Documents considered by the Committee on 23 March - European Scrutiny Committee Contents

10   Economic governance



Opinion of the European Central Bank of 16 February 2011 on economic governance reform in the European Union

Legal base
Deposited in Parliament1 March 2011
DepartmentHM Treasury
Basis of considerationEM of 21 March 2011
Previous Committee ReportNone
To be discussed in CouncilNot known
Committee's assessmentPolitically important
Committee's decisionCleared


10.1  Two elements of the EU's common economic policies are the Economic and Monetary Union, with the eventual aim that all Member States should adopt the euro,[53] and the processes for economic policy coordination under the "Europe 2020" strategy.[54] A third element is the Stability and Growth Pact. The Pact 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%. Each year the Council of Economic and Finance Ministers (ECOFIN) issues an Opinion on the updated stability or convergence programme of each Member State.[55] 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.

10.2  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.

10.3  In response to current economic problems the EU has adopted a number of fiscal and support measures, including the European Economic Recovery Plan of 2008 for fiscal stimulus[56] and the May 2010 package of a European Financial Stabilisation Mechanism, which allows EU financial assistance to be granted to a Member State facing "severe difficulties caused by natural disasters or exceptional occurrences beyond its control", and a Special Purpose Vehicle for a voluntary intergovernmental agreement of eurozone Member States for mutual financial support, the European Financial Stabilisation Facility.[57]

10.4  Such measures have been adopted whilst there has been a parallel discussion of the perception that the EU's economic policy framework has been tested by the global economic crisis, that the EU does not have a mechanism to provide crisis support to its Member States, particularly in the eurozone, and that ex ante budgetary surveillance of some countries had not always been sufficiently robust. In May and June 2010 the Commission published two Communications: Reinforcing economic policy coordination and Enhancing economic policy coordination for stability, growth and jobs: tools for stronger EU economic governance.[58]

10.5  In September 2010 the Commission followed up these Communications with six legislative proposals with the aim of improving economic governance. Four of the proposals concerned the present Growth and Stability Pact — two draft Regulations amending the existing secondary legislation on the Pact's preventative arm and excessive deficit procedure, a draft Regulation to create a new series of sanctions for eurozone Member States strengthen and a draft Directive proposing a series of minimum standards for Member States' domestic budgetary frameworks.[59] The other two proposals concerned macroeconomic imbalances. The first was a draft Regulation to create a two stage process to monitor and then correct such imbalances across all Member States. Correction would be through an "excessive balance procedure". A second draft Regulation would provide enforcement measures for the procedure, applicable to eurozone Member States.[60]

10.6  In November 2010 the Council asked the European Central Bank (ECB) for a formal Opinion on the legislative package.

The document

10.7   The ECB submitted that Opinion to the Council last month. In introductory general observations the ECB says that:

  • its June 2010 note Reinforcing economic governance in the euro area proposed strengthening governance and enforcement structures in eurozone economic and budgetary policies and selectively extending such strengthening to all Member States;[61]
  • an October 2010 final report to the European Council from a task force on economic governance made a series of additional recommendations to the Commission's proposals;[62]
  • although it was a member of the task force, the ECB did not subscribe to all elements of the report;
  • the Commission's proposals constitute important improvements in economic governance, but both they and the task force's report are insufficient to achieve the degree of surveillance required in the eurozone;
  • it suggests, therefore, amendments to achieve this, none of which would require Treaty change;
  • it believes the recent crisis demonstrated the danger that a eurozone Member State pursuing "unsound" economic policies can pose to others;
  • it suggests, therefore, that the legislative process currently underway should be used to strengthen economic governance "to the maximum allowed under the Treaties";
  • Treaty reform to allow further strengthening should be considered at some future point;
  • implementation needs to be consistent and coherent and this will be best achieved through simplicity in applying this legislation; and
  • it recommends, consequently, minimising bureaucracy and room for interpretation.

