COMMISSION STAFF WORKING DOCUMENT Report on the application of Regulations (EU) No 1173/2011, 1174/2011, 1175/2011, 1176/2011, 1177/2011, 472/2013 and 473/2013 and Council Directive 2011/85/EU Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE AND THE COMMITTEE OF THE REGIONS Economic governance review Report on the application of Regulations (EU) No 1173/2011, 1174/2011, 1175/2011, 1176/2011, 1177/2011, 472/2013 and 473/2013 and Council Directive 2011/85/EU
Date: 2020-02-05
Institutions: Directorate-General for Economic and Financial Affairs, European Commission
Subjects: EU Member State, Economic and Monetary Union, budget deficit, budget policy, budgetary control, economic convergence, economic disparity, economic reform, macroeconomics, participating country (euro area)

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 5.2.2020  SWD(2020) 210 final  COMMISSION STAFF WORKING DOCUMENT Report on the application of Regulations (EU) No 1173/2011, 1174/2011, 1175/2011, 1176/2011, 1177/2011, 472/2013 and 473/2013 and Council Directive 2011/85/EU Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE AND THE COMMITTEE OF THE REGIONS Economic governance review            Report on the application of Regulations (EU) No 1173/2011, 1174/2011, 1175/2011, 1176/2011, 1177/2011, 472/2013 and 473/2013 and Council Directive 2011/85/EU {COM(2020) 55 final} - {SWD(2020) 211 final}  
 
 
COMMISSION STAFF WORKING DOCUMENT 

Report on the application of Regulations (EU) No 1173/2011, 1174/2011, 1175/2011, 
1176/2011, 1177/2011, 472/2013 and 473/2013 and Council Directive 2011/85/EU 

Accompanying the document 

COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN 
PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK, THE 
EUROPEAN ECONOMIC AND SOCIAL COMMITTEE AND THE COMMITTEE 
OF THE REGIONS 

Economic governance review 

Report on the application of Regulations (EU) No 1173/2011, 1174/2011, 1175/2011, 
1176/2011, 1177/2011, 472/2013 and 473/2013 and Council Directive 2011/85/EU1

1 Six pack: Regulation (EU) No 1173/2011 of the European Parliament and of the Council of 16 November 2011 
on the effective enforcement of budgetary surveillance in the euro area, OJ L 306, 23.11.2011, p. 1; Regulation 
(EU)  No  1174/2011  of  the  European  Parliament  and  of  the  Council  of  16  November  2011  on  enforcement 
measures  to  correct  excessive  macroeconomic  imbalances  in  the  euro  area,  OJ  L  306,  23.11.2011,  p.  8; 
Regulation (EU) No 1175/2011 of the European Parliament and of the Council of 16 November 2011 amending 
Council  Regulation  (EC)  No  1466/97  on  the  strengthening  of  the  surveillance  of  budgetary  positions  and  the 
surveillance and coordination of economic policies, OJ L 306, 23.11.2011, p. 12; Regulation (EU) 1176/2011 of 
the  European  Parliament  and  of  the  Council  of  16  November  2011  on  the  prevention  and  correction  of 
macroeconomic imbalances, OJ L 306, 23.11.2011, p. 25; Regulation (EU) No 1177/2011 of 8 November 2011 
amending Regulation (EC) No 1467/97 on speeding up and clarifying the implementation of the excessive deficit 
procedure,  OJ  L  306,  23.11.2011,  p.  33;  Directive  2011/85/EU  of  the  Council  of  8  November  2011  on  the 
requirements  for  budgetary  frameworks  of  the  Member  States,  OJ  L  306,  23.11.2011,  p.  41;  Two-pack: 
Regulation  (EU)  No  472/2013  of  the  European  Parliament  and  of  the  Council  of  21  May  2013  on  the 
strengthening  of  economic  and  budgetary  surveillance  of  Member  States  in  the  euro  area  experiencing  or 
threatened with serious difficulties with respect to their financial stability, OJ L 140, 27.5.2013, p. 1; Regulation 
(EU) No 473/2013 of the European Parliament and of the Council of 21 May 2013 on common provisions for 
monitoring and assessing draft budgetary plans and ensuring the correction of excessive deficit of the Member 
States in the euro area, OJ L 140, 27.5.2013, p. 11. 

1 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                 
 
Table of Contents 

1. 

Introduction ........................................................................................................................ 3 

2.  Fiscal surveillance .............................................................................................................. 3 

2.1 Objectives of the Stability and Growth Pact .................................................................... 3 

2.2 Implementation of the Stability and Growth Pact ............................................................ 6 

2.3 Developments at the level of national fiscal frameworks ................................................ 9 

2.4 Effectiveness of the fiscal surveillance framework ........................................................ 11 

2.5 Conclusions .................................................................................................................... 27 

3.  Macroeconomic Imbalance Procedure ............................................................................. 29 

3.1 Objectives of the Macroeconomic Imbalance Procedure ............................................... 29 

3.2 Implementation of the MIP ............................................................................................ 30 

3.2.1 The Alert Mechanism Report .................................................................................. 30 

3.2.2 In-depth reviews and classification of imbalances .................................................. 33 

3.2.3 Recommendation, monitoring, and enforcement .................................................... 37 

3.3 Effectiveness of the MIP ................................................................................................ 41 

3.3.1 Follow-up to policy recommendations .................................................................... 41 

3.3.2 The development of a supportive policy environment ............................................ 43 

3.3.3 Impact on economic outcomes ................................................................................ 46 

3.4 Conclusions .................................................................................................................... 49 

4. Euro area Member States experiencing or threatened with serious difficulties with financial 
stability ..................................................................................................................................... 54 

4.1 Objectives ....................................................................................................................... 54 

4.2 Enhanced surveillance .................................................................................................... 54 

4.3 Financial assistance and macroeconomic adjustment programmes ............................... 55 

4.4 Post-programme surveillance ......................................................................................... 56 

4.5 Conclusions .................................................................................................................... 56 

5  Overall findings ................................................................................................................ 58 

Annex 1: Assessing the impact of the SGP: empirical evidence ............................................. 60 

Annex 2: Assessing the impact of the MIP on policy progress: an empirical assessment ....... 67 

2 

 
 
 
 
 
 
 
1.  INTRODUCTION 

This  Staff  Working  Document  provides  evidence  and  analytical  underpinning  for  the 
Commission  Communication  on  the  economic  governance  review.  The  review 
encompasses legislative packages known as the six-pack and two-pack, which were adopted 
with  the  aim  of  strengthening  the  EU’s  economic  governance  system  in  response  to  the 
economic and financial crisis.2 The objective of the review, which is to be carried out every 
five years as mandated in the seven Regulations, is to assess their effectiveness, the progress 
in  ensuring  closer  coordination  of  economic  policies  and  sustained  convergence  in  the 
economic performance of the Member States in accordance with the Treaty of the Functioning 
of  the  European  Union,  and  where  applicable3  the  contribution  of  the  Regulations  to  the 
achievement of the Union’s strategy for growth and jobs. All seven Regulations are equipped 
with a clause that the Commission shall submit to the European Parliament and to the Council 
a report on the application of the legislation, accompanied, where appropriate, by proposals 
for amendments.  

In  the  following  sections,  the  effectiveness  of  the  individual  surveillance  strands  is 
assessed against their key objectives. Section 2 outlines the main objectives of the EU fiscal 
framework, its evolution over time and the way it has been implemented. It also looks at the 
related  developments  within  the  national  fiscal  frameworks.  It  concludes  by  assessing  the 
effectiveness of both the EU and national fiscal frameworks in strengthening public finances 
in various respects. Section 3 presents the main objectives of the Macroeconomic Imbalance 
Procedure  as  well  as  the  evolution  in  its  implementation,  and  discusses  its  effectiveness  in 
fostering  policy  action  and  favouring  the  correction  of  imbalances.  Section  4  evaluates 
Regulation No 1173/2011 on the surveillance of Member States in the euro area experiencing 
or  threatened  with  serious  difficulties  with  respect  to  their  financial  stability.  It  looks  at 
provisions  regarding  enhanced  surveillance,  and  macroeconomic  adjustment  programmes  as 
well  as  post-programme  surveillance  and  the  implementation  thereof.  Finally,  section  5 
provides the key conclusions.  

2.  FISCAL SURVEILLANCE 

2.1 Objectives of the Stability and Growth Pact 

The primary objective of the Pact is to ensure the sustainability of public debt. The Pact 
aims  to  prevent,  and  where  necessary  correct,  excessive  deficits  so  as  to  keep  debt  at 
sustainable levels.4 Safe levels of debt allow so-called ‘automatic stabilisers’ to operate (e.g. 
higher  expenditure  on  unemployment  benefits  and  lower  tax  revenues  during  downturns) 
without  leading  to  fiscal  or  financial  market  stress.  Without  prejudice  to  the  objective  of 
sustainability,  the  Pact  is  also  meant  to  allow  for  fiscal-based  macroeconomic  stabilisation. 

2 This Staff Working Document covers the seven Regulations included in the six and two-pack. With regards to 
Council  Directive  2011/85/EU  on  requirements  for  budgetary  frameworks  of  the  Member  States,  which  has  a 
specific  review  clause,  a  dedicated  review  assesses  its  overall  suitability,  including  the  suitability  of  the 
statistical requirements for all sub-sectors of government, the design and effectiveness of numerical fiscal rules, 
and the general level of transparency of public finances in the Member States. 
3 This is mandated in Regulation No 472/2013 and Regulation No 473/2013. 
4  A  summary  of  the  challenges  associated  with  designing  supranational  fiscal  rules  can  be  found  in  Yared,  P. 
(2019),  ‘Rising  Government  Debt:  Causes  and  Solutions  for  a  Decades-Old  Trend’,  Journal  of  Economic 
Perspectives, Vol 33 No 2. 

3 

 
 
  
                                                 
Differences  in  national  preferences  on  the  appropriate  pace  of  debt  reduction  makes 
reconciling the sustainability and stabilisation objectives challenging.  

The corrective arm of the  Pact aims to correct excessive deficits when they occur. The 
Treaty defines deficit and debt thresholds, i.e. a deficit below 3% of GDP and a debt-to-GDP 
ratio of below 60% of GDP, unless the ratio is sufficiently diminishing towards that level at a 
satisfactory  pace.  Breaches  of  those  thresholds  are  referred  to  as  ‘gross  policy  errors’  and 
trigger an excessive deficit procedure (EDP), as set out in Article 126 TFEU. Member States 
in  an  EDP  are  required  to  correct  their  excessive  deficit  situation  by  a  deadline  set  by  the 
Council. If a Member State fails to put in practice the recommendations of the Council, the 
procedure may be stepped up. Member States concerned can be subject to the suspension of 
payments  or  commitments  under  the  European  Structural  and  Investment  Funds.5  Euro-area 
Member States can also be subject to financial sanctions under the Pact. 

The preventive arm of the Pact aims to prevent the occurrence of excessive deficits and 
ensuring  sound  public  finances.  It  aims  to  ensure  that  Member  States  build  fiscal  buffers 
during  economic  good  times  so  that  they  have  sufficient  fiscal  space  for  economic 
stabilisation during downturns. It requires Member States to reach a country-specific medium-
term  budgetary  objective  (MTO),  which  is  defined  in  structural  terms,  i.e.  adjusted  for  the 
economic  cycle.  Meeting  the  MTO  gives  Member  States  scope  to  use  fiscal  policy  for  the 
purpose  of  macroeconomic  stabilisation  in  bad  economic  times,  i.e.  by  allowing  automatic 
stabilisers to operate or by making policy choices that support the economy (e.g. increasing 
investment).  The  minimum  level  of  a  country’s  MTO  is  determined  based  on  the  Member 
State’s  debt  level,  the  budgetary  impact  of  population  ageing,  and  cyclical  volatility  of  its 
economy in order to ensure an appropriate safety margin with regard to the 3% of GDP deficit 
threshold. For euro-area Member States, the MTO cannot be lower than a structural deficit of 
1% of GDP.6 Member States that have not reached their MTO are required to adjust towards 
that objective (by 0.5% of GDP per year as a benchmark).  

The Pact has developed considerably since its creation, largely in response to weaknesses 
that  became  apparent  during  periods  of  crisis.  The  conceptual  underpinning  of  the 
framework has been gradually elaborated and its scope extended with a view to making the 
rules  ‘smarter’,  i.e.  better  adapted  to  the  economic  situation.  Based  on  the  observation  that 
Member  States  fail  to  make  necessary  fiscal  adjustments  during  economic  good  times,  and 
that  debt  levels  tend  to  increase  considerably  during  recessions,  successive  reforms  have 
made  the  preventive  arm  of  the  Pact  more  central  and  increased  the  focus  on  debt 
developments. In particular, the economic and financial crisis shifted the focus to risks arising 
from unsustainable levels of public debt, and to possible debt crises, which could threaten the 
financial stability of the euro area as a whole. In a context of heightened market pressure and 
rapidly  rising  debt  levels,  there  was  a  need  to  decisively  strengthen  safeguards  for  debt 
sustainability. 

The  2011  six-pack  reform  reinforced  the  preventive  arm  of  the  Pact,  in  particular  to 
ensure  adequate  efforts  in  good  times.  It  introduced  a  greater  emphasis  on  aggregate 
expenditure developments and revenue-increasing (or decreasing) policy measures, which are 
more  directly  under  the  control  of  governments  than  other  fiscal  indicators.  Accordingly,  a 
Member  State’s  adjustment  towards  its  MTO  is  assessed  annually  on  the  basis  of  two 

5 This is the  so-called  macro-economic conditionality of European Funds,  which  falls outside the scope of the 
Stability and Growth Pact. It is not a sanction, but instead aims to safeguard the funds belonging to the Union 
budget. 
6 In addition, the intergovernmental Treaty on Stability, Coordination and Governance in EMU sets a lower limit 
of a structural deficit of 0.5% of GDP for its signatories. See section 2.3 

4 

 
 
                                                 
measures:  1)  the  growth  rate  of  primary  expenditure  developments  net  of  discretionary 
revenue measures, relative to medium-term economic growth (the ‘expenditure benchmark’); 
and  2)  the  change  in  the  cyclically-adjusted  budget  balance  net  of  one-off  measures  (the 
‘structural  balance’).  Member  States  that  significantly  deviate  from  their  MTO  or  from  the 
adjustment  path  towards  it  (i.e.  by  more  than  0.5%  of  GDP),  are  required  to  correct  the 
deviation within a given timeframe under the so-called ‘significant deviation procedure’. For 
euro-area  Member  States,  insufficient  correction  (i.e.  no  ‘effective  action’)  can  lead  to  the 
application  of  sanctions  in  the  form  of  an  interest-bearing  deposit.  Finally,  reflecting  the 
economic  and  financial  crisis,  a  collective  ‘escape  clause’  was  introduced,  effectively 
allowing  (but  not  prescribing)  a  suspension  of  the  rules  in  case  of  ‘a  severe  economic 
downturn’ in the EU or the euro area as a whole.  

In  the  corrective  arm,  the  six-pack  reform  operationalised  the  debt  criterion  and 
strengthened  the  sanction  mechanism.  The  six-pack  introduced  the  debt  reduction 
benchmark,  making  the  Treaty’s  debt  criterion  of  sufficiently  diminishing  towards  the  60% 
threshold  operational.  For  euro-area  Member  States,  sanctions  under  the  excessive  deficit 
procedure  are  now  meant  to  kick  in  at  an  earlier  stage  and  be  more  automatic,  through  the 
application  of  reverse  qualified  majority  voting  for  Council  decisions  on  Commission 
proposals.7  

The 2013 two-pack reform strengthened budgetary coordination in the euro area in view 
of  potential  consequences  of  spillovers  within  the  Economic  and  Monetary  Union.  In 
particular,  it  established  an  obligation  for  euro-area  Member  States  to  submit  their  draft 
budgetary  plans  to  the  Commission  for  an  opinion  before  their  adoption  by  national 
parliaments. Furthermore, it strengthened budgetary coordination through a discussion in the 
Eurogroup of those Commission opinions and of the budgetary situation and prospects in the 
euro  area  as  a  whole.  It  also  reinforced  the  surveillance  for  euro-area  Member  States  with 
excessive deficits. 

After the entry into force of the six- and two-pack, various implementation decisions and 
approaches  have  been  codified  and  endorsed  by  the  Council,  in  particular  the  use  of 
flexibility within the EU’s fiscal rules. The need to restore market confidence between 2010 
and 2012 forced some Member States to implement large fiscal adjustments, sometimes going 
beyond  the  requirements  of  the  Pact.  Moreover,  after  the  economic  and  financial  crisis,  the 
euro area experienced a second recession in 2012-2013. This was followed by a period of low 
growth relative to the pre-crisis period and low inflation, with monetary policy facing the zero 
lower bound and the European Central Bank introducing a number of non-standard monetary 
policy measures. In the context of a slow recovery from the economic and financial crisis, the 
Commission  has  placed  an  emphasis  on  making  best  use  of  the  flexibility  within  the  EU’s 
fiscal rules. That  was operationalised by an interpretative Commission’s Communication on 
Flexibility within the SGP in January 20158 and a Commonly Agreed Position on flexibility 
endorsed by the Council.9 Namely, taking into account the need for the same highly-indebted 
Member  States  to  implement  reforms  in  labour  and  product  markets,  the  Commission 
operationalised the so-called structural reform clause. The particular nature of investment has 

7  Under  the  intergovernmental  Treaty  on  Stability,  Coordination  and  Governance  in  EMU,  euro-area  Member 
States committed to also use reverse qualified majority voting on other proposals or recommendations submitted 
by  the  Commission  for  euro-area  Member  States  in  breach  of  the  deficit  criterion  in  the  framework  of  an 
excessive deficit procedure. 
8 European Commission (2015), ‘Making the best use of the flexibility within the existing rules of the Stability 

and Growth Pact’, COM(2015)12 of 13 January 2015. 

9 Commonly agreed position on flexibility within the Stability and Growth Pact, endorsed by the Council on 12 
February 2016. 

5 

 
 
                                                 
also been taken into account, to a limited extent, by allowing temporary deviations from the 
fiscal requirements to cater for investment needs. Lastly, the Flexibility Communication and 
Commonly  Agreed  Position  on  flexibility  introduced  a  matrix  to  determine  the  required 
adjustment under the preventive arm that takes into account cyclical conditions. Concretely, 
the  required  annual  fiscal  adjustment  towards  the  MTO  varies  depending  on  the  position  in 
the economic cycle (i.e. higher in good times, lower in bad times) and the level of debt (below 
or above 60% of GDP). 

Lastly,  the  Commission  increasingly  made  use  of  the  discretion  available  within  the 
framework  when  applying  the  fiscal  rules.  It  considered  compliance  with  the  preventive 
arm  a  key  relevant  factor  when  assessing  compliance  with  the  Treaty’s  debt  criterion.  That 
discretion also included the use of the concept of ‘broad compliance’ with the preventive arm 
requirements as well as specific changes to the fiscal requirements, as recalled by the Court of 
Auditors.10  The  Commission  has  fostered  a  regular  dialogue  with  Member  States  and  the 
European Parliament and has consistently sought to clarify the rationale for its decisions in a 
cross-country  perspective.11  The  framework  has  nevertheless  become  more  complex  and 
arguably less predictable. The increased use of discretion also reflected the fact that the six- 
and  two-pack  reforms  increased  the  Commission’s  responsibility  for  decisions,  such  as  the 
imposition of sanctions, having far-reaching political implications in the Member States. 

In parallel to the evolution of the Pact, EU requirements for national fiscal frameworks 
have  been  introduced  and  have  become  increasingly  precise.  There  has  been  a  growing 
recognition  of  the  importance  of  fiscal  arrangements  at  the  national  level  as  a  means  of 
ensuring compliance with EU fiscal rules. In that respect, national frameworks are perceived 
as  serving  two  goals:  first,  to  provide  the  necessary  setting  for  the  implementation  of  fiscal 
policy  in  compliance  with  EU  rules;  and  second,  as  a  means  of  strengthening  national 
‘ownership’ of EU rules. Member States agreed on a number of requirements for their fiscal 
frameworks with a view to improving their quality and effectiveness in the support of fiscal 
discipline  in  the  EU  context.  Most  of  those  requirements  took  the  form  of  EU  law,  while 
others,  more  intrusive,  were  established  in  the  so-called  ‘Fiscal  Compact’  as  part  of  the 
intergovernmental  Treaty  on  Stability,  Coordination  and  Governance  in  the  Economic  and 
Monetary Union.12 

2.2 Implementation of the Stability and Growth Pact 

There were no Member States in an EDP at the end of 2019. While there have frequently 
been breaches of the Pact’s deficit threshold of 3% of GDP since its inception, the economic 
and  financial  crisis  resulted  in  an  exceptional  situation  in  which  almost  all  Member  States 
breached  that  threshold  (see  Graph  1).  Due  to  the  depth  of  the  recession  and  bank 
recapitalisation needs in some Member States, the headline deficit at the aggregate EU level 
exceeded 6% of GDP in 2009-2010. As a consequence, 24 out of the then 27 Member States 
entered the EDP for breaching the Treaty’s deficit criterion.13 By 2018, all Member States had 

10  European  Court  of  Auditors,  Is  the  main  objective  of  the  preventive  arm  of  the  Stability  and  Growth  Pact 
delivered?, Special report No 18/2018;  
11 Each year, the Directorate-General for Economic and Financial Affairs of the European Commission publishes 
a  Vade  Mecum  on  the  Stability  and  Growth  Pact  that  brings  together  all  the  relevant  procedures  and 
methodologies  involved  in  the  implementation  of  the  EU's  rules-based  fiscal  policy  framework.  For  the  2019 
edition, see: https://ec.europa.eu/info/publications/vade-mecum-stability-and-growth-pact-2019-edition_en 
12 They included also substantive rules, on top of requirements for the design of policy frameworks 
13 Finland was placed in EDP for a planned breach, although the deficit eventually stayed below 3%. 

6 

 
 
                                                 
brought  their  headline  deficits  below  3%  of  GDP.14  Since  2015,  however,  headline  deficits 
have  mainly  been  reduced  thanks  to  improving  macroeconomic  conditions,  which  have 
generated additional revenues and lowered unemployment expenditure. Some Member States 
have  therefore  been  able  to  correct  their  excessive  deficits  without  making  any  significant 
structural  fiscal  adjustments  (the so-called ‘nominal strategy’, i.e.  aiming  at  headline deficit 
targets).  In  addition,  some  Member  States,  including  some  of  the  largest,  still  have  deficits 
that are close to the 3% of GDP threshold. 

Graph 1: Member States’ headline deficits and EU output gap 

Debt dynamics across Member States have been quite divergent since the economic and 
financial crisis. While the aggregate EU debt remained around 60% of GDP in the pre-crisis 
period,  it  increased  to  almost  90%  between  2009  and  2014.  Indeed,  the  crisis  led  to  higher 
cyclical  and  structural  deficits,  pushing  debt-to-GDP  ratios  substantially  upwards.  That  was 
further amplified by the impact of low real and nominal economic growth (which delays the 
reduction in the ratio for any given debt level in absolute terms)15 and by direct intervention 
by  some  Member  States  in  the  financial  sector.  Aggregate  debt  ratios  started  to  decline  in 
2015,  on  the  back  of  lower  primary  deficits/higher  surpluses,  higher  economic  growth  and 
historically low interest rates on public debt. Overall, the Commission forecasts the debt-to-
GDP ratio to continue the declining path of recent  years and to fall to around 79% in 2020, 
which is far lower than in the USA or Japan (around 114% and 237% respectively). However, 
debt  dynamics  across  Member  States  overall  have  been  quite  divergent  since  the  economic 
and  financial  crisis  (see  Graph  2).  This  reflects  large  differences  in  the  pace  of  fiscal 
consolidation  and the impact  of the  economic  growth-interest  rate differential,  as well as in 
country-specific  fiscal  costs  related  to  support  measures  for  the  banking  sector.  As  a 
consequence, around half of the Member States now have debt levels (again) below 60% of 
GDP  while  some  others  have  their  debt  around  or  (well)  above  100%  of  GDP.  The  latter 
group of Member States account for half of the EU’s GDP. 

14 With the exception of Cyprus, where there was a temporary peak in the deficit in 2018 (at 4.4% of GDP), due 
to  the  one-off  support  measures  related  to  the  sale  of  the  Cyprus  Cooperative  Bank.  In  2019,  the  budget 
balance is expected to have returned to a comfortable surplus of close to 4% of GDP. 

15 In turn, growth dynamics, in both real and nominal terms, have been significantly affected by the unwinding of 
large macro-economic imbalances accumulated in the run-up to the crisis. 

7 

 
 
 
 
                                                 
Graph 2: Debt dynamics 
(2018 debt levels versus pre-crisis low point and post-crisis peak) 

Member States’ fiscal positions in relation to their MTOs also vary widely. All Member 
States have now moved to the preventive arm of the Pact and are thus required to maintain or 
make progress towards their MTOs. Around half of them have reached those objectives, with 
some  accumulating  structural  surpluses  (going  beyond  the  requirements  of  the  preventive 
arm) and a few others being close to their MTOs (see Graph 3). However, a group of Member 
States remains far away from their objectives and have not  yet built sufficient fiscal buffers 
for the next downturn, notably with respect to the 3% of GDP headline deficit threshold. Most 
of those Member States also have the highest debt ratios in the EU.16 

Graph 3: How far Member States were from their MTO in 2018? 

16  For  a  more  detailed  overview  of  recent  fiscal  developments  in  the  EU,  see  European  Commission  (2019), 
‘Fiscal policy’, Quarterly  Report of the  Euro Area, Volume 18 N. 2, Institutional Paper 119, November 2019. 
https://ec.europa.eu/info/publications/quarterly-report-euro-area-volume-18-no-2-2019_en 

8 

020406080100120140160180ELITPTCYBEFRESUKHRATSIHUIEDEFINLSKPLMTSELVRODKLTCZBGLUEEEU28trough2018peak-3-2-1012345ELBGLUDECYCZHRDKNLSEMTATLTIEPLFIPTLVSISKEEROBEUKFRHUITESMember States above or at MTOMember States close to MTOMember States far from MTO 
 
 
 
 
 
 
                                                 
Expenditure dynamics  now seem better controlled  than before the crisis. The pre-crisis 
period saw government primary expenditure in most Member States grow faster than potential 
output. Since the crisis, the growth rate of primary expenditure has slowed down in relation to 
potential  output,  which  itself  was  significantly  affected  by  the  crisis.  Average  expenditure 
growth since the crisis has actually been at or below the growth of potential output in nearly 
all  Member  States  in  spite  of  the  concomitant  slowdown  in  inflation  (see  Graph  4).  The 
difference  between  the  two  periods  would  likely  be  even  larger  if  discretionary  revenue 
measures  were  also  considered.  Indeed,  the  pre-crisis  period  saw  the  majority  of  Member 
States cutting taxes, a trend that reversed in the aftermath of the economic and financial crisis 
(up to 2015). 

Graph 4: Controlling primary expenditure dynamics 
Pre-crisis periodPost-crisis period 

2.3 Developments at the level of national fiscal frameworks 

EU  requirements  for  national  budgetary  frameworks  have  evolved  rapidly  in  terms  of 
scope  and  granularity  in  recent  years.  While  EU  policy-makers  have  paid  increasingly 
more  attention  to  national  fiscal  frameworks  since  the  introduction  of  the  euro,  Directive 
2011/85 was the first EU legislative initiative in that area. The Directive introduced a set of 
binding minimum requirements for the main elements of budgetary frameworks,17,18 although 
the requirements themselves remained fairly general. In particular, it requires Member States 
to adopt numerical fiscal rules conducive to the respect of the Maastricht criteria and defines 
general  requirements  for  their  design  and  specification,  while  leaving  the  choice  of  specific 
rules to the discretion of Member States. It was soon followed by further initiatives in the area 
of  domestic  budgetary  frameworks,  i.e.  the  Fiscal  Compact  and  the  two-pack.  The  Fiscal 
Compact, though not part of EU law, has had a big impact on national frameworks: it required 

17 See also Review of the suitability of Council Directive 2011/85/EU on requirements for budgetary frameworks 
of the Member States, Commission Staff Working Document ( SWD(2020) 211). 
18  i.e.:  (i)  systems  of  budgetary  accounting  and  statistical  reporting;  (ii) rules  and  procedures  governing  the 
preparation of forecasts for budgetary planning; (iii) country-specific  numerical  fiscal rules; (iv)  medium-term 
budgetary frameworks; and (v) transparency of public finances and mechanisms that regulate fiscal relationships 
between public authorities across sub-sectors of general government. 

