European Commission Proposes New Economic Governance Scheme for Member States

On April 26, the European Commission announced a proposal to implement the comprehensive reform of the EU’s economic governance rules to resolve the aftermath of the economic and financial crisis. The central objective is to strengthen public debt sustainability and promote sustainable and inclusive growth in all Member States through reforms and investing.

The economic surveillance framework launched in February 2020, and in November 2022, the Commission presented directions for a reformed EU economic governance framework. It consists of the EU fiscal policy framework (the Stability and Growth Pact and requirements for national fiscal frameworks) and the Macroeconomic Imbalance Procedure (the program which aims at the prevention of occurrence of potentially harmful macroeconomic imbalances that may threaten EU countries’ economies).

The proposal calls for Member States to design and present plans setting out their fiscal targets, measures to address macroeconomic imbalances and priority reforms and investments over a period of at least four years. These plans will be assessed by the Commission and endorsed by the Council based on common EU criteria.

Such approach is prognosed to strengthen national ownership of Member States and allow them to develop their own fiscal adjustment methods and improve investment commitments. Member States will present annual progress reports to facilitate monitoring and enforcement of the implementation of these commitments.

The new fiscal surveillance process will be integrated in the European Semester (EU’s system of the coordination and surveillance of economic and social policies), which will remain the central platform for economic and employment policy coordination.

Tackling Fiscal Challenges 

Since a unified approach may no longer be acceptable due to varying conditions of EU’s economies, the proposal seeks to work on a more risk-based surveillance framework that puts public debt sustainability at its core, while promoting sustainable and inclusive growth.

Member States’ individual plans will set out their fiscal adjustment paths, formed as prolonged expenditure targets. The paths will be extended in time and are currently set at the 7-years mark.

For each Member State with a government deficit above 3% of GDP or public debt above 60% of GDP, the Commission will issue a country-specific “technical trajectory”, aimed at keeping debt levels at check and maintaining or bringing deficits below 3% of GDP in the medium term. The 3% and 60% of GDP reference values for deficit and debt will remain unchanged.

Reforming and Investment Quickening

Green and digital transitions, strengthening of economic and social resilience and the need to work on Europe’s security require sustained public investment. Reforms enhancing sustainable and inclusive are necessary for debt-reduction plans.

As such, the proposal aims to facilitate and encourage Member States to carry out important reform and investment measures. Member States will benefit from a more gradual fiscal adjustment path if they follow specific and transparent criteria.

Achieving Effective Enforcement

The proposals put in place a stricter enforcement regime to ensure Member States deliver on the commitments they undertake in their medium-term fiscal plans.

For Member States that face substantial public debt challenges, departures from the agreed fiscal adjustment path will by default lead to the opening of an excessive deficit procedure.

If the Member State struggles to comply with reform and investment commitments it has undertaken and requests for the extension of the fiscal adjustment period, it may actually result in such period being shortened.

Next Steps

The Commission calls on the European Parliament and the Council to reach agreement on the proposals presented as quickly as possible, but the established implementation deadlines have not yet been set in stone. However, an agreement on the relevant legislative acts is expected by the end of 2023.

European Commission’s press release

Factsheet of the new economic governance rules