1 Introduction |
TEMPORARY STABILITY MEASURES
1. In May 2010 there was
a first response to a gathering sovereign debt crisis in the eurozone,
caused partly by a crisis in the banking sector. The main elements
of this were the EU's European Financial Stabilisation Mechanism
(EFSM), established under
Article 122 of the Treaty on the Functioning of the European Union
(TFEU), and the European Financial Stabilisation Facility (EFSF),
a special purpose vehicle established by an intergovernmental
agreement between the eurozone Member States and funded by them.
2. The EFSM gives financial
assistance to a Member State in the form of loans or credit lines
raised from capital markets or financial institutions guaranteed
by the EU Budget; the guarantee is up to a level of 60 billion
(£50.64 billion). The continuing need
for the EFSM is to be reviewed every six months, and it is to
be discontinued once the exceptional circumstances cited as justification
for it no longer exist.
3. The EFSF can issue bonds or other debt instruments
on the markets to raise
funds for loans to eurozone Member States. Bond issues are backed
by guarantees, allowing a loan capacity of 440 billion (£371
billion), given by eurozone Member States in proportion to their
share in the paid-up capital of the European Central Bank. The
EFSF is to expire in June 2013.
4. Support for eurozone Member States in difficulties
under these arrangements can be complemented by assistance from
the International Monetary Fund (IMF).
5. To date Greece, Ireland and Portugal have
first, three year, bailout package, agreed in May 2010 (outside
the EFSM and EFSM mechanisms), consisted of 80 billion in
bilateral loans from eurozone Member States and 30 billion
from the IMF;
recently agreed three-year bailout package includes 109.1
billion from the EFSF and 28 billion from the IMF (over
received a three-year loan package of 85 billion in November
2010, comprising 22.5 billion each from EFSM, EFSF and IMF,
plus bilateral loans from Denmark, Sweden
and the UK; and
received a three-year loan package of 78 billion in May
2011, comprising 26 billion each from EFSM, EFSF and IMF.
A PERMANENT STABILITY MEASURE
October 2010 the European Council agreed that the EFSM and EFSF
should be replaced by a European Stabilisation Mechanism (ESM),
"a permanent crisis mechanism to safeguard the financial
stability of the euro area as a whole",
to be established and financed by the eurozone Member States.
It was also agreed that a limited revision of the EU Treaties
would be necessary to bring the ESM into effect. Accordingly,
in March 2011 the European Council adopted, under the simplified
Treaty revision procedure,
a Decision amending Article 136 TFEU, which allows the eurozone
Member States to establish by intergovernmental treaty a permanent
stability mechanism (the ESM) "if indispensable to safeguard
the stability of the euro area as a whole".
The Decision has still to be ratified by several Member States,
including the UK, and is to come into effect on 1 January 2013.
7. During 2011 the eurozone Member States only
agreed an intergovernmental treaty to establish the ESM. This
was to come into effect on 1 January 2013 but, because of the
scale of the crisis, was subsequently amended to come into effect
in July 2012.
The ESM will have an effective lending capacity of 500
billion (a figure it has recently suggested should be increased),
but it will also seek to supplement its lending capacity through
the participation of the IMF in financial assistance operations.
In his evidence to us on 14 March, the Financial Secretary
to the Treasury described the ESM as "a firewall, with 500
billion of funds there to act as a brake and prevent contagion
from spreading. It is a helpful way of trying to resolve the crisis
in the eurozone, and one to which we do not have to contribute".
A "SIX PACK" OF LEGISLATIVE
8. In parallel to these
support measures, the EU adopted the so-called "Six Pack"
of EU legislation on economic governance in October
2011. This package of legislation, based on existing provisions
in the EU Treaties, is intended to strengthen the fiscal stability
of Member States and introduced measures for the surveillance
and correction of macroeconomic imbalances similar to those applying
to fiscal deficits in the EU's Stability and Growth Pact. And,
like the coercive measures in the Stability and Growth Pact's
excessive deficit procedure, the "Six Pack" provides
for coercive measures in an excessive macroeconomic imbalance
procedure to be applied
to eurozone Member States.
AN INTERGOVERNMENTAL AGREEMENT ON
FISCAL DISCIPLINE AND ECONOMIC INTEGRATION
9. By Autumn 2011 there was renewed pressure
on the eurozone to come
up with further responses to contain the financial crisis. The
absence of enforceable measures to improve fiscal discipline and
economic integration prompted the Euro Summit in October 2011
to call for the first time for the possibility of "limited
to be explored in time for the December 2011 European Council.
Germany in particular wanted fiscal
discipline to be enforceable through the Court of Justice. At
the European Council on 9 December the eurozone Heads of State
or Government accordingly proposed new rules on a "fiscal
compact" and strengthened economic policy coordination. As
was widely reported, the
UK exercised its veto at that meeting to prevent the EU Treaties
and institutions being used to this end. This is recorded in the
Statement of the eurozone Heads of State or Government as follows:
Some of the measures [
can be decided through secondary
legislation. The euro area Heads of State or Government consider
that other measures should be contained in primary legislation
[the EU Treaties]. Considering the absence of unanimity among
EU Member States, they decided to adopt them through an international
agreement to be signed in March or at an earlier date. The objective
remains to incorporate these provisions into the treaties of the
Union as soon as possible.
10. On 2 March 2012, 25 Member States signed
a non-EU intergovernmental Treaty on Stability, Coordination and
Governance in the Economic and Monetary Union (the SCG
Treaty). The contents of the SCG Treaty are summarised in the
box following this chapter. In outline its purpose is to further
strengthen the fiscal and economic discipline of the Stability
and Growth Pact and the "Six Pack" legislation. For
eurozone Member States access
to the ESM will be dependent on compliance with the SCG Treaty.
