The sovereign debt crisis has opened the door for further economic and fiscal policy integration – the EU is moving fast towards the economic government. The so-called economic governance proposals have been subject to intense, behind closed doors, negotiations between the Council, the European Parliament and the European Commission and a first reading agreement was reached one year after the Commission presented them. The Council confirmed, yesterday (4 October) the compromise reached with the European Parliament, which has already been endorsed by the MEPs on 28 September. The Council would formally adopt the so-called six-pack at a later date. Consequently, the new Economic Governance in the EU and EMU is expected to enter into force by the beginning of 2012.
The proposals are intended to strengthen economic governance in the EU and will apply to all member states, but more strictly to the eurozone states. Once the proposals come into force there will be broader and enhanced surveillance of fiscal policies as well as macroeconomic policies and structural reforms. Member States will be monitored not just for excessive deficits and debts, but also for imbalances and falling competitiveness. Although the UK would not be subject to sanctions, some of the provisions on economic coordination and surveillance would also apply to the UK, which is unacceptable.
It is now clear that member states economic and fiscal policies will be further co-ordinated at EU level. National governments would no longer be responsible for a great range of domestic economic policies. Brussels is set to have unprecedented power to intervene in domestic policies. According to Commissioner Rehn the legislative package “is the cornerstone of an ever closer economic union of Europe.” Moreover, he said, “Beyond this major step forward, we should be open to considerably deepen our economic coordination and fiscal integration, not least in the euro area." As Bill Cash said, David Cameron must go to the next European Summit and “set out an agenda for renegotiation of all the Treaties and to make it clear that there will be a UK Referendum for the proposals for economic governance of the Eurozone and fiscal union.”
Stability and Growth Pact
The draft Regulation on the effective enforcement of budgetary surveillance in the euro area amends the Regulation on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies and the Regulation on speeding up and clarifying the implementation of the excessive deficit procedure. It is aiming at strengthening enforcement of budgetary surveillance in the Euroarea by introducing a new set of financial sanctions for euro-area Member States, which would apply much earlier in the process according to a graduated approach. Presently, the ECOFIN does not automatically impose sanctions, but it takes a decision at each step of the excessive deficit procedure. The Commission proposed to grant more powers to itself by becoming less dependent on the Ecofin when implementing budgetary surveillance, which have now been approved by the Council and the MEPS.
The Commission proposed to introduce the so-called ‘reverse voting’ mechanism for imposing the new sanctions in connection with the successive steps of the excessive deficit procedure. Whereas Germany as well as Netherlands and Sweden have demanded more “automatic sanctions” and favour the so-called “quasi-automatic” sanctions, France, Italy, Spain have been against such idea, as they wanted more political intervention. In the other hand, the European Parliament has asked for the Commission to have more powers and voted to weaken the Council's decision-making powers on this issue. The Commission will have, therefore, a stronger role in the surveillance procedure.
Under the compromise deal, the Commission first warning to the member state which failed to respect the Stability and Growth pact principles (preventive arm of the Stability and Growth Pact) has to be adopted by a qualified majority of eurozone member states. If a member state deviates from the adjustment path toward its medium term budgetary objective, on the basis of a Commission’s recommendation, the Council will decide by qualified majority voting, on non-compliance by a member state. However, if the Council does not take this decision, and if the noncompliance continues, after one month the Commission can recommend, again, to the Council to decide on non-compliance, but this time such decision is taken by reverse simple majority. Hence, it is considered adopted by the Council if not rejected by simple majority.
Under the corrective arm of the pact (excessive deficit procedure), the Commission's proposal for imposing sanctions related to non-compliance with the SGP will be deemed adopted by the Council unless it decides, by qualified majority, to reject the proposal. This, obviously, entails further transfer of powers from member states to the European Commission.
At the European Parliament request, the proposals now also foresee that a relevant parliament committee may offer the opportunity to a member state subject to Council decisions under the excessive deficit procedure to participate in “an exchange of views.” This attendance would be voluntary. Member States could not accept compulsory attendance.
