The ‘Two-Pack’ reform package enters into force on 30th May 2013 in all euro area Member States

The ‘Two-Pack’package is completing budgetary surveillance cycle and further improving economic governance for the euro area

Brussels, 27-5-2013 — /europawire.eu/ — Since the launch of the euro, clear rules to ensure sound public finances have been in place in the form of the Stability and Growth Pact (SGP), which sets the well-known limits for budget deficits and public debt of 3% and 60% of GDP, respectively. However, the global economic and financial crises exposed shortcomings in economic governance and budgetary surveillance at the EU level. These shortcomings were effectively addressed with the creation in 2010-2011 of the European Semester of economic policy coordination and the six legislative proposals known as the ‘Six-Pack’, which strengthened the SGP in a number of ways.

However, given the higher potential for spillover effects of budgetary policies in a common currency area, there is a clear need for still stronger mechanisms specifically for the euro area. To address this need, in November 2011 the Commission proposed two further Regulations to strengthen euro area budgetary surveillance.

This reform package, the so-called ‘Two-Pack’, enters into force on 30th May 2013 in all euro area Member States. The new measures mean increased transparency on their budgetary decisions, stronger coordination in the euro area starting with the 2014 budgetary cycle, and the recognition of the special needs of euro area Member States under severe financial pressure. The entry into force of the Two-Pack also paves the way for further steps to be taken to reinforce the Economic and Monetary Union, as set out by the Commission in its ‘Blueprint for a Deep and Genuine EMU’ published last November (see IP/12/1272; MEMO/12/909).

Why are these two new Regulations needed?

To strengthen the economic pillar of the Economic and Monetary Union, euro area Member States needed to go beyond the ‘Six-Pack’ legislation agreed in 2011. Economic and budgetary policies pursued in euro area Member States have evident spillover effects elsewhere in the common currency area. In good times, this interdependence brings more prosperity. In harder times, it means risks are shared to a greater extent. This risk sharing should be accompanied by shared responsibility, implying a greater degree of information sharing and coordination as well as a seamless procedure covering all eventualities, including the use of financial backstops.

What is the legal basis for the new legislation?

The new procedures are based on Article 136 of the EU Treaty. This Article enables euro area Member States to strengthen the coordination and surveillance of budgetary policies in order to ensure the necessary budgetary discipline in the Economic and Monetary Union. The new legislation therefore only applies to the euro area.

What are the main components of the Two-Pack?

The Two-Pack comprises two Regulations designed to further enhance economic integration and convergence amongst euro area Member States. The Regulations build on and complement the Six-Pack reforms to the SGP, the European framework for fiscal surveillance, and the European Semester for economic policy coordination.

The first Regulation applies to all euro area Member States, with special rules applying to those in the corrective arm of the SGP, the Excessive Deficit Procedure (EDP).

The second Regulation sets out clear and simplified rules for enhanced surveillance for Member States facing severe difficulties with regard to their financial stability, those receiving financial assistance, and those exiting a financial assistance programme.

The Two-Pack creates a common framework in the euro area based on a graduated approach. It introduces appropriate surveillance requirements for a wide range of budgetary situations, to ensure a seamless continuity of policy monitoring.

The EU fiscal framework has already been amended with the Six-Pack. Why these extra changes?

The crisis has taught us about the need for more prudent fiscal policymaking throughout the economic cycle. The Six-Pack reforms to the SGP added new requirements for Member States in terms of budgetary policy, notably new fiscal rules. This is not the case of the Two-Pack, which focuses on coordination.

The crisis has also shown the need for further improvements to budgetary coordination and surveillance for euro area Member States, given their greater interdependence and susceptibility to spillover effects from each other’s fiscal decisions. This has led to an increased willingness to reinforce mutual surveillance and consider budgetary decisions a matter of common concern. Through strengthened cooperation and integration in the euro area, with graduated and closer monitoring, the Two-Pack will help to strengthen the economic part of the Economic and Monetary Union.

How will the Two-Pack improve euro area budgetary coordination?

The Two-Pack introduces a common budgetary timeline and common budgetary rules for euro area Member States. Specifically, and starting with the forthcoming budgetary cycle:

• By 30 April, euro area Member States must publish their medium-term fiscal plans (Stability Programmes), together with their policy priorities for growth and employment for the forthcoming 12 months (National Reform Programmes) in the context of the European Semester on economic policy coordination.
• By 15 October, euro area Member States must publish their draft budgets for the following year.
• By 31 December, euro area Member States must adopt their budgets for the following year.

A major innovation of the Two-Pack is that the Commission will examine and give an opinion on each draft budget by 30 November at the latest. If the Commission detects severe non-compliance with the obligations under the Stability and Growth Pact, it will ask the Member State concerned to submit a revised plan. For the euro area as a whole, the Commission will publish a comprehensive assessment of the budgetary outlook for the forthcoming year. The Commission’s opinions on national budgets and on the euro area will facilitate discussions in the Eurogroup.

As this exercise of coordinated surveillance takes place in the autumn, i.e. between two European Semesters, it usefully complements the existing governance framework by setting the scene for the following spring as well as by providing a follow-up to the recommendations addressed in the previous one. Also, in the spirit of integrated surveillance which led to the creation of the European Semester, the Two-Pack ensures consistency between budgetary and other economic policy processes and decisions.

Importantly, the Two-Pack will also enhance the soundness of national budgetary processes by obliging Member States to base their draft budgets on independent macroeconomic forecasts and ensure independent bodies are in place to monitor compliance with national fiscal rules.

How will the Two-Pack enhance economic and financial surveillance in the euro area?

