Skip to main content
SpringerLink
Log in

The Fiscal Compact, the European Semester, and the Two-Pack and Six-Pack

  • Chapter
  • First Online:
Public Finance and National Accounts in the European Context

Part of the book series: Financial and Monetary Policy Studies ((FMPS,volume 47))

Abstract

The Fiscal Compact was introduced to reinforce the objective of the fiscal balance of the National Accounts in the Member States of the European Union. This fiscal balance, obtained through specific rules in line with those approved in the Stability and Growth Pact, enables the preservation of the stability of the euro zone and economic growth. The Treaty uses the Fiscal Compact to establish an objective of a structural fiscal balance corrected from the economic cycle of below −0.5% of GDP. The Fiscal Compact has the purpose of reinforcing the economic pillar from the Economic and Monetary Union, adopting a set of rules which are intended to promote fiscal discipline, to reinforce the coordination of the economic policies, and to improve the governance of the euro zone. Mechanisms of automatic correction are established for those cases where the structural deficit limit or the adjustment path towards the same are jeopardised. However, there is a certain margin of flexibility, depending on the recessive economic cycle or exceptional situations. Those countries subject to an Excessive Deficit Procedure are forced to present an adjustment programme. When the value of public debt exceeds 60% of GDP, the country in question must reduce its public debt ratio to an average rate of one-twentieth per year as a reference pattern. The European Semester establishes the calendar of fiscal planning, namely, the delivery date of the Stability Programme (April) and the national budget for the following year (October). In this way, Member States are permitted to discuss, several times during the year, their economic and budgetary plans with the remaining countries and the various European entities. The Six-pack and the Two-pack reinforce the surveillance of the control of the Excessive Deficit Procedure and the correction of macroeconomic imbalances.

This is a preview of subscription content, log in via an institution to check access.

Access this chapter

Log in via an institution
Chapter
USD 29.95
Price excludes VAT (USA)
  • Available as PDF
  • Read on any device
  • Instant download
  • Own it forever
eBook
USD 99.00
Price excludes VAT (USA)
  • Available as EPUB and PDF
  • Read on any device
  • Instant download
  • Own it forever
Hardcover Book
USD 129.99
Price excludes VAT (USA)
  • Durable hardcover edition
  • Dispatched in 3 to 5 business days
  • Free shipping worldwide - see info

Tax calculation will be finalised at checkout

Purchases are for personal use only

Institutional subscriptions

Notes

  1. 1.

    To this fiscal constraint, one can add the argument that the domestic legal order, namely, the constitutional order, no longer constitutes the totality of a legal order in fiscal and tax matters, in that fiscal constitutions are strongly limited by the European economic constitution. This process results from the entry to the European Union and, later on, from the adherence to the Economic and Monetary Union, which was reinforced by the Lisbon Treaty, which has been in force since 1 January 2009. This is the result of the change in the fiscal rules issued by European Law, namely, the Fiscal Compact, as we will see ahead, implying its introduction in the Constitution or in a law of reinforced value.

  2. 2.

    The reform of the fiscal process at European Union level has resulted, to a large extent, from a report of a task force commissioned for that purpose by the European Commission of 25 and 26 March 2010, which included the Presidents of the European Council, the Eurogroup, and the ECB and also the Commissioner for Economic And Financial Affairs and the Ministries of Finance of each Member State. This report suggested the implementation of a set of measures based on the following pillars: fiscal discipline and supervision to strengthen the Stability and Growth Pact; reinforcement of economic supervision, through the Macroeconomic Imbalances Procedure; and the creation a framework for crisis management in the euro zone, with the creation of a permanent mechanism for the stability and reinforcement of the institutional framework of the European Union.

  3. 3.

    The Council Regulation No. 479/2009, revised by the Council Regulation No. 679/2010, requires that each Member State reports an Excessive Deficit Procedure to Eurostat twice a year (March and September). Thus, the Member States submit a set of accounts which is submitted to Eurostat as part of a regulatory programme of transmission of data used in key areas of the social, economic, and fiscal policy of the Union. These uses include the definition of the financial contributions of the Member States to the EU budget through the “fourth resource”, namely, aid to EU regions through structural funds programme and the oversight of the economic performance of the Member States under the framework of the procedure for excessive deficits and the Stability and Growth Pact.

  4. 4.

    On 9 December 2011, the Heads of State or of Government of the Member States in the euro zone reached an agreement on a reinforced architecture for the economic and monetary union, which is based on the founding Treaties of the European Union, which eases the application of the measures taken, based on Articles 121, 126, and 136 of the Treaty on the Functioning of the European Union.

