The Euro Plus Pact : how integration into the EU framework can give new momentum for structural reforms in the euro area. Issue 3 / 2015, 08, May.
Date: 2016-11-15
Institutions: European Political Strategy Centre
Subjects: EU policy, common strategy, economic reform, euro area, financial policy, stability programme, structural policy

EPSC Strategic Notes

Issue 3 / 2015
08 May

The Euro Plus Pact  

How Integration into the EU Framework can Give New 
Momentum for Structural Reforms in the Euro Area

The Euro Plus Pact originated at the height of the crisis as one of the measures to stabilise the euro area. Driven 
by French and German concerns that at least part of the financial and economic fallout was due to underlying 
factors that had hitherto not featured prominently in the crisis response – such as Unit Labour Costs and 
employment rates – the Euro Plus Pact was conceived as an intergovernmental solution to increase fiscal and 
economic discipline in the Member States. After integration in the euro area governance framework – and guided 
by the largely ineffective Open Method of Coordination – it has since lost traction with Member States and suffers 
from a lack of political ownership. The case for reviving it is nevertheless strong, and rests on two premises: 1) as 
the pressures of the crisis have abated, it is crucial that Member States do not become complacent and miss the 
opportunity afforded by low oil prices and exchange rate, as well as quantitative easing by the European Central 
Bank; 2) the Pact can serve as a vehicle for stronger Member State engagement in – and ownership of – the 
overall economic governance process. The Euro Plus Pact is an untapped resource for the euro area to achieve 
convergence by complementing other instruments, such as the European Semester, and cover areas where the 
Treaty does not specify provisions, such as the labour market. The Euro Plus Pact was concluded on 25 March 
2011, with all seventeen euro zone members as signatories – Austria, Belgium, Cyprus, Estonia, Finland, France, 
Germany, Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia and Spain – as well 
as six additional countries: Bulgaria, Denmark, Latvia, Lithuania, Poland and Romania. In the meantime, Latvia and 
Lithuania have become members of the euro area.  

Untapped Potential 
The Euro Plus Pact addressed key policy areas but 
it largely failed to incentivise structural reforms 
across the board and over time. Nonetheless, many 
Member States have undertaken significant reform 
efforts in past years, prompted primarily by market 
pressure. The overriding challenge is how to rekindle 
the appetite for these reforms that remain necessary 
now that intense market scrutiny has abated. 

Member State Ownership is Key 
A fundamental lesson from the reform of Economic 
and Monetary Union governance is that coordination 
needs to span across policy areas, with better 
connectivity between different fields and stronger 
safety valves against possible risks. The process 
needs to combine sufficient oversight from the EU 
level as well as Member State ownership. 

Momentum for Relaunch 
The Euro Plus Pact is largely dormant and receives 
little attention in Member States, as evidenced by 
poor take-up in the National Reform Programmes. 
However, the case for reviving the Pact is strong 
given that it has been agreed by all euro area 
countries as the framework through which to keep 
track of structural reforms. The guiding idea behind 
the Euro Plus Pact of encouraging greater national 
reform efforts in a fashion that creates a positive-
sum, remains valid and innovative.

Anchored in the European Semester 
To become relevant, the Pact needs to be firmly 
integrated into the European Semester and into the 
framework of EU law, to provide better incentives for 
Member State engagement. The overall positioning 
needs to be recast and incentives drawn up. 

EPSC Strategic Notes are analytical papers on topics chosen by the President of the European Commission. They are produced by the European 
Political Strategy Centre (EPSC), the European Commission’s in-house think tank. 

Disclaimer
The views expressed in the EPSC Strategic Notes series are those of the authors and do not necessarily correspond to those of the European Commission.

