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 communication@bruegel.org.

View comments
Read about event More on this topic

Upcoming Event

Oct
29
08:30

Bank resolution: its impact in the EU

Closed-door workshop on various aspects of bank resolution.

Speakers: Jon Cunliffe, Martin J. Gruenberg and Elke König Topic: Finance & Financial Regulation Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article More on this topic

Blog Post

European champion-ships: industrial champions and competition policy

This blog post investigates the debate on whether European competition rules should foster European industrial champions, or allow national champions to grow to a European scale. It explores the criteria that one would intuitively ascribe to industrial champions, illustrating the difficulties in defining either ‘European’ or ‘Champion’. It then conducts a brief look into whether EU Merger decisions have impeded the formation of ‘European Champions’.

By: Mathew Heim and Catarina Midoes Topic: Innovation & Competition Policy Date: July 26, 2019
Read article More on this topic More by this author

Blog Post

Modernising European Competition Policy: A Brief Review of Member States’ Proposals

French, German and Polish governments have jointly proposed options for modernising EU competition policy. The debate to recalibrate European competition rules was already well underway. So, it is not surprising that proposals are consistent with other statements made by France and Germany. Yet, proposals do not address current issues weighing on the international competition community, such as conglomerate effects theory or algorithmic collusion.

By: Mathew Heim Topic: Innovation & Competition Policy Date: July 24, 2019
Read article More on this topic More by this author

Opinion

The EU needs a bold climate strategy

Scientists report that global temperature increases must be limited to below 1.5 degrees Celsius. With global greenhouse gas emissions continuing to increase and rising temperatures driving up the frequency of extreme weather events, the world needs a greater commitment to climate policy.

By: Guntram B. Wolff Topic: Energy & Climate Date: July 19, 2019
Read article More on this topic More by this author

Blog Post

How should the relationship between competition policy and industrial policy evolve in the European Union?

Competition policy aims to ensure that market practices and strategies do not reduce consumer welfare. Industrial policy, meanwhile, aims at securing framework conditions that are favourable to industrial competitiveness, and deals with (sector-specific) production rules as well as the direction of public funds and tax measures. But, how should competition policy and industrial policy interact? Is industrial policy contradicting the aims of competition policy by promoting specific industrial interests?

By: Georgios Petropoulos Topic: Innovation & Competition Policy Date: July 15, 2019
Read about event More on this topic

Past Event

Past Event

The 4th industrial revolution: opportunities and challenges for Europe and China

What is the current status of EU-China relations concerning innovation, and what might their future look like?

Speakers: Elżbieta Bieńkowska, Chen Dongxiao, Patrick Child, Eric Cornuel, Maria Demertzis, Ding Yuan, Luigi Gambardella, Jiang Jianqing, Frank Kirchner, Pascal Lamy, Li Mingjun, Gwenn Sonck, Gerard Van Schaik, Reinhilde Veugelers, Wang Hongjian, Guntram B. Wolff, Xu Bin, Zhang Hongjun and Zhou Snow Topic: Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: July 12, 2019
Read article More on this topic More by this author

Opinion

Brexit banking exodus creates a dilemma for Dublin

Irish consumers’ interests may not coincide with the needs of banks relocating here.

By: Rebecca Christie Topic: Finance & Financial Regulation Date: July 10, 2019
Read article Download PDF More on this topic

Policy Contribution

Redefining Europe’s economic sovereignty

This Policy Contribution delves into the position of the EU in the current global order. China and the United States increasingly trying to gain geopolitical advantage using their economic might. The authors examine the specific problems that China and the US pose for European economic sovereignty, and consider how the EU and its member states can better protect European economic sovereignty.

By: Mark Leonard, Jean Pisani-Ferry, Elina Ribakova, Jeremy Shapiro and Guntram B. Wolff Topic: Global Economics & Governance Date: June 25, 2019
Read about event More on this topic

Past Event

Past Event

What reforms for Europe's Monetary Union: a view from Spain

How is a successful European Monetary Union still possible in today's ever-shifting political landscape? What reforms need to occur in order to guarantee success of cohesive policies?

Speakers: Fernando Fernández, José Carlos García de Quevedo, Gabriele Giudice, Inês Goncalves Raposo, Javier Méndez Llera and Isabel Riaño Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: June 19, 2019
Read about event More on this topic

Past Event

Past Event

Role of national structural reforms in enhancing resilience in the Euro Area

At this event Gita Gopinath, Chief Economist at the IMF will discuss the role of national structural reforms in enhancing resilience in the Euro Area.

Speakers: Shekhar Aiyar, Maria Demertzis, Romain Duval, Gita Gopinath and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: June 17, 2019
Read about event More on this topic

Past Event

Past Event

Past, present, and future EU trade policy: a conversation with Commissioner Malmström

What was trade policy during the last European Commission? What will be the future of European trade under the next Commission?

Speakers: Cecilia Malmström, André Sapir and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: June 13, 2019
Read about event More on this topic

Past Event

Past Event

EU-LAC Economic Forum 2019: New perspectives in turbulent times

The third edition of the EU-LAC Economic Forum.

Speakers: Diego Acosta Arcarazo, Ignacio Corlazzoli, Maria Demertzis, Mauricio Escanero Figueroa, Alicia García-Herrero, Carmen González Enríquez, Bert Hoffmann, Edita Hrdá, Matthias Jorgensen, Juan Jung, Tobias Lenz, Carlos Malamud, J. Scott Marcus, Elena Pisonero, Belén Romana and Guntram B. Wolff Topic: Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: June 11, 2019
Load more posts