10 Economic governance
(32550)
5570/11
| Opinion of the European Central Bank of 16 February 2011 on economic governance reform in the European Union
|
Legal base |
|
Deposited in Parliament | 1 March 2011
|
Department | HM Treasury
|
Basis of consideration | EM of 21 March 2011
|
Previous Committee Report | None
|
To be discussed in Council | Not known
|
Committee's assessment | Politically important
|
Committee's decision | Cleared
|
Background
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.
Conclusion
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 http://www.ecb.int/pub/pdf/other/reinforcingeconomicgovernanceintheeuroareaen.pdf.
Back
62
See http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/117236.pdf.
Back
|