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: European Macroeconomics & Governance

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 about event More on this topic
 

Past Event

Past Event

Redefining Europe's role after the COVID-19 pandemic

Amidst COVID-19: how to keep markets integrated when states play a bigger role in the EU and its neighbourhood?

Speakers: Gabriele Bischoff, John Erik Fossum, Kalypso Nicolaïdis and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: June 25, 2020
Read article
 

Blog Post

One last push is needed to improve the Just Transition Fund proposal

The European Parliament and the Council still have an opportunity to improve the Just Transition Fund by refocusing it on social support and basing fund allocations on more granular information that takes into account not only countries’ needs but also their green ambitions.

By: Aliénor Cameron, Grégory Claeys, Catarina Midões and Simone Tagliapietra Topic: Energy & Climate, European Macroeconomics & Governance Date: June 11, 2020
Read about event More on this topic
 

Past Event

Past Event

The Sound of Economics Live: Rebooting Europe - a framework for post COVID-19 economic recovery

Mapping out the post COVID-19 recovery.

Speakers: Maria Demertzis, Giuseppe Porcaro, Simone Tagliapietra and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: May 15, 2020
Read about event More on this topic
 

Past Event

Past Event

Democracy in the times of COVID-19 with Věra Jourová

How can Europe uphold its democratic values while fighting COVID-19?

Speakers: Sam Fleming, Věra Jourová and Michael Leigh Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: May 14, 2020
Read article More on this topic
 

Blog Post

EU trade in medical goods: why self-sufficiency is the wrong approach

As countries are struggling with the COVID-19 pandemic, shortages in medical equipment led to EU export controls and war-time like procurement of respirators. While the crisis is still unfolding, there is a debate on whether the EU is too reliant on global value chains for medical goods. Looking at the world market of medical goods for the EU, we argue that self-sufficiency is the wrong approach. Global medical markets are to the benefits of the EU and stockpiling and preparation are more effective in preparing for emergencies.

By: Sybrand Brekelmans and Niclas Poitiers Topic: Global Economics & Governance Date: April 14, 2020
Read about event More on this topic
 

Past Event

Past Event

A European response to the coronavirus crisis with Paolo Gentiloni

This is the second event in our series with the Financial Times, where Paolo Gentiloni will discuss the European response to the coronavirus crisis.

Speakers: Paolo Gentiloni, Mehreen Khan and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: April 6, 2020
Read article More on this topic More by this author
 

Blog Post

What the EU should do and not do on trade in medical equipment

The European Union has introduced export controls on some medical supplies. This was a mistake. It should announce that it is withdrawing the measure, and call on other countries to do the same.

By: André Sapir Topic: European Macroeconomics & Governance Date: March 25, 2020
Read article Download PDF More on this topic
 

External Publication

How has the macroeconomic imbalances procedure worked in practice to improve the resilience of the euro area?

This paper shows how the Macroeconomic Imbalances Procedure (MIP) could be streamlined and its underlying conceptual framework clarified. Implementation of the country-specific recommendations is low; their internal consistency is sometimes missing; despite past reforms, the MIP remains largely a countryby-country approach running the risk of aggravating the deflationary bias in the euro area. We recommend to streamline the scoreboard around a few meaningful indicators, involve national macro-prudential and productivity councils, better connect the various recommendations, simplify the language and further involve the Commission into national policy discussions. This document was prepared for the Economic Governance Support Unit at the request of the ECON Committee.

By: Agnès Bénassy-Quéré and Guntram B. Wolff Topic: European Macroeconomics & Governance Date: March 24, 2020
Read article More on this topic More by this author
 

Blog Post

Be bold now: coronavirus, the Eurogroup and fiscal safety nets

This blog post sketches two scenarios: one in which countries provide a large fiscal safety net to companies and another in which they do not. Both lead to similar debt-to-GDP ratios in 2021, but the safety net leads to a smaller and shorter recession and a quicker rebound. We then discuss how to fund a large response without fragmenting the euro area. Until the lockdowns end, such measures should be implemented.

By: Guntram B. Wolff Topic: European Macroeconomics & Governance Date: March 17, 2020
Read article Download PDF
 

External Publication

Analysis of developments in EU capital flows in the global context

This report presents an overview of the recent trends of capital flows, focused especially on the past year. It provides a detailed analysis at the global level and at the European Union level.

By: Grégory Claeys, Maria Demertzis, Marta Domínguez-Jiménez, Konstantinos Efstathiou and Tanja Linta Topic: European Macroeconomics & Governance Date: March 16, 2020
Read article Download PDF More on this topic
 

External Publication

The effect of digitalization in the energy consumption of passenger transport: An analysis of future scenarios for Europe

The paper evaluates the effects on energy consumption of digitalization in transport. Digitalization needs a tailored policy support to avoid higher energy consumption.

By: Simone Tagliapietra and Michel Noussan Topic: Energy & Climate Date: March 16, 2020
Read article Download PDF
 

Policy Contribution

An effective economic response to the Coronavirus in Europe

'Whatever it takes' needs to be the motto to preserve lives and reduce the impact on the economy of the epidemic.

By: Maria Demertzis, André Sapir, Simone Tagliapietra and Guntram B. Wolff Topic: European Macroeconomics & Governance, Testimonies Date: March 12, 2020
Load more posts