1 European Semester 2014
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(35855)
7413/14
COM(14) 150
(b)
(35858)
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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 Occasional Paper: Macroeconomic imbalances: United Kingdom, 2014
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| Legal base
| — |
| Documents originated
| (a) 5 March 2014
(b) —
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| Deposited in Parliament
| (a) and (b) 11 March 2014
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| Department
| HM Treasury
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| Basis of consideration
| Two EMs of 31 March 2014
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| Previous Committee Report
| None |
| Discussion in Council
| None planned
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| Committee's assessment
| Politically important
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| Committee's decision
| For debate in European Committee B, before the June 2014 European Council, together with other documents relevant to the European Semester
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Background
1.1 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).
1.2 The European Semester cycle begins
with an Annual Growth Survey by the Commission, followed by a
series of overarching and country specific documents from the
Commission and culminating in examination of the overall and country-specific
situations by the European Council.
1.3 The Annual Growth Survey for the
present cycle was accompanied by a draft Joint Employment Report
and a Commission Report: A single market for growth and jobs:
an analysis of progress made and remaining obstacles in the Member
States — contribution to the Annual Growth Survey 2014.
1.4 An element of the European Semester
process is the Macroeconomic Imbalances Procedure (MIP). The MIP
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. It has a preventative
and a corrective arm. Under the corrective arm, 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 Procedure". 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 first stage of the MIP is publication by the
Commission of an annual Alert Mechanism Report.
1.5 The centrepiece of the Alert Mechanism
Report is the "scoreboard". Each Member State is assessed
against a scoreboard comprising 11 macroeconomic indicators that
monitor the potential development of problematic external and
internal imbalances. In the Alert Mechanism Reportfor the 2014
European Semester the UK was said to have exceeded the thresholds
for three of these indicators: general government debt, private
sector debt and export market share.The 2014 Alert Mechanism Report
identified 16 Member States as showing signs of potential macroeconomic
imbalances: Belgium, Bulgaria, Croatia, Denmark, Spain, France,
Germany, Italy, Hungary, Luxembourg, Malta, the Netherlands, Finland,
Slovenia, Sweden and the UK.
1.6 We considered the three Annual Growth
Survey documents and the Alert Mechanism Report for the 2014 European
Semester in December 2013 and recommended them for debate in European
Committee B before consideration by the relevant functional Councils
ahead of the March European Council.[1]
Our intention was, as the Government knew, that these documents,
the overarching introductory stage of the cycle, should be debated
then, with a separate debate to follow later on documents concerning
the detailed emerging conclusion of the cycle. However, the Government
deliberately ignored our timing recommendation, thus consequentially
breaching the House's Scrutiny Reserve Resolution of 17 November
1998. Nevertheless, the debate recommendation is extant.
The documents
The Commission Communication
1.7 In its Communication, document (a),
the Commission publishes the findings of In-Depth Reviews (IDRs)
into the 16 Member States identified in the 2014 Alert Mechanism
as showing signs of potential macroeconomic imbalances, as well
as on Ireland which had just completed its adjustment programme.
Publication of the IDRs represents the second stage of the MIP.
Cyprus, Greece, Portugal and Romania are already under enhanced
economic surveillance as part of their macroeconomic assistance
programmes and so are not subject to IDRs.
Main findings of theIDRs
1.8 The Commission finds that macroeconomic
imbalances in the EU are gradually unwinding but notes, however,
that the nature, scale and risks presented by imbalances have
changed over time and vary greatly from one Member State to another.
It draws attention to the close linkages between eurozone economies
and the potential for policies in one eurozone Member State to
impact on others. The Commission:
· considers, therefore, that
certain imbalances in the eurozone should be treated as common
rather than Member State-specific challenges, for instance restoring
economic growth, financial market function, deflationary pressure,
and broader challenges around wage adjustments and supporting
domestic demand; and
· points specifically to the
role of large eurozone Member States in supporting economic growth
and demand.
1.9 The Commission presents a number
of findings which apply to several Member States. For instance,
while many Member States have reduced current account deficits,
this has not always translated into improved competitiveness;
equally, Member States with large and persistent current account
surpluses should look to rebalance towards domestic demand. The
Commission points to the role of both cost and non-cost competitiveness
in boosting export market shares and notes that a correction in
house prices has occurred in many Member States. Finally, the
Commission notes that unemployment — and youth unemployment
in particular — remains a matter of concern for most Member
States.