    During the European Council meeting of 12 March 2012, the European Fiscal Compact, whose fiscal component is the Fiscal Treaty, was signed by all Member States, except the United Kingdom and the Czech Republic (although Croatia also did not sign the Treaty, either before or after its adherence to the EU on 1 July 2013). However, the Czech Republic approved and ratified the Treaty later in 2014.

  5. 5.

    Sustainability is understood to be the possibility of maintaining current public policies (no-policy change). In the opinion of Blanchard (1989), or of Balassone and Franco (2001), Balassone et al. (2002), the sustainability of public accounts relates to the capacity, or not, to be able to comply with the obligations resulting from public debt in the long run (interest and capital amortisation). The authors identify sustainability as being a medium-long-term concept that should be distinguished from the short-term concept of solvency. In the opinion of Blanchard, fiscal sustainability, by being placed in a perspective of “inter-temporal fiscal restriction”, forces the onset of a surplus primary deficit (in other words, that revenues are higher than expenditure, net of interest), mostly in scenarios where the difference between GDP growth rate and the average interest rate is reduced or even negative (given the “snowball” effect). Therefore, the “snowball effect” results from the fact that the interest rate implicit in the public debt may be greater than the GDP nominal growth rate. As such, once the numerator grows at a velocity greater than the denominator, the presence of a fiscal surplus is necessary to avoid an increase in the public debt ratio. The inverse situation (with interest rates lower than the GDP nominal growth) permits reducing this ratio, even if there is a primary deficit. Blanchard’s (1989) original paper states that “a sustainable fiscal policy can be defined as a policy such that the ratio of debt to DGP converges to its initial level”. The concept of inter-temporal fiscal restriction implies that the sustainability of public finances results from the net present value (NPV) of the future primary balances, being equal to the current value of the public debt. As such, in cases of excessive debt, a sustainable fiscal policy forces a surplus of the primary balance. In cases where the interest rate of the public debt is higher than the nominal growth rate of GDP, the greater the value of public debt, the greater will be the primary surplus. Sustainability demands that the public debt ratio as a percentage of GDP grows to a rate that is lower than the difference between the average interest rate and the nominal growth in GDP.

  6. 6.

    The European mechanisms of financial aid are intended to preserve the financial stability of the EU and the euro zone. The last economic and financial crisis proved that there is a need to coordinated financial aid and properly provide for the Member States of the EU, as the financial difficulties of one country can have a significant impact on the macro-financial stability of the rest of the EU and the euro zone. This financial aid is conditional to macroeconomic constraint (it refers to loans and not to budgetary transfers), in order to ensure that those Member States that receive such aid implement the necessary budgetary, economic, structural, and supervision reforms. Furthermore, the loans are paid in tranches, with the possibility of being suspended if the beneficiary Member States do not meet the agreed obligations. The EU has conceived new mechanisms and instruments, including the procedure regarding macroeconomic imbalances, with the aim of reducing the probability of a new crisis arising in the future. The legal basis consists of Article 3 of the European Union Treaty (EUT); Articles 2–5, 119–144, and 282–284 of the Treaty on the Functioning of the European Union (TFEU); and Protocols 12, 13, and 14, attached to the TFEU.

    In May 2010, the Member States of the EU created a temporary stabilisation mechanism to preserve its financial stability in the context of the sovereign debt crisis. This mechanism is formed by the European Financial Stabilisation Mechanism (EFSM) and by the European Financial Stability Facility (EFSF). In the context of the EFSM, the Commission can borrow until a maximum limit of 60 billion EUR in the financial markets, in the name of the Union, with an implicit warranty of the EU budget. This mechanism was triggered for Ireland (22.4 billion EUR between 2010 and 2013), for Portugal (26 billion EUR between 2011 and 2014), and for Greece (7.2 billion EUR in 2015). The EFSF has an effective capacity of loan concession of 440 billion EUR. These loans are financed by bonds of the EFSF and other debt instruments in the capital markets which are granted by the shareholders (the Member States of the euro zone). The fund was triggered for Ireland, Portugal, and Greece, and since 1 July 1 2013, the ESFS has not intervened in any new programme of financial aid, but will keep managing and repaying the existing debt. The final programme of EFSF aid ended on 30 July 2015 (to Greece). In October 2012, the European Stability Mechanism (ESM) was created to provide primary support. The ESM, whose main characteristics are inspired by the EFSF, is currently the only instrument available to provide new requests for financial aid from the Member States of the euro zone. The effective loan capacity of the ESM is of 500 billion EUR. The loans granted are financed by the debt incurred by the ESM in the financial markets, which is insured by the shareholders (the Member States of the euro zone). The ESM provided financial aid for the recapitalisation of the banking sector of Spain and is currently providing financial aid to Cyprus, which is implementing a macroeconomic adjustment programme. The ESM cooperates closely with other international institutions that provide support for financial stability, according to their respective objectives and competences, namely, the International Monetary Fund (IMF) and the European Central Bank (ECB), which can carry out definitive transactions in the secondary market of sovereign bonds. The financing costs of the ESM are substantially lower than those that the countries would have to pay if they resorted to the primary market in the face of financing difficulties. However, the ESM does not have just a single interest rate. The instrument passes on its own variable financing costs to each beneficiary. In other words, at the moment when each country needs financial aid, the ESM issues debt, and the same country pays the ESM the value of that debt (Euribor + spread), depending on the conditions in effect of the market. The spread represents a small fee to cover the costs for the operation and placement of debt from the ESM, being approximately 10–20 bp. In this way, each loan has its own particular financing cost. The reimbursement of each loan is carried out by the country on maturity, but the interest is paid annually or semi-annually. In March 2015, the ESM had an Aa1 rating from Moody’s and AAA from Fitch.

