European Scrutiny Committee Contents

8 Economic policy coordination




COM(10) 250




COM(10) 367

Commission Communication: Reinforcing economic policy coordination

Commission Communication: Enhancing economic policy coordination for stability, growth and jobs: tools for stronger EU economic governance

Legal base
Document originated(a) 12 May 2010

(b) 30 June 2010

Deposited in Parliament(a) 25 May 2010

(b) 7 July 2010

DepartmentHM Treasury
Basis of considerationEM of 26 July 2010
Previous Committee ReportNone
Discussion in CouncilNot known
Committee's assessmentPolitically important
Committee's decisionFor debate on the Floor of the House


8.1 The main elements of the EU's common economic policies are the Economic and Monetary Union, with the eventual aim that all Member States would adopt the euro,[30] and the Stability and Growth Pact.

8.2 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%.[31] Each year the Council of Economic and Finance Ministers (ECOFIN) issues an Opinion on the updated stability or convergence programme of each Member State.[32] 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.

8.3 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 (formerly Article 104 EC) 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.

8.4 In response to the current economic problems the EU has adopted a number of measures including the European Economic Recovery Plan of 2008 for fiscal stimulus[33] 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.[34] Such measures have been adopted whilst there has been a parallel discussion of the perception 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. The June 2010 European Council reiterated Heads of Government agreement on the need to address some of the issues.[35]

The documents

8.5 These two Commission Communications have a wide range of suggestions of how the EU economic governance framework could be strengthened, in order to prevent and manage future crises. The Commission believes that all of these ideas could be taken forward within the current Treaty framework. These Commission suggestions can be summarised under six headings:

  • strengthening the Stability and Growth Pact via sanctions;
  • stronger focus on the debt criterion of the Stability and Growth Pact;
  • improving macroeconomic surveillance;
  • creation of an "EU semester" for fiscal and budgetary policy co-ordination;
  • national fiscal frameworks; and
  • a crisis management framework for the euro-area.

Strengthening the Stability and Growth Pact via sanctions

8.6 Both Communications stress that sanctions under the Stability and Growth Pact should be used more frequently and should be drawn from a wider range of sources. The current sanctions regime only allows for fines or suspension of Cohesion Funds, but the second Communication, document (b), proposes that sanctions could involve suspension of other EU funds to Member States, such as Common Agricultural Policy or fisheries funds. The first Communication, document (a) proposes that the Stability and Growth Pact should be much more strictly enforced in future, particularly for Member States that persistently breach the Pact. The second Communication makes the same point, and suggests that sanctions in the excessive deficit procedure could be applied on a semi-automatic basis:

  • where a Member State is placed into excessive deficit EU funds to the Member State are temporarily suspended, but payments can restart when the Member State shows that it is meeting the Council recommendations. Because there is a significant time lag between commitments by the EU to fund particular programmes and the actual payments being made, the Member State should normally have sufficient time to announce deficit reduction plans that would enable the payment of these funds to be made on time, without delay to the end beneficiary; and
  • where a Member State is in excessive deficit and not meeting its Council recommendations EU funds to the Member State could be stopped for a period of one year. The Communication makes clear that end beneficiaries of funds, such as farmers or fisheries owners, should not suffer, as their government would be required to make up the extra money from the national budget.

In addition to these punitive measures the second Communication floats the idea of positive performance rewards to Member States that run sound fiscal policies.

8.7 The first Communication suggests that the timeframe for the excessive deficit procedure is currently too lengthy and that the steps under this process should be accelerated in future, particularly when dealing with Member States that have repeatedly breached their recommendations under the procedure.

8.8 The second Communication proposes sanctions also for the preventative arm of the Stability and Growth Pact:

  • if a Member State in the eurozone is not consolidating fast enough towards its medium term objective (a fiscal benchmark below 3% of GDP), it would be required to make an interest-bearing deposit with the EU and could be given Council rules dictating its expenditure plans;
  • this deposit would only be released back to the Member State once its fiscal position was closer to the medium term objective;
  • Cohesion Funds for a Member State that is making insufficient progress on fiscal consolidation could also be suspended, unless the Member State made improvements to the way in which it used cohesion funding, so that funds were being used more efficiently and effectively;
  • all these sanctions should be created for eurozone Member States by means of a new Regulation; and
  • the Commission will work on ways in which such sanctions could be applied to non-eurozone Member States in future.

(The UK cannot be made subject to sanctions under the Stability and Growth Pact, as sanctions are explicitly disapplied from the UK in Protocol No 15 TFEU.)

Stronger focus on the debt criterion of the Stability and Growth Pact

8.9 There are two fundamental rules of the Stability and Growth Pact — Member States are required to keep their deficits below 3% of GDP and their debt to GDP ratios below 60%. If they breach these limits, they can be placed in the excessive deficit procedure. Historically, the focus has been purely on the deficit criterion of the Pact, so some Member States have run debt levels well above 60% without being placed in excessive deficit procedure because their deficits have been below 3% of GDP.

