European economic governance

European economic governance in the European treaties

The legal basis for European economic governance is now enshrined in the Treaty on the Functioning of the European Union (TFEU). ² . Budgetary discipline is at the heart of this coordination: indeed, it is the only area for which binding criteria are laid down in the Treaties.

Economic policy objectives

According to Article 120 TFEU, “Member States shall conduct their economic policies with a view to contributing to the achievement of the objectives of the Union, as defined in Article 3 of the Treaty on European Union”.

These objectives are very broad, and include the promotion of peace, the well-being of peoples, balanced economic growth, social justice and protection, full employment, protection and improvement of the quality of the environment, solidarity between member states and between generations… Although there is no trace at this stage of budgetary surveillance, this is nevertheless at the heart of European economic governance.

Economic coordination, multilateral surveillance, budgetary rules

> Article 121 sets out the main operating procedures for European economic coordination. ⁴ and introduces the concept of surveillance of the economic situation of member states.

In particular, it is envisaged that the Council, on a recommendation from the Commission, will draw up the “broad economic policy guidelines” and then adopt them following a debate by the European Council. The Commission verifies the conformity of national economic policies with these guidelines and, if necessary, issues a warning. The Council can then issue recommendations to the country concerned.

> Article 126 details the Commission’s monitoring of member states’ budgetary situations, assessed according to two criteria: public debt must not exceed 60% of GDP and the public deficit must not exceed 3% of GDP. ⁵ . This article also sets out the stages of the “excessive deficit procedure”, triggered in the event of non-compliance with the criteria.

> Under article 136, specific measures may be taken for euro zone countries.

Coordinating employment policies

Under article 148, the Council draws up annual “employment guidelines”, compatible with the “broad economic policy guidelines”. On the basis of reports submitted by the Member States, the Council examines national policies and may make recommendations. The Council and the Commission then produce a joint annual report on the employment situation in the EU.

The European Semester

While a form of economic and budgetary policy coordination was already present in the Maastricht Treaty (1992), it has been considerably strengthened since 2011 with the introduction of the European Semester, which has synchronized several existing processes. It has become the central tool for coordinating European and national economic and employment policies.

In addition to setting out the “broad economic policy guidelines” for each year, the European Semester allows us to integrate a common annual calendar:

• provisions for monitoring the Stability and Growth Pact(see part 3)
• provisions relating to macroeconomic imbalances(see section 4);
• employment provisions (which we detail in this chapter only, as they do not include specific procedures other than the submission and review of reports).

The political and administrative staff in charge of public budgets and financial issues dominate the process. ⁶ .

Commission and Council (Ecofin configuration) ⁷ are assisted in their economic policy coordination tasks by the Economic and Financial Committee and the Economic Policy Committee, made up of senior officials from national administrations, the European Commission and the European Central Bank, responsible for budgetary, financial, economic and structural policies. The secretariat of these two committees is housed within DG ECFIN. ⁸ of the European Commission.

Milestones in the European Semester

The European semester takes place every year according to the same timetable. Here are the main stages of the 2024 reform.

It begins in November with the Commission’s publication of the “autumn package which includes several general framework and analysis documents on the European Union and the euro zone. These are then formally adopted by other European institutions (in particular the Council).

By April 30 each member state must submit a medium-term budgetary and structural plan (covering a period of 4 to 5 years) ¹¹ followed by an annual progress report.

In particular, this plan must set out a trajectory for net public spending, enabling public debt to be reduced until it reaches (or remains below) 60% of GDP, as well as the structural reforms and public investments envisaged to achieve this objective.

In May, the Commission publishes the “spring package which focuses on an analysis of the situation in each Member State, together with country-specific recommendations which are later validated by the Council. It is also at this time that the Commission may propose that the Council initiate an excessive deficit procedure against certain countries.

Finally, from July to October, member states implement the Commission’s recommendations. Eurozone countries are subject to an additional procedure, as they must submit their draft budget plans for the following year to the Commission and theEurogroup by mid-October.

The Commission examines them in the light of the requirements of the Stability and Growth Pact (see section 3) and issues a formal opinion on each of them, which is published in the “autumn package” of the following European semester.

Details of documents published as part of the “autumn package

The “autumn package” comprises several documents produced by the Commission to define the EU’s economic and social priorities for the coming year.

These documents are subject to specific validation or adoption procedures, which take place between January and March.

