Documents considered by the Committee on 12 January 2011 - European Scrutiny Committee Contents

19 Stability and Growth Pact and financial assistance to Member States







Council Recommendation with a view to bringing to an end the

situation of an excessive deficit in Ireland

Council implementing Decision on granting Union financial

assistance to Ireland

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

(b) Article 122(2) TFEU; —; QMV

Document originated
Deposited in Parliament13 December 2010
DepartmentHM Treasury
Basis of considerationTwo EMs of 20 December 2010
Previous Committee ReportHC 428-x (2010-11), chapter 8 (8 December 2010)
Discussion in Council7 December 2010
Committee's assessmentPolitically important
Committee's decisionCleared


19.1 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%.[87] Each year the Council of Economic and Finance Ministers (ECOFIN) issues an Opinion on the updated stability or convergence programme of each Member State.[88] 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.

19.2 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.

19.3 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.[89]

19.4 In December 2010 the Financial Secretary to the Treasury (Mr Mark Hoban) told us about the Council Decision to grant financial assistance under the EFSM to Ireland, document (b), and an accompanying excessive deficit procedure Recommendation, document (a). He undertook to let us have Explanatory Memoranda once the documents were publicly available.[90]

The documents

19.5 The Council Recommendation to Ireland, document (a), starts with a brief background to Ireland's excessive deficit procedure:

  • in accordance with Article 104(6) EC (now in Article 126 TFEU) the Council decided on 27 April 2009 that an excessive deficit existed in Ireland;
  • the Council issued recommendations to Ireland and set deadlines of 2013 to correct the excessive deficit and 27 October 2009 for effective action to be taken towards meeting this target;
  • on 2 December 2009 the Council concluded that the Irish authorities had taken effective action, despite having experienced 'unexpected adverse economic events with major unfavourable consequences for government finances';
  • the Council therefore adopted a revised Recommendation under Article 126(7) TFEU, extending the deadline for the correction of the excessive deficit to 2014, with another six months for the Irish authorities to take effective action; and
  • the Council concluded on 13 July 2010 that Ireland had taken effective action.

19.6 The Council Recommendation then provides an update on the fiscal situation in Ireland:

  • the impact of the crisis on Ireland's financial sector has turned out to be more pronounced than previously anticipated;
  • as a consequence, the Council observes that the fiscal situation is significantly worse than expected at the time the previous Council Recommendations were made;
  • according to the Commission's autumn forecasts, the general government deficit is now projected to reach 32.3% of GDP in 2010, compared to a forecast of 14.7% in the spring, as a result of one-off measures by the Irish authorities to support the banking sector;
  • without these one-off measures the Commission predicts the deficit would have been 12.5% of GDP in 2010;
  • in line with Council recommendations, the Irish government has included fiscal consolidation measures equivalent to 2.5% of GDP in the budget for 2010, contributing to a total consolidation effort of around 9% of GDP over the 2009-2010 period;
  • the Commission expects the Irish economy to grow at a slow rate in the immediate post-crisis period — it is now expected to grow by 0.9% in 2011, compared with a forecast of 2.6% in the spring; and
  • inflation is also expected to moderate.

19.7 The Council Recommendation concludes that in light of these developments, and in accordance with Article 126(7) TFEU, it now sets a deadline of 2015 for the Irish authorities to correct the excessive deficit. The Council recommends that Ireland should:

  • implement measures to ensure that the general government deficit does not exceed 10.6% of GDP in 2011, 8.6% in 2012, 7.5% in 2013, 5.1% in 2014 and 2.9% in 2015;
  • be prepared to take additional consolidation measures to meet the correction deadline should downside risks materialise;
  • achieve an improvement in the structural balance of at least 9.5% of GDP over the period 2011 to 2015;
  • seize opportunities resulting from better economic conditions for accelerating the reduction of the gross debt ratio;
  • establish a budgetary advisory council to provide independent oversight of the government's budgetary position and forecasts;
  • adopt a fiscal responsibility law setting out a medium-term expenditure framework; and
  • pursue further reforms to the social security system in order to reduce the risks to the long-term sustainability of public finances.

19.8 The Council Recommendation establishes a new deadline of 7 June 2011 for the Irish government to take effective action towards the correction of the excessive deficit.

19.9 The Council Decision, document (b), confirms and formalises the EU's financial assistance of up to €22.5 billion (£18.8 billion) through the EFSM to Ireland following the deterioration in its public finances. It also sets out the scale, timeline and conditions attached to the loan. The EFSM loan is part of the total support package from Ireland's EU partners of up to €45 billion (£37.7 billion), which includes €17.7 billion (£14.8 billion) from the EFSF and bilateral loans of €4.8 billion (£4 billion) from the UK, Sweden and Denmark. The EU package complements IMF financing of 19.5 billion in Special Drawing Rights (about £19.9 billion) and is supplemented by a contribution of €17.5 billion (£14.7 billion) by Ireland itself.

