New developments in the economic governance of the European Union

In the past few years it has become painfully clear that the financial markets’ loss of confidence confronting certain euro area countries can swiftly spread to other Member States, ultimately threatening the orderly functioning and stability of the euro area as a whole. Back in 2007, before the financial crisis, vulnerable positions had become apparent within the euro area. In the absence of adequate fiscal discipline, the initial budgetary position of several euro area countries was not very strong. Moreover, there were wide divergences in competitiveness and domestic demand within the euro area, and the situation in some Member States had become particularly fragile owing to structural losses of competitiveness or property market bubbles combined with the accumulation of household debts, or because of the vulnerable state of the banking sector. Decision makers and financial markets have long underestimated the importance of these macroeconomic imbalances. The coordination of economic policies fell short of the ambitions : the way in which the fiscal rules were interpreted and applied was too flexible, and the macroeconomic surveillance of structural policy was insufficiently rigorous. However, following the financial crisis of 2008-2009, it became apparent that these imbalances had a destabilising effect. Aware of the seriousness of the situation, the European Council had already at the beginning of 2010 decided to strengthen the economic governance of the European Union (EU), including its fiscal rules. The Van Rompuy task force was set up, and the European Commission (EC) drafted six legislative proposals which were formally approved in amended form by the European Parliament and the Ecofin Council in the autumn of 2011 (the “Six-Pack”). The EC then proposed two additional regulations to ensure more rigorous budgetary surveillance (the “Two-Pack”). In addition, the EU Member States – except for the United Kingdom and the Czech Republic – concluded a new intergovernmental treaty on stability, coordination and governance in the Economic and Monetary Union. In parallel with these measures to strengthen governance within the EU, various mechanisms have been set up since the beginning of 2010 to contain the debt crisis, and a number of Member States have received emergency funding from the EU and the International Monetary Fund.