'Genuine Economic and Monetary
Union' and the implications for the UK |
CHAPTER 1: 'GENUINE ECONOMIC AND MONETARY
UNION'STICKING PLASTER OR MIRACLE CURE?
1. The proposals for European 'Genuine
Economic and Monetary Union' first emerged as a key plank of the
EU institutions' attempts to respond to the series of crises to
hit the eurozone in the wake of the 2008 financial crisis.
In particular, the links between sovereign states and their seriously
indebted banking sectorsthe so-called 'doom loop'combined
with the threat of cross-border contagion, threatened to overwhelm
2. When it was revealed by the IMF
in the summer of 2012 that there was a near 40 billion hole
in the balance sheets of Spanish banks, EU leaders recognised
that urgent action needed to be taken. The President of the European
Council, Herman Van Rompuy, prepared a report for discussion at
the June 2012 European Council. The report, entitled Towards
a Genuine Economic and Monetary Union, envisaged a "stable
and prosperous EMU based on four essential building blocks":
(1) An integrated financial framework
to ensure financial stability in particular in the euro area and
minimise the cost of bank failures to European citizens. Such
a framework would elevate responsibility for supervision to the
European level, and would provide for common mechanisms to resolve
failing banks and guarantee customer deposits;
(2) An integrated budgetary framework
to ensure sound fiscal policy-making at the national and European
levels, encompassing coordination, joint decision-making, greater
enforcement and commensurate steps towards common debt issuance.
It was envisaged that this framework could also include different
forms of fiscal solidarity;
(3) An integrated economic policy
framework which has sufficient mechanisms to ensure that national
and European policies are in place that promote sustainable growth,
employment and competitiveness, and are compatible with the smooth
functioning of EMU;
(4) Ensuring the necessary democratic
legitimacy and accountability of decision-making within the EMU,
based on the joint exercise of sovereignty for common policies
3. The Council invited the Four
Presidents to develop by the end of 2012 "a specific and
time-bound road map for the achievement of a genuine Economic
and Monetary Union."
A final report was produced in December 2012, in preparation for
that month's European Council.
The Commission published its own, complementary document, A
Blueprint for a Deep and Genuine Economic and Monetary Union:
Launching a European Debate, in November 2012.
Both papers set out the measures that needed to be taken in the
short, medium and long term. The main elements of 'Genuine Economic
and Monetary Union', and the proposed timeframe for its implementation,
are set out in Boxes 1 and 2 below.
Main elements of 'Genuine
Economic and Monetary Union'
|Notwithstanding some differences of detail between the Four Presidents' Report and the Commission Blueprint, the principal elements of 'Genuine Economic and Monetary Union' are as follows:
(1) Banking Union, comprising:
(a) Centralised bank supervision, led by the ECB (since agreed);
(b) A Single Resolution Mechanism incorporating an effective common backstop, but limiting the exposure of taxpayers;
(c) An operational framework to enable the European Stability Mechanism to be used for direct bank recapitalisation;
(d) Common deposit insurance.
(2) Fiscal union:
(a) Mechanisms for better discipline in, and coordination of, fiscal policy, building on the measures already agreed in the last three years;
(b) A new fiscal capacity for the eurozone: initially to provide targeted but temporary support for countries undertaking structural reforms; subsequently becoming an instrument to help in dealing with country-specific economic shocks through a centrally-managed insurance system;
(c) The possible establishment of forms of debt mutualisation, including the eventual introduction of a Eurobond available to all participating Member States, which would be jointly and severally guaranteed.
(3) Closer integration of economic policies intended to promote sustainable growth, competitiveness and employment and improving the resilience of the economy to shocks. This would include:
(a) Further efforts to complete the Single Market, including by stimulating labour mobility across borders and possibly greater tax harmonisation;
(b) A reinforced framework for ex-ante coordination of major policy reforms, notably those affecting the supply-side of the economy;
(c) Contractual relationships between Member States and the Commission on economic strategies, with accountability to both the European Parliament and national parliaments.
(4) Enhancement of democratic oversight of pooled economic policies.
Proposed timescale for 'Genuine
Economic and Monetary Union' (as proposed in late 2012)
Two distinct timetables were put forward, with the final version of the Four Presidents' Report suggesting three phases, two of which would be completed by the end of 2014, and the Commission suggesting short, medium and longer term developments of EMU.
