The Commission has presented a review of the various legislative texts known as the “six-pack” and “ two-pack ” to strengthen the economic governance of the European Union. This review analyses to what extent the new rules introduced have been effective in achieving the objectives of ensuring closer coordination of economic policies.

The legislative packages aim to:

· more closely coordinate economic policies through a strengthening of budgetary surveillance under the Stability and Growth Pact;

· introduce a new procedure in the area of macroeconomic imbalances ;

· establish a framework for dealing with countries experiencing difficulties with financial stability;

· to proceed with codification in legislation, in the form of the European Semester, of integrated economic and budgetary surveillance.

Taking into account the short experience of their operation, with the six-pack entering into force in end-2011 and the two-pack only in mid-2013, the Commission considers it difficult to draw conclusions on the effectiveness of the regulations.

Fiscal surveillance and coordination of economic policies (six-pack)

Overall, the two main objectives of the six-pack and two-pack reforms in the area of fiscal surveillance were

· to strengthen and deepen budgetary surveillance by making it more continuous and integrated, also via an intensified sanctions mechanism; and

· to provide an additional surveillance for euro area Member States to ensure the correction of excessive deficits and an appropriate integration of EU policy recommendations in the national budgetary preparation.

The preventive arm of the Stability and Growth Pact : this was reinforced and made more binding . The six-pack:

· established the concept of a significant deviation from the medium-term objective, or from the adjustment path towards it. Insufficient correction of such a deviation can eventually lead to financial sanctions for a euro area country;

· introduced the expenditure benchmark to provide clearer and more operational guidance to Member States.

The increased involvement and enforcement in the preventive arm reflects the importance of prudent fiscal policies during good economic times.

Overall, the Stability and Growth Pact was made more flexible via the possibility to adapt the pace of fiscal consolidation both in the preventive and corrective arm in justified cases.

Assessment : overall, the Commission considers that the reformed framework has proven effective in strengthening budgetary surveillance and thus in guiding Member States in their efforts to consolidate public finances in difficult economic conditions.

· While it has been in operation for a rather short period of time, the reformed framework has already played a role in the correction of excessive deficits . The EU-28 average fiscal deficit has fallen from 4.5% of GDP in 2011 to a forecast of around 3% of GDP in 2014. The number of countries subject to an Excessive Deficit Procedure fell from 23 Member States of 27 to 11 on 28.

· The experience with the debt benchmark is very limited , not least as the new rules included a transition period for the debt benchmark to fully enter into force. Nevertheless, the operationalisation of the debt criterion has increased the awareness of the relevance of debt for fiscal stability and has offered additional incentives to bring debt on a sustainable path.

· The intermediate nominal and structural deficit targets under the Excessive Deficit Procedure have enabled more precise and transparent policy advice and monitoring. The possibility to adapt existing recommendations has been used for well-justified reasons, and has proved particularly valuable in adapting the consolidation trajectories in the fast changing environment of the past ten years.

· N o sanctions having been imposed on countries non-compliant with the reformed Stability and Growth Pact rules, it is not possible to fully assess whether the objective of a more effective enforcement of budgetary surveillance in the euro area was indeed achieved.

The Commission considers that the additional budgetary surveillance elements for euro area Member States introduced by the two-pack seem to have broadly fulfilled their objective to increase at least the pressure to correct excessive deficits. The European Semester combines these different tools in an overarching framework for integrated multilateral economic and budgetary surveillance. The streamlining and strengthening of the 2015 exercise will further improve its functioning.

In conclusion , if the review has revealed some strengths, it also shows possible areas for improvement, concerning transparency and complexity of policy making , and their impact on growth, imbalances and convergence.

According to the Commission, a proper involvement of national Parliaments remains crucial in ensuring the legitimacy of Member States' action. At EU level, the European Parliament has a key role to play, notably through “economic dialogues”, which have ensured that institutional actors have been regularly held to account on the main issues related to economic governance.

The Commission plans to discuss these points with the European Parliament and the Council in the coming months.

PURPOSE: to strengthen economic governance in the EU – and more specifically in the euro area – as part of the EU's response to the current difficulties on sovereign debt markets (reform of the preventative arm of the Stability and Growth Pact).

LEGISLATIVE ACT: Regulation (EU) No 1175/2011 of the European Parliament and of the Council amending Council Regulation (EC) No 1466/97 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies.

CONTENT: on the basis of a compromise reached with the European Parliament, the Council adopted a package of six legislative proposals (“six-pack”) aiming to strengthen economic governance in the EU – and more specifically in the euro area.

The measures set out to ensure the degree of coordination necessary to avoid the accumulation of excessive imbalances and to ensure sustainable public finances. This will help the EU's monetary union to function properly in the long term.

They consist of:

a regulation amending regulation 1466/97 on the surveillance of Member States budgetary and economic policies ; a regulation amending regulation 1467/97 on the EU's excessive deficit procedure; a regulation on the enforcement of budgetary surveillance in the euro area ; a regulation on the prevention and correction of macroeconomic imbalances; a regulation on enforcement measures to correct excessive macroeconomic imbalances in the euro area; a directive on requirements for the Member States' budgetary frameworks .

The main elements of this Regulation are as follows:

Scope : this Regulation sets out the rules covering the content, the submission, the examination and the monitoring of stability programmes and convergence programmes as part of multilateral surveillance by the Council and the Commission so as to prevent, at an early stage, the occurrence of excessive general government deficits and to promote the surveillance and coordination of economic policies thereby supporting the achievement of the Union's objectives for growth and employment.

European Semester for economic policy coordination : in order to ensure closer coordination of economic policies and sustained convergence of the economic performance of the Member States, the Council shall conduct multilateral surveillance as an integral part of the European Semester for economic policy coordination.

The European Semester shall include: (a) the formulation, and the surveillance of the implementation, of the broad guidelines of the economic policies of the Member States and of the Union; (b) the formulation, and the examination of the implementation, of the employment guidelines that must be taken into account by Member States; (c) the submission and assessment of Member States' stability or convergence programmes under this Regulation; (d) the submission and assessment of Member States' national reform programmes supporting the Union's strategy for growth and jobs; (e) the surveillance to prevent and correct macroeconomic imbalances and on the prevention and correction of macroeconomic imbalances.

