4 Economic governance: European Semester
and macroeconomic imbalances
| (a)
(34856)
8660/13
COM(13) 199
(b)
(34877)
—
SWD(13) 125
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Commission Communication: Results of in-depth reviews under Regulation (EU) No. 1176/2011 on the prevention and correction of macroeconomic imbalances
Commission Staff Working Document: In-depth review for the United Kingdom in accordance with Article 5 of Regulation (EU) No 1176/2011 on the prevention and correction of macroeconomic imbalances
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| Legal base | —
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| Documents originated | 10 April 2013
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| Deposited in Parliament | 22 April 2013
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| Department | HM Treasury
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| Basis of consideration | Two EMs of 30 April 2013
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| Previous Committee Report | None
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| Discussion in Council | 21 June 2013
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| Committee's assessment | Politically important
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| Committee's decision | For debate in European Committee B, together with related documents previously recommended for debate[24]
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Background
4.1 In March 2010 the Commission proposed a "Europe 2020
Strategy",[25] to
follow on from the Lisbon Strategy. This strategy is aimed at
promoting smart, sustainable and inclusive economic growth. It
was endorsed by the March 2010 European Council.[26]
During the latter half of 2010 the Council adopted, in the context
of the Europe 2020 Strategy, broad guidelines for the economic
policies of the Member States and the EU and guidelines for the
employment policies of the Member States, together the "Europe
2020 integrated guidelines".[27]
4.2 The June, September and October 2010 European
Councils considered and endorsed measures to increase coordination
of EU economic governance, including strengthening the Stability
and Growth Pact and an annual "European Semester".
The European Semester is an EU-level framework for coordinating
and assessing Member States' structural reforms and fiscal/budgetary
policy and for monitoring and addressing macroeconomic imbalances.
It attempts to exploit the synergies between these policy areas
by aligning their reporting cycles. which would tie together consideration
of National Reform Programmes (reports on progress and plans on
structural reforms, under the Europe 2020 Strategy) and Stability
and Convergence Programmes (reports on fiscal policy, under the
Stability and Growth Pact).[28]
4.3 In January 2011 the Commission published
its first "Annual Growth Survey" — it noted that
this marked the start of the new cycle of EU economic governance
and the first European Semester.[29]
In January we considered the third Annual Growth Survey and recommended
it for debate in European Committee B.[30]
4.4 The Macroeconomic Imbalances Procedure (MIP)[31]
is a mechanism designed to identify and, if necessary, correct
harmful macroeconomic imbalances across the EU, which were a key
cause of the current sovereign debt crisis. The procedure forms
an element of the European Semester. The first stage of the MIP
is publication by the Commission of an annual Alert Mechanism
Report. Its purpose is to identify which Member States may have
macroeconomic imbalances. If a Member State is deemed at risk,
the Commission conducts a more detailed assessment contained within
an In-Depth Review (IDR). (As Cyprus, Greece, Ireland, Portugal
and Romania are under enhanced economic surveillance they are
not subject to IDRs.)
4.5 We considered the 2013 Alert Mechanism Report
and an associated Commission Staff Working Document in January
and recommended them for debate in European Committee B. In the
Report the Commission assessed each Member State against a scoreboard
of 11 macroeconomic indicators that monitor the potential development
of problematic external and internal imbalances based on data
for 2011. The Commission:
- identified 13 Member States
as showing signs of potential macroeconomic imbalances —
Belgium, Bulgaria, Denmark, Spain, France, Italy, Hungary, Malta,
the Netherlands, Finland, Slovenia, Sweden and the UK; and
- said that the UK exceeded the thresholds for
three of these indicators — general government debt, private
sector debt and export market share.[32]
4.6 There are three alternative outcomes following
the publication of IDRs. First, the Commission might find that
none of the indicators that exceed their threshold represents
a macroeconomic imbalance within a country and no further action
would be taken at this point. Secondly, the Commission might
identify that one or more of the indicators that exceed their
threshold represent an imbalance, but that none are deemed to
be "excessive". Under this scenario, the Commission
would propose non-binding recommendations under Article 121(2)
TFEU, the same legal basis as country-specific recommendations
issued as part of the European Semester. These recommendations
would be to address the identified imbalances under the "Preventive
Arm" of the procedure and would need to be agreed by Council
approval through QMV. They would subsequently be made public
under Article 121(4) TFEU. Thirdly, if the Commission considers
that an "excessive" imbalance exists, it would propose,
subject to Council approval by QMV, placing the Member State in
an "Excessive Imbalances Position". This would involve
more stringent requirements, which could, in the case of non-compliance
by eurozone Member States, result in escalating sanctions up to
and including a non-refundable fine of 0.1% of GDP. For non-eurozone
countries non-compliance would not lead to sanctions, but it would
be made public.
