8 Stability and Growth Pact and financial
assistance to Member States
| (a)
(32310)
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—
(b)
(32311)
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—
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Council Recommendation to Ireland with a view to bringing to an end the situation of an excessive Government deficit
Council Decision on financial assistance to Ireland
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| Legal base | (a) Article 126 TFEU; —; QMV (without the Member State concerned voting)
(b) Article 122(2) TFEU; —; QMV
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| Department | HM Treasury
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| Basis of consideration | Minister's letter of 6 December 2010
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| Previous Committee Report | None
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| Discussion in Council | 7 December 2010
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| Committee's assessment | Politically important
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| Committee's decision | Not cleared; further information awaited
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Background
8.1 The Stability and Growth Pact adopted by the Amsterdam European
Council in June 1997 emphasised the obligation of Member States
to avoid excessive government deficits, defined as the ratio of
a planned or actual deficit to gross domestic product (GDP) at
market prices in excess of a "reference value" of 3%.[43]
Each year the Council of Economic and Finance Ministers (ECOFIN)
issues an Opinion on the updated stability or convergence programme
of each Member State.[44]
These Opinions, which are not binding on Member States, are based
on a recommendation from the Commission. The economic content
of the programmes is assessed with reference to the Commission's
current economic forecasts. If a Member State's programme is found
wanting, it may be invited by ECOFIN, in a Recommendation, to
make adjustments to its economic policies, though such Recommendations
are likewise not binding on Member States. This whole procedure
is essentially the Pact's preventative arm.
8.2 On the other hand, the Pact also endorsed a dissuasive
or corrective arm involving action in cases of an excessive government
deficit — the excessive deficit procedure provided for in
Article 126 TFEU and the relevant Protocol. This procedure consists
of Commission reports followed by a stepped series of Council
Recommendations (the final two steps do not apply to non-members
of the eurozone). Failure to comply with the final stage of Recommendations
allows ECOFIN to require publication of additional information
by the Member State concerned before issuing bonds and securities,
to invite the European Investment Bank to reconsider its lending
policy for the Member State concerned, to require a non-interest-bearing
deposit from the Member State concerned whilst its deficit remains
uncorrected, or to impose appropriate fines on the Member State
concerned.
8.3 In May 2010 the Council adopted a Regulation
to establish a European Financial Stabilisation Mechanism (EFSM),
for giving financial assistance to a Member State in the form
of loans or credit lines raised from capital markets or financial
institutions guaranteed by the EU Budget. The guarantee would
be up to a level of €60 billion (£50.26 billion). Financial
assistance would granted by the ECOFIN Council to a Member State
on the basis of a programme of support drawn up by the Commission
and the IMF. At the same time, and additionally, a voluntary intergovernmental
Special Purpose Vehicle, the European Financial Stabilisation
Facility (EFSF), was established by and for eurozone Member States.
The EFSF can issue bonds or other debt instruments on the market
to raise funds needed to provide loans to eurozone Member States.
Bond issues would be backed by guarantees, up to a total of €440
billion (£368.59 billion) given by eurozone Member States
in proportion to their share in the paid-up capital of the European
Central Bank. Loans would be granted by the Eurogroup (eurozone
finance ministers) on the basis of the programme of support drawn
up by the Commission and the IMF.[45]
The Minister's letter
8.4 The Financial Secretary to the Treasury (Mr Mark
Hoban) writes to tell us about financial assistance to be given
to Ireland. Reminding us that on 28 November 2010 the Chancellor
of the Exchequer attended an additional ECOFIN Council meeting
following the request of the Irish government for financial assistance
from the EU, the Minister tells us that at that meeting the Council
unanimously agreed, in principle, to grant financial assistance
to Ireland, in order to safeguard financial stability in the eurozone
and the EU as a whole. He explains that:
- eurozone and EU financial support
will be provided on the basis of a programme which has been negotiated
with the Irish authorities by the Commission and the IMF, in liaison
with the European Central Bank;
- the financial package of the programme will cover
financing needs up to €85 billion (£71.2 billion), including
€10 billion (£8.38 billion) for immediate recapitalisation
measures, €25 billion (£20.94 billion) on a contingency
basis for banking system supports, and €50 billion (£41.89
billion) covering budget financing needs;
- half of the banking support measures, €17.5
billion (£14.66 billion), will be financed by an Irish contribution
through the Irish Treasury cash buffer and investments of the
National Pension Reserve Fund;
- the remainder of the overall package should be
shared equally, €22.5 billion (£18.85 billion) each
amongst the EFSM, the EFSF, together with bilateral loans from
the UK, Denmark and Sweden, and the IMF;
- in principle, the UK's bilateral loan is for
£3.25 billion and the rate of interest on the loan will be
similar to the rates levied by the IMF and the eurozone; and
- there will be a Bill to authorise the UK loan.
8.5 The Minister continues that on 7 December 2010
the ECOFIN Council would adopt a Stability and Growth Pact Recommendation
to Ireland with a view to bringing an end to the situation of
an excessive government deficit, which will be document (a), and
would agree a Decision to grant financial assistance to Ireland,
in accordance with the Regulation governing the EFSM, which will
be document (b). The Minister comments that:
- regrettably, the accelerated
timetable means that full scrutiny of the Council Decision to
grant assistance under the EFSM was not be possible before its
adoption;
- he hopes, however, that we will agree that in
such exceptional circumstances there is a need for the EU to act
quickly to ensure stability in Europe; and
- the Government will of course provide an Explanatory
Memorandum as soon as the documents are publicly available and
answer any questions we might have.
Conclusion
8.6 We are grateful to the Minister for this account
of ECOFIN Council plans in relation to financial assistance for
Ireland. We note and accept his assertion of the need to process
this issue before any (not, as he says, before full) scrutiny
of the Council Decision (we do not see Stability and Growth Pact
Recommendations before adoption). We will scrutinise the two documents
once they are deposited in Parliament and we have the Minister's
promised Explanatory Memorandum on them.
43 This obligation does not apply to Member States,
including the UK, whilst they remain outside the eurozone, but
they are required to endeavour to avoid excessive deficits. Back
44
The 16 Member States (Austria, Belgium, Cyprus, Germany, Greece,
Finland, France, Ireland, Italy, Luxembourg, Malta, the Netherlands,
Portugal, Slovakia, Slovenia and Spain) that have adopted the
euro have Stability Programmes, whereas the other 11 Member States
(including the UK) produce Convergence Programmes. Back
45
(31611) 9606/10: see HC 428-i (2010-11), chapter 7 (8 September
2010). Back
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