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: “Hard” sanctioning powers in the EMU economic pillar

: Sanctions under the Stability and Growth Pact

The above-mentioned SGP is a set of rules enforcing the so-called ‘basic budgetary rule’,[1] as envisaged by Article 126(1) TFEU and the Protocol on EDP. According to this rule, Member States must avoid excessive deficits, which occur when the deficit-to-GDP ratio exceeds the 3% threshold, and excessive debt, i.e. a debt-GDP ratio higher than 60%.

The SGP has two components: a preventive arm, focusing on the surveillance of budgetary positions and the coordination of economic policies, and a corrective one, aiming “to deter excessive government deficits and, if they occur, to further prompt their correction”. Quite understandably, the exercise of sanctioning powers by EU institutions in the context of the SGP has traditionally been associated with the corrective arm of the SGP. However, post-crisis reforms and, in particular, the Six-Pack introduced the possibility of exercising such prerogatives as early as in the preventive arm. The choice is fully in line with the idea that pervaded the crisis-induced reform, according to which strengthening the SGP’s sanctioning machinery was the main step to be taken to restore its credibility and its ability to deter the Member States from adopting unsound budgetary policies.

In particular, under Article 4 of Regulation 1173/2011, the Council, acting on a recommendation by the Commission, can request a Member State to lodge an interest-bearing deposit amounting to 0.2% of its GDP when it has significantly deviated from its Medium-Term Objective (MTO) or the adjustment path toward it. Before adopting such a measure, the Commission, when it observes a significant deviation, must address a warning to the Member State concerned “to prevent the occurrence of an excessive deficit”.3 Within one month of the warning, the Council may recommend the State to adopt specific policy measures to address the situation by a certain deadline. If the State fails to adopt those measures, the Council may adopt a decision establishing that no effective action has been taken. That decision is a prerequisite for requiring the Member State concerned to lodge a deposit. The introduction of this possibility was intended to fill what many commentators considered a lacuna of the preventive component of the SGP, i.e. “the absence of any legally binding means to sanction Member States for non-compliance”.[2]

The core of the EU institutions’ sanctioning power in the context of the SGP lies with the EDP. This procedure, set out in Article 126 TFEU and regulated in detail by Regulation 1467/97, allows EU institutions to sanction Member States for failing to comply with the basic budgetary rule. The overall structure of the EDP has remained largely unaltered since its introduction in 1997, but the Six-Pack and the TSCG have broadened its scope of application and considerably increased the stringency of the mechanism.

The EDP begins with a decision by the Council on the existence of an excessive deficit, i.e. exceeding 3% of the GDP, based upon a recommendation by the Commission. The crisis-induced reforms of the SGP clarified that the deficit criterion is not the only relevant one and that an EDP may also be launched where public debt exceeds 60% of the GDP and the State has failed to reduce it at an average rate of l/20th per year. When it decides that an excessive deficit or debt exists, the Council may address recommendations to the Member State concerned, demanding the adoption of specific measures to correct the situation. Since the entry' into force of the Six-Pack, these recommendations have now been incorporated into the Country Specific Recommendations adopted in the context of the European Semester.

The TSCG and Regulation 473/2013 imposed a further obligation upon a Member State under the EDP. Indeed, the State must present to the Commission and the Council an economic partnership programme, detailing “the policy measures and structural reforms that are needed to ensure an effective and lasting correction of the excessive deficit”.[3] Moreover, the State is subjected to enhanced reporting requirements, if so requested by the Commission.

Lastly, the decision on the existence of an excessive deficit or debt can also trigger a non-interest bearing deposit requirement. Pursuant to Article 5 of Regulation 1173/2011, this can occur either when the State had already been requested to lodge a deposit within the preventive arm of the SGP or when the Commission has identified “particularly serious non-compliance with the budgetary policy obligations”.

When the Council - again acting upon a recommendation from the Commission - finds that the State has taken no effective action, it can decide to make its recommendations public.51 Following the logic according to which reasserting the centrality of the sanctioning component was the only way to restore the SGP’s lost credibility, the Six-Pack sought to add teeth to this decision, introducing the possibility for the Council to impose a fine on the State that has failed to take effective action.

Prior to the adoption of the Six-Pack, the final phase of the EDP was the only one in which EU institutions could adopt sanctions against the State that persisted in not adopting the requested corrective measures. According to Article 126(11) TFEU, in determining the most appropriate ‘sanction’, the Council may choose from different options: requiring the State to publish additional information, inviting the European Investment Bank to reconsider its lending policy towards the State, requiring the State to lodge a non-interest bearing deposit, or imposing a fine. The original version of Article 11 of Regulation 1467/97 sought to articulate more clearly the relationship between the last two options, clarifying that the Council first had to impose a deposit. Only then could it issue a fine. The 2011 reform of this provision subverted the order, by specifying that “[w]henever the Council decides under Article 126(11) TFEU to impose sanctions on a participating Member State, a fine shall, as a rule, be required”.

: The Macroeconomic Imbalances Procedure

A further element of novelty introduced by the Six-Pack was the creation of the

Macroeconomic Imbalances Procedure (MIP). Structurally, the MIP is largely modelled on the SGP, having a preventive arm and a corrective one.[4] Substantively, it aims to overcome the SGP’s exclusive focus on fiscal policy, by taking into account macro-financial and macro-structural aspects that, as the crisis dramatically showed, contributed to the accrual of internal and external imbalances triggering balance of payment crises and debt crises.

