Documents considered by the Committee on 21 July 2015 - European Scrutiny Contents


4 Economic and Monetary Union

Committee's assessment Politically important
Committee's decisionNot cleared from scrutiny; recommended for debate on the floor of the House; drawn to the attention of the Treasury Committee
Document detailsCommission Report, on behalf of the "Five Presidents", about Completing Europe's Economic and Monetary Union
Legal base
Department

Document number

HM Treasury

(36946), —

Summary and Committee's conclusions

4.1 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.

4.2 Building on earlier work the Commission President (Jean-Claude Juncker) now presents this report, described as having been produced in close cooperation with the Presidents of the European Council, the Eurogroup, the European Central Bank and the European Parliament. After providing background information on the Economic and Monetary Union, the first section of the report sets out an overview of sequencing, describing how measures to improve the Economic and Monetary Union could be implemented in three stages. The next sections of the report focus on four key pillars of further EMU reform: towards Economic Union; towards Financial Union; towards Fiscal Union; and democratic accountability, legitimacy, and institutional strengthening.

4.3 The Presidents make clear that their report "focuses on the euro area, as countries that share a currency face specific common challenges, interests and responsibilities". They also make clear that the process towards deeper Economic and Monetary Union should be "transparent and preserve the integrity of the Single Market in all its aspects".

4.4 The Government welcomes the Presidents' statement about the integrity of the single market and says that it does not want to stand in the way of the eurozone resolving its difficulties, economic and financial stability in the eurozone being in the UK's interests. But the Government adds that it will not let the integration of the eurozone jeopardise the integrity of the single market or in any way disadvantage interests of non-euro Member States, such as the UK.

4.5 Although this report is targeted primarily at the eurozone, implementation of its proposals will inevitably have implications for non-eurozone Member States, including in relation to democratic accountability and legitimacy. So we recommend that the document be debated on the floor of the House, when Members might wish to examine the potential implications for the UK. We also draw the document to the attention of the Treasury Committee, particularly for the suggestions for a Fiscal Union and a Financial Union.

Full details of the document: Commission Report — Completing Europe's Economic and Monetary Union: (36946), —.

Background

4.6 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. In December 2012 a Report, Towards a genuine Economic and Monetary Union, commonly referred to as the "Van Rompuy Report" or the "Four Presidents' Report", was published for the European Council. It was prepared by the President of the European Council, "in close collaboration with" the Presidents of the Commission, the Eurogroup and the European Central Bank. The Report suggested measures, for implementation in three stages — 2012-2013, 2013-2014 and post-2014, under four pillars thought necessary for a genuine Economic and Monetary Union (EMU): an integrated financial framework, an integrated budgetary framework, an integrated economic policy framework and democratic legitimacy and accountability. The Report said that "the process towards a deeper EMU should be … fully compatible with the Single Market in all aspects".[ 45]

4.7 Since the Report implementation of these suggested measures has been concerned primarily with an integrated budgetary framework, especially the Banking Union, designed for the eurozone and any non-eurozone Member States which wish to participate. The Banking Union measures, principally the Single Supervisory Mechanism and the Single Resolution Mechanism, are based upon the EU's "single rulebook" or common financial regulatory framework — the legislation which governs the financial sector across the entire EU.

4.8 However, the October 2014 Euro Summit called "for work to continue … to develop concrete mechanisms for stronger economic policy coordination, convergence and solidarity. It invited the President of the Commission, in close cooperation with the President of the Euro Summit, the President of the Eurogroup and the President of the European Central Bank, to prepare next steps on better economic governance in the euro area".[ 46] In response an analytic note, Preparing for next steps on better economic governance in the euro area,[ 47] was presented for consideration at the February informal European Council.[ 48]

The document

4.9 Building on the February analytical note and earlier work the Commission President now presents this report, described as having been produced in close cooperation with the Presidents of the European Council, the Eurogroup, the European Central Bank and the European Parliament. (Consequently the report is commonly referred to as the Five Presidents' Report.)

4.10 After providing background information on the EMU, the first section of the report sets out an overview of sequencing, describing how measures to improve the EMU could be implemented in three stages:

·  Stage 1 (between 1 July and mid 2017) — relatively modest reforms to the priorities and procedures of the EU and eurozone;

·  Stage 2 (from mid-2017 to 2025) — more substantial suggestions for stronger economic and political integration; and

·  Stage 3 (2025 onwards) — a properly functioning EMU that other EU countries will want to join.

4.11 The next sections of the report focus on four key pillars of further EMU reform:

·  towards Economic Union;

·  towards Financial Union;

·  towards Fiscal Union; and

·  democratic accountability, legitimacy, and institutional strengthening.

4.12 The report makes clear that it "focuses on the euro area, as countries that share a currency face specific common challenges, interests and responsibilities". It also makes clear that the process towards deeper EMU should be "transparent and preserve the integrity of the Single Market in all its aspects".

ECONOMIC UNION

4.13 The Presidents argue that convergence between Member States to the highest levels of prosperity is "at the heart of our Economic Union". They suggest that it follows that all eurozone Member States should pursue sound policies so that they can rebound quickly from short term shocks and are able to exploit their comparative advantage within the single market, thereby sustaining high levels of growth and employment. They add that much could be achieved through a deepening of the single market, which is important for all 28 Member States.

4.14 On Stage 1 the Presidents propose:

·  creation of a eurozone system of Competitiveness Authorities;

·  strengthened implementation of the Macroeconomic Imbalance Procedure;

·  greater focus on employment and social performance; and

·  stronger coordination of economic policies within a revamped European Semester.

4.15 For Stage 2 the Presidents propose formalising the convergence process, by agreeing a common set of high level standards that would be defined in EU legislation. They argue that these standards should focus primarily on:

·  labour markets;

·  competitiveness;

·  business environment;

·  public administrations; and

·  certain aspects of tax policy (for example, corporate tax base).

