The importance of the European Semester in its second cycle

The European Semester is a framework for enhanced economic policy coordination in Europe. It builds on two innovations. First, the European Commission and the European Council provide ex ante policy guidance at the beginning of the year suggesting a number of policy priorities Member States should focus on. In turn, EU Member States submit to the EU their Stability or Convergence Programmes and their National Reform Programmes already in April every year, after having incorporated elements from EU ante guidance. Second, the two documents are indeed jointly submitted so as to force Member States to take account of the budgetary implications of their reforms.

The idea of a European Semester was launched back in 2010 in the midst of the debt crisis and became operational at the beginning of 2011. We are now in the second Semester cycle; the Member States have submitted their national documents; and the European Commission is about to deliver its country-specific recommendations, which will be then adopted by the Council and ultimately endorsed by the European Council at the end of June.  But, the circumstances underlying this second cycle have changed from the first cycle in ways that make this economic policy coordination exercise much more relevant than it was in 2011.

First, the new economic governance framework is now in force following approval of the six-pack at the end of 2011. The Semester’s ex ante policy guidance and successive EU recommendations on both fiscal and structural issues are now delivered in a context in which excessive deficits are more severely sanctioned and other macroeconomic imbalances must be addressed by means of structural reform under penalty of sanctions.

Second, the second Semester cycle coincides with the very final stage of the Excessive Deficit Procedure (EDP). All euro zone countries but Estonia, Finland and Luxembourg are formally under the EDP and have to reduce their public deficits below 3% of GDP by either 2012 (Cyprus and Belgium) or 2013 (all other cases). Yet, the slow-growth environment makes some countries more vulnerable than others and a handful of them risks breaching the reference value. This year is thus also a test of the Semester’s capacity to contribute to effective surveillance and macroeconomic adjustment and to deliver a proper integrated approach that allows analysing national economic systems in a holistic fashion accounting for both fiscal and structural vulnerabilities.

Third, this year’s Semester is strongly backed by the existence of a new process, the Macroeconomic Imbalance Procedure (MIP) and its corrective arm known as Excessive Imbalance Procedure (EIP), which is indeed one important part of the recently approved six-pack. Countries of the euro zone that display severe imbalances in their current accounts, export market shares, unit labour costs, private debt and credit flows, house prices and unemployment will be subject to intense monitoring, pressures for adjustment and ultimately sanctions. We found that non-binding EU recommendations on structural reform delivered in the framework of the first Semester cycle failed to bite, especially in the area of product and service market liberalization*. As the EU recommendations that will be delivered this year rely on more coercive methods than last year, Member States are going to be subject to strong pressures for change. How they will deal with them is likely to depend on national electoral cycles, growth conditions (as reform is typically easier in good times), and different degrees of commitment to EU policy coordination, a first clear test of the extent to which Member States have internalised the need for radical change following the debt crisis.

* Upcoming EP’s study “The first European Semester cycle: assessing its effectiveness and legitimacy” by Mark Hallerberg, Benedicta Marzinotto, and Guntram Wolff.

* Benedicta Marzinotto also co-authored the working paper How effective and legitimate is the European semester? Increasing role of the European parliament published on 22nd September 2011