The starting point of the MIP is the Alert Mechanism Report (AMR), which contains the Commission’s assessment of the Member States’ economic developments based upon a scoreboard of indicators looking at external imbalances and competitiveness, internal imbalances and employment trends. In the AMR, the Commission also identifies those States at risk of being affected by imbalances and thus worthy of further scrutiny. For each of these countries, the Commission carries out an in-depth review, to assess the existence and the gravity of economic imbalances. On this basis, the Council, acting upon a recommendation from the Commission, may take preventive action, recommending that the Member State involved adopt corrective measures.

If the Commission is convinced that the State is facing excessive imbalances, it can recommend that the Council certify the existence of this situation and can recommend the State to adopt corrective measures. This is the opening step of the Excessive Imbalance Procedure (EIP), which is the corrective phase of the MIP. At that point, the Member State concerned must present a corrective action plan, which is then monitored and assessed by the Council and the Commission. If the Council, based upon a report by the Commission, considers that the measures adopted are not in line with those planned, it can adopt a decision establishing non-compliance, together with a recommendation setting a new deadline for the adoption of the corrective measures. For euro area Member States, the non-compliance decision can trigger a sanctioning mechanism pursuant to Regulation 1174/2011. The sanctions are similar to those that can be adopted in the context of the SGP, since the Council can impose an interest-bearing deposit or a fine. More specifically, the Council, after having issued the non-compliance decision, can first impose a deposit, when it concludes that the Member State concerned has failed to adopt the recommended corrective action.[5] Conversely, the State may be requested to pay a fine if, in the same imbalance procedure, the Council adopts either two successive recommendations finding that the corrective plan is insufficient or two successive non-compliance decisions.

  • [1] 2 2> Protocol (No 12) on the excessive deficit procedure. 3 Article 6(2) Regulation 1466/97. 4 Article 1 Regulation 1467/97.
  • [2] Amtenbrink, supra note 22, 726. 2 Article 2 Regulation 1467/1997. 3 The European Semester is a framework that, after being launched as a code of conduct for the implementation of the SGP, was fully codified by the Six-Pack and, in particular, by Regulation (EU) No. 1175/2011. It brings under the same umbrella different strains of EU policy coordination and surveillance which touch upon both economic and social policies. The Semester rests upon three main pillars, namely the Europe 2020 Integrated Guidelines, the Stability and Growth Pact, and the Macroeconomic Imbalances Procedure (MIP). It starts in November, when the Commission adopts the Annual Growth Survey (AGS), whose content, after being endorsed by the European Council, should feed into Member States’ National Reform Programmes (NRPs) and Stability or Convergence Programmes (SCPs). In May, the Commission evaluates national reform and fiscal plans and issues Country-Specific Recommendations (CSRs) which indicate the actions to be taken by the State concerned. In July, the CSRs are finally approved by the ECOFIN Council. The approval of the ‘Two-Pack’ added a further step to the Semester, at least with regard to Euro States. Indeed, since 2013, the latter have been required to submit to the Commission by 15 October a draft budgetary plan for the following year. This allows the Commission to look into the measures proposed by national Governments at a time when these measures, and their modes of implementation, are being discussed by the national parliaments. If the Commission identifies serious non-compliance with SGP obligations, it can request the State concerned to submit a revised plan within three weeks.
  • [3] Article 9 Regulation 473/2013. 2 Article 10 Regulation 473/2013. 3 Article 126(8) TFEU. 4 Article 6 Regulation 1173/2011.
  • [4] ’’See, respectively, Regulation 1176/2011 and Regulation 1174/2011. See generally L. Flynn, ‘Non-Fiscal Surveillance of the Member States’, in Amtenbrink and Herrmann (eds), supra note 12, 850. 2 Article 3 Regulation 1176/2011. 3 Article 5 Regulation 1176/2011. 4 Article 10(4) Regulation 1176/2011. 5 3'The Regulation is based on Article 121 TFEU in combination with Article 136 TFEU and 6 only applies to Member States whose currency is the euro.
  • [5] 2 is Article 3(1) Regulation 1174/2011. w Article 3(2) Regulation 1174/2011. 3 '"’See https://ec.europa.eu/info/business-econorny-euro/economic-and-fiscal-policy-coordina tion/eu-economic-governance-monitoring-prevention-correction/stability-and-growth-pact/corrective-arm-excessive-deficit-procedure/excessive-deficit-procedures-overview_en. 4 See Stability and Growth Pact: fiscal proposals for Spain and Portugal, press release, 27 July 2016, https://ec.europa.eu/comrnission/presscorner/detail/en/IP_16_2625. 5 Council Decision (EU) 2017/984 of 8 August 2016 giving notice to Spain to take measures for the deficit reduction judged necessary in order to remedy the situation of excessive deficit, OJ 2017 L 148/38; Council Decision (EU) 2017/985 of 8 August 2016 giving notice to Portugal to take measures for the deficit reduction judged necessary in order to remedy the situation of excessive deficit, OJ 2017 L 148/42. 6 4J Council Decision (EU) 2015/1289 of 13 July 2015 imposing a fine on Spain for the manipulation of deficit data in the Autonomous Community of Valencia.
 
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