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69-665: The Euro-Plus Pact (or Euro+ Pact , also initially called the Competitiveness Pact or later the Pact for the Euro ) was adopted in March 2011 under EU's Open Method of Coordination , as an intergovernmental agreement between all member states of the European Union (except Croatia, Czech Republic, Hungary, Sweden and UK), in which concrete commitments were made to be working continuously within

138-473: A 40 percent increase in world population and 7.8 years increase in the median age over the next 40 years. Fiscal sustainability is considerably impacted by this phenomenon but this can be triggered multiple ways. For example, shocks such as war and mass migration can dramatically alter the demographic composition of a society. In the industrialized world this trend is driven by simultaneous decreasing fertility and increasing longevity. One economic indicator that

207-683: A common base for corporate tax and adopting debt brakes. In the following sections the motivation for and criticism of each objective is summarized. Wage indexation is the process of adjusting wages to compensate for inflation, which reduces the value of money over time. Abolishing indexation would allow for real wages to decrease increasing the competitiveness of countries as it becomes less expensive to employ people. Understandably this policy objective has been called into question by some governments such as Belgium as it reduces people's purchasing power. In countries with "pay as you go" pension systems, as most European countries have, raising pension ages has

276-568: A communication for a concerted strategy on social protection, proposing a Social Protection Committee which was made official in the Nice Treaty . Said committee was responsible for the initial standard setting exercise. Next, each member state was asked to benchmark its situation by producing a two-year national action plan (NAP or NAPincl), presenting national-level strategies for improving the situation. These were made available in June 2001. 18 months later

345-583: A new commonly agreed political general framework for the implementation of structural reforms intended to improve competitiveness, employment, financial stability and the fiscal strength of each country. The plan was advocated by the French and German governments as one of many needed political responses to strengthen the EMU in areas which the European sovereign-debt crisis had revealed as being too poorly constructed. The pact

414-476: A regular "structured dialogue". Tax policy coordination is expected to help strengthen the sharing of best practices and fight against tax fraud and evasion . Direct taxation remains a national competence for each Euro Plus Pact member to decide upon individually. The European Commission had presented a proposal to introduce a Common Consolidated Corporate Tax Base (CCCTB) with appliance for all EU member states already back in March 2011, which if agreed could be

483-436: A revenue neutral way to ensure consistency among national tax systems, while respecting national tax strategies - as it refrain to set a common tax rate. The Euro Plus Pact explicit mentioned, that its featured "structured dialogue" for "tax policy coordination", should also be used for the purpose to try and reach a future CCCTB agreement. The CCCTB proposal had still not reached any final agreement as of June 2015, which prompted

552-430: A very profound impact on government revenue as people who continue working will also pay taxes instead of requiring them. This too is a controversial proposal as can be seen in the 2010 French pension reform strikes . Creating a "common base" is perceived by some as a first step in a process of unifying tax rates and as such has been opposed by countries such as Ireland, which have low corporate tax rates. The opinion of

621-492: A whole. One example of this is the financial sector in EU non Eurozone member states which benefit from trading currencies and would lose a large part of their income should their country join the eurozone. Creating independent fiscal institutions keeps these instruments out of the reach of political actors that would seek to use them for their personal benefit. The potential for states to reform their fiscal policy to ensure sustainability

690-466: Is in fact not the correct criterion for sustainability. There are many different indicators of fiscal sustainability. The indicators measure the fiscal adjustment required to bring public finances back to sustainable track. Specifics of the indicator depend on the operational definition of fiscal sustainability and the underlying economic modelling framework employed in a study. Some of the most commonly used indicators are so-called tax gaps. For example,

759-457: Is necessary to transfer sovereignty. Open Method of Coordination The OMC works in stages. Firstly, the Council of Ministers agrees on (often very broad) policy goals. Secondly, Member states then transpose guidelines into national and regional policies. Thirdly, specific benchmarks and indicators to measure best practice are agreed upon. Finally, results are monitored and evaluated. However,

