Documents considered by the Committee on 27 October 2010 - European Scrutiny Committee Contents

2 Economic policy coordination




COM(10) 525




COM(10) 527

Draft Regulation on enforcement measures to correct excessive macroeconomic imbalances in the euro area

Draft Regulation on the prevention and correction of macroeconomic imbalances

Legal baseArticle 121(6) TFEU; co-decision; QMV
Documents originated29 September 2010
Deposited in Parliament12 October 2010
DepartmentHM Treasury
Basis of considerationEM of 23 October 2010
Previous Committee ReportNone
To be discussed in CouncilNot known
Committee's assessmentPolitically important
Committee's decisionFor debate on the Floor of the House, together with two Commission Communications, already recommended for debate,[13] and four other legislative proposals dealt with in a separate chapter of this Report[14]


2.1 Two elements of the EU's common economic policies are the Economic and Monetary Union, with the eventual aim that all Member States would adopt the euro,[15] and the Stability and Growth Pact.[16] A third element is the current processes for economic policy coordination under the "Europe 2020" strategy,[17] which are based on Articles 121 and 136 TFEU:

  • the Council adopts, on the basis of Commission drafts, broad economic policy guidelines and employment guidelines;[18]
  • the broad economic policy guidelines inform annual policy recommendations to Member States agreed by the Council on the basis of a recommendation from the Commission;
  • Member States report annually on reform plans and priorities;
  • the Commission can, on its own initiative, address a public policy warning to Member States whose policies are deemed inconsistent with the broad economic policy guidelines;
  • there is a separate process for policies under the employment guidelines; and
  • eurozone Member States can agree their own guidelines, provided they are consistent with those agreed among all the Member States.

2.2 In response to the current economic problems the EU has adopted a number of measures including the European Economic Recovery Plan of 2008 for fiscal stimulus[19] and the May 2010 package of a European Financial Stabilisation Mechanism, which allows EU financial assistance to be granted to a Member State facing "severe difficulties caused by natural disasters or exceptional occurrences beyond its control", and a Special Purpose Vehicle for a voluntary intergovernmental agreement of eurozone Member States for mutual financial support, the European Financial Stabilisation Facility.[20] Such measures have been adopted whilst there has been a parallel discussion of the perception that the EU's economic policy framework has been tested by the global economic crisis, that the EU does not have a mechanism to provide crisis support to its Member States, particularly in the eurozone, and that ex ante budgetary surveillance of some countries had not always been sufficiently robust.

2.3 In May and June 2010 the Commission published two Communications: Reinforcing economic policy coordination and Enhancing economic policy coordination for stability, growth and jobs: tools for stronger EU economic governance — we have recommended these documents for debate on the Floor of the House.[21] The June 2010 European Council reiterated Heads of Government agreement on the need to address some of the issues related to economic governance.[22]

The documents

2.4 These two draft Regulations carry forward some of the proposals from the Commission's Communications. With the draft Regulation on the prevention and correction of macroeconomic imbalances, document (b), the Commission proposes a two stage process to firstly monitor and then correct such imbalances across all Member States. Macroeconomic imbalances can refer to divergences in current account positions and competitiveness trends across countries, excessive domestic demand growth which can contribute to asset price and credit bubbles and over-reliance on particular components of output, such as exports. For the purposes of the legislation imbalances are defined as "macroeconomic developments which are adversely affecting, or have the potential adversely to affect, the proper functioning of the economy of a member state or of economic and monetary union, or of the Union as a whole". In presenting the draft Regulation the Commission argues that "the emergence of large macroeconomic imbalances, including wide and persistent divergences in competitiveness trends, proved highly damaging to the European Union, and in particular to the euro, when the crisis struck" and that the mechanics of this included "low financing costs [that] fuelled misallocation of resources, often to less productive uses, feeding unsustainable levels of consumption, housing bubbles and accumulation of external and internal debt in some Member States".

2.5 In relation to prevention of imbalances the Commission proposes that:

  • there should be initial surveillance starting "with an alert mechanism that aims to identify Member States with potentially problematic levels of macroeconomic imbalances" — this "complements the macro-structural country surveillance provided for under Europe 2020";
  • the alert mechanism should consist of a scoreboard of macroeconomic and macro-financial indicators for Member States, which would be established by the Commission after consultation with Member States;
  • alert thresholds would be set and announced for each indicator, with thresholds for eurozone Member States possibly differing from those applicable to other Member States;
  • "the thresholds should be seen as indicative values to guide assessment, but should not be interpreted in a mechanical way; they should be supplemented by economic judgement and country-specific expertise";
  • there should be regular release of the results of the scoreboard, accompanied by a Commission report "containing an economic and financial assessment, putting the movement of the indicators into perspective";
  • the report would indicate "whether the crossing of lower or upper thresholds in one of more Member States signifies the possible emergence of imbalances";
  • the Commission would, on the basis of the available information, compile a list of Member States it considered to be affected by, or at risk of, imbalances;
  • as part of multilateral surveillance, the Council should discuss and adopt conclusions on the scoreboard report;
  • following this discussion the Commission would prepare country-specific in-depth reviews for those Member States affected by, or at risk of, imbalances; and
  • the in-depth reviews would take into account early warnings or recommendations from the European Systemic Risk Board, along with policy intentions from the Member State concerned, as reflected in its Stability or Convergence Programme and its National Reform Programme.

