House of Commons - Documents considered by the Committee on 9 February 2011

Documents considered by the Committee on 9 February 2011 - European Scrutiny Committee Contents

2 Economic governance

(32445)

18066/10

+ ADDs 1-3

COM(11) 11

Annual Growth Survey: Advancing the EU's comprehensive response to the crisis

Legal base —

Document originated 12 January 2011

Deposited in Parliament 19 January 2011

Department HM Treasury

Basis of consideration EM of 31 January 2011

Previous Committee Report None

To be discussed in Council 15 February 2011

Committee's assessment Politically important

Committee's decision For debate in European Committee B

Background

2.1 In March 2010 the Commission proposed a "Europe 2020 Strategy",[10] to follow on from the Lisbon Strategy. This strategy is aimed at promoting smart, sustainable and inclusive economic growth. It was endorsed by the March 2010 European Council.[11] During the latter half of 2010 the Council adopted, in the context of the Europe 2020 Strategy, broad guidelines for the economic policies of the Member States and the EU and guidelines for the employment policies of the Member States, together the "Europe 2020 integrated guidelines".[12]

2.2 On the basis of two Commission Communications, Reinforcing economic policy coordination and Enhancing economic policy coordination for stability, growth and jobs: tools for stronger EU economic governance,[13] and of the Van Rompuy Task Force report, Strengthening economic governance in the EU[14] the June, September and October 2010 European Councils considered and endorsed measures to increase coordination of EU economic governance, including strengthening the Stability and Growth Pact and a "European semester" which would tie together consideration of National Reform Programmes (reports on progress and plans on structural reforms, under the Europe 2020 Strategy) and Stability and Convergence Programmes (reports on fiscal policy, under the Stability and Growth Pact).[15]

The document

2.3 In publishing this "Annual Growth Survey" the Commission notes that it marks the start of a new cycle of EU economic governance and the first European semester of economic policy coordination. The Commission says that the AGS "brings together the different actions which are essential to strengthen the recovery in the short-term, to keep pace with our main competitors and prepare the EU to move towards its Europe 2020 objectives". The Commission suggests that:

"The first priority of this Annual Growth Survey is to set budgetary policies on a sound footing through rigorous fiscal consolidation, and to restore the normal functioning of the financial sector. The second priority is a rapid reduction in unemployment through labour market reforms. But tackling these two priorities will be ineffective without a major effort to frontload growth at the same time."

2.4 In the AGS the Commission sets out ten priority actions for the year ahead. These are focused on key measures in the context of the Europe 2020 Strategy, are designed to apply to the EU as a whole but will need to be tailored to the specific situation of each Member State. They cover three areas:

Macroeconomic pre-requisites for growth

implementing a rigorous fiscal consolidation;
correcting macroeconomic imbalances;
ensuring stability of the financial sector;

Mobilising labour markets, creating job opportunities

making work more attractive;
reforming pensions systems;
getting the unemployed back to work;
balancing security and flexibility;

Frontloading growth-enhancing measures

tapping the potential of the single market;
attracting private capital to finance growth; and
creating cost-effective access to energy.

2.5 In summary the detail of the Commission's proposed priority actions is:

Priority 1: implementing a rigorous fiscal consolidation

the Commission argues that putting public expenditure on a sustainable track is a prerequisite for future growth and that "annual adjustments of the structural budget balance in the order of 0.5% of GDP will clearly be insufficient to bring debt ratios close to the 60% requirement";
it calls, therefore, for stronger consolidation to be implemented on the basis of the reinforced fiscal rules proposed by the Commission;[16]

Priority 2: correcting macro-economic imbalances

the Commission argues that large and persistent macroeconomic imbalances are a major source of vulnerability, especially within the eurozone, and that Member States need to tackle their lack of competitiveness with greater urgency;
it calls for action from Member States with large current account deficits and high levels of indebtedness, to present concrete corrective measures, and from Member States with large current account surpluses, to identify and tackle the sources of persistently weak domestic demand;

Priority 3: ensuring stability of the financial sector

the Commission calls for the regulatory framework at the EU level to be further reinforced and asserts that the quality of supervision should be enhanced by the European System Risk Board and European Supervisory Authorities, which became operational at the beginning of this year;
it argues that bank restructuring must be accelerated both to safeguard financial stability and to underpin the provision of credit to the real economy;
it notes that, in accordance with the recently agreed Basel III framework,[17] banks will be required to strengthen progressively their capital base so as to improve their capacity to withstand adverse shocks;
it says that it is working on a "comprehensive bank crisis resolution framework" and that "another more ambitious and stringent EU-wide stress test" will be conducted in 2011;

