bruegelpolicybrief ISSUE 2012/02 SEPTEMBER 2012 FISCAL RULES: TIMING IS EVERYTHING

by Benedicta Marzinotto THE ISSUE The strengthening of the European Union’s fiscal rules with the Research Fellow at Bruegel approval of the so-called ‘six-pack’, and the parallel worsening of economic [email protected] and André Sapir conditions in Europe, re-opened the debate about the relationship between Senior Fellow at Bruegel fiscal discipline and growth. Influential voices have argued against the EU’s [email protected] perceived obsession with fiscal discipline, which risks being self-defeating in bad times. However, EU fiscal rules are not as rigid as commonly thought, but represent a sophisticated system of surveillance and ex-post control that provides sufficient room for manoeuvre under exceptional circumstances. POLICY CHALLENGE The EU fiscal framework has come under attack more because of the timing of the application of the new rules than for substantive reasons. The frame- work entered into force when most euro-area countries were under the Excessive Deficit Procedure. Linked to this is the fact that the six-pack sug- gests that the new surveillance procedure enters into force after EU coun- tries have corrected nominal fiscal deficits. We argue that: a) fiscal surveillance should be prioritised over enforcement of sanctions for exces- sive deficits; b) it is inconsistent to allow for exceptional circumstances, while not recognising up-front the role of surveillance; c) there is scope to decide that slow growth at member state level and EU levels acts as a con- straint on fiscal consolidation: it should be done ex ante in a way that allows governments to use the Commission’s forecasts in their Stability Pro- grammes, and must be decided by the Commission and not by the Council. Time inconsistency in the application of the new SGP rules 2012 → 2013 → 2014 onwards Potential sanctions under Estonia, Finland, Luxembourg Belgium, Cyprus, Estonia, Finland, All countries Preventive Arm Germany, Luxembourg Potential sanctions under Austria, Belgium, Cyprus, France, Austria, France, Greece, Ireland, All countries Corrective Arm Germany, Greece, Ireland, Italy, Malta, Italy, Malta, Netherlands, Netherlands, Portugal, Slovakia, Portugal, Slovakia, Slovenia, Slovenia, Spain Spain Source: Bruegel. 02 austerity gonetoofar?', 1. See,forexample,the 2. Exceptionsaremade http://www.voxeu.org/d programme (ieGreece, respective adjustment Commission (2012b). ebates/has-austerity- Ireland andPortugal), whose commitments policybrief for countriesunder are definedintheir bruegel Vox Debate'Has programmes. gone-too-far. 3. European available at UNION FISCAL RULES THE TIGHTENING OF EUROPEAN EVERYTHING IS TIMING RULES: FISCAL Commission 2012, asacknowledgedbythe growth prospectsespeciallyfor tries faceloworeven negative an often-underestimated flexibil- cal rules arewelldesigned,offer theEUfis- Infact, new framework. from ameasuredanalysisof the should notbeallowedtodetract But thedebateabouttiming tor structuralfiscal positions. toolstomoni- its newsurveillance even beforetheEUisabletouse later asrecentlydecidedforSpain, deficits, whetherin2013orayear face sanctionsforexcessive 2013 (12others) by 2012(BelgiumandCyprus)or deficits tobelow3percentofGDP tobringingtheir were committed sive DeficitProcedure (EDP)and embourg) wereundertheExces- except Estonia,FinlandandLux- 17 euro-areacountries(ieall rules enteredintoforce,14ofthe the newsystem.When stances, whichwillseverely test time ofexceptionalcircum- deficits have beenintroducedata new, tougherrulesonexcessive thecase thatthe It iscertainly this tobeself-defeating and thepotentialinbadtimesfor obsession withfiscal discipline, about theEU’s perceived governments andacademics provoked awave ofcriticismfrom discipline andgrowth,has the relationshipbetweenfiscal has re-openedthedebateabout timing Europe. Thisunfortunate worsening economicconditionsin 2011, comesatatimeof entered intoforceinDecember called six-pack regulationsthat in March2012,andthroughtheso- Fiscal Compact,whichwassigned 3 . Thus,theycould 2 . Yet EDPcoun- through the 1 . meantime the EU fiscal rulesare could happenin early2013.Inthe countries have which ratifiedit, force whenatleast12euro-area cal architecture.Itwillenterinto additiontotheEU'sfis- important and Governance–TSCG) willbean Treaty Coordination onStability, ofthe