Under the Four Presidents' proposals, an initial phase was to be completed by the end of 2013, and was expected to ensure fiscal sustainability and break the damaging links between banks and sovereign debt. A second phase, foreseen for 2013 and 2014, was supposed to complete the integrated financial framework and to put in place mechanisms for stronger policy coordination. In a third phase, beyond 2014, the plan was to improve the resilience of EMU by creating a "shock-absorption function at the central level".
The Commission timetable, which included much of the first two phases of the Four Presidents' proposals in its first stage, was as follows:
In the short term (within six to 18 months), completion of the Banking Union andonce an agreement on the Multiannual Financial Framework has been reached (which it was in June 2013, following the assent of the European Parliament)create a "convergence and competitiveness instrument" within the EU budget to support the timely implementation of structural reforms. This support could be based on commitments set out in "contractual arrangements" concluded between Member States and the EU institutions.
In the medium term (18 months to five years), a further strengthening of the collective conduct of budgetary and economic policyincluding tax and employment policycould go hand-in-hand with a dedicated fiscal capacity for the euro area, relying on own resources and providing sufficient support for important structural reforms in large economies under stress. Short-term Eurobills or a Debt Redemption Fund, subject to strict conditionality, could also be considered.
In the longer term (beyond five years), based on the adequate pooling of sovereignty, responsibility and solidarity at the European level, it should be possible to establish an autonomous euro area budget providing for a fiscal capacity for the EMU. A deeply integrated economic and fiscal governance framework could allow for the common issuance of public debt. This could be the final stage in EMU.
Diagnosing the problem
4. The concept of 'Genuine Economic
and Monetary Union' is based on the premise that the existing
Economic and Monetary Union was somehow incomplete or deficient.
The flaws in EMU's architecture, predicted by some at the outset
of the single currency project, are now widely acknowledged, including
by the EU institutions. The Commission has drawn attention to
the following deficiencies:
· The accumulation in some
eurozone Member States of large private and public debts, losses
in competitiveness, and macroeconomic imbalances, which rendered
them vulnerable when the financial crisis struck. This led to
significant contagion effects across the eurozone once the sovereign
debt crisis developed.
· EMU's unique status amongst
monetary unions in combining a centralised monetary policy with
decentralised responsibility for most economic policies and with
no centralised fiscal policy function or fiscal capacity (i.e.
a federal budget). This meant that the rules governing the coordination
of budgetary policies, as set out in the Stability and Growth
Pact (SGP), were of vital importance.
Yet the SGP was insufficiently observed by the Member States and
lacked robust mechanisms to ensure sustainable public finances.
· The coordination of national
economic policies relied on soft instruments peer pressure
and recommendationsand had a limited impact on the actions
of individual Member States. The approach was too weak to counter
growing gaps in competitiveness and growth between Member States.
Little consideration was given to the euro area-wide spillover
effects of national measures.
· The global easing of inflationary
pressure in the late 1990s led to a rapid and sustained expansion
in the money supply. This resulted in a global excess of liquidity
and ultimately a severe mispricing of risk of both private and
public assets. The reliance by banks on national bonds for their
open market operations resulted in strong yield convergence, considerably
limiting market discipline despite differences in national budgetary
performance. Euro area economies in a cyclical expansion and with
relatively high inflation rates tended to enjoy low or even negative
real interest rates. This led to significant credit expansion
in some countries, fuelling significant housing bubbles.
· The inception of EMU saw
a sharp acceleration in the pace of financial integration. While
this created opportunities, it also accelerated the transmission
of shocks across national borders. Yet the responsibility for
prudential supervision and crisis management remained predominantly
at the national level.
