Navigating the Maze

A Finance Watch primer on how to reform European economic governance. European Member States remain constrained by European economic governance – a maze of rules impacting their fiscal and socio-economic policies. Highly intertwined with an annual cycle of coordination known as the European Semester, Europe’s “three pillars” governance system aims to enforce fiscal discipline, ensure macroeconomic surveillance, and facilitate socio-economic coordination.

This publication looks at rules in place, their legal foundation and how Europe can best reform them. This primer helps the reader better understand European economic governance by:

  1. Clarifying the main elements within the legislative framework, provided in Part 1 – The Maze. It includes a presentation of the primary and secondary legislation as well as extra-legislative and interpretive documents that comprise the framework for fiscal surveillance (Pillar I), macroeconomic surveillance (Pillar II) and socio-economic coordination (Pillar III).
  2. Discussing procedures to reform its different components as contained in Part 2 – The Navigation. It includes a discussion on why fiscal rules need to remain frozen and what needs to be reformed in the short and long run.

Main points:

  • Europe faces serious environmental, economic and social challenges that require a rethink on public intervention. But European governments’ are not free to do as they wish. Fiscal and socio-economic policies they devise are constrained by a self-imposed maze of rules that comprise European economic governance.
  • European economic governance is a multilateral and three-pillar system aimed at (i) enforcing fiscal surveillance, (ii) ensuring macroeconomic surveillance and (iii) facilitating socio-economic coordination. These pillars are grounded in primary legislation (i.e. articles of the EU treaties), developed in secondary legislation (i.e. regulation, directive) and refined via extra-legislative interpretive documents (e.g. code of conduct, commonly agreed positions).
  • To allow Member States to respond to the Covid-19 pandemic, the European Union has put on ice for 2020 and 2021 its fiscal rulebook via the activation of the general escape clause of the Stability and Growth Pact (SGP). At the time of writing, a debate takes place on the appropriate timing to reactivate EU fiscal rules and on whether they should be reformed first – and to what extent as different legislative procedures could apply.
  • A thorough understanding of the policy maze is the first step to any meaningful effort to reform it. To grasp its complexity, Finance Watch provides in this primer the key elements of the European economic governance as well as the main procedures to reform its prominent fiscal pillar. Reform measures needed now are:
    • Tweaking the Stability and Growth Pact Code of Conduct: the low-hanging fruit that would clarify escape clauses and ease existing flexibilities, but would fail to address fiscal rules’ main flaws.
    • Transforming both arms of the Stability and Growth Pact via the Ordinary Legislative Procedure: to improve flexibility for sustainable public investment, as well as better account for public spending quality and reduce ill-timed debt-reduction pressures, among others.
    • Rewriting the European treaties via the ordinary or simplified revision procedures: needed if we are to scrap or relax the core numerical fiscal rules – maximum 3% deficit-to-GDP ratio and 60% debt-to-GDP ratio – and integrate the sustainability imperative at the heart of the fiscal and socio-economic pillars.