The Fiscal Compact (apart RULESTHE NEW EXPLAINED first application oftherules. arise because ofthe timingofthe ameliorate therisksthatmight final sectionwithsuggestionsto cumstances’. We concludeinthe and thenotionof‘exceptionalcir- potentially self-defeatingnature, vance ofargumentsaboutits of therequiredcorrection,rele- third section,wediscussthesize Inthe the newfiscal framework. by outliningthemainfeaturesof inthenextsection them. We start provisions withoutundermining application ofthesix-pack'smart' a simplerulethatwillallow old tothenewregime,wesuggest For asmoothertransition fromthe is everything. be negotiatedsuccessfully,timing For thefirsttestofnew rulesto minor correctionstotheprocess. fully exploited,possiblywithsome Treaties andthenewsix-pa ckis manoeuvre providedbythe thattheroomfor important many euro-areacountries–itis growth andhighunemploymentin economic situation–withslow Inthecurrent into account. Policymakers needtotakethis timing oftheirintroduction. be underminedbecause ofthe the credibilityofruleswereto tary union.Itwouldbeashameif the functioningofEuropeanmone- ity, andareausefulcontributionto rather than signalling discre- unfavourable growth conditions, deficit levels may beaffectedby unbalanced fiscal positions.As early detectionandcorrection of and concerned withsurveillance The preventive arm oftheSGPis The structural balance provisions, theywillbe. sanctioned. Underthesix-pack but deviations have never been Pact, first versionoftheStability sion hasbeentheresincethevery provi- term. The‘balancedbudget’ balanced budgetinthemedium invites memberstatestoachieve a The preventive armoftheSGP The preventive arm ing financialassistance. and monitoringofcountriesreceiv- more clearly-definedsurveillance ance withthedeficitcriterion,and countries thatrisknon-compli- enhanced monitoringofeuro-area whichintroduce two-pack, latory proposals,knownasthe mission madetwoadditionalregu- On 23November2011,theCom- and GrowthPact (SGP). the correctivearmsofStability rules bothinthepreventive and deficits. Thesix-pack introduces and/or tocorrectexcessive able (structural)fiscal positions progress towardsmoresustain- that have failedtomakesufficient to imposesanctionsoncountries the EuropeanCommission powers improve enforcementbygranting and strengthen fiscal surveillance and theFiscal Compact aimto Fiscal Compact.Boththesix-pack which formthebackboneof force on13December2011,and six regulationsthatenteredinto thesetof laid downinthesix-pack, FISCAL RULES: TIMING IS EVERYTHING

tionary measures that are exces- respect to the 3 percent target. other countries after they have sively expansionary, the fiscal Table 1 sets out the MTOs and corrected their excessive deficits 03 aggregate that is used for the sur- sanctions contained in the SGP and formally exited the EDP. This veillance exercise is the so-called and six-pack7. implies that, for most countries, medium-term budgetary objective the new regime and the ensuing

(MTO), which is a country’s cycli- Deviations from MTOs are allowed. sanctions on medium-term com- brief cally adjusted (or structural) budg- They are accepted if a country has mitments will be enforced from etary position net of one-off and implemented structural reforms 2014, by which time it will pre- temporary measures. This aggre- (eg pension reform) that may be sumably be strengthened by the gate is typically assessed over the costly in the short-term but con- Fiscal Compact (Table 2 on the policy medium-term (ie about three tribute to debt sustainability. Devi- next page). years, the typical time horizon of ations are also allowed if they Stability and Convergence Pro- result from “an unusual event out- Box 1 describes the main features grammes)4. The reference value for side the control of the Member of the TSCG Treaty, of which the Fis- bruegel the MTO is a structural balance but, State concerned... or in case of cal Compact is a part, and the in reality, each country has the severe economic downturn for the extent to which it adds to the six- freedom to pick its own MTO follow- euro area or the Union as a pack rules. The Fiscal Compact ing a commonly agreed measure- whole”8. This is a further novelty recognises the importance of the ment methodology, provided the from the six-pack, namely the structural balance, above and target does not exceed a deficit of appreciation