'Whatever it takes': the Five Presidents' Report on completing Economic and Monetary Union Contents

‘Whatever it takes’: the Five Presidents’ Report on completing Economic and Monetary Union

Chapter 1: Introduction: why the euro matters to the UK

The subject matter of this report

1.On 22 June 2015 the ‘five Presidents’1 published their report Completing Europe’s Economic and Monetary Union.2 The report is widely known as the ‘Five Presidents’ Report’, which is how we refer to it throughout this report.

2.The resilience of Economic and Monetary Union (EMU) and the eurozone have been tested since their inception but particularly since the financial crisis in 2008 which exposed shortcomings in their original mechanisms and the policies adopted in response. In October 2014 the Euro Summit issued a call to the European Commission for further work to “develop concrete mechanisms for stronger economic policy coordination, convergence and solidarity”, and “to prepare next steps on better economic governance in the euro area”.3 The response was the Five Presidents’ Report, which was released at the height of the negotiations on the third Greek bailout, also a time when there was intense speculation over the future of the euro itself.

Will the euro survive?

3.We asked witnesses about the future of the euro. Almost all of them could identify issues with the architecture but the majority concluded that so much political will was invested in the survival of the euro that it was likely to “muddle through”.

4.Professor Otmar Issing, President, Center for Financial Studies, Goethe University, was sure the euro would survive: “There is too much political investment in this project to allow the idea that the euro will one day collapse,”4 a position echoed by Kay Swinburne MEP,5 a member of the European Parliament ECON Committee. John Peet, Political Editor, The Economist, considered that “it will probably muddle on because one lesson of the last five years is that it is generally agreed that the costs of going back and breaking it up could be very large and therefore that is something everybody wants to avoid.”6 David Marsh, Managing Director, Official Monetary and Financial Institutions Forum, was more sceptical: while Europe had a “remarkable facility for continuing to survive when all around think it is dead”, it was “limping on in a way that could well be thought of as terminal.”7 The challenge facing the eurozone was summed up by Fabian Zuleeg, Chief Executive, European Policy Centre:

“I would not expect the euro to collapse any time soon, but if those structural issues are not addressed we can be fairly certain that some sort of crisis will recur. Then the question is how you deal with that crisis and whether the eurozone is robust enough to again find political consensus and the countries can pull themselves together to take whatever actions are necessary.”8

Why the euro matters to the UK

5.We note that there are potential tensions between eurozone and non-eurozone countries and within the eurozone itself, some of which have been allayed by the outcome of the February 2016 European Council.

6.Although the UK is not a member of the eurozone there are two main reasons that further strengthening and integration of EMU and the eurozone are relevant to it.

7.First, the health of the eurozone economy has a direct impact on the health of the UK economy. We have consistently taken this view. For instance, in our 2014 report Euro area crisis: an update we concluded that “The economic fortunes of the UK and the euro area are intrinsically linked. Although the UK economy has suffered from the decline in business activity arising from the euro area crisis, it stands to benefit from a prosperous euro area”.9 The Government agrees. For instance, the Chancellor of the Exchequer said in an interview with the BBC in October 2014 that the UK would “not be immune” to a further eurozone crisis.10 David Gauke MP, Financial Secretary to the Treasury, told us towards the end of our inquiry that: “It is in our interest that the euro area is a successful, strong currency area, so we do not want to stand in the way of the euro area resolving its difficulties.”11

8.Second, the establishment of new mechanisms within the eurozone, or the enhancement of those that already exist, will have a range of impacts on the UK’s interests within the EU or its institutions, or on the functioning of the wider Single Market. For instance, the establishment of Banking Union, in which the UK has chosen not to participate, has created an institutional and legislative framework that has the potential, even if indirectly, to affect the UK’s banks and regulators.

Overview of policy developments since 2011

9.In response to the challenges it has faced the eurozone has developed a variety of policy responses. This Committee’s predecessors followed those developments closely and reported on them.12 This report seeks to build on previous work rather than repeating it, so in Box 1 we briefly list the major policies developed so far.

Box 1: Steps taken so far

1.November 2011: The conclusion of the ‘six-pack’, comprising five regulations and a directive, which aimed to provide for tighter discipline on public finances. This encompassed the recasting of the Stability and Growth Pact and an obligation to introduce stronger fiscal rules in national policy frameworks. It also introduced the macroeconomic imbalances procedure (MIP).

