The European Commission presented on 18 November its autumn economic policy package, including the Opinions on euro area Draft Budgetary Plans (DBPs) for 2021 and policy recommendations for the euro area.
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What does today’s package include?
Today, the Commission presents:
- Communication on the 2021 Draft Budgetary Plans (DBPs)
- Opinions on euro area Member States’ DBPs
- Euro area recommendation 2021
- Alert Mechanism Report 2021
- Proposal for a Joint Employment Report 2021
- Communication on the fiscal situation in Romania
- Post-programme surveillance reports for Cyprus, Ireland, Spain, and Portugal
- Enhanced surveillance report for Greece
- Staff-working document on the implementation of the United Nations Sustainable Development Goals
How did the Commission assess the 2021 DBPs, given the activation of the general escape clause and the lack of any fiscal adjustment recommendations?
The Opinions on the 2021 DBPS take into account the activation of the general escape clause and the qualitative nature of the fiscal recommendations addressed by the Council to Member States in July 2020. The Opinions assess whether the measures contained in the DBPs are temporary and if not, whether offsetting measures are planned. Ensuring medium-term sustainability is a necessary condition for the departure from the normal budgetary requirements under the general escape clause.
The recommendation on the economic policy of the euro area
The euro area recommendation presents tailored advice to euro area Member State on those topics that affect the functioning of the euro area as a whole. The recommendation reviews fiscal, financial and structural issues, as well as institutional aspects of Europe’s Economic and Monetary Union (EMU). This year the recommendation also provides policy guidance on the priorities that euro area Member States should pursue in their Recovery and Resilience Plans.
What is contained in the euro area recommendation?
In the context of the current crisis, the 2021 euro area recommendation focuses on short-term urgent priorities. Strong and coordinated action for the euro area is necessary to support the recovery and ensure the proper functioning of the EMU.
The recommendation places a strong emphasis on the use of the Recovery and Resilience Facility (RRF), the central pillar of NextGenerationEU, the EU’s recovery instrument. The euro area recommendation intends to provide policy guidance on priorities that Member States should include in their Recovery and Resilience Plans (RRPs), outlining national investment and reform projects that will be supported by the RRF. They highlight areas where euro area Member States could work collectively to improve the economic and social resilience of the EMU. Such reforms and investment measures should create the right conditions for the recovery and should also effectively contribute to and accelerate the green and digital transitions.
The recommendation focuses on five policy areas, with a strong emphasis on reforms, economic resilience and macroeconomic linkages, namely to:
- Ensure a supportive aggregate fiscal and structural policy stance for the euro area;
- Further improve convergence, resilience and sustainable and inclusive growth;
- Address bottlenecks to investments and the efficient use of EU funds’ in order to ensure effective utilisation of the RRF, which comprises improving the business environment;
- Maintain credit flows and sound bank balance sheets;
- Complete the EMU and strengthen the international role of the euro.
What are the next steps following the presentation of the 2021 euro area recommendation?
The current 2021 euro area recommendation is a “Recommendation for a Council Recommendation”. The Council will have to formally adopt the Recommendation, based on this Commission’s proposal.
The Commission’s proposal for the euro area recommendation will be presented at the Economic and Financial Affairs Council on 1 December 2020 and discussed by the Eurogroup on 16 December 2020. The endorsement by the European Council should take place in March 2021 and the adoption by the Economic and Financial Affairs Council on 18 May 2021.
Member States should take action based on the Recommendation both individually, including through their RRPs, and collectively within the Eurogroup, in the period 20212022 to implement the euro area recommendation.
What is the Alert Mechanism Report?
The so-called “six-pack” legislation adopted in 2011 introduced a system to monitor broader economic developments, to detect early on problems such as credit and property bubbles, issues in external sustainability or falling competitiveness. The Macroeconomic Imbalance Procedure (MIP) is integrated in the European Semester and is kicked-off by an Alert Mechanism Report (AMR) that identifies Member States for which the Commission should undertake in-depth reviews to assess whether they are experiencing macroeconomic imbalances. The analysis in the AMR is based on the economic reading of a scoreboard of agreed indicators.
What are the main findings of the Alert Mechanism Report?
The AMR recommends that in-depth reviews should be prepared for 12 Member States to identify and assess the severity of possible macroeconomic imbalances. The Member States identified are: Croatia, Cyprus, France, Germany, Greece, Ireland, Italy, Netherlands, Portugal, Romania, Spain, and Sweden the same ones that had already been identified as having imbalances or excessive imbalances in February 2020.
