Thirty-ninth Report of Session 2012-13 - European Scrutiny Committee Contents


8   Economic and Monetary Union

(a)

(34794)

6849/13

COM(13) 165

(b)

(34795)

7945/13

COM(13) 166


Commission Communication: Towards a deep and genuine Economic and Monetary Union — the introduction of a Convergence and Competitiveness Instrument

Commission Communication: Towards a deep and genuine Economic and Monetary Union — ex ante coordination of plans for major economic policy reforms

Legal base
Documents originated20 March 2013
Deposited in Parliament(a) 26 March 2013

(b) 25 March 2013

DepartmentHM Treasury
Basis of considerationTwo EMs of 5 April 2013
Previous Committee ReportNone
Discussion in Council(a) 27-28 June 2013 (European Council)

(b) Not known

Committee's assessmentPolitically important
Committee's decisionNot cleared; further information requested

Background

8.1  In recent years various measures have been discussed, and some introduced, to strengthen economic governance in the eurozone and in the wider EU. Much of this activity has been concerned with countering the present eurozone difficulties. Measures introduced or proposed include the "Six Pack" of legislation strengthening the Stability and Growth Pact, the Treaty for Stability Coordination and Governance (TSCG), the "Two Pack" of proposed legislation aimed at strengthening economic governance in the eurozone and proposals for a "Banking Union" concerning supervision of the banking sector, with a Single Supervisory Mechanism.

8.2  The Commission's Communication A blueprint for a deep and genuine EMU — Launching a European debate and the President of the European Council's Report Towards a genuine Economic and Monetary Union contained proposals for short-, medium- and long-term measures on how to strengthen cooperation and integration in the financial, fiscal, economic and political fields. Among the issues to be implemented in the short run to complete the governance framework for economic policy coordination in general, and for the single currency in particular, were "contractual arrangements" combined with a solidarity mechanism for national structural reforms for competitiveness and growth, lack of implementation of which would have a spillover effect on other Member States but implementation of which would need to be carried out by the Member State under particular stress.[23]

The documents

8.3  In its Communication, document (a), the Commission discusses introduction of a Convergence and Competiveness Instrument (CCI), that would combine a contractual arrangement linked to certain key reforms, with a mechanism for financial support for the implementation of these reforms. It presents options and poses 18 questions to elicit input from stakeholders on what should be the scope of the CCI, which Member States should be eligible, how it should be financed and how it should fit into the overall system of economic governance of the eurozone and the EU. The Commission "aims to address these questions as part of the debate which is now underway between key stakeholders on the next steps towards the completion of the EMU, in particular the European Parliament, the Member States and the national parliaments".

8.4  The Commission says that the aim is to help Member States facing a difficulty that may affect the entire eurozone to undertake necessary reforms through a CCI sooner than they would be able to do on their own. It comments that the proposal for mutually agreed contracts supported by a solidarity mechanism would provide "solidarity" in the form of financial help to support "increased economic responsibility and fiscal discipline" which would be set out clearly and with conditions through "contractual arrangements".

8.5  The Commission suggests that:

  • as part of the new economic governance of the eurozone and of the EU, there is a need to ensure that the structural reforms which are needed to remove key weaknesses in some economies take place and take place earlier than has recently been the case;
  • its proposal is an instrument "designed to meet the specific needs that arise from euro area membership";
  • the existing economic surveillance framework should be expanded to include the use of a dedicated instrument that would assist Member States undertaking certain key reforms;
  • while such reforms are first and foremost in the interest of the Member State undertaking them, they are also in the interest of the wider eurozone and EU more resilient Member States contribute positively to the wellbeing of their partners, while delaying necessary reforms because of short term negative domestic impacts can have negative spill over effects on other partners; and
  • safeguards against moral hazard would be needed to ensure that reforms were not delayed with a view to becoming eligible for financial assistance and to guard against financing reforms that should be undertaken anyway.

