Documents considered by the Committee on 8th December 2010 - European Scrutiny Committee Contents

8 Stability and Growth Pact and financial assistance to Member States





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

Legal base(a) Article 126 TFEU; —; QMV (without the Member State concerned voting)

(b) Article 122(2) TFEU; —; QMV

DepartmentHM Treasury
Basis of considerationMinister's letter of 6 December 2010
Previous Committee ReportNone
Discussion in Council7 December 2010
Committee's assessmentPolitically important
Committee's decisionNot cleared; further information awaited


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.


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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