8 Financial assistance for Member
States
| (a)
(30541)
8642/09
COM(09)169
(b)
(30614)
—
COM(09)199
|
Draft Council Regulation amending Regulation (EC) No. 332/2002,
establishing a facility providing medium-term financial assistance for Member States' balances of payments
Recommendation for a Council Decision granting mutual assistance for Romania and Draft Council Decision providing EU medium-term financial assistance for Romania
|
| Legal base | (a) Article 308 EC; consultation; unanimity
(b) Article 119 EC; —; QMV
|
| Documents originated | (a) 8 April 2009
(b) 21 April 2009
|
| Deposited in Parliament | (a) 15 April 2009
(b) 5 May 2009
|
| Department | HM Treasury |
| Basis of consideration | Two EMs of 28 April 2009 and Minister's letter of 28 April 2009
|
| Previous Committee Report | None
|
| Discussed in Council | 5 May 2009
|
| Committee's assessment | Politically important
|
| Committee's decision | Cleared
|
Background
8.1 Article 119 EC allows the Commission to investigate the
situation of a Member State experiencing difficulties with its
balance of payments or movement of capital. It can then make recommendations
to the Member State to bring the situation to an end. If the actions
taken by the Member State or the Commission are insufficient they
may make recommendations to the Council to grant mutual assistance.
Such assistance may include:
(i) a concerted approach to international organisations;
(ii) measures needed to avoid deflection of trade
(where the Member State has maintained or reintroduced quantitative
restrictions against third parties); and
(iii) granting of limited credits by other Member
States (subject to their agreement).
8.2 Council Regulation (EC) No. 332/2002 established
a Community medium-term facility for balance of payments support
for Member States outside the eurozone. Pursuant to Article 119
EC this facility can be activated by the Commission, in agreement
with the Member State concerned, or at the direct request of the
Member State. The facility can be mobilised when a Member State
is "in difficulties or seriously threatened with difficulties
as regards its balance of payments either as a result of an overall
disequilibrium in its balance of payments or as a result of the
type of currency at its disposal". When agreement has been
reached, through a Council Decision, to grant a loan to a Member
State, the Commission, through the European Central Bank (ECB),
borrows the money on financial markets and lends it on to the
Member State, with accompanying economic policy conditions, with
a view to stabilising the balance of payments.
8.3 Regulation (EC) No. 332/2002 replaced Regulation
(EEC) No. 1969/88, in which the total amount outstanding of the
facility was limited to €16 billion (£14.97 billion).
A lower ceiling of €12 billion (£11.20 billion) was
determined, on the one hand, in the light of the reduction, following
introduction of the euro, in the number of Member States that
could potentially access the facility and, on the other, taking
into account the then forthcoming enlargements of the Community.
This limit was raised to €25.00 billion (£23.30 billion)
in November 2008.[30]
The European Council of 19-20 March 2009 endorsed the Commission's
intention to propose a doubling of the limit to €50.00 billion
(£46.50 billion).[31]
8.4 During the current economic and financial
crisis assistance from the facility has been granted to Hungary
and Latvia, following agreement by their governments with the
International Monetary Fund on assistance packages.[32]
The documents
8.5 The draft Regulation, document (a), is to
amend Council Regulation EC 332/2002 so as to increase the limit
of the financial assistance facility to €50.00 billion as
foreshadowed by the European Council.