2.2011: The establishment of the European Semester and the agreement of the (intergovernmental) Euro-Plus Pact, intended to promote better economic policy through a consistent sequence of monitoring measures.

3.2012: The agreement of the Fiscal Compact, designed to reinforce the governance of fiscal and economic policies, incorporated in the intergovernmental Treaty on Stability, Coordination and Governance (TSCG).

4.May 2013: The conclusion of the ‘two-pack’, comprising two regulations that apply only to the euro area, ensuring closer oversight of the public finances of euro area members, notably through the obligation to submit draft budgets to the Commission for scrutiny.

5.The adoption of financial regulation and supervision measures, including the Capital Requirements Regulation and Directive IV (CRR and CRD IV), which transposed the Basel III agreement into the EU legal framework; reinforcement of the European Supervisory Authorities covering the banking, insurance and securities sectors; and the creation in 2010 of the European Systemic Risk Board (ESRB) to oversee risk in the financial system as a whole.

6.The establishment of funding mechanisms for bailing out countries in difficulty, including the temporary (eurozone only) European Financial Stability Facility (EFSF); the European Financial Stabilisation Mechanism (EFSM) (EU-wide and temporary, backed by the EU Budget); and the European Stability Mechanism (ESM) (eurozone and permanent). The ESM, based on a limited amendment to Article 136 TFEU, and a separate treaty, has a capacity of €500 billion backed by participating Member States. It obtains its funds by issuing bonds and is obliged to impose strict conditionality on any loans it makes to Member States.

7.The development of the role of the European Central Bank through the Securities Market Programme (through which the ECB purchased the debt of Member States on the secondary markets), access for banks to Long-Term Refinancing Operations (LTROs) to ensure liquidity, and 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. In July 2012 ECB President Mario Draghi famously made a commitment to “do whatever it takes” to save the euro. The ECB has also joined the IMF and the Commission in ‘Troika’ missions to oversee the adjustment programmes of countries which have received a bailout, most recently Greece.

8.The creation of the ‘Banking Union’, following the proposals put forward by the four Presidents in 2012. This currently comprises a Single Supervisory Mechanism in which the ECB has overall responsibility for the supervision of Banking Union banks and a Single Resolution Mechanism run by a Single Resolution Board.

10.In our 2014 report on ‘Genuine Economic and Monetary Union’ and the implications for the UK, we described the policy responses listed above as “a mix of crisis management and longer-term recasting of the system”, and noted that the apparently ad hoc approach had been the result of the impetus for reform ebbing and flowing in response to the intensity of crisis.13

Genuine Economic and Monetary Union

11.Our 2014 report considered proposals put forward in 2012 by the ‘Four Presidents’ and the European Commission to create ‘Genuine Economic and Monetary Union’.14 Those proposals built on the achievements listed above and introduced a set of short- and long-term proposals to improve economic, monetary and financial governance in the EU.

Box 2: Genuine Economic and Monetary Union

The main elements of the Four Presidents’ Report were as follows:

1.Banking Union: centralised bank supervision led by the ECB—the Single Supervisory Mechanism (SSM); a Single Resolution Mechanism (SRM); a framework to enable the ESM to be used for direct bank recapitalisation; and common deposit insurance.

2.Fiscal Union: mechanisms for better discipline in and coordination of fiscal policy; a new fiscal capacity for the eurozone to provide initially temporary support for countries undertaking structural reforms but in the longer term an instrument to deal with country-specific economic shocks; possible debt mutualisation including the introduction of a Eurobond.

3.Closer integration of economic policies: further efforts to complete the Single Market (including by stimulating labour mobility and possibly greater tax harmonisation); reinforced coordination of major policy reforms; and contractual relationships between Member States and the Commission on economic strategies with accountability to the European Parliament and national parliaments.

4.Enhanced democratic oversight of pooled economic policies.

12.These proposals were intended to be implemented to varying timetables. Banking Union should have been complete within six to 18 months, along with the creation of a “convergence and competitiveness instrument”. Within five years, the Commission timetable foresaw further strengthening of collective conduct of budgetary and economic policy, alongside a dedicated fiscal capacity, such as a separate budget, for the euro area and the possible introduction of Eurobills or a Debt Redemption Fund. In the longer term, the Four Presidents’ Report anticipated the creation of an autonomous euro area budget and fiscal capacity, alongside the common issuance of public debt. This would be dependent on an adequately integrated governance framework and associated pooling of sovereignty.

