EMU economic governance

The ECB operates within the framework of the Economic and Monetary Union (EMU) of the European Union.

Multi-level governance

With the introduction of the euro, the competences for monetary policy and exchange rate policy were transferred to the ECB. At the same time, the competences for economic policies – such as fiscal or labour market policies – have largely remained the responsibility of national policymakers.

The multi-level governance structure of EMU reflects, among other things, the economic reality that the single currency and the EU’s Single Market have made Europe’s economies highly interdependent. These interdependencies give rise to spillovers across members, especially of the currency union, i.e. policy decisions or economic developments in one member country strongly affect other member countries.

Coordinating national policies

Within EMU, national economic policies are subject to a European coordination and surveillance framework. This ensures that these policies are geared towards sustainability and resilience, contributing to the smooth functioning of EMU and thereby also supporting the single monetary policy in delivering price stability.

In addition, coordinated national policy responses may be more effective in averting or cushioning economic shocks which affect most or all members of the currency union.

The Stability and Growth Pact

The Stability and Growth Pact (SGP) was adopted in 1997 to enhance the Treaty provisions on fiscal sustainability. Sound public finances help to achieve other important policy objectives such as strong and sustainable growth, thereby also supporting employment creation.

The European Semester

EU surveillance of the economic policies of its Member States is organised in an annual cycle, known as the European Semester. This process was set up to better align EU surveillance of fiscal and economic policies, which remain legally separate.

These policies are assessed simultaneously to ensure greater consistency among the different surveillance processes and to obtain a holistic assessment of the economies of Member States and their interaction.

The Macroeconomic Imbalance Procedure

The Macroeconomic Imbalance Procedure (MIP) aims to identify and address macroeconomic imbalances and declining competitiveness. It is important to tackle macroeconomic imbalances to improve the economic resilience of the euro area and to prevent crises from emerging.

Completing EMU

In spite of various improvements in recent years, the economic governance structure of EMU continues to suffer from some weaknesses.

Economic policy decisions are subject to soft coordination at the European level, which can create gaps in the implementation of sound economic policies. Against this background, further steps are expected to complete the EMU architecture.

The ECB took part in drafting blueprints for deepening EMU in 2012 and 2015, which culminated in the publication of a roadmap entitled “Completing Europe’s Economic and Monetary Union”, also referred to as the Five Presidents’ Report. This report lays out key principles and steps necessary to complete EMU under the four headings of:
a genuine Economic Union, a Financial Union, a Fiscal Union and a Political Union. It considers steps both in the short and the long term, but which should be taken by 2025 at the latest. As such, it offers a concrete roadmap for deepening EMU that is ambitious, yet pragmatic.