The future of economic governance in the EU - European Union Committee Contents

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 stability.


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.[182]

133.  Macroeconomic imbalances[183] 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.[184]


Regulation on the prevention and correction of macroeconomic imbalances
This proposal for a Regulation[185] 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 currency area".[186] 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 different".[187] 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".[188]

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 surveillance—not just to rely on a general treaty article but to put in place a formalised, structured surveillance framework based on secondary legislation".[189]

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"[190] 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".[191]


Article 121 and the basis for macroeconomic surveillance

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." [192]


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".[193] 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 threatens".[194] 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,[195] 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 imbalance".[196] 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 surveillance process".[197]


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.[198]

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.[199] Mr Cliffe asserted that macroeconomic surveillance would require a "whole host of variables" that would need to be monitored closely.[200] 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".[201] 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".[202] 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".[203]

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.[204]


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.[205] 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 proved unsustainable.

145.  Dr Annunziata argued that "surveillance should be symmetrical in the sense that large current account surplus should be as undesirable as large deficits".[206] 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".[207] 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".[208] 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 countries.[209]

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".[210] 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".[211]

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".[212] 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 market?"[213]

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.[214] 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 demand".[215]

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".[216] 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".[217]

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".[218] 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".[219]

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 imbalances.

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 global competitiveness.

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.

Enforcing competitiveness?

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".[220] The Commission agreed,[221] as did some of our other witnesses.[222]


Enforcing the excessive imbalance procedure
Regulation on enforcement measures to correct excessive macroeconomic imbalances in the euro area[223]

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".[224] 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".[225]

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.[226] Professor Copeland agreed.[227]

161.  If recommendations are to be addressed to both surplus and deficit countries, as suggested by the Commission,[228] 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.[229]

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 a whole.

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.[230]

166.  The UK will be subject to the European Semester.[231] 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 for this".[232]

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".[233]

168.  Witnesses, overall, had positive comments about the European Semester.[234] 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".[235] The Government support the European Semester, noting that it will put EU level surveillance of fiscal and macroeconomic policies on "a common timetable".[236]

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 the EU.

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".[237] 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.


Financial supervision
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.[238]

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.[239] 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".[240]

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".[241]

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 framework.

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".[242]

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".[243] 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".[244]

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 need".[245] While 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.[246] 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.[247]

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.[248] 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".[249]

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".[250] 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".[251]

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".[252]

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.[253]

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,[254] 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.


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 reforms—well beyond those currently envisaged under Europe 2020. The Pact for Competitiveness included:

  • the abolition of salary indexation systems;
  • the mutual recognition of educational diplomas and vocational qualifications;
  • the creation of a common assessment of corporate income taxes;
  • 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.[255] 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.[256]

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 finances; and
  • 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 to take.

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

183   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

184   Q 384 Back

185   COM (2010) 527 Back

186   EGE 10 Back

187   Q 189 Back

188   Q 123 Back

189   Q 376 Back

190   Government Explanatory Memorandum EM 14515/10, Proposal for a Regulation on the Prevention and Correction of Macroeconomic Imbalances (October 2010) Back

191   Q 533 Back

192   Professor Pisani-Ferry, Euro area governance: what went wrong. How to repair it (May 2010) Back

193   Q 142 Back

194   Q 500 Back

195   Q 228 Back

196   Q 532 Back

197   Q 29 Back

198   EGE 10 (Dr Dabrowski), EGE 7 (Open Europe) Back

199   Q 439 Back

200   Q 69 Back

201   Q 281 Back

202   Q 281 Back

203   EGE 10 Back

204   Q 40 Back

205   Q 302 Back

206   EGE 9  Back

207   Q 82. See also Q 74 (Mr Cliffe) Back

208   Q 88. See also QQ 109 (Dr Schelkle), 78 (Mr Cliffe) Back

209   Q 284. See also Q 110 (Dr Schelkle) Back

210   Q 308 Back

211   Q 309 Back

212   Q 201 Back

213   Q 484. See, for example, EGE 7 (Open Europe), Q 439 (Mr Persson) Back

214   Q 382 Back

215   Q 245 Back

216   Q 540 Back

217   Q 550 Back

218   Q 302 Back

219   Q 302 Back

220   Q 250 Back

221   Q 374 Back

222   Q 500 (Professor Buiter), Q 301 (Mr de la Chapelle Bizot) Back

223   COM (2010) 525 Back

224   Q 108 Back

225   EGE 17 Back

226   Q 440 Back

227   Q 441 Back

228   QQ 381, 382 Back

229   Q 283 (Professor Pisani-Ferry). See also QQ 75 (Mr Cliffe), 97 (Professor Goodhart) Back

230   Q 391 Back

231   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

232   Q 392 Back

233   Q 336 Back

234   QQ 46 (Mr Smewing), 336 (Mr Zuleeg), EGE 22 (European Policy Centre) Back

235   Q 303 Back

236   EGE 14 Back

237   Q 382 Back

238   COM (2009) 499, para 6.2 Back

239   Q145 Back

240   Q 282 Back

241   EGE 20 Back

242   Q 63 Back

243   Q 94 Back

244   Q 333 Back

245   Q 398 Back

246   Q 398 Back

247   Q 334 Back

248   Q 96 Back

249   EGE 18 Back

250   QQ 554-5 Back

251   Q 519 Back

252   Monti M, "Europe must buck short-term tendencies", Financial Times (13 December 2010) Back

253   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

254   Monti M, A new strategy for the single market (May 2010) Back

255   Hollinger P and Spiegel P, "Cracks over Franco-German Eurozone plan", Financial Times (4 February 2011)  Back

256   Conclusions of the heads of state or government of the euro area of 11 March 2011: Back

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