Documents considered by the Committee on 29 March 2017 Contents

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1European Semester

Committee’s assessment	Politically important
Committee’s decision	Not cleared from scrutiny; recommended for debate in European Committee B, once the Country Specific Recommendations are available for scrutiny
Document details	(a) Commission Communication: 2017 European Semester: Assessment Country Reports and In-Depth Reviews; (b) Commission Staff Working Document: Country Report for the United Kingdom 2017 accompanying the Commission Communication
Legal base	—
Department	HM Treasury
Document Numbers	(a) (38557), 6619/17, COM(17) 90; (b) (38558), 6550/17, SWD(17) 93

Summary and Committee’s conclusions

1.1In January 2017 we recommended that the 2017 Annual Growth Survey and the 2017 Alert Mechanism Report, the opening documents for the 2017 European Semester and other relevant documents be debated in European Committee B before their consideration by the Council and the Spring 2017 European Council. Disgracefully the Government has ignored that recommendation, so failing in its professed duty to the House.

1.2The Commission has now published, as the next stage of the European Semester, Country Reports for all Member States, except Greece. These reports contain, if applicable, the conclusion of a Member State’s In-Depth Review (IDR) of macroeconomic imbalances, and an assessment of progress in addressing the European Council’s 2016 Country Specific Recommendations. In its present Communication the Commission assessed, on the basis of the Country Reports, progress on structural reforms, prevention and correction of macroeconomic imbalances. It also described the results of In-Depth Reviews, noting that of the 13 Member States subject to a review it found that one Member State was experiencing no imbalances, six were experiencing imbalances and six were experiencing excessive imbalances.

1.3In the UK’s Country Report the Commission gave a generally positive assessment of the general UK economic situation, considerations of other structural issues and a statement of UK progress towards structural reforms outlined in the 2016 Country Specific Recommendations. It did, however, say that some policy challenges remained.

1.4The Government commented to us no more than it had noted the Commission’s documents, but mentioned particularly the assessment that the UK had made progress on all areas covered by the 2016 Country Specific Recommendations.

1.5The next significant stage of the European Semester will be publication by the Commission of Member States’ 2017 Country Specific Recommendations for consideration and endorsement by the July 2017 European Council. These will be based on this Communication, the Country Reports and Member States’ Stability or Convergence Programmes and their National Reform Programmes, which are to be submitted in April 2017.

1.6We will, in due course, be recommending the 2017 Country Specific Recommendations for debate in European Committee B. This Communication and the UK Country Report will be relevant to that debate, so we recommend that they be joined in it.

Full details of the documents

(a) Commission Communication: 2017 European Semester: Assessment of progress on structural reforms, prevention and correction of macroeconomic imbalances, and results of in-depth reviews under Regulation (EU) No 1176/2011 {SWD(2017) 67 final to SWD(2017) 93 final}: (38557), 6619/17, COM(17) 90; (b) Commission Staff Working Document: Country Report United Kingdom 2017 accompanying the Commission Communication: 2017 European Semester: Assessment of progress on structural reforms, prevention and correction of macroeconomic imbalances, and results of in-depth reviews under Regulation (EU) No 1176/2011 {COM(2017) 90 final}, {SWD(2017) 67 final to SWD(2017) 93 final}: (38558), 6550/17, SWD(17) 93.

Background

1.7The annual European Semester has become a key element in the EU’s efforts to promote effective economic governance through EU-level mutual monitoring and benchmarking. The key documents starting the annual cycle are the Commission’s Annual Growth Survey (AGS) and Alert Mechanism Report (AMR), published in the late autumn.

1.8A Macroeconomic Imbalance Procedure was introduced in 2011 as part of the response to the economic and financial crisis. Its processes are a slightly separate part of the European Semester and it is designed to prevent and correct risky macroeconomic developments, such as high current account deficits, unsustainable external indebtedness and housing bubbles. The procedure aims to reinforce the monitoring and surveillance of macroeconomic policies in the EU, particularly in relation to the eurozone. The first step of the annual cycle is the AMR, which is based on a scoreboard of economic indicators and which identifies the Member States and issues which require In-Depth Reviews for further economic analysis.

