Member States worked hard in 2013 to get public finances under control and succeeded in halving the EU’s overall budget deficit from its peak in 2009. They also engaged in structural reforms — the fundamental economic reforms to pension and tax systems, labour laws or product and service markets. These have changed the way economies function and can enhance Member States’ potential to grow and create jobs. Ireland became the first country to exit its economic adjustment programme.
In addition to reinforced capital requirements for banks, which enter into force on 1 January 2014, the EU has made significant progress towards the completion of a banking union in the euro area in order to increase financial stability and protect taxpayers’ interests. The banking union is open to all Member States, and also to non-euro area countries. Only a common system will succeed in breaking the vicious cycle in which sovereigns and their banks reinforce each other’s difficulties. One central pillar of the banking union — the Single Supervisory Mechanism — was agreed in 2013 and will become fully operational in 2014. It will be complemented by a second pillar, the Single Resolution Mechanism, on which the Parliament and the Council adopted their respective positions in December 2013 with a view to swift trilogue negotiations in 2014. These two mechanisms, underpinned by a single banking rule book common to all 28 EU Member States, will make banks more stable and avoid the prospect of taxpayers picking up the bill for failing banks in the future.
Banner hanging from the European Commission Berlaymont building in Brussels, Belgium, welcoming Latvia to the euro area.
A key instrument in the European Union’s economic governance system is the European semester, which entered its third year in 2013. The semester process ensures the close coordination of Member States’ budgetary policies under the Stability and Growth Pact and economic policies in line with the Europe 2020 strategy, the EU’s long-term growth and jobs plan.
The purpose of the European semester is:
to identify the major economic and social challenges for the EU and the euro area, reflecting the growing interdependence between Member States;
to assess policy progress, detect new policy challenges early on and, through country-specific recommendations (CSRs), guide Member States to implement their policies in ways that help the EU to adjust and grow sustainably, providing jobs and decent living standards for all.
Based on the guidance given by the Commission in its 2013 annual growth survey, the March 2013 European Council set EU-wide reform priorities for the year ahead. These priorities remain unchanged from the previous year, partly because major economic challenges require sustained policy attention, but mainly because the evidence shows that the EU’s strategy is working. The priorities are:
pursuing differentiated, growth-friendly fiscal consolidation;
restoring normal lending to the economy;
promoting growth and competitiveness for today and tomorrow;
tackling unemployment and the social consequences of the crisis;
modernising public administration.
Olli Rehn, European Commission Vice-President responsible for Economic and Monetary Affairs and the Euro, during a debate on the European semester in the European Parliament in Strasbourg, France.
These priorities informed the Member States’ economic and fiscal plans over the course of 2013. In April, Member States submitted their medium-term budgetary plans (stability or convergence programmes) and planned economic reforms (national reform programmes) to the Commission for assessment. Based on an integrated analysis covering fiscal, macroeconomic and structural policies, the Commission proposed concrete policy advice for each country, or CSRs, at the end of May. The CSRs were discussed by the Member States, and subsequently endorsed by the June European Council and adopted by the Council of the European Union in July. Policy advice was thus given to Member States before they started to finalise their draft national budgets and reform plans for 2014. The Commission closely monitored the implementation of the CSRs during the second half of 2013. The Commission also took action to ensure that EU cohesion policy complemented fiscal consolidation and structural reforms, by supporting investment in growth and jobs and the implementation of CSRs.
In May 2013, the ‘two-pack’ budgetary legislation for the euro area entered into force. October 2013 marked the first concrete instance of the new rules in action, as euro area Member States submitted their draft national budgetary plans to the Commission for its views. The Commission’s overall assessment of these budgetary plans on 15 November was relatively positive. Most plans were found to be broadly in line with the debt and deficit commitments made by euro area countries, including those under the excessive deficit procedure (the EU’s strengthened monitoring system for countries with deficits over 3 % of GDP). However, in some countries, the Commission found there was little room for manoeuvre.
The Commission’s opinions and the draft budgetary plans themselves were carefully scrutinised and discussed by finance ministers in the Eurogroup in November. They found that compliance with the rules of the Stability and Growth Pact was at risk for a number of countries, but ministers also manifested their full commitment to addressing this risk. It was agreed that Member States should focus on the quality and composition of any further fiscal adjustments so as to ensure these are as growth friendly as possible.
