Fiscal frameworks, Fiscal Compact and Independent Fiscal Institutions "Challenges in establishing fiscal policy surveillance" - Ljubljana, 8 July 2015 Stefan Ciobanu Head of Unit "Fiscal governance and fiscal statistics" European Commission – DG Economic and Financial Affairs

Outline  Strengthened economic governance in EU  Brief overview of European requirements for national fiscal frameworks  Independent fiscal monitoring institutions:  role and set-up  what Member States have done so far  Typical features / good practices 2

The origin of the crisis Failure to adapt to requirements of EMU  Accumulation of unsustainable debt levels (public and private)  Excessive risk-taking in the banking sector  Failing market discipline  EMU led Member States to delay necessary structural reforms Inadequate governance framework  Insufficient monitoring and enforcement tools to safeguard fiscal discipline  No instruments to address macroeconomic imbalances  No established sovereign-debt crisis resolution mechanism for euro area Member States  No integrated European supervisory and regulatory architecture for financial institutions 3

ESM Strengthened economic governance in EU Prevention and correction of macro imbalances New surveillance procedure and possible sanctions Better enforcement of rules -Larger range of sanctions, starting more gradual, quasi- automaticity (RQMV) -Strengthened national fiscal frameworks More effective preventive arm of Stability & Growth Pact - Expenditure benchmark - Draft Budgetary Plans - Autonomous recommendations Focus on debt developments Numerical benchmark in the corrective arm of the SGP Structural reforms Europe 2020 strategy Price stability ECB - LTRO - OMT - Forward guidance Fiscal compact Crisis Resolution Financial backstops (EFSM/EFSF/ESM) Financial Stability Sound Fiscal Policy Sustained Economic Growth Banking Union Based on a single rule book for the EU 28 Single Supervisory Mechanism Single Resolution Mechanism 4

Reinforcing the role of national fiscal frameworks ‘Fiscal framework’ means the set of arrangements, procedures, rules and institutions that underlie the conduct of budgetary policies of general government  Crisis led to emergence of European legislation  Fiscal Frameworks Directive  Two-Pack  Fiscal Compact 5

Fiscal Frameworks Directive 2011/85/EU Part of the "Six-pack" (Nov 2011) Minimum requirements in 5 main areas: Accounting & Statistics Forecasts Numerical Fiscal Rules Medium-Term Budgetary Frameworks Transparency and coordination Deadline for national transposition: Dec 2013 Regulation (EU) 473/2013 Part of the "Two-pack" (May 2013) Introduces enhanced budgetary policy monitoring Concerns only Member States in the euro area Defines features of independent bodies monitoring national fiscal rules and requires independent production/endorsement of macroeconomic forecasts used for budgeting 6

Fiscal Compact  Title III of the Treaty on Stability, Coordination and Governance (inter-governmental instrument, not EU law), signed in March 2012  Applies automatically to euro area Member States; other countries can subscribe on a voluntary basis (so far: Bulgaria, Denmark and Romania)  Calls for: National balanced budget rule in structural terms (preferably constitutional) Automatic correction mechanism in case of deviation from goals Independent monitoring institution  Accompanying "Common principles on national fiscal correction mechanisms" provide operational details 7

Overview of European requirements

What is a "monitoring institution"? A body which:  discharges a range of fiscal policy tasks (e.g. monitoring fiscal rules, assessing macroeconomic and budgetary forecasts, assessing fiscal sustainability, providing opinion on draft legislation with significant budgetary impact)  is structurally independent or endowed with functional autonomy vis-à-vis the budgetary authorities of the Member State Known under different names: fiscal council, independent fiscal institution 9

Specific mission from the Fiscal Compact Objective: Monitor compliance with the balanced-budget rule in structural terms and provide independent assessment and recommendations, in particular with respect to the application of the correction mechanism. Specific tasks: To provide assessments on:  whether circumstances warrant the activation of the correction mechanism;  once the correction mechanism has been triggered, whether the correction plan is delivering;  whether a state of exceptional circumstances may apply or be terminated. 10

How to set up a monitoring institution  Monitoring institutions shall be underpinned by national legal provisions ensuring a high degree of autonomy, including: Statutory regime grounded in law Freedom from outside interference Capacity to communicate publicly Nomination procedures based on experience and competence Adequacy of resources (budget, staff, endowment) Appropriate access to information  Legal basis should include a 'comply-or-explain' principle 11

What have Member States done so far (1)  All Member States bound by the Fiscal Compact have adopted the legislation for setting up independent monitoring institutions, except for Slovenia  A fiscal council-type of institution has been effectively set up in all EU Member States but BG, CZ, EL, PL and SI  Allocation of tasks varies quite considerably: Comprehensive portfolio vs. "EU requirements only" "All-in-one" approach vs. dual model (i.e. one body responsible principally for fiscal policy monitoring and another body preparing or endorsing macroeconomic forecasts – AT, NL) 12

What have Member States done so far (2)  Institutional set-up – two main models Stand-alone body: e.g. UK, Ireland, Sweden, Portugal, Romania, Cyprus Body with functional autonomy hosted within an existing institution (Parliament, Court of Auditors, Central Bank): e.g. France, Finland, Germany, Italy, Lithuania, the Netherlands The conformity check of the provisions transposing in each Member State the specific requirements of the Fiscal Compact is underway, so no clean bill of health yet 13

Typical features / good practices (1) Statutory regime grounded in constitutional provisions (or other superior law) and implementing legislation Explicit legal references to freedom from any interference, right to communicate freely and privileged access to information Strong safeguards for the members (fairly long mandates, strict conditions for removal from office) Demanding conditions for membership (relevant background, incompatibilities) Nominations originating from several institutions (government, parliament, central bank, academia, etc.) 14

Typical features / good practices (2) Endowment with specialised support staff (economists) Sufficient financial resources, commensurate with the size and mandate of the entity (including funds for outsourced expertise) Own corporate identity and own website Access to relevant information facilitated through agreements with key stakeholders (especially Ministry of Finance) 15

Monitoring institution in Slovenia  Adoption of legal basis is long overdue  Call for establishment of fiscal council in the 2015 Commission proposal for country-specific recommendation to Slovenia Adopt the Fiscal Rule Act and revise the Public Finance Act 16

Thank you for your attention 17