Eurozone has (another) way of supervising national budgets

Another package joins the tangled European legislative in reaction to the financial and debt crisis. After the Fiscal Compact, the European semester and the Six-pack there is also a Two-pack. What is it all about?

Let us start with a little bit of history. The legislative storm was put in motion by the failure of the corrective arm of the Stability and Growth Pact (SGP) passed in 1997. Since then the Pact has been revised twice (2005 and 2011). The Eurozone states bound not to overdraw the deficit of public finances 3 % GDP and the public debt 60 % GDP. No respect towards this agreement made the policy-makers to accept various arrangements in order to tighten up the budget responsibility and coordination of fiscal policies in the EU as well as in the Eurozone.

The first of the arrangements aimed at SGP reform is the so-called Six-pack, a pack of six provisions (five regulations and one directive) in force for the entire EU since December 13, 2011. Apart from fiscal issues it should also recognise and deal with macroeconomic imbalance within the EU and the Eurozone. In the fiscal issues the Six-pack strengthens both preventive and corrective elements of the SGP. In the preventive element there is freshly important quantification of “important deflection” from the medium-term objective (MTO) of balanced budget. The corrective element containing the process of solution of the Excessive Deficit Procedure (EDP) applies to all member states which transgress one of the criteria of deficit or debt (3 % / 60 %) and in the case of the Eurozone members can lead to financial sanctions. For most of these sanctions the Six-pack introduces the possibility of turning them by the reverse qualified majority voting (RQMV). That is a qualitative change of the previous state in which the Ministers of Finance had to confirm the sanctions at the ECOFIN council via the standard qualified majority voting (QMV). In reality this did not happen due to both solidarity amongst the states and simple strategic reasons. The cases of Germany and France in 2005 are the best examples.



The Six-pack also contains a part on macroeconomic imbalances: more specifically the external imbalances (e.g. deficits/surpluses of a current account of the balance of payments) and internal imbalances (e.g. the development of real estate prices) – the so-called Macroeconomic Imbalance Procedure. This part of the Six-pack is a reaction to the fact that the European financial and debt crisis was not just a result of a big indebting of European countries, in some cases it was mainly a symptom of the “balance of payments” crisis. It turned out that the imbalances have the potential to increase debt burden on member countries by tens of GDP percentage points. As it can be seen in the case of Ireland which, during the crisis, had to face banking crisis caused by the bubble burst at the real estate market. Another goal of this part of macroeconomic supervision is to contribute to the monitoring of imbalances within the Eurozone. This very procedure has just been triggered off towards Germany which has exceeded the upper limit for the 6 % GDP surplus of current account (of the balance of payments).

 In the Czech Republic we are familiar with the Treaty on Stability, Coordination and Governance (TSCG) and mainly with its fiscal part – Fiscal Compact. It came into practice in January 1, 2013 and works for 25 EU states: those who have not yet joined are the Czech Republic, the United Kingdom and Croatia. What is important is the fact that the TSCG is an intergovernmental agreement and therefore it is not an EU legislative. Concurrently, its regulations are obligatory only for the Monetary Union states. The key element of the fiscal stability strengthening effort is measuring of the so-called structural deficit of public finance: i.e. the deficit relieved from the influence of business cycle without one-time and temporal arrangements. Based on the approved computation methodology, it can be at maximum -0.5 % GDP. For the states with the level of public debt lower than 60 % GDP the tolerance can be up to -1 % GDP. Signatory states are obliged to integrate the rules of TSCG into national legislature in the form of constitutional law. The TSCG also toughens the procedure of excessive deficit.

The convergence of interstate economic goals with the goals of the EU and the solution of supervising the broader macroeconomic policies of the EU member countries grow through the effort of aiming at prevention and solution of financial crisis. These were the reasons for the European Semester to be introduced in 2010 on the EU27 level. Its first cycle took place in 2011. It consists in subjecting plans of budget politics and plans for structural reforms to inspection on the EU level from where they are returned back in the form of evaluation (by European Commission) and economic policy recommendations (by the EU Council). The aim of such coordination cycle (which takes place in the first half of a year) is to ensure that the member states take given reform recommendations into account while approving its upcoming year budget (usually in the second half of a year).

