House of Commons - European Scrutiny Committee

European Scrutiny Committee Contents

1 Economic recovery

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7084/09

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COM(09) 114

Commission Communication for the Spring European Council: Driving European Recovery

Legal base —

Document originated 4 March 2009

Deposited in Parliament 6 March 2009

Department HM Treasury

Basis of consideration EM of 19 March 2009

Previous Committee Report None

Discussed in Council European Council 19-20 March 2009

Committee's assessment Politically important

Committee's decision For debate in European Committee B after evidence session with Minister

Background

1.1 In recent months the Community has adopted a number of measures and plans designed to assist in the recovery of its economy. An overall approach, outlined in the Commission Communication A European Economic Recovery Plan, was endorsed by the European Council of 11-12 December 2008.[1]

The Document

1.2 The Commission presented this Communication in advance of the Spring European Council of 19-20 March 2009 to set out its view of the next steps in dealing with the economic crisis and facilitating recovery of Community markets. It builds on measures already taken through in implementation of the European Economic Recovery Plan; it is not a proposal, rather it details the general direction of proposals which the Commission will be making in the coming months.

1.3 After a scene-setting introduction the Commission first discusses "Restoring and maintaining a stable and reliable financial system" under the headings "Rebuilding confidence and lending" and "Responsible and reliable financial markets for the future". In this section the Commission:

urges Member States to act quickly to restore confidence and get bank lending flowing again, in particular by implementing the guidance the Commission issued on 25 February 2009 on removing impaired assets from banks, balance sheets;[2]
endorses — and asks heads of Government to endorse — the key principles on financial regulation and supervision set out by the de Larosière High Level Group;[3]
calls for a supervisory system combining stronger oversight at Community level with national supervisors taking forward the supervision of firms;
backs the de Larosière proposal to set up an early warning body under European Central Bank auspices to identify and tackle systemic risks; and
supports the de Larosière recommendation for a core set of regulatory standards throughout the Community.

1.4 The Commission says that it will be developing proposals to establish a new Community financial supervision system in order to suggest a reform programme with five key principles:

providing the Community with a supervisory framework that detects potential risks early, deals with them effectively before they have an impact and meets the challenge of complex international financial markets;
filling gaps where Community or national regulation is insufficient or incomplete, based on a "safety first" approach;
ensuring that Community investors, consumers and SMEs can be confident about their savings, access to credit and their rights as concerns financial products;
improving risk management in financial firms and aligning pay incentives with sustainable performance; and
ensuring more effective sanctions against market wrongdoing.

It sets out its intentions more fully in Annex I to the Communication.

1.5 The Commission next discusses "Supporting the real economy" under the headings "Implementing the European Economic Recovery Plan", "The Single Market as a lever for recovery" and "Renewing the European economy beyond the crisis". Here the Commission:

summarises the first results of the European Economic Recovery Plan, estimating that the overall fiscal support to the economy from Community and national measures, including from the impact of automatic stabilisers, amounts to at least 3.3% of GDP, or approximately €400 billion (£357 billion), over the 2009-2010 period;
noting that Annex II to the Communication summarises some 500 national measures, concludes that they are broadly in line with the principles that recovery action should be timely, targeted and temporary;
promotes the role internal market can play as one of the key drivers for recovery, inviting Member States to make full use of the flexibilities available under existing Community rules — including accelerated public procurement procedures to facilitate public investment and a temporary framework for state aid measures to help companies access finance and insurance, where these are difficult to obtain from the banking and private sectors;
recognises the need for further work in the Community to improve the business environment, supporting small and medium sized enterprises and reducing administrative burdens;
argues against Member States retreating to national markets and protectionism, instead encouraging the maximisation of positive spillovers by use of a coordinated Community response;
calls on the Community to endorse clear principles for further action, in line with the single market, open global trade, building a low carbon economy and returning to sustainable public finances as soon as possible; and
points to the existing frameworks of the European Economic Recovery Plan, the Stability and Growth Pact and the Lisbon Strategy, which it argues together form the best way to ensure that short-term structural measures taken by Member States are consistent with medium and long-term sustainability.

1.6 In Annex II, relevant to this section, the Commission gives, in addition to the details of measures being taken by Member States in response to the European Economic Recovery Plan, an overview and some general insights followed by a closer look at individual policy areas, separated into measures aimed at supporting industrial sectors, businesses and companies, those aimed at supporting a good functioning of labour markets, measures to support investment activities and measures to support household purchasing power. In Annex III to the Communication, also relevant to this section, the Commission provides further guidance on how Member States can plan possible recovery measures which are compatible with relevant Community legislation.