of aggregate circum- beyond deficit levels. However, the 4. Stability and Conver- 1 percent of GDP5. stances, on top of country-specific commitment of the contracting gence Programmes are medium-term fiscal exceptional circumstances. The parties to include a debt brake rule plans which euro-area MTOs have always been central to provision addresses the problem either in their constitutions or via a countries and countries that are preparing for the exercise of fiscal surveillance of possible negative growth spirals similarly binding regulation, risks accession respectively under the SGP. The original text of when all countries reduce public making the system more rigid at need to submit to the 1997 already called on EU consumption in bad aggregate home than what it really is at EU EU in the Spring every year in the framework 9 countries to adhere to “the conditions . level, at least in some countries. of the SGP provisions. medium-term objective of 5. The Fiscal Compact budgetary positions of close to The transition from the old to the The corrective arm revises the lower limit 6 to 0.5 percent of GDP, balance or surplus” . The 2005 new regime and adds that a MTO of Stability Pact reform introduced The new provisions on the Stability minus 1 percent of GDP the concept of country-specific At present, the new preventive- Pact’s corrective arm foresee sanc- may only be allowed in countries whose public MTOs, for which each member arm regime only applies to euro- tions not only for excessive debt is significantly country can identify its own target area countries that are not under deficits but also for excessive below 60 percent of provided this guarantees an EDP (ie Estonia, Finland, and Lux- debts (Table 3 on page 4). The pro- GDP. appropriate safety margin with embourg). It will only apply to the visions also strengthen enforce- 6. European Council (1997). 7. The six-pack imposes Table 1: The changing definition of the medium-term objective also an expenditure Medium-term benchmark. Sanctions Adjustment effort Sanctioning system objective may thus be imposed also on deviation of First SGP Close to balance or No minimum adjustment effort No sanctions actual expenditure from (1997) surplus the benchmark but here Revised Country-specific Minimum annual adjustment in the structural bal- No sanctions the excess over the benchmark is not quan- SGP (2005) medium-term budget- ance of 0.5% of GDP tified. The final decision ary objective (MTO) on sanctions is taken < - 1% of GDP by the European Com- Six Pack Country-specific Minimum annual adjustment in the structural bal- Sanctions (ie interest-bearing deposit of 0.2% of mission and may only (2011) medium-term budget- ance of at least 0.5% of GDP or > 0.5% of GDP in GDP) in case of lack of effective action on deviation reversed by the Council ary objective (MTO) high-debt countries of structural balance from target that is at least (2011a). < - 1% of GDP 0.5% of GDP in one year or deviations from mini- 8. See Regulation mum annual adjustment effort (7-8 months after 1466/97. initial warning from the Commission) 9. European Commis- Source: Bruegel. sion (2012a). 04 porting theproposalsor porting that aqualifiedmajority 12. Article 7oftheTSCG 12. Article mitted bytheEuropean mitted 10. Irelandheldarefer- recommendations sub- apply whereitisestab- of them…isopposed to in breachofthedeficit lished amongtheCon- the decisionproposed currency istheeuro considers thataMem- tracting Parties whose tracting Parties whose currencyisthe deficit procedure.This 2012, votinginfavour criterion intheframe- ber State oftheEuro- ber State work ofanexcessive Commission whereit euro committosup- currency istheeuro

treaty states:“…The policybrief obligation shallnot 11. Seefootnote7. Contracting Parties pean Unionwhose or recommended”. endum on31May bruegel of ratification. Source: Bruegel. Source: Bruegel. Table 3:The corrective arm of the SGP Table 2:Time inconsistency inthe application of the new SGPrules FISCAL RULES: TIMING IS EVERYTHING IS TIMING RULES: FISCAL Council decision Council recommendation Council decision Initial legal act Corrective Arm Potential sanctions under Preventive Arm Potential sanctions under • The Fiscal Compact further strengthenstheroleofEuropeanCommission TheFiscal vis-à-vistheCouncil, Compact asit further • Failure totransposethebalanced-budget