COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL Towards a Deep and Genuine Economic and Monetary Union The introduction of a Convergence and Competitiveness Instrument
Date: 2013-03-20
Institutions: European Commission
Subjects: Economic and Monetary Union, competitiveness, economic convergence, economic reform, financial aid, intergovernmental cooperation (EU)

EUROPEAN 
COMMISSION 

Brussels, 20.3.2013  
COM(2013) 165 final 

COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN 
PARLIAMENT AND THE COUNCIL 

Towards a Deep and Genuine Economic and Monetary Union 
The introduction of a Convergence and Competitiveness Instrument  

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COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN 
PARLIAMENT AND THE COUNCIL 

Towards a Deep and Genuine Economic and Monetary Union 
The introduction of a Convergence and Competitiveness Instrument  

1. 

INTRODUCTION 

Background 

The Commission's Blueprint for a Deep and Genuine Economic and Monetary Union adopted 
on 28 November 20121 contained proposals for short-, medium- and long-term measures on 
how to strengthen cooperation and integration in the financial, fiscal, economic and also in the 
political  fields.  Among  the  issues  to  be  implemented  in  the  short  run  to  complete  the 
governance  framework  for  economic  policy  coordination  in  general,  and  for  the  single 
currency  in  particular,  were  "contractual  arrangements"  combined  with  a  solidarity 
mechanism  for  national  structural  reforms  for  competitiveness  and  growth  whose  lack  of 
implementation  would  have  a  spillover  effect  on  other  Member  States  but  whose 
implementation  would  need  to  be  done  by  the  Member  State  concerned  under  particular 
stress.  The  aim  is  to  help  Member  States  facing  a  difficulty  that  may  affect  the  entire  Euro 
area  to  undertake  the  necessary  reforms  through  the  Convergence  and  Competitiveness 
Instrument (CCI), which is a combination of a contractual arrangement with a mechanism for 
financial  support,  sooner  than  they  would  be  able  to  do  on  their  own.  On  the  basis  of  the 
Commission's Blueprint and the four Presidents' Report on a genuine Economic and Monetary 
Union2, the 2012 December European Council agreed on a roadmap for the completion of the 
EMU.  Up  until  the  2013  June  European  Council,  work  will  continue  in  the  areas  of: 
coordination of national reform, the social dimension of EMU including social dialogue, the 
feasibility  and  modalities  of  mutually  agreed  contracts,  and  a  solidarity  mechanism3.  In  the 
December report of the four Presidents' the issues of contractual arrangements and a solidarity 
funding mechanism are also addressed separately. 

The Commission's proposal 

The  Convergence  and  Competitiveness  Instrument,  as  proposed  by  the  Commission, 
encompassed both the ideas of mutually agreed contracts and that of a solidarity mechanism. 
The inter-play between the two pillars would provide solidarity in the form of financial help 
to  support  increased  economic  responsibility  and  fiscal  discipline  which  would  be  set  out 
clearly and with conditions through "contractual arrangements". Specifically, a Convergence 
and Competitiveness Instrument would be based on two pillars: 

•  Contractual  arrangements  which  would  lay  down  the  key  measures  a  Member  State 
commits  to  put  in  place,  with  agreed  timelines.  These  measures  would  be  designed  to 

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http://ec.europa.eu/commission_2010-2014/president/news/archives/2012/11/pdf/blueprint_en.pdf 
http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/134069.pdf 
http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/134353.pdf, par 12. 

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implement  the  Country  Specific  Recommendations  agreed  as  part  of  the  European 
Semester, in particular those emanating from the Macroeconomic Imbalance Procedure.  
•  Financial support for the implementation of the reforms in the contractual arrangement. 

This Communication presents options and questions to elicit input from stakeholders on what 
should  be  the  scope  of  the  Convergence  and  Competitiveness  Instrument,  which  Member 
States  should  be  eligible,  how  it  should  be  financed  and  how  it  should  fit  into  the  overall 
system  of  economic  governance  of  the  Euro  area  and  the  EU.  The  Communication  aims  to 
address  these  questions  as  part  of  the  debate  which  is  now  underway  between  key 
stakeholders on the next steps towards the completion of the EMU, in particular the European 
Parliament, the Member States and the national parliaments.  