8.6 The amending Regulation would also make further
changes to the procedure and implementation of such financial
assistance, with provisions:
(i) seeking, in the light of experience gained,
to clarify the respective roles and responsibilities of the Commission
and the Member State concerned by ensuring that a Member State
wishing support discusses financial needs with the Commission
and submits a draft adjustment programme;
(ii) for the Council to examine this adjustment
programme alongside the situation in the Member State and to decide
(as a rule during the same meeting) on whether or not to grant
a loan or appropriate financing, along with its amount and duration,
on the economic policy conditionality attached to any assistance,
set with a view to restabilising the balance of payment situation,
and on the techniques for disbursing the loan or financing facility;
(iii) to enshrine what has occurred in previous
use of the facility, where the Commission and Member State concerned
have concluded a Memorandum of Understanding detailing the economic
conditionality laid down by the Council;
(iv) to ensure that the Council and the Commission,
in collaboration with the Economic and Financial Committee, use
the adjustment programme submitted by the Member State to monitor
the application of support and fulfilment of conditionality;
(v) for the Commission, on the basis of reviewing
the situation and actions of a Member State in line with its adjustment
programme and after receiving an opinion from the Economic and
Financial Committee, to decide on the release of further instalments
of a loan;
(vi) further clarification, for operational reasons,
on rules guiding the financial management of the Community assistance
— primarily obliging a Member State to open a special account
with its Central Bank for the management of the Community financial
assistance and for the Member State to transfer principal and
interest due under the loan to an account with the European Central
Bank seven TARGET2[33]
business days prior to the corresponding due dates;
(vii) allowing the European Court of Auditors
to carry out any financial controls or audits that it considers
necessary in relation to the management of this assistance; and
(viii) giving the Commission, including the European
Anti-Fraud Office, the right to send officials (or authorised
representatives) to carry out technical or financial controls
or audits that it considers necessary in relation to the management
of the assistance.
8.7 In document (b) the Commission makes a Recommendation
that the Council agrees medium-term financial assistance to Romania
and presents a draft Decision to formalise such an agreement.
This follows an application in March 2009 by Romania for International
Monetary Fund and Community assistance. In the document the Commission
provides details of:
(i) the approach to the Fund and the Community;
(ii) recent macroeconomic developments;
(iii) public finances;
(iv) financial markets;
(v) balance of payment and external financing
requirements; and
(vi) Community support under the medium-term
facility for balance of payments, as part of an international
effort and the main elements the Community support programme.
8.8 The Commission says that:
(i) Romania's strong growth over the recent years
was driven mainly by domestic demand, fuelled by strong wage growth
and a foreign-financed boom in credit;
(ii) high external borrowing has led to a rapid
build-up of external debt;
(iii) widespread foreign currency-denominated
domestic lending has increased the private sector's balance sheet
vulnerability to sudden shifts in the exchange rate;
(iv) domestic demand pressures have been further
exacerbated by pro-cyclical fiscal policies — Romania pursued
these during the boom years of 2005-2008, and the headline government
deficit increased from 1.2% of GDP in 2005 to 5.4% of GDP in 2008,
largely due to weak budgetary planning and execution;
(v) the global economic downturn and increased
risk-aversion has resulted in a significant tightening of capital
flows to Romania and pressure on the exchange rate has increased;
(vi) following the several years of strong growth,
activity decelerated sharply in the fourth quarter of 2008, which
came alongside a virtual stop in bank lending;
(vii) growth is expected to turn negative in
2009;
(viii) although the current account deficit narrowed
slightly, it remained at the high level of 12.3% of GDP in 2008;
(ix) foreign direct investment financed more
than half of the current account deficit, with the remainder being
financed through external debt, which increased to around 53%
of GDP;
(x) the Romanian banking sector is largely foreign
owned and banks with majority foreign capital (including foreign
bank branches) control around 88% of total banking sector assets;
(xi) the loan-to-deposit ratio increased to 122%
in 2008 following rapid credit growth and the expansion of mainly
foreign currency-denominated loans (representing around 59% of
total domestic credit to the private sector) made the banking
sector heavily dependent on foreign financing; and
(xii) although the banking sector is currently
well capitalised, with the capital adequacy ratio at 12.3%, financial
stability could come under strain given the expected pick-up in
non-performing loans.
8.9 In summary, the Commission says that:
(i) Romania's economic boom in recent years was
characterized by the emergence of large external imbalances and
an unsustainable build-up of external liabilities;
(ii) its financial markets have been under continued
pressure since the beginning of October 2008;
(iii) external financing is expected to remain
under significant pressure for some time; and
(iv) total financing need in the period up to
the first quarter of 2011 is estimated at €20.00 billion
(£18.60 billion).
