CHAPTER 6: Final Conclusions and summary
of conclusions and recommendations |
244. The Commission's proposals for enhanced
economic coordination, supported by the conclusions of the van
Rompuy taskforce, are the only ones currently on the table. While
the measures for enhanced coordination apply to all Member States,
it is in the euro area that these measures are most necessary.
245. In design, we believe that they are a step
in the right direction, and will complement the constructive work
that has been done to strengthen regulation and oversight of the
financial sector. The proposals relating to fiscal discipline
and cooperation should make it easier for Member States in the
euro area to arrive at a collective fiscal stance that is coherent
with a centralised monetary policy. Similarly, the proposals for
more intensive macroeconomic surveillance should help detect and
address excessive imbalances which have the potential to destabilise
the euro area. We do, however, stress that the excessive imbalance
procedure should not result in countries with a current account
balance in surplus being asked to make adjustments which will
harm their global competitiveness.
246. Above all, it is the implementation of these
measures that most concerns us. Previous attempts to enforce fiscal
discipline on Member States were largely ineffective. If these
new proposals for economic governance are to have any chance of
success it is essential that the political authorities of the
EU take them seriously and abide by the rules. Governments will,
in future, be encouraged to do so by markets which are less likely
to make the same mistakes again in treating the sovereign debt
of all euro area Member States as risk-free. The markets are not
foolproof however and will need to be supplemented by effective
enforcement mechanisms. The political resolve of Member States,
particularly France and Germany, will determine whether these
measures to increase the long-term stability of the EU, and the
euro area in particular, are successful.
Summary of conclusions and recommendations
247. The UK has a strong interest in seeing the
euro area stable and prosperous. It is therefore directly affected
by developments in the euro area. The Government have a vested
interest in ensuring that proposals to increase stability in the
euro area through increased economic coordination are effective
248. The interconnection of the sovereign debt
and banking sectors was one of the principal elements that contributed
to the current crisis. Recent events have demonstrated the debilitating
effect on public finances of transferring private debt to the
public sector. Mechanisms must put in place to control the behaviour
of banks and to ensure that the public sector does not end up
carrying the cost of failing banks. These must be effective. We
also note the risk of a vicious circle whereby a sovereign debt
crisis puts pressure on banks, including UK banks (para 29).
249. There are flaws in the concept and design
of the euro area, caused by an asymmetry between a centralised
monetary policy and decentralised fiscal and supply-side policies,
and by a build-up of competitiveness imbalances between Member
States. The simplest solution, a greater centralisation of fiscal
policy leading to a full fiscal union, is politically unfeasible
at the present time. A more limited form of fiscal union consisting
of collective borrowing by the euro area is perhaps more plausible.
Given that there has been no general agreement on this issue among
Member States, however, it is unlikely to be more than an incomplete
alternative in the near future. The package put forward by the
Commission and the governments of EU Member States (through the
Van Rompuy task force) opts for a greater coordination of fiscal
and economic policies among euro area countries to overcome these
flaws. If these proposals work well, they should make it easier
for Member States of the EU, and particularly the euro area, to
arrive at a collective fiscal stance that is compatible with a
single monetary policy (para 46).
250. We believe that the political imperatives
holding the euro area together are strong, and we do not think
it is likely that any country, whether fiscally weak or strong,
will try to leave voluntarily. We do, however, recognise that
it is now conceivable that a country could be forced to leave
the euro, or that the euro area could separate into two parts
251. Any break-up of the euro area would not
only be economically and politically costly for those Member States
leaving the euro, but would have a damaging impact on all members
of the euro area and the wider EU, not least the UK (para 55).
252. We did not receive compelling evidence to
suggest that the Eurogroup needed a more formal role and position.
Such a move could have implications for the UK and for the position
of ECOFIN as the ultimate decision-making body on financial and
economic matters. Recent decisions by the Eurogroup to adopt a
"Pact for the Euro" have brought these implications
into sharp relief (para 60).
253. There is a clear need for the euro area
to speak with one voice in crisis situations. It is essential
that it improves the speed and clarity with which it communicates
with the markets (para 63).
254. We welcome the Commission's proposals to
introduce an explicit public debt criterion, alongside the deficit
criterion, into the excessive deficit procedure under the SGP.
We consider it important that the most heavily indebted countries
move rapidly to reduce their level of public debt. We do not,
therefore, share the Government's concerns about a numerical benchmark
for reducing debt under the EDP. We believe that having such a
benchmark will be an effective way of exerting pressure on heavily
indebted countries to ensure that the higher a country's level
of debt the faster it is reduced (para 72).
255. Accurate and comparable statistics are essential
if there is to be effective economic coordination between Member
States. The Commission's proposal to enhance the powers of Eurostat,
adopted in 2010, was a good start. The van Rompuy taskforce report
suggested a need for measures to improve the quality of national
statistical data and to strengthen further the Eurostat's powers.
We agree, and recommend that the Commission should bring forward
legislative proposals to do so to ensure that measures to improve
economic governance are not undermined by unreliable statistics
256. After the events of the last year, the markets
can no longer assume that all sovereign debt issued by euro area
Member States bears the same risk. They will therefore play the
key role in restraining fiscal irresponsibility by Member State
by charging higher interests rates for countries deemed to have
lax fiscal policies. The markets have not, however, always proven
effective at enforcing responsible fiscal behaviour and further
mechanisms to reinforce compliance must also be available (para
257. The rules of the SGP must be enforced by
Member States acting together through the Council. Repeated breaches
by Member States in the past are proof that compliance is not
otherwise guaranteed (para 82).
258. We welcome the introduction of a more graduated
system of sanctions against non-compliance with the SGP. The availability
of sanctions earlier in the process will help ensure that irresponsible
behaviour by Member States is discouraged so that the corrective
arm can be avoided (para 88).
