5. European Policies and Possible Improvements
5.2. Macroeconomic Surveillance
In September 2010 the European Commission presented six legislative proposals (five regulations and one directive: the so-called Six-Pack) to strengthen the European institutions of economic governance. Two of these proposals were introduced to reduce macroeconomic imbalances and promote competitiveness through preventive and corrective ac-tions. One year later, under the pressure of the euro area crisis, this macroeconomic surveillance framework was specified in terms of the Macroeconomic Imbalance Procedure (MIP) and was approved by the EU Council and by the European Parliament on behalf of the EU Member States (see European Commission 2011). This mechanism is based on two factors: (i) an early warning system, based on a scoreboard consist-ing of a set of macroeconomic indicators (Regulation EU No 1176/ 2011 of 16 November 2011 on the prevention and correction of macroeco-nomic imbalances); (ii) a new Excessive Imbalance Procedure (EIP), based on Article 121.6 of the Treaty, which allows the Commission and the EU Council to adopt preventive recommendations under Article 121.2 of the Treaty at an early stage, that is, before the imbalances be-come too large to be managed (Regulation EU No 1174/2011 of 16 No-vember 2011 on enforcement measures to correct excessive macroeco-nomic imbalances in the euro area).
5.2.1 The early warning system: the MIP scoreboard
The set of indicators, which are at the basis of the Macroeconomic Im-balances Procedure (MIP), specifies both internal and external imbal-ances and sets threshold values acting as an early warning device.
Thresholds have not been set at very stringent levels in order to avoid a large number of “false alarms” (that is, signals of macroeconomic imbal-ances which – ex post – clearly reveal themselves as non-excessive). At the same time, threshold levels have been set at prudential levels in or-der to be able to identify problems before they became too hard to solve (European Commission 2012b). The objective is to ensure that appro-priate policy responses are promptly adopted by EU countries with
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lose their heads. Hence, the European Commission defined eleven early warning indicators and identified lower and upper thresholds for each of them. It is understood that the composition of the scoreboard can evolve over time, according to new possible threats for macroeconomic stability and improvements in data availability.
The current scoreboard includes two external imbalance indicators, three competitiveness indicators and six internal imbalance indicators.
The external imbalance indicators are: (i) three-year rolling average cur-rent account (CA) imbalance in percentage of GDP, with lower and upper thresholds equal to -4% (in case of negative imbalances) and +6% (in case of positive imbalances); and (ii) net international investment posi-tion (NIIP) in terms of GDP, which should not fall below -35%. The three competitiveness indicators are: (iii) three-year percentage change in the Real Effective Exchange Rate (REER), which refers to thirty-five industrial countries, with lower and upper thresholds equal to -/+5% for the euro area countries and -/+11% for the rest of the EU; (iv) five-year percent-age change in export market share, with a threshold of -6%; (v) three-year percentage change in nominal Unit Labour Costs (ULC), with a threshold of +9% for the euro area countries and +11% for the rest of the EU. Finally, the six internal imbalance indicators are: (vi) the amount of private sector (consolidated) debt in percentage of GDP with an upper threshold of 160%; (vii) the credit flow to the private sector in percent-age of GDP (15% threshold); (viii) the annual changes in the house price index relative to a Eurostat consumption deflator, with an upper thresh-old of 6%; (ix) the total amount of government debt in percentage of GDP (upper threshold of 60%); (x) three-year rolling average of the unem-ployment rate (threshold of 10%); (xi) annual percentage change in total financial sector liabilities (upper threshold of 16.5%).
The MIP Scoreboard for euro area countries in 2012 is reported in the appendix (see Table 5.1).
5.2.2 The Excessive Imbalance Procedure (EIP)
If a significant subset of the eleven indicators included in the scoreboard has figures incompatible with their specific thresholds, there is the acti-vation of an Alert Mechanism Report (AMR) for the country involved.
IN SEARCH OF A NEW EQUILIBRIUM.ECONOMIC IMBALANCES IN THE EUROZONE
The AMR is a necessary but not a sufficient condition to put a given Member State under in-depth review, in the sense that the decision to start this review is not mechanically based on the scoreboard results but also refers to other information. If the European Commission decides to start an in-depth review, this will imply a more detailed country-study based on a wider set of indicators and analytical tools (Figure 5.1).
