Euro Plus Pact
The Euro-Plus Pact (or Euro+ Pact, also initially called the Competitiveness Pact or later the Pact for the Euro), is a 2011 plan in which some member states of the European Union make concrete commitments to a list of political reforms which are intended to improve the fiscal strength and competitiveness of each country.
The plan was advocated by the French and German governments for more widespread adoption by other Eurozone countries. As such it is designed as a more stringent successor to the Stability and Growth Pact, which has not been implemented consistently. It was adopted in March 2011 and uses the EU's Open Method of Coordination.
The Euro-Plus Pact came with four broad strategic goals along with more specific strategies for addressing these goals. The four goals are:
- fostering competitiveness
- fostering employment
- contributing to the sustainability of public finances
- reinforcing financial stability.
An additional fifth issue is:
- tax policy coordination
Although for tax policy coordination, member states only "commit to engage in structured discussions on tax policy issues, notably to ensure the exchange of best practices, the avoidance of harmful practices and proposals to fight against fraud and tax evasion."
The four key goals listed above are intended to be addressed with individualized measures by all member countries of the pact, unless a Member State can "show that action is not needed" in a specific area. While the pact comes with specific strategies, these are not compulsory. Specifically the pact states:
"The choice of the specific policy actions necessary to achieve the common objectives remains the responsibility of each country, but particular attention will be paid to the set of possible measures mentioned below."
The aims and strategies of the pact are to be updated yearly using the following procedure:
"...each year participating Member States will agree at the highest level on a set of concrete actions to be achieved within 12 months."
The actions and initiatives taken by each member state across the five strategic goals are published as part of their "National Reform Program", which is submitted along with their Stability/Convergence reports annually by the end of April. In addition to this:
"Member States also commit to consult their partners on each major economic reform having potential spill-over effects before its adoption".
This area of the pact is the same as addressed in Abolishing Wage Indexation. It will be evaluated by the national Unit Labour Cost (ULC), a quantitative measure of wage costs, and is to be addressed by both reducing the cost of labour as well as increasing productivity. Labour costs are to be reduced by reforming the "degree of centralisation in the bargaining process", the "indexation mechanisms" as well as decreasing wages in the public sector. Productivity is to be increased by deregulating industries as well as improving infrastructure and education.
The goal will be evaluated by quantitative measures of long term and youth unemployment rates, and labour participation rates. This aim is to be achieved by promoting the “flexicurity” model as well as "lowering taxes on labour" and "taking measures to facilitate the participation of second earners in the work force".
Sustainability of public finances
Indicated as being the most important aim of the pact this objective is to be addressed by increasing the "sustainability of pensions, health care and social benefits" as well as implementing "national fiscal rules." Increasing the sustainability of pensions, health care and social benefits means limiting the liability of the government to a more manageable level, this will be done by "limiting early retirement ... in the age tranche above 55" as well as implementing "schemes and using targeted incentives to employ older workers", reducing the burden on pension systems.
One of the most stringent conditions of the pact is given with respect to fiscal rules:
"Participating Member States commit to translating EU fiscal rules as set out in the Stability and Growth Pact into national legislation."
When implementing a balanced budget amendment "Member States will retain the choice of the specific national legal vehicle to be used" provided that it has a "sufficiently strong binding" condition and a "durable nature." The pact recommends a constitutional amendment or framework law that is formulated as either a "debt brake, rule related to the primary balance or an expenditure rule." Additionally it should "ensure fiscal discipline at both national and sub-national levels" in case these have autonomy to issue debt or other liabilities.
The Financial stability will be measured quantitatively with respect to the "level of private debt for banks, households and non-financial firms." With assistance from the President of the European Systemic Risk Board countries are expected to put into place "national legislation" to resolve these in case they exceed benchmark levels.
Tax policy coordination
The Euro Plus Pact does not entail any specific commitments on tax policy initiatives, other than to briefly outline that member states commit to engage in discussions about it. Tax policy coordination is expected to help strengthen the sharing of best practices and fight against tax fraud and evasion. Direct taxation remains a national competence for each Euro Plus Pact member to decide upon individually. The European Commission has presented a proposal to introduce a Common Consolidated Corporate Tax Base (CCCTB), which could be a revenue neutral way to ensure consistency among national tax systems, while respecting national tax strategies, and to contribute to the fiscal sustainability and the competitiveness of European businesses. The CCCTB does not set a common tax rate. As of January 2013, the proposal was pending the outcome of further discussions among the heads of state in the Council of the European Union.
On 25 March 2011 the proposal for economic measures and cooperation was adopted by the European Council and included as participants without any caveats the Eurozone member states as well as Bulgaria, Denmark, Latvia, Lithuania, Poland and Romania. The EU members which did not participate are Czech Republic, Hungary, Sweden and the United Kingdom, all for different reasons. Croatia subsequently acceded to the EU in July 2013.
According to the latest Euro Plus Monitor report 2011, published on 15 November, many eurozone member countries are now rapidly reforming to increase the competitiveness of their economies. The authors write that "Many of those countries most in need to adjust [...] are now making the greatest progress towards restoring their fiscal balance and external competitiveness". Greece, Ireland, Malta and Spain are among the top five reformers among 17 countries included in the report.
The original plan: The Competitiveness Pact
The original plan was announced by Germany and France in February 2011 and called for six policy changes to be set as well as for a monitoring system to be implemented to ensure progress. The six objectives are: abolishing wage indexation, raising pension ages, creating a common base for corporate tax and adopting debt brakes. In the following sections the motivation for and criticism of each objective is summarized.
- Abolishing wage indexation
Wage indexation is the process of adjusting wages to compensate for inflation, which reduces the value of money over time. Abolishing indexation would allow for real wages to decrease increasing the competitiveness of countries as it becomes less expensive to employ people. Understandably this policy objective has been called into question by some governments such as Belgium as it reduces people's purchasing power.
- Raising pension ages
In countries with "pay as you go" pension systems, as most European countries have, raising pension ages has a very profound impact on government revenue as people who continue working will also pay taxes instead of requiring them. This too is a controversial proposal as can be seen in the 2010 French pension reform strikes.
- Creating a common base for corporate taxes
Creating a "common base" is perceived by some as a first step in a process of unifying tax rates and as such has been opposed by countries such as Ireland, which have low corporate tax rates. The opinion of the European Commission is that having a common rules for calculating of the base amount over which the different national tax rates are applied is beneficial for the enterprises since it will reduce the administrative burden and costs of maintaining compliance with 27 different rule sets for corporate bookkeeping.
- Adopting debt brakes
The word "debt brake" comes from the German "Schuldenbremse", an amendment to the constitution legally limiting the size of sovereign debt countries are allowed to run. These have been implemented in Switzerland in 2003 and in Germany in 2010. Debt brakes can vary in strictness and details of the intended implementation are not yet clear, but the motivation for this rule is to create a legally binding policy instead of the current budget guidelines on deficits which have been not been implemented by member countries.
The plan has been criticised for impinging on the sovereignty of countries, due to its authority to set policy in areas that were previously under national sovereignty. The reforms that the pact contain have also been criticised as being too harsh, or conversely called into question for not being strict enough in its requirements to implement reforms. On the other hand, some leaders agree that in order to avoid dangerous nationalisms and have fiscal and economic governance, it is necessary to transfer sovereignty.
- Enhanced co-operation
- European sovereign debt crisis
- European Fiscal Union
- Treaty of Lisbon
- Sixpack (EU)
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