Moreover, the MEPs were able to introduce the so called “comply-or-explain principle.” Under the compromise deal, the Council “is expected to, as a rule, follow the recommendations and proposals of the Commission.” Hence, if the Council decides not to follow the Commission’s recommendations and proposals, it will have to explain its position publicly.
Requirements for budgetary frameworks of the Member States
The Proposal for a Council Directive on requirements for budgetary frameworks of the Member States, intends to specify the obligations of national authorities to comply with the provisions of Article 3 of Protocol No 12 to the Treaties on the excessive deficit procedure. This Directive is addressed to all Member States, which are required to bring into force the provisions necessary to comply with it by December 2013. Member States are required to reflect on their national fiscal frameworks the priorities of EU budgetary surveillance. This draft Directive lays down uniform requirements as regards the rules and procedures forming the budgetary frameworks of the Member States.
It should be for each Member State to decide their fiscal frameworks however as abovementioned, the proposal provides for uniform requirements for national fiscal frameworks. The draft directive would have impinged upon the UK's national fiscal competence. Bill Cash said "The direction in which our increased fiscal obligations to the EU are heading gives cause for great concern because they affect our own budgetary arrangements." The UK was able to convince the Commission and the other member states that it is exempt from the fiscal framework and budgetary oversight. George Osborne argued that the UK is not a eurozone member, therefore it is not required to meet single currency deficit and debt standards, and accordingly should not be subject to such rules. A recital was inserted in the proposal making clear that medium-term budgetary objectives mentioned in the directive would not apply to the UK. It states “Considering that by virtue of Protocol (No 15) on certain provisions relating to the United Kingdom of Great Britain and Northern Ireland, the reference values mentioned in Protocol (No 12) on the excessive deficit procedure are not directly binding on the United Kingdom, the obligation to have in place numerical fiscal rules that effectively promote compliance with the specific reference values for the excessive deficit, and related obligation for the multi-annual objectives in medium-term budgetary frameworks to be consistent with such rules, should not apply to the United Kingdom.” The proposal is based on Article 126(14), therefore is subject to the special legislative procedure and unanimity was required at the Council. Hence, the UK could have vetoed the proposal.
Under the draft directive in order to facilitate the monitoring of fiscal developments, Member States are required to ensure that national budgetary frameworks, specifically accounting and statistical issues and forecasting practices are in line with European standards. Moreover, to ensure the achievement of the medium-term objectives set at EU level, domestic budgetary frameworks have to adopt a multi-annual fiscal planning perspective. Furthermore, Member States are required to have in place numerical fiscal rules contributing to compliance with the deficit and debt thresholds. In order to guarantee the transparency of the budget process, Member States are required to provide detailed information on existing extra-budgetary funds, tax expenditures and contingent liabilities. Furthermore, Member States shall prepare their macroeconomic and budgetary forecasts taking into account the Commission forecasts. The official macroeconomic and budgetary forecasts prepared for fiscal planning shall be published, including the methodologies, assumptions and parameters on which they are based. The macroeconomic and budgetary forecasts for fiscal planning shall be regularly audited, including ex post evaluation and its result shall be published.
George Osborne has said “The UK negotiated a UK opt-out on the articles in the fiscal frameworks directive pertaining to fiscal rules…” however, the UK would be subject to the macroeconomic surveillance framework.
Macroeconomic surveillance
The Council and the European Parliament endorsed the mechanism, proposed by the Commission, for the prevention and correction of macroeconomic imbalances based on two draft proposals, whereas the first proposal outlines the excessive imbalance procedure (EIP), the second focuses on the associated enforcement measures.
The proposal for a regulation on the prevention and correction of macroeconomic imbalances provides for a “new element of the economic surveillance process” the so-called Excessive Imbalance Procedure (EIP), which comprises a regular assessment of risks of imbalances, including an alert mechanism. At the European Parliament request, under the compromise deal, the proposal not only covers member states with current account deficits but also surpluses.