8.10 The Communications propose that there should be new emphasis on the debt criterion of the Stability and Growth Pact. They suggest that:

  • Member States with high debt levels above 60% should be required to make greater annual efforts towards their medium term objective than Member States with lower debt levels; and
  • Member States that fail to reach these targets could be placed in the excessive deficit procedure even if their deficit is below 3% (or, if they were already in excessive deficit, these Member States could be kept in the excessive deficit procedure even if the deficit level has fallen back below 3%).

The second Communication:

  • recommends that the Council should still retain some discretion in analysis of Member States' debt levels, as debt is complex and has many drivers. Therefore Member States would not be automatically placed into the excessive deficit procedure on the basis of the debt criterion alone; and
  • proposes that a numerical benchmark should be set to define the appropriate pace of annual debt reduction once Member States are in the excessive deficit procedure. The current legislative provisions require that, once in the procedure, Member States should reduce their debt levels "at a satisfactory pace" — such a benchmark would make this more precise.

Improving macroeconomic surveillance

8.11 The first Communication suggests that the Commission should play a greater role in macroeconomic surveillance in future, in order to prevent Member States from building up imbalances that could pose a threat to their competitiveness or macroeconomic stability. The second Communication:

  • proposes a scoreboard of competitiveness indicators, including productivity, labour costs, employment, productivity, current accounts, foreign assets and real exchange rates;
  • says the scoreboard would be used to assess Member States' performance against these indicators, in order to develop tailored recommendations for individual Member States;
  • says such monitoring would go into more detail for eurozone Member States, in order to ensure that imbalances did not jeopardise the functioning of the single currency;
  • suggests that eurozone Member States could be given policy recommendations by the Commission and other euro-area Member States in the Council and, if necessary, the Commission could issue a warning directly to a Member State under the new provisions in Article 136 TFEU; and
  • recommends that in addition to preventative monitoring systems, there should also be an enforcement mechanism — an "excessive imbalances procedure".

This new procedure seems to be akin to the existing excessive deficit procedure. Member States with "excessive imbalances" would be required to make more regular reports to the ECOFIN Council and, for eurozone Member States, to the Eurogroup on progress of their reforms that the Council had recommended to them. As with the Stability and Growth Pact, a more stringent approach is suggested for eurozone Member States, given the greater potential for problems to spread to other members of the single currency.

Creation of an "EU semester" for fiscal and budgetary policy co-ordination

8.12 Both Communications suggest that fiscal and structural policies should be assessed at the same time of year as part of an "EU semester":

  • in January the European Council would identify the most significant economic challenges in the EU and give Member States guidance as to what their economic priorities should be for the coming year;
  • Member States would then factor this guidance into the preparation of their Stability and Convergence Programmes, which would be submitted in April, alongside the National Reform Programmes (reports under the Europe 2020 Strategy).[36] This would allow the macroeconomic situation of a Member State to be taken into account when deciding fiscal policy recommendations for it;
  • in June the ECOFIN Council would agree individual recommendations to Member States that could be incorporated into their draft national budgetary plans;
  • the European Council would subsequently endorse those recommendations;
  • Member States would then prepare their budgets over the autumn, as is currently the case for most of them, taking the EU recommendations into account; and
  • in January, the cycle would begin again, with the Commission making an analysis of how far Member States had acted on their Council recommendations.

National fiscal frameworks

8.13 The Communications stress that Member States' national fiscal frameworks should reflect their Treaty obligations under the Stability and Growth Pact. The second Communication:

  • calls for Member States that still prepare budgets with a twelve month horizon to move to a multiannual budgetary framework, like that of the UK, where each annual Budget also contains forecasts and projections for the next few years — this increases transparency and facilitates monitoring of the impact of fiscal decisions over the longer term;
  • recommends that Member States take action to improve the independence and quality of their national statistical and accounting systems, to ensure that they are sending accurate and reliable data to the EU; and
  • indicates that the Commission will propose draft legislation this autumn to set out the minimum standards that Member States' national fiscal frameworks must meet.

A crisis management framework for the euro-area

8.14 The first Communication:

  • states the importance of a permanent, clear framework for providing emergency financial support to eurozone Member States, in order to prevent problems spreading to other members of the eurozone;
  • refers to the need for financial assistance to be provided in the form of loans and under stringent policy conditionality in order to address the underlying imbalances; and
  • says such assistance would be based on the temporary European Stabilisation Financial Mechanism agreed at the emergency 9 May 2010 ECOFIN Council meeting.[37]

The Government's view

8.15 The Financial Secretary to the Treasury (Mr Mark Hoban) says that there are no immediate policy implications for the UK, as these documents are not proposals for legislation. He adds, however, that the Government agrees with many of the ideas in these Communications, noting that the EU is the UK's single largest trading partner and, as such, measures to improve the functioning of the eurozone and to reinforce economic stability across the EU are welcome.