1.9The IDRs are published in the following spring. In the case of Member States where an imbalance exists, but is not of an excessive nature, the follow-up to the IDRs will take place under the preventive arm of the Macroeconomic Imbalance Procedure. This means that a relevant recommendation would be integrated in the package of proposals for Country Specific Recommendations (CSRs), the final stage of the European Semester cycle. If the Commission were to find in an IDR existence of an excessive imbalance, this might trigger an Excessive Imbalance Procedure under the corrective arm of the Macroeconomic Imbalance Procedure. In a case where an excessive imbalance was deemed to be jeopardising the proper functioning of the Economic and Monetary Union the Commission could recommend that the Council initiate the Excessive Imbalance Procedure. The Member State would have to submit a “corrective action plan” to the Council and Commission. Surveillance would subsequently be stepped up by the Commission through regular progress reports from the Member State concerned. Enforcement of the Excessive Imbalance Procedure is backed by sanctions for eurozone Member States (up to 0.1% of GDP), if they were to repeatedly fail to take agreed action or to deliver a sufficient “corrective action plan”. This provision has not yet be used against any Member State.

1.10The Commission published the 2017 AGS and 2017 AMR for the current European Semester in November 2016. In the AMR the Commission identified 13 Member States for which IDRs should be undertaken to assess whether they were affected by imbalances in need of policy action. The Commission was clear that it would not at that stage carry out further analyses in the context of the Macroeconomic Imbalance Procedure for the other Member States, including the UK (which exited Macroeconomic Imbalance Procedure surveillance in 2016).1

The documents

1.11The Commission has published Staff Working Documents with Country Reports for all Member States (including the UK), except Greece. These reports contain the conclusion of a Member State’s IDR of macroeconomic imbalances (where applicable) and an assessment of progress in addressing the 2016 CSRs, agreed by the July 2016 European Council.

1.12In its Communication, document (a), the Commission assessed progress on structural reforms, prevention and correction of macroeconomic imbalances, and results of IDRs. It said that:

• the EU economy had proven to be resilient in 2016, despite a number of challenges;
• moderate growth was expected in 2017–2018, although there were both domestic and external risks;
• while income distributions in the EU were more equal than in other major economies, income inequality remained a policy challenge;
• on progress with CSRs, all Member States were actively pursuing structural reforms;
• Member States were on target to meet Europe 2020 Strategy targets on energy and climate, although meeting other targets (such as national employment targets, the poverty target and the research and development target) would require sustained efforts;
• funds available under the Multiannual Financial Framework were being used to help prepare and implement structural reform;
• on addressing macroeconomic imbalances, Member States were making progress on correcting imbalances, but risks remained;
• public budgets had improved, but the stock of public, private and external debt had been falling at a slow rate;
• the correction of current account imbalances was ongoing, and competitiveness developments had been broadly consistent with rebalancing needs; and
• financial sector deleveraging had resulted in improved capital positions.

1.13To assess the reform effort by Member States, the Commission grouped reforms into four thematic areas:

• first, investment growth had improved due to favourable financing conditions, above-average capacity utilisation and lower corporate deleveraging pressure;
• several cyclical and structural factors, however, were preventing more robust growth;
• supervision of the banking sector had been strengthened and efforts had been made to improve the management of non-performing loans;
• public investment declined significantly during the crisis, and was yet to return to historical levels;
• second, many Member States had implemented reforms in employment protection legislation to address segmented labour markets;
• the labour tax wedge, however, remained high in most countries;
• labour market participation of some groups (in particular those with migrant backgrounds) remained a challenge, and Member States needed to ensure that all young people had their labour market opportunities improved;
• third, Member States had pursued policies to strengthen overall competitiveness, and the rapid development of the collaborative economy had the potential to contribute to competitiveness and growth;
• progress in structural reform of professional services had been slow, but there had been some positive developments;
• public administration reforms were essential to deliver high-quality public services and boost competitiveness;
• fourth, on fiscal sustainability, general government debt and deficit ratios were expected to decline in the coming years, but at a slower pace;
• Member States need to support investment to strengthen the recovery, and to balance this with fiscal sustainability;
• the quality of public finances was also important for fiscal sustainability, with national fiscal frameworks a tool which could be used to foster growth-friendly public spending; and
• reforming pension and healthcare systems could also enhance the quality of public finances, as their medium and long-term sustainability posed significant challenges in view of high debt levels and population ageing—progress on this varied across Member States.

