Economic policy co-ordination in Stage II of Economic and Monetary Union

Fabio Colasanti

The Treaty on European Union and the passage, in January 1994, to Stage II of the process towards Economic and Monetary Union have brought significant additions to the Communityís arsenal of instruments to monitor economic developments in the Member States. The most important development in this regard is certainly the introduction of a procedure, the "broad guidelines", which moves the taking of the main decisions on economic policy to the highest possible political level in the Community, namely the European Council. A number of other important changes have also taken place and the purpose of this paper will be to briefly present an overview of the main instruments which currently constitute the Community's policy co-ordination framework .

The main procedures now in force are:

- the "broad guidelines" on economic policy (art.103.2),
- the "multilateral surveillance" (art. 103.3 and 103.4),
- the "excessive deficit" (art. 104c),
- the "convergence programmes" (art 109e.2).

Additional available instruments are the Annual Economic Report, the Country examinations and the Medium-term Financial Assistance operations. The whole monitoring activity relies heavily on the results of the bi-annual economic forecasts exercises. In fact these exercises, conducted by the Commissionís services, provide most of the statistical material used in the documentation for all the procedures just mentioned.

The "broad economic guidelines"

Article 103 calls on Member States to "regard their economic policies as a matter of common interest" and to "co-ordinate them within the Council". To this end it sets up a procedure to define the "broad guidelines of the economic policies of the Member States and of the Community". Article 103.2 lays down that the draft for the guidelines will be formulated by the [EcoFin] Council, acting by qualified majority on a recommendation from the Commission. This draft will then be transmitted to the European Council which will discuss and approve it (given the peculiar legal status of the European Council, the wording of the Treaty does not mention any formal approval but only refers to the discussion of "a conclusion on the broad guidelines"). On the basis of the conclusion of the European Council, the [EcoFin] Council adopts, by qualified majority, a recommendation setting out the broad guidelines. The Treaty also obliges the Council to inform the European Parliament of its recommendation.

These provisions of the Treaty have introduced important innovations. The most important one concerns the role of the guidelines and their political importance. Economic policy co-ordination within the Community is based on the building of a consensus among Member States on the most appropriate policy course. To this end it is useful to produce, at periodic intervals, a document which embodies the existing common view on policy matters and which then can be used as a reference both for future discussions and for the monitoring of economic developments in the Community and in the Member States. Until now, this policy guidelines role had been played by the Annual Economic Report (AER), introduced by the 1974 convergence decision and confirmed by the equivalent Council decision of 1990 introduced to coincide with the entry into force of Stage One of the EMU process. The provisions of the European Union Treaty do not, however, explicitly mention, the AER and clearly attribute the role of reference document for the conduct of economic policy within the Community and in the Member States to the guidelines report.

Significant procedural differences exist for the adoption of this guidelines document compared with those previously pertaining to the AER. The guidelines, for example, are effectively adopted at a higher political level (European Council, i.e. heads of State and Government) than was the case with the Annual Economic Report (EcoFin Council). This change was obviously motivated by the desire to increase the political value and the visibility of the document and, through these means, enhance the effectiveness of economic policy co-ordination.

A second change concerns the role of the Commission in the drafting of the document. The Annual Economic Report was a standard Community document proposed by the Commission to the Council for adoption. This meant that the Council discussion took place only on the basis of the draft provided by the Commission and that any modifications to the Commission's text could only be introduced by the Council acting by unanimity. The guidelines, on the other hand, are "formulated by the Council acting by a qualified majority on a recommendation from the Commission". This means that the Council is not restricted in its work to the draft provided by the Commission. Indeed, during the first application of the procedure in December 1993, important additions and modifications to the Commission's draft were made by the Council on the basis of proposals coming from the Member State which held the Presidency (Belgium) and from the Monetary Committee.

A final significant procedural change concerns the role of the European Parliament and of the Economic and Social Committee. Under the previous arrangements, these two institutions were requested to produce an opinion on the draft Annual Economic Report which was adopted by the Commission. The Council in fact could not adopt the document without having received the latter. The Treaty on European Union only stipulates that the Council shall inform the European Parliament of the recommendation it has adopted and does not mention at all the Economic and Social Committee.

The Treaty, appropriately, does not specify the scope and the detailed content of the guidelines nor does it say anything about the frequency of their adoption. As to their scope and content a decision had to be made between two extreme options: on the one hand, the very high political level at which they are discussed might suggest very broad statements covering the Community as a whole and a medium term time horizon; on the other hand, the desire to have a document available which could be used as a reference for the monitoring of developments in the Member States might call for a very detailed document containing perhaps quantitative targets by Member States. The first application of the procedure in December 1993 has resulted in a medium term document containing some quantitative targets for the Community as a whole. The emphasis on the macro-economic aspects, presented in the original draft from the Commission, was tempered by the addition by the Council of various paragraphs relating to structural adjustment policies. Both the original draft from the Commission and the additions by the Council, however, were strongly inspired by the analysis contained in the Commissionís White Paper "Growth, Competitiveness and Employment" discussed at the same time as the guidelines.