Under the European Semester the policy surveillance and coordination cycle starts early in the year with a horizontal review in which the European Council, based on input from the Commission and the Council, identifies the main challenges facing the Union and the euro area and gives strategic guidance on policies.

Discussion should also take place in the European Parliament at the beginning of the annual cycle of surveillance in due time before the discussion takes place in the European Council. When preparing their stability or convergence programmes and national reform programmes, Member States should take into account the horizontal guidance by the European Council.

National parliaments should be duly involved in the European Semester and in the preparation of stability programmes, convergence programmes and national reform programmes in order to increase the transparency and ownership of, and accountability for the decisions taken.

Economic dialogue : in order to enhance the dialogue between the Union institutions, in particular the European Parliament, the Council and the Commission, and to ensure greater transparency and accountability, the competent committee of the European Parliament may invite the President of the Council, the Commission and, where appropriate, the President of the European Council or the President of the Eurogroup to appear before the committee to discuss: (i) information provided to it by the Council on the broad guidelines of economic policy; (ii) general guidance to Member States issued by the Commission at the beginning of the annual cycle of surveillance; (iii) Council recommendations addressed to Member States.

The competent committee of the European Parliament may offer the opportunity to the Member State concerned by the Council recommendation to participate in an exchange of views .

Medium-term budgetary objective : the obligation to achieve and maintain the medium-term budgetary objective needs to be put into operation, through the specification of principles for the adjustment path towards the medium-term objective. Those principles should, inter alia, ensure that revenue windfalls, namely revenues in excess of what can normally be expected from economic growth, are allocated to debt reduction.

Adjustment path : a faster adjustment path towards the medium-term budgetary objective should be required for Member States faced with a debt level exceeding 60 % of GDP, or with pronounced risks in terms of overall debt sustainability.

(1) Temporary departure from the adjustment path : a temporary departure from the adjustment path towards the medium-term objective may exceptionally be allowed: (i) when resulting from an unusual event outside the control of the Member State concerned and which has a major impact on the structural balance of the general government of at least 0.5% of GDP in one single year or; (ii) in case of severe economic downturn for the euro-area or the Union as a whole, on condition that this does not endanger fiscal sustainability in the medium-term, in order to facilitate economic recovery.

The implementation of major structural reforms should also be taken into account in allowing a temporary departure from the medium-term budgetary objective or the appropriate adjustment towards it, on condition of maintaining a safety margin with respect to the deficit reference value. A special attention should be paid in this context to systemic pension reforms .

In the event of a significant observed deviation from the adjustment path:

a warning should be addressed by the Commission to the Member State concerned, to be followed within 1 month by an examination of the situation by the Council and a recommendation for the necessary adjustment measures. if the Member State concerned fails to take appropriate action within the deadline specified in a Council recommendation, the Commission shall immediately recommend to the Council to adopt, by qualified majority, a decision establishing that no effective action has been taken . At the same time, the Commission may recommend to the Council to adopt a revised recommendation; in case the Council does not adopt the decision on the Commission recommendation that no effective action has been taken, and failure to take appropriate action on the part of the Member State concerned persists, the Commission, after one month from its earlier recommendation, shall recommend to the Council to adopt the decision establishing that no effective action has been taken. The decision shall be deemed to be adopted by the Council unless it decides, by simple majority, to reject the recommendation within ten days of its adoption by the Commission.

Principle of statistical independence : with a view to ensuring that the multilateral surveillance is based on sound and independent statistics, Member States shall ensure the professional independence of national statistical authorities, which shall be consistent with the European statistics code of practice as laid down in Regulation (EC) No 223/2009 of the European Parliament and of the Council on European Statistics.

Review : by 14 December 2014 and every 5 years thereafter, the Commission shall publish a report on the application of this Regulation. The report shall evaluate, inter alia: (a) the effectiveness of this Regulation, particularly whether the provisions governing decision-making have proved sufficiently robust; (b) the progress in ensuring closer coordination of economic policies and sustained convergence of economic performances of the Member States in accordance with the TFEU.

ENTRY INTO FORCE: 13/12/2011.

The European Parliament adopted by 354 votes to 269, with 34 abstentions, a legislative resolution on the proposal for a regulation of the European Parliament and of the Council amending Regulation (EC) No 1466/97 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies.

The report was sent back to the committee responsible to be re-examined on 23 June 2011.

Parliament adopted its position at first reading, under the ordinary legislative procedure. The amendments adopted in plenary are the result of a compromise negotiated between the European Parliament and the Council. They amend the Commission proposal as follows:

Scope : this Regulation sets out the rules covering the content, the submission, the examination and the monitoring of stability programmes and convergence programmes as part of multilateral surveillance by the Council and the Commission so as to:

prevent, at an early stage , the occurrence of excessive general government deficits; promote the surveillance and coordination of economic policies thereby supporting the achievement of the Union's objectives for growth and employment.

Stability Pact : the preventive part of the Stability and Growth Pact would benefit from more stringent forms of surveillance in order to ensure Member States' consistency and compliance with the Union's budgetary coordination framework. The Stability and Growth Pact and the complete economic governance framework complement and support the Union strategy for growth and jobs . Inter linkages between the different strands should not provide for exemptions from the provisions of the Stability and Growth Pact.

Stability programmes : the budgetary targets in the stability and convergence programmes should explicitly take into account of the measures adopted in line with the Broad Economic Policy Guidelines, the Guidelines for the Employment Policies of the Member States and the Union and, in general, the national reform programmes.

The Stability or Convergence Programmes and the National Reform Programmes should be prepared in a coherent manner and the timing of their submissions should be aligned. These programmes should be submitted to the Council and the Commission. These programmes should be made public.

The submission and assessment of Stability and Convergence programmes should be made before key decisions on the national budgets for the following years are taken. A particular deadline for submission of the Stability and Convergence programmes should therefore be established. Taking into account the specificities of the budgetary year of the United Kingdom, special provisions for the date for submission of its convergence programmes should be established.