9 

 
 
 
 
 
 
                                                 
its  euro  area  signatories19  to  introduce  in  national  legislation  (preferably  at  constitutional 
level)  a  structural  balanced  budget  rule  –  effectively  reproducing  the  MTO  -  and  to 
complement  it  with  an  automatic  correction  mechanism,  as  well  as  an  independent  fiscal 
institution  to  monitor  the  rule.  Regulation  No  473/2013,  which  concerns  only  euro-area 
Member States, introduced the criteria for establishing independent fiscal institutions into EU 
law and added requirements related to:  

1) independent macroeconomic forecasts being used for budgeting; and  

2) a common budgetary timeline across euro-area Member States.  

As  a  result,  the  current  economic  governance  system  blends  various  requirements  for 
domestic  budgetary  frameworks,  with  Directive  2011/85  providing  basic  standards  for  all 
Member States, complemented by reinforcements in specific areas introduced by Regulation 
No  473/2013  for  euro-area  Member  States  and  by  the  Fiscal  Compact  for  euro-area  and 
voluntarily adhering non-euro-area Member States. 

Since the adoption of the EU legal requirements and the Fiscal Compact, there has been 
significant  development  of  national  budgetary  frameworks  in  Member  States.  The 
progress  is  most  noticeable  in  Member  States  that  had  no  or  only  rudimentary  frameworks 
before  the  crisis.  For  those  Member  States,  the  EU  requirements  served  as  a  basis  for  a 
modern fiscal framework.  

Numerical fiscal rules are now at the centre of fiscal frameworks in all Member States 
and  their  quality  has  improved  markedly.  The  number  of  fiscal  rules  has  increased 
significantly in the Member States in recent years. However, rather than just the mere number 
of  rules,  which  (if  too  high)  can  create  challenges  of  its  own,  the  greater  quality  of  rules 
should be emphasised (see Graph 7). Overall, the Member States now have sets of fiscal rules 
that  are  more  specific  in  terms  of  target  and  scope,  generally  have  some  consequences  for 
non-compliance and are usually monitored on the basis of independent analysis. Where they 
contain escape clauses, these are limited in number and generally well-defined.  

All Member States have a medium-term budgetary framework. Extending the horizon of 
fiscal  policy  beyond  the  annual  budget  brings  benefits  in  terms  of  credibility,  transparency 
and  discipline.  Recognising  this,  Directive  2011/85  required  Member  States  to  establish 
credible  and  effective  medium-term  budgetary  frameworks  (MTBF).  Currently,  all  Member 
States  have  a  more  or  less  developed  MTBF  based  on  multiannual  objectives  for  the  main 
budgetary  aggregates,  a  noteworthy  improvement  over  the  period  before  the  adoption  of 
Directive 2011/85. However, as that Directive contains only general requirements on MTBFs, 
their design differs significantly across the Member States. 

19  Outside  the  euro  area,  Bulgaria,  Denmark  and  Romania  have  also  submitted  voluntarily  to  the  same 
requirements. 

10 

 
 
                                                 
Graph  5:  Main  design  features  of  new  or 
reformed national rules 

Graph  6:  Number  of  independent  fiscal 
institutions (IFIs) in the EU 

Note:  Each  indicator  ranges  between  0  (non-existent)  and  1 
(very  strong)  and  is  averaged  across  all  rules  in  force  at  all 
levels of government. 
Source: Commission’s Fiscal Governance Database.  

Source: Commission’s Fiscal Governance Database.  

The  transparency  and  independent  monitoring  of  fiscal  policy  have  improved 
significantly.  Independent  institutions  have  been  set  up  (or  reinforced)  in  virtually  all 
Member  States  (see  Graph  6),  with  a  mandate  to  monitor  public  finances,  in  particular 
national fiscal rules, and to provide independent assessment. New streams of fiscal statistics 
have been created, most notably on Member States’ contingent liabilities, which has helped to 
raise  awareness of specific aspects  of public  finances among policy-makers and the  general 
public. The requirements of Regulation (EU) No 473/2013 for the preparation or endorsement 
of macroeconomic forecasts by independent  fiscal  institutions appear to  have led to  slightly 
more prudent forecasting. 

2.4 Effectiveness of the fiscal surveillance framework  

Sustainability of public finances 

The corrective arm of the Pact has been an effective tool for reducing and maintaining 
government  deficits  below  the  3%  of  GDP  threshold.  As  discussed  above,  no  Member 
State is currently under the EDP, compared to 24 Member States in the wake of the economic 
and financial crisis. Furthermore, the biggest structural fiscal adjustments took place between 
2011 and 2013, when most Member States were still under the EDP.20 This suggests that the 
corrective  arm  of  the  Pact  has  proved  effective  in  reducing  excessive  headline  deficits  (see 
box 1). However, as noted above, a number of Member States have corrected their excessive 
deficits  thanks  to  better-than-initially-expected  macroeconomic  conditions  rather  than 
structural fiscal adjustments.21  

At the same time, government debt is now very high in some Member States, including 
some of the largest. While around half of Member States currently have debt ratios below the 
Treaty threshold of 60% of GDP, debt ratios increased substantially in some others following 
the economic and financial crisis, only stabilising in recent years. In particular, seven Member 

20 This also partly reflected intense financial market pressure on some Member States during that period. 
21  These  Member  States  followed  a  so-called  ‘nominal  strategy’  whereby  they  met  the  headline  deficit  targets 
without implementing the structural adjustment targets of the EDP recommendations.  

11 

00.20.40.60.811990-2011New/reformed rules 
 
 
 
 
 
                                                 
States (Greece, Italy, Portugal, Cyprus, Belgium, France and Spain) have debt ratios above or 
close to 100% of GDP, as opposed to only two in the pre-crisis period (Greece and Italy).22 

There is also a clear inverse relationship between Member States’ debt levels and budget 
balances  (see  Graph  7).  Member  States  that  have  met  (or  exceeded)  their  MTOs  are  also 
those  with  relatively  low  debt  levels.  This  is  the  case  for  large  Member  States,  such  as 
Germany and the Netherlands, but also for Bulgaria, Czechia, Denmark, Luxembourg, Malta 
and Sweden. On the other hand, some of the most highly-indebted Member States (Belgium, 
Spain,  France,  Italy)  still  remain  quite  far  from  their  MTOs  and  have  made  little  progress 
towards them in recent years (see box 1).  

Graph 7: Structural balance and debt ratios across Member States 
(Size of bubbles is proportional to country shares in total EU-28 GDP) 

On  the  basis  of  those  observations,  it  could  be  argued  that  the  reformed  Pact  has  not 
been  successful  in  bringing  the  level  of  debt  down  sufficiently  in  the  most  vulnerable 
Member States. Member States that were furthest away from their MTOs after the economic 
and financial crisis have not necessarily made more progress than those that were closer. This 
also suggests that the preventive arm has had little traction in those Member States (see box 
1). As a consequence, some highly-indebted Member States remain far below their objectives, 
despite favourable economic conditions, and have thus not built sufficient buffers to provide 
themselves  with  a  safety  margin  vis-à-vis  the  3%  of  GDP  deficit  threshold  in  the  case  of 
deteriorating macroeconomic conditions.  

Overall, the 3% of GDP  reference value appears  to have only  acted  as a  target rather 
than as a ceiling for a number of highly-indebted Member States. This confirms the role 
of  the  3%  headline  deficit  ceiling  as  an  ‘anchor  for  the  laggards’:  it  acts  as  a  safeguard  for 

22 It is sometimes argued that the fiscal consolidation  following  the economic crisis has been self-defeating in 
some  high-debt Member States. However, the possible contractionary effects and possible induced  increase in 
the  debt-to-GDP ratio is in most cases short-lived and unwinding in the  medium run. For further analysis: see 
European  Commission  (2012),  ‘Consolidation  and  dynamics  of  the  multipliers.  Are  there  counter-intuitive 
effects?’ in ‘Report on Public Finances 2012’ European Economy 4. July 2012,  

12 

BEBGCZDKDEEEIEELESFRHRITCYLVLTLUHUMTNLATPLPTROSISKFISEUK-5-4-3-2-10123456020406080100120140160180Structural balance (%potGDP, 2018)Gross debt (%GDP, 2018)Highdebt / structural surplusLowdebt / structural surplusLowdebt /structural deficitFiscal spaceavailabeHighdebt / structural deficitSignificantadjustment needs 
 
 
 
 
 
 
                                                 
those being far away from their MTO and not progressing sufficiently toward it.23 However, 
with economic growth now clearly lower than before the crisis, maintaining headline deficits 
just  below  3%  of  GDP  may  no  longer  be  sufficient  for  some  Member  States  to  avert 
unsustainable  debt  dynamics,  forcing  those  Member  States  to  adjust  in  bad  times  in  a  pro-
cyclical manner. 

At the same time, there is  some  evidence that compliance with  the preventive arm has 
improved  relative  to  the  period  before  the  reform  of  the  Pact,  especially  for high  debt 
Member States.  In that respect, the operationalisation of the debt criterion is likely to have 
had a deterrent effect. The Commission has considered compliance with the preventive arm as 
a  key  relevant  factor  when  assessing  a  possible  opening  of  an  EDP  for  breach  of  the  debt 
criterion. That approach is likely to have had a positive impact on preventive arm compliance 
for those Member States. 

A  simulation  exercise  reveals  that  the  use  of  the  expenditure  benchmark  in  the 
preventive  arm  contributes  to  more  sustainable  fiscal  positions.  Findings  from 
counterfactual simulations show that public debt  ratios would have been significantly lower 
than today, particularly in high-debt Member States, if the expenditure benchmark had been 
applied and complied with since 2000 (see Annex 1).24 The simulations show that the positive 
effects  from  a  credible  and  more  front-loaded  fiscal  adjustment  (higher  primary  budget 
balance  and  lower  interest  payments)  outweigh  the  negative  effects  of  temporary  lower 
economic growth and inflation on the public debt ratio. Lower public debt ratios will reduce 
the  need  to  consolidate  in  downturns  and  allow  the  automatic  stabilisers  to  operate  fully, 
which  will  help  avoid  future  protracted  losses  in  GDP.  The  findings  also  suggest  that  strict 
compliance with the expenditure benchmark, compared to the structural balance requirement, 
would have promoted a more growth-friendly path, as demonstrated by the lower average loss 
in output. The adjustment based on the expenditure benchmark was also found to be less pro-
cyclical than the one implied by the structural balance. The reason is that compliance with the 
expenditure benchmark would have required a larger fiscal adjustment in good times (as it is 
not impacted by revenue windfalls and interest windfalls). All in all, the findings confirm the 
relevance  of  the  introduction  of  the  expenditure  benchmark  in  the  fiscal  framework  in  the 
context of the 2011 six-pack reform. 

Overall,  the  experience  so  far  raises  the  question  of  the  extent  to  which  the  reformed 
Pact  has  made  a  material  difference  in  the  cases  where  fiscal  discipline  is  most 
necessary. While the overall fiscal situation has improved on the back of the efforts done by 
many Member States and while an improvement in compliance is apparent compared to the 
pre-crisis period, the reinforced preventive arm does not seem to have had sufficient traction 
in  several  high-debt  Member States.  For those  Member States with  small fiscal  imbalances, 
this  has  led  to  debates  about  the  right  balance  between  stabilisation,  investment  and 
consolidation  needs.  Indeed,  with  the  development  of  the  preventive  arm,  surveillance 
increasingly  focused  on  promoting  sound  public  finances,  broadening  the  initial  focus  on 
correcting  gross  policy  errors.  From  the  point  of  economic  externalities  across  Member 
States, the preventive arm may have unnecessarily focused on Member States with low public 
debt. Moreover, as highlighted in section 1, the changing economic context with a structural 
decline  in  potential  growth  and  persistently  low  inflation  and  real  interest  rates  adds  new 
challenges to the EU’s rules-based fiscal framework. Meanwhile, the effectiveness of the 3% 
deficit ceiling points to the signalling value of very simple numerical rules. They are easy to 

23  European  Fiscal  Board  (2019),  ‘Assessment  of  the  EU  fiscal  rules  with  a  focus  on  the  six  and  two-pack 
legislation’. 
24 European Commission (2019), ‘Performance of spending rules at the EU and Member States’ level’ in Report 
on Public Finances in EMU 2019, forthcoming. 

13 

 
 
                                                 
grasp, not least  for the general public. It should however be borne in mind that maintaining 
headline deficits just below 3% of GDP is not sufficient for high debt Member States to avert 
unsustainable debt dynamics, and forces those Member States to implement pro-cyclical fiscal 
consolidation in bad times. 

Box 1: Performance of EU fiscal rules 

The 3% of GDP headline deficit ceiling and fiscal outcomes in the EU  

Empirical  analysis  suggests  that  the  EU’s  fiscal  governance  framework  has  contributed  to 
more prudent fiscal policies, although causality is difficult to establish.25 Member States that 
had  large  headline  deficits  just  before  the  Pact  was  launched  (in  1998)  have  reduced  their 
deficits significantly, with the exception of the economic and financial crisis period. In graph 
A,  the  orange  area  shows  the  range  of  deficits  for  the  quarter  of  Member  States  with  the 
highest  deficits  (‘bad  performers’)  for  each  year  since  1985.  Before  1998,  several  Member 
States had deficits exceeding 5% of GDP. Deficits then decreased slowly until the start of the 
economic and financial crisis, with only three Member States having deficits exceeding 3% of 
GDP in 2007. In the aftermath of the crisis, Member States’ deficits rose significantly, with 
24 out of the then 27 Member States entering the EDP. Since then, all Member States have 
corrected  their  excessive  deficits.  Overall,  those  developments  suggest  that  the  3%  of  GDP 
deficit threshold has contributed to better fiscal outcomes, particularly in Member States that 
were characterised by high public deficits before the launch of the Pact. At the same time, the 
deficit threshold seems to have in some cases acted as a target rather than a ceiling. Indeed, 
several Member States that generally had a record of high deficits currently still have deficits 
close to 3% of GDP, even though macroeconomic conditions have remained favourable. 

Graph A: Headline balances in the EU Member States (% of GDP) 

Note:  Headline  balance  figures  from  1995  are  based  on  ESA  2010  while  previous  figures  are  back-casted 
according to the observed change in the ratio as from the series based on ESA 1995. As a consequence of the 
variable composition of the groups of ‘bad performers’ and ‘good performers’, some of the fluctuations could be 
the result of composition effects (i.e. Member States shifting categories). Figures are based on the Commission’s 
spring 2018 forecast. 

By  contrast,  there  seems  to  be  no  clear-cut  impact  of  the  3%  deficit  criterion  on  Member 
States that typically had headline surpluses or low deficits before the introduction of the Pact. 
The green area in graph A depicts, for each year, the range of budget balances for the quarter 
of  Member  States  with  the  lowest  deficits  or  highest  surpluses  in  that  year  (‘good 
performers’). While the composition of the group has varied, there have always been Member 

25 See for instance: European Commission (2019), ‘Fiscal outcomes in the EU in a rules-based framework – new 
evidence’ in Report on Public Finances in EMU 2018, Institutional Paper 095. 

14 

 
 
 
  
                                                 
States  recording  (on  average)  surpluses  since  the  launch  of  the  Pact  in  1998,  with  the 
exception  of  the  years  following  the  economic  and  financial  crisis.  This  suggests  that  there 
has been no downward convergence of the good performers towards the 3% of GDP deficit 
criterion, as has recently been argued in policy papers.26  

Structural balances and sound budgetary positions 

All  Member  States  have  now  moved  to  the  preventive  arm  of  the  Pact  and  are  required  to 
make  progress  towards  sound  budgetary  positions,  defined  in  the  form  of  medium-term 
budgetary  objectives  (MTOs).  Graph  B  shows  developments  in  the  structural  balances  of 
Member  States,  divided  into  three  groups  based  on  their  debt  ratio  in  2011.  The  biggest 
structural  adjustments  took  place  between  2011  and  2013,  when  most  Member  States  were 
still under the EDP. This partly reflected intense financial market pressure on some Member 
States during that period. Since 2014, the average fiscal effort of the Member States with the 
highest post-crisis debt levels (Italy, Portugal, Ireland, Belgium, France, Austria, the UK and 
Hungary) has slowed down. This is partly explained by the fact that improvements in headline 
balances in some Member States have been achieved by relying on better cyclical conditions, 
thus allowing those Member States in the corrective arm to achieve their required adjustments 
without making a structural fiscal effort. It also shows that the preventive arm has gained little 
traction  in  a  number  of  Member  States,  despite  the  relatively  high  debt  ratios  of  Member 
States  in  that  group.  On  the  other  hand,  Member  States  with  lower  debt  have  continued  to 
adjust, even when a structurally balanced budget or surplus were reached. For both groups of 
Member States, however, one can detect an improvement in structural fiscal positions relative 
to the pre-crisis period. 

Graph B: Structural balances in Member States (% of potential GDP)  

Note: due to data availability, the figures up to 2009 refer to the cyclically-adjusted balance (i.e. including one-
offs). 
Source:European Commission, based on the Commission’s autumn 2019 forecast 

26  See  for  instance:  Caselli,  F.  and  Wingender,  M.  (2018),  ‘Bunching  at  3  Percent:  The  Maastricht  Fiscal 
Criterion and Government Deficits’, IMF Working Paper 18/182. 

15 

-6.0-5.0-4.0-3.0-2.0-1.00.01.0MS with debt > 80% of GDP in 2011 (IT, PT, IE, BE, FR, AT, UK, HU)MS with debt between 60 and 80% of GDP in 2011 (DE, MT, ES, CY, HR, NL)MS with debt < 60% of GDP in 2011 (PL, FI, SI, DK, SK, LV, CZ, SE, LT, RO, LU, BG, EE) 
 
 
 
 
 
                                                 
Box 2: Experiences in selected Member States 

It is possible for Member States under the corrective arm to apply a ‘nominal’ strategy, 
i.e. reaching intermediate headline targets while delivering very little or no fiscal effort, 
as  shown  by  the  examples  of  Spain  and  France.  Both  Member  States  broadly  met  their 
headline  targets  between  2016  and  2018  (Spain)  and  2015  and  2017  (France)  with  fiscal 
efforts that were 0.5-1.0% of GDP smaller than those the Council had recommended. Such a 
strategy is possible when macroeconomic conditions turn out better than expected at the time 
the adjustment path  was  set,  which is  more likely  to  happen in  excessive deficit procedures 
with a long adjustment period. In the case of Spain, the excessive deficit procedure in 2018 
involved a less demanding requirement than those that would have been expected under the 
preventive arm. 

Respecting  the debt reduction  benchmark during periods of relatively  low growth and 
inflation has proved to be very demanding, as highlighted by the cases of  Belgium and 
Italy.  Between  2014,  when  it  became  subject  to  the  transitional  arrangements  of  the  debt 
benchmark, and 2016,  Belgium experienced  a period of low inflation  and modest real  GDP 
growth,  making  it  challenging  to  reduce  its  debt-to-GDP  ratio.  At  the  same  time,  negative 
inflation  surprises  contributed  to  upward  revisions  to  required  adjustments,  with  slippages 
accumulating  over  time.  That  led  to  the  Commission  giving  priority  to  compliance  with 
preventive  arm  requirements  as  a  relevant  factor  in  considering  compliance  with  the  debt 
criterion.  Compliance  with  the  preventive  arm  was  also  considered  a  key  mitigating  factor 
against opening debt-based excessive deficit procedures against Italy, despite non-compliance 
with  the  debt  reduction  benchmark.  In  the  case  of  Finland,  public  debt  hovered  around  the 
reference value of 60% of GDP between 2013 and 2017. Therefore, the Commission prepared 
seven  consecutive  reports  for  Finland  for  planned  or  actual  breaches  of  the  60%  threshold, 
even though public debt remained much lower than in many other Member States. 

Various flexibility clauses and allowances have been put into operation in recent years 
under the preventive arm, with Italy as the main beneficiary. Over the period 2015-2018, 
Italy benefitted from cumulated allowances of around 1.8% of GDP, thus facilitating its broad 
compliance with the requirements of the preventive arm despite the absence of improvement 
in  the  structural  balance  over  that  period.  The  Commission  Communication  on  the  2017 
European Semester also introduced the concept of the ‘margin of discretion’, which allowed 
the Commission to assess Italy, together with Slovenia, against a lower requirement for 2018 
than the one included in the matrix of requirements.27  

Under the preventive arm, the structural balance and expenditure benchmark can give 
differing  indications  of  the  fiscal  effort,  for  example  due  to  different  underlying 
estimates of the growth potential of the economy. For example, both Portugal and Slovakia 
experienced strong downturns during the crisis period followed by strong recoveries. This led 
to  marked  falls  in  estimated  annual  potential  growth  rates  (used  in  the  calculation  of  the 
structural  balance),  followed  by  a  rising  trend.  The  medium-term  growth  rate  that  underlies 
the expenditure benchmark (i.e. an average of potential growth estimates over a period of ten-
years)  is  less  volatile.  This  means  that,  all  else  equal,  requirements  from  the  expenditure 
benchmark were less demanding than those of the structural balance in the acute phase of the 
crisis but, conversely, became more demanding in recent years. As a consequence, the use of 
the expenditure benchmark as an operational  indicator for fiscal  policy  mitigates the risk of 
pro-cyclicality.  Of  course,  other  factors  also  contribute  to  differences  between  the  two 

27  European  Commission  (2017),  ‘2017  European  Semester:  Country-specific  recommendations’,  COM(2017) 
500 final. 

16 

 
 
                                                 
indicators, such as revenue windfalls/shortfalls and changes in interest payments, which both 
affect the structural balance but are excluded from the expenditure benchmark.  

The cases of some small open economies highlight the problems associated with basing 
preventive  arm  requirements  and  assessments  on  unobservable  variables.  The  output 
gaps of Slovenia, Slovakia and Latvia, for example, are subject to sizeable revisions. This is 
partly  due  to  volatility  in  (EU-funded)  public  investment,  which  is  characteristic  of  those 
Member States. The tools put in place by the Commission to deal with such uncertainty are 
not  fully  effective.  For  example,  while  the  so-called  ‘constrained  judgement’  approach 
suggested  a  lowering  of  Slovenia’s  preventive  arm  requirement  for  2019  compared  to  the 
standard  ‘matrix’  requirement,  there  exists  no  clearly  defined  methodology  for  setting 
alternative  requirements.  Moreover,  while  the  Commission  has  placed  an  emphasis  on  the 
expenditure benchmark,  the output  gap is  still a  crucial factor when setting the requirement 
for  Member  States  that  are  close  to  their  MTOs,  as  their  requirement  is  determined  by  the 
distance of their structural balance to this objective. 

The  case  of  Romania  highlights  the  difficulty  of  enforcing  a  Significant  Deviation 
Procedure.  Romania  has  been  subject  to  repeated  Significant  Deviation  Procedures  since 
2017. Even so, its structural deficit increased from 0.2% GDP in 2015 to 2.7% GDP in 2018. 
This  calls  into  question  the  effectiveness  of  the  Significant  Deviation  Procedure  when  a 
Member  State  decides  to  ignore  Council  recommendations.  It  is  worth  recalling  that  the 
current rules do not provide for any legal sanctions in case of non-compliance by non-euro-
area Member States. As a result of Romania’s structural deterioration, the Commission 2019 
autumn forecast projects that the Member State will have breached the 3% of GDP headline 
deficit threshold in 2019 and in subsequent years.  

Economic stabilisation at the level of individual Member States and the euro area 

The pro-cyclicality of national fiscal policies remains an issue.  Fiscal  policy was already 
pro-cyclical  in  the  mid-2000s,  as  fiscal  policies  were  expansionary  when  economic  times 
were good. National fiscal policy has remained largely pro-cyclical after the adoption of the 
six- and two-pack reforms. Most Member States implemented sizeable fiscal adjustments in 
the  immediate  post-crisis  period,  reflecting  a  lack  of  fiscal  buffers  at  the  onset  of  the 
economic  and  financial  crisis,  a  need  to  correct  excessive  deficits  and,  in  some  cases, 
heightened market pressure. Those fiscal adjustments took place in a context of very low or 
even  negative  economic  growth  in  some  Member  States  and  were,  therefore,  pro-cyclical. 
This  likely  contributed  to  the  weak  economic  situation  in  that  period,  even  if  it  aimed  at 
bringing  public  finances  on  a  sustainable  path  and  at  regaining  market  confidence.  Fiscal 
consolidation came to a halt in 2014, at the moment when the output gap in the euro area was 
still negative. However, the aggregate fiscal stance in the euro area continued to be broadly 
neutral after 2016, even though the euro area’s output gap had turned positive in the meantime 
and the recovery had strengthened. In addition, national fiscal policies were not appropriately 
differentiated  across  Member  States  in  light  of  their  specific  sustainability  and  stabilisation 
needs,  and  the  fact  that  in  many  Member  States  the  recovery  was  stronger  than  initially 
expected. Thus, despite the reinforced preventive arm, many Member States did not use the 
more benign economic times to build up counter-cyclical buffers. 

Differing  views  among  Member  States  about  appropriate  debt  and  deficit  levels 
contributed  to  a  pro-cyclical  pattern  of  fiscal  policy  in  good  times.  As  discussed  above, 
some Member States have remained just below the 3% of GDP deficit limit instead of moving 
towards  their  MTOs  and  remain  with  high  debt  levels,  despite  relatively  favourable  macro-
economic  conditions.  This  raises  the  issue  of  implementation  of  the  preventive  arm,  which 
aims  to  ensure  that  fiscal  buffers  are  being  built  in  good  times.  In  contrast,  other  Member 

17 

 
 
 
States  have  sought  to  exceed  their  MTOs  and  in  spite  of  strong  fiscal  positions  are  only 
gradually implementing the Council's recommendations to use fiscal and structural policies to 
achieve a sustained upward trend in investment. That pattern qualifies the widespread view of 
the pro-cyclicality of the Pact. 

Empirical  evidence  suggests  that  compliance  with  EU  fiscal  rules  mitigates  pro-
cyclicality of fiscal policy in the Member States (see Graph 8).28 First, Member States that 
met the requirements of the preventive arm of the Pact had less pro-cyclical fiscal effort than 
others.  Second,  avoiding  high  headline  deficits  appears  to  reduce  the  pro-cyclicality  of 
discretionary fiscal policy. Third, keeping public debt at a reasonable level mitigates the pro-
cyclical  pattern  of  the  fiscal  effort.  Conversely,  having  high  deficit  and  debt  levels  tends  to 
amplify  pro-cyclicality.  It  suggests  that  the  design  of  the  Pact  per  se  is  addressing,  at  least 
partly, the issue of pro-cyclicality, which is a pervasive feature of fiscal policy (both within 
and outside the EU).  

Graph 8: Cyclicality of the fiscal effort and compliance with EU rules 

Note:  For  more  information  on  the  estimation  technique  used,  see  European  Commission  (2019),  “Have  EU  fiscal  rules 
mitigated pro-cyclicality?”, Report on Public Finances in EMU 2018, 121-130. 

The  EU’s  ability  to  coordinate  the  aggregate  fiscal  stance  in  the  euro  area  remains 
constrained. Regulation No 473/2013 established a common budgetary timeline for the euro 
area, which provides for a check of the budgetary situation and prospects in the euro area on 
the basis Member States’ budgetary plans  and their interactions across the euro area, before 
the  budgets  are  adopted  in  national  parliaments.  While  the  legal  framework  allows  the 
the  coordination  of  budgetary  and 
Commission 
macroeconomic  policy  at  the  euro  area  level,  it does  not  allow  it  to  enforce  the  appropriate 
fiscal stance for the euro area as a whole. While the Pact has established procedures for the 
correction  of  high  public  deficits  in  terms  of  nominal  thresholds,  it  cannot  compel  fiscal 
policies  in  support  of  economic  activity.  In  such  a  context  and  in  the  absence  of  a  central 
fiscal  capacity  with  stabilisation  features,29  the  ability  to  steer  the  fiscal  stance  for  the  euro 

to  outline  measures 

to  reinforce 

28  European  Commission  (2019),  ‘Fiscal  outcomes  in  the  EU  in  a  rules-based  framework  –  new  evidence’  in 
Report on Public Finances in EMU 2018, Institutional Paper 095. 
29  Such  a  fiscal  stabilisation  function  was  put  forward  in  the  2015  Five  Presidents’  Report  on  Completing  the 
Economic and Monetary Union, but falls outside the scope of this review. 