    Lastly, it should be noted that, at this moment, the ESM already possesses a support instrument for the Member States for the recapitalisation of the financial system of Member States. This is one of the elements of the Banking Union. Up until the creation of this instrument, the ESM could only recapitalise financial institutions in an indirect way, through loans to the State where the institution in question had its headquarters, whereby the States would use this money to recapitalise their financial institutions (such as what happened with the intervention in Spain). Given the negative impact on the public debt of a country, by creating a connection between problems in the financial system and problems in the sustainability of the public debt, this instrument thus aims to separate the financial system risk from the sovereign debt risk, to ensure that the former does not spread to the latter. With the completion of the Banking Union in January 2016, this instrument will now only be used in cases when both the shareholders and creditors lose their capital and, even in the face of such an event, if the recapitalisation is still necessary and if the Member State proves that using public funds would seriously jeopardise the State’s fiscal situation. When this support is requested, the institution in question will be subject to a restructuring plan approved by the European Commission.

  7. 7.

    Greece made a formal request for financial help on 23 April 2010, which was formally approved on 2 May the same year, for a total financial support of 110 billion EUR (50% of GDP). Ireland made its formal request on 21 November 2010, which was formally approved on 28 November the same year. The amount requested by the Irish Government was of 85 billion EUR (54% of GDP). Although the total amount of the Irish programme of financial aid was greater than 85 billion EUR, 17.5 billion of this corresponded to a national contribution, through the Treasury and National Pension Reserve Fund. Without this component, the amount of aid would have corresponded to 43.1% of GDP.

    Portugal presented its formal request on 6 April 2011, with approval occurring at the 16 April of the same year. The amount requested was of 78 billion EUR, around 45% of GDP.

    Later on, Greece had to submit a second request, on 21 February 2012, of 165 billion EUR (85% of GDP). The amount of the first Greek financial aid programme was later reduced by 2.7 billion EUR, as Slovakia, Portugal, and Ireland did not contribute to the financing. The amount of the second programme (164.5 billion EUR) was the equivalent of the balance of the first programme yet to be repaid by the agreement date, together with an additional 130 billion EUR. From this total, 144.7 billion were financed by the euro zone, with the remaining 19.8 billion being financed by the IMF. In 2013, a programme for Cyprus was approved for financial support amounting to 10 billion EUR, representing 55% of GDP, followed by a programme for the recapitalisation of the Spanish banking sector of 100 billion EUR, representing around 10% of the GDP of that country. (Note: In all these cases, the value of GDP presented refers to the year previous to the request for financial aid.)

  8. 8.

    It is referred that the European Parliament has gained in these last years in what concerns fiscal supervision: “With the entry into force of the Treaty of Lisbon, Parliament has become a co-legislator in setting rules for multilateral surveillance (Article 121(6) TFEU). The legislative acts relating to macroeconomic surveillance establish the Economic Dialogue. In order to enhance the dialogue between the institutions of the Union—in particular Parliament, the Council and the Commission—and to ensure greater transparency and accountability, the competent committee of Parliament may invite the President of the Council, the Commission, the President of the European Council, and/or the President of the Eurogroup to discuss their decisions or present their activities within the European Semester. As part of this dialogue, Parliament may also provide an opportunity to participate in an exchange of views with a Member State which is the subject of a Council recommendation under the EIP. In late autumn, Parliament expresses its opinion on the ongoing European Semester cycle (including the country-specific recommendations adopted by the Council), also taking into account the outcome of a joint meeting with representatives of the competent committees of national parliaments. Under the MIP, the Commission cooperates with Parliament and the Council in defining the set of macroeconomic indicators to be included in the scoreboard used for monitoring possible macroeconomic imbalances in the Member States. Parliament promotes the involvement of national parliaments through annual meetings with members of the relevant committees of those parliaments. Furthermore, and in line with the legal and political arrangements of each Member State, the national parliaments should be duly involved in the European Semester and in the preparation of Stability Programmes, convergence programmes, and national reform programmes, in order to increase the transparency and ownership of and accountability for the decisions taken” (Source: European Parliament site).

