CHAPTER 4: Macroeconomic surveillance
and enforcement |
130. To supplement the existing system of fiscal
surveillance under the SGP, the Commission has proposed the creation
of an excessive imbalance procedure (see Box 5 below). This would
greatly extend the Commission's surveillance of economic policies
under the Broad Economic Policy Guidelines. Sanctions could be
imposed, on euro area countries only, when countries fail to take
action to correct macroeconomic imbalances.
131. In this chapter we look first at the Commission's
new proposals on macroeconomic surveillance, before considering
the accompanying sanctions regime. We then analyse the idea of
a "European Semester" that aims to coordinate better
the EU's different strands of surveillance of economic policies,
before turning to the European Systemic Risk Board which will
act as the interface between the EU's macroeconomic surveillance
and its surveillance of the financial sector. Finally, we consider
the importance of ensuring growth in Member States as a complement
to measures designed to ensure fiscal prudence and macroeconomic
THE COMMISSION'S PROPOSAL FOR MACROECONOMIC
132. In light of the shortcomings of the Stability
and Growth Pact, there has been a recognition that a surveillance
framework is needed which goes beyond fiscal issues to cover wider
macroeconomic factors. As with the SGP, this framework would cover
all Member States in the EU. As Mr Larch explained,
"Before the crisis there was this prevailing
paradigm in macroeconomic analysis that, if you keep your fiscal
house in order and if you keep inflation low and stable, you ensure
overall macroeconomic stability; you do not have to worry about
anything else. The crisis taught us that this paradigm no longer
holds. It taught us that there are some other imbalances ... that
are a threat to overall macroeconomic stability.
133. Macroeconomic imbalances
might be caused by very different phenomena, including: divergences
in different areas such as current account positions or competitiveness
trends across countries; excessive domestic demand growth (which
can contribute to asset price inflation and credit bubbles); or
an overreliance on exports. The surveillance framework proposed
by the Commission (see Box 5 below) aims to detect imbalances
at an early stage, in time to allow the formulation of corrective
policies that will prevent a significant imbalance from occurring.
Regulation on the prevention and correction
of macroeconomic imbalances
|This proposal for a Regulation would introduce a new element to the EU's economic surveillance framework: the 'excessive imbalance procedure' (EIP). This procedure will comprise a regular assessment of the risks of imbalances in a Member State based on a 'scoreboard' composed of economic indicators, but with provision for judgement to be exercised.
According to the provisions of this proposal:
- once an alert has been triggered for a Member State, the Commission will launch a country-specific, in-depth review in order to identify the underlying problems and submit recommendations to the Council on how to deal with the imbalances;
- for member-states with severe imbalances, including imbalances that put at risk the functioning of the EMU, the Council may open the EIP and place the Member State in an 'excessive imbalances position';
- a member-state under EIP would have to present a 'corrective action plan' to the Council, which will set deadlines for corrective action;
- A complementary regulation provides for sanctions to be imposed on euro area Member States who repeatedly fail to take corrective action (see Box 8).
This Regulation will apply to the UK.
134. Dr Dabrowski contended, however, that
"the conceptual background of this legislation is very controversial,
if not completely wrong". He argued that by trying to control
current account imbalances, "the Commission intends to control
a macroeconomic variable which is beyond direct policy influence
in a world of free capital movement, especially within a single
Other witnesses were also sceptical, such as Dr Gros, who
thought that the proposals for an excessive imbalance procedure
were "a nice try", but added, "I'm not against
it, but I'm very doubtful that it would work. If you get exactly
the same thing, then it will work, but the next bubble will be
Dr Hodson was just as sceptical: "on the excessive
imbalance procedure, my sense is that it is not going to amount
to very much more than what we already see at present". He
added that there was already surveillance of macroeconomic imbalances
through the broad economic policy guidelines (see Box 6 below)this
would simply "see a wider range of indicators used".
135. In response to this scepticism, Mr Costello
stated that the proposal amounted to "something significantly
more" than the current system of surveillance. He acknowledged
that it was true, "in a legal sense", that the Commission
already had the authority to intervene when Member States implemented
economic policy that was damaging to the EU, but he maintained
that, in practice, this surveillance was limited and not really
focused on imbalances. He stated that "what is proposed now
is to embed the surveillancenot just to rely on a general
treaty article but to put in place a formalised, structured surveillance
framework based on secondary legislation".