· The lack of an integrated
EU-level framework and a mechanism to mutualise the response to
risks coming from the banking sector resulted in powerful and
damaging negative loops (often referred to as a 'vicious circle')
between the banking system and sovereign states. This fuelled
the debt crisis further. As a result, some Member States were
excluded from market financing and there has been a risk of contagion
affecting the euro area as a whole. The absence of an effective
mechanism to provide liquidity to Member States in distress, and
thus to manage contagion risk and to safeguard euro area financial
stability, emerged as a clear inadequacy in the crisis management
5. Our own analysis, as set out
in our March 2011 report on The Future of Economic Governance
in the EU, was that:
"An asymmetry between a centralised
monetary policy and decentralised fiscal and supply-side policies,
combined with a build-up of competitiveness imbalances between
Member States, have left the future stability of the euro area
in doubt. These problems were exacerbated by a failure of the
markets, and Member States themselves, to understand the construction
of the euro area. This saw the markets treating the euro area
as a single entity without considering, and thus acting on, the
financial health of individual Member States (for example, there
was very little difference between the cost of Greek and German
6. In light of subsequent experience,
other problems have been revealed, including a lack of crisis
management capability or means of dealing with sovereign debt
and bank resolution, and a range of legitimacy and political accountability
challenges. In particular, the toxic link between banks and sovereign
states was accompanied by retrenchment of financial activity within
national boundaries, not least because many banks did not want
to be exposed to risks posed by weak sovereign states as well
as to credit risk. This created the pernicious 'doom loop' from
which several of the most affected Member States struggle to escape.
The Commission and EU Member States have long acknowledged the
problem, but as yet have failed to reach agreement on the decisions
necessary to break the link: in December 2013 they were roundly
criticised by European Central Bank (ECB) President Mario Draghi
for failing to do so.
The sticking plaster approach
7. The Commission has been at pains
to point out that significant steps have already been taken to
seek to address the consequences of the crisis, some of which
apply to all 28 members of the EU, some only to the eurozone and
some to eurozone members plus others who choose to 'opt-in'. These
are set out in Box 3 below.
Measures already taken to
address the crisis
|(1) Economic policy surveillance:
(a) The Six-pack, concluded in November 2011, comprising five regulations and a directive, which are designed to provide for tighter discipline on public finances. Provisions include the recasting of the Stability and Growth Pact and an obligation to introduce stronger fiscal rules in national policy frameworks, together with a new mechanism to curb macroeconomic imbalances;
(b) The Two-pack, concluded in May 2013, consisting of two regulations applying only to the euro area, ensuring closer oversight of the public finances of euro area members. The first round of scrutiny of national budgets was conducted in autumn 2013;
(c) The European Semester and the euro-plus pact, the latter with 23 signatories, intended to promote better economic policy;
(d) The Fiscal Compact, designed to reinforce the governance of fiscal and economic policies, incorporated in the Treaty on Stability, Coordination and Governance (TSCG), signed by 25 Member States (subsequently also by Croatia).
(2) Financial regulation and supervision (broadly based on the recommendations of 2009 report of the high level group chaired by Jacques de Larosière):
(a) CRD IV, the package which transposesvia a Regulation and a Directivethe new global standards on bank capital (commonly known as the Basel III agreement) into the EU legal framework;
(b) European Supervisory Authorities covering, respectively, the banking, insurance and securities sectors. These so-called 'level 3' agencies were given greater powers as a result of the reforms launched in 2009;
(c) European Systemic Risk Board (ESRB), charged with assuring 'macroprudential supervision'the interplay between macroeconomic developments, especially budgetary policies, and financial stability.
(3) Crisis resolution funding mechanisms, all of which were set up to provide resources for bailing out countries in difficulty:
(a) The creation of the European Financial Stability Facility (EFSF) (limited to eurozone and temporary), agreed in May 2010, with a nominal capacity of 440 billion and backed by the governments of the eurozone;
(b) European Financial Stabilisation Mechanism (EFSM) (EU-wide and temporary), also agreed in May 2010, with a capacity of 60 billion and backed by the EU budget;
(c) European Stability Mechanism (ESM) (eurozone and permanent), signed in February 2012 and based on a limited amendment to Article 136 TFEU, and a separate treaty, with a capacity of 500 million and backed by participating Member States. It was inaugurated in October 2012. The ESM obtains its funds by issuing bonds and is obliged by the Treaty provision to impose strict conditionality on any loans it makes to Member States.
(4) Expanding the role of the ECB:
(a) Securities Market Programme through which the ECB purchased the debt of Member States on the secondary markets, but not directly from national treasuries;
(b) Access to Long-Term Refinancing Operations (LTROs) opened to banks which used them to ensure liquidity. The facility enables banks facing funding problems to borrow directly from the ECB in what is, in effect, lending in the last resort by the ECB;
(c) The offer of Outright Monetary Transactions (OMTs) through which the ECB would purchase unlimited amounts of national debt on the secondary markets, provided that the country in question had agreed to a reform programme;
(d) ECB President Mario Draghi's July 2012 commitment to "do whatever it takes" to save the euro;
(e) Participation, alongside the IMF and the Commission, in 'Troika' missions which oversee the adjustment programmes of the countries which have received a bailout (Greece, Ireland, Portugal and Cyprus);
(f) New supervisory function within the Single Supervisory Mechanism.