1.7 The Commission's third discussion concerns "Supporting people through the crisis" under the headings "Alleviating the human cost of the crisis" and "An Employment Summit for Europe". In this section the Commission:

calls for Member States to step up efforts to tackle unemployment — which is estimated to approach 10% in 2010 — and social exclusion;
argues that these efforts will also help maintain demand and prevent further job losses and that they should be a central part of national stimulus plans;
invites Member States to use measures such as financial support for temporary working-time arrangements, boosting income support for unemployed people, lowering non-wage costs for employers and boosting investment in skills and retraining;
calls, at Community level, for rapid approval of its proposal to allow an immediate increase of €1.8 billion in advance payments under the European Social Fund;[4] and
sets out a road map towards the planned European Employment Summit in Prague in May 2009, which it hopes will agree on further measures to save jobs and create them in the sectors of the future, saying it will organise a series of workshops with all key stakeholders in different Member States in the approach to the summit.

1.8 The Commission's final discussion concerns "Promoting global recovery: the European contribution to the G20 Summit". The Commission:

asks Heads of Government to agree on a number of areas where the Community can give a firm lead at the London G20 Summit;
calls on the Community to make a united push to improve the global financial and regulatory system, focusing on better transparency and accountability, appropriate regulation of all financial actors, tackling difficulties caused by uncooperative jurisdictions, boosting international supervisory cooperation and reforming the International Monetary Fund, the Financial Stability Forum[5] and the World Bank; and
urges the Community to promote global recovery by calling for a review of the global impact of fiscal measures taken so far, by promoting open trade and by inviting the London Summit to launch a multilateral initiative on trade finance and to reaffirm the Washington commitment to the Millennium Development Goals.

1.9 The Commission concludes its Communication by inviting the Spring European Council to:

"Agree on the need for a new package of financial sector reform measures including a new supervisory framework for the EU's financial sector, based on the work of the de Larosière group, and to decide on the main elements of this new framework at the June European Council, on the basis of further proposals from the Commission; and to invite the Council and European Parliament to give priority to the adoption of the proposals on financial services regulation to be proposed by the Commission in the coming months;

"Invite Member States to take the necessary action to ensure long-term financial stability as soon as economic conditions allow, in line with the revised Stability and Growth Pact;

"Invite Member States to expedite the implementation of their national recovery plans and structural reforms;

"Invite Member States to apply the common principles set out in section 3.2 when designing and implementing measures to strengthen the real economy;

"Invite Member States to effectively support people through the crisis, drawing on the elements for action outlined in this Communication;

"Endorse the process for the preparation of the European Employment Summit in May;

"Approve the joint European position for the G-20 Summit in London."

The Government's view

1.10 The Financial Services Secretary to the Treasury (Lord Myners) says that the Government broadly welcomes the publication of the Commission's Communication and looks forward to discussing it with other Member States as an important contribution to the Spring European Council and other meetings including the informal ECOFIN Council on 3-4 April 2009. He adds that the Government will carefully consider each of the policy actions to which the Communication refers as and when the Commission presents them.

1.11 The Minister then comments in more detail, first saying, in relation to "Restoring and maintaining a stable and reliable financial system" that the Government:

has welcomed the Commission's guidelines "Treatment of Impaired Assets in the Community Banking Sector" in its Communication of 25 February 2009[6] and has been working closely with the Commission while developing its ideas for the UK Asset Protection Scheme;
has suggested to G20 members, following the Commission guidelines, a set of common principles on dealing with impaired assets to ensure coherence and facilitate wider international cooperation;
as implementation of the UK Asset Protection Scheme is conditional on state aid approval, is working with the Commission towards that goal; and
welcomes the de Larosière High Level Group's report and the Commission's discussion of it in this Communication.

1.12 The Minister comments further on the de Larosière report and the Commission's comments, saying that:

these are both a good basis for further discussions;
following publication of the report, the Chancellor of the Exchequer (Mr Alistair Darling) wrote to his ECOFIN Council colleagues to outline the Government's views on the future of Community financial regulation and supervision;
he set out a series of principles within which to consider any reforms — prudential and conduct-of-business issues cannot be separated and need to be considered together, supervisory and crisis-management arrangements need to be consistent and aligned, Community arrangements need to fit with global practice, through all of this the Community must continue to support the development of open, global markets and supervision and regulation should be independent but accountable;
he proposed, in the light of these principles, establishing an independent macro-economic early warning system, a new independent body to set detailed technical financial rules and improve supervisory standards, new rules for clearing and settlement systems, and a fundamental review of the single market's cross-border business models; and
the Government looks forward to discussing these issues with partners at forthcoming Community meetings.[7]