2.6 As a result of these in-depth reviews, three outcomes would be possible:

  • the Commission could propose that no further steps were necessary, if imbalances were considered unproblematic;
  • if it considered that a Member State was experiencing imbalances, the Commission would inform the Council accordingly, which could, on the basis of a proposal from the Commission, address necessary "preventive" recommendations to the Member State concerned; and
  • if the Commission considered that the Member State was affected by "excessive imbalances", it would notify the Council accordingly, so beginning an enforcement procedure to correct excessive macroeconomic imbalances.

This second stage corrective mechanism, an "Excessive Imbalance Procedure", which could be applied to any Member State, would be a new element of the economic surveillance process.

2.7 For the Excessive Imbalance Procedure the draft Regulation provides that:

  • the Council could, on a recommendation from the Commission, adopt recommendations "declaring the existence of an excessive imbalance and recommending the Member State concerned to take corrective action";
  • these recommendations would be made public and would be more detailed and prescriptive than the "preventative" recommendations provided for in the second outcome under the surveillance procedure;
  • the Member State concerned would be required to submit a corrective action plan, that would set out "specific and concrete policy actions the Member State concerned has implemented or intends to implement", to a deadline agreed by the Council when it opened the Excessive Imbalance Procedure;
  • within two months of submission of the corrective action plan, the Council would, on the basis of a Commission report, assess the corrective action plan and, if considered sufficient, adopt an opinion endorsing it;
  • if actions taken or envisaged were deemed insufficient the Council would, on the basis of a Commission proposal, invite the Member State to amend its corrective action plan within a new deadline;
  • the Commission would monitor implementation of corrective action in Member States in the Excessive Imbalance Procedure;
  • for that purpose the Member State concerned would be required to report to the Council and the Commission at regular intervals with progress reports, which would be made public;
  • the Commission could carry out "surveillance missions" to the Member State concerned to monitor implementation;
  • on the basis of a Commission report, the Council would conclude whether or not the Member State concerned had taken the recommended corrective action;
  • where the Council concluded that the Member State had taken the recommended action, the procedure would be held in "abeyance" (which "means that the Member State is making satisfactory progress ... However, due to the possibly long lags between adoption of corrective action and its effect on the ground, effective resolution of imbalances might take some time") and the monitoring process would be continued;
  • if the Council concluded that the Member State had not taken the recommended action, the Member State would remain subject to the Excessive Imbalance Procedure and the Council would adopt, on a proposal from the Commission, revised recommendations for corrective action on which the Member State concerned would be required to report, as in the monitoring process; and
  • the Excessive Imbalance Procedure would be closed once the Council, on a recommendation from the Commission, concluded that "the Member State is no longer affected by excessive imbalances".

2.8 With the draft Regulation, document (a), the Commission proposes enforcement of measures to correct excessive macroeconomic imbalances in the eurozone. It is designed to accompany the draft Regulation to establish the Excessive Imbalance Procedure, document (b). It would provide that:

  • if a eurozone Member State repeatedly failed to act on Council recommendations to address excessive imbalances, it would have to pay a yearly fine until the Council established that corrective action had been taken;
  • as a rule the fine would be 0.1% of GDP in the preceding year;
  • repeated failure would be not meeting two successive deadlines for corrective action; and
  • Council decisions concerning such fines would be made by a qualified majority of eurozone Member States, excluding the Member State.

The Government's view

2.9 The Financial Secretary to the Treasury (Mr Mark Hoban) says that the Commission's proposals would have a number of policy implications in the UK:

  • were the UK deemed to be experiencing imbalances, the Council could address policy recommendations to the Government on measures to address imbalances;
  • were the UK deemed to be experiencing excessive imbalances, the Council could adopt recommendations placing the UK in the Excessive Imbalance Procedure; and
  • further reporting and monitoring of progress would follow, to potentially include surveillance missions from the Commission.

The Minister adds however, that the draft Regulations are clear that the enforcement mechanism of fines to correct excessive imbalances would apply only to eurozone Member States.