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828-482: Is no consensus among economists on a precise operational definition for fiscal sustainability, rather different studies use their own, often similar, definitions. However, the European Commission defines public finance sustainability as: the ability of a government to sustain its current spending, tax and other policies in the long run without threatening the government's solvency or without defaulting on some of

897-631: Is not necessarily the case for other OMCs. According to FEANTSA (2005), the Pensions OMC is more closed and involves mainly the commission and national civil servants. When comparing the EES and social inclusion OMC, Pochet (2005: 43) notes that the first seems to go more in a direction of centralization , naming and shaming without any broad discussion about the content on the European level ( top-down ). The second process goes more towards an experimental dynamic with

966-498: Is preparing to streamline the methods used in the different OMCs (social inclusion, pensions etc.). In this context, critics fear that the number of indicators will be too much reduced. Fiscal sustainability Fiscal sustainability , or public finance sustainability , is the ability of a government to sustain its current spending, tax and other policies in the long run without threatening government solvency or defaulting on some of its liabilities or promised expenditures. There

1035-573: Is reflected across current expenditure levels and projected changes to spending, states are uses a number of measures to combat this trend. The two main categories of reform in the area of pensions are altering the age eligibility for pension benefits or altering the coverage of the benefits and adjusting the size of the benefits. Altering the age eligibility for pensions can be done through legislation through increasing statutory retirement ages or it can be achieved through nudging whereby incentives are given to individuals that postpone retirement. Adjusting

1104-558: Is the government's inter-temporal budget constraint or inter-temporal equilibrium condition: where B t {\displaystyle B_{t}} is the stock of public debt, r {\displaystyle r} is the interest rate of public debt and P B t {\displaystyle {PB}_{t}} is the primary balance (negative of primary deficit or government revenues minus government expenditures excluding interest expenditure). The government's inter-temporal budget constraint states that

1173-537: Is the primary balance to GDP ratio. The infinite horizon tax gap gives the adjustment required to satisfy the inter-temporal budget constraint in terms of a permanent one-time change to projected path of primary balance to GDP ratios. Thus, if ITGAP = 5%, primary balance must be greater than projected by 5% of GDP for each future year. This could be achieved by permanently raising taxes or cutting expenditures 5% of GDP. For derivations and more information, see for example, or. There are numerous challenges and threats to

1242-409: Is typically oriented around institutional independence and covering the cost of aging over a longer time horizon. As public pension spending is the most affected by the demographic shift of aging at the EU level accounts for 11% of GDP it is critical to develop reforms that anticipate this trend. Although there is a large variation between the composition of the welfare state between member states which

1311-408: Is used to illustrate the share of economically inactive people in society is the old age dependency ratio . The dependency ratio is an age to population ratio of those not typically in the labor force with individuals between 0-14 and 65+ comprising the dependent part individuals between 15 and 64 measured as the productive part. This ratio is significant for determining the pressure on exerted on

1380-653: The Broad Economic Policy Guidelines (which were introduced as an instrument to realise the goals set down in the Lisbon Agenda ) can be considered a sort of “proto-OMC” with comparatively hard sanctioning mechanisms. As a reaction to the economic integration of Europe, the European Employment strategy (EES) evolved in the 1990s with the rationale of rebalancing monetary and economic integration. The original EES thus consisted in more or less replicating

1449-542: The European Commission is that having a common rules for calculating of the base amount over which the different national tax rates are applied is beneficial for the enterprises since it will reduce the administrative burden and costs of maintaining compliance with 27 different rule sets for corporate bookkeeping. The word "debt brake" comes from the German "Schuldenbremse", an amendment to the constitution legally limiting

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1518-556: The European Convention . Historically, the OMC can be seen as a reaction to the EU's economic integration in the 1990s. This process reduced the member states' options in the field of employment policy. But they were also weary of delegating more powers to the European institutions and thus designed the OMC as an alternative to the existing EU modes of governance. In the following, the OMCs in