8. Taken as a whole, this represents
a considerable achievement. Nevertheless, it was a paradox that
the reforms were gradually bringing about a new architecture of
economic governance, but often appeared piecemeal. Indeed, the
whole process of governance reform has been a mix of crisis management
and longer-term recasting of the system. The 'Genuine Economic
and Monetary Union' package is itself a reflection of this. Whereas
the proposals for an integrated financial framework, or Banking
Union, are acknowledged as a pressing priority to ensure the stability
of the banking sector, many of the proposals for fiscal union
and economic integration can be seen as longer-term, or even idealistic,
objectives. Whether such long-term steps are either politically
realistic or strictly necessary to guarantee the stability of
the eurozone has been the subject of considerable debate.
9. A contributory factor to the
apparent ad hoc approach is the way in which the impetus for reform
has ebbed and flowed in line with the intensity of the crisis
at any given time. As the pressure from financial markets eased
(aided in particular by Mario Draghi's welcome commitment to "do
whatever it takes" to save the euro),
the air escaped from the ambitious 'Genuine Economic and Monetary
Union' balloon. There was and remains a tangible sense of lost
momentum, despite the renewed urgency to establish a Banking Union
following the Cyprus crisis, which came to a head in March 2013
after many months of uncertainty.
10. This loss of momentum is also
a reflection of the ambition of the 'Genuine Economic and Monetary
Union' project. Given the political sensitivities involved, many
Member States were reluctant to move as far and as fast as the
EU institutions recommended, with the result that less has been
agreed than the Commission and the Four Presidents had originally
envisaged. As Box 4 below outlines, the 'Genuine Economic and
Monetary Union' agenda has been continually buffeted by events.
Key events since June 2012
· Spain requests financial support for the recapitalisation of its banks after the IMF publishes estimates of an aggregate capital shortfall of 37 billion on the most pessimistic assumptions;
· Renewed pressure on Spanish and Italian sovereign bond spreads;
· Elections in Greece result in the formation of a new coalition government;
· European Council calls for roadmap towards 'Genuine Economic and Monetary Union' and agrees a Compact for Growth and Jobs.
· ECB President Mario Draghi's commitment to "do whatever it takes" to save the euro calms markets.
· ECB announcement of OMTs reinforces commitment to the euro and results in a significant easing of sovereign bond spreads;
· German Constitutional Court decision allows ratification of the ESM Treaty and the Treaty on Stability, Coordination and Governance (TSCG).
· ESM Treaty (which formally spells out how the new mechanism will operate and establishes the financial vehicle for disbursing funds) is ratified and the ESM is able to start operating;
· Cyprus requests a bailout in light of the worsening problems in its banking sector, but no agreement is reached on how to proceed and a decision is deferred;
· Publication of the Commission's Blueprint for a Deep and Genuine Economic and Monetary Union.
· Publication of the Four Presidents' final report on Genuine Economic and Monetary Union;
· Italian Prime Minister Mario Monti announces his resignation, triggering fresh elections. There is limited market reaction;
· European Council agrees roadmap towards 'Genuine Economic and Monetary Union'.
· Indecisive Italian election results lead to deadlock in forming a new government;
· Cypriot problems deepen: A presidential election results in a change in government.
· Commission consultation documents on Convergence and Competitiveness Instrument and on closer coordination of economic policies are published;
· Cyprus bailout agreed after banks suspend access to accounts and capital controls are imposed to prevent an outflow of money.
· Italian coalition government led by Enrico Letta takes office;
· 'Two-pack' regulations to reinforce budgetary discipline are formally enacted.
· Negative reactions in some Member States to country-specific recommendations in the European Semester;
· Euro area returns to weak economic growth.
· German elections result in return of CDU as largest party: Angela Merkel remains as Chancellor pending outcome of coalition negotiations.
· First Commission scrutiny of national budgets under the Two-pack regulations;
· Single Supervisory Mechanism formally approved;
· ECB asset quality review launched.
· German CDU/CSU/SPD coalition government led by Angela Merkel takes office;
· Council agreement on Single Resolution Mechanism.