13.Progress has taken longer than the eighteen months envisaged in the Commission blueprint that followed the Four Presidents’ Report, although it should be noted that the first two ‘pillars’ of Banking Union (the Single Supervisory Mechanism and the Single Resolution Mechanism) were agreed quite rapidly in 2013 and 2014, respectively, and were then implemented as quickly as was practicable. The SSM became operational in November 2014 under a newly established part of the ECB, after a ‘comprehensive assessment’ of the major banks it will cover, and the SRM was largely in place by January 2016. Deposit insurance did not advance as originally hoped, but is back on the table as one of the key elements of the Five Presidents’ Report.

The Five Presidents’ Report

14.The Five Presidents’ Report relaunched the debate on the future of EMU. It set out a series of policies to be undertaken between 2015 and 2025, arranged under four main headings: Economic Union; Financial Union; Fiscal Union and Democratic Accountability, Legitimacy and Institutional Strengthening. These are essentially the same headings as in the Four Presidents’ Report. The Report proposes two stages. The first includes a number of short-term measures to be completed between 2015 and 2017, referred to as ‘Stage 1’.15 These would “build on existing instruments and make the best possible use of the existing Treaties”. The second sets out a Stage 2 that would involve more ambitious measures to be put in place after 2017. A White Paper would be published in 2017 describing the way forward for Stage 2. Stage 3 would be from 2025 onwards.

15.The Commission took early steps to implement the Stage 1 proposals through the publication on 21 October 2015 of a Communication ‘On steps towards Completing Economic and Monetary Union,’16 accompanied by a set of more specific measures. Further proposals for the completion of Banking Union were published on 26 November 2015.

16.The short-term proposals involved completing initiatives already launched, such as Banking Union and Capital Markets Union, and enhancing coordination within, and the effectiveness of, structures already in place, such as the European Semester. A full list of the short-term measures, the steps taken to implement them and the progress made at the time of writing are set out in the table in Appendix 4. We consider them in more detail in the following chapters.

17.The long-term proposals envisaged for 2017–2025 are introduced by the five Presidents in much vaguer terms. They can be described as follows:

18.There is much that remains unsaid in the Five Presidents’ Report about how these proposals are likely to be taken forward and the implications of doing so. Our inquiry sought to explore some of those implications.

19.As noted, the Five Presidents’ Report is ‘a report of two halves’, consisting of limited but potentially achievable short-term proposals and a series of broadly-described ambitious long-term goals. Some witnesses described this approach as “pragmatic”;18 others spoke of the eurozone “muddling through”19 on the basis of the report. Several suggested that the proposed publication of the White Paper in 2017 was deliberately timed to take place after general elections in Germany and France20—although European Commission Vice-President Valdis Dombrovskis told us the Commission was “not currently adjusting [its] plans or work with a view to different elections, because in a union of 28 countries you always have elections of one kind or another in some of the countries”.21

20.We consider the political realism of the proposals in greater depth later in this report, but note at this point that the Five Presidents’ Report has not received the attention it might have, as the political focus in the EU has been elsewhere. Guntram Wolff, Director, Bruegel, told us that he sensed a desire for more concrete proposals to emerge before the 2017 elections, but noted that currently, “given all the other ongoing political issues, in particular the refugee crisis, political capital is very much in different quarters at this stage.”22 However, work continues on the basis of the report, and an expert group will soon be appointed to prepare the 2017 White Paper. While attention might currently be diverted the publication of the White Paper is likely to reignite the debate. We have prepared this report with a view to contributing to the informal stakeholder engagement process feeding in to the White Paper.

21.It is also apparent that any further financial or economic crisis would prompt action, and that the Five President’s Report constitutes the best guide to the form such action might take. John Peet suggested that “the European Union moves in response to crises”.23

22.We hope it does not come to that as the current architecture, much of it borne of crises, suffers from concerns about its legitimacy and democratic accountability, as we discuss in Chapter 4.

23.We strongly urge that the issues raised in the Five Presidents’ Report, particularly those relating to democratic accountability, are addressed as part of a long-term strategy.

24.We welcome the publication of the Five Presidents’ Report as a sign that the leaders of the EU institutions recognise that, despite the steps already taken, more needs to be done to ensure the long-term sustainability of the eurozone. We believe that there is sufficient political will to ensure its survival.