259. We believe that fully automatic sanctions
are a step too far. The introduction of semi-automatic reverse
majority voting, however, is a positive step. By reducing the
scope for political interference this new voting system will make
it more likely that sanctions will be applied, making them a more
effective deterrent to non-compliance (para 95).
260. With its ability to block sanctions under
the reverse majority voting procedure, final responsibility for
the decision to impose sanctions will continue to rest with the
Councilas is only appropriate. Only time will tell whether
the collective will of Member States is strong enough to ensure
that the sanctions process is applied even when the current crisis
is over. We endorse the Minister's remark: "the cost of the
crisis in the Eurozone is a reminder to us that we must make these
processes work much more effectively". We hope that this
continues to be true beyond the immediate crisis (para 100).
261. We stress the need for the Council to ensure
that, despite its ability to block sanctions, they become an effective
means to ensure Member States' compliance with the SGP once the
current crisis is over. We remain sceptical this will be the case
262. We do not believe that the withdrawal of
voting rights in Council is an appropriate sanction. Not only
would it require a significant treaty change, it would raise significant
questions about legitimacy and sovereignty if Member States were
unable to have any say in decisions taken in Council. Nor do we
think that a voluntary 'political agreement' is a plausible solution
as an alternative (para 107).
263. We believe that the overriding incentive
for Member States is that of maintaining a stable and prosperous
euro area. We do not feel that other incentives should be necessary
264. We do not support the recommendation in
the van Rompuy taskforce report to extend sanctions to Member
States outside the euro area (excluding the UK) by making EU expenditure
conditional upon compliance with the SGP. Sanctions are imposed
on euro area countries on the basis of express Treaty provisions.
It is inappropriate to do so through other means for Member States
outside the euro area (para 114).
265. The Commission's proposal to complement
the top-down oversight of fiscal policy through the incorporation
of EU-wide rules in domestic budgetary frameworks is a welcome
development. We believe it will complement other proposals to
enforce responsible fiscal behaviour through promoting a national
ownership of EU rules (para 127).
266. We welcome the proposal to ensure that,
where countries delegate substantial levels of expenditure to
sub-national authorities, these bodies are subject to the same
fiscal rules as central government (para 128).
267. We support the thrust of the draft Directive
which states that 'provision' for fiscal rules should be introduced
at a national level. We note, however, that the Directive may
be more effective if Member States implement these rules through
national legislation as far as possible, rather than relying on
administrative provisions (para 129).
MACROECONOMIC SURVEILLANCE AND ENFORCEMENT
268. 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 (para 153).
269. 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 (para 154).
270. 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 (para 155).
271. 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 (para 156).
272. The causes of the current crisis are now
well known; the causes of any future crises, 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 (para 157).
273. 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 (para 163).
274. 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 (para 169).
275. 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 (para 170).
276. 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 (para 176).
277. 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 (para 177).
278. 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 (para 185).
279. 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 (para
280. 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 (para 187).
281. 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 (para 193).
A CRISIS MANAGEMENT FRAMEWORK FOR THE EURO AREA
282. The finance ministers of France, Germany,
Italy, Spain and the UK have stated that there will be no losses
for the private sector on sovereign debt issued before a new permanent
crisis mechanism comes into force in 2013. While we recognise
that this commitment may be necessary to maintain market confidence
in the euro area in the short-term, we are doubtful that it will
prove sustainable. It implies a significant burden upon citizens
in the debtor countries; a burden that they may find difficult
to maintain in the period to 2013 and beyond (para 203).
283. We welcome the recent decision by euro area
Member States to increase the size of the EFSF. We recommend that
Member States make clear that they will have no hesitation in
further increasing the size of the EFSF, if that is necessary,
to preserve the solvency of euro area Member States. In addition,
we recommend that Member States carefully consider the interest
rate on loans given by these two mechanisms to ensure that they
do not prove overly onerous on those countries receiving assistance
284. The ECB's purchase of sovereign bonds has
longer-term consequences for its reputation and balance sheet.
These should be carefully monitored and assessed. The ECB should
consider how to reduce its own exposure to heavily indebted banks
and sovereigns by shifting the funding burden to the new European
Stability Mechanism (para 210).
285. Discussions over the feasibility or otherwise
of different proposals for eurobonds will continue. Although their
proponents suggest that they would help stabilise weaker members
of the euro area, there is little consensus on how they might
work at the present time. They may well represent a greater degree
of fiscal integration than Member States are willing to accept
given the current disparities between economies in the euro area
286. We welcome the Council's proposals for a
European Stability Mechanism. The existence of a formal way of
restructuring sovereign debt will encourage the market to price
better the risks posed by individual Member States within the
euro area, and encourage more responsible fiscal behaviour by
Member States which will no longer be insulated from market forces
by their membership of the euro. Conditionality is a vital element
and we support its application. The ECB should be consulted on
the terms and conditions of loans under the ESM (para 232).
287. We welcome the principle, enshrined in the
ESM agreement, that the private sector should share the burden
of any restructuring of sovereign debt under the new ESM mechanism.
It is only right that as they share in the rewards, they should
share the risks (para 234).
288. The ESM will be compulsory only for members
of the euro area. However, we recognise that it might be in the
UK's interests to contribute to rescue packages for Member States
in difficulties, as happened with Ireland. In this light, we welcome
the recent European Council proposals which will allow Member
States outside the euro area to contribute on a bilateral basis
when they consider it is in their national interests (para 242).
289. We recognise the expertise of the IMF in
this area. The IMF has been involved in the rescue packages provided
to Greece and Ireland; we recommend that it should be involved
in any future rescue package provided by the European Stability
Mechanism (para 243).