COMMISSION STAFF WORKING DOCUMENT Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK, THE ECONOMIC AND SOCIAL COMMITTEE, THE COMMITTEE OF THE REGIONS AND THE EUROPEAN INVESTMENT BANK on the review of the flexibility under the Stability and Growth Pact
Date: 2018-05-23
Institutions: Directorate-General for Economic and Financial Affairs, European Commission
Subjects: budget policy, economic growth, economic stabilisation, fiscal policy, investment, stability pact, structural adjustment

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 23.5.2018 SWD(2018) 270 final  COMMISSION STAFF WORKING DOCUMENT Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK, THE ECONOMIC AND SOCIAL COMMITTEE, THE COMMITTEE OF THE REGIONS AND THE EUROPEAN INVESTMENT BANK on the review of the flexibility under the Stability and Growth Pact {COM(2018) 335 final}  
 
 
INTRODUCTION 

This technical annex presents the calculations underpinning the review of the commonly 
agreed  position  on  flexibility  in  the  Stability  and  Growth  Pact  (SGP).  On  13  January 
2015,  the  Commission  issued  a  Communication  on  "making  the  best  use  of  the  flexibility 
within the existing rules of the Stability and Growth Pact". It provided new guidance on how 
to apply the existing rules of the Stability and Growth Pact (the "Pact"). Those clarifications 
by the Commission were discussed with Member States and resulted in the publication of a 
common  position  agreed  by  the  Economic  and  Financial  Committee  (EFC)  in  November 
2015,  which  was  endorsed  by  the  ECOFIN  Council  on  12  February  2016.1  The  commonly 
agreed position on flexibility requests the Commission to review the new approach by the end 
of June 2018. In November 2017, the European Fiscal Board (EFB) in its first annual report2 
made  an  assessment  of  the  fiscal  framework,  including  the  use  of  flexibility,  pointing  to  a 
balanced  implementation.  The  EFB  assessment  highlighted  that  the  implementation  of  the 
Pact  succeeded  in  avoiding  on  the  one  hand  a  major  relaxation  of  the  rules,  potentially 
detrimental to sustainability of public finances, and, on the other  hand, a rigid application of 
the rules, which could have undermined the continuation of a still fragile recovery. 

The  ECOFIN  Council  asked  the  Commission  to  review  two  key  elements  of  the 
commonly  agreed  position  (see  Box  1  for  details).  First,  the  Commission  is  to  review  the 
effectiveness  of  the  so-called  flexibility  for  cyclical  conditions,  which  mainly  specifies  a 
modulation of the required fiscal adjustment along the economic cycle and the debt level of 
Member States, while ensuring an appropriate fiscal adjustment. Second, the Commission is 
to review the application of the so-called structural reform and investment clauses, which aim 
at promoting structural reforms and investment through a temporary and limited relaxation of 
the required fiscal adjustment.3 

Box  1:  Key  elements  of  the  review  according  to  the  commonly  agreed  position  on 
flexibility 

The commonly agreed position asks the Commission to review the following two elements:  

Review of the flexibility for cyclical conditions 

"The  Commission  shall  submit  a  review  report  to  the  Council  before  30  June  2018  on  the 
effectiveness of the matrix specifying the annual fiscal adjustment towards the Medium-Term 
budgetary Objective (MTO). In particular, the review will examine the success of the matrix 
in  promoting  counter-cyclical  fiscal  policies  and  the  achievement  by  the  Member  States  of 
their MTOs, thereby creating the necessary room to accommodate economic downturns. The 
review will also assess whether the new matrix has ensured a reduction in government debt at 
a satisfactory pace, thereby contributing to the long-term sustainability of public finances, in 
line with the requirements under the debt rule as specified in Sub-section B(1) of Section I of 
the Code of Conduct" (see Chapter 2.2. of the commonly agreed position on flexibility in the 
SGP).  

Review of the structural reform and investment clause 

1  http://data.consilium.europa.eu/doc/document/ST-14345-2015-INIT/en/pdf 
2 European Fiscal Board, Annual Report 2017, 15 November 2017 
3 The Vade mecum on the Stability and Growth Pact – 2018 edition explains how the flexibility clause for cyclical conditions 

as well as the structural reform and investment clauses were implemented in Chapter 1.3.2. 

1 

 
 
                                                 
"By the end of June 2018, the Commission will carry out a review on the application of the 
structural reform and investment clauses, taking full account of the economic situation at that 
time and the achievement of its objectives. The review will examine the achievement by the 
Member  States  of  their  MTOs,  thereby  creating  the  necessary  room  to  accommodate 
economic  downturns.  The  review  will  examine  to  what  extent  the  projects  eligible  for  the 
investment clause were co-funded by the EU and whether the investment  clause led to  new 
investments.  The  review  will  also  examine  the  implications  of  the  continuation  of  the 
investment  clause.  The  review  may,  as  appropriate,  be  accompanied  by  proposals  to  the 
Economic  and  Financial  Committee  for  a  possible  modification  of  the  commonly  agreed 
position  on  flexibility  in  the  Stability  and  Growth  Pact"  (see  Chapter  5  of  the  commonly 
agreed position on flexibility in the Stability and Growth Pact). 

The technical annex follows an analytical and evidence-based approach and reviews the 
use of the flexibility based on past experience.  It remains factual, refraining from making 
policy  suggestions.  It  is  structured  in  two  parts.  Part  I  reviews  the  effectiveness  of  the 
flexibility for cyclical conditions. Part II reviews the application of the structural reform and 
investment clauses.  

I.  REVIEW OF THE FLEXIBILITY FOR CYCLICAL CONDITIONS 

This part reviews the effectiveness of the flexibility for cyclical conditions. In line with 
the ECOFIN mandate, the technical annex addresses three main questions.  It examines 
whether the flexibility for cyclical conditions (i) promoted counter-cyclical fiscal policies by 
modulating  the  fiscal  effort  along  the  economic  cycle  and  the  debt  level  of  Member  State 
(Chapter  I.1),  (ii)  contributed  to  the  achievement  of  sound  budgetary  position  over  the 
medium term (Chapter I.1) and (iii) ensured a reduction in government debt at a satisfactory 
pace (Chapter I.2).4 The review concentrates on the effectiveness of the design of the matrix, 
rather than its enforcement, which corresponds to the much broader issue of compliance with 
the preventive arm of the Pact.  

The  main  element  of  the  flexibility  for  cyclical  conditions  is  the  so-called  matrix  of 
requirements  (hereafter,  simply  "matrix")  (Table  1).  The  matrix  aims  at  modulating  the 
required  annual  fiscal  adjustment  of  Member  States  in  the  preventive  arm  of  the  Pact 
according to the position of the Member States in the cycle (measured by the output gap, the 
real growth rate and the comparison between actual and potential growth) and their debt level. 
The matrix was designed to ensure an average adjustment requirement of 0.5% of GDP as a 
benchmark (defined as a change in the structural balance) requested in secondary legislation.5  
The required fiscal adjustment should be higher than the benchmark in good times and more 
limited  in  bad  times.  In  addition,  it  should  be  higher  for  Member  States  with  a  debt  level 
exceeding 60% of GDP or with pronounced risks to overall debt sustainability.  

4  The review is based on forecast vintages from the European Commission covering the years until 2017. 
5  Article 5(1) of Regulation (EC) No 1466/97 provides: "The Council and the Commission, when assessing the adjustment 
path  toward  the medium-term  budgetary  objective,  shall  examine  if  the  Member  State  concerned  pursues  an  appropriate 
annual  improvement  of  its  cyclically-adjusted  budget  balance,  net  of  one-off  and  other  temporary  measures,  required  to 
meet its medium-term budgetary objective, with 0.5% of GDP as a benchmark. For Member States faced with a debt level 
exceeding  60%  of  GDP  or  with  pronounced  risks  of  overall  debt  sustainability,  the  Council  and  the  Commission  shall 
examine  whether  the  annual  improvement  of  the  cyclically-adjusted  budget  balance,  net  of  one-off  and  other  temporary 
measures  is  higher  than  0.5%  of  GDP.  The  Council  and  the  Commission  shall  take  into  account  whether  a  higher 
adjustment  effort  is  made  in  economic  good  times,  whereas  the  effort  might  be  more  limited  in  economic  bad  times.  In 
particular, revenue windfalls and shortfalls shall be taken into account." 

2 

 
 
                                                 
Table 1: Matrix of the required annual fiscal adjustment under the preventive arm of the Pact 

Source: European Commission (2018): Vade Mecum on the SGP, Institutional Paper, 75, March, p. 38. 

I.1  Promoting counter-cyclical fiscal policies and supporting the MTO achievement  

The methodological approach 

This  technical  annex  follows  an  analytical,  evidence-based  and  backward-looking 
approach.  

  Member States' coverage: It focuses on Member States in the preventive arm of the SGP, 
i.e.  excluding  years  when  Member  States  have  either  achieved  or  overachieved  their 
Medium-Term  budgetary  Objective  (MTO)  or  have  to  comply  with  budgetary  targets 
under the Excessive Deficit Procedure (EDP).  

  Time coverage: While the matrix of requirements has only been applied since 2015,6 the 
technical  annex  also  takes  a  longer  time  period  into  account  to  assess  its  impact  over 
several  economic  cycles.  For  this  purpose,  it  uses  data  in  real  time  from  Commission 
forecast vintages from 2000 to 2017 at two crucial points in time of the EU surveillance 
process, namely (i) when the requirements are set for the first time, i.e. in spring for the 
year ahead ("ex ante requirement") and (ii) when the fiscal outcomes are finally assessed 
in terms of compliance with the governance framework, i.e. in spring for the previous year 
("ex post requirement").  

  Definition  of  fiscal  adjustment  requirements:  This  technical  annex  derives  the  fiscal 
adjustment requirements from two options: First, it applies the matrix irrespective of the 
distance  to  the  MTO,  thereby  potentially  leading  to  an  overachievement  of  the  MTO  in 
certain  years  (pure  matrix  requirement);  Second,  it  caps  the  required  fiscal  effort  when 
Member  States  have  achieved  their  MTO,  preventing  an  overachievement  of  the  MTO 
(matrix requirement not exceeding MTO). The first option is a theoretical case which has 
never been applied in practice. However, it serves as the key reference point for assessing 

6 It should be recalled that also the required fiscal adjustments for 2018 were based on the matrix of requirements. At the 
same time, the Commission decided to make use of its margin of discretion when assessing departures from those required 
adjustments for Italy and Slovenia (see also Commission Communication of 22 November 2017 on "2018 Draft Budgetary 
Plans: Overall Assessment").  

3 

 
 
 
                                                 
the effectiveness of the matrix, since the secondary legislation, not the commonly agreed 
position on flexibility, prescribes the required fiscal adjustment only for Member States on 
their  adjustment  path  towards  the  MTO,  while  asking  the  remaining  Member  States  to 
stay at their MTO.7  

The cyclical modulation 

The  findings  show  that  the  design  of  the  matrix  modulates  the  required  fiscal 
adjustment around the benchmark requirement of 0.5% (Fig. 1a,b, 2). If the matrix had 
been applied since 2000 irrespective of the distance to the MTO, the benchmark requirement 
of  0.5%  of  GDP  would  have  remained  the  most  frequent  requirement  (43%)  (Fig.  1a). 
However, the matrix would have allowed for lower requirements (15% of the sample) in case 
of exceptionally bad, very bad or bad times,8 while it would have led to higher requirements 
(42% of the sample) in case of normal times for high-debt Member States or in case of good 
times  (Fig.  1a).  Member  States  with  public  debt-to-GDP  ratios  exceeding  60%  would  have 
received on average requirements exceeding 0.5% (Fig. 1b). 