18 

 
 
 
 
                                                 
area  as  a  whole  remains  constrained,  limiting  the  scope  for  fiscal  policy  to  contribute  to 
macroeconomic  stabilisation  at  the  level  of  the  euro  area  as  a  whole  in  the  event  of  large 
shocks that are not policy-induced. This is partly the result of a lack of effort in good times, as 
a  result  of  which  the  Pact  required  consolidation  in  a  number  of  Member  States  when 
economic conditions became less benign. 

While the issue could be considered secondary at the time when the EU fiscal rules were 
adopted,  its  salience  has  increased  in  recent  years  due  to  the  changing  economic 
circumstances. This is due to the growing perception of a risk that monetary policy may face 
constraints  in  fulfilling  its  mandate  in  an  environment  of  unprecedented  low  inflation  and 
interest rates, and hence in the event of a severe economic downturn the policy mix be unable 
to fully support economic activity.30 In the absence of a central stabilisation capacity, this is 
liable to place strain on the rules-based fiscal framework. Moreover, a negative interest rate, 
or simply a growth rate differential, risks exacerbating the relative scarcity of safe assets (see 
box A1 in Annex 1), which would make it even more difficult for the central bank to achieve 
its  inflation  target. At  the  same  time,  as  some  recent  experiences  show,  shifts  in  saving 
behaviour  and  preference/aversion  for  risk  may  result  in  sudden  reversals  of  the  interest 
rate/growth  rate differential, and with it of the fiscal burden of debt, especially in high-debt 
Member States. Above all, even in the absence of changes in fundamentals, perceptions of the 
safety  of  different  national  issuers  can  change  substantially,  and  put  in  danger  the 
sustainability of their debt. In highly-indebted Member States, this could make the burden of 
debt servicing unsustainable. That risk is possibly more acute within a monetary union, where 
governments  with  very  different  debt  levels  share  the  same  currency  and  the  central  bank 
cannot  act  as  government  lender  of  last  resort.  This  confirms  the  need  for  rules  imposing 
constraints on debt trajectories. 

30 In that context, the European Central Bank has recently called for a more active role for fiscal policy. See for 
instance President Draghi’s press conference of 12 September 2019: 
https://www.ecb.europa.eu/press/pressconf/2019/html/ecb.is190912~658eb51d68.en.html 

19 

 
 
 
                                                 
Quality of public finances, including the development of public investment 

The  quality  of  public  finances  is  a  complex  and  multi-faceted  issue  largely  outside  the 
reach  of  the  fiscal  rules  and  covered  by  other  EU  instruments,  such  as  the  country-
specific recommendations under the European Semester.  In principle, the composition of 
public  revenue  and  expenditure  is  a  national  prerogative,  since  the  Pact  primarily  aims  to 
prohibit  policies  endangering  fiscal  sustainability,  while  providing  space  for  fiscal 
stabilisation.  The  European  Semester,  in  particular  the  country-specific  recommendations 
based  on  Article  121(2)  TFEU,  and  specific  EU  initiatives  have  been  the  instruments  to 
improve  the  quality  of  public  finance  while  respecting  national  prerogatives.  For  instance, 
ageing  populations  are  expected  to  confront  most  Member  States  with  rising  government 
expenditure  over  the  next  several  decades.  In  light  of  that  challenge,  the  Council  addressed 
recommendations  to  those  Member  States  to  undertake  fiscal  structural  reforms  to  improve 
fiscal  sustainability  and  strengthen  economic  growth  potential.  Governance  issues  are  also 
important  for  the  quality  of  public  finances:  improving  the  functioning  of  national  fiscal 
frameworks,  implementing  well-managed  spending  reviews  and  establishing  transparent 
public procurement procedures can also strengthen the efficiency and effectiveness of public 
expenditure  and  the  credibility  of  fiscal  policy.  A  composition  of  public  expenditure  that 
prioritises  productive  spending  helps  strengthen  potential  growth  in  the  longer  term31  and 
promotes a sustainable and inclusive economy. On the revenue side, shifting taxes away from 
labour, combating aggressive tax planning and addressing the race to the bottom in corporate 
taxation can make tax systems fairer and more efficient. 

Regarding public investment, the EU has faced a widespread and persistent decline over 
the last decade (in some cases even below replacement levels keeping the stock of public 
capital  stable).  After  the  crisis,  most  Member  States  significantly  cut  public  investment, 
probably at the expense of future growth.32 Public investment in the EU declined from a peak 
of 3.7% of GDP in 2009 to 2.7% of GDP in 2017. If not reversed, the cut in public investment 
could result in a substantial reduction in the public capital stock. This in turn has a negative 
impact  on  potential  growth  and  affects  debt  dynamics.  It  has  also  led  to  criticism  of  the 
appropriateness  of  fiscal  consolidation.  While  the  Pact  is  in  principle  neutral  regarding  the 
composition of public revenue and expenditure, it may affect public investment decisions in 
specific cases. It may be politically more expedient during periods of fiscal consolidation to 
raise certain taxes or to cut public investment, rather than to cut current expenditure.  

fiscal  rules  are  conducive 

Meanwhile, 
to  macroeconomic  stability  and  debt 
sustainability, which are necessary conditions for public and private investment.  Fiscal 
rules  tend  to  reduce  policy  volatility,  and  which  makes  them  beneficial  to  investment  and, 
more  generally,  to  long-term  growth.  Moreover,  when  thoroughly  adhered  to  over  the 
business  cycle,  fiscal  rules  ensure  that  public  debt  remains  sustainable,  thus  creating  fiscal 
space  that  can  be  used  for  investment.33  Sound  national  fiscal  rules  appear  to  reduce  the 

31  Ceparullo  and  Mourre  (forthcoming),  ‘How  and  How  much?  The  growth-friendliness  of  public  spending 
through the lens?’; European Commission (2016), ‘Insights on the quality of public expenditures’ in Report on 
Public Finances in EMU 2016, Institutional Paper 045. 
32  See  for  example:  European  Commission  (2019),  ‘The  2019  Stability  and  Convergence  programmes:  an 
overview and assessment of the euro area fiscal stance’, Box 2.7. 
33 Once achieved, a Member State’s MTO is primarily meant to ensure (i) the long-term sustainability of public 
finances and (ii) a safety margin towards breaching the 3% of GDP reference value of the Treaty. The definition 
of  the  minimum  MTO  under  Regulation  No  1466/97  also  refers  to  room  for  budgetary  manoeuvre  and  in 
particular the need for public investment. 

20 

 
 
 
                                                 
negative impact of public debt on public investment (see Annex 1),34 and empirical research 
does not point to the conclusion that fiscal rules have hampered public investment in Member 
States over the past decades.  

The  essential  role  of  public  investment  to  deliver  public  goods  and  to  support 
sustainable  public  finances  is  well  recognised  in  the  EU’s  fiscal  framework.  First,  the 
Treaty requires the Commission to take into account government investment spending when 
assessing whether a Member State has an excessive deficit. Second, the Stability and Growth 
Pact, both in its title and content recognises the need to consider the overall quality of public 
finances  in  terms  of  the  growth-friendliness  of  the  taxation  system  and  public  expenditure. 
Third,  the  definition  of  the  medium-term  budgetary  objective  refers  to  room  for  budgetary 
manoeuvre and in particular the need for public investment.35 This has led to provisions in the 
fiscal framework that seek to protect the level of public investment during downturns and to 
incentivise  the  implementation  of  structural  reforms,  which  contribute  to  sustainable  public 
finances, including by raising potential growth. 

However, recent innovations in the Pact have not significantly improved the quality and 
composition  of  public  finances.  This  primarily  reflects  deliberate  policy  choices  in  the 
Member  States.  In  2015,  the  Commission  operationalised  the  so-called  ‘investment  clause’, 
granting a temporary deviation from the adjustment path under the preventive arm to cater for 
an increase in investment.36 However, the investment clause can only be used if GDP growth 
is negative or if the output gap (which measures the amount of slack in the economy) is below 
-1.5% of potential GDP. The rationale is to safeguard investment during (very) bad economic 
times. Only Italy and Finland have so far benefited from the investment clause, both in 2016. 
However,  in  neither  case  was  there  a  substantial  positive  impact  on  public  investment. 
Similarly, the structural  reform  clause has had a rather mixed success  in  promoting reforms 
that improve the quality of public finances and/or increase potential growth, with only five of 
the eligible Member States having made use of the clause.37 

Fulfilling  the  ambition  set  by  the  European  Green  Deal  to  achieve  a  carbon-neutral 
continent  by  2050,  will  require  significant  investment.  The  magnitude  of  the  investment 
challenges  requires  mobilising  both  the  public  and  private  sector.  Box  3  presents  some 
considerations  on  green  public  investment  in  the  context  of  the  EU’s  fiscal  framework.  As 
announced in the Commission’s Communication on the European Green Deal, the outcome of 
the debate on how to improve EU fiscal governance will form the basis for any possible future 
steps  including  how  to  treat  green  investments  within  the  EU  fiscal  rules,  while  preserving 
safeguards against risks to debt sustainability.38 

34  Mohl  and  Poissonnier  (forthcoming),  ‘Do  fiscal  rules  hamper  public  investment?’;  European  Commission 
(2017), ‘Government investment in the EU’ in Report on Public Finances in EMU 2017, Institutional Paper 069. 
35  Moreover,  euro-area  Member  States  that  become  subject  to  an  EDP  must  submit  an  Economic  Partnership 
Programme  describing  the  policy  measures  and  structural  reforms  needed  to  ensure  an  effective  and  lasting 
correction  of  the  excessive  deficit.  The  policy  priorities  in  the  programme  must  also  be  consistent  with  the 
Union’s strategy for growth and jobs.  
36 European Commission (2015), ‘Making the best use of the flexibility within the existing rules of the Stability 
and Growth Pact’, COM(2015)12 of 13 January 2015. 
37 The structural reform clause was applied in the case of Italy in 2016, Latvia, Lithuania and Finland in 2017, 
and  Belgium  in  2019.  On  the  assessment  of  the  2015  Flexibility  Communication,  see  European  Commission 
(2019), ‘Staff Working Document accompanying the Commission Communication on the review of the flexibility 
under the Stability and Growth Pact’, SWD(2018) 270 final. 
38 European Commission (2019), ‘The European Green Deal’, COM(2019) 640 final. 

21 

 
 
 
                                                 
Box 3: Green investment in the EU’s fiscal framework  

Climate  change  poses  important  challenges  to  public  finances.  Extreme  weather  events 
may  raise  the  risks  to  the  sustainability  of  public  finances  and  the  transition  to  a  climate 
neutral  economy  will  require  substantial  public  and  private  investment.  While  climate 
adaptation investments should reduce the risks and costs of climate change in the longer run, 
they will also weigh on government finances in the short and medium run. 

At present, the EU’s fiscal framework does not include specific provisions to deal with 
climate-related costs and risks.  By promoting  sound fiscal  positions, the fiscal  framework 
ensures  that  fiscal  policy  can  fulfil  its  various  roles  and  support  emerging  policy  priorities, 
including  climate  change.  Given  the  scale  of  the  climate  change  challenge  and  the  risks  it 
poses  to  the  long-term  sustainability  of  public  finances,  a  case  can  be  made  that  specific 
provisions  be  incorporated  into  the  EU’s  fiscal  framework.  However,  the  public  finance 
implications  of  climate  change  are  multi-dimensional.  At  this  stage  there  is  no  conceptual 
analytical  framework  to  identify  the  main  links  involved  and  the  possible  trade-offs.  For 
instance, as both measured fiscal sustainability risks and investment needs rise, trade-offs may 
arise between catering for increasing investment needs on the one hand and anticipating future 
costs by raising saving on the other. 

There  are  several  dimensions  as  regards  financing  green  public  investment  needs.  In 
particular,  should  those  investments  compete  with  current  spending  priorities  and  not  affect 
the  overall  fiscal  stance?  Or  could  additional  public  investment  spending  come  on  top  of 
existing commitments and needs and thus raise public debt? While the European Green Deal 
underlines the key role for the EU budget, it also acknowledges that national budgets will play 
a significant role in the transition. 

There is literature on the use of fiscal rules as a means to preserve and incentivise public 
investment. Traditional public finance literature often refers to a ‘golden rule’ that allows for 
the financing of public investment through public debt. Advocates of such a rule argue that it 
is  conducive  for  intergenerational  fairness  and  economic  growth.39  Specifically,  as  long  as 
public investment increases the public and/or social capital stock that they will inherit, future 
generations will benefit from it and so it is justifiable that they should assume the burden of 
the debt related to such investment. In fact, financing the public capital stock exclusively with 
taxation would lead to a disproportionate burden for the present  generation, with the risk of 
insufficient  provision  of  public  investment.  The  ‘golden  rule’  literature  refers  to  net 
investment,  i.e.  gross  fixed  capital  formation  minus  consumption  of  fixed  capital,  as  that 
expenditure item does not affect the net debt of the public sector (i.e. gross debt minus assets).  

Literature  also  provides  more  sceptical  views  on  preferential  treatment  of  public 
investment  within  fiscal  rules.40  In  particular,  risks  related  to  such  a  favourable  treatment 
have  been  highlighted,  as  such  rules  may  distort  the  allocation  of  public  goods,  incentivise 

39 See  for instance: Balassone, F. and D. Franco (2000): Public investment, the Stability Pact and the ‘Golden 
Rule’, Fiscal Studies, 21(2), 207-229; Blanchard, O. (2019): Public debt and low interest rates, NBER Working 
Paper 25621; Buiter, W. (1984), Measuring aspects of fiscal and financial policy, NBER Working Paper 1332; 
European Fiscal Board (2019), Assessment of EU fiscal rules with a focus on the six and two-pack legislation, 11 
September; Truger, A. (2016): The golden rule of public investment: A necessary and sufficient reform of the EU 
fiscal framework, IMF Working Paper, 168.  
40  See  for  instance:  Heinemann,  F.  (2006):  Factor  mobility,  government  debt  and  the  decline  in  public 
investment,  IEEP,  3,  11-26.  Mehrotra,  A.  and  T.  Välilä  (2006):  Public  investment  in  Europe:  Evolution  and 
determinants  in  perspective,  Fiscal  Studies,  27(4),  443-471.  Minea,  A.  and  P.  Villieu  (2009):  Borrowing  to 
finance  public  investment?  The  golden  rule  of  public  finance  reconsidered  in  an  endogeneous  growth  setting, 
Fiscal Studies, 30(1), 103-133.  

22 

 
 
                                                 
creative  accounting,  increase  the  coverage  of  eligible  expenditure  over  time,  make  fiscal 
surveillance  more  complex,  etc.  Some  empirical  work  shows  that,  based  on  available 
information,  there  is  only  weak  evidence  that  ‘golden  rules’  support  public  investment  and 
that  investment  is  hampered  by  fiscal  rules.41  Other  factors  than  fiscal  rule  constraints  may 
lead to low public investment, such as insufficient administrative capacity, poor governance, 
weak monitoring institutions, etc. Political-economy arguments can also  explain why public 
resources are devoted to spending items other than investment, as it is less visible for voters 
than for instance social spending.  

Ownership and governance of EU fiscal rules 

The  accumulation  of  rules,  indicators  and  implementation  procedures  over  time  has 
made the Pact increasingly complex and has harmed predictability. The development of 
‘smarter’  and  multiple  rules  has  come  at  the  cost  of  increased  complexity.  In  the  current 
framework, there are multiple rules (for the headline balance, the structural balance and, since 
the six-pack, for expenditure growth and debt reduction), associated with different indicators 
for  measuring  compliance  and  various  clauses  allowing  for  deviations  from  the  required 
adjustments (see box 2). Procedures for implementing those rules (preventive and corrective 
arm, ex ante and ex post assessments) are equally complex. While that accumulation of rules 
and procedures was driven by a legitimate desire to make the framework more adaptable to 
changing  economic  conditions,  it  has  led  to  a  blurring  of  key  requirements  and  objectives, 
such as avoiding gross policy errors. 

The current framework relies heavily on variables that are not directly observable and 
that are frequently revised, which also hampers ownership. The output gap, which is used 
to  estimate  the  structural  balance,  is  a  key  variable  underpinning  the  Pact.  It  enters  the 
Commission’s assessments at different steps of the surveillance procedures, particularly in the 
preventive  arm.  Since  potential  growth  and  output  gaps  are  unobservable,  they  need  to  be 
estimated  from  economic  data.42  This  leads  to  unavoidable  uncertainty  and  revisions  of  the 
estimates,  which  has  allowed  Member  States  to  increasingly  challenge  the  Commission’s 
fiscal policy guidance and compliance assessments, for example when it comes to estimating 
a Member State’s precise structural balance position compared to its MTO. The use of a wider 
set of macroeconomic indicators for determining the cyclical position of a Member State has 
had  limited  success  in  addressing  Member  States’  concerns.  Overall,  the  wide  use  of 
unobservable indicators has likely reduced ownership and political buy-in.43 To some extent, 
this has been addressed by ‘freezing’ the required adjustment for the following year44 and by 
increasing  the  focus  on  the  expenditure  benchmark,  which  provides  more  stable  and 

41 Mohl and Poissonnier (forthcoming), ‘Do fiscal rules hamper public investment?’; European Commission 
(2017), ‘Government investment in the EU’ in Report on Public Finances in EMU 2017, Institutional Paper 069. 
42  The  structural  balance  also  depends  upon  fiscal  semi-elasticities,  which  are  estimated  from  macroeconomic 
data  and  information  on  tax  revenues;  see  Mourre,  Poissonnier  and  Lausegger  (2019),  ‘The  semi-elasticities 
underlying  the  cyclically-adjusted  budget  balance:  an  update  and  further  analysis’,  Commission  ECFIN 
Discussion Paper 098.    
43  However,  it  should  be  borne  in  mind  that  the  main  source  of  revisions  are  errors  in  forecasting,  which  are 
bound to affect the working of any forward-looking framework. 
44 In order to provide ex ante guidance and to ensure predictability of the assessment’s outcome and certainty on 
what is expected from a Member State, the required adjustment for year t is frozen in the spring of year t-1, on 
the basis of the estimated output gap and Member State’s distance to its MTO at that time. 

23 

 
 
 
 
                                                 
operational  policy  guidance  by  focussing  on  budgetary  items  directly  under  the  control  of 
governments.45  

While the strengthening of national fiscal frameworks has improved ownership of fiscal 
discipline,  discrepancies  have  emerged  between  EU  and  national  fiscal  rules, 
undermining the credibility of both and adding to complexity.  The objective of stronger 
national  frameworks  was  to  underpin  fiscal  policies  better  at  national  level  in  line  with  EU 
obligations and to increase ownership of such policies among policy-makers and stakeholders. 
Consequently,  the  Directive  2011/85  and  Regulation  No  473/2013  created  only  broad 
requirements for national frameworks to accommodate national specificities. On the contrary, 
the Fiscal Compact went to impose a specific rule modelled on the preventive arm of the Pact 
(as  re-defined  by  the  six-pack).  This  means  that  most  Member  States  now  have  in  their 
national  law  –  at  a  constitutional  level  or  high  in  the  national  legal  order  –  a  structural 
balanced-budget rule that arguably does not take into account interpretative developments in 
the preventive arm agreed after 2012. This has had two consequences. First, in some Member 
States,  it  has  arguably  hampered  rather  than  improved  ownership  of  fiscal  rules,  including 
those at national level. Second, it has given rise to inconsistencies between EU and national 
rules and encouraged some Member States to arbitrage between them. That situation creates 
risks of putting in doubt the value of national frameworks, and with it that of the independent 
fiscal institutions (IFIs) that are required to assess compliance with national rules. Given that 
the  strengthening  of  national  frameworks  is  meant  to  improve  compliance  with  EU  rules, 
weakening  the  former  will  in  turn  reflect  on  the  latter  as  well.  Furthermore,  differences  of 
views  between  the  independent  fiscal  institutions  and  the  Commission  may  weaken  the 
authority  of  both  and  give  the  impression  that  the  national  and  the  EU  fiscal  rules  work  at 
cross-purposes.  This  raises  the  question  whether  complementarity  between  the  EU  and 
national  fiscal  frameworks  have  been  utilised  in  an  optimal  way,  particularly  now  that  the 
national frameworks are well developed. 

The  process  for  draft  budgetary  plans  has  proved  useful  for  ex  ante  coordination  and 
dialogue,  but  has  also  underlined  the  difficulty  of  influencing  national  fiscal  policy  in 
practice.  Since  Regulation  No  473/2013,  euro-area  Member  States  have  been  required  to 
submit their budget plans for the coming year to the Commission and the Eurogroup. They are 
subsequently assessed by  the Commission.  That process  was designed to strengthen ex ante 
fiscal surveillance, i.e. allowing the Commission to give a view on the likely compliance of 
the draft annual budget with the EU’s fiscal rules (see Graph 9). This is meant to alleviate the 
burden  of  surveillance  carried  out  ex  post,  which  was  perceived  as  more  punitive  and  less 
efficient as it came too late in the process and offered less scope for timely corrective action. 
In practice, the process has turned out to be useful for setting up a dialogue between the EU 
institutions  and  euro-area  Member  States,  as  well  as  for  fostering  awareness  of  among 
national parliaments and the public of Member States’ obligations under the Pact. At the same 
time, the focus of the assessment on annual changes in the (unobservable) structural balance 
or annual expenditure growth imparted a certain narrowness to that dialogue. Only once has 
the Commission requested a Member State to submit a revised plan (Italy for its 2019 draft 
budgetary plan). The Commission has instead sent ‘follow-up letters’ in all rounds since 2014. 
The  corrective  action  taken  by  Member  States  in  response  has  been  limited.  Despite  that 
seemingly  limited  impact,  the  mere  existence  of  the  process  may  have  encouraged  Member 
States to take the Pact’s requirements into account when preparing their draft budgets. 

45  The  European  Fiscal  Board  has  suggested  to  replace  the  debt  reduction  benchmark  and  the  MTO  by  an 
expenditure rule (net of discretionary revenue measures) anchored on debt. Doing so would reduce the role of 
unobservable variables. See: European Fiscal Board (2019), ‘Assessment of the EU fiscal rules with a focus on 
the six and two-pack legislation’. 

24 

 
 
                                                 
Graph 9: Overall compliance of the draft budgetary plans with the Stability and Growth 
Pact (number of euro-area Member States) 

The Commission and the Council have been reluctant to launch enforcement procedures 
against  Member  States  and  to  impose  financial  sanctions.  That  reticence  has  also  been 
stressed  by  the  European  Court  of  Auditors.  46  The  Significant  Deviation  Procedure  was 
introduced  as  part  of  the  six-pack  as  a  means  to  enforce  the  preventive  arm  of  the  Pact. 
However, it has so far only been applied in the clear-cut cases of Romania and Hungary, with 
limited effectiveness (see box 2). Similarly, the debt reduction benchmark was introduced in 
2011 as an attempt to make the Treaty’s debt criterion operational. However, in a context of 
very low inflation, the benchmark has proved to be more demanding than foreseen and pro-
cyclical. Therefore, no EDPs have been opened so far on the basis of the debt criterion alone, 
in  spite of successive breaches of the debt  reduction benchmark,  e.g. by  Italy  and  Belgium. 
Indeed,  in  those  highly  indebted  Member  States,  the  debt  reduction  benchmark  required 
particularly high fiscal efforts that could actually have aggravated debt dynamics. Therefore, 
the  Commission’s  assessment  of  compliance  with  the  debt  criterion  appropriately  took  into 
account all relevant factors, in line with the provisions of the six-pack, including low inflation 
and weak growth,  and in particular compliance with the requirements of the preventive arm 
(see  box  2).  Lastly,  the  introduction  of  swifter  sanctions  and  of  reverse  qualified  majority 
voting  for  Council  decisions  on  Commission  proposals  have  increased  the  role  of  the 
Commission. 47 So far, the Commission has refrained from proposing financial sanctions. The 
application of sanctions under the Pact is different compared to the field of statistics, where 
fines  involve  rather  symbolic  amounts  but  carry  a  credible  reputational  cost  via  adequate 
communication.  Political  incentives,  which  would  also  reinforce  the  disciplining  effect  of 
financial markets, are relatively underdeveloped under the Pact.   

46  European  Court  of  Auditors,  Is  the  main  objective  of  the  preventive  arm  of  the  Stability  and  Growth  Pact 
delivered?,  Special  report  No  18/2018;  European  Court  of  Auditors,  Further  improvements  needed  to  ensure 
effective implementation of the excessive deficit procedure. 
47 The European Fiscal Board has argued that the introduction of reverse qualified majority voting has blurred 
the  distinction  between  the  analytical  and  (growing)  political  role  of  the  Commission.  It  recommends  a  better 
separation between the economic analysis performed within the Commission and the policy decisions taken on 
the basis of that analysis. In addition, it proposes to remove the reverse qualified majority voting principle.  See: 
European  Fiscal  Board  (2019),  ‘Assessment  of  the  EU  fiscal  rules  with  a  focus  on  the  six  and  two-pack 
legislation’. 

25 

051015202014201520162017201820192020particularly serious non-complianceat risk of non-compliancebroadly compliantcompliant 
 
 
 
 
                                                 
The medium-term orientation of fiscal policy, including its multi-annual ‘track record’, 
is insufficiently taken into account. In principle, the Pact has a strong medium-term focus, 
for instance with a central role of Stability and Convergence Programmes, focus on a ‘close-
to-balance or in surplus’ budgetary position in the medium term, and multi-annual targets in 
the EDP. In practice, however, the six- and two-packs have introduced a strong focus on an 
assessment  of  annual  targets.  As  a  result,  the  focus  on  medium-term  performance  (both 
backward-  and  forward-looking)  has  weakened  in  relative  terms,  especially  given  that  the 
implementation  of  the  debt  reduction  benchmark  has  so  far  relied  on  an  assessment  of 
compliance  with  the  annual  requirements  of  the  preventive  arm.  The  emphasis  on  annual 
fiscal adjustments has made it more difficult to differentiate between Member States that have 
markedly different overall fiscal positions and sustainability risks. It has also been argued that 
a more medium-term focus could help simplify the framework and be easier to reconcile with 
the stabilisation objective of fiscal policy. However, such an approach also has drawbacks. In 
particular,  it  could  lead  to  procrastination  or  a  lack  of  political  ownership.  From  that 
perspective,  past  performance  (not  least  in  terms  of  public  debt  accumulation)  is  a  key 
indicator. 

National fiscal frameworks  

There are indications that the strengthened national fiscal frameworks have contributed 
to  the  objectives  of  EU  fiscal  rules.  While  it  is  difficult  to  isolate  the  effects  of  national 
fiscal governance on budgetary outcomes in an unambiguous way, the fiscal frameworks have 
been developing in a manner that has been supportive of the objective of EU fiscal rules. The 
Commission analysis suggests that national fiscal rules, particularly when well designed, have 
contributed  to  sound  budgetary  policy  in  the  Member  States.  Domestic  rules  with  a  strong 
legal basis, binding targets, independent monitoring, a well-defined correction mechanism and 
high media visibility appear to  be effective in  reducing budget  deficits. A similar role, with 
potentially even larger effect, can be attributed to the Member States’ MTBFs developed by 
the Member States. 48 At the same time, practices concerning the design and role of medium-
term planning in national budgetary processes differ significantly across Member States, with 
significant  impact  on  the  effectiveness  of  MTBFs.  The  analysis  also  shows  that  national 
expenditure rules have had a cyclical stabilisation effect, in addition to the stability-increasing 
effect  of rules overall.49  Furthermore, there  are indications that the development of national 
frameworks  has  strengthened  national  ownership  of  fiscal  discipline  and  that  stakeholders 
generally  consider  strong  national  frameworks  as  an  effective  and  efficient  tool  to  promote 
compliance with EU fiscal rules. 

The  strengthening  of  national  fiscal  frameworks  has  been  a  positive  development  that 
should  be  seen  in  a  broader  context.  That  strengthening  has  supported  Member  States’ 
domestic  institutional  frameworks,  thus  helping  to  improve  the  overall  quality  of  public 
administrations.  In  particular,  the  establishment  of  independent  fiscal  institutions  in  all  but 
one  Member  State  should  be  viewed  as  a  key  institutional  development.  Indeed,  while  they 
differ  in  terms  of  scope,  competences  and  experience,  together  they  are  playing  an 
increasingly  important  role  in  fiscal  discussions  at  national  and  EU  levels.  It  is  also  worth 
noting  that  the  EU’s  efforts  to  create  robust  national  fiscal  frameworks  have  been  part  of  a 
worldwide trend, with wide-ranging reforms in this area also taking place outside the EU. 

