Opinion

EU policy recommendations: A stronger legal framework is not enough to foster national compliance

In 2011, the EU introduced stricter rules to monitor the implementation of country-specific policy recommendations. Using a new dataset, this column investigates whether these new laws have increased national compliance. There is no evidence that these stricter processes matter for implementation rates, whereas macroeconomic fundamentals and market pressure are important determinants of implementation progress. These results suggest ways to improve the effectiveness of European policy coordination that go beyond stronger legal processes.

By: , and Date: July 23, 2019 Topic: Macroeconomic policy

Macroeconomic imbalances in EU countries and their fallout during the crisis have led the EU to adopt stronger surveillance laws. In particular, a new mechanism called the Macroeconomic Imbalance Procedure (MIP) was introduced in 2011 to deal with imbalances. Together with fiscal surveillance and broader structural surveillance they form the ‘European Semester’.

But is this reinforced form of policy coordination actually working? Do member states implement the recommendations they receive from the EU? Only a few empirical studies have investigated the implementation of country-specific recommendations and its determinants. One notable exception is a study by EU Commission staff (Brincogne and Turrini 2017).

EU recommendations and their implementation

In a new paper (Efstathiou and Wolff 2019), we have put together a comprehensive dataset containing (a) the country-specific recommendations EU member states received from 2013 to 2018; and (b) the European Commission’s measure of the progress countries made in implementing each recommendation. The dataset covers all the recommendations except those related to fiscal surveillance. Countries under financial assistance programmes are not covered by the macroeconomic imbalance procedure and are therefore not included in our sample.

Overall implementation has deteriorated at a time of subsiding market pressure and falling sovereign spreads. Average implementation scores have fallen since 2014, with an additional sharp drop taking place in 2018 (Figure 1).  Moreover, implementation rates among countries judged to have particularly excessive macroeconomic imbalances according to the macroeconomic imbalance procedure drive this decline.

 

Implementation rates also vary across countries. The countries with the highest implementation scores were the United Kingdom, Finland, Slovenia, Malta, and Ireland. We observe low scores for Luxembourg, Hungary, Slovakia, Germany, and Sweden (see Figure 2).

 

Implementation scores also vary substantially across policy areas (Figure 3). Scores on average are high for the sectors of financial services, skills and life-long learning, and childcare. However, recommendations in several sectors are overall poorly implemented, for example those related to taxation, reducing the debt bias, competition in services, unemployment benefits, and the long-term sustainability of public finances including pensions.

The drivers behind the lack of implementation

But what is behind these falling implementation rates? In our paper, we test three hypotheses: first, that the likelihood of implementing recommendations is influenced by macroeconomic fundamentals; second, that pressure from financial markets increases implementation rates; and finally, that stronger macroeconomic surveillance at the EU level, captured by the classification of countries into imbalances categories, increases the probability of implementing recommendations. The classification of countries into the imbalances or excessive imbalances categories of the macroeconomic imbalance procedure results in stronger legal obligations. Moreover, countries with excessive imbalances are subject to tighter monitoring and could face more severe consequences in case of non-compliance. We also control for political factors and the policy area of individual recommendations.

First, we find that countries with high public and external deficits are more likely to implement recommendations. Larger public and external deficits were either the root cause or the symptom of the European debt crisis, so member states that were vulnerable because of these fundamentals might have had little choice but to implement recommendations.

Second, whether financial market pressure increases the probability of implementation depends on the choice of variable. The coefficient on the one-year sovereign default probability is positive and statistically significant, but when the five-year credit default swap spread takes its place, statistical significance vanishes.

Third, stronger surveillance under the macroeconomic imbalance procedure does not seem to drive implementation rates. The categorisation of countries into either the imbalances or the excessive imbalances category does not result in a statistically significant effect when compared to countries with no imbalances. The difference in implementation between the groups with imbalances and excessive imbalances is not statistically significant either.

Our results suggest only a limited effectiveness of EU policy recommendations given to member states. In particular, stronger legal obligations and tighter monitoring do not seem to increase the implementation of recommendations, which is affected instead by macroeconomic fundamentals and financial market pressure. We therefore recommend that the EU reconsider its approach to policy coordination. Legally stronger processes are unlikely to have strong effects on national sovereign decision makers. Instead, we consider it more important that recommendations are more clearly and forcefully communicated. The EU process currently is difficult to digest and often gets unnoticed at the national level (Hallerberg et al. 2018).

A second dimension for improvement concerns focus. We find that, while many recommendations are pertinent, there are also many recommendations where the link to macroeconomic imbalances is difficult to establish. We would recommend that the EU policy coordination focus in particular on issues with significant macroeconomic spillovers on the EU as a whole, while leaving other goals at the national level, in the spirit of subsidiarity.

Finally, our results are also a call on member states to deliver on the truly important reforms. Without relevant reforms implemented at the national level, in particular in vulnerable countries or in countries with strong spillovers to the rest of the EU such as Germany, the EU and the euro area both risk remaining more vulnerable and fragile than necessary.

References

Bricongne, J and A Turrini (2017), “The EU macroeconomic imbalance procedure: Some impact and no sanctions”, VoxEU.org, 22 June.