Strengthening the role of the Commission : the Commission should have a stronger role in the enhanced surveillance procedure as regards assessments that are specific to each Member State, monitoring, missions, recommendations and warnings.

Improving economic governance : the text stresses the need to improve economic governance in the Union, which should be built on a stronger national ownership of commonly agreed rules and policies. Strengthening economic governance should include a closer and more timely involvement of the European Parliament and the national parliaments.

In order to enhance national ownership of the Stability and Growth Pact, national budgetary frameworks should be fully aligned with the objectives of multilateral surveillance in the Union, and, in particular, with the Semester.

European semester for economic policy coordination : in order to ensure closer coordination of economic policies and sustained convergence of the economic performance of the Member States, the Council will conduct multilateral surveillance as an integral part of the European Semester for economic policy coordination in accordance with the objectives and requirements set out in the Treaty on the Function of the European Union (TFEU). Under the European Semester the policy surveillance and coordination cycle starts early in the year with a horizontal review under which the European Council, based on input from the Commission and the Council, identifies the main challenges facing the Union and the euro area and gives strategic guidance on policies. Discussion will also take place in the European Parliament at the beginning of the annual cycle of surveillance in due time before the discussion takes place in the European Council. Member States are expected to take into account the horizontal guidance by the European Council when preparing their Stability or Convergence Programmes and National Reform Programmes.

Transparency : national parliaments should be duly involved in the Semester and in the preparation of Stability Programmes, Convergence Programmes and National Reform Programmes in order to increase the transparency, ownership and accountability of the decisions taken. The Economic and Financial Committee, the Economic Policy Committee, the Employment Committee and the Social Protection Committee will be consulted within the framework of the Semester where appropriate. Relevant stakeholders, in particular the social partners, will be involved within the framework of the Semester, on the main policy issues where appropriate, in accordance with the provisions of the TFEU and national legal and political arrangements.

Economic dialogue : in order to enhance the dialogue between the Union institutions, in particular the European Parliament, the Council and the Commission, and to ensure greater transparency and accountability, the competent committee of the European Parliament may invite the President of the Council, the Commission and, where appropriate, the President of the European Council or the President of the Eurogroup to appear before the committee to discuss: (i) information provided to it by the Council on the broad guidelines of economic policy pursuant to Article 121(2) TFEU; (ii) general guidance to Member States issued by the Commission at the beginning of the annual cycle of surveillance; (iii) any conclusions drawn by the European Council on orientations for economic policies in the context of the European Semester; (iv) the results of multilateral surveillance carried out under this Regulation; (v) any conclusions drawn by the European Council on the orientations for and results of multilateral surveillance; (vi) any review of the conduct of multilateral surveillance at the end of the European Semester; (vii) Council recommendations addressed to Member States.

The competent committee of the European Parliament may offer the opportunity to the Member State concerned by the Council recommendation to participate in an exchange of views.

Medium-term budgetary objective : the medium-term budgetary objective should be updated regularly on the basis of a commonly agreed methodology reflecting appropriately risks of explicit and implicit liabilities for public finance as embodied in the aims of the Stability and Growth Pact. The obligation to achieve and maintain the medium-term budgetary objective needs to be put into operation, through the specification of principles for the adjustment path towards the medium-term objective. These principles should, inter alia, ensure that revenue windfalls, namely revenues in excess of what can normally be expected from economic growth, are allocated to debt reduction. The obligation to achieve and maintain the medium-term-objective should equally apply to participating Member States and to non-participating Member States.

Sufficient progress towards the medium-term budgetary objective should be evaluated on the basis of an overall assessment with the structural balance as a reference, including an analysis of expenditure net of discretionary revenue measures.

A faster adjustment path towards the medium-term budgetary objectives should be required for Member States faced with a debt level exceeding 60% of GDP or with pronounced risks in terms of overall debt sustainability.

Temporary departure from the adjustment path : a temporary departure from the adjustment path towards the medium-term objective may exceptionally be allowed: (i) when resulting from an unusual event outside the control of the Member State concerned and which has a major impact on the structural balance of the general government of at least 0.5% of GDP in one single year or; (ii) in case of severe economic downturn for the euro-area or the Union as a whole, on condition that this does not endanger fiscal sustainability in the medium-term, in order to facilitate economic recovery.

The implementation of major structural reforms should also be taken into account in allowing a temporary departure from the medium-term budgetary objective or the appropriate adjustment towards it, on condition of maintaining a safety margin with respect to the deficit reference value. A special attention should be paid in this context to systemic pension reforms , where the departure should reflect the direct incremental cost of the diversion of contributions from the publicly managed to the fully funded pillar.

In the event of a significant deviation from the adjustment path towards the medium-term objective:

a warning should be addressed by the Commission to the Member State concerned to be followed within one month by a Council recommendation , setting a deadline of no more than five months to take the necessary corrective measures; if the Member State concerned fails to take appropriate action in the deadline set by the Council, the Commission should recommend to the Council to establish that has been no effective action . The decision should be deemed adopted by the Council, unless it decides by qualified majority to reject it within ten days from the Commission adoption. At the same time the Council, on a proposal by the Commission, should report to the European Council.

In the event of a significant observed deviation from the adjustment path towards the medium-term objective :

the Commission shall address a warning to the Member State concerned. The Council shall, within one month of the date of adoption of the early warning, examine the situation and adopt a recommendation for the necessary policy measures, on the basis of a Commission recommendation. The recommendation shall set a deadline of no more than five months for addressing the deviation. The deadline shall be reduced to three months if the Commission, in its warning, considers that the situation is particularly serious and warrants urgent action. The Council, on a proposal from the Commission, shall make the recommendation public; if the Member State concerned fails to take appropriate action within the deadline specified in a Council recommendation under the second subparagraph, the Commission shall immediately recommend to the Council to adopt, by qualified majority, a decision establishing that no effective action has been taken. At the same time, the Commission may recommend to the Council to adopt a revised recommendation; in case the Council does not adopt the decision on the Commission recommendation that no effective action has been taken, and failure to take appropriate action on the part of the Member State concerned persists, the Commission, after one month from its earlier recommendation, shall recommend to the Council to adopt the decision establishing that no effective action has been taken. The decision shall be deemed to be adopted by the Council unless it decides, by simple majority , to reject the recommendation within ten days of its adoption by the Commission.

