European Scrutiny Committee Contents

15 Economic governance




COM(11) 818




COM(11) 821




COM(11) 819

Green Paper on the feasibility of introducing stability bonds

Draft Regulation on common provisions for monitoring and assessing draft budgetary plans and ensuring the correction of excessive deficit of the Member States in the euro area

Draft Regulation on the strengthening of economic and budgetary surveillance of Member States experiencing or threatened with serious difficulties with respect to their financial stability in the euro area

Legal base(a) —

(b) and (c) Articles 121(6) TFEU; co-decision; QMV of Member States in the eurozone

DepartmentHM Treasury
Basis of considerationMinister's letter of 13 February 2012
Previous Committee ReportHC 428-xlvi (2010-12), chapter 11 (11 January 2012)
Discussion in CouncilNot known
Committee's assessmentPolitically important
Committee's decisionCleared


15.1 In December 2011 the so-called "Six Pack" of legislative measures entered into force. These six Regulations, which were in part motivated by the general financial and economic crisis, were concerned with improving economic governance within the EU. Some parts of the legislation only apply to Member States within the eurozone.[62]

15.2 These draft Regulations, documents (b) and (c), are intended, in the light of the ongoing eurozone crisis, to enhance economic governance in the eurozone, by building on the "Six Pack" Regulations, so as to strengthen budgetary discipline and financial stability in eurozone Member States. The draft Regulation, document (c), would provide a framework for enhanced surveillance by the Commission for countries requesting assistance programmes from the European Financial Stability Facility (EFSF) or European Stability Mechanism (ESM), as well as countries experiencing serious financial disturbance or are at risk of it. The draft Regulation, document (b) would provide for monitoring and assessment of draft budgets and closer monitoring for eurozone Member States in excessive deficit.

15.3 In its Green Paper on stability bonds, document (a), the Commission analyses issues associated with joint issuance of debt in the eurozone. In the paper the Commission:

  • presents three models for stability bonds, with the variation between models based on the type of guarantees and the proportion of stability bonds within a Member State's total bond issuance;
  • examines three broad approaches — a full substitution of joint stability bonds in place of national bonds, a partial substitution and the issuing of several but not joint guarantees on stability bonds;
  • sets out the likely effects of each of these approaches;
  • details the advantages to eurozone Member States of a common instrument with higher liquidity and lower credit risk including alleviating the current sovereign debt crisis, reinforcement of financial stability in times of crisis, improved stability for the banking system, facilitating the transmission mechanism of eurozone monetary policy and improving market efficiency;
  • recognises the disadvantages associated with stability bonds, with particular reference to moral hazard — greater joint issuance yields higher benefits but higher costs in terms of moral hazard; and
  • makes clear that any move towards introducing stability bonds would need to be accompanied by a simultaneous strengthening of budgetary discipline.

15.4 When last month we considered these documents we were told by the Government that:

  • the draft Regulations would apply only to the eurozone and so there are no direct policy implications for the UK;
  • they form part of a larger discussion on economic governance that is currently taking place between Member States;
  • securing the UK's national interest determines the Government's approach to the current crisis in the eurozone;
  • the UK national interest is best served by a stable eurozone and an increasingly competitive, open and productive economy and single market across the whole EU;
  • the Government therefore strongly supports measures to protect and strengthen the eurozone and the wider EU economy;
  • strong and responsible economic governance is required across the EU and in particular the eurozone;
  • these proposals address the closer fiscal coordination and discipline that the eurozone needs in order to restore market confidence and better control debt and deficits — however, it is likely that further steps will be needed;
  • further proposals could be brought forward in 2012, following agreements at the European Council on 9 December 2011; and
  • the Government welsomes the two proposals.

On the Green Paper, document (a), we heard that:

  • the Government welcomes the document — it thinks the case for stability bonds requires serious consideration and the paper marks an important stage in the debate;
  • stability bonds may, in future, form a key component of the successful functioning of Economic and Monetary Union; and
  • the remorseless logic of monetary union entails greater fiscal integration.

We reported that:

  • although these documents are primarily for eurozone Member States, we were not clearing them from scrutiny;
  • rather, we wanted the Government to substantiate its assertion that these matters have no direct policy implications for the UK;
  • we had been concerned for some time that assertions, such as this, about eurozone matters were belied by comments, such as made in this instance, about the Government having secured Council consideration of requests for financial assistance, in negotiations on the ESM, to protect the UK national interest; and
  • additionally, we should like to see any response the Government was making to the Green Paper.[63]

The Minister's letter

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

  • the Government supports the eurozone's desire to do what is needed to stabilise itself and place the single currency on a sustainable footing;
  • it broadly supports the aims of the two legislative proposals and considers that they can be part of a strengthened governance framework for the eurozone;
  • the two draft Regulations are brought forward by the Commission under Article 136 TFEU — as such their provisions do not apply to the UK and it would not be bound by them; and
  • in this regard, there are no direct policy implications for the UK.

15.6 The Minister continues that:

  • the UK does, of course, have a significant interest in how the eurozone tackles the crisis — its economy is highly integrated with the eurozone economy; and
  • as such, it is right that with regard to, for example, the draft Regulation on surveillance, document (c), the full Council (and where appropriate the Economic and Financial Committee) is involved in discussion and decisions on these matters.

15.7 As for the Commission's Green Paper on Stability Bonds, the Minister says that:

  • this was a public consultation that ended on 8 January 2012;
  • the Government did not respond to this consultation; and
  • the Commission makes clear that it will seek the views of Member States in the appropriate bodies of the EU.


15.8 We are grateful to the Minister for his further comments. We have no more questions to ask and now clear the documents.

62   (32036) 14498/10 (32043) 14497/10 (32044) 14496/10 (32045) 14512/10 (32046) 14515/10 (32047) 14520/10: see HC 428-v (2010-11), chapters 1 and 2 (27 October 2010) and HC Deb, 10 November 2010, cols 359-387. Back

63   See headnote. Back

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Prepared 29 February 2012