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EUROPEAN UNION POLICIES

The following is a summary of the EU policies that are closely related to Eesti Pank's daily activities: the internal market and the coordination of economic policy.

Internal market

The single market is EU's main economic principle, which was introduced already in the Treaty establishing the European Economic Community in 1958. The internal market consists of "Four Freedoms": free movement of goods, services, people and capital. Only in the presence of all four freedoms is it possible to divide resources efficiently and thus create favourable conditions for economic development.

Free movement of services includes also financial services, in the case of which the Financial Services Action Plan (FSAP) is implemented to improve the practical functioning of the internal market. The Action Plan includes both legislative and other measures.

Economic policy coordination

The coordination of EU's economic policy is largely based on the use of "soft methods". It means that the legal framework is marginal, and the exchange of information and experiences, discussions on the implementation of measures in other Member States, conduct of peer reviews etc. are rather used.

The framework for economic policy coordination can be divided into two:

  Those initiated in the European Commission: broad economic policy guidelines, guidelines for employment, excessive deficit procedure;
  Those initiated in the Member States' reports: stability and convergence programmes, the Cardiff process.

The central document framing EU's economic policy is the Broad Economic Policy Guidelines (BEPG). This is a longer term strategy paper, which is reviewed thoroughly in every three months. It includes integrated recommendations but regards every Member State separately as well.

  In the framework of the Luxembourg process, employment policy is analysed and the employment matters regarded in the BEPG are specified, and this takes place in the same time cycle as the BEGP.
  The Cardiff process regards the structural matters of product and capital markets.
  The Cologne process or the macroeconomic dialogue covers discussions on wage developments in the context of the economic situation.

In March 2000, the EU initiated a process in Lisbon, the aim of which was to make the Union the most dynamic and competitive knowledge-based economy in the world by 2010. Five years later, however, the European Union was still far from achieving the expected success and therefore, at the 2006 Spring European Council, a renewed Lisbon Strategy or the strategy for growth and jobs was agreed on, which is implemented through National Reform Programmes (NRP) prepared by the Member States every year.

Broad Economic Policy Guidelines need to ensure the economic policy integrity of the goals set in the Lisbon Strategy. These guidelines also instruct Member States on how to achieve the said goals via economic policy measures.

A very important instrument in the coordination of economic policy is the Stability and Growth Pact, which focuses on fiscal matters. The Stability and Growth Pact covers the two following aspects.

  The preventive aspect, for which the Member States prepare and launch stability and convergence programmes that present their strategies and fiscal goals for the following three years. Stability programmes are prepared by the euro area Member States and convergence programmes by the non euro area Member States.
  The corrective aspect with the purpose of avoiding excessive budget deficit. Pursuant to the Stability and Growth Pact, national budgets have to be balanced in the medium term and the deficit must not exceed 3% of GDP in any year. If the permitted rate is exceeded, the Commission will start the excessive deficit procedure, which may result in imposing a fine on the Member State.

The global economic crisis of 2007-2009 brought out the shortcomings of coordinating fiscal and economic policies in the European Union. The problems encountered by several euro area countries demonstrated that inconsistent compliance with rules and principles damages the operation of the whole euro area. To rectify this, the economic policy coordination of Europe is undergoing improvements in 2010. Key changes include:

  Paying greater attention to strengthening public finances;
  Strategy improvements in specific areas as well as the pan-European EU2020, which involves determining the bottlenecks of the economy of the EU and its Member States;
  An aid package in the sum of 750 billion euro was agreed upon to help the euro area countries that are experiencing difficulties now or in the future.