With the aim of strengthening economic governance in the EU, the European Parliament and the Council adopted last November the economic governance proposals, the so-called six-pack. This legislative package has entered into force in December 2011 and, consequently member states’ fiscal policies as well as macroeconomic policies and structural reforms are now subject to broader and enhanced surveillance. Member States are not only monitored for excessive deficits and debts, but also for imbalances and falling competitiveness. Although the UK is not subject to sanctions, some of the provisions on economic coordination and surveillance also apply to the UK, which is unacceptable.
The 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. The alert mechanism is intended to early detect Member States with potentially problematic levels of macroeconomic imbalances. Such mechanism is based on a scoreboard, which consists 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 rates therefore member states' performances as regards economic stability and competitiveness.
The Commission has therefore established a scoreboard composed of ten economic, financial and structural indicators and it has defined alert thresholds for each of them. It includes indicators on government and private debt, private credit flow, house prices, unemployment, current account balance, net investment positions, real effective exchange rates, trade balance and unit labour cost. Member States performance, including the UK, has been assessed against these indicators.
On 14 February, the European Commission adopted its first annual report, the so-called Alert Mechanism Report, providing for an economic and financial assessment “putting the movement of the indicators into perspective.” According to the Commission “Large and persistent macroeconomic imbalances (…) accumulated over the past decade and were part of the root causes of the current economic crisis.”
Based on a scoreboard of 10 macroeconomic indicators, the European Commission’s Alert Mechanism Report has identified 12 EU Member States that the Commission deems to be affected by, or at risk of, imbalances as well as the cases for which more in-depth analyses are required. The Commission has, therefore, compiled a list of Member States deemed at risk of imbalances (black list) and whose macroeconomic situation requires a further in-depth review. According to the European Commission the macroeconomic situation in the following countries needs to be further investigated: Belgium, Bulgaria, Cyprus, Denmark, Finland, France, Italy, Hungary, Slovenia, Spain, Sweden and the UK. Among the reasons presented by the European Commission for calling for in-depth analysis on the UK are a loss of export market shares over the last decade, although the Commission has noted “some stabilisation can be noted in recent years”, high level of private debt and rising house prices. The Commission pointed out “The household debt largely reflects mortgages in a context of high accumulated increases in house prices.” Moreover, the report reads “While both the level of household debt and real house prices has been reduced, they still remain high which suggests that the unwinding of these imbalances has further to go where the speed of adjustment is an important aspect.” The UK will be therefore subject to in-depth investigation by the European Union.
The Commission has pointed out that “It is only these subsequent in-depth reviews that will assess whether or not imbalances exist and whether or not they are harmful.” The conclusions of the Alert Mechanism Report will be now discussed by the Ecofin and the Eurogroup. 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 Commission will start preparing in-depth reviews for the Member States abovementioned, including the UK. 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 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.
All member states, including the UK, are subject to burdensome reporting requirements. The Commission is 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. The regulation provides “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.”
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.
The 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. 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.
