Another interesting aspect is also that the measures on countries under financial distress, which are now subject to the imposition of adjustment programmes by the Council, may in the future reduce incentives to delay requests for the activation of precautionary programmes….…
For professional investors and advisers only
The European Parliament, the European Commission, and the EU Council of Ministers, have recently reached an agreement on the new budgetary surveillance rules for euro area countries: the so-called “Two-Pack”. The first of the two new regulations applies to all euro area Member States, with special rules for those subject to excessive deficit procedure. The second applies to countries facing severe difficulties in terms of financial stability, and to those which have applied for, or are receiving, financial assistance. Unlike previous reforms, the Two-Pack concentrates more on the transparency of fiscal planning, guaranteeing access to timely and comparable data on budgetary processes also to external actors (investors, analysts). However, it also confers the Council the power to impose adjustment obligations on a Member State in financial distress even before a formal request for assistance is made.
Let’s begin with the new general rules. As a result of the reform, national budgeting processes will be subjected to new pre-emptive rules. Medium-term fiscal plans (the so-called “Stability Programmes”) will have to be presented by 30 April each year (preferably by 15 April), and must be based on independent macroeconomic projections. In addition, Member States will have to publish their draft budgets for the following year by 15 October, the Commission will have to issue its opinion by 30 November, and final approval by Parliament will have to take place by 31 December. The Commission’s opinion, which will be public, may prove not to be a mere formality: if severe non-compliance with the obligations of the Stability and Growth Pact is detected, the Commission will ask the Member State to submit a revised plan. Also, the
Commission will publish an assessment of the budgetary outlook for the forthcoming year.
Member States in EDP will face further disclosure obligations. These countries will have to publish a half-yearly report on the implementation of the budget and on the measures adopted to reach the objectives laid out. Additional reporting will be required if a tangible risk of the targets being breached is detected.
A further strengthening of budgetary process transparency rules is imposed on Member States in financial distress, even before they formally apply for assistance. The Commission will have the power to place under enhanced surveillance Member States facing difficulties with regard to their financial stability, with the risk of repercussions on the rest of the euro area, as well as Member States that are already benefiting from assistance programmes of any nature. In addition, to the provisions addressed to countries in EDP, the Member State facing difficulties will also have to conduct stress testing and sensitivity analysis on its financial system, subject its supervisory authorities to periodical external assessments, and provide broken down data on the development of its financial system, which, however, will be treated as confidential by the Commission and by the ECB.
However, a much more invasive measure than a simple request for information will also be imposed on Member States facing financial difficulties: the Council will have the power to issue recommendations (generally confidential, but potentially public) imposing precautionary corrective measures, or a macroeconomic adjustment programme. The possibility of intervening along these lines may have interesting developments: as the situation of financial distress may trigger correction obligations regardless of the application for financial assistance, Member Sates facing difficulties would incur a smaller political cost by requesting the activation of precautionary stabilisation programmes.
Appendix
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