11. On 19 December 2011 we announced our inquiry
into possibilities for reinforcing the eurozone following the
December 2011 European Council. In calling for evidence we said
that we intended to examine:
the resolution of the eurozone crisis was developing and the possible
consequences for the UK;
to reconcile monetary and fiscal policies within the eurozone,
based initially on the Statement of 9 December 2011 by the eurozone
Heads of State or Government, with the legal and institutional
Government's position on such monetary and
fiscal policies within the potential confines of an intergovernmental
We received 16 written submissions and took
oral evidence on four occasions. Those who helped us as witnesses
were: Professor Paul Craig, University of Oxford, and Professor
Simon Hix, London School of Economics; Charles Grant, Director,
Centre for Economic Reform; Professor
Michael Dougan, Liverpool Law School, and Martin Howe QC; Wolfgang
Münchau, President, Eurointelligence ASBL and Associate Editor
of the Financial Times, Douglas McWilliams, Chief Executive, Centre
for Economic and Business Research, and Roger Bootle,
Managing Director, Capital Economics; Mr David Lidington MP, Minister
for Europe, Foreign and Commonwealth Office, and Mr Mark Hoban
MP, Financial Secretary to the Treasury, together with their officials.
are grateful to all who assisted us in our inquiry, although we
were hindered by the refusal of the Foreign Secretary and the
Chancellor of the Exchequer to do so.
12. During the inquiry we looked at seven broad
questions. Two were primarily legal:
the SCG Treaty was compatible with the EU Treaties, particularly
in relation to the roles conferred on the Commission and the Court
of Justice; and
were the dangers for the UK in the SCG Treaty's encouragement
of enhanced cooperation, particularly with regard to taxation
Three were primarily economic:
the SCG Treaty would work, in terms of ending the eurozone crisis;
it implied for Member States with severe fiscal difficulties;
· if the
SCG Treaty did not work, what the consequences might be for the
eurozone, the UK and the wider world?
And two were primarily political:
the consequences might have been for the UK in ratifying the SCG
might they be in standing aside from that Treaty?
Additionally, late in the inquiry our attention was
drawn to a question as to whether amendment of Article 136 TFEU
was a necessary precursor to setting up the ESM.
|Summary of the SCG Treaty
Article 1 concerns purpose and scope, which are to strengthen the economic pillar of the economic and monetary union (EMU) by fostering budgetary discipline through a fiscal compact; to strengthen the coordination of economic policies; and to improve the governance of the eurozone, "thereby supporting the achievement of the European Union's objectives for sustainable growth, employment, competitiveness and social cohesion".
Article 2 requires that the SCG Treaty be interpreted and applied in conformity with the EU Treaties, with reference made to the principle of sincere cooperation laid down in Article 4(3) TEU, and with EU law (secondary legislation, decisions of the Court of Justice of the European Union), and that the EU Treaties and EU law take precedence in the event of a conflict.
Articles 3 and 4 establish the balanced budget rules for the "fiscal compact, namely that:
· national budgets should be balanced or in surplus, with the annual structural deficit (the balance between government tax receipts and current expenditure, adjusted for change in the business cycle) at the country-specific medium-term objective being no greater than 0.5% for contracting States that have a debt-to-GDP ratio of over 60%, and no greater than 1% for contracting States whose debt is below this mark;
· contracting States may temporarily deviate from their medium-term objectives only in exceptional circumstances, defined as:
an unusual event outside the control of the Contracting Party concerned which has a major impact on the financial position of the general government or to periods of severe economic downturn as set out in the revised Stability and Growth Pact;
· there must be a correction mechanism triggered automatically in the event of significant deviations from the medium-term objective or the adjustment path towards it; and
· when the ratio of a government's debt to GDP exceeds 60% it must reduce it by one twentieth of the difference between the present ratio and the 60% target each year.
Article 3(2) requires contracting States within a year of the SCG Treaty coming into force to put in place the rules in the above paragraph (with the exception of the last) "through provisions of binding force and permanent character, preferably constitutional, or otherwise guaranteed to be fully respected and adhered to throughout the national budgetary processes."
Article 3(2) further provides that the automatic correction mechanism is to be implemented nationally "on the basis of common principles to be proposed by the European Commission".
Article 5 requires a contracting State subject to an excessive deficit procedure under the EU Treaties to put in place a "budgetary and economic partnership programme", containing a detailed description of the structural reforms to be followed. The content and format of such programmes will be set out in EU legislation, and they are to be monitored by the Council and the Commission.
Article 6 requires contracting States to report ex-ante to the Council and Commission their borrowing (public debt issuance) plans.
Article 7 commits eurozone States to voting in the Council in support of the Commission's recommendations against a eurozone State which it considers to be in breach of the deficit criterion in the framework of an excessive deficit procedure, unless a qualified majority is against the recommendation (a "reverse qualified majority").
Article 8(1) and (2) set out the enforcement mechanism for Article 3(2):
· the Commission will issue a report to each contracting State assessing whether it has fully transposed Article 3(2);
· if the Commission, after having given the State concerned the opportunity to submit its observations, concludes in its report that a State has failed to comply with Article 3(2), the matter will be brought to the Court of Justice by one or more of the contracting States;
· in addition, where a contracting State considers, independently of the Commission's report, that another State has failed to comply with Article 3(2), it may also bring the matter to the Court of Justice;
· in both cases, the judgment of the Court of Justice shall be binding on the parties in the procedure;
· in addition the complainant contracting State may request that the Court of Justice impose financial penalties