Priority 4: making work more attractive

the Commission argues that the most vulnerable face the risk of long term exclusion from employment and that, in response, training and job search should be tied more closely to benefits;
it calls for Member States to shift taxes away from labour as a priority in order to stimulate demand for labour and create growth and for tax benefit systems, flexible working arrangements and childcare facilities to be geared to facilitating the participation of second earners in the work force;
it argues that efforts need to be stepped up to reduce undeclared work, both by strengthening the enforcement of existing rules and reviewing tax benefit systems;

Priority 5: reforming pensions systems

the Commission calls for fiscal consolidation to be supported through reform of pension systems, by making them more sustainable, and for Member States, that have not already done so, to increase the retirement age and link it with life expectancy;
it argues that Member States should reduce early retirement schemes as a priority and use targeted incentives to employ older workers and promote lifelong learning;
it calls for Member States to support development of complementary private savings to enhance retirement incomes;

Priority 6: getting the unemployed back to work

the Commission calls for Member States to design benefits to reward return to work, or incentives to go into self-employment, for the unemployed, through time-limited support and conditionality linking training and job search more closely to benefits;
it argues that Member States need to ensure that work pays through greater coherence between the level of income taxes (especially for low incomes) and unemployment benefits and that Member States need to adapt their unemployment insurance systems to the economic cycle, so that protection is reinforced in times of economic downturn;

Priority 7: balancing security and flexibility

the Commission argues that in some Member States employment protection legislation creates labour market rigidity and prevents increased participation in the labour market;
it calls for such employment protection legislation to be reformed to reduce over-protection of workers with permanent contracts and to provide protection to those left outside or at the margins of the job market;
it calls on Member States to simplify their regimes for the recognition of professional qualifications to facilitate the free circulation of citizens, workers and researchers;

Priority 8: tapping the potential of the single market

the Commission calls for all Member States to fully implement the Services Directive and notes that it is evaluating its implementation and the potential for further growth enhancing measures through a further opening of the services sector;
it calls on Member States to identify and remove unjustified restrictions on professional services, such as quotas, and closed shops, together with restrictions on the retail industry;
it says, on trade, that it will continue to press for the conclusion of the Doha Round and will advance negotiations on free trade agreements with partners such as India, Canada and Mercosur;[18]
it says that, "although sensitive, work should be taken forward on taxation," arguing that this has the potential to stimulate growth and job creation, reduce administrative burdens, and remove obstacles in the single market;
it calls for tax treatment disadvantaging cross-border trade or investment to be eliminated and notes that in 2011 it is proposing measures to modernise the VAT system,[19] to introduce a common consolidated corporate tax base[20] and to develop a coordinated European approach to taxation of the financial sector;[21]
it argues that progress on taxation also implies reducing taxes on labour to the minimum necessary and adapting the EU framework for energy taxation in line with EU energy and climate objectives;

Priority 9: attracting private capital to finance growth

the Commission notes that it will make proposals for EU project bonds to help bring public and private financing together for priority investments notably in energy, transport and ICT and that it will include these finance instruments in its forthcoming proposals for the next Multi Annual Financial Framework;
it says that, to help facilitate access to finance for SMEs and innovative start-ups, it is making proposals to enable venture capital funds established in one Member State to operate freely anywhere in the EU and to eliminate remaining tax obstacles to cross-border activities;[22]

Priority 10: creating cost-effective access to energy

the Commission calls for Member States to implement rapidly the third internal market energy package[23] in full and to step up their energy efficiency policies, which it argues will lead to significant savings and create jobs in the construction and services sectors; and
it says that in 2011 it will propose initiatives to take forward the transport, energy or telecommunication infrastructure needed for a truly integrated single market and that it is developing EU-wide standards for energy efficiency products to help the expansion of markets for innovative products and technologies.

2.6 The Commission says that it will continue work on "a broad range of other policy areas, including trade and a host of internal policies", which are not dealt with in this paper. It proposes that the ten actions in the AGS form the basis for an agreement by the European Council that Member States should commit themselves to implementation of the actions, saying that "Given the interdependencies of Member States, in particular in the euro area, ex-ante coordination in the Council is the essential element of the European semester."

2.7 The AGS is accompanied by three annexes setting out the more detailed analysis underpinning the Commission's assessment and proposed priority actions:

Annex 1 — a progress report on Europe 2020;
Annex 2 — a macroeconomic report; and
Annex 3 — a draft Joint Employment Report.