The documents
4.7 Last month the Commission published the findings
of IDRs into the 13 Member States identified in the 2013 Alert
Mechanism Report. The Commission Communication, document (a),
summarises its overall findings and its findings for each Member
State. The main findings are that:
- all 13 Member States have macroeconomic
imbalances;
- in 11 Member States, namely Belgium, Bulgaria,
Denmark, France, Italy, Hungary, Malta, the Netherlands, Finland,
Sweden and the United Kingdom, imbalances were not excessive —
all 11 will receive non-binding recommendations in June, which
will reflect the analysis in the IDRs;
- two countries, Spain and Slovenia, have excessive
imbalances;
- macroeconomic adjustment is taking place though
with differences in nature and pace across the Member States;
and
- weak economic activity and the fragile economic
outlook in some cases may have aggravated both the risks and the
cross-country spillovers from the macroeconomic imbalances which
have been analysed.
4.8 The Commission says of Belgium that it "is
experiencing macroeconomic imbalances, which deserve monitoring
and policy action" and uses the same formulation for the
other ten Member States without excessive imbalances. It identifies
several key issues in their economies pertaining to:
in the case of Belgium, external competitiveness
of goods and high level of public debt;
- Bulgaria, the impact of deleveraging in the corporate
sector, competitiveness and labour markets;
- Denmark, to the housing market, the high level
of indebtedness in the household and private sector and external
competitiveness;
- France, deterioration in the trade balance and
competitiveness levels and high public debt;
- Italy, loss of competitiveness and high public
indebtedness;
- Hungary, private sector deleveraging in a context
of high public debt and a weak business environment;
- Malta, sustainability of the public finances
and the strong link between the domestically-oriented banks and
the property market;
- the Netherlands, private sector debt and deleveraging
pressures, inefficiencies in the housing market and a large current
account surplus;
- Finland, deterioration in the current account
position and weak export performance;
- Sweden, private sector debt and deleveraging,
inefficiencies in the housing market and a large current account
surplus; and
- the UK, high levels of mortgage debt and external
competitiveness.
4.9 The Commission considers that "Slovenia
is experiencing excessive macroeconomic imbalances" and that
urgent policy action will be needed to address the rapid accumulation
of imbalances. It points to a particular risk regarding the financial
sector in light of corporate indebtedness and deleveraging, which
the Commission thinks is made worse by a predominance of state
ownership. As for Spain the Commission considers that it also
"is experiencing excessive macroeconomic imbalances".
Although the Commission recognises that adjustment is taking
place, it notes risks from high levels of domestic and external
debt and thinks that recent economic developments have made the
situation in Spain more serious.
4.10 The Commission's Communication is accompanied
by the 2013 IDRs for the 13 Member States concerned. That for
the UK, running to 65 pages, is document (b). It comprises an
executive summary, introduction, macroeconomic scene setter, in-depth
analysis of selected topics and policy challenges. Within the
executive summary, the Commission notes that the macroeconomic
imbalances identified within the UK's 2012 IDR, specifically high
levels of household debt and external competitiveness, remain.
It is also judged that the macroeconomic imbalances that the
UK is experiencing pose a greater threat to growth than to stability.
The introduction sets out the legal base for the MIP, the various
steps of the procedure and Commission's rationale for subjecting
the UK to an IDR for a second time to examine further the persistence
of imbalances or their unwinding.
4.11 The macroeconomic scene setter sets out
the severe impact the financial crisis has had on the UK economy
and gives an overall assessment of the UK's performance against
all of the macroeconomic indicators in the Commission's scoreboard.
The analysis highlights the value of assessing country-specific
circumstances. For instance, the UK continues to generate net
positive foreign income flows, despite having a Negative International
Investment Position.
4.12 The in-depth analysis section reviews the
external competiveness and levels of household/corporate sector
debt for the UK. The Commission notes that the UK is the worst
performer of any Member State on its export market share indicator,
although acknowledges that this is influenced by the sharp depreciation
of sterling when measuring the UK's exports in euros. Despite
losing export market share, from 2007 to 2011, export volumes
increased by 3.3% in the UK, at a time when GDP contracted by
2.3%. The Commission also acknowledges the extent to which the
weak growth in the EU has constrained the UK's external demand.
4.13 On the subject of private sector debt, the
Commission notes that the level of household debt remains high
and considers that it constitutes an imbalance. The progress
of deleveraging in both the corporate and household sectors is
highlighted, but the Commission reflects the inevitable tension
between the conflicting aims of deleveraging with a need for access
to credit to provide for investment-led growth. It acknowledges
the range of demand and supply side measures that the Government
is undertaking to stimulate the housing market.
4.14 The policy challenges section reflects the
Commission's preferred Government response to the issues raised
within the IDR. To improve external competitiveness it advocates
policy action in infrastructure, skills and access to finance.
To address household indebtedness, action is recommended to increase
residential construction, to reform property taxation and to encourage
longer term private renting.
The Government's view
4.15 On the Commission Communication, document
(a), the Financial Secretary to the Treasury (Greg Clark) says
that:
- the Government welcomes the
publication of the IDRs;
- these come at a crucial juncture where the EU
and eurozone urgently need to tackle its fiscal deficits and debt,
improve its economic growth prospects and take action to correct
harmful macroeconomic imbalances;
- the UK being placed in the "preventive arm"
of the MIP means that no further action will be taken under the
procedure; and
- more generally, while eurozone countries are
potentially subject to sanctions under the MIP, the UK is not
subject to fines or sanctions at any stage of the European Semester
process.
