THE LIMITATIONS OF IN THE EURO AREA...

ISSUE 2015/19 NOvEMBER 2015 THE LIMITATIONS OF

POLICy COORDINATIONIN THE EURO AREAUNDER THE EUROPEANSEMESTER

ZSOLT DARvAS AND ÁLvARO LEANDRO

Highlights

• The European Semester is a yearly process of the European Union to improveeconomic policy coordination and ensure the implementation of the EU’s economicrules. Each Semester concludes with recommendations for the euro area as a wholeand for each EU member state. We show that implementation of recommendationswas poor at the beginning of the Semester in 2011, and has deteriorated since.The European Semester is not particularly effective at enforcing even the EU’s fiscaland macroeconomic imbalance rules. We find that euro-area recommendationswith tangible economic goals are not well reflected in the recommendations issuedto member states. Finally, we review various proposals to improve the efficiency ofthe European Semester and conclude that while certain steps could be helpful,policy coordination will likely continue to have major limitations.

Zsolt Darvas is a Senior Fellow at Bruegel ([email protected]). Álvaro Leandrois a research assistant at Bruegel ([email protected]). This paper wasrequested by the European Parliament’s Economic and Monetary Affairs Committeefor the Economic Dialogue with the President of the Eurogroup, 10 November 2015.This document is also available on Economic and Monetary Affairs Committeehomepage at: http://www.europarl.europa.eu/committees/en/ECON/ home.html.The authors are thankful to colleagues from Bruegel and the Economic GovernanceSupport Unit of the European Parliament for helpful comments and suggestions. Theopinions expressed in this document are the sole responsibility of the authors anddo not necessarily represent the official position of the European Parliament and itsemployees.Copyright remains with the European Union.

Telephone+32 2 227 4210 [email protected]

www.bruegel.org

BRU EGE LPOLICYCONTRIBUTION

THE LIMITATIONS OF POLICy COORDINATION IN THEEURO AREA UNDER THE EUROPEAN SEMESTER

ZSOLT DARvAS AND ÁLvARO LEANDRO

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BR U EGE LPOLICYCONTRIBUTION

ExECUTIvE SUMMARy

This paper assesses economic policy coordinationin the euro area under the European Semester. Insections 2 and 3, we make a positive (and notnormative) assessment by taking Council recom-mendations made in the context of the EuropeanSemester as given and evaluating their imple-mentation and consistency, without assessingtheir desirability. Section 4, which assessesoptions to improve compliance with the recom-mendations, is by definition more subjective.

The key conclusion of section 2, which analysesthe implementation of European Semesterrecommendations in comparison with OECD Goingfor Growth recommendations, is that the EuropeanSemester is not effective:

Implementation of recommendations given•under the European Semester was modest(40 percent in the EU according to our indica-tor) at its inception in 2011. In spite of theefforts made to improve the EuropeanSemester in recent years the implementationindex steadily fell to 29 percent by 2014.

Euro-area countries, for which policy coordi-•nation should be stronger in principle,implemented their recommendations onlysomewhat more than non-euro area countries(31 percent versus 23 percent for the 2014recommendations), while the implementa-tion rate fell steadily in both country groupsfrom 2011-14.

The rate of implementation of recommenda-•tions related to the Stability and Growth Pact(SGP) is typically higher (44 percent onaverage in 2012-14) than the implementationof recommendations related to the Macro-economic Imbalance Procedure (32 percentin 2012-14) and other recommendations (29

THE LIMITATIONS OF POLICy COORDINATION IN THE EURO AREA UNDER THE EUROPEAN SEMESTER

percent in 2012-14). Even though SGPrecommendations have the strongest legalbasis, the average 44 percent implementa-tion rate cannot be regarded as large, whilethe EIP implementation rate is even lower,suggesting that the European Semester is notparticularly effective in enforcing the EU’sfiscal and macroeconomic imbalance rules.

Despite huge efforts by European institutions•to coordinate economic policies within theEuropean Semester, the rate of implementa-tion of these recommendations is not higherthan the rate of implementation of the OECD’sunilateral recommendations. Overlapsbetween the European Semester and OECDrecommendations only partly explain thissimilarity.

OECD reform responsiveness rates were prac-•tically the same in 2013-14 and in 2007-08,suggesting that reform efforts have notincreased compared to the pre-crisis period.

Countries tend to undertake more reforms•when they are under a financial assistanceprogramme, experience market pressure orface high unemployment. Yet even in thosecountries, reform momentum fades once thesituation normalises.

Section 3 takes the 2015 recommendations forthe euro area as given and assesses theirconsistency with the country-specific recom-mendations (CSRs) to the five largest memberstates. Our general conclusion is that the 2015euro-area recommendations with tangibleeconomic goals are not well reflected in therecommendations issued to member states (withthe exception of reforming services markets):

On the 2015 euro-area recommendations with•tangible economic goals, we conclude that:

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The reference to the euro-area aggregate•fiscal stance is not much more thanempty rhetoric. How the optimal aggre-gate fiscal stance should be determinedis not defined. The Council recommendsthat the aggregate fiscal stance shouldbe in line with sustainability risks andcyclical conditions, but it does not evenstate what this aggregate stance is. Thereis no top-down approach to determinenational fiscal stances that correspondwith the optimal aggregate, and it istherefore accidental if the sum of coun-try-specific fiscal stances correspondswith the optimal aggregate fiscal stance.

Fostering investment is a key goal men-•tioned in two euro-area recommenda-tions, but CSRs to the five largesteuro-area countries are not consistentwith this goal.

The euro-area recommendation to cor-•rect excessive internal and external debtis not well reflected in the CSRs to the fivelargest euro-area countries despite thefact that the Alert Mechanism Report of2015, which was published before theCSRs, identifies this as an excessiveimbalance in Italy, the Netherlands andSpain.

The euro-area recommendation to•reduce the high tax wedges on labour isnot well reflected in the CSRs to the fivelargest euro-area countries despite thehighlighted importance of this issue inthe preamble of the Council recommen-dation for the euro area.

Reform of services markets: this euro-•area recommendation is well reflected inthe CSRs of the five largest euro-areacountries. Each country, except for theNetherlands, received a recommenda-tion to reform its services sector.

While a recommendation on the need for sym-•metric intra-euro adjustment was made forthe euro area in 2012, 2013 and 2014, it wasnot included in the 2015 recommendations.

The key conclusions of section 4, which reviewsvarious proposals to improve the efficiency of theEuropean Semester, are that while certain stepscould be helpful, policy coordination will likely stillhave major limitations in the future:

The proposal to split the European Semester•into two stages, with only euro-area issuesdiscussed in the first stage and country-spe-cific issues reflecting the euro-area conclu-sions in the second stage, is welcome.However, in the absence of a euro-area instru-ment for stabilising economic cycles or amechanism to force counties to run largerbudget deficits, the optimal aggregate fiscalstance will not be achieved by anything otherthan pure chance.

The establishment of an independent advi-•sory European Fiscal Board is welcome. Itcould increase transparency and foster thedebate about fiscal policies in the euro area.It should be entrusted with the definition ofan unconstrained optimal aggregate fiscalstance (ie the fiscal stance disregarding SGPrules) and its constrained version, which con-siders the SGP rules for the euro area as awhole and for each member state. It shouldalso define the available fiscal space.

Decentralisation efforts, such as the estab-•lishment of national competitiveness author-ities and greater involvement of nationalgovernments, parliaments and social part-ners in discussions and decisions on thereform process, are welcome. These meas-ures would likely increase domestic owner-ship of the reform process, which would be agreat improvement, though we are scepticalabout whether cross-country spillover effectswill be better internalised.

Formalising the convergence process might•help the reform process, but we see major dif-ficulties in the definition of benchmarks, inmaking them binding and in political enforce-ment, should a country not comply.

Financial incentives for the reform process,•such as grants in exchange for reforms or areallocation of EU investments to countries

THE LIMITATIONS OF POLICy COORDINATION IN THE EURO AREA UNDER THE EUROPEAN SEMESTER BR U EGE LPOLICYCONTRIBUTION

04

complying with European Semester recom-mendations, risk limiting the domestic own-ership of reforms, would be unfair to countriesthat have already implemented reforms andare unlikely to influence those countries thathave sound fiscal positions.

Ex-post monitoring of reform implementation•by an independent EU-level ‘structural coun-cil’ would be worth consideration, not leastbecause it could improve transparency andcould highlight the steps the European Com-mission could take to improve the cross-country consistency of CSRs.

1. INTRODUCTION

The European Semester is a yearly cycle of eco-nomic policy coordination within the EuropeanUnion. It is supposed to improve economic policycoordination within the union and ensure theimplementation of the EU’s economic rules (suchas those in the Stability and Growth Pact – SGP –and the Macroeconomic Imbalance Procedure –MIP). In autumn each year, the European Com-mission sets out the EU priorities for the comingyear in the Annual Growth Survey and publishesits opinions on each country’s draft budgetaryplan. After each country presents its Stability(euro-area countries) or Convergence (non-euroarea countries) Programme and its NationalReform Programme (later, in the spring), which setout their budgetary and economic policies,respectively, the European Commission proposesCountry-Specific Recommendations (CSRs) forbudgetary and economic policies. The Council dis-cusses these recommendations, amends them ifdeemed appropriate and adopts them.

Recommendations made in the context of anExcessive Deficit Procedure (EDP) and an Exces-sive Imbalance Procedure (EIP) are binding. Forother recommendations, member states “shalltake due account of the guidance addressed tothem in the development of their economic,employment and budgetary policies before takingkey decisions on their national budgets for thesucceeding years”1. Non-compliance with rec-ommendations can lead to warnings, further rec-ommendations and enhanced monitoring, and inthe case of EDP and EIP requirements, non-com-

1. See Regulation (EU) No1175/2011 of the

European Parliament and ofthe Council of 16 November

2011 amending CouncilRegulation (EC) No

1466/97 on the strength-ening of the surveillance of

budgetary positions andthe surveillance and

coordination of economicpolicies, which was part of

the so-called Six Packagreed by all European

Union Member States in2011. We note that the

Excessive ImbalanceProcedure has not yet been

activated for anyEU country.

2. See sanctions under theSGP at:

http://ec.europa.eu/econ-omy_finance/economic_gov-ernance/sgp/index_en.htm ,

and sanctions underthe MIP:

http://ec.europa.eu/econ-omy_finance/economic_gov-

ernance/macroeconomic_imbalance_procedure/index_

en.htm.

pliance can lead to even financial sanctions2.