1

EPSC Strategic Notes

1. The Challenge of Addressing 
Competitiveness in the Midst of an 
Economic Meltdown 
The Euro Plus Pact grew out of a Franco-German 
proposal in February 2011 for a so-called 
“Competitiveness Pact” (see page 3: The Euro Plus Pact: 
Key Facts). As an intergovernmental initiative, 
it reflected the dominant perception in some 
capitals of the need for a more rigorous approach 
towards economic and financial imbalances. 
At its inception, it was an ambitious strategy to 
mobilise both Member States and the Commission 
to accelerate and incentivise structural reforms. The 
initial idea was to “achieve a new quality of economic 
policy coordination”1, to improve competitiveness and 
avoid harmful divergences in performance. Despite 
its broad scope and its membership open to non-
euro area countries, the Euro Plus Pact has often 
been criticised as being excessively focused on 
differences in cost competitiveness in the euro 
area. Since in reality it was primarily capital movements 
that led to the overheating of labour markets, the 
Euro Plus Pact was seen as targeting “the messenger 
of economic imbalances rather than the underlying 
causes”.2

Nonetheless, monitoring economic performance on 
an ongoing basis is vital for the European Union in 
general and the euro area in particular. The Euro Plus 
Pact analyses key indicators that are crucial to evaluate 
progress on structural reforms, such as Unit Labour Costs, 
sustainability of public finances and the employment 
rate. But, given the complex causality of economic 
processes in a common currency area, the scope of 
reforms covered needs to be broadened with closer 
coordination across policy areas. Looking back at the 
first four years of the Euro Plus Pact, it appears that the 
overall approach was disjointed, replicating the traditional 
silo structure of economic management. This meant that 
problems were treated in an ad hoc fashion, without 
full grasp of their interdependence. While this may have 
been a necessity in the midst of the crisis, the improving 
economic situation at the moment allows for a more 
comprehensive and sustainable process. 

Box I: Competitiveness Loss More 
Strongly Associated with Capital Flows
Evidence shows that the correlation between changes 
in export market shares (as reported by the Eurostat 
Macroeconomic Imbalance Procedure Scoreboard) 
against the change of nominal Unit Labour Costs (ULCs) 
is rather weak (Figure 1). On the other hand, there is 
a strong positive correlation between the increase in 
nominal Unit Labour Costs and the strength of domestic 
demand (Figure 2).

Graph 1: Nominal Unit Labour Costs  
and Export Markets 
Percentage change, 2002-2007

Ireland

Spain

Portugal

Finland

30

25

20

15

10

5

0

-5

-10

y=-02377x + 7.7459
R2=0.1274

Austria

Germany

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Exports in world markets

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30

Source: Vinhas de Souza, L., “Euro Area Periphery: Structural Reforms 
Have Significantly Improved External Imbalances, But Full Resolution 
May Still Take Years”, Moody’s, 2012.

Graph 2: Nominal Unit Labour Costs  
and Domestic Demand 
Percentage change, 1999-2007

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y=0.3686x + 2.6404
R2=0.7709

Ireland

Portugal

Spain

Finland

Austria

Germany

50

100

150

Domestic Demand

Source: Vinhas de Souza, L., “Euro Area Periphery: Structural Reforms 
Have Significantly Improved External Imbalances, But Full Resolution 
May Still Take Years”, Moody’s, 2012.

Importantly, domestic demand in the “periphery” 
of the euro area in the run-up to the sovereign 
debt crisis was largely financed by capital flows 
(surplus savings) from the euro area core. Thus, 
the deterioration of the periphery countries’ external 
positions was at least partially rooted in dissaving 
by the private sector, which chose to use the large 
financing flows from core euro area economies  
to finance domestic spending, frequently in non-
productive ways.3

2

 
 
 
 
 
 
EPSC Strategic Notes

2. Bottom-up Dynamic and National 
Buy-in is Key for Success  
The key idea of the Euro Plus Pact is to incentivise 
Member States to undertake reforms in areas 
that fall under their national competence.  
The Pact rightly defines these as crucial for the future 
of the common currency. In spite of a number of efforts 
aimed at creating solutions in areas such as banking 
supervision at the European level, the future of the  
euro rests squarely on the ability to bring to life 
mutually reinforcing national reform commitments:  
the implementation of reforms in a Member State 
would not only reinforce the effectiveness of 
other reforms in that country, but across the euro 
area as a whole. 

In line with the original concept, the selection of the 
specific policy measures for implementation has 
remained the responsibility for each country, with  
“a strong central role for the Commission in 
the monitoring of the implementation of the 
commitments”.4 The commitments were to be included 
in the National Reform Programmes and Stability 
Programmes, meant to be subsequently assessed by 
the Council, the Commission and the Eurogroup in the 
context of the European Semester. 

