Cooperation between the EU Member States on matters relating to the coordination of economic policies (fiscal policy and structural reforms) is aimed at achieving price stability, economic growth and full employment. The acceleration of European and international economic integration and monetary union, particularly following the introduction of the single currency, has increased the need for closer coordination of economic policies between the Member States of the European Union.
The Treaty of Rome did not consider it necessary to make provision for monetary cooperation (particularly given the operation of the Bretton Woods system) and simply established the practice of consultation on economic policy affairs.
The idea of establishing an economic and monetary union began to be cultivated in the late 1960s. With the introduction of the European Monetary System in 1979, which was based on fixed but adjustable exchange rates, efforts to establish an area of monetary stability became more apparent. The currencies of all Member States participated in the Exchange Rate Mechanism with the exception of the British pound.
At the end of the 1980s and in view of prospects for the creation of the single market, there was greater will to coordinate macroeconomic policies and a plan was proposed to establish an Economic and Monetary Union (EMU).
The Treaty of Maastricht provided for the introduction of EMU before the end of the last century in three successive stages which would enable Member States to overcome any problems and comply with the specific requirements of the Treaty and in particular with its five specific convergence criteria.
At the Amsterdam European Council in 1997, the Stability and Growth Pact was adopted with the aim of ensuring adherence to the rules on budgetary discipline and it was also decided to establish a new Exchange Rate Mechanism for the Member States not participating in the Euro area. At the same time, rules of operation for this mechanism were also determined.
Completion of Economic and Monetary Union in May 1998, which marked an historic turning point for the Union, and the introduction of the Euro as a single currency by 12 of the 15 Member States (including Greece) on 1 January 2002 are important milestones in the process of European integration. Today, the monetary policy of the Member States of the Euro area is determined by the European Central Bank, while monetary policy in the other three Member States is formulated by their respective central banks.
In effect implementation of EMU entails:
- at an economic level, increased convergence of policies with greater levels of multilateral supervision and the obligation of Member States in the Euro area to avoid excessive public deficits,
- at a monetary level, a single monetary policy implemented by the European System of Central Banks in which the European Central Bank and national central banks participate,
- the introduction of the euro, which is now the only currency of those Member States that have adopted it.
- the anticipated enlargement of the European Union will contribute to economic growth and stability not only for the countries scheduled to accede but also for the present 15 Member States.
Article 3a of the Treaty on European Union makes provision for ... the definition and conduct of a single monetary policy and exchange-rate policy, the primary objective of which shall be to maintain price stability .... The provisions of the Treaty which regulate fiscal policy matters are supplemented by the Stability and Growth Pact.
The ability to impose sanctions in the case of excessive deficits is provided in article 104c of the Treaty. The form which sanctions may take, including the imposition of fines, was clarified by Council Regulation (EC) No. 1467/97, within the context of the Stability and Growth Pact.
Moreover, Council Regulation (EC) No. 1466/97 strengthens the overseeing of the fiscal situation in Member States (as provided by article 104c of the Treaty) as well as the overseeing and coordination of economic policies (article 103 of the Treaty).
Articles 105-109 relate to implementation of monetary policy. The primary objective of the European System of Central Banks (ESCB), which was established in July 1998, is to maintain price stability (article 105, par. 1). Subject to the objective set out in article 105, par. 1, the ESCB supports the general economic policies in the Community in order to contribute to the implementation of its objectives.
The general guidelines proposed by the Commission on an annual basis reflect a common strategy to ensure an increasingly closer coordination of economic policies and gradual convergence of the economic performance of Member States and the Community itself. Medium-term attainment of high, constant economic growth as well as high, sustainable levels of employment can be achieved by means of an overall, consistent strategy which entails sound, macroeconomic policies as well as policies which improve the adaptability of Member States.
In the macroeconomic sector, it has been confirmed that the common strategy should continue to develop on the basis of three parameters:
- Sound macroeconomic policies with emphasis on stability.