The track record of implementation has beenrather weak. Therefore, various changes havealready been implemented to improve compliancewith recommendations, including the ‘StreamlinedEuropean Semester’ from 2015, which aims toachieve greater focus, and allows more discussiontime to discuss and more opportunities to engageon substance with various stakeholders. Also, inJune 2015 the so-called Five Presidents’ Report(Juncker, 2015) set out a plan for strengtheningthe Economic and Monetary Union, and on 21October 2015, the European Commissionpublished a first set of concrete proposals(European Commission, 2015b). One of the pro-posals is a revised approach to the EuropeanSemester, with more focus on the situation of theeuro area as a whole in the first part of the Semes-ter and a better reflection of this situation in thediscussion of each country’s situation and theresulting CSRs. The proposed package of meas-ures also includes the introduction of nationalCompetitiveness Boards and an advisory Euro-pean Fiscal Board, more unified representation ofthe euro area in international organisations, and

0.00

0.25

0.50

0.75

1.00

2011 2012 2013 2014

21 EU countries

14 Euro -area countries

7 No n-euro area co untries

Figure 1: European Semester reformimplementation index

Source: Bruegel. Note: we gave a score of 1 to‘full/substantial progress’, a score of 0.5 to ‘some progress’and a score of zero to ‘no/limited progress’: our indicator isthe ratio of the sum of the scores to the total number ofrecommendations. Progress assessments are based onEuropean Parliament studies. We report an unweightedaverage of those 21 EU countries for which data is availablefor all years: Austria, Belgium, Bulgaria, Czech Republic,Denmark, Estonia, Finland, France, Germany, Hungary, Italy,Lithuania, Luxembourg, Malta, Netherlands, Poland,Slovakia, Slovenia, Spain, Sweden and the United Kingdom.The horizontal axis indicates the date of the EuropeanSemester recommendations.


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steps towards a Financial Union, notably via aEuropean Deposit Insurance Scheme.

In this Policy Contribution, we first analyse thetrack record of implementation of CSRs made in2011-14 in comparison to the implementation ofthe OECD’s Going for Growth recommendations. Wethen evaluate the consistency between the 2015euro-area recommendations and CSRs. Finally, wediscuss various proposals for improving the effec-tiveness of the European Semester

2. REFORM IMPLEMENTATION

2.1 Our European Semester reform implementa-tion index

IWe calculate a European Semester reform imple-mentation index, which ranges between zero (no

BOx 1: CALCULATION OF A EUROPEAN SEMESTER REFORM IMPLEMENTATION INDEx

In order to assess the implementation of recommendations under the European Semester, we build onthe work by Deroose and Griesse (2014), and calculate a reform implementation index, which rangesbetween zero (no or limited progress on all recommendations) and one (full implementation of, orsubstantial progress on, all recommendations). The index is based on the qualitative assessmentincluded in various European Parliament reports, which in turn primarily depend on the EuropeanCommission's own assessment, augmented (at least for 2011-12) with assessments from the IMF andOECD when available. The assessment of the 2011 recommendations classified implementation intothree categories: “no implementation”, “partial implementation” and “full implementation”, while theassessments of recommendations made in later years were classified into five categories: “fully imple-mented”, ”substantial progress”, “some progress”, “limited progress” and “no progress”. Deroose andGriesse (2014) create a synthetic indicator using the 5-scale assessment for 2012-13, by giving scoresof 1, 0.75, 0.5, 0.25 and 0 to the five categories, respectively. In order to include the assessments of the2011 recommendations, we use a 3-scale assessment and give a score of 1 to “fully implemented” and“substantial progress”, a score of 0.5 to ”some progress” and a score of zero to “limited and no progress”:our indicator is the ratio of the sum of the scores to the total number of recommendations.

Certainly, there are some issues limiting the comparability of this index across time and acrosscountries, as highlighted by Deroose and Griesse (2014). Not all recommendations have the same‘importance’ or ‘difficulty’. Countries might implement the ‘easier’ reforms first and postpone the moredifficult ones to later years. Implemented recommendations are not repeated in later years, but severalnon-fully implemented reforms are recommended again. Therefore, the difficulty of recommendationsmight increase over time. But very few recommendations have been fully implemented and partialimplementation of a recommendation in one year might be followed by the same recommendationthe next year, which would be easier to implement given the partial implementation of the previousyear's recommendation. Also, most recommendations included several sub-recommendations. The qual-itative assessment assessed each of these sub-recommendations one by one, so even ‘easy’recommendations generally included a number of sub-components. The assessments of thesesub-recommendations form the basis of an overall assessment for the main recommendations. There-fore, while the issue of comparability across countries and time can be important and therefore resultsshould be assessed carefully, we believe that using a single index of reform implementation can providea useful summary indicator.

or limited progress on all recommendations) andone (full implementation of, or substantialprogress on, all recommendations), as describedin Box 1. The index is primarily based on theassessments of the European Commission. Figure1 shows that the track record of implementationof CSRs is modest and deteriorating. The averagevalue of our reform implementation index for the21 EU countries for which recommendations weremade every year since 2011 was 40 percent. Thisnumber does not mean that 40 percent of thereforms were implemented in 2011; rather, it is anindication of reform efforts. If “some progress”would have been achieved on all recommenda-tions, our indicator would have a value of 50 per-cent. Since the aim of the recommendations istheir implementation, one would expect that somerecommendations are fully implemented, whilethere was at least some progress with others, so a

3. On average, 6 recommen-dations were made to each

country in 2014.The following ten countries

implemented one recom-mendation in full or

achieved substantialprogress: Austria, Belgium,

Denmark, Croatia, Lithuania,Malta, Netherlands,

Portugal, Slovenia andthe United Kingdom.


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countries in the past three years, but the differ-ence is small and the downward trend is visible inboth country groups.

2.2 The Stability and Growth Pact andMacroeconomic Imbalance Procedureimplementation

We also check the implementation rates for thetwo main procedures included in the EuropeanSemester: the Stability and Growth Pact (SGP) andthe Macroeconomic Imbalance Procedure (MIP),in comparison to recommendations that are notrelated to either of these procedures. Again, ourindicators are based on the European Commis-sion’s assessment.

Given that the SGP has strong legal enforcementtools, one would expect a high implementationrate for recommendations related to the SGP. Thereare some enforcement tools for the MIP under theExcessive Imbalance Procedure, but this proce-dure has not been so far activated for any coun-try. The MIP has six phases ranging from ‘Noimbalances’ to ‘Excessive imbalances, whichrequire decisive policy action and the activationof the Excessive Imbalance Procedure’. Recom-mendations are more binding when the ExcessiveImbalance Procedure is activated. Table 1 showsthe 2015 status of the MIP.

Figure 2 shows that the implementation rate ofrecommendations related to the SGP tends to behigher than that for the MIP and other recommen-dations. The difference was particularly large for

score well above 50 percent would be appropriate.We therefore assess that the 40 percent score ismodest at best. Yet instead of improved imple-mentation in later years as the European Semes-ter matured, the implementation index fellsteadily to 29 percent in 2014. In 2014, out of the157 main recommendations issued to Europeancountries, only 10 were fully implemented orshowed substantial progress3. There was someprogress on 70 main recommendations, whilethere was no or limited progress on 77 main rec-ommendations. Implementation was slightlyhigher in euro-area countries than in non-euro

0.00

0.25

0.50

0.75

1.00

2012 2013 2014

SGP MIP Neithe r

Figure 2: European Semester implementationrates according to the type of recommendations

Source: Bruegel using European Commission and EuropeanParliament data. Note: see the notes to Figure 1 for themethod of calculating our index. Averages for therecommendations made for 21 countries are reported(programme countries and Croatia, which joined the EU in2014, are not included). Some recommendations are relatedfor both the SGP and MIP, which are taken into account forboth procedures.

Table 1: Macroeconomic Imbalances Procedure, status per member state in 2015

MIP Category Member states*

No imbalancesAustria, Czech Republic, Denmark, Estonia, Lithuania, Lux-embourg, Latvia, Malta, Poland and Slovakia

Imbalances, which require policy action and monitoringBelgium, Netherlands, Romania**, Finland, Sweden, UnitedKingdom

Imbalances, which require decisive policy action and moni-toring

Hungary, Germany

Imbalances, which require decisive policy action and spe-cific monitoring

Ireland, Spain, Slovenia

Excessive imbalances, which require decisive policy actionand specific monitoring

Bulgaria, France, Croatia, Italy, Portugal

Excessive imbalances, which require decisive policy actionand the activation of the Excessive Imbalance ProcedureSource: Box 1 of European Commission (2015a). Note: * Cyprus and Greece are in a macroeconomic adjustment programme. **Romania is in a precautionary financial assistance programme.

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European Semester. Moreover, the OECD’s reformresponsiveness rate was practically the same in2013-14 (30 percent) as in 2007-08 (31 percent),while it was somewhat higher in 2011-12 (42 per-cent). The somewhat higher rate in 2011-12 couldbe explained by increased efforts during the crisis,but from 2007-08 to 2013-14 there was noincrease in reform implementation, notwithstand-ing the new European economic governanceframeworks.

The other panels of Figure 3 show the two indica-tors (when available) for all EU countries exceptCyprus, and for the United States and Japan4. Thesimilarity we highlighted holds for almost everyEU country.

Figure 3 highlights that the countries under afinancial assistance programme or undergoingsevere macroeconomic adjustments, implementthe most. The highest reform responsiveness rate,92 percent, was observed in Greece in 2011-12according to the OECD. In the same period, thereform responsiveness rate was 82 percent for Ire-land and 77 percent for Portugal. Estonia, a coun-try undergoing severe macroeconomicadjustment, had a high score too (80 percent).Next in the ranking is Spain with a reform respon-siveness rate of 70 percent. The only other occa-sion with a similarly high reform responsivenessrate was for Hungary in 2007-08 (73 percent),when Hungary had already started a major fiscaland macroeconomic adjustment process. In allof these countries, the reform responsivenessrate fell in the next time period (though it typicallyremained above the EU average), when eitherthe financial assistance programme ended(Ireland and Portugal), or market pressure eased(Hungary and Spain), or when reform fatigue setin while continuing the financial assistance pro-gramme (Greece).

For those countries not under a financial assis-tance programme, or not undergoing severemacroeconomic adjustment, the reform imple-mentation index remained very low, a result whichalso holds for the United States and Japan5. Thissuggests that implementation of reforms sug-gested by international organisations is generallylow and that the European Semester was not ableto improve this situation.

the 2013 recommendations, but narrowed by2014. The average SGP implementation rate in2012-14 was 44 percent, which is not particularlyhigh and suggests that the European Semester isnot particularly effective in enforcing the EU’sfiscal rules.

2.3 European Semester vs OECDrecommendations

We would like to assess whether reform imple-mentation has increased compared to the pre-crisis period (ie whether the European Semesterhad a positive impact on reform implementation),including reform implementation in countriesunder a financial assistance programme, whichare not included in the regular European Semes-ter recommendations and are also exempt fromthe obligation to submit medium-term budgetaryplans or reform programmes. Therefore, weinclude in our analysis the implementation of theOECD’s Going for Growth recommendations, whichare available for a longer time period for OECDmember states, including countries which areunder a financial assistance programme. TheOECD recommendations are not part of any cross-country surveillance process and therefore thereis no mechanism to coordinate these reformsacross countries or to enforce them. The OECD cal-culates an indicator called ‘Overall reform respon-siveness rates’, which is based on OECD staffassessment. This responsiveness indicator is cal-culated for two-year periods; for comparability, wealso calculate our European Semester reformimplementation index over the same periods.

