Recommendation for a COUNCIL RECOMMENDATION on the implementation of the broad guidelines for the economic policies of the Member States whose currency is the euro
Date: 2013-05-29
Institutions: European Commission
Subjects: EU control, Euro Group (euro area), banking system, budgetary control, budgetary equilibrium, economic growth, interest

EUROPEAN 
COMMISSION 

Brussels, 29.5.2013  
COM(2013) 379 final 

Recommendation for a 

COUNCIL RECOMMENDATION 

on the implementation of the broad guidelines for the economic policies of the Member 
States whose currency is the euro  

{SWD(2013) 379 final}

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Recommendation for a 

COUNCIL RECOMMENDATION 

on the implementation of the broad guidelines for the economic policies of the Member 
States whose currency is the euro  

THE COUNCIL OF THE EUROPEAN UNION, 

Having  regard  to  the  Treaty  on  the  Functioning  of  the  European  Union,  and  in  particular 
Article 136 in conjunction with Article 121(2) thereof, Having regard to 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  policies1,  and  in  particular 
Article 5(2) thereof, 

Having  regard  to  Regulation  (EU)  No  1176/2011  of  the  European  Parliament  and  of  the 
Council  of  16  November  on  the  prevention  and  correction  of  macroeconomic  imbalances2, 
and in particular Article 6(1) thereof, 
Having regard to the recommendation of the European Commission3, 
Having regard to the resolutions of the European Parliament4, 

Having regard to the conclusions of the European Council, 

After consulting the Economic and Financial Committee, 

Whereas: 

(1) 

(2) 

The  Eurogroup  has  a  special  responsibility  in  the  economic  governance  of  the  euro 
area.  The  economic  crisis  clearly  exposed  the  close  interrelations  in  the  euro  area, 
underscoring the need for a coherent aggregate policy stance which reflects the strong 
spillovers between countries whose currency is the euro, for effective arrangements for 
policy coordination to swiftly respond to changes in the economic environment. 

The Member States whose currency is the euro have committed themselves to a set of 
far-reaching  additional  policy  reforms  and  policy  coordination  by  signing  the  Treaty 
on Stability, Coordination and Governance in the Economic and Monetary Union on 2 
March  2012.  The  entry  into  force  of  the  so  called  "Two  Pack"  regulations5  in  2013 
will further deepen budgetary and economic policy coordination within the euro area. 

(3)  Work  is  ongoing  to  deepen  further  the  economic  and  monetary  union.  On  28 
November 2012, the Commission presented a communication on a blueprint for a deep 
and genuine economic and monetary union6. The blueprint identified the rationale and 
objectives of a genuine EMU as well as the instruments and steps that would make it 
possible to reach them. The blueprint intended to launch the European debate. On 12 

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OJ L 209, 2.8.1997, p. 1. 
OJ L 306, 23.11.2011, p. 25. 
COM(2013) 379 final  
P7_TA(2013)0052 and P7_TA(2013)0053. 
COM(2011)821 final and COM(2011)819 final.  
COM(2012) 777 final. 

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(4) 

(5) 

(6) 

September  2012,  the  Commission  presented  a  roadmap  towards  a  Banking  Union7. 
This proposal was accompanied by a proposal for two regulations needed to establish 
the  single  supervisory  mechanism8.  On  5  December  2012,  the  President  of  the 
European Council issued a report which was developed in in close collaboration with 
the President of the Commission, the President of the Eurogroup and the President of 
the  ECB,  and  which  contained  a  specific  and  time-bound  road  map  for  the 
achievement of a genuine Economic and Monetary Union. It was structured around the 
areas  of  an  integrated  financial-,  budgetary  and  economic  policy  framework  and 
democratic legitimacy and accountability. On 14 December 2012, the Heads of State 
or Government decided on work to be taken forward on a roadmap for the completion 
of  EMU,  recognising  the  interdependence  between  the  economies  of  the  euro  area 
Member States and the benefits that stability in the euro area can bring to its members 
and to the European Union as a whole.  

The  European  Parliament  has  been  duly  involved  in  the  European  Semester  and 
expressed  its  views  on  the  deepening  of  the  economic  and  monetary  union  in  its 
resolution  of  20  November  2012  “Towards  a  genuine  Economic  and  Monetary 
Union”9. 

Crisis  management  in  the  euro  area  has  been  characterised  by  strong  resolve.  The 
commitment of all Member States and EU institutions to safeguarding the integrity of 
the euro area has been clearly put beyond question. However, the effectiveness of euro 
area governance as well as the conduct of crisis management by the Eurogroup need to 
be  further  improved  to  fully  ensure  effective  coordination  at  the  euro  area  level. 
Strengthened  coordination  is  also  needed  to  arrive  at  a  coherent  aggregate  policy 
stance  in  the  euro  area  and  to  ensure  that  the  necessary  policy  measures  are 
implemented.  Achieving  these  goals  will  bolster  the  confidence  of  citizens  and 
markets,  and  thereby  contribute  to  economic  recovery  and  financial  stability  in  the 
euro area. 

