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Economic policy

Economic reforms

Economic reforms in the goods, capital and labour markets which remove barriers to competition and increase market flexibility are essential for the smooth functioning of the Economic and Monetary Union (EMU). Such reforms are key to raising productivity and employment in the euro area, thereby supporting the growth potential of the euro area in the long run. At the same time, such reforms will contribute to lowering price pressures by enhancing competition and fostering innovation. By making the euro area markets more flexible, they also help countries to adapt faster and at lower cost to economic shocks. The case for structural economic reforms is very strong in a monetary union, such as the euro area, since there are no longer national monetary and exchange rate policies to respond to country-specific shocks and to improve competitiveness.

Lisbon Strategy for Growth and Jobs

Launch in March 2000: economic, social and environmental reforms

The economic reform agenda for Europe has been laid down in the so-called Lisbon Strategy for Growth and Jobs. In this context, the EU Heads of State or Government (European Council) launched a wide-ranging and ambitious programme of economic, social and environmental reforms in March 2000 covering policies at both the national and the EU level to enhance the standard of living of European citizens. To achieve this goal, the Lisbon Strategy aimed to transform the European Union into a highly competitive and knowledge-based economy while maintaining a high degree of social cohesion and environmental sustainability.

Relaunch in March 2005: refocused on four priorities

As the results obtained in the first five years of implementation were rather mixed, partly due to a lack of clear focus, the Lisbon Strategy was relaunched in March 2005. While acknowledging the continuing relevance of the social and environmental pillars, the European Council streamlined the governance framework (see below) and refocused the strategy on ‘growth and jobs’ by identifying four main priority areas:

  • Promoting knowledge and innovation
  • Making the EU an attractive area to invest and work in
  • Fostering growth and employment based on social cohesion
  • Promoting sustainable development.

Institutional arrangements

The institutional framework for implementing the Lisbon Strategy consists mainly of two processes spelled out in Articles 121 and 148 of the Treaty on the Functioning of the European Union (TFEU). These pertain to the EU Council of Ministers' adoption of Broad Economic Policy Guidelines (BEPGs) and Employment Guidelines (EGs) , which are proposed by the European Commission and cover macroeconomic, microeconomic and employment policies.

In order to improve the consistency of the BEPGs and EGs, and to focus on the implementation of structural reforms, the 2005 reform of the Lisbon Strategy brought the two sets of guidelines together under the single heading of the Integrated Guidelines . The guidelines are endorsed for a three-year period (see below for details). The first three-year period was 2005-07. The second three-year period is 2008-10.

On the basis of the Integrated Guidelines, each EU Member State draws up its National Reform Programme describing key priorities for economic reforms, planned reforms and own targets in a single document. National parliaments, social partners and civil society are invited to participate in the formulation of the programme. This is intended to improve the national ownership of the structural reform agenda of each Member State.

As a complement to the National Reform Programmes, the Commission presents a Community Lisbon Programme covering all actions to be undertaken at the Community level. The implementation of the Community Lisbon Programme largely entails the adoption of Community legislation by the EU Council and European Parliament, on the basis of proposals by the Commission.

The Heads of State or Government hold a Spring European Council every year in order to provide political impetus and direction to the strategy.

The three-year EU economic policy cycle

In March 2008, a new policy cycle started. The general set-up is always the same: each cycle begins with a strategic report by the Commission which puts forward the priorities of EU economic policy for the ensuing three years. The report is accompanied by a proposal for a set of Integrated Guidelines which is adopted by the Council.

On the basis of the Integrated Guidelines , each Member State puts forward a National Reform Programme and gives account of its progress in autumn of each year in an Implementation Report . The Commission assesses the Implementation Reports in its Annual Progress Report in December. If deemed necessary, the country-specific recommendations (including euro area specific recommendations), which are an essential part of the Integrated Guidelines, may be adopted in the course of the annual review process.

At the end of the third year, the Integrated Guidelines, the National Reform Programmes and the Community Lisbon programme are renewed, on the basis of an overall assessment of progress during the cycle.

Europe 2020 Strategy

Against this background, the EU leaders adopted, at the European Council meeting in June 2010, the ‘Europe 2020 Strategy’ .

This is the Union’s strategy for creating jobs and promoting growth through economic and social reforms, while respecting environmental limitations. Under the three headings of smart, sustainable and inclusive growth, the strategy covers policy actions at both national and EU level aimed at enhancing the welfare of European citizens.

The ambition of the Europe 2020 Strategy is expressed in five headline targets for the EU (e.g. 75% of 20 - 64 year olds to be employed). On the basis of EU-level targets, Member States set national targets in each area to suit their particular situation, taking account of different starting positions, different growth potentials and country-specific circumstances.

