The role of the European Fiscal Board
in the economic governance framework

by Laszlo Jankovics, Economist, Secretariat of the European Fiscal Board(*), and Martin Larch, Head of the Secretariat of the European Fiscal Board(*)

The EFB’s genesis and its original set-up^[1]

At the mid-2010s, the reflection process in the EU aimed at deepening the Economic and Monetary Union brought about the concept of creating an independent advisory body at the supranational level. There were two key motivations for setting up such an entity. First, a number of Member States and the academic literature repeatedly raised question marks over the consistent and even-handed application of the SGP rules by the relevant institutions, namely the European Commission and the Council of the EU. These concerns were further reinforced by the at best mixed track-record of Member States in complying with the EU fiscal rules. The critics postulated that the arrival of independent assessment addressing the often complex implementation issues around EU fiscal rules would strengthen transparency. This, in turn, would enhance the accountability of decision makers. Second, as the euro area wide dimension of fiscal policy has been routinely overlooked in the EU framework, it was assumed that the advice of an independent supranational assessor could improve the coordination of national fiscal policies.

Inspired by the above considerations, the Five Presidents’ Report included the proposal of setting up a new advisory European Fiscal Board.[2] Specifically, the report envisaged that the Board would provide a ‘public and independent assessment of how national budgetary policies perform against the economic objectives and recommendations set out in the EU fiscal framework’.

Following up on the Five Presidents' report, the independent European Fiscal Board was set up by a Commission Decision in October 2015[3]. The role of the Board was stipulated to contribute in an advisory capacity to the Commission’s works and decisions in the European fiscal surveillance regime. Specifically, according to the above referred Decision, the EFB is mandated to:

• provide an evaluation of the implementation of the EU fiscal framework, in particular regarding the horizontal consistency of the decisions and implementation of budgetary surveillance, cases of particularly serious non-compliance with the rules, and the appropriateness of the actual fiscal stance at euro area and national level. In this evaluation, the Board may also make suggestions for the future evolution of the Union fiscal framework.
• advise on the prospective fiscal stance appropriate for the euro area as a whole based on an economic judgment and, where warranted, on the implications for the national fiscal stances;
• cooperate with national fiscal councils to promote exchange of best practices and common understanding on EU fiscal matters.
• provide ad hoc advice at the request of the Commission President.

The list of tasks is rather straightforward. Two aspects may need further explanations. First, the absence of EFB’s direct oversight of national budgetary policies could be contrasted with the fact that one of the key functions of national IFIs in the EU is checking systematically the compliance of Member States with domestic numerical rules. At the EU level, the respective monitoring functions regarding Member States’ compliance with SGP rules are allocated by EU law, including the Treaty, to the European Commission and the Council of the EU. The EFB was therefore charged to provide an independent evaluation of how these institutions implement the EU fiscal framework.   

Second, the mandate of assessing the euro area fiscal stance stems from the peculiarities of the EU economic governance framework (Larch-Thygesen, 2020). In the Economic and Monetary Union, fiscal policy essentially remains a national prerogative, but subject to the constraints of the Stability and Growth Pact. In the aftermath of the Global Financial Crisis, the policy responses to the sluggish economic recovery in the early 2010s showed the limits of the EU framework. National fiscal policies were still bound by the SGP rules, which at the time did not include any serious escape clause, and the single monetary policy was constrained by the zero lower bound on policy rates. As a result, it became clear that, unless the coordination of fiscal policy was improved, the simple aggregation of national fiscal policies would likely not produce an appropriate fiscal stance for the euro area in the wake of particularly severe economic shocks.[4] Although the European Fiscal Board has never meant to be equipped with direct fiscal policy levers, its ex ante advice was expected to inform national decision makers by focusing on the aggregate as opposed to the country-specific factors of fiscal policy.

As to institutional aspects, the EFB is composed of a Chair and four members appointed for a period of three years, renewable once. The Commission formally selected the members of the first Board on 21 October 2016 (i.e. one year after the formal establishment of the EFB).[5] The appointment came after a public call for expressions of interest and appropriate consultations with the European Central Bank, the Council of the EU and national fiscal councils. The first official reports of the EFB were published in 2017.