1587-459: The Stability and Growth Pact into national legislation." When implementing a balanced budget amendment , Member States are free to choose the type of legislation instrument (i.e. constitutional law or framework law), as long as it impose a "sufficiently strong binding" condition and a "durable nature". The law-enforced rule, needs to be fully compliant with the Stability and Growth Pact rules, but

1656-605: The EMU , this recommendation was adopted with a target for its transposition to take place at the latest in June 2017. The Euro-Plus Pact came with four broad strategic objectives along with more specific strategies for addressing these objectives. The four objectives are: An additional fifth issue is: Although for tax policy coordination, there is no requirement to achieve certain improvements or implement specific measures, as member states only more vaguely: "commit to engage in structured discussions on tax policy issues, notably to ensure

1725-523: The EMU process with mid-term objectives, indicators and pressure for convergence. Legitimised through the Amsterdam treaty, the EES then became a process in its own right. As mentioned above, its principles were generalized and christened “Open Method of Coordination” at the Lisbon Summit (2000). Finally, the third phase of the EES began with the five year review in 2003 where the EES was repoliticised, due to

1794-448: The EU in July 2013. The pact did not set up any structures or agreement for an independent monitoring of reform progress among its participating members. However, as a third party independent initiative aimed to keep institutional investors informed, the annual Euro Plus Monitor report conducts a comparative competitiveness ranking for all eurozone states and selected EU member states, as per

1863-665: The EU released a joint report on social inclusion where the member state's approaches were compared and contrasted and recommendations were given. While the NAPs form a first level of action, the Community Action Programme to combat poverty and social exclusion, which aims to improve cooperation between the member states, can be considered the second level of action. In the social inclusion OMC some funds were made available for NGOs and consequently its "inclusive" approach to civil society has been favourably commented upon. However, this

1932-559: The European Commission) upon its analysis of the latest set of submitted National Reform Programmes, declared the pact was in a dormant state (not being actively used or referred to by the majority of participating states), and recommended it should be revived by moving it from its current intergovernmental state to become an integrated part of the European Semester in the EU framework law. In the latest approved plan for reforming

2001-474: The OMC differs significantly across the various policy areas to which it has been applied: there may be shorter or longer reporting periods, guidelines may be set at EU or member state level and enforcement mechanisms may be harder or softer. The OMC is more intergovernmental in nature than the traditional means of policy-making in the EU, the so-called community method . Because it is a decentralised approach through which agreed policies are largely implemented by

2070-466: The OMC was devised as a tool in policy areas which remain the responsibility of national governments (and where the EU itself has no, or few, legislative powers) it is sometimes seen as a way for the commission to "get a foot in the door" of a national policy area. The OMC was first applied in EU employment policy, as defined in the Amsterdam Treaty of 1997, although it was not called by this name at

2139-691: The President of the European Systemic Risk Board , the countries will be regularly informed on their present state of macro-financial stability, and will be expected to put into place "national legislation" to resolve potential problems. In addition, all participating Member States commit to adopt a fully community acquis compliant national legislation for banking resolution. The Euro Plus Pact does not entail any specific commitments on tax policy initiatives, other than to briefly outline that member states commit to engage in discussions about it through

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2208-450: The SGP rules. Additionally, reforms that address the root causes of risks to fiscal responsibility take into account the costs of aging and their components. Independent fiscal institutions which act responsibly are key for maintaining fiscal responsibility but often these institutions are created or further developed in response to crises instead of proactively preventing it. For example, during

2277-563: The application of the OMC has been discussed. In March 2004 the European Parliament passed a resolution calling on the commission to present a proposal for the use of the OMC in health and long-term care. The April 2004 Communication by the Commission recommended to apply the OMC to the development and modernization of health care provision and funding. As potential advantages the Commission pointed to: Further steps have been taken to start

2346-493: The areas found in critical need of improvement. It also featured a commitment to transpose and operationalize one of the Stability and Growth Pact fiscal rules directly into national legislation – to make it more effectively working, and a commitment to perform regular "structured dialogue" for enhanced tax policy coordination in EU. In May 2015, the European Political Strategy Centre (in-house think tank of