As to the frequency of the adoption of the guidelines, a consensus rapidly appeared on the advantages of yearly exercises. The first application of the procedure took place in December 1993 because of the desire to translate, as rapidly as possible, the White Paper suggestions into actual policies, but it has been decided that from 1994 onwards the guidelines will be adopted by the Summer European Council. This choice was strongly motivated by the desire to influence the formulation of national budgetary plans for the year in question since most Member States in fact prepare their budgets during the Summer and present them to their Parliaments in September/October of each year.

With regard to the Annual Economic Report, the European Commission has decided to retain it, although with a modified format and role. The AER, from now on, will be produced by the Commission under its sole responsibility. The document will not contain recommendations and will confine itself to an analysis of present economic developments in the Community and in the Member States as well as progress made in implementing the current guidelines. The document will also contain indications regarding the available economic policy options. The Commission will adopt the document at the beginning of the year and transmit it for information to the Council, the European Parliament and the Economic and Social Committee. The principal aim in publishing this document will be to spark off an open debate on the course of economic policy from which the Commission could draw useful indications for the drafting of its recommendation for the guidelines exercise.

The multilateral surveillance

This procedure was first formalised by the convergence decision of March 1990. Its aim was to create opportunities for policy makers to discuss the current situation in an open and frank way. The rationale was to use "peer pressure" as an alternative to legally binding texts or sanctions which are impossible under the current Community constitutional arrangements (the excessive deficit procedure constitutes a limited exception to this general rule). The experience of previous years, and in particular that gathered in managing the exchange rate mechanism, had shown that this could indeed be a powerful instrument.

The role of the multilateral surveillance process has been spelled out more precisely by the Treaty. Article 103.3 calls on the Council to "monitor economic developments in each of the Member States and in the Community as well as the consistency of economic policies with the broad guidelines". This monitoring will be conducted on the basis of reports provided by the Commission. Art. 103.4 confirms the possibility for the Council to address a public recommendation to a Member State if its policies are not considered to be consistent with the guidelines or if "they risk jeopardising the proper functioning of economic and monetary union". Such a recommendation should be adopted by a qualified majority on a recommendation from the Commission. The Council and the Commission have a duty to report to the European Parliament on the results of the multilateral surveillance exercises. The President of the Council may be invited to appear before the competent Committee of the Parliament if the Council has made its recommendations public.

Since 1990, "multilateral surveillance" discussions have taken place in the Council twice a year. The Commission prepared detailed documentation which was analysed in an "Enlarged Monetary Committee". The Council then received a shorter document identifying the main issues from the Enlarged Monetary Committee and a document (sometimes a formal communication, sometimes a working document) from the Commission. The Council discussion took place in a very restricted framework (head of delegation plus two) and led to the release of a short, typically one page, statement included in the minutes of the Council meeting.

The wording of the Treaty, like that of the 1990 con-vergence decision, however, attributes to multi-lateral surveillance a brief which goes beyond these twice yearly Council sessions. Indeed all the procedures described in this paper (except perhaps the guidelines) can be said to form part of the multilateral surveillance process.

For practical reasons it has been decided to have one formal "multilateral surveillance" session at the turn of the year given that in the Summer the Council would have already an occasion to monitor the economic situation during the formulation and the adoption of the guidelines. This surveillance session would allow for a mid-term assessment of the implementation of the Guidelines. On the other hand, the conclusions of the Brussels European Council in December 1993 provide for an annual report from the [EcoFin] Council to the European Council in December on the implementation of the guidelines.

The excessive deficit procedure

The excessive deficit procedure, laid down in Article 104c, to ensure the respect of the Member States' commitment "to avoid excessive government deficits" (Art.104c.1) stands out from the rest of the other instruments which are aimed at fostering economic policy co-ordination in the Community. Whereas all other procedures aim at agreeing common overall economic goals and at ensuring, through persuasion, that the decisions taken at the national level are consistent with these goals, the excessive deficit procedure has a legal nature and force. The margin for interpretation and assessment of the figures is narrowly defined in the Treaty itself. In a narrow sense, the excessive deficit procedure appears more as an instrument in an harmonisation process than as an integral part of the process of economic policy co-ordination as is commonly understood.

The excessive deficit procedure, consists essentially in an assessment, to be made by the Council, of the budgetary situation existing in each Member State. This assessment aims at ascertaining the existence, or not, of an "excessive deficit" in each Member State. The Treaty specifies that the assessment must particularly be conducted on the basis of two criteria:

a) whether the ratio of the planned or actual government deficit to gross domestic product exceeds the reference value fixed in a protocol annexed to the Treaty (3 per cent of GDP);

b) whether the ratio of government debt to gross domestic product exceeds a reference value also fixed in the same protocol (60 per cent of GDP).