48 European Commission (2019), “Has ownership of the  EU’s fiscal rules been strengthened by national fiscal 
frameworks?” in Report on Public Finances in EMU 2018, Institutional Paper 095 
49 European Commission (forthcoming), “Performance of spending rules at the EU and Member States’ level” in 
Report on Public Finances in EMU 2019, Institutional Paper forthcoming.   

26 

 
 
 
                                                 
Nevertheless,  there  remains  scope  to  further  improve  national  fiscal  frameworks.  The 
state of development of fiscal frameworks differs considerably across Member States. This is 
linked, on the one hand, to different constitutional settings, preferences and experience among 
Member States and, on the other, to the rather general nature of EU requirements for most of 
the components of fiscal frameworks (which leaves ample room for a variety of approaches at 
country level). Likewise, the implementation of national provisions, in particular compliance 
with national fiscal rules, differs across Member States. In this context, the European Court of 
Auditors has recommended strengthening EU requirements for national fiscal frameworks and 
improving  their  monitoring.50,51At  the  same  time,  as  illustrated  by  experience  of  the  Fiscal 
Compact,  it  is  important  to  bear  in  mind  the  risk  of  undermining  national  ownership  and 
effectiveness if requirements are too specific or do not take national specificities sufficiently 
into  account.  Furthermore,  while  the  design  of  fiscal  frameworks  matters  for  their 
effectiveness,  steadfast  implementation  is  key.  The  promotion  of  good  budgetary  practices, 
such as 'green budgeting', could also help to improve the quality of public finances. 

The interaction between the national fiscal frameworks and the EU fiscal rules is key for 
the effectiveness of both. As the granularity of EU fiscal rules has increased in parallel with 
strengthened requirements for national frameworks, there has been a growing tension between 
ensuring  national  ownership  and  maintaining  horizontal  consistency.  This  has  been  more 
apparent in the preventive arm of the SGP, as the Fiscal Compact led most Member States to 
introduce in their national law substantive rules similar to those of the preventive arm. Better 
compliance  with  national  fiscal  rules  and  stronger  national  fiscal  frameworks  overall  are  a 
means  of  reducing  the  intensity  of  fiscal  surveillance  at  EU  level,  strengthen  national 
ownership of fiscal  prudence  and improve  compliance with  EU  rules as  well. Exchanges of 
best  practices  among  Member  States  in  terms  of  the  design  and  implementation  of  their 
frameworks,  and  cooperation  between  the  IFIs  and  the  Commission  on  the  design  and 
implementation  of  the  framework,  help  to  improve  the  interaction  of  national  frameworks 
with EU fiscal requirements.  

2.5 Conclusions 

The reformed EU fiscal framework has helped to make public finances in the EU more 
sound. Public deficits and debt levels have been falling, and all Member States have exited 
the excessive deficit procedure. 13 Member States have reached their medium-term budgetary 
objectives,  providing  them  with  fiscal  buffers  for  the  next  downturn.  The  process  for  draft 
budgetary  plans  has  proved  useful,  allowing  for  an  early  identification  of  fiscal  risks  and  a 
degree  of  ex  ante  coordination.  The  reinforcement  of  national  fiscal  frameworks  has 
contributed to better outcomes. 

At the same time, the reformed Pact has not led to sufficient fiscal adjustment in highly 
indebted Member States in good times. Despite the return of economic growth, public debt 
levels  remain  high  in  several  Member  States,  which  are  also  far  from  their  medium-term 
budgetary objectives. This implies that those Member States are more exposed to the risk of 
being forced to  adjust in  bad times in  a pro-cyclical  manner.  Fiscal  policy  at  Member State 
level has frequently been pro-cyclical, both in good and in bad times. In addition, the ability 
to  deliver  an  appropriate  fiscal  stance  for  the  euro  area  as  a  whole,  with  the  appropriate 

50 An attempt in that direction was made in December 2017, when the Commission presented a proposal for a 
Directive incorporating the Fiscal Compact into EU law, which however has not received sufficient support from 
legislators. 
51 European Court of Auditors, “EU requirements for national budgetary frameworks: need to further strengthen 
them and to better monitor their application”, Special Report No 22/2019. 

27 

 
 
                                                 
differentiated fiscal effort among Member States, is hampered by the lack of prudent policies 
in good times. It remains inherently constrained as long as it rests exclusively on coordination 
of national fiscal policies in the absence of a central stabilisation capacity. 

The assessment of fiscal performance above points to a number of shortcomings in the 
EU  fiscal  framework.  The  framework  has  become  increasingly  complex,  reducing 
predictability  and  undermining  political  ownership  among  Member  States.  It  consists  of 
multiple  rules,  associated  with  different  indicators  for  measuring  compliance,  and  contains 
various clauses  allowing for deviations from the  requirements,  each of them  with  their own 
eligibility  criteria.  It  does  not  sufficiently  differentiate  between  Member  States  that  have 
markedly different fiscal positions and debt sustainability risks, diluting the focus away from 
the prevention and correction of gross policy errors. It has not fostered an improvement in the 
quality  of  public  finances,  nor  has  it  been  able  to  support  investment  despite  the  limited 
flexibility  that  was  introduced  to  that  effect,  although  it  cannot  be  concluded  that  it  has 
hampered  investment.  The  interplay  between  EU  and  national  fiscal  frameworks  could  be 
improved to ensure that they work better in tandem.  

An effective framework needs to ensure the sustainability of public debt where it is most 
necessary, while allowing for macro-economic stabilisation in both good and bad times. 
Fiscal policy guidance supports Member States in ensuring long-term sustainability of public 
finances and pursuing counter-cyclical fiscal policies to contribute to a better macroeconomic 
stabilisation  in  both  good  and  bad  times.  Sufficient  fiscal  effort  and  debt  reduction  in  good 
economic times helps to create the space to use fiscal policy in bad times. Medium-term fiscal 
policy planning and an appropriate policy anchor help in that regard. It needs to be discussed 
what  the  appropriate  role  of  the  EU  surveillance  framework  is  in  helping  to  protect  public 
investment  in  consolidation  periods,  promoting  a  growth-friendly  composition  of  public 
finances and sustaining adequate levels of investment. In particular, it raises the question of 
the extent to which the fiscal framework could provide flexibility for the public investments 
needed to meet the broader ambition for a green and digital transformation of Europe, in line 
with the objective of the European Green Deal. Lastly, the deployment of fiscal surveillance 
instruments  could  be  considered  simultaneously  with  that  of  other  instruments,  such  as  the 
macro-economic imbalances procedure, to address low potential growth.  

A  simpler  framework  and  implementation  could  help  to  increase  ownership,  improve 
communication, and reduce the political costs of enforcement and compliance.  Whereas 
the current  fiscal  surveillance framework has included elements  of  flexibility  and discretion 
through a complex set of provisions adopted against a background of lack of trust among key 
stakeholders, an effective application of economic judgement within a rules-based framework 
needs to be done in a manner which is objective and transparent. This includes, for example, a 
need to consider whether a clear focus on gross policy errors as set out in the Treaty, based on 
clearly  defined  objectives  and  operational  policy  targets,  could  contribute  to  an  effective 
implementation of the fiscal framework. Indeed, surveillance should be commensurate to the 
gravity  of  the  situation,  with  a  stronger  focus  on  the  most  pressing  cases  and  less-intrusive 
procedures  where  overall  risks  are  low.  Therefore,  it  could  also  be  considered  whether  the 
surveillance  framework,  in  order  to  be  effective,  should  focus  more  on  ‘identifying  gross 
errors’52,  i.e.  on  Member  States  whose  policy  strategy  puts  public  debt  on  a  potentially 
unsustainable  trajectory.  Lastly,  it  has  to  be  considered  whether  a  stronger  role  for  national 
fiscal  frameworks,  in  particular  independent  fiscal  institutions,  would  contribute  to  better 
compliance with EU fiscal rules and improve ownership of the framework at the same time. 

52 Cf. Article 126(2) TFEU. 

28 

 
 
 
                                                 
3.  MACROECONOMIC IMBALANCE PROCEDURE 

3.1 Objectives of the Macroeconomic Imbalance Procedure 

The  Macroeconomic  Imbalance  Procedure  (MIP)  was  established  after  the  economic 
and financial crisis with the aim of supporting macro-financial stability. The 2008-2009 
crisis was accompanied by a general  reappraisal of risks in financial markets and acted as a 
trigger  for  sudden  stops  and  reversals  in  current  account  financing  and  for  the  bursting  of 
asset bubbles. Macro-financial and macro-structural aspects driving the accumulation of both 
external  (e.g.,  large  current  account  imbalances)  and  internal  imbalances  (e.g.,  excess  debt 
accumulation  or  the  building  up  of  housing  bubbles)  revealed  themselves  as  key  factors  in 
triggering balance of payment crises and debt crises, which spilled over to other countries and 
in  some  cases  required  financial  assistance  to  Member  States.  Therefore,  the  MIP  was 
introduced with the aim to identify, prevent and address the emergence of potentially harmful 
macroeconomic  imbalances  that  could  adversely  affect  economic  stability  in  a  particular 
Member  State,  the  euro  area,  or  the  Union  as  a  whole.  Regulation  No  1176/2011  therefore 
considers that, when assessing macroeconomic imbalances, account should be taken of their 
severity and their potential negative economic and financial spillover effects which aggravate 
the  vulnerability  of  the  Union  economy  and  are  a  threat  to  the  smooth  functioning  of  the 
economic  and  monetary  union.  In  particular,  given  vulnerabilities  and  the  magnitude  of  the 
adjustment required, the need for policy action was mentioned to be particularly pressing in 
Member States showing persistently large current-account deficits and competitiveness losses. 
Furthermore,  recital  17  to  Regulation  No  1176/2011  notes  that,  in  Member  States  that 
accumulate  large  current  account  surpluses,  policies  should  aim  to  identify  and  implement 
measures  that  help  strengthen  their  domestic  demand  and  growth  potential.  With  a  view  to 
provide an integrated response to economic and social challenges, the MIP was integrated into 
the European Semester.  

The  MIP  legal  framework  consists  of  Regulation  No  1176/2011  on  the  prevention  and 
correction of macroeconomic imbalances, and Regulation No 1174/2011 on enforcement 
measures  to  correct  excessive  macroeconomic  imbalances.  Regulation  No  1176/2011 
outlines  the  procedure,  while  Regulation  No  1174/2011  details  an  enforcement  mechanism, 
including pecuniary sanctions for euro area Member States. The legal basis of Regulation No 
1176/2011 is the Treaty article dealing with economic policy coordination (Article 121 of the 
Treaty  on  the  Functioning  of  the  European  Union),  while  the  legal  basis  of  Regulation  No 
1174/2011 is Article 136 TFEU, which allows for economic policy measures specific to the 
euro area.  

Regulation (EU) No 1176/2011 sets a number of steps to identify imbalances in Member 
States,  to  recommend  policy  action,  and  to  ensure  adequate  monitoring  and 
enforcement. All Member States53 are screened by means of a set of indicators known as the 
MIP scoreboard. The Commission’s economic reading of the scoreboard is complemented by 
additional  relevant  information  and  published  in  an  annual  Alert  Mechanism  Report.  The 
Alert  Mechanism  Report  indicates  the  Member  States  for  which  the  Commission  will  carry 
out in-depth reviews on the basis of prima-facie evidence suggesting the possible presence of 
imbalances.  Based  on  those  in-depths  reviews,  the  Commission  adopts  conclusions  on  the 
existence  and  severity  of  imbalances.  A  difference  is  made  between  “imbalances”  and 

53 According to Regulation (EU) No 472/2013 on the strengthening of economic and budgetary surveillance of 
Member States in the euro area experiencing or threatened with serious difficulties with respect to their financial 
stability, MIP surveillance does not apply to euro area Member States subject to a macroeconomic adjustment 
programme for the duration of that programme. 

29 

 
 
                                                 
“excessive imbalances” depending on the severity of the imbalances, both implying possible 
recommendations  by  the  Council  upon  a  Commission  recommendation.  Surveillance  of 
Member States identified with imbalances takes place in the framework of the MIP preventive 
action.  The  identification  of  excessive  imbalances  implies  a  stronger  surveillance  process, 
possibly  leading  to  corrective  action  under  the  MIP  –  the  Excessive  Imbalance  Procedure 
(EIP) – which also can give rise to sanctions for the euro area Member States. The EIP has not 
been launched to date. 

The  legal  framework  has  provided  the  Commission  and  the  Council  a  degree  of 
discretion.  While  being  relatively  detailed  on  the  steps  of  the  annual  cycle,  Regulation  No 
1176/2011 does not specify which actions are to be taken in each contingency. This reflects 
the challenge of legislating on a broad, complex, evolving, and multi-faceted matter such as 
macroeconomic  imbalances.  Against  this  background,  the  Commission  has  exercised  its 
discretion  to  apply  the  MIP  in  light  of  accumulated  experience  and  in  response  to  evolving 
economic  conditions  and  thus  the  framework  has  developed  over  time. While  the  format  of 
the  surveillance  process  stabilised  however  over  the  first  years  of  its  application,  the 
analytical framework has been gradually enriched. The gradual development of the approach 
to MIP surveillance is illustrated in the MIP Compendium.54 In 2018, following its audit on 
the implementation of the MIP, the European Court of Auditors addressed recommendations 
to  the  Commission.  The  Commission  accepted  a  number  of  those  recommendations  and 
proposed to take them into account in this review.55  

The remainder of this chapter is organised as follows. The next section reports on the actual 
application of the main steps of the procedure. Section 3.3 focuses on the actual effectiveness 
of the MIP in terms of direct impact on policies and in supporting the broader policy context, 
and looks into relevant economic developments. Section 3.4 outlines the main achievements 
and challenges with the current framework. 

3.2 Implementation of the MIP  

3.2.1 The Alert Mechanism Report 

The  Alert  Mechanism  Report  is  the  initial  step  in  the  annual  MIP  cycle.  The  Alert 
Mechanism Report serves to select Member States for which prima-facie evidence indicates 
the  possible  presence  of  macroeconomic  imbalances.  This  subset  of  Member  States  is 
thereafter subject to an in-depth review. 

The  analysis  takes  into  account  a  scoreboard  of  indicators  and  other  additional 
information. Regulation No 1176/2011 provides that “the scoreboard shall be used as a tool 
to  facilitate  early  identification  and  monitoring  of  imbalances”  (Article  4(1)).  Scoreboard 
indicators  are  assessed,  inter-alia,  against  their  respective  thresholds.  The  regulation  also 
specifies that, in the reading of the scoreboard, the Commission shall use economic judgement 
(Article 3(2)). The assessment also draws on other relevant economic and financial indicators 
not  included  in  the  scoreboard  (Article  3(2)).  In  practice,  the  Alert  Mechanism  Report  has 
taken  the  form  of  an  annual  Commission  Communication  to  the  European  Parliament,  the 
Council, the European Central Bank, and the European Economic and Social Committee. 

54 European Commission (2016), “The Macroeconomic Imbalance Procedure. Rationale, Process, Application: a 
Compendium”, European Commission, Institutional Paper 39, November 2016. 
55 European Court of Auditors (2018), "Audit of the Macroeconomic Imbalance Procedure", Special Report 03. 

30 

 
 
 
                                                 
The scoreboard has a number of purposes. Although the MIP scoreboard is not intended to 
predict the occurrence of crises, it allows for tracking the evolution of indicators suggestive of 
the  building  up  of  risks.  The  Alert  Mechanism  Report  also  helps  tracking  the  evolution  of 
existing  imbalances.  The  MIP  came  into  force  in  a  particular  context,  when  most  Member 
States were still running large current account imbalances and were accumulating large stocks 
of  net  foreign  liabilities  and  of  public  and  private  debt.  The  Alert  Mechanism  Report  has 
proved  useful  in  tracking  the  unwinding  of  those  imbalances  in  a  comparative  perspective. 
The scoreboard has also contributed to define the scope of MIP surveillance, by providing an 
anchor  for  its  remit,  and  it  has  facilitated  the  communication  on  the  surveillance  of 
macroeconomic imbalances. 

The  MIP  scoreboard  currently  includes  14  headline  indicators  and  28  auxiliary 
indicators. All indicators are based on ‘hard’ and published data to ensure the required high 
statistical quality.56 The headline indicators have indicative thresholds to serve as alert levels 
in  line  with  the  requirements  of  Regulation  No  1176/2011  (Article  4(4)).57  The  headline 
scoreboard  has  been  expanded  to  incorporate  indicators  on  financial  conditions  and 
employment  developments,  in  2012  and  2015  respectively.  As  outlined  in  the  2016  Alert 
Mechanism  Report,  which  first  included  additional  employment  indicators  in  the  headline 
scoreboard,  the  inclusion  of  these  variables  into  the  scoreboard  does  not  have  legal 
implications nor changes the focus of the MIP and consequently cannot trigger further steps 
under the MIP. Auxiliary indicators have also been adjusted over time.  

The  scoreboard  has  been  found  to  perform  satisfactorily  in  capturing  macroeconomic 
risks.  The  scoreboard  has  sometimes  been  criticised  to  be  backward  looking.  Criticisms  in 
this  respect  were  notably  raised  by  the  European  Court  of  Auditors.  Data  included  in  the 
scoreboard  comes  with  lags  because,  in  line  with  the  principle  enshrined  in  Regulation  No 
1176/2011, it should include only variables of high quality statistical data, not forecasts. The 
fact that some flow variables (e.g., current account balances, and unit labour costs growth) are 
averaged over past years introduces a backward-looking bias, but also helps avoiding that the 
scoreboard values for these volatile variables are fully driven by temporary developments. At 
the same time,  analyses  show that the scoreboard would have warned about  the building of 
risks ahead of the economic and financial crisis.58  

The scoreboard has  been fine-tuned with  timely,  targeted, and parsimonious  revisions. 
Regulation  No  1176/2011  calls  on  the  Commission  to  “assess  on  a  regular  basis  the 
appropriateness of the scoreboard, including the composition of indicators, the thresholds set 
and the methodology used, and it shall adjust or modify them where necessary” (Article 4(7)). 
The  Commission  has  revised  the  scoreboard  to  factor  in  improved  availability  of  published 

56  These  indicators  are  mainly  compiled  by  Eurostat  from  the  data  transmitted  by  Member  States,  following 
Union  legislation.  Some  indicators  are  produced  in  the  Member  States  by  National  Central  Banks  in  their 
capacity as members of the European System of Central Banks (ESCB). Eurostat prepares a Statistical Annex to 
the Alert Mechanism Report scoreboard and auxiliary indicators. 
57 The MIP Compendium (section 3.3.1.1.) elaborates on the indicators in the scoreboard, the rationale for their 
choice,  their  statistical  definitions,  data  sources  and  the  relevant  thresholds  and  the  criteria  for  their 
determination.  See  also  European  Commission,  "Scoreboard  for  the  Surveillance  of  Macroeconomic 
Imbalances"  –  European  Economy,  Occasional  Paper  92,  2012;  and  "Scoreboard  for  the  surveillance  of 
macroeconomic imbalances: envisaged initial design", – SEC (2011) 1361 final, 8.11.2011. 
58 E.g., C. Kamps, R. De Stefani, N. Leiner-Killinger, R. Rüffer and D. Sondermann (2014), "The identification 
of  fiscal  and  macroeconomic  imbalances  unexploited  synergies  under  the  strengthened  EU  governance 
framework", ECB Occasional paper Series No 157, November 2014; B. Pierluigi,  and D. Sondermann (2018), 
Macroeconomic imbalances in the euro area: where do we stand?", ECB Occasional paper Series No 211, June 
2018. 

31 

 
 
                                                 
statistics  relevant  for  macroeconomic  stability  and  to  add  variables  that  help  qualifying 
imbalances and the adjustment process.  

The Commission has fostered a regular dialogue on the scoreboard with the European 
Parliament  and  the  Council.  While  Regulation  No  1176/2011  leaves  revisions  of  the 
scoreboard  to  the  discretion  of  the  Commission,  it  calls  for  interaction  with  the  European 
Parliament and the Council on possible adjustments to the scoreboard. The Commission has 
maintained a regular dialogue with Member States on the adequacy of the scoreboard and on 
possible improvements to it, mainly through the Economic Policy Committee (EPC) and its 
LIME working group. Likewise, the Commission has consulted the European Parliament on 
changes to the scoreboard. The Parliament and the Council have generally been supportive of 
the revisions.  

The  scoreboard  reading  has  not  been  mechanical.  This  is  in  line  with  the  spirit  of  the 
regulation. The overall number of indicators beyond the respective thresholds and the severity 
of those breaches have been taken into account as a starting point. However, that information 
has always been put in context and there has been no automaticity in the conclusions of the 
Alert  Mechanism  Reports.  Likewise,  a  low  number  of  indicators  beyond  the  thresholds  has 
not  always  precluded  selection  for  an  in-depth  review  if  risks  appeared  sufficiently 
worrisome. The MIP Compendium reports a number of principles that have been followed in 
the economic reading of the scoreboard.59 

The  Commission’s  analysis  has  made  use  of  information  beyond  the  scoreboard 
indicators. That covers forecast figures, existing analyses, including analytical findings under 
previous MIP cycles, including in-depth  reviews, and other relevant research.60 At the same 
time,  the  country-specific  analyses  have  accounted  for  relevant  additional  information, 
including  policy  settings  or  governance  issues,  which  have  macroeconomic  relevance  and 
thereby need to be taken into account when selecting a Member State for an in-depth review. 
In addition, the Alert Mechanism Report analyses have benefited from the use of a common 
set  of  analytical  tools  with  country-specific  benchmarks,  which  allow  to  gauge  risks  and  to 
assess adjustment needs. These tools have been developed in cooperation with the EPC and its 
LIME working group and are described in section 3.2.2.61  

The  Commission  has followed  the  prudential  practice  of  selecting  for  in-depth  reviews 
the Member States that were already identified with imbalances in the previous annual 
cycle.  That  practice  has  allowed  to  continuously  monitor  how  existing  imbalances  evolved, 
whether they were corrected or aggravated, with a view to timely adapt the categorisation of 
imbalances  and  the  modulation  of  MIP  surveillance.  The  approach  to  the  Alert  Mechanism 
Report has left room for appropriate economic judgment and the advisable flexibility. Such an 
approach  has  allowed  considering  also  risks  that  were  not  fully  or  not  yet  reflected  in  the 
scoreboard.62  

59 See, in particular, section 3.3.1.2 of the MIP Compendium. 
60 This may include regular or ad-hoc reports and analyses by international organisations and institutions, such as 
ECB, ESRB, OECD, IMF, central banks, or academia. 
61 Although the scoreboard has not been used mechanistically to identify imbalances, it turns out that the number 
of  readings  beyond  the  thresholds  has  tended  to  be  higher  in  Member  States  with  imbalances  and  especially 
excessive imbalances (see MIP Compendium, section 4.3.1).  
62  For  instance,  the  selection  of  Romania  for  an  IDR  as  in  the  AMR  2019  was  partly  motivated  by  financial 
governance issues. 

32 

 
 
                                                 
The selection of Member States for an in-depth review has been broadly consensual. The 
Council has always endorsed the selection of Member States for an in-depth review proposed 
by the Commission.63 

3.2.2 In-depth reviews and classification of imbalances 

Identification of imbalances 

Regulation  No  1176/2011  defines  imbalances  in  a  general  and  comprehensive  manner, 
leaving  ample  room  for  economic  interpretation.  As  compared  with  the  rules-based 
surveillance framework of the Stability and Growth Pact, MIP surveillance is intentionally not 
driven by automatic triggers. Drivers of macro-financial instability can be diverse and multi-
dimensional  phenomena  that  need  to  be  assessed  taking  into  account  also  country-specific 
features,  including  those  linked  to  the  adjustment  capacity  of  the  economy.  Therefore,  the 
Commission  carries  out  in-depth  reviews  that  provide  the  basis  for  the  identification  of 
imbalances.  

Regulation  No  1176/2011  distinguishes  between  “imbalances”  and  “excessive 
imbalances”.  That  distinction  depends  only  on  the  severity  of  the  imbalances.  The  latter 
implies  a  stronger  activation  of  surveillance,  possibly  leading  to  the  launch  of  corrective 
action, i.e. the EIP, which also can five rise to possible sanctions for euro area Member States. 
The severity of macroeconomic imbalances is determined not only by considerations relating 
to  the  Member  State  concerned,  but  also  critically  by  the  existence  or  risk  of  negative 
spillovers  to  other  euro  area  Member  States.  In  particular,  the  risks  of  large  negative 
spillovers  are  considerably  larger  for  current  account  deficits,  and  are  especially  worrying 
when  combined  with  sustained  losses  of  cost  competitiveness  and  export  market  shares.  At 
the  same  time,  large  and  sustained  current  account  surpluses,  while  not  creating  immediate 
risks to national economic stability, affect the smooth functioning of the euro area. 

There have been calls for more transparency and predictability. Such calls should be seen 
in  light  of the substantial  role for the Commission in  exercising economic judgement in  the 
implementation of the MIP. In its conclusions on the in-depth reviews, the Council has voiced 
the  importance  of  transparency  for  what  concerns  the  reasons  underlying  the  identification 
and  classification  of  macroeconomic  imbalances  and  the  activation  of  MIP  surveillance, 
notably the launch of the EIP once excessive imbalances are identified.64 Policy makers and 
experts have criticised that the scope of the MIP was sometimes unclear and, for instance, that 
the MIP should focus on key issues of macroeconomic and cross-border relevance.65 The Five 
Presidents' Report recommends an effective and transparent  implementation  of the MIP and 
using the MIP at full potential, including the use of the EIP "as soon as excessive imbalances 

63 See also the ECOFIN Council Conclusions on AMR 2019: https://data.consilium.europa.eu/doc/document/ST-
5603-2019-INIT/en/pdf 
64  See,  e.g.,  Council  conclusions  on 
releases/2016/05/25/conclusions-in-depth-review-2015-csr/ 
65  K.  Efstathiou  and  G.  B.  Wolff  (2018),  "Is  the  European  Semester  effective  and  useful?",  Bruegel  Policy 
Contribution, Issue 09, June 2018. A. Bénassy-Quéré (2017), "Making the European semester  more efficient", 
ECB Forum on Central Banking "Investment and growth in advanced economies: Conference proceedings". 

the  2015  IDRs:  https://www.consilium.europa.eu/en/press/press-

33 

 
 
 
                                                 
are identified".66 The Commission in its October 2015 Communication took steps to enhance 
the transparency of the MIP (see below).67  

The  MIP  Compendium  reports  principles  followed  by  the  Commission  in  the 
identification and assessment of imbalances.  

  The Compendium explains MIP-relevant macroeconomic imbalances as unsustainable 
trends  (e.g.,  buoyant  house  price  growth  that  could  lead  to  the  burst  of  a  housing 
bubble with  implications for the banking sector)  or vulnerabilities (e.g., high private 
debt, which makes the economy more vulnerable to shocks) that could have harmful 
implications  for  macroeconomic  stability  for  the  country  itself,  the  euro  area  or  the 
EU.  

 

In  assessing  imbalances,  the  Commission  therefore  takes  account  of  potential  spill-
overs to other Member States, the euro area, or the EU as a whole.  

  The Commission highlights the sources of imbalances and also adjustment issues, i.e. 
factors that hamper a successful correction of existing imbalances. Adjustment issues 
also include challenges that have resulted from the unwinding of existing imbalances 
(e.g.,  the  impact  of  demand  compression  following  current  account  reversals  on  the 
labour market, or the impact of deleveraging on investment). 

The  identification  and  assessment  of  imbalances  has  taken  into  account  the  gravity  of 
the challenges, their evolution and policy responses. The Commission assessment has been 
based on three main criteria: 

  The gravity of imbalances, i.e., the likely magnitude of the risks involved; 

  Their  evolution,  to  distinguish  if  the  identified  imbalances  exhibit  any  tendency  to 

further aggravate or to correct; 

  The policy response, with a view to assess to what extent already enacted or planned 

policies are adequately tackling the identified issues.  

Hence,  in  its  assessment  of  imbalances  the  Commission  has  taken  a  forward-looking 
approach, factoring in also the extent to which policies contribute to the correction of risks. 