Figure 1a: Distribution of pure matrix 
requirements (Member States) 

Figure 1b: Distribution of pure matrix 
requirements (Member States with public 
debt > 60% GDP) 

Notes: The figures show frequency distributions of the fiscal adjustment requirements (stemming from an application of the 
pure matrix) based on unweighted averages for the EU-28 (changing composition) using ex-ante forecasts from COM spring 
forecast vintages from 2000 to 2017 for the year ahead. The sample focuses on Member States in the preventive arm of the 
SGP. `Pure matrix requirements' refer to the required fiscal effort derived from a strict application of the matrix irrespective 
of the distance to the MTO.  

7  See footnote 5. 
8  In case of bad times, Member States with a debt ratio above 60% of GDP or high sustainability risks and real growth above 

potential growth are requested to implement an annual fiscal adjustment of 0.5% of GDP. 

4 

 
 
 
 
                                                 
The design of the matrix allows for a better modulation of the required fiscal adjustment 
over  the  cyclical  situation  of  individual  Member  States  (Fig.  2).  If  the  matrix  had  been 
applied  since  2000,  the  matrix  would  have  required  smaller  fiscal  adjustments  during 
downturns,  compared  with  a  uniform  benchmark  adjustment  of  0.5%  per  year.  This  would 
have  contributed to the stabilisation of the economy. Symmetrically,  the  matrix would  have 
required  larger  fiscal  adjustment  in  good  times,  compared  with  a  uniform  benchmark 
adjustment  of  0.5%  per  year.  This  would  have  contributed  to  building  up  fiscal  buffers  and 
ensure sustainability.  

Figure 2: Relationship between matrix requirements and economic cycle  

Notes: Fiscal requirements and output gaps are derived from unweighted averages for the EU-28 (changing composition) for 
the sample of Member States in the preventive arm of the SGP. The fiscal requirements are derived from a strict application 
of  the  matrix  irrespective  of  the  distance  to  the  MTO.  Data  stem  from  vintages  from  the  European  Commission  spring 
forecast for the previous year (in real time). 

Promoting the required fiscal benchmark in the medium run 

For the EU-28 on average, the matrix would have led to a fiscal adjustment requirement 
close to the benchmark of 0.5% requested in principle in secondary legislation (Table 2). 
The  application  of  the  pure  matrix  would  have  resulted  in  an  average  fiscal  requirement  of 
0.5%  (using  forecast  vintages  since  2000)  and  0.59%  (since  2015).  The  higher  requirement 
since  2015  can  be  explained  by  the  positive  and  above-average  economic  conditions  since 
2015,  on  top  of  the  fact  that  debt-to-GDP  ratios  had  been  close  to  their  historical  peaks  in 
several Member States and actual growth exceeded on average potential growth. Taking into 
account  that  Member  States  must  not  exceed  their  MTO  reduces  the  average  matrix 
requirement by roughly 0.1 percentage point (0.41 since 2000; 0.46 since 2015).  

The application of the so-called `freezing principle' results in a somewhat smaller fiscal 
adjustment  requirement  on  average  (Table  2).  The  required  fiscal  effort  is  initially  set  in 
spring  for  the  year  ahead.  To  avoid  unwarranted  consequences  of  fluctuations  in  the  output 
gap and the structural balance beyond the control of the governments, the initial requirement 
is  ‘unfrozen’  if  a  Member  State  faces  "exceptionally  bad"  or  "very  bad  times"  or  if  the 
Member  State  comes  closer  to  its  MTO.  That  approach  is  called  the  `freezing  principle', 
which can only lead to lower (not to higher) requirements if the conditions described above 
5 

 
 
 
are met (see Box 2 for an application of the freezing principle in the exemplary case of the 
Netherlands  in  2016).  To  assess  the  impact  of  that  principle,  vintages  from  three  different 
Commission forecast reports are analysed here, namely spring and autumn reports for the year 
ahead  and  spring  reports  for  the  previous  year.9  Overall,  the  application  of  the  freezing 
principle slightly reduces the average fiscal adjustment requirement by around 0.1 percentage 
point.  

Table 2: Average fiscal adjustment requirements 

Notes: The Table shows the requested annual fiscal requirements based on unweighted averages for the EU-28 (changing 
composition) using COM forecast vintages from 2000 to 2017 for Member States in the preventive arm. `Requirement w/o 
freezing principle' is based on vintages from COM spring forecasts for the year ahead, `requirement with freezing principle' 
takes the smallest requirement from three forecast rounds, namely COM spring and autumn forecasts for the year ahead as 
well as COM spring forecast for the previous year.  
Reading example: The average fiscal adjustment requirement since 2000 without freezing principle of the Member States in 
the preventive arm of the Pact is 0.5pp. Allowing for an unfreezing of that requirement in case of very bad or exceptionally 
bad economic circumstances reduces the requirement to 0.39 (by 0.1pp). Taking into account that Member States must not 
exceed their MTO, further reduces the requirement to 0.28 (by 0.1pp).  

Box 2: The asymmetry of the freezing principle – the case of the Netherlands in 2016 

This box examines the freezing principle for the exemplary case of the Netherlands in 2016. 
It  concludes  that  the  freezing  principle  can  lead  to  a  situation  in  which  a  Member  State  is 
allowed  a  structural  deterioration  (based  on  the  frozen  requirement),  while  real-time  data 
indicate that the MTO has not yet been achieved. 

In  all  cases,  when  setting  the  requirement,  the  first  step  is  to  assess  whether  or  not  the 
Member State has achieved the MTO. When defining if a Member State is at MTO or has a 
further  adjustment  to  make  to  reach  MTO,  the  starting  point  for  year  t  is  the  structural 
balance  of  year  t-1.  Therefore,  when  setting  the  Netherlands'  requirement  for  2016,  the 
distance to be covered is the gap between the MTO and the structural balance in 2015. 

According to the Commission spring forecast 2015, the Netherlands was projected to record a 
structural  balance  of  -0.3%  of  GDP  in  2015,  which  implied  a  0.2  percentage  point 
overachievement  of  the  MTO,  set  at  -0.5%  of  GDP.  As  the  Netherlands  was  expected  to 
continue to overachieve its MTO, no fiscal adjustment was required for 2016.   

However, on the basis of the Commission 2015 autumn forecast, due to a worsening of the 
headline balance and a large upward revision in the output gap (by 0.5 pp of potential GDP), 

9 Following the Opinion of the EFC of 29 November 2016 and the subsequent discussion and endorsement by the Committee, 

such unfreezing may take place in two occasions: in autumn for the year ahead or in spring for the previous year. 

6 

 since                     2000since                                   2015since                     2000since                                   2015Pure matrix requirement0.500.590.390.47Matrix requirement not exceeding MTO 0.410.460.280.25Requirement                                                                  w/o freezing principle                                        Requirement                                                    with freezing principle 
 
 
 
                                                 
the  Commission  indicated  that  the  MTO  would  not  be  achieved  in  2015,  which  was 
confirmed  by  ex  post  data.  However,  as  the  unfreezing  is  applied  asymmetrically  (i.e. 
requirements  are  not  increased  if  the  structural balance  is  revised  down),  the  assessment  of 
the  Netherlands'  2016  Draft  Budgetary  Plan  (DBP)  was  based  on  the  assumption  of  MTO 
overachievement  stemming  from  the  spring  forecast  2015.  Effectively,  the  2016  DBP  was 
found  to  be  compliant  with  the  SGP  provisions,  while  at  the  same  time  the  Member  State 
planned to deviate from the MTO.  

Figure A: Evolution of the structural balances for 2015 and 2016 over forecast vintages                  

To  sum  up,  the  frozen  structural  position  in  2015  from  the  2015  spring  forecast  (-0.3%  of 
GDP) appeared ex post as an outlier among the forecast vintages (Figure A). In other terms, 
the freezing principle is applied asymmetrically. At the same time, given the relatively large 
revisions in the structural balance over vintages, the freezing principle provides stability and 
predictability  for  policy  objectives.  In  the  specific  case  of  the  Netherlands,  the  asymmetric 
application of the freezing principle did not lead to an expansionary fiscal policy, since the 
Netherlands  did  not  in  fact  allow  its  structural  balance  to  deteriorate  in  2016,  but  largely 
overachieved the MTO.  

Looking at the country-by-country findings reveals that the matrix would have led to an 
average annual requirement of above 0.5% for around half of the Member States (Fig. 
3). Croatia would have been the Member States with the highest, Denmark and Sweden those 
with the lowest average requirements based on the sample of Member States, which are bound 
by the matrix (i.e. excluding years when Member States (over-)achieved the MTO and/or had 
to  comply  with  budgetary  targets  of  the  EDP).  Since  those  findings  are  based  for  some 
Member States on a very small number of observations,10 we also conduct the analysis for an 
EU-28 sample excluding only those years when Member States (over-)achieved the MTO. For 
most  Member  States  and  with  everything  else  unchanged,  it  leads  to  slightly  lower 
requirements,  since  countries 
typically  face  worse  economic  conditions, 
overcompensating the fact that Member States in EDP frequently have higher public debt-to-
GDP ratios.  

in  EDP 

10  

Sweden,  for  instance,  has  been  bound  by  the  matrix  conditions  in  only  two  years  since  2000,  since  it  (over-

)achieved the MTO in the remaining years (based on the COM ex ante forecasts for the year ahead)  

7 

 
 
 
 
 
 
                                                 
Figure 3: Pure matrix requirements by country (EU-28, preventive arm SGP) 

Notes:  Ex  ante  forecasts using  vintages  from COM  spring  forecast  between  2000  and  2017  for  the  year ahead  for  28  EU 
Member States. The number of years of a given country under the preventive arm of the Pact is shown next to the country 
code. 

The relevance of the matrix categories 

The difference between ex ante and ex post budgetary requirements is mainly related to 
the gap between the cyclical position as forecast and as actually observed two years later 
(Fig.  4).  For  the  EU-28  on  average,  exceptionally  bad  and  good  times  turn  out  to  be  more 
frequent events based on ex post outcomes (light blue bars in Fig. 4) than on ex ante forecasts 
(dark blue bars). By contrast, normal times appear to occur less often than projected. A shift 
in  the  matrix  categories  across  forecast  vintages  hampers  the  predictability  of  the  matrix 
categories, translating into country-specific forecast error (Table 3). Overall, the total number 
of forecast errors is however rather limited. 

Figure 4: Frequency distribution of matrix categories (in %) 

80

60

40

20

0

22 

3 

Exceptionally bad
times

71 

54 

5 

0 

12 

11 

14 

9 

Very bad times

Bad times

Normal times

Good times

Ex ante forecast

Ex post outcome

Notes: `Ex ante forecast' based on vintages from COM spring forecasts for the year ahead, `ex post outcome' derived from 
vintages  of  COM  spring  forecasts  for  the  previous  year.  The  sample  shows  unweighted  average  for  the  EU-28  (changing 
composition) for Member States in the preventive arm of the SGP. 

According to our analysis, merging two matrix categories would have greater costs - loss 
of  cyclical  modulation  -  than  benefits  -  improving  predictability  of  matrix  categories. 
Merging two matrix categories can have costs and benefits. On the one hand, costs can occur 
due to a loss of cyclical modulation in setting the requirements, which is the very raison d'être 

8 

 
 
 
 
of the matrix. On the other hand, benefits can emerge from improving the predictability of the 
matrix categories between forecast and observed data (i.e. reducing the forecast error). We try 
to quantify the costs and benefits of merging two matrix categories with a cost indicator. That 
indicator  measures  in  how  many  percent  of  the  cases  the  merging  of  two  categories  would 
have  implied  a  loss  of  cyclical  modulation.  It  varies  between  100%  (i.e.  merging  two 
categories  has  only  costs  and  no  benefits  since  it  does  not  improve  the  predictability  of  the 
matrix categories) and 0% (i.e. merging two categories has only benefits and no costs, since it 
does not lead to a loss of cyclical modulation). Our findings show that irrespective of which 
of  the  two  matrix  categories  analysed  are  merged,  the  costs  of  merging  clearly  exceed  the 
benefits (Table 4). We therefore conclude that the matrix categories constitute a good balance 
between granularity and stability of requirements over forecast vintages. 