This report

25.The Five Presidents’ Report is wide ranging and contains proposals set out in differing levels of detail. We have tried to be comprehensive in our assessment of it, but inevitably certain areas received more attention than others. This report examines, in Chapter 2, the proposals put forward, both for the short and long term, to encourage economic coordination and convergence. Chapter 3 considers elements of risk-sharing and risk reduction, largely based on the five Presidents’ proposals for ‘Financial Union’ and ‘Fiscal Union’. Finally, we consider the democratic and institutional arrangements required to support a more deeply integrated EMU. While the proposals in the Five Presidents’ Report were our starting point, we have considered alternative ways forward where evidence has taken us in that direction.

26.We acknowledge that this report will be published against the important background of the UK renegotiation of its relationship with the EU and the referendum due to take place on 23 June 2016. Some areas of the renegotiation, for instance those relating to economic governance, are relevant to the subject of the inquiry. The UK’s relationship with the EU has been addressed in our report The EU referendum and EU reform24, published on 30 March 2016, and in our ongoing detailed scrutiny of the European Council’s agreement of 19 February 2016. This report does not offer a detailed analysis of the merits of the agreement, but touches on the renegotiation issues where necessary in the context of the five Presidents’ proposals.

27.Our findings are based on oral and written evidence collected between November 2015 and March 2016 from a range of witnesses, including David Gauke MP, Financial Secretary to the Treasury, politicians, academics, economists and media commentators. We also visited Brussels in January 2016 and met Commission Vice-President Valdis Dombrovskis, members of the European Parliament Economic and Monetary Affairs (ECON) Committee, and a number of Brussels-based think tanks and experts. We are 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 The five Presidents were: Jean-Claude Juncker, President of the European Commission; Donald Tusk, President of the Euro Summit; Jeroen Dijsselbloem, President of the Eurogroup; Mario Draghi, President of the European Central Bank; and Martin Schulz, President of the European Parliament.

2 European Commission, Completing Europe’s Economic and Monetary Union: https://ec.europa.eu/priorities/sites/beta-political/files/5-presidents-report_en.pdf

3 Euro Summit statement, 24 October 2014

9 European Union Committee, Euro area crisis: an update (11th Report, Session 2013–14, HL Paper 163)

10 ‘Osborne warns eurozone slowdown will impact UK economy’, BBC (9 October 2014): http://www.bbc.

12 For instance, European Union Committee, The future of economic governance in the EU (12th Report, Session 2010–12, HL Paper 124) and ‘Genuine Economic and Monetary Union’ and the implications for the UK (8th Report, Session 2013–14, HL Paper 134)

13 European Union Committee, ‘Genuine Economic and Monetary Union’ and the implications for the UK (8th Report, Session 2013–14, HL Paper 134), paras 8 and 9

14 The ‘Four Presidents’ were Herman Van Rompuy, President of the European Council; Jose Manuel Barroso, President of the European Commission; Jean-Claude Juncker, President of the Eurogroup and Mario Draghi, President of the ECB. There were in fact three reports: two by the four Presidents in June and December 2012, both titled “Towards a Genuine Economic and Monetary Union” and one by the European Commission in November 2012 titled “A Blueprint for a Deep and Genuine Economic and Monetary Union: Launching a European Debate”.

15 European Commission, Completing Europe’s Economic and Monetary Union: https://ec.europa.eu/priorities/sites/beta-political/files/5-presidents-report_en.pdf, p 5 [accessed 6 April 2016]

16 Communication from the Commission to the European Parliament, the Council and the European Central Bank, On steps towards Completing Economic and Monetary Union, COM(2015) 600 [accessed 6 April 2016]

17 European Commission, Completing Europe’s Economic and Monetary Union: https://ec.europa.eu/priorities/sites/beta-political/files/5-presidents-report_en.pdf, p 18 [accessed 6 April 2016]

18 Q 56 (Lorenzo Codogno and Reza Moghadam)

19 Q 28 (Sebastian Barnes); Q 68 (John Peet)

20 For example, written evidence from Professor John Ryan, EMU0007, 2 (Philippe Legrain), Q 17 (Baroness Bowles of Berkhamsted)

24 European Union Committee, The EU Referendum and EU Reform (9th Report, Session 2015–16, HL Paper 122)

© Parliamentary copyright 2016