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 on the suitability of 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  COM(2020) 55 final  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 on the suitability of Council Directive 2011/85/EU {SWD(2020) 210 final} - {SWD(2020) 211 final}  
 
 
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 on the suitability of Council Directive 
2011/85/EU1 

1 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) No 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; 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 

 
 
 
 
 
                                                 
1.  Introduction  

The euro is the single currency of over 340 million Europeans in 19 Member States and is one 
of  Europe’s  most  significant  and  tangible  achievements.  The  euro  is  more  than  a  monetary 
project.  It  provides  a  basis  for  our  economies  to  become  more  integrated  with  a  view  to 
supporting greater stability and prosperity.  

The architecture of the Economic and Monetary Union, established by the Maastricht Treaty 
in  1992, is  unique.  It combines a single monetary  policy  that pursues the objective of price 
stability with decentralised fiscal  and economic policies under the responsibility of Member 
States. The Maastricht Treaty recognised the need for sound fiscal policies and coordination 
of economic policies to  allow for an  effective conduct  of the single monetary policy and to 
ensure  a  stable  and  successful  euro  in  face  of  potential  risks  of  spillovers  among  Member 
States  and  possible  free-riding  behaviour  leading  to  excessive  government  deficits  and  debt 
levels. This, in turn, would threaten price stability and might ultimately force the central bank 
to use monetary policy to finance budget deficits.  

In light of those considerations, the Treaty requires Member States to regard their economic 
policies  as  a  matter  of  common  concern  and  to  coordinate  them  within  the  Council.  It  also 
established a requirement for Member States to avoid government deficits exceeding 3 % of 
GDP and to keep public debt levels below 60 % of GDP. In addition, it establishes elements 
to  maintain  market  discipline,  notably  the  no-bailout-principle  according  to  which 
governments  should  not  repay  each  other’s  debt,  and  it  prohibits  monetary  financing  of 
government debt by the central bank. This architecture was influenced by the experiences of 
high  inflation  in  the  1970s  and  1980s,  and  a  strong  conviction  amongst  policy  makers  that 
economic  and  financial  integration  would  be  a  powerful  force  of  convergence  and 
stabilisation within the monetary union. 

Since the early 1990s, when the Maastricht Treaty laid the foundations of the single currency 
area,  the  Union  has  developed  a  very  comprehensive  and  detailed  framework  for  economic 
and  fiscal  surveillance.  The  framework  is  laid  down  in  a  range  of  secondary  legislation 
described below, as well as in other documents that provide more details and transparency on 
how  surveillance  is  carried  out  in  practice.  The  latter  include  the  Code  of  Conduct  of  the 
Stability and Growth Pact and the Code of Conduct of the Two-Pack. Further details on the 
implementation of surveillance framework are provided in the Vade Mecum on the Stability 
and Growth Pact and the Compendium on the Macroeconomic Imbalance Procedure. 

The framework has evolved in waves over time, with changes introduced in response to the 
emergence  of  new  economic  challenges,  as  well  as  based  on  the  lessons  gained  in  the 
implementation of the surveillance framework. In brief:  

 

In 1997, the Stability and Growth Pact (SGP) was established so as to strengthen the 
monitoring and coordination of national fiscal  and economic policies to permanently 
enforce the deficit and debt limits established by the Maastricht Treaty for all Member 
States.2 Notably, it operationalised the deficit criterion of the Maastricht Treaty via the 

2  Council  Regulation  (EC)  No  1466/97  of  7  July  1997  on  the  strengthening  of  the  surveillance  of  budgetary 
positions and the surveillance and coordination of economic policies, Council Regulation (EC) No 1467/97 on 
speeding up and clarifying the implementation of the excessive deficit procedure and the Resolution of 17 June 
1997 on the Stability and Growth Pact. 

2 

 
 
                                                 
 

 

corrective arm3 of the SGP and it established a preventive arm4 to avoid the build-up 
of excessive deficits. 

In the early 2000s, adherence to the nominal deficit targets of the SGP proved difficult 
for  some  Member  States  in  a  recessionary  environment.  In  the  light  of  those  early 
experiences,  the  SGP  was  reformed  to  allow  for  greater  consideration  of  economic 
conditions.  The  reform  of  2005  therefore  placed  greater  emphasis  on  the  structural 
fiscal  effort,  with  the  aim  to  account  for  the  impact  of  the  economic  cycle  on 
government  finances.  In  general,  the  SGP  was  amended  to  allow  for  a  better 
consideration  of 
the  country-specific  economic  and  budgetary  position  and 
sustainability risks of Member States, including the impact of population ageing.  

In response to the vulnerabilities exposed by the economic and financial crisis that hit 
the EU and the euro area after 2007, the EU took a series of measures to strengthen its 
economic governance and surveillance framework. They are relevant for all Member 
States, but  have a  number of specific features for those that use the euro. Central  to 
those  efforts  have  been  the  legislative  packages  known  as  the  six-pack  (2011)  and 
two-pack (2013) (see Box 1 for an overview of the elements of the six-pack and two-
pack reforms). These packages aimed at a closer coordination of economic policy and 
in  economic  performance  by  strengthening  budgetary 
sustained  convergence 
surveillance  under  the  SGP,  and  by  requiring  Member  States  to  establish  national 
fiscal  frameworks.  They  also  broadened  the  scope  of  surveillance  to  include 
macroeconomic  imbalances.  To  address  the  specific  relevance  of  spillovers  in  the 
euro-area,  the  two-pack  introduced  rules  on  the  monitoring  and  assessment  of  euro-
area  Member  States’  budgetary  plans,  specific  reinforcements  for  euro-area  Member 
States under the corrective arm of the SGP  and  a framework for dealing with  euro-
area  Member  States  experiencing,  or  threatened  with,  financial  stability  difficulties. 
Those  reinforcements  were  introduced  at  a  time  when  market  confidence  and  trust 
among Member States was fragile, and therefore focused essentially on risk reduction 
in  individual  Member  States  and  on  safeguarding  the  stability  of  the  euro  area  as  a 
whole. The two packages were part of a wider set of steps to strengthen the economic 
and  financial  stability  of  the  Union  and  the  euro  area  as  a  whole,  including  the 
establishment  of  mechanisms  to  provide  conditional  financial  support  to  euro-area 
Member  States  experiencing,  or  threatened  with,  financial  stability  issues,  and  the 
creation of a Banking Union with common supervisory and resolution mechanisms. 

  The  revamped  macroeconomic  and  budgetary  surveillance  were  integrated  into  the 
European  Semester,  a  common  timeline  for  the  coordination  of  economic  and 
employment  policies  at  EU  level,  and  which  was  established  in  the  same  context. 
Since  its  introduction  in  2011,  the  European  Semester  has  moved  progressively 
towards more integrated economic surveillance, including the monitoring of Member 
States’ efforts under the Europe 2020 strategy.  

3  The  corrective  arm  of  the  SGP  ensures  that  Member  States  adopt  appropriate  policy  responses  to  correct 
excessive  deficits  or  debt  levels  by  implementing  the  Excessive  Deficit  Procedure,  which  provides  Member 
States  with binding and operational recommendations on the  fiscal adjustment  needed to correct the excessive 
deficit situation within a given timeframe. 
4  The  preventive  arm  of  the  SGP  supports  Member  States  in  achieving  their  commitments  on  sound  fiscal 
policies.  It  requires  that  Member  States  attain  a  country-specific  budgetary  objective  over  the  medium-term, 
which takes into account the economic cycle, thus allowing for automatic stabilisation while it is conducive to 
sustainable public finances.  

