Policy coordination in the euro area
Sharing a single currency means that euro area countries must coordinate their economic and fiscal policies closely – much more so than other EU countries.
Although primary responsibility for these policies lies with the euro area member states, they are required to regard their economic policies as a matter of common concern and to coordinate them accordingly. The aim of this coordination is to ensure stability in the euro area as a whole and to develop coherent economic policies that benefit the whole of the single currency area.
Policy coordination between euro area governments
Euro area finance ministers hold monthly Eurogroup meetings to discuss all issues related to the management of the single currency area. The Eurogroup coordinates economic and fiscal policies in the euro area and decides on measures to ensure the stability of the euro area as a whole.
This includes detailed examination of member states' budgetary and economic policies. It may also include financial support to individual member states experiencing difficulties, to ensure the stability both of the euro area as a whole and of its member states, and has resulted in the establishment of the permanent European Stability Mechanism to provide such support.
Key topics regularly discussed by the Eurogroup are:
- Budgetary policies: Stability and Growth Pact
- Macroeconomic imbalances
- Structural reforms to boost growth - European Semester
- Financial support to member states facing difficulties
- The euro area's relations with the global economy
- Euro area enlargement.
Leaders of euro area member states meet at least twice a year at Euro Summits to outline the strategic direction of economic policies.
Since euro area issues are of key political and economic importance to all 27 EU countries, these matters are also regularly discussed at leaders' level in the European Council.
In addition, dedicated euro area meetings are often held in the European Council format.
Policy coordination in the Council of the European Union
All EU member states coordinate their economic and fiscal policies in the Council as provided in the EU treaties.
The treaties make the Council responsible for coordinating EU member states' economic policies through specific rules for budgetary discipline and more general coordination of other economic policies. This takes place primarily in the Economic and Financial Affairs Council.
When the Council adopts acts that apply to the euro area, preliminary discussions may take place in the Eurogroup, on the eve of the Council meeting.
The rules on budgetary policies, known as the Stability and Growth Pact, aim at ensuring the sustainability of public finances. They were initially agreed on during the process of establishing the euro area in 1997. These rules were reinforced in 2005 and again in 2011 through the economic governance legislative package ('six-pack').
A new process for preventing and correcting macroeconomic imbalances was introduced in 2011 as part of a reinforcement of all economic governance procedures.
There are more binding rules for euro area members requiring correction of excessive deficit and of any macroeconomic imbalances that emerge. This is owing to the fact that imbalances in one euro area member state can have a greater impact on others within the monetary union, thus necessitating greater coordination.
When the Council takes decisions that concern all EU member states, the finance ministers of all EU countries cast their vote, but only euro area ministers can vote on decisions specific to euro area member states.
The Council, usually together with the European Parliament, also adopts other EU-wide measures to boost economic stability, growth and jobs, in particular through deepening of the single market.
Continuing process of reinforcement
Much has been done in the last few years to achieve stronger coordination and better enforcement of economic policy. The process, however, is ongoing. In many cases new measures are launched by the euro area countries together with a number of other EU member states.
In March 2011 the euro area member states as well as six non-euro area member states – Bulgaria, Denmark, Latvia, Lithuania, Poland and Romania – adopted a Euro Plus Pact on issues affecting competitiveness.
The Treaty on Stability, Coordination and Governance in the Economic and Monetary Union ('fiscal compact'), containing a balanced budget rule, entered into force on 1 January 2013. It requires binding rules in national laws on balancing budgets and reducing debt, provides for consultation with EU partners on major economic reforms and foresees detailed monitoring in the event that budgetary targets are not met. All euro area member states and eight other EU countries are parties to this treaty.
Strengthened provisions (the 'two-pack') are being prepared for the surveillance of budgetary policies of euro area member states. They will complement the fiscal and macroeconomic provisions enacted in 2011 (the 'six-pack').
A Single Supervisory Mechanism (SSM) for banks under the responsibility of the European Central Bank, the first step towards a banking union, was initiated in June 2012. The mechanism will apply to the euro area but is also open to all 27 EU member states. The ECB is expected to assume its supervisory tasks within the single supervisory mechanism in the first half of 2014.
The Commission will propose, in the course of 2013, a single resolution mechanism for member states participating in the SSM. This mechanism will safeguard financial stability if banks fail and ensure that taxpayers' money need not be used in the event of a bailout.
The President of the European Council, the meeting of all EU leaders, will present in June 2013 a roadmap on a number of issues to strengthen the economic policy coordination of the euro area.
Monetary policy decisions are taken by the Governing Council of the independent European Central Bank (ECB). This brings together the Executive Board of the ECB and the governors of the central banks of all euro area member states.
The ECB and the euro area countries' central banks make up the Eurosystem, which, inter alia, defines and implements the euro area's monetary policy, carries out foreign exchange operations, promotes smooth operation of payment systems, and holds and manages foreign reserves.
Last updated: 16/01/2013