The results are reported in Figure 3. The top-leftpanel (for 16 EU countries) shows a striking result:the two indicators are practically the same forthose countries for which both European Semes-ter and OECD recommendations were available in2011-14. One reason for the similar values of thetwo indices is that there is some overlap betweenthe European Semester and OECD recommenda-tions (see Annex 1). However, the overlap is farfrom being perfect and therefore the similar imple-mentation rates highlight the ineffectiveness ofthe European Semester: its implementation is notbetter than the OECD’s unilateral recommenda-tions, despite the huge efforts by European insti-tutions to coordinate economic policies within the

4. Cyprus entered a financialassistance programme in

2012 and thereforeEuropean Semester

recommendations weremade only in the first 2011round, for which the reform

implementation rate was 27percent. Moreover, Cyprus is

not included in the OECDGoing for Growth studies.

5. By studying the OECDreform responsiveness rate,

the regression analysis byTerzi (2015a) suggests that

an IMF programme, a highunemployment rate and

financial market stressall tend to increase

reform efforts.

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120

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2009

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16 EU countries

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2007

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Austria

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1

2007

2009

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Belgium

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1

2007

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Bulgaria

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1

2007

2009

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2013

Croatia

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1

2007

2009

2011

2013

Czech Republic

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0.75

1

Denmark

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Estonia

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Finland

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France

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Germany

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Greece

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Hungary

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Ireland

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Italy

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Latvia

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Lithuania

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Luxembourg

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Malta

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Netherlands

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Poland

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Portugal

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Romania

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Slovakia

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Spain

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Sweden

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1

United Kingdom

European Semester OECD

0

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Japan

0

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0.5

0.75

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United States

2007

2009

2011

2013

2007

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2007

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2011

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2007

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2007

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2007

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2011

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Slovenia

2007

2009

2011

2013

Source: Bruegel using European Commission, European Parliament and OECD data. Note: The European Semester reformimplementation index is our calculation: see the notes to Figure 1. For the OECD Going for Growth recommendations wereport the “Overall reform responsiveness rate”, which is calculated by the OECD. The first panel shows the unweightedaverage for those 16 EU countries for which data is available in the full period: Austria, Belgium, Czech Republic, Denmark,Finland, France, Germany, Hungary, Italy, Luxembourg, Netherlands, Poland, Slovakia, Spain, Sweden and the UnitedKingdom. For Croatia, Ireland and Portugal the 2013-14 2014 ES reform implementation index considers only the 2014recommendations, while the 2011-12 value for Latvia considers only the 2012 recommendations.

Figure 3: Reform implementation: comparison of European Semester and OECD Going for Growthrecommendations

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6. Annex 2 gives the full textof the recommendations.

3. THE 2015 EURO-AREA RECOMMENDATIONS

On 14 July 2015, the European Council adoptedfour recommendations for the euro area6:

“Use peer pressure to promote structural1reforms that facilitate the correction of largeexternal and internal debts and supportinvestment.” The specific elements men-tioned are monitoring and assessing reformsby member states only in those countriesthat are under the MIP; regular thematicassessment of structural reforms; a coordi-nation exercise to reduce the tax wedge onlabour and to reform services markets.

“Coordinate fiscal policies to ensure that the2aggregate euro-area fiscal stance is in linewith sustainability risks and cyclical condi-tions.” The specific elements emphasise thesupremacy of Stability and Growth Pact rules;the need for thematic discussions onimprovements in the quality and sustainabil-ity of public finances; and monitoring thefunctioning of national fiscal frameworks.

Completing the EU’s financial unions: banking3union (follow up to the ECB’s ComprehensiveAssessment; implementation of the BankRecovery and Resolution Directive; ratifica-tion of the Single Resolution Fund agreement)and capital markets union (“Promote meas-ures to deepen market-based finance, toimprove access to finance for SMEs anddevelop alternative sources of finance.”).Further reforms of national insolvency frame-works are also encouraged.

“Take forward work on deepening Economic4and Monetary Union…”, a recommendationthat includes a reference to the FivePresidents’ Report.

Since our goal is to assess policy coordinationunder the European Semester, we take theserecommendations as given and do not assesstheir desirability, though we note that in general,we agree with the aims of these headline recom-mendations. We highlight that in 2015, no recom-mendation has been made on the need for asymmetric adjustment within the euro area, even

though such a recommendation was made in2012, 2013 and 2014, and the preamble of the2015 Council recommendation for the euro areaalso recognises that “External rebalancing isongoing, but progress has been asymmetric andelevated current account surpluses in a fewMember States persist”.

Our assessment of the four recommendations(and the lack of a recommendation for a moresymmetric adjustment) takes three factors intoaccount:

First, we briefly comment on whether the•specifics listed in the euro-area recommen-dations are sufficient to achieve the statedgoals.

Second, we assess the consistency between•the euro-area recommendations and theCSRs, by focusing on the five largest euro-area countries.

Third, we discuss the missing aspect of the•symmetric adjustment in the euro area.

3.1 The specifics of the 2015 euro-area recom-mendations

The specific recommendations that underpin thefirst two euro-area recommendations are unlikelyto be sufficient for achieving the stated goals. Thethird and fourth euro-area recommendations aremore general and therefore such assessmentcannot be made.

As highlighted in the previous section, imple-1mentation of European Semester recommen-dations has been rather weak and evendeclining from 2011-14. While it is importantto improve compliance, recommendation No.1 made in 2015 does not seem to have hadany power to improve compliance. Peerpressure did not work in the last four yearsand it is unclear why it would work better thisyear. Moreover, while “supporting investment”is included in the first sentence of thisrecommendation, no indication was given ofhow this goal should be achieved, beyondpeer pressure.

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The reference to the aggregate fiscal stance2is vague. We see two crucial problems: first,nothing is said about how the optimal fiscalstance should be determined, and second, noindication is provided on what “coordination”specifically means to achieve it. Certainly,improving the quality and sustainability ofpublic finances and monitoring the function-ing of national fiscal frameworks are impor-tant, but they are not directly linked to theaggregate fiscal stance of the euro area.

The recommendation to complete Europe’s3financial unions is welcome. We only high-light that this recommendation does not fore-see new initiatives, but primarily aims for theratification and implementation of previousagreements. Unfortunately, there is noreference to a common deposit insurancefacility, which has become an intensively dis-cussed topic7.

Given that the Five Presidents’ Report was4published shortly ahead of the July 2015European Council meeting, a reference to thisreport was a must. We generally find thelevel of ambition of the Five Presidents’Report weak, but a detailed assessmentof that report is beyond the scope of thisPolicy Contribution.

3.2 Consistency of euro-area and country-spe-cific recommendations

We classify the euro-area recommendations infour categories:

Procedural recommendations, such as “use1peer pressure” and “continue/hold thematicassessment of structural reforms/thematicdiscussions on improvements in the qualityand sustainability of public finances”;

Strategic thinking, such as “Take forward work2on deepening Economic and MonetaryUnion”;

Legal ratification and implementation of exist-3ing agreements, such as the completion ofthe ratification of the intergovernmentalagreement on the Single Resolution Fund and

the implementation of the Bank Recovery andResolution Directive;

Recommendations that aim to achieve4certain tangible economic goals, such as

“promote structural reforms that facilitate•the correction of large internal and externaldebts”;“support investment”;•“coordinate fiscal policies to ensure that the•aggregate euro area fiscal stance is inline with sustainability risks and cyclicalconditions”;“reducing the high tax wedge on labour”•“reforming services markets”.•

Euro-area recommendations belonging to the firsttwo categories concern the Eurogroup and shouldnot be repeated in country-specific recommenda-tions. Recommendations on the implementationof existing laws should not be repeated incountry-specific recommendations either, whileratification of agreements could be mentionedwhere it has not yet been done (category 3). Ourfocus therefore is on category 4 recommenda-tions, which aim to achieve certain tangibleeconomic goals. We assess whether they aresufficiently reflected in CSRs and whether the cur-rent institutional framework, along with theprocedural recommendations in category 1, offersa good prospect for their implementation.

None of the category 4 recommendations includenumerical targets, which complicates the assess-ment of their consistency with CSRs, while nextyear this feature will give the Commission muchfreedom to assess compliance with theserecommendations. In our assessment we assumethat the aim is to achieve ‘significant’ progresstowards these economic goals and therefore weassess whether CSRs, if implemented, would beable to achieve ‘significant’ (as opposed to ‘mar-ginal’) progress.

3.2.1 The aggregate fiscal stance

Over the past few years, the EU institutions havestarted paying more attention to the aggregatefiscal stance of the euro area. While the first 2011European Semester did not include a recommen-

7. We note that the EuropeanCommission is in favour of

developing a commondeposit insurance scheme,

as detailed in its 21 October2015 communication

(European Commission,2015b).

11



dation on the aggregate fiscal stance, such arecommendation has been made in all subse-quent rounds of the Semester (Table 2). The word-ing has been slightly different in different rounds,but the main message has been essentially thesame as in 2015: “to coordinate fiscal policies toensure that the aggregate fiscal stance is in linewith sustainability risks and cyclical conditions”,which should be differentiated across countriesand take into account the cyclical position andpublic debt sustainability of each country, whilefiscal consolidation (where needed) should havea growth-friendly composition.

European Central Bank president Mario Draghi alsoemphasised the importance of the aggregatefiscal stance in his Jackson Hole speech in 2014(Draghi, 2014): “it may be useful to have adiscussion on the overall fiscal stance of the euroarea. Unlike in other major advanced economies,our fiscal stance is not based on a single budgetvoted for by a single parliament, but on the aggre-gation of eighteen national budgets and the EUbudget. Stronger coordination among thedifferent national fiscal stances should in princi-ple allow us to achieve a more growth-friendlyoverall fiscal stance for the euro area”.

However, notwithstanding the recognition by theCouncil, the European Commission and PresidentDraghi of the importance of the aggregate fiscalstance, we find that the reference to the aggregateeuro-area fiscal stance by the Council in euro-areaand country-specific recommendations is littlemore than empty rhetoric. First, neither the Coun-cil, nor the Commission defines how the optimalfiscal stance should be determined. In addition,

the Council does not even state what aggregatefiscal stance “is in line with sustainability risksand cyclical conditions”. While the CommissionStaff Working Document on the euro area statesthat the current neutral aggregate fiscal stance isbroadly appropriate and strikes a good balancebetween fiscal sustainability and cyclical condi-tions8, it is more a value judgement than the resultof rigorous analysis, and the Council has notadopted this judgement.

Second, irrespective of the way the optimal fiscalstance is defined, the approach to achieving adesired aggregate fiscal stance is not top-down,whereby the optimal aggregate stance is taken asthe starting point and national budgets are deter-mined accordingly. Instead, the resultingaggregate stance is just the sum of nationalbudgets and it is accidental if this sum is equal towhat is considered optimal.