3 

 
 
 
 
                                                 
Box 1: The six-pack and two-pack reforms of the economic surveillance framework 

The six-pack reform (2011) 

The six-pack reform comprised five Regulations and one Directive, which strengthened fiscal 
surveillance  and  broadened  the  scope  of  economic  surveillance  to  include  macroeconomic 
imbalances.5  In  particular,  the  six-pack  strengthened  fiscal  surveillance  by  reinforcing  the 
preventive  arm  of  the  SGP,  as  running  sound  fiscal  policies  in  good  economic  times 
strengthens the capacity of Member States to withstand economic shocks, and create the space 
to  use  fiscal  policy  in  bad  times.  To  that  end,  it  introduced  the  concept  of  a  significant 
deviation from the medium-term budgetary objective or from the adjustment path towards it 
and  it  established  a  procedure  for  Member  States  to  correct  such  a  deviation.  For  euro-area 
Member  States,  an  insufficient  policy  response  could  eventually  lead  to  the  imposition  of 
financial  sanctions.  To  better  monitor  how  Member  States  implement  their  budgetary 
commitments,  an  expenditure  benchmark  was  introduced  as  a  complement  to  the  structural 
balance. The expenditure benchmark provides more operational guidance to Member States in 
the conduct of prudent fiscal policies, by focussing surveillance on indicators directly under 
the control of the government.  

The six-pack reform also strengthened the corrective arm of the SGP by operationalising the 
Treaty’s debt criterion6, thus widening the focus from avoiding excessive deficits to ensuring 
sustainable debt trajectories.  

In addition, the six-pack intensified the possible sanctions when euro-area Member States fail 
to comply with the Council recommendations and decisions under the SGP.  

The Directive on budgetary frameworks introduced requirements for Member States relative 
to their national fiscal frameworks. It fostered a stronger emphasis on medium-term planning 
and transparent budgetary processes. It also promoted the use of unbiased macroeconomic and 
budgetary  forecasts  for  fiscal  plans  and  independent  monitoring  of  compliance  with  fiscal 
rules at the national level. 

In  addition  to  strengthening  fiscal  surveillance,  the  six-pack  reform  introduced  the 
Macroeconomic  Imbalance  Procedure  (MIP)  to  detect  harmful  macroeconomic  imbalances, 
prevent  their  emergence  and  ensure  the  correction  of  existing  imbalances.  The  Commission 
identifies  macroeconomic  imbalances  and  their  severity,  including  the  existence  or  risk  of 
the  Council  addresses 
negative  spillovers 
recommendations  to  the  Member  States  concerned  to  address  them.  In  case  excessive 
macroeconomic  imbalances  are  identified,  the  MIP  allows  for  the  launch  of  an  Excessive 
Imbalance  Procedure  (EIP),  which  focuses  on  corrective  action  plans  put  forward  and 
implemented by Member States and monitored by the Commission and the Council. 

to  other  euro-area  Member  States,  and 

The two-pack reform (2013) 

The  two  Regulations  of  the  two-pack  reform  introduced  dedicated  surveillance  and 
monitoring  procedures  for  euro-area  Member  States  given  potential  spillovers  within  the 
Economic and Monetary Union.  

In  particular,  the  two-pack  established  a  framework  for  dealing  with  Member  States 
experiencing or threatened by financial stability difficulties, receiving financial assistance, or 
exiting  a  financial  assistance  programme.  Crucially,  the  two-pack  also  further  strengthened 

5 Cf. footnote 1. 
6 The debt criterion refers to the Treaty provisions that require Member States to achieve a debt-to-GDP ratio of 
below 60%, unless the ratio is sufficiently diminishing towards that level at a satisfactory pace. 

4 

 
 
                                                 
budgetary coordination among euro-area Member States through a multilateral assessment of 
Member  States’  budgetary  plans  that  follows  a  common  timeline.  It  includes  Commission 
Opinions on those plans before their adoption by national parliaments and a discussion of the 
budgetary  situation  and  prospects  in  each  Member  State,  as  well  as  for  the  euro  area  as  a 
whole  in  the  Eurogroup.  The  two-pack  also  reinforced  surveillance  for  euro-area  Member 
States with an excessive deficit.  

The  start  of  a  new  political  cycle  in  the  Union  is  an  opportune  and  appropriate  moment  to 
assess  the  effectiveness  of  the  current  framework  for  economic  and  fiscal  surveillance, 
especially the six-pack and two-pack reforms, for which the Commission is required to report 
on their application. The main questions addressed in this review are the extent to which the 
different  surveillance  elements,  as  introduced  or  amended  by  the  six-pack  and  two-pack 
reforms, have been effective in achieving their key objectives, namely (i) ensuring sustainable 
government  finances  and  growth,  as  well  as  avoiding  macroeconomic  imbalances,  (ii) 
providing an integrated surveillance framework that enables closer coordination of economic 
policies  in  particular  in  the  euro  area,  and  (iii)  promoting  the  convergence  of  economic 
performances among Member States. The purpose of this Communication is to start a public 
debate on those questions. 

to  when 

In  approaching  the  review,  it  is  important  to  note  that  the  economic  context  has  materially 
evolved. 10 years after the Great Recession, Member States face a combination of challenges 
two-pack  reforms  were 
which  are  different  compared 
adopted. While  the  recovery  since  then  has  been  historically  long,  the  growth  potential  of 
many Member States has not  recovered to  pre-crisis levels  and interest  rates have remained 
persistently  low.7  The  decline  in  potential  growth  and  interest  rates,  in  a  context  of  ageing 
population,  has  gone  hand  in  hand  with  persistently  low  inflation. While  implementation  of 
structural reforms to strengthen potential growth and support economic adjustment was strong 
in the aftermath of the crisis, reform momentum has faded and progress has become uneven 
across Member States and policy areas.  

the  six-pack  and 

This  must  be  seen  against  the  broader  aim  spelled  out  in  the  Annual  Sustainable  Growth 
Strategy8 to generate a new growth model that will respect limitations of our natural resources 
and  ensure  job  creation  and  lasting  prosperity  for  the  future.  Concretely,  this  objective  has 
been  translated  in  the  European  Green  Deal9  and  the  Communication  on  a  Strong  Social 
Europe for Just Transitions10, which outline a sustainable growth strategy that aims to make 
the EU the world’s first climate-neutral continent, resource efficient and fit for the digital age, 
while ensuring social fairness. Achieving such goals will require significant additional private 
and  public  investment  over  a  sustained  period  of  time.  Those  ambitions  are  in  line  with 
Europe’s commitment to put the Sustainable Development Goals at the heart of EU’s policy-
making and action.  

The implications of prevailing economic conditions for the economic governance framework 
deserve careful reflection. First, it needs to be carefully assessed whether those developments 
have  implications  for  debt  sustainability  risks.  As  some  recent  experiences  show,  market 
sentiments  can  change  abruptly  and  may  lead  to  sudden  shifts  in  interest  rates.  Even  in  the 

7 Moreover, the employment and social situation has improved across the board but has not recovered yet to the 
pre-crisis levels in several Member States. 
8 Cf. Annual Sustainable Growth Strategy 2020; COM(2019) 650 final. 
9 COM(2019) 640 final. 
10 COM(2020) 14 final. 