In Annex 1 the Commission:

notes that it has set, or is setting, out seven "flagship initiatives" at the EU level, on innovation,[24] youth education and training,[25] digital policy,[26] resource efficiency,[27] industrial policy,[28] skills and jobs[29] and poverty,[30] as well as parallel action on horizontal policies supporting the Europe 2020 Strategy, on the single market — the Single Market Act,[31] the EU Budget Review[32] and promoting trade;[33]
summarises its priorities for growth at the EU level, also covered in the main AGS document itself;
summarises the status of Member States' preliminary national targets as part of the Europe 2020 Strategy, contributing to the five headline EU-level targets agreed by the June 2010 European Council, in the fields of employment, research and development, climate change and energy, education and training and social inclusion and the fight against poverty;
notes that "The fact that each Member State sets it own level of ambitions as regards the overall Europe 2020 targets is an important element of this strategy, ensuring that national targets are 'politically owned', that is, subject to an internal political debate";
shows that eleven Member States have not set national targets in at least one of the five headline EU-level target areas;
notes that the UK has set national targets for emissions reductions, renewable energy and poverty reduction;
notes that "In most cases, the aggregation of the provisional national targets shows that the EU still has some way to travel to meet the EU headline targets agreed by the European Council";
summarises the main features of Member States' draft National Reform Programmes that were submitted in November 2010;
argues that, among other features, "... at this stage, the policies presented in the draft NRPs fall short of providing a clear response to the important macroeconomic challenges and growth bottlenecks";
notes that it plans to hold bilateral discussions with Member States as they work towards submitting their full National Reform Programmes in April 2011; and
calls on Member States to consult and involve at the national level political actors (national parliaments and regional and local authorities) and social partners and other stakeholders as they develop their full National Reform Programme.

2.8 In Annex 2 the Commission provides the analytical underpinnings behind its proposed priorities in its main AGS document. In Annex 3 the Commission presents a draft Joint Employment Report. This report, by the Council and the Commission to the European Council, as required by Article 148 TFEU, is primarily a forward looking analysis, expanding on the key employment messages contained in the main AGS document. The analysis and messages it contains are based on the employment situation in the EU and implementation of the employment policy guidelines[34] as well on the results of country examination of the draft National Reform Programmes carried out by the EU's Employment Committee.[35]

2.9 The timetable for the AGS and other aspects of the 2011 European semester is:

publication of the AGS on 12 January 2011;
initial discussion of the AGs by the ECOFIN Council on 18 January 2011;
adoption by ECOFIN of conclusions on fiscal and macroeconomic challenges in February 2011;
adoption by ECOFIN of a comprehensive report on economic growth in March 2011, in preparation for Spring European Council discussions on economic growth;
parallel consideration by other Council formations of the AGS, covering areas within their competence;
tabling of the Joint Employment Report for the Employment and Social Policy Council on 7 March 2011;
the Spring European Council on 24-25 March 2011;
submission by Member States of National Reform Programmes and Stability and Convergence Programmes in April 2011; and
to be followed by issue by the Council of country-specific policy guidance, based on these reports and follow-up recommendations from the Commission, for Member States to take into account when preparing their 2012 budgets and in implementing their national growth strategies.

The Government's view

2.10 The Commercial Secretary to the Treasury (Lord Sassoon) says that the Government welcomes the Commission's new AGS and its focus on the urgent need for the EU and the Member States to promote economic growth (including in the light of market concerns over sovereign debt). And he adds that alongside fiscal consolidation and a more competitive financial sector, Member States need a structural reform programme to make its economies more competitive.

2.11 In further comments on the AGS document itself, some of which are also relevant to the AGS's Annex 2, the macroeconomic report, the Minister says that:

Member States should be ambitious and set out the necessary detail in their Stability and Convergence Programmes and National Reform Programmes in April 2011;
in particular, the Government supports the Commission's focus on fiscal consolidation, tackling macroeconomic imbalances; financial stability and Basel III, the need for labour market and welfare reforms at the national level and the single market (including services and Doha), including that the Single Market Act should prioritise measures that support growth;
the Government is engaging in the detail of the individual policy priorities and proposals outlined in the AGS — one area it will be promoting is greater focus on the importance to growth of smarter EU regulation;
on taxation, the Government recognises the role that tax can play in growth and will engage with EU partners on the tax aspects of the AGS and ongoing work on the Single Market Act;
it remains important that Member States retain the flexibility to shape their tax policy to suit their own circumstances and compete in a global environment — for example, in its recent publication on The path to strong, sustainable and balanced growth,[36] the Government set out the action it is taking to provide a more competitive, predictable, and simpler tax system; and
the Government has launched a "Growth Review"[37] to help create the conditions for private sector growth — it will be an intensive programme reporting by Budget 2011, initially focussing on structural reform priorities and removing barriers faced by industry.

