The EU Macroeconomic Imbalance Procedure: Some impact and no sanctions

Jean-Charles Bricongne, Alessandro Turrini 22 June 2017

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The experience of the Global Crisis required policymakers to broaden EU macroeconomic surveillance beyond fiscal aspects. A number of macroeconomic imbalances (relating, for example, to current account balances, competitiveness divergences, private indebtedness, housing market dynamics, etc.) revealed themselves as key factors in triggering balance-of-payment crises and the recourse to financial assistance. The Macroeconomic Imbalance Procedure (MIP) was introduced in 2011 with the aim of preventing the accumulation of harmful macroeconomic imbalances and foster their correction, once in place, by means of a system of surveillance comprising of recommendations and possible sanctions.1

MIP surveillance follows a regular cycle. Cross-country analysis carried out in an Alert Mechanism Report provides the basis for selecting a number of countries that also would be analysed in in-depth-reviews by the Commission, with a view to assess the existence of imbalances that are harmful for macroeconomic stability, and evaluate their severity.2

The in-depth reviews may result in the identification of no imbalances, imbalances, or excessive imbalances. Countries identified as having imbalances or excessive imbalances receive Country-Specific Recommendations (CSRs) by the Commission and the EU Council in the context of the ‘European semester’. For the countries identified with excessive imbalances, the Excessive Imbalance Procedure (EIP) may also be activated, which comprises of the delivery of a corrective action plan with a set of policy measures to be carried out within a pre-determined time frame. The repeated delivery of an insufficient corrective action plan or repeated lack of compliance with the policy measures detailed in the plan may imply sanctions for the countries that belong to the Eurozone.

Since its inception, MIP surveillance has been activated mainly to foster an orderly correction of imbalances accumulated before the financial crisis. In some cases MIP surveillance was replaced by financial assistance programmes (Spain and Cyprus). In other cases MIP surveillance was activated soon after the conclusion of programmes (Spain, Ireland, Romania, Portugal, and Cyprus).

So far, the EIP has not been launched. The identification of excessive imbalances was instead followed by relatively prescriptive recommendations with deadlines, enhanced policy commitments by the Member States concerned (contained in their National Reforms Programmes), and a process of ‘specific monitoring’ of the implementation of MIP-related policy commitments. The categorisation of MIP imbalances by the Commission has also been more articulated than envisaged by the MIP regulation, including considering the necessity of policy action and monitoring.

Was the MIP effective in triggering policy action despite that fact that no use was made of the enhanced surveillance framework in the EIP Procedure, and the procedure remained far from the step of sanctions?

Similar questions have been raised in recent studies. Darvas and Leandro (2015) analyse compliance to the Commission CSRs. They find a higher level of implementation for CSRs that are related to the Stability and Growth Pact, followed by MIP-related CSRs, and then the remaining CSRs. A straightforward interpretation would be that the former two sets of CSRs are backed by a relatively higher degree of enforcement, as the associated procedures are the only ones foreseeing the possibility of sanctions. However, results may depend on other factors as well, including a discipline role played by markets or the political capital absorbed by complying to CSRs. The present analysis carries controls for these factors. The detailed methodology is contained in European Commission (2016).

Assessing the effectiveness of the MIP

Figure 1 provides prima facie evidence that the MIP seems to matter for CSR compliance. A synthetic indicator of progress with respect to CSRs has been computed at the level of disaggregated policy fields.3 For each recommendation, the indicator takes five possible values, depending on whether it is judged that there is no progress, limited progress, some progress, substantial progress, or full compliance (Deroose and Griesse 2014). The recommendations that are issued in the context of MIP surveillance are on average followed by a higher degree of progress.