The preamble of the Council recommendation forthe euro area highlights that “coordination of fiscalpolicies remains sub-optimal. A number of euroarea Member States still need to continue withfiscal adjustment to bring down very high levelsof debt. Other countries have more room formanoeuvre and could use it to encourage domes-tic demand, with a particular emphasis on invest-ment; this would support domestic growth and theeuro area as a whole”. It seems therefore that theconclusion about sub-optimal coordination wasreached for two reasons: (1) countries with highdebt might have not carried out sufficient fiscalconsolidation to bring down public debt, and (2)countries with more fiscal space might have notseized the opportunity to encourage domestic

Table 2: Evolution of euro-area recommendations about the euro-area aggregate fiscal stance

year Recommendation2011 The 2011 euro-area recommendations did not include any mention of the aggregate fiscal stance.

2012“ensure a coherent aggregate fiscal stance in the euro area by pursuing fiscal consolidation as set out inCouncil recommendations and decisions, in line with the rules of the Stability and Growth Pact, which accountfor country-specific macro-financial situation”

2013“ensure that the Eurogroup monitors and coordinates fiscal policies of the euro area Member States and theaggregate fiscal stance for the euro area as a whole to ensure a growth friendly and differentiated fiscalpolicy”

2014“coordinate fiscal policies of the euro area Member States, in close cooperation with the Commission, in par-ticular when assessing draft budgetary plans to ensure a coherent and growth-friendly fiscal stance acrossthe euro area”

2015“euro area Member States take action within the Eurogroup to coordinate fiscal policies to ensure that theaggregate fiscal stance is in line with sustainability risks and cyclical conditions”

8. The Commission StaffWorking Document accom-

panying the 2015 euro areastates: “The aggregate fiscal

picture in the euro area hasimproved considerably

since the crisis began andthe aggregate fiscal stance

is broadly neutral, whichcould be considered as an

acceptable balancebetween ensuring sustain-

ability and stabilising thebusiness cycle.”

12



demand, with an emphasis on investment.Despite this conclusion, the specific euro-arearecommendation on the aggregate fiscal stancedid not consider aspect (2) by referring to the useof available fiscal space, and similar recommen-dations were not reflected in the CSRs of thosecountries that have “more room for manoeuvre”.

In particular, for Germany, the EuropeanCommission recommendation of 13 May 2015included a slight attempt at fostering a reductionof the fiscal surplus9:

“Further increase public investment in infrastruc-ture, education and research, including by usingthe available fiscal space.”

However, the recommendations approved by theCouncil no longer included the reference to theuse of available fiscal space:

“Further increase public investment in infrastruc-ture, education and research.”

Certainly, it is the legitimate right of the Council todecide on a tighter fiscal stance than what isproposed by the Commission, similar to the rightof a government to adopt a tighter fiscal policythan what is suggested by its fiscal council. Butthe removal of the reference to the use of the avail-able fiscal space underlines that even though theCouncil acknowledged that one of the two aspectsof sub-optimal fiscal policy coordination is thatcountries with fiscal space do not encouragedomestic demand, no attempt is needed toremedy this problem10 .

Furthermore, we highlight that while the conclu-sion about the desirability of the aggregateneutral fiscal stance is included only in the Com-mission Staff Working Document, but not in theCouncil recommendations, the CSRs for the fivelargest euro-area countries are not consistent withthis aggregate view. For France and Spain the fiscal

consolidation recommendation is in-line with theon-going Excessive Deficit Procedure, while forItaly it is in line with the preventive arm of the SGP.Therefore, to achieve a neutral aggregate fiscalstance, fiscal consolidation in three of the fivelargest euro-area countries (France, Italy andSpain) should have been compensated for byfiscal expansion in other large countries, butthis was not recommended to Germany orthe Netherlands11.

3.2.2 Support investment

There is a lot of emphasis in various Commissionreports on the importance of increasing invest-ment. The Commission Staff Working Document onthe euro area (which does not necessarily reflectthe view of the College of Commissioners)presented a simulation result demonstrating theimportance of public investment12. The impor-tance of investment is also highlighted in the pre-amble of the Council recommendations (“a wideinvestment gap has opened”) and is reflected byits inclusion in two of the Council’s four euro-arearecommendations. Yet we conclude that this euro-area goal is not well reflected in CSRs.

For France, the fifth CSR includes a reference toinvestment: “To promote investment, take actionto reduce the taxes on production and the corpo-rate income statutory rate, while broadening thetax base on consumption.”

For Germany, the first recommendation is: “Furtherincrease public investment in infrastructure, edu-cation and research. To foster private investment,take measures to improve the efficiency of the taxsystem, in particular by reviewing the local tradetax and corporate taxation and by modernisingthe tax administration. Use the ongoing review toimprove the design of fiscal relations between thefederation, Länder and municipalities, particularlywith a view to ensuring adequate public invest-ment at all levels of government.”

9. We call it a ‘slight attempt’,because the Commission’s

proposal to the use of theavailable fiscal space wasnot well specified, as it didnot quantify by how much

the budget surplus ofGermany should be reduced.

10. We note that Germanyhas already over-achievedits Medium-Term Objective

by around 1 percentagepoint of GDP, and plans to do

so for the next 3 yearsat least.

11. We note that the actualaggregate fiscal stance of

the euro area may be evenexpansionary in 2015, if

countries which are requiredto consolidate do not to

comply with their recom-mendations and if the large

inflow of refugees andmigrants into the EU neces-sitates extra public spend-

ing. However, the role of thisPolicy Contribution is not to

speculate about expectedoutcomes, but to assess

the consistency ofrecommendations.

12. The simulation resultsquoted in the Commission

Staff Working Document onthe Euro area indicate that a

temporary two-yearincrease in government

investment of 1 percent ofGDP in countries with fiscal

space would have apersistent positive effect on

growth not just in thesecountries (where the

multiplier would be between0.8-1), but also in the rest of

euro area countries, whereGDP would also be boosted

by between 0.2-0.3 percent.

‘The removal of the reference to the use of the available fiscal space underlines that even

though the Council acknowledged that one of the two aspects of sub-optimal fiscal policy

coordination is that countries with fiscal space do not encourage

domestic demand, no attempt is needed to remedy this problem.’

13



For the Netherlands, the first recommendation is:“Shift public expenditure towards supportinginvestment in R&D and work on framework condi-tions for improving private R&D expenditure inorder to counter the declining trend in public R&Dexpenditure and increase the potential foreconomic growth.”

For Italy and Spain, investment is not even men-tioned in their CSRs.

We conclude that these CSRs are insufficient tofoster a reasonable increase in public and privateinvestment.

Public investment: As we noted above, the•Commission’s proposal to use “the availablefiscal space” was deleted by the Council fromthe German recommendation on publicinvestment. This implies that a public invest-ment stimulus should not be expected, only achange in the composition of public expendi-tures in favour of investment, similarly to theNetherlands. In our view, one should notexpect much from changing the compositionof public spending, certainly not the 1 percentof GDP extra investment stimulus, the effectsof which were simulated in the CommissionStaff Working Document on the euro area, aswe noted above. France, Italy and Spain didnot receive recommendations to increasepublic investment.

Private investment: France and Germany are•recommended to make their tax systemsmore efficient, which is certainly welcome,but we do not expect a major private invest-ment boom as a result. Italy, the Netherlandsand Spain were not recommended to boostprivate investment.

Therefore, we conclude that while fostering invest-ment is a top priority at the euro-area level, thisrecommendation is not well reflected in the CSRsof the five largest euro-area countries.

3.2.3 Facilitate the correction of large internal andexternal debts

The first euro-area recommendation invites euro-area countries to use peer pressure to promote

structural reforms that facilitate the correction oflarge internal and external debts.

The Commission itself, in the 2015 Alert Mecha-nism Report13, identifies excessive imbalancesconcerning private debt (in the Netherlands andSpain) and public debt (in Italy and Spain).However there are almost no recommendations toaddress large private debt overhangs; only Italy isrecommended to “take measures to acceleratethe broad-based reduction of non-performingloans”.

Regarding public debt, if we accept the premisethat cutting deficits during a recession willsuccessfully reduce public debt, then the euro-area recommendation to correct large public debtsis reflected in the cases of France and Spain,which are invited to correct their excessivedeficits, and Italy, which is recommended tocomply with the rules of the preventive arm of theSGP. Germany and the Netherlands do not havelarge public debts and therefore lack of such areference is to be expected.

3.2.4 Reduce the high tax wedge on labour

The first euro-area recommendation includes asub-recommendation on reducing high taxwedges on labour. The importance of this issue isalso mentioned in the preamble to the Councilrecommendations. Box 2 of the EuropeanCommission Staff Working Document accompa-nying the euro-area recommendations presentsnumbers on the tax wedge and identifies very hightax burdens on labour in Germany, France, Spainand Italy. However, only Germany received arecommendation to “take measures to reducehigh labour taxes”.

Moreover, the same Staff Working Documentadmits that “shifts away from labour taxes to moregrowth-friendly taxes such as consumption,recurrent property and environmental have beentaking place but these reforms remain relativelymodest compared to the challenge”. If reformswere modest, it is surprising that this issue, whichthe Council agrees is important, has not appearedin the CSRs to the four other countries.

We conclude that the recommendation to reduce

13. European Commission(2014) Alert Mechanism

Report 2015, Brussels, 28November, COM (2014)

904 final.

14



the high tax wedges on labour is not well reflectedin the CSRs to the five largest euro-area countries,despite the apparent consensus about the impor-tance of the issue.

3.2.5 Reform services markets

This recommendation is well reflected in the CSRs.France, for example, is recommended to “Removethe restrictions on access to and the exercise ofregulated professions, beyond the legal profes-sions, in particular as regards the health profes-sions as from 2015.” Germany is recommendedto ”take more ambitious measures to stimulatecompetition in the services sector”. In its sixth rec-ommendation to Italy, the Council invites it to“adopt competition-enhancing measures in allsectors covered by the competition law, and takedecisive action to remove remaining barriers”.Finally, Spain is recommended to “adopt theplanned reform on professional services”. There isno related recommendation for the Netherlands.

We conclude that this euro-area recommendationis indeed well reflected in the CSRs of the fivelargest euro-area countries. Each country, exceptthe Netherlands, received a recommendation toreform its services sector in some way.

3.3 Lack of symmetric adjustment within theeuro area

In 2012, 2013 and 2014, the Council maderecommendations for more symmetric adjust-ment within the euro area, but the recommenda-tion has disappeared by 2015 (Table 3).

In 2012, the recommendation called for “anorderly unwinding of intra-euro area macroeco-nomic imbalances”: by definition, intra-euroimbalances include both deficits and surpluses.In 2013, the recommendation was even clearer byexplicitly mentioning current account surpluses:“correction of external and internal imbalances”was recommended, with a particular emphasis onaddressing “distortions to saving and investmentbehaviour in Member States with both currentaccount deficits and surpluses”. In 2014 asimilarly clear and strong recommendation wasmade: “Foster appropriate policies in countrieswith large current account surpluses to contributeto positive spillovers.” It is very surprising thatdespite the importance of symmetric intra-euroadjustment, which was also recognised by the2015 Commission Staff Working Document on theeuro area, this recommendation has disappearedfrom the 2015 recommendations for the euroarea. Relevant recommendations are not includedin CSRs either.