1.10 The Commission considers 14 Member
States to have macroeconomic imbalances: Belgium, Bulgaria, Germany,
Ireland, Spain, France, Croatia, Italy, Hungary, Netherlands,
Slovenia, Finland, Sweden, and the United Kingdom.Three countries,
Croatia, Italy and Slovenia, are found to have excessive imbalances
(Slovenia was already found to have excessive imbalances in its
2013 IDR). Three countries, Ireland, Spain and France, have imbalances
that require decisive policy action. Three countries, Denmark,
Malta and Luxembourg, are not experiencing imbalances.
1.11 Given that public debt levels are
also a feature of macroeconomic imbalances across the EU, the
Commission also refers to two recommendations, adopted on the
same day it adopted this Communication, for France and Slovenia
to ensure a timely correction of their excessive deficits. These
recommendations were issued under a "Two Pack" Regulation
which applies only to the eurozone and the Commission expects
both countries to report on measures in a dedicated section of
their forthcoming 2014 Stability Programmes, under the Stability
and Growth Pact.
Findings by Member State
1.12 The Commission:
· considers that Belgium "continues
to experience macroeconomic imbalances, which require monitoring
and policy action";
· identifies several key issues
in Belgium's economy pertaining to external competitiveness of
goods and a high level of public debt;
· considers that Bulgaria "continues
to experience macroeconomic imbalances, which require monitoring
and policy action";
· identifies several key issues
in Bulgaria's economy pertaining to the protracted adjustment
of the labour market to the imbalances that occurred during the
accession to the EU;
· considers that Germany "is
experiencing macroeconomic imbalances, which require monitoring
and policy action";
· identifies the high current
account surplus as the key issue in Germany's economy;
· considers that Ireland "is
experiencing macroeconomic imbalances, which require specific
monitoring and decisive policy action";
· identifies several key issues
in Ireland's economy pertaining to the financial sector, indebtedness
levels (both public and private) and the labour markets;
· considers that Spain "is
experiencing macroeconomic imbalances which require specific monitoring
and decisive policy action";
· identifies, although it no
longer considers Spain's imbalances to be "excessive",
risks from high levels of domestic and external debt;
· considers that France "continues
to experience macroeconomic imbalances, which require specific
monitoring and decisive policy action";
· identifies several key issues
in France's economy pertaining to the deterioration in the trade
balance and competitiveness levels and notes that high public
debt deserves continued attention;
· considers that Croatia "is
experiencing excessive macroeconomic imbalances, which require
specific monitoring and strong policy action";
· identifies several key issues
in Croatia's economy pertaining to the external liabilities, export
performance and indebtedness (from the public and the corporate
sector);
· considers that Italy "is
experiencing excessive macroeconomic imbalances, which require
specific monitoring and strong policy action";
· identifies several key issues
in Italy's economy pertaining to loss of competitiveness as well
as high public indebtedness;
· considers that Hungary "continues
to experience macroeconomic imbalances, which require monitoring
and decisive policy action";
· identifies several key issues
in Hungary's economy pertaining to export performance, the fragile
financial sector and deleveraging in a context of high public
and private debt;
· considers that the Netherlands
"continues to experience macroeconomic imbalances, which
require monitoring and policy action";
· identifies several key issues
in the Netherlands's economy pertaining to private sector debt,
inefficiencies in the housing market and large current account
surplus;
· considers that Slovenia "continues
to experience excessive macroeconomic imbalances which require
specific monitoring and continuing strong policy action";
· identifies several key issues
in Slovenia's economy pertaining to weak corporate governance,
high level of state involvement in the economy, competitiveness
and indebtedness (for corporate and government sectors);
· considers that Finland "continues
to experience macroeconomic imbalances, which require monitoring
and policy action";
· identifies several key issues
in Finland's economy pertaining to deterioration of competitiveness
and weak export performance;
· considers that Sweden "continues
to experience macroeconomic imbalances, which require monitoring
and policy action";
· identifies several key issues
in Sweden's economy pertaining to household indebtedness, inefficiencies
in the housing market and a large current account surplus;
· considers that the UK "continues
to experience macroeconomic imbalances, which require monitoring
and policy action";
· identifies several key issues
in the UK's economy pertaining to high levels of household debt
and declining export market shares;
· considers that "the
macroeconomic challenges in Denmark no longer constitute substantial
macroeconomic risks and are no longer identified as imbalances
in the sense of the MIP";
· notes that issues pertaining
to the housing market, high private sector debt and the stability
of the financial sector in Denmark seem contained, even though
they still need to be monitored along with developments of external
competitiveness;
· considers that "the
macroeconomic challenges of Luxembourg have not been identified
as imbalances in the sense of the MIP";
· notes, however, that losses
in manufacturing competitiveness, the evolution of the housing
market and the high level of indebtedness of the private sector
in Luxembourg deserve continued monitoring;
· considers that "the
macroeconomic challenges in Malta no longer constitute substantial
macroeconomic risks and are no longer identified as imbalances
in the sense of the MIP"; and
· notes that Malta's risks
to the sustainability of debt (both public and private) and the
stability of the financial sector appear contained, even if they
deserve continued monitoring.
