2 Economic policy coordination
| (a)
(32045)
14512/10
COM(10) 525
(b)
(32046)
14515/10
COM(10) 527
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Draft Regulation on enforcement measures to correct excessive macroeconomic imbalances in the euro area
Draft Regulation on the prevention and correction of macroeconomic imbalances
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| Legal base | Article 121(6) TFEU; co-decision; QMV
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| Documents originated | 29 September 2010
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| Deposited in Parliament | 12 October 2010
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| Department | HM Treasury
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| Basis of consideration | EM of 23 October 2010
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| Previous Committee Report | None
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| To be discussed in Council | Not known
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| Committee's assessment | Politically important
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| Committee's decision | For 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]
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Background
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".
Conclusion
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 http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/115346.pdf.
Back
23
See http://www.pittsburghsummit.gov/mediacenter/129639.htm. 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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