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Macroeconomic conditionality and rural development funding

The European Commission has proposed to extend the principle of macroeconomic conditionality which currently exists for the Cohesion Fund to all the ‘CSF’ funds in the next MFF period. The CSF funds are those covered by the Common Strategic Framework and include the EAFRD rural development fund as well as the regional, social, cohesion and fisheries funds. The basic idea is that commitments agreed for a member state under its Partnership Contract could be suspended if a member state is not compliant with its macroeconomic guidelines. As the Commission explains:

The draft Regulation seeks to establish a much closer linkage between EU cohesion policy and economic governance, on the grounds that sound economic policies are essential to ensure that CSF Funds are spent effectively. So, for example, the Commission may ask a Member State to amend its Partnership Contract to bring it into line with recommendations issued within the framework of the EU’s broad economic or employment guidelines or excessive deficit procedure, and may suspend CSF payments if a Member State fails to do so. In some cases, some or all of a Member State’s CSF payments must be suspended until it has taken effective action to correct macroeconomic imbalances. However, any suspension of payments must be “proportionate and effective” and take into account the economic and social circumstances of the Member State concerned.
The power to suspend payments is complemented by a provision enabling Member States to request an increase of 10% in the EU’s contribution to their CSF programmes if they are experiencing temporary liquidity problems and are receiving assistance from one of the EU’s financial support mechanisms.

The significance of this provision was underlined by the Commission’s move in February 2012 to suspend €495 million of Cohesion Fund commitments in Hungary for 2013 due to the country’s failure to address its excessive government deficit, the first time that it made use of this provision in the Cohesion Fund regulation.
Strengthening macroeconomic conditionality

The proposal is part of a series of steps to strengthen macroeconomic governance both in the eurozone and in the EU as a whole. The Excessive Deficit Procedure (EDP) established in the EU Treaty (Article 126) and spelled out in the Stability and Growth Pact (SGP) is intended to ensure that Member States avoid gross fiscal policy imbalances. The two key reference values are one for the general government deficit (3% of GDP) and one for gross government debt (60% of GDP). The problem was that governments simply ignored these provisions and the EU sanctions were not credible. Currently, 23 out of the 27 EU Member States are subject to an EDP (all except Estonia, Finland, Luxemburg and Sweden).
On 13 December 2011, a new set of rules entered into force which is often referred to as the “six-pack”, as it consists of five regulations and one directive. The new rules affect both the preventive arm of the SGP – the procedures to promote surveillance and coordination of economic policies and ensure that excessive deficits are avoided – and the corrective arm of the pact, the EDP. New enforcement mechanisms, including, in particular, financial disincentives and fines, were drawn up for non-compliant euro-area Member States in order to make the SGP more effective.
The new sanctions begin with a requirement for a non-interest-bearing deposit of 0.2% of GDP from a euro area country that is newly placed in EDP. This can be converted into a fine for persistent offenders who fail to take effective action to correct their excessive deficit. These steps are taken by the so-called “reverse qualified majority” voting procedure, which makes the enforcement of the EDP “semi-automatic”.
The six-pack also created a macroeconomic imbalance procedure to prevent and correct wider macroeconomic imbalances including loss of competitiveness within the EU. This also provides for financial sanctions in the form of a requirement for interest-bearing deposits which can be converted into a fine for eurozone countries.
EU Member States that are not part of the euro area do not face sanctions in the form of a financial deposit or a fine under the six-pack. But non-euro area countries would be affected by the provisions to suspend CSF fund payments.
Including CAP Pillar 1 payments in macroeconomic sanctions

In its June 2010 Communication on enhancing economic policy coordination the Commission had actually gone further. When a member state was subject to the EDF, it proposed greater use of the EU budget to ensure respect of the key macroeconomic conditions of the SGP. In cases of non-compliance with the rules, incentives would be created by suspending or cancelling part of current or future financial appropriations from the EU budget, including CAP Pillar 1 payments.
The Commission was careful to point out that sanctions should not affect end beneficiaries of EU funds but rather payment to Member States or payments for which Member States act as an intermediary.

With regard to the CAP and EFF, a situation in which a reduction of EU spending would lead to a reduction of farmer’s and fisherman’s income would be excluded. Conditionality on payments should therefore target the EU reimbursements to the national budgets only: Member States would have to continue to pay the farm subsidies, but the reimbursement of this expenditure by the EU budget could be (partially) suspended.

This suggestion was supported by the Task Force on Economic Governance set up under the chairmanship of Herman van Rompuy in 2010. It recommended a two-stage approach to the introduction of new enforcement mechanisms. The first stage would focus on eurozone countries and introduce interest-bearing deposits and noninterest- bearing deposits and fines. The second stage would introduce conditionality rules on compliance with the SGP requirements in the relevant regulations on EU expenditures for all EU member states (except the UK which has a Treaty opt-out). The scope should be as broad as possible (i.e. including CAP Pillar 1 payments) and the rules should be introduced at the latest in the context of the next Multi-annual Financial Framework.
Reactions to the Commission’s proposals

However, this proposal to extend macroeconomic conditionality to CAP Pillar 1 payments has not been followed up in the Commission’s legislative proposals. Even its proposal to extend conditionality to Pillar 2 funding along with other CSF funds has been widely criticised.
Some argue that trying to extract further money from countries already in the EDP is counter-productive and likely to fail. An alternative suggestion (if politically unrealistic) might be non-financial sanctions such as temporarily suspending a member state’s voting rights in the Council. Others say that miscreant countries will be punished sufficiently by the financial markets by having to pay higher interest rates on their government bonds.
For eurozone countries, the proposal might be seen as a form of double sanction, as the loss of CSF funds would presumably come on top of the requirement for non-interest-bearing deposits and possibly fines.
For groups like the Committee of the Regions and COMAGRI in its draft opinion on the Commission proposal, the issue is that the main beneficiaries of such projects are local and regional authorities and local communities who themselves have been seriously hit by the financial and economic crisis. Should the suspension option prevail, it is those beneficiaries who would also suffer the repercussions of the interruption of relevant long-term investment programmes.
The Commission’s proposal creates a trade-off between the development objectives of the CSF funds and the need for effective sanctions to encourage good macroeconomic behaviour. If financial sanctions are deemed appropriate, it would seem more sensible to confine them to the revenue side of the EU budget rather than to interrupt the flow of programmed expenditures.
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