19 Stability and Growth Pact and financial
assistance to Member States
| (a)
(32310)
17210/10
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(b)
(32311)
17211/1/10
—
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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
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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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| Document originated | —
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| Deposited in Parliament | 13 December 2010
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| Department | HM Treasury
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| Basis of consideration | Two EMs of 20 December 2010
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| Previous Committee Report | HC 428-x (2010-11), chapter 8 (8 December 2010)
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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 | Cleared
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Background
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.
Conclusion
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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