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Coordination of Economic and Budgetary Policy


Economic and Monetary Union requires national economic and budgetary policies to be closely coordinated. The countries participating in the common currency have a particular responsibility in this context, as they must coordinate their economic and budgetary policies with each other, taking due account of cyclical trends and the ECB’s monetary policy. They must also support macroeconomic policy, i.e. the interaction between monetary, budgetary and wage policies, with economic and structural reforms. The Broad Economic Policy Guidelines and the Stability and Growth Pact are the two main coordination instruments.

The Broad Economic Policy Guidelines, together with the Employment Guidelines, make up the Integrated Guidelines for Growth and Jobs which set out the medium-term priorities for the European Union and the Member States. These include, in particular, ensuring the long-term sustainability of public finances by reducing debt and reforming pension and healthcare systems, integrating labour markets and increasing labour force participation, improving education and training systems, increasing expenditure on research and development and promoting innovation, and modernising infrastructure.

On the basis of the Integrated Guidelines, the Member States submitted national reform programmes for the first time in autumn 2005, with specific measures to promote growth and employment. The programmes are designed to further improve coherence between national economic policies and to achieve speedier and more consistent implementation of the necessary structural reforms.

The Stability and Growth Pact is the framework for Member States’ budgetary policy, and sets a ceiling of 60 % of GDP for overall debt and 3 % of GDP for the annual deficit. Under the budgetary surveillance procedure, countries participating in the common currency must submit annually updated stability programmes, while non-participating countries have to present annually updated convergence programmes. These programmes outline in detail the medium-term budgetary developments and the measures planned to ensure the stability goals are achieved. If a Member State’s deficit exceeds the reference value of 3 %, an excessive deficit procedure is normally initiated and the Member State concerned is invited to take immediate corrective action.

The European Council in March 2005 agreed on reform of the Stability and Growth Pact in order to better link stability and growth. Member States are required to use periods of economic growth much more effectively to consolidate their budgets in order to create room for manoeuvre during economic downturns. At the same time, the reform also allows exceptional and temporary excess of a government deficit over the reference value under special circumstances. Finally, the budgetary adjustment path takes into account country-specific conditions, such as the overall debt level or the implementation of economic and structural reforms.

 

Date: 22.12.2005