5 

 
 
 
                                                 
absence  of  changes  in  fundamentals,  this  could  increase  the  fiscal  burden,  particularly  for 
high-debt countries and  endanger the sustainability of their debt. That  risk is  possibly more 
acute in a monetary union, where governments with very different debt levels share the same 
currency  and  the  central  bank  cannot  act  as  a  lender  of  last  resort  to  governments.  This 
confirms  the  need  for  a  continued  focus  on  ensuring  debt  sustainability.  At  the  same  time, 
because monetary policy is increasingly constrained by the effective lower bound on interest 
rates,  the  appropriate  role  of  fiscal  and  economic  policy  in  macroeconomic  stabilisation 
should be assessed. Moreover, national fiscal policies also affect the functioning of financial 
markets and interact with monetary policies, particularly given the role of national sovereign 
bonds as benchmark safe assets and the potential impact in case of a relative scarcity of safe 
assets.  Finally,  the  consequences  of  climate-related  risks  on  financial  markets  stability  and 
public finances are gaining more relevance within the EU surveillance processes. 

The review takes account of those new challenges. It draws on the assessment of the EU fiscal 
rules by the European Fiscal Board11 (EFB), as well as the existing reports by the European 
Parliament12, Member States, the European Court of Auditors13, and  other stakeholders and 
academia. 

2.  Assessment of the application of the six-pack and two-pack legislation 

2.1 The Stability and Growth Pact and national fiscal frameworks 

This subsection assesses the fiscal surveillance framework against key objectives, namely to 
help  ensure  sustainable  public  finances,  to  provide  room  for  economic  stabilisation,  to 
recognise the importance of the quality of public finances, and to foster ownership of the EU 
fiscal rules. Finally, it assesses Directive 2011/85 with regard to its impact on national fiscal 
frameworks. 

Sustainability of public finances 

In its initial design of 1997, with the 3%-of-GDP deficit threshold as the central anchor, the 
SGP  focused  on  the  prevention  of  spillovers  from  excessively  high  deficits,  which  could 
undermine price stability in the Economic and Monetary Union and affect the effectiveness of 
monetary  policy.  

With the advent of the economic and financial crisis, the focus of fiscal surveillance shifted 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. It was in that context that the six-pack and two-pack legislations were 
designed. 

11

  European  Fiscal  Board,  Assessment  of  the  EU  fiscal  rules  with  a  focus  on  the  six-pack  and  two-pack 

legislation, August 2019. 
12  European  Parliament  resolution  of  24  June  2015  on  the  review  of  the  economic  governance  framework: 
stocktaking and challenges, OJ C 407, 4.11.2016, p. 86. 
13  European  Court  of  Auditors,  Is  the  main  objective  of  the  preventive  arm  of  the  Stability  and  Growth  Pact 
delivered?, Special report No 18/2018; Further improvements needed to ensure effective implementation of the 
excessive  deficit  procedure,  Special  report  No  10/2016;  EU  requirements  for  national  budgetary  frameworks: 
need to further strengthen them and to better monitor their application, Special Report No 22/2019; Audit of the 
Macroeconomic Imbalance Procedure (MIP), Special report No 03/2018.  

6 

 
 
 
                                                 
The  reformed  SGP  encouraged  Member  States  to  return  to  sound  budgetary  positions  by 
reducing their deficits and putting debt ratios on a downward path. In particular, the Excessive 
Deficit  Procedure  has  proven  itself  an  effective  tool  to  correct  high  deficits:  All  Member 
States  that entered the Excessive Deficit Procedure during the economic  and financial crisis 
have effectively corrected their high deficits. Whereas all but three Member States registered 
excessive  deficits  in  2010,  in  the  aftermath  of  the  economic  and  financial  crisis  (with  the 
headline  deficit  at  the  aggregate  EU  level  exceeding  6%  of  GDP  in  2009-2010  due  to  the 
depth of the recession and bank recapitalisation needs in some Member States), all Member 
States  respected  the  3%  of  GDP  deficit  criterion  in  201814.  16  Member  States  have  also 
reached,  or  are  close  to,  their  medium-term  budgetary  objectives,  thus  providing  them  with 
appropriate fiscal buffers and fiscal space to invest. 

However, in recent  years, the correction of excessive deficits and the subsequent adjustment 
towards  the  medium-term  budgetary  objectives  has  been  driven  more  by  favourable 
macroeconomic conditions, revenue windfalls and lower interest rates, than by durable fiscal 
adjustments.  The  Significant  Deviation  Procedure,  which  aims  to  prevent  excessive  deficits 
by  giving  Member  States  the  opportunity  to  correct  deviations  from  their  medium-term 
budgetary objectives, or  the adjustment path towards it,  showed limited effectiveness  in  the 
case of non-euro area Member States.15 

After having risen to almost 90% between 2009 and 2014, the debt-to-GDP ratios of the EU 
and  the  euro  area  began  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 its declining path of recent years 
and to fall to around 79% in 2020, a level far below that of the US or Japan (around 114% and 
237%,  respectively).  However,  debt  dynamics  across  Member  States  have  been  quite 
divergent since the economic and financial crisis. This reflects large differences in the pace of 
fiscal consolidation and economic growth, as well as in country-specific fiscal costs related to 
support  measures  for  the  banking  sector.  Public  debt  levels  are  now  (again)  below  60%  of 
GDP in around half of the Member States, but remain around or (well) above 100% of GDP 
in some others, accounting for a large share of euro area GDP.  

Some  Member  States’  debt  ratios  have  in  fact  continued  to  rise  or,  at  best,  have  stabilised. 
This has increased divergences between debt levels in the EU. Some highly indebted Member 
States still have deficits that do not provide a sufficient safety margin towards the 3%-of-GDP 
reference  value,  despite  favourable  economic  conditions.  They  also  remain  far  from  their 
medium-term budgetary objectives.  

Those observations  underline the importance of  an effective preventive arm   and the timely 
and effective implementation of fiscal  policy  recommendations by  all Member States. They 
also  suggest  that  the  enforcement  of  the  fiscal  rules  did  not  make  a  material  difference  in 
cases  where  the  enforcement  of  fiscal  discipline  was  most  necessary.  Enforcing  the  debt 
reduction benchmark during periods of weak  real  growth  and very low inflation has proven 
politically and  economically difficult.  In some highly indebted  countries,  the debt  reduction 

14 The only exception is Cyprus, where the general government temporarily recorded a deficit of 4.4% of GDP in 
2018 due to one-off support measures related to the Cyprus Cooperative Bank sale. In 2019, the budget balance 
is expected to have returned to a comfortable surplus of close to 4% of GDP. 
15 So far, the Significant Deviation Procedure has been launched for two non-euro area Member States: Romania 
in 2017 and Hungary in 2018. They both failed to take effective action to correct the significant deviation and, 
consequentially, have been subject to repeated procedures since then, which calls into question the effectiveness 
of  the  Significant  Deviation  Procedure  for  non-euro-area  Member  States,  given  the  rules  do  not  allow  for 
sanctions in case of non-compliance by them. 

