Sustainable Prosperity for Europe

Economic governance


Economic policy coordination in the euro area under the European Semester

12 November 2015
Fabian Zuleeg (Chief Executive and Chief Economist)



This paper was previously published on the website of the European Parliament Committee on Economic and Monetary Affairs (ECON)

Executive Summary 

This briefing paper was requested by the ECON Committee of the European Parliament, ahead of the regular Economic Dialogue with the Eurogroup President. It takes stock of the European Semester 2015 cycle and the current proposed changes to the European Semester process, identifying shortcomings in policy implementation and providing recommendations for improvement. Specific attention was paid to what actions the Eurogroup President could take.

The paper concludes that the implementation of the Country Specific Recommendations under the 2013 and 2014 European Semester processes has been less than satisfactory. While the proposed changes will streamline the process and make it more effective, an implementation gap will remain, driven by a fundamental political economy problem: implementation of reforms decided at EU level have to be justified politically at the national level.

A fully-fledged Economic and Monetary Union (EMU) with real decision-making power at its heart - implying significant transfer of sovereignty to the Eurozone level - would address this implementation gap, but this is not on the political cards. Instead, the Eurozone will continue to rely on a governance mechanism that can best be described as ‘enhanced coordination’, associated with limited enforcement/implementation mechanisms.

This process can be improved: a more efficient, transparent and inclusive European Semester is required to better support the smooth functioning of the EMU. In the short run, the improvements in the Commission’s package of measures, which build on the Five Presidents’ Report, are a useful starting point: two successive stages for the European Semester (a European and a national stage); a more streamlined European Semester with fewer and less detailed CSRs; a stronger implementation of the Macroeconomic Imbalances Procedure and the introduction of (a system of) National Competitiveness Boards and a European Fiscal Board are useful reforms of the system, although details could still be improved.

To help to facilitate implementation of this more effective governance framework, the Eurogroup President, in close cooperation with the European Commission and Parliament, should:

  • Foster political commitment from all members to adhere to and publicly support the new governance;
  • Require clarification of the VPs and Commissioners’ roles and responsibilities;
  • Be seen to be urging and coordinating the Member States to deliver on the commitment for EMU reform.

Concerning the necessary broader economic governance reform, due to domestic political considerations, decisive actions are taken only in a state of acute crisis. In the European Council response to the Five Presidents’ Report, one can see the current lack of urgency: despite the Report proposing an implementation table that could in no way be perceived as ambitious, the response by the euro area
members has been half-hearted at best.

Reform is crucial to make EMU sustainable in the longer term. EMU must improve both its preventive and corrective mechanisms in order to avoid or mitigate future significant crises. To support this process, a fiscal capacity, ex ante risk sharing facilities, active dialogue between the European institutions and national governments and effective measures to ensure implementation of national reforms and facilitate increases in public and social investments are required.

In the end, to make EMU stable in the long-term will require a transfer of sovereignty. A genuine EMU is not an option but a necessity to avoid further crises. Whether the current timetable will deliver these reforms quickly enough, given the lack of urgency, remains to be seen. In the meantime, steps should be taken that can be the starting point for further integration in future:

  • Flexibility in the fiscal framework to encourage public and social investment, alongside a framework that ensures that this flexibility is dedicated to productive investment rather than simply enabling Member States to avoid fiscal consolidation;
  • A fiscal capacity to underpin this investment approach, providing an incentive for reform and ensuring that Member States have the capacity to invest; and
  • Contractual arrangements as a mechanism to underpin the implementation of CSRs, tied to the increased resources provided by the fiscal capacity.

This combination of measures would enable the EMU to, at least partially, achieve more effective economic coordination by overcoming the implementation gap between necessary domestic structural reforms and investments, and the lack of trust which hampers cross-border support.

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