8.10 Against this background, the Commission:
(i) is of the opinion that there is a serious
threat to the Romanian balance of payments;
(ii) believes that it is appropriate for the
Community to provide support to Romania of up to €5.00 billion
(£4.60 billion) from the its support facility to underpin
Romania's balance of payments sustainability; and
(iii) proposes the draft Decision to that effect.
The Community assistance would come in conjunction
with support of €13.00 billion (£12.10 billion) from
the International Monetary Fund and €1.00 billion (£0.90
billion) from the World Bank. The European Bank of Reconstruction
and Development and other multilateral creditors stand ready to
provide a further €1.00 billion (£0.90 billion), bringing
the total package to €20.00 billion (£18.60 billion)
over the period to the first quarter of 2011. In addition, the
parent institutions of the nine largest foreign-owned banks incorporated
in Romania jointly committed to maintaining their overall exposures
to the country and agreed to support their subsidiaries in order
to preserve their current good financial standing over the programme
period.
8.11 The Community assistance would be managed
by the Commission, which would verify at regular intervals that
the economic policy conditions attached to the assistance were
being fulfilled. The main elements of the Community programme,
consistent with the conditions of the International Monetary Fund
programme, include:
(i) fiscal consolidation, with a government deficit
target of 5.1% of GDP in 2009, 4.1% in 2010 and below 3% in 2011
— through cuts in the public sector wage bill and general
government expenditure;
(ii) fiscal governance reform, including a fiscal
responsibility law, limits on in-year budget revisions, fiscal
rules and pensions reform;
(iii) enhanced monetary and financial sector
policies through amendments to banking laws, strengthening financial
supervision and the powers of the National Bank of Romania and
the administrators of banks placed in special administration;
and
(iv) structural reforms including improving the
efficiency and effectiveness of public administration, enhancing
the quality of public expenditure, sound use and increased absorption
of Community funds, the improvement of the business environment
and tackling undeclared work.
This programme is reflected in the economic policy
conditionality included in the draft Decision — the conditionality
attached to loan disbursements would be set out in a Memorandum
of Understanding to be concluded with the Romanian authorities.
The Government's view
8.12 In his Explanatory Memorandum on the draft
Regulation to amend Council Regulation (EC) 332/2002 governing
financial assistance for Member States, document (a), the Economic
Secretary to the Treasury (Ian Pearson), telling us that the Government
is in favour of the proposal, says that:
(i) the Government is of the view that in the
current exceptional climate it is vital to ensure that the Community
is fully able to support Member States in need, ensuring wider
financial stability and protecting the single market;
(ii) it is therefore appropriate to further raise
the ceiling on this facility in view of any future demand that
may be placed upon it;
(iii) the Government views the additional amendments
as appropriate and necessary in ensuring that the process for
utilising balance of payments support is as smooth and as transparent
as possible, including the clarification of procedures relating
to the transfer of loan and interest repayments to the European
Central Bank;
(iv) the Government welcomes the obligation to
submit a draft adjustment programme outlining the proposed steps
that a Member State would take in utilising support provided by
the Community with a view to restabilising the situation;
(v) it is vital that the Council, Commission
and Economic and Financial Committee are able to make decisions
on providing assistance based on a clear and credible adjustment
programme;
(vi) such a programme is useful in the appropriate
monitoring and further disbursement of assistance;
(vii) the Government welcomes codification of
provisions that obliging the Commission and Member State to complete
a Memorandum of Understanding detailing conditionality laid down
by the Council — while this has been regular practice in
previous uses of the facility, it is appropriate to ensure that
a consistency of approach is applied in future cases and allows
full and transparent disclosure of the conditionality that applies
to a Member State in use of the facility; and
(viii) the Government is in full support of ensuring
that Community funds are handled with integrity and welcomes the
proposal to allow officials or representatives of the European
Court of Auditors, the Commission and the European Anti-Fraud
Office to carry out appropriate investigations or controls, in
order to ensure that support provided under the medium-term assistance
facility is being managed appropriately.