7 

 
 
                                                 
benchmark  required  particularly  high  fiscal  efforts  that  could  actually  have  aggravated  debt 
dynamics. Therefore, the Commission’s assessment of compliance with the debt criterion and 
the subsequent Opinions issued by the Economic and Financial Committee 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.  

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

The  legislation  contained  in  the  six-pack  and  two-pack  reforms  recognises  the  role  of 
macroeconomic stabilisation, in  particular the importance of  avoiding pro-cyclical policy.  It 
aims to ensure that Member States adjust their fiscal policies during economic good times in 
order  to  build  fiscal  buffers,  so  that  they  have  sufficient  fiscal  space  to  allow  automatic 
stabilisers  to  play  and  to  provide  fiscal  support  during  downturns.  Strengthened  fiscal 
coordination also  gave more prominence to the aggregate fiscal stance of the euro area as a 
whole.  Subsequent  interpretation  and  implementation  of  that  legislation  by  the  Commission 
and  the  Council16  gradually  reinforced  elements  of  short-term  stabilisation  of  economic 
activity.  

Specifically,  the  design  of  the  preventive  arm  of  the  SGP  allows  Member  States  to  address 
sustainability  and  stabilisation  needs.  Achieving 
their  country-specific  medium-term 
budgetary  objective  provides  Member  States  with  the  scope  to  use  fiscal  policy  for  the 
purpose  of  macroeconomic  stabilisation  in  bad  economic  times  by  allowing  automatic 
stabilisers to operate freely or to increase investment. Moreover, the medium-term budgetary 
objective itself and a Member State’s effort to reach its medium-term budgetary objective is 
set in structural terms, i.e. corrected from the influence of the economic cycle. The required 
structural  effort  reflects  the  Member  State’s  position  in  the  economic  cycle  (i.e.  higher  in 
good times, lower in bad times) and the level of debt. 

Nonetheless, Member States’ fiscal policies have remained largely pro-cyclical. Fiscal policy 
was already pro-cyclical in the mid-2000s, when economic times were particularly good, and 
remained  largely  pro-cyclical  during  the  crisis  as  consolidation  took  place  in  a  context  of 
heightened market pressure at a moment of very low growth or even contraction in economic 
activity.  While  the  reformed  fiscal  framework  allowed  automatic  stabilisers  to  work,  their 
effect  was  offset  by  discretionary  consolidation  measures  needed  to  correct  unsustainable 
positions in a context of heightened market pressure. This contributed to the weak economic 
and employment performance 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 as of 
2014,  at  a  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 even though the euro 
area’s output gap had turned positive by 2017. In addition, the distribution of the fiscal stance 
across Member States was not appropriate in light of specific sustainability and stabilisation 
needs. Thus, despite the reinforced preventive arm, many Member States did not make use of 
the more benign economic times to build up counter-cyclical buffers. 

16  The  Commission  Communication  of  13  January  2015  on  “Making  the  best  use  of  the  flexibility  within  the 
existing rules of the Stability and Growth Pact” introduced new, albeit constrained room for discretionary fiscal 
stabilisation.  That  Communication  resulted  in  a  commonly  agreed  position  by  the  Economic  and  Financial 
Committee (EFC) in November 2015, which was endorsed by the Council (ECOFIN) on 12 February 2016. 

8 

 
 
                                                 
Moreover, the SGP is focused on the correction of high public deficit and debt levels. While 
the  SGP  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. 

The  two-pack  reform  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 of 
Member States’ budgetary plans and their interactions across the euro area before budgets are 
adopted  in  national  parliaments.  While  the  legal  framework  foresees  the  possibility  for  the 
Commission and the Council to  outline measures to  reinforce the coordination of budgetary 
and macroeconomic policy at the euro area level, it does not allow the Union institutions to 
enforce  the  appropriate  fiscal  stance  for  the  euro  area  as  a  whole.  While  the  European 
Semester encourages Member States to take account of the recommendation on the economic 
policy of the euro area17 in their Stability Programmes and National Reform Programmes, the 
euro area dimension is still not central to Member States’ policies.  

In such a context and in the absence of a central fiscal capacity with stabilisation features, the 
ability to steer the fiscal stance for the euro area as a whole remains constrained. This limits 
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.  As  a  result,  in 
addition  to  national  fiscal  and  economic  policies,  the  euro  area  continues  to  rely  mainly  on 
monetary  policy  for  macroeconomic  stabilisation,  which  acquires  a  particular  relevance  at 
times  when  monetary  policy  is  close  to  the  effective  lower  bound.  The  establishment  of  a 
fiscal  stabilisation  capacity  for  the  euro  area,  which  would  complement  national  fiscal 
policies, would allow monetary policy to become more effective and with fewer side effects. 

Quality of public finances, including the development of public investment  

The  quality  of  public  finances  is  a  complex  and  multifaceted  issue.  It  concerns  the 
composition  of  public  revenues  and  expenditures  and  whether  they  adequately  support 
sustainable growth and social inclusion. It moreover relates to the efficiency of tax collection 
and mechanisms to control and prioritise public expenditure. In this context, spending reviews 
can contribute to improve expenditure allocation. One issue of particular relevance relates to 
the observation that, during periods of fiscal consolidation, it is often more expedient to cut 
public  investment  or  increase  taxes  rather  than  rationalising  other  expenditure  items.  It  is 
important  that  the  fiscal  surveillance  framework,  which  is  rules-based,  pays  sufficient 
attention  to  those  issues18,  including  the  role  of  public  investment,  as  a  necessary  condition 
for supporting sustainable economic growth and for long-term sustainability.  

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, Article 126(3) of the 
Treaty  on  the  Functioning  of  the  European  Union  requires  the  Commission  to  take  into 
account  government investment spending when considering whether a Member State has an 
excessive  deficit.  Second,  the  SGP,  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 

17 In autumn of each year, and following an assessment of the European Fiscal Board in June, the Commission 
adopts a euro area recommendation with guidance on the appropriate fiscal stance for the single currency area as 
a whole. 
18 In that regard, Article 6(3)(d) of the Regulation No 473/2013 states that "the draft budgetary plan shall contain 
[…] relevant information on the general government expenditure by function, including on education, healthcare 
and employment, and, where possible, indications on the expected distributional impact of the main expenditure 
and revenue measures". 

9 

 
 
                                                 
objective  refers  to  room  for  budgetary  manoeuvre  and  in  particular  the  need  for  public 
investment.19 This has led to provisions in the fiscal framework that have sought 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.  

Overall, however, the current fiscal framework did not prevent a decline in the level of public 
investment  during  periods  of  fiscal  consolidation,  nor  did  it  make  public  finances  more 
growth-friendly.20  This  primarily  reflects  deliberate  policy  choices  in  the  Member  States. 
Indeed, there is no clear evidence that investment was actually hampered by the fiscal rules. 
Whilst the operationalisation of the investment clause in 2015 and 201621 sought to strengthen 
the  growth  orientation  of  the  SGP  by  protecting  investment  during  downturns,  it  does  not 
appear to have had a substantial positive impact on public investment. In particular, its focus 
on  protecting  investments  in  the  specific  situation  of  a  deep  downturn  entailed  overall  a 
limited use of this clause.22 Similarly, the structural reform clause has been applied five times 
so far23 and has had a rather limited success in promoting reforms that improve the quality of 
public finances and/or increase potential growth.  

