8 Economic policy coordination
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(31618)
9433/10
COM(10) 250
(b)
(31776)
11807/10
COM(10) 367
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Commission Communication: Reinforcing economic policy coordination
Commission Communication: Enhancing economic policy coordination for stability, growth and jobs: tools for stronger EU economic governance
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| Legal base | —
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| Document originated | (a) 12 May 2010
(b) 30 June 2010
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| Deposited in Parliament | (a) 25 May 2010
(b) 7 July 2010
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| Department | HM Treasury
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| Basis of consideration | EM of 26 July 2010
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| Previous Committee Report | None
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| Discussion in Council | Not known
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| Committee's assessment | Politically important
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| Committee's decision | For debate on the Floor of the House
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Background
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.
Conclusion
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 http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/115346.pdf.
Back
36
(31573) 9231/10 (31574) 9233/10: see chapter 9 in this Report. Back
37
See footnote 34. Back
38
See http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/113591.pdf,
paragraph 7. Back
39
See footnote 38. Back
40
See footnote 34. Back
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