Coordination and surveillance of fiscal and macroeconomic policies

Summary of findings: Input legitimacy rests largely with national governments. The Commission and the Council (and only to a limited extent the EP) have an important role in the formulation of the country-specific recommendations, but experience suggests that they are only partially taken into account by national governments. The steps foreseen in the framework of the coordination process remain of key importance to ensure transparency of and commitment to certain policies by national governments. In terms of output legitimacy of EMU, coordination is the fundamental answer in order to avoid the emergence of negative externalities, which we interpret here by the idea that Member States with sound policies contribute to an EMU that is able to deliver good outcomes.

Input legitimacy

EU Member States have to submit their stability or convergence programmes (outlining their medium-term budgetary strategies) as well as their national reform programmes (outlining specific structural reforms to promote growth and competitiveness) to the Commission in mid-April following the European Council’s policy orientations based on the AGS and, where appropriate, taking into account the Commission’s recommendations following the in-depth reviews of macroeconomic imbalances. The Commission evaluates the national plans and presents draft country-specific recommendations, which are then discussed and adopted by the Council – once they have been endorsed by the European Council. The Council has to justify any changes to the Commission’s proposal. Regulation 473/2013 of the two-pack established the obligation of the euro-area Member States to submit their draft annual budgetary plans before mid-October to the Commission in order to check, and the

Eurogroup to discuss, whether they are in line with the recommendations of the European Semester.

If the Commission identifies particularly serious non-compliance with the budgetary policy obligations, the Commission might ask the concerned Member State to present a revised draft. Before the end of November, the Commission has to publish its final opinion on the draft budgetary plans for discussion in the Eurogroup.²⁷

All these steps were undertaken as the sovereign debt crisis has clearly shown the ineffectiveness of control mechanisms and sanctions of the SGP. On the one hand, the case of Greece revealed how the quality of the information provided by the states was often inaccurate or reductive. On the other hand, the procedures to sanction ex-post have never produced the enforcement necessary to ensure that the SGP rules were truly respected and could act as a constitutional constraint on the states.

Output legitimacy

The problems related to the lack of effectiveness of an EU rule-based system which have to co-exist with national sovereignty are well known and widely documented. The measures contained in the six-pack and in the two-pack have been designed to effectively solve some of these problems and thus increase the output legitimacy. However, significant issues remain.

In the framework of the European Semester country-specific recommendations endorsed by the European Council at the end of the Semester cycle in early July represent a crucial EU output for policy coordination. They are formulated on the basis of specific challenges previously identified by the Commission and they are intended to provide policy prescriptions to Member States and concrete and measurable policy objectives that should be assessed ex-post by the Commission. Nonetheless countries tend either to circumvent or just disregard them.

Country-specific recommendations could be divided into two broad classes. Policy recommendations regarding fiscal policy are usually precise and refer to specific numerical targets. In this case it is more difficult for the country to avoid compliance, despite economic circumstances are often advocated for benefiting of delays. By contrast, policy recommendations on structural reforms aiming at the promotion of growth and competitiveness, financial stability or the improvement of the judicial system are usually very broad and quite vague. While this is unavoidable, as specific numerical targets cannot be applied in all contexts, the assessment of compliance becomes very difficult. In some cases, the vagueness of the country-specific recommendations, results in a poor delivery of the requested policies (this is especially true for some parts of structural reforms).²⁸

27 Among others, the draft budgetary plan must contain the following information: i) The targeted budget balance for the general government as a percentage of gross domestic product (GDP), broken down by subsector of general government; ii) The projections, assuming no change in current policies, for expenditure and revenue as a percentage of GDP for the general government and their main components, including gross fixed capital formation; iii) The targeted expenditure and revenue as a percentage of GDP for the general government and their main components; and iv) 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.

28 Alcidi and Gros (2014b) provide two, admittedly extreme, examples of the ambiguity of these recommendations. The first one is the recommendation to “further stimulate competition” in the

In general terms, it is hard to describe the overall progress made with the implementation of the country-specific recommendations as a success, especially for particular policy domains.

According to recent analysis (Clayes et al., 2013), only 16% of the recommendations issued in the social domain were actually implemented by the Member States, while 44% were just

‘promised’ in the National Reforms Plans. Also in the domain of internal market policy, the number of recommendations actually implemented by Member States is only 28% of the total (Figure 7). By contrast, measures on financial markets and the environment have shown a higher degree of implementation.

In this framework, the assessment of output legitimacy is very difficult. The one message that emerges is that countries seem unable to see the benefit of policy coordination and tend to make efforts in bypassing country-specific recommendations rather than to comply with them.

Figure 7. Index of implementation of country-specific recommendations by domain

Source: Authors’ elaboration based on Clayes et al. (2013) data.

German services sector contained in the 2012 country-specific recommendations. The German government responded to this request by adopting measures on....chimney sweeping! The second case refers to Italy, where the 2013 country-specific recommendations invited the country to “shift the tax burden away from capital and labour towards property”. In 2013 the government proceeded to abolish the real estate tax (IMU) introduced by the Monti government in 2012. A somewhat similar real estate tax was then introduced again for 2014.