The Board is supported by a small secretariat, consisting of a Head of Secretariat and dedicated staff. The EFB Secretariat assists in the decision-making process by preparing the meetings of the Board and provides analytical, statistical, administrative and logistical support. While the Board's secretariat is attached, for administrative purposes, to the Secretariat-General of the European Commission, when performing the EFB’s tasks, it takes instructions only from the Board.

Around the time of its establishment, international organisations and academics expressed scepticism regarding the independence of the EFB.[6] The main criticism was that its organisational set-up and mandate fall short of the independence and transparency safeguards of national independent fiscal institutions as advocated by the Commission itself (see e.g., the requirements set in one of the two-pack regulations for euro-area IFIs since 2013).

Following the first years of the EFB activities with its published reports containing numerous critical findings and remarks concerning the operation of the EU fiscal surveillance framework (see next section for details and examples), the observers’ views and perceptions evolved. Most notably, also on the basis of a stakeholder survey, the European Court of Auditors (2019) concluded that the EFB’s reports are of ‘good analytical quality’ and despite its embedded status into the Commission, it was ‘able to form independent opinions’. In a similar vein, Fromage (2020) found that although the EFB was ‘formally a rather weak body’, it has been able to successfully deliver on its mandate. Nevertheless, the cited reports still called for a reinforcement of the EFB both in terms of institutional standards and resources. 

Activities of the EFB

The 2015 Commission decision establishing the EFB requested an annual activity report, which should serve as an outlet containing all of the advice and evaluations provided by the Board in a given year. Besides this compulsory report that got published in autumn, the EFB decided to launch another regular publication to offer its assessment of the prospective fiscal stance appropriate for the euro area as a whole. It was issued in the time frame of mid-June to early July (often labelled as the ‘June report’). The timing of this publication reflects the sequencing of policy decisions in the EU’s annual surveillance cycle: to be useful, advice on fiscal policy for the forthcoming year has to arrive before Member States start preparing their draft budgets. In these reports, the EFB provides an assessment of the fiscal policy guidance (or fiscal country-specific recommendation) issued by the Commission in its spring fiscal surveillance package of the European Semester. More prominently, against the background of the expected macroeconomic developments, the EFB presents its own ex ante advice for next year’s budgetary policies deemed appropriate based on economic judgement.

The key platform of the EFB has been its annual report as foreseen by the legal provisions. Its standard content follows the EFB mandate as shown below (not in the usual order of the chapters):

• Ex post evaluation of the implementation of the EU fiscal framework
• Reform of the EU fiscal framework
• Assessment of the euro area fiscal stance
• Cooperation with independent fiscal institutions

Ex post evaluation of the implementation of the EU fiscal framework

The key contribution of the annual reports is the backward-looking assessment of the implementation of the EU fiscal governance framework, which focuses on the last completed surveillance cycle. It means that the analysis published in the autumn of year t+1 covers the ex ante fiscal guidance for year t issued in year t-2, the budgetary execution in year t, and the final assessment of the EU institutions in the spring of year t+1. Before the eruption of the Covid-19 pandemic (and the widespread activation of the European and national escape clauses) the EFB reports contained a number of critical remarks. As the 2017-2019 period was characterised by historically low but still decent GDP growth rates, coupled with robust labour market performance both in the euro area and in the EU, the EFB repeatedly regretted that most EU Member States, and in particular countries with very high public debt ratios, failed to preventively build buffers. In hindsight, these buffers would have been very useful in the face of the rapid succession of the Covid-19, geopolitical and energy shocks in the early 2020s.

The missed opportunities were partly linked to the recourse to the ‘nominal strategy’ as several governments found it easier to correct their excessive headline deficits during the economic recovery, while showing lower compliance with the structural balance and expenditure rules. This approach was often coupled with budgetary short-termism as the countries’ medium-term budgetary plans, as embodied in the stability and convergence programmes, had little impact on national budgetary decisions, with public attention focused on the annual budgets only. The often lenient assessment of compliance by the Commission further exacerbated the lax approach of some Member States. By way of illustration, the EFB recurrently criticised the use of various flexibility provisions on the part of the Commission and the Council to reduce fiscal requirements, and in particular the application of a  ‘margin of discretion’ on top of the existing flexibility clauses. Moreover, these elements served as rather discretionary and non-transparent justifications for not drawing conclusions or taking corrective measures against several Member States that had significantly deviated from the numerical constraints stipulated by the SGP rules.