4.16 On the next stages of the European Semester
the Minister says that:
- the Commission is likely to
present a package of draft country-specific advice to Member States
in late May;
- since Spain and Slovenia have been identified
as having excessive imbalances, the Commission may present a recommendation
for a Council recommendation establishing the existence of excessive
imbalances in these Member States, thereby triggering the corrective
arm of the MIP;
- if, as expected, the Commission comes forward
with such a recommendation as part of its package of country-specific
advice in late May, a decision on excessive imbalances can be
expected at the ECOFIN Council on 21 June;
Member States which do not have an excessive imbalance,
such as the UK, will receive non-binding recommendations as part
of the Commission's package of country-specific advice, which
are expected to reflect the analysis contained in the IDR; and
- the advice addressed to Member States under the
European Semester will be formally endorsed by Heads of State
or Government at the European Council on 27-28 June.
4.17 In his Explanatory Memorandum on the UK
IDR, document (b), the Minister says that the Government takes
note of the Commission's assessment placing the UK in the "preventive
arm" of the MIP and reiterates that, this means, consistent
with the Commission's approach that Member States that had taken
effective policy action to address imbalances would not be subject
to follow-up measures, that no further steps are foreseen under
the procedure, and that the UK is not subject to sanctions under
the MIP or at any point in the European Semester.
4.18 The Minister then comments that:
- the Government continues in
its efforts to increase exports as part of the strategy to rebalance
the economy;
- the OBR's March 2013 forecast shows UK exports
growing strongly in future years, above 5% per year from 2015;
- import growth is expected to be weaker, leading
the trade deficit to narrow and driving a positive contribution
to GDP growth;
- with the Autumn Statement 2012 the Government
announced £70 million in additional funding for UK Trade
and Investment, along with additional flexibilities, to enable
it to deliver improved services and refocus its activities on
the highest value opportunities and emerging markets;
- in 2011, the EU still represented approximately
half of the UK export market, but exports to emerging markets
have been rising faster since 2009;
- the unsustainable pre-crisis borrowing in the
private sector was accompanied by an increasing reliance on poorly
regulated growth in the financial sector;
- the Government's macroeconomic strategy as set
out in the June 2010 Budget is designed to lay the foundation
for a stronger more balanced economy in the future;
- private sector debt is falling as a proportion
of GDP (from 221% in 2007 to 205% in 2011) but remains above the
Commission's threshold of 160%;
- the level of household debt should be seen in
the context of the UK's internationally high owner-occupation
rate and households' stock of financial and housing assets (79%
of household debt is secured against property);
- the UK housing market is undergoing a period
of gradual recovery;
- household debt has fallen as a proportion of
income from 175% in the first quarter of 2008 to 144% currently;
- in the 2013 Budget, the Government announced
£5.4 billion of financial support to tackle long term problems
in the housing market;
- this builds on the £11 billion the Government
has already committed to investing in housing during this Spending
Review period; and
- the Government is providing £225 million
more funding for affordable housing through the guarantees programme
to support a further 15,000 affordable homes by 2015.
Conclusion
4.19 We have recommended that the Alert Report
Mechanism and its related Commission Staff Working Document be
debated in European Committee B, once the UK IDR is available.[33]
Accordingly we now recommend that the IDR, document (b), together
with the overarching Commission Communication, document (a), be
joined in a European Committee B debate with the earlier documents.
We have also recommended the Annual Growth Report for debate
in European Committee B.[34]
4.20 Given the stage now reached in the European
Semester we suggest that this document should also be melded into
the one debate.
4.21 However the debate should not take place
until we have seen and been able to recommend for the same debate
the forthcoming country-specific recommendations. But the debate
should take place before the ECOFIN Council of 21 June.
24 (34483) 16513/12, (34487) 16671 + ADDs 1-2: see
HC 86-xxvi (2012-13), chapter 3 (9 January 2013); and (34486)
16669/12 + ADDs 1-2: see HC 86-xxvi (2012-13), chapter 6 (9 January
2013). Back
25
(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
26
See http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/113591.pdf. Back
27
(31573) 9231/10, (31574) 9233/10: see HC 428-i (2010-11), chapter
9 (8 September 2010), HC 428-v (2010-11), chapter 3 (27 October
2010) and Gen Co Debs, European Committee B, 10 January
2011, cols. 3-30. Back
28
See http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/115346.pdf,
http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/116547.pdf
and http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/117496.pdf. Back
29
(32445) 18066/10 + ADDs 1-3: see HC 428-xvi (2010-11), chapter
2 (9 February 2011) and Gen Co Debs, European Committee
B, 29 March 2011, cols. 3-20. Back
30
Op cit. Back
31
MIP rests on two pieces of legislation: Regulation (EU) No 1176/2011
of 16 November 2011 on the prevention and correction of macroeconomic
imbalances and Regulation (EU) No 1174/20011 of 16 November 2011
on enforcement measures to correct excessive macroeconomic imbalances
in the euro area. Back
32
Op cit. Back
33
Op cit. Back
34
Op cit. Back
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