157th CoR Plenary Session (10-11 Oct 2023)

On 26 April 2023, the Commission presented legislative proposals to implement the most comprehensive reform of the EU’s economic governance rules since the aftermath of the economic and financial crisis.
The central objective of these proposals is to strengthen public debt sustainability while promoting sustainable and inclusive growth in all Member States through reforms and investment.
The proposals address shortcomings in the current framework. They take into account the need to reduce much-increased public debt levels, build on the lessons learned from the EU policy response to the COVID-19 crisis and prepare the EU for future challenges by supporting progress towards a green, digital, inclusive and resilient economy and making the EU more competitive.

On 14 March 2023, the Council adopted conclusions on the Commission’s orientations for a reformed framework, which seeks to be simpler, more transparent and effective, with greater national ownership and better enforcement. EU leaders endorsed these orientations on 23 March 2023.

On 26 April 2023, the European Commission published a package of three proposals to revise the EU's economic governance framework: a regulation to replace the current preventive arm of the stability and growth pact (SGP), an amending Council regulation on the corrective arm of the SGP, and an amending Council directive to strengthen the role of independent fiscal institutions. The main proposal on the preventive arm is to be adopted through the ordinary legislative procedure with the Parliament and the Council as co-legislators. The reform proposals are shaped by the trade-off between reducing higher and more dispersed public debt levels after several years of unprecedented fiscal challenges and the need for sustained public investment in the Union's shared priorities. Stricter fiscal monitoring would ensure debt sustainability, based on a country-specific fiscal adjustment path anchored to a debt sustainability analysis framework [...]

After an unexpectedly strong economic recovery from the COVID-19 pandemic, the EU now faces the difficult task of bringing down inflation – mainly caused by sharp increases in energy and food prices in 2022 – while sustaining economic growth and investment in strategic areas such as the green and digital transitions. Economic growth in the EU has declined since mid-2022 and nearly stalled, while the euro area endured a mild technical recession. At the same time, in 2022, annual inflation in the EU reached the highest level ever measured, at 9.2 %, more than triple the 2021 level of 2.9 %. Central banks made unprecedented interest rate increases – referred to as 'monetary policy tightening'. This approach is starting to show its effect on inflation, with May 2023 data indicating a drop to 7.1 %, from 8.1 % in April. However, monetary policy tightening has worsened financing conditions, while raising tensions on financial markets and reducing growth. At the same time, labour markets have proven particularly resilient, with unemployment rates at historic low levels, underscoring a record tight labour market. This points to a build-up of wage pressure, while evidence suggests that corporate profits have contributed more than half of recent domestic price pressures. After reaching a historic peak in 2020, the levels of public debt – defined as debt to gross domestic product (GDP) ratio – declined significantly in a majority of Member States, and by 8 percentage points on average across the EU [...]

In October 2021, the European Commission relaunched, following a pause in 2020 as a result of the COVID-19 pandemic, the review of the EU's economic governance framework. In the context of heightened economic and geopolitical uncertainty, the review has put the spotlight back on the fiscal rules, its relevance and effectiveness. On 9 November 2022, the Commission published a communication on orientations for a reform of the EU economic governance framework, which outlines how key economic and policy issues should be addressed through EU economic policy coordination and surveillance. A question time with the Commission on the orientations is scheduled to be held during the European Parliament's November II plenary session.

The 8th Cohesion Report, published by the European Commission in February 2022, paints a mixed picture of cohesion policy. On the one hand, since the 2008 financial crisis and the contraction of public spending, cohesion policy has played an increasing role in maintaining territorial integrity and public services. On the other hand, many less developed and middle-income regions, especially in the southern and south-western parts of Europe, are stagnating or falling behind. The report highlights that while it is relatively easy to increase growth in less developed regions, which benefit from low-cost labour, regions in transition often face several obstacles. Their industrial fabric is weak and their population numbers are in decline, with young people fleeing to more promising regions and urban nodes. There is a risk that distrust of the established institutional order – a 'geography of discontent' – may emerge. Taking the above into account, the report proposes the development of a more sophisticated strategy focused in particular on offering people training and education aligned with the needs generated by the dual digital and green transition [...]

The 'do no harm to cohesion' principle, introduced by the European Commission in the 8th Cohesion Report, puts an emphasis on enhancing the coherence between cohesion policy and other EU policies. The European Parliament recommended that the European Committee of the Regions be involved in defining the principle in more detail. While the principle's introduction has been welcomed unanimously, there have been a number of calls to flesh it out further and to redefine the relationship between cohesion policy and the European Semester.

Policy pointers:
- The proposed economic governance rules should match the elevated importance they attribute to public investment, with fewer constraints on Member States to undertake the necessary investment to meet pressing common priorities, such as the just green transition and upward social convergence.
- More flexible safeguards on net public expenditure and/or special treatment of types of public investment, especially those explicitly combining green and social objectives (‘eco-social public investment’) and those aimed at high quality jobs, by means of a ‘golden rule’ or a different amortisation of their cost over a longer period, would be ways forward.
- Eventually, a more permanent and powerful EU fiscal capacity should be established to complement national efforts to meet common priorities.

A collection of articles published on Euractiv related to the topic of Economic Governance.