Four years into its implementation, there is a clear 
ownership deficit on the part of the Member States which 
see the Euro Plus Pact as part of a broader set of EU-
level obligations, without recognising its special role. In 
fact, the Pact was meant to encourage Member States to 
undertake more ambitious reforms in a way that creates 
positive-sum at the EU level. Hence, the main weakness 
of the Pact lies in the insufficient recognition of 
its bottom-up character and lack of incentives for 
Member States to take action. 

3. Integrating the Euro Plus Pact in 
the EU Framework
Considerable effort would be needed to revive the Euro 
Plus Pact. The initiative has largely been neglected 
by policymakers as the euro area governance 
framework developed further. There is hardly a mention 
of the Euro Plus Pact commitments in the latest set of 
National Reform Programmes, even though they were 
meant to be their main hub. The political traction of 
the Pact has been weak, with the Member States not 
being able to distinguish its provisions from those of 
other “Brussels-centred” mechanisms. No institution has 
provided political guidance on its implementation and 
no interest groups have exerted pressure to deliver on 
the Pact. Not surprisingly, Member States have felt no 
temptation to outshine others given the Pact’s legacy of 
the past and its lukewarm implementation. 

   The Euro Plus Pact: Key Facts 
•  The Euro Plus Pact focuses on four priority areas: 
competitiveness and employment, sustainability 
of public finances and reinforcing financial 
stability. Tax coordination is also mentioned but 
subordinated to the others.   

•  Endorsed by the Heads of State or Government 
at the European Council on 25 March 2011, the 
Euro Plus Pact grew out of a Franco-German 
initiative that led to a proposal for a so-called 
“Competitiveness Pact” in February 2011. The 
preparation began at the end of 2010 when 
economic divergences in the euro area became 
a source of concern. Originally conceived only 
for the then 17-member euro area, six non-
euro area countries signed on as well: Bulgaria, 
Denmark, Latvia, Lithuania, Poland and Romania. 
At the time, the fact that also non-euro area 
countries joined was considered by some a 
success and tribute to the attractiveness of the 
agreement.  Croatia, Czech Republic, Hungary, 
Sweden and the United Kingdom secured the 
option of signing up at a later date. 

•  All signatories are committed to implementing a 

set of reforms enforced through the  
so-called “Open Method of Coordination” – 
effectively, peer pressure. To that end, the 
European Commission collects and publishes 
various indicators that capture the progress of 
individual countries. The Euro Plus Pact is meant to 
be embedded in the new EU economic governance 
framework and the commitments taken therein 
are to be included in the National Reform 
Programmes of the concerned Member States. 

•  The Euro Plus Pact aims to further strengthen 

the economic pillar of the Economic and 
Monetary Union and achieve a new quality 
of policy coordination. It encourages cost 
competitiveness in order to reduce the 
likelihood of financial and economic imbalances. 
The underlying rationale of the Pact is that 
deteriorating cost competitiveness is an 
important factor behind the accumulation 
of current account deficits and financial 
vulnerabilities. 

3

 
EPSC Strategic Notes

The case for reviving the Euro Plus Pact rests on 
the continued need for structural reforms in all 
euro area countries. Going forward, it must become 
more evident that the future governance mechanism is 
a two-way street in which some functions need to be 
performed at the EU level and others at Member State 
level. Some elements of this new positioning are already 
underway, as underlined in the communication on 
flexibility in the Stability and Growth Pact, which gives 
countries more time to bring down deficits in return for 
reforms or investment. In addition, the revival of the 
Pact would have to be part of the effort to streamline 
the euro area governance system with fewer and 
more targeted mechanisms and a genuine partnership 
between the Commission and Member States. 

The way to do so is to more fully integrate the 
Euro Plus Pact commitments in the European 
Semester and into the framework of EU law 
(Figure 3). In the Annual Growth Survey, the Commission 
should identify areas where additional commitments 
of the Member States would be desirable. In order 
to avoid duplication, Member State commitments 
should be presented in March-April in the National 
Reform Programmes and Stability or Convergence 
Programmes in specific chapters. The commitments 

should be presented to both the President of the 
European Council and the President of the Commission 
and discussed annually by the European Council. 
Additionally, the Commission should offer guidelines 
for implementation of the commitments in the 
Country Specific Recommendations in May. Finally, the 
commitments should be part of the draft budgetary 
plans and Economic Partnership Programmes presented 
in October. This way, the Euro Plus Pact would be fully 
integrated in the existing framework while the Member 
States would gain a significant co-leadership role in the 
entire process. At the same time, the Pact would cover 
complementary policy areas, ensuring convergence in 
the real economy of euro area countries.