10.8  In relation to the automaticity of the procedures proposed in the draft legislation the ECB:

  • whilst acknowledging that the current proposals provide for increased automaticity, recommends further increasing this by using reverse qualified majority voting whenever possible;
  • says it would like to see the changes made in 2005 to the Stability and Growth Pact (which allowed Member States greater flexibility with regard to their obligations) reversed;
  • suggests a formal Council declaration that, as a rule, will follow Commission recommendations or proposals on Pact-related procedures and that where it fails to do so the Council will substantiate its reasons;
  • says that if the Council is unwilling to provide this, then as a minimum alternative it suggests a similar declaration by Eurogroup Member States;
  • advises against proposed escape clauses (such as allowing departure from progress towards a budgetary target in the event of a severe economic downturn), or at the very least making their activation conditional upon not endangering fiscal sustainability;
  • suggests deleting provisions that would allow the Council to review and amend financial sanctions it has already imposed; and
  • disagrees with limiting the Commission's capacity to act on continuing Pact-related procedures by obliging it to take account of Council discussions on such matters.

10.9  In relation to excessive deficits the ECB:

  • would like to see Member States obliged to prove they have taken effective action to address an excessive deficit in order to avoid sanctions, as part of the implementation of the excessive deficit procedure;
  • thinks current proposals are too lenient when considering whether excessive debt exists;
  • believes that relevant mitigating factors should only be considered where the Commission forecasts that debt is declining over a three year period;
  • disagrees with the introduction of additional leeway in assessing whether an excessive deficit exists (notably by allowing a range of relevant factors to be considered where debt is below the 60% of GDP threshold);
  • says compliance with Pact discipline should continue in line with current rules, which restrict the consideration of such factors to situations where the deficit is close to the 3% of GDP threshold and any excess is considered temporary; and
  • believes the use of the numerical benchmark to assess changes in debt levels should commence immediately upon the relevant proposed Regulation coming into force, rather than the Commission's proposal to delay its implementation.

10.10  On macroeconomic surveillance the ECB:

  • welcomes the proposed macroeconomic surveillance procedure but believes this should "concentrate firmly" on eurozone Member States with sustained losses of competitiveness and large deficits;
  • says the list of indicators to be used should be allowed to evolve over time to reflect changing circumstances;
  • believes the aim of the macroeconomic surveillance procedure should be expanded to include the prevention of "vulnerabilities" as well as imbalances, to broaden its scope and emphasise its preventive nature;
  • believes the Regulation should clarify that recommendations under the procedure should be consistent with other procedures set out in the TFEU and take account of ERM (Exchange Rate Mechanism) II agreement obligations (of Member States planning to join the eurozone);
  • says reference should be made to the need to respect the confidentiality of the European Systemic Risk Board; and
  • believes that assessments and recommendations made under the macroeconomic surveillance procedures should be publicised at all stages, that there should be increased automaticity in the proposed excessive imbalances procedure and that financial sanctions proposed for the eurozone should follow any non-compliance with recommendations (rather than the current proposal that they would apply in the event of repeated non-compliance).

10.11  On fiscal frameworks the ECB:

  • believes national transposition by Member States of the proposed Directive on budgetary frameworks, should use wording which closely follows the Directive itself;
  • says this is important, particularly for the eurozone area, and that it would like to see a political commitment to this by the Eurogroup;
  • would like two additional features incorporated into eurozone Member States' budgetary frameworks — mandatory establishment of independent fiscal councils, to provide monitoring, analysis and forecasting, and consideration of applying "top-down budgetary processes" whereby total spending is first agreed and then allocated to ministries and government agencies;
  • believes consideration should be given to introducing an obligation on Member States to embed borrowing frameworks containing precise definitions and limits into their national legislation;
  • believes the Directive should make specific reference to the likely costs (both financial sanctions and other non-financial measures) that would result from non-compliance with numerical fiscal rules and should include an obligation to redeem debt exceeding that permitted by the fiscal framework;
  • says that circumstances in which any temporary non-compliances are to be permitted should be clearly defined;
  • considers that the deadline for transposition of the Directive should be brought forward by a year to 31 December 2012 since the European Stability Mechanism will come into effect in 2013;
  • proposes using an amendment to the Directive to bring forward the adoption of internationally accepted public sector accounting systems across all Member States; and
  • recommends that additional legislation should be introduced to further strengthen standards of data collection and government statistics.