Challenges linked to low productivity or potential growth have been considered among 
sources  of  imbalances  when  relevant  for  macroeconomic  stability.  Over  time,  the 
Commission has clarified the principles for deciding which issues are dealt with under MIP 
surveillance  and  why.  These  clarifications  are  relevant  especially  for  those  issues  that  are 
already  dealt  with  in  other  surveillance  streams.  Notably,  this  concerns  government  debt, 
which is the object of surveillance under the Stability and Growth Pact, and economic growth, 
being  the  subject  of  the  Commission’s  growth  strategy  organised  under  the  European 
Semester. The MIP Compendium has clarified that MIP surveillance is not aimed at directly 
enhancing  the  growth  performance  of  Member  States.  In  fact,  there  are  instances  where 
buoyant  growth  comes  together  with  harmful  trends  (e.g.,  unsustainably  widening  external 
imbalances).  However,  in  some  cases,  low  potential  GDP  growth  can  pose  macroeconomic 
risks if left unaddressed: this is especially the case for Member States burdened by high debt 
levels, as an insufficient growth potential also implies lack of the resources needed to finance 

66  Juncker,  J.-C.  in  close  cooperation  with  D.  Tusk,  J.  Dijsselbloem,  M.  Draghi  and  M.  Schulz  (2015), 
"Completing Europe's Economic and Monetary Union". 
67  Communication  from  the  Commission  to  the  European  Parliament,  the  Council  and  the  European  Central 
Bank  "On  Steps 
final. 
https://ec.europa.eu/transparency/regdoc/rep/1/2015/EN/1-2015-600-EN-F1-1.PDF 

towards  completing  Economic  and  Monetary  Union",  COM(2015)  600 

34 

 
 
                                                 
high  stocks  of  debt  going  forward.  Government  debt  is  object  of  MIP  surveillance  to  the 
extent  that  it  contributes  to  overall  macroeconomic  imbalances  and  has  potentially  harmful 
implications for macroeconomic stability.68  

The  Commission’s  identification  and  assessment  of  imbalances  have  concerned  the 
overall  situation  of  the  economy.  The  assessment  has  not  referred  to  the  identified  issues 
separately, but  to  the overall combination of factors  contributing to  risks to  macroeconomic 
stability. Thus, Commission conclusions on imbalances have concerned whether imbalances 
exist in a certain Member State and whether they are excessive or not.  

Commission analysis in the in-depth reviews 

The  in-depth  reviews  identify  the  sources  of  imbalances  that  need  to  be  monitored. 
While  the  assessment  of  the  existence  and  severity  of  imbalances  concern  the  overall 
economy, the main sources of imbalances have been spelled out. The introduction of the MIP 
Assessment  Matrix  in  2016  has  made  that  identification  more  transparent  and  came  in  the 
spirit of enhanced transparency announced in the October 2015 Commission Communication 
(see next section).69 

The Commission has developed a broad spectrum of analytical tools in its MIP analysis. 
Those tools help qualifying selected developments and assessing their drivers, going beyond 
the  one-size-fits-all  approach  of  the  scoreboard  thresholds  and  taking  into  account  country 
specificities.  The  tools  are  mainly  used  to  assess  the  evolution  of  a  number  of  variables, 
including  their  sustainability,  also  with  a  view  to  inferring  about  underlying  vulnerabilities 
and adjustment needs. Areas covered currently include:  

  External  sustainability:  cyclically-adjusted  current  account  balances,  current  account 
balances  based  on  the  economy’s  fundamentals  ("norms"),  and  balances  taking  into 
account  the  implications  for  the  net  international  investment  positions  (NIIP);  NIIP 
levels  predicted  on  the  basis  of  fundamentals  and  levels  suggested  by  prudential 
concerns; 

  Private debt (households and non-financial corporations): levels predicted on the basis 
of  fundamentals  and  levels  suggested  by  prudential  concerns  and  subsequent 
implications for estimated deleveraging needs; 

  Housing  prices:  benchmarks  are  used  to  infer  about  possible  over/undervaluation  of 

housing; 

  Spill-overs, with general equilibrium modelling approaches being followed for the five 

largest euro area Member States.70 

The use of a common set of analytical tools allows a deeper analysis while maintaining 
consistency  across  Member  States.  Before  being  applied,  the  tools  are  disclosed  to  and 
discussed in Council Committees mainly through the LIME working group of the EPC. The 
tools follow state-of-the-art methodologies and are regularly updated.  

68  This  was  corroborated  by  the  Council  on  its  conclusions  on  the  original  design  of  the  scoreboard: 
https://register.consilium.europa.eu/doc/srv?l=EN&f=ST%2015781%202011%20REV%202 
69 See footnote67. 
70  Government  debt  sustainability  analysis  developed  in  the  context  of  the  surveillance  related  to  the  Stability 
and Growth Pact is also used when relevant for the MIP analysis. 

35 

 
 
 
 
 
 
                                                 
Classification of imbalances  

The Commission streamlined the categorisation of imbalances in 2016. Until 2015, up to 
six  categories  of  imbalances  were  used  not  only  to  reflect  the  three-category  framework 
stipulated  by  Regulation  No  1176/2011  ("no  imbalances",  "imbalances",  "excessive 
imbalances"),  but  also  to  better  reflect  different  needs  of  policy  action  and  monitoring. 
Amidst  efforts  to  enhance  transparency,  clarity,  and  stability,  in  October  2015,  the 
Commission  committed  to  stabilise  the  categorisation  of  imbalances.71  In  spring  2016,  the 
MIP  categories  were  streamlined  to  four:  "no  imbalances",  "imbalances",  "excessive 
imbalances", and "excessive imbalances with corrective action" (i.e., the opening of the EIP), 
which have been stable since then (see MIP Compendium, section 4.3.3).  

The  format  of  the  in-depth  reviews  has  changed  over  time.  Until  2014,  the  in-depth 
reviews were self-standing documents  published as Commission  Staff Working  Documents. 
While  that  allowed  for  a  fully-fledged  assessment,  it  also  partially  overlapped  with  other 
documents  in  the  European  Semester.  Therefore,  in  2015,  they  became  part  of  the 
Commission's  Country  Reports,  which  are  also  Staff  Working  Documents,  with  the  aim  of 
further  integrating  surveillance  and  ensuring  consistency  of  diagnoses.  As  of  2016,  to 
safeguard  the  MIP  and  to  identify  the  in-depth  review  in  the  Country  Reports,  the  main 
elements of the analysis of the in-depth reviews have been summarised in a separate chapter 
of the Country Report. Also as of 2016, the findings and rationale have been summarised in a 
synthetic  table  to  improve  transparency.  The  so-called  MIP  Assessment  Matrix  lists  the 
sources of imbalances and adjustment issues, reports the main findings regarding the gravity 
of identified challenges, the evolution of risks, and the relevant policy responses taken by the 
authorities  and  remaining  policy  gaps.  This  concise  repository  of  information  has  enhanced 
transparency and communication across countries and over time.  

The  conclusions  of  the  in-depth  reviews  have  been  reported  in  a  Commission 
Communication.  The  in-depth  reviews  have  presented  the  technical  assessment,  while  the 
conclusions  on  the  existence  and  severity  of  imbalances  have  been  reported  in  an 
accompanying  Commission  Communication.  That  practice  ensures  consistency  on  the 
classification  across  Member  States  and  allows  taking  better  account  of  systemic  aspects, 
including spill-overs and the overall context. 

Findings from the in-depth reviews 

The  number  of  Member  States  identified  with  imbalances  or  excessive  imbalances  has 
evolved  as  result  of  the  changing  severity  of  risks.  That  in  turn  has  been  owed  to  the 
evolution  of  the  economic  situation  or  the  policy  action  taken  by  the  Member  States 
concerned to tackle those risks.  

  On the one hand, the reduction of macroeconomic risks led more Member States into 
the  MIP  because  some  of  them  transitioned  into  MIP  surveillance  once  their 
macroeconomic  adjustment  programmes  ended  between  2013  and  2016  (Ireland, 
Portugal,  Romania,  Cyprus)  and  were  identified  as  experiencing  imbalances  (or 
excessive imbalances). The same applied to Greece in 2019. After its accession to the 
Union in 2013, Croatia was also identified with excessive imbalances. 

71 See footnote 67, and also Communication from the Commission to the European Parliament, the Council, the 
European Central Bank and the Eurogroup, "2016 European Semester: An assessment of progress on structural 
reforms,  prevention  and  correction  of  macroeconomic  imbalances,  and  results  of  in-depth  reviews  under 
Regulation 
final, 
Strasbourg, 
http://ec.europa.eu/europe2020/pdf/csr2016/cr2016_comm_en.pdf. 

1176/2011", 

COM(2016) 

8.3.2016 

(EU) 

No 

95 

36 

 
 
 
                                                 
  On  the  other  hand,  notably  after  the  economic  recovery  became  more  widespread, 
reduced  macroeconomic  risks  coincided  with  the  exit  or  de-escalation  of  Member 
States already under the MIP. This was the case in 2016 for four Member States that 
were  found  to  be  no  longer  experiencing  imbalances  (Belgium,  Hungary,  Romania, 
and the United Kingdom). 

  A number of Member States exited or were de-escalated under the MIP  surveillance 
also on the basis of policies they took that improved the forward-looking assessment 
of risks. 

  As  some  imbalances  tend  to  be  persistent  phenomena,  a  number  of  Member  States 

have continued to be marked by imbalances or excessive imbalances. 

Graph 10: Macroeconomic Imbalances 

Note:  Categories  used  in  2012  are  not  directly  comparable  to  those  used  in  subsequent  years  (see  MIP 
Compendium, section 4.3.3) and thereby they are not included in this figure. 
Source: European Commission 

There has been broad consensus on the findings from the in-depth reviews. As with the 
Alert Mechanism Report, the in-depth reviews are discussed by Member States at the Council 
preparatory  committees,  including  the  EPC  and  its  LIME  working  group.  In  addition,  the 
proposed categorisation of imbalances is subject to a dialogue with Member States, with the 
ECOFIN Council eventually adopting conclusions. While borderlines cases are discussed, the 
Council  has  regularly  endorsed  the  Commission  categorisation  of  imbalances.  Nonetheless, 
some  doubts  on  the  Commission  decisions  regarding  the  classification  of  imbalances  have 
been expressed publicly. For instance, the European Court of Auditors in its report on the MIP 
finds that the evidence contained in the 2016 in-depth review for France does not obviously 
signal  an  aggravation  of  risks  requiring  the  escalation  from  imbalances  to  excessive 
imbalances as decided by the Commission in 2016. 

3.2.3 Recommendation, monitoring, and enforcement 

Policy recommendations 

Member  States  experiencing  imbalances  or  excessive  imbalances  have  received  more 
policy recommendations  than other Member  States.  In particular, this holds for Member 

37 

04812162024282013201420152016201720182019Excessive ImbalancesImbalancesIDR but no imbalancesNo IDRMIP not applicable 
 
 
 
 
 
States  identified  with  excessive  imbalances.  That  difference  became  even  stronger  after  the 
streamlining of the country-specific recommendations (CSRs) in 2015 (see Graph 11).72 The 
higher  number  of  policy  recommendations  for  those  Member  States  is  justified  by  the 
additional challenges they face. 

Graph 11: Average number of CSR subparts per Member State per MIP status 

Source: European Commission 

The  MIP-relevant  recommendations  cover  the  most  pressing  challenges.  The  relevant 
policy challenges in Member States are identified on the basis of the in-depth review analysis. 
Those  recommendations  have  reflected  the  policy  efforts  needed  to  address  imbalances  and 
foster macroeconomic stability. Compared with non-MIP Member States, MIP Member States 
received more recommendations on macro-financial and macro-structural areas, in particular 
in  areas  relating  to  the  financial  sector  (see  also  MIP  Compendium,  Graph  4.5). 
Recommendations that are relevant from an MIP perspective have been indicated as such in 
the  relevant  Commission  and  Council  recommendations.  The  information  on  the  MIP-
relevance of the CSRs  has been included in  the  recitals  in  the preamble  of the Commission 
recommendation  for  a  Council  recommendation  and  of  the  Council  recommendations  by 
listing which CSRs are issued under Article 6 of Regulation No 1176/2011. Since a CSR can 
incorporate  recommendations  in  different  policy  fields  and  as  a  CSR  is  "tagged"  as  MIP 
relevant in its entirety, it could be the case that MIP-relevant CSRs also include some policy 
measures not directly aimed at addressing macroeconomic imbalances. 

For Member States experiencing imbalances or excessive imbalances, most of the CSRs 
have been linked to those imbalances. CSRs under the MIP have always been a major share 
of  the  total  number  of  CSRs,  especially  for  Member  States  with  excessive  imbalances  (see 
Graph 12, left panel).² Almost all recommendations relating to the financial sector have been 
indicated as MIP relevant (see Graph 12, right panel). In other policy areas less directly linked 
to macroeconomic stability (e.g., those concerning social issues), a relatively lower share of 
CSRs  were  considered  MIP-relevant.  The  share  of  MIP-relevant  CSRs  for  Member  States 
with  imbalances  increased  with  the  streamlining  of  CSRs  around  2015,  and  it  receded 
somewhat in 2019 reflecting an increasing number of CSRs subparts for all Member States. 

72  To  allow  a  finer  degree  of  detail,  data  on  policy  recommendations  presented  here  refers  always  to  CSR 
subparts unless stated otherwise. 

38 

0510152025302013-20142015-2019Number of CSR subpartsNon-MIPMIP imbalancesMIP excessive  imbalances 
 
 
 
 
                                                 
The fact that a majority of CSRs were considered as MIP-relevant for Member States under 
MIP  surveillance  is  linked  to  two  main  reasons.  First,  CSRs  have  aimed  not  only  at 
preventing  and  correcting  imbalances  but  also  at  addressing  adjustment  issues  (e.g., 
addressing  the  labour  market  implications  of  the  unwinding  of  imbalances).  Second,  some 
MIP-relevant challenges require policy action on a wide range of policy fields (e.g., restoring 
competitiveness  may  require  action  on  a  number  of  fronts  including  taxation,  product  and 
labour markets). 

in 

recital 

the  Commission  Communication  accompanying 

The  MIP  has  usefully  complemented  other  EU  surveillance  processes.  The  fact  that 
government  debt  was  in  some  cases  considered  a  source  of  imbalances  did  not  imply 
duplications  in  surveillance.  Recommendations  aimed  at  reducing  high  public  debts  in  the 
context  of  SGP  surveillance  were  simply  considered  to  be  relevant  also  from  an  MIP 
standpoint for those Member States identified with imbalances that also originate from public 
debt.  A  devoted 
its 
recommendations to the Council for the country-specific recommendations made clear which 
fiscal  recommendations  originating  from  the  SGP  were  also  relevant  from  the  viewpoint  of 
the MIP. Conversely, Member States under MIP surveillance received also recommendations 
focusing  on  longer-term  potential  growth  and  productivity  issues  for  high  debt  countries, 
which  usefully  complemented  the  SGP  by  providing  a  surveillance  framework  to  address 
public  finance  challenges  arising  from  an  insufficient  growth  potential.  In  other  cases, 
recommendations  to  address  imbalances  in  the  context  of  the  MIP  called  for  fiscal 
expansions, notably with a view to reducing large and persistent current account surpluses, a 
type of recommendation that could not originate from the SGP, a procedure that is aimed at 
ensuring fiscal sustainability. Yet the MIP has sometimes been criticised for lacking focus. In 
particular, it has been  criticised that the broad scope of the MIP does not  help  transparency 
and may have reduced the effectiveness of the MIP in triggering policy responses.73 

Graph  12:  Share  of  MIP-relevant  subparts  in  country-specific  recommendations  for 
Member States experiencing imbalances or excessive imbalances 

(a) per MIP category 

(b) per policy area (average 2013-2019) 

Source: European Commission 

73 See, e.g., Bénassy-Quéré (2017). 

39 

0102030405060708090100ImbalancesExcessive imbalances20132014201520162017201820190102030405060708090100FinancialsectorPublicadmin &businessenvironm.Publicfinances &taxationStructuralpoliciesLabourmarketSocialinclusionandeducation 
 
 
 
 
 
                                                 
Monitoring risks and policy reaction 

A process of “specific monitoring” has been developed to strengthen the monitoring of 
policy  progress  for  Member  States  under  MIP  surveillance.  Specific  monitoring 
comprises fact-finding visits to the Member States concerned, reports by the Commission, and 
discussions of the reports in the EPC and the Economic and Financial Committee (EFC). For 
the  Member  States  subject  to  MIP  surveillance,  specific  monitoring  complements  the 
monitoring of policy progress under the European Semester with an additional check on the 
state  of  play.74  Specific  monitoring  was  introduced  after  the  identification  of  excessive 
imbalances  in  Spain  and  Slovenia  in  2013.  In  2014,  it  was  expanded  to  all  Member  States 
with  excessive  imbalances  and  to  selected  euro  area  Member  States  with  imbalances  of 
systemic  relevance.  Since  2016,  in  light  of  the  streamlining  of  MIP  categories,  specific 
monitoring has covered all Member States found to be experiencing imbalances or excessive 
imbalances. Its frequency changed from two to one reports per annual cycle in 2015/2016. 

The ECOFIN Council adopts conclusions on the annual specific monitoring exercise and 
where applicable the monitoring is integrated with post-programme surveillance. Since 
2016, the Council has adopted horizontal conclusions on specific monitoring, a practice that is 
in line with the October 2015 Communication, which invited the Council to be more involved 
in the specific monitoring. Those conclusions have been integrated with the ones on the Alert 
Mechanism Report. Specific monitoring reports have been made public. For Member States in 
post-programme surveillance, the two reports have been bundled.75  

Overall, specific monitoring has contributed to an enhanced policy dialogue. It has also 
allowed  an  up-to-date  and  informed  peer  review  discussion  in  the  Council  Committees, 
focused on the implementation of policy measures to address identified imbalances. 

Follow-up to the identification of excessive imbalances 

The  EIP  has  so  far  not  been  launched.  For  Member  States  identified  with  excessive 
imbalances,  the  Commission,  rather  than  immediately  recommending  the  Council  to  launch 
the EIP, aimed first at raising policy commitments in line with the challenges identified and at 
strengthening  monitoring.  For  such  cases,  the  Commission  proposed  more  numerous,  more 
detailed, and sometimes time-bound, CSRs. In addition, the Commission raised its vigilance, 
notably  in  the  context  of  the  specific  monitoring  (see  above),  by  monitoring  policy 
commitments,  including  those  in  the  National  Reform  Programmes,  and  their  subsequent 
implementation, while making clear that launching the EIP remained an option. 

MIP  surveillance  has  had  some  effectiveness  in  Member  States  with  excessive 
imbalances.  Member  States  identified  with  excessive  imbalances  were  on  average 
characterised  by  more  recommendations  as  shown  above,  and  a  higher  degree  of  policy 
responsiveness. This is found also in econometric work that permit to control for other factors 
that  could  have  contributed  to  comply  with  country-specific  recommendations  (see  Annex 
2).76 A possible interpretation is that the mere possibility of launching the EIP could have had 
an impact on policy progress. Nonetheless, more recent evidence relating to policy progress 

74  Within  the  European  Semester,  a  regular  monitoring  process  applies  to  all  CSRs,  irrespective  of  whether 
countries  are  under  MIP  surveillance  or  if  the  CSRs  are  flagged  as  MIP-relevant  or  not,  and  the  results  are 
published in detail with the annual Country Reports.  
75 See, e.g., the January 2019 ECOFIN Council Conclusions on the specific monitoring, which are bundled with 
those on the AMR: https://data.consilium.europa.eu/doc/document/ST-5603-2019-INIT/en/pdf. 
76 See  also MIP Compendium  and J.C. Bricongne  and A. Turrini (2017), "The EU Macroeconomic Imbalance 
Procedure: Some impact and no sanctions", VOXEU column, 22 June 2017, for similar results limited to the first 
years of MIP implementation. 

40 

 
 
 
                                                 
according  to  MIP  status  reveal  a  somehow  reduced  policy  response  in  Member  States  with 
excessive imbalances.  

The lack of full enforcement of the MIP has been a subject of debate. The Council in its 
conclusions on in-depth reviews has remarked on several occasions that “the MIP procedure 
should be used to its full potential, with the corrective arm applied where appropriate”.77 The 
Five  Presidents’  Report  stated  that  the  EIP  “should  be  triggered  as  soon  as  excessive 
imbalances are identified and be used to monitor reform implementation.” In its October 2015 
Communication, the Commission expressed the view that the EIP could be “opened in case of 
insufficient commitment to reforms and lack of effective progress in implementation, and will 
be used in case of severe macroeconomic imbalances (…), like those that led to the crises.” 
The  ECB  has  repeatedly  claimed  that  the  use  of  the  EIP  “could  increase  the  procedure’s 
effectiveness and credibility.”78 The ECA in its audit of the MIP, expressed the view that “the 
systematic  non-activation  of  the  EIP  has  reduced  the  credibility  and  effectiveness  of  the 
MIP”, yet also pointing out to somewhat contrasting views by other stakeholders that “using 
the EIP in circumstances which were not clear-cut would also affect its credibility, and that it 
should be reserved for use only in very obvious circumstances”.  

Regulation No 1176/2011 does not provide full  guidance on the way the EIP should be 
implemented. In particular, it does not specify the time frame of the EIP, the scope and time 
frame of the corrective action plan, the assessment of effective action in the execution of the 
corrective  action  plan,  or  the  criteria  for  abrogating  the  procedure  or  for  the  application  of 
fines. This lack of detail coupled with the potentially intrusive nature of the corrective action 
plan, as recommendations could concern a wide range of policy fields and policy action can 
be prescriptive and are time-bound in the corrective action plan, may have contributed to non-
use of the EIP so far.  

3.3 Effectiveness of the MIP 

3.3.1 Follow-up to policy recommendations 

Member  States  experiencing  imbalances  or  excessive  imbalances  have  implemented  a 
higher  share  of  their  CSRs.  Graph  13  reports  that  Member  States  under  MIP  surveillance 
have on average recorded more progress compared with other Member States. Thus, Member 
States  under  MIP  surveillance  in  general  have  adopted  a  higher  number  of  recommended 
measures  both  because 
they  received  more  recommendations  and  because  more 
recommendations  were  followed  up  by  policy  action.  Statistical  analyses  suggest  a  stronger 
follow-up  to  policy  recommendations  under  the  MIP.79  Analysis  in  the  MIP  Compendium 
finds  that  MIP  surveillance  was  associated  with  a  higher  record  of  progress  in  addressing 
CSRs, controlling for other factors. More specifically, recommendations issued over the years 
2013 and 2014 were followed-up to a greater extent by policy action in Member States with 
stronger  activation  of  MIP  surveillance  (as  measured  by  the  categorisation  of  imbalances), 
after controlling for policy field, growth, interest rate spreads, and election variables.  

77 See, e.g. the Council Conclusions on the 2016 and 2017 IDRs.  
78 ECB, Economic Bulletin, Issue 2/2019, Box 7. Similar views have been expressed in several other instances, 
for example, Economic Bulletin, Issue 2/2018 and Economic Bulletin, Issue 2/2017.  
79 See e.g. S. Darvas and A. Leandro (2015), "Economic policy coordination in the euro area under the European 
Semester", European Parliament, Directorate-General for Internal Policies, Study provided at the request of the 
Economic and Monetary Affairs Committee. The authors find that over the 2012-2014 period, the highest rates 
of implementation were observed for recommendations under the Stability and Growth Pact, followed by MIP-
related recommendations, and then other country-specific recommendations. 

41 

 
 
 
                                                 
The degree of CSR implementation has nevertheless declined recently. For CSRs issued 
in  2016  and  2017,  the  evidence  suggests  that  the  degree  of  policy  progress  recorded  in 
Member  States  under  MIP  surveillance  fell  short  of  that  of  other  Member  States,  while  for 
2018 Member States subject to MIP still exhibit stronger policy progress in light of a big drop 
in CSR compliance in the rest of the EU (Graph 13). Consistently, recent statistical evidence 
finds  that  CSR  implementation  for  Member  States  with  excessive  imbalances  was  not 
significantly  higher  compared  with  that  of  other  Member  States,  controlling  for  other 
factors.80  

Graph 13: CSR progress indicator, averages according to MIP category81 

(a) MIP vs non-MIP 

(b) Excessive  imbalances,  imbalances, 

no imbalances 

Note: the MIP status is the one at the time of CSR issuance and CSR progress in year t refers to CSRs issued in 
year t and assessed in year t+1; the data reported concern progress at CSR subpart level.  
Source: European Commission 

A  number  of  factors  could  have  played  a  role  in  reducing  policy  progress  in  Member 
States experiencing imbalances or excessive imbalances:  

  The improving economic situation and reduced market pressure reduced the sense of 

urgency to address persisting imbalances; 

  Considerable reform activity took place in earlier years in a number of Member States, 
thereby reducing the perceived need of carrying out additional marginal reforms; 

80 K. Efstathiou, and G. Wolff (2019), "What drives national implementation of EU policy recommendations?" 
Bruegel Working Paper, Issue 04, April 2019. 
81 The CSR progress indicator is calculated as the simple average of progress for all CSRs. It is based on five 
possible  categories:  no  progress;  limited  progress;  some  progress;  substantial  progress;  full  progress,  to  which 
values of 0, 25, 50, 75, and 100 are assigned respectively following the methodology first used in S. Deroose and 
J. Griesse (2014), "Implementing economic reforms – are EU Member States responding to European Semester 
recommendations?", ECFIN Economic Brief, Issue 37. Thus, an overall progress indicator of 100 indicates full 
progress for all CSRs subparts, and a reading of 0 arises in case of no progress in any CSR subpart. The progress 
indicator  at  CSR  subpart  level  is  available  starting  only  from  the  CSRs  issued  in  2013  as  no  assessment  at 
subpart level was carried out for the CSRs issued in 2012. 

42 

253035404550201320142015201620172018Average compliance scoreYear of issuanceNon-MIPMIP253035404550201320142015201620172018Average compliance scoreYear of issuanceNon-MIPMIP imbalancesMIP excessive imbalances 
 
 
 
 
 
                                                 
 

In  light  of  past  reform  record,  reform  fatigue  may  have  played  a  role,  implying  a 
reduced “political capital” left available for additional reforms; 

  Statistical  results  could  be  affected  by  “reverse  causation”,  because  strong  policy 
responses were observed in Member States that exited the MIP (or that improved their 
categorisation). This implied that policy-active Member States moved away from the 
set of so-called MIP countries and entered that of non-MIP countries, thus contributing 
to  the statistical  findings that the policy  progress  in  MIP countries fell over time (in 
Graph 13 the set of countries change over time).  

The  evidence  in  Annex  2  confirms  that  Member  States  under  MIP  surveillance  recorded  a 
significantly higher degree of policy progress controlling for other factors. As compared with 
the  MIP  Compendium,  the  analysis  includes  more  recent  years,  and  controls  for  additional 
factors,  notably  the  past  stock  of  recommendations  received  and  past  CSR  progress,  thus 
capturing reduced need of marginal reforms and reform fatigue respectively. The inclusion of 
those  variables  tend  to  increase  the  estimated  advantage  of  MIP  Member  States  in  terms  of 
policy  progress.  The  estimates  also  show  that  the  positive  impact  of  MIP  surveillance  is 
estimated higher once the role of reverse causation is taken into account.   

3.3.2 The development of a supportive policy environment 

The  impact  of  the  MIP  should  also  be  judged  on  the  basis  of  its  contribution  to  a 
supportive  policy  environment,  strengthening  awareness  of  challenges  and  the  policy-
making framework. Box 4 reviews several country-specific examples for the impact of MIP 
surveillance  on  the  policy  environment.  MIP  surveillance  has  contributed  to  a  supportive 
policy environment in a number of respects: 

  Raising awareness about the issues around macroeconomic imbalances; 

  Providing  a  framework  for  prioritising  the  national  policy  agenda  with  a  view  to 

ensuring macroeconomic stability;  

  Strengthening policy dialogues on macro-stability issues between national authorities 

and EU institutions and among Member States. 

MIP  surveillance  has  contributed  to  raise  awareness  about  the  relevance  of 
macroeconomic  imbalances  and  related  challenges.  The  MIP  has  put  macroeconomic 
imbalances on policy agendas at national level and helped creating awareness and mobilising 
political capital for subsequent policy action.82 

The MIP has helped focusing and prioritising the domestic policy debates. For instance, 
in a survey of EPC members conducted by the European Court of Auditors in the context of 
their audit of the MIP, nearly three quarters of the respondents found that the MIP had some 
or considerable impact on domestic policy debate, and a similar share was of the view that the 
MIP  is  somewhat  or  highly  effective.  Almost  two  thirds  of  the  respondents  to  that  survey 
agreed that the MIP has made the Commission’s views more important for policy making at 
domestic  level.83  At  the  same  time,  the  MIP  sets  a  framework  that  allows  policy  makers  to 

82  See,  e.g.,  D. J.  Bokhorst  (2019), "Governing  Imbalances  in  the  Economic  and  Monetary  Union:  A  Political 
Economy  Analysis  of  the  Macroeconomic  Imbalance  Procedure",  Doctoral  dissertation,  University  of 
Amsterdam, Department of Political Science; Pierluigi and Sondermann (2018), op. cit. 
83 ECA (2018): answers to questions 36, 40 and 44 of the survey to EPC members. 

