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

Summary of conclusions and recommendations

1.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. (Paragraph 23)

2.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. (Paragraph 24)

3.While we welcome the existence of the rules set out in the Stability and Growth Pact and wider reforms as, at the very least, a framework within which Member States can consider their budgetary policy-making, we note that adherence to the rules is patchy and liable to be influenced by domestic political pressures. While the Pact’s rules allow some flexibility for Member States, which may lessen the degree of pro-cyclicality, we recognise that they are still seen as excessively pro-cyclical. (Paragraph 41)

4.National fiscal policies have spillover effects on other Member States. In establishing a fiscal stance for the eurozone it is important to take into account the particular conditions of each Member State. Just as there may be between regions within particular countries, there may be a tension, in perception or reality, between what appears to be the right fiscal and monetary stance for the eurozone as a whole and what is right for individual Member States, at least in the short term. The effectiveness of this attempt at coordination will ultimately depend on political will at Member State level. (Paragraph 47)

5.We look forward to seeing how the advisory European Fiscal Board will work once it is operational. As the Board will be merely advisory, it will be for Member States to do the heavy lifting in implementing its recommendations, and we are not convinced that at present there is sufficient desire to do so. (Paragraph 54)

6.The evidence we have heard suggests that the strengthening of the Macroeconomic Imbalances Procedure, proposed in the Five Presidents’ Report, is unlikely to change the status quo or encourage more symmetrical adjustment between euro area Member States. We agree with those who have suggested that, in order to foster long-term structural reforms at the Member State level, it is necessary for individual Member States to take ownership. There is, however a tension between ensuring Member State ownership (whether in curbing imbalances or in disciplining public finances) and creating an effective enforcement mechanism at the EU level. Given that financial penalties have still not been used under either the SGP or the MIP, despite the introduction of reverse majority voting, in which a majority must be mustered to oppose a Commission proposal, we are sceptical that financial sanctions under the MIP are any more likely to be used in the future. As a result the still large macroeconomic imbalances in the euro area will probably continue to be a source of instability. (Paragraph 79)

7.We note the doubts expressed about the likely effectiveness of National Competitiveness Boards in Member States that do not currently have a similar body in operation. (Paragraph 91)

8.We recognise that the establishment of a Board might bring with it the perception of another layer of bureaucracy being imposed by the EU, unless it is accompanied by a clear objective of how it will improve policy-making and increase national ownership of those policies. There may be a tension between national ownership and the consideration of eurozone-wide benefits, in addition to the inherent tension that exists between the need for Boards to be both independent and accountable. If, on the other hand, National Competitiveness Boards are intended as a first step towards a nationally anchored but eurozone-owned institution, then their independent status could detract from national political accountability. (Paragraph 92)

9.The drive towards improving competitiveness in the eurozone must stress solutions that enhance productivity. We echo the conclusions of our previous report on The future of economic governance in the EU which stated: “It is unreasonable to ask successful Member States to reduce their competitiveness in a global environment. It is, however, in the interests of all Member States in the euro area that the proceeds of those countries in surplus are not deployed in ways which disadvantage their neighbours, and that those countries in deficit are supported in making the structural adjustments necessary to improve productivity and levels of employment.” (Paragraph 93)

10.The impetus towards economic convergence is laudable to the extent that it is intended to encourage common and shared aims among euro area countries and to instil discipline in policy-making. This matters as much for non-eurozone countries as for the eurozone. We recognise that any further steps towards economic and fiscal integration will require commensurate democratic and accountability structures to be put in place. The Expert Group’s White Paper in 2017 will be crucial to getting this balance right. Further changes in this direction are likely to require treaty change. (Paragraph 96)

11.Although the UK is not a participant in Banking Union we fully support its aims. Achieving consensus on the long-term backstop for the Single Resolution Fund will require a balance to be struck between risk-sharing and risk reduction, both between taxpayers and the banking sector and among the Member States participating in Banking Union. We stress the importance of working towards a common fiscal backstop to the Single Resolution Fund and welcome the agreement of short-term bridging arrangements as an interim measure. (Paragraph 123)