136. The Government has previously stated that
"heightened surveillance of macroeconomic imbalances and
competitiveness is crucial if the EU is to generate stronger and
more stable growth in the future"
and the Minister was positive about the proposals put forward
on macroeconomic surveillance. He told us that the proposals were
"very helpful" and noted that "the cost of tackling
[imbalances] is far less when they start to emerge than when they
have triggered a crisis".
Article 121 and the basis for macroeconomic
Following the Lisbon Treaty, the rules on economic policies are detailed in Articles 120-26 TFEU. Article 121 prescribes a system of multilateral surveillance of economic policies conducted by Member States. It states that "Member States shall regard their economic policies as a matter of common concern and shall coordinate them within the Council". To this end, the Council shall "formulate a draft for the broad guidelines of the economic policies of the Member States and of the Union".
From a legal standpoint, therefore, the EU already has in place a legal base from which to carry out macroeconomic surveillance. In theory, macroeconomic imbalances of the sort that have afflicted Ireland, Portugal, Spain and the UK should have been detected by the surveillance envisaged under the Broad Economic Policy Guidelines, with recommendations then issued to the countries in question about redressing the problems. Recommendations have certainly been issued, but in practice Member States took little notice of them. Professor Pisani-Ferry concluded: "The Broad Economic Policy Guidelines that were supposed to be the backbone of coordination have been consistently ignored by national policymakers." 
137. As described above, events have shown that
fiscal surveillance alone is not sufficient to detect incipient
problems of macroeconomic imbalance. The construction of the SGP
made it unable to catch the build-up of unsustainable private
debt and the associated asset bubbles. Dr Annunziata made
it clear that "from the point of view of the systemic stability
of a country it is the sum of public and private debt that matters.
This is the way in which markets tend to look at it". He
concluded that monitoring private debt was "a sensible step
towards enlarging the stability pact to a broader set of variables".
Professor Buiter also supported the surveillance of levels
of private debt, noting that "what is private but systemically
important or politically well connected becomes public when insolvency
Ireland can be seen as a prime example: before the crisis it had
highly favourable fiscal indicators, but a highly indebted financial
sector became a public sector problem when the government issued
a blanket guarantee to depositors.
138. Mr Leandro agreed with these views,
as did the Minister who said that "the level of private credit
is highlighted often ... clearly the macroeconomic surveillance
should look at that as one of the factors that will create an
Mr Curwen informed us that since "there was no Treaty
basis for having private debt considered, per se, in the SGP",
it was therefore "best looked at in the context of the multilateral
DETERMINING IMBALANCES: A DIFFICULT
139. Our witnesses pointed to some difficulties
in widening surveillance to capture macroeconomic imbalances.
First, the definition of imbalances is problematic and no clear
explanation was offered in the Commission's proposal.
140. The macroeconomic imbalances that have become
so visible in recent years are of different sorts, and it is difficult
to judge which are symptoms and which are the result of wider
economic problems. Consequently, determining the appropriate statistical
indicators to detect and identify the sources of imbalances is
a challenging intellectual exercise.
Mr Cliffe asserted that macroeconomic surveillance would
require a "whole host of variables" that would need
to be monitored closely.
Professor Pisani-Ferry explained that an analysis of imbalances
would inevitably require "a discussion on what is behind
them". This, he considered, would be difficult since "it
requires an assessment that is necessarily disputable and open
to discussion, instead of the relatively mechanical approach that
we have for fiscal or budgetary deficits".
Thus, an excessive public deficit is easily pinpointed, but what
constitutes unsustainable wage increases, excessive asset price
inflation or unsafe credit growth is much harder to judge. Unless
Member States were willing to have discussions about imbalances,
the policy failures that brought them about, and possible solutions,
this proposal would be an "empty exercise".
Dr Dabrowski's interpretation was slightly different: he
argued that most elements of the proposal were subject to discretion,
"and, therefore, for political bargaining". He concluded
that "one can hardly believe that such a vaguely defined
and highly discretionary framework may work effectively".
141. Mr Curwen accepted that the implementation
of the proposal was "not going to be straightforward".
The Commission would produce a list of the indicators to be monitored,
differentiated between the euro area and non-euro area Member
States to reflect the specific nature of the EMU, and this "scoreboard"
would be agreed by the Council.
The German surplus
|Although not the only country in the euro area to be running a surplus (indeed, that of the Netherlands has consistently been higher as a proportion of GDP in recent years) our evidence frequently led to discussions over Germany's competitiveness.
In the years preceding the crisis, Germany pursued a policy of wage moderation and extensive labour market reform that led to a progressive improvement in its labour costs relative to other EU countries. In combination with its traditional strength in industrial exports, this policy helped to boost German export growth while constraining internal demand. To the extent that German export success reflects a commitment to improved competitiveness on the global, and European, stage it has manifestly been in the interests of the whole EU.