2. 

A  CONVERGENCE  AND  COMPETITIVENESS 
ARRANGEMENTS AND FINANCIAL SUPPORT 

INSTRUMENT:  CONTRACTUAL 

2.1. 

The rationale for a Convergence and Competitiveness Instrument 

The interdependence of Member States participating in a single currency means that each has 
a vital stake in all the others following sound budgetary and economic policies. The crisis has 
shown that lack of necessary reforms or half measures in one Member State can have negative 
effects  in  others.  As  part  of  the  new  economic  governance  of  the  Euro  area  and  of  the  EU, 
there  is  a  need  to  ensure  that  the  structural  reforms  which  are  needed  to  remove  key 
weaknesses  in  some  economies  take  place  and  take  place  earlier  than  has  recently  been  the 
case. The Commission sees it as an instrument designed to meet the specific needs that arise 
from Euro area membership. Being bound together in a single currency area implies the need 
for timely and targeted reforms. Therefore, an additional instrument is needed to promote and 
support reforms that can also have a positive impact on others when individual Member States 
are under stress. 

The  ambitious  implementation  of  structural  reforms  by  the  Member  States  in  a  coordinated 
manner,  taking  the  Euro  area  dimension  into  account,  can  deliver  a  better  result  for  all  of 
them,  contributing  to  sustainable  growth,  employment  and  social  cohesion.  High  levels  of 
adjustment capacity and competitiveness would better protect all Member States against the 
impact  of  economic  downturns  and  avoid  the  development  of  harmful  macroeconomic 
imbalances with their associated economic and social costs. 

The  current  EU  economic  surveillance  framework  already  provides  incentives  to  undertake 
reforms,  for  example  through  the  fixing  of  common  targets  to  be  reached  by  each  Member 
State, the regular provision of policy guidance and surveillance, the use of peer pressure and 
the exchange of best practice to create an environment conducive to promoting convergence 
and  competitiveness,  as  well  as  through  more  direct  measures  such  as  sanctions  and 
macroeconomic conditionality.  

In its Blueprint the Commission has explained why it considers that the existing framework 
should  be  expanded  to  include  the  use  of  a  dedicated  instrument  that  would  assist  Member 
States undertaking certain key reforms by providing financial assistance for flanking measures 
to  overcome  possible  social  and  political  difficulties  in  implementing  these  reforms.  While 
such reforms are first and foremost in the interest of the Member State undertaking them, they 
are  also  in  the  interest  of  the  wider  Euro  area  and  EU:  more  resilient  Member  States 
contribute  positively  to  the  wellbeing  of  their  partners  while  delaying  necessary  reforms 
because of short term negative domestic impacts can have negative spill over effects on other 

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partners. Financial support for a well-defined set of reforms would be of particular importance 
in  cases  where  imbalances  persisted  in  spite  of  full  compliance  with  previous  Country 
Specific Recommendations addressed to the Member State concerned.  

The  design  of  the  Convergence  and  Competitiveness  Instrument  would  have  to  include 
safeguards  to  prevent  moral  hazard  arising  from  the  perception  that  reforms  would  be 
rewarded  once  they  were  overdue,  which  could  delay  reforms  until  the  moment  they  were 
eligible for financial support, as well as the risk of deadweight losses occurring by providing 
incentives  for  reform  that  would  have  been  implemented  even  without  that  incentive.  This 
new financial support mechanism should only intervene in support of significant reforms with 
a potential impact on other Member States and the Euro area and EU as a whole. Under these 
circumstances,  it  would  help  to  deliver  reforms  that  would  either  not  be  undertaken  in  the 
normal course of events, or that could not be undertaken in a particular time period because of 
their costs to the Member State undertaking them or would only be undertaken later at greater 
cost to the Member State and the wider Euro area and EU.  

2.2. 

Contractual arrangements 

Coverage: options on participation of Member States 

As envisaged by the Commission the "contractual arrangement" under the Convergence and 
Competitiveness Instrument would build on the existing EU surveillance framework. It would 
link  the  policy  guidance  resulting  from  the  Country  Specific  Recommendations  in  the 
European Semester and the national process of structural reform implementation.  