During the 2020-2023 period, the Commission and the Council triggered the severe economic downturn clause (commonly but erroneously known as the ‘general escape clause’), on account of the adverse impacts of the Covid-19 pandemic. At that time, the EFB fully supported the activation of the clause to allow for a forceful policy response.[7] Thereafter, the Commission and the Council decided to repeatedly extend the clause, even when the conditions for doing so as laid down by the Commission were no longer met. In this context, the Board recalled that the clause did not suspend the SGP rules and procedures; it also criticised the extensive interpretation of the clause.[8] In particular, the EFB regretted that the Commission and the Council repeatedly opted not to launch any procedural follow-up when they assessed clear cases of non-compliance (e.g., significant breaches of the deficit threshold). It is worth stressing that the EFB did not advocate the launch of excessive deficit procedures (EDPs) to be used as an instrument of frontloaded and abrupt fiscal adjustment, but rather as an instrument to define a medium-term strategy back to a sustainable fiscal policy path. The EFB noted, in particular, that the extensive interpretation of the severe economic downturn clause by the EU institutions had weakened the common fiscal framework. In 2022 and 2023, when various Covid-19 and energy temporary support measures were set to be phased out, many EU countries missed the opportunities to make progress towards sound fiscal positions. This was chiefly due to an acceleration of underlying expenditure well above prudent benchmark rates, in particular in very high-debt countries.

Reform of the EU fiscal framework

Starting from its first report in 2017, the EFB shared the emerging consensus that the EU fiscal framework had been in the need of adjustment. At the same time, recognising the political realities, the EFB advocated to preserving the deficit and debt reference values, as clear and recognisable numerical goalposts. Faced with heterogeneous compliance records across Member States.[9] the effectiveness of the SGP rules had been put into question by some stakeholders. In the relatively favourable years up to the eruption of the Covid-19 pandemic, the fiscal regime’s further deficiencies became evident: complexities and various ambiguities of the fiscal rulebook, and the tendency of some Member State to run pro-cyclical fiscal policies.[10]

In view of these weaknesses, and following the thinking among fiscal policy experts more generally, the EFB started to develop a more comprehensive reform proposal, which was updated and refined in successive annual reports. The fundamental design features of this new surveillance regime have been proposed as: (i) a medium-term debt anchor; (ii) an expenditure rule serving as a single operational indicator; (iii) nationally differentiated adjustment paths; and (iv) a single escape clause applied on the basis of independent analysis. In fact, the reform blueprints of international organisations, think tanks and academics increasingly converged towards such a reform concept. The eventually adopted 2024 SGP reform brought about a broadly similar fiscal framework.[11]

Assessment of the euro area fiscal stance

As regards the part on the assessment of the euro area fiscal stance, the annual report serves as a backward-looking counterpart of the report on the ex ante advice on the appropriate fiscal stance issued typically in June. It first reviews and compares the fiscal stance guidance for the concerned year issued by the Commission, the Council and the EFB. Thereafter, it discusses, whether the observed fiscal stance was in line with the guidance and assessed, in hindsight, what would have been the appropriate stance. 

Cooperation with independent fiscal institutions

In the parts of the annual report dealing with independent fiscal institutions, the EFB looks at horizontally relevant characteristics or functions of independent bodies. Accordingly, past EFB reports investigated, inter alia, the state-of-play with IFIs’ access to information rights and the functioning of the comply-or-explain principle in the EU Member States. Also on the basis of empirical methods, other annual reports analysed the impacts of the independent production or endorsement of macroeconomic forecasts and the monitoring of domestic fiscal rules. The IFI chapter regularly included country-specific sections as well. First, each edition of the annual reports offered portraits of IFIs in two Member States.[12] These detailed accounts of  the institutional set-up and activities are prepared to draw possible lessons for other EU IFIs and to share best practices. Second, in relevant years the chapter reviewed the role of national IFIs in the implementation of the EU fiscal surveillance framework in selected countries for which the Commission had identified significant fiscal risks.