Others, however, view Germany's net export performance as being at least partly derived from the equivalent of a 'beggar-thy-neighbour' strategy of holding down domestic demand. They argued that the burden of reducing macroeconomic imbalances within the euro area should fall not only on countries in deficit, but on surplus countries as well. The German authorities, it was suggested, could reduce its surplus by boosting internal demand and should be receptive, rather than resistant, to lending or transferring funds to the deficit countries from which Germany's surplus derives.
142. How best to deal with imbalances will depend
on the nature of the imbalance. A runaway property bubble, as
occurred in Spain and Ireland (and, to a lesser extent, the UK),
reflects mistakes in domestic policies in these countries and
could have been mitigated by a combination of regulatory and fiscal
action. The Spanish construction boom, in particular, was a direct
cause of the country's worsening current account deficit, reflecting
excessive domestic demand, but mirrored in the surpluses of Germany
and the Netherlands. In Spain, as in certain other countries,
wage increases not backed by productivity increases led to a gradual
deterioration in relative unit labour costs. Discussion over correction
of imbalances brought up a key point of controversy: whether those
countries currently running a surplus on the current account of
their balance of payments should also be called upon to take action
to help reduce macroeconomic imbalances. In most cases Germany
was used as a key example (see Box 7 above).
143. Mr de la Chapelle Bizot made the point
that there were "different ways of achieving surpluses",
and that it was important to look at whether they were sustainable,
or if they were the result of policies that were detrimental to
other Member States within the EU.
A country which deliberately restrains domestic demand to bolster
its net exports or (as China is currently accused of doing) holds
down its exchange rate to gain a competitive advantage, may be
accused of acting in an unfair manner (a "vicious" surplus).
By contrast, a country which invests in skills, research and productivity
growth can reasonably claim that it is achieving success by virtuous
means (a "virtuous" surplus). Our witnesses were divided
on this issue, illustrating the sheer difficulty of ascertaining
what is a "virtuous" or a "vicious" surplus.
144. This distinction is critical when it comes
to prescriptions for how to redress imbalances and how the burden
of adjustment should be shared. The question of current account
balances also has an intra-EU (euro area) and global dimension.
The EU as a whole (unlike the US or indeed China) has been quite
close to balance vis-à-vis the rest of the world, but there
have been growing divergences in current account positions inside
the EU. Much of Northern Europe is in surplus, while Southern
Europe is in deficit. This intra-European divergence may be helpful
if it reflects an investment of surpluses into improved productivity
and growth in deficit countries. In recent years, however, these
surpluses financed excessive government deficits (in Greece, for
example), and excessive private debt (such as in Ireland) that
145. Dr Annunziata argued that "surveillance
should be symmetrical in the sense that large current account
surplus should be as undesirable as large deficits".
Professor Goodhart criticised the Commission's proposal for
"trying to constrain the position of the deficit countries,
which the market is doing in any case, rather than looking at
a more symmetric adjustment mechanism in which the surplus countries
have to play a role as well".
He explained that while Germany was in surplus, "the counterpart
to that surplus has been the Germans transferring capital to other
deficit countries" because "the German banks are ...
buying very large quantities of the debt of the peripheral countries".
The result was that "unless things change quite rapidly,
the surplus countries are going to find their capital investments
in these countries are going to suffer a very large hit indeed".
Professor Pisani-Ferry took a slightly softer line, suggesting
it was necessary "to foster a discussion that takes into
account the interdependence" between surplus and deficit
146. Lord Monks, General Secretary of the ETUC,
simply stated that "the economics of it are that not everybody
can repair their deficits if the surplus countries continue to
run strong surpluses".
Mr Ronald Janssen, Economic Adviser at the ETUC, explained further:
"it is not sufficient to cut the external deficits of the
periphery countries. They need to turn it into an export external
surplus. By logic, that means that Germany should in theory become
a deficit country for a while".
147. Dr Gros thought that these arguments
were "irrelevant". He contended that over the time markets
would redress the balance: "the market works, slowly ...
if you give countries enough time to make the adjustment, it works".