8.6  Under the arrangements canvassed by the Commission:

  • the "contractual arrangement" would build on the existing EU surveillance framework and would link the policy guidance resulting from the Country Specific Recommendations in the European Semester and the national process of structural reform implementation;
  • the CCI could cover the eurozone Member States, excluding those with a macroeconomic adjustment programme, and ways should be found to allow non-eurozone Member States to take part, in particular those preparing for adoption of the euro;
  • use of the CCI might be available to all participating Member States, available when a participating Member State is under the Macroeconomic Imbalances Procedure or available following an invitation by the Commission to a participating Member State;
  • for voluntary participation Member States could present a plan for a set of concrete reforms with clear deadlines, building on relevant Country Specific Recommendations;
  • if the CCI applied to eurozone Member States under the preventative arm of the Macroeconomic Imbalances Procedure, the proposed reforms should include the recommendations under procedure, in particular measures addressing competitiveness, promoting financial stability and improving the functioning of labour, product and services market and thus the capacity of the economy;
  • for eurozone Member States under the excessive imbalance procedure, in order to avoid overlapping surveillance tools, the mandatory Corrective Action Plan would replace a contractual arrangement in this case, the CCI would speed up the correction of imbalances;
  • Member States' reform plans would be assessed by the Commission, including for the appropriateness of the proposed measures, the additional reform effort and the extent to which they address the economic weaknesses which are taken up in the relevant Country Specific Recommendations
  • on the basis of its assessment, the Commission would negotiate the details of the plan with the proposing Member State before making a formal proposal to the Council to approve the contractual arrangement;
  • the Council would then approve (possibly with modifications) the specific actions proposed together with the agreed timetable;
  • should the Member State and Commission fail to reach an agreement, or should the Council disagree with the arrangement, there would be no contractual arrangement and consequently no financial support;
  • the Commission would monitor implementation of the arrangement on an annual basis as part of the European Semester, with Member States reporting on progress in their National Reform Programmes and, where needed, both the Commission and the Member State could propose changes to the contractual arrangement, leading to a new negotiating process;
  • increased EU involvement in the reform process would necessitate a timely and active involvement of national parliaments and other relevant national stakeholders;
  • Member States would need to ensure national commitment to the implementation of the contractual arrangements by involving their national parliamentary assemblies, preferably before submission of their plans for a set of concrete reforms and in all circumstances, national parliaments should be involved before the endorsement of the contractual arrangements by the Council;
  • in order to ensure democratic legitimacy and accountability at EU level, the European Parliament should be fully involved;
  • one option for funding would be for all participating Member States to contribute, (though the Commission is considering different options);
  • irrespective of the option chosen, the mechanism could be based either on dedicated contributions, for example on the basis of a GNI key, or on the proceeds of new specific financial resources dedicated to it;
  • the mechanism would be included in the EU budget as external assigned revenues;
  • to maximise its potential impact, the Commission is considering proposing that the financial support would be committed up front at the moment of approval of the contractual arrangement and paid in regular instalments or instalments otherwise linked to the agreed timetable for reforms;
  • the financial support would be conditional on the full and timely implementation of the reforms set out in the arrangement; and
  • the Commission could issue warnings if a Member State does not meet the contract, requesting the Member State to correct the deviation, with a new timeline were this is not met, the financial support would be withheld.

8.7  As for the next steps the Commission says that "On the basis of further discussion with the European Parliament and the Council, [it] will make a proposal in the course of 2013".

8.8  The Commission introduces its Communication about ex ante coordination of plans for major economic policy reforms, document (b), by saying that:

"The new economic surveillance architecture in the EU, and in the Euro area in particular, provides for differentiation between Member States depending on their economic conditions. This is reflected in different policy instruments ranging from preventive surveillance through the European Semester [implemented through the Europe 2020 Strategy and the preventive arms of the Stability and Growth Pact and the Macroeconomic Imbalances Procedure] to corrective surveillance [under the corrective arms of the Stability and Growth Pact and the Macroeconomic Imbalances Procedure] to crisis surveillance of a Member State that seeks recourse to the backstops.

"To complement this governance framework, the Commission considers it important that national plans for any major economic policy reforms are assessed and discussed at EU-level before final decisions are taken at the national level. This would also ensure that Member States internalise the EU-level dimension of key reforms in their national decision-making process. This is what is known as ex ante coordination, which also reflects the spirit of Article 121(1) of the Treaty ['Member States shall regard their economic policies as a matter of common concern.']

"The concept of ex ante coordination of plans for major economic policy reforms was introduced by the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union (TSCG). Article 11 of the TSCG includes a commitment to discuss ex ante and, where appropriate, coordinate all plans for major economic policy reforms.

"The Commission already set out some reflections on ex ante coordination in its Blueprint for a Deep and Genuine Economic and Monetary Union in November 2012."

8.9  In its discussion of ex ante coordination the Commission poses 11 questions to elicit input from stakeholders. It says that "This Communication is a contribution to the debate which is now underway between key stakeholders on the next steps towards a deep and genuine EMU, in particular the European Parliament, the Member States, and the national parliaments. It concentrates on ways of implementing ex ante coordination of plans for major economic policy reforms under the existing Treaties".

8.10  The Commission states that:

  • the surveillance of economic, budgetary and structural policies that has been brought together into the European Semester has made the Economic and Monetary Union more robust than it was at the onset of the crisis and better equipped for the future;
  • the new economic surveillance architecture in the EU, and in the eurozone in particular, provides scope for differentiation between Member States depending on their economic conditions;
  • to complement this existing governance framework, it is important that national plans for any major economic policy reforms are assessed and discussed at EU-level before final decisions are taken at national level;
  • this would ensure that Member States internalise the EU-level dimension of these key reforms in their national decision-making process;
  • this is what the Commission considers as ex ante coordination;
  • although the current EU economic surveillance framework includes a process for economic policy coordination, it does not provide for a structured ex ante discussion and coordination of major economic reform plans, as foreseen in Article 11 of the TSCG, which initially introduced the concept of ex ante coordination of major economic reform plans.