However, the first criterion is moderated by the precision that an excess over the reference value may not be considered as implying the existence of an excessive deficit if "the ratio has declined substantially and continuously and reached a level that comes close to the reference value" or "the excess over the reference value is only exceptional and temporary and the ratio remains close to the reference value". In the case of the second criterion, there is no reason to conclude that an excessive deficit exists if "the ratio is sufficiently diminishing and approaching the reference value at a satisfactory pace".

The above assessment is conducted by the Council on the basis of a report prepared by the Commission. There is no obligation for the Commission to prepare a report unless it considers that a Member State does not fulfil one or other of the two criteria. The Treaty specifies that in its report the Commission shall take into account "whether the government deficit exceeds government investment expenditure and take into account all other relevant factors, including the medium-term economic and budgetary position of the Member State". The first part of this provision reflects the preference expressed by some delegations, during the negotiation of the Treaty, for a deficit to GDP reference value embodying the so called "golden rule" (i.e. a public deficit not exceeding the amount of public investment).

The Treaty lays down detailed rules for a series of measures that can be taken against a Member State not complying with its provisions. These range from a public recommendation addressed to the Member State to actual sanctions such as the obligation to publish additional information before issuing bonds and obligations, reductions in lending from the European Investment Bank and the obligation "to make a non-interest-bearing deposit of an appropriate size with the Community until the excessive deficit has, in the view of the Council, been corrected".

The implementation of the excessive deficit procedure has required a considerable amount of preparatory work aimed at agreeing harmonised definitions for the terms "government deficits" (general government net borrowing) and "government debt" (gross general government debt) used in the Treaty. This work has led to the adoption of secondary legislation and to the adoption of agreed procedures for the notification to the Commission of the relevant statistical and economic data.

The convergence programmes

The convergence programmes were introduced during Stage I as a way of reinforcing the commitment of Member States to achieving economic convergence. Member States were to present, on their own initiative and under their sole responsibility, multi-annual programmes spelling out their convergence objectives and the means which were to be deployed to achieve them. These programmes were to receive the widest degree of consultation and approval domestically (publication; wide diffusion; if possible, discussion in the national parliament) and were then to be "endorsed" at the Community level. The idea was that the Community at large would take note of the intention of the country in question to achieve certain quantified results in the area of economic convergence. The proposal received a warm welcome in the countries where public opinion was largely favourable to the European ideal. It was widely believed that Community encouragement and endorsement would strengthen the hand of the government in implementing tough and unpopular measures.

Convergence programmes, on this voluntary basis, were presented as early as October 1991 and by mid-1993 nine countries had presented convergence programmes. These programmes were very different from one another in the areas, and time horizon, covered and in the detail concerning the measures to be implemented. Attempts to obtain the presentation of programmes that would cover the same areas and that would, if possible, be based on the same macro-economic assumptions met with a distinct lack of enthusiasm from most Member States.

The Maastricht Treaty has given a legal basis to the convergence programmes by specifying (art. 109e.2) that such programmes would have to be adopted "if necessary" before the transition to Stage II.

As of now, eleven of the twelve Member States have presented convergence programmes, with the exception of Luxembourg which already satisfied all the Maastricht criteria. Of the countries which presented programmes several of them have already submitted revised programmes since previous versions had clearly become out of date, while a number of the remaining countries are now also in the process of revising their programmes.

The country examinations

Detailed analysis of the economic situation in individual Member States has been prepared by the services of the Commission for some time. These studies are discussed in either the Economic Policy Committee or the Monetary Committee and provide a useful occasion to examine, in greater detail than is the case on other occasions and in a medium term perspective, the policy problems of a specific Member State. These studies, and their discussion, allow "peer pressure", on which much of the co-ordination process is based, to work very effectively.

The Commission services have recently taken the initiative to publish these studies in the European Economy series.

The Medium-term Financial Assistance (MTFA) Operations

Balance of payments Community loans carry a considerable degree of conditionality and they therefore allow economic policy co-ordination to become more effective since the Community can impose conditions on the applicant Member State. The nature of the Community as a small club of countries bound together by strong ties of friendship and common interests precludes any possibilities either of acrimonious discussions or of the imposition of conditions that the applicant Member State would find too hard to accept. Nevertheless, these operations are very effective. Very often the disbursement of the loan is made in various instalments linked to the reaching of certain pre-determined macroeconomic targets. At the beginning of 1994, only one MTFA operation is active and it concerns Italy which in 1993 asked for a Community loan of 8 billion Ecus.