12.Efforts to reduce risk in the banking sector are in principle welcome. The European Deposit Insurance Scheme would be a useful addition to the Banking Union architecture. Although we note the significant moral hazard concerns of countries such as Germany, we believe that pursuing risk reduction and risk-sharing in parallel would both reduce any actual moral hazard and ensure political buy-in for the measure. For this reason EDIS should be encouraged, but should not be thought of as a panacea. As with other retail deposit insurance schemes, the value of EDIS may ultimately lie more in the reassurance engendered by its existence rather than its practical benefits. (Paragraph 143)

13.We note that ‘ring-fencing’ of bank deposits continues despite the establishment of a single supervisor. This may have an effect on the efficient allocation of capital across the eurozone—insofar as EDIS may help to alleviate the concerns of the supervisor and allow deposits to move across borders, it is to be welcomed. (Paragraph 144)

14.We welcome the risk reduction agenda for all 28 EU Member States. Our concern is that UK-based banks could be at a competitive disadvantage through not benefiting from the cover of European deposit insurance. We therefore urge the Government to remain vigilant in preserving the integrity of the Single Market. (Paragraph 145)

15.The Capital Markets Union is an EU-28 project and we continue to welcome it, as we did in our 2015 report Capital Markets Union: a welcome start. We noted then that it is likely to benefit the UK in particular. We now note that, properly constructed, it should produce added benefits for the resilience of the eurozone through spreading risk more evenly across countries and acting as a shock absorber, as happens in the United States. However, private risk-sharing is not a panacea and may have limited effect in a crisis. (Paragraph 154)

16.CMU is an aspect of risk-sharing—albeit private risk-sharing. Though included in the Five Presidents’ Report, it is unlikely to be achieved in the short term. We are concerned that CMU will not make progress without agreement on tax and insolvency law, stimulating greater cross-border investment. We acknowledge that harmonising measures are likely and that a consequent need for additional institutional oversight may arise as a result of efforts to deepen financial integration. (Paragraph 155)

17.The Five Presidents’ Report hints at the creation of a European Single Supervisor for capital markets, which would have ramifications for the UK and which we have previously opposed. However, the CMU Action Plan, presented by Commissioner Hill in 2015, did not mention this. Any ambiguity over the creation of a Single Supervisor is unhelpful. (Paragraph 156)

18.‘Fiscal Union’ is not defined in the Five Presidents’ Report. Perhaps this was deliberate but we are alarmed that such a key component of that report remains such a nebulous concept and was interpreted in so many different ways by our witnesses. (Paragraph 176)

19.Some form of stabilisation function would be necessary and this would entail transfers between Member States. The question is the level of those transfers and the trigger for making them. Because the EU does not have the sort of tax and expenditure powers that are the norm in Member States, it lacks a capacity for automatic stabilisers to function when there are cyclical upswings or downswings. Nor does it have permanent transfer mechanisms that provide equalisation. Neither appears to be politically feasible in the near future. The stabilisation mechanism proposed by the five Presidents, which would be automatic (so not contingent on a decision-making authority such as the Troika) but not permanent, and responding only to asymmetric shocks, seems a pragmatic way forward. (Paragraph 177)

20.We note that there may be higher political support for transfers responding to a cyclical shock rather than structural problems. Such an arrangement would need appropriate agreement at Member State level and some form of institutional oversight. The plans put forward at the moment are vague, although we note the suggestion of an unemployment reinsurance scheme to deal with cyclical, rather than structural, unemployment. A precondition for any such system would be appropriate structural convergence, or at least coordination. (Paragraph 178)

21.Financial integration, through the completion of Banking Union and Capital Markets Union, may appear to be more achievable than a fiscal union in the short term. However, several challenges remain. These include a potentially ambitious risk reduction agenda before risk-sharing through EDIS takes place, and uncertainty surrounding the long term common backstop to the Single Resolution Mechanism. In addition, the opening of politically sensitive legislative agendas such as insolvency and tax, within the Capital Markets Union initiative, may limit private risk-sharing in the short term. (Paragraph 179)