Ms Ford summed up the views of several witnesses when she
asked, "How do you tell a country to be less competitive
versus its neighbours, especially when it is competing in a global
148. The Commission's view was that, while correcting
surplus would be a part of the debate, clearly the urgency and
rigour would fall much more immediately and severely on countries
in deficit. Mr Leandro
confirmed this was also the view of the van Rompuy taskforce:
"According to the taskforce report reforms are
needed in all countries, both in those that have accumulated large
deficits because of competitiveness deficiencies and also in those
that have accumulated large surpluses. It is more urgent in the
current context to take corrective action in the countries with
deficits than in those with surpluses. However, there is also
a need in the countries with surpluses
for a better-balanced
growth model, less reliant on exports and more reliant on domestic
149. The Minister expressed a slightly different
view, noting that "we are very good at identifying what should
happen to deficit countries but, equally, those countries with
surpluses need to think through which policies they should implement".
We questioned how the Commission could ask Germany to reduce its
overall competitiveness, and the Minister clarified their approach:
"we would not say, 'Can you make yourself less competitive?'
... However, if there were particular restrictions in place that
skewed the balance of the economy, that might be recommended".
150. Mr de la Chapelle Bizot felt this would
be an acceptable approach, and that macroeconomic surveillance
could aim to identify and avoid "non-cooperative policies".
He also remarked that this would be helpful at a wider EU level,
since it would allow Member States to consider a currency devaluation
by one country was "in the interests of the whole European
Union or not".
151. We feel that, in principle, an adjustment
of imbalances which address both deficits and surpluses would
be more effective than putting the emphasis of reform purely on
those countries in deficit and experiencing a loss of competitiveness.
In particular, there is a risk that excessive retrenchment by
deficit countries (competitive deflation) will lead to a downward
spiral in demand that is contrary to the collective interest of
the EU and will damage the surplus countries as well. We recognise
that it is unreasonable to ask successful Member States to reduce
their competitiveness in a global environment. It is, however,
in the interests of all Member States in the euro area that the
proceeds of those countries in surplus are not deployed in ways
which disadvantage their neighbours, and that those countries
in deficit are supported in making the structural adjustments
necessary to improve productivity and levels of employment.
152. We believe that the approach set out by
the Minister, of identifying and correcting particular policies
that contribute to macroeconomic imbalances is the correct one.
There must be a distinction, however, between the manner in which
countries in deficit are engaged with compared with those in surplus.
It would not be appropriate to issue corrective recommendations
to countries with current account surpluses.
153. The euro area crisis has made clear the
need to extend surveillance to monitor and correct macroeconomic
imbalances that threaten the stability of the euro area. Fiscal
discipline alone is not sufficient to ensure the stability of
the monetary union. We welcome therefore the Commission's proposals
to monitor excessive imbalances.
154. It is essential that the level of private
debt should be monitored as part of any comprehensive surveillance
mechanism and we welcome the Commission's proposals to ensure
that this is included under new proposals to detect excessive
155. We recognise the intrinsic difficulty
of defining, measuring and analysing macroeconomic imbalances,
and distinguishing between excessive and benign imbalances. Therefore
the success or otherwise of the planned macroeconomic surveillance
will depend on the capacity of the early warning system to detect
excessive imbalances at a sufficiently early stage, and Member
States having the political will to engage in honest discussion
of the results. This calls for judgement in distinguishing between
macroeconomic developments which can be blamed on national policy
choices (such as property bubbles), improvements in competitiveness
that arise from sound structural policies, and current account
divergences that reflect inconsistencies between domestic demand
among Member States.
156. We recognise that there are two sides
to current account imbalances, but we do not believe that countries
in surplus should be subject to the same procedures as those in
deficit. Where excessive current account deficits arise as a result
of national policy choices, it is proper that they should be the
subject of corrective recommendations under these proposals. It
is not appropriate or realistic, however, to issue corrective
recommendations to a country with a current account surplus. Nevertheless,
surpluses are not always benign and it is important that surplus
countries also face pressure from their peers to contribute to
the reduction of imbalances in ways which do not damage their
157. The causes of the current crisis are
now well known; the causes of any future crisis, however, are
likely to be different. The Commission and Member States must
ensure that the criteria and types of imbalance covered by this
surveillance are regularly reviewed to maintain their relevance
as EU and global economies develop.
158. In contrast to the sanctions available for
enforcing fiscal discipline under the SGP, the sanctions proposed
under the excessive imbalance procedure for macroeconomic surveillance
are new. Our witnesses suggested that, while the market could
quickly punish governments for irresponsible fiscal behaviour,
it would not play the same role in the macroeconomic sphere. The
market will help rebalance macroeconomic imbalances in the long-term,
but it will not act quickly. Mr Leandro explained why the
van Rompuy taskforce had recommended sanctions to enforce the
EIP: to "make sure that what has been recommended has a chance
to be implemented ... both Commission and taskforce members recognised
that ultimately, in the case of this imbalance [mechanism], you
need sanctions and an enforcement mechanism".