Principle of the statistical independence : with a view ensuring that the multilateral surveillance is based on sound and independent statistics, Member States shall ensure the professional independence of national statistical authorities, which shall be consistent with the European statistics code of practice as laid down in Regulation (EC) No 223/2009 on European Statistics.

Report : within three years after the entry into force of this Regulation and every five years thereafter, the Commission shall publish a report on the application of this Regulation. It shall evaluate, inter alia:

the effectiveness of the regulation, particularly whether the provisions governing decision-making have proved sufficiently robust, the progress in ensuring closer coordination of economic policies and sustained convergence of economic performances of the Member States in accordance with the TFEU.

The European Parliament adopted, at first reading of the ordinary legislative procedure (by 333 votes to 303, with 26 abstentions), the proposal for a regulation of the European Parliament and of the Council amending Regulation (EC) No 1466/97 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies.

The vote on the legislative resolution was postponed until a later plenary session.

The main amendments by the Parliament are as follows:

Scope : Parliament clarifies that this Regulation sets out the rules covering the content, the submission, the examination and the monitoring of stability programmes and convergence programmes as part of multilateral surveillance by the Council and the Commission so as to prevent, at an early stage, the occurrence of excessive general government deficits and to promote the surveillance and coordination of economic policies thereby supporting the achievement of the Union's objectives for growth and employment.

Stability Pact : the preventive part of the Stability and Growth Pact would benefit from more stringent forms of surveillance in order to ensure Member States' consistency and compliance with the Union's budgetary coordination framework.

The Stability and Growth Pact and the complete economic governance framework complement and support the Union strategy for growth and jobs . Inter linkages between the different strands should not provide for exemptions from the provisions of the Stability and Growth Pact.

Stability programmes : the budgetary targets in the stability and convergence programmes should explicitly take into account of the measures adopted in line with the Broad Economic Policy Guidelines, the Guidelines for the Employment Policies of the Member States and the Union and, in general, the national reform programmes.

The Stability or Convergence Programmes and the National Reform Programmes should be prepared in a coherent manner and the timing of their submissions should be aligned. These programmes should be submitted to the Council and the Commission. These programmes should be made public.

The submission and assessment of Stability and Convergence programmes should be made before key decisions on the national budgets for the following years are taken. A particular deadline for submission of the Stability and Convergence programmes should therefore be established. Taking into account the specificities of the budgetary year of the United Kingdom, special provisions for the date for submission of its convergence programmes should be established

Strengthened role of the Commission : the Commission should have a stronger role in the enhanced surveillance procedure as regards assessments that are specific to each Member State, monitoring, missions, recommendations and warnings.

Improved governance : Members underline the need for improved economic governance in the Union, which should be built on a stronger national ownership of commonly agreed rules and policies and on a more robust surveillance framework at the Union level of national economic policies. Strengthening economic governance should include a closer and more timely involvement of the European Parliament and the national parliaments .

In order to enhance national ownership of the Stability and Growth Pact, national budgetary frameworks should be aligned with the objectives of multilateral surveillance in the Union, and, in particular, with the Semester for economic policy coordination.

European Semester : the amended text provides that under the European Semester the policy surveillance and coordination cycle: (i) starts early in the year with a horizontal review under which the European Council, based on input from the Commission and the Council; (ii) identifies the main challenges facing the Union and the euro area and; (iii) gives strategic guidance on policies.

Discussion will also take place in the European Parliament at the beginning of the annual cycle of surveillance in due time before the discussion takes place in the European Council. Member States are expected to take into account the horizontal guidance by the European Council when preparing their Stability or Convergence Programmes and National Reform Programmes.

Transparency : national parliaments should be duly involved in the Semester and in the preparation of Stability Programmes, Convergence Programmes and National Reform Programmes in order to increase the transparency, ownership and accountability of the decisions taken.

The Economic and Financial Committee, the Economic Policy Committee, the Employment Committee and the Social Protection Committee will be consulted within the framework of the Semester where appropriate. Relevant stakeholders, in particular the social partners, will be involved within the framework of the Semester, on the main policy issues.

Economic dialogue : in order to enhance the dialogue between the Union institutions, in particular the European Parliament, the Council and the Commission, and, to ensure greater transparency and accountability, the competent committee of the European Parliament may invite the President of the Council, the Commission and, where appropriate, the President of the European Council or the President of the Eurogroup to appear before the committee to discuss: (i) information provided to it by the Council on the broad guidelines of economic policy; (ii) general guidance to Member States issued by the Commission at the beginning of the annual cycle of surveillance; (iii) any conclusions drawn by the European Council on orientations for economic policies in the context of the European Semester; (iv) the results of multilateral surveillance carried out under this Regulation; (v) any conclusions drawn by the European Council on the orientations for and results of multilateral surveillance; (vi) any review of the conduct of multilateral surveillance at the end of the European Semester; (vii) Council recommendations addressed to Member States.

The competent committee of the European Parliament may offer the opportunity to the Member State concerned by the Council to participate in an exchange of views.

Medium-term budgetary objective : this should be evaluated on the basis of an overall assessment with the structural balance as a reference, including an analysis of expenditure net of discretionary revenue measures. In this regard, and as long as the medium-term budgetary objective is not achieved, the growth rate of government expenditure should normally not exceed a reference medium-term rate of potential GDP growth, with increases in excess of that norm being matched by discretionary increases in government revenues and discretionary revenue reductions being compensated by reductions in expenditure. The medium-term budgetary objectives shall ensure the sustainability of public finances or a rapid progress towards such sustainability while allowing room for budgetary manoeuvre, considering in particular the needs public investment.

The obligation to achieve and maintain the medium-term budgetary objective needs to be put into operation, through the specification of principles for the adjustment path towards the medium-term objective. These principles should, inter alia, ensure that revenue windfalls, namely revenues in excess of what can normally be expected from economic growth, are allocated to debt reduction.