43 

 
 
 
                                                 
disclose their policy commitments in a structured way, and where commitments are regularly 
monitored. 

The  MIP  has  provided  a  comprehensive  framework  for  dialogue.  The  MIP  has  set  a 
framework that allows policy makers to  disclose their policy intentions in  a structured way. 
All steps of the annual cycle of the MIP implementation (Alert Mechanism Report, in-depth 
reviews, country-specific recommendations, policy follow-up including monitoring) bring the 
main  messages  to  the  attention  of  the  Member  States.  Technical  discussions  take  place  in 
committees, notably the EPC and its LIME working group. The ECOFIN Council adopts and 
publishes  conclusions  in  the  MIP  context  twice  a  year,  namely  a  conclusion  on  the  Alert 
Mechanism Report and the specific monitoring outcomes at the start of the calendar year, and 
another one on the in-depth reviews in spring. Overall, the MIP has enshrined macroeconomic 
imbalances on the Council agenda on a structured and regular basis. 

Overall, the MIP was generally associated with more recommendations and more policy 
responses,  and  contributed  to  a  supportive  policy  environment.  But  its  political  traction 
was  in  some  cases  insufficient.  The  complexity  of  MIP  issues,  the  broad  scope  of  the 
procedure, and the lack of simple numerical decision rules have implied that MIP objectives 
and recommendations are less visible and known to the large public, e.g. as compared to the 
Stability and Growth Pact. For those reasons, in the current set-up of the surveillance process 
it has been challenging to leverage political traction of the MIP recommendations.  

Box 4: Learning from country cases  

This  box presents a number of instances in which MIP surveillance  contributed to the 
strengthening  of  the  policy  response  to  macroeconomic  imbalances.  The  country  cases 
selected  are  not  exhaustive  and  aim  simply  to  illustrate  different  ways  in  which  the  MIP 
contributed to a more supportive policy environment. 

Spain  and  Slovenia  were  the  first  two  cases  identified  with  excessive  imbalances  and 
where specific monitoring was applied. In April 2013, both Member States had been found 
with  excessive  imbalances.  The  MIP  provided  the  framework  for  them  to  engage  in  a 
structured dialogue with the Commission, the Council and the other Member States on reform 
plans, to  disclose their National  Reform  Programmes, and to  support enhanced reporting on 
actual  progress.  In  both  cases,  the  relatively  strong  progress  with  reforms  contributed  to 
fostering macroeconomic stability in high-risk settings without the need to resort to the EIP. 
In more detail:  

  Spain agreed a financial assistance programme for the recapitalisation of its financial 
institutions  in  July  2012  and  which  ended  in  early  2014.  There  was  a  visible 
acceleration  of  reform  efforts  in  late  2013  and  throughout  2014.  Several  important 
reforms  were  adopted 
local 
administration and the pension system; avoid the build-up of commercial arrears; adopt 
product  market  reforms  aimed  at  addressing  regulatory  fragmentation  in  Spain's 
internal market; reform the corporate insolvency framework; establish the independent 
fiscal  council.  Reforms  to  network  industries  as  well  as  reforms  to  firm’s  access  to 
finance  were  also  on  the  list.  In  March  2014,  Spain  was  de-escalated  from  excessive 
imbalances to imbalances requiring decisive action.  

to:  strengthen  public  finance  management, 

the 

 

In  2013,  Slovenia  was  struggling  with  excessive  imbalances  and  hiking  market 
pressures  on  its  sovereign  debt.  Against  that  background,  considerable  progress  was 
made as of 2013 in repairing the banks' balance sheets. Efforts included asset quality 
reviews,  stress  tests,  recapitalisation  of  State-owned  banks  and  transfer  of  non-
performing-loans  to  a  'bad  bank',  the  Bank  Asset  Management  Company;  a  new 

44 

 
 
 
legislative  framework  for  corporate  restructuring  was  introduced  in  December  2013; 
also in 2013, the labour market reform addressed segmentation and introduced greater 
flexibility,  and  the  pension  reform  improved  the  medium-term  sustainability  of  the 
pension  system.  The  Slovenian  Sovereign  Holding,  responsible  for  the  management 
and  divestment  of  State  assets,  became  fully  operational,  and  a  new  corporate 
governance code for State-owned enterprises was adopted in December 2014. Slovenia 
moved  from  excessive  imbalances  to  imbalances  in  February  2015  and  eventually 
corrected the imbalances by March 2018. 

In  other  situations,  the  MIP  worked  by  combining  calls  on  the  need  of  addressing 
governance issues with a ready-set framework for swift policy response. 

 

In  early  2015,  Bulgaria  was  moved  from  imbalances  to  excessive  imbalances 
following  the  financial  turbulence  in  the  second  half  of  2014  that  revealed  major 
governance  flaws  and  could  have  had  significant  implications  for  the  financial  sector 
and  the  overall  macroeconomic  stability.  Such  escalation  in  MIP  surveillance  was 
followed by CSRs to ensure the robustness of the banking sector and the revision of the 
supervision of the banking and the non-banking financial sectors. The MIP surveillance 
leveraged  the  recommendations  for  timely  completion  of  asset  quality  reviews  and 
stress  tests  of  the  banking  sector,  a  portfolio  screening  for  the  pension  funds  and 
insurance  sectors,  and  the  take  up  of  actions  found  needed.  All  that  happened  in  a 
context  of  a  still  negative,  even 
improving,  external  position,  corporate 
overleveraging and weak labour market adjustment. In addition to calls for action, the 
MIP  crucially  provided  the  setting  for  the  close  and  integrated  monitoring  of  policy 
action  and  relevant  developments.  In  light  of  considerable  progress  in  tackling  the 
issues identified and monitored under MIP surveillance, and positive developments on 
the  front  of  bank  balance  sheets,  non-performing  loans,  and  other  relevant 
macroeconomic variables, Bulgaria imbalances were no longer identified as excessive 
in 2018.   

if 

  Romania  was  found  to  be  with  imbalances  in  March  2019.  That  decision  was  also 
taken  based  on  concerns  around  recent  legislative  initiatives  creating  risks  to  the 
financial sector and private investment. The Romanian authorities have since reversed 
part of those initiatives even though risks are still building  up. Here too  the MIP can 
provide a framework to closely and timely monitor those developments.  

There  were  also  cases  where  the  MIP  worked  by  raising  awareness  and  giving 
prominence  to  certain  issues  and  help  mainstreaming  and  entrenching  them  on  the 
policy debate.  

  For instance, in Sweden, the in-depth review gave augmented prominence to housing 
issues since the very beginning of MIP surveillance in 2012. More generally, the MIP 
helped in keeping the topic high on the policy debate. 

  Similarly, the in-depth review called for attention to the large current account surplus 
of  the  Netherlands.  In  addition,  the  MIP  helped  keeping  the  issue  of  mortgage 
interest deductibility on personal income taxes on the policy agenda despite reluctance 
from the national authorities to act on it.  

  Likewise, the MIP has  managed to  cast  Germany’s high current  account  surplus  on 
the policy debate. It raised awareness and shifted the debate with the current account 
surplus not being regarded only as a re-assurance of strong competitiveness, and led to 
an  engagement  on  a  debate  with  the  Commission  and  the  other  Member  States  (see 
also Bokhorst, 2019).  

45 

 
 
  The  MIP  has  fed  the  policy  debate  in  Croatia  and,  in  light  of  potentially  stronger 
enforcement associated with the EIP. Moreover, the policy response right after being 
classified  as  excessive  imbalances  triggered  visible  preparation  of  policy  plans,  as 
shown in the subsequent National Reform Programmes, even if subsequent action was 
somewhat left wanting.  

3.3.3 Impact on economic outcomes 

A  thorough  assessment  of  the  MIP  surveillance  on  economic  outcomes  is  beyond  the 
scope of the present review. The MIP can affect relevant economic variables not only via its 
impact  on  policies  carried  out  by  Member  States  under  surveillance  but  also  via  the  impact 
that the presence of a structured surveillance framework could have on market sentiment. A 
thorough  assessment  would  require  a  counterfactual  that  permits  to  check  countries’ 
performance  in  absence  of  the  MIP.84  However,  the  application  of  econometric  techniques 
usually employed to construct such counterfactual would hardly permit robust conclusions in 
the case of the MIP for two main reasons. First, the experience with the implementation of the 
framework is  rather limited, implying that the data do not  contain sufficient  observations to 
assess the effectiveness  of the MIP in  the correction of slow-moving stock variables, or the 
prevention of the accumulation of new imbalances. Second, and moreover, MIP objectives are 
multifaceted  and  country  specific,  implying  that  a  test  of  MIP  effectiveness  based  on  the 
impact of the MIP on a single or few economic variables cannot lead to general conclusions. 
The  remainder  of  this  section  will  present  nonetheless  prima-facie  evidence  aimed  at 
corroborating a number of tentative findings on the impact of MIP surveillance. 

Graph 14: Sovereign 10-year bond spread against Germany 

Note: A Member State is classified as identified with excessive imbalances or  imbalances if it has been in that 
category for at least 3 years (not necessarily consecutively) since MIP inception. Member States never subject to 
IDR, or subject to an IDR but with no imbalances found, or with imbalances (or excessive imbalances) but for 

84 An approach sometimes used to establish a counterfactual against which to compare the effects of economic 
surveillance  frameworks  is  by  means  of  a  difference-in-difference  regression  approach  (aimed  at  assessing 
whether  the  presence  of  MIP  surveillance  made  a  difference  for  the  countries  concerned  as  opposed  to  those 
countries not under the MIP, controlling for other factors). An alternative is the use of “synthetic counterfactual” 
analysis  (where  the  performance  of  each  MIP  country  under  MIP  surveillance  is  confronted  with  that  of  a 
synthetic comparator combining the relevant characteristics that best resemble the country under investigation, 
except being under MIP surveillance). 

46 

0123452000200220042006200820102012201420162018percentage pointsIdentified with excessive imbalances for at least 3 yearsIdentified with imbalances for at least 3 yearsOther EU countries 
 
 
 
                                                 
less  than  3  years,  are  included  in  the  group  “Others”  for  the  sake  of  comparison.  Actual  composition  of  the 
Member State groups is as follows: “Identified with excessive imbalances”: BG, FR, HR, IT, CY, PT; “Identified 
with imbalances”: BE, IE, ES, HU, NL, SI, FI, SE, UK”. Averages are unweighted. 
Source: Eurostat 

Member  States  experiencing  imbalances,  and  especially  those  found  to  have  excessive 
imbalances, recorded, on average a bigger drop in risk premia as compared with other 
Member States. Over the post-crisis period, when the MIP was introduced, macro-financial 
risks as reflected by markets were considerably higher in Member States that were subject to 
MIP  surveillance.  Over  time,  notably  as  a  result  of  enhanced  governance  for  euro  area 
Member  States  and  the  establishments  of  firewalls  addressing  default  risk  and  contagion 
(European Stability Mechanism; Banking Union, with the Single Supervisory Mechanism and 
the  Single  Resolution  Mechanism;  and  measures  by  the  European  Central  Bank,  such  as 
Quantitative Easing and announcement of the Outright Market Transactions programme), risk 
premia fell in across the EU, with more sizeable reductions on average in cases identified with 
excessive imbalances (Graph 14). 

Economic activity in Member States that have undergone MIP surveillance has strongly 
accelerated  after  years  of  weaker  economic  performance.  In  particular,  Member  States 
marked by excessive imbalances have underperformed relative to their EU peers in the post 
crisis  period,  with  weaker  GDP  growth  and  higher  unemployment.  However,  the  economic 
recovery  appears  to  have  benefited  especially  a  number  of  Member  States  under  MIP 
surveillance  as  growth  resumed  more  markedly  therein,  especially  those  that  were  more 
affected by adjustment to large current account  deficit reversals.  In addition, unemployment 
exhibited a bigger drop as compared with non-MIP Member States.  

The evidence suggests  that MIP surveillance has helped to address  the risks  stemming 
from  macroeconomic  imbalances,  which  in  turn  improved  economic  growth.  The 
reduction  in  risk  premia  in  Member  States  subject  to  MIP  contributed  to  a  stronger  growth 
performance  by  improving  prospects  for  public  finances  and  the  banking  sector,  thereby 
creating the conditions for resumed domestic demand, notably investment.85 Resumed growth, 
in turn, had a positive feedback loop on perceived risks. The fact that the reduction in risk was 
stronger in Member States under MIP cannot be taken as evidence. Other factors undoubtedly 
played a role, including market reactions and policies not affected by MIP surveillance. The 
evidence is nonetheless consistent with increased policy activism due to the MIP or improved 
market sentiment associated with the presence of a structured surveillance framework set by 
the MIP. 

Sources  of  imbalances  have  been  receding  in  Member  States.  Sources  of  imbalances 
identified  in  the  earlier  years  of  MIP  implementation  were  often  related  to  large  current 
account  deficits,  past  competitiveness  losses,  inflated  house  prices,  high  debt  levels  often 
coupled with undercapitalised banking systems. The available evidence suggests that in most 
cases, Member States under MIP surveillance have recorded improvements in variables linked 
to the identified imbalances. Graph 15  and Graph 16 report consistent evidence for external 
imbalances (current account balances and NIIPs). Member States under MIP surveillance with 
imbalances  identified  in  areas  relating  to  excessively  large  current  account  deficits  were 
reporting  much  larger  deficits  compared  with  other  Member  States  but  recorded  faster 

85 On the  role of  macroeconomic imbalances in affecting patterns of  growth and convergence in the euro area 
see, e.g., M. Buti and  A. Turrini (2015), "Three waves of  convergence.  Can Eurozone countries start  growing 
together  again?"  VOXEU  column,  17  April  2015;  and  L.  Coutinho  and  A.  Turrini  (2019),  "Convergence  and 
Macroeconomic Imbalances", Quarterly Report on the Euro Area, European Economy, Institutional Paper 111, 
July 2019.  

47 

 
 
 
                                                 
improvements during the years under MIP surveillance. Competitiveness also improved faster 
in Member States with the need to rebalance after a history of large current account deficits.86 
Similar  considerations  apply  to  stock  variables  like  the  NIIP  and  private  debt,  although 
improvements were visible only recently and stock imbalances remain important.  

Graph 15: Current Accounts: deficits and 
surpluses as source of imbalances 

Graph 16: NIIP 

Note: "CA deficit a source of imbalances" ("CA surplus a source of imbalances") includes those Member States 
that have had current account deficits (surplus) identified as a source of imbalance at least once (as presented in 
the MIP matrix or chapeau communication); and, being classified with imbalances or excessive imbalances for 
at least 3 years. Actual composition of the groups is as follows:  "CA deficit a source of imbalances": BG, CY, 
ES, HR, HU, IE, PT; "CA surplus a source of imbalances": DE, NL, SE. Averages are unweighted. 
Source: AMECO 

Despite  the  positive  findings  on  the  effectiveness  of  MIP  surveillance  in  addressing 
imbalances and contributing to risk reduction, a number of challenges stand out: 

  Stock  variables  like  high  public  and  external  debt  adjust  slowly.  Imbalances 
associated  with  flow  variables,  like  current  account  balances  or  house  price  growth, 
adjusted  swiftly  in  light  of  market  reactions  in  a  context  of  compressed  demand 
dynamics  and,  later  on,  on  the  back  of  the  improving  economic  environment.  More 
recently,  rebalancing  has  been  slowing,  also  as  cost  competitiveness  developments 
became  less  supportive.  Stock  variables  like  the  NIIP  or  private  debt,  which  are 
measured  as  a  share  of  GDP,  adjusted  much  more  slowly  because  the  unwinding  of 
imbalances was associated with a detrimental “denominator effect”, on account of the 
reduced or even falling nominal GDP growth. The economic recovery, which became 
gradually  more  widespread  and  consolidated,  eventually  helped  to  reduce  stock 
imbalances, but vulnerabilities linked inter alia to high debt, non-performing loans, or 
external  liabilities  still  remain  high  in  some  Member  States,  requiring  continued 
prudent external positions. 

86  See,  e.g.,  European  Commission,  Alert  Mechanism  Report,  issues  2015-2019.  Regarding  imbalances 
associated  with  past  housing  booms,  downward  house  prices  corrections  were  in  most  cases  recorded  in  the 
countries concerned already before MIP surveillance started being implemented (e.g., Spain).  

48 

-15-10-505102000200220042006200820102012201420162018% of GDPUnder MIP for at least 3 years, CA deficit a source of imbalancesUnder MIP for at least 3 years, CA surplus a source of imbalancesOther EU countries-120-100-80-60-40-2002040602000200220042006200820102012201420162018% of GDPUnder MIP for at least 3 years, CA deficit a source of imbalancesUnder MIP for at least 3 years, CA surplus a source of imbalancesOther EU countries 
 
 
 
 
 
 
                                                 
  Large  and  persistent  current  account  surpluses  in  some  Member  States  adjust 
slowly.  Because  of  the  simultaneous  progressive  reduction  of  large  current  account 
deficits  and  the  persistency  of  large  current  account  surpluses  in  euro  area  Member 
States,  in  light  of  a  major  deleveraging  processes  involving  various  sectors  of  the 
economy, including in Member States with little or no deleveraging needs, and strong 
export performance, the  overall current  account  position of the euro area has moved 
from  broadly balanced to a substantial  surplus.  The progressive rise in  the euro  area 
surplus  reveals  persistent  weak  demand  dynamics  in  the  post-crisis  period  that 
underpinned the low inflation environment  in  the euro  area. Rebalancing  at  the euro 
area  level  of  both  current  account  deficits  and  surpluses  matter  for  the  MIP 
surveillance as that rebalancing would help fostering nominal growth, which in turns 
helps  narrowing  imbalances.  Systemic  issues  linked  to  the  persistency  of  large 
surpluses  and  their  impact  on  the  euro  area  were  not  at  the  centre  of  the  policy 
discussion when the MIP entered into force.87 Progress on this front will be a key test 
for the effectiveness of the MIP. In this respect, it is important to highlight that while 
the correction of large current account deficits is often the result of market dynamics 
(notably, a sudden stop in external financing), the adjustment of surpluses is generally 
more  gradual.  In  this  context,  supportive  policies  sustained  over  time  could  make  a 
difference  in  fostering  a  rebalancing  of  both  current  account  deficits  and  surpluses 
across the euro area and the EU.  

  The effectiveness of the MIP in preventing the accumulation of new imbalances is 
still  untested.  The  economic  recovery  is  bringing  new  possible  challenges  in  a 
number of Member States, some of them not directly under MIP surveillance, linked 
notably 
labour  costs  and  deteriorating  competitiveness, 
acceleration  in  house  prices  in  a  context  of  resuming  household  indebtedness,  and 
current  account  balances  returning  into  negative  territory.  Detecting  those  risk  and 
eliciting appropriate policy responses will be a key test on the preventive capacity of 
the MIP. 

to  fast-growing  unit 

3.4 Conclusions 

Overall,  the  MIP  helped  broadening  economic  surveillance.  But  a  number  of  challenges 
stand  out.  The  procedure  has  sometimes  been  judged  as  lacking  transparency.  In  particular, 
the scope of the MIP has sometimes been seen as too broad and its boundaries as blurred. The 
MIP contributed to  a supportive environment  to  address  macro-stability challenges, but  it is 
debatable whether the full potential of the MIP in triggering policy action has been exploited, 
especially  due  to  the  limited  political  traction  that  the  procedure  has  generated.  Regarding 
economic  outcomes,  while  flow  imbalances  linked  to  the  pre-crisis  booms  have  been 
corrected  in  a  majority  of  Member  States,  the  correction  of  stock  imbalances  such  as  high 
public, private and external debt has been slower and is still incomplete. Regarding external 
rebalancing,  the  correction  of  large  and  persistent  current  account  surpluses  has  been  slow. 
The  effectiveness  of  the  MIP  in  preventing  the  accumulation  of  new  imbalances  is  largely 
untested.  The  rest  of  this  section  reviews  the  achievements  to  date,  and  related  challenges 
ahead, along three central questions. 

87 Recital 17 to Regulation No 1176/2011 acknowledges the lower degree of risk associated with large current 
account surpluses as compared with deficits, a point made also in a Commission declaration joined to the same 
Regulation. 

49 

 
 
 
 
                                                 
Widening the scope of the macroeconomic surveillance 

The MIP broadened surveillance, complementing other procedures, and enhancing the 
analytical  and  statistical  basis  to  detect  imbalances.  The  reason  underpinning  the 
introduction  of  the  MIP  was  to  give  EU  macroeconomic  surveillance  more  effective 
instruments  to  prevent  and  correct  challenges  to  macroeconomic  stability  of  various  nature, 
thereby  complementing  existing  surveillance  procedures.  The  MIP  framework  for  analysis 
was  enriched  and  expanded  in  cooperation  with  Member  States.  Progress  was  made  on 
towards enhancing the standards and methods used for the compilation of data used in MIP 
analysis as well as strengthening the statistical quality assurance framework. A Memorandum 
of  Understanding  was  concluded  in  2016  between  Eurostat  and  the  European  Central 
Bank/Directorate  General  Statistics  on  the  quality  assurance  of  statistics  underlying  the 
MIP.88 This review of economic governance provides an opportunity to reflect further on how 
the quality of MIP statistics is best assured. 

The  scope  of  MIP  surveillance  has  remained  anchored  to  macroeconomic  stability. 
Gradually,  it  has  been  taking  into  account  also  broader  implications  relating  to  adjustment, 
notably those affecting employment and social developments. The crisis highlighted the need 
for  an  enhanced  framework  to  monitor  and  correct  challenges  arising  from  issues  such  as 
current account imbalances, private debt, or housing bubbles, as all these factors compounded 
stability risks  originating from  high  government  deficits and debt  levels.  In this respect,  the 
MIP can act as a useful complement to the Stability and Growth Pact by prioritising policies 
not dealt with directly by the SGP, but which can be of relevance for achieving sound public 
finances.  In  particular,  by  covering  longer-term  potential  growth  and  productivity  issues  in 
high-debt  countries,  the  MIP  can  help  addressing  public  finance  challenges  arising  from  an 
insufficient growth potential. The existing synergies between the MIP and the SGP may have 
not been fully exploited effectively. 

European-level considerations and systemic aspects were taken into account in applying 
MIP surveillance. Decisions under MIP surveillance were driven mostly by the assessment at 
Member State level. However, issues pertaining to the level of the EU and euro area as well as 
systemic and international aspects were also taken into account. Thus, decisions also reflected 
the  overall  economic  situation  and  outlook  of  the  euro  area,  and  the  presence  of 
interdependencies and spill-overs with possible negative implications for the rest of the euro 
area or the EU. Following the Five Presidents' report, the euro area dimension of imbalances 
has  been  assessed  on  a  regular  basis  in  recent  Alert  Mechanism  Reports  and  reflected  in 
country-specific and euro area recommendations.  

The MIP has gradually taken on board social aspects linked to adjustment issues. Social 
and  employment  considerations  linked  to  adjustment  to  macroeconomic  imbalances  have 
been  gradually  incorporated  in  MIP  surveillance  and  recommendations  were  increasingly 
geared to cater for the trade-offs between ensuring macroeconomic adjustment and addressing 
social  distress.  The  need  to  take  into  account  also  trade-offs  between  macroeconomic 
adjustment and environmental and climate challenges may arise in the future, while keeping 
the macro-stability focus of the MIP.  

Policy responses and correction of imbalances  

The  MIP  contributed  to  a  supportive  policy  environment.  The  MIP  contributed  to  raise 
awareness  of  the  relevance  of  the  challenges,  mobilise  political  capital  and  focus  policy 

88  As  an  outcome,  a  joint  ESS-ESCB  annual  quality  reports  provides  an  assessment  of  the  quality  of  these 
statistics. 

50 

 
 
 
                                                 
action, and deepen the dialogue between EU institutions and national policy authorities. In a 
number of cases, the MIP provided a framework for policy efforts to shore up macroeconomic 
stability in Member States severely threatened by the risk of debt or financial crises, without 
the need to resort to the more intrusive EIP instrument. More generally, the MIP was effective 
in raising prominence of risks and challenges and feeding the national debate on MIP-related 
challenges and policy responses. 

MIP  surveillance  was  associated  with  stronger  policy  progress.  Evidence  suggests  that 
Member States under MIP surveillance received more recommendations and exhibited more 
policy progress as compared with the other Member States. That effect was particularly strong 
in  the  first  years  of  MIP  implementation  and  in  a  context  where  market-based  discipline 
proved  relevant  and  awareness  of  the  need  to  address  macroeconomic  imbalances  was 
widespread. However, policy progress declined more recently, and is now comparable to that 
of other recommendations under the European Semester, reflecting lower perceived urgency 
of reform and reduced political capital. 

MIP  surveillance  was  associated  with  a  correction  of  most  flow  imbalances  and  a 
gradual  reduction  of  stock  imbalances.  Large  current  account  deficits  were  reduced  or 
turned into surpluses, competitiveness developments started being supportive of rebalancing, 
deleveraging in the private sector took place in Member States with large debt, inflated house 
prices undergone a downward correction. Stock variables (e.g., private debt, NIIP) underwent 
a  more  gradual  correction,  and  embarked  on  a  downward  trend  only  once  nominal  GDP 
growth resumed, requiring continued prudent external positions going forward. The evidence 
is  consistent  with  a  possible  role  played  by  the  MIP  in  contributing  to  reduced  risks  and 
thereby a fast recovery in output and employment in Member States under MIP surveillance, 
although causation is difficult to establish. 

The  MIP  has  been  punching  below  its  weight  when  it  comes  to  the  effectiveness  in 
triggering policy action. Despite MIP surveillance being associated with somehow stronger 
policy responses and a more supportive policy environment, the MIP might have not managed 
to  get  sufficient  political  traction  to  mobilise  the  political  capital  needed  to  carry  out  major 
reforms  also  in  the  absence  of  market  pressure.  This  may  point  to  weaknesses  in  terms  of 
communication  and  focus.  It  has  also  been  noted  that  the  MIP  was  so  far  not  used  at  full 
potential, as the EIP has not yet been activated. This may be related to the lack of clarity on 
the implementation of the EIP and on how corrective action under the MIP would be applied.  

The  jury  is  still  out  on  the  effectiveness  of  the  MIP  in  preventing  the  accumulation  of 
new  imbalances.  When  the  MIP  was  introduced,  imbalances  were  already  present  in  many 
Member States. However, the effectiveness of the MIP in preventing the accumulation of new 
imbalances is still untested. The economic expansion of recent years has brought new possible 
challenges in a number of Member States, some of them not directly under MIP surveillance. 
Those  challenges  are  linked  notably  to  fast-growing  unit  labour  costs  and  deteriorating 
competitiveness,  acceleration  in  house  prices  in  a  context  of  resuming  household 
indebtedness, current account balances returning into negative territory. Detecting those risks 
and eliciting appropriate policy responses will be a key test on the preventive role of the MIP. 

External deficits have seen a stronger correction that external surpluses. The larger risks 
associated  with  external  deficits  has  entailed  a  stronger  focus  of  the  MIP  on  those  Member 
States, especially in the first years of application. Those deficits have been gradually reduced, 
while prudence remains warranted in view of the remaining stock imbalances. However, large 
and  persistent  current  account  surpluses  in  a  number  of  Member  States  have  not  yet  been 
corrected. In this respect, it is important to highlight that while the correction of large current 
account  deficits  is  often  the  result  of  market  dynamics  linked  to  a  sudden  stop  in  external 
financing,  this  is  not  the  case  for  surpluses,  whose  adjustment  is  generally  more  gradual. 