The current crisis has exacerbated certain existing challenges and is posing new risks. This highlights the need to make the best use of available EU support measures and ensuring that investment and reforms across the euro area work in addressing imbalances.
The report also finds that current account balances appear rather stable despite the coronavirus shock, but the reduction of external debts are coming to a halt. Debt ratios for both corporations and households are on the rise due, to a large extent, to the fall in GDP. Credit for corporations has risen considerably in response to the current crisis, while credit to households has slowed down. House price dynamics are set to lose pace and cost competitiveness is set to improve following a spike in unit labour costs in 2020. Government debt is currently on the rise in all Member States, due to the need to cushion decisively the coronavirus crisis. The coronavirus shock will put the resilience of the banking sector to the test notably because of likely debt repayment difficulties by corporations and households going forward, and reduced profitability.
What are the next steps following the presentation of the Alert Mechanism Report?
The 2021 Semester cycle, including the implementation of the Macroeconomic Imbalances Procedure, is being adjusted in light of the creation of the Recovery and Resilience Facility. The in-depth reviews for the 12 selected Member States will be published later than usual, together with the assessment of the Stability and Convergence Programmes in spring 2021. On the basis of findings of these in-depth reviews, the Commission will decide on the existence and severity of imbalances.
What is the Proposal for a Joint Employment Report?
The Joint Employment Report provides an annual overview of the main employment and social developments in the EU. In addition, the Joint Employment Report 2020 monitors Member States’ performance in relation to the Social Scoreboard accompanying the European Pillar of Social Rights.
What are the main findings of the proposal for a Joint Employment Report?
The coronavirus pandemic broke a six-year long positive trend in EU labour markets. Total employment, which had increased by 15 million people since mid-2013, decreased by 6.1 million people between the fourth quarter of 2019 and the second quarter of 2020. This is the sharpest decline ever observed over two successive quarters. The employment rate for women has decreased less than the employment rate for men. Women continue to be over-represented in lower paid sectors and occupations, such as services and care.
The immediate reaction of Member States and the EU helped mitigate the impact of the crisis. The increase in the overall unemployment rate has, to date, been contained through the swift adoption of short-time work schemes and similar measures. Nonetheless, some groups have been more severely affected: young people, temporary employees, non-EU migrants, and those working in particular sectors of the economy (for example hospitality, cultural and entertainment sectors).
The report shows that reforms and investments are urgently needed to foster job creation, ease transitions from unemployment into employment and across different sectors, and improve economic and social resilience. This can be achieved by modernising labour market institutions, as well as education, training and social protection systems, with a view to make them more inclusive and fair. Member States and employers must also invest heavily in reskilling (training in new skills) and upskilling (improving existing skills) their workforce. EU funding can support Member States’ efforts substantially, including via the European Social Fund Plus (with the additional resources made available to existing crisis response measures by REACT-EU) and through the Recovery and Resilience Facility. In the exceptional 2021 European Semester the Joint Employment Report will additionally help Member States identify priority areas for reforms and investment to be included in their recovery and resilience plans, against the background of the Employment Guidelines.
What are the next steps following the presentation of a Joint Employment Report?
The proposal for a Joint Employment Report will now be discussed within two advisory bodies of the Council: the Employment Committee and the Social Protection Committee, with a view to final adoption by the Employment, Social Policy, Health and Consumer Affairs Council (EPSCO) in March 2021.
What are the findings of the enhanced surveillance report for Greece?
The Commission has also published the eight report for Greece under the Enhanced Surveillance framework that was activated following the conclusion of the European Stability Mechanism support programme in August 2018. The report concludes that, in spite of the adverse circumstances caused by the pandemic, Greece has taken the necessary actions to achieve its due specific commitments.
The coronavirus pandemic led to a standstill, in the first half of the year, of a number of reforms in view of the need to address more immediate priorities. The Greek authorities managed to restart the work on the commitments in the past months and delivered on a number of fundamental reforms.
The European institutions welcome the close and constructive engagement in all areas and encourage the authorities to keep up the momentum and, where necessary, reinforce the efforts, to quickly complete the implementation of recently adopted primary legislation. This is, in particular, the case with the financial sector reforms, where a large body of secondary legislation is to be completed and adopted shortly.
The report could serve as a basis for the Eurogroup to decide on the release of the next set of policy-contingent debt measures.
What are the main findings of the post programme surveillance reports for Spain, Portugal, Cyprus and Ireland?