Table 3: Forecast error of matrix categories by 
Member States  

Table 4: Cost indicator of merging two 
matrix categories 

Notes:  To  simplify  readability,  the  table  reports  only  forecast 
revisions  if  the  number  of  downward/upward  revisions  (indicated 
in  brackets)  exceeds  1.  The  number  of  stars  shows  by  how  many 
categories  the  forecast  was  revised  upwards/downwards  on 
average.  The  sample  covers  the  Member  States  excluding  Greece 
in  the  preventive  arm  of  the  SGP.  Member  States  highlighted  in 
bold  have  debt-to-GDP  ratios  exceeding  60%  according  to  the 
COM AF 2017.  

Reading  example:  The  forecast  for  Italy  was  revised  downwards 
five  times,  on  average  by  two  categories,  i.e.  from  bad  to 
exceptionally bad times. 

Notes: The cost indicator of merging a couple of 
adjacent categories (κ) is defined as follows:  

where i corresponds to the respective matrix category, 
i.e. exceptionally bad times (i=1), … , good time (i=5), 
SF t-1|t stands for the ex ante forecast, while SF t+1|t 
refers to the ex post outcome. "shift" refers to the 
number of cases when the matrix category shifted 
upwards/downwards by one matrix category between 
the ex ante forecast and the ex post outcome; "obs" 
refers to the number of observations in category i 
according to the ex post outcome. 

Comparing the requested with the actual effort: a delicate and inconclusive exercise 

The  actual  fiscal  effort  needs  to  be  compared  with  the  requested  effort  under  the  EU 
fiscal governance framework, which is determined by the matrix but also other factors. 
It would be misleading to compare the actual fiscal effort delivered by Member States  with 
the  benchmark  requirement  of  0.5%.  The  requested  effort  under  the  EU  fiscal  governance 
framework  can  be  derived  from  the  pure  matrix-based  required  fiscal  adjustment.  That 
adjustment  may  be  reduced  to  avoid  that  Member  States  overachieve  the  MTO  and  to  take 
into  account  the  freezing  principle.  Finally,  the  requirement  may  be  further  reduced  to  take 
into account the possible application of i) the flexibility clauses to promote structural reforms 

9 

Downward                                        revisions                                                      (Ex ante forecast vs.                                      ex post outcome) Upward                                                                 revisions                                                      (Ex ante forecast vs.                                              ex post outcome) Good timesEE (2)*, LT (2)*Normal timesSK (2)*Bad timesPT (2)*Very bad timesSK (2)*Exceptionally bad times IT (5)**, FI (5)**, NL (2)**,               PT (3)**, IE (2)**, LV (2)** 
 
 
 
 
 
and public investment, ii) the pension clause found in Regulation (EC) No 1466/97, and iii) 
the  unusual  event  clause.    It  leaves  us  with  a  requested  annual  fiscal  effort  of  around  0.27 
(since 2000) and 0.2 (since 2015) on average (Table 5). 

The  actual  fiscal  effort  of  Member  States  falls  short  of  the  required  one  (Table  5). 
Comparing  the  requested  fiscal  effort  described  above  with  the  actual  implemented  fiscal 
effort  -  measured  by  the  change  in  the  structural  balance  -  points  to  a  significant  gap.  The 
sizeable gap for the period since 2000 should be interpreted with caution, since the matrix did 
not exist before 2015. In addition, it should be recalled that the actual fiscal effort refers only 
to the average fiscal effort for Member States in the preventive arm of the Pact, i.e. excluding 
years when Member States (over-)achieved their MTO and/or were under the corrective arm 
of the Pact, namely the Excessive Deficit Procedure. The average effort for the EU-28 and for 
Member States in the corrective arm of the Pact is significantly higher (see last two rows of 
Table 5). 

Table 5: Requested requirement vs. actual fiscal effort  

Note: European Commission vintages using unweighted averages for the EU-28 (changing composition) under the preventive 
arm.  Actual  fiscal  effort  Member  States  in  corrective  arm  based  on  EU-28  (changing  composition),  excluding  only  years 
when Member States had to comply with budgetary targets of the SGP.  

The implementation gap is driven by numerous factors, outside the remit of the review, 
but  the  matrix  may  have  helped  to  reduce  it  by  improving  the  design  of  fiscal 
surveillance.  The review concentrates on the effectiveness of the design of the matrix, rather 
than its compliance, which corresponds to the much broader issue of ownership by Member 
States and enforcement at Union level.  It is reasonable to assume that the matrix could, by 
promoting  a  better  design  to  avoid  pro-cyclical  policy,  improve  the  credibility  of  the 
application of fiscal rules. In particular, the matrix reduces the required effort in bad and very 
bad times, which may help give further buy-in by national authorities, which are in charge of 
applying the Union’s fiscal rules. In short, good design can contribute to a better enforcement, 
but cannot ensure it all by itself.  As a tentative illustration, the implementation gap appears 
smaller since the introduction of the matrix. 

10 

since        2000since       2015Requested requirementPure matrix (Tab. 1)0.500.59Matrixnot exceeding MTO (Tab. 1)0.410.46Matrix not exceeding MTO with freezing principle (Tab. 1)0.280.25Matrix not exceeding MTO with freezing principle and clauses  ●with granted structural reform and public investment clause since 20160.270.22  ●with granted structural reform, pub. inv., pension and unusal events clause0.270.20Actual fiscal effort-0.45-0.290.880.310.200.15Actual fiscal effort of EU Member States in preventive arm                                                                                                                                                                                                           Actual fiscal effort of EU Member States in corrective arm                                                                                                                                                                                                          Actual fiscal effort of EU Member States                                                                                                                                                                                                       
 
  
  
Cases of departure from the matrix-based approach 

The  matrix  has  been  the  base  for  setting  the  fiscal  adjustment  requirements  in  the 
Country-Specific  Recommendations  proposed  by  the  Commission  in  the  context  of  the 
European  Semester  since  2015.  The  Commission  has  departed  from  the  matrix-based 
approach only in the following limited cases. 

In  2015,  Romania  was  allowed  to  worsen  its  structural  position,  instead  of  keeping  it 
unchanged as per the matrix, in order to encourage the absorption of EU funds.  In the 
case  of  Romania,  under  the  terms  of  its  2013-15  balance-of-payments  financial  assistance 
programme,  it  was  allowed  in  2015  to  deviate  from  the  MTO  by  a  maximum  of  0.25%  of 
GDP. That allowed deviation was due to the application of the so-called “EU funds adjustor”, 
aiming  at  accelerating  EU  funds  absorption  above  past  trends11.  In  2014,  Romania  had 
reached its MTO, a deficit of 1.0% of GDP in structural terms, and in the absence of the EU 
funds  adjustor  it  would  have  been  requested  to  continue  achieving  its  MTO  in  2015  (i.e.  a 
required  adjustment  of  0%  of  GDP).  The  EU  funds  adjustor  was  subject  to  national  co-
financing of Union funds (net of non-eligible spending and corrections) being in line with or 
above the allocation in the budget. The outturn data showed that Romania remained within its 
MTO in 2015, i.e. it did not use the allowed deviation. 

In 2017, a smaller fiscal adjustment was required of Slovenia than that implied by the 
matrix,  in  light  of  the  uncertainty  on  the  output  gap  estimates  due  to  its  particular 
economic situation. In the case of Slovenia, the Commission decided that a structural effort 
in  2017  of  0.6%  of  GDP,  in  line  with  normal  times,  was  more  appropriate  than  the  matrix-
based adjustment of 1.0% of GDP implied by the projected output gap of X% of GDP. Based on 
the  Commission  2016  spring  forecast,  Slovenia  was  assessed  to  be  in  "good  times"  in  2017, 
requiring  a  structural  adjustment  of  1.0%  of  GDP  according  to  the  matrix.  The  Commission 
considered the significant uncertainty regarding the calculation of potential growth and the output 
gap  in  the  specific  case  of  Slovenia  because  of  the  peculiar  situation  of  the  labour  market,  the 
particularly  large  economic  contraction  in  2008-2013  and  the  structural  reforms  being 
implemented.  Alternative  output  gap  estimations  covering  a  longer  time  horizon,  reflecting  the 
review of the estimation method ongoing at that time, suggested a smoother output gap profile for 
Slovenia,  implying  that  it  would  be  premature  to  conclude  that  the  Slovenian  economy  was  in 
good times in 2017. As such, the Commission concluded that a structural effort in 2017 of 0.6% 
appeared more appropriate12. 

For  2018,  the  Commission  decided  to  exercise  a  degree  of  discretion  when  considering 
departures  from  the  matrix  requirements  for  Italy  and  Slovenia.13  The  Commission  set 
its recommendations for 2018 Country Specific Recommendations on the basis of the matrix 
of requirement. However, for the nine Member States with a matrix requirement of 0.5% of 
GDP or above, the Commission specified that its assessment of compliance would take into 
account  the  need  to  ensure  sustainability  as  well  as  the  need  to  strengthen  the  ongoing 
recovery. Specifically, in its assessment of the 2018 Draft Budgetary Plans, the Commission 
assessed the cyclical conditions of five Member States, which were initially found at risk of a 
significant deviation for 2018. As part of its overall assessment, the Commission concluded 
that the recovery of Belgium, France and Portugal was sufficiently robust and no discretion 

11  See  Section  4.2,  Assessment  of  the  2015  Convergence  Programme  for  Romania,  DG  ECFIN,  European  Commission  - 

https://ec.europa.eu/info/sites/info/files/file_import/23_ro_scp_en_2.pdf.    

12  See  Box  2,  Assessment  of  the  2016  Stability  Programme  for  Slovenia,  DG  ECFIN,  European  Commission  - 

https://ec.europa.eu/info/sites/info/files/file_import/24_si_scp_en_4.pdf.  

13 See Commission Communication of 22 November 2017 on "2018 Draft Budgetary Plans: Overall Assessment". 

11 

 
 
                                                 
was  warranted,  confirming  the  risk  of  non-compliance  with  the  requirements  for  2018.  By 
contrast, for Italy the Commission concluded that the recovery appeared still fragile and for 
Slovenia that a too large fiscal tightening could jeopardise it, also considering that investment 
was still below pre-crisis level and that the estimation of the output gap was surrounded by 
large  uncertainty.  Therefore,  the  Commission  considered  that  a  fiscal  adjustment  departing 
from  the  matrix  requirement  could  be  deemed  adequate,  provided  that  Italy  and  Slovenia 
ensure such a fiscal adjustment.  

I.2  Ensuring a reduction in government debt at a satisfactory pace 

to 

the 

long-term  sustainability  of  public 

As  long  as  the  matrix  ensures  the  achievement  of  the  MTO,  it  also  supports  fiscal 
sustainability.  The  commonly  agreed  position  indicates  that  the  review  should  also  assess 
whether the matrix has ensured reduction  in government debt at a satisfactory pace, thereby 
finances14.  Under  normal 
contributing 
macroeconomic  circumstances,  achieving  the  MTO  entails  compliance  with  the  debt 
reduction benchmark over the medium term15. Indeed, the minimum MTO takes into account, 
among other things, implicit liabilities related to ageing populations and the level of the debt-
to-GDP  ratio  in  order  to  ensure  sustainability  or  rapid  progress  towards  it.  Specifically,  for 
Member  States  that  are  not  yet  at  their  MTO,  compliance  with  the  preventive  arm,  i.e.  an 
adjustment  path  towards  the  MTO  of  0.5%  of  GDP  on  average  per  year,  allows  the  debt 
reduction benchmark to be fulfilled, with some delays in some cases. This is specifically why 
adherence to the MTO or the adjustment path towards it is considered a key relevant factor 
when assessing compliance with the debt reduction benchmark.  

