4 Macroeconomic imbalances
| (35533)
15808/13
COM(13) 790
| Commission Report: Alert Mechanism Report 2014 (prepared in accordance with Articles 3 and 4 of Regulation (EU) No. 1176/2011 on the prevention and correction of macroeconomic imbalances)
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| Legal base | —
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| Document originated | 13 November 2013
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| Deposited in Parliament | 20 November 2013
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| Department | HM Treasury
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| Basis of consideration | EM of 3 December 2013
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| Previous Committee Report | None
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| Discussion in Council | Early 2014
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| Committee's assessment | Politically important
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| Committee's decision | For debate in European Committee B, together with the Annual Growth Survey 2014 and associated documents
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Background
4.1 In March 2010 the Commission proposed a Europe 2020
Strategy, 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. 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.
4.2 On the basis of two Commission Communications,
Reinforcing economic policy coordination and Enhancing
economic policy coordination for stability, growth and jobs: tools
for stronger EU economic governance, and of the Van Rompuy
Task Force report, Strengthening economic governance in the
EU, 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 introducing a "European Semester".
4.3 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).
4.4 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. The Regulation on enforcement
measures to correct excessive macroeconomic imbalances in the
eurozone, Regulation (EU) No. 1174/2011, and the Regulation on
the prevention and correction of the macroeconomic imbalances,
Regulation (EU) No. 1176/2011, creating the procedure, form part
of the so-called "six pack" of legislation for improving
EU economic governance.
4.5 The first stage of the MIP is publication
by the Commission of an annual Alert Mechanism Report, which is
based on assessing Member States against a "scoreboard".
The scoreboard comprises macroeconomic indicators, which monitor
the potential development of problematic external and internal
imbalances. The role of the Alert Mechanism Report is to identify
which Member States may have macroeconomic imbalances. This is
based on an economic reading of the scoreboard, which takes into
account additional macroeconomic indicators. If a Member State
is deemed at risk, the Commission conducts a more detailed assessment
contained within an in depth review (IDR).
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.
4.7 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.
4.8 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 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.
4.9 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. The Annual Growth Survey for
the 2014 cycle is dealt with elsewhere in this Report.[20]
The document
4.10 The Alert Mechanism Report (AMR) 2014 and
accompanying documents are the first stage in the EU level Macroeconomic
Imbalances Procedure (MIP). The centrepiece of the AMR is the
scoreboard, in which each Member State is assessed against 11
macroeconomic indicators that monitor the potential development
of problematic external and internal imbalances based on data
for 2012, although certain indicators are assessed with historical
data over a number of years.
4.11 The indicators designed to monitor external
imbalances are current account balance, net international investment
position, real effective exchange rate, export market share and
unit labour cost index. The indicators monitoring internal imbalances
are growth rate of financial liabilities, house prices, private
sector credit flow, private sector debt, public sector debt and
unemployment. Each indicator has a threshold value. For example,
any Member State with public sector debt higher than 60% of GDP
exceeds the threshold for that indicator. For certain indicators,
there are more restrictive thresholds for eurozone countries,
increasing the possibility of them exceeding the threshold.
4.12 In the AMR 2014 the Commission:
- recognises that most Member
States improved their imbalances in the past year;
- presents short country-specific analysis of all
Member States excluding payment assistance programme countries
— Cyprus, Greece, Ireland and Portugal and Romania are already
under enhanced economic surveillance as part of their assistance
programmes and are therefore not subject to IDRs; and
- includes a new table of social indicators as
auxiliary indicators, which are not measured against any thresholds.