- Ongoing efforts to ensure fiscal reform (by reducing public expenditure, strengthening coordination on taxation matters, reforming pension systems, investments in infrastructure and in human resources, etc.).
- Ensuring that nominal salaries are in line with price stability and that increases in real salaries do not exceed increases in productivity, in order to boost returns on investments.
The more consistent fiscal measures are with the stabilising role of monetary policy, the more positive the role of monetary conditions (including exchange rates and long-term interest rates) will be for economic growth and the reduction of unemployment.
In this context, cooperation on taxation matters and fiscal instruments is aimed at contributing to the attainment of the objective of the improved operation of the internal market and combating unfair tax competition.
At the same time, the improved operation of the single market is a prerequisite for the enhanced operation of the product and services markets, the strengthening of competition and the encouragement of innovation in order to facilitate growth and employment. It is considered necessary to continue efforts to improve development without causing any dysfunction in commercial activity, as well as to promote policies to improve the operation of the labour market for a more productive and competitive European market.
The single financial services market is particularly important for the competitiveness of European businesses. A common market in financial services could make it easier and less expensive for businesses to finance their investments, making it simpler for investors to find more profitable investments. Strengthening the internal market in financial services will help promote the objective of economic growth and full employment.
At the Lisbon European Council (March 2000), the heads of states and governments set the strategic goal of creating the most competitive, knowledge-based economy in the world by 2010; an economy capable of generating steady economic growth with more and better jobs and greater social cohesion. The Lisbon objectives can be achieved through the interaction and complementarity of macroeconomic policies and other policies relating to structural reforms. The blending of development, employment and stability targets is directly linked to fiscal policy, low inflation, respect for multilateral agreements on free trade and efforts to reform the economic and social sector.
The EU implements structural reforms with the aim of improving the economic structure of Member States. These improvements enable an increase in performance and flexibility in the goods, services and capital markets, with the aim of promoting the international competitiveness of the Member States. Structural reforms must tackle the issue of labour incentives in a coherent manner and be accompanied by a clear reorientation of other policies in support of employment.
The Member States of the Euro area have a single monetary policy. Cooperation takes the form of annual stability programmes for countries in the Euro area or convergence programmes in the case of the three countries not yet participating.
However, other aspects of economic policy remain within the competence of Member States. The general orientations of economic policy adopted each year by ECOFIN, based on the Commission's recommendations and in accordance with the guidelines set by the European Council, are the main instruments for promoting economic cooperation.
The Council regularly carries out an overall evaluation and - if necessary - makes recommendations to Member States in cases where their economic policy conflicts with the general orientations. Regarding the free movement of capital, there is already a considerable body of legislation in the form of regulations and directives.
In the framework of structural reforms, the Member States prepare an annual progress report accompanied by a joint report (Cardiff Process). For the purpose of promoting full employment, each Member State prepares an annual action plan on the basis of which common guidelines and recommendations are prepared by the Employment and Social Affairs Council (Luxembourg Process).
The taxation package is one of the cornerstones of collaboration in taxation policy affairs. Cooperation takes the form of proposals to avoid detrimental tax competition in the taxation of businesses, limiting tax hurdles in competition between businesses and preventing interest on deposits being taxed in other Member States as a means of tax evasion. Activities to strengthen cooperation between tax authorities in the Member States is also important. One of the main objectives in this respect is to improve measures to fight VAT-related fraud.
At the same time, the possibility of introducing a new common taxation framework for energy is being discussed in parallel with the deregulation of energy markets.
Strengthening the internal market in financial services could be achieved by more effective rules on the control of mergers between financial service providers, the use and movement of capital, market manipulation, matters relating to insurance and pensions, etc. In order to promote a more effective and integrated money and capital market in the EU, Member States must implement the action plan for financial services by 2005.
As far as shares and bonds are concerned, the objective is for an integrated market to have been established by the end of 2003.
Communication from the Commission to Council and the European Parliament : Strengthening the co-ordination of budgetary policies
The Monetary Policy of the ECB, August 2001