· Latvia becomes eighteenth member of eurozone;
· European Banking Authority publishes the main features of the stress tests on banks to be conducted later in 2014.
· In a split decision, the German Constitutional Court finds that the OMTs programme may be incompatible with primary law (i.e. the EU Treaties), but refers the case to the Court of Justice of the European Union for a definitive interpretation of the relevant EU law.
11. The focus of concern has also
shifted. The period since June 2012 has been characterised by:
· A calming of the financial
markets since Mario Draghi's commitment to "do whatever it
takes" to save the euro;
· Anaemic, stagnant or negative
growth in several eurozone Member States. The eurozone as a whole
endured a double-dip recession, only returningjustto
growth in the second quarter of 2013;
· Continuing high unemployment
(in particular youth unemployment) in countries such as Spain,
reaching a peak across the eurozone of 12.2% in September 2013
and still rising in countries such as Italy;
· Increased disparities between
eurozone members: today, French unemployment is more than double
that of Germany, having been the same as recently as the middle
· Falling inflation rates,
prompting anxiety about the risks of a prolonged period of disinflation,
or even deflation, leading to a Japan-style "lost decade"
12. As a result, the terms of debate
have shifted from tackling deficits to growth and job creation.
There is a widely held view that the focus on deficits is constraining
growth by enforcing a eurozone-wide contraction in demand. The
Commission appeared to acknowledge this when it referred in the
Annual Growth Survey for 2013 to "growth-friendly fiscal
Some softening of its position was apparent in the marginal extension
for some Member States in the deadlines for dealing with excessive
deficits. There are
also growing calls for Germany, as the largest Member State (and
given its substantial budget surplus), to seek to stimulate eurozone
demand. Critics of German policy argue that its insistence on
a so-called 'austerity agenda' threatens to thwart any hope of
economic recovery and places the democratic process itself in
jeopardy as extremist parties seek to transform political disenchantment
into electoral support. The German response is to argue that its
surplus is falling, and that measures to boost German demand would
in any case be unlikely to help other eurozone countries.
13. Much argument has focussed on
the treatment of legacy debts. Member States under the most economic
pressure have stressed that such losses need, to a greater or
lesser degree, to be mutualised so as to place the eurozone on
a stable footing. Germany in particular has called on Member States
suffering from excessive deficits to put their own affairs in
order first by undertaking structural reforms to improve their
14. Such debates touch directly
on several elements of the 'Genuine Economic and Monetary Union'
proposals. Much of what is proposed is either highly contentious,
politically unrealistic, or both. Some of the proposals put forward
by the Commission are, in addition, not necessary to achieve the
goal of a stable Economic and Monetary Union but derive instead
from an integrating agenda. For these reasons, several of the
'Genuine Economic and Monetary Union' proposals appear to have
been postponed indefinitely or quietly dropped, while others are
likely to proceed only on a less ambitious scale than originally
proposed. As this report sets out, the original vision for Banking
Union has only been partially fulfilled, while the prospects of
agreement on the most contentious elements of the other pillars,
such as a eurozone budget and debt mutualisation, areas
15. The asymmetry between a centralised
monetary policy and decentralised fiscal and structural policies
remains a fundamental flaw in EMU. This shortcoming was pointed
out by many at the outset of the single currency project, but
there was little political will to do anything about it. Instead,
national central banks and regulators stood by while widespread
mispricing of risk led to excessive borrowing in certain countries,
most notoriously Greece. The mispricing of public debt may have
been due in part to a false assumption by investors that there
would be some degree of solidarity or ultimate common responsibility
for governmental borrowing within the eurozone. The effect of
this borrowing was to finance an expanding current account deficit
in many countries which itself reflected a steady decline in their
relative competitiveness. The outbreak of the financial crisis
led to a crisis of confidence in the public debt of Greece, Portugal
and to a lesser degree Italy, and in the real estate market and
its principal lenders in Spain and Ireland. Because the obvious
need of Spain and Ireland (and later of Cyprus) to recapitalise
their banks was clearly beyond the capacity of these governments
alone, a crisis of confidence in these countries' public debt
was rapidly engendered. The resulting vicious circle linking banks
and sovereign states is a defining symptom of the eurozone crisis.
16. The Commission has now acknowledged
the flaws in Economic and Monetary Union. Yet there remains a
clear conflict between the steps that are economically necessary
to secure the eurozone and those that are politically realistic.