8.16 The Minister then comments that:

  • from a legislative and a policy perspective, the UK is different from most other Member States by virtue of its opt-out from euro membership and of Protocol No 15 TFEU;
  • a number of ideas relating to the Stability and Growth Pact will, therefore, either not apply to the UK at all or will apply in a different way;
  • the Protocol makes it clear that the UK only has to "endeavour to avoid" excessive deficits, whereas under Article 126 TFEU all other Member States "shall avoid" excessive deficits;
  • because of this provision, sanctions cannot apply to the UK under the Stability and Growth Pact;
  • this is a point that has been made by both the Chancellor to the Van Rompuy Taskforce on economic governance[38] and the Prime Minister at June 2010 European Council;
  • although sanctions under the Stability and Growth Pact do not apply to the UK, the Government supports the idea that sanctions should be used more frequently in future for other Member States and should be applied on an automatic basis in cases where Member States have breached their excessive deficit procedure recommendations; and
  • Member States should be clear that failure to comply with excessive deficit procedure recommendations will result in sanctions, otherwise the Stability and Growth Pact will lack credibility as a mechanism to monitor and enforce fiscal discipline by Member States.

8.17 The Minister comments further that:

  • the Government believes that there is some merit in the idea of the "EU semester", which would allow the EU to consider each Member State's fiscal position at the same time as analysing its performance on structural reform issues;
  • this would also allow all Member States to be given recommendations under the Stability and Growth Pact at the same time of year, which would improve transparency and fairness of these recommendations;
  • as the June 2010 European Council conclusions[39] indicate, national budgetary procedures must, however, continue to be respected within the context of the "EU semester";
  • Section 5 of the European Communities (Amendment) Act 1993 provides that the Government can only submit information to the EU if it has first been approved by Parliament;
  • the Government has made it clear at the meetings of the Van Rompuy Taskforce and at June 2010 European Council that the UK will not submit its draft budget to the EU before it has been approved by Parliament;
  • instead, the Government will send its final Budget to the Commission at the same time as other Member States submit their national budgetary plans;
  • the Government supports the proposed greater focus on public debt within the framework of the Stability and Growth Pact;
  • the impact of the economic crisis will, however, leave many Member States with debt levels above 60% of GDP for a number of years;
  • the Government therefore believes that there should be an appropriate period of adjustment and that the primary focus should be on the path of debt;
  • it may be appropriate for countries with rapidly increasing debt levels to be put into the excessive deficit procedure or kept in the procedure when their deficits fall below 3% — debt is, however, a complex issue and some degree of discretion needs to be maintained;
  • the Government agrees that there may be some benefit in reinforcing national fiscal frameworks within eurozone Member States — measures to improve the quality of national statistics and the independence of national statistical authorities would be particularly welcome;
  • it supports the idea that Member States working on annual budgets should move to multiannual budgetary frameworks;
  • it will look closely at the detail of any legislative proposals made by the Commission on minimum requirements for national fiscal frameworks, to ensure that these respect the UK's national fiscal competence;
  • it believes that any minimum requirements for national fiscal frameworks must take due account of subsidiarity and must reflect Member States' respective responsibilities under the Stability and Growth Pact;
  • it believes that macroeconomic surveillance is important and agrees with the Commission that there should be a stronger surveillance mechanism for the eurozone, to avoid eurozone Member States building up unsustainable imbalances;
  • it believes that any new surveillance mechanism must be simple and proportionate in order to be effective and that it must not place unnecessary reporting burdens on Member States;
  • it will look carefully at the detail of any proposals to reinforce the macroeconomic surveillance mechanism, to ensure that the UK will not be made subject to onerous reporting under this process;
  • it understands the eurozone's apparent wish to improve the capacity to resolve any crises that emerge;
  • the Van Rompuy Taskforce was specifically tasked by the Spring 2010 European Council to identify the measures necessary to achieve "an improved crisis resolution framework" and those discussions are ongoing;
  • ultimately, it will be for the eurozone to decide whether there should be a permanent successor to the Special Purpose Vehicle European Financial Stabilisation Facility;[40] and
  • the Government's decision not to participate in the facility reflects its view that these are issues for the eurozone to resolve.


8.18 These documents suggest options important both for economic policy formation at the EU level and for policy formation by individual Member States. We recommend that the documents be debated on the Floor of the House, when Members might particularly wish to examine the possible consequences of the various suggestions for the freedom of action for individual Member States.

30   At present 16 Member States (Austria, Belgium, Cyprus, Germany, Greece, Finland, France, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia and Spain) have adopted the euro. Back

31   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

32   The Member States have adopted the euro have Stability Programmes, whereas the other 11 Member States (including the UK) produce Convergence Programmes. Back

33   (30213) 16097/08: see HC 19-i (2008-09), chapter 4 (10 December 2008) and Hansard, 20 January 2009, cols 626-653. Back

34   (31611) 9606/10 (31796) 12119/10: see chapter 7 in this Report. Back

35   See  Back

36   (31573) 9231/10 (31574) 9233/10: see chapter 9 in this Report. Back

37   See footnote 34. Back

38   See, paragraph 7. Back

39   See footnote 38. Back

40   See footnote 34. Back

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