To control for the effect of other factors that are likely to influence the extent to which countries are likely to comply with policy recommendations, a regression analysis has been carried out (European Commission 2016: 82-83). Each data point corresponds to a recommendation in a specific disaggregated policy field. The sample comprises all member states under MIP surveillance (selected for an in-depth review) for the years 2014 and 2015. The CSR progress indicator is put in relation with a variable scoring the MIP categorisation at the time that CSR progress is assessed, and a number of control variables as follows: GDP growth, the sovereign spread with respect to the benchmark German 10-year interest rate on government bonds (proxying the pressure from financial markets), dummies indicating legislative elections, a dummy indicating whether the recommendation is hard to comply with because politically costly, dummies indicating the main policy area of the recommendation, country and year fixed effects to take into account unobservable country, and time-specifc factors.4

Figure 1 CSR progress for MIP versus non-MIP countries

Note: Simple average of the progress indicator across all recommendations defined at disaggregated policy fields. CSR progress in year t refers to recommendations given in year t-1..

There are five important results.

  • First, recommendations classified as politically costly are less likely to be followed by policy implementation, with borderline significance.
  • Second, GDP growth has a positive impact but limited significance, the interpretation being that higher growth tends to make reforms easier to implement by raising the available political capital.
  • Third, interest rate spreads have a positive coefficient, in line with the view that market pressures have induced policy progress in the period analysed.
  • Fourth, consistent with the expectations that election could be a constraint on the implementation of reforms, it is found that compliance tends to be higher after elections, and lower when elections are forthcoming.
  • Finally, a variable codifying the categorisation of imbalances by the Commission in the MIP context is found to be positive and significant, suggesting that a stronger activation of MIP surveillance is associated with policy progress, other things being equal.

Conclusion

All in all, results corroborate the prima facie findings that MIP-related recommendations have a higher chance of being followed up by implementation. Controlling for a number of factors, the follow-up to recommendations is stronger the higher the degree of MIP surveillance activation. This suggests that the MIP is more than just a smokescreen. On the one hand, this finding raises doubts on the criticism that the EIP’s not being launched has deprived the MIP from teeth. On the other hand, one could argue that MIP-related recommendations have a higher chance of being followed-up exactly because of the faculty for the Commission and the Council to activate the EIP – though the procedure never approached the step of sanctions, the mere existence of this possibility may have had some impact on reform compliance.

Authors’ note: The views expressed in the text are the private views of the author and may not, under any circumstances, be interpreted as stating an official position of the European Commission.

References

Darvas, Z, and A Leandro (2015), “The limitations of policy coordination in the euro area under the European Semester” Bruegel Policy Contribution, Issue 2015/19.

Deroose, S, and J  Griesse (2014), “Implementing economic reforms – are EU Member States responding to European Semester recommendations?”, ECFIN Economic Brief, Issue 37/October.

European Commission, DG ECFIN (2016), “The Macroeconomic Imbalance Procedure. Rationale, Process, Application: A Compendium”, European Economy Institutional Papers no. 39, November.

Olson, M (1965), The Logic of Collective Action: Public Goods and the Theory of Groups, Cambridge MA: Harvard University Press.

Endnotes

[1] The legal basis of the MIP are two regulations: one outlining the steps in the procedure (regulation (EU) 1176/2011), and one providing a scheme of sanctions in case of reiterated lack of compliance by Eurozone Member States (regulation (EU) 1174/2011).

[2] In Regulation (EU) 1176/2011 imbalances are given a relatively broad definition, being "any trend giving rise to macroeconomic developments which are adversely affecting, or have the potential adversely to affect, the proper functioning of the economy of a Member State or of the economic and monetary union, or of the Union as a whole".

[3] The CSRs as they appear in the Council text are aggregated into few recommendations per country, each CSR spanning a group of analogous policy fields (e.g., the financial sector, labour markets, etc.). In the present analysis the disaggregation is more refined, with a break down spanning 34 policy fields.

[4] The "hard-to-comply with recommendations" variable is a dummy variable taking value 1 for policy fields where the political cost of reforms is higher either because the group of potential losers is wide or because it is well organised (e.g. Olson 1965).

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Topics:  EU policies Macroeconomic policy

Tags:  macroeconomic stability, MIP, imbalances, Eurozone crisis, global crisis

Economist, European Commission

Head of Unit, DG Economic and Financial Affairs, European Commission

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