Select Committee on European Scrutiny Second Report


COM(01) 224


Commission Recommendation for the 2001 broad guidelines of the economic policies of the Member States and the Community.

Council Recommendation for the 2001 broad guidelines of the economic policies of the Member States and the Community.

Legal base: Article 99(2) EC; qualified majority voting
Document originated: (a) 25 April 2001
(b) 15 June 2001
Forwarded to the Council: (a) 27 April 2001
Deposited in Parliament: (a) 20 June 2001
(b) 11 July 2001
Department: HM Treasury
Basis of consideration: (a) EM and Minister's letter of 20 June 2001
(b) EM of 19 July 2001
Previous Committee Report: None
Discussed in Council: 15-16 June 2001
Committee's assessment: Politically important
Committee's decision: For debate in European Standing Committee B


3.1 Article 98 EC requires Member States to conduct their economic policies with a view to contributing to the achievement of the objectives of the Union and in the context of the Broad Economic Policy Guidelines (BEPGs). Article 99 EC requires Member States to regard their economic policies as a matter of common concern and to co-ordinate them within the Council. To that end, Article 99 (2) requires the Council (ECOFIN), acting by a qualified majority on a recommendation from the Commission, to formulate a draft for the BEPGs of the Member States and the Community, and to report its findings to the European Council. The European Council then discusses a conclusion on the basis of the report from ECOFIN; this conclusion is used by ECOFIN as the basis of a recommendation formally setting out the guidelines; and finally the recommendation is adopted by ECOFIN, acting by qualified majority. This is now an annual exercise, with the BEPGs at the centre of the economic policy co-ordination process in the EU. We reported on and cleared the BEPGs for 2000 on 21 March 2001.[2]

The documents

3.2 Document (a) sets out the Commission's Recommendation for the 2001 BEPGs. As in previous years, the guidelines are divided into two parts: General Economic Policy Guidelines applicable to all Member States and Country­Specific Policy Guidelines applicable to individual Member States. The guidelines are set in the context of the Commission's Spring 2001 economic forecasts and against the Commission's overall assessment that economic performance in 2000, the second year of Economic and Monetary Union, had been good.

3.3 The Commission notes that in 2000 the euro area experienced the strongest economic growth and lowest unemployment for a decade and that the non-euro area showed robust economic growth. However, the Commission also recognises that external economic conditions have deteriorated since the previous guidelines were adopted and that the EU is being adversely affected by the global economic slowdown.

3.4 The Commission identifies three factors contributing to the global slowdown: a combination of high and volatile oil prices during 2000; economic slowdown in the US and Japan; and sharp falls in global equity markets. As regards its spring forecasts for economic growth, the Commission expects a growth rate of around 2% in 2001-02 in the euro area. The Commission considers the non-euro area to be in a good position to weather the deteriorating external economic environment.

3.5 According to the Commission, the key challenges for European policy are: to maintain the expansion in growth and jobs; to improve the basis for future growth and employment; and to prepare for the impact of ageing populations.

3.6 To meet these challenges, the Commission proposes a series of specific actions under the following broad headings:

    "— ensure growth and stability-oriented macro-economic policies;

    — improve the quality and sustainability of public finances;

    — invigorate labour markets;

    — ensure efficient product (goods and services) markets;

    — promote the efficiency and integration of the EU financial services market;

    — encourage entrepreneurship;

    — foster the knowledge-based economy; and

    — enhance environmental sustainability."

3.7 The country-specific guidelines are divided into three parts:

    "— budgetary policy;

    — product and capital markets; and

    — labour markets."

3.8 In her Explanatory Memorandum of 20 June 2001, the Economic Secretary to the Treasury (Ruth Kelly) summarises the Commission's guidelines for the UK as follows:

    "Budgetary Policy: The Commission notes that UK public finance projections show a deficit of around 1% of GDP emerging in 2003­2004. However, it also recognises that these projections are based on a cautious growth assumption. It notes that fiscal loosening between 2000­2002 is unlikely to compromise economic stability and that expenditure plans have increased the resources to public sector investment. Over the long term, the Commission comments that public finances are sustainable on current policies. It recommends the UK should:

      'i ensure that a general government surplus of at least 0.5 per cent of GDP is achieved in 2001­02 as projected in the 2001 budget;

      'ii. for the general government balance, ensure, in preparing the budget, that an outturn in 2002­03 is achieved that, as planned, is close to balance. In particular, the expected ratio of public sector current expenditure to GDP should not exceed, in 2002­03, the 37.3 per cent of the Budget 2001 projections; and

      'iii. allow public investment, net of depreciation, to double, as planned, as a share of GDP, between 2000­01 and 2003­04 while, at the same time, ensuring that the terms of the Stability and Growth Pact continue to be respected.'