Under the Strategy, Member States will align their economic policies with redrafted Integrated Guidelines adopted at EU level (see below). They will also design structural reform strategies to overcome country-specific growth and employment bottlenecks. At EU level, seven flagship initiatives developed and suggested by the Commission will also support the strategy. One of them is the ‘ Innovation Union ’, which aims to improve the framework conditions and access to finance for research and innovation. Other initiatives focus on areas such as education, competitiveness and raising skill levels.

Three flanking policies at EU level are also foreseen:

  1. the re-launch of the Single Market,
  2. aligning the EU budget and EIB lending with the Strategy, and
  3. a new trade strategy improving global market access for EU companies.

The Europe 2020 Strategy is a follow-up to the Lisbon Strategy, which is generally considered to have been only moderately successful, mainly because of weak governance arrangements, a lack of clear focus and deficiencies in communication. The Europe 2020 Strategy tries to correct these weaknesses, most importantly by giving the European Council a strong role in steering the implementation of the reform agenda and by reinforcing the surveillance of Member States’ reform policies.

Integrated guidelines

The Treaty stipulates that Member States are to regard their economic policies as a matter of common concern and coordinate them within the Council. The institutional framework for implementing the Europe 2020 Strategy consists mainly of two processes spelled out in Articles 121 and 148 of the Treaty on the Functioning of the European Union (TFEU). These pertain to the EU Council of Ministers’ adoption of the Broad Economic Policy Guidelines (BEPG) and Employment Guidelines (EG) , which have been proposed by the European Commission and cover macroeconomic, microeconomic and employment policies.

Since 2005, the two sets of guidelines have been brought together under the single heading of the Integrated Guidelines. They were revised in July 2010 as part of the adoption of the Europe 2020 Strategy and also contain a specific guideline for the euro area. They are endorsed at the highest political level by EU leaders.

The Integrated Guidelines set out the framework for the strategy at Member State level. On the basis of the guidelines, each EU country draws up its National Reform Programme (NRP) setting out in detail the economic reforms it will take under the new strategy, with a particular emphasis on efforts to meet the national targets and to remove the bottlenecks that constrain sustainable growth at national level.

National parliaments, social partners and civil society are invited to participate in the formulation of the programme. This is intended to improve the national ‘ownership’ of the structural reform agenda of each Member State. Building on monitoring by the Commission and surveillance by the Council, every year the European Council will assess the overall progress achieved both at EU and national level in implementing the strategy in line with the timetable of the European Semester.

European Semester of policy coordination

A key new element of the governance of the Europe 2020 Strategy is the introduction of a “European Semester” which started in January 2011. Under this new process, both economic and fiscal policy coordination – i.e. the two strands of economic surveillance in the EU - will be aligned, while remaining legally separate. Macroeconomic, structural, and competitiveness developments and overall financial stability will be examined simultaneously in order to enhance the overall consistency of policy advice to Member States.

The European Semester starts in January with the publication of a European Commission report, the Annual Growth Survey , which aims to identify the main policy challenges for the EU and the euro area as a whole. An annual economic summit of the European Council in March then provides strategic guidance on policies to be taken into account by Member States in their stability and convergence programmes (SCPs), which are submitted in April. In parallel, and as part of the Europe 2020 Strategy to strengthen growth and employment, Member States identify in their NRPs the appropriate reform strategy to foster employment and sustainable, socially inclusive economic growth.

Based on the SCPs and the NRPs, the Council issues policy recommendations focused on the following year, before national budgets are finalised in the autumn. Finally, the cycle ends with the publication of the Annual Growth Survey in the following year, in which the Commission assesses the extent to which Member States have taken EU recommendations into account.

The Euro Plus Pact

The Euro Plus Pact was agreed by euro area leaders in March 2011. It aims to further strengthen the economic pillar of monetary union by improving competitiveness and enhancing economic policy coordination, thereby leading to a higher degree of convergence. Several non-euro area countries have joined the Pact on a voluntary basis (Bulgaria, Denmark, Latvia, Lithuania, Poland and Romania) and the Pact still remains open to the other four non-members (the Czech Republic, Hungary, Sweden and the UK).

The Pact focuses primarily on areas that fall under national competence and are key to increasing competitiveness and avoiding harmful imbalances. The common policy objectives are: fostering competitiveness and employment, contributing further to the sustainability of public finances and reinforcing financial stability.

The countries that have signed up to the Pact are committed to including specific policy actions in their SCPs and NRPs to reach these goals within the next 12 months. The choice of actions to achieve the common objectives remains the responsibility of each country.

The implementation of commitments and progress towards the common policy objectives will be monitored politically by the heads of state and government of the euro area and participating countries on a yearly basis on the basis of a series of indicators. The commitments reflected in the NRPs and SCPs will also be assessed by the Commission, the Council and the Eurogroup in the context of the European Semester.

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