19 Macro-financial assistance: Ukraine
| (a)
(35901)
7907/14
COM(14) 182
(b)
(35904)
—
SWD(14) 112
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Draft Council Decision providing macro-financial assistance to Ukraine
Commission Staff Working Document: Ex-ante evaluation statement on EU macro-financial assistance to Ukraine
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| Legal base | (a) Article 213 TFEU; —; QMV
(b) —
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| Documents originated | 19 March 2014
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| Deposited in Parliament | 24 March 2014
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| Department | HM Treasury
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| Basis of consideration | EM of 24 March 2014
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| Previous Committee Report | None
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| Discussion in Council | 14 April 2014, at the latest
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| Committee's assessment | Politically important
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| Committee's decision | Cleared
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Background
19.1 Macro-financial Assistance (MFA) is an external
instrument of the EU under which financial assistance is granted
to third countries close to the EU to help them address acute
balance-of-payments difficulties. MFA complements financing provided
by the International Monetary Fund (IMF) in the context of an
adjustment and reform programme. It can take the form of grants
financed from the EU budget or loans, for which the Commission
is empowered to borrow the necessary funds in capital markets
(guaranteed by the Guarantee Fund for external actions) and to
lend them on to the beneficiary country. MFA is exceptional in
nature and is discontinued once the country can satisfy its external
financing needs through other sources, such as the international
financial institutions (IFIs) and private capital flows.
19.2 MFA is currently provided on a case-by-case
basis where the launch of an individual MFA operation requires
a separate legislative decision.
19.3 MFA operations are based on a number of principles
defined by the Council, the so called 'Genval Criteria', which
were last stated by the ECOFIN Council in October 2002. These
stipulate the geographical scope, preconditions and principal
modalities for implementation of MFA.
The documents
19.4 In presenting a proposal for MFA for Ukraine
the Commission says that:
· the Ukrainian economy is very weak and
in need of domestic reform;
· Ukraine is facing a rapidly worsening
balance-of-payments crisis with large financing needs over the
period 2014-15;
· large debt repayments over the course
of the last six months have resulted in the central bank intervening
to defend the currency peg against the dollar and reserves have
dropped dramatically to $15.5 billion;
· the current political crisis makes the
situation more volatile and the interruption of financial assistance
from Russia alongside the announcement by Gazprom of an end to
a gas price reduction for Ukraine will worsen the situation leaving
Ukraine 'at serious risk of default';
· Ukraine has requested financial assistance
from the IMF, which, in the coming weeks, is expected to come
to an agreement on an economic programme and financing arrangement;
· the Commission expects the international
support will reduce economic vulnerabilities, boost international
reserves and foster economic growth;
· MFA can only be disbursed alongside an
IMF programme and would contribute towards the residual financing
gap over 2014-15; and
· the Commission anticipates other bilateral
lenders would also contribute as part of a wider international
support package.
19.5 With this draft Council Decision, document (a),
the Commission proposes providing up to €1 billion (£826
million) of MFA to Ukraine in the form of loans. The loans would
have a maximum maturity of 15 years and would be disbursed in
one or two tranches. They would be in addition to the €610
million (£504 million) in MFA loans the EU has previously
committed under two previous decisions (in 2002 and 2010), which
loans are also conditional on an IMF programme being in place
and are to be disbursed in three tranches.
19.6 Upon adoption of the Decision, the Commission,
acting under examination by the Council, would negotiate a Memorandum
of Understanding with Ukraine, detailing the economic policy and
financial conditions attached to the MFA. The conditions would
be consistent with those agreements and understandings reached
by Ukraine and the IMF and would provide that:
· assistance is to be exceptional, time
limited and conditional on the satisfactory implementation of
an IMF programme;
· if the assistance is disbursed in two
tranches they would have to be at least three months apart; and
· the second tranche would be subject to
Ukraine complying with the conditionality set out in the Memorandum
of Understanding and successful implementation of the associated
IMF programme.
19.7 The draft Council Decision is accompanied by
a Commission Staff Working Document, document (b), which expands
on the background to and need for financial assistance for Ukraine.
It notes other possible sources of support for Ukraine and that
the United States has pledged support of $1 billion in loan guarantees.
The Government's view
19.8 The Economic Secretary to the Treasury (Nicky
Morgan) first explains that
· the Council Decision is to be made under
Article 213 TFEU, which foresees the possibility of a 'third country'
requiring urgent financial assistance from the EU and which does
not provide for role for the European Parliament;
· MFA programmes normally follow the procedures
set out in Article 212 TFEU, which provides for co-decision with
the European Parliament;
· given Ukraine's financing needs and the
forthcoming European Parliamentary elections, the Commission has
proposed, however, using Article 213 as the legal basis for this
assistance, which would circumvent the need for European Parliamentary
approval that could further delay the process; and
· the Government accepts the use of Article
213 in such exceptional circumstances, so long as further MFA
programmes continue to follow the usual decision making procedures
set out under Article 212.
19.9 On the policy and financial implications the
Minister comments that:
· the Government supports EU efforts to
provide MFA to third countries under exceptional circumstances
and on a temporary basis;
· it has committed to supporting Ukraine
through the EU and the IFIs as part of an international package;
· it welcomes the Commission's proposal
to provide MFA to Ukraine in the form of loans and will press
for these loans to be properly sequenced and linked to reforms;
· the Commission has said that the use of
Article 213 TFEU is exceptional and does not constitute a precedent
for future proposals;
· the loan would be guaranteed by the European
Guarantee Fund for External Actions, an off budget fund managed
by the European Investment Bank; and
· in line with the Guarantee Fund Regulation,
the provisioning of the Guarantee Fund, amounting to 9% of the
proposed loans, is expected to take place in 2016 from within
the 2016 EU budget which will be negotiated in 2015.
Conclusion
19.10 Although this proposal is, apart from use
of the urgent procedure, entirely consistent with the aims of
the EU's Eastern Partnership and the orientations of its European
Neighbourhood Policy, whilst clearing it from scrutiny we draw
the documents to the attention of the House, given the present
situation in relation to Ukraine.
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