ruleintonationallegislationgivesanyEUmemberstatearight • national parliamentsandmaybesubjecttoreferenduminsomememberstates The TSCG isanintergovernmentaltreaty,signedby25ofthe27EUcountries.Itneedstoberatified TheFiscal Compact isaninstrumenttoguaranteedebtsustainabilityratherthanfightexcessive • TheTSCG Treaty isanintergovernmentaltreaty,whereasthesix-pack isbasedontheLisbontreatyand • ferent inthreemainrespects: enter intoforceinearly2013.TheFiscal Compact buildsonthesix-pack butisdif- andrepeatedlyreferstoit, processes hingesonthetimingofapplication ofthetreatyprovisions,butinalllikelihoodTSCG will unless theCouncil rejectsthembyqualifiedmajorityatevery stageoftheEDP states thatallCommission proposalsandrecommendationsmay beconsideredasautomatically applied to anECJ request. ofJustice(ECJ) foranopinion.Afinemaybeappliedifacountryfailstorespond to refertheEUCourt be. requires thatarulebeintroducedinnationallegislationisasbindingconstitutionalwould envisaged inthesix-pack deficits. TheTSCG Treaty textmainlyaddressesthequestion ofMTOs withathresholdthatislowerthan recommendations, theCouncil remainsthefinaldecision-maker. theEuropeanCommission’s 7oftheTSCGmaking process.Even invitesgovernmentstosupport ifArticle at thecentreoflegislativeprocess.TheTSCG putsmembergovernmentsatthecentreofdecision- therefore respectstheCommunity method.UndertheCommunity method,theEuropeanCommission is Slovenia, Spain Slovakia, Netherlands, Portugal, Ireland, Italy,Malta, France, Germany,Greece, Austria, Belgium,Cyprus, Estonia, Finland,Luxembourg taken (QMV, exceptMS) Establishing noeffectiveaction above inhigh-debtcountries) adjusted balanceperannumor 0.5% ofGDPcyclically action andtimeline(atleast Recommending corrective except MS) excessive deficit(EDP)(QMV, Establishing existence Scope of document 11 . To reinforcethebalanced-budgetobjective,Fiscal Compact further 2012 → BOX 1:THETSCG TREATY shall recommendafine Within 20days,theCommission deposit) presence ofinterest-bearing bearing deposit(mainlyinthe shall recommendnon-interest- Within 20days,theCommission Follow-up by Commission Spain Slovakia,Slovenia, Portugal, Italy, Malta,Netherlands, Austria, France, Greece,Ireland, Finland, Germany,Luxembourg Belgium, Cyprus,Estonia, 2013 → 10 12 sion recommendation (QMV) • Council mayamendCommis- sion recommendation(RQMV) • Council mayrejectCommis- sion recommendation(QMV) • Council mayamendCommis- sion recommendation(RQMV) • Council mayrejectCommis- Follow-up by Council All countries All countries . Thelengthofratification . 2014 onwards mendation, butcan blockit. not requiredtoconfirmtherecom- the Council, meaningtheCouncil is qualified majorityvoting(RQMV)in which isdealtwithbyreversed a Commission recommendation, on sanctionsnowtakestheformof significant thatthefinaldecision From aproceduralperspective,itis and isoverallquickerthanbefore. tions quiteearlyonintheprocess deficit procedureimposessanc- thenewexcessive Infact, ment. GDP compared to the5.8percent target wasset at5.3percentof Eurogroup, wherebySpain's2012 compromise decisiontakenby the announcement wasfollowedby a unilateral Spain's unorthodox to meetthe2012deadline ernment saiditwouldnotbeable On 2March2012theSpanishgov- December 2011. approved austeritymeasuresin is end-2012,immediately gium andCyprus,whosedeadline Slovenia, SlovakiaandSpain.Bel- were Belgium,Cyprus,France, were introduced.Thesecountries extraordinary fiscal measures EDP recommendation,unless deadline laiddowninthelatest meet thedeficittargetby area countrieswouldbeunableto Commission forecast thatsixeuro- In November2011,theEuropean gets bytheagreeddeadline. measures tomeettheirdeficittar- ment additionaldeficitreduction Some countrieswillneedtoimple- deficits atatimeofslowgrowth. euro-area countriestoadjusttheir the EUrelatestoneedformost synchronised fiscal contractionin debate ontheundesirabilityof As wehave discussed,muchofthe TIMES REDUCTION IN BAD DEFICIT 13 . recapitalise itsbankingsystem. granted EUfinancialassistanceto summit inwhichSpainwas one-year extensionatthesame 20 July,theCouncil approvedthe country’s originaldeadline lined inblackindicate each gramme countries.Columns out- currently underEDPexcludingpro- deficits intheeuro-areacountries 1 providesasnapshotofnominal obtain deadlineextensions.Figure extraordinary fiscal packagesor sanctions, unlesstheyimplement the agreeddeadlineandmayrisk