Additional effort will be desirable to make dialogue 
with Member States more of a two-way street, 
in which the Commission assists and guides the 
identification and implementation of commitments, but 
also listens and learns from Member State experience. 
Based on past experience, the Commission should 
refrain from a “one-size-fits-all” approach and instead 
set overall targets rather than spelling out the minutia 
of each reform, allowing Member States to design them 
in a way that suits their national circumstances. 

Graph 3: Integrating the Europlus pact in the European Semester

k
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Commision Annual Growth 
Survey and Alert 
Mechanism Report.

Commission opinion on 
draﬅ budgetary plans

Member States present 
their National Reform 
Programmes (economic 
policies) and Stability or 
Convergence Programmes 
(on budgetary policies).

Commission proposes 
Country-Speciﬁc 
Recommendations for 
budgetary, economic and 
social policies.

Member States present 
draﬅ budgetary plans and 
Economic Partership 
Programmes

November

March-April

May

October

Commision Annual Growth 
Survey identiﬁes areas for 
Member State 
commitments. 

Euro Plus Pact commitments 
are presented to both the 
President of the European 
Council and the President 
of the Commission. Annual 
European Council discussion 
on the Euro Plus Pact. 

Commission oﬀers 
guidelines for the 
implementation of 
commitments declared by 
the Member States in the 
Country Speciﬁc 
Recommendations

Commitments become part 
of the draﬅ budgetary 
plans and the Economic 
Partnership Programmes

Fully integration and signiﬁcant gain of co-leadership role from the Member States

Source: Making it happen: the European Semester

4

 
 
 
 
EPSC Strategic Notes

4. Recalibrated Focus to Enhance 
Impact and Delivery
Competitiveness improvements in the euro area in the 
past few years are impressive. A number of Member 
States have made consistent and thorough efforts and 
achieved remarkable results, reducing the divergence in 
performance that preceded the crisis. The scale of the 
adjustment is revealed by the shifts in real Unit Labour 
Costs and in the current account balance (Figure 4 and 5). 

Graph 4: Real Unit Labour Costs 
Index, 2005=100

EU

EA

Core

Periphery

106

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102

100

98

96

94

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Note: Simple average for the “core”, defined as Austria, Belgium, 
Finland, France, Germany, Luxembourg and the Netherlands. Simple 
average for the “periphery”, defined as Cyprus, Greece, Ireland, Italy, 
Portugal and Spain.
Source: Unit labour cost - quarterly database, Eurostat

Graph 5: Balance of the current account 
As a percentage of GDP

6

4

2

0

-2

-4

-6

-8

-10

-12

EU

EA

Core

Periphery

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Note: Simple average for the “core”, defined as Austria, Belgium, 
Finland, France, Germany, Luxembourg and the Netherlands. Simple 
average for the “periphery”, defined as Cyprus, Greece, Ireland, Italy, 
Portugal and Spain. 
Source: Balance of current account, Eurostat

5

These gains, however, are not necessarily structural 
and durable: the perception of a waning crisis lowers 
immediate pressure to introduce reforms, exactly at the 
moment when a more supportive economic situation, 
with lower oil prices, accomodating European Central 
Bank measures and higher growth would reduce the 
costs of implementing those. 

Faithful to its original idea, the Euro Plus Pact could 
have a role to play in ensuring that the achievements 
of the past few years are sustained. This would 
require a Competitiveness Check – a system for 
monitoring cost competiveness of national economies, 
using a benchmark that takes into account labour costs 
in the given Member State’s main trading partners. 
This system could either be Euro Plus Pact-wide and 
operated by the Commission or it could consist of a 
range of national systems with the Commission being 
responsible for the aggregation of the result (Box 
2). In addition, the impact of capital flows should be 
monitored more closely through the Alert Mechanism 
Report, which identifies problem areas in national 
economies requiring further analysis in the form  
of an in-depth review and 11 headline indicators at the 
beginning of the Annual Growth Survey process  
in November. 