Those  findings  require  careful  consideration,  not  least  in  light  of  the  substantial  additional 
investments  needed  to  modernise  infrastructure,  make  the  EU  economy  climate-neutral  by 
2050 and foster the digital transition. As part of that, the Commission will continue to explore 
with Member States the greater use of green budgeting tools.  

Ownership and governance of the EU fiscal rules  

The design of the current EU fiscal governance framework is characterised by 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.  

Those  multiple  rules  do  not  always  yield  the  same  conclusion  in  terms  of  compliance,  thus 
requiring  the  use  of  economic  judgement.  In  addition,  the  framework  relies  heavily  on 
variables  that  are  not  directly  observable  and  are  frequently  revised,  such  as  the  output  gap 
and the structural balance, which hampers the provision of stable policy guidance. While the 
higher degree of sophistication of the SGP is meant to make the framework more adaptable to 
changing  economic  conditions,  it  has  also  increased  its  complexity  and  reduced  its 
transparency, especially of the preventive arm. This has hampered ownership, communication 
and  political  buy-in.  To  some  extent,  these  shortcomings  have  been  addressed  by  the 
Commission through its stronger focus on the expenditure benchmark, which provides more 
stable  and  operational  policy  guidance,  and  focuses  on  budgetary  items  directly  under  the 
control of the government.  

19  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.  
20 Public investment in the EU declined from a peak of 3.7% of GDP in 2009 to 2.7% in 2017, while the share of 
public investment  for environmental protection has remained broadly  stable at 5-6% of  the total, see Eurostat, 
general government expenditure by function (COFOG). 
21 Cf. footnote 15. 
22 So far, only Italy and Finland benefited from the investment clause in 2016. 
23 The structural reform clause was applied in the cases of Italy in 2016, Latvia, Lithuania and Finland in 2017, 
and Belgium in 2019.  

10 

 
 
                                                 
As  a  linked  issue,  while  the  emphasis  on  annual  fiscal  adjustments  and  compliance 
assessments  has  been  strengthened,  the  focus  on  medium-term  budgetary  planning  has 
weakened,  with  many  Member  States  postponing  the  achievement  of  their  medium-term 
budgetary  objectives.24  The  strong  focus  on  compliance  with  annual  requirements  may  also 
have contributed to an insufficient differentiation between Member States that have markedly 
different fiscal positions and sustainability risks.  

The annual  examination of euro-area Member States’ draft budgetary plans has allowed the 
Commission to inform Member States’ budgetary processes earlier, but has also highlighted 
the  challenges  of  making  Member  States  change  their  plans,  at  the  end  of  the  year  and  of 
sparking a genuine discussion on the euro area fiscal stance in the Eurogroup.  

National fiscal frameworks 
The requirements related to national fiscal frameworks25 in Directive 2011/85 and Regulation 
No  473/2013  spurred  a  broad  development  and  strengthening  of  rules,  procedures  and 
institutions  underlying  the  conduct  of  budgetary  policy  in  Member  States.  This  has  led  to 
significantly enhanced national fiscal frameworks, which has increased national ownership of 
fiscal  discipline  and  promoted  compliance  with  EU  fiscal  rules.  The  progress  is  most 
noticeable in Member States that had no, or only rudimentary, domestic  frameworks before 
the  crisis.  The  EU  requirements  served  as  a  basis  for  them  to  construct  a  modern  fiscal 
framework. All elements of fiscal frameworks have seen rapid development, but most of the 
progress  has  concerned  national  fiscal  rules  and  the  establishment  of  independent  fiscal 
institutions.  The  number  and  quality  of  numerical  fiscal  rules  has  increased  significantly. 
They  are  now  a  central  part  of  fiscal  frameworks  in  all  Member  States,  supporting  fiscal 
discipline and compliance with EU rules. 

Independent  fiscal  institutions  have  been  established,  or  reinforced,  in  virtually  all  Member 
States  and  play  an  increasingly  important  role  in  fiscal  discussions  at  the  national  and  EU 
level.  Independent  monitoring  of  fiscal  policy,  together  with  improved  fiscal  statistics  and 
provisions related to the preparation and the publication of forecasts, have greatly improved 
the  transparency  of  fiscal  policy.  National  stakeholders  generally  consider  strong  national 
frameworks as an effective and efficient tool to promote compliance with the EU fiscal rules. 

At the same time, the design and the effectiveness of national frameworks differ significantly 
across Member States. This is because (i) the Union law sets only minimum requirements for 
national frameworks and (ii) actual implementation and compliance with national provisions 
vary. In addition, with the Fiscal Compact26 and its structural balanced budget rule, the set of 
provisions for national frameworks has become rather complex, giving rise to inconsistencies 
between EU and some national rules. This has encouraged some Member States to arbitrage 
between national and EU rules.  

24 The role of the stability and convergence programmes in the surveillance framework has declined, which has 
also  contributed  to  repeated  postponement  of  the  achievement  of  the  Member  States’  medium-term  budgetary 
objectives. 
25 A set of rules and institutions governing fiscal policy at national level. 
26  The  Fiscal  Compact  is  part  of  the  Treaty  on  Stability,  Coordination  and  Governance  in  the  Economic  and 
Monetary  Union  (TSCG),  which  entered  into  force  on  1  January  2013.  The  main  provision  of  that 
intergovernmental Treaty is the requirement to have a balanced budget rule in domestic legal orders (the Fiscal 
Compact). The objective was to complement the EU rules-based fiscal framework by provisions at the national 
level in order to better achieve sound budgetary policies in the Contracting Parties The Fiscal Compact binds all 
euro area Member States and, on a voluntary basis, three non-euro area Member States (Bulgaria, Denmark and 
Romania). 

11 

 
 
                                                 
Box 2: Economic governance in the context of the European Semester of economic policy 
coordination 

Since its inception in 2011 by means of the six-pack legislation, the European Semester has 
become a well-established framework for economic policy coordination. It aims to provide an 
integrated approach by blending the various strands of economic policy surveillance—fiscal, 
structural  and  financial  policies—under  a  common  timeline  and  framework  for  the  annual 
surveillance cycle.27 To that end, key steps in the implementation of the SGP and the MIP are 
organised within the European Semester, both in  terms of timing and, where appropriate, in 
terms  of  reporting  and surveillance requirements. That  alignment helps  ensure that Member 
States benefit from an integrated approach as regards economic policies.   

In recent  years, the focus of the European Semester has widened to better take into account 
the  euro  area  dimension,  as  well  as  employment  and  social  aspects,  notably  through  the 
integration of the European Pillar of Social Rights.  Dialogue with  the European Parliament, 
national authorities and social partners, has also been enhanced. Consistent with the European 
Green  Deal,  the  environmental  dimension  of  Member  States’  economic  and  employment 
policies is set to gain significantly more prominence in the European Semester, while it will 
also  become the framework for assessing and  coordinating  the  economic policies needed to 
achieve  the  Sustainable  Development  Goals  while  remaining  focused  on  key  challenges  for 
economic and employment policies.  

