27. Adjustment mechanisms within and between euro-area
countries may also help promote stability. Those countries participating
in Stage Three of EMU have lost autonomy over two national adjustment
mechanisms, interest rates and the exchange rate. Witnesses debated
whether, in the interests of stability, there was scope for a
greater role for the EU in coordinating fiscal policy. Professor
Begg advocated a "top down fiscal stabilisation" approach,
which he defined as a new centralised European taxation system,
on a limited scale.
This, Professor Begg argued, would be similar to the US system
of federal transfer of welfare benefits, which is used to limit
downturns and upswings in states' economies and could be achieved
with a budget of about 0.4 per cent of EU GDP.
Professor Buiter, however, disagreed with the need for such a
body, instead arguing that such a stabilisation function could
continue to be undertaken by national, or even sub-national, authorities
either through automatic fiscal stabilisers, or discretionary
fiscal policy measures. The Paymaster General denied that the
EU was progressing towards a "totally harmonised united system"
of fiscal policy, rather than a system of cooperation in certain
areas, which she insisted was the way forward.
28. Co-ordination of EU fiscal policy is presently
achieved, to a degree, by the Stability and Growth Pact and the
Broad Economic Policy Guidelines. The Pact states that, while
maintaining the reference value for government deficits of three
per cent of national GDP, euro-area member states shall seek "sound
budgetary positions close to balance or in surplus".
Mr Forder warned that the fiscal restrictions placed on euro-area
member states, in particular the three per cent limit, "imposes
tight constraints on borrowing. Historical experience suggests
that the deficits which are contemplated will not be sufficient
to alleviate economic downturns".
In contrast, countries experiencing periods of high and even unsustainable
growth, Credit Lyonnais UK argued, were under no obligation as
a result of the Pact to tighten fiscal policy or take other appropriate
Corus argued that, when public finances are balanced or in surplus,
"tightening fiscal policy seems to be difficult for politicians"
meaning that "it will probably take some time before the
right policy mix per country is implemented".
The Guidelines set out a number of "general orientations"
to all EU countries and for the EU as a whole, as well as country-specific
Professor Begg observed that the Maastricht Treaty did not explicitly
create a mechanism for fiscal policy coordination, and that the
EU had sought to address this issue by taking a "soft policy
approach" (i.e one not enshrined in a Treaty or directives).
While the Guidelines encourage cooperation, Professor Buiter speculated
that peer pressure alone might be sufficient to encourage coordination.
The Economic Secretary explained that the importance of the Guidelines
was to encourage structural economic reform in the EU and, although
they were non-binding, the Minister said there had been "a
lot of progress" in this direction as a result of them.
Miss Johnson denied, however, that the European Commission could
determine whether EU countries changed their tax rates.
THE EURO-11 GROUP
29. French Finance Minister, Laurent Fabius, is reported
to have called recently for the euro-11 group of finance ministers,
which meets informally before European Council of Finance Ministers
(ECOFIN) meetings, to be given a stronger role, although it is
not yet clear what that role might be.
The role of the euro-11 group of finance ministers was seen by
Professor Buiter as facilitating the coordination of fiscal policy
with monetary policy in the euro-area.
He envisaged the euro-11 group usurping many of the functions
of ECOFIN, including consideration of issues such as EU financial
Professor Begg agreed, pointing out that euro-11 had only been
established because ECOFIN was unable to fulfil its original role
because not all EU states were participating in Stage Three of
The Economic Secretary offered reassurance that nothing had changed
the agreement of the 1997 Luxembourg Council that the euro-11
group would only "meet informally ... to discuss issues connected
with their shared specific responsibilities for the single currency",
a point reiterated by the Chancellor.
Mr O'Donnell, of HM Treasury, added that, if the euro-11 group
attempted to usurp ECOFIN, "the governing procedures where
vetoes hold will all be governed by ECOFIN procedures, so there
is no change to that whatsoever".
There is clearly a potential for conflict between ECOFIN and
the euro-area group. Although the formal role of ECOFIN is clear,
the euro-area group may increasingly shape the economic agenda.
The British Government will need to ensure that, while the UK
remains outside EMU, the euro-area group does not usurp the role
of ECOFIN in shaping economic policy.
121 Spring 2000: Economic Forecasts 1999-2001,
European Commission, 11 Apr 00; and see Q573 for the Chancellor's
Ev, p15 Back
App 27 Back
Qq2, 46 Back
Quo Vadis Euro?, pp44-5 Back
Ev, p78 paragraph 2.2 Back
Ev, p71 Back
Ev, p4 Back
The neutral interest rate
is not directly observable and can only be estimated. Deutsche
Bank's estimation of the ECB's neutral rate was based on the Taylor
Rule, which calculates the neutral interest rate based on the
difference between the actual rate of inflation and the central
bank's target, the output gap, and the reference level for the
3-month nominal rate of interest Back
Ev, p76 Back
Ev, p15 Back
Ev, p18 Back
Ev, p78 paragraph 3.3 Back
Ev, p15 Back
App 19 Back
Statement to the Irish Parliament's Joint Committee on European
Affairs, Maurice O'Connell, Governor of the Central Bank of
Ireland, Dublin, 23 Feb 00 Back
App 5, paragraph 9; UK Membership of the Single Currency: An
Assessment of the Five Economic Tests, HM Treasury, Oct 97,
(hereafter Five Tests) paragraph 1.27 Back
EMU: One Year On, OECD Policy Brief, Feb 00, p9 Back
App 16, paragraph 16 Back
Q381; also see the Chancellor Qq589-603 Back
Resolution of the European Council on the Stability and Growth
Pact, European Council, Amsterdam, 17 Jun 97 Back
App 23, paragraph 19 Back
App 27 Back
App 6 Back
Monthly Report, European Central Bank, Jul 00, p29 Back
For instance see BBC Online Reports of 30 May and 17 Jul 00; and
Daily Telegraph, 9 May 00 Back
Q53 and Q80 Back
Q402; Presidency Conclusions, Luxembourg European Council,
12 Dec 97, paragraph 44 Back
Qq604-5, 607 Back