Key EU players, notably the Commission, the ECB, and Germany,
have different priorities. Thus while the political commitment
to maintaining the single currency is as strong as ever, there
is a continuing failure to agree the steps necessary to address
its flaws. The end result is what was described to us as "the
euro continuing as an injured patient with a massive sticking
plaster in the form of bailouts."
Whether the 'Genuine Economic and Monetary Union' proposals
form a realistic basis for overcoming such conflicts is a matter
of considerable doubt.
A case for treaty change?
17. A further fundamental obstacle
to addressing these flaws is the need for treaty change. In its
Blueprint the Commission stated that, while some of the elements
of 'Genuine Economic and Monetary Union' could be adopted within
the limits of the current Treaties and thus could progress in
the short to medium term, others would require modifications of
the current Treaties and new competences for the Union, and could
therefore only be completed in the long term.
18. Specifically, the Commission
acknowledged that the following proposals would require treaty
· More intensive EU control
of national budgetary policy, for example by setting up a European
right to require a revision of national budgets in line with European
· Greater coordination on tax
policy in the euro area;
· Moves towards a proper fiscal
capacity, in particular if it provided for the EU level to borrow
and thus to act in a demand stabilising manner;
· The establishment of a Debt
· Ensuring that there was appropriate
democratic legitimacy and accountability of decision-making.
Further details of those elements of
'Genuine Economic and Monetary Union' which are likely to require
treaty change are set out in Table 1 below.
The timescale and legal form
of the 'Genuine Economic and Monetary Union' proposals
|Banking Union, comprising:
||Short term for initial stages, longer term to be completed
||Secondary legislation and limited treaty change
|i) Centralised bank supervision, led by the ECB
||Agreement finalised in October 2013
|ii) A Single Resolution Mechanism incorporating an effective common backstop, but limiting the exposure of taxpayers
||Council agreement reached in December 2013 on a limited mechanism. Trilogue negotiations continuing
|iii) An operational framework to enable the European Stability Mechanism to be used for direct bank recapitalisation
||Agreed in principle, details to be elaborated
||Limited treaty change to Article 136; separate intergovernmental ESM treaty
|iv) Common deposit insurance
||Mix of short, medium and long term
||Initially, secondary legislation and intergovernmental treaty
|Mechanisms for better discipline in, and coordination of, fiscal policy, building on the measures already agreed in the last three years
||Already enacted through a succession of measures in 2011, 2012 and 2013.
Implementation being tested
|Secondary legislation and Treaty on Stability, Coordination and Governance (TSCG)
|A new fiscal capacity for the eurozone: initially to provide targeted but temporary support for countries undertaking structural reforms; subsequently becoming an instrument to help in dealing with country-specific economic shocks through a centrally-managed insurance system
||Proposals tabled in March 2013 for Convergence and Competitiveness Instruments (CCI) and discussed at December 2013 European Council; pushed back to October 2014
||Initially, TSCG; more extensive permanent mechanism likely to require new treaty base
|The possible establishment of forms of debt mutualisation, including the eventual introduction of a Eurobond available to all participating Member States, which would be jointly and severally guaranteed.
||Likely to require a treaty base, but uncertain whether it would be full, limited or separate intergovernmental treaty
|Closer integration of economic policies intended to promote sustainable growth, competitiveness and employment and improving the resilience of the economy to shocks
||Already partly realised through macroeconomic imbalances procedure, Two-pack and coordination provisions for deeper policy coordination agreed in 2011-2013
||Initially, secondary legislation and TSCG
|Further efforts to complete the Single Market, including by stimulating labour mobility across borders and possibly greater tax harmonisation
|A reinforced framework for ex-ante coordination of major policy reforms, notably those affecting the supply-side of the economy
||Commission communication tabled March 2013
||TSCG and secondary legislation
|Contractual relationships between Member States and the Commission on economic strategies, with accountability to both the European Parliament and national parliaments
||Proposals tabled in March 2013 for CCI and discussed at December 2013 European Council; pushed back to October 2014
|Enhancement of democratic oversight of pooled economic policies
||Outside scope of present inquiry
19. Treaty change is a highly sensitive
political issue. The history of EU referendums in countries such
as France or Ireland, coupled with the high levels of political
instability seen across much of the EU, suggests that popular
approval could not be guaranteed. As a result, elements of 'Genuine
Economic and Monetary Union' have been specifically designed to
avoid the need for treaty change. This is notably the case in
relation to Banking Union. This begs the question whether the
proposals put forward will be sufficient to tackle the flaws they
are designed to address.