A  key  question  to  be  addressed  is  for  which  Member  States  the  Convergence  and 
Competitiveness Instrument should be established? This could include covering: 

•  All  Euro  area  Member  States  (except  those  with  a  macroeconomic  adjustment 

programme4). 

•  Ways should be also found to allow Member States that are not part of the Euro area to 
enter  a  contractual  arrangement  in  particular  regarding  the  Member  States  preparing  for 
Euro accession taking also into account the preparation stage.  

Another  key  question  to  be  addressed  is  about  when  the  use  of  the  Convergence  and 
Competitiveness Instrument would be triggered? Possible options include: 

•  The  use  of  the  Convergence  and  Competitiveness  Instrument  would  be  available  to  all 

participating Member States. 

•  The  Convergence  and  Competitiveness  Instrument  would  be  used  when  a  participating 
Member State is under the Macroeconomic Imbalances Procedure. Should participation be 
voluntary or obligatory? 

•  The  use  of  the  Convergence  and  Competiveness  Instrument  would  be  triggered  by  an 

invitation by the Commission to a participating Member State. 

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Proposal  for  a  Regulation  of  the  European  Parliament  and  of  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 - 
http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2011:0819:FIN:EN:PDF 

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Which reforms should be covered? 

Depending  on  the  coverage  chosen  there  are  different  options  for  implementing  this  new 
instrument. For example: 

• 

• 

In  the  case  of  voluntary  participation,  Member  States  could  present  a  plan  for  a  set  of 
concrete  reforms  with  clear  deadlines  building  on  the  relevant  Country  Specific 
Recommendations5. This would form the core of the contractual arrangement.  
If the new instrument applies to Euro area Member States under the preventive arm of the 
macroeconomic  imbalance  procedure  then  the  proposed  reforms  should  include  the 
recommendations issued under the macroeconomic imbalances procedure and in particular 
measures  addressing  competitiveness,  promoting  financial  stability  and  improving  the 
functioning  of  labour,  product  and  services  markets  and  thus  the  adjustment  capacity  of 
the economy. 

•  For Euro area Member States under the excessive imbalance procedure, in order to avoid 
overlapping surveillance tools the (mandatory) Corrective Action Plan would replace the 
contractual  arrangement.  In  this  case,  the  CCI  would  speed  up  the  correction  of 
imbalances. The procedure for the conclusion of the Corrective Action Plan, as well as the 
subsequent  system  of  monitoring  of  implementation,  would  be  the  procedure  defined  in 
Regulation  (EU)  No  1176/2011  on  the  prevention  and  correction  of  macroeconomic 
imbalances.  

Questions for consultation: 

•  To  which  Member  States  should  the  Convergence  and  Competitiveness  Instrument 

apply?  

•  At what stage should the Convergence and Competitiveness Instrument be triggered? 
•  What  kind  of  reforms  should  be  eligible  for  support  under  the  Convergence  and 
Competitiveness Instrument? Should there be a threshold in terms of size or importance 
of the reforms to be supported? Do you agree with the categories described above? If 
yes, why? If not, why? 

•  Do you see other ways of defining reforms to be covered according to the situation of 

the different Member States to be covered by the new instrument? 

Procedure 

In  keeping  with  the  existing  monitoring  and  surveillance  systems  Member  State's  reform 
plans  would  be  assessed  by  the  Commission.  That  assessment  would  focus  notably  on  the 
appropriateness of the proposed measures, the additional reform effort and the extent to which 
they  address  the  economic  weaknesses  which  are  taken  up  in  the  relevant  Country  Specific 
Recommendations. It would also look at potential spill-over effects on other Member States, 
as  well  as  the  feasibility  of  implementation  also  in  the  light  of  the  proposed  timelines.  The 
assessment  of  the  expected  impact  would  include,  where  relevant,  the  impact  on  the 
sustainability of public finances and their social impact. 

On the basis of its assessment, the Commission would negotiate the details of the plan with 
the proposing Member State before making a formal proposal to the Council to approve the 

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Adopted by the Council in the context of the European Semester. 

