2. We consider that the following raises
questions of legal and political importance, and recommend its
further consideration on the Floor of the House rather than by
European Standing Committee B, together with (17539) COM(96)499
on the introduction of the euro and (17541) COM(96)496 on a
stability pact for ensuring budgetary discipline in stage 3 of
Economic and Monetary Union:--
H M Treasury
(17540)
--
COM(96)498 |
Commission Communication on reinforced convergence procedures
and a new exchange rate mechanism in stage three of Economic and
Monetary Union (EMU). |
Background
2.1 In January we reported[4] on an interim Commission report setting out
the case for an exchange rate mechanism for non-participating
Member States during stage three of EMU.
2.2 The report had been requested by the European
Council in Madrid in December 1995, which had asked the ECOFIN
Council together with the Commission and the European Monetary
Institute to study, in their respective fields of competence, the
range of issues raised by the fact that some Member States would
not participate in the euro area at the outset. At the time the
Government said it would resist any compulsory membership of such
a system. We recommended a debate on the Commission report,
which took place in European Standing Committee B on 24 April
1996.
2.3 The Commission's present paper explains that
the new exchange rate arrangement was first discussed by the
ECOFIN Council at an informal meeting in April, and that progress
reports were submitted to the European Council in Florence in
June. We are told by the Commission that the ECOFIN Council
reached a broad understanding upon the main elements of a new
exchange rate mechanism, based on the existing ERM, at an
informal meeting in Dublin in September. The Commission's paper
welcomes this understanding and sets out the main elements of the
proposed new mechanism.
The main elements of the proposed new ERM
2.4 The main elements of the new ERM, as
summarised in an Explanatory Memorandum dated 31 October,
submitted by the Chancellor of the Exchequer (Mr Clarke) are:
"--The euro will be the anchor currency,
with bilateral links with other currencies set up on a
'hub-and-spoke' basis. This contrasts with the current ERM,
which uses a parity grid.
--Parities will be set in a common procedure
involving Ministers; the European Central Bank (ECB) or, in the
case of non-euro Member States, national central banks (NCBs);
and the Commission. Fluctuation margins will be wide, though with
flexibility to make closer links if Member States so wish.
--Intervention support will be available
automatically at the margins, though NCBs and the ECB will have
the right to suspend intervention if this conflicts with their
overriding objectives of price stability.
--Realignments should be made in a timely manner
and by common procedure. Both the ECB and the NCB concerned will
have the opportunity to call for realignments."
It is not envisaged that the new ERM will have a
statutory base from the Treaty: it would be achieved by
inter-governmental agreement.
Reinforced convergence procedures
2.5 The Commission's paper notes that exchange
rate stability enjoyed since 1995 reflects the substantial
progress in convergence already achieved by Member States. It
also discusses, "with a view to ensuring full participation
in the euro at the earliest possible date", the need to
underpin the convergence efforts of the "pre-ins"[5] in parallel with the obligatory
stability programmes proposed for the "ins".
2.6 The Commission suggests that, given the link
between exchange rate stability and convergence, reinforced
convergence programmes could have a role in the management of a
new ERM, suggesting that progress achieved by a
"pre-in" towards convergence objectives might be used
as a reference in determining the sustainability of central
exchange rates.
2.7 The Commission also suggests that convergence
programmes should follow a common format, and include objectives
for inflation, budget deficits and debt, and prospects for the
exchange rate and long term interest rates. Economic assumptions
underlying the convergence strategy would be made explicit.
Medium-term as well as short run information should be included.
National convergence programmes, which would be mandatory instead
of voluntary as at present, would be updated each year, with
information on how to correct any slippage from the previous
year's plans. The Commission would have a monitoring role, in
accordance with the surveillance procedures set out in Article
103 of the Treaty. Legislation to introduce the proposed
reinforced convergence procedures would rely on Article 104(5)
of the Treaty as a legal base.
The Government's view
2.8 The Chancellor says in his Explanatory
Memorandum:
--"Under the terms of protocol 11 to the EC
Treaty, and the European Communities (Amendment) Act 1993, the
United Kingdom would not be able to participate in the third
stage of EMU without a separate decision to do so by Government
and Parliament. Furthermore, the European Council in Florence
states clearly in its conclusions that while a new exchange rate
mechanism will be established to link the euro with the
currencies of the outs, membership of the mechanism will remain
voluntary. The Government has repeatedly stated that it has no
intention of re-entering sterling into an exchange rate
mechanism.
"In the light of these facts, the Government
has the following comments on the Commission's Communication.
"--Policies aimed towards convergence -- low
inflation and sound public finances -- are sound in their own
right, with or without . . . EMU. The Government will continue
to pursue these, regardless of the eventual decision on whether
or not to join the single currency.
--The Commission rightly say that 'experience has
shown that exchange rate stability depends more than anything
else upon sound macro-economic management.' The Government does
not, however, believe that ERM membership is the best way to
achieve these sound macro-economic policies. This may work for
some Member States. But it is not the best way of achieving
exchange rate stability for all. In the UK's case, inflation
targets have been very successful in achieving and maintaining
low inflation since 1992.
--It is, however, in every Member State's
interest that the new exchange rate mechanism works well. Europe
is the UK's biggest market, and accounts for 60 per cent of our
exports. It is therefore important to the UK that the details
of the new arrangement are sensible, even though we do not plan
to join it. The proposals which the Commission summarise
preserve flexibility, which is desirable given that the members
of the new mechanism will, at least to begin with, not be fully
convergent either with each other or with the euro zone.
--It has been agreed by Ministers and Heads of
Government that the basis for establishing the new exchange rate
mechanism will be European Council Resolution, like the current
EMS -- in other words it will be agreed on an inter-governmental
basis. It will not be a Community instrument based on the
Treaty.
--Final details of the new mechanism cannot,
however, be agreed before the establishment of the ECB in July
1998.
--On the question of convergence programmes, the
Government already submits these annually to the Council."
2.9 The Chancellor described the paper as
representing the views of the Commission and having no policy
consequences.
Conclusion
2.10 Whether or not the United Kingdom
participates in the single currency, the stability of the euro
and the stability of the currencies of the countries of the
European Union which are either "pre-ins" or even
"outs" (though the Commission does not recognise that
term) are of considerable importance to the United Kingdom. The
Commission's paper recognises that increased movement towards
convergence, in terms of the criteria set out in Article 109j of
the Treaty, has brought about greater exchange rate stability.
So any proposals which are intended to reinforce the convergence
process and maintain exchange rate stability must be of legal and
political importance to this country.
2.11 We note that the Chancellor has said that
decisions on the key principles of the new ERM are likely to be
reached at the European Council in Dublin on 13-14 December. He
does not say so, but we would expect that the proposals relating
to reinforced convergence criteria will be discussed at the same
time.
2.12 We think there should be a debate. It
would be logical for the debate on this document to take place
on the Floor of the House with the draft legislation for the
introduction of the euro and for a stability pact, on which we
also report today[6].
4.(16707)--; see HC 51-v (1995-96), paragraph 5
(10 January 1996). Back
5.The Commission's term for those countries who
have not joined the euro area. Back
6.See paragraph 1 and 3. Back
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