European economic governance

European economic governance is defined by the Economic and Financial Affairs Directorate-General of the European Commission as a series of decisions aimed at strengthening economic and budgetary coordination for the EU as a whole, and for the euro area in particular.

Economic and fiscal governance measures have been tightened in response to Europe’s continuing economic and financial crisis, which began in 2008. The overall aim is to put economies across the EU on the path to growth and job creation.

The cornerstone of the EU response is a new set of rules on enhanced economic governance which came into force on 13 December 2011 and has four main components:

• stronger preventive action through a reinforced Stability and Growth Pact (SGP), and deeper fiscal coordination;
• stronger corrective action through the reinforced SGP;
• minimum requirements for national budgetary frameworks;
• preventing and correcting macroeconomic and competitiveness imbalances.

These four components require the Member States to make significant progress towards medium-term objectives (MTO) for their budget balances.

Part of the reinforced SGP is an Excessive Deficit Procedure (EDP), which can be implemented after taking account of a government’s debt developments, as well as its deficit. Member States with a debt over 60% of GDP should reduce it in line with a numerical benchmark. Progressive financial sanctions now take effect at an earlier stage of the EDP.

Member States will be required to ensure that their national budgetary frameworks are in line with minimum quality standards and cover all administrative levels. To achieve medium-term objectives, national fiscal planning should span several years.

The Commission has stated that, over the past decade, economic choices by Member States have led to ‘competitiveness divergences’ and ‘macroeconomic imbalances’ within the EU. The new surveillance mechanisms will aim to prevent and correct such divergences. The Commission will rely on an alert system that uses a scoreboard of indicators and in-depth country studies, strict rules in the form of a new Excessive Imbalance Procedure (EIP) and better enforcement in the form of financial sanctions for Member States which do not follow up on recommendations.

Individual elements of European economic governance include:

• the Euro Plus Pact (148 KB PDF)
• the so-called ‘six pack’;
• specific financial assistance for individual EU Member States that have difficulties and request help from the EU;
• the Treaty on Stability, Coordination and Governance, known as the Fiscal Treaty, an intergovernmental agreement signed by 25 EU Member States on 2 March 2012 and entered into force in January 2013.

Individual measures

The Euro Plus Pact was signed in March 2011 by 23 Member States to give further impetus to governance reforms. The signatories included six countries from outside the euro area: Bulgaria, Denmark, Latvia, Lithuania, Poland and Romania. The Pact commits countries to stronger economic coordination for competitiveness and convergence. Concrete goals are agreed on and reviewed each year by heads of state or governments. The Pact is integrated into the European semester cycle of policy governance, and the Commission monitors the implementation of commitments.

The ‘six pack’, which came into force in December 2011, comprises five regulations and one directive. It covers fiscal and macroeconomic surveillance under the new Macroeconomic Imbalance Procedure (MIP) and strengthens the EU’s Stability and Growth Pact.

Cyprus, Greece, Hungary, Ireland, Latvia, Portugal, Romania and Spain have to date been granted special financial assistance. This has been accompanied by fiscal and economic measures, set out in Troika memoranda, which these Member States are obliged to implement. The Troika is made up of the International Monetary Fund (IMF), European Union (EU) and European Central Bank (ECB).

The intergovernmental Fiscal Treaty demonstrates the willingness of the Member States to enshrine the culture of financial stability in their legislation, mirroring the EU fiscal rules at national level. This means that if a country does not properly implement the new EU budget rules in national law and fails to comply with a ruling by the European Court of Justice (ECJ), the ECJ can impose financial sanctions. On 21 December 2012, Finland was the twelfth euro zone Member State to ratify the Fiscal Treaty, meaning the Treaty entered into force on 1 January 2013.

In order to avoid neighbouring countries being affected by difficulties in one euro area Member State, the Commission has also introduced extra surveillance to contain problems. Thus, the so-called ‘two pack’ (two regulations to enhance economic surveillance, coordination, integration and convergence amongst euro area Member States), which came into force on 30 May 2013, introduced a new cycle of monitoring for the euro area. This means that the euro zone Member States (except for those under macroeconomic adjustment programmes) submit their draft budgetary plans every October for the opinion of the Commission.

Under the ‘two pack’, Member States in the Excessive Deficit Procedure must submit regular progress reports on steps they are taking to correct their deficits. Countries experiencing financial difficulties or which are under precautionary assistance programmes from the European Stability Mechanism are put under enhanced surveillance, during which they are subject to regular reviews by the Commission and must provide additional data on their financial sectors. Furthermore, Member States whose difficulties could adversely affect the rest of the euro area can be asked to prepare full macroeconomic adjustment programmes. The ‘two pack’ also includes an element of post-programme surveillance.

These measures have had an impact on industrial relations in EU Member States over the past few years, mainly in the areas of pay, wage indexation and employment, triggering pay pauses, pay freezes and pay cuts, particularly in the public sector. Cuts in employment in the public sector are also being made in order to reduce spending and shrink government debt in line with EU targets. They are also likely to accelerate existing industrial relations trends in EU Member States, such as the decentralisation of collective bargaining, deregulation of the labour market and decreases in trade union density.

In some EU Member States, the influence of the EU’s economic governance measures is negligible, but in others – particularly those that have received targeted financial assistance from the EU – the impact is severe. For more details, see the Eurofound report Impact of the crisis on industrial relations (TN1301019S).

See also: Annual Growth Survey; Broad Economic Policy Guidelines; Collective industrial relations; Country-Specific Recommendations; Economic And Monetary Union; European Globalisation adjustment Fund; Lisbon Strategy; Macroeconomic Imbalance Procedure; National Action Plans; National Reform Programmes; Treaty on Stability, Coordination and Governance.