At the same time, the revamped Euro Plus Pact needs to 
extend beyond issues of competitiveness and cover the 
full dimension of the Member States’ growth agendas 
that are relevant from the point of view of resilience 
of the euro area. Productivity in particular is crucial 
to achieving higher potential output and sustainable 
incomes. A holistic resilience (rather than 
competitiveness) indicator could be developed 
under the framework of the Euro Plus Pact to measure 
Member States’ progress in improving their economic 
performance and social cohesion.5

Box 2: Examples of Competitiveness 
Councils in the euro area
Belgium 
In 1996 (Law of 26 July 1996 on the promotion of 
employment and preventative measures to protect 
Competitiveness), Belgium introduced a law to promote 
employment and preserve external competitiveness vis-
à-vis France, Germany, and the Netherlands, its three 
major trading partners. Specifically, the law requires 
that the growth of nominal hourly labour costs for 
enterprises in a period of two years should not exceed 
a “wage norm”: a weighted average of the projected 
increases in labour costs in the three neighbouring 
countries. The law stipulates that overruns of the  
wage norm should be corrected in the subsequent  
wage agreements. 

EPSC Strategic Notes

Ireland 
The National Competitiveness Council was established 
in 1997. It reports to the Taoiseach on key 
competitiveness issues facing the Irish economy and 
offers recommendations on policy actions required 
to enhance Ireland’s competitive position. Each year 
the NCC publishes a report benchmarking Ireland’s 
competitiveness performance: Ireland’s Competitiveness 
Scorecard (previously named Benchmarking Ireland’s 
Performance) provides a comprehensive assessment 
of Ireland’s competitiveness performance, using over 
125 statistical indicators. The indicators are drawn 
from data sources such as OECD, Eurostat, and others. 
The Council also publishes Ireland’s Competitiveness 
Challenge. The Competitiveness Challenge report 
focuses on the national competitiveness issues of most 
importance to the enterprise sector and identifies policy 
recommendations required to address these issues. 
Ireland’s Competitiveness Challenge builds on the data 
published in Ireland’s Competitiveness Scorecard.

5. Incentivising the Member States
The promise of the Euro Plus Pact is to give Member 
States a policy and comparative framework through 
which to articulate, incentivise and implement structural 
reforms. It is easier to do so in tandem with EU partners 
and through an EU mechanism, particularly if it comes 
with “carrots” on offer. For the European institutions, the 
case is also clear: an economic governance framework 
where national reform efforts are better integrated 
would be more likely to have an impact on the euro 
area that is greater than the sum of its parts. 

In order to create such a virtuous, mutually reinforcing 
cycle, Member States need to be politically 
and financially incentivised to undertake more 
ambitious commitments. One European Council 
meeting should be devoted to the implementation 
of the Euro Plus Pact with Member States that lead 
on particular policies playing a key role (“naming and 
faming”). Prior to that, Member State governments 
could be invited to meet with the College of the 

European Commission to discuss their commitments. 
Groups of Member States could be encouraged to work 
together through “policy communities”, engaging both 
leaders and laggards in each area. 

Financial incentives for reform should also be 
considered through the following three possible 
channels:
•  short-term solutions enabling more flexible use of 

• 

the EU budget to support reforms, 
leveraging the flexibility within the existing rules of 
the Stability and Growth Pact clearly and explicitly 
towards support for reforms, 

•  a Euro Plus Pact-linked instrument to support 

specific reform efforts, which could be based on the 
“Convergence and Competitiveness Instrument”.6

6. The Euro Plus Pact: Paving the Way 
for Future Structural Reforms
The Euro Plus Pact can help to complete the euro area 
governance architecture by advancing a comprehensive 
reform agenda and generating more Member State 
engagement. Both are necessary corrections to 
streamline and fine-tune the set of mechanisms which 
was created in the heat of the crisis. Better connectivity 
between policy areas is not only necessary to reduce 
risks but can also help to create synergies and augment 
the impact of reforms. Finally, more engagement of 
the Member States is needed to break away from the 
perception of a “Brussels-imposed” process which is 
seen as a burden and not a trigger for action. 