Table 3: Evolution of euro-area recommendations concerning symmetric intra-euro adjustment

year Recommendation

2011The 2011 euro-area recommendations did not include any mention of symmetric adjustment and intra-euroarea macroeconomic imbalances

2012

“Implement structural reforms, which also promote flexible wage adjustments, and which – together with adifferentiated fiscal stance – would promote an orderly unwinding of intra-euro area macroeconomic imbal-ances and thus growth and jobs. This would include action at national level which reflects the country-spe-cific situation and takes account of the Council recommendations to individual euro area Member States.”

2013“Promote further adjustment in the euro area, ensuring a correction of external and internal imbalances, interalia by following thoroughly the reforms that address distortions to saving and investment behaviour inMember States with both current account deficits and surpluses”

2014

“Promote and monitor, in close cooperation with the Commission, the implementation of structural reforms inthose areas most relevant for the smooth functioning of the euro area in order to foster growth and conver-gence and adjustment of internal and external imbalances. Assess and stimulate progress in delivering onreform commitments in euro area Member States experiencing excessive imbalances and in reform imple-mentation in the euro area Member States with imbalances requiring decisive action, to limit negativespillovers to the rest of the euro area. Foster appropriate policies in countries with large current account sur-pluses to contribute to positive spillovers.”

2015The 2015 euro-area recommendations did not include any mention of symmetric adjustment and intra-euroarea macroeconomic imbalances

15



Indeed, the adjustments of current account bal-ances were asymmetric: deficit countriesadjusted, but surpluses continued growing(Figure 4).

The disappearance of the call for symmetricadjustment from the euro-area recommendationsis in contrast to the main conclusions included inthe Commission Staff Working Documents (which,as we have already highlighted, might not neces-sarily reflect the views of the College of Commis-sioners). The preamble of the 2015 Councilrecommendation agrees that "external rebalanc-ing is ongoing, but progress has been asymmetricand elevated current account surpluses in a fewMember States persist"14.

As the Commission argues in its Staff WorkingDocument accompanying its 2015 CSRs toGermany, Germany’s close links to the rest of theeuro area, especially through trade and financialmarkets, mean that economic spillovers can bepotentially large. Therefore both Germany and therest of the euro area would benefit from higherlevels of investment in Germany and a reductionin its current account surplus: the resulting higherdomestic demand in surplus countries “is the onlyother way of closing the output gap of the euroarea as a whole”15, given the constraints on mon-etary and fiscal policy. The IMF (2015a, 2015c)drew the same conclusion. By estimatingpanel-econometric models for the medium-termdeterminants of current account balances, Darvas

(2015) concluded that European current accountsurpluses became excessive during the pasttwelve years, while they were in line with modelpredictions in the preceding three decades.

Consequently, the disappearance of the call forsymmetric adjustment from the euro-area recom-mendations suggests that the Council disagreeswith the findings of Commission staff, IMF reportsand some academic research.

We have to conclude that there has been noimprovement since 2013, when Darvas andVihriälä (2013) concluded that “A major drawbackis that the Council recommendations do not givesufficient importance to symmetric intra-euroarea adjustments. Reference to the euro area’s‘aggregate fiscal stance’ is empty rhetoric.Insufficient attention is paid to demand manage-ment. The most comprehensive recommenda-tions are made on structural reforms.”

4. PROPOSALS FOR AN IMPROvED EUROPEANSEMESTER

Our key conclusions showing that implementationof 2011-14 CSRs has been weak and has evendeclined, and that there are major consistencyproblems between the 2015 euro-area recommen-dations and CSRs, are in sharp contrast to the self-congratulation included in the Commission StaffWorking Document on the euro area16. Efforts toimprove the European Semester are badly needed.

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Figure 4: Current account balance of the euro area (€ billions), 1999-2015

Source: AMECO database November 2015.

14. Page C272/99 of the2015 Council Recommen-

dations on the implementa-tion of the broad guidelinesfor the economic policies of

the Member States whosecurrency is the euro.

15. Page 7 of the 2014Commission Staff WorkingDocument accompanying

the Council Recommenda-tions on the implementation

of the broad guidelines forthe economic policies of the

Member States whosecurrency is the euro,

SWD(2014) 401 final.

16. “The recommendationsaddressed to the euro area

in the context of the Euro-pean Semester have already

proven their value infostering stronger policycoordination in the euro

area. The increased owner-ship of the euro area recom-

mendations by theEurogroup has facilitatedprogress on a number of

important policy areas overthe last year. As a result, the

review of the draft budgetaryplans has led to firm

commitments taken byMember States to adjust

their fiscal policies. TheEurogroup has thoroughly

discussed reform plans andfostered common under-

standing on importantissues such as the potential

benefits of structuralreforms, including those to

address high taxes onlabour, and the effects of

asymmetric economicadjustment within EMU. This

has helped to find commonunderstanding on current

policy challenges, pinpointbest practices and helped to

better coordinate policyresponses into directions

favourable to growth”[emphasis added].

16



4.1 On-going reforms

The European Commission has already “stream-lined” the 2015 European Semester by further pri-oritising and shortening the recommendations, bypublishing CSRs and euro-area recommendationsthree months earlier than in previous years toenable more discussion with various stakehold-ers, and by aiming more intensive outreach. Thussome of the proposals of Hallerberg, Marzinottoand Wolff (2012a, 2012b) have been adopted. Thelength of recommendations generally increasedbetween 2011-14, while there was a major cut-back in 2015.

Recent proposals to revamp the EuropeanSemester go in the right direction. According to theFive Presidents’ Report, and a European Commis-sion communication on 21 October 2015 (Euro-pean Commission, 2015b), the EuropeanSemester is to be split into two stages: first therewill be discussions and recommendations aboutthe euro area, and only then will CSRs be dis-cussed and decided on, which should reflect thecommon challenges identified in the first stage.In our view, this is a welcome reform of the Euro-pean Semester.

On 21 October 2015, the Commission also issuedits decision on the establishment of an independ-ent advisory European Fiscal Board (EuropeanCommission, 2015c). This board will provide to theCommission an evaluation of the implementationof the fiscal framework, but it will also “advise theCommission on the prospective fiscal stanceappropriate for the euro area as a whole”, and“may advise the Commission on the appropriatenational fiscal stances that are consistent withits advice on the aggregate fiscal stance of theeuro area within the rules of the Stability andGrowth Pact”. This is a very welcome developmentin our view and at least partly in line with the pro-posal of Darvas and Vihriälä (2013), who sug-gested the establishment of an independent fiscalauthority responsible for the definition and man-agement of the euro area’s aggregate fiscal stance.The Fiscal Board should promote a much-neededdiscussion of the aggregate fiscal stance in thefirst stage. It could also improve coordination bypointing out which countries have fiscal space,and should implement more expansionary fiscal

policy in order to bring the aggregate fiscal stanceto desired levels: this was an element that wasclearly missing in the CSRs, as we have pointedout.

However, according to the Commission’s 21October 2015 proposal, the Fiscal Board can giveadvice only within the SGP rules, so it will not befree to define the optimality of the aggregate fiscalstance. It will not have the power to manage thefiscal stance and the European Commission willnot be obliged to incorporate the suggestions ofthe Fiscal Board when deciding about euro-arearecommendations and CSRs. But even if the FiscalBoard one day concludes that some countriesshould have more expansionary fiscal policies,and both the Commission and the Council endorsethat conclusion, there will not be many instru-ments to enforce it. While countries can berequired to reduce their debts and deficits accord-ing to the regulations of the Stability and GrowthPact, there exists no mechanism by whichcountries can be required to enact fiscal expan-sion. This process could be supported by the useof the Excessive Imbalance Procedure forcountries with too-large current accountsurpluses, for example by requiring an increase inpublic investment. While non-compliance withsuch a recommendation could in principle lead tosanctions under the current rules, even in the bestcase, influencing countries via the MIP to increasetheir public investment would take several years,while the optimal fiscal stance should be achievedpromptly. Moreover, not all countries with fiscalspace have excessive current account surpluses.

In terms of the implementation of structuralreforms, the most promising proposal in our viewis the establishment of a euro-area system ofcompetitiveness authorities, composed of inde-pendent national councils, a proposal made bySapir and Wolff (2015) and endorsed by the FivePresidents’ Report. On 21 October 2015 the Euro-pean Commission proposed a Council Recom-mendation on the establishment of NationalCompetitiveness Boards within the euro area(European Commission, 2015e). The nationalcouncils would assess wage and productivitydevelopments and economic reforms to fostercompetitiveness, while their European networkshould help to exploit their synergies.

17



We see the establishment of national competi-tiveness councils as a kind of decentralisation,through which reform priorities would be definednationally. It will likely increase the ownership ofthe reform process because a conclusion by sucha national council could be seen by the nationalparliament and the government as a recommen-dation coming from inside the country, but not asan intrusion from Brussels. In our view, this is avery welcome proposal. However, it needs to beseen to what extent national councils would beable to internalise the cross-border implicationsof the reform process, and we are sceptical aboutthis. The proposed recommendation includes areference to euro-area considerations: “The Com-mission should facilitate coordination betweennational competitiveness boards and exchangeviews with them, in particular to ensure theconsideration of euro-area and EU objectives inthe work of the boards.” While discussions andinformation exchanges can foster mutual under-standing of the cross-country spillover effects ofdomestic policies, ultimate decisions remainnational. So far the MIP has been ineffective ininternalising cross-country spillover effects, partlybecause of major disagreements about the signif-icance of such affects, and therefore it remains tobe seen if the coordination of national competi-tiveness boards would be able to achieve commonunderstanding leading to policy actions.

Nevertheless, the establishment of such compet-itiveness boards would be a major improvementcompared to the current governance framework inour view, even if the national boards primarilyfocus on the domestic consequences of thereform process.

4.2 Further possible reforms

4.2.1 The aggregate fiscal stance

Political federations have central and sub-centralbudgets. In a federation, fiscal stabilisation (whichhas implications for the aggregate fiscal stance ofthe federation) is mostly the job of the federalgovernment through automatic stabilisers anddiscretionary fiscal decisions. The euro area is nota political federation and does not have a centralbudget. The EU has a budget, but its aim is notfiscal stabilisation. We believe that a euro-area

fiscal stabilisation instrument would be morehelpful for aligning the aggregate fiscal stancewith the aggregate economic situation of the euro-area (see, for example, Darvas, 2012; Wolff, 2012;Pisani-Ferry, Vihriälä and Wolff, 2013) than coor-dination of fiscal policies of member states. A fed-eral stabilisation instrument could also let nationalfiscal policies to follow national preferences whenfiscal rules are not binding. However, there are alsoopposing views about the desirability of a (small)euro-area budget or any other centralised fiscalstabilisation instrument. Opponents argue that ifEuropean fiscal rules are met, member states willhave sufficient room for manoeuvre for stabilisingtheir own economic cycles using their own fiscalpolicies. In any case, the Five Presidents’ Reportincorporated a related proposal only for the longterm, so we do not expect a euro-area fiscal instru-ment in the foreseeable future.