• In the Annual Strategy for Sustainable Growth ¹² the Commission assesses the economic and social situation in the EU and defines priorities for the next 12-18 months in line with the “Broad Economic Policy Guidelines” established by the Council(see section 1). Since 2020, this document has had to integrate the ecological dimension, and in particular the Sustainable Development Goals (SDGs). It is then discussed with member states and various EU bodies, some of which can provide input. ¹³ . The Spring European Council reports on these discussions in its conclusions and formulates broad policy guidelines.
• In the draft “Recommendations of the Council of the EU on the economic policy of the euro zone”, the Commission proposes that the Council take initiatives or formulate opinions on key issues affecting the euro zone. This document is then amended and formally adopted by the Council.
• In the Alert Mechanism Report, the Commission analyzes the macroeconomic situation of each Member State. This is the starting point for the procedure relating to macroeconomic imbalances(see section 4).
• The draft Joint Employment Report analyzes the social and employment situation across the EU, as well as the reforms carried out by Member States. Since 2018, it has also made it possible to monitor Member States’ performance with regard to the European Social Rights Base (via the updated Social Scoreboard). The report proposed by the Commission is adopted by the Council (EPSCO formation). ¹⁴ in March.

Details of the documents published in the “spring package”.

It essentially comprises reports specific to the situation in each member state.

• The country reports analyze the economic, social and budgetary situation of each member state, and assess the extent to which the recommendations made by the Commission the previous year have been taken on board. Since 2020, these reports have included a section devoted to environmental sustainability, as well as an appendix presenting each state’s performance in achieving the Sustainable Development Goals (SDGs).
• In the “country recommendations”, the Commission proposes to each member state measures to be taken over the following year in terms of socio-economic, budgetary and environmental policy, based in particular on the analysis of the situation carried out in the country reports. These are then examined and adopted by the Council (in June and July).
• In-depth reviews are reports produced by the Commission on member states presenting risks of macroeconomic imbalance (see section 4).
• Post-program monitoring reports assess the repayment capacity of member states that have benefited from financial assistance programs (see section 3.2 on the corrective arm of the SGP).

The spring package also includes three general reports:

• A General Communication summarizing the main elements of the spring package.
• A report on compliance with the public debt and deficit criteria, possibly proposing the opening of an excessive deficit procedure against certain Member States.
• A proposal for employment guidelines which is then adopted by the Council.

The Stability and Growth Pact (SGP) and budgetary discipline

Launched by a resolution of the Amsterdam European Council on June 17, 1997, the Stability and Growth Pact brings together a set of legal texts setting out the main principles of budgetary surveillance enshrined in the TFEU.

These texts have evolved over time, in particular in 2005, 2011(Six pack), 2013(Two pack) and 2024. We present below the main elements of the version currently in force.

The preventive arm of the Stability and Growth Pact

The preventive aspect is the one most modified by the 2024 reform. It is based on Article 121 of the TFEU, which sets out the main principles and operating methods of economic coordination.

The main text of secondary legislation is Regulation 2024/1263 ¹⁵ which:

• establishes and describes the main stages of the European Semester(see part 2);
• puts a new indicator at the heart of budgetary surveillance: the trajectory of net public expenditure;
• lays down the provisions for the medium-term budgetary and structural plans to be drawn up by States (content, timetable, review, adoption, monitoring, etc.).

Medium-term national budgetary and structural plans

By September 20, 2024, each member state must submit a medium-term national budgetary and structural plan setting out its budgetary, reform and investment commitments.

These plans cover the duration of a legislature, i.e. 4 or 5 years depending on the national situation. They can be revised to take account of different situations, including the arrival of a new government.

Between two budget and structural plans, each state publishes an annual progress report at the end of April.

The key indicator of these budgetary and structural plans is the trajectory of net public spending, which must be consistent with European budgetary requirements (debt maintained or reduced to below 60% of GDP and a deficit of less than 3% of GDP).

Budgetary and structural plans also include explanations of the measures taken to implement the recommendations made by the Commission in previous years, as well as explanations of the reforms and investments carried out to contribute to the European Union’s priorities (in particular ecological and equitable digital transition, social and economic resilience, energy security, and where appropriate, the strengthening of defense capabilities).

Fiscal adjustment period and reference trajectory for net public spending

States that fail to meet the debt and deficit criteria are subject to a four-year budgetary adjustment period, which can be extended to 7 years if the country commits to an ambitious investment and reform program “improving potential growth and resilience” and contributing to the achievement of the Union’s objectives.