51 

 
 
Altogether,  the  progressive  rise  in  the  euro  area  surplus  reveals  persistent  weak  demand 
dynamics in the post-crisis period that underpinned the low inflation environment in the euro 
area. Therefore, the rebalancing not only of current account deficits but also that of surpluses 
would help boost growth in the Member States concerned, and would have positive spillovers 
to the rest of the euro-area. For instance, already in the conclusions to its audit, the European 
Court  of  Auditors  pointed  out  that  the  MIP  was  not  encouraging  symmetric  rebalancing 
within the euro area and recommended the Commission through the MIP to "give systematic 
consideration to policies with cross-country impacts that can enhance symmetric rebalancing 
within the euro area."89  

Ownership and governance 

The  Commission  has  used  economic  judgement  in  the  application  of  the  MIP.  MIP 
surveillance does not lend itself to a mechanistic use of numerical rules. Issues dealt with in 
the  MIP  context  are  multifaceted  and  interrelated.  Moreover,  the  nature  of  imbalances  may 
change across Member States and over time. To address the many macroeconomic challenges 
that are the object of MIP surveillance, a wide range of policy instruments is needed, which 
sometimes  exert  only  an  indirect  and  possibly  weak  effect  on  economic  outcomes.  As 
opposed  to  fiscal  surveillance,  use  of  numerical  rules  would  not  be  appropriate  to  MIP 
surveillance.  Hence,  the  identification  and  assessment  of  imbalances  has  required  economic 
judgement in the first place in line with definition of imbalances in Regulation No 1176/2011:  

  Economic  judgement  has  also  been  used  in  the  surveillance  and  follow  up  to  the 
identification of imbalances. The assessment and monitoring framework  has evolved 
in  light  of  the  accumulated  experience,  making  use  of  the  discretion  allowed  by  the 
legal framework. 

  While  the  EIP  has  never  been  launched,  where  Member  States  were  identified  with 
excessive  imbalances,  recommendations  in  the  context  of  the  MIP  were  more 
prescriptive  compared  to  those  for  Member  States  not  directly  under  MIP,  and 
monitoring of policy response to recommendations was stepped up. 

is 

transparency  and  accountability 

The  use  of  economic  judgement  by  the  Commission  was  balanced  by  enhanced 
transparency  and  accountability.  The  natural  counterpart  to  discretion  on  the  part  of  the 
towards  Member  States  and  main 
Commission 
stakeholders,  with  a  view  to  ensure  equal  treatment  and  predictability.  This  balance  is 
anchored in the Regulation No 1176/2011, which endows the Commission with discretion as 
concerns  assessments  and  decisions  in  the  MIP  context,  but  under  close  scrutiny  from  the 
Council, which takes conclusions on Commission decisions. While the Council has generally 
endorsed  Commission  decisions,  a  request  of  increased  transparency  and  predictability  was 
voiced by Member States and EU institutions (notably in the Council conclusions on in-depth 
reviews  and  the  Five  Presidents'  report).  The  Commission  has  taken  steps  to  enhance 
transparency  regarding  the  criteria  underpinning  assessments  (made  public  in  the  MIP 
Compendium), the reasons underlying specific decisions (clarified in the in-depth reviews by 
means  of  MIP  Assessment  Matrices),  and  the  implications  of  MIP  decisions  in  terms  of 
recommendations and activation of surveillance. At the same time, the Commission simplified 
the framework by streamlining and stabilising the classification of imbalances. In a nutshell, 
consistency and predictability of the framework was enhanced by increased transparency and 
the built up of a stock of precedents under the MIP, which made it possible to judge new cases 
in light of past decisions with analogous challenges and under similar conditions. 

89 ECA(2018) op. cit., recommendation 5. 

52 

 
 
 
                                                 
There have been calls to further enhance transparency and predictability. Despite steps 
being taken towards a more transparent and stable MIP implementation, some policy makers 
and  experts  see  scope  for  further  improvement.  The  European  Court  of  Auditors  has 
recommended clarifying the link between MIP recommendations and recommendations under 
other surveillance streams (MIP vs. European Semester, link to SGP  recommendations, link 
with  recommendations  to  the  euro  area).  In  this  respect,  the  Commission  has  already  taken 
first  steps:  in  line  with  that  recommendation  by  the  European  Court  of  Auditors,  the  2019 
country-specific  recommendations  include  recitals  that  explain  the  links  between  SGP  and 
finer  mapping  between  MIP  challenges  and 
MIP-related 
recommendations  would  also  help  focusing  the  procedure,  giving  priority  to  critical 
recommendations  to  address  imbalances  and  favour  adjustment.  Some  authors  have  argued 
that  a  more  focused  MIP  could  increase  its  effectiveness.90  Calls  for  transparency  and 
disclosure  have  also  concerned  the  Commission’s  reasoning  for  not  launching  the  EIP,  as 
echoed in the European Court of Auditors recommendations.91 Increased transparency could 
also concern aspects linked to the implementation of the EIP not detailed in the Regulation No 
1176/2011 (see section 3.2.3) 

recommendations.  A 

90 E.g., Bénassy-Quéré (2017), op. cit.; Efsthatiou and Wolff (2018), op. cit. 
91 See also the Council conclusions on the 2019 IDRs: https://data.consilium.europa.eu/doc/document/ST-9473-
2019-INIT/en/pdf 

53 

 
 
                                                 
4.  EURO  AREA  MEMBER  STATES  EXPERIENCING  OR  THREATENED  WITH 

SERIOUS DIFFICULTIES WITH FINANCIAL STABILITY 

4.1 Objectives 

Regulation  No  472/2013  provides  a  framework  under  which  the  Commission  and  the 
Council  can  exercise  a  degree  of  strengthened  surveillance  complementary  to  other 
existing  multilateral  surveillance  processes.  It  sets  out  rules  for  enhanced  surveillance, 
macroeconomic  adjustment  programmes  and  post-programme  surveillance.  In  particular,  it 
sets the framework for macroeconomic adjustment programmes for euro area Member States 
in  case  financial  assistance  is  inter  alia  provided  by  the  European  Stability  Mechanism 
(ESM), which is an intergovernmental institution outside the EU legal framework.  

 Under  Regulation  No  472/2013,  the  Commission  and  the  Council  can  require  that  a 
euro area Member State takes further measures to address the specific risks emanating 
from that Member State to preserve financial stability in the euro area. Those measures 
aim to rapidly re-establish a sound economic and financial situation and, if relevant,  restore 
the euro area Member State’s capacity to finance itself fully on the financial markets. 

The  changes  agreed  in  the  context  of  ESM  Treaty  reform  do  not  require  a  change  to 
Regulation  No  472/2013.  The  Regulation  was  also  used  as  the  basis  for  agreeing  the 
Memorandum of Cooperation between the Commission and the ESM on their future working 
relations.92  

4.2 Enhanced surveillance  

Enhanced  surveillance  aims  to  ensure  that  a  euro  area  Member  State  takes  corrective 
measures  to  address  the  sources  of  its  structural  imbalances  with  a  view  to  ensure  its 
swift return  to a normal  situation and to protect other euro area Member States from 
potential spill-over effects. As such, the decision by the Commission to subject a euro area 
Member  State  to  enhanced  surveillance  will  usually  be  based  on  the  findings  of  the  normal 
European  Semester  cycle  of  economic  and  fiscal  policy  coordination,  notably  the  Alert 
Mechanism Report and where available the latest in-depth review. 

Enhanced  surveillance  has  so  far  never  been  applied  ex-ante.  It  has  been  applied,  ex-
post,  in  the  case  of  Greece.  Indeed,  when  Regulation  No  472/2013  was  introduced,  no 
further  cases  warranted  applying  that  process.  Moreover,  at  that  stage,  the  other  euro  area 
Member  States  in  difficulty  were  already  under  a  macroeconomic  adjustment  programme. 
Cyprus  was  the  only  Member  State  whose  economic  and  budgetary  surveillance  took  place 
within  the  European  Semester  process  before  requesting  a  macroeconomic  adjustment 
programme. However, the macroeconomic imbalances were so high that it was only a matter 
of  months  before  Cyprus  had  to  request  financial  assistance.  Greece  started  its  third 
macroeconomic  adjustment  programme  in  2015  but  had  been  subject  to  two  other 
programmes prior to then. 

92 The Memorandum of Cooperation will be concluded between the Commission and the ESM once the amended 
Treaty of the ESM has been ratified. It will be based on the Memorandum of Understanding concluded in April 
2018, 
2018 
https://ec.europa.eu/info/business-economy-euro/economic-and-fiscal-policy-coordination/eu-financial-
assistance/loan-programmes/european-stability-mechanism-esm_en. 

the  Commission 

Joint  Position 

in  November 

the  ESM 

and 

and 

the 

of 

54 

 
 
                                                 
The  regime  foreseen  by  Regulation  No  472/2013  relative  to  enhanced  surveillance  was 
applied in the case of Greece, but given that the procedure only started at end of August 
2018,  it  is  too  early  to  draw  definitive  conclusions.  The  decision  to  subject  Greece  to 
enhanced surveillance following the end of its financial assistance programme in August 2018 
was taken because Greece continued to face risks with respect to its financial stability, which, 
if they materialise, could have adverse spill-over effects on other euro area Member States, in 
particular  via  confidence  effects  that  could  increase  refinancing  costs  for  their  banks  and 
sovereigns. 

4.3 Financial assistance and macroeconomic adjustment programmes  

For macroeconomic adjustment programmes, the aim of Regulation No 472/2013 was to 
codify  the  process  for  designing  a  programme  and  properly  involving  the  necessary 
stakeholders  sufficiently  early  in  the  process.  In  particular,  Regulation  No  472/2013 
provides for specific requirements for the Commission for euro area Member States under a 
macroeconomic adjustment programme, namely: (i) the preparation of the programme and the 
information to relevant stakeholders on progress made; (ii) ensuring consistency between the 
Memorandum  of  Understanding  signed  with  the  euro  area  Member  State  and  the 
macroeconomic  adjustment  programme  prepared;  (iii)  monitoring  the  progress  made  in 
implementing the programme through regular review missions and the involvement of social 
partners  and  relevant  civil  society  organisations  during  these  missions;  (iv)  the  granting  of 
technical  assistance  where  the  requirement  is  that  it  helps  with  the  implementation  of 
programme conditionality.  

The  provisions  of  Regulation  No  472/2013  governing  the  process  for  framing 
macroeconomic  adjustment  programmes  have  been  respected.  Information  has  been 
provided  more  regularly  to  the  European  Parliament  on  the  progress  made  with  the 
implementation of programmes in the case of Greece and Cyprus than Portugal. This was due 
to  the  fact  that  the  programme  for  Portugal  began  prior  to  the  adoption  of  Regulation  No 
472/2013.  

The  framework  put  in  place  by  Regulation  No  472/2013  has  been  effective  in  dealing 
with  the  problems  that  led  euro  area  Member  States  to  request  macroeconomic 
adjustment programmes. All the euro area Member States that received financial assistance 
have been able to return to markets at reasonable financing rates; external and fiscal balances 
have  been  largely  resolved;  and  the  stability  of  the  financial  sector  has  been  restored. 
Regulation  No 472/2013 also  helped to  preserve  the financial stability of  the euro area  as a 
whole by putting those procedures in place.  

Regulation  No  472/2013  has  provided  the  right  degree  of  scrutiny  in  the  economic 
situation  of  the  vulnerable  euro  area  Member  States.  It  has  also  allowed  a  proper 
management of the procedures such that the imbalances in the euro area Member States were 
resolved  in  an  orderly  fashion  and  without  creating  major  disruption.  At  the  same  time,  it 
appears that it has not always been easy to sustain national ownership of the macroeconomic 
adjustment  programmes  particularly  at  the  time  of  programme  exit  or  programme 
discontinuation when incentives for authorities to backtrack on certain reforms agreed in the 
programme increased. 

In  addition,  Regulation  No  472/2013  has  contributed  to  a  closer  coordination  of 
economic  policies  and  a  sustained  convergence  among  euro  area  Member  States.  This 
has  been  achieved  by  ensuring  consistency  between  the  normal  surveillance  cycle  of  the 
European  Semester  and  the  strengthened  surveillance  of  a  macroeconomic  adjustment 
programme. Vulnerabilities and imbalances identified in  the normal  surveillance cycle were 

55 

 
 
explicitly  addressed  in  macroeconomic  adjustment  programmes.  Outstanding  adjustment 
needs  after  the  end  of  a  programme  were  subsequently  addressed  by  the  country-specific 
recommendations in the context of the European Semester.  

4.4 Post-programme surveillance  

According  to  Regulation  No  472/2013,  once  a  euro  area  Member  State  is  no  longer 
subject  to  a  macroeconomic  adjustment  programme,  it  will  be  subject  to  post-
programme  surveillance  until  at  least  75%  of  the  financial  assistance  received  is  paid 
back. The objective of post-programme surveillance is to ensure a Member State’s capacity to 
repay the financial assistance granted. At the same time, post-programme surveillance aims to 
ensure a continuous assessment of a Member State’s economic, fiscal and financial situation 
and  identify  any  risks  to  its  medium-term  viability  allowing  for  the  continuation  of  any 
remaining adjustment. 

The  provisions  governing  post-programme  surveillance  have  been  implemented  in  full 
accordance with the requirements of Regulation No 472/2013. The framework put in place 
by  Regulation  No  472/2013  for  post-programme  surveillance  foresees  specific  requirements 
in  terms  of:  (i)  the  information  to  be  provided  by  the  euro  area  Member  State;  (ii)  the 
monitoring process by the Commission in liaison with the ECB; (iii) the information provided 
to  the  European  Parliament,  the  EFC  and  the  national  Parliament  of  the  Member  State 
concerned. The assessment of remaining adjustment needs to be undertaken by the euro area 
Member State exiting a macroeconomic adjustment programme has been consistent with the 
findings  of  the  Country  Reports  published  as  part  of  the  European  Semester  cycle.  These 
assessments are also in line with the in-depth reviews conducted for those Member States that 
are  still  found  to  have  imbalances  in  the  framework  of  the  Macroeconomic  Imbalance 
Procedure. The requirements of Regulation No 472/2013 have been respected in terms of the 
additional  data  to  be  provided  by  the  Member  State  concerned  and  the  regular  information 
provided  by  the  Commission  to  the  European  Parliament,  EFC  and  parliaments  of  the 
Member State under post-programme surveillance. So far, no corrective measures have been 
deemed  necessary  in  any  of  the  euro  area  Member  States,  given  the  evolution  in  their 
adjustment process. There has also been no specific requests from the European Parliament or 
parliaments for exchanges of views on the progress in post-programme surveillance in those 
euro area Member States, in addition to the regular review mission reports. 

4.5 Conclusions  

All of the criteria93 that provided the basis for the evaluation have been broadly met. At 
the same time, experience has shown that the implementation of the Regulation No 472/2013 
could be improved, particularly as regards certain aspects of the surveillance processes as well 
as in relation to economic adjustment programmes. 

When to place a Member State in enhanced surveillance  

Regulation  No  472/2013  provides  concrete  elements  of  when  to  place  a  euro  area 
Member  State  under  enhanced  surveillance  in  some  particular  cases,  but  leaves 

93  These  criteria  are:  (i)  the  effectiveness  of  the  Regulation;  (ii)  progress  in  ensuring  closer  coordination  of 
economic  policies  and  sustained  convergence  of  economic  performance  of  the  Member  States  in  accordance 
with  the  TFEU;  and  (iii)  the  contribution  of  this  Regulation  to  the  achievement  of  the  Union’s  strategy  for 
growth and jobs. 

56 

 
 
 
                                                 
discretion to the Commission in others94. The original purpose of the procedure was to be a 
first  step  in  the  strengthened  surveillance  spectrum  to  lead  a  euro  area  Member  State  to 
implement  measures  aimed  at  solving  accumulated  imbalances  and  possibly  avoid  the  next 
step in terms of strengthened surveillance, which is a macroeconomic adjustment programme. 
Enhanced surveillance also serves to avoid situations where a euro area Member State delays 
the  request  for  a  financial  assistance  programme  and  avoids  taking  measures  to  address  its 
imbalances until the adjustment costs become very high. The enhanced surveillance procedure 
has  only  been  applied  once  (in  the  case  of  Greece  and  only  after  the  end  of  a  financial 
assistance programme rather than prior to a programme). In practice, however, Regulation No 
472/2013 allows for a certain degree of flexibility when deciding to place a vulnerable euro 
area Member State from normal surveillance into enhanced surveillance. 

Increased national ownership  

As  regards  economic  adjustment  programmes,  the  appropriate  involvement  of 
stakeholders in the Member State is  crucial to  ensure national  ownership, particularly 
in  the  transition  from  a  programme  back  into  normal  surveillance.  Regulation  No 
472/2013 establishes specific requirements as to the involvement of social partners and civil 
society  when  preparing  a  macroeconomic  adjustment  programme,  with  a  view  to  building 
consensus  over its content.  That  requirement  was broadly met in  all the  financial assistance 
programmes.  However,  both  in  the  case  of  Cyprus  and  Portugal,  the  programmes  ended 
without the completion of the last review and the disbursement of the last tranche of financial 
assistance.  Overall,  those  experiences  suggest  that  national  ownership  of  the  reforms 
implemented in the programmes tends to decrease at the end.  

Intensity of post-programme surveillance 

The experience of the recent years has led to a de facto modulation of the intensity of the 
surveillance  based  on  the  needs  of  the  euro  area  Member  State  in  question.  This  was 
done through the length  of the post-programme surveillance missions to  the Member States 
which varied from four working days to seven working days, as well as focusing the scope of 
surveillance.  Regulation  No  472/2013  allows  for  such  flexibility  as  it  requires  that  the 
Commission  conducts  regular  review  missions  with  a  view  to  identifying  factors  of 
importance to the repayment capacity of the Member State concerned and every six months 
communicates  its  assessment  to  the  competent  committee  of  the  European  Parliament,  the 
EFC and the parliament of the Member State concerned. 

94  Regulation  No  472/2013  provides  that  in  case  a  euro  area  Member  State  requests  precautionary  financial 
assistance from the ESM with the exception of a  Precautionary Conditioned  Credit Line that is not drawn, the 
EFSM,  the  EFSF,  one  or  several  other  Member  States  or  third  countries  or  another  relevant  international 
financial institution such as the IMF, a Member State should be placed in enhanced surveillance. If the euro area 
Member State does not request precautionary financial assistance, then it may be placed in enhanced surveillance 
if it is experiencing or threatened with serious difficulties with respect to its financial stability which are likely to 
have adverse effects on other euro area Member States. This is a discretionary decision of the Commission based 
on its expert judgement of when a euro area Member State would find itself in such a situation. 

57 

 
 
 
 
 
                                                 
5  OVERALL FINDINGS  

This review reveals strengths as well as possible areas for improvement. It confirms that 
the six-pack and two-pack reform, together with the roll out of the European Semester, have 
strengthened  the  framework  for  economic  surveillance  in  the  EU  and  euro  area  and  guided 
Member States in achieving their economic and fiscal policy objectives. They have also led to 
a  broader  and  more  integrated  approach  to  surveillance  that  better  assures  the  overall 
consistency of policy advice within the European Semester. The establishment of a common 
budgetary  timeline  and  the  policy  guidance  issued  on  the  basis  of  Member  States’  draft 
budgetary plans has led to closer coordination within the euro area. The measures introduced 
by the six-pack and two-pack reforms thus have contributed to ensuring closer coordination of 
economic policies. 

The  implementation  of  the  recommended  policies  by  Member  States  has  contributed, 
among  other  factors,  to  the  gradual  strengthening  of  EU  economies  and  strong  job 
creation  recorded  in  recent  years.  Furthermore,  by  supporting  the  correction  of  existing 
macroeconomic  imbalances,  the  prevention  of  the  build-up  of  new  imbalances  and  the 
reduction  of  government  debt  levels,  the  surveillance  framework  has  helped  to  create  the 
conditions  for  sustainable  growth,  strengthened  resilience,  reduced  vulnerabilities  and 
lowered  the  risk  of  potentially  harmful  spillovers.  The  six-pack  and  two-pack  reforms  have 
thus contributed to achieving the Union’s strategy for growth and jobs. 

The strengthened surveillance framework has also fostered convergence in the economic 
performance  of  Member  States,  with  an  overall  return  to  economic  growth  and  declining 
unemployment  rates  in  all  Member  States,  reduced  macroeconomic  imbalances,  and  falling 
public  deficits  and  debt  levels,  with  all  Member  States  having  exited  the  excessive  deficit 
procedure.  Furthermore,  the  framework  put  in  place  to  support  euro-area  Member  States 
experiencing, or threatened with, difficulties with respect to financial stability contributed  to 
reducing the temporary divergence of the Member States concerned from the rest of the euro 
area and laid the ground for renewed convergence.  

The recovery since the  financial crisis has been long by historical standards, but there 
has also been a decline in trend growth, accompanied by persistently low inflation, while 
public debt levels remain high in some Member States. Those Member States are also far 
from  their  medium-term  budgetary  objectives  while  their  reform  efforts  are  waning.  Some 
Member  States’  economies  remain  vulnerable  to  an  economic  slowdown  with  risks  of 
spillovers that would affect the functioning of the euro area as a whole.  

The fiscal stance at Member State-level has frequently been pro-cyclical. Moreover, the 
composition  of  public  finances  has  not  become  more  growth-friendly  and  national 
governments  have  revealed  their  preference  for  increasing  current  expenditure  rather  than 
protecting investment. In the event of large shocks that are not policy-induced, the ability to 
steer the fiscal stance for the euro area as a whole, with the appropriate differentiated fiscal 
effort among Member States, is hampered by the lack of prudent  policies in good times and 
remains constrained as long as it rests exclusively on coordination of national fiscal policies 
in  the  absence  of  a  central  stabilisation  capacity.  The  current  framework  and  its 
implementation thus has not fostered macroeconomic stabilisation.  

Furthermore, the current surveillance framework and its implementation did not ensure 
a  sufficient  differentiation  between  Member  States  that  have  markedly  different  fiscal 
positions, sustainability risks or other vulnerabilities. The interplay between Union fiscal 
rules and national fiscal frameworks is another area of improvement.  

58 

 
 
 
The  fiscal  framework  (which  includes  the  secondary  legislation  and  other  documents 
that  provide  more  details  and  transparency  on  how  surveillance  is  carried  out  in 
practice)  has  grown  excessively  complex.  This  complexity  results  from  the  framework 
pursuing  multiple  objectives  and  the  need  to  cater  for  a  wide  variety  of  evolving 
circumstances, including by the use of flexibility, in a context of divergences of views among 
Member  States.  It  is  reflected  in  a  very  detailed  codification,  encompassing  several 
operational indicators of which a number are non-observable and frequently revised, as well 
as  a  variety  of  escape  clauses.  As  a  result,  the  fiscal  rules  have  become  less  transparent, 
hampering predictability, communication and political buy-in.  

Other  imbalances  accumulated  during  the  economic  crisis  are  receding,  but  in  many 
instances only slowly. The MIP has been more successful in reducing current account deficits 
than it has been in reducing persistent and large current account surpluses. While this may be 
explained  by  the  more  pressing  needs  to  correct  large  current  account  deficits  given  the 
concerns about sustainability, persistent current account surpluses can also affect the smooth 
functioning of the euro  area.  The traction of policy recommendations  is  suboptimal  and has 
been  declining  over  time  as  the  momentum  for  reform  has  faded.  Moreover,  while  the 
interaction between the specific surveillance strands has been adequate, there is further scope 
to  make  them  work  better  together.  Important  links  between  individual  surveillance 
instruments  are  not  sufficiently  taken  into  account,  in  particular  where  public  debt 
sustainability  issues  are  intrinsically  linked  to  wider  macroeconomic  imbalances  or  low 
potential growth.95  

Finally,  thought  should  be  given  to  the  need  for  the  surveillance  framework  to  help 
tackling  today  and  tomorrow’s  pressing  economic,  demographic  and  environmental 
challenges.  Currently,  one  of  the  key  economic  challenges  is  that  growth  may  remain 
subdued for a longer period unless policy action is taken  to boost potential growth. With an 
already highly accommodative monetary policy, it is important to consider whether and how 
Member  States’  fiscal  and  structural  policies  could  contribute  to  the  policy  mix  in  the  euro 
area and to raising potential growth,  and to reflect on the potential role of the EU economic 
governance  framework  therein.  Furthermore,  it  should  be  considered  to  what  extent  the 
framework  can  support  economic,  environmental  and  social  policy  needs  related  to  the 
transition  towards  a  climate-neutral,  resource  efficient  and  digital  European  economy, 
complementing the key role of the regulatory environment and structural reforms.  

95 In addition, the surveillance of sovereign-bank spillovers has not played a central role within the framework, 
although their relevance for macroeconomic and financial stability remains. 

59 

 
 
  
 
                                                 
ANNEX 1: ASSESSING THE IMPACT OF THE SGP: EMPIRICAL EVIDENCE 

A.  Relationship between fiscal rules and sustainability 

There  is  ample  of  empirical  evidence  showing  that  Member  States  with  sound  fiscal  rules 
have,  on  average,  lower  debt  ratios  compared  to  countries  without  rules.96  Still,  causality  is 
difficult to establish for endogeneity reasons. Having or adopting a fiscal rule indeed depends 
on a range of factors that can correlate with fiscal performance. For instance, countries with 
fiscal rules may have a clear preference for a prudent conduct of fiscal policy whether or not a 
rule is in place.97 In addition, evidence on the performance of spending rules used at the EU 
and Member States’ level was very scarce so far. 

A  recent  counterfactual  simulation  shows  that  public  debt  ratios  would  have  been 
significantly  lower  today,  in  particular  in  high-debt  Member  States,  if  the  expenditure 
benchmark had been applied and complied with since 2000 (Graph A1.1, green line).98 Strict 
compliance with the expenditure benchmark compared with the structural balance adjustment 
would have required a larger fiscal  adjustment in good times, which would have resulted in 
higher fiscal buffers at the start of recession. As a consequence, the expenditure benchmark-
based  adjustment  would  have  led  to  a  more  growth-friendly  adjustment,  given  the  lower 
average loss in output.  

Graph A1.1: Debt developments in case of strict implementation of the preventive arm 
(EU 28, 1999-2019) 

Note: The black line refers to the baseline in line with the Commission Spring Forecast 2019. The impact of a 
strict  compliance  with  the  preventive  arm  are  shown  using  two  counterfactual  scenarios,  namely  compliance 
with the expenditure benchmark (green line CEB) and the structural balance requirement (red line CSB). 

B.  Relationship between fiscal policy and the economic cycle 

Existing  evidence  points  to  a  rather  pro-cyclical  pattern  of  discretionary  fiscal  policy  in  the 
EU. Studies typically find that total fiscal policy (i.e. discretionary fiscal policy and automatic 

96 See IMF (2009), Heinemann et al. (2018), Tapsoba (2012), Debrun et al. (2008), Caselli et al. (2018). 
97 Poterba (1996). 
98 European Commission (forthcoming), ‘Performance of spending rules at the EU and national level’, Report on 
Public Finances in EMU 2019. 

60 

 
 
 
 
 
 
                                                 
stabilisers) tend to be a-cyclical or countercyclical,99 while discretionary fiscal policy appears 
to  be  pro-cyclical  (Table  1.1).100  Pro-cyclicality  happens  in  particular  in  good  economic 
times.101  In  Europe,  most  Member  States  implemented  sizeable  fiscal  adjustments  in  the 
immediate post-crisis  period, reflecting  a lack of fiscal  buffers at  the onset  of the economic 
and financial crisis, a need to correct excessive deficits and, in some cases, market pressure. 
The role of the reinforced EU fiscal rules on cyclicality has only scarcely been investigated. 

 Table A1.1.:Empirical findings on cyclicality 

Note: The sample includes the 28 Member States covering the period 2000-18. All estimations are based on real 
time  data  from  the  COM  autumn  forecast  vintages.  Regressions  are  estimated  based  on  the  two-step  system 
GMM  estimator  following  Blundell  and  Bond  (1998),  controlling  for  endogeneity  of  the  lagged  dependent 
variable,  output  gap  and  current  account.  ***,  **  and  *  denote  respectively  statistical  significance  at  1,  5  and 
10%. 
Source:  European  Commission  (2019),  ’Have  EU  fiscal  rules  mitigated  pro-cyclicality?’,  Report  on  Public 
Finances in EMU 2018, 121-130. 

New  evidence  by  the  Commission  shows  that  that  compliance  with  EU  fiscal  rules  reduces 
the  pro-cyclicality  of  the  fiscal  effort.102  The  analysis  assesses  pro-cyclicality  for  Member 
States that conducted fiscal policy in line with the preventive and corrective arm of the SGP. 