2.12 Turning to the AGS's Annex 1, the progress report on Europe 2020, the Minister says that:

the Government welcomes the focus in the report on the need for the EU and Member States to implement growth-enhancing structural reforms, including tackling "bottlenecks to growth" — "the policies presented in the draft NRPs fall short of providing a clear response to the important macro-economic challenges and growth bottlenecks";
on national targets, the Government notes, as mentioned in the annex, that the June 2010 European Council conclusions[38] called on "Member States ... to implement these policy priorities at their level. They should, in close dialogue with the Commission, rapidly finalise their national targets, taking account of their relative starting positions and national circumstances, and according to their national decision-making procedures";
the Government notes the recognition from the Commission that "an important element of [the] strategy [is] ensuring that targets are 'politically owned', i.e., subject to an internal political debate";
the Government has set out in the UK's draft National Reform Programme[39] the relevant impact indicators described in departments' business plans, coupled with datasets measured through departments' information strategies (which make available a wide array of data to ensure improved transparency) and through wider public information — these form the core of the UK's contribution to greater transparency on progress against the EU-level targets described in the June European Council conclusions;
as the draft National Reform Programme notes, the information strategy and indicators have been published for comment by Parliament and stakeholders to ensure that this section of departments' business plans contain the most relevant and timely information and technically robust indicators — final business plans will be adopted in April 2011; and
the Devolved Administrations have in some instances a different approach to performance and transparency — where this is still being finalised, it will be reflected in the full National Reform Programme in April 2011.

2.13 The Minister comments about the AGS's Annex 3, on the draft Joint Employment Report, that:

there are three means by which the Joint Employment Report has implications for all Member States;
first, it can be used to propose how Member States should use the Employment Guidelines and their strategic reporting in light of those Guidelines, now within National Reform Programmes;
on employment, however, the terms in Article 148 TFEU are clear — this reporting is on implementation of Member States' own employment policy, so it is for national governments to decide how far they take into account now, or in the future, the approaches identified in the Joint Employment Report;
secondly, the Commission can use the Joint Employment Report when drafting proposals for recommendations to Member States;
these must, however, also take account of Member States' own mutual examination (in the EU's Employment Committee) and the proposals must be adopted by the Council; and
thirdly, the Joint Employment Report is taken into account by the EU's Employment Committee when considering its forward programme — this is where impact is arguably the greatest, in that Member States can consider evidence for what works well in tackling EU-wide labour market issues in the context of the current employment situation.

Conclusion

2.14 This document is important, both intrinsically for its content and as the opening stage in the first European semester. As such we recommend that it should be debated in European Committee B, so that Members can consider both the Commission's ten policy priorities for 2011 and the plans for the 2011 European semester.

10 (31373) 7110/10: see HC 5-xiv (2009-10), chapter 1 (17 March 2010) and Gen Co Debs, European Committee B, 22 March 2010, cols. 3-28. Back

11 See http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/113591.pdf. Back

12 (31573) 9231/10 (31574) 9233/10: see HC 428-i (2010-11), chapter 9 (8 September 2010), HC 428-v (2010-11), chapter 3 (27 October 2010) and Gen Co Debs, European Committee B, 10 January 2011, cols 3-30. Back

13 ((31618) 9433/10 (31776) 11807/10: see HC 428-i (2010-11), chapter 8 (8 September 2010). Back

14 See http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/117236.pdf. Back

15 See http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/115346.pdf, http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/116547.pdf and http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/117496.pdf. Back

16 (32036) 14498/10 (32043) 14497/10 (32044) 14496/10 (32047) 14520/10: see HC 428-v (2010-11), chapter 1 (27 October 2010) and HC Deb, 10 November 2010, cols. 359-388. Back

17 See http://www.bis.org/bcbs/basel3.htm. Back

18 Mercosur is an economic and political agreement and a full customs union between Argentina, Brazil, Paraguay and Uruguay. Back

19 (32317) 17491/10 + ADD 1: see HC 428-xiii (2010-11), chapter 7 (19 January 2011). Back

20 (28619) 9415/07: see HC 41-xxv (2006-07), chapter 15 (13 June 2007). Back

21 (32095) 15282/10 + ADD 1: see HC 428-ix (2010-11), chapter 2 (24 November 2010) and Gen Co Debs, European Committee B, 7 February 2011, cols 3-24. Back