2.2 The Macroeconomic Imbalance Procedure 

Widening the scope of macroeconomic surveillance 

imbalances,  productivity,  competitiveness, 

The  Macroeconomic  Imbalance  Procedure  (MIP)  widened  the  scope  of  the  surveillance 
framework  beyond  fiscal  policies  to  cover  other  potential  sources  of  macroeconomic 
imbalances  that  had  previously  been  neglected.  This  entailed,  inter  alia,  a  greater  focus  on 
macro-structural  and  macro-financial  issues  relevant  to  macroeconomic  stability,  such  as 
external 
the  housing  market  and  private 
indebtedness.  In  addition,  public  finance  developments,  notably  government  debt,  are  also 
analysed  under  the  MIP  given  their  relevance  to  overall  macroeconomic  stability.  In  that 
respect, the MIP has complemented other surveillance instruments and provided the basis for 
prioritising  policies  not  dealt  with  by  the  SGP  but  which  are  of  relevance  for  the  orderly 
development of public finance. The analytical basis to detect imbalances has been enhanced, 
and processes to  monitor economic developments and policy  action have been put  in  place. 
While  the  scope  of  MIP  surveillance  has  remained  anchored  on  aspects  relevant  for 
macroeconomic  stability,  it  has  also  been  gradually  expanded  to  take  into  account  broader 
implications  relating  to  adjustment,  such  as  those  affecting  employment  and  social 
developments. 

However, the links with other surveillance strands have not always been fully exploited. This 
concerns the interplay between the MIP and the SGP surveillance to address at the same time 
to  public  debt 
imbalances,  potential  growth  challenges  and  risks 
macroeconomic 

27 Regulation No 1175/2011 inserted into Regulation No 1466/97 the legal basis for the European Semester, with 
the  aims  of  ensuring  closer  coordination  of  economic  policies  and  sustained  convergence  of  the  economic 
performance  of  the  Member  States  and  of  providing  integrated  and  coherent  policy  advice  on  economic  and 
employment policies of Member States. 

12 

 
 
 
 
                                                 
sustainability.  Finally,  MIP  surveillance  so  far  may  not  have  sufficiently  encompassed 
interactions with new emerging economic challenges, notably relating to climate change and 
other environmental pressures.   

Policy responses and effectiveness in terms of correction of macroeconomic imbalances  

The MIP has raised awareness and focussed on policy action, with successful results in some 
cases, even if the Excessive Imbalances Procedure (EIP) has never been activated.  The MIP 
has helped to deepen the dialogue between the EU institutions and national policy authorities 
about  the  ways  to  address  the  identified  challenges,  focusing  the  policy  debate  at  national 
level, and strengthening policy-making processes. In a number of cases, the MIP provided the 
framework  to  prioritise  policies  to  address  macro-structural  and  macro-financial  issues  in 
countries  severely  threatened  by  the  risk  of  financial  instability.  In  those  cases,  MIP 
surveillance was followed by policy responses subject to close and regular monitoring, and by 
a reduction in financial market tensions without the need to resort to the more intrusive EIP 
instrument. 

However,  the  MIP  has  not  generated  the  political  traction  necessary  to  sustain  reform 
ambition  in  Member  States  where  imbalances  persist,  including  with  domestic  and  foreign 
debt that remains high. While there is evidence that country-specific recommendations under 
the  MIP  were  initially  associated  with  stronger  follow  up,  reform  implementation  has  over 
time  become  comparable  to  that  of  other  non  MIP-related  recommendations  under  the 
European  Semester.  Progress  in  unwinding  imbalances  has  decelerated  in  recent  years, 
arguably in light of reduced financial market pressure and a slower pace of reforms.  

in  Member  States  showing 

The  MIP  has  been  more  successful  in  reducing  current  account  deficits  than  it  has  been  in 
reducing  persistent  and  large  current  account  surpluses.  The  need  for  policy  action  was 
large  current-account  deficits  and 
particularly  pressing 
competitiveness losses, given the  concerns about the sustainability of their external debt and 
related  solvency  risks,  which  are  especially  worrying  if  combined  with  sustained  losses  of 
cost  competitiveness  and export market  shares.  In turn, the MIP has not  been  able to  foster 
adjustment  of  large  and  persistent  current  account  surpluses,  which  economic  fundamentals 
cannot  fully  explain.  Large  and  sustained  current  account  surpluses,  while  not  creating 
immediate risks to national economic stability, can affect the smooth functioning of the euro 
area. Adjusting them would help boost real GDP in the Member States concerned, and would 
have positive spillovers to the rest of the euro area. Finally, as the MIP was introduced in a 
context  where  imbalances  and  excessive  imbalances  were  already  present  in  many  Member 
States, its effectiveness in preventing the accumulation of new imbalances, vulnerabilities and 
risks remains to be tested. This requires a timely detection of emerging imbalances to allow 
for adequate preventive policy action.  

Ownership of the Macroeconomic Imbalance Procedure 

Given the wide scope of potential imbalances, surveillance under the MIP relies on the use of 
both quantitative and qualitative analysis and does not lend itself to a mechanistic reading of 
indicators. The Commission  has therefore made  use of the discretion granted by Regulation 
No 1174/2011 and Regulation No 1176/2011 in implementing the framework and the Council 
has always broadly endorsed Commission views on the existence and severity of imbalances. 
In 2016, the Commission clarified the criteria for identifying and assessing imbalances, and 

13 

 
 
streamlined  their  classification.28  Since  the  beginning,  the  implementation  of  the  preventive 
part of the MIP has been integrated in the European Semester and its application has evolved 
in  light  of  acquired  experience,  the  evolution  of  challenges,  and  as  a  result  of  continuous 
dialogue with Member States and stakeholders. 

Despite progress made for a transparent implementation of the MIP, further efforts could be 
pursued  on  the  link  between  the  MIP  analysis  and  recommendations  and  the  interplay 
between  the  MIP  and  other  surveillance  procedures.  When  Member  States  have  been 
identified with an excessive imbalance,  the Commission has used the possibility foreseen in 
the  MIP  framework  to  put  in  motion  a  specific  and  close  monitoring  of  policy 
implementation,  contributing  to  peer  pressure  and  promoting  reform  action  in  the  Member 
States  concerned.  However,  there  was  no  requirement  for  the  Member  State  concerned  to 
implement  specific  policy  actions  set  out  in  an  agreed  corrective  action  plan.  Such  practice 
has  prompted  some  calls  on  the  Commission  to  make  full  use  of  the  MIP  instruments, 
including  recommending  that  the  Council  activate  the  EIP,  and  to  enhance  transparency  in 
cases  where  the  EIP  is  not  launched  for  Member  States  identified  with  excessive 
imbalances.29  

2.3 Euro-area Member States experiencing, or threatened with, serious difficulties with 
financial stability 

Framework  for  the  design  and  monitoring  of  macroeconomic  financial  assistance 
programmes 

During  the  first  decade  of  the  Economic  and  Monetary  Union,  there  was  no  framework  to 
provide  support  specifically  to  euro-area  Member  States  experiencing,  or  threatened  with, 
serious financial stability difficulties. Specific mechanisms to provide financial support were 
developed over the course of 2010 and in subsequent years30 leading to the establishment of 
the  European  Stability  Mechanism  (ESM).  However,  Union  legislation  providing  a 
surveillance  framework  and  a  governance  structure  for  that  support  was  still  missing. 
Regulation  No  472/2013  established  a  framework  to  organise  such  support  so  as  to  ensure 
transparency and democratic accountability.  