The Commission agreed,
as did some of our other witnesses.
Enforcing the excessive imbalance procedure
|Regulation on enforcement measures to correct excessive macroeconomic imbalances in the euro area
This Regulation creates a series of sanctions to enforce the Commission's proposals for an excessive imbalance procedure (see Box 5 on page 41).
The sanctions process
If a euro area member-state repeatedly fails to act on Council EIP recommendations to address excessive imbalances, it will have to pay, according to the provisions of this Regulation, a yearly fine equal to 0.1% of its GDP. The fine can only be stopped by a qualified majority vote (according to the reverse voting mechanism), with only euro area member-states having the right to vote.
This Regulation will not apply to the UK.
159. Others however, even those who argued that
a symmetrical adjustment should take place, were concerned about
the use of sanctions to enforce the EIP. Dr Schelkle argued
that "you cannot punish a government" just because their
private sector is "not as competitive as those of the Dutch,
the Finnish or the Germans".
She argued that governments would not necessarily be able to control
imbalances, and that it would be unreasonable to "punish
sovereign Member States for imbalances that governments cannot
be held responsible for".
160. Earlier in this chapter we recognised the
intrinsic difficulties of defining and measuring imbalances. Mr Persson
put this in the context of sanctions and argued that the criteria
for an excessive imbalance would be "subject to judgement"
and "endless negotiation between the Council and the Commission".
It was therefore "not as easy as with fiscal rules"
where there are clear targets.
Professor Copeland agreed.
161. If recommendations are to be addressed to
both surplus and deficit countries, as suggested by the Commission,
this would potentially mean sanctions under the EIP could be levied
against not only those countries in deficit, but also competitive
countries which refused to comply with the Commission's recommendations.
Several witnesses suggested that the thought of punishing surplus
countries such as Germany for refusing to comply with recommendations
that would lower their relative competitiveness was ridiculous.
162. The SGP gives concrete, measurable criteria
for judging responsible fiscal performance. It is therefore reasonable
that sanctions are available to force the compliance of Member
States who break these criteria. Recommendations under the EIP,
however, will be based on more subjective decisions, and we would
be concerned if sanctions were used to enforce these decisions
if reasoned argument has failed. We do not feel that sanctions
can realistically be levied against a sovereign nation because
it refuses to act to reduce its own competitiveness, even if such
a decision might be against the interests of the euro area as
163. Because of the intrinsic difficulty in
determining what constitutes an excessive imbalance, we have strong
reservations about resorting to sanctions within the excessive
imbalance procedure, especially for outcomes that are much less
directly under the control of governments.
Economic and fiscal policy coordination:
the European Semester
164. The idea of establishing a 'European Semester'
as an additional instrument for enhanced surveillance was approved
at the ECOFIN Council on 7 September 2010. The Semester intends
to align better three strands of EU economic policy: macroeconomic
surveillance, fiscal consolidation and structural reforms. In
other words, it will bring closer together the procedures underpinning
the Europe 2020 Strategy, the Stability and Growth Pact and, assuming
that it is adopted, the excessive imbalance procedure.
165. Until now, the Commission has conducted
fiscal surveillance and issued recommendations under the SGP to
a different annual timetable from that used when conducting surveillance
and issuing recommendations under the Europe 2020 Strategy for
growth and jobs. Mr Costello explained some of the difficulties
this caused: "We took care to ensure that those recommendations
were not inconsistent, but that is not to say that they were as
aligned as they should have been". He explained that the
European Semester would allow the Commission to issue both sets
of recommendations in one go. Secondly, it will allow the Commission
to issue its recommendations on fiscal policy before Member States'
budgets are adopted, rather than after the fact as had previously
been the case.
166. The UK will be subject to the European Semester.
Mr Costello noted that, since the UK's fiscal and calendar
years are different from other Member States, "it is probably
a nicer fit for the UK budget calendar than any other", although
he noted wryly that "that was not the original validation
167. When first proposed, there were concerns
that the European Semester would mean that the Commission was
being given oversight over the UK budget before it was approved
by Parliament. Several witnesses disagreed with this interpretation,
with Mr Zuleeg pointing out that "oversight implies
some form of control. That is
not really on the table".
He added that the function of the Semester was "simply to
have a discussion about what impact a budget in one country has
on other countries before it actually happens".
