Select Committee on European Union Twenty-Sixth Report


Letter from Lord Grenfell to Ms Ruth Kelly MP


  Thank you for the Government's response to our report The Stability and Growth Pact (Session 2002-03, Thirteenth Report, HL 72). I have to say that the Committee found the Government's response disappointing. Little, if any, attempt was made to address directly the points made in the Committee's report. The response largely consisted of repetitions of evidence already given to the Committee before its report was prepared.

  I am therefore now writing to you to ask you to clarify the Government's position on the Stability and Growth Pact. The Committee would like you to answer the following questions.


  In paragraph 165 we concluded that "when monitoring Member States' compliance with the 3 per cent deficit criterion, the Commission should continue to use the actual deficit-to-GDP ratio." Do the Government agree with this conclusion?

  In the same paragraph, we concluded that "the Council's decision whether or not to implement the excessive deficit procedure, once a country has breached the 3 per cent reference value, should take account of the underlying economic situation, including the Member State's position in the economic cycle and possibly its level of debt." Do the Government agree with the Committee on this issue?

  In response to paragraph 165, you quote your evidence to Sub-Committee A on 28 January 2003 ". . . it is now the case that the Council and the Commission take into account not just the hard and fast 3 per cent rule, but also take into account the debt positions of different countries and also the cyclical factors; and the use of automatic stabilisers has been specifically mentioned . . . the 3 per cent reference value has been given operational use through a set of guidelines—the Code of Conduct, agreed in 2001—which suggests there is room for flexibility within it." The Committee would like you to give specific examples of situations where the Council has not treated the 3 per cent deficit criterion as a "hard and fast" rule. Furthermore, can you say whether there has been a case when the deficit of a Member State has breached the 3 per cent mark and when that Member State has not been judged to have an excessive deficit?


  In paragraph 167, we said that it "is important to tackle the fact that the Stability and Growth Pact works asymmetrically across the economic cycle. Furthermore, countries need to be encouraged not to act pro-cyclically in times of boom. The Committee does not, however, consider that the Commission's proposal to apply the sanction of the excessive deficit procedure in good times would be the most effective way of achieving these twin objectives. The Committee shares the concern that the rules of the Pact should not be complicated. The number of situations that lead to the formal sanctions of the excessive deficit procedure being invoked should not be extended, or these measures will lose their force."

  Your response says that the automatic stabilisers should "operate fully and symmetrically across the cycle". We support this. You then go on to mention the Ecofin report, which says that "Member States should avoid pro-cyclical policies, especially when growth conditions are favourable." This quote does not address the second issue in paragraph 167, namely, what happens to those Member States that do adopt pro-cyclical policies. Would the Government support the use of the excessive deficit procedure in such a situation? Do the Government agree with the Committee that if the number of situations that lead to the formal sanctions of the excessive deficit procedure being invoked are extended, then these measures will lose their force?


  In paragraph 170, we concluded that the "Treaty should be amended to grant the Commission the power to issue early warnings directly to Member States without recourse to the Council." You reply that the Government remain "very concerned" about institutional changes "which would increase the role of the Commission in enforcing the disciplines of the Pact". However, our proposal would not affect the enforcement of the Pact, which we agree should remain under the exclusive control of the Council (as we make clear in paragraph 171). There is surely a distinction between monitoring the Pact and enforcing it. Our recommendation pertains only to the former and is therefore, as we said in our report, "in line with the monitoring and surveillance functions of the Commission." Do the Government reject the distinction between the monitoring role that the Commission currently caries out, maintaining surveillance over the Pact, and the enforcement of the Pact through the implementation of sanctions (of which the early warning is not one)?

  The Committee would like your reply to arrive by no later than 3 June, as Members may wish to return to these issues and the Government's response in the debate in the House on 4 June.

  I am copying this letter to Jimmy Hood MP, Chairman of the House of Commons European Scrutiny Committee; Dorian Gerhold, Clerk to the Commons Committee, Michael Carpenter, Legal Adviser to the Committee; Les Saunders, Cabinet Office; Jay Amarasena, Scrutiny Co-ordinator, HM Treasury; David Martin, Select Committee Liaison Officer, HM Treasury; Klaus Regling, Director General, Directorate-General Economic and Financial Affairs, European Commission; Dr Gunthe Grosche, Head of the Secretariat of the Economic and Financial Committee, European Commission; Peter Hain MP, UK Government Representative to the Convention on the Future of Europe; Gisela Stuart, MP, Member of the Praesidium of the Convention and UK National Parliament Representative; and to David Heathcoat-Amory, MP, Lord Maclennan of Rogart and Lord Tomlinson, UK National Parliament Representatives on the Convention.

13 May 2003

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