For Member States in Excessive Deficit Procedure, the Two-Pack introduces a system of monitoring that will co-exist with, and complement, the requirements set out under the SGP. Graduated according to the EDP stage it finds itself in, the Member State concerned must regularly provide further information to the Commission on the measures it has taken to correct its excessive deficit. The Commission will then be in a better position to detect any risks to this correction. When such risks are detected, the Commission can address a recommendation directly to the Member State concerned so that it makes sure it does everything necessary to avoid being judged non-compliant and thereby avoid financial sanctions.

The Two-Pack also strengthens monitoring and surveillance for Member States threatened with, or experiencing, serious difficulties regarding their financial stability. The strength of monitoring and surveillance will depend on the seriousness of the financial situation of a Member State.

This includes, but is not limited to, those Member States receiving financial assistance, or in the process of phasing out such assistance. Those experiencing severe financial instability or receiving financial assistance on a precautionary basis will also be subject to very tight enhanced surveillance by the Commission and by the European Central Bank. This enhanced surveillance will build on, and go beyond, Member States’ requirements under an EDP.

On the basis of this surveillance, the Commission can conclude that a Member State must take further measures since its financial situation could have major adverse effects on the financial stability of the euro area. In such cases, the Commission can propose that the Council of Ministers recommend to the Member State concerned to adopt corrective measures or put together a draft macro-economic adjustment programme.

How does the Two-Pack relate to the Fiscal Compact Treaty?

The intergovernmental Treaty on Stability, Coordination and Governance in the Economic and Monetary Union, commonly referred to as the Fiscal Compact Treaty, is an agreement between Member States of the euro area and eight other EU Member States. Although it is not integrated into EU law it does include a commitment to transfer its substance into the EU legal framework within five years.

The Two-Pack integrates some of the elements of the Fiscal Compact Treaty into EU law, including the requirements for Member States in EDP to prepare economic partnership programmes and the requirement for ex-ante coordination of Member States’ debt issuance plans.

How does this new legislation relate to the Stability and Growth Pact and the European Semester?

The Two-Pack is designed to fit seamlessly into the SGP and to complement it. As part of the European Semester, in the spring of every year, Member States present their medium-term fiscal plans (called Stability Programmes for euro area Member States; Convergence Programmes for the others). For euro area Member States, the Two-Pack adds an autumn counterpart to the spring exercise, but focusing only on the budgetary plans for the forthcoming year.

The Commission will issue an opinion on whether or not a draft budget is in line with the requirements of the SGP and the country-specific recommendations as part of the European Semester in the area of budgetary policy, before the budget is adopted. It is important to stress, however, that the Two-Pack does not give the Commission the right to change draft national budgets, nor does it create the obligation for Member States to strictly follow the Commission’s opinion. The added value of this exercise is the direct guidance that it introduces within the budgetary procedure, thereby equipping all stakeholders in the national budgetary process with the information they need before they make their decision on the budget.

Additional reporting on measures taken by Member States in EDP comes on top of the existing requirements they face under the SGP rules, without overlapping or replacing these. Nonetheless, this complementary information increases the responsibility of the Commission in delivering timely guidance on a breach of EDP recommendations. It enhances the preventive role of the EU in that respect, and supplements the strengthening of the enforcement mechanisms in the euro area (in the form of gradual financial sanctions) introduced with the Six-Pack.

Thanks to these new reporting procedures, the Two-Pack strengthens the SGP by adding to the Commission’s toolbox for making recommendations. For example, if the Commission flags in its opinion that a draft budget is not in line with its SGP obligations and that the Member State in question does not take measures to correct it, this early flagging by the Commission can be used later to form part of the evidence in deciding, for instance, whether to place the Member State in EDP if its deficit or debt is not consistent with SGP rules.

What happens when a Member States exits an adjustment programme or precautionary assistance?

The Two-Pack introduces a new system of post-programme surveillance for Member States emerging from adjustment programmes or precautionary assistance. Until they have paid back a minimum of 75% of the assistance received, they will remain subject to new enhanced surveillance. This is to ensure a successful and durable return to the markets as well as fiscal sustainability, to the benefit of the individual Member State concerned as well as the euro area as a whole.

Why create an enhanced surveillance process on top of the normal surveillance process? Does this assume that the latter will not work?

The surveillance process has been considerably improved with the Six-Pack. However, experience shows that we should expect the unexpected. Consequently, the enhanced surveillance procedures introduced by the Two-Pack will enable closer monitoring of countries either threatened with, or experiencing, financial difficulties. They will give the Commission the powers needed to ensure, or re-establish, a sustainable path.

Why adapt the implementation of the Stability and Growth Pact, the Macroeconomic Imbalance Procedure and the European Semester for programme countries? Doesn’t it weaken surveillance?

Macroeconomic adjustment programmes are very broad in scope and go well beyond strict fiscal issues and multilateral surveillance. In practice, the Member State concerned is asked to do whatever is identified as needed to improve its near, medium, and long-term economic and financial situation. Suspending implementation of the Macroeconomic Imbalance Procedure/Excessive Imbalance Procedure and the monitoring and reporting under the SGP and the European Semester will help avoid unnecessary duplication of monitoring and reporting obligations.

Is the enhanced surveillance in the Two-Pack consistent with that foreseen in the ESM/EFSF guidelines for countries under precautionary financial assistance?

Yes. The Commission prepared the relevant ESM/EFSF guidelines and discussed them with the Member States with the Two-Pack in mind, thus ensuring natural consistency between the texts. What the Two-Pack does is to embed in the EU legal framework the working practices established under these intergovernmental instruments.

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