  9. 9.

    In the original from the Code of Conduct of the Two-pack, pg 21: “Table 1a contains data on real GDP rate of change observed in year t − 1, and real GDP rate of change forecasted for years t and t + 1. The estimated impact on economic growth of the aggregated budgetary measures envisaged in the DBP should be included in these forecasted growth rates for years t and t + 1. Therefore, following Article 6(3)(g) of Regulation 1, this estimated impact on economic growth is recommended to be specified in Table 1a or otherwise detailed in the methodological annex”.

  10. 10.

    In the original from the Code of Conduct of the Two-pack, pp. 21 and 22: “Each Member State should appropriately define a scenario for expenditure and revenue at unchanged policies for the forthcoming year (i.e. pre-budget, excluding the new measures that have been proposed in the context of the budgetary process) and make public the underlying assumptions, methodologies and relevant parameters. The ‘no-policy change’ assumption involves the extrapolation of revenue and expenditure trends before adding the impact of discretionary budgetary measures decided in the context of the budgetary process for the forthcoming year. The results of projections for the expenditure and the revenue sides on the basis of the unchanged policy assumption are presented in Table 3 of Annex I, while the set of Tables 5.a, 5.b and 5.c describe and summarize the discretionary measures in the process of being adopted by the different sub-sectors to reach the budgetary targets. These three tables should contain an exhaustive technical description of the measures being taken by the different sub-sectors, together with information concerning the motivation, the design and the implementation of the measure. The target of the budgetary measure should also be detailed, in ESA terms, specifying whether it is a discretionary expenditure or revenue measure. Furthermore, the precise component of the expenditure or revenue side targeted by the discretionary measure should also be specified. This will make the comparison between the targets and the no-policy-change outcomes feasible. In other words:

    On the revenue side, it should be stated whether it is a measure targeting:

    • Taxes on production and imports (ESA code: D.2)

    • Current taxes on income, wealth, etc. (ESA code: D.5)

    • Capital taxes (ESA code: D.91)

    • Social contributions (ESA code: D.61)

    • Property income (ESA code; D.4)

    • Other (ESA code: P.11+P.12+P.131+D.39+D.7+D.9 {other than D.91})

    On the expenditure side, it should be stated whether it is a measure targeting:

    • Compensation of employees (ESA code: D.1)

    • Intermediate consumption (ESA code: P.2)

    • Social payments (social benefits other than social transfers in kind and social transfers in kind via market producers ESA codes: D.62, D.632), of which, where applicable, unemployment benefits including cash benefits and in kind social transfers should be also specified.

    • Interest expenditure (ESA code: D.41)

    • Subsidies (ESA code: D.3)

    • Gross fixed capital formation (ESA code: P.51g)

    • Capital transfers (ESA code: D.9)

    • Other (ESA code: D.29+D.4 {other than D.41} +D.5+D.7+P.52+P.53+NP+D.8)”.

  11. 11.

    Source: “Vade Mecum SGP 2017”: According to Code of Conduct on the Two-pack, “particularly serious non-compliance” could be found in the cases described below. Those examples are non-exhaustive. Therefore, there may be other circumstances which represent a serious risk of non-compliance with the SGP and trigger a Commission opinion requesting the submission of a new DBP:

    • If an obvious breach of the Treaty deficit or debt criteria would follow from the implementation of the DBP

    • For Member States in the preventive arm of the SGP, if the fiscal effort envisaged in the DBP falls clearly short of the fiscal effort recommended by the Council in accordance existing Council recommendation issued in accordance with Article 121(4) TFEU

    • For Member States in the corrective arm of the SGP, if the fiscal effort envisaged in the DBP falls clearly short of the recommended fiscal effort by the Council in accordance with Article 126(7) or 126(9) TFEU

    • Where the implementation of the initial budgetary plan would put at risk the financial stability of the Member State concerned or would risk jeopardising the proper functioning of the economic and monetary union

  12. 12.

