EN 3 EN
Urgent action has been taken to deal with the immediate needs of the crisis culminating
on 9 May when an extraordinary Ecofin Council decided, based on a proposal of the
Commission, on the establishment of a European stabilisation mechanism and agreed on
a strong commitment to accelerated fiscal consolidation where warranted. Lessons
should be drawn and steps taken to strengthen the EU's system of economic governance for
the future. In this Communication, the Commission sets out a three pillar approach to
reinforcing economic policy co-ordination. Most of the proposals pertain to the EU as a
whole, but a more demanding approach is proposed for the euro area, based on Article 136 of
the Treaty on the Functioning of the European Union.
The Communication stresses the case for making full use of the surveillance instruments
available under the Treaty. Where necessary, existing instruments should be modified and
complemented. The Communication calls for reinforcing compliance with the Stability and
Growth Pact and extending surveillance to macro-economic imbalances. To do this, it
proposes the establishment of a European Semester for economic policy coordination, so that
Member States would benefit from early coordination at European level as they prepare their
national stability and convergence programmes including their national budgets and national
reform programmes. Finally, it sets out the principles that should underpin a robust
framework for crisis management for euro-area Member States.
These are ambitious and necessary ideas on which the Commission is seeking the views
of Member States, the European Parliament and stakeholders. The Commission will
come forward with legislative proposals to implement these ideas in the coming months.
II. THE GLOBAL FINANCIAL CRISIS HAS EXPOSED AND AMPLIFIED THE CHALLENGES
FACING THE
EUROPEAN ECONOMY
Public debt was not sufficiently reduced over the past decade. There was not enough
commitment to fiscal consolidation, in particular during good economic times. In some
Member States, revenues were temporarily boosted by tax-rich activity, driven by
unsustainable booms in housing, construction and financial services. As these macro-financial
imbalances have unwound sharply due to the crisis, tax revenues in concerned Member States
have collapsed, revealing a much weaker-than-anticipated underlying fiscal position.
Government budgets in the European Union have gone from close to balance (-0.8% of GDP
in EU and -0.6% in the Euro area) in 2007 to an expected deficit of close to 7% of GDP in
2010. Public debt continues to rise. According to the latest Commission services' forecasts,
public debt will reach 84% of GDP in 2011 (88% in the Euro area), wiping out the results of
twenty years of consolidation. Sizeable contingent liabilities related to financial rescues,
representing another 25 percentage points of GDP in the EU, present an additional source of
concern, adding to the long-standing fiscal challenges related to ageing.
Other macroeconomic and financial imbalances aggravated the vulnerability of the
euro-area economy in particular. Persistent competitiveness divergences and
macroeconomic imbalances within the euro area cause a risk to the functioning of Economic
and Monetary Union. In the years preceding the crisis, low financing costs fuelled the
misallocation of resources to often low productive uses, feeding unsustainable levels of
consumption, housing bubbles and the accumulation of external and internal debt in some
Member States. The competitiveness gap reached an all-time high just before the crisis. From
a balanced position in 1999, current account surpluses in the euro area steadily accumulated