Member States with debt ratios exceeding 60% or with pronounced risks of overall debt 
sustainability  are  required  to  deliver  a  structural  adjustment  higher  than  the 
benchmark of 0.5% of GDP in normal or good economic times. As shown in Figure 5 for 
2015,  those  Member  States  with  the  highest  debt  ratios  were  also  typically  those  with  the 
highest structural deficit, requiring a significant fiscal adjustment. In line with Article 5(1) of 
Regulation  (EC)  No  1466/97,  the  matrix  is  modulated  differently  for  Member  States  with 
debt-to-GDP  ratios  above  60%  (or  with  pronounced  risks  of  overall  debt  sustainability), 
requiring  a  fiscal  adjustment  of  more  than  0.5%  of  GDP  on  average.  As  suggested  by  the 
analysis  conducted  in  the  previous  Chapter,  if  the  matrix  had  been  applied  since  2000, 
Member  States  with  public  debt-to-GDP  ratios  exceeding  60%  would  have  received  on 
average requirements above 0.5%, in line with the provisions of Regulation (EC) No 1466/97.  

14 Member States in the preventive arm of the SGP and with debt-to-GDP ratios above 60% should ensure compliance with 
the debt reduction benchmark. That benchmark requires that the differential of the debt ratio with respect to the reference 
value of 60% has decreased over the previous three years at an average rate of 1/20th per year as a benchmark. 

15  Note  to  the  EFC-Alternates  on  "The  2015  update  of  the  minimum  medium  term  objectives",  February  2016  (Ref. 

Ares(2016)936286). 

12 

 
 
 
 
 
 
 
 
 
 
 
                                                 
Figure 5: Structural balance and debt ratios across Member States with country sizes  

Note: Size of bubbles is proportional to country shares in total EU-28 GDP  

For  Member  States  with  debt  ratios  exceeding  60%  of  GDP,  full  compliance  with  the 
matrix requirements since 2016 would have resulted in a debt trajectory similar to that 
required  by  a  constant  adjustment  of  0.5%  of  GDP  (i.e.  pre-matrix  regime).  Figure  6 
shows  the  two  debt  trajectories,  resulting  from  respectively  full  compliance  with  the  matrix 
requirements not exceeding the MTO16 and a constant structural adjustment of 0.5% of GDP. 
The  two  debt  trajectories  are  displayed  for  those  Member  States  with  a  debt-to-GDP  ratio 
above 60% in 2015 and they cover a relatively short time period (2015-2020) since the matrix 
of requirements was introduced only recently. Further details on the simulations are provided 
in the note to the Table. The charts suggest that full compliance with the matrix requirement 
implies a debt reduction, which is either marginally faster or equal to the one achieved with a 
constant  requirement  of  0.5%  of  GDP.  Such  findings  can  be  explained  by  the  fact  that  the 
years  under  analysis  are  considered  by  the  matrix  of  requirements  to  be  normal  economic 
times on average. In fact, the output gaps for both the euro area and the Union are between -
1.5%  and  1.5%  for  all  years  after  2016.  Under  those  economic  conditions,  the  matrix  of 
adjustment  requires  on average  an  adjustment  higher than  0.5%  of  GDP,  which is  normally 
implemented as a required fiscal effort of 0.6% of GDP.  

16 The simulation corresponds to the established SGP debt projection scenario, used and described in the Debt Sustainability 
Monitor  2017  (Annex  A3).  The  simulations  are  run  on  the  basis  of  the  2017  Commission  autumn  forecast,  which 
incorporates outturn data for the years up to 2016. 

13 

 
 
 
 
 
 
 
 
 
 
 
                                                 
Figure 6: Simulations on general government debt developments since 2015 

              Matrix requirement       

0.5pp of GDP structural adjustment      
Ex post data and COM 2017 autumn forecast       
14 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Note:  Debt  developments  resulting  from  full  compliance  with  the  matrix-based  requirements  are  compared  with  debt 
developments resulting from a constant adjustment of 0.5% of GDP. A deterministic debt trajectory is simulated assuming 
full  compliance  with  the  matrix-based  requirement  from  2016,  the  first  year  when  the  matrix  was  fully  implemented. 
Specifically, in the simulation, the structural balance is supposed to converge towards its MTO according to the requirement 
prescribed  by  the  matrix,  and  to  remain  at  its  MTO  thereafter.  The  requirements  are  set  on  the  basis  of  the  cyclical 
conditions and debt levels as per the ex post data and the Commission 2017 autumn forecast. As a term of comparison, debt 
developments as implied by a constant adjustment of 0.5% of GDP are simulated. Moreover, those projections are run by 
taking  into  account  a  feedback  effect  of  fiscal  consolidation  on  GDP  growth  (a  1pp.  of  GDP  structural  effort  impacting 
negatively on baseline GDP growth of 0.75pp in the same year). Those debt trajectories correspond to the so-called Stability 
and  Growth  Pact  scenario  run  for  debt  sustainability  analysis  (see  Debt  Sustainability  Monitor  2017,  Institutional  Paper 
071, European Commission, January 2018).  
Source: DG ECFIN calculations based on the 2017 autumn forecast 

I.3  Summarising  the  findings  on  the  cyclical  modulation  of  the  required  budgetary 

adjustment 

The  design  of  the  matrix  ensures  a  modulation  of  the  required  fiscal  effort  over  the 
economic cycle. The findings show that the design of the matrix leads to a modulation of the 
required fiscal adjustment around the benchmark requirement of 0.5%. In addition, the design 
of  the  matrix  allows  for  an  effective  modulation  of  the  required  fiscal  adjustment  in  the 
preventive arm of the Pact over the cyclical situation of individual Member States. It means 
that the matrix requires smaller fiscal adjustments during downturns to  promote growth and 
asks Member States to do more in good times to build up fiscal buffers. 

The design of the matrix supports the achievement of the MTO inasmuch as it leads to 
an  average  requirement  close  to  the  benchmark  of  0.5%  of  GDP.  Regulation  (EC)  No 
1466/97  requires  Member  States  in  the  preventive  arm  of  the  Pact  that  are  not  yet  at  their 
MTO  to  pursue  an  appropriate  structural  adjustment  towards  it,  with  0.5%  of  GDP  as  a 
benchmark. Applying the pure matrix requirements since 2000 or 2005 would have resulted in 
an  average  requirement  of  close  to  the  benchmark  requirement  of  0.5%.  Therefore,  the 
application  of  the  matrix  seems  to  support  the  achievement  of  the  MTO  in  line  with  the 
provisions  of  the  SGP.  The  average  matrix  requirement  is  slightly  reduced  by  fact  that 
Member States already close to their MTO cannot be required to overachieve it. It leads to an 
average  reduction  in  the  budgetary  requirement  of  around  0.1  percentage  point.  Similarly, 
applying the freezing principle also leads to somewhat lower fiscal requirements (in the order 
of  0.1pp)  because,  according  to  that  principle,  the  requirement  used  at  the  time  of  the 
assessment of compliance can be reduced if the country concerned finds itself  in very bad or 
exceptionally bad economic circumstances.  

By ensuring the achievement of a sound budgetary position (i.e. the MTO), the design of 
the matrix also does not weaken debt reduction and supports fiscal sustainability. If the 
matrix  had  been  applied  since  2000,  Member  States  with  public  debt-to-GDP  ratios  above 
60%  would  have  received  on  average  requirements  exceeding  0.5%,  in  line  with  the 
provisions of the Pact. The matrix then supports the achievement of the MTO also –and even 
more– for Member States with high debt ratios. Under normal macroeconomic circumstances, 
compliance  with  the  preventive  arm,  namely  achieving  the  MTO  or  compliance  with  the 
adjustment  path  towards  it,  allows  to  fulfil  the  debt  reduction  benchmark.  Therefore,  by 
ensuring  the  achievement  of  the  MTO,  the  matrix  allows  to  promote  debt  reduction  and 
ultimately,  the  long-term  sustainability  of  public  finances.  From  a  simulation,  the  debt 
trajectories resulting from full compliance with the matrix requirements as of 2016 are similar 
to those resulting from a constant adjustment of 0.5% of GDP. 

15 

 
 
The  level  of  granularity  of  the  matrix  appears  to  strike  the  right  balance.  When 
comparing  the  matrix  requirements  on  the  basis  of  the  forecast  with  those  of  the  ex  post 
outcome, normal economic times occur less often than initially projected. Although merging 
two rows of the matrix could slightly reduce the forecast error, the benefits of doing so clearly 
fall short of the costs associated to a loss of cyclical modulation, which is precisely what the 
matrix  tries  to  achieve.  In  short,  the  matrix  categories  constitute  a  good  balance  between 
granularity and stability of requirements over forecast vintages. 

The actual budgetary adjustment made by the Member States falls short of the required 
one. It is possible to compare the actual fiscal effort made with the required effort. However, 
the  latter  differs  from  the  pure  matrix  requirement  since  it  factors  in  many  other 
considerations. They are not only the distance to the MTO and the application of the freezing 
principle,  but  also  the  further  flexibility  granted  under  the  investment  and  structural  reform 
clauses, and the possible deviation from the path to MTO allowed to cater for unusual events. 
That comparison exercise points to a significant gap between the actual and requested efforts, 
the analysis of which stands beyond the scope of this review.  

The Commission has only departed from the matrix-based approach in two specific and 
well-justified  cases.  When  setting  the  required  budgetary  adjustment,  the  Commission 
departed  from  the  matrix  in  the  cases  of  Romania  in  2015  and  Slovenia  in  2017  due  to 
country-specific and rather exceptional circumstances. For Romania the departure was made 
to incentivise the absorption of EU funds, while the departure for Slovenia is explained by the 
uncertainty  of  the  output  gap  estimates.  When  assessing  a  departure  from  the  matrix 
requirements  for  2018,  the  Commission  applied  its  discretion  in  the  cases  of  Italy  and 
Slovenia in light of their particular cyclical conditions.  

16 

 
 
 
 
II.  REVIEW OF THE STRUCTURAL REFORM CLAUSE AND INVESTMENT CLAUSE 

This second section focuses on the application of the structural reform and investment 
clauses. The pension reform clause is excluded given the specific provisions reserved to it in 
Regulation  (EC)  No  1466/9717.  As  a  first  step,  the  technical  annex  examines  the  eligibility 
criteria and the potential coverage of the two clauses, i.e. which Member States were eligible 
based on some ex ante eligibility criteria. The technical annex then focuses on those Member 
States that applied for and were granted/rejected use of the clauses, explaining how flexibility 
was applied in practice.  

II.1  The eligibility criteria and potential coverage of the flexibility clauses 

The  eligibility  criteria  for  the  flexibility  clauses  are  designed  to  safeguard  fiscal 
sustainability,  while  still  supporting  Member  States  in  undertaking  structural  reforms 
and additional public investment. The spirit of such flexibility is that ambitious structural 
reforms or well targeted government investment can improve growth potential and therefore 
improve  fiscal  sustainability  of  Member  States  over  the  long  run.18  Such  reforms  or 
investment can however imply either financial or political costs in the short run. In such cases, 
a degree of flexibility in the application of the fiscal rules can be warranted. The commonly 
agreed  position  on  flexibility  in  the  Stability  and  Growth  Pact  (SGP)  was  achieved  after 
detailed discussions between the Council and the Commission over the course of 2015. Those 
discussions  reflected  the  differing  views  amongst  Member  States  regarding  the  correct 
balance  between  supporting  and  encouraging  both  structural  reforms  and  government 
investment,  while  ensuring  fiscal  responsibility,  a  concern  which  led  to  the  inclusion  of  the 
review clause in the final commonly agreed position. Key components in ensuring the correct 
balance  between  those  objectives  are  the  eligibility  criteria  for  accessing  the  clauses.  The 
safeguards  need  to  be  sufficiently  tight  to  ensure  that  the  use  of  the  clauses  does  not 
negatively impact upon the Member States’ sustainability, while at the same time, not being 
so severe as to render access to the clauses practically impossible.  