1.13 In relation to "Supporting the real economy" the Minister says that the Government:

agrees with the Commission that the Community, building on the European Economic Recovery Plan, should continue to focus on what more can be done to stimulate national economies and enable families, workers and businesses to get through the downturn and on track for a sustainable path to recovery and growth;
strongly supports the emphasis of the single market as one of the key drivers of success;
welcomes the call to use accelerated public procurement procedures to facilitate public investment and supports cautioning against use of such measures for protectionist motivations and undermining principles of value for money and competition;
supports the flexibilities in the temporary Community state aid framework to support the real economy in a timely targeted and temporary manner;
believes it is now important for Member States to respect those principles and for the Commission to enforce the rules against illegal actions;
welcomes the Commission's focus on better regulation, in particular its work on reducing administrative burdens;
supports the Commission's call to give priority to the needs of small and medium sized enterprises, and in particular to speed up the implementation of the Small Business Act[8] — small and medium sized enterprises are integral to the Community's economic recovery as they are the highest contributors to overall employment and growth;
believes it is important that the Community focuses on short-term actions that support the long-term fundamental objectives, in particular on ensuring a global competitive internal market and using the key opportunities for the Community in the 21st century, such as in environmental technologies;
welcomes the Commission's call for a more coordinated approach through introduction of common guidelines and principles for designing sectoral measures in line with existing frameworks;
particularly welcomes the call for sectoral measures to be timely, targeted and temporary;
supports the long-term objectives on the Lisbon Strategy — maintaining the openness of the Community's single market, maintaining openness with its trading partners and respecting international commitments, avoiding discrimination and the taking into account of spillover effects and ensuring cost effectiveness whilst minimising burdens on tax payers and competitive distortions; and
supports calls for regular reviews of these measures, particularly in the context of the state aid framework — market monitoring and sector enquiries could usefully contribute into this review process over the medium-term.

1.14 On "Supporting people through the crisis" the Minister says that the Government:

notes the urgency reflected in forecasts of unemployment;
supports the Commission's appeal for increased efforts to tackle unemployment and agrees that efforts would have positive consequences for other parts of the economy;
broadly welcomes the Commission's suggestions for the design of national employment measures;
agrees that workers made redundant through the economic downturn should be offered tailored support to retrain in the context of moving towards the low-carbon economy of the future, where new skills will be required;
supports measures to alleviate the human cost of the crisis, whilst maintaining focus on long-term investment in skills and innovation for a low carbon recovery;
looks forward to participating in the Commission's proposed European Employment Summit in May 2009;
believes that, while short-term measures in response to the crisis should rightly be taken in the context of the individual labour market conditions of Member States, they should remain consistent with long-term structural reform needs; and
concurs with the Commission's view that active labour market policies can combine economic efficiency with fairness, by ensuring that unemployed workers can swiftly re-enter the labour market while providing support for those who cannot work.

1.15 Turning to "Promoting global recovery: the European contribution to the G20 Summit" the Minister says that the Government:

believes that the Community must act to shape the global agenda and so lay the foundations for a sustainable economic recovery and for a new era of international partnership;
looks forward to discussing the Commission's proposals for the Community contribution to the London Summit, along with other contributions to the debate at the Spring European Council — the world's leading economies can come together in London to agree a package of internationally coordinated measures to restore stability and set a course for a sustainable recovery;
welcomes the drive for commitment by G20 members to ensure that institutions are subject to appropriate regulation and oversight;
strongly agrees, in the context of the Commission's belief that the Community should make a joint contribution to increase the International Monetary Fund's resources, that Fund's resources need to be urgently increased, but believes that Member States' contributions should be individually presented as part of the increase;
agrees that a reformed and internationally coordinated system of financial regulation that closes regulatory gaps is urgently needed — world leaders should work closely to address problems and coordinate actions to these ends;
believes that countries in need should be assisted by those in a position to help; and
believes the Community must stand ready to do whatever it takes to support those in need in Europe, recognising that the situation varies from country to country; and this requires significant action within the Community, working closely with international partners.

Conclusion

1.16 This document points the way the Commission envisages the next stages of Community action to promote economic recovery should develop. Although the House has recently debated the European Economic Recovery Plan,[9] we recommend that this document should be debated in European Committee B, with a focus particularly on the section "Restoring and maintaining a stable and reliable financial system". However, before that debate takes place we wish to take evidence from the Minister (Lord Myners) on the Government's expectations and ambitions in relation to this matter, following the European Council of 19-20 March 2009.[10]

1.17 Subsequently, Members of the European Committee might wish, in the light of the Commission Communication's comments on the de Larosière report and of the oral evidence we take, to examine:

whether what is suggested is the right degree of regulation, whether it goes from too light to too heavy; and
whether supervision should be primarily at national, Community or even international level.

1.18 Finally, we draw this document to the attention of the Treasury Committee, primarily in relation to the comments in it on the de Larosière report.

1 (30213) 16097/08: see HC 19-i (2008-09), chapter 4 (10 December 2008) and HC Deb, 20 January 2009 , cols.626-53. Back

2 See http://ec.europa.eu/competition/state_aid/legislation/impaired_assets.pdf. Back

3 See http://ec.europa.eu/internal_market/finances/docs/de_larosiere_report_en.pdf. Back

4 (30229) 16543/08 (30230) 16548/08: see HC 19-ii (2008-09), chapter 16 (17 December 2008). Back

5 See http://www.fsforum.org/. Back

6 http://ec.europa.eu/competition/state_aid/legislation/impaired_assets.pdf. Back

7 For the Chancellor's letter see http://www.hm-treasury.gov.uk/d/chxletter_ecofin030309.pdf. Back

8 See http://ec.europa.eu/enterprise/entrepreneurship/sba_en.htm. Back

9 See footnote 1. Back

10 See http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/106809.pdf, paragraph 5. Back