99  Fatas, and Mihov 2009, Benetrix and Lane 2013, Afonso and Hauptmeier 2009, Baldi and Staehr 2015. 
Woo 2009, Checherita-Westphal and Žďárek (2017), Baldi and Staehr (2016); The findings by Eyraud et al. 
(2017) indicate acylical fiscal policy based on Member States plans, but pro-cyclical fiscal policy based on real-
time and ex-post data. 
101 European Commission (2018), ‘Fiscal outcomes in the EU in a rules-based framework – new evidence’, 
Report on Public Finances in EMU 2018, 105-156, Eyraud, Gaspar and Poghosyan (2017), Fiscal politics in the 
Euro area. IMF Working Paper 17/18. 
102 European Commission (2018), ‘Fiscal outcomes in the EU in a rules-based framework – new evidence’, 
Report on Public Finances in EMU 2018, 105-156, 

61 

(1)(2)(3)(4)(1)(2)(3)(4)Fiscal effort (t-1)0.128*0.080.0790.0740.288**0.307**0.309**0.261*(respectively  ∆SPB and EB)(1.758)(1.226)(1.158)(1.135)(1.978)(2.357)(2.355)(1.890)∆ Output gap (t)-0.321***-0.370***-0.371***-0.369***0.754***0.892***0.869***0.791**(-3.756)(-5.190)(-5.093)(-4.730)(2.765)(2.908)(2.847)(2.166)Public debt (t-1)0.006***0.011***0.011***0.011***-0.019**-0.036***-0.036***-0.045***(3.529)(3.804)(3.209)(2.897)(-2.485)(-2.874)(-2.754)(-3.530)Current account (t-1)0.108***0.114***0.112***-0.198-0.198-0.087*(3.315)(3.508)(3.487)(-1.265)(-1.252)(-1.973)Age dependency ratio (t-1)-0.074***-0.076**-0.103**0.244*0.249*0.211**(-3.332)(-2.440)(-2.584)(1.664)(1.702)(2.139)Election year (t-1)-0.003**-0.003**0.011**0.014***(-2.106)(-1.974)(2.436)(3.388)Crisis dummy 2008-09-1.584**1.396*(-2.102)(1.948)# observations437427427427347340340340# countries2828282827272727R-squaredWald test time/country dummies0.000.000.000.000000AR(1) (p-value)0.000.000.000.000.000.000.000.00AR(2) (p-value)0.310.220.280.290.840.840.830.90Hansen (p-value)0.290.830.780.770.520.580.570.68# instruments2529303022262728Dependent variable:                                                 ∆ Structural prim. balanceDependent variable:EB-based fiscal effort 
 
 
 
                                                 
For that purpose, real-time data is used from past Commission forecast vintages for a sample 
of Member States since  2000. The results show that Member States who  complied with  the 
expenditure benchmark and/or the structural balance requirement exhibit on average a lower 
pro-cyclical  fiscal  effort.  In  addition,  Member  States  with  public  debt  ratios  below  60%  of 
GDP have on average a smaller pro-cyclical fiscal effort than Member States with a debt ratio 
above 60% of GDP. Conversely, pro-cyclicality appears higher for Member States with debt 
ratios exceeding 60% of GDP.  

As  regards  national  fiscal  rules,  fiscal  policy  is  found  to  be  least  pro-cyclical  when 
expenditure rules operate in combination with budget balance rules.103 Well-functioning fiscal 
frameworks  typically  consist  of  several  fiscal  rules  targeting  different  budgetary  aggregates 
and  with  different  time  horizons,  thus  reinforcing  each  other.  Results  suggest  that  the 
combination of budget balance rules and expenditure rules provides for the least pro-cyclical 
fiscal  policy,  namely  an  a-cyclical  fiscal  policy  (Graph  A1.2).  In  the  absence  of  both 
expenditure and budget balance rules, fiscal policy would have been more pro-cyclical, while 
pro-cyclical  bias  declines  only  marginally  if  expenditure  rules  operate  in  the  absence  of 
budget balance rules. 

Graph A1.2. Pro-cyclical bias for different combinations of fiscal rules 

Source: Stability and Convergence Programmes, AMECO spring vintage and Commission’s Fiscal Governance 
Database 2016 vintage. 
Note: The graph shows the pro-cyclical bias, i.e. by how much expenditure increases/decreases to a 1pp of GDP 
unexpected  revenue  shortfall/windfall  in  different  combination  of  rules.  ER  stands  for  expenditure  rule  while 
BBR stands for budget balance rule. Four combinations of rules are shown: no expenditure or budget balance 
rules, only expenditure rules, only budget balance rules and both expenditure and budget balance rules. The bars 
indicate the 95% confidence interval. 

C.  Relationship between fiscal rules and public investment 

There  is  a  vivid  debate  on  the  relationship  between  fiscal  rules  and  public  investment. 
Evidence from the early years of Economic and Monetary Union finds no clear impact of EU 
fiscal  rules  on  public  investment.104  However,  the  evidence  can  be  challenged  by  the  short 
sample  period.  Recent  studies  point  to  a  more  nuanced  picture.  Member  States’  investment 

103 European Commission (forthcoming), ‘Performance of spending rules at the EU and national level’, Report 
on Public Finances in EMU 2019. 
104  Galí and Perotti 2003, Turrini 2004, Perée and Välilä 2005, Heinemann 2006, Mehrotra and Välilä 2006. 

62 

 
 
 
                                                 
 
 
decisions  appear  to  be  more  constrained  by  high  debt  than  by  the  SGP.105  Similarly,  fiscal 
rules  and  governance  quality  appear  to  reduce  the  negative  impact  of  public  debt  on  public 
investment.106 

Commission  analysis  provides  new  evidence  on  the  relationship  between  fiscal  rules  and 
public investment. The key objective of that analysis was to run a positive analysis supported 
by a very large number of robustness checks.107 Overall, the study does not find evidence that 
fiscal rules hamper public investment. This finding holds irrespective of the analysed duration 
of  the  impact  (short  vs.  long  term),  the  type  of  investment  (total  investment,  investment  in 
infrastructure,  redistribution),  the  level  of  government  (general,  national  and  sub-national 
government level) and the type of fiscal rules (balanced budget, expenditure, debt and revenue 
rules) (Graph A1.3).  

Graph A1.3: Summary: significance levels of regressions (in percentage points) 

Note: The chart summarises the  main  findings of the  panel  regressions on the impact of fiscal rules on public 
investment for a sample of EU Member States over the time period 1990-2018. It shows the percentage  share 
fiscal rules turned out to be significant and non-significant based on more than 10000 robustness tests. Reading 
example:  Taking  the  full  sample  shows  that  87  percent  of  the  regressions  suggested  that  fiscal  rules  have  no 
statistically significant impact on public investment. Only in 13 percent of the regressions fiscal rules turned out 
to  be  significant,  with  an  almost  equal  split  on  the  direction  of  fiscal  rules  on  public  investment  (6%  positive 
impact of fiscal rules on public investment, 7% negative and significant impact). 

Box A1: Possible implications for the policy mix of current trends in debt reduction 
across the euro area 

Fiscal discipline is a crucial component of the economic and monetary union framework, as 
responsible  fiscal  policies  are  key  for  the  macroeconomic  stability  and  long-term  growth 
potential of its Member States. In particular, in a monetary union fiscal policy might be relied 

105  Bacchiocchi et al. 2011. 
106  European Commission 2017, Government investment in the EU : the role of institutional factors, Report on 
Public Finances in Emu 2017, 133-186. 
107 Overall, the study is based on more than 25000 regressions. 

63 

 
 
 
 
 
                                                 
on to address country-specific shocks in the absence of national monetary and exchange rate 
policies. From a monetary policy perspective, excessive indebtedness carries the risk of fiscal 
dominance,  i.e.  a  situation  in  which  the  central  bank  is  restricted  in  the  pursuit  of  its  price 
stability objective by the potential impact of a policy tightening on the sovereign’s solvency. 
In light of this, the Treaty on the Functioning of the European Union includes strong clauses 
on  central  bank  independence  and  the  prohibition  of  monetary  financing.108  Furthermore,  a 
Member State’s over-indebtedness might increase its banks’ financing costs via the sovereign-
bank nexus and ultimately distort the transmission of the ECB’s single monetary policy across 
Member  States.  That  being  said,  a  sustainable  volume  of  government  debt  is  necessary  to 
ensure the smooth implementation of monetary policy, which partly relies on the presence of 
a sufficient amount of safe assets.  

Government debt currently with the highest rating in the euro area is set to rapidly decrease in 
the  next  decade.  After  a  period  of  steep  increase  following  the  Great  Financial  Crisis, 
government debt-to-GDP ratios have gradually decreased in most Member States since 2014, 
albeit  at  different  pace across Member States (see Table A).  In 2019, 9 out  of 19 euro-area 
Member States would have government debt ratios below the Treaty reference value of 60% 
of  GDP.  Assuming  full  implementation  of  Member  States’  fiscal  plans,  that  overall 
downtrend  trend  should  continue  in  the  next  decade.  Debt  projections  for  countries  such  as 
Germany and the Netherlands in particular show a reduction over that horizon (see Graph A), 
notably on the back of a continuing favourable differential between interest and growth rates. 
In those two Member States,  government  debt-to-GDP ratios are projected to  fall to  around 
45% and 40% of GDP respectively by 2029. In that context, the amount of government debt 
rated AAA, which has already declined markedly,109 is expected to continue to do so over the 
coming  years  (see  Graph  B).  At  the  same  time,  in  some  high-debt  Member  States  without 
AAA rating (such as IT and FR), debt burdens are set to decrease considerably less in the next 
decade, remaining at values (well) above 90% of GDP.  

Table A and Graph A: Government debt-to-GDP ratio, historical and projected values 
in the euro area (Stability and Convergence Programmes’ scenario) 

Source: European Commission based on projections according to the ‘Stability and Convergence Programmes’ 
scenario (see 2018 Fiscal Sustainability Report for more explanations on the methodology) 

108 In particular Articles 123, 124 and 130 TFEU. Of course, fiscal dominance can arise from governments’ over-
indebtedness irrespective of monetary financing. 
109 First, as a result of several downgrades following the crisis, then, as a result of the reduction of debt to GDP 
ratios in sovereigns rated AAA. 

64 

2007201420192029Var. 2014/19Var. 2019/29BE87.0107.5100.684.7-6.9-15.9DE63.775.358.645.2-16.6-13.5EE3.710.58.215.8-2.37.6IE23.9104.161.134.5-43.0-26.6ES35.6100.495.885.4-4.5-10.4FR64.594.998.995.74.0-3.2IT99.8131.8132.6126.10.8-6.5CY54.0108.095.756.9-12.3-38.8LV8.040.937.427.6-3.5-9.8LT15.940.537.030.1-3.5-6.9LU7.722.720.27.1-2.5-13.1MT62.363.442.715.0-20.6-27.7NL43.067.949.139.8-18.8-9.3AT65.084.069.650.4-14.4-19.2PT68.4130.6118.686.9-12.0-31.7SI22.880.465.439.9-15.0-25.5SK30.153.547.534.3-6.0-13.2FI34.060.258.155.4-2.1-2.7EA-1965.094.485.573.7-8.9-11.902040608010012020072008200920102011201220132014201520162017201820192020202120222023202420252026202720282029% of GDPDENLOther EAProjections 
 
 
 
 
                                                 
Graph B: Government debt in the euro area, per credit rating (Stability and 
Convergence Programmes’ scenario) 

Note: for the projections, countries considered rated AAA are those rated at this grade end 2019 (i.e. DE, LU 
and NL). 
Source: Bloomberg, European Commission 

While  declining  supply  of  safe  assets110  currently  does  not  seem  to  pose  a  problem  for 
monetary  policy  implementation  and  transmission  in  the  euro  area,  a  hypothetical  severe 
contraction  could  have  negative  consequences.  For  example,  the  ECB’s  Extended  Asset 
Purchase  Programme  so  far  relied  to  a  large  part  on  sovereign  debt  purchases,  which  were 
conducted  according  to  the  ECB’s  capital  key  and  were  subject  to  an  issuer  limit  of  33% 
applied  to  all  consolidated  Eurosystem  holdings.  A  significant  reduction  in  outstanding 
sovereign  debt  of  individual  Member  States  would  thus  restrict  the  scope  of  any  future 
purchase programme111 with similar parameters from the onset. While the ECB could react to 
a  severe  reduction  in  outstanding  sovereign  debt  by  selected  Member  States  in  a  possible 
future asset purchase programme by focusing on other asset classes such as corporate bonds, 
this could come at the cost of higher Eurosystem risk-taking and market distortions in those 
relatively less deep markets. Compared with the euro area sovereign bond markets, the pool 
of outstanding euro area corporate bonds is significantly smaller in volume, overall riskier and 
stronger focused on short- to medium-term maturities.112   

A  second  concern  relates  to  the  role  of  safe  sovereign  bonds  as  collateral  in  central  bank 
liquidity-providing  operations  and  secured  money  market  transactions.  While  central 
government securities made up around half of the universe of assets eligible as collateral in 
Eurosystem  credit  operations  in  2019Q3,  their  share  in  actually  pledged  collateral  was  only 

110 A safe asset can be understood as any asset with low default risk or risk of loss of value, independent of 
cyclical conditions. 
111 The ECB has repeatedly indicated that it considers asset purchases a permanent feature of its monetary policy 
toolbox going forward. 
112 As of early January 2020, investment-grade EMU non-financial corporate bonds were estimated to amount to 
just  25%  of  the  outstanding  amount  of  investment-grade  EMU  sovereign  bonds.  Among  the  respective 
investment-grade  bonds,  only  8.4%  were  rated  AA  or  higher  for  non-financial  corporate  issuers  (sovereign 
bonds:  57%),  while  59%  were  rated  BBB  (sovereign  bonds:  25.7%).  The  average  remaining  maturity  of 
investment-grade  corporate  bonds  was  5.6  years,  compared  to  8.3  years  for  investment-grade  rated  euro  area 
sovereign bonds (Source: Bloomberg). 

65 

0%10%20%30%40%50%60%70%80%90%100%2007Q12008Q22009Q32010Q42012Q12013Q22014Q32015Q42017Q12018Q22019Q32020Q42022Q12023Q22024Q32025Q42027Q12028Q22029Q3% of euro area GDPAAATotal EAProjections 
 
 
 
                                                 
14%  and  has  been  decreasing  since  the  start  of  the  Public  Sector  Purchase  Programme. By 
contrast,  government  bonds  play  a  dominant  role  in  repo  markets,113 and  consequently,  a 
severe  reduction  in  outstanding  safe  assets  (triple-A  in  this  case)  could  impact  repo  market 
pricing  and  impair  repo  market  functioning.  Already  following  the  launch  of  the  PSPP, 
tensions occurred in collateral markets as reflected in both widening repo premia on special 
collateral (SC) markets – in particular for German government bonds – and also in a marked 
divergence between core and peripheral euro area countries’ national General Collateral (GC) 
rates114. Although the ECB’s securities lending programme115 has alleviated those concerns to 
some  extent  and  has  led  to  a  decrease  in  repo  premia,116  this  suggests  some  dispersion  of 
money  market  funding  conditions  across  the  euro  area  and  thus  could  signal  a  potentially 
uneven transmission of monetary policy. One explanation for diverging rates on national GC 
repo baskets that has been brought forward is that at the current juncture, country-specific GC 
rates  are  not  completely  cash-driven  when  all  bonds  from  a  given  country  have  value  as 
special collateral.117 In other words, in an environment of safe asset scarcity, increased bond 
specialness118 might spill over to GC repo funding. Therefore, a further significant reduction 
of  outstanding  safe  government  bonds  could  resuscitate  tensions  in  SC  repo  markets  and 
reinforce  existing  divergences  in  GC  repo  spreads  across  Member  States,  which  might 
ultimately manifest itself in steady differences in lending and borrowing conditions at the later 
stages of the monetary policy transmission mechanism. Safe asset scarcity and its effects on 
repo  markets  could  gain  particular  relevance  in  situations  of  heightened  uncertainty  and 
market stress, with potential financial stability implications. What is more, financial stability 
could be adversely affected in the long run with financial markets relying on other assets to 
play the role of the safe asset.  

113  According  to  the  International  Capital  Market  Association’s  (ICMA)  June  2019  European  repo  market 
survey,  EU  central  government  bonds  accounted  for  two-thirds  of  pledged  collateral  in  European  repo 
transactions, with German central government bonds accounting for 15%. 
114 Besides euro area-wide General Collateral (e.g. GC pooling) baskets, several national GC baskets exist, i.e. 
baskets containing only sovereign bonds from the respective country. 
115  Under  the  securities  lending  programme,  the  Eurosystem  makes  securities  purchased  under  the  PSPP 
available for lending. The programme was enhanced in December 2016 by allowing Eurosystem central banks to 
also accept cash as collateral in the lending process. 
116 See Brand, C., Ferrante, L. and A. Hubert (2019). “From cash- to securities-driven euro area repo markets: 
the role of financial stress and safe asset scarcity”. ECB Working paper No 2232, January 2019. 
117  See,  e.g.  Arrata,  W.  Nguyen,  Rahmouni-Rousseau,  I.  and  M.  Vari  (2018).  “The  Scarcity  Effect  of 
Quantitative Easing on Repo Rates: Evidence from the Euro Area”. IMF Working paper 18/258. 
118 The International Capital Market Association defines specialness as the case when the repo rate quoted on a 
particular security falls at least about 10 basis points below the GC repo rate for that currency. 

66 

 
 
 
 
                                                 
ANNEX  2:  ASSESSING  THE  IMPACT  OF  THE  MIP  ON  POLICY  PROGRESS:  AN 

EMPIRICAL ASSESSMENT 

Assessing to what extent MIP surveillance strengthens policy progress requires controlling for 
other factors that may play a role in driving reform outcomes. Empirical work was performed 
to  this  purpose  in  the  MIP  Compendium.  Those  results  showed  that,  controlling  for  other 
factors, the MIP did have a positive impact on policy progress.119 The analysis below updates 
and extends that earlier analysis to cover the CSRs issued over the period 2013-2018 and to 
take into account additional factors that may have had an impact on policy progress.120 

In Table A2.1, columns (3) and (4) display results corresponding to the specification found in 
the MIP Compendium estimated to a sample extended until CSRs issued in year 2018. Some 
additional explanatory variables are tested in columns (1) and (2) of Table A2.1: with a view 
to capture potential reform fatigue, past progress and the number of sub-CSRs cumulated until 
the year before have been added as regressors. More precisely, for each year, Member States 
are classified by quartiles, depending on the sum of progress over all their sub-CSRs and the 
number  of  sub-CSRs,  higher  quartiles  corresponding  to  more  progress  and  more  sub-CSRs 
respectively.  This  treatment  helps  comparability  over  time,  enabling  to  control  for  the 
streamlining of the number of CSRs and sub-CSRs around 2015, which appears in the second 
part of the period now under review. 

A number of findings emerge from the analysis. 

 

In  all  cases,  over  the  whole  period,  the  MIP  imbalance  category  has  a  significant  and 
positive impact on progress, at the 5% significance level. 

  Recommendations that a priori are hard-to-comply with, have a negative and significant 

impact on the overall compliance rate at the 1% level (columns (1) to (4)). 

  GDP growth normally has a positive sign, implying that growth helps reform compliance 
by  raising  the  available  political  capital.  The  interest  rate  spread  variable  has  also 
normally  a  positive  effect,  linked  to  market  pressure.  Neither  variable  however  reach 
statistical significance. 

  Parliamentary  elections,  notably  if  to  come  by  the  subsequent  year,  have  a  strong  and 
significant  negative  impact  as  reforms  are  perceived  to  be  potentially  costly  in  electoral 
terms. 

  The cumulated number of past sub-CSRs plays a negative and significant role at the 1% 
level,  implying that CSR progress  tend to  be lower the higher the cumulated number of 
previous recommendations, consistently with the idea of “reform fatigue”.  

  At  the  same  time,  it  appears  that  reform  progress  can  unfold  only  gradually,  as  reform 
progress  depends  positively  past  progress.  This  is  confirmed  by  the  coefficient  of  the 
variable "cumulated progress until previous year" which is significant at the 1% level and 
positive. 

119 The control variables were as follows: a dummy indicating whether the recommendation is “hard-to-comply” 
with  because  politically  costly,  GDP  growth,  the  sovereign  spread  with  respect  to  the  benchmark  German  10-
year interest rate on government bonds, dummies indicating legislative elections at most one year before or by 
next year, and dummies indicating the main policy area of the sub-CSR (public finances and taxation; financial 
sector;  labour  market,  education  &  social  policies;  structural  policies;  public  administration  and  business 
environment).  The  MIP  imbalances  category  used  in  the  MIP  Compendium  were  more  articulated  than  those 
used in the present exercise.  
120  Progress  is  assessed  at  sub-CSR  level  and  on  the  year  following  the  issuance  of  the  CSR.  The  size  of  the 
sample is defined by the year of issuance of CSRs, namely to all CSRs issues between 2013 and 2018, both dates 
included. 

67 

 
 
                                                 
  Once  reform  fatigue  effects  are  taken  into  account,  the  impact  of  MIP  surveillance  on 
policy progress appears stronger. This is consistent with a stronger reform fatigue in MIP 
countries,  which  needs  to  be  taken  into  account  to  fully  appreciate  the  impact  of  MIP 
surveillance on CSR compliance.  

Table A2.1: MIP surveillance and CSR progress, data at detailed recommendation level, 
all Member States (except those under adjustment programme) 

Dependent  variable:  CSR  compliance 
score 

Ordered 
PROBIT 

(1) 

(2) 

OLS 

(3) 

Ordered 
PROBIT 

(4) 

OLS 

MIP imbalance category 

0.222*** 

0.170** 

0.184*** 

0.133** 

(0.0762) 

(0.0672) 

(0.0673) 

(0.0616) 

GDP growth 

-0.0133 

-0.0452 

0.00525 

-0.0230 

(0.0300) 

(0.0335) 

(0.0322) 

(0.0351) 

Cumulated progress until previous year  0.0842*** 

0.0733*** 

Cumulated  number  of  sub-CSRs  until 
previous year 

(0.0213) 

(0.0216) 

-0.0670*** 

-0.0629*** 

(0.0166) 

(0.0180) 

Hard-to-comply  with  recommendation, 
dummy 

-0.232*** 

-0.320*** 

-0.211*** 

-0.296*** 

(0.0705) 

(0.0885) 

(0.0673) 

(0.0857) 

Interest rate spread in previous year 

0.0158 

0.0220 

-0.0148 

-0.00901 

(0.0309) 

(0.0344) 

(0.0350) 

(0.0388) 

Elections in previous year 

-0.0583 

-0.0892 

-0.125 

-0.148 

Elections by the following year 

-0.187** 

-0.192** 

-0.189* 

-0.201** 

(0.0838) 

(0.0886) 

(0.0881) 

(0.0932) 

(0.0920) 

(0.0926) 

(0.101) 

(0.101) 

Constant 

Observations 

R-squared 

Year F.E 

Control for policy area 

Clustering at country-year level 

3.507*** 

(0.273) 

1,548 

0.061 

Yes 

Yes 

Yes 

1,580 

Yes 

Yes 

Yes 

3.558*** 

(0.271) 

1,580 

0.043 

Yes 

Yes 

Yes 

1,548 

Yes 

Yes 

Yes 

Note:*, ** and ***: coefficients significant at the 10%, 5% and 1% level respectively. Student-t are reported in 
parenthesis. Standard errors are robust with-respect to clustering at the country-year level. 
Dependent  variable:  CSR  compliance  score  defined  at  disaggregated  policy  field.  0=no  progress;  25=limited 
progress;  50=some  progress;  75=substantial  progress;  100=full  achievement.  The  scores  are  transformed  as 
log(1+score) to smooth the effect of the retained scaling. 
MIP categories: no imbalances=0; imbalances=1; excessive imbalances=2. The MIP categorisation refers to the 
preceding year. The correspondence between the classifications in MIP categories used in 2013 and 2014 is the 

68 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
one  displayed  in  table  4.3  of  the  MIP  Compendium,  with  the  two  categories  qualified  as  being  excessive 
imbalances in 2013 corresponding to excessive imbalances category of 2014. 
The  "hard-to-comply  with  recommendations"  variable  is  a  dummy  variable  taking  value  1  for  sub-CSRs 
belonging to the fields listed in the note to Table A.3.1. in the MIP Compendium. 
Interest  rate  spreads  are  expressed  as  the  difference  of  the  10-year  government  bond  yield  with  the  one  of 
Germany. 
"Elections in previous year" and "Elections in following year" are dummies equal to one if legislative elections 
have taken place at most one year before the related year or if these elections are to take place in at most by one 
year, respectively. 
The  variables  on  cumulated  progress  and  number  of  sub-CSRs  are  based  on  classifications  by  quartiles, 
depending  on  the  sum  of  progress  over  all  sub-CSRs  and  the  number  of  sub-CSRs,  higher  quartiles 
corresponding respectively to more progress and more sub-CSRs.  
Source: European Commission CeSAR database, DG ECFIN AMECO database, Eurostat, World Bank political 
database. 

Additional  regressions  are  displayed  in  Table  A2.2,  which  distinguishes  by  sub-periods. 
Moreover,  additional  specifications  attempt  to  address  reverse  causation,  i.e.  the  fact  that 
policy  progress  affects  the  extent  of  MIP  surveillance.  To  control  for  this  issue, 
instrumentation is performed in columns (3) and (4) of Table A2.2, over the whole period and 
the last two years respectively. Instruments correspond to the synthetic indicators of economic 
conditions in stocks and flows, used in Annex 2 of the MIP Compendium, taking into account 
sources of imbalances identified in in-depth reviews. 
Results in Table A2.2 show that the additional impact of MIP surveillance on policy progress 
seems to vanish in the sub-period 2016-2018 (column (2)). However, this appears to be partly 
related to a reverse causation effect, namely, to the fact that policy progress also reduces the 
likelihood  for  a  country  to  remain  under  MIP  surveillance.  Once  this  effect  is  taken  into 
account by means of instrumental variables estimation, the magnitude of the impact of MIP 
surveillance rises over the whole period and also for the 2016-2018 sub-period, although not 
reaching statistical significance.  

Table A2: MIP surveillance and CSR progress, data at detailed recommendation level, 
all  Member  States  by  sub-periods  and  taking  into  account  reverse  causation  (except 
those under adjustment programme) 

(1) 

(2) 

(3) 

(4) 

Dependent variable: CSR compliance 
score 

Ordered 
PROBIT 
[2013:2015] 

Ordered 
PROBIT 
[2016:2018] 

IV Regress 
[2013:2018] 

IV Regress 
[2016:2018] 

MIP imbalance category 

0.252*** 

0.0895 

0.331*** 

0.196 

GDP growth 

0.00724 

-0.0714 

-0.0179 

-0.0555 

(0.0934) 

(0.114) 

(0.0862) 

(0.216) 

(0.0337) 

(0.0582) 

(0.0329) 

(0.0602) 

Cumulated progress until previous year 

0.101*** 

0.0660** 

0.0719*** 

0.0662** 

Cumulated number of sub-CSRs until 
previous year 

(0.0280) 

(0.0306) 

(0.0223) 

(0.0260) 

-0.0538** 

-0.0709*** 

-0.0717*** 

-0.0793*** 

(0.0233) 

(0.0273) 

(0.0199) 

(0.0304) 

69 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Hard-to-comply with recommendation, 
dummy 

-0.179** 

-0.337*** 

-0.329*** 

-0.452*** 

Interest rate spread in previous year 

0.0112 

(0.0870) 

(0.124) 

0.0310 

(0.0874) 

0.0156 

(0.137) 

0.0382 

Elections in previous year 

(0.0346) 

(0.0616) 

(0.0380) 

(0.0603) 

-0.0998 

(0.114) 

0.116 

-0.104 

-0.0320 

(0.136) 

(0.0898) 

(0.133) 

Elections by following year 

-0.218* 

-0.00900 

-0.238** 

-0.0884 

(0.126) 

(0.163) 

(0.0990) 

(0.166) 

Constant 

Observations 

Year F.E 

Control for policy area 

Clustering at country-year level 

Sample countries 

R-squared 

Fisher coefficient 

1,029 

Yes 

Yes 

Yes 

All 

500 

Yes 

Yes 

Yes 

All 

3.469*** 

3.087*** 

(0.274) 

(0.381) 

1,548 

Yes 

Yes 

Yes 

All 

0.056 

62.17 

500 

Yes 

Yes 

Yes 

All 

0.097 

14.47 

Note:*, ** and ***: coefficients significant at the 10%, 5% and 1% level respectively. Student-t are reported in 
parenthesis.  
Standard errors are robust with-respect to clustering at the country-year level. 
For the definition of variables see notes to Table A1.  
Source: European Commission, Eurostat, World Bank political database, national sources, own calculations. 

70