The limited application of sanctions: reasons and alternatives

Elements of flexibility in the sanctioning machinery

Despite recent reforms of EU economic governance focusing on strengthening the sanctioning machinery, the actual recourse to sanctions against Member States in this context has been negligible. Although every Member State, except Estonia and Sweden, has been subject to an EDP, none of them have been sanctioned so far. In 2016, Spain and Portugal narrowly escaped fines when the Commission proposed that sanctions be imposed on those Member States due to the failure to tackle their excessive deficit, which it later recommended be cancelled. The Council followed the Commission’s recommendation and cancelled the fines. The only instance where a sanction was adopted against a Member State in the context of the SGP occurred in 2015, when Spain was fined for presenting incorrect budgetary statistics.

The mismatch between the perceived centrality of sanctions as enforcement tools in the EMU and their lack of application in practice can be explained on two counts: the intrinsic flexibility embedded in the SGP and in the MIP, and the existence of alternative, possibly more effective, enforcement mechanisms which, despite not being sanctions in the proper sense, play a comparable role.

Traditionally, the SGP has been considered as being rather mechanical and rigid in its functioning. In reality, both its preventive and its corrective arm contain several elements of flexibility that make the process of adopting a sanction far from straightforward. Flexibility is certainly essential in a context where eminently political choices on the allocation of scarce resources are at stake. This, in turn, entrusts supranational institutions - and the Commission, in particular - with a broad margin of discretion.

An initial element of flexibility lies with the inherent vagueness of the terms used to define some of the benchmarks against which the State’s fiscal or macroeconomic position is to be assessed. This is the case, for instance, with the notion of “excessive deficit”, to be determined by taking into account whether it is due to “an unusual event outside the control of the Member State concerned” or “a severe economic downturn”,[1] or with the definition of “excessive imbalance” in the context of the МІР.

Secondly, in the aftermath of the financial crisis, the Commission, giving in to the pressure of several Member States, sought to inject greater flexibility into the SGP, without formally changing the rules. To this end, it identified certain investments that were not to be taken into account when determining the fiscal adjustment under the preventive or the corrective arm of the SGP and it announced that it would interpret extensively the so-called “structural reforms clause” contained in Article 5 of Regulation (EC) 1466/97.

A further element of flexibility is the so-called ‘general escape clause’ enshrined in Articles 3(5) and 5(2) of Regulation 1467/2011. Pursuant to this mechanism, in the case of a severe economic downturn in the euro area or in the Union as a whole, the Council may decide, on a recommendation from the Commission, to adopt a revised fiscal trajectory. Recently, this ‘general escape clause’ was activated in the face of the expected severe economic downturn caused by the COVID-19 pandemic. Finally - and most importantly - quantitative benchmarks are not decisive per se in determining whether or not a State should be sanctioned for its failure to implement a sustainable budgetary policy or to correct excessive macroeconomic imbalances. As is already clarified by Article 126 TFEU with regard to the EDP, a sanction can be triggered by the failure of the Member State concerned to adopt the corrective measures recommended by the Council. The same applies to the МІР, as

Article 10(4) of Regulation 1176/2011 provides that the Council may adopt a decision of non-compliance - which is the precondition for applying pecuniary sanctions - only “[w]here it considers that the Member State has not taken the recommended corrective action”.

Over the years, the control exercised by supranational institutions has progressively shifted its focus from quantitative benchmarks to adopted policy measures.[2] The Six-Pack pushed this evolution further, by combining hard sanctioning mechanisms and soft coordination processes under the European Semester. In this context, the possibility of adopting coercive measures is now seen primarily as an instrument to pressure Member States into adopting the structural reforms recommended by EU institutions.