Efstathiou, K and G B Wolff (2019), “What drives national implementation of EU policy recommendations?”, Working Paper 2019/04, Bruegel.

Hallerberg, M, B Marzinotto and G B Wolff (2018), “Explaining the evolving role of national parliaments under the European Semester”, Journal of European Public Policy 25(2): 250-267.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint.

Due to copyright agreements we ask that you kindly email request to republish opinions that have appeared in print to [email protected].

Read article Download PDF
 

Policy Contribution

European governance

Fiscal support and monetary vigilance: economic policy implications of the Russia-Ukraine war for the European Union

Policymakers must think coherently about the joint implications of their actions, from sanctions on Russia to subsidies and transfers to their own citizens, and avoid taking measures that contradict each other. This is what we try to do in this Policy Contribution, focusing on the macroeconomic aspects of relevance for Europe.

By: Olivier Blanchard and Jean Pisani-Ferry Topic: European governance, Macroeconomic policy Date: April 29, 2022
Read article
 

External Publication

European governance

Green public procurement: A neglected tool in the European Green Deal toolbox?

A new EU regulatory action in public procurement could unlock the potential of green public procurement and add an important element to the European Green Deal toolbox.

By: André Sapir, Tom Schraepen and Simone Tagliapietra Topic: European governance, Green economy Date: April 26, 2022
Read article More on this topic
 

External Publication

What drives implementation of the European Union’s policy recommendations to its member countries?

Article published in the Journal of Economic Policy Reform.

By: Konstantinos Efstathiou and Guntram B. Wolff Topic: Macroeconomic policy Date: April 13, 2022
Read article More by this author
 

Blog Post

European governance

Bold European Union action is needed to support Ukrainian refugees

Hosting Ukrainian refugees could cost European Union countries in excess of €40 billion this year. A dedicated EU fund is needed to manage the fiscal burden.

By: Zsolt Darvas Topic: European governance, Global economy and trade Date: April 6, 2022
Read article More on this topic
 

Blog Post

Can Europe manage if Russian oil and coal are cut off?

A stop to Russian oil and coal supplies would push Europe into a short and painful adjustment period. But if managed well, disruptions would remain temporary.

By: Ben McWilliams, Giovanni Sgaravatti, Simone Tagliapietra and Georg Zachmann Topic: Green economy Date: March 17, 2022
Read article More on this topic More by this author
 

Opinion

China can see the limits of bailing out Russia's economy

Beijing will support Moscow as long as it does not fall foul of Western sanctions.

By: Alicia García-Herrero Topic: Global economy and trade Date: March 16, 2022
Read article More on this topic More by this author
 

Blog Post

European governance

A new Thessaloniki offer: the aspirations of Georgia, Moldova, and Ukraine to join the EU

The European Union should grant candidate status to Georgia, Moldova and Ukraine, as part of a long-term stabilisation strategy.

By: Marek Dabrowski Topic: European governance Date: March 15, 2022
Read article More by this author
 

Blog Post

European governance

How should the EU respond to Georgia, Moldova and Ukraine’s membership aspirations?

European Union membership for Georgia, Moldova and Ukraine is at present unrealistic, but they should be offered more than Association Agreements.

By: André Sapir Topic: European governance, Global economy and trade Date: March 14, 2022
Read article
 

Opinion

European governance

How to reconcile increased green public investment needs with fiscal consolidation

The EU’s ambitious emissions reduction targets will require a major increase in green investments. This column considers options for increasing public green investment when major consolidations are needed after the fiscal support provided during the pandemic. The authors make the case for a green golden rule allowing green investment to be funded by deficits that would not count in the fiscal rules. Concerns about ‘greenwashing’ could be addressed through a narrow definition of green investments and strong institutional scrutiny, while countries with debt sustainability concerns could initially rely only on NGEU for their green investment.

By: Zsolt Darvas and Guntram B. Wolff Topic: European governance, Green economy, Macroeconomic policy Date: March 8, 2022
Read article More by this author
 

Blog Post

European governance

How has growth changed what countries get from the European recovery fund?

Adjustments to growth forecasts mean some countries will get 10% more than expected and others 20% less in grants from the EU Recovery and Resilience Facility. But the benefits of more quickly rising growth rates dwarf foregone recovery funds.

By: Zsolt Darvas Topic: European governance, Macroeconomic policy Date: February 17, 2022
Read article More on this topic
 

External Publication

The Euro in 2022

An annual review of the euro published jointly by Fundación ICO and Fundación de Estudios Financieros to expand knowledge, raise awareness of the single currency, and suggest ideas and proposals for strengthening its acceptance and sustainability.

By: Grégory Claeys, Maria Demertzis and Fernando Fernández Topic: Macroeconomic policy Date: February 17, 2022
Read article Download PDF More on this topic
 

Policy Contribution

European governance

The failure of global public health governance: a forensic analysis

The emergence of the Omicron variant in November 2021 was a stark reminder of the high overall cost of the persistence globally of extremely unequal access to vaccines and treatments. What are the reasons for these failures of global collective action?

By: Anne Bucher, George Papaconstantinou and Jean Pisani-Ferry Topic: European governance Date: February 17, 2022
Load more posts