The implementation of two-pack will further strengthen budgetary surveillance in the 
euro area. The two-pack legislation assigns a role to the Eurogroup in discussing the 
draft budgets of individual Member States as well as the budgetary prospects for the 
euro  area  as  a  whole  in  view  of  ensuring  an  appropriate  overall  fiscal  stance.  These 
discussions  take  place  on  the  basis  of  the  Commission's  opinions  of  the  draft 
budgetary  plans  of  the  euro  area  Member  States  and  the  of  the  overall  euro  area 
assessment by the Commission of the draft budgetary plans and their interaction. For 
fiscal consolidation across the euro area, the challenge is to put the debt-to-GDP ratio 
on  a  steadily  declining  path  over  time.  This  can  be  done  by  pursuing  differentiated, 
growth-friendly fiscal consolidation policies while boosting the growth potential of the 
euro  area.  The  corrective  arm  of  the  Stability  and  Growth  Pact  foresees  budgetary 
adjustment  as  defined  in  structural  terms  taking  into  account  cross-country  country 
differences  in  risks  to  sustainability,  both  in  short  and  medium  term,  and  allows  the 
automatic stabilisers to function along the adjustment path. The preventive arm of the 
Stability  and  Growth  Pact  foresees  a  gradual  adjustment  towards  the  Medium  Term 
Objectives with the annual structural improvement of 0.5% as a benchmark. This can 
be modulated on a country specific basis taking  into  account  cyclical  conditions  and 
debt  sustainability  risk.  The  credibility  of  fiscal  policy  over  the  medium-term  would 

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COM(2012) 510 final. 
COM(2012) 511 final and COM(2012) 512 final. 
The  resolution  of  20  November  2012  “Towards  a  genuine  Economic  and  Monetary  Union”,  see 
P7_TA(2012)0430. 

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be  reinforced  by  if  the  composition  of  government  expenditure  and  revenues  better 
reflecting  the  growth  impact  of  the  different  spending  items  and  revenue  sources. 
Furthermore,  the  growth  potential  of  the  economy  can  be  enhanced  by  further 
structural  reforms  and  by  exploiting  available  budgetary  margins  to  foster  public 
investment  in  the  euro  area,  using  the  scope  provided  by  the  Stability  and  Growth 
Pact.  

(8)  Most  risk  indicators  related  to  EU  financial  markets  as  well  as  market  sentiment 
improved  compared  to  2012  as  the  intensity  of  self-fulfilling  and  destructive 
confidence spirals has dissipated. However, significant market fragmentation remains. 
Improved funding conditions for banks are yet to feed through to a pick-up of credit 
for  the  real  economy  and  significant  differences  persist  across  Member  States  as 
regards bank lending activity and cost of funding to the private sector. Facilitating an 
orderly  deleveraging  of  both  the  banking  sector  and  the  non-financial  private  sector 
while  sustaining  the  flow  of  new  credit  for  productive  uses  in  the  real  economy  and 
particularly SMEs, are the key challenge at the current conjuncture.  

(9) 

Further  repairing  banks'  balance  sheets  and  continuing  the  strengthening  of  equity 
buffers,  where  needed,  would  contribute  to  repairing  the  credit  channel.  In  this 
context,  asset  quality  reviews  and  stress  tests  by  the  SSM  and  EBA  will  provide 
transparency  of  banks'  balance  sheets,  help  identify  any  remaining  pockets  of 
vulnerability,  and  hence  reinforce  confidence  in  the  sector  as  a  whole.  The  risk  of 
further financial-market fragmentation and financial turmoil illustrates the importance 
for  the  euro  area  of  rapidly  moving  ahead  with  the  creation  of  the  Banking  Union 
while avoiding ad hoc approaches to bank resolution.  

(10)  Structural  reforms  are  needed  across  the  euro  area  to  improve  the  functioning  of 
product  and  labour  markets  in  order  to  promote  competitiveness,  to  strengthen  the 
ongoing  adjustment  process  and  to  guarantee  a  sustainable  reallocation  of  resources. 
Moreover, structural reforms play an essential role in facilitating the rebalancing and 
deleveraging  process.  For  deficit  countries,  competitiveness  gains  will  increase  net 
exports,  which  help  in  rebalancing  the  growth  pattern  towards  more  productive,  less 
labour-intensive  tradable  sectors,  while  supporting  economic  recovery  and  bringing 
down debt ratios. At the same time, reforms to improve competition in countries with 
a  current  account  surplus  could  contribute  to  the  reallocation  of  resources  and  help 
boosting  investment  in  non-tradable  sectors.  This  would  strengthen  the  role  of 
domestic demand in the composition of growth making the adjustment in the euro area 
more symmetric. At the same time, the crisis had largely asymmetric effects on euro-
area Member States’ employment, with countries most hit being those with the most 
severe  compression  of  domestic  demand  linked  to  current  account  reversals.  In  the 
absence  of  an  effective  and  quick  absorption  of  cyclical  unemployment,  hysteresis 
effects,  whereby  unemployment  becomes  entrenched  and  less  sensitive  to  wage 
dynamics, may materialise. Structural reforms in the labour market therefore remain of 
particular importance to mitigate risks for social cohesion and future growth potential 
in the euro area. By signing the Treaty on Stability, Coordination and Governance in 
the  Economic  and  Monetary  Union,  on  2  March  2012,  the  euro  area  Member  States 
committed themselves to coordinating ex ante their national plans for major economic 
reforms.  The  impact  of  the  measures  already  adopted  should  be  monitored  by  the 
Eurogroup, with a view of encouraging further action where necessary, and to step up 
the ambition of reforms in line with the country specific recommendations. 