FINANCIAL UNION

4.16 The Presidents argue that a stronger Economic Union must be accompanied by the completion of a Financial Union, suggesting that this is because in a Monetary Union the financial system must be single or else the impulses from monetary policy will not be transmitted uniformly across Member States. They propose that in Stage 1 the Banking Union should be completed. This would include:

·  full transposition of the Bank Resolution and Recovery Directive; setting up a bridge financing mechanism for the Single Resolution Mechanism's Single Resolution Fund (SRF);

·  implementing concrete steps towards a common backstop to the SRF;

·  agreeing a common Deposit Insurance Scheme;

·  improving the effectiveness of the process for direct bank recapitalisation in the European Stability Mechanism (ESM); and

·  addressing the significant margin for discretion at the national level.

4.17 In also recommending launching of a Capital Markets Union for Stage 1, the Presidents:

·  note the need to address the most important bottlenecks preventing the integration of capital markets in areas such as insolvency law, company law, property rights, and legal enforceability of cross-border claims;

·  argue that this will require strengthening the tools to manage financial players' systemic risks prudently, and strengthening the supervisory framework to ensure the solidity of all financial actors; and

·  argue that this should ultimately lead to a single EU capital markets supervisor.

FISCAL UNION

4.18 The Presidents argue that a key lesson from the crisis is that fiscal policies are a matter of vital common interest in a Monetary Union. They say that responsible national fiscal policies must perform a double function of ensuring that fiscal automatic stabilisers can operate to cushion country-specific economic shocks and ensure that the sum of national budget balances leads to an appropriate fiscal stance at the eurozone level.

4.19 For Stage 1 the Presidents propose an advisory European Fiscal Board, which would coordinate and complement the national fiscal councils set up in the context of the Council Directive 2011/85/EU on requirements for the budgetary frameworks of Member States, for the Stability and Growth Pact (SGP)'s excessive deficit procedure. Such a Board would provide public and independent assessment, at the EU level, of how budgets perform against the EU fiscal framework. The Presidents also argue that every Member State should stick to the fiscal rules, and that the forthcoming review of the 'Six-Pack' and 'Two-Pack' SGP legislation[ 49] should be an opportunity to improve clarity, transparency, compliance and legitimacy, while preserving their stability-oriented nature.

4.20 The Presidents propose that in Stage 2:

·  a macroeconomic stabilisation function for the eurozone be set up, as "the culmination of a process of convergence and further pooling of decision making on national budgets";

·  this function could build on the European Fund for Strategic Investments;[ 50]

·  to avoid moral hazard, participation should be tightly linked to compliance with the common economic governance standards they suggest and to progress on convergence; and

·  the function should be consistent with the current EU fiscal framework, and should not be an instrument for crisis management.

DEMOCRATIC ACCOUNTABILITY, LEGITIMACY, AND INSTITUTIONAL STRENGTHENING.

4.21 The Presidents argue that:

·  greater responsibility and integration at the EU and eurozone level should go hand in hand with greater democratic accountability, legitimacy, and institutional strengthening;

·  at the height of the crisis, far-reaching decisions had often to be taken in a rush, sometimes overnight;

·  in several cases, intergovernmental solutions were chosen to speed up decisions or overcome opposition; and

·  "now is the time to review and consolidate our political construct".

4.22 The Presidents' Stage 1 proposals include:

·  reorganising the European Semester;

·  strengthening European Parliament and national parliamentary oversight of the European Semester;

·  increased cooperation between the European Parliament and national parliaments;

·  taking steps towards a consolidated external representation of the eurozone; and

·  strengthening the Eurogroup President and its support function.

4.23 For Stage 2 the Presidents:

·  recommend integrating the ESM into EU law;

·  argue that a genuine Fiscal Union will require more joint decision making on fiscal policy; and

·  suggest setting up a eurozone treasury accountable at the EU level.

The Government's view

4.24 In his Explanatory Memorandum of 3 July 2015 the Financial Secretary to the Treasury (Mr David Gauke) introduces his remarks by saying that the Government notes that the report's focus is the eurozone and that it will study the recommendations in the report in more detail. He continues that:

·  the Government welcomes that the Presidents state that the process towards a deeper EMU should be "transparent and preserve the integrity of the Single Market in all its aspects";

·  the UK benefits from the single market and the Government does not want to stand in the way of the eurozone resolving its difficulties — economic and financial stability in the eurozone is in the UK's interests; but

·  the Government has been clear that it will not let the integration of the eurozone jeopardise the integrity of the single market or in any way disadvantage interests of non-euro Member States, such as the UK.

4.25 On timetabling the Minister tells us that:

·  the report was discussed at the June European Council where leaders "took note of the report on the Economic and Monetary Union requested by the December 2014 European Council and asked the Council to rapidly examine it"; and

·  the timetable for Council discussions is yet to be agreed.

Previous Committee Reports

None.





45   (34453): see Twenty-fourth Report HC 86-xxiii (2012-13), chapter 1 (12 December 2012) and Twenty-eighth Report HC xxvii (2012-13), chapter 1 (16 January 2013). Back

46   See http://www.consilium.europa.eu/en/meetings/european-council/2014/10/23-24/.  Back

47   See http://ec.europa.eu/priorities/docs/economic-governance-presentation_en.pdf.  Back

48   See http://www.consilium.europa.eu/en/meetings/european-council/2015/02/12/.  Back

49   See http://ec.europa.eu/economy_finance/economic_governance/sgp/index_en.htm.  Back

50   See http://www.eib.org/about/invest-eu/index.htm?media=shortlink.  Back


 
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Prepared 30 July 2015