This trend is exemplified by those cases in which the Commission decided to close an EDP after the State concerned adopted the recommended policy measures, despite its fiscal position not improving. The adoption of the so-called Lot Khomri (or Lot Travail) in France is a case in point. In the wake of the crisis, France struggled to meet the SGP debt and deficit benchmarks and was placed under an EDP in April 2009. In 2013, the Commission and the Council began to place greater emphasis on the link between the "correction of the fiscal imbalances” and “a credible implementation of ambitious structural reforms to increase the adjustment capacity and boost growth and employment”. In particular, France was recommended to reduce the cost of labour and to “ensure that developments in the minimum wage are supportive of competitiveness and job creation”.’ The same happened, with only minor terminological variations, in 2014

and 2015.[3] In February 2015, the French Government bowed to the pressure, passing a law that aimed to make the labour market more business-friendly. The decision paid off, as the Commission refrained from sanctioning France despite its failure to bring the deficit under the 3 % threshold.

  • [1] ■’■’Article2 Regulation 1467/2011. 2 Article 2 Regulation 1176/2011 is of little help in this regard, simply stating that “‘excessive imbalances’ means severe imbalances, including imbalances that jeopardise or risk jeopardising the proper functioning of the economic and monetary union”. 3 Commission Communication, Making the Best Use of Flexibility within the Existing Rules of the Stability and Growth Pact, COM(2015) 12 final. 4 4' Regulation 1467/2011, respectively Articles 5(1) and 9(1) for the preventive arm, and Articles 3(5) and 5(2) for the corrective arm of the SGP. 5 The Commission recommended activating the ‘general escape clause’ on 20 March 2020 (Commission Communication on the activation of the general escape clause of the Stability and Growth Pact, COM(2020) 123 final). On 23 March 2020, the Council endorsed the Commission’s recommendation.
  • [2] D. Chalmers, 'The European Redistributive State and a European Law of Struggle’ (2012) 18 European Law journal 667, 679-681. Further, on this point, D. Chalmers, ‘Crisis Reconfiguration of the European State’, in D. Chalmers, M. Jachtenfuchs and C. Joerges (eds.) The End of the Eurocrats Dream (Cambridge University Press, 2016), 266. See also F. Costamagna, ‘National Social Spaces as Adjustment Variables in the EMU: A Critical Legal Appraisal’ (2018) European Law journal 163, 175. 2 R. Erne, ‘A Supranational Regime that Nationalizes Social Conflict: Explaining European Trade Unions’ Difficulties in Politicizing European Economic Governance’, (2015) 56 Labor History 345,348. 3 Council Decision No. 2009/414/EC of 27 April 2009 on the existence of an excessive deficit in France, QJ L 135 of 30.05.2009, 19-20. 4 Council Recommendation of 9 July 2013 on the National Reform Programme 2013 of France and delivering a Council opinion on the Stability Programme of France, 2012-2017, OJ C 217 of 30.07.2013,31. 5 5J Ibidem. 6 Council Recommendation of 8 July 2014 on the National Reform Programme 2014 of France and delivering a Council opinion on the Stability Programme of France, 2014, OJ C 247 of 29.07.2014,47-48.
  • [3] Council Recommendation of 14 July 2015 on the 2015 National Reform Programme of France and delivering a Council opinion on the 2015 Stability Programme of France, OJ C 272 of 18.08.2015,55. 2 Commission recommendation for a Council Recommendation with a view to bringing an end to the excessive government deficit in France, 27 February 2015, COM(2015) 115 def. The French case is discussed in European Court of Auditors, Special Report No 10/2016: Further Improvements Needed to Ensure Effective Implementation of the Excessive Deficit Procedure (Publications Office of the European Union 2016). 3 See Amtenbrink and Repasi, supra note 16, 169. 4 R. Bieber, F. Maiani, 'Enhancing Centralized Enforcement of EU Law: Pandora’s Toolbox?’ (2014) 51 Common Market Law Review 1057, 1058. 5 M. loannidis, ‘Europe’s New Transformations: How the EU Economic Constitution Changed during the Eurozone Crisis’ (2016) 53 Common Market Law Review 1237, 1249-1259.
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