Given its dormant state at the present time, the Euro 
Plus Pact would need to be essentially relaunched to 
achieve that objective but this time with clear and 
enduring political buy-in, as well as precise deliverables, 
timelines and division of labour. The key advantage of 
the Euro Plus Pact is that it is already agreed, it covers 
the areas that require most urgent attention and it is 
based on a bottom-up logic with co-leadership from the 
Member States and the Commission. 

Further Readings:

•  Briguglio, L. et al. (2009) “Conceptualizing and Measuring Economic Resilience”, University of Malta.

•  Dieppe, A. et al. (2012), “Competitiveness and external imbalances within the euro area”, Occasional Paper Series, No. 139, European Central 

Bank.

•  Gabrisch, H. and Staehr, K. (2014), “The Euro Plus Pact. Cost Competitiveness and External Capital Flows in the EU Countries”, Working Paper 

Series, No. 1650, ECB 

•  Fernald, J. and Wang, B. (2015), “The Recent Rise and Fall of Rapid Productivity Growth”, FRBSF Economic Letter.

•  Gros, D. and Alcidi, C. (2011), “Sense and nonsense of the Euro-Plus Pact”, The 2011 TGAE Report, Notre Europe.

•  Sapir, A. and Wolff; G. (2015), “Euro-Area Governance: What to Reform and How to Do It”, Bruegel Policy Brief, Issue 2015/01.

•  Stephane Hallegatte, S. (2014), “Economic Resilience: Definition and Measurement”, Policy Research Working Paper. 6852, World Bank.

6

EPSC Strategic Notes

Notes

1.  The Euro Plus Pact. Stronger Economic Policy Coordination for 

4.  The Euro Plus Pact. Stronger Economic Policy Coordination for 

Competitiveness and Convergence. Annex I to European Council 
Conclusions, 24-25 March 2011. 

Competitiveness and Convergence. European Council Conclusions, 
24-25 March 2011. 

2.  Hubert Gabrisch and Karsten Staehr, “The Euro Plus Pact. Cost 

Competitiveness and External Capital Flows in the EU Countries”, 
ECB Working Paper Series, March 2014. 

3.  Vinhas de Souza, L., “Euro Area Periphery: Structural Reforms Have 
Significantly Improved External Imbalances, But Full Resolution May 
Still Take Years”, Moodys, 2012..

5.  Briguglio et al., 2009, provides an example of how such an index 
could be constructed, combining both “structural” elements of an 
economy (for instance, its demographic profile) and those more 
amenable to policy decisions (like fiscal deficit).

6.  http://ec.europa.eu/economy_finance/articles/governance/

pdf/2039_165_final_en.pdf.

ANNEX

The Euro Plus Pact 
Stronger Economic Policy Coordination 
For Competitiveness And Convergence 
(25 March 2011)
This Pact has been agreed by the euro area Heads of 
State or government and joined by Bulgaria, Denmark, 
Latvia, Lithuania, Poland, Romania to strengthen the 
economic pillar of the monetary union, achieve a 
new quality of economic policy coordination, improve 
competitiveness, thereby leading to a higher degree of 
convergence. This Pact focuses primarily on areas that 
fall under national competence and are key for increasing 
competitiveness and avoiding harmful imbalances. 
Competitiveness is essential to help the EU grow faster 
and more sustainably in the medium and long term, 
to produce higher levels of income for citizens, and to 
preserve our social models. Other Member States are 
invited to participate on a voluntary basis. 

This renewed effort for stronger economic policy 
coordination for competitiveness and convergence rests 
on four guiding rules:

a.  It will be in line with and strengthen the existing 
economic governance in the EU, while providing 
added value. It will be consistent with and build 
on existing instruments (Europe 2020, European 
Semester, Integrated Guidelines, Stability and 
Growth Pact and new macroeconomic surveillance 
framework). It will involve a special effort going 
beyond what already exists and include concrete 
commitments and actions that are more ambitious 
than those already agreed, and accompanied 
with a timetable for implementation. These new 
commitments will thereafter be included in the 
National Reform and Stability Programmes and 
be subject to the regular surveillance framework, 
with a strong central role for the Commission 