There  are  common  eligibility  criteria  for  both  the  structural  reform  clause  and  the 
investment  clause,  as  well  as  a  few  specific  safeguards  for  each  clause.  There  is  a 
relatively  high  consistency  between  the  criteria  that  Member  States  must  satisfy  when 
applying for use of the clauses. This is consistent with the fact that the investment clause is, in 
legal  terms,  a  specification  of  the  structural  reform  clause:  the  investment  clause  concerns 
government  investments  aiming  at,  ancillary  to,  and  economically  equivalent  to  the 
implementation of major structural reforms. Among the common criteria are that both the 3% 
of GDP deficit ceiling and  a safety margin with respect to the MTO are not breached and that 
the  MTO  is  reached  within  the  four-year  horizon  of  the  Stability  and  Convergence 
Programme.  Specific requirements also  apply  for  each  clause.  In  the  case  of  the  investment 
clause,  there  is  an  additional  safeguard  placed  on  the  use  of  that  clause:  the  Member  State 
must  be  experiencing  negative  GDP  growth  or  an  output  gap  below  -1.5%  of  GDP,  while 
government  investment  must  not  decrease.  In  the  case  of  the  structural  reform  clause,  the 

17 Sustainability-enhancing pension reforms have received specific consideration in the legislation (Articles 5(1) and 9(1) of 
Regulation (EC) No 1466/97). Specifically, pension reforms introducing a multi-pillar system that includes a mandatory, 
fully-funded pillar, constitute a specific case of structural reforms which also justify a temporary deviation from the MTO 
or the adjustment path towards it.  

18  The  sustainability  effects  can  stem  either  from  direct  budgetary  savings  from  the  reforms  (such  as  in  pensions  or 
healthcare), or from the increased revenues drawn in the medium to long-run from a more efficient economy with higher 
potential output (e.g. due to lower structural unemployment or an increased labour force), or from a combination of both 
kinds of effects. 

17 

 
 
                                                 
reforms should be implemented or already adopted by government. All those criteria should 
be fulfilled in order for the Member State to be granted flexibility. A comprehensive list of the 
criteria for eligibility of the structural reform and investment clauses are presented in Table 6. 

Table 6: Criteria for eligibility to the structural reform clause and investment clause and the 
timing of their assessment (in brackets) 

Structural Reform Clause 

Investment Clause 

Remaining in 
the preventive 
arm 

  Be and remain in the preventive arm in year t+1 (before and after granting) 
  Safety margin with respect to the 3% of GDP reference value for the deficit (minimum benchmark) 

(before granting) 

Integrity of 
the MTO 

  Achievement of the MTO within the four-year horizon of the current SCP should be sought, which 

operationally means less than 1.5% deviation from MTO in initial year (before granting) 
  Additional application of the clauses restricted until achievement of the MTO (after granting) 

Temporary 
and limited 
deviation from 
the MTO (or 
adjustment 
path) 

Cyclical 
conditions 

  The deviation cannot exceed 0.5% of GDP, 
except  in  the  case  of  pension  reforms 
introducing  a  mandatory  fully-funded  pillar 
(before granting) 

  The  deviation  cannot  exceed  0.5%  of  GDP 

(before granting) 

  The cumulated deviation for the two clauses cannot exceed 0.75% of GDP (before granting) 

  The temporary deviation remains valid over a period of three years (not applicable) 

 Does not apply 

  Negative GDP growth or output gap inferior to 

 -1.5% of GDP (before granting) 

  Major  structural  reform  with  positive  long-
term budgetary effects, including by raising 
(before 
potential 
granting) 

sustainable 

growth 

 

Investments  aiming  at,  ancillary 
to,  and 
economic equivalent to the implementation of a 
major  structural  reforms,  i.e.  with  a  verifiable 
major  net  positive  impact  on  potential  growth 
and on sustainability of public finances  (before 
granting) 

Objective 

  The reforms must be fully implemented (or 
submission  of  a  medium-term  structural 
reform  plan 
specified 
measures  and  credible  timelines)  (before 
and after granting) 

including  well 

  Projects  to  a  large  extent  co-financed  by  the 
Union  under  Cohesion  policy  (including  the 
YEI), TEN, CEF, EAFRD, EMFF and the EFSI 
(before and after granting) 

Timing of 
application 

 Information 

  Total  public  investments  are  not  reduced,  i.e. 
co-financed  expenditure  should  not  substitute 
for nationally financed investments (before and 
after granting) 

 

In the SCP (or DBP) submitted in year t for benefitting from the clause in year t+1  

 

In-depth and transparent documentation with 
quantitative  analysis  of  short-term  cost  –  if 
any  –  and  of  medium-term  budgetary  and 
potential growth impact as well as timetable 
implementation  of  reforms.  (before 
for 
granting) 

  Detailed 

information  on 

the  projects  co-
financed by the Union (e.g. size, key features), 
specifying  how  they  will  contribute  to  boost 
potential growth and long-term sustainability of 
public finances. (before and after granting) 

 

Independent  evaluation  of  the  information  provided  or  comprehensive  independent  information  to 
support the estimated impact (and planned timetable). (before granting) 

18 

 
 
 
  
  
 
The Commission services have examined how demanding some eligibility criteria were 
in practice. While a low number of Member States have made use of the clauses to date, i.e. 
four of them, it is a policy decision for the national authorities whether they want to apply to 
use  one  of  the  clauses.  The  more  relevant  question,  in  terms  of  the  design  of  the  clauses, 
would appear to be how many Member States have been eligible for use of the clauses – even 
if they did not apply for them – since the Commission Communication of January 2015. As 
part  of  the  review  of  the  clauses,  the  Commission  services  have  retroactively  examined 
eligibility across all Member States. That exercise is conducted considering only a subset of 
the eligibility criteria, which are listed hereafter. The other eligibility criteria become relevant 
only when Member States formally apply for use of the clauses and submit the information 
needed  to  assess  them  (for  that  reason,  they  are  examined  as  part  of  Chapter  II.2,  which 
covers the cases of application of the clauses).19 The exercise is run for the years from 2015 
until 2018. In particular, eligibility for the application of the clause in year t is assessed on the 
basis  of  the  information  available  in  spring  of  year  t-1,  when  the  Member  State  should 
normally apply for the clause in its Stability or Convergence Programme (SCP). 

Eligibility criteria assessed for the exercise:  How it is checked in practice: 

A.  achievement  of  the  MTO  within  the  four 
year horizon of the SCP, i.e. the maximum 
initial  distance  at  which  the  structural 
balance of a Member State can be from the 
MTO is 1.5% of GDP 

B.  an 

appropriate 

is 
continuously preserved20, i.e. the structural 
balance respects the minimum benchmark 

safety  margin 

SB t-1 – MTO t-1 ≥ -1.5% 

SB t +i ≥ Minimum Benchmark t+i  
with i=0,1,2 

C.  negative  GDP  growth  or  output  gap  lower 
than -1.5% of GDP (only for the investment 
clause) 

Real GDP growth t < 0 or  
Output gap t  -1.5% 

Over the  period 2015-2018, a greater  number of  Member  States could have applied  to 
avail  of  the  structural  reform  clause  compared  with  the  investment  clause21.  Table  7 
reports  whether  each  Member  State  (excluding  Greece  which  has  been  subject  to  a 
macroeconomic  adjustment  programme)  met  those  three  eligibility  criteria  in  the  spring  for 
use  of  the  clause  in  the  following  year.  It  is  important  to  highlight  that  the  Table  does  not 
consider  cases  where  those  eligibility  criteria  could  be  met  as  a  result  of  the  constrained 
judgement approach. The Table clearly shows that there were more Member States potentially 
eligible  for  use  of  the  structural  reform  clause  than  the  investment  clause.  In  particular,  the 
number of Member States potentially eligible for the structural reform clause averages around 
12 per year. For the investment clause, only five Member States were eligible in 2015, none 
of  which  applied  for  use  of  the  clause  for  that  year.  Out  of  those  five  Member  States,  two 
would also have been eligible in one of the following years. However, Denmark did not apply 
for use of the investment clause and only Italy applied to use and benefitted from the clause 
for 2016.  

19  The  presence in  Member  States of  projects  co-financed  by  the Union  under  Cohesion  policy (including  the  YEI),  TEN, 

CEF, EAFRD, EMFF and the EFSI was not assessed. 

20 It is worth highlighting that the respect of the minimum benchmark is assessed only at the time of the assessment of the 
application for the use of the clause. That approach is justified by the fact that the clauses are not retracted once granted, if 
compliance with the minimum benchmark is altered due to future revisions of the minimum benchmark.   

21 It is based on the subsets of eligibility criteria that can be assessed.   

19 

 
 
 
 
                                                 
Only four countries eventually applied and benefitted from use of the structural reform 
clause  out  of  the  18  countries  that  could  potentially  have  applied  for  it  during  the 
assessment period. Table 7 shows that nine Member States have never been eligible for use 
of the structural reform clause while six have always been eligible over the period assessed, 
one  of  which  benefitted  from  it  in  2017  (Lithuania).  The  other  three  Member  States  that 
benefitted  from  the  clause  are  Italy  in  2016,  and  Latvia  and  Finland  in  2017.    Italy  and 
Finland  also  applied  for  use  of  the  investment  clause  respectively  in  2016  and  2017.  In  the 
case  of  Finland,  the  Commission  applied  "constrained  judgement"  to  the  estimate  of  the 
output gaps and on that basis concluded on its eligibility for the clauses22. 

Table  7:  Fulfilment  of  some  eligibility  criteria  and  scope  for  flexibility  based  on  real  time 
data 

The  respect  of  the  minimum  benchmark  for  both  clauses  proves  to  be  a  more 
demanding  criterion  than  the  maximum  allowable  distance  from  the  MTO  of  1.5%  of 

22 The three eligibility criteria were fulfilled as follows: 
  achievement  of  the  MTO  within  the  four-year  horizon  of  the  SCP:  based  on  the  Commission  2017  spring  forecast, 
Finland  was  expected  to  remain  sufficiently  close  to  its  MTO  in  2017-2018  and  according  to  the  Government  plans, 
Finland would return to its MTO in 2019. In addition, on the basis of the constrained judgement approach, the structural 
balance  in  2016  was  estimated  at  -0.5%  (Finland's  MTO).  Therefore,  the  eligibility  criterion  of  a  maximum  initial 
distance of 1.5% of GDP between the structural balance in 2016 and the MTO was satisfied; 

  an appropriate safety margin is continuously preserved: on the basis of the constrained judgement approach, the structural 
balance  was  estimated  at  -1%  in  2017  and  2018,  above  the  minimum  benchmark  of  -1.1%  (2019  was  beyond  the 
Commission 2017 spring forecast horizon);  

  negative GDP growth or output gap lower than -1.5% of GDP: on the basis of the constrained judgement approach, the 
output gap for 2017 was estimated at -2.1% of potential GDP (-1.4% on the basis of the commonly agreed methodology). 
20 

Member State201520162017201820152016201720182015201620172018BEA,BA,BA,BA,BA,BA,B,CA,B,CA,B,CBGA,BA,B,CCC0.50.50.5CZBB,CCCC0.10.50.5DKBBC0.20.030.5DECCCC0.50.50.50.5EECCCC0.50.50.50.5IE (EDP 2015)A,BAA,B,CA,CC0.5ES (EDP 2018)FR (EDP 2017)A,BA,B,CHR (EDP 2016)BBB,CB,CITA,BA,BA,B,CA,B,C0.750.75CY (EDP 2015)CCC0.50.50.5LVBBBB,CB,CCB,C0.1LTCCCC0.50.50.50.0LUCCCC0.40.50.50.5HUBBBA,BB,CB,CB,CA,B,CMTA,BAAA,B,CA,CA,CC0.5NLBCB,CC0.60.50.5ATCCCC0.50.40.40.5PLA,BA,BA,BA,BA,B,CA,B,CA,B,CA,B,CPT (EDP 2016)A,BA,BA,B,CA,B,CROBA,BA,BCB,CA,B,CA,B,C0.1SI (EDP 2015)A,BA,BA,BA,B,CA,B,CA,B,CSKA,BBAA,BBA,CC0.5FIBBBBB,CB,C0.2SECCCC0.50.050.10.5UK (EDP 2016-17)A,BA,BA,B,CA,B,CLEGEND              Member State in EDP              Member State is potentially eligibile               Member State is not eligibleA means that the condition of max distance of 1.5% of GDP from the MTO is not metB means that the condition of respecting the minimum benchmark is not metC means that the condition of negative real GDP growth and output gap below -1.5% are both not metStructural reform clauseInvestment clauseIf the MS can apply, how big is the scope for flexibility available  (SBt -  MB)?Is the MS satisfying the eligibilty conditions under consideration? 
 