That framework applied to the programmes concerning Ireland and Portugal financed by the 
EFSF and the EFSM; Spain and Cyprus financed by the ESM, as well as Greece (second and 
third  programmes)  which  received  financial  assistance  from  both  the  EFSF  and  the  ESM. 
External  and  fiscal  deficits  were  largely  resolved  and  the  stability  of  the  financial  sector 
preserved  or  restored.  Moreover,  structural  policies  under  the  programmes  helped  foster 
potential  growth.  All  euro-area  Member  States  that  received  financial  assistance  have 
successfully  returned  to  markets  at  reasonable  financing  rates  and  are  now  subject  to  post-
programme surveillance. 

28  In  2016,  the  Commission  published  a  compendium  which  documents  the  implementation  of  the  MIP  in  a 
comprehensive and transparent way; European Commission (2016), The Macroeconomic Imbalance Procedure. 
Rationale, Process, Application: A Compendium. 
29 The Court of Auditors recommended increased transparency whenever the Commission does not recommend 
the  opening  of  the  EIP  (European  Court  of  Auditors  (2018),  "Audit  of  the  Macroeconomic  Imbalance 
Procedure", Special Report 03.) 
30 Such as the Greek loan facility agreement (GLF), European Financial Stability Facility (EFSF), and the 
European Financial Stabilisation Mechanism (EFSM). 

14 

 
 
 
                                                 
The provisions for framing macroeconomic adjustment programmes have been respected, in 
particular regarding: (i) the preparation of the programme and the information to stakeholders 
on  progress  made;  (ii)  ensuring  consistency  between  the  Memorandum  of  Understanding 
signed  with  the  euro-area  Member  State  and  the  macroeconomic  adjustment  programme 
adopted  by  the  Council;  (iii)  monitoring  progress  made  in  implementing  the  programme 
through regular reviews and the involvement of social partners and civil society organisations; 
(iv)  the  granting  of  technical  assistance  to  help  with  the  implementation  of  programme 
conditionality. Regulation No 472/2013 also allowed to preserve the financial stability of the 
euro area as a whole by putting those procedures in place. 

Concerning the governance arrangements across the institutions involved in macroeconomic 
adjustment  programmes  –  the  Commission  in  liaison  with  the  European  Central  Bank  and 
where  appropriate  the  International  Monetary  Fund  –  ,  the  framework  provides  some 
flexibility as to how the governance arrangements are implemented in practice with the caveat 
that  any  specifically  assigned  roles  should  be  fully  respected.  Overall,  the  governance 
arrangements have worked well.  

Regulation  No  472/2013  also  helped  improve  the  transparency  and  accountability  of  the 
Commission’s  actions,  in  particular  through  the  reinforced  dialogue  with  the  European 
Parliament  and  national  parliaments.31  In  addition,  the  Regulation  interacts  with  the  ESM 
Treaty. The Commission must ensure that any Memorandum of Understanding signed with a 
euro-area  Member  State  on  behalf  of  the  ESM  is  consistent  with  such  a  macroeconomic 
adjustment programme and Union law. As regards the relationship between the Commission 
and  the  ESM,  the  practical  implementation  was  specified  through  a  Memorandum  of 
Understanding  signed  on  27  April  2018  and  a  joint  position  agreed  between  them  on  14 
November 2018, which serve as a basis for the current revision of the ESM Treaty.  

Economic performance and coherence with EU surveillance procedures 

Regulation  No  472/2013  contributed  to  a  closer  coordination  of  economic  policies  and  a 
sustained  convergence  of  euro-area  Member  States  by  ensuring  consistency  between  the 
normal surveillance cycle of the European Semester and the strengthened surveillance under 
that Regulation. The Regulation streamlined processes, with a view to ensuring consistency of 
economic  policy  surveillance  and  to  avoiding  duplication  of  reporting  obligations. 
Vulnerabilities  and  imbalances  identified  under  the  standard  surveillance  procedures  (SGP 
and  MIP)  were  explicitly  addressed  in  the  macroeconomic  adjustment  programmes.  Any 
outstanding adjustment after the end of the programme was taken over by the country-specific 
recommendations in the normal surveillance cycle and the post-programme surveillance. The 
strengthened  surveillance  put  in  place  by  the  Regulation  thus  contributed  to  reducing  the 
temporary divergence of the Member States concerned from other euro-area Member States 
and laid the ground for renewed convergence.  

The  provisions  for  post-programme  surveillance  have  been  fully  implemented  by  the 
Commission.  With  regard  to  the  effectiveness  of  enhanced  surveillance,  the  respective 
requirements  apply  to  Greece  as  of  August  2018  (the  end  of  a  financial  assistance 
programme).  An  initial  assessment  based  on  the  limited  experience  with  the  specific 
provisions is positive. However, while enhanced surveillance was initially conceived as a pre-

31 This was confirmed by the European Court of Auditors’ performance audit, see  Special report No 17/2017: 
The Commission's intervention in the Greek financial crisis.  

15 

 
 
                                                 
emptive framework to help Member States at risk of requiring financial assistance, to date it 
has not been activated for such a purpose. 

At  the  same  time,  it  is  important  to  retain  adequate  national  ownership  of  the  programmes, 
particularly  at  the  time  of  programme  exit  or  programme  discontinuation.  Issues  of 
transparency  and  accountability  also  persist,  including  in  view  of  the  fact  that  the  ESM 
remains to date an intergovernmental body. 

2.4. 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 (see Box 2). 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. At the same time, 
public debt levels remain high in some Member States, which 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 

16 

 
 
 
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.  

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.32  

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.  

3.  Issues for public debate 

Based on the experience with the legislation so far, a number of issues for a public debate can 
be established:  

32 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. 

17 

 
 
 
                                                 
How  can  the  framework  be  improved  to  ensure  sustainable  public  finances  in  all  Member 
States and to help eliminate existing macroeconomic imbalances and avoid new ones arising? 
In the light of experience, effective delivery on the objectives of ensuring sustainable public 
finance  positions  and  avoiding  macroeconomic  imbalances  is  key.  Effective  economic 
coordination  and  surveillance  is  a  cornerstone  for  ensuring  resilience  in  the  EU  and  the 
Economic  and  Monetary  Union  in  view  of  potential  negative  spillovers  resulting  from  the 
building up of unsustainable positions. While there has been progress overall in terms of debt 
sustainability and correction of macroeconomic imbalances, that progress has not always been 
sufficient,  with  large  differences  across  Member  States.  Therefore,  an  effective  framework 
needs to ensure the sustainability of public debt, including where it is most necessary, and the 
prevention  and  correction  of  macroeconomic  imbalances.  In  this  context,  risks  related  to 
climate change are to be considered. 

