Documents considered by the Committee on 5 September 2018 Contents

25Eurozone Investment Stabilisation Function (EISF)

Committee’s assessment

Politically important

Committee’s decision

Cleared from scrutiny

Document details

Proposal for a Regulation on the establishment of a European Investment Stabilisation Function

Legal base

Article 175(3) TFEU; ordinary legislative procedure; QMV



Document Number

(39838), 9615/18 + ADDs 1–4, COM(18) 387

Summary and Committee’s conclusions

25.1The institutional establishment of the euro centralised monetary policy within the European Central Bank and the Eurosystem,174 but left responsibility for economic and fiscal policies in the hands of the Eurozone’s national governments. When the financial crisis erupted in 2008, this decentralised structure allowed financial and sovereign debt crisis in one Eurozone country to spread to others, while the EU lacked the necessary structures to mount a unified response.

25.2To stabilise the Eurozone economy, and to put in place the structures necessary to prevent a recurrence of the crisis, the EU has engaged in a far-reaching process of economic, legal and institutional reform.175 In 2015, the ‘Five Presidents Report’—issued by the European Commission, European Central Bank, European Parliament, European Council and the Eurogroup—identified a need for the Eurozone to move closer to a “Fiscal Union”. As part of this, the report called for a common macroeconomic stabilisation function,

25.3In spring 2017, the European Commission presented a “reflection paper“ on the Economic & Monetary Union (EMU). In his September 2017 “State of the Union“ speech, European Commission President Jean-Claude Juncker announced that the Commission would be bringing forward further proposals to make the structural changes identified as necessary by the Five Presidents Report, including a creation of a dedicated euro area budget line within the EU budget, which would fund structural reform assistance and perform a stabilisation function in the event of an economic shock.

The Commission proposals for reform of the EMU

25.4On 6 December 2017, the Commission presented a first package of initiatives for reform of the EMU. It included proposals for the creation of a European Monetary Fund (including a backstop for the Eurozone’s Single Resolution Fund for failing banks), a financial support mechanism to help countries meet the eligibility criteria for joining the euro, and a Directive to integrate the Fiscal Compact into EU law. It also proposed that the Eurozone should appoint a Minister for the Economy. We discussed these proposals in some detail in our Report of 21 February 2018 on the deepening of the EU’s Economic & Monetary Union.

25.5In parallel to its legislative proposals, the Commission also published a policy paper setting out plans for new budgetary instruments to support Eurozone countries in financial distress or in need of support to achieve structural reforms.176 Among these would be a new Structural Reform Support Programme under the 2021–2027 Multiannual Financial Framework, focused primarily on helping Member States achieve the necessary reforms to meet ensuring sound public finances and avoiding balance of payment difficulties. The Commission also continued work on an automatic fiscal stabiliser for the Eurozone, as called for in the Five Presidents’ Report. This facility would respond to macro-economic shocks affecting the single currency area that could not be addressed by national fiscal buffers.177

Proposal for the European Investment Stabilisation Function

25.6In May 2018, the European Commission tabled its proposals for the post-2020 Structural Reform Support Programme and the automatic stabiliser for the Eurozone (the ‘European Investment Stabilisation Function’ or EISF). We have already cleared the former from scrutiny because it is a funding instrument that will only become operational after the UK has left the EU. However, the EISF would be a significant alteration to the institutional structure of the Eurozone, the functioning of which is of especial importance to the UK economy. As such we have considered it in more detail in the remainder of this Report.

25.7The Commission’s proposal for the Eurozone stabilisation function takes the shape of an investment protection fund, which could provide loans under favourable conditions to Eurozone countries and Denmark,178 if they experienced an economic shock. It would aim to protect public investment when a national government may not have sufficient fiscal space to cut back on public spending (as traditional monetary levers are not available to individual Eurozone countries). The new Function would be complementary to the EU’s existing ‘toolbox’ of instruments to address financial distress in Member States, including the European Stability Mechanism.179

25.8The key elements of the Commission proposal are as follows:

25.9Although EISF support would take the form of a loan, the Commission argues that the new mechanism would still present a favourable option for a Member State to choose in the event of an economic shock, because:

25.10For the purposes of effectively subsidising the interest due, the proposed EISF Regulation would establish a Stabilisation Support Fund. It would be funded via contributions from Eurozone countries,180 investment returns on those contributions, and repayments of interest rate subsidies by Member States if they have failed to meet the conditions attached to their loan (namely that it did not invest the entirety of the loan in eligible investments, or maintained at least the same level of public investment compared to the average in the five years before the loan was granted).

Possible future developments of the Eurozone stabilisation function

25.11The option for the stabilisation mechanism chosen by the Commission avoids the creation of a permanent transfer union within the Eurozone—traditionally opposed by various countries such as Germany and the Netherlands—because the loans from the EISF would have to be repaid. As such, the Commission says, the investment protection option “may thus be politically more feasible, at least in the near future”.

25.12The Commission has also reiterated that the stabilisation mechanism as proposed now could be expanded over time, for example by introducing an insurance-based ‘rainy day’ fund. Eurozone countries would pay a ‘premium’ in return for pay-outs in the case of pre-defined adverse economic consequences. Politically, that would be a hard sell because some countries were more likely to benefit from the fund and would therefore most likely have to pay higher contributions. Negotiations on the technical detail would be extremely politically sensitive. The Commission wants to assess the feasibility of this option as part of its first full review of the EISF, which would take place four years after the stabilisation function became operational.