Similarly, the prospect of a euro-area mechanismthat would force countries to have higher budgetdeficits, as suggested by, for example, Sapir andWolff (2015), is extremely unlikely. As we high-lighted earlier, even the modest attempt of theEuropean Commission to include in Germany’s2015 CSR a clause to encourage the governmentto use its fiscal space was deleted by the Council.While parliaments and governments can change,we see no political possibility of countries agree-ing to a binding process that might force them tohave deficits that are larger than their domesticpreferences would deem appropriate.

In the absence of a euro-area fiscal stabilisationinstrument or a mechanism to force counties tohave larger budget deficits, the remaining optionsto influence the aggregate fiscal stance are ratherlimited. In any case, the European Fiscal Boardshould be entrusted with the definition of anunconstrained optimal aggregate fiscal stance (iethe fiscal stance disregarding SGP rules) and itsconstrained version which considers the SGPrules. This exercise should be done for the euroarea as a whole and for each euro-area memberstate. Such an exercise would help foster discus-sions, but the problem will remain that there willbe no enforcement mechanism to require expan-sionary fiscal policy.

To sum up, we see it as extremely unlikely that

18



any coordination mechanisms or the use of theMIP would enable countries to be forced to havelarger deficits than their national preferenceswould suggest. We are sceptical about whetherthe optimal aggregate fiscal stance could beachieved by anything other than pure chance. Weexpect that vague statements will continue to bemade in the future about the aggregate fiscalstance and the benefits of coordination.

4.2.2 The implementation of structural reforms

A number of proposals have been made on theimplementation of structural reforms. The IMF(2015b) and Banerji et al (2015) suggested someways to enhance the implementation of structuralreforms. These include the definition of “outcome-based” benchmarks, which are sufficiently con-crete, measurable and directly under the controlof policymakers, and the use of EU legislationwhere possible instead of coordination. Suchproposals were included in the Five Presidents’Report for the medium term (“Stage 2”, whichshould be completed by 2025). The proposal aimsto formalise and make more binding the conver-gence process by “agreeing on a set of commonhigh-level standards that would be defined in EUlegislation, as sovereignty over policies ofcommon concern would be shared and strongdecision-making at euro area level would beestablished”. While setting benchmarks may beuseful, Terzi (2015b) highlights that structuralreforms cannot be objectively measured. Hedemonstrates that some of the indicatorsproposed by Banerji et al (2015) show very sig-nificant variations between the countries that areat the top of the World Economic Forum WorldCompetitiveness Report rankings. We also seedifficulties in enforcement and making the systembinding if a country does not meet the standardsby the agreed time.

Some further proposals were also made by IMF(2015b) and Banerji et al (2015) to strengthenincentives, such as direct financial transfers fromthe EU to cover reform costs and support imple-mentation, a proposal that echoes the 2013-14discussion on “contracts for competitiveness andgrowth”. One key problem with such a contract, asemphasised by Pisani-Ferry (2013), is that such agrant in exchange for a particular reform would be

seen by domestic stakeholders as a bribe by whichEuropean partners want to enforce a reform on thecountry. The popularity of the government enter-ing into such a contract might fall quickly. Even ifthe reform proposal originally comes from thecountry in question, domestic stakeholders mightperceive it as coming from European partners.

There are other problems too. Such contracts orany other financial incentives, such as a realloca-tion of EU-sponsored investments to countriesthat implement European Semester reformsuggestions, would reward countries that are slowto implement reforms. Those countries thatfollowed the European Semester advice earlierwould not benefit from such a contract, whileproviding retroactive contracts to reward thosecountries that have already implemented reformswould lead to a very messy system. Moreover,financial incentives would not really matter forlarger countries with sound fiscal positions. Forexample, we see it as inconceivable that Germanywould speed up services market reforms on thebasis that it would receive a few billion euros fromother euro-area countries.

Banerji et al (2015) also suggest ex-postmonitoring of reform implementation by anindependent EU-level “structural council”. We findthis proposal worth consideration, not leastbecause independent evaluation could improvetransparency and could highlight the steps theEuropean Commission could take to improve thecross-country consistency of CSRs.

In terms of increasing the domestic ownership ofthe reform process, some proposals in the FivePresidents’ Report and the 21 October 2015Commission Communication on steps towardscompleting economic and monetary union pointin the right direction. For example, Hallerberg,Marzinotto and Wolff (2012a, 2012b) suggestedenhancing the role of national parliaments at theEU level, enhancing the role of European institu-tions at member-state level and increasing therole of the European Parliament in the EuropeanSemester. These suggestions are endorsed by theFive Presidents’ Report. Similarly to the establish-ment of national competitiveness councils, wesee the greater involvement of nationalparliaments, governments and social partners in

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the discussion of the reform process as a meansof decentralisation, which can improve ownershipof the process.

CONCLUDING REMARKS

The European Semester was enacted in 2011 withthe consent of all European Union member statesto foster economic policy coordination, to enforcethe overhauled Stability and Growth Pact and thenew macroeconomic imbalance rules, and toachieve Europe 2020 targets. Despite theunanimous will to create this new system of policycoordination, our findings show that the EuropeanSemester has been rather ineffective. This failurehighlights the fundamental problem of policy coor-dination in the EU: national policymakers areaccountable to their national parliaments andfocus on national interests, which in many casesdiffer widely in different member states. Unlessmany member states face a common threat, suchas the existential threat to the euro in 2011-12,

coordination between national policymakers willalways have limitations.

The question that naturally arises is if the Euro-pean Semester is worth the effort, another policycoordination system should be designed, or evenpolicy coordination should be scrapped. In ourview, given the cross-country implications of var-ious national policies and the specific set-up ofthe euro area, with centralised monetary policyand banking oversight while most fiscal and eco-nomic policies are decentralised, some form ofdialogue between member states is needed. TheEuropean Semester has a legal basis based onunanimity and we do not believe that any othermethod of policy coordination is likely to workmuch better, because of the fundamental problemwe have highlighted above. Therefore, efforts torevamp the European Semester are welcome, butexpectations about possible achievementsshould be realistic.

REFERENCES

Banerji, Angana, Bergljot Barkbu, James John, Tidiane Kinda, Sergejs Saksonovs, Hanni Schoelermannand Tao Wu (2015) ‘Building a Better Union: Incentivizing Structural Reforms in the Euro Area’, WorkingPaper 15/201, International Monetary Fund Darvas, Zsolt (2012) ‘The euro crisis: ten roots, but fewer solutions’, Policy Contribution 2012/17,BruegelDarvas, Zsolt (2015) ‘The grand divergence: global and European current account surpluses’, WorkingPaper 2015/08, BruegelDarvas, Zsolt and Erkki Vihriälä (2013) ‘Does the European Semester deliver the right policy advice?’Policy Contribution 2013/12, BruegelDeroose, Servaas and Jörn Griesse (2014) ‘Implementing economic reforms – are EU Member Statesresponding to European Semester recommendations?’ ECFIN Economic Brief Issue 37Draghi, Mario (2014) ‘Unemployment in the euro area’, speech at the annual central bank symposiumin Jackson Hole, 22 August European Commission (2014) ‘Alert Mechanism Report 2015’, Brussels, 28 November, COM (2014)904 finalEuropean Commission (2015a) ‘2015 European Semester: Country-specific recommendations’,Brussels, 13 May, COM (2015) 250 finalEuropean Commission (2015b) ‘Communication from the Commission to the European Parliament, theCouncil and the European Central Bank on steps towards Completing Economic and Monetary Union’,Brussels, 21 October, COM (2015) 600 finalEuropean Commission (2015c) ‘Commission Decision establishing an independent advisory EuropeanFiscal Board’, Brussels, 21 October, C (2015) 8000 finalEuropean Commission (2015d) ‘Recommendation for a COUNCIL RECOMMENDATION On theestablishment of National Competitiveness Boards within the Euro Area’, Brussels, 21 October, COM

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(2015) 601 finalEuropean Parliament (2014a) ‘A traffic - light approach to the implementation of the 2011 and 2012Country Specific Recommendations (CSRs)’, 3 March, PE 497.735European Parliament (2014b) ‘Implementation of the 2013 Country Specific Recommendations’,6 October, PE 528.763European Parliament (2015) ‘Implementation of the 2014 Country Specific Recommendations’, 12August, PE 542.649Hallerberg, Marzinotto and Wolff (2012a) ‘An Assessment of the European Semester’, 1 October, studyfor the European Parliament, Directorate-General for Internal policies, Policy Department A (PE 475.121)Hallerberg, Marzinotto and Wolff (2012b) ‘On the effectiveness and legitimacy of EU economicpolicies’, Policy Brief 2012/04, BruegelIMF (2015a) 2015 External sector report – Individual country assessments, International MonetaryFund, Washington DCIMF (2015b) ‘Euro area policies: selected issues’, Country Report No. 15/205, International MonetaryFund, Washington DCIMF (2015c) ‘Imbalances and Growth’, Update of Staff Sustainability Assessments for G-20 MutualAssessment Process, International Monetary Fund, Washington DCJuncker, Jean-Claude (2015) Completing Europe’s Economic and Monetary Union, report byJean-Claude Juncker, in close cooperation with Donald Tusk, Jeroen Dijsselbloem, Mario Draghi andMartin Schulz, Brussels, 22 JunePisani-Ferry, Jean (2013) ‘Distressed Europe should not be bribed to reform’, 6 February, Bruegel blogPisani-Ferry, Jean, Erkki Vihriälä and Guntram B. Wolff (2013) ‘Options for a Euro-area fiscal capacity’,Policy Contribution 2013/01, BruegelSapir, André and Guntram B. Wolff (2015) ‘Euro-area governance: what to reform and how to do it’,Policy Brief 2015/01, BruegelTerzi, Alessio (2015a) ‘Is the ECB sacrificing reforms on the altar of inflation?’, 13 March, Bruegel blogTerzi, Alessio (2015b) ‘No coordination without representation’, 8 October, Bruegel blogWolff, Guntram B. (2012) ‘A budget for Europe’s monetary union’, Policy Contribution 2012/22, Bruegel

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ANNEx 1: COMPARISON OF 2014 EUROPEAN SEMESTER AND 2013 OECD RECOMMENDATIONS

Table 4 compares the 2014 European Semester CSRs and the 2013 OECD recommendations for the sixlargest EU countries, France, Germany, Italy, Poland, Spain and the United Kingdom. OECD recommen-dations are set every two years, so these two sets of recommendations are broadly comparable(especially given the persistence through time of both CSRs and OECD recommendations). The tableshows that while there are a few similar recommendations by the OECD, there are still many differenceswith the Country-Specific Recommendations made in the context of the European Semester. Also,European Semester recommendations are usually much more detailed, and may contain many sub-rec-ommendations. OECD recommendations typically do not. Thus, a single OECD recommendation mightecho part of a European Semester recommendation, but not its entirety. Therefore, while there existcommon recommendations given to each country in the context of the OECD Going for Growth and theEuropean Semester, these do not explain the finding that implementation rates are very similar for bothtypes of recommendations.