Parliament stresses that a faster adjustment path towards the medium-term budgetary objectives should be required for Member States faced with a debt level exceeding 60% of GDP or with pronounced risks in terms of overall debt sustainability.

A temporary departure from the adjustment path towards the medium-term objective should be allowed when resulting from an unusual event outside the control of the Member State concerned and which has a major impact on the financial position of the general government or in case of severe economic downturn for the euro area or the EU as a whole, on condition that this does not endanger fiscal sustainability in the medium-term, in order to facilitate economic recovery.

In the event of a significant deviation from the adjustment path towards the medium-term budgetary objective a warning should be addressed by the Commission to the Member State concerned, to be followed within one month by an examination of the situation by the Council and a recommendation for the necessary adjustment measures. The recommendation should set a deadline of no more than five months for addressing the deviation.

If the Member State concerned fails to take appropriate action in the deadline set by the Council, the Council should adopt a decision establishing that no effective action has been taken and report to the European Council. The decision should be deemed adopted by the Council, unless it decides by qualified majority to reject it within ten days from the Commission adoption. At the same time, the Commission may recommend to the Council to adopt revised recommendations.

Principle of the statistical independence : with a view ensuring that the multilateral surveillance is based on sound and independent statistics, Member States shall ensure the professional independence of national statistical authorities, which shall be consistent with the European statistics code of practice as laid down in Regulation (EC) No 223/2009 on European Statistics.

Review : within three years after the entry into force of this Regulation and every five years thereafter, the Commission shall publish a report on the application of this Regulation.

The Council agreed unanimously an updated general approach on a package of legislative proposals on economic governance, with the aim of enabling negotiations with the European Parliament to be concluded in time for the European Council meeting on 23 and 24 June.

It will inform the Parliament of its compromise text by a letter to be sent by the chairman of the Permanent Representatives Committee on 21 June.

The proposals set out to strengthen economic governance in the EU – and more specifically within the euro area – as part of the EU's response to the challenges highlighted by recent turmoil on sovereign debt markets.

The Council reached agreement on a general approach on 15 March, opening the way for the negotiations with the Parliament.

Recognising that existing EU instruments have not generated a satisfactory decline in public debt levels and have catered insufficiently for macroeconomic imbalances, the proposals are aimed at enhancing budgetary discipline in the Member States and broadening the surveillance of their economic policies. They implement the recommendations of a task force, chaired by the President of the European Council, Herman Van Rompuy, which concluded that the EU's monetary union will not be able to function properly in the long term without increased economic policy coordination .

The Council took note of a report from the presidency on progress in negotiations with the European Parliament on a package of legislative proposals on economic governance.

Taking note of the views expressed by delegations, the presidency called on all parties to remain constructive and show the degree of flexibility that will be necessary to enable an agreement to be reached in June, as called for by the European Council.

The proposals set out:

to strengthen economic governance in the EU – and more specifically within the euro area – as part of the EU's response to the challenges highlighted by recent turmoil on sovereign debt markets. The Council reached agreement on a general approach in March, opening the way for the negotiations with the Parliament; to enhance budgetary discipline in the Member States and broaden the surveillance of their economic policies , thus implementing the recommendations of a task force chaired by the President of the European Council, Herman Van Rompuy.

The package consists of:

a draft regulation amending Regulation (EC) No 1466/97 on the surveillance and coordination of Member States' budgetary and economic policies; a draft regulation amending Regulation (EC) No 1467/97 on the excessive deficit procedure; a draft regulation on the enforcement of budgetary surveillance in the euro area; a draft regulation on the prevention and correction of macroeconomic imbalances; a draft regulation on enforcement measures to correct excessive macroeconomic imbalances in the euro area; a draft directive on requirements for the Member States' budgetary frameworks.

Four of the proposals deal with reform of the EU's Stability and Growth Pact , enhancing the surveillance of fiscal policies, introducing provisions on national fiscal frameworks, and applying enforcement measures for non-compliant Member States more consistently and at an earlier stage. The other two proposals target macroeconomic imbalances within the EU.

The Committee on Economic and Monetary Affairs adopted the report drafted by Corien WORTMANN-KOOL (EPP, NL) on the proposal for a regulation of the European Parliament and of the Council amending Regulation (EC) No 1466/97 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies.

It recommended that the European Parliament’s position adopted at first reading, under the ordinary legislative procedure, should be to amend the Commission proposal as follows:

Stability Pact : Members consider that the Stability and Growth Pact should support the achievement of the Union’s objectives for sustainable growth and employment . The budgetary targets in the stability and convergence programmes should explicitly take into account of the measures adopted in line with the Broad Economic Policy Guidelines, the Guidelines for the Employment Policies of the Member States and the Union and, in general, the national reform programmes.

The Stability and Growth Pact and the complete economic governance framework should complement and be compatible with a Union strategy for growth and jobs. However, these inter linkages should not provide for exemptions to the provisions of the Stability and Growth Pact.

Strengthening the Commission’s role : the Commission should have a stronger and more independent role in the enhanced surveillance procedure as regards assessments that are specific to each Member State, monitoring, missions, recommendations and warnings. In particular, the role of the Council should be limited in the steps leading to potential sanctions and the reversed qualified majority voting in the Council should be used wherever possible under the TFEU.

Improving economic governance : Members stress the need to improve economic governance in the Union, which should be built on a stronger national ownership of commonly agreed rules and policies.

In order to enhance national ownership of the Stability and Growth Pact, national budgetary frameworks should be fully aligned with the objectives of multilateral surveillance in the Union, and, in particular, with the Semester , in the context of which the national parliaments and all other relevant stakeholders, in particular the social partners, should be informed in a timely manner and should be duly involved.

Strengthening economic governance should go hand in hand with reinforcing the democratic legitimacy of economic governance in the Union, which should be achieved through a closer and more timely involvement of the European Parliament and the national parliaments throughout the economic policy coordination procedures.

European semester for economic policy coordination : the Semester should play a vital role in implementing the requirement provided by the TFEU that Member States regard their economic policies as a matter of common concern and coordinate them accordingly. The relevant stakeholders, in particular the social partners and the European platform against poverty and for social inclusion, should be consulted, within the framework of the Semester, on the main policy measures to be discussed by the Union institutions.