2415-424: The areas of employment and social protection will be analysed because they are usually considered the most developed ones. A brief introduction to the "upcoming" OMC in health is also given. However, bear in mind that the open method seems to become more and more widespread, including areas such as immigration and asylum which are not discussed here. EMU and in particular the Stability and Growth Pact as well as

2484-574: The autonomous impact of the OMC has been relatively significant in the case of employment and relatively insignificant in the case of social inclusion. One key difference was the treaty status of the employment OMC which forced the Italian authorities to comply - this component was lacking for social inclusion. Furthermore, the issue of unemployment and labour market reform was simply more salient than social inclusion. As member states increasingly face common concerns in healthcare (such as demographic ageing ),

2553-477: The commission to announce they will now submit a relaunched less ambitious CCCTB proposal in 2016 - leaving out the more difficult "consolidation part" for later agreement - so that the core CCTB can be adopted more rapidly in the short-term. In November 2011, the Finance ministers of all 23 participating states agreed on the content and format of the regular "structured dialogue" on tax policy coordination. The dialogue

2622-568: The competitiveness. Each country will be responsible for the selection of its own specific policy actions to improve employment, but should mainly pick and choose between the following reform types: This objective will be assessed on basis of the sustainability gap indicators (S0 for the short-term, S1 for the medium-term and S2 for the long-term), which the Commission already publish every third year in their fiscal sustainability report (as part of their work to calculate appropriate minimum Medium-Term budgetary Objectives for each EU member state). If

2691-611: The composite S0 indicator is above 0.43, it signals existence of too high risk for fiscal stress in the short-term, which call on implementation of immediate counter measures. If the fiscal gap indicators S1 and/or S2 indicators are positive, it means debt levels are forecast to become unsustainable in the medium-term and/or long-term under a no-policy-change assumption, because of increasing public expenditures caused by demographic factors. If such S1 or S2 sustainability issues arise, they are to be addressed through implementation of fiscal consolidation leading to sufficient annual improvements for

2760-596: The exact formulation of the rule is up for each country to decide, as it could either be a "debt brake rule, or a rule related to the primary balance or an expenditure benchmark rule." Additionally, in case sub-national levels of the general government have autonomy to issue debt or other liabilities, the rule should ensure enforcement of fiscal discipline both at the national and sub-national levels. The Financial stability will be measured quantitatively for each country with respect to its " level of private debt for banks, households and non-financial firms. " With assistance from

2829-438: The exchange of best practices, the avoidance of harmful practices, and consideration of proposals to fight against fraud and tax evasion." The four key objectives listed above are intended to be addressed with individualized measures by all member countries of the pact, unless a Member State can "show that action is not needed" in a specific area. While the pact comes with specific strategies, these are not compulsory. Specifically

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2898-463: The four common key objectives, shall after having been agreed, then be noted as an explicit part of their "National Reform Program" and/or "Stability/Convergence Program" reports, being published annually in March/April. Finally, in addition to this: "Member States also commit to consult their partners on each major economic reform having potential spill-over effects before its adoption". This area of

2967-433: The government's liabilities or promised expenditures. Many countries and research institutes have published reports which assess the sustainability of fiscal policies based on long-run projections of country's public finances (see for example, and ). These assessments attempt to determine whether an adjustment to current fiscal policies that is required to reconcile projected revenues with projected expenditures. The size of

3036-427: The great recession new fiscal rules were introduced to counteract debt accumulation. The question can be raised whether these economies are sustainable in the short run due to economic shocks and in the long run due to endemic problems in the structure of the system. The major challenges of the public finance sustainability consist of creating independent fiscal institutions, fiscal responsibility laws, fiscal rules and

3105-425: The growing dominance of right wing governments in the EU. Nowadays the EES is a political compromise aimed to exclude both pure neo-liberal and social democratic approaches. The social inclusion OMC, by contrast, was not directly linked to the EMU debate. Social inclusion was for many years a controversial topic to address at the European level due to the subsidiarity concept. In 1999 the Commission finally adopted