8.11  The Commission suggests that ex ante coordination should concern only major national economic reform plans, which would be selected based on the following filters:

  • trade and competitiveness the Commission says that these are among the main channels through which spillovers are transmitted and that product, services and labour market reforms, as well as certain tax reforms, may affect employment and growth in the implementing Member State and hence the demand for products and services from other Member States;
  • spillovers through financial markets the Commission says that these may occur when reforms increase the Member State's ability to withstand external shocks and limit the risk of contagion of risk premiums in case of concerns with regard to debt sustainability; and
  • political economy considerations the Commission says that coordinated reforms across Member States can help communicate the broader welfare effects of structural reform, that Member States can learn from each other's policies and that benchmarking, mutual learning and the exchange of best practices across the Member States can be helpful.

8.12  The Commission suggests a framework for ex ante coordination as follows:

  • as spillover effects are magnified in the eurozone due to stronger interdependence among eurozone Member States, it is the Commission's intention to establish a binding framework for all eurozone Member States
  • ex ante coordination could, however, be extended to the non-zone Member States, which would reflect the spirit of Article 121(1) TFEU;
  • coordination would form an integral part of the European Semester;
  • Member States would submit to the Commission their major economic reform plans in a timely manner and at any time in the year — National Reform Programmes could be an appropriate method to submit the information and the Commission or Council could invite Member States to submit information;
  • the Commission would make an assessment of the plan and adopt an opinion — sufficient time would be needed to allow a proper assessment, while, at the same time, the national decision-making process should be taken into account;
  • the assessment would cover the extent to which the reform is likely to meet its declared purpose and contribute to improving competitiveness and the adjustment capacity of the Member State and the social dimension would be taken into account;
  • the assessment would pay specific attention to the impact of the reform on the functioning of the eurozone and possible spillover effects on other Member States;
  • the Commission assessment would be presented to the Council which could suggest modifications to the reform plan should it be justified by the expected effects on other Member States and the functioning of the Economic and Monetary Union;
  • Commission and Council opinions would be taken into account in advice issued to Member States in the context of the European Semester;
  • direct legitimacy and accountability of the process must start with national democratic institutions;
  • the new process would fully respect national decision-making powers, with the decision on the reform plan remaining with the Member State itself; and
  • the relevant committee of the European Parliament could offer the opportunity to the Commission, the President of the Council or the President of the Eurogroup to appear before the committee to discuss the Commission opinion on a Member State's reform plans and any conclusions of the discussions in the Council.

8.13  In regard to the next steps the Commission says that "Following this consultation and other discussions with the European Parliament and the Council, the Commission will make a formal legislative proposal, in the framework of existing Treaties, in the course of 2013."

The Government's view

8.14  In his Explanatory Memorandum about the Commission Communication on a Convergence and Competitiveness Instrument, document (a), the Financial Secretary to the Treasury (Greg Clark) says that:

  • the Government welcomes the efforts the eurozone is making to resolve the current crisis and to put in place a more stable framework to avoid future crises;
  • it considers that introduction of a CCI for the eurozone could be a potentially valuable addition to its surveillance tools, which may help to strengthen the governance and stability of the eurozone by tackling spillovers between eurozone Member States and ensuring that necessary reforms are undertaken;
  • the Government welcomes that the Commission is clear that this measure would not automatically cover all Member States, which is right as these challenges stem from the single currency;
  • there are still many unresolved issues, including the precise procedure that will be used, the interface with the existing European Semester process and the source of funding for financial support;
  • the Government will be involved in negotiations in order to best serve the national interest; and
  • following this consultation, the CCI will be discussed at the June European Council.

8.15  In his second Explanatory Memorandum, on the Commission Communication about ex ante coordination, document (b), the Minister says, again, that the Government welcomes the efforts the eurozone is making to resolve the current crisis and put in place a more stable framework to avoid future crises. He continues that:

  • the Government considers that ex ante coordination for the eurozone could be another potentially valuable addition to its surveillance tools, which may help to strengthen the governance and stability of the eurozone, again by tackling spillovers between eurozone Member States;
  • it welcomes that the Commission is clear that this measure would be binding for eurozone Member States only the UK will not automatically be covered which is right as these challenges stem from the single currency;
  • there are still unresolved issues, including which reforms should be covered and the precise procedure that will be used; and
  • the Government will be involved in negotiations in order to best serve the national interest.

Conclusion

8.16  Although the ideas the Commission canvasses in these two Communications appear to have no immediate direct implications for the UK, they may lead to important developments with indirect effects on the UK. Although the Communications are partially framed as consultations, we presume that the matters discussed will be carried forward with the Commission in discussions and negotiations, rather than in formal governmental responses. Nevertheless we should like to hear about developments on the Commission's proposals in either of the Communications before the June European Council. Meanwhile the documents remain under scrutiny.





23   (34452) -; (34453) -: see HC 86-xxiv (2012-13) 12 December 2012 and HC 86-xxviii (2012-13) 16 January 2013. Back


 
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