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

CHAPTER 6: Final Conclusions and summary of conclusions and recommendations

Final conclusions

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 (para 22).


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 (para 54).

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 (para 77).

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 81).

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 Council—as 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 (para 101).

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 (para 110).

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).


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 186).

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).


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 (para 204).

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 (para 217).

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).

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