The Commission then sends them a “reference trajectory” for net public expenditure, which is supposed to be designed to ensure that :

• the public debt/GDP ratio decreases by 1% per year when it exceeds 90% and by 0.5% when it is between 90 and 60%;
• at the end of the adjustment period, this ratio is below 60% of GDP, or is on a “plausible” downward trajectory. ¹⁶  ;
• the projected public deficit to be brought below 3% of GDP during the adjustment period and maintained below this value. To achieve this, the annual improvement in the primary structural balance of “0.4 percentage points of GDP” ;
• the budgetary adjustment effort is gradual (and not all at once).

Once a State has received a reference trajectory, it must include it in its medium-term strategic and budgetary plan. If it forecasts a higher net expenditure trajectory, it must explain the differences with “sound economic arguments based on data”.

Validation, monitoring, evaluation

Each budgetary and structural plan is assessed by the Commission within 6 weeks of its presentation, and validated by the Council, which formally adopts the net public spending trajectory.

On a proposal from the Commission, the Council may ask a Member State to present a revised plan if it considers the initial version unsatisfactory. However, when the country is not formally declared to be in “excessive deficit” (see section 3.2), these recommendations have only reputational consequences.

Each year, the Commission monitors the implementation of national budgetary and structural plans on the basis of progress reports submitted by the Member States. In particular, it monitors the trajectory of net expenditure, as well as the investments and reforms used to justify the extension of the adjustment period.

Finally, the role of national parliaments and civil society is extremely limited, and they are only consulted before budgetary and structural plans are presented.

Obligations specific to eurozone countries(Regulation (EU) No 473/2013)

By October 15, submit the draft central government budget for the following year and the main parameters of the draft budgets of the other government sub-sectors (i.e. local authorities and social security bodies).

Set up independent bodies to monitor compliance with each country’s own budgetary rules and evaluate budgetary frameworks. In France, for example, this is the Haut Conseil des finances publiques.

The corrective arm of the Stability and Growth Pact

The corrective arm of the SGP is based on Article 126 of the TFEU, which details the “excessive deficit procedure”. The principles laid down in the Treaties have been largely supplemented and developed in various European regulations, in particular Regulation no. 1467/97 (in its consolidated version following the 2024 reform).

The Excessive Deficit Procedure (EDP)

The Commission is responsible for examining the decision to launch the PDE.

In May of each year (as part of the “spring package”, see section 2.3), it publishes a report assessing member states’ compliance with the debt and deficit criteria. Indeed, despite its name, the EDP concerns not only the deficit criterion, but also the debt criterion. ¹⁷ .

Reasons for triggering PDE :

• deficit criterion: the deficit must exceed 3% , unless the excess is minimal and temporary, or due to exceptional factors (recession in the Union or euro zone, events beyond the government’s control);
• debt criterion: debt exceeds 60% of GDP AND the budget balance is not in surplus or close to balance AND the country is not respecting its public spending trajectory.

If, at the end of its analysis, which must take account of the above criteria as well as other factors (debt sustainability, existence of macroeconomic imbalances, defense investment), the Commission considers that an excessive deficit exists, it transmits an opinion and a proposal to this effect to the Council.

On this basis, the Council can decide to launch the EDP and make recommendations to the State concerned:

• if the EDP has been triggered on the basis of the deficit criterion: the member state must define a new net expenditure trajectory so that the “primary structural deficit” is lower than the deficit criterion. ¹⁸ decreases by at least 0.5% of GDP per year for as long as the actual deficit exceeds 3% of GDP. From 2028, this condition will be tightened, as it will apply to the structural deficit (i.e., including interest charges).
• if the EDP has been triggered on the basis of the debt criterion: the Member State must define a new net expenditure trajectory in order to close the accumulated gap with the previous trajectory, and meet the conditions defined for the preventive part.

Eurozone countries subject to an EDP must also submit regular reports on budget execution in public administrations and present an “economic partnership program” describing the budgetary and structural reforms they intend to carry out to correct their deficits. ¹⁹ .

In the absence of measures taken by the country concerned, the Council triggers each of the subsequent stages in the procedure, culminating in financial sanctions (0.05% of GDP every 6 months). Since the 2011 reform, most sanctions for eurozone countries are decided semi-automatically. ²⁰ .

Every country in the European Union has had an EDP at one time or another. Since June 2024, 8 countries (including France and Italy) have been subject to an EDP.

Enhanced surveillance of eurozone countries

Enhanced surveillance” is planned for eurozone countries:

• whose financial system or public finances are in serious difficulty (in this case, the Commission decides to initiate the procedure on the basis of its analyses of macroeconomic imbalances _ see section 4);
• requesting financial assistance from another country, the European Stability Mechanism or the IMF (in which case the procedure is automatic).