The post-programme surveillance reports for Spain, Portugal, Cyprus and Ireland find that all four Member States retain their capacity to service their outstanding debt and sovereign financing terms remain favourable amid record low bond yields.
In the case of Cyprus, the pandemic and the decisive policy response undertaken to counter the impact of the shock have taken a toll on public finances, which are however expected to improve as from next year. The effects of the coronavirus crisis are also seen in the financial sector as banks made losses in the first half of the year. Nevertheless, the pandemic still allowed a major sale of non-performing loans by the largest bank. The government enjoyed a supportive market environment when tapping the international markets and built a sizeable liquidity buffer.
In the case of Spain, support schemes from Spanish and European authorities have mitigated the strong economic impact of the pandemic and credit risks. However, challenges for the real economy and financial sector have increased. Recent debt auctions have reflected continued market confidence in Spain’s economy and sovereign debt in spite of the coronavirus outbreak.
In the case of Portugal, the biggest challenge, like in all Member States, is to address the negative impact of the coronavirus pandemic, both in human and economic terms. While the policy response has been instrumental in cushioning the impact of the pandemic, Portugal faces specific challenges of low investment and productivity. Active debt management had smoothened the debt redemption profile and helped reduce interest costs.
In the case of Ireland, the public support implemented since March has prevented a more severe economic contraction, but has contributed to a large general government deficit and higher public debt. A number of financial policy measures have ensured that banks can continue to support the economy. However, as the pandemic is still unfolding, some of its adverse impact may only materialise later and it is important that banks prepare for this possibility.
What are the main findings of the Communication on the fiscal situation in Romania?
Romania has been under the excessive deficit procedure (EDP) since April 2020 due the breach of Treaty deficit threshold in 2019. The trend of rising public deficits were driven by expansionary measures that were adopted before the onset of the coronavirus pandemic. The Council recommendation under Article 126(7) of the Treaty requires Romania to bring to an end its excessive deficit by 2022.
The Romanian authorities submitted their report on action taken in response to the Recommendation in September. The report points to a deterioration of public finances during 2020 due to the coronavirus pandemic.
In its 2020 autumn forecast, the Commission projects Romania’s deficit to rise above 10% of GDP in 2020 and increase further in the coming years.
In light of the continued high uncertainty due to the coronavirus pandemic, the Commission considers that no decision on further steps in the Romania’s excessive deficit procedure should be taken at this juncture. It will reassess Romania’s budgetary situation in spring 2021 and take the necessary steps under the EDP at that moment, if appropriate.
How has the European Semester process been altered this year?
The European Semester and the new Recovery and Resilience Facility are intrinsically linked. Given that deadlines under the two processes will overlap, it is necessary to temporarily adapt the European Semester to the launch of the Recovery and Resilience Facility. The recovery and resilience plans will become the main reference document on the Member States’ forward-looking policy initiatives. Their assessment will be performed, amongst others, against the relevant country-specific recommendations.
Given the complementarities with the Semester and in order to streamline the content and the number of documents requested, Member States are encouraged to submit the National Reform Programme and their recovery and resilience plan in a single integrated document. This document will provide an overview of the reforms and investments that the Member State will undertake in the next years, in line with the objectives of the Recovery and Resilience Facility.
Once Member States submit officially their recovery and resilience plan in 2021, the Commission will put forward proposals for Council implementing acts together with analytical documents assessing the substance of the recovery and resilience plans. This process is still subject to inter-institutional negotiations. These documents will replace the European Semester country reports in 2021. The assessments of plans will be published in staggered batches, depending on the respective delivery of the recovery and resilience plans and the finalisation of the Commission’s assessments.
Given the comprehensive and forward-looking policy nature of the recovery and resilience plans, there will be no need for the Commission to propose country-specific recommendations in 2021 for those Member States that will have submitted such a plan.
The Commission will nevertheless propose recommendations on the budgetary situation of Member States in 2021 as envisaged under the Stability and Growth Pact.
The Commission will align as much as possible the reporting activities under both post-programme and enhanced surveillance with the streamlined timetable of the European Semester. From autumn 2020, the Commission will publish the biannual post-programme surveillance reports and two of the quarterly reports on Greece as part of the broader economic and fiscal surveillance European Semester packages each autumn and spring.
Communication on the 2021 Draft Budgetary Plans
Opinions on Draft Budgetary Plans
Proposal for a Joint Employment Report 2021
Communication on the fiscal situation in Romania
Source: European Commission