    "Labour Markets: The Commission notes that labour market performance in the UK is among the strongest in the EU, with robust employment growth and share of long­term unemployment among the lowest in the EU. It recognises the measures taken to improve tax and benefit systems to make work pay. It also recognises that further challenges remain in lowering the level of economic inactivity; in particular it recommends the UK:

      'i reinforce active measures targeted at those communities and individuals most prone to the risk of concentrated or long­term unemployment and inactivity, and reform passive benefit schemes to provide people who are able to work with the opportunities and incentives to do so.'

    "Product markets and the knowledge­based economy: The Commission notes that the UK is well advanced in terms of liberalising goods markets, with an economic environment favourable to business and entrepreneurship. It recognises measures taken to stimulate R&D, but considers that a further challenge remains in boosting the UK's relatively low level of productivity. As such, it recommends the UK:

      'i take measures to address the relatively low level of productivity, in particular by increasing competition in sectors such as retail banking services, car retailing and postal services and by increasing the supply of skilled ICT personnel; and

      'ii ensure that the announced investment to improve the transport infrastructure and to improve the quality of public transport is delivered in practice and ensure that there is adequate co­ordination between different public bodies, regulators and private firms.'

    "Capital Markets: The Commission notes that financial markets in the UK remain the most developed in the EU. It also recognises the efforts to further develop the risk capital market, and welcomes developments in promoting public private partnerships, reforming financial market supervision, and improving competition in the banking sector. It sees the main priority for the UK as to:

      'i further ease constraints on pension funds which may limit their investment in risk capital.'"

3.9 Document (b) is the revised text as adopted by ECOFIN on 15 June 2001. The substantive changes include: allowing more account to be taken of the general economic situation when assessing whether Member States have followed the budgetary recommendations; giving more emphasis to raising the productive potential of EU economies; noting that wages in Member States should reflect different economic and employment conditions; and including a reference to targeted reforms of the tax and benefit system. More importantly, the UK­specific budgetary guideline that public sector current expenditure should not exceed 37.3 of GDP has been removed.

The Government's view

3.10 The Minister says:

    "The Broad Economic Policy Guidelines set out the Commission's views on economic policy priorities for the year ahead. The BEPGs are non­binding on Member States. Earlier this year, the Council adopted a recommendation on Ireland, arguing that it was in breach of the 2000 Broad Economic Policy Guidelines. This was the first time such a recommendation has been issued. Article 249 of the Treaty states that 'recommendations and opinions shall have no binding force'. Therefore there are no direct policy implications arising from them for the UK.

    "The UK has been keen to develop the role of the BEPGs. In particular, the UK supported that the BEPGs should follow up the conclusions of Spring European Councils, pursuing a strategy of sound macroeconomic policy and structural reforms.

    "As such, the Government shares the Commission's emphasis on the strategic goal agreed at Lisbon European Council and extended in light of the Stockholm Council. This requires a strategy of sound macroeconomic policies and comprehensive reforms of labour, product and capital markets. The Government's policies for achieving these are: sound macroeconomic policies based on well­managed public finances and low inflation, economic and structural reform, improvements in the workings of goods and services markets, modernisation of the labour market through improved training and better incentives to work for the low paid, better regulation and promotion of entrepreneurship.

    "The UK has made it clear that the Commission had exceeded its remit in proposing a UK­specific guideline that the expected ratio of UK public sector current expenditure to GDP should not exceed 37.3 per cent. This guideline was subsequently removed from the final BEPGs adopted by the Council. Decisions on the level of public spending are for member states, and the Government's fiscal rules ensure sound and sustainable public finances while enabling increased investment in priority public services."


3.11 The Broad Economic Policy Guidelines are non-binding on Member States. Nevertheless they are at the centre of the economic policy co-ordination process in the European Union. As regards the specific guidelines for the United Kingdom, we express our surprise and concern that the United Kingdom's Broad Economic Policy Guidelines at first included a limit of 37.3 per cent for the expected ratio of United Kingdom public sector current expenditure to Gross Domestic Product. We welcome the subsequent redrafting of the Broad Economic Policy Guidelines and the removal of that guideline.

3.12 The Broad Economic Policy Guidelines were adopted by ECOFIN on 15 June 2001. Although the Broad Economic Policy Guidelines were prepared and agreed against the background of a weakening world economy, the prospects for the global economy have deteriorated significantly since then, especially over recent weeks, and the balance of risk between inflation and recession has shifted markedly towards recession. Although the Broad Economic Policy Guidelines have already been adopted, we recommend that the documents be debated in European Standing Committee B, since it will provide an opportunity for the House to debate European Union economic policy coordination, which is especially important given the deterioration in the prospects for the global economy.

2  (22218) 6561/01; see HC 28-ix (2000-01), paragraph 13 (21 March 2001). Back

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Prepared 2 November 2001