 
                                                 
GDP.  The  exercise  described  above  also  illustrates  which  of  those  ex  ante  criteria  are  the 
most  demanding.  Over  the  years  assessed,  the  respect  of  the  minimum  benchmark  is  less 
frequently met than the maximum distance of 1.5% of GDP from the MTO. In particular, the 
annual  update  of  the  minimum  benchmarks  has  led  to  marginally  stricter  benchmarks  over 
time. At the same  time, as  economic conditions improve, the required fiscal efforts become 
larger and the Member States' structural balances should converge faster towards their MTO, 
making the respect of the minimum benchmark easier.  

The specific eligibility criteria for the investment clause, which requires a country to be 
in  bad  economic  times,  has  become  harder  to  fulfil,  as  the  recovery  strengthens.  With 
respect to the eligibility criterion for the investment clause (i.e. negative real GDP growth or 
negative output gap below 1.5%), all Member States experienced positive GDP growth since 
2015  but  around  half  of  them  showed  an  output  gap  below  -1.5%  in  2015.  However,  as 
economic  conditions  improved  and  output  gaps  started  to  close,  by  2018  only  Greece  still 
appears to be in bad times.   

The scope for flexibility averaged to around 0.4% of GDP in the Member States eligible 
for use of the clauses. It is possible to determine the scope for flexibility available to those 
Member States that could have applied for the clauses. That scope for flexibility is computed 
as the difference between the structural balance in year t and the minimum benchmark, under 
the  assumption  that  the  Member  State  does  not  benefit  already  from  other  clauses,  e.g.  the 
pension clause. The commonly agreed position also imposes a cap on the flexibility which can 
be granted to a Member State, namely 0.5% of GDP for each clause or 0.75% in case of both 
clauses  being  granted.  That  capping  is  taken  into  account  when  computing  the  available 
scope. As reported in Table 7, the scope for flexibility for each of the years assessed averages 
around 0.4% of GDP, with substantial variation by Member State and year. 

II.2  The Member States that actually applied for use of the clauses 

Four  Member  States  were  granted  use  of  the  structural  reform  clause,  namely  Italy, 
Latvia,  Lithuania  and  Finland23.  Italy  and  Finland  were  the  only  two  Member  States 
that were granted use of the investment clause. Member States can make use (or not) of the 
granted  flexibility,  in  particular  by  fulfilling  the  eligibility  criteria.  To  be  eligible,  all  four 
Member States were either close to their MTO or, at least, no farther from it by 1.5% of GDP, 
which  limits  the  possible  induced  delays  in  achieving  the  MTO24.  Table  8  shows  the 
flexibility  applied  for  and  granted  to  each  Member  State  under  the  structural  reform  and 

23  The  temporary  deviations  granted  to  Latvia  and  Lithuania  for  the  reform  of  their  pension  systems  is  considered  to  fall 
outside  the  scope  of  the  review,  because  the  pension  reform  clause  was  already  well  detailed  and  applied  before  the 
commonly agreed position on flexibility in the SGP. Latvia implemented a systemic pension reform as from 2013, which 
entailed a gradual increase in the share of social security contributions diverted to a funded pension scheme. The reform 
was fully implemented in three steps in 2013, 2015 and 2016, with each step leading to a temporary deviation lasting for 
three years. The allowed deviation totalled 0.5% of GDP in 2013-14, 0.8% in 2015, 0.6% in 2016-17 and 0.3% in 2018. In 
the case of Lithuania, in April 2015, at the time of the submission of the 2015 Stability Programme, Lithuania applied for 
flexibility in 2016 of 0.1% of GDP for its systemic pension reform. The amount requested was 0.1% of GDP. The pension 
reform clause was demanded in relation to changes to the  Lithuanian pension system initiated in 2012, which resulted in 
three sources being used to fund the second pillar of the pension system, as of 2014. From 2016 contributions paid by the 
State  increased  by  one  percentage  point,  resulting  in  an  estimated  additional  spending  of  EUR  38.7  million  (or  0.1%  of 
GDP). According to the 2015 Stability Programme, such modification would allow reducing spending on pensions by 0.1% 
of GDP by 2040 and 0.2% of GDP by 2050 and 2060. 

24 A slight delay in achieving the MTO cannot be ruled out, as a predictable consequence of the modulation of the required 
budgetary  adjustment,  in  particular  if  a  Member  State  cumulates  the  use  of  the  two  clauses  and  a  (temporarily)  lower 
adjustment as per the matrix.  

21 

 
 
                                                 
investment clauses25 up to the spring 2018 forecast. Flexibility was formally granted in spring, 
as part of the Country Specific Recommendations issued by the Commission for adoption by 
the  Council.  As  regards  the  assessment  of  the  implementation  of  the  structural  reforms,  the 
Commission  performed  a  continuous  monitoring  of  the  progress  in  the  implementation  of 
structural  reforms,  with  detailed  assessments  published  in  Member  States’  annual  Country 
Reports.  However,  implementation  may  not  be  fully  achieved  already  in  the  year  when 
granting the clause. This is because some applications for use of the clause were based on a 
package of reform measures rather than on one single reform. As a result, it is unlikely (and 
would  perhaps  be  unwise  in  terms  of  the  economic  impact)  for  all  of  the  measures  to  be 
introduced at once. Therefore, it may require a number of years before all of the reforms can 
be effectively implemented.  

Table 8: Flexibility under the structural reform and investment clauses 

Section  II.2  is  structured  as  follows.  First,  it  provides  an  assessment  of  the  information 
provided by each Member State that was granted use of the clauses and the fulfilment of the 
(ex post) eligibility criteria (sections II.2.1 to II.2.4). Then, Romania is discussed as a case of 
rejection  of  an  application  for  flexibility  (section  II.2.5).  Box  3  presents  Finland  as  a  case 
study  on  the  interplay  of  the  clauses  for  the  purpose  of  determining  the  required  fiscal 
adjustments. 

II.2.1  Italy 

A. Application for flexibility  

In April 2015, in its 2015 Stability Programme, Italy requested a temporary deviation of 0.4% 
of GDP from the required adjustment path towards the MTO in 2016 in view of the planned 
implementation  of  major  structural  reforms  with  a  positive  impact  on  the  long-term 
sustainability  of  public  finances.  In  October  2015,  in  its  2016  Draft  Budgetary  Plan,  Italy 
updated the requested temporary deviation in 2016 for structural reforms to 0.5% of GDP and 
requested an additional temporary deviation for 2016 of 0.3% of GDP under the investment 
clause. 

B. Information provided by Member State  

Structural reform clause 

The reform areas put forward in the 2015 Stability Programme and the 2016 Draft Budgetary 
Plan included: (i) public administration and simplification; (ii) product and service markets; 
(iii) labour market; (iv) civil justice; (v) education; (vi) a tax shift; (vii) spending review as 
financing  measure;  and  (viii)  changes  in  bankruptcy  law  and  in  the  tax  treatment  of  banks’ 
nonperforming  loans.  The  2015  Stability  Programme  included  information  on  the  state  of 
implementation  of  the  reforms  (already  adopted  or  about  to  be  completed)  as  well  as  a 

25 The unusual event clause is outside the scope of this review. 

22 

RequestedGrantedFlexibility usedRequested GrantedRequested (additional)Granted (additional)RequestedGrantedFlexibility usedRequestedGrantedRequestedRevised requestedGrantedTimelineDBP2016Spring 2016Spring 2017SCP2015Spring 2015DBP2016Spring 2016DBP2017Spring 2017Spring 2018SCP2016Spring 2016DBP2017Updated DBP2017Spring 2017IT0.250.250.210.40.40.10.1LV0.2-0.50.1*LT0.6-0.60.50.4*FI0.10.10.00.50.5* while granting the requested flexibility for structural reforms, the temporary deviation allowed for 2017 is limited in order to respect the minimum benchmark MS20172016Structural reformInvestmentInvestmentStructural reform 
 
 
                                                 
detailed timeline for delivery (by the end of 2015 most reforms were to have been completed). 
The positive impact on GDP was estimated at 3% of GDP by 2025, and the national indicator 
measuring the direct and indirect net gains in debt sustainability was expected to improve by 
1.1pps.  Although  the  estimates  were  produced  by  the  Ministry  of  Finance  without 
independent evaluations, extensive details on the computations were provided together with a 
comparison with similar estimates produced by the OECD. 

Investment Clause 

The  amounts  presented  under  the  investment  clause  included  EUR  5.1  billion  (or  0.3%  of 
GDP) of national expenditure on projects co-financed by the Union, representing 46.6% of the 
total  cost  of  the  projects.  The  policy  areas  concerned  were:  competitiveness  of  SMEs, 
research  and  innovation,  sustainable  transport,  network  infrastructures,  energy  efficiency, 
employment  and  labour  mobility,  education  and  training,  social  inclusion,  institutional 
capacity  and  efficiency  of  the  public  administration.  The  increase  in  potential  GDP  was 
estimated at 0.3% by 2027, corresponding to an improvement in debt sustainability of 1.7 pps, 
measuring both the direct and indirect net gains. 

C. Assessment of fulfilment of conditions  

The  amount  of  flexibility  granted  ex  ante  and  ex  post  under  the  structural  reform  clause 
amounts  to  0.5%  of  GDP26.  The  Commission  assessed  the  estimated  positive  impact  on 
growth and the long-term sustainability of public finances as plausible at the time of granting 
the  clause,  through  their  effect  on  growth  and  tax-intake.  Implementation  of  the  structural 
reform  clause  has  been  monitored  by  the  Commission  services  based  on  the  information 
provided  by  the  Italian  authorities.  The  2017  and  2018  Country  Reports  acknowledged  the 
progress  made  in  several  policy  areas,  but  also  pointed  out  the  remaining  obstacles  and  a 
general  slow-down  of  the  reform  momentum.  In  some  cases,  reforms  have  been  fully 
implemented, while in others the relevant laws have been adopted but implementation is still 
ongoing.  Italy's  economic  outcomes  also  seem  to  broadly  confirm  ex  ante  expectations. 
Specifically,  Italy's  output  growth  accelerated  to  1.5%  in  2017  (from  0.9%  in  2016), 
supported in particular by exports and investment. That momentum, driven both by domestic 
and external demand, is expected by the Commission to largely continue in 2018 as well. 