10.12  In other comments and proposals the ECB:

  • wants to see additional political and reputational Pact-related measures such as reports by the Council to the European Council and Commission/ECB missions to non-compliant eurozone and ERM II Member States;
  • proposes specific criteria relating to what constitutes satisfactory progress towards the medium term budgetary objective and how this should be evaluated — these suggest that growth in government expenditure should not exceed a reference rate (yet to be determined) unless any such excess is matched by discretionary increases in government revenues, that the rate of growth should be calculated according to a common methodology used by the Commission and that growth structure should be considered;
  • believes that monies received as a result of fines and non-interest-bearing deposits should be paid into the European Stability Mechanism once it is created in 2013 and that transitional arrangements should be put in place until then;
  • suggests that, where the proposals call for Commission missions to Member States, for eurozone and ERM II Member States the ECB should participate, where it feels this is appropriate;
  • favours establishing an independent advisory body, comprised of competent economic and fiscal commentators, to prepare an annual report on compliance by the Council and the Commission, including Eurostat, with their obligations under Articles 121 and 126 TFEU; and
  • suggests this body might also provide analysis of specific issues at the request of the European Council, the Council or the Commission.

The Government's view

10.13  The Financial Secretary to the Treasury (Mr Mark Hoban) says that:

  • the Government supported the final report of the task force on economic governance and supports the general approach that has now been agreed to the legislative proposals on which the ECB expresses an Opinion;
  • it accepts the need to boost confidence in the EU's economies and believes the package agreed will significantly contribute to this by strengthening economic governance, particularly in the eurozone;
  • once these proposals have been implemented their effectiveness should therefore be properly assessed before determining whether further legislation on these issues is necessary;
  • the Government accepts the need to ensure that the Commission and the Council take adequate steps to ensure that effective action is promptly taken against Member States which fail to comply with their obligations;
  • to this end it supports the Commission's proposals to introduce reverse qualified majority voting for the imposition of financial sanctions relating to the enforcement of budgetary surveillance in the eurozone;
  • the Government, like the ECB, strongly supports an increased focus on government debt;
  • given the complexity and volatility of debt, the Government believes, however, that any numerical benchmark should be considered alongside a range of other factors and discretion should be exercised in deciding whether the excessive deficit procedure should be initiated on the basis of debt alone;
  • the Government believes that where harmful imbalances emerge, all Member States should consider the need for adjustments to address these and thus help generate strong and sustainable growth;
  • it believes macroeconomic surveillance should include analysis of relevant factors in all Member States and should thus address issues such as factors that may be causing weak domestic demand growth in Member States that have accumulated large current account surpluses;
  • the Government recognises, with regard to the ECB's suggestion that the Directive on fiscal frameworks should be transposed by the end of 2012, that the Directive will involve considerable adjustment for a number of Member States;
  • in practice therefore there may not be sufficient time to reasonably expect them to fully transpose the Directive a year earlier than the Commission proposes;
  • the Government agrees with the ECB that non-financial political and reputational measures could be effective additions to existing and proposed financial sanctions; and
  • the legislative proposals, on which the ECB comments, were considered by the 15 March 2011 ECOFIN Council and a general approach reached — negotiations with the European Parliament will now take place with a view to finalising legislation by the summer.


10.14  Although the legislative proposals to which this Opinion relates have cleared scrutiny and Council negotiation of them has concluded, whilst clearing the document from scrutiny we draw it to the attention of the House.

53   At present 17 Member States (Austria, Belgium, Cyprus, Germany, Estonia, Greece, Finland, France, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia and Spain) have adopted the euro. Back

54   (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

55   The Member States which have adopted the euro have Stability Programmes, whereas the other 10 Member States (including the UK) produce Convergence Programmes. Back

56   (30213) 16097/08: see HC 19-i (2008-09), chapter 4 (10 December 2008) and HC Deb, 20 January 2009, cols 626-653. Back

57   (31611) 9606/10 (31796) 12119/10: see HC 428-i (2010-11), chapter 7 (8 September 2010) and Gen Co Debs, European Committee B, 1 February 2011, cols 3-32. Back

58   (31618) (31776) 9433/10 11807/10: see HC 428-i (2010-11), chapter 8 (8 September 2010) and HC Deb, 10 November 2010, cols 359-388. Back

59   (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

60   (32045) 14512/10 (32046) 14515/10: see HC 428-v (2010-11), chapter 2 (27 October 2010) and HC Deb, 10 November 2010, cols 359-388. Back

61   See  Back

62   See  Back

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