7

in the monitoring of the implementation of the 
commitments, and the involvement of all the relevant 
formations of the Council and the Eurogroup. The 
European Parliament will play its full role in line with 
its competences. Social partners will be fully involved 
at the EU level through the Tripartite Social Summit.  

b.  It will be focused, action oriented, and cover 

priority policy areas that are essential for 
fostering competitiveness and convergence. It 
will concentrate on actions where the competence 
lies with the Member States. In the chosen policy 
areas common objectives will be agreed upon 
at the Heads of State or Government level. 
Participating Member States will pursue these 
objectives with their own policy-mix, taking into 
account their specific challenges. 

c.  Each year, concrete national commitments 

will be undertaken by each Head of State or 
Government. In doing so, Member States will take 
into account best practices and benchmark against 
the best performers, within Europe and vis-à-vis 
other strategic partners. 

The implementation of commitments and progress 
towards the common policy objectives will be 
monitored politically by the Heads of State 
or Government of the euro area and participating 
countries on a yearly basis, on the basis of a report 
by the Commission. In addition, Member States 
commit to consult their partners on each major 
economic reform having potential spill-over effects 
before its adoption. 

d.  Participating Member States are fully committed to 
the completion of the Single Market which is key to 
enhancing the competitiveness in the EU and the 
euro area. This process will be fully in line with the 
treaty. The Pact will fully respect the integrity of 
the Single Market.

 
EPSC Strategic Notes

Our goals
Participating Member States undertake to take all 
necessary measures to pursue the following objectives:
•  Foster competitiveness
•  Foster employment
•  Contribute further to the sustainability of public finances
•  Reinforce financial stability 

Each participating Member State will present the 
specific measures it will take to reach these goals. If a 
Member State can show that action is not needed on 
one or the other areas, it will not include it. The choice 
of the specific policy actions necessary to achieve the 
common objectives remains the responsibility of 
each country, but particular attention will be paid 
to the set of possible measures mentioned below.

Concrete policy commitments  
and monitoring
Progress towards the common objectives above will 
be politically monitored by the Heads of State or 
Government on the basis of a series of indicators 
covering competitiveness, employment, fiscal 
sustainability and financial stability. Countries facing 
major challenges in any of these areas will be identified 
and will have to commit to addressing these challenges 
in a given timeframe.

a. Foster competitiveness
Progress will be assessed on the basis of wage and 
productivity developments and competitiveness 
adjustment needs. To assess whether wages are 
evolving in line with productivity, unit labour costs (ULC) 
will be monitored over a period of time, by comparing 
with developments in other euro area countries and in 
the main comparable trading partners. For each country, 
ULCs will be assessed for the economy as a whole 
and for each major sector (manufacturing; services; 
as well as tradable and non-tradable sectors). Large 
and sustained increases may lead to the erosion of 
competitiveness, especially if combined with a widening 
current account deficit and declining market shares for 
exports. Action to raise competitiveness is required in 
both all countries, but particular attention will be paid to 
those facing major challenges in this respect. To ensure 
that growth is balanced and widespread in the whole 
euro area, specific instruments and common initiatives 
will be envisaged to foster productivity in regions 
lagging behind.

Each country will be responsible for the specific policy 
actions it chooses to foster competitiveness, but the 
following reforms will be given particular attention:

(i) respecting national traditions of social dialogue 
and industrial relations, measures to ensure costs 
developments in line with productivity, such as:
•  review the wage setting arrangements, and, where 

necessary, the degree of centralisation in the 
bargaining process, and the indexation mechanisms, 
while maintaining the autonomy of the social 
partners in the collective bargaining process;

•  ensure that wages settlements in the public sector 
support the competitiveness efforts in the private 
sector (bearing in mind the important signalling effect 
of public sector wages).

(ii) measures to increase productivity, such as:
•  further opening of sheltered sectors by measures 
taken at the national level to remove unjustified 
restrictions on professional services and the retail 
sector, to foster competition and efficiency, in full 
respect of the Community acquis;

•  specific efforts to improve education systems and 

promote R&D, innovation and infrastructure;
•  measures to improve the business environment, 
particularly for SMEs, notably by removing red 
tape and improving the regulatory framework (e.g. 
bankruptcy laws, commercial code).

b. Foster employment
A well functioning labour market is key for the 
competitiveness of the euro area. Progress will be 
assessed on the basis of the following indicators: 
long term and youth unemployment rates, and labour 
participation rates.