19.10 The Council Decision starts with a brief background to the EU support package for Ireland:

  • Ireland officially requested financial assistance from the EU on 21 November 2010;
  • the package was proposed at an additional ECOFIN Council on 28 November 2010 and formally adopted at the ECOFIN Council of 7 December 2010; and
  • an assessment by the Commission and European Central Bank is that Ireland needs financing of €85 billion (£71.2 billion) over the period from December 2010 to the end of 2013.

The document also provides brief economic context:

  • the Commission estimates GDP growth in Ireland to reach 3.8% in 2013;
  • combined with the deficit reduction programme, this is consistent with a debt-to-GDP ratio of 98.9% in 2010, 113.5% in 2011, 120% in 2012 and 121.8% in 2013; and
  • the Commission therefore believes the debt-to-GDP ratio will be stabilised in 2013 and placed on a declining path thereafter, assuming further progress in the reduction of the deficit.

19.11 The Council Decision says that Ireland will implement an economic and financial adjustment programme to reduce the deficit to below 3% of GDP by 2015 and identifies three main elements to the programme:

  • a financial sector strategy comprising of fundamental downsizing, deleveraging and reorganisation of the banking sector, complemented by appropriate recapitalisation;
  • an ambitious fiscal consolidation strategy, building on the National Recovery Plan 2011-14 published by the Irish authorities on 24 November 2010, to reduce the deficit below 3% GDP by 2015; and
  • also building on the National Recovery Plan, an ambitious structural reform agenda with a view to strengthening the economy's growth potential.

19.12 The Council Decision provides that:

  • the financial assistance from the EFSM will be made available in a maximum of 13 instalments, with each instalment disbursed in one or several tranches;
  • the first instalment shall be released subject to the acceptance of a Loan Facility Agreement and a Memorandum of Understanding governing the conditions of the EU financial assistance, in line with the details set by the Council;
  • further releases are subject to favourable quarterly assessments by the Commission of Ireland's compliance towards its programme of economic and fiscal stability;
  • Ireland shall pay the actual cost of funding of the EU for each tranche, plus a margin of 292.5 basis points, resulting in similar conditions to those for IMF support.

19.13 The Council Decision reiterates the Council's excessive deficit procedure Recommendation that Ireland's projected annual deficit path should not exceed 10.6% of GDP in 2011, 8.6% in 2012 and 7.5% in 2013 to remain on track to reduce the deficit to below 3% of GDP by 2015. In addition, there are detailed year-on-year targets for Ireland's fiscal consolidation plans, such that it adopts a budget including fiscal consolidation measures worth €6 billion (£5 billion) by the end for 2011, at least €3.6 billion (£3 billion) for 2012 and at least €3.1 billion (£2.6 billion) in 2013, and a series of structural reforms to be implemented including, but not limited to, legislating for an increase in the state pension age and a transfer of responsibility for water services provision from local authorities to water utilities.

19.14 The Council Decision confirms that the Commission will verify at regular intervals that the economic policy conditions attached to the EU's assistance are fulfilled, with regular reporting by Irish authorities on a monthly basis, and that the Commission will keep the Council informed of any possible refinancing or any restructuring of the financial conditions.

The Government's view

19.15 The Financial Secretary to the Treasury comments that the Council Recommendation, document (a), is addressed to Ireland and has no policy or budgetary implications for the UK and that the Government believes that Member States should take forward fiscal consolidation as a priority to reduce their deficits and support recovery.

19.16 On the Council Decision, document (b), and the support package generally the Minister says that:

  • the Government believes it is in the UK's national interest that the Irish economy is successful and its banking system is stable and it supports the steps taken by the Council to achieve this;
  • the Council Decision does not directly concern the UK — however, it could have implications for the UK's obligations under the EFSM in the event that Ireland were to default; and
  • the UK does not participate in the EFSF and therefore no financial implications for the UK arise from the provision of €17.7 billion (£14.8 billion) from the EFSF to Ireland.

In elaborating on the possible EFSM consequences for the UK in the event of an Irish default the Minister explains that:

  • to provide Ireland with financial assistance under the EFSM the Commission will raise money on capital markets, using the EU budget as a guarantee for those loans;
  • if Ireland were to default on loan repayments the EU budget would be called on to meet the cost of that repayment;
  • this would require an increase in the budget, and in turn an increase in Member States' contributions to the EU budget; and
  • as an indicative guide, the UK's GNI-share contribution to the 2010 budget is currently 13.8% — any increase to the UK's contribution would be within the limits of the EU Own Resources ceiling already provided for in the European Communities (Finance) Act 2008.


19.17 We are grateful to the Minister for this information about the Council's Recommendation and Decision and, whilst clearing them, draw the documents to the attention of the House.

87   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

88   The 17 Member States (Austria, Belgium, Cyprus, Estonia, 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 10 Member States (including the UK) produce Convergence Programmes. Back

89   (31611) 9606/10: see HC 428-i (2010-11), chapter 7 (8 September 2010). Back

90   See headnote. Back

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