4.13 In the AMR the UK is shown as having exceeded
threshold values for the same three indicators as last year —
those relating to general government debt, private sector debt
and the change in export market shares. The AMR includes a short
country-specific commentary on the UK, in which the Commission:
- considers that there was gradual
improvement towards the end of 2012 in relation to export performance,
although structural challenges remain;
- notes that, although private sector debt remains
in excess of the Commission's indicator threshold, a slow deleveraging
process is underway, even though an increase in house prices may
impact this;
- notes that, in terms of public debt, the deficit
is forecast to fall, but points to slower than expected progress
on fiscal consolidation due to temporary factors such as the disruption
in oil production and unfavourable conditions in trading partners;
and
- points to ongoing balance sheet repair in the
financial sector, meaning that bank liabilities are not likely
to experience rapid growth.
4.14 The Commission concludes that the UK, along
with Belgium, Bulgaria, Croatia, Denmark, Finland, France, Germany,
Hungary, Italy, Luxembourg, Malta, Netherlands, Spain, Slovenia,
and Sweden will have IDRs conducted. These reviews are scheduled
to be published in spring 2014.
4.15 Annexed to the AMR is a Commission Staff
Working Document Technical Changes to the Scoreboard and Auxiliary
Indicators.[21]
This document presents adjustments that could be considered
for some of the scoreboard indicators, with a focus on the real
effective exchange rate, and the private sector debt and credit
flows. It also presents proposed changes for auxiliary indicators
such as inward FDI stocks, export performance compared with advanced
economies and terms of trade.
4.16 Another Staff Working Document Statistical
Annex is also annexed to the AMR.[22]
It contains historical scoreboards, country specific scoreboards
and indicator specific scoreboards.
The Government's view
4.17 The Economic Secretary to the Treasury (Nicky
Morgan) says that:
- the Government takes note of
the publication of the AMR and supports the MIP as a means of
strengthening its understanding of macroeconomic risks, particularly
in the eurozone;
- the Government does not support the inclusion
of social auxiliary indicators in the AMR, which it considers
undermine the focus of the Mechanism on preventing harmful macroeconomic
imbalances; and
- the Government notes that the October European
Council conclusions recognised that "The strengthened economic
policy coordination and further measures to enhance the social
dimension in the Euro area are voluntary for those outside the
single currency."
4.18 The Minister continues that:
- the Government notes that the
UK has been found to exceed the threshold for the same three indicators
as in the 2013 AMR and will be subject to an IDR by the Commission;
- the analysis set out in the AMR represents the
first stage in the Commission's assessment of Member States;
- exceeding the threshold values for one or more
indicators does not mean that an imbalance or excessive imbalance
is present; and
- the Government also considers that it will be
important for the Commission to take into account the historical
context behind the indicators where Member States have exceeded
pre-determined thresholds.
4.19 The Minister comments further that:
- the Government's economic plan
is designed to equip the UK to succeed in a global race, to secure
a stronger economy and a fairer society and to help people who
aspire to work hard and get on;
- this strategy is restoring the public finances
to a sustainable path and the deficit has been reduced by a third
as a percent of GDP in the three years from 2009-10;
- the UK is seen as a relative safe haven, with
interest rates remaining near historical lows and in line with
other core economies, helping keep interest payments lower for
households, businesses and the taxpayer;
- the Office for Budget Responsibility's (OBR)
March forecast showed the UK economy rebalancing over the forecast
period; and
- an updated forecast from the OBR is presented
with the Autumn Statement.
4.20 Finally, the Minister reminds us that the
UK is not subject to sanctions under the MIP or at any point in
the European Semester.
Conclusion
4.21 The Alert Mechanism Report is one important
document in the opening stage of the European Semester. So we
recommend that it be debated in European Committee B, together
with the other important document, the Annual Growth Survey,
and associated document dealt with elsewhere in this Report.[23]
This debate should take place before the relevant functional Councils
consider the documents in preparation for the March 2014 European
Council.
20 See (35532) 15803/13: chapter 3. Back
21
See http://ec.europa.eu/europe2020/pdf/2014/mipsb2014_swd_en.pdf. Back
22
See http://ec.europa.eu/economy_finance/economic_governance/documents/alert_mechanism_report_2014_statistical_annex_en.pdf. Back
23
Op cit. Back
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