3174-404: The health of a country's public finance sector. If a country does suffer from a high proportion of outstanding government debt then it is very vulnerable to interest shocks and a negative growth rate. For EU member states in 2016, the expected government debt to GDP ratio is above the 60%. This is expected to change with the strong support of financial independent institutions assuming they respect

3243-419: The impact of tax changes on growth). It was agreed, to set up a regular monitoring and reporting to the highest political level (European Council meetings) by the end of each future Council presidencies , on the following issues: "progress within the structured dialogue, concrete results in the field of tax coordination, avenues explored and specific issues on which agreement could be reached". Status reports for

3312-441: The infinite horizon tax gap, or S2 sustainability indicator in European Commission phraseology is defined as: where b t {\displaystyle b_{t}} is the debt-to-GDP ratio , r {\displaystyle r} is the interest rate of government debt, g {\displaystyle g} is the growth rate of the economy and p b t {\displaystyle pb_{t}}

3381-406: The initial debt level should be equal to the present value of future surpluses. That is, the government debt must be backed by expected future cash flows. Many economists have voiced grave concerns over using inter-temporal budget constraint as a de facto definition or criterion for fiscal sustainability. Also, it has been shown that under plausible assumptions the inter-temporal budget constraint

3450-463: The introduction of the OMC. The choice of indicators is of vital consequence for the OMC and critics have argued that, for instance in the Social Protection OMC, the quality of the indicators is not high enough or oriented too much on economic criteria and not social ones. Also, for health the comparability of national data has been doubted. In the social protection field the commission

3519-539: The involvement of local and regional actors ( bottom-up ). However, the author also notes that this is probably an overgeneralization with tensions between centralization and decentralization being present in both forms. Due to their different nature the impact of those two OMCs can be quite diverse as well. Ferrera and Sacchi (2004) analyse the impact of the EES and the Social Inclusion OMC in Italy. They conclude that

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3588-609: The joint analysis and opinion of Berenberg Bank and the Lisbon Council . According to the Euro Plus Monitor report 2011, many eurozone member countries were found to be rapidly reforming to increase the competitiveness of their economies as of November 2011. The report also found that "Many of those countries most in need to adjust [...] are now making the greatest progress towards restoring their fiscal balance and external competitiveness". Greece, Ireland, Malta and Spain are among

3657-496: The management of fiscal risks. A few key factors for creating stability through institutions which have been leveraged by EU member states are the following activities which the majority of fiscal councils have enacted: The trend of demographic aging presents a major challenge to the industrialized world and an increasing number of developing countries. Recent projections developed by the UN Population Division estimate

3726-583: The member states and supervised by the Council of the European Union , the involvement of the European Parliament and the European Court of Justice is very weak indeed. Formally, at least, the European Commission has primarily a monitoring role; in practice, however, there is considerable scope for it to help set the policy agenda and persuade reluctant Member States to implement agreed policies. Although

3795-455: The pact states: "The choice of the specific policy actions necessary to achieve the common objectives remains the responsibility of each country, but particular attention will be paid to the set of possible measures mentioned below. " Each member state commits at an annual frequency to "agree at the highest level on a set of concrete [policy] actions to be achieved within 12 months". The actions and initiatives taken by each member state across

3864-470: The pact, is the same as several European countries had to address in the 1980s by abolishing Wage Indexation . The need for competitiveness improvements will be evaluated for each country upon analysis of its national Unit Labour Cost (ULC), a quantitative measure of wage costs per unit produced or serviced, and is to be addressed by measures that will reduce the cost of labour and/or measures that will increase productivity. Each country will be responsible for

3933-458: The productive population by the dependent population. Although longevity is an arguably positive outcome, when paired with a decline in fertility it can create higher financial stress on working people. Key aspects that influence the age-dependency ratio: Political actors often get in the way of financial stability due to competing interests between stakeholders that have a lot to gain through not implementing changes that would benefit society as

4002-582: The proposal for economic measures and cooperation was adopted by the European Council and included as participants without any caveats the Eurozone member states as well as Bulgaria , Denmark , Latvia , Lithuania , Poland and Romania . The EU members which did not participate are Czech Republic , Hungary , Sweden and the United Kingdom , all for different reasons. Croatia subsequently acceded to