22.We welcome the fact that the initiatives and programmes aimed at financial integration are already underway and can be completed without a major revision of the Treaties, or the creation of significant new institutions. These projects largely aim to reduce risk, though we note that a single backstop for Banking Union and the EDIS proposal entail a degree of risk-sharing. It is the risk-sharing elements that have proved the most controversial, and this suggests that any further ‘fiscal union’ that entails pooling of funds will be unlikely to succeed in the short term, and certainly not before significant risk reduction measures have been put in place. (Paragraph 180)

23.It is unclear how unified representation of the euro area in international fora will be achieved, and there appears to be opposition at Member State level, which may be difficult to overcome. The Commission has not made a convincing case for unified representation at the IMF. We note, however, that any further integration of the eurozone, including the issuance of common debt, may require unified representation of eurozone interests at the international level. (Paragraph 193)

24.While the proposal for external representation has been included by the five Presidents among their plans for strengthening democratic accountability, the proposal is in reality more of an institutional reform aimed at rationalising the eurozone’s role on the world stage. However, what looks like a worthwhile administrative reform may be at odds with the desire to enhance democratic accountability, if it takes decision-making away from decision-makers at the national level. The challenge will be to establish appropriate and accountable eurozone-level decision-making structures. (Paragraph 194)

25.The plans for strengthening the Eurogroup are currently very speculative and could develop in different ways, depending what is decided about a eurozone treasury and ‘fiscal union’. (Paragraph 204)

26.Although our witnesses were divided on the extent to which caucusing currently takes place (or might take place in the future), we note that a stronger Eurogroup, along with the forthcoming changes to the QMV procedure, may make mechanisms to protect the position of non-euro area Member States all the more important. Notwithstanding what was agreed at the February 2016 European Council, the Government should remain alert to the impact that a formalised Eurogroup might have on the UK’s position and should do everything in its power to ensure that the UK is protected. (Paragraph 205)

27.We agree that it is primarily for eurozone Member States to decide the appropriate mechanism of democratic accountability that is needed to support their chosen level of fiscal integration. Fiscal integration as developed through the design of EMU and accelerated through crisis mechanisms has resulted in significantly more sovereignty pooling, yet democratic structures and processes have not developed commensurately. This lack of democratic structures or processes undermines the legitimacy of EMU in the eyes of the very citizens in whose name it has been developed. (Paragraph 222)

28.It will be vital that the creation of any new accountability structure, whether that is a treasury, a finance minister, a new formation of the European Parliament, or a new role for national parliaments, should be accompanied by a clear mandate from the citizens of the eurozone countries. (Paragraph 223)

29.The challenges to achieving any of the proposals set out by the five Presidents for Stage 2 of completing EMU remain significant. Eurozone Member States must first reach consensus on the balance between risk-reduction (or fiscal discipline) and risk-sharing, and on the appropriate mechanisms to achieve that balance. They must then agree on the democratic accountability structures or processes to support those mechanisms. Treaty change will be required to implement any significant change and this will require referendums in many Member States, the results of which will not be guaranteed. We doubt this will be done quickly: the five Presidents’ suggested target date of 2025 appears ambitious. (Paragraph 227)

30.The creation of a eurozone parliament, treasury or finance minister will require treaty change; and any treaty change requires the unanimous consent of all 28 Member States including the UK. Thus there will be an opportunity for the Government of the day to ensure that UK interests are preserved if the UK remains a member of the EU after the referendum. (Paragraph 232)

31.The UK renegotiation deal foresees its terms being incorporated into the Treaties at their next revision. The five Presidents’ more fundamental proposals to enhance the functioning of the eurozone would, by requiring treaty change, provide an opportunity for the Government to entrench the settlement in EU law while at the same time ensuring that the protections secured were not undermined by the development of new institutions. (Paragraph 235)

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