HEREBY  RECOMMENDS  that  euro  area  Member  States  take  action,  individually  and 
collectively, without prejudice to the competences of the Council as regards the coordination 

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of economic policies of the Member States, but in particular in the context of economic policy 
coordination in the framework of the Eurogroup, within the period 2013-2014 to: 

1. 

2. 

3. 

4. 

5. 

Take collective action in the Eurogroup to ensure a coherent policy stance across the 
euro area, and to deliver the necessary policy decisions which are needed to ensure 
the good functioning of the euro area. Allow the Eurogroup to play a central role in 
the  strengthened  surveillance  framework  applicable  to  euro  area  Member  States  to 
coordinate  and  monitor  reforms  at  national  and  at  the  euro  area  level  that  are 
necessary for a stable and robust euro area and to ensure policy coherence. 

Ensure that the Eurogroup monitors and coordinates fiscal policies of the euro area 
Member States and the implied aggregate fiscal stance for the euro area as a whole to 
ensure a growth friendly and differentiated fiscal policy. To this end the Eurogroup 
should discuss the Commission opinions of the draft budgetary plans of each of the 
euro area Member States, and the budgetary situation and prospects for the euro area 
as  a  whole  on  the  basis  of  the  overall  assessment  by  the  Commission  of  the  draft 
budgetary  plans  and  their  interaction.  The  coordination  shall  contribute  to  ensuring 
that  the  pace  of  fiscal  consolidation  is  differentiated  according  to  the  fiscal  and 
economic  situation  of  the  euro  area  Member  States  with  the  budgetary  adjustment 
defined  in  structural  terms,  allowing  the  automatic  stabilisers  to  function  along  the 
adjustment path and that, in view of reinforcing the credibility of fiscal policy over 
the  medium  term,  fiscal  consolidation  is  supported  by  an  overall  efficient  and 
growth-friendly  mix  of  expenditure  and  revenue  and  by  appropriate  structural 
reforms which enhance the economic growth potential. 

Assess,  in  the  framework  of  the  Eurogroup,  the  reasons  behind  the  differences  in 
lending  rates  especially  to  SMEs  across  the  euro  area  Member  States;  explore  the 
consequences  of  the  fragmentation  of  the  financial  markets  in  the  euro  area  and 
advise on ways to overcome it. 

Building  on  the  recapitalisation  and  the  restructuring  of  the  past  years,  promote 
further balance-sheet repair among banks as a means to reverse fragmentation in the 
single market and improve the flow of credit to the real economy, particularly SMEs. 
To  this  end:  (a)  ensure  that  the  balance  sheet  assessments  and  stress  tests  to  be 
conducted  by  the  Single  Supervisory  Mechanism  (SSM)  in  co-operation  with  the 
European  Banking  Authority  (EBA)  are  concluded  in  accordance  with  the  agreed 
timeline; (b) ensure a level playing field in applying burden-sharing requirements in 
the  recapitalisation  of  banks;  (c)  put  in  place  credible  fiscal  backstops  for  possible 
recapitalisation of banks ahead of balance sheet assessments and stress; (d) remove 
supervisory  incentives  for  banks  to  match  asset  and  liabilities  within  national 
borders;  and  (e)  accelerate  the  necessary  steps  to  establish  the  Banking  Union, 
comprising  the  SSM,  a  single  resolution  mechanism,  a  capacity  for  bail-in,  a 
common resolution fund and a common fiscal backstop including the possibility for 
direct recapitalisation of financial institutions.  

Coordinate  ex  ante  the  major  economic  reform  plans  of  the  Member  States  whose 
currency is the euro. Monitor the implementation of structural reforms, notably in the 
labour  and  product  markets  and  assess  their  impact  on  the  euro  area,  taking  into 
account  the  Council  recommendations  to  individual  euro  area  Member  States. 
Promote further adjustment in the euro area, ensuring that it proceeds in a balanced 
and  structural  way,  by  following  thoroughly  the  reforms  that  address  distortions  to 
saving and investment behaviour in Member States with both current account deficits 
and  surpluses.  Take  the  necessary  steps  for  an  effective  implementation  of  the 

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Macroeconomic  Imbalances  Procedure,  notably by  assessing  progress  in  reform 
commitments  in  Member  States  experiencing  excessive  imbalances  and  in  reform 
implementation in Member States with imbalances requiring decisive action to limit 
negative spillovers to the rest of the euro area. 

Done at Brussels,  

For the Council 
The President 

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