Next steps
1.13 The outcome of the IDRs forms the
basis for potential further steps under the MIP — the Commission's
assessment reflects the perceived severity of macroeconomic imbalances.
The 14 Member States found by the Commission to have imbalances
will receive non-binding recommendations as part of the European
Semester process in June, which will reflect the analysis in the
IDRs.
THE COMMISSION OCCASIONAL PAPER
1.14 The IDR of the UK in document (b)
comprises an executive summary, introduction, macroeconomic scene
setter, in-depth analysis of selected topics and policy challenges.
In the executive summary the Commission notes that the macroeconomic
imbalances identified within the 2013 IDR of the UK remain, specifically
household debt, the housing market and, to a lesser extent, external
competitiveness. The Commission considers that the UK's export
market share continues to decline although it has stabilised recently.
It notes that fiscal consolidation is underway and that private
sector indebtedness has fallen significantly from its peak (in
particular for private non-financial corporations). However, the
Commission also notes that household sector indebtedness remains
high and continues to pose risks.
1.15 In the introduction the Commission
sets out the legal base for the MIP, the various steps of the
procedure and the Commission's rationale for subjecting the UK
to an IDR for a third time, in order to examine further the persistence
of imbalances or their unwinding. Its 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,
notably in terms of growth, inflation, unemployment, poverty,
export market share, fiscal position, private indebtedness and
credit conditions.
1.16 The in-depth analysis section is
divided into three parts. It reviews external competiveness first,
then the level of private sector indebtedness and finally the
housing sector and household mortgage indebtedness. On the export
share and competitiveness issue, the Commission notes that the
UK's export share in world exports continues to decline, but the
pace is less rapid than in previous years, and that declining
export share is unlikely to pose short-term risks to the economy.
As for private sector indebtedness, the Commission says that it
remains high, but that the challenge posed by this (excluding
household secured lending) is less marked than at the time of
the 2013 IDR. It notes the importance of access to funds for companies
to expand and welcomes the Government's responses, such as setting
up a Business Bank to support SMEs access to non-bank finance,
and refocusing the Funding for Lending Scheme towards SMEs.
1.17 On the housing sector and household
mortgage indebtedness, the Commission says that:
· it expects demand for housing
to continue to outstrip supply;
· as a consequence, house prices
are likely to rise (especially in London), and therefore so is
household indebtedness;
· although the likelihood of
the risks materialising in the short term is assessed as "modest",
there is scope for action both on the demand and the supply sides
of the housing market; and
· if flows of credit to the
private sector were to increase considerably, the rationale for
the Help to Buymortgage guarantee scheme might become less obvious.
1.18 The policy challenges section of
its document reflects the Commission's preferred Government response
to the issues raised within the IDR. To improve external competitiveness
the Commission advocates policy action in four main areas: in
infrastructure (especially in transport), in skills to ensure
that the labour force has the aptitudes that exporters are looking
for, on access to finance to ensure that businesses can expand
and export and on broad-based export promotion in order to make
sure that businesses wishing to export can have access to the
relevant information. To address private sector indebtedness,
the Commission's recommended actions include continuing to increase
residential construction, monitoring of credit availability to
households, reform of property taxation, reform of the planning
system and facilitating longer term private renting.