20. One potential trigger for treaty
change could be the outcome of the continuing legal investigation
into the legality of the ECB's programme of Outright Monetary
Transactions (OMTs). In a long-anticipated judgment, on 7 February
2014 the German Constitutional Court found that, subject to the
interpretation by the Court of Justice of the European Union,
the programme was "incompatible with primary law", because
it "does not appear to be covered by the mandate of the European
Central Bank". If so, that would create an obligation on
the German authorities to refrain from implementing the OMT decision
and a duty to challenge it. However, it added that, if the OMT
decision were interpreted restrictively, it could be lawful. It
therefore referred the questions to the Court of Justice of the
European Union for a definitive interpretation of the relevant
EU law, following which the German Constitutional Court will consider
21. There is widespread recognition
that some treaty change is necessary to underpin the scale of
reforms needed to address EMU's flaws. But some of what the Commission
proposes goes beyond what is strictly necessary to shore up EMU.
Treaty change is both difficult to achieve and an unpredictable
process. Instead, there has been a clear preference to look for
ingenious, and at times complex, solutions within the current
treaty framework, or to reach intergovernmental agreements outside
it. The key test must not only be whether these solutions are
politically achievable, but whether they are really needed and,
if they are, whether they will be effective in tackling the weaknesses
Inoculating the UK?
22. A key question for this report
is where all this leaves the UK. The Government have made clear
that, while they support measures to increase eurozone integration
as necessary to stabilise the eurozone, they will not participate
in any element of 'Genuine Economic and Monetary Union'. However
they will seek to engage in negotiations as the proposed reforms
are discussed in the European Council, in particular to ensure
that the Single Market is not undermined by eurozone integration.
We agree that a strong and sustainable eurozone is in the best
interests of the UK. However the Government need to consider whether
their semi-detached position is sustainable in the long term,
or whether, in the words of one of our witnesses, the UK will
ultimately need to choose whether to be in or out.
We consider this issue in more detail in Chapter 4.
Bottling the cure
23. The economic and political context
of 'Genuine Economic and Monetary Union' prompts the following
· How far towards this model
is it politically realistic to expect the eurozone to move?
· Will this be far enough to
ensure that the foundations of Economic and Monetary Union are
stabilised and strengthened?
· Will this be sufficient to
reassure the markets about the single currency's continuing viability?
· Which elements of 'Genuine
Economic and Monetary Union' are required to bring this about?
Which aspects should be pursued as a matter of priority? Which
can be put to one side?
· How long will it take to
achieve the necessary reforms?
· Will treaty change be required,
and if so, for which elements of 'Genuine Economic and Monetary
· What will be the impact of
all of this on the Single Market in general, and the UK in particular?
These questions form the basis of our
24. The most effective cure to
EMU's flaws, namely full fiscal and political union, is politically
unachievable. Although a full and 'Genuine' Economic and Monetary
Union as envisaged by the Commission may be beyond reach and would
also entail more changes than are strictly necessary, a strengthened
EMU is both vital and achievable.
25. In line with the remit of the
EU Economic and Financial Affairs Sub-Committee, which conducted
this inquiry, this report focuses on the first three pillars of
'Genuine Economic and Monetary Union':
· An integrated financial framework;
· An integrated budgetary framework;
· An integrated economic policy
Our analysis of the first pillar builds
upon and takes forward our December 2012 report, European Banking
Union: Key issues and challenges.
26. The fourth pillar, democratic
legitimacy and accountability, is vital, in particular in the
current context of political uncertainty and instability in a
number of Member States. This issue is directly relevant to the
EU Committee's current inquiry into the role of national parliaments
in the EU. We will consider such important questions fully in
the report on that inquiry.