Table 4: 2014 European Semester vs 2013 OECD Going for Growth recommendationsFranceEuropean Semester Country-Specific Recommendations OECD Going for Growth Recommendations

Reinforce the budgetary strategy:• Comply with the rules of the SGP• Implement ambitious structural reforms to increase the adjustmentcapacity and boost growth and employment• Step up efforts to achieve efficiency gains across all sub-sectors ofgeneral government• Reinforce incentives to streamline local government expenditure• Take steps to tackle the increase in public expenditure on health• Take additional measures when and where needed to bring the pen-sion system into balance by 2020

No similar recommendation

• Ensure that the labour cost reduction resulting from the crédit d’im-pôt compétitivité emploi is sustained• Take action to further lower employer social security contributions• Further evaluate the economic impact of social security contributionexemptions and take appropriate measures if necessary• Further reduce the cost of labour in a budget neutral way


• Simplify companies’ administrative, fiscal and accounting rules andtake concrete measures to implement the Government’s ongoing"simplification plan" by December 2014• Eliminate regulatory impediments to companies’ growth• Simplify and improve the efficiency of innovation policy• Ensure that resources are focused on the most effective competi-tiveness poles and further promote the economic impact of innovationdeveloped in the poles.


• Remove unjustified restrictions on the access to and exercise ofregulated professions and reduce entry costs and promote competi-tion in services• Take further action to reduce the regulatory burden affecting thefunctioning of the retail sector• Ensure that regulated gas and electricity tariffs for household cus-tomers are set at an appropriate level which does not represent anobstacle to competition• Strengthen electricity and gas interconnection capacity with Spain• In the railway sector, ensure the independence of the new unifiedinfrastructure manager from the incumbent operator and take steps toopen domestic passenger transport to competition

Reduce regulatory barriers to competition

Reduce the tax burden on labour and step up efforts to simplify andincrease the efficiency of the tax system

Shift the tax burden away from labour, and con-tinue to reduce the minimum cost of labour

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• Take further action to combat labour-market rigidity• Take additional measures to reform the unemployment benefitsystem• Ensure that older workers benefit from adequate counselling andtraining and re-assess the relevant specific unemployment benefitarrangements with respect to their situation on the labour market

Reform job protection and strengthen activelabour market policies

• Pursue the modernisation of vocational education and training,implement the reform of compulsory education, and take furtheractions to reduce educational inequalities in particular bystrengthening measures on early school leaving• Ensure that active labour market policies effectively support themost vulnerable groups• Improve the transition from school to work

Improve equity and outcomes in primary and sec-ondary education

Improve the quality and efficiency of tertiary edu-cation

Germany

European Semester Country-Specific Recommendations OECD Going for Growth RecommendationsPursue growth-friendly fiscal policy and preserve a sound fiscal posi-tion:• Use available scope for increased public investment ininfrastructure, education and research• Improve efficiency of tax system• Increase cost-effectiveness of public spending on health-care andlong-term care• Ensure sustainability of public pension system• Complete implementation of the debt brake consistently across allLänder


Improve conditions that further support domestic demand:• By reducing high taxes and social security contributions• When implementing the general minimum wage, monitor its impacton employment• Improve employability of workers (through ALMPs and better educa-tion)• Reduce fiscal disincentives to work• Facilitate transition from mini-jobs to forms of employment subjectto full mandatory social security contributions• Address regional shortages in the availability of fulltime childcarefacilities and all-day schools while improving their overall educationalquality

Reduce tax wedges on labour income and shifttaxation towards less distortive sources.

Minimise costs of transforming the energy system No similar recommendation

• Stimulate competition in the services sector• Identify reasons behind the low value of public contracts open toprocurement under EU legislation• Remove unjustified planning regulations• Remove remaining barriers to competition in railway markets• Pursue consolidation efforts in the Landesbanken sector

Reduce regulatory barriers to competition, espe-cially in the services sector

No similar recommendation Improve tertiary education outcomes

No similar recommendation Ease job protection for regular workers

No similar recommendationRemove obstacles to full-time female labour par-ticipation

Italy

European Semester Country-Specific Recommendations OECD Going for Growth Recommendations

Reinforce the budgetary measures for 2014:• Comply with the rules of the SGP• Carry out the ambitious privatisation plan• implement a growth-friendly fiscal adjustment while preservinggrowth-enhancing spending like R&D, innovation, education andessential infrastructure projects


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• Guarantee the independence and full operationalisation of the fiscalcouncil

• Further shift the tax burden from productive factors to consumption,property and the environment• Ensure more effective environmental taxation, including in the areaof excise duties, and remove environmentally harmful subsidies• Implement the enabling law for tax reform by March 2015• Further improve tax compliance by enhancing the predictability ofthe tax system, simplifying procedures, improving tax debt recoveryand modernising tax administration• Pursue the fight against tax evasion and take additional stepsagainst the shadow economy and undeclared work.

Improve the efficiency of the tax structure

• As part of a wider effort to improve the efficiency of publicadministration, clarify competences at all levels of Government• Ensure better management of EU funds by taking decisive action toimprove administrative capacity, transparency, evaluation and qualitycontrol• Further enhance the effectiveness of anti-corruption measures• Monitor in a timely manner the impact of the reforms adopted toincrease the efficiency of civil justice


• Reinforce the resilience of the banking sector and ensure itscapacity to manage and dispose of impaired assets• Foster non-bank access to finance for firms• Continue to promote and monitor efficient corporate governancepractices in the whole banking sector


• Evaluate, by the end of 2014, the impact of the labour market andwage-setting reforms on job creation, dismissals’ procedures, labourmarket duality and cost competitiveness• Work towards a more comprehensive social protection for theunemployed• Strengthen the link between active and passive labour marketpolicies• Adopt effective action to promote female employment• Provide adequate services across the country to non-registeredyoung people and ensure stronger private sector commitment tooffering quality apprenticeships and traineeships by the end of 2014• Scale-up the new pilot social assistance scheme, in compliance withbudgetary targets• Improve the effectiveness of family support schemes and qualityservices favouring low-income households with children.

Enhance active labour market policies

• Implement the National System for Evaluation of Schools to improveschool outcomes in turn and reduce rates of early school leaving• Increase the use of work-based learning in upper secondaryvocational education and training and strengthenvocationally-oriented tertiary education• Create a national register of qualifications to ensure wide recognitionof skills.• Ensure that public funding better rewards the quality of higher edu-cation and research.

Improve equity and efficiency in education

• Approve the pending legislation or other equivalent measures aimedat simplifying the regulatory environment for businesses and citizens• Foster market opening and remove remaining barriers to, andrestrictions on, competition in the professional and local public serv-ices, insurance, fuel distribution, retail and postal services sectors• Enhance the efficiency of public procurement• In local public services, rigorously implement the legislation provid-ing for the rectification of contracts that do not comply with therequirements on in-house awards by 31 December 2014.

Reduce barriers to competition

• Ensure swift and full operationalisation of the Transport Authority bySeptember 2014.


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• Approve the list of strategic infrastructure in the energy sector andenhance port management and connections with the hinterland.

No similar recommendationPursue rebalancing of protection from jobs toworkers’ income

PolandEuropean Semester Country-Specific Recommendations OECD Going for Growth RecommendationsReinforce the budgetary strategy:• Comply with the rules of the SGP• Implement ambitious structural reforms to increase the adjustmentcapacity and boost growth and employment• Minimise cuts in growth-enhancing investment, improve the target-ing of social policies and the cost effectiveness of spending and theoverall efficiency of the healthcare sector, broaden the tax base forexample by addressing the issue of an extensive system of reducedVAT rates, and improve tax compliance, in particular by increasing theefficiency of the tax administration• Establish an independent fiscal council.


• Strengthen efforts to reduce youth unemployment in line with theobjectives of a youth guarantee• Increase adult participation in lifelong learning• Combat labour market segmentation• Continue efforts to increase female labour market participation• Include farmers in the general pension system• Phase out the special pension system for miners• Underpin the general pension reform by stepping up efforts to pro-mote the employability of older workers to raise exit ages from thelabour market


Improve the effectiveness of tax incentives in promoting R&D in theprivate sector as part of the efforts to strengthen the links betweenresearch, innovation and industrial policy, and better target existinginstruments at the different stages of the innovation cycle.


• Renew and extend energy generation capacity and improve effi-ciency in the whole energy chain• Speed up and extend the development of the electricity grid• Ensure effective implementation of railway investment projects• Accelerate efforts to increase fixed broadband coverage• Improve waste management


• Take further steps to improve the business environment by simplify-ing contract enforcement and requirements for construction permits. • Step up efforts to reduce costs and time spent on tax compliance bybusinesses. • Complete the ongoing reform aimed at facilitating access to regu-lated professions.

Upgrade transport, communication and energyinfrastructure

No similar recommendationReduce public ownership and lower barriers toproduct market competition

No similar recommendationReduce labour taxes and reform the welfaresystem

No similar recommendationImprove equity and efficiency of the educationsystem

No similar recommendation Reform housing policies

SpainEuropean Semester Country-Specific Recommendations OECD Going for Growth RecommendationsReinforce the budgetary strategy:• Comply with the rules of the SGP• Implement ambitious structural reforms to increase the adjustmentcapacity and boost growth and employment• Ensure that the new independent fiscal authority becomes fully operational


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• Ensure a full implementation of the preventive, corrective andenforcement measures in the Budgetary Stability Organic Law at alllevels of government• Carry out by February 2015 a systematic review of expenditure at alllevels of government• Continue to increase the cost-effectiveness of the healthcare sector• Adopt by the end of 2014 a comprehensive tax reform• Step up the fight against tax evasion


• Complete reform of the saving banks sector• Promote banks’ efforts to sustain strong capital ratios• Monitor the asset management company Sareb’s activity in order toensure timely asset disposal while minimising the cost to the tax-payer• Complete the ongoing measures to widen SMEs access to finance• Remove remaining bottlenecks in the corporate insolvency frame-work• Develop a permanent framework for personal insolvency


• Reduce labour market segmentation• Continue regular monitoring of the labour market reforms• Strengthen the job-search requirement in unemployment benefits• Enhance the effectiveness and targeting of active labour marketpolicies• Accelerate the modernisation of public employment services• Ensure the effective application of public-private cooperation inplacement services before the end of 2014• Ensure the effective functioning of the Single Job Portal and com-bine it with further measures to support labour mobility

Improve active labour market policies

Reduce the gap in job protection between tempo-rary and permanent contracts

• Implement the 2013-2016 Youth Entrepreneurship and Employ-ment Strategy and evaluate its effectiveness• Provide good quality offers of employment, apprenticeships andtraineeships for young people• Increase the quality of primary and secondary education• Enhance guidance and support for groups at risk of early schoolleaving• Increase the labour-market relevance of vocational education andtraining and of higher education

Improve educational attainment in secondaryeducation and access to tertiary education

• Implement the 2013-2016 National Action Plan on Social Inclusion• Strengthen administrative capacity and coordination betweenemployment and social services• Improve the targeting of family support schemes and quality serv-ices favouring low-income households with children


• Ensure an ambitious and swift implementation of Law No 20/2013on Market Unity at all levels of administration• Adopt an ambitious reform of professional services and of profes-sional associations by the end of 2014• Further reduce the time, cost and number of procedures required forsetting up an operating business• Identify sources of financing for the new national strategy for sci-ence, technology and innovation and make operational the new StateResearch Agency.