Another regular forum of cooperation between the EFB and national fiscal councils is the EFB annual conference.[13] where one session of the programme is customarily organised in collaboration with the Network of EU IFIs.[14] Moreover, in some cases, the key topic of the conference directly addressed the role and challenges faced by independent bodies, such as ‘Centralisation vs decentralisation of the EU fiscal framework’ and ‘The role of independent advice on fiscal policy’.

2024 SGP reform: potential implications for the EFB

The precursor of the 2024 reform was the economic governance review, which was officially launched by the Commission in early 2020 as part of a legally mandated, regular review of the 2011-2013 six- and two-pack reforms. The process was put on hold during the Covid-19 pandemic and relaunched in autumn 2021.[15] Initiating the last phase of this review, the Commission published a blueprint for revamping the EU fiscal surveillance system in November 2022. It included a broad reference to the need to reconsider the EFB’s mandate and role in case of a reformed framework (European Commission, 2022). The Council formulated a clearer intention as part of its conclusions on the economic governance review, when it stated that ‘a stronger role for the European Fiscal Board’ should be sought (ECOFIN Council, 2023).

The Commission unveiled its legislative proposal in April 2023, a package of draft legal texts amending or replacing the formal elements of the Stability and Growth Pact (European Commission, 2023). Apart from a reference in the explanatory memorandum attached to the package of drafts, there was no mention of the EFB in the new provisions. Specifically, the memorandum indicated some options to enhance the mandate of the EFB through new tasks, such as the ’periodic evaluation of the reformed framework and providing assessments on the implementation of central elements of the reformed governance system.’ The memorandum also considered asking the EFB to ’provide an opinion to inform the Council decision on activating (or extending) the general escape clause.’ This arrangement suggested that the Commission intended to continue to regulate the EFB entirely via its Decision, which could be adjusted on its own terms when the new SGP provisions were adopted.

In its opinion on the Commission's proposal, the European Central Bank (2023) advocated a more ‘significant role of the European Fiscal Board in the economic governance framework’. Beyond endorsing the possible new tasks mentioned in the Commission’s memorandum, the ECB saw ‘merit in consulting the European Fiscal Board on the methodology’ underlying the Commission’s debt sustainability analysis tool, which was set to become a cornerstone of designing the medium-term net expenditure paths in the reformed fiscal regime. Furthermore, the ECB suggested to enhance the EFB’s current role in assessing the appropriate euro area fiscal stance.

At the end of 2023, the Council agreed to a general approach on the SGP reform. One of the notable governance changes compared to the Commission’s April 2023 initiative was the new preventive arm Regulation which explicitly incorporated the EFB in secondary EU law, buttressing its institutional and operational autonomy. Key provisions of the EFB’s mandate, independence safeguards and organisational features (essentially mirroring the arrangements of 2015 Commission decision) are now listed in the Regulation. In terms of novelties, three elements are worth mentioning: (i) the Regulation opens the possibility for the Council to directly turn to the EFB for ‘advice on the implementation of the Stability and Growth Pact’; (ii) the mandate was complemented with a role for the EFB in the extension of the general escape clause (but not in its activation); and (iii) the EFB was granted an observer status in the newly established methodological working group on debt sustainability analysis. In early 2024, during the trilogue negotiations[16] only some small EFB-relevant further changes were agreed. Most notably, the Parliament successfully pushed for a consultation role over the appointment of new Board members (while the European Central Bank and national fiscal councils are no longer need to be consulted).

The reform of the economic governance framework entered into force on 30 April 2024.[17] Following up on the EFB-related changes in EU legislation, the Commission adopted a new decision in August 2024[18], which included more detailed rules regarding the Board’s composition and appointment procedures, independence, functioning, and the work of the EFB Secretariat. 

At the end of 2026, the EFB will celebrate its 10^th birthday as a widely respected independent entity. It earned the appreciation of relevant counterparts and stakeholders in the fiscal surveillance domain through its deep analytical contributions and independent voice, often criticising the actions of its host institution, the Commission, but also the Council. Its increased relevance was reflected in the incorporation of key EFB provisions in the preventive arm Regulation that grants new tasks and opens options for future work. At the time of the completion of this paper, it cannot be determined to what extent the EFB’s role will change going forward, as it depends, inter alia, on the approach of the incoming new Board and the inclination of the Council to request opinions from the EFB at specific moments in the surveillance cycle.