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contractual  arrangement.  The  reforms  to  be  supported  would  vary  according  to  the  specific 
situation of the proposing Member State – for some they could be of short duration, for others 
they might take several years to implement fully. 

The  Council  would  approve  (possibly  with  modifications)  the  specific  actions  proposed 
together with the agreed timetable. Should the proposing Member State and Commission fail 
to reach an agreement, or should the Council disagree with the arrangement, there would be 
no contractual arrangement and subsequently no financial support. 

The  Commission  would  monitor  implementation  of  the  arrangement  on  an  annual  basis  as 
part  the  European  Semester,  with  Member  States  reporting  on  progress  in  their  National 
Reform Programmes. The Commission would assess progress in reform implementation and 
evaluate  the  adequacy  of  the  agreed  reform  plans  vis-à-vis  the  evolution  of  the  economic 
situation and challenges faced by the Member State. Where needed, both the Commission and 
the  Member  State  could  propose  changes  to  the  contractual  arrangement,  leading  to  a  new 
negotiating process.  

Since  the  measures  included  in  the  contractual  arrangements  could  be  expected  to  include 
major economic reform plans in the sense of the envisaged ex ante coordination process there 
should  be  a  strong  link  between  the  two  instruments.  For  this  reason  the  Commission  is 
simultaneously  launching  a  consultation  on  ex  ante  coordination  of  major  economic  policy 
reforms. 

Questions for consultation: 

•  Do you agree that the proposed contractual arrangements should be negotiated by the 

Commission with the concerned Member State? 

•  Do you agree that they should be decided by the Council?  
•  Do you agree that both the Commission and the concerned Member State should have 
the  right  to  propose  changes  to  agreed  contractual  arrangements?  Under  which 
circumstances? 

•  Do you agree that there should be annual reporting on the contractual arrangements via 

the European Semester? 

2.3. 

Democratic legitimacy and accountability 

One of the main objectives of setting up the Convergence and Competitiveness Instrument is 
to support Member States in the sometimes difficult process of implementing major reforms 
necessary  to  tackle  the  weaknesses  identified  in  the  Country  Specific  Recommendations. 
Increased  EU  involvement  in  the  reform  process  would  necessitate  a  timely  and  active 
involvement of national parliaments and other relevant national stakeholders. 

Member  States  would  need  to  ensure  national  commitment  to  the  implementation  of  the 
contractual  arrangements  by  involving  their  national  parliamentary  assemblies,  preferably 
before submission of their plans for a set of concrete reforms. In all circumstances, national 
parliaments should be involved before the endorsement of the contractual arrangements by the 
Council. Where appropriate, and depending on the specific nature of the envisaged reforms, 
other  national  stakeholders  such  as  social  partners  should  also  be  involved.  Where  relevant 
and  appropriate,  representatives  of  the  Commission  would  be  available  to  participate  in 
dialogue with national parliaments on the application of the instrument.  

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In  ensuring  democratic  legitimacy  and  accountability  at  EU  level,  the  European  Parliament 
should  be  fully  involved.  Given  the  importance  of  the  reform  measures  expected  to  be 
covered  by  the  Convergence  and  Competitiveness  Instrument  for  the  well-functioning  of 
EMU as a whole, representatives of the Commission would be available for dialogue with the 
European  Parliament  whenever  necessary.  Arrangements  could  be  envisaged  for  dialogue 
with representatives of the Council and the Member States. 

Questions for consultation: 

•  How  should  national  parliaments  be 

involved 

in  decisions  on  contractual 

• 

arrangements? 
In which way should other national stakeholders be consulted? Which ones? At what 
stage in the process? 

•  How should representatives of the Commission be involved in dialogue with national 

parliaments on the contractual arrangements? 

•  How  should  representatives  of  the  Council  and  of  the  relevant  Member  States  be 
available  to  participate  in  dialogue  with  the  European  Parliament  on  contractual 
arrangements? At which stage in the process? 

3. 