8.13 The Minister says that Article 308 EC is
used as the legal base for the draft Regulation because Regulation
(EC) No. 332/2002 is itself based on that provision. He explains
that the Treaty does not provide for a system of "mutual
assistance" for Member States facing balance of payments
difficulties, envisioned under Articles 119 or 120 EC. Consequently,
and pursuant to Article 3(1)(k) EC, on strengthening economic
and social cohesion, Article 308 was used to create such a system
of mutual assistance and is invoked as and when it is deemed necessary
to make any amendments to it.
8.14 The Minister also tells us that there are
no direct financial implications for the UK arising from this
proposal — loans provided under this facility are financed
by capital markets and underwritten by the Community budget, which
would only be called upon in the case of a default in the repayment
of the loan.
8.15 In his Explanatory Memorandum about the
proposal relating to Romania, document (b), the Minister says
that the Government:
(i) is in full support of providing assistance
to Romania through the Community medium-term facility for balance
of payments; and
(ii) believes that in the current economic climate
the Community must act in a decisive and coordinated manner to
support the needs of all Member States and protect the functioning
of the single market.
8.16 The Minister tells us, both in the relevant
Explanatory Memorandum and in his letter, that:
(i) preparation by the Commission of the draft
Regulation, document (a), following political agreement at the
Spring European Council, took longer than expected (it was not
published until 8 April 2009);
(ii) but after discussion by the Economic and
Financial Committee on 20 and 21April 2009 and by officials on
22 April 2009, it was to go to the ECOFIN Council on 5 May 2009
for unanimous agreement;
(iii) the Government regrets that it has not
been able to give Parliament sufficient advance notice of the
detail of the proposed amendment to Regulation (EC) No. 332/2002
ahead of the Council vote; and
(iv) it believes, however, that it is necessary
to signal its support for such an amendment to send a positive
message on the Community's will and ability to act decisively
to support its Member States in the current climate.
In the Explanatory Memorandum on document (b) and
in his letter the Minister tells us that:
(v) Romania's application for funds under the
Community support facility was submitted and discussed within
a very short time frame;
(vi) the document was received by the Government
on 22 April 2009;
(vii) such proposals and related documents are
not published until the details of the Community loan are agreed,
given their market sensitive nature and parallel negotiations
with other donors;
(viii) the Commission was seeking a decision
from the ECOFIN Council on 5 May 2009;
(ix) the Government regrets that it has not been
able to give Parliament sufficient advance notice of the detail
of the Community assistance package ahead of the Council vote;
and
(x) it believes, however, that it is necessary
to provide rapid support to Romania in order for it to be effective,
and intended to vote in favour of the proposal at the ECOFIN Council.
Conclusion
8.17 We have no questions to raise on the
substance of these two documents and clear them.
8.18 But, whilst we understand the need for
speed, and an element of confidentiality in the case of Member
State applications for financial support, in processing these
proposals we regret that we were not enabled to scrutinise the
documents before adoption by the Council. So we urge the Government,
not for the first time, to give us as much notice as possible
on any future similar proposals.
30 (30106) 15105/08: see HC 16-xxxvi (2007-08), chapter
24 (26 November 2008). Back
31
See http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/106809.pdf. Back
32
(30093) 14949/08: see HC 16-xxxiv (2007-08), chapter 18 (5 November
2008) and (30332) 5223/09: see HC 19-iv (2008-09), chapter 18
(21 January 2009). Back
33
As defined in the Guideline ECB/2007/2 of 26 April 2007 on Trans-European
Automated Real-time Gross settlement Express Transfer System (TARGET2),
(OJ No. L 237, 8.9.07, p. 1). Back
| 