Transparency : transparency, accountability and independent oversight are an integral part of enhanced economic governance. The Council and the Commission should make public and set out the reasons for their positions and decisions at the appropriate stages of the economic policy coordination procedures, in order to ensure effective peer pressure.

The Commission should present and explain the preventive and corrective actions recommended to a Member State to the European Parliament and its competent committee . The European Parliament may invite the Member State concerned to explain its decisions and policies before its competent committee. The President of the Euro Group may, at the request of the European Parliament or on his own initiative, be heard by the competent committees of the European Parliament.

National budgetary procedures : the Protocol on the excessive deficit procedure annexed to the Treaties provides that Member States ensure that national procedures in the budgetary area enable them to meet their obligations in this area deriving from the Treaties. Member States whose currency is the euro should therefore anchor the objectives of the Union fiscal framework in national law , and should ensure that adequate budgetary procedures are in place for meeting those objectives.

Member States should, in the framework of national budgetary law, set targets for deficits and surpluses for three years ahead , aiming for medium-term balance in public finances.

Debt criteria : an assessment of the sustainability of public finances, including the debt level, debt profile (including maturity), ageing costs and debt dynamics should be more strongly taken into account in the required pace of adjustment towards Member-State-specific medium-term budgetary objectives to be included in the Stability and Convergence Programmes.

Medium-term budgetary objective : according to Members, sufficient progress towards the medium-term budgetary objective should be evaluated on the basis of an overall assessment with the structural balance as a reference, including an analysis of expenditure net of discretionary revenue measures.

In this regard, and as long as the medium-term budgetary objective is not achieved, the growth rate of government expenditure should normally not exceed a reference medium-term rate of potential GDP growth, with increases in excess of that norm being matched by discretionary increases in government revenues and discretionary revenue reductions being compensated by reductions in expenditure. The reference medium-term rate of potential GDP growth should be calculated according to a commonly agreed methodology validated by the Member States.

Temporary departure from the adjustment path : Members consider that a temporary departure from the adjustment path towards the medium-term objective may exceptionally be allowed: (i) when resulting from an unusual event outside the control of the Member State concerned and which has a major impact on the structural balance of the general government of at least 0.5% of GDP in one single year or; (ii) in case of severe economic downturn for the euro-area or the Union as a whole, on condition that this does not endanger fiscal sustainability in the medium-term, in order to facilitate economic recovery.

In the event of a significant deviation from the adjustment path towards the medium-term objective:

§ a warning should be addressed by the Commission to the Member State concerned to be followed within one month by a Council recommendation , setting a deadline of no more than five months to take the necessary corrective measures;

§ if the Member State concerned fails to take appropriate action in the deadline set by the Council, the Commission should recommend to the Council to establish that has been no effective action . The decision should be deemed adopted by the Council, unless it decides by qualified majority to reject it within ten days from the Commission adoption. At the same time the Council, on a proposal by the Commission, should report to the European Council.

The Commission, in liaison with the ECB for euro area Member States and for ERM2 Member States, may carry out a monitoring mission. The Commission should report to the Council on the outcome of the mission and should make its findings public within one month.

The Commission should when making proposals for measures to implement this Regulation take into account the economic and budgetary situation of the concerned Member State that are subject to an EU/IMF adjustment programme.

OPINION OF THE EUROPEAN CENTRAL BANK on economic governance reform in the European Union.

On 29 November 2010, the European Central Bank (ECB) received a request from the Council for an opinion on a package of six legislative proposals aiming to strengthen economic governance.

The ECB considers that the Commission proposals represent an important broadening and strengthening of the EU economic and budgetary surveillance framework and go some way in improving enforcement in the euro area. However, they fall short of the necessary quantum leap in the surveillance of the euro area, which the ECB deems necessary to ensure its stability and smooth functioning .

The ECB calls on the EU legislator and the Member States to take advantage of the ongoing legislative process to strengthen the economic governance package to the maximum allowed under the current Treaties. In addition, the EU should consider at a certain point in time Treaty reform to further strengthen economic governance.

The ECB makes the following observations:

Insufficient automaticity : for the ECB, insufficient automaticity is a fundamental flaw of the Commission proposals. In this vein, the ECB proposes that the EU legislator consider reverting the changes to the Stability and Growth Pact introduced in 2005 which increased the leeway allowed to Member States in respect of their obligations under the Pact.

Furthermore, the ECB states that there are several elements showing insufficient automaticity in the Commission proposals which should be reconsidered:

the draft budgetary surveillance procedure provides the possibility for Member States to depart from the adjustment path towards the medium-term budgetary objective in case of a severe economic downturn of a general nature; the draft budgetary enforcement procedure provides that the Council will review interest-bearing deposits, non-interest bearing deposits and fines it imposes, on the grounds of exceptional economic circumstances or following a reasoned request by the Member State concerned; lastly, the Commission’s obligation to take into account discussions within the Council as a condition for the continuation by the Commission of any procedure should be excluded. In addition, the ECB recommends increasing automaticity by means of adding reverse Council qualified majority voting whenever possible.

Additional political and reputational measures : these measures should be established in the draft budgetary surveillance procedure and EDP, including Member State reporting obligations and reports from the Council to the European Council. In addition, the Commission, in liaison with the ECB if it deems it appropriate, where euro area Member States or ERM II participant Member States are concerned, should conduct missions to Member States not complying with Council recommendations.

Assessing compliance with the reference value for the government debt ratio : while all relevant factors should be considered when the Commission prepares a report on the existence of an excessive debt ratio and while particular consideration should be given to the effect of guarantees issued by the Member States under the European Financial Stability Facility or eventually under the future European Stability Mechanism (ESM), all these factors should only be considered where the government debt ratio is declining over a three-year horizon according to the Commission’s forecasts. Any relevant mitigating factors should never lead to an assessment that a Member State has no excessive debt ratio where its debt ratio exceeds the reference value and is projected to be on an increasing path.