There are three possible outcomes of each in-depth review: (a) the signalled imbalances of the country under review are not significant or have been already re-absorbed, so that the procedure stops; (b) these imbalances are still operative but not immediately harmful for the rest of the euro area, so that the European Commission and the EU Council limit themselves to release recommendations under Article 121.2 of the Treaty; (c) these same imbalances are excessive in the sense that they threaten the stability of the euro area, so that the Commission and the EU Council ask the given Member State to present a corrective action plan. In principle, the latter recommendation (taken under Article 121.4 of the Treaty) is equivalent to the opening of a procedure for excessive macroeconomic imbalance. In fact, the formal procedure (EIP) would start only if a euro area country failed twice to submit an adequate cor-rective action plan. In this case, a fine of up to 0.1% of GDP can be im-posed. Sanctions are decided by reverse qualified majority voting (RQMV).3
In 2014, fourteen European countries have been involved in an in-depth review. Three of them (that is, Croatia, Italy, and Slovenia) have been considered as affected by excessive macroeconomic imbalances, and were hence asked to undertake strong policy actions. On the other hand, the imbalances of Belgium, Bulgaria, Germany, Ireland, Spain, France, Hungary, Netherlands, Finland, Sweden, and the United King-dom were not found to be excessive.
The case of Italy is crucial for the problems under discussion, since its excessive macroeconomic imbalances are due to the possible incompati-bility between a very high level of public debt and a too weak external
3 This means that the recommendation of the European Commission is adopted un-less the Council decides by qualified majority to reject it.
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competitiveness. In the coming weeks Italy will possibly be able to im-plement the policy actions required by the European institutions. How-ever, we are not confident that these actions will be sufficient to over-come the competitiveness gap of this important peripheral country and to stimulate a process of growth. This means that the MIP and the EIP are useful tools to improve the European control on the disequilibria inside the euro area and on the internal market; however, these tools are not adequate to design effective incentives to change the inertia of peripheral Member States and to structurally improve their competitiveness.
5.2.3 The new procedures for the prevention of imbalances
A similar conclusion applies to a related policy initiative: the so-called Two-Pack. In November 2011 the European Commission introduced two new regulations to strengthen budgetary and macroeconomic sur-veillance in the euro area. These two regulations (the Two-Pack) came into force in May 2013 for all the Eurozone countries. They are built on the Six-Pack reforms to the Stability and Growth Pact (SGP) and are aimed at integrating these reforms by strengthening the ex ante moni-toring mechanisms.
The main novelties of the Two-Pack concern the management of the public balance sheet of euro area Member States, with special rules ap-plying to those in the corrective arm of the new SGP, that is under the Excessive Deficit or Debt Procedures. Moreover, the new regulations provide rules designed to improve the ex ante surveillance on the budg-etary plans of the euro area Member States (presentation to the Euro-pean Commission by mid-October of each year), with strengthened rules applying to those under – or just exiting from – financial assistance pro-grammes or affected by serious problems of financial stability. It follows that troubled Member States are asked to do whatever is identified as needed to improve their short-, medium-, and long-term economic and financial situation. The basis of the new procedures is the Article 136 of the Treaty allowing the Eurozone countries to strengthen the coordina-tion and surveillance of budgetary discipline in order to ensure the func-tionality of the EMU.
IN SEARCH OF A NEW EQUILIBRIUM.ECONOMIC IMBALANCES IN THE EUROZONE
Here we are not specifically interested in analysing these new mecha-nisms devoted to the ex ante control of the European fiscal aspects. This also explains why we neglect any specific reference to the so-called Fiscal Compact which, from the point of view of the contents, does not intro-duce significant novelties with respect to the Six-Pack and does not refer to the control of the current accounts imbalances. We are instead inter-ested to stress that the Two-Pack also strengthens the ex ante monitor-ing of the euro area countries with macroeconomic imbalances, and in particular of those under Macroeconomic Imbalance Procedure (MIP).