Nevertheless, the Eurozone states went an extra mile when for the first time in mid-October last year they sent their draft budgets to the European Commission to get prompts – which they already have. This process was created following two new regulations that came into practice on May 30, 2013 (based on the article 136 of the Treaty on the Functioning of the EU) and are being trialled for the first time this year.

The reform package of two became known as Two-pack. Its purpose is to create even stricter framework for the Eurozone countries, especially in the fiscal supervision sphere. The Two-pack integrates some of the intergovernmental TSCG elements (of the Fiscal Compact) into EU law. Especially those countries that are in the excessive deficit procedure have to prepare economic partnership programmes. It also applies a duty on the member countries to bring forward their plans on issuance of bonds in order to ensure the ex-ante coordination with the other Eurozone states.

The first regulation basically strengthens the fiscal supervision within the Stability and Growth Pact. Every year the Draft Budgetary Plan (DBP) has to be submitted to the European Commission for prompts by mid-October. National parliaments vote on the budget drafts only after the Commission’s feedback is available (usually around mid-November). In case the Commission discovers serious infringement of budgetary obligations, which stem from the Stability and Growth Pact, it can return the budget draft to the member countries with comments – i.e. request its reworking. Concurrently with these external proceedings the Two-pack requires establishment of independent institutions which would monitor budget plans on the national level. The overall goal of new legislature is to create such institutional platform that would indirectly put pressure on keeping fiscal stability via providing national parliaments with impartial opinions of both the Commission and the independent national institutions.

The second regulation establishes procedures suitable for states in distress and states receiving financial help. A member state which is undergoing financial difficulties (for instance speculative attacks) or uses precautionary financial help would go under an increased supervision. A member state which uses non-precautionary financial help would be subjected not only to an increased supervision but also to the so-called macroeconomic adjustment programme. This regulation “institutionalises” relations with states in distress and increases transparency of financial help. The supervision of such states contains a commitment of the member states to accept such arrangements that would eliminate the financial instability causes. Simultaneously the Two-pack introduces supervision procedures and termination of financial help programme. Therefore, it is about the effort to codify conditionality of financial help to the states in fiscal difficulties so that the EU would have significant influence on their reformation steps, could prevent crisis escalation and possible negative effects on the other member states. This should also contribute to stronger trust of the states providing emergency loans.


The Two-pack is not a breakpoint in the evolution of rules regulating budget behaviour of individual member states and the approach of the EU itself to prevention and solution of financial crisis. On the contrary: it is about completing existing rules and their codification within the European law. In spite of the fact that not in all the cases the current financial and debt crisis is the result of previous indebtedness of the member states, the crisis as such manifested in increased indebting of the individual states and following turbulences on the government bond market. The effort of the EU and the European Commission to tighten up the rules of individual member states’ fiscal policy is thus logical.

However, a question remains: what impact will these initiatives have on the legitimacy of the EU? For a long time the EU has been struggling with something that is – by the academy – described as democratic deficit. The relationship of the EU with individual member states does change according to the financial and debt crisis and growing influence of the European Commission on the process of national budget approval could deepen the legitimacy problem even more. Of course, the EU is aware of this problem and therefore, it is trying to create processes and institutions on the national level which would lead to the intended results without direct intervention of the European institutions (e.g. the effort to set budget limits in the member states’ constitutions and the ordinance to create independent national institutions for budget evaluation). Nevertheless, the question of legitimacy is fundamental for the whole functioning of the EU so it should not be neglected in the public debate on the precautions which are being accepted by the EU as a reaction to the ongoing crisis. That is why it seems to be a problem that the debate is mainly lead and joined by economists and lawyers who view the whole problematic from the technical point of view and often neglect the political proportion of given solutions.

Creation of the Monetary Union and current financial and debt crisis inevitably lead to the necessity of better coordination of economic and fiscal policies. This coordination keeps moving towards stricter rules and mechanisms, which necessity clashes with the political reality of the EU form and functioning. The EU awaits a specific political vision which would legitimise fiscal policies coordination because in the future the current political, institutional and legal framework can turn out to be insufficient for the means that the EU is now accepting.


Jan Famfule is the Analytical team Manager of the European Values Think-Tank.


Kamil Kovář is active in CERGE-EI and the Analytical team of the European Values Think-Tank.