1.14Of the 13 Member States with an IDR, the reviews had found that one Member State was experiencing no imbalances, six were experiencing imbalances and six were experiencing excessive imbalances. The Commission viewed the state of play of country imbalances as follows:

• Bulgaria was experiencing excessive macroeconomic imbalances relating to vulnerabilities in the financial sector, coupled with high corporate indebtedness and in the context of incomplete labour market adjustment;
• Germany was experiencing macroeconomic imbalances pertaining to the persistently high current account surplus, which had cross-border relevance and reflected excess savings and subdued investment in both the private and public sector;
• Ireland was experiencing macroeconomic imbalances, stemming from large stocks of public and private debt and net external liabilities;
• France was experiencing excessive macroeconomic imbalances relating to high public debt and weak competitiveness in the context of low productivity growth;
• Croatia was experiencing excessive macroeconomic imbalances relating to high levels of public, private and external debt, largely dominated in foreign currency, and in a context of low potential growth;
• Spain was experiencing macroeconomic imbalances related to public and private debt, which continued to constitute a vulnerability in the context of high unemployment;
• Italy was experiencing excessive macroeconomic imbalances due to high government debt and protracted weak productivity dynamics, in a context of high non-performing loans and unemployment;
• Cyprus was experiencing excessive macroeconomic imbalances as a result of a high share of non-performing loans and high stock of public and private debt in the context of high unemployment and weak potential growth;
• the Netherlands was experiencing macroeconomic imbalances related to the high stock of private debt and the large current account surplus;
• Portugal was experiencing excessive macroeconomic imbalances where weaknesses in the banking sector, corporate indebtedness and fiscal risks constitute vulnerabilities;
• Slovenia was experiencing macroeconomic imbalances as a result of weaknesses in the banking sector, corporate indebtedness and government fiscal risks;
• Finland was experiencing no macroeconomic imbalances; and
• Sweden was experiencing macroeconomic imbalances, with persistent house price growth from already overvalued levels coupled with a continued rise in household debt posing the risk of a disorderly correction.

1.15The Communication is accompanied by the 27 Country Reports on which its summary assessments were based.

1.16The 2017 Country Report for the UK, document (b), comprised an assessment of the general UK economic situation, considerations of other structural issues, and a statement of UK progress towards structural reforms outlined in the 2016 CSRs. The Commission notes it:

• described 2016’s 2% growth (regarding the UK’s macroeconomic outlook), driven by strong domestic consumption and employment, as robust;
• expected UK growth to be weaker in 2017 (1.5%) and 2018 (1.2%) due to subdued business investment and slower increases in private consumption, but anticipated that net exports would offset any weakness in domestic demand;
• projected that, while the UK’s current account deficit reached a record high in 2016 due to a substantial deficit in primary income flows, this would narrow as exports were boosted with the depreciation of sterling;
• said inflation was correspondingly expected to exceed the Bank of England’s target of 2% in 2017 and 2018, as depreciation would gradually feed through to higher producer prices and consumer price inflation;
• recognised that the labour market was strong and unemployment was low (and expected it to remain so), with ongoing stagnation of real wages reflecting slower GDP growth;
• assessed that the current high level of government debt remained a source of vulnerability;
• predicted that, while fiscal risks remained low in the short term, they would rise in the medium term under a high and increasing stock of government debt;
• said that household balance sheets remained strong overall;
• noted that, following years of weakness, the banking sector was returning to health, but assessed that pockets of risky lending remained—house price growth had continued to exceed the modest growth in both secured credit and household disposable income, private sector indebtedness remained relatively high and unsecured lending growth accelerated in 2016;
• found that the UK had made “some” progress in in addressing the 2016 CSRs assessed in the report and was performing well on reaching national targets set under the Europe 2020 Strategy (climate and energy targets); and
• noted, in particular, the improving fiscal situation and UK measures to boost housing supply, to address infrastructure investment shortfalls, to tackle the skills deficit and to improve childcare availability, but advised that policy challenges remained in all of these areas.

The Government’s view

1.17In his Explanatory Memorandum of 15 March 2017 the Chief Secretary to the Treasury (Mr David Gauke) first recites the Government’s ritual mantra that until conclusion of the Brexit negotiations, the UK would remain a full member of the EU and all the rights and obligations of EU membership would remain in force and during this period, the Government would continue to negotiate, implement and apply EU legislation. He then said that the Government noted:

• the Commission’s assessment that the UK had made progress on all areas covered by the 2016 CSRs—boosting housing supply and network infrastructure investment, improving skills deficits and increasing childcare provision; and
• publication of other Member States’ Country Reports, as well as the Commission’s decisions under the Macroeconomic Imbalance Procedure.

Previous Committee Reports

None.

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1 (38286) 14357/16, (38288) 14359/16 + ADD 1: see Twenty-seventh Report HC 71-xxv (2016–17), chapter1 (18 January 2017).

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31 March 2017