Six eurozone countries (Cyprus, Greece, Portugal, Latvia, Ireland and Spain) have so far been placed under enhanced surveillance because of their requests for financial assistance.

Non-euro zone EU Member States may also request financial assistance if they are experiencing difficulties with their balance of payments or capital movements (see Council Regulation 332/2002, amended in 2008 and 2009).

The applicant country must then submit an adjustment program outlining the economic policy conditions (measures to ensure sound public finances and financial sector stability, structural reforms to improve economic competitiveness and growth) to be met before funds are released. On this basis, the Commission and the country concerned sign a Memorandum of Understanding (MoU) setting out the adjustment program and a loan agreement.

The State concerned is subject to regular checks by the Commission on compliance with the conditions of the MoU. Following these checks, financial aid is released in stages.

Methodological and interpretative framework

Supervision of the statistical, accounting and budgetary production of States

This methodological framework covers budgetary accounting and statistical information systems, macroeconomic forecasts surrounding budget projections (differences with the macroeconomic forecasts produced by the Commission must be explained), the drawing up of budgetary rules for Member States, and the implementation of the medium-term budgetary framework.

> See Directive n°2011/85/EU (on the budgetary framework, consolidated version resulting from the 2024 reform) and Regulation 479/2009 (which governs statistical definitions).

Non-legislative documents providing guidelines and interpretations of the CSP

The Debt Sustainability Monitor (2023) provides an “overview of the fiscal sustainability challenges facing EU member states in the short, medium and long term”. It details a “methodology that will play an important role in the EU’s new budgetary surveillance framework”.

The SGP Code of Conduct (2017) provides guidelines on the format and content of stability and convergence programs. It also specifies certain important aspects of the implementation of the Stability and Growth Pact, including the common position on flexibility rules (see next point).

Two-Pack Code of Conduct ²¹ provides guidelines on the format and content of draft budget plans and economic partnership programs, among others.

The Vade-mecum is a manual prepared by the European Commission which sets out the procedures and methodologies for implementing the Stability and Growth Pact, and in particular all the elements used to calculate the Medium-Term Budgetary Objective and the debt and deficit criteria.

Flexibility margins in the Stability and Growth Pact

To enable member states to respond to the COVID-19 pandemic, the European Union has suspended its budgetary rules from March 2020 by activating the “general derogation clause” of the Stability and Growth Pact.

There are in fact margins of flexibility that allow us to depart from the rules of the SGP.

Under Article 126 of the TFEU, the Commission must verify that the public deficit does not exceed 3% of GDP “unless the excess over the reference value is only exceptional and temporary”.

This concept is specified in Regulation 2024/1263, which supports the preventive aspect of the CSP and defines two derogation clauses:

• The “general derogation clause” (art.25) allows Member States to deviate from their net expenditure trajectory in the event of a severe economic downturn in the eurozone or the EU.
• The “national derogation clauses” (art.26) allow a Member State to request authorization to deviate from its trajectory “if exceptional circumstances beyond its control have a major impact on its public finances”.

Prior to the 2024 reform, these clauses were set out in secondary legislation. ²³ in a far less precise manner than today, leaving a wider margin for interpretation. Moreover, their activation is now strictly circumscribed and subject to the imperative of not “jeopardizing medium-term fiscal sustainability”.

Monitoring macroeconomic imbalances

The financial crisis of 2007-2008 highlighted the inadequacy of criteria focused on public finances. Other macroeconomic imbalances, such as excessive private debt or a balance of payments imbalance, are likely to destabilize the EU and eurozone economies.

The economic coordination measures hitherto focused on budgetary surveillance were therefore supplemented in 2011 by the surveillance of “macroeconomic imbalances” (see Regulation 1176/2011).

Procedure for monitoring “macroeconomic imbalances

At the launch of the European Semester, the Commission draws up the Report on the Early Warning Mechanism and publishes it with the other documents in the autumn package.

This report is mainly based on a dashboard of fourteen indicators (see box), with associated alert thresholds.

When these thresholds are exceeded by a member state, the Commission carries out an in-depth review to assess whether the country is at risk of macroeconomic imbalances, which is published as part of the “spring package” of the European Semester.

If, on the basis of the in-depth assessment, the Commission considers that the State concerned is affected by excessive imbalances, the Council may initiate an “excessive imbalance procedure”. Unlike budgetary procedures, there is no automaticity between the level of the indicators and the triggering of the procedure, which takes place on the basis of a detailed judgment. The State concerned receives recommendations and must revise its medium-term budgetary and structural plan to introduce corrective measures.

The procedure can go as far as sanctions (defined in Regulation 1174/2011).