered by an escape clause be granted over a defined horizon, and that a minimum pace of 
adjustment follows the exit from the escape clause, in line with both the requirement of the 
Stability and Growth Pact as a minimum. Again, a corrective plan that would be binding on 
future budgets would be expected at the exit of the escape clause.  

3. Role and independence of monitoring institutions 

While  the  responsibility  for  ensuring  compliance  with  the  correction  mechanisms  primarily 
lies  with  fiscal  authorities,  national  monitoring  institutions  would  be  a  key  ingredient  in 
fostering credibility and transparency, as acknowledged in the last of the proposed principles 
(principle (7)).  These  bodies  would  be  expected  to  evaluate  the  working  of  the  correction 
mechanisms  in  conformity  with  national  rules  at  the  various  stages  of  activation  and 
implementation of the correction, including also the possible recourse to escape clauses.  

A "comply or explain" principle – whereby the advice of these monitoring institutions would 
either be followed, or the concerned Member  States would explain why it departs from it – 
would  ensure  that  the  assessments  are  not  just  ignored,  without  infringing  on  the 
policymaking responsibilities of fiscal authorities.  

The independence of functional autonomy of these bodies is a fundamental feature enabling 
them to play effectively their role in the national fiscal policy landscape. Principle (7) tables 
several  provisions  to  that  effect.  First,  to  ensure  ownership,  the  design  of  the  monitoring 
institutions should be consistent with the already existing institutional setting and the country-
specific administrative structure. Second, several criteria are put forward to guarantee a high 
degree of functional autonomy. Legal provisions should ground the statutory regime, mandate 
and  accountability  of  these  bodies.  Strong  safeguards  should  also  be  put  in  place  regarding 
appointments  and  the  adequacy  of  resources  and  access  to  information  in  relation  to  the 
mandate.  These  conditions  are  necessary  to  allow  the  monitoring  institutions  to  effectively 
work and act as guardians  of  the  transparency and  credibility  of  the  mechanisms.  Particular 
emphasis should be placed on allowing unhindered communication with the public.  

 
 
 
ANNEX 

Common principles for national fiscal correction mechanisms 

(1)  [Legal  status]  The  correction  mechanism  shall  be  enshrined  in  national  law  through 
provisions  of  binding  force  and  permanent  character,  preferably  constitutional,  or  otherwise 
guaranteed to be fully respected and adhered to throughout the national budgetary processes. 
The mechanism shall fully respect the prerogatives of national Parliaments.  

(2) [Consistency  with EU  framework] National correction mechanisms shall rely closely on 
the  concepts  and  rules  of  the  European  fiscal  framework.  This  applies  in  particular  to  the 
notion of a 'significant deviation' and the definition of possible escape clauses. The correction, 
in  terms  of  size  and  timeline,  shall  be  made  consistent  with  possible  recommendations 
addressed to the concerned Member State under the Stability and Growth Pact.  

(3)  [Activation]  The  activation  of  the  correction  mechanism  shall  occur  in  well-defined 
circumstances characterising a significant deviation from the medium-term objective (MTO) 
or the adjustment path towards it. The activation triggers may comprise EU-driven or country-
specific  criteria,  to  the  extent  that  they  meet  the  above  condition.  Subject  to  the  same 
condition,  both  ex  ante  mechanisms 
the 
materialisation  of  deviations  and  ex  post  mechanisms  that  trigger  corrections  in  reaction  to 
prior deviations, may fulfil the requirements.  

that  set  budgetary  objectives  preventing 

(4) [Nature of the correction] The size and timeline of the correction shall be framed by pre-
determined  rules.  Larger  deviations  from  the  medium-term  objective  or  the  adjustment  path 
towards  it  shall  lead  to  larger  corrections.  Restoring  the  structural  balance  at  or  above  the 
MTO  within  the  planned  deadline,  and  maintaining  it  there  afterwards,  shall  provide  the 
reference  point  for  the  correction  mechanism.  The  correction  mechanism  shall  ensure 
adherence  to  critical  fiscal  targets  as  set  before  the  occurrence  of  the  significant  deviation, 
thereby preventing any lasting departure from overall fiscal objectives as planned before the 
occurrence  of  the  significant  deviation.  At  the  onset  of  the  correction  Member  States  shall 
adopt  a  corrective  plan  that  shall  be  binding  over  the  budgets  covered  by  the  correction 
period.  

(5)  [Operational  instruments]  The  correction  mechanism  may  give  a  prominent  operational 
role to rules on public expenditure and discretionary tax measures, including in activating the 
mechanism and implementing the correction, to the extent that these rules are consistent with 
attainment  of  the  MTO  and  the  adjustment  path  towards  it.  The  design  of  the  correction 
mechanism shall consider provisions as regards, in the event of activation, the coordination of 
fiscal adjustments across some or all sub-sectors of general government.  

 
 
 
 
 
 
 
 
(6)  [Escape  clauses]  The  definition  of  possible  escape  clauses  shall  adhere  to  the  notion  of 
'exceptional circumstances' as agreed in the Stability and Growth Pact. This would include an 
unusual event outside the control of the concerned Member State with a major impact on the 
financial  position  of  the  general  government,  or  periods  of  severe  economic  downturn  as 
defined  in  the  Stability  and  Growth  Pact,  including  at  the  level  of  the  euro  area.  The 
suspension  of  the  correction  mechanism  in  the  event  of  an  escape  clause  shall  be  on  a 
temporary  basis.  The  correction  mechanism  shall  foresee  a  minimum  pace  of  structural 
adjustment once out of the escape clause, with the requirement from the Stability and Growth 
Pact  a  lower  limit.  When  exiting  the  escape  clause,  Member  States  shall  adopt  a  corrective 
plan that shall be binding over the budgets covered by the correction period. 

(7)  [Role  and  independence  of  monitoring  institutions]  Independent  bodies  or  bodies  with 
functional  autonomy  acting  as  monitoring  institutions  shall  support  the  credibility  and 
transparency  of  the  correction  mechanism.  These  institutions  would  provide  public 
assessments over: the occurrence of circumstances warranting the activation of the correction 
mechanism;  of  whether  the  correction  is  proceeding  in  accordance  with  national  rules  and 
plans; and over the occurrence of circumstances for triggering, extending and exiting escape 
clauses.  The  concerned  Member  State  shall  be  obliged  to  comply  with,  or  alternatively 
explain  publicly  why  they  are  not  following  the  assessments  of  these  bodies.  The  design  of 
the  above  bodies  shall  take  into  account  the  already  existing  institutional  setting  and  the 
country-specific administrative structure. National legal provisions ensuring a high degree of 
functional  autonomy  shall  underpin  the  above  bodies,  including:  i)  a  statutory  regime 
grounded  in  law;  ii)  freedom  from  interference,  whereby  the  above  bodies  shall  not  take 
instructions,  and  shall  be  in  a  capacity  to  communicate  publicly  in  a  timely  manner;  iii) 
nomination procedures based on experience and competence; iv) adequacy of resources and 
appropriate access to information to carry out the given mandate.