27. Our findings are based on oral
and written evidence collected between May and November 2013 from
a range of witnesses including Nicky Morgan MP, Economic Secretary
to the Treasury, politicians, academics, economists and media
commentators. We also undertook two visits during the course of
this inquiry. Our visit to Brussels in October 2013 enabled us
to meet with Commission Vice-President Olli Rehn, members of the
European Parliament Economic and Monetary Affairs (ECON) Committee,
and a number of Brussels-based thinktanks and experts. Our visit
to Berlin and Frankfurt in November 2013 enabled us to understand
the German perspective on 'Genuine Economic and Monetary Union'
and on the UK's position. We met with a cross-party panel of German
politicians, leading economists and, in private meetings, with
the German Ministry of Finance, the German Bundesbank and the
ECB. We also sought to gain a sense of the perspective of other
Member States, and our witnesses included academics, politicians
and government representatives from France, Portugal, Spain and
Italy. We are grateful to all of our witnesses for their assistance.
We are also grateful to Professor Iain Begg, Professorial Research
Fellow, European Institute, London School of Economics, who acted
as Specialist Adviser for this inquiry.
28. We make this report to the
House for debate.
1 It should be noted that many elements of 'Genuine
Economic and Monetary Union' were not new proposals, and had in
fact been set out in the 1989 Delors Report on Economic and Monetary
Union in the European Community. Back
Van Rompuy, H., President of the European Council (26 June 2012),
'Towards a Genuine Economic and Monetary Union'. Back
European Council Conclusions (29 June 2012). The report was prepared
by President Van Rompuy in close collaboration with the Presidents
of the European Commission, the Eurogroup and the European Central
Bank, colloquially known as the 'Four Presidents'. Back
Van Rompuy, H., President of the European Council (5 December
2012), 'Towards a Genuine Economic and Monetary Union'. Back
European Commission (30 November 2012), 'A Blueprint for a Deep
and Genuine Economic and Monetary Union: Launching a European
Debate', COM (2012) 777 FINAL. Back
The Stability and Growth Pact was agreed in 1997 and entered into
force in 1998 and 1999. Back
House of Lords European Union Committee, The future of economic
governance in the EU (12th Report, Session 2010-12, HL Paper
Mario Draghi, President of the European Central Bank, speaking
to the European Parliament (16 December 2013). Back
de Larosière, J. (Chairman) (2009), 'The High-Level Group
on Financial Supervision in the EU: Report', 25 February.
Mario Draghi, President of the European Central Bank (26 July
2012), Speech at the Global Investment Conference, London. Back
It had become clear that Cyprus had an over-extended banking sector
which required shoring-up of the banking system as a whole, and
restructuring of its two biggest banks. The sheer scale of the
problems overwhelmed the ability of the Cypriot government to
cope, requiring a combination of loans from the IMF and EU sources,
and losses for large depositors in the banks. The initial proposal
to subject all Cypriot bank deposit-holders to a one-off tax on
their deposits was quickly abandoned under mounting political
For a full timeline of events since the outbreak of the financial
crisis, see http://www.bruegel.org/fileadmin/bruegel_files/Blog_pictures/Eurocrisis_timeline/121130_Eurocrisis_Timeline.pdf.
See also http://www.theguardian.com/business/interactive/2012/oct/17/eurozone-crisis-interactive-timeline-three-years
and http://www.ecb.europa.eu/ecb/html/crisis.en.html. Back
Christlich Demokratische Union Deutschlands (the Christian Democratic
Party of Germany); Christlich-Soziale Union in Bayern (Christian
Social Union in Bavaria); Sozialdemokratische Partei Deutschlands
(Social Democratic Party of Germany). Back
European Commission (28 November 2012), 'Annual Growth Survey',
COM (2012) 750 FINAL. Back
Delivered in the country-specific recommendations issued in June
2013 as part of the European Semester. Back
Syed Kamall MEP, Q 217. Back
'Blueprint for a Deep and Genuine Economic and Monetary Union'
(November 2012), Op. Cit. Back
German Federal Constitutional Court (2014), 'Principal Proceedings
ESM/ECB: Pronouncement of the Judgment and Referral for a Preliminary
Ruling to the Court of Justice of the European Union', Press release
no.9/2014, 7 February, http://www.bverfg.de/en/press/bvg14-009en.html.
For the full decision see http://www.bverfg.de/en/decisions/rs20140114_2bvr272813en.html.
See Wagstyl, S., and Jones, C. (2014), 'German court refers ECB
bond-buying programme to European justice', Financial Times,
7 February. Back
EM 16988/1/12 (10 December 2012). Back
Manfred Zöllmer MdB, Q 295. Back
House of Lords European Union Committee, European Banking Union:
Key issues and challenges (7th Report, Session 2012-13,
HL Paper 88). Back