sure tomeettheEDP’s targetsby which countriesareunderpres- casts provideagoodindication of The Commission's May2012fore- The size of the correction European Semesterprocess publishes every yearunderthe dations whichtheCommission of thecountry-specificrecommen- the frameworkofpresentation light ofpoorgrowthconditionin extension tothedeadlinein prepared tograntSpainaone-year announced on30Maythatitis 2013. Moreover, theCommission lower than3percentofGDPin toadeficit remained committed providedthecountry ment, initially announcedbythegovern- Source: European Commission’s Spring Economic Forecast, 2012. Figure 1:Expected evolution of deficit levels, 2011, 2012 and 2013 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 YB IS TF SN TD IT DE AT NL ES FR MT SK SI BE CY 0121 2013 2012 2011 15 14 . The . On difference inthedeficitatend cent ofGDP, calculated asthe area countriesisabout2.75per- acrosstherelevant 11euro- effort average plannedconsolidation needed.The and theextraeffort correction ineuro-areacountries the cumulativesizeofplanned Figure 2onthenextpageshows the targetyear and the3percentofGDPlevel in deficit forecast bytheCommission lated asthegap betweenthe classified as'extra'andarecalcu- the agreeddeadline;theseare deemed necessarytocomplywith measures thatarenotplannedbut as 'planned',andtheextraordinary ity Programmes, whichweclassify envisaged intheApril2012Stabil- measures thathave alreadybeen distinguish betweencorrective cases To significant. seethis,we correction over2012-13 isinsome thesizeof 2012. Nevertheless, than-expected fiscal outcomesfor as theydonotaccountforworse- Our figuresareratherconservative and theNetherlands. France andSpain,butalsoCyprus 2011, iemainlySlovenia,Slovakia, nalled problemsbackinNovember which theCommission hadsig- countries offtrackarethosefor FISCAL RULES: TIMING IS EVERYTHING IS TIMING RULES: FISCAL 16 . documents andprovides approved. Inotherwords, Programme andthelevel distance fromthe3%-tar- mendations. TheCouncil Stability orConvergenceStability government inthelatest adopts thecountry-spe- the sameresultthathas 30 Aprilevery yeartheir country-specific recom- 14. UndertheEuropean ence betweenthe2012 grammes. TheCommis- for 2013includesfiscal year willleadtoexactly cific recommendations get issimplythediffer- states mustsubmitby 16. For allcountriesfor based ontheCommis- Spring Forecast, asthe rection inthefollowing Commission’s forecast Semester, EUmember Programmes andtheir granted anextension mistically thatthecor- which thedeadlinefor correction is2013the we assumeveryopti- deficit intheStability 13. ‘SpaindefiesEU Stability Programme.Stability National ReformPro- been forecast bythe 15. OnlySpainwas in theCommission’s Financial Times over deficitrules’, sion assessesthe measures notyet sion proposal. March 2012. up to2014. 05

, 2 bruegelpolicybrief FISCAL RULES: TIMING IS EVERYTHING

Figure 2: Cumulative size of deficit reduction 2012-13, % of GDP place in order to allow timely 7 deficit correction by 2012 (Bel- 06 6.6 gium and Cyprus) and by 2013 (all 6 6.1 Planned Extra others but Spain). Negative growth

5 4.7 Total is expected in 2012 in Cyprus, brief 4 Spain, Italy, the Netherlands and

3.4 Slovenia. These discouraging fig- 3 ures partly explain why the adjust- 2.3 2.0 2 1.9 ment in these countries' nominal 1.55 policy

1 1.1 deficits needs to be so significant

0.5 to compensate for dismal busi- 0 ness-cycle conditions. CY BE SI SK FR ES NL AT DE IT Source: Bruegel based on National Stability Programmes and Commission’s Spring Most interestingly, both the origi- bruegel Economic Forecast, 2012. nal SGP and its revised form under of 2013 compared with the level in exact size of fiscal multipliers the six-pack allow for exceptional 17. This is now spread 2011, implying an annual nominal remains the subject of debate, it is and temporary excessive deficits over three years instead of two. fiscal cut-back of close to 1.4 per- now generally accepted that when the economic downturn is 18. See for example IMF cent of GDP. It is not desirable to deficit reductions depress eco- especially severe both in each (2010), which calculates retrench in extremely slow growth nomic growth rather than produce country and across the Union. This that a fiscal consolidation periods but the figure is probably so-called non-Keynesian expan- is one clear example of the