The two regulations constituting the ‘two-pack’
The main features of the ‘two-pack’ are as follows.
Tighter monitoring and closer coordination of budgetary policy within the euro area, including a common assessment of draft budgetary plans in autumn and continuous surveillance of excessive deficits in the euro area.
Increasing accountability and responsibility in national policy setting. In this regard, national independent forecasts will form the basis for national budgets, thereby increasing reliability and credibility, while national independent institutions will monitor compliance with national fiscal rules, thus strengthening ownership of European budgetary commitments.
Enshrining monitoring principles used in the granting of financial assistance into the Union framework. This establishes new enhanced surveillance, entailing closer monitoring than under the normal surveillance processes, and means that the obligations of countries under a macroeconomic adjustment programme are placed within the EU framework and that a regime for postprogramme surveilalnce is introduced.
The macroeconomic imbalances procedure, which came into force in 2011, provides for ongoing analysis of all 28 Member States’ economic policies throughout the year, allowing for risks such as bubbles forming in housing markets or losses in competitiveness to be flagged early, before they become a problem for the wider economy and other Member States.
Monitoring takes place through a scoreboard of statistical indicators, which is published every autumn in the alert mechanism report (AMR). This is followed up with more in-depth analysis if needed.
In 2013, the Commission concluded that Member States were making progress in correcting the imbalances that built up before the crisis. A number of Member States have reduced their deficits and achieved significant improvements in cost competitiveness. However, further progress is needed to reduce excessive debt and improve the net international investment position of the most indebted economies. In the 2014 AMR
The annual growth survey found that the biggest challenge facing the Union and its Member States in 2014 will be to nurture and boost the recovery that got underway in 2013. The survey showed that Member States made progress on the five priorities identified in 2013 and have begun correcting the imbalances that developed before the crisis.
Signs of economic improvement should, therefore, be taken as an encouragement to pursue efforts with determination, avoiding risks of fallback, complacency or ‘reform fatigue’. Fairness considerations and clarity about the goals to be achieved will be essential to make sure that the efforts made at national and European level bring tangible results in the medium and long term, and that they are accepted by citizens.
The European Stability Mechanism (ESM) saw its first full year of operation in 2013. It is a vital element for safeguarding financial stability within the euro area. Equipped with a lending capacity of €500 billion, the ESM is a key financial backstop, providing financial assistance to euro area Member States experiencing or threatened by financing difficulties. The ESM has already provided financial assistance to Spain, to help recapitalise its financial sector, and to Cyprus, to assist in implementing its macroeconomic adjustment programme. Programmes for Ireland, Greece and Portugal continued to be funded jointly by the European Financial Stabilisation Mechanism (EFSM), the European Financial Stability Facility (EFSF) and the International Monetary Fund (IMF).
The establishment of the ESM is not a stand-alone response to the sovereign debt crisis, but complements a series of reforms undertaken at national, euro area and EU levels. The efforts being made by Member States with respect to fiscal consolidation and structural reforms, along with EU and intergovernmental initiatives such as the strengthened Stability and Growth Pact, the Treaty on Stability, Coordination and Governance in the EMU (including a fiscal compact), the European semester and the banking union, are critically important for eradicating the roots of the crisis and preventing possible future crises. If, however, a euro area Member State does require financial assistance, the ESM will have the capacity and resources to act as a financial backstop and apply a lending instrument that will bridge the financing needs of that country until sovereign bond market access is re-established. To fulfil its purpose, the ESM raises funds by issuing money market instruments as well as medium- and long-term debt with maturities of up to 30 years. ESM issuance is backed by paid-in capital of €80 billion and the binding obligation of ESM Member States to provide their contribution to the ESM’s authorised capital stock.
The Commission communication on strengthening the social dimension of EMU
57 % (+ 2 %) of EU citizens living in the euro area say that the single currency is a good thing. In 2011 this was 56 %; this number then dropped by 1 percentage point to 55 % in 2012, and is now up to 57 %.
Ireland became the first country to successfully exit its economic adjustment programme in December 2013. The programme had been formally agreed in December 2010. It included a joint financing package of €85 billion and covered the period 2010–13.