    On the role of the “fiscal independent councils”, see, among others, Calmfors and Wren-Lewis (2011); Debrun et al. (2009, 2012); Debrun and Kumar (2009); Hagemann (2011); Hemming and Joyce (2013).

  13. 13.

    In the original from the Code of Conduct of the Two-pack: “In the case of macroeconomic forecasts produced by the independent body, the latter should have in place a dedicated procedure for this purpose, in accordance with Directive 2011/85/EU, which should be consistent with the stages of the national budgetary process and related timetable. The Ministry of Finance should provide support to facilitate the production of the macroeconomic forecasts by the independent body, such as access rights to relevant budgetary information, including budgetary execution data”. “Analogously, for the macroeconomic forecasts produced by public sector entities and submitted for endorsement to the independent body, Member States should lay down implementing aspects of the endorsement process (including deadlines for action and the consequences arising from the forecast-related decisions of the independent body), without prejudice to the independent assessment of the endorsing body. The independent body should make clear whether it endorses or not the forecasts and provide the underlying justifications. It is understood that, while the endorsement would enable the use of the respective forecasts for fiscal planning purposes, a negative decision would typically trigger a review of the forecasts in the light of comments issued by the independent body. A revised forecast may be produced and submitted for assessment to the independent body, which would have to issue a new decision”.

  14. 14.

    Prudent projections are particularly important when looking at the medium run in times of deep policy and structural change. Structural measures needed to bring about a higher trend growth rate often take time to produce results and can have a negative impact on real GDP in the short run. Ignoring this and concentrating on the short run for as long as debt proved financeable was part of the strategies that brought the country to the present crisis.

  15. 15.

    The deflator is a price index, which is calculated by the ratio between the underlying variable, for example, private consumption, at current prices and at constant prices. In other words, in the case of the private consumption deflator, (C) for period t,

    Defaltor Ct = Ctcurrent prices/Ctconstant prices × 100.

    It should be noted that the base used for the constant prices is the same as that for the deflator. In the macroeconomic analysis, when the variation of the deflator is referred to, it is usual to use the deflator variation rate at prices from the previous year. Considering that the deflator is an index, it is possible to obtain the series of prices from the previous year, or the series based in a reference year, using the properties of indices chaining.

  16. 16.

    In the original from the Code of Conduct of the Two-pack, Page 19: “Programme Member States have their budgetary surveillance framework considerably simplified so as to avoid overlaps and duplications of reporting obligations. In this sense: Programme Member States are exempted from submitting a SP (but should submit the SP tables) and are required to integrate the content of such SP into its macroeconomic adjustment programme.

    If the Member State is the subject of a recommendation under Article 126(7) TFEU:

    • it is exempted from submitting, as appropriate, the reports on actions taken in response to the 126(7) TFEU recommendation;

    • annual budgetary targets set in the macroeconomic adjustment programme will be integrated into the above-mentioned recommendation;

    • monitoring of the progress made in the implementation of the macroeconomic adjustment programme replaces monitoring of implementation of action taken by the Member State in response to the recommendation of Article 126(7) TFEU.

    If the Member State is under an Article 126(9) TFEU decision to give notice:

    • it is exempted from submitting, as appropriate, the reports on actions taken in response to the 126(9) TFEU decision to give notice;

    • annual budgetary targets set in the macroeconomic adjustment programme, as well as the measures conducive to those targets will be integrated into the above-mentioned decision to give notice;

    • monitoring of the progress made in the implementation of the macroeconomic adjustment programme replaces monitoring of implementation of action taken by the Member State in response to the decision to give notice of Article 126(9) TFEU”.

References

Download references

Author information

Authors and Affiliations

  1. ISEG Lisbon School of Economics and Management, University of Lisbon, Lisbon, Portugal

    Joaquim Miranda Sarmento

Authors
  1. Joaquim Miranda Sarmento
    View author publications

    You can also search for this author in PubMed Google Scholar

Rights and permissions

Reprints and permissions

Copyright information

© 2018 Springer Nature Switzerland AG

About this chapter

Check for updates. Verify currency and authenticity via CrossMark

Cite this chapter

Miranda Sarmento, J. (2018). The Fiscal Compact, the European Semester, and the Two-Pack and Six-Pack. In: Public Finance and National Accounts in the European Context . Financial and Monetary Policy Studies, vol 47. Springer, Cham. https://doi.org/10.1007/978-3-030-05174-7_3

Download citation

Publish with us

Policies and ethics

Search

Navigation