The Government's view
1.19 In her Explanatory Memorandum on
the Commission Communication, document (a), the Economic Secretary
to the Treasury (Nicky Morgan) says that:
· the Government welcomes the
publication of the IDRs;
· while it agrees with the
Commission that signs of recovery and stabilisation are present
across the EU, there can be no room for complacency and Member
States still need to take urgent action to tackle significant
fiscal deficits and public debt levels, improve economic growth
prospects, put in place flexible and well-functioning labour markets
and take action to correct harmful macroeconomic imbalances;
· it notes the Commission's
focus on the specific challenges facing the eurozone and the likelihood
of spill-over effects between eurozone Member States;
· the Government considers
that, while the eurozone's return to growth after a long recession
is welcome, the eurozone needs to push ahead with structural reforms
and continue the work that has been started on fiscal consolidation;
and
· it considers that tackling
the EU's overall low productivity, lack of economic dynamism and
labour market flexibility is a challenge to all Member States.
1.20 The Minister, noting the Commission
conclusion that the UK is experiencing imbalances, but that these
are not 'excessive', says that:
· the UK therefore remains
under the preventive arm of the MIP in 2014;
· this means that no further
action will be taken under the MIP; and
· more generally, the UK is
not subject to fines or sanctions under the MIP or at any stage
of the European Semester process.
1.21 In her second Explanatory Memorandum,
on the Commission Occasional Paper, document (b), the Minister
first repeats her comments in her other Explanatory Memorandum
about the situation of the UK in relation to the MIP and the European
Semester. She then says that:
· the Government continues
its efforts to increase exports — the trade deficit narrowed
to -£29.9 billion in 2013 from -£33.6 billion in 2012,
according to the Office for National Statistics;
· the Government has announced
a range of measures to support exporters, including by expanding
the support offered by UK Export Finance;
· it welcomes the Commission's
view that the Funding for Lending Scheme is an appropriate policy
measure and highlights that the Autumn Statement 2013 announced
a further £250 million to support an extension of the Business
Bank;
· the Government recognises
the key role that infrastructure investment can play in supporting
competitiveness and highlights the ambitious National Infrastructure
Plan 2013 update, published in December 2013, setting out plans
worth £375 billion to 2020 and beyond;
· it takes note of the Commission's
analysis of private debt in the UK and notes that deleveraging
is underway — private sector debt is falling as a proportion
of GDP (from 221% in 2007 to 179% in 2012) but remains above the
Commission's threshold;
· the Government takes note
of the Commission's commentary on household debt;
· it notes that household debt
has fallen as a proportion of income from 175% in the first quarter
of 2008 to 140% currently and that this should be seen in the
context of the UK's internationally high owner-occupation rate
and households' stock of financial and housing assets (household
debt is predominantly secured against property);
· the Government disagrees
with the Commission's assessment of the Help to Buy mortgage guarantee
scheme, which increases the supply of low-deposit mortgages for
credit-worthy households;
· with regard to the Commission's
specific remarks that the scheme requires careful monitoring,
the Government notes that it has asked the Bank of England's Financial
Policy Committee to carry out an annual review to assess
the ongoing impact of the scheme and to advise on whether key
parameters of the scheme, the price cap and the fees charged to
lenders, remain appropriate;
· to help a further 120,000
households purchase a new-build home and to continue to support
house building as the market improves, the Government announced
in the Budget 2014 that it would extend the Help to Buy equity
loan scheme to March 2020;
· the Government is also creating
a £525 million Builders Finance Fund to provide loans to
SME housing developers;
· in the Autumn Statement 2013
the Government announced support for 10,000 new affordable homes
by raising local authority Housing Revenue Amount borrowing limits
by £300 million, allocated on a competitive basis, and from
the sale of vacant high-value social housing;
· the Government announced
that it would launch an independent review into the role local
authorities can play in increasing overall housing supply; and
· it also announced a £1
billion six year investment programme to unlock new large housing
sites — this will support the delivery of around 250,000
new homes.
Conclusion
1.22 We have recalled that the Government
has subverted the House's scrutiny process by its failure to meet
our intention that the House should, through a European Committee
debate, have the opportunity to consider the overarching introductory
documents for the 2014 European Semester before the March European
Council. So we have no choice but to recommend that those documents
now be debated, in European Committee B, together with these present
documents and, once available, the draft Country-Specific Recommendations.
This debate should take place before the June European Council.
1 (35532) 15803/13 (35535) 16348/13: see HC 83-xxiv
(2013-14), chapter 3 (11 December 2013); (35533) 15808/13: see
HC 83-xxiv (2013-14), chapter 4 (11 December 2013) and (35534)
16171/13: see HC 83-xxv (2013-14), chapter 1 (18 December 2013). Back
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