‘The successful conclusion of the Irish programme is a strong signal that our common response to the crisis is delivering results’ — Olli Rehn, Commission Vice-President responsible for Economic and Monetary Affairs and the Euro.
On 21 November 2010, Ireland officially requested financial assistance from the EU and the IMF. The economic adjustment programme for Ireland included contributions from the EU/EFSM (€22.5 billion); euro area Member States/EFSF (€17.7 billion); bilateral contributions from the United Kingdom (€3.8 billion), Sweden (€0.6 billion) and Denmark (€0.4 billion); and funding from the IMF (€22.5 billion). Moreover, there is an Irish contribution through the treasury cash buffer and investments of the National Pension Reserve Fund.
The programme’s objectives were:
immediate strengthening and comprehensive overhaul of the banking sector;
ambitious fiscal adjustment to restore fiscal sustainability, with correction of the excessive deficit by 2015;
growth-enhancing reforms, in particular on the labour market, to allow a return to robust and sustainable growth.
Please note that some figures have been rounded, and the totals therefore may not represent the exact sums contained in the rows and columns.
| Review | Date | EFSF | EFSM | IMF | Bilateral | Total |
|---|---|---|---|---|---|---|
|
1st |
Q1 2011 |
3.6 |
8.4 |
5.8 |
0.0 |
17.8 |
|
2nd |
Q2 2011 |
0.0 |
3.0 |
1.4 |
0.0 |
4.4 |
|
3rd |
Q3 2011 |
3.0 |
2.5 |
1.5 |
0.5 |
7.4 |
|
4th |
Q4 2011 |
2.7 |
1.5 |
3.9 |
0.5 |
8.6 |
|
5th |
Q1 2012 |
2.8 |
3.0 |
3.2 |
0.7 |
9.7 |
|
6th |
Q2 2012 |
0.0 |
2.3 |
1.5 |
0.5 |
4.2 |
|
7th |
Q3 2012 |
0.0 |
1.0 |
0.9 |
0.7 |
|
|
8th |
Q4 2012 |
0.8 |
0.0 |
0.9 |
0.5 |
2.2 |
|
9th |
Q1 2013 |
1.6 |
0.0 |
1.1 |
0.7 |
3.43 |
|
10th |
Q2 2013 |
1.0 |
0.0 |
1.0 |
0.5 |
2.4 |
|
11th |
Q3 2013 |
2.3 |
0.0 |
0.76 |
0.25 |
3.31 |
|
12th |
Q4 2013 |
0.0 |
0.8 |
0.6 |
0.0 |
1.4 |
|
Total disbursements |
17.7 |
22.5 |
22.5 |
4.8 |
67.5 |
|
Please note that some figures have been rounded, and the totals therefore may not represent the exact sums contained in the rows and columns.
Euro area finance ministers endorsed the 12th and final review of the Irish adjustment programme in December 2013. The endorsement was based on the Commission’s draft compliance report released in November 2013. The Commission supported the Irish government’s decision to exit the adjustment programme in December as planned, and without a pre-arranged precautionary credit facility. The Eurogroup commended the Irish authorities for their steadfast implementation of the programme and noted that the then imminent completion of the Irish programme was proof that the EU’s strategy for responding to the crisis was delivering results. Final disbursements to Ireland by the EFSF, the EFSM and the IMF are ongoing.
Demand components of GDP (left axis), growth in real GDP (right axis).
Underlying government deficit excludes deficit-increasing financial-sector measures.
Percentage points.
Tax revenue includes direct and indirect taxes, and social contributions.
A minus sign signifies a worsening of the government deficit.
Regulation (EU) No 472/2013 on the strengthening of economic and budgetary surveillance of Member States in the euro area experiencing or threatened with serious difficulties with respect to their financial stability (OJ L 140, 27.5.2013)
Regulation (EU) No 473/2013 on common provisions for monitoring and assessing draft budgetary plans and ensuring the correction of excessive deficit of the Member States in the euro area (OJ L 140, 27.5.2013).
Commission report — Alert mechanism report 2014 (COM(2013) 790).
Commission communication — Strengthening the social dimension of the economic and monetary union (COM(2013) 690).
European Union: pages 20, 22, 34
iStockphoto.com/Stefan_Redel: page 43
European Central Bank: page 44