SGP's equal to 1 percent of GDP not dramatic either. But the extra sionary effects, at least under the flexibility. The texts of the regula- typically reduces GDP by about 0.5 percent. A key effort necessary to meet the tar- conditions prevailing in the periph- tion define a severe economic point of the research on gets in some countries and its eral euro-area countries18. downturn as “negative annual GDP non-Keynesian effects likely impact on neighbours, which volume growth rate or an accumu- builds on the role of expectations. The idea is is not normally quantified by EU Growth forecasts are already dis- lated loss of output during a pro- that fiscal adjustment institutions, are more worrying. appointing without accounting for tracted period of very low annual may generate economic Spain, Slovenia, Cyprus, Slovakia, the recessionary impact of addi- GDP volume growth relative to its growth if rational eco- nomic agents also expect France, Spain and the Netherlands tional fiscal retrenchment. Table 4 potential”. A severe economic their own government to need to introduce additional meas- provides the latest available data downturn may be either country- be virtuous in the future ures above those already planned for real GDP growth in 2012 and specific or EU-wide. Exceptional (leaving fiscal pressure unchanged) and would in in their 2012 Stability Pro- 2013. A crucial element is the GDP circumstances give rise to the fol- turn continue to con- grammes, leaving the total forecast for 2012, as this is the lowing adjustments: i) the Com- sume and invest even (planned plus extra, where neces- year in which a large part of the mission and the Council may under austerity. Yet, the possibility of continuing sary) and cumulated consolida- adjustment is supposed to take decide not to initiate an EDP, ii) the tion effort in 2012 and 2013 at an target may be set for a much later consumption and invest- Table 4: Real GDP growth forecasts ment even at times of impressive 6.6 percent of GDP in period19, iii) the Commission and diminishing aggregate Spain17, 6.1 percent in Cyprus, 4.7 New forecast Previous forecast the Council may agree to allow a demand is a function of 2012 2013 2012 2013 the availability of credit percent in Slovenia, and at a more one-year extension of the deadline (or of the absence of moderate 2.3 percent in France, 2 AT 0.8 1.7 0.9 -0.2 for correction. We argue that the EU credit constraints), which percent in Slovakia, and 1.9 per- BE 0 1.2 0.9 -0.3 should make full use of the refer- is a condition that is not cent in the Netherlands. CY -0.8 0.3 0 -1.5 ence in the new rules to the overall fully satisfied at present. DE 0.7 1.7 0.8 0.2 EU economic situation. We further 19. For example, the cur- ES -1.8 -0.3 0.7 -1.7 Exceptional circumstances suggest that the one-year exten- rent EDP was launched FR 0.5 1.3 0.6 -0.1 for most countries in sion is granted as early as possi- 2009 and dismal growth IT -1.4 0.4 0.1 -0.3 conditions plus the crisis The size of the fiscal correction in MT 1.2 1.9 1.3 -0.1 ble, ideally before member states explain why the dead- 2012 and 2013 is considerable, NL -0.9 0.7 0.5 -0.6 submit Stability Programmes to line for correction was especially for some countries, and SI -1.4 0.7 1 -0.8 the EU, and under some other con- set so much in advance, raises concern about extreme aus- ditions. We will address these an early indication of the SK 1.8 2.9 1.1 0 ‘intelligent’ flexibility of terity in the euro-area countries Source: European Commission issues in the next section. the fiscal framework. with excessive deficits. While the Economic Forecast, May 2012 FISCAL RULES: TIMING IS EVERYTHING

POLICY IMPLICATIONS countries that face negative The general economic environ- growth in 2012-13, or particularly ment: Deviations from the deficit 07 Some of the apparent weaknesses low growth relative to potential, target should be allowed as early in the EU's new fiscal governance again provided they stick to a min- as possible. Ideally, the decision framework underestimate the flex- imum yearly adjustment of the to grant an extra year to countries ibility of the framework and do not cyclically adjusted balance. that are already under an EDP brief relate to substance but concern should be taken in time for euro- the timing of the application of the Surveillance: Following on from the area countries