Each country will be responsible for the specific policy 
actions it chooses to foster employment, but the 
following reforms will be given particular attention:
• 

labour market reforms to promote “flexicurity”, reduce 
undeclared work and increase labour participation;
life long learning;

• 
•  tax reforms, such as lowering taxes on labour to 

make work pay while preserving overall tax revenues, 
and taking measures to facilitate the participation of 
second earners in the work force.

c. Enhance the sustainability of public finances
In order to secure the full implementation of the Stability 
and Growth Pact, the highest attention will be paid to:

Sustainability of pensions, health care and  
social benefits
This will be assessed notably on the basis of the 
sustainability gap indicators1. These indicators measure 
whether debt levels are sustainable based on current 

8

EPSC Strategic Notes

policies, notably pensions schemes, health care and benefit 
systems, and taking into account demographic factors.

Reforms necessary to ensure the sustainability and 
adequacy of pensions and social benefits could include:
•  aligning the pension system to the national 

demographic situation, for example by aligning the 
effective retirement age with life expectancy or by 
increasing participation rates;
limiting early retirement schemes and using targeted 
incentives to employ older workers (notably in the 
age tranche above 55).

• 

National fiscal rules
Participating Member States commit to translating EU 
fiscal rules as set out in the Stability and Growth Pact 
into national legislation. Member States will retain 
the choice of the specific national legal vehicle to 
be used, but will make sure that it has a sufficiently 
strong binding and durable nature (e.g. constitution 
or framework law). The exact formulation of the rule 
will also be decided by each country (e.g. it could take 
the form of a “debt brake”, rule related to the primary 
balance or an expenditure rule), but it should ensure 
fiscal discipline at both national and sub-national levels.
The Commission will have the opportunity, in full respect 
of the prerogatives of national parliaments, to be 
consulted on the precise fiscal rule before its adoption 
so as to ensure it is compatible with, and supportive of, 
the EU rules.

d. Reinforce financial stability
A strong financial sector is key for the overall stability 
of the euro area. A comprehensive reform of the 
EU framework for financial sector supervision and 
regulation has been launched.

In this context, Member States commit to putting in 
place national legislation for banking resolution, in full 
respect of the Community acquis. Strict bank stress 
tests, coordinated at EU level, will be undertaken on 
a regular basis. In addition, the President of the ESRB 
and the President of the Eurogroup will be invited 
to regularly inform Heads of State or Government 

on issues related to macro-financial stability and 
macroeconomic developments in the euro area requiring 
specific action. In particular, for each Member State, the 
level of private debt for banks, households and non-
financial firms will be closely monitored.

In addition to the issues mentioned above, attention 
will be paid to tax policy coordination. Direct taxation 
remains a national competence. Pragmatic coordination 
of tax policies is a necessary element of a stronger 
economic policy coordination in the euro area to support 
fiscal consolidation and economic growth. In this context, 
Member States commit to engage in structured discussions 
on tax policy issues, notably to ensure the exchange 
of best practices, avoidance of harmful practices and 
proposals to fight against fraud and tax evasion.

Developing a common corporate tax base could be a 
revenue neutral way forward to ensure consistency 
among national tax systems while respecting national 
tax strategies, and to contribute to fiscal sustainability 
and the competitiveness of European businesses.

The Commission has presented a legislative proposal on 
a common consolidated corporate tax base.

Concrete yearly commitments
In order to demonstrate a real commitment for 
change and ensure the necessary political impetus to 
reach our common objectives, each year participating 
Member States will agree at the highest level on a set 
of concrete actions to be achieved within 12 months. 
The selection of the specific policy measures to be 
implemented will remain the responsibility of each 
country, but the choice will be guided by considering 
in particular the issues mentioned above. These 
commitments will also be reflected in the National 
Reform Programmes and Stability Programmes 
submitted each year which will be assessed by the 
Commission, the Council, and the Eurogroup in the 
context of the European Semester.

Notes

1.  The sustainability gap are indicators agreed by the Commission and 

Member States to assess fiscal sustainability.

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