How  to  ensure  responsible  fiscal  policies  that  safeguard  long-term  sustainability,  while 
allowing  for  short-term  stabilisation?  Fiscal  policy  guidance  supports  Member  States  in 
ensuring the long-term sustainability of public finances and in pursuing counter-cyclical fiscal 
policies  to  contribute  to  a  better  macroeconomic  stabilisation  in  both  good  and  bad  times. 
While an effective framework should aim to be counter-cyclical in good and bad times, it has 
often not  been  achieved  in  practice. An appropriate fiscal  effort  and debt  reduction in  good 
economic  times  helps  to  create  the  space  to  use  fiscal  policy  in  bad  times.  Appropriate 
medium-term policy planning, both regarding fiscal targets and structural reforms to promote 
productivity and investment, and an appropriate policy anchor help in that regard.  

What  is  the  appropriate  role  for  the  EU  surveillance  framework  in  incentivising  Member 
States to undertake key reforms and investments needed to help tackle today and tomorrow’s 
economic, social, and environmental challenges while preserving safeguards against risks to 
debt  sustainability?  The  framework  should  be  consistent  with  today  and  tomorrow’s 
challenges.  It  needs  to  be  discussed  what  the  appropriate  role  of  the  EU  surveillance 
framework  is  in  helping  to  promote  a    composition  of  public  finances  conducive  to 
sustainable  growth  and  for  Member  States  to  sustain  adequate  levels  of  investment.  In 
particular,  significant  investment  will  be  requiredto  meet  the  broader  ambition  of  the 
European Green Deal. This raises the question of the extent to which the fiscal framework can 
support  the  reforms  and  investments,  including  in  human  capital  and  skills,  needed  for  the 
transition to a climate-neutral, resource-efficient, and competitive economy fit for the digital 
age, in a manner that leaves no one behind. This includes re-assessing the appropriateness of 
the current flexibility clauses in terms of their scope and eligibility, in order to facilitate the 
right  type  and  level  of  investment  while  preserving  debt  sustainability.  In  addition,  thought 
should be given to the role of the fiscal framework in greening national budgets.  

the 

improve 

the  EU 

transparency  of 

its 
framework  and 
How  can  one  simplify 
implementation? 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 amongst key stakeholders, an effective application of economic judgement within 
a  rules-based  framework  needs  to  be  done  in  an  objective  and  transparent  manner.  This 
includes, for example, considering 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 surveillance framework. A simpler framework and  
implementation  could  contribute  to  increased  ownership,  better  communication,  and  lower 
political costs for enforcement and compliance.   

18 

 
 
 
 
How can surveillance focus on the Member States with more pressing policy challenges and 
ensure quality dialogue and engagement? 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  is  to  be  considered  whether  the  surveillance 
framework, in order to be effective, should focus more on ‘identifying gross errors’33, i.e. on 
Member  States  whose  policy  strategy  puts  public  debt  on  a  potentially  unsustainable 
trajectory or leads to other macroeconomic imbalances.   Moreover, a strong policy dialogue 
with  Member  States  and  stakeholders  is  key,  especially  in  a  multilateral  setting,  but  also 
bilaterally with the Commission.  

How can the framework ensure effective enforcement? What should be the role of pecuniary 
sanctions,  reputational  costs  and  positive  incentives?  The  appropriate  balance  between 
pecuniary sanctions and tools incentivising macroeconomic stability and sustainable growth, 
such  as  a  Budgetary  Instrument  for  Convergence  and  Competitiveness    or  the  Convergence 
and  Reform  Instrument,  has  to  be  carefully  considered  as  an  element  to  ensure  an  effective 
implementation of the framework.  

Is there scope to strengthen national fiscal frameworks and improve their interaction with the 
EU  fiscal  framework?  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. 
Moreover, given that high quality statistics are key for a transparent fiscal framework, it has 
to be assessed what further improvements in data quality would be needed. 

How should the framework take into consideration the euro area dimension and the agenda 
towards deepening the Economic and Monetary Union? There are a number of concrete links 
between  the  economic  governance  framework  and  the  broader  agenda  to  complete  the 
Economic  and  Monetary  Union.  First,  both  the  SGP  and  the  MIP  focus  exclusively  on 
national policies, in particular on the prevention and correction of high public debt levels and 
current account deficits. In such a context and in the absence of a central fiscal capacity with 
stabilisation features, the ability to steer the fiscal stance for the euro area as a whole remains 
constrained. The introduction of a stabilisation capacity of appropriate size would allow fiscal 
policy  to  contribute  more  to  macroeconomic  stabilisation  at  the  level  of  the  euro  area  as  a 
whole.  Second,  the  completion  of  the  financial  union  (Banking  Union  and  Capital  Markets 
Union), the introduction of a common safe asset and the review of the regulatory treatment of 
bank  sovereign  exposures,  could  –  depending  on  the  specific  design  –  facilitate  market 
discipline  and  allow  further  simplification  of  the  design  of  an  effective  fiscal  surveillance 
framework.  Third,  a  vibrant  and  resilient  Economic  and  Monetary  Union,  resting  on  solid 
foundations, is the best means to increase financial stability in Europe. It is a prerequisite to 
strengthening  the  international role of  the  euro,  which  in  turn  is  a  tool  to  enhance  Europe’s 
clout in the world and on global markets, thereby promoting European values and supporting 
the interests of European firms, consumers and governments.  
Within  the  context  of  the  European  Semester,  how  can  the  SGP  and  the  MIP  interact  and 
work better together, so as to improve economic policy coordination among Member States? 
The  European  Semester  successfully  aligns  the  different  surveillance  strands  under  one 
common  timeline.  It  also  helps  synchronise  national  procedures  and  contributes  to 
convergence within the EU. Nevertheless, there may be scope to further strengthen it as a tool 
for policy coordination in view of a better integrated surveillance and in  the context of new 

33 Cf. Article 126(2) of the Treaty on the Functioning of the European Union. 

19 

 
 
 
 
                                                 
emerging  challenges.  While  the  individual  strands  focus  on  their  own  objectives,  it  is  to  be 
assessed whether they  could  be implemented together more effectively  when the  challenges 
are interlinked. This can, for instance, be done by making use of the existing links between 
the MIP and the SGP in cases where public debt sustainability issues are related both to fiscal 
discipline and structural impediments to potential growth. 

The effective functioning of the surveillance framework is the collective responsibility of all 
Member States, European institutions and other key stakeholders. A high degree of consensus 
and  trust  amongst  all  key  stakeholders  is  crucial  for  the  effectiveness  of  economic 
surveillance  in  the  Union.  The  Commission  invites  all  stakeholders  to  engage  in  a  public 
debate  to  provide  their  views  on  how  to  strengthen  the  implementation  of  the  economic 
governance framework. 

The  public  debate  should  provide  an  opportunity  for  stakeholders  to  provide  their  views  on 
the functioning of surveillance so far and the possible ways to enhance the effectiveness of the 
framework  in  delivering  on  key  objectives.  The  Commission  looks  forward  to  an  inclusive 
debate,  involving  the  European  Parliament,  the  Council,  the  European  Central  Bank,  the 
European  Economic  and  Social  Committee,  the  Committee  of  the  Regions,  national 
governments and parliaments, national central banks, independent fiscal institutions, national 
productivity  boards,  social  partners,  civil  society  organisations  as  well  as  academic 
institutions, with the aim of collecting feedback within the first half of 2020. The Commission 
will engage with  these stakeholders in the  coming months through various means including 
through dedicated meetings, workshops and an online consultation platform. The Commission 
will consider all views and on that basis complete by the end of 2020 its internal reflections 
on the scope for any possible future steps.  

20