The proposal creates an alert mechanism intend to early detect Member States with potentially problematic levels of macroeconomic imbalances. Such mechanism will be based on a scoreboard, which will consist of a set of economic and financial indicators, with corresponding indicative thresholds, aiming at identifying imbalances emerging in different parts of the economy. A scoreboard will rate therefore member states' performances as regards economic stability and competitiveness. The Commission, after consulting the Member States, will establish an indicative scoreboard. The Commission will define and announced alert thresholds for each indicator.
Such scoreboard would be composed of macroeconomic and macro financial indicators for Member States. It would review macro-economic indicators including current accounts and external debt, price or cost competitiveness as well as productivity, unit labour costs, public debt and private sector credit. Moreover, under the draft regulation, the Commission “shall pay close attention to developments in the real economy including economic growth, employment and unemployment performance, nominal and real convergence inside and outside the euro area, productivity developments and its relevant drivers such as R&D and foreign/domestic investment, as well as sectoral developments including energy, which affect GDP and current account performance.” Member States performance, including the UK, would be assessed against these indicators. The thresholds applicable to eurozone Member States might be different from those applicable to the other Member States.
Then, the Commission will present a report providing for an economic and financial assessment “putting the movement of the indicators into perspective.” The proposal notes, “The assessment of Member States showing large current account deficits may differ from that of Member States that accumulate large current account surpluses.” The report will identify Member States that the Commission deems to be affected by, or at risk of, imbalances. The Commission will compile, therefore, a list of Member States deemed at risk of imbalances (black list).
Based on the multilateral surveillance procedure and the alert mechanism, and taking account of the discussions in the Council and the Euro Group, the Commission will provide a country-specific in-depth reviews for Member States where the alert mechanism indicates possible imbalances or a risk. The in-depth review will cover an analysis of sources of imbalances in the Member State under review and whether these imbalances constitute excessive imbalances. It will analyze “the origin of the detected imbalances against the background of prevailing economic circumstances, including the deep trade and financial inter-linkages between Member States and the spillover effects of national economic policies” as well as “relevant developments related to the Union strategy for growth and jobs. It shall also consider the relevance of economic developments in the Union and the euro area as a whole.” The Commission would undertake a detailed investigation of the underlying problems in the identified Member States.
The review may include enhanced surveillance missions by the Commission to Member States concerned and additional reporting by the Member State in case of severe imbalances. The in-depth review will take into account the severity of imbalances and possible spillovers to other Member States, whether the Member State in question has taken appropriate action in response to Council recommendations as well as the Member State policy intentions, as reflected in its Stability and Convergence Programme and National Reform Programme, and any early warnings or recommendations from the European Systemic Risk Board to the Member State under review.
After the abovementioned in-depth Commission analysis, if the Commission considers that there are macroeconomic imbalances, or there is a risk that a Member State is experiencing imbalances, it shall inform the Council and the Euro Group accordingly and the European Parliament. Then, the Council on a recommendation from the Commission, may adopt the necessary preventive recommendations to the Member State concerned. An excessive imbalance procedure would be initiated if the in-depth review identified severe macroeconomic imbalances in Member State, including imbalances that jeopardise the proper functioning of the economic and monetary union. On a recommendation from the Commission, the Council may declare the existence of an excessive imbalance and recommend the Member State concerned to take corrective action within a specified deadline to remedy the situation. According to the Commission “Member States with excessive imbalances within the meaning of the EI would be subjected to stepped-up peer pressure.” Such recommendations may address policy challenges across several policy areas such as fiscal and wage policies, product and services markets.
Any Member State for which an excessive imbalance procedure is opened would be therefore required to present its policy intentions designed to implement the Council recommendations in a corrective action plan. Such corrective action plan should also include a timetable for implementation of the measures envisaged. If considered sufficient, on the basis of a Commission proposal, the Council will adopt an opinion, approving it. In the other hand, if the actions taken or foreseen in the corrective action plan or their timetable for implementation are deemed not enough to implement the recommendations, on the basis of a Commission proposal, it will invite the Member State to present a new corrective action plan within a new deadline. The Member State concerned would be under the obligation to report regularly on the progress of implementation. In fact, the Member State concerned shall report to the Council and the Commission on regular basis in the form of progress reports. Under this proposal member states, including the UK, would be subject to burdensome reporting requirements. The Commission will be allowed to carry out enhanced surveillance missions to the Member State in question in order to monitor implementation of the corrective action plan. This will be done “in liaison with the ECB when those missions concern Member States whose currency is the euro or Member States participating in ERM II.”