FINANCIAL SUPPORT TO FACILITATE REFORM IMPLEMENTATION 

In  its  Blueprint  for  a  Deep  and  Genuine  EMU,  the  Commission  considers  that  financial 
support will be needed to support the implementation of structural reforms. One option is that 
all participating Member States contribute to a financial support mechanism. The Commission 
is  considering  different  options,  also  with  regard  to  the  obligation  to  contribute  to  the  new 
mechanism – it could be required of all participating Member States, obligatory for all Euro 
area Member States irrespective of whether they apply to draw from it etc. Irrespective of the 
option chosen the mechanism could either be based on dedicated contributions, for example 
on the basis of a GNI key, or on the proceeds of new specific financial resources dedicated to 
it.  The  Commission  envisages  that  the  mechanism  would  be  included  in  the  EU  budget  as 
external  assigned  revenues.  This  means  they  would  not  come  under  the  ceilings  set  in  the 
MFF  Regulation.  This  mechanism  would  be  defined  in  a  new  legal  act  which  would  define 
the potential beneficiaries  (for  example only contributing Member States could benefit) and 
authorise  spending.  The  Commission  envisages  that  the  size  of  the  mechanism  would  be 
limited  at  the  outset.  It  could  grow  over  time  and  with  experience  if  it  proves  to  be  an 
effective and cost efficient way of promoting reform. Once such a mechanism is put in place 
the modalities for its operation need to be fixed. Options being considered by the Commission 
include the payment of a lump sum to be attributed per contractual arrangement, e.g. through 
a budgetary support. The definition and use of the amounts involved and of the disbursement 
would depend on strict conditions specified in the contractual arrangement. The conditionality 
would be linked to the implementation of the agreed reforms, but not to the achievement of a 
specific  economic  outcome  of  those  reforms.  The  financial  support  would  also  strengthen 
EMU's  social  dimension.  For  example,  funding  by  Member  States  could  be  geared  towards 
support the modernisation of vocational training systems or increased effectiveness of active 
labour market policies but could not be directly linked to a defined number of people finding 
employment. 

The new financial instrument would need to be consistent, coherent and complementary to the 
existing instruments, such as the Structural Funds, and in particular the European Social Fund. 
The  value  added  of  this  financial  mechanism  in  supporting  such  measures  would  be  to 

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provide targeted, limited in time and quick support. This is crucially important in the case of 
the  macroeconomic  conditionality  foreseen  under  the  Structural  Funds  for  the  period  2014-
2020. 

To maximise its potential impact, the Commission is considering proposing that the financial 
support  would  be  committed  up  front  at  the  moment  of  approval  of  the  contractual 
arrangement  and  paid  in  regular  instalments  or  instalments  otherwise  linked  to  the  agreed 
timetable  for  reforms.  The  financial  support  would  be  conditional  on  the  full  and  timely 
implementation  of  the  reforms  set  out  in  the  arrangement.  The  Commission  could  issue 
warnings  if  a  Member  State  does  not  meet  the  contract,  requesting  the  Member  State  to 
correct  the  deviation,  including  with  a  new  timeline.  When  this  is  not  met,  the  financial 
support  would  be  withheld.  Instances  of  non-compliance  would  be  reported  in  the 
Commission's  annual  assessment,  and  depending  on  the  gravity  could  be  followed  by  the 
suspension  of  payments.  Similar  arrangements  would  apply  in  cases  where  previously 
implemented reforms are reversed or where other measures are taken which negate the impact 
of the agreed reforms. 

Questions for consultation: 

•  Do  you  agree  that  the  Convergence  and  Competitiveness  Instrument  needs  a  new 

financial instrument? 

•  Do you agree that it should be inside the EU budget but not subject to the ceilings of 

the MFF as described above? If not, what would you propose? 

•  Do you agree that the financial mechanism should be financed by direct contributions 
from Member States? Should all Euro area Member States be obliged to contribute?  
•  Would you agree that some form of specific financial resources should be identified to 

finance the mechanism? Do you have any other proposals? 

•  Do you agree that only those Member States that contribute to the fund should be able 

to benefit from it? 

•  Do  you  agree  that  failure  to  implement  the  agreed  reforms  correctly  could  lead  to 

suspension of payments? 

4. 

NEXT STEPS 

On  the  basis  of  further  discussion  with  the  European  Parliament  and  the  Council,  the 
Commission will make a proposal in the course of 2013.  

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