to design a corre- new rules. Euro area fiscal gover- previous recommendation, the EU sponding new fiscal strategy in the nance should address this timing should apply the principles of fis- Stability Programmes that they policy issue, which arises because: cal surveillance to countries must submit every year by 30 April already under EDP and not just in the framework of the European • The enforcement of final sanctions those that are not. This means Semester, or at least before they on excessive deficits precedes the countries may be punished for finalise budget negotiations for the bruegel exercise of surveillance of under- deviations from their medium- relevant year. We thus suggest lying fiscal positions, a problem term positions or insufficient that, in the light of the general eco- related to transition times from the progress, as envisaged under the nomic situation in the euro area, a old to the new regime. SGP's new corrective arm. Looking one-year extension is granted • Exceptional circumstances apply at actual data, a recommendation already in 2012 to all EU countries. in the current low-growth envi- for corrective action under our ronment, but it is important that terms may only be addressed to Ex-ante exceptional circum- the EU uses fully its provision on Malta and Slovakia, which are far stances: As Stability Programme the general economic situation, from the close-to-balance position forecasts need to be compared and that the one-year extension and are not taking sufficient meas- with the most recent Commission in the correction of the deficit is ures (Table 5)20. Our recommenda- forecast21, it is desirable, post- decided in a timely manner. tion is more stringent compared to 2012, that the Commission brings the EU fiscal framework, in which forward the publication of the Policy recommendations poor growth exempts euro-area Spring Economic Forecast by at countries from preventive and not least one month to allow countries The fiscal framework is not too just corrective arm obligations. to take it into account in the draft- stringent, and may be success- ing of their Stability Programmes. Table 5: The size of structural fully applied in the current context. This procedural change would also balance correction (% of GDP) Minor adjustments can improve its improve cross-country compara- consistency and efficacy. bility of fiscal policy, and facilitate the European Semester22. If this is Exceptional circumstances: Deficits Level not possible, it would be desirable above 3 percent of GDP should be (2013) to postpone submission of Stabil- considered acceptable in euro- ity Programmes until mid May, con area countries given the EU's poor required target, trary to proposals contained in the 2011-13 (per year) (per 2011-13 Forecasted average adjustment, effort in effort adjustment, Size of deviation from deviation of Size growth prospects, especially for year) (per adjustment two pack, now under negotiation, AT 0.40 0.10 -1.8 20. Much smaller adjust- 2012. This should be conditional: under which euro-area countries BE 0.45 0.05 -2.6 ments may be also nec- the EU should bring forward the shall submit fiscal plans earlier essary in Germany, CY 2.15 0 -1.7 provision under which euro-area than 30 April (and national draft Austria and Belgium, DE 0.35 0.15 -0.3 even if the former are in members are sanctioned in all ES 1.05 0 -4.8 budgets by 15 October). fact relatively close to a cases in which the annual adjust- FR 0.60 0 -2.9 balanced budget. ment effort in their structural bal- IT 1.50 0 0.1 Credibility: The recognition of the 21. See Regulation ance is lower than 0.5 percent of MT -0.25 0.75 -3.1 existence of very low EU growth 1466/97. GDP. In the following years, when NL 0.50 0 -2.5 follows from the application of the 22. See also Hallerberg, the general situation improves, SI 1.55 0 -1.9 six-pack rules and should not be Marzinotto, and Wolff, ‘An assessment of the Euro- deficits of greater than 3 percent SK 0.05 0.45 -4.6 considered a threat to the new sur- pean Semester’, Bruegel, should be allowed in all euro-area Source: Bruegel. veillance and enforcement frame- forthcoming. 