2.10 The Minister tells us that the Government believes that heightened surveillance of macroeconomic imbalances and competitiveness is crucial if the EU is to generate stronger and more stable growth in the future and it welcomes the Commission's proposals as a useful starting point in establishing stronger surveillance of macroeconomic imbalances and competitiveness developments. He comments further that:

  • in the negotiations on the draft Regulations the Government will look to take forward the principle, from negotiations in the Van Rompuy Taskforce on economic governance, that the Council and Commission should work closely together to address imbalances;
  • in order to create more meaningful surveillance it is important to improve the ownership, responsibility and accountability for reforms to address imbalances at the Member State level — this could include greater Council involvement on, for instance, agreeing the scoreboard of indicators on the basis of a Commission recommendation;
  • the Government will seek to ensure that discussions on imbalances take place among all Member states where relevant;
  • it welcomes the Commission's proposals to allow eurozone Member States to go further with surveillance, to include sanctions if they wish;
  • the need for intra eurozone surveillance of macroeconomic imbalances is particularly strong, with a focus on developments in competitiveness and economic flexibility, because membership of the single currency necessarily removes some particular channels of adjustment;
  • the Government believes that changes to surveillance should build on existing instruments for policy coordination under the Europe 2020 strategy, where possible;
  • it welcomes the clarity in the Commission's proposals as to how the Excessive Imbalance Procedure would build on existing mechanisms for policy recommendations and warnings under Article 121 TFEU;
  • it believes that analysis of imbalances and competitiveness developments should also feed into recommendations for Member States' national obstacles or "bottlenecks" to growth in the Europe 2020 strategy, as a valuable mechanism for improving national ownership, responsibility and accountability;
  • it believes equally that praise should be given to Member States that have made significant progress, so that there are positive incentives for countries to improve, and more efforts should be made to highlight and share best practice;
  • the Government will seek to ensure that reporting under the Excessive Imbalance Procedure is not overly burdensome on Member States, including in relation to the Commission's proposed surveillance missions to Member States;
  • it will seek to ensure that analysis of imbalances from other organisations are taken on board, such as the European Systemic Risk Board, as noted in the Commission's proposals, but also including the IMF, OECD and others; and
  • it will seek to ensure that surveillance of imbalances in the EU and the eurozone complements the G20 Framework for Strong, Sustainable and Balanced Growth.[23]

2.11 The Minister says that the draft Regulations have no financial implications for the UK. But, recalling that the proposal relating to the eurozone, document (a), would establish a system of fines applicable in the eurozone, notes that such fines would "constitute other revenue, as referred to in Article 311 of the Treaty, and shall be distributed, in proportion to their share in the total gross national income (GNI) of the eligible Member States, between Member States whose currency is the euro and which are not subject to the excessive imbalances procedure...and do not have an excessive deficit as determined in accordance with Article 126(6) of the Treaty".


2.12 These draft Regulations are an important step in developing coordination of economic policy at EU level. As such we recommend that they be debated on the Floor of the House, together with the Commission Communications Reinforcing economic policy coordination and Enhancing economic policy coordination for stability, growth and jobs: tools for stronger EU economic governance which we have already recommended for debate and four related proposals which we are recommending in a another chapter of this Report.[24] And given the importance and breadth of the subject matter, the debate ought to be for three hours.

2.13 In debating these two documents Members could examine particularly the degree to which an Excessive Imbalance Procedure might inhibit the Government's freedom of manoeuvre in deciding economic policy.

13   See (31618) 9433/10 and (31776) 11807/10: HC 428-i (2010-11), chapter 8 (8 September 2010). Back

14   See (32036) 14498/10 and (32043) 14497/10 (32044) 14496/10 (32047) 14520/10: chapter 1 of this Report. Back

15   At present 16 Member States (Austria, Belgium, Cyprus, Germany, Greece, Finland, France, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia and Spain) have adopted the euro. Back

16   The Member States which have adopted the euro have Stability Programmes, whereas the other 11 Member States (including the UK) produce Convergence Programmes. Back

17   See (31373) 7110/10: HC 5-xiv (2009-10), chapter 1 (17 March 2010) and Gen Co Debs, European Committee B, 22 March 2010, cols 3-28. Back

18   See (31574) 9233/10: HC 428-i (2010-11), chapter 9 (8 September 2010) and chapter 3 of this Report. Back

19   See (30213) 16097/08: HC 19-i (2008-09), chapter 4 (10 December 2008) and Hansard, 20 January 2009, cols 626-653. Back

20   See (31611) 9606/10 (31796) 12119/10: HC 428-i (2010-11), chapter 7 (8 September 2010). Back

21   HC 428-i (2010-11), op. cit., chapter 8 (8 September 2010). Back

22   See  Back

23   See  Back

24   HC 428-i (2010-11), op. cit., chapter 8 (8 September 2010); and chapter 1 of this Report. Back

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