168. Witnesses, overall, had positive comments
about the European Semester.
In Mr de la Chapelle Bizot's view, "it will feed the
debate and will provide Members of Parliament with another point
of view, which could be different from the Government's. I think
it will help the national Parliament to vote with more information".
The Government support the European Semester, noting that it will
put EU level surveillance of fiscal and macroeconomic policies
on "a common timetable".
169. We believe that Member States will benefit
greatly from the introduction of a European Semester which will
lead to more coherence in the way the Commission offers advice
on how Member States could coordinate economic policies across
170. Rather than downgrading the role of national
parliaments we believe that a European perspective can only strengthen
national parliaments' scrutiny of their national executives by
providing more information.
European Systemic Risk Board
171. The proposals on macroeconomic surveillance
include a role for the European Systemic Risk Board (ESRB), a
body created under the new European system of financial supervision,
and established from January 2011. The ESRB is in charge of macro-prudential
supervision, with the power to issue systemic risk warnings. Its
primary objective is to identify and prevent risks to financial
stability, and it provides an important means by which the monetary
authorities, led by the European Central Bank, contribute to the
overall surveillance of Member State economies.
172. There is an inter-linkage between macroeconomic
surveillance and the ESRB. The Commission made it clear to us
that "whenever the Commission steps up surveillance on a
Member State and believes, on the basis of its analysis, that
there are imbalances, when formulating recommendations to the
Member State it will take into account the deliberations of the
European Systemic Risk Board".
Mr Leandro further clarified its role, explaining that the
idea was for the new macroeconomic surveillance framework to consider
the opinions and inputs of the ESRB when assessing macro-imbalances,
so that fiscal, financial and structural dimensions could be integrated.
|The new financial supervision architecture consists of the European Systemic Risk Board for macro-prudential supervision (ESRB) and the European Supervisory Authorities (ESAs) for micro-prudential supervision. The ESAs oversee the supervision of banks, insurers and securities markets.
The ESRB will oversee macroeconomic and financial market trends, and identify and deter the build-up of excessive risk at an early stage. The ESRB "has been conceived as a 'reputational' body with a high-level composition that should influence the actions of policymakers and supervisors by means of its moral authority," according to the Commission proposal.
The board will be made up of governors of the 27 national central banks, the president and vice-president of the ECB, a member of the European Commission and the chairs of the three ESAs. The ESRB has no binding legal powers.
173. Some witnesses emphasised the significance
of the ESRB in the macroeconomic surveillance architecture. Dr Annunziata
defined the ESRB as "extremely precious" and noted that
its role would be complementary to the monitoring taking place
under the SGP.
It will bridge the gap between supervision and regulation of the
financial sector and the budgetary policies of Member States.
Given that the ECB has also been a major contributor to the response
to the economic crisis, initially by providing liquidity to banks
and subsequently by buying up sovereign debt, its place in the
governance architecture is important.
174. Despite the ESRB's potential importance,
we were unclear as to how it would operate in practice. We posed
this question to our witnesses. Professor Pisani-Ferry
responded that there was not much information to clarify what
the ESRB was going to do, or how. He stated, though, that there
was a great deal of crossover between financial stability (overseen
by the ESRB), macroeconomic imbalances (monitored through the
EIP) and fiscal surveillance (through the SGP). He warned that
the discussion treated the three different fields as if they were
"three silos", whereas "they had much in common".
He observed, "How the policy framework is going to clarify
better the distinction of what exactly the role is of this three-part
procedure is a major issue for the clarity of the policy framework".
175. Professor Copeland suggested there
were a number of potential concerns. In particular, he questioned
whether the ESRB would "have the power, and the political
independence, to make objective assessments of risks associated
with banks' sovereign lending, questions which are obviously very
sensitive in political terms since they involve passing judgment
on the sustainability of fiscal policy at national level".
176. The European Systemic Risk Board (ESRB)
is a key new body in the European financial supervisory framework,
and will serve as the interface between macro-economic surveillance
and macro-prudential supervision. We recommend that more consideration
should be given to the way the ESRB interacts with the Commission
and ECOFIN in the excessive imbalance procedure and the SGP. We
encourage the Government to ensure that the analyses of the ESRB
are considered, and acted upon, when the Commission and Council
consider the results of the proposed macroeconomic surveillance
177. The European Central Bank has played
a central role in managing the crisis and will continue to be
a cornerstone of EU economic governance. The ESRB is the route
through which the central banks, and the ECB in particular, should
be able to contribute actively to discussions on the fiscal and
macroeconomic positions of Member States.