If there is a change in the economic circumstances, on a Commission recommendation, the Council may amend the EIP recommendations. In this case, the Member State concerned would have to submit a revised corrective action plan. The Council will assess the corrective action plan and, on the basis of a Commission report, it will decide whether or not the Member State concerned has taken the recommended corrective action. If the Council concludes that the Member State has taken the recommended corrective action, the excessive imbalance procedure will be held in abeyance which means that, although the member state is making satisfactory progress because of the possibly long period between adoption of corrective action and its effect, the Member States concerned will have to face periodic reporting and surveillance until the EIP is effectively closed. If the Council concludes, on a recommendation from the Commission, that the Member State is no longer affected by excessive imbalances, the excessive imbalance procedure shall be closed. However, the Member State concerned will remain subject to the excessive imbalance procedure if it has not taken appropriate action. If the Member State has not taken the recommended corrective action, the Council, on a recommendation from the Commission, will adopt a decision declaring non-compliance and a recommendation setting new deadlines for taking corrective action. Under the draft regulation “The recommendation on declaring non-compliance by the Commission shall be deemed adopted by the Council unless it decides, by qualified majority, to reject the recommendation within ten days of the Commission adopting it.”
Under the compromise deal, the Commission is required to “ensure a permanent dialogue with the authorities of the Member States” consequently it shall “carry out missions for the purpose of the assessment of the actual economic situation in the Member State and the identification of any risks or difficulties in complying with the objectives of this Regulation.” Member States, which are the subject of a recommendation on the existence of an excessive imbalance position will be, particularly subject to “enhanced surveillance.” It is provided that “When the Member State concerned is a Member State whose currency is the euro or participating in ERM II, the Commission may invite representatives of the European Central Bank, if appropriate, to participate in surveillance missions.”
It is important to stress that although the UK will not be subject to sanctions, but it will be subject to the Council policy recommendations and might be placed in Excessive Imbalance procedure, moreover it would be subject to burdensome reporting requirements and surveillance missions from the Commission.
Under the compromise deal, at the European Parliament request, the relevant committee of the European Parliament may invite Member States concerned by the abovementioned Council’s recommendations or decisions “to participate in an exchange of views”, meaning to explain their national budgetary plans and their national policies. The MEPs have purposed for such attendance to be compulsory but under the compromise deal “Member States' attendance is voluntary.” As Bill Cash said "We have absolutely no business complying with any demand of the European Parliament. They have no status whatsoever," and "It would be humiliating and degrading for any British Treasury ministers to be exposed to this demand."
The draft regulation on enforcement measures to correct excessive macroeconomic imbalances in the euro area, lays down a system of fines for correction of macroeconomic imbalances in the euro area. Hence, if a member state repeatedly fails to comply with Council recommendations to address excessive macroeconomic imbalances would be subject, as a rule, to a yearly fine, until the Council concludes that the Member State has taken corrective action to comply with its recommendations. Moreover, if a Member State repeatedly fails to present a corrective action plan that is sufficient to address the Council recommendations would be also subject to a yearly fine, until the Council establishes that the Member State has provided a corrective action plan that sufficiently addresses its recommendations. The Council, acting on a proposal by the Commission, will impose a yearly fine on member states, which fail to follow reforms to boost their economic competitiveness such as measures to counter balance of payments deficits or excessive wage costs. Such decision would be deemed adopted by the Council unless it decides, by qualified majority, to reject the proposal within ten days of the Commission adopting it. Only a qualified majority of the members of the Council of eurozone members can stop the fine being applied. The fine will be therefore adopted based on the so-called reverse voting mechanism.
Under the compromise deal, all the fines collected, under both the excessive imbalance and excessive deficit, would be assigned to the European Financial Stability Facility as well as to the future European Stability Mechanism.