08 bruegelpolicybrief Eurogroup (2012) IMF (2010) European Council (1997) COM(2011) 819Final ber States experiencingorthreatenedwithseriousdifficultiesrespecttotheirfinancial stabilityintheeuroarea European Commission (2011h) ofexcessiveplans andensuringthecorrection deficitoftheMemberStates intheeuroarea European Commission (2011g) European Commission (2011f) European Commission (2011e) Bruegel, Ruedela Charité33,B-1210 Brussels, (+32)22274210 European Commission (2011d) European Commission (2011b) nation ofeconomicpolicies European Commission (2011a) European Commission (2012b) onPublic FinancesinEMU’, European Commission (2012a)‘Report REFERENCES European Commission (2011c) 1177/2011 editorial responsibility of Jean Pisani-Ferry, Director. Opinions expressed inthis publication are those of the author(s) alon without explicit permission provided that the source isacknowledged. The Bruegel Policy Brief Series ispublished under the © Bruegel 2012. Allrights reserved. Short sections, not to exceed two paragraphs, may be quoted inthe original language ance rule,thusreinforcingtheidea emphasises thestructural-bal- it envisaged inthesix-pack, mechanism with thesurveillance whilealigned coordination. First, desirable foreconomicpolicy the Fiscal Compact thatmakeit aspectsof There aretwoimportant The roleoftheFiscal Compact: this,asweexplainbelow.port down intheTSCG Treaty maysup- political motivation.Theruleslaid change hasatechnical andnota markets thattheprocedural strengthening theperceptionof sion intheCommission’s hands, would morevisiblyleave thedeci- RQMV posal butcan onlyblockit. to confirmaCommission’s pro- meaning theCouncil isnot asked not alsohaving RQMVatthisstage, majority. Butthereisnoreasonfor recommendation byaqualified the Council backstheCommission one-year extensionisgrantedif the political process.Atpresent, Itshouldhowever beanon- work. EVERYTHING IS TIMING RULES: FISCAL World EconomicRecovery,RiskandRebalancing Outlook. Terms ofreference onSpain Resolution oftheEuropeanCouncil ontheStability andGrowthPact , 1175/2011 Enforcement excessive measurestocorrect macroeconomicimbalancesintheeuroarea On requirements for budgetaryframeworksofthememberstates Proposal for aregulationoncommon provisionsfor monitoringandassessing draftbudgetary On the strengthening of the surveillance of budgetary positions and the surveillance andcoordi- ofbudgetarypositionsandthesurveillance On thestrengtheningofsurveillance On theeffective intheeuroarea enforcement ofbudgetarysurveillance On theprevention ofmacroeconomicimbalances andcorrection On speedingupandclarifyingtheimplementation oftheexcessive deficitprocedure Spring Forecast Proposal ofMem- for aregulationonthe strengthening ofeconomicandbudgetarysurveillance ation concernsnominaldeficits, reference value,whetherthedevi- case ofsevere deviations fromthe veillance andsanctioninginthe been designedtostrengthensur- The newEUfiscal frameworkhas framework enjoysattheEUlevel. thatthefiscal ing theflexibility least insomecountries,undermin- policy becomestoorestrictive,at rule. Theriskisthatnationalfiscal quasi-constitutional debtbrake toadopta the contractingparties relates totheobligation foreachof ever adrawbackintheTreaty that There ishow- sion ofthesix-pack. reduction, withoutaformalrevi- extension isallowedfordeficit used inallcases inwhichan cation willthusallowRQMVtobe Itssuccessfulratifi- provide forit. also wherethesix-pack doesnot every stageoftheEDP, possibly cates theapplication ofRQMVat nominal deficits.Second,itadvo- than tions aremoreimportant that underlyingbudgetaryposi- , 12March , May2012 [email protected] European Economy , pp.93-124 www.bruegel.org 4 steps intheEDP. the Commission, asareother and thatitismostlyinthehandsof ideally atthebeginningofApril, sion istakenearlierthannormal, thatthedeci- it isonlyimportant their budgetsfor2013.Thereafter, to allcountriesbeforetheyfinalise year extensionshouldbegranted eral economicsituation,theone- countries. For 2012,given thegen- growth intheEU,orspecific may begrantedincase ofnegative the deadlinefordeficitcorrection ing rules.Aone-yearextensionto already bedealtwithintheexist- EDP. Thesecondproblemcan arm tocountriesthatareunder by extendingthenewpreventive The firstproblemcan bedealtwith euro-area countriesareunderEDP. force inarecessionwhenmost Second, thenewrulesenterinto excessive deficitsarecorrected. apply forstructuralbalancesuntil sanctionsdonot unhelpful. First, ever, thetimingofnewrulesis structural balancesordebts.How- , COM(2011) 821Final , Amsterdam , 1176/2011 , 85/2011 , 1173/2011 e. , 1174/2011 , ,