Procedure concerning the draft budgetary surveillance procedure : the ECB recommends that:

sufficient progress towards the medium-term objective should be evaluated on the basis of an overall assessment with the structural balance as a reference, including an analysis of expenditure net of discretionary revenue measures; the growth rate of government expenditure should normally not exceed a projected reference medium- term growth rate of potential gross domestic product (GDP) growth; the projected medium-term rate of potential GDP growth should be calculated according to the common methodology used by the Commission; taking into account the impact of the structure of economic growth on revenue growth.

Macroeconomic surveillance procedure : the ECB strongly welcomes the introduction of a macroeconomic surveillance procedure, which closes an important lacuna in the economic governance framework. This new procedure should concentrate firmly on euro area Member States experiencing sustained losses of competitiveness and large current account deficits. The scope of the procedure should by defining the term ‘imbalances’ address an open list of situations to be prevented by the procedure. In addition, the macroeconomic surveillance procedure should be determined by transparent and effective trigger mechanisms.

Fines : as to the interest accruals from the non-remunerated deposits and the fines imposed on euro area Member States under the Commission proposals, they should be assigned to the ESM to be created in 2013, with an appropriate transition solution until its creation.

Independent advisory body : the ECB sees also the need to establish an advisory body of persons of recognised competence in economic and fiscal matters to prepare an independent annual report addressed to the Union institutions on compliance by the Council and the Commission, including Eurostat, with their obligations under Articles 121 and 126 of the Treaty and under the procedures addressed in the Commission proposals.

Draft directive on the budgetary frameworks :

the ECB also considers that all Member States should in any case be required to ensure independent monitoring, analysis and validation of the key elements of their budgetary frameworks. All these measures should not prevent Member States from developing stronger budgetary frameworks, such as by including rules prohibiting general government structural deficits above a certain threshold of GDP; the ECB recommends highlighting the importance of transparent national forecasts and methodologies for their preparation. At the same time, the Commission’s forecasts have to play a central role in benchmarking national forecasts; regarding its effectiveness, the directive should refer expressly to costs imposed on national authorities for non-compliance with numerical fiscal rules, including both non-financial measures and financial sanctions at national level. Obligations to redeem in the medium-term debt exceeding amounts tolerated by the fiscal framework should be included; regarding statistics, the ECB favours an increase in the timeliness and reliability of the annual and quarterly government accounts reported to the Commission under Regulation (EC) No 2223/96 on the European system of national and regional accounts in the Community. Regarding statistics in future legislation, the ECB notes that EU legislative action is required for the ‘European statistics code of practice’ to become legally binding, while, in the meantime, the complete implementation of the code is accelerated, in particular regarding quality and the mandates for data collection.

Lastly, Eurostat powers in assessing and monitoring the EDP notifications should be further strengthened with a focus on proactive measures to enhance the quality of government statistics.

The Council held a policy debate on a package of measures intended to strengthen economic governance in the EU, and more specifically in the euro area, in order to address the challenges highlighted by recent difficulties on sovereign debt markets.

The package consists of:

a draft regulation amending regulation 1466/97 on the surveillance of Member States budgetary and economic policies; a draft regulation amending regulation 1467/97 on the EU's excessive deficit procedure; a draft regulation on the enforcement of budgetary surveillance in the euro area; a draft regulation on the prevention and correction of macroeconomic imbalances; a draft regulation on enforcement measures to correct excessive macroeconomic imbalances in the euro area; a draft directive on requirements for the member states' budgetary frameworks.

Four of the propositions deal with reform of the EU's Stability and Growth Pact . They are aimed at enhancing the surveillance of fiscal policies, introducing provisions on national fiscal frameworks, and applying enforcement measures for non-compliant member states more consistently and at an earlier stage.

In particular, a so-called reverse majority rule , whereby the Commission's proposal for imposing a fine will be considered adopted unless the Council turns it down by qualified majority, will trigger the sanction more automatically than at present.

Moreover, greater emphasis will also be placed on the debt criterion of the Stability and Growth Pact, with member states whose debt exceeds 60% of GDP required to take steps to reduce their debt at a pre-defined pace, even if their deficit is below the 3% of GDP threshold.

The other two proposals target macroeconomic imbalances within the EU . Here, the aim is to broaden the surveillance of economic policies, introducing the possibility of fines on Member States found to be in an "excessive imbalances position". Risks of macroeconomic imbalances will be assessed using a "scoreboard" of economic indicators.

The Council asked the Permanent Representatives Committee to oversee further work on the package, in the light of its discussion. The presidency's aim – in accordance with the deadlines set by the European Council on 4 February – is for the Council to agree on a general approach on all six proposals at its meeting on 15 March 2011, with a view to reaching an agreement with the European Parliament in June 2011 .

As regards the excessive deficit procedure, the Council took note of a communication from the Commission assessing action taken by Bulgaria, Denmark, Cyprus and Finland in order to bring their government deficits below 3% of GDP, the reference value set by the EU treaty.

It shared the Commission's view that, on the basis of current information, all four countries have taken action representing adequate progress towards correcting their deficits within the time limits set in its recommendations, and that no further steps under the EU's excessive deficit procedure are required at present.

Bulgaria, Denmark, Cyprus and Finland have been subject to excessive deficit procedures since July 2010, when the Council issued its recommendations. The Council called on Bulgaria and Finland to reduce their deficits below the threshold of 3 % of GDP by 2011, Cyprus by 2012 and Denmark by 2013.

The Council discussed draft national reform programmes (NRPs) presented by the Member States. Ministers committed themselves to rectifying identified difficulties with the draft NRPs.

The programmes are required, under the EU's economic governance arrangements, to enable multilateral surveillance of the Member States' economic policies .

They should contain:

· a macroeconomic scenario for the medium term,

· national targets for translating headline targets set under the "Europe 2020" strategy for jobs and growth,

· identification of the main obstacles to creating growth and jobs,

· measures for concentrating growth-enhancing initiatives in an early period.

Review of the draft programmes constitutes, along with the annual growth survey, first steps in implementation of the so-called "European semester", which involves simultaneous monitoring of the Member States' budgetary policies and structural reforms , in accordance with common rules, during a six-month period every year.