4071-449: The required adjustment is given with measures such as the Fiscal gap . In empirical works, weak and strong fiscal sustainability are distinguished. Differences are related to both econometric techniques used for examination and variables involved. There is no consensus among economists about the correct criterion/definition to be used for fiscal sustainability. The most commonly used criterion

4140-581: The selection of its own specific policy actions to improve competitiveness, but should mainly pick and choose between the following reform types: This objective will be evaluated on basis of measured figures for the long-term unemployment rate, youth unemployment rate and labour participation rates. Beside of full employment being an objective by itself, a flexible all-inclusive labour market with security arrangements removing barriers for employees to conduct an increased amount of job shifts throughout their working career, also positively spill-over into improving

4209-562: The size of sovereign debt countries are allowed to run. These have been implemented in Switzerland in 2003 and in Germany in 2010. Debt brakes can vary in strictness and details of the intended implementation are not yet clear, but the motivation for this rule is to create a legally binding policy instead of the current budget guidelines on deficits which have been not been implemented by member countries. The plan has been criticised for impinging on

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4278-435: The sovereignty of countries, due to its authority to set policy in areas that were previously under national sovereignty. The reforms that the pact contain have also been criticised as being too harsh, or conversely called into question for not being strict enough in its requirements to implement reforms. On the other hand, some leaders agree that in order to avoid dangerous nationalisms and have fiscal and economic governance, it

4347-416: The structural budget balance and/or by increasing the sustainability of pensions, health care and social benefits systems through the following expenditure saving reforms: To further safeguard fiscal sustainability, one of the most stringent conditions of the pact is given with respect to also implementing national fiscal rules: "Participating Member States commit to translating EU fiscal rules as set out in

4416-640: The structured dialogue on tax policy coordination, were subsequently published in: June 2012, November 2012, June 2013, December 2013, June 2014, December 2014, and June 2015. These regular specific reports which focus on Euro Plus related taxation dialogues, supplement those being simultaneously published by the ECOFIN council - which produce status on all relevant tax dialogues conducted between all EU member states. The ECOFIN tax dialogue reports were also published in June 2012, November 2012, June 2013, December 2013, June 2014, December 2014, and June 2015. On 25 March 2011

4485-426: The sustainability of public finance which can range from institutional challenges ranging from creating independent fiscal institutions, fiscal responsibility laws, fiscal rules and the management of fiscal risks to changing dynamics in the demographic structure of societies. Although these factors are significant, the core indicator of outstanding government debt in proportion to GDP is the go to metric for analyzing

4554-456: The time. It was officially named, defined and endorsed at the Lisbon Council for the realm of social policy. Since then it has been applied in the European employment strategy , social inclusion, pensions, consumer care, immigration, asylum, education and culture and research, and its use has also been suggested for health as well as environmental affairs. The OMC was also frequently debated in

4623-453: The top five reformers among 17 countries included in the report. The monitor report was also published in 2012, 2013, and 2014. The original plan was announced by Germany and France in February 2011 and called for six policy changes to be set as well as for a monitoring system to be implemented to ensure progress. The four objectives are: abolishing wage indexation, raising pension ages, creating

4692-504: Was constructed as an attempt to incentivize increased implementation of structural reforms by each participating EU member state, to improve their performance within the four focus areas of the pact, through: (1) A regular bottom-up inter-governmental political dialogue (learning best practices from each other) and (2) A commitment for each state to include reform measures (freely chosen from a broad list of potential policy action responses) in their annual National Reform Programme for those of

4761-466: Was decided to focus on: Avoidance of harmful practices, fight against fraud and tax evasion, exchange of best practices, prospects for International Coordination, and other potential issues (including taxation challenges related to digital economy, stronger alignment of national tax systems in specific areas like the recently proposed CCCTB, financial transaction tax , environmental and energy taxation, sustainability of tax systems, and empirical analysis of

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