The Commission recognised ex ante a temporary deviation of only 0.25% of GDP under the 
investment  clause  due  to  the  uncertainty  in  some  planned  investment.  This  also  allowed 
respecting  the  eligibility  criteria  according  to  which  the  cumulated  deviation  for  the  two 
clauses cannot exceed 0.75% of GDP. Ex post, flexibility was reduced to 0.21% of GDP in 
light  of  the  actual  eligible  investment.  In  terms  of  the  eligibility  criteria,  Italy's  total  public 
investment declined by around EUR 1.6 billion in  2016 compared to 2015. However, when 
taking into account the sharp fall in the amount of investment financed though Union funds, 
nationally-financed  public  investment  moderately  increased  in  2016  by  around  EUR  1.1 
billion, pointing to no substitution between co-financed and nationally-financed investment in 
line with the commonly agreed position. 

26  That  temporary  deviation  for  2016  was  granted  in  two  steps:  0.4%  of  GDP  under  the  structural reform  clause  in  spring 
2015 and a further 0.35% of GDP, of which additional 0.1% of GDP under the structural reform clause and 0.25% of GDP 
under the investment clause in spring 2016, conditional however on: (i) the existence of credible plans for the resumption 
of the adjustment path towards the MTO as of 2017; (ii) the effective use of a deviation from the adjustment path for the 
purpose  of  increasing  investments;  and  (iii)  progress  with  the  structural  reform  agenda,  taking  into  account  the  Council 
recommendations. 

23 

 
 
                                                 
II.2.2  Latvia  

A. Application for flexibility 

Latvia  applied  for  flexibility  in  2016  for  a  major  structural  reform  in  the  health  sector.  The 
first  application  was  made  in  the  2015  Stability  Programme  but  was  rejected  because  the 
eligibility  criterion  of  the  minimum  benchmark  was  not  met  based  on  the  Commission 
forecast. The second application in the 2016 Stability Programme for a temporary deviation of 
0.5 % of GDP in 2017 met the eligibility criteria. The carry forward effect27 of the temporary 
deviations granted in 2015 and 2016 under the pension reform clause and the respect of the 
minimum  benchmark  of  1.7%  of  GDP  constrains  the  allowed  deviation  under  the  structural 
reform clause to  0.1% of GDP in  2017 0.4%  of GDP in  2018 and the full 0.5%  of GDP in 
2019.  

B. Information provided by Member State  

The  use  of  structural  reform  clause  for  the  healthcare  sector  was  based  on  ongoing 
implementation of Latvia’s Health Strategy for 2014-2020. One of the key objectives of the 
strategy is to increase public financing for the health sector by around 1% of GDP by 2020, 
exceeding  the  amount  of  flexibility  requested  under  the  reform  clause.  Specific  measures 
under the reform clause are detailed and implemented as part of the annual budgetary process.  

The reform was independently evaluated by the University of Latvia. The reform is estimated 
to  reduce  the  large  number  of  premature  deaths  due  to  health  problems,  thus  increasing 
working-age  population  and  employment.  The  full  implementation  of  the  reform  would 
increase  employment  by  0.6%  and  the  GDP  level  by  2.2%  by  2023.  It  in  turn  will  have  a 
positive impact on the sustainability of public finances in the long run.  

C. Assessment of fulfilment of conditions  

With  respect  to  the  structural  reform  in  the  health  sector,  the  Commission  assessed  the 
estimated  positive  impact  on  growth  and  the  long-term  sustainability  of  public  finances  as 
plausible  at  the  time  of  granting  the  clause.  That  assessment  was  based  on  the  information 
provided in the 2016 stability programme and the evaluation by the University of Latvia.  

Implementation  of  the  structural  reform  clause  has  been  monitored  by  the  Commission 
services based on the information provided in the Stability Programmes of Latvia. For 2017, 
the 2017 Stability Programme of Latvia presented a package of three measures totalling 0.1% 
of  GDP:  (i)  early  diagnosis  and  treatment  of  oncological  patients,  (ii)  improved  access  to 
specialists,  examinations,  day  care,  rehabilitation  and  (iii)  improved  access  to  medicine  for 
hepatitis  C  virus  patients.  Ex  ante  assessment  of  those  measures  confirmed  an  estimated 
positive effect on GDP and public finances in the long run as plausible. The implementation 
broadly  followed  the  announced  plans.  For  2018,  the measures  launched  in  2017  are 
continued and expanded. The 2018 Stability Programme reconfirmed a positive effect of the 
reform measures on economic growth, employment and public finances in the long run, which 
the Commission has assessed as plausible. 

27  In  line  with  the  commonly  agreed  position,  the  temporary  deviations  under  all  clauses  are  applied  in  such  a  way  as  to 
ensure  that  a  Member  State  benefiting  from  the  clause  experiences  the  same  increase  in  its  debt  level  as  a  result  of  the 
deviation, regardless of its distance from the MTO. See also Box 3. 

24 

 
 
 
 
                                                 
II.2.3  Lithuania  

A. Application for flexibility 

In April 2016, Lithuania requested flexibility for a structural reform (The New Social Model), 
but the clause was not granted as the reform package had yet to be adopted. In October 2016, 
Lithuania's  caretaker  government  submitted  the  (no  policy  change)  2017  Draft  Budgetary 
Plan containing a request for flexibility in 2017 due to the same structural reform. The amount 
requested was 0.6% of GDP. It was reduced to 0.5% of GDP in the updated 2017 DBP. The 
request for flexibility was confirmed in the 2017 Stability Programme. 

B. Information provided by Member State  

The structural reform package known as 'The New Social Model' aimed at introducing more 
flexibility  in  labour  relations  and  a  new  pension  adjustment  mechanism.  According  to  the 
information provided in the updated 2017 DBP, the cost of the reform amounted to EUR 220 
million  (or  0.5%  of  GDP).  In  the  medium  term,  according  to  an  independent  group  of 
scientists  and  experts,  that  reform  should  result  in  10%  higher  employment,  while  pension-
related changes should reduce expenditures by 0.8%. 

C. Assessment of fulfilment of conditions  

The Commission assessed the estimated positive impact of the reform as plausible at the time 
of  granting  the  clause.  The  assessment  of  the  'The  New  Social  Model'  structural  reform 
package was performed during the evaluation of the 2017 Stability Programme.  By then all 
the necessary legal acts were adopted, and their provisions came into force in 2017. Lithuania 
was granted a temporary deviation of 0.4% of GDP for 2017 taking into account the country's 
MTO, the minimum benchmark and previously granted flexibility under the pension clause.  

In 2017 under the New Social Model labour relations were made more flexible, i.e. the new 
types  of  contracts  were  introduced  and  periods  of  notice  became  shorter,  while  severance 
allowances for dismissed employees were lowered. On the other hand, the rules for receiving 
unemployment benefits were adjusted and more persons became eligible to receive such type 
of financial support and also for a longer period. 

Following  the  amended  legislation  on  the  State  social  insurance  pensions,  the  new  pension 
indexation  mechanism  was  applied  for  the  first  time  in  2018.  As  that  mechanism  links 
pensions  to  the  wage  bill  growth,  Lithuania’s  long-term  fiscal  sustainability  seems  to  have 
improved. The 2018 Country Report acknowledged the progress made in that respect, but also 
pointed out the remaining risks due to uncertainties surrounding the adequacy of pensions. 

II.2.4  Finland 

A. Application for flexibility  

Finland  requested  flexibility  for  2017  on  the  basis  of  structural  reforms  and  investment  in 
October  2016  in  its  2017  Draft  Budgetary  Plan.  In  its  application,  Finland  requested  a 
temporary deviation from the MTO or the adjustment path towards it of 0.5% of GDP under 
the structural reform clause and of 0.1% of GDP under the investment clause.  

B. Information provided by Member State  

Structural reform clause 

In its 2017 DBP, two major reforms were presented: a pension reform that was implemented 
as  from  2017  and  the  Competitiveness  Pact,  a  labour  market  agreement,  which  came  into 

25 

 
 
force in January 2017. The main feature of the pension reform28 was that the lowest old-age 
retirement  age  of  the  earnings-related  pension  system  would  be  increased  gradually  by  two 
years. At the time of submission of the request, the Research Institute of the Finnish Economy 
estimated the positive impact of the reform on the sustainability of public debt at 1.1 pps of 
GDP. 

The  Competitiveness  Pact  aimed  at  improving  Finland's  cost-competitiveness  vis-à-vis 
competitor  countries.  The  pact  included  a  12-month  wage  freeze,  an  increase  in  annual 
working time without extra compensation, and a reduction and partial shift of social security 
contributions  from  employers  towards  employees.  As  a  result  of  the  measures  of  the  Pact, 
Finland's unit labour costs were expected to decrease by 2020 by about 4%. The government 
decided  to  lower  personal  income  taxation  to  compensate  employees  for  the  increase  in 
contributions.  Therefore,  as  a  short-run  cost,  general  government  revenue  was  projected  to 
decline by 0.55% of GDP in 2017.  

Investment Clause  

According  to  the  Finnish  authorities,  Finland’s  financing  contribution  in  2017  grant 
authorisations  to  Structural  Funds,  external  border  cooperation  and  other  cohesion  policy 
programmes totalled EUR 175 million (0.1% of GDP). 

C. Assessment of fulfilment of conditions  

Structural reform clause 

The  Commission  assessed  the  estimated  positive  impact  on  growth  and  the  long-term 
sustainability of public finances as plausible at the time of granting the clause. The pension 
reform was already adopted by the Parliament at the time of submission of the request for the 
clause. An ex post assessment points to the same direction as ex ante expectations: taking into 
account the pension reform, the estimates for long-run sustainability of public finances have 
improved by1.1pps of GDP.  

In  addition,  the  Competitiveness  Pact  was  implemented  in  2017.  The  2018  Country  Report 
acknowledged a positive trend in Finland's cost competitiveness since 2014. That trend was 
further  strengthened  by  the  Competitiveness  Pact.  The  preliminary  economic  outcomes  are 
also rather close to  the ex ante expectations. Specifically, as a result of the Pact and on the 
basis of preliminary  outturn data, Finland's unit labour costs decreased in 2017 by 3.0%.  In 
addition,  exports  increased  significantly  so  that  Finland  gained  export  market  share  and 
employment expanded by 1.1%. As for the short-run cost, direct taxes paid by households fell 
by about 5% (or 0.2% of GDP) and contributions to social security declined by 2.2% (0.3% of 
GDP) despite a 2.8% increase in the wage bill. The amount of flexibility granted ex ante and 
ex post amounts to 0.5% of GDP. 

Investment Clause  

As with the structural reform clause, ex ante the criteria for eligibility (a negative output gap 
larger than -1.5% of potential GDP, the respect of the minimum benchmark (-1.1% of GDP) 
with the use of constrained judgement29, increasing public investment) were met. Therefore, 
in  spring  2017,  Finland  was  granted  a  temporary  deviation  of  0.1%  of  GDP  under  the 
investment clause. However, in spring 2018, outturn data for 2017 showed a decline in public 

28 It should be noted that that pension reform was part of the structural reform clause. In fact, to be eligible for the pension 

reform clause, a reform should qualify as a systemic pension reform according to Eurostat.  

29 See footnote 22. 

26 

 
 
                                                 
investment in 2017 compared to the previous year, while investment linked to Union funds is 
estimated to have remained stable.  