25.13In the long term, the European Commission wants to fold the stabilisation function into a proper Eurozone budget. That would go beyond just providing stabilisers in the case of an economic shock, but create a ‘tax and spend’ authority at the supranational level for the single currency area. The Commission admits that “further reflections and discussions would be needed to assess its content and raise its political acceptability”. However, in June 2018 France and Germany also called in the ‘Meseberg Declaration’ for a dedicated ‘Eurozone budget’ to “promote competitiveness, convergence and stabilisation in the euro area”, and said they would jointly work on a proposal for a European Unemployment Stabilisation Fund. Those developments will colour the negotiations among the Eurozone’s Member States on the Commission’s EISF proposal.

The Government’s position

25.14In January 2018, the Chief Secretary to the Treasury (Elizabeth Truss) provided a first Explanatory Memorandum on the EMU reform proposals, including the EISF. This was almost entirely non-committal, noting the lack of concrete proposals at that stage, and that the Stabilisation Function would be part of the “next MFF, post 2020, when the UK is envisaged to play no part, so are not relevant to the UK”. Following the publication of the detailed proposal in June, the Chief Secretary submitted a second Explanatory Memorandum on 13 July 2018. It provides no substantive assessment of the Commission proposal, but states that, “regardless of our relationship with the EU” after Brexit, “a resilient Euro area remain[s] in the UK’s interest”. The Memorandum adds that “any costs associated with the functioning of the euro area should be borne by [its] Member States”.

Our conclusions

25.15The creation of the stabilisation function is primarily a matter for the countries of the Eurozone, and is likely to be subject to intense negotiations given the range of views among members of the single currency area on the benefits and costs—including the possibility of ‘moral hazard’—inherent in the creation of a mechanism that essentially mutualises some of the risks inherent in monetary union at the EU-level.

25.16However, we do consider the Commission proposal to be politically important given that the strength of the Eurozone is of key importance to the UK’s own economic health, and given the close trading links the UK has and will maintain with the single currency area after Brexit. The EISF proposal should also be seen in the context of the recent Franco-German Meseberg Declaration‘ on a budget for the Eurozone. In the future, should such a Eurozone budget become a reality, it could take on the function of the stabilisation mechanism in addition to other centralised spending responsibilities. For example, Paris and Berlin are developing a joint proposal for a European Unemployment Stabilisation Fund, to be presented to EU leaders at the December 2018 European Council.

25.17There does not appear to be any direct exposure by the UK to contingent liabilities that could be created by the EISF, as the UK is due to cease being a contributor to the EU budget as if it were a Member State at the end of the transitional period in December 2020. It is extremely unlikely that any contingent liabilities incurred by the EU budget would crystallise before that time.181

25.18The Committee will continue to monitor the attempts at reform of the Economic and Monetary Union for the time being, and report any relevant developments to the House as appropriate. We are content to now clear the proposal for the Investment Stabilisation Function from scrutiny.

Full details of the documents

Proposal for a Regulation on the establishment of a European Investment Stabilisation Function: (39838), 9615/18 + ADDs 1–4, COM(18) 387.

Previous Committee Reports


174 The Eurosystem is the collective name for the European Central Bank and the Central Banks of each Eurozone country.

175 These reforms to preserve economic stability have included the creation of the European Semester; the inclusion of the Excessive Deficit Procedure and Macroeconomic Imbalances Procedure under the Stability and Growth Pact; the Fiscal Stability Treaty (after the UK vetoed EU Treaty change in December 2011) and the European Stability Mechanism. The Eurozone has also created a Banking Union, where supervision and resolution of troubled large banks is handled by the European Central Bank, rather than by national regulators.

176 These new budgetary initiatives would complement existing tools such as the Structural Reform Support Programme, the European Structural & Investment Funds, and the European Financial Stability Mechanism.

177 In its policy paper of December 2017, the Commission suggested the automatic stabiliser could take one of a number of forms, such as an investment protection fund; a reinsurance mechanism for national unemployment benefit schemes; a ‘rainy day’ insurance fund that would pay out grants to contributing Member States under pre-defined adverse economic circumstances.

178 Denmark has pegged its currency to the euro via the European Exchange Rate Mechanism (ERM II). Non-Eurozone Member States will also have an interest in the proposal because—with the exception of the UK and Denmark—they are required to adopt the single currency area, and any EISF loans would be guaranteed by the EU budget to which they are contributors.

179 The European Stability Mechanism (ESM) provides financial assistance to Eurozone countries experiencing or threatened by severe financing problems, primarily through macro-financial loans, but also via bank recapitalisation and purchasing sovereign bonds. It was established outside the framework of the EU Treaties due to the pressures of the 2012 Eurozone crisis, but the Commission has recently proposed re-integrating the ESM into EU law as the European Monetary Fund.

180 The methodology for calculating Member State contributions would be laid down in a separate intergovernmental agreement. According to the Commission, contributions should be equivalent to a share of their monetary income from the assets they hold in exchange of the banknotes they supply (“seigniorage”).

181 This situation could change if there were to be an extension of the post-Brexit transitional period beyond December 2020.

Published: 11 September 2018