Lower entry barriers in services industries

• Following the reform of 2013, ensure the effective elimination ofdeficit in the electricity system as of 2014• Address the problem of insolvent toll motorways• Set up an independent body to contribute to the assessment offuture major infrastructure projects by the end of 2014• Take measures to ensure effective competition in freight and pas-senger rail services


• Implement at all government levels the recommendations of thecommittee for the reform of the public administration• Strengthen control mechanisms and increase the transparency of


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administrative decisions• Complete and monitor closely the ongoing measures to fight againstthe shadow economy and undeclared work• Adopt pending reforms on the structure of the judiciary and on thejudicial map

No similar recommendationMake wages more responsive to economic andfirm-specific conditions

No similar recommendationReduce the disincentives for older workers to con-tinue working

United KingdomEuropean Semester Country-Specific Recommendations OECD Going for Growth RecommendationsReinforce the budgetary strategy• Comply with the rules of the SGP• Consideration should be given to raising revenues through broaden-ing the tax base• Address structural bottlenecks related to infrastructure, skills mis-matches and access to finance for SMEs.


• Increase the transparency of the use and impact of macro-pruden-tial regulation in respect of the housing sector by the Bank of Eng-land’s Financial Policy Committee• Deploy appropriate measures to respond to the rapid increases inproperty prices in areas that account for a substantial share ofeconomic growth in the United Kingdom, particularly London, and miti-gate risks related to high mortgage indebtedness• Monitor the Help to Buy 2 scheme and adjust it if deemed necessary• Consider reforms to the taxation of land and property• Continue efforts to increase the supply of housing.


• Maintain commitment to the Youth Contract• Ensure employer engagement by placing emphasis on addressingskills mismatches• Reduce the number of young people with low basic skills.


• Continue efforts to reduce child poverty in low-income households• Improve the availability of affordable quality childcare.

Strengthen work incentives by reforming welfareand childcare policies

• Continue efforts to improve the availability of bank and non-bankfinancing to SMEs. • Ensure the effective functioning of the Business Bank and supportan increased presence of challenger banks.


• Follow up on the National Infrastructure Plan by increasing the pre-dictability of the planning processes as well as providing clarity onfunding commitments. • Ensure transparency and accountability by providing consistent andtimely information on the implementation of the Plan.


No similar recommendation Improve outcomes and equity in education

No similar recommendationImprove public infrastructure, especially for trans-port

No similar recommendation Strengthen public sector efficiency

No similar recommendation Reform planning regulation

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Table 5: The 2015 recommendations for the euro-area and the five largest euro-area Member States

Euro area

1. Use peer pressure to promote structural reforms that facilitate the correction of large internal andexternal debts and support investment. Regularly assess the delivery of reforms in those MemberStates which require specific monitoring within the framework of the Macroeconomic Imbalances Proce-dure. Continue the regular thematic assessment of structural reforms. By spring 2016, take decisionson the follow-up to the coordination exercise on reducing the high tax wedge on labour and on reformingservices markets.

2. Coordinate fiscal policies to ensure that the aggregate euro area fiscal stance is in line with sustain-ability risks and cyclical conditions. This is without prejudice to the fulfilment of the requirements ofthe Stability and Growth Pact. By spring 2016, hold thematic discussions on improvements in the qual-ity and sustainability of public finances, focussing in particular on the prioritisation of tangible andintangible investment at national and EU levels, and on making tax systems more growth friendly. Mon-itor the effective functioning of the recently strengthened national fiscal frameworks.

3. Ensure the timely finalisation of the follow up of the Comprehensive Assessment carried out by theEuropean Central Bank, implementation of Directive 2014/59/EU of the European Parliament and of theCouncil (1) (Bank Recovery and Resolution Directive), completion of the ratification of the Intergovern-mental Agreement on the Single Resolution Fund and make the Fund fully operational as from January2016. Promote measures to deepen market-based finance, to improve access to finance for SMEs andto develop alternative sources of finance. Encourage further reforms of national insolvency frame-works.

4. Take forward work on deepening Economic and Monetary Union, and contribute to the improvementof the economic surveillance framework in the context of the report on the next steps on better eco-nomic governance in the euro area, prepared by the President of the European Commission, Jean-Claude Juncker, in close cooperation with the President of the European Council, Donald Tusk, thePresident of the European Parliament, Martin Schulz, the President of the European Central Bank, MarioDraghi, and the President of the Eurogroup, Jeroen Dijsselbloem, and its follow-up.

France

1. Ensure effective action under the excessive deficit procedure and a durable correction of the exces-sive deficit by 2017 by reinforcing the budgetary strategy, taking the necessary measures for all yearsand using all windfall gains for deficit and debt reduction. Specify the expenditure cuts planned forthese years and provide an independent evaluation of the impact of key measures.

2. Step up efforts to make the spending review effective, continue public policy evaluations and identifysavings opportunities across all sub-sectors of general government, including on social security andlocal government. Take steps to limit the rise in local authorities’ administrative expenditure. Take addi-tional measures to bring the pension system into balance, in particular ensuring by March 2016 thatthe financial situation of complementary pension schemes is sustainable over the long term.

3. Ensure that the labour cost reductions stemming from the tax credit for competitiveness andemployment and from the responsibility and solidarity pact are sustained, in particular by implement-ing them as planned in 2016. Evaluate the effectiveness of these schemes in the light of labour andproduct market rigidities. Reform in consultation with the social partners and in accordance withnational practices, the wage-setting process to ensure that wages evolve in line with productivity.Ensure that minimum wage developments are consistent with the objectives of promoting employmentand competitiveness.

4. By the end of 2015, reduce regulatory impediments to companies’ growth, in particular by reviewingthe size-related criteria in regulations to avoid threshold effects. Remove the restrictions on access toand the exercise of regulated professions, beyond the legal professions, in particular as regards thehealth professions as from 2015.

5. Simplify and improve the efficiency of the tax system, in particular by removing inefficient tax expen-diture. To promote investment, take action to reduce the taxes on production and the corporate incomestatutory rate, while broadening the tax base on consumption. Take measures as from 2015 to abolishinefficient taxes that are yielding little or no revenue.

ANNEx 2: EUROPEAN SEMESTER 2015 RECOMMENDATIONS.

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6. Reform the labour law to provide more incentives for employers to hire on open-ended contracts.Facilitate take up of derogations at company and branch level from general legal provisions, in particu-lar as regards working time arrangements. Reform the law creating the accords de maintien de l’emploiby the end of 2015 in order to increase their take-up by companies. Take action in consultation with thesocial partners and in accordance with national practices to reform the unemployment benefit systemin order to bring the system back to budgetary sustainability and provide more incentives to return towork.

Germany

1. Further increase public investment in infrastructure, education and research. To foster private invest-ment, take measures to improve the efficiency of the tax system, in particular by reviewing the localtrade tax and corporate taxation and by modernising the tax administration. Use the ongoing review toimprove the design of fiscal relations between the federation, Länder and municipalities, particularlywith a view to ensuring adequate public investment at all levels of government.

2. Increase incentives for later retirement. Take measures to reduce high labour taxes and social secu-rity contributions, especially for low-wage earners, and address the impact of fiscal drag. Revise thefiscal treatment of mini-jobs to facilitate the transition to other forms of employment.

3. Take more ambitious measures to stimulate competition in the services sector, in particular in pro-fessional services, by eliminating unjustified restrictions such as legal form and shareholding require-ments and fixed tariffs. To this end, conclude the ongoing domestic review of these barriers and takefollow-up measures. Remove the remaining barriers to competition in the railway markets, in particularin long-distance rail passenger transport.

Italy

1. Achieve a fiscal adjustment of at least 0,25 % of GDP towards the medium-term budgetary objectivein 2015 and of 0,1 % of GDP in 2016 by taking the necessary structural measures in both 2015 and2016, taking into account the allowed deviation for the implementation of major structural reforms.Ensure that the spending review is an integral part of the budgetary process. Swiftly and thoroughlyimplement the privatisation programme and use windfall gains to make further progress towards put-ting the general government debt ratio on an appropriate downward path. Implement the enabling lawfor tax reform by September 2015, in particular the revision of tax expenditures and cadastral valuesand the measures to enhance tax compliance.

2. Adopt the planned national strategic plan for ports and logistics, particularly to help promote inter-modal transport through better connections. Ensure that the Agency for Territorial Cohesion is madefully operational so that the management of EU funds markedly improves.

3. Adopt and implement the pending laws aimed at improving the institutional framework and mod-ernising the public administration. Revise the statute of limitations by mid-2015. Ensure that thereforms adopted to improve the efficiency of civil justice help reduce the length of proceedings.

4. By end-2015, introduce binding measures to tackle remaining weaknesses in the corporate gover-nance of banks, implement the agreed reform of foundations, and take measures to accelerate thebroad-based reduction of non-performing loans.

5. Adopt the legislative decrees on the design and use of wage supplementation schemes, the revisionof contractual arrangements, work-life balance and the strengthening of active labour market policies.Promote, in consultation with the social partners and in accordance with national practices, an effec-tive framework for second-level contractual bargaining. As part of efforts to tackle youth unemploy-ment, adopt and implement the planned school reform and expand vocationally-oriented tertiaryeducation.

6. Implement the simplification agenda for 2015-17 to ease the administrative and regulatory burden.Adopt competition-enhancing measures in all the sectors covered by the competition law, and takedecisive action to remove remaining barriers. Ensure that local public services contracts not complyingwith the requirements on in-house awards are rectified by no later than end-2015.

Netherlands

1. Shift public expenditure towards supporting investment in R&D and work on framework conditionsfor improving private R&D expenditure in order to counter the declining trend in public R&D expenditureand increase the potential for economic growth.

2. With the strengthening of the recovery, accelerate the decrease in mortgage interest tax deductibilityso that tax incentives to invest in unproductive assets are reduced. Provide for a more market-oriented-

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pricing mechanism in the rental market and further relate rents to household income in the social hous-ing sector.

3. Reduce the level of contributions to the second pillar of the pension system for those in the earlyyears of working life.

Spain

1. Ensure a durable correction of the excessive deficit by 2016 by taking the necessary structuralmeasures in 2015 and 2016 and using windfall gains to accelerate the deficit and debt reduction.Strengthen transparency and accountability of regional public finances. Improve the cost-effectivenessof the healthcare sector, and rationalise hospital pharmaceutical spending.

2. Complete the reform of the savings bank sector, including by means of legislative measures, andcomplete the restructuring and privatisation of state-owned savings banks.3. Promote the alignment of wages and productivity, in consultation with the social partners and inaccordance with national practices, taking into account differences in skills and local labour marketconditions as well as divergences in economic performance across regions, sectors and companies.Take steps to increase the quality and effectiveness of job search assistance and counselling, includ-ing as part of tackling youth unemployment. Streamline minimum income and family support schemesand foster regional mobility.

4. Remove the barriers preventing businesses from growing, including barriers arising from size-contin-gent regulations; adopt the planned reform on professional services; accelerate the implementation ofthe law on market unity.

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