27 

 
 
Box  3  –  Finland:  a  specific  case  illustrating  the  potentially  complex  interplay  of  the 
clauses for the purpose of determining the required fiscal adjustment  

This  box  includes  an  example  on  how  the  interplay  of  the  clauses  works  in  practice  when 
determining  the  requirements  (e.g.  updating  Finland's  fiscal  requirements  for  2017  and 
determining  those  for  2018  in  the  spring  of  2017).  It  highlights  how  technical  it  can  be  to 
determine  the  requirements,  mainly  because  of  the  carry  forward  effects  of  previously 
granted flexibility. 

When  applying  flexibility,  equal  treatment  of  Member  States  irrespective  of  their 
distance  to  the  MTO  has  to  be  ensured.  In  line  with  the  commonly  agreed  position,  the 
temporary deviations under all clauses are applied in such a way as to ensure that a Member 
State benefiting from the clause experiences the same increase in its debt level as a result of 
the deviation, regardless of its distance from the MTO. Concretely, a Member State that is at 
its MTO is allowed to depart from it for three years and therefore the flexibility granted in a 
given year is carried forward for the next two years. For Member States not yet at the MTO 
but  likely  to  reach  it  before  the  end  of  the  period  during  which  they  have  the  clause,  the 
matrix-based adjustment path is delayed by one year. Specifically, they are required to adjust 
towards  their  MTO  until  they  reach  a  distance  from  the  MTO  that  is  equal  to  the  allowed 
temporary deviation30.  

When  Finland  was  granted  flexibility  under  the  structural  reform  and  investment 
clauses, it was already benefiting from flexibility under the unusual event clause. As a 
case  study,  Finland  was  granted  temporary  deviations  in  2017  of  0.5%  of  GDP  for  major 
structural reforms and 0.1% of GDP for Union co-financed investments (see Section II.2.X). 
Finland  had  also  been  granted  a  temporary  deviation  related  to  the  exceptional  inflow  of 
refugees  of  0.05%  of  GDP  in  2015  and  0.17%  of  GDP  in  2016.  In  its  2017  Stability 
Programme, Finland also reported an expected decrease by 0.15% of GDP of the budgetary 
impact stemming from the exceptional inflow of refugees in 2017.  

In  spring  2017,  when  the  structural  reform  and  investment  clauses  were  formally 
granted,  the  fiscal  requirement  for  2017  was  updated  accordingly.  The  following  steps 
were followed: 

i. 

Finland's  initial  fiscal  requirement  for  2017  corresponded  to  a  structural  effort  of 
0.36% of GDP31. In fact, Finland had an initial structural balance position in 2016 of -
0.86%  of  GDP  and  a  MTO  of  -0.5%  of  GDP  on  the  basis  of  the  Commission  2017 
spring forecast 

ii.  Adjusting this requirement for the flexibility granted for 2017 (0.6% of GDP) resulted 
in  an  allowed  deterioration  of  the  structural  balance  by  0.24%  of  GDP  (0.36%  - 
0.6%). 

iii.  However, in 2017, Finland was allowed to depart from its MTO taking into account 

30  Algebraically,  the  adjustment  path  towards  the  MTO  in  year  t+1  for  a  Member  State  benefitting  from  the  structural 

reform/investment clause and/or the unusual event clause will be: 

  SBt+1 – SBt = min[adj_matrixt+1 – deviation increment t+1 , {(MTO – deviation level t+1) – SBt }] 

In  fact,  the  Member  State  would  halt  the  adjustment  if,  while  being  entitled  to  the  deviation,  the  distance  between  its 
structural  balance  and  the  MTO  corresponds  to  the  cumulated  allowed  deviation  (i.e.  its  MTO  minus  the  cumulated 
temporary deviation). See also Annex 13 of the Vade mecum on the SGP – 2018 edition. 

31 Applying the freezing principles in Spring 2017, the requirement corresponded to the distance of the structural balance to 
the MTO, being this lower than the pure matrix-based adjustment (0.6% of GDP). This is to avoid that the matrix-based 
adjustment leads to an overachievement of the MTO. 

28 

 
 
                                                 
not only the newly granted flexibility of 0.6% of GDP but also the carry-over of the 
temporary  deviations  under  the  unusual  event  clause32  granted  in  2015  and  2016 
(0.22%  of  GDP).  Considering  also  the  latter,  the  fiscal  requirement  for  Finland 
corresponded to an allowed deterioration of the structural balance by 0.46% of GDP (- 
0.5% - 0.6% - 0.22% - 0.86%). 
If  the  expected  decrease  by  0.15%  of  GDP  in  the  costs  related  to  the  exceptional 
inflow of refugees were also to be considered, the allowed deterioration would have to 
be reduced by that amount, to 0.31% of GDP. 

iv. 

It is worth noting two further aspects. Firstly, the complexity in determining the requirement 
for  2017  arises  from  the  interplay  of  the  flexibility  granted  for  2017  under  the  structural 
reform and  investment clauses with the carry-over of the flexibility  granted in  the previous 
years  under  the  unusual  event  clause.  Secondly,  since  Finland's  initial  structural  balance 
position  was  -0.86%  of  GDP,  the  temporary  deviation  for  2017  (-0.46%  of  GDP)  allows 
Finland  to  deteriorate  to  a  structural  balance  position  (-1.32%)  below  its  minimum 
benchmark (-1.1%).33  

Such complexity also applied for the 2018 requirement for Finland. On the basis of the 
Commission 2017 spring forecast, the Commission also set as the fiscal requirement for 2018 
a structural effort of 0.1% of GDP. When setting that requirement, the following steps were 
followed: 

i. 

The  structural  balance  in  2017  (i.e.  -1.34%  of  GDP)  was  estimated  well  below  the 
MTO  (-0.5%  of  GDP).  Finland  being  in  normal  economic  times,  the  matrix-based 
requirement would have therefore led to a structural effort of 0.6% of GDP. 

ii.  However,  in  2018,  Finland  was  allowed  to  depart  from  its  MTO  (-0.5%  of  GDP) 
taking  into  account  the  temporary  deviations  carried  forward  on  the  basis  of  the 
unusual  event  clause  granted  in  2016  (0.17%  of  GDP),  the  structural  reform  clause 
and  the  investment  clause  (0.6%  of  GDP).  Considering  all  that  and  Finland's  initial 
structural  balance  position  (-1.34% of  GDP),  the  fiscal  requirement  for  Finland  was 
set at 0.07% of GDP (- 0.5% - 0.6% - 0.17% - 1.34%). 
If  the  expected  decrease  by  0.15%  of  GDP  in  the  costs  related  to  the  exceptional 
inflow of refugees in 2017 were also to be considered and carried over, the required 
effort would have to be increased by that amount, to 0.22% of GDP. 

iii. 

II.2.5  Romania as a case of rejection of application for flexibility 

In April 2015, at the time of the submission of the 2015 Convergence Programme, Romania 
applied for the use of the structural reform clause in 2016. Romania applied for a temporary 
deviation of 0.5% of GDP under the structural reform clause. The structural reforms included 
in the 2015 Convergence Programme pertained to research and development, the health care 
sector and social inclusion. The Convergence Programme stated that detailed documentation 
would  be  submitted  by  June.  Hence,  it  was  not  possible  to  provide  an  assessment  of  the 
reforms and their impact on public finances. The Commission  concluded that  Romania was 
also  not  eligible  for  use  of  the  structural  reform  clause  given  that  the  structural  deficit  for 

32 The carry-over of deviations due to unusual events results solely from a consistent application of the approach agreed for 

the structural reform and investment clauses also to the unusual event clause.  

33 This is possible because the minimum benchmark is respected after applying the "constrained judgement approach" to the 
estimates of the output gaps (see footnote 22). In addition, the temporary deviation related to the unusual event clause is not 
subject to such condition. 

29 

 
 
                                                 
2016,  as  forecast  in  the  Commission's  2015  spring  forecast,  significantly  exceeded  the 
minimum benchmark (i.e. 3.4% versus 1.8% of GDP).  

II.3  Summarising the findings on the structural reform and investment clause 

There  are  common  eligibility  criteria  across  the  structural  reform  and  investment 
clause,  as  well  as  a  number  of  specific  requirements  for  each  clause.  The  eligibility 
criteria  were  designed  to  safeguard  fiscal  sustainability  while  supporting  and  encouraging 
both  structural  reforms  and  government  investment.  A  comprehensive  overview  of  those 
eligibility  criteria  confirms  that  most  of  them  are  common  between  the  two  clauses.  That 
commonality  is  also  explained  by  the  fact  that  the  investment  clause  is,  in  legal  terms,  a 
specification of the structural reform clause. Some specific eligibility criteria were added for 
each clause, which was justified by their particular nature.  

Regarding the common criteria, the respect of the minimum benchmark has proved to 
be  a  more  demanding  criterion  than  the  maximum  allowable  distance  from  the  MTO. 
Indeed, over 2015-2018, the respect of the minimum benchmark is  less frequently met than 
the maximum distance of 1.5% of GDP from the MTO. This is in part explained by the fact 
that  the  annual  update  has  tightened  the  minimum  benchmarks  over  the  years,  as  a 
consequence of the calculation methodology. 

Over  2015-2018,  the  specific  eligibility  criterion  for  the  investment  clause  requiring  a 
Member State to be in bad economic times has become increasingly difficult to meet. A 
greater number of Member States could have applied for the structural reform clause than for 
the investment clause34. This is notably due to the specific eligibility criterion applying to the 
investment  clause,  which  requires  being  in  bad  economic  times  (i.e.  negative  real  GDP 
growth  or  negative  output  gap  below  1.5%).  As  economic  conditions  improve  (with  many 
countries  closing  their  output  gaps),  this  criterion  has  prevented  most  Member  States  from 
requesting  the  investment  clause.  By  2018  only  Greece  still  appears  to  be  in  bad  times. 
Examining the implications of the continuation of the investment clause, the review concludes 
that,  on  the  basis  on  the  Spring  2018  Commission  forecast,  all  Member  States  (excluding 
Greece) will remain in normal or good economic times in 2018 and 2019, with an output gap 
much higher than -1.5%, and will, therefore, be ineligible to the investment clause.   

Few eligible Member States have actually applied for use of the structural reform or the 
investment clause. Two Member States have applied for use of both clauses at the same 
time. Out of 18 countries that could have potentially applied for use of the structural reform 
clause in at least one of the years assessed (2015-2018), only four eventually applied for use 
of and benefitted from the clause. Regarding the investment clause, only Italy benefitted from 
the investment clause on top of the structural reform clause in 2016. 

For the four Member States that were granted flexibility, the objectives of the clauses, 
namely  strengthening  the  link  between  investment,  structural  reforms  and  fiscal 
responsibility,  have  been  reached to  some  extent.  Regarding  the  structural  reform  clause, 
while some structural reforms have been fully implemented in the Member States that were 
granted the clause, others are still under implementation. Regarding the investment clause, the 
review  confirms  that  the  projects  eligible  for  the  investment  clause  were  co-funded  by  the 
Union.  The  analysis  is  more  mixed  as  to  whether  the  investment  clause  led  to  new 

34  This is  based  on  the  subsets  of  eligibility  criteria  that  can  be  assessed.  In  addition,  cases  where  those  eligibility  criteria 

could be met as a result of the constrained judgement approach were not considered.   

30 

 
 
                                                 
investments. While acknowledging that total public investment may be highly dependent on 
the  implementation  of  Union  funding,  the  public  investment  financed  nationally  increased 
only in the case of Italy while it remained stable in Finland. In addition, public investment did 
not increase by the same amount as the temporary budgetary deviation allowed by the clause, 
which  suggests  that  the  flexibility  was  partly  used  for  other  purposes  than  boosting 
investment. Overall, the flexibility to foster structural reforms and public investment appears 
to have been economically justified, when looking at the Member States that benefitted from 
it.  Nevertheless,  the  positive  impact  of  the  reforms/investment  on  sustainability  is  meant  to 
unfold over time and is only partially captured by this review, which covers only few years. 

31