Long term correction of competitiveness
imbalances: economic growth
178. Economic growth is central to any programme
to reduce imbalances and restore competitiveness in the EU. As
Mr Cliffe argued, "the integrity of monetary union isn't
just about fiscal discipline and fiscal responsibility; it's also
about economic growth".
179. Professor Goodhart drew attention to
a situation where "the interest rates that peripheral countries,
which are seen as under threat, are having to face are high, and
their prospective growth is terribly low, and that simply is not
sustainable". He concluded that "what is missing from
all the work in Europe is any study or exercise about how the
heck these countries are going to get growth, particularly through
the net export side".
Mr Zuleeg's greatest concern was that there was little debate
about the growth part of economic governance. All the emphasis
on enforcement and sanctions was of little significance if not
accompanied by measures leading to growth as, ultimately, "debt
has to be eroded through GDP growth".
180. We considered the significance of Europe
2020, the EU strategy for jobs and growth, as a driver for growth
across the EU. Mr Costello felt that Europe 2020 "should
be the growth component of the entire recovery strategy that countries
other mechanisms would address fiscal stability and imbalances,
the Europe 2020 strategy should drive growth as "part and
parcel" of the discussions on economic governance.
Mr Martens argued that Europe 2020 should be an integral
part of discussion about economic governance, because structural
reforms were essential for ensuring future growth.
181. Other witnesses were more sceptical. Professor Goodhart
said that while Europe 2020 would help, he did not believe that
the strategy would have any "immediate effect", which
would be needed in the short run to offset austerity programmes.
Dr Dadush argued that Europe 2020's credibility was weak.
He explained that "Structural reforms
can only be
achieved by determined action at the national level, fully legitimized
by the national political process. EU guidelines can help provide
a framework, but that is where they stop".
182. The Minister had a similar view, noting
that while Europe 2020 could help encourage future growth, it
required "real focus and commitment from Member States to
deliver some of the priorities in there".
He also remarked on the importance of the single market project
to enhance EU growth: "the more work we have done to widen
and deepen the single market, the better the chances of economic
growth". This will "help Member States tackle their
deficits. It will help improve stability".
183. Professor Mario Monti, President of
Bocconi University and a former European Commissioner, echoed
these views in an article in December 2010. He argued that an
uneven development of the single market lay behind divergences
in competitiveness and the inadequate economic performance of
the EU, especially in the euro area. He suggested that "the
proposed framework goes a long way towards providing economic
governance but neglects economic union".
184. We agree that promoting growth should be
a vital component of any measures to help the EU out of the current
crisis. The Europe 2020 strategy has an important role to play
in this regard, although its success will depend on the willingness
of Member States to take national action to meet its priorities.
Further developing the single market should also be a priority
to help drive growth.
185. Loss of competitiveness and an absence
of growth are a damaging combination for the Member States struggling
to deal with the aftermath of the crisis. Reviving growth and
reducing the deficit are complementary rather than competing objectives.
Countries with large fiscal and current account imbalances need
policies that support growth and restore competitiveness to ensure
long-term sovereign debt sustainability.
186. We believe that the emphasis should be
on both dimensions of the Stability and Growth Pact: ensuring
stability while enhancing growth so that recovery from the crises
of the past three years can be achieved along with competitiveness.
187. The enhanced EU economic governance regime
must connect with overarching policies such as Europe 2020 to
ensure the single market is able to stimulate growth and competitiveness
across the EU. The EU and the UK Government should be driving
forward the single market agenda, along the lines set out by Professor Mario
Monti in his report A new strategy for the single market,
with a view to making it an integral part of the reformed economic
governance architecture. Without a return to sufficiently robust
economic growth, the prospects for dealing with the legacy of
the crisis will be much more slender.
THE PACT FOR THE EURO
188. The Pact for Competitiveness was a proposal
circulated by France and Germany to Member States before the European
Council on 4 February 2011. It suggested a series of measures
to reduce the competitive divide among euro area countries through
much closer coordination of structural reformswell beyond
those currently envisaged under Europe 2020. The Pact for Competitiveness
- the abolition of salary indexation systems;
- the mutual recognition of educational diplomas
and vocational qualifications;
- the creation of a common assessment of corporate
- overhaul of national pension systems;
- the insertion of a "debt alert mechanism"
into national constitutions of all Member States; and
- the establishment of national crisis management
regimes for banks.
189. Due to concerted opposition from a number
of Member States, the proposal was never formally tabled for consideration
by the European Council.