At its meeting on 24 and 25 March, the European Council is due to provide guidance to the Member States for finalisation of their stability and convergence programmes (budgetary policies) and national reform programmes (structural reforms).

The European semester is implemented for the first time this year as part of a reform of EU economic governance.

Concerning the excessive deficit procedure : the Council discussed a Commission communication assessing the action taken by Malta in response to the Council recommendation of 16 February 2010 based on article 126(7) to bring to an end the situation of excessive deficit at the latest by 2011. The Council shares the Commission's view that, based on current information, Malta has taken action representing adequate progress towards the correction of the excessive deficit within the time limit set by the Council. In particular, the Maltese authorities have taken fiscal consolidation measures to correct the excessive deficit by 2011, while ensuring an adequate fiscal effort in 2011.

Against this background, the Council considers that at present no further steps under the excessive deficit procedure are necessary.

At the same time, the Council notes that in spite of a better macroeconomic environment than expected in the Council recommendations, there was no acceleration in the reduction of the deficit in 2010. In addition, considerable downside risks exist to the achievement of the 2011 deficit target . In this context, the Council calls for rigorous execution of the budget and close monitoring of budgetary developments in order to take corrective measures if needed to ensure that the deficit target of 2.8% of GDP is reached in 2011. Furthermore, further steps should be taken to strengthen the binding nature of the medium-term budgetary framework and improve the long-term sustainability of public finances, as requested by the Council in its recommendations and invitations.

PURPOSE: the reform of the preventive part of the Stability and Growth Pact with a view to strengthening the EU’s economic governance.

PROPOSED ACT: Regulation of the European Parliament and of the Council.

BACKGROUND: the global economic and financial crisis revealed gaps and weaknesses in the existing instruments and methods of co-ordination and surveillance of economic policies in the Economic and Monetary Union (EMU). There is broad agreement that the framework for EMU should be urgently strengthened in order to anchor macroeconomic stability and the sustainability of public finances.

The key instrument for fiscal policy co-ordination and surveillance is the Stability and Growth Pact (SGP), which implements the Treaty provisions on budgetary discipline. Strengthening the Pact is important for both increasing the credibility of the agreed co-ordinated fiscal exit strategy and avoiding a repetition of past mistakes.

This proposal is part of legislative package comprising six texts which seeks to strengthen the pact by improving its provisions in the light of experience, not least of the crisis:

1) A Regulation amending the legislative underpinning of the preventive part of the Stability and Growth Pact (Regulation 1466/97);

2) A Regulation amending the legislative underpinning of the corrective part of the Stability and Growth Pact (Regulation 1467/97);

3) A Regulation on the effective enforcement of budgetary surveillance in the euro area;

4) A new Council Directive on requirements for the budgetary framework of the Member States;

5) A new Regulation on the prevention and correction of macroeconomic imbalances;

6) A Regulation on enforcement measures to correct excessive macroeconomic imbalances in the euro area.

The outlines of these proposals were announced by the Commission in two communications on economic governance: “ Reinforcing economic policy coordination ” (12 May 2010) and “Enhancing economic policy coordination for stability, growth and jobs – Tools for stronger EU economic governance” (30 June 2010).

In June 2010, the European Council agreed on the urgent need to reinforce the coordination of economic policies. In particular, it agreed on:

strengthening both the preventive and corrective parts of the SGP, including with sanctions and taking due account of the particular situation of euro-area Member States; giving, in budgetary surveillance, a much more prominent role to levels and evolutions of debt and overall sustainability; ensuring that all Member States have national budgetary rules and medium term budgetary frameworks in line with the SGP; ensuring the quality of statistical data.

IMPACT ASSESSMENT: no impact assessment was undertaken.

LEGAL BASE: Article 121(6) of the Treaty on the Functioning of the European Union (TFEU).

CONTENT: the preventive part of the SGP is meant to ensure that Member States follow prudent fiscal policies so that there is no need to adopt more stringent forms of coordination to avoid public finance sustainability being put at risk, with potential negative consequences for EMU as a whole.

Accordingly, Member States are required to present stability and convergence programmes outlining their plans to achieve medium-term budgetary objectives (MTOs), which are defined as a percentage of GDP in structural terms (i.e. adjusting for the effect of the cycle and excluding one-off and temporary measures) and are differentiated across countries around a close-to-balance position to reflect the level of public debt and liabilities related to ageing. Member States not having reached their MTO are expected to converge towards it at an annual pace of 0.5% of GDP in structural terms.

However, progress towards MTOs in the medium term has been generally insufficient. In a number of countries, even apparently sound budgetary positions before the crisis masked a strong reliance on windfall revenues to finance expenditure, the reversal of which contributed to soaring budget deficits.

To respond to these shortcomings the reform of the preventive part that is being proposed, while retaining the current MTOs and the 0.5% of GDP annual convergence requirement, makes them operational in terms of a new principle of prudent fiscal policy-making . This new principle will provide the benchmark against which countries’ fiscal plans in the stability and convergence programme will be examined.

A prudent fiscal policy implies that the rate of growth of public expenditure does not exceed, in principle, a prudent medium-term rate of growth of GDP, unless the MTO has been significantly overachieved or the excess of expenditure growth over the prudent medium-term rate is matched by discretionary measures on the revenue side.

Failure to keep to the agreed rate of growth of expenditure, in conjunction with the stipulated revenue measures, will make the Member State concerned liable to a warning from the Commission and, if persistent and/or particularly serious, a Council recommendation to take corrective action.

A temporary departure from prudent fiscal policy-making should be allowed in case of severe economic downturn of a general nature in order to facilitate economic recovery.

Special attention shall be paid to pension reforms introducing a multi-pillar system that includes a mandatory, fully funded pillar. Member States implementing such reforms shall be allowed to deviate from the adjustment path to their medium-term budgetary objective or from the objective itself, with the deviation reflecting the net cost of the reform to the publicly managed pillar, under the condition that the deviation remains temporary and that an appropriate safety margin with respect to the deficit reference value is preserved.

BUDGETARY IMPLICATION: the proposal relates to the extension of an existing action and does not require any additional human or financial resources.