Instead, Herman van Rompuy was asked to explore the matter further
and report back at the European Council meeting in March 2011.
190. Mr van Rompuy put his proposals to a meeting
of the heads of state or government of the euro area at a meeting
on 11 March 2011. The "Pact for the Euro" was endorsed
by this group, which indicated that they would adopt the Pact
at the European Council meeting on 24 and 25 March 2011. The group's
statement invited non-euro area Member States to participate in
the Pact on a voluntary basis.
191. The Pact for the Euro requires Member States
to pursue measures to achieve the following objectives:
- foster competitiveness;
- foster employment;
- contribute further to the sustainability of public
- reinforce financial stability.
192. The Pact for the Euro does not go as far
as was proposed by France and Germany in the Pact for Competitiveness,
but it does commit euro area Member States to coordinating more
closely a number of areas which fall under national competences,
and goes beyond currently agreed strategies such as Europe 2020.
It is therefore a significant step for the euro area Member States
193. The Pact for the Euro was proposed after
we had completed taking evidence so we were unable to discuss
it with witnesses. We do, however, have concerns about its implications
for those countries outside the euro area, particularly those
Member States which choose not to participate voluntarily. The
development of a 'two-speed' Europe would create a significant
distinction within the single market between those states inside
the euro area or participating voluntarily in the Pact and those
who choose not to.
182 Q 378 Back
In general terms, a macroeconomic imbalance exists where the trajectory
of an economy is unsustainable and risks causing problems of volatility
or instability, including financial instability. Such imbalances
often manifest themselves in deficits or surpluses on the current
account of the balance of payments. Back
Q 384 Back
COM (2010) 527 Back
EGE 10 Back
Q 189 Back
Q 123 Back
Q 376 Back
Government Explanatory Memorandum EM 14515/10, Proposal for
a Regulation on the Prevention and Correction of Macroeconomic
Imbalances (October 2010) Back
Q 533 Back
Professor Pisani-Ferry, Euro area governance: what went wrong.
How to repair it (May 2010) Back
Q 142 Back
Q 500 Back
Q 228 Back
Q 532 Back
Q 29 Back
EGE 10 (Dr Dabrowski), EGE 7 (Open Europe) Back
Q 439 Back
Q 69 Back
Q 281 Back
Q 281 Back
EGE 10 Back
Q 40 Back
Q 302 Back
EGE 9 Back
Q 82. See also Q 74 (Mr Cliffe) Back
Q 88. See also QQ 109 (Dr Schelkle), 78 (Mr Cliffe) Back
Q 284. See also Q 110 (Dr Schelkle) Back
Q 308 Back
Q 309 Back
Q 201 Back
Q 484. See, for example, EGE 7 (Open Europe), Q 439 (Mr Persson) Back
Q 382 Back
Q 245 Back
Q 540 Back
Q 550 Back
Q 302 Back
Q 302 Back
Q 250 Back
Q 374 Back
Q 500 (Professor Buiter), Q 301 (Mr de la Chapelle Bizot) Back
COM (2010) 525 Back
Q 108 Back
EGE 17 Back
Q 440 Back
Q 441 Back
QQ 381, 382 Back
Q 283 (Professor Pisani-Ferry). See also QQ 75 (Mr Cliffe), 97
(Professor Goodhart) Back
Q 391 Back
See also European Union Committee, 5th Report (2010-11):
The EU Strategy for economic growth and the UK National Reform
Programme (HL Paper 81). Back
Q 392 Back
Q 336 Back
QQ 46 (Mr Smewing), 336 (Mr Zuleeg), EGE 22 (European Policy Centre) Back
Q 303 Back
EGE 14 Back
Q 382 Back
COM (2009) 499, para 6.2 Back
Q 282 Back
EGE 20 Back
Q 63 Back
Q 94 Back
Q 333 Back
Q 398 Back
Q 398 Back
Q 334 Back
Q 96 Back
EGE 18 Back
QQ 554-5 Back
Q 519 Back
Monti M, "Europe must buck short-term tendencies", Financial
Times (13 December 2010) Back
A report from the European Union Select Committee on the single
market will examine some of these issues in more detail. It will
be published in early April 2011. Back
Monti M, A new strategy for the single market (May 2010) Back
Hollinger P and Spiegel P, "Cracks over Franco-German Eurozone
plan", Financial Times (4 February 2011) Back
Conclusions of the heads of state or government of the euro
area of 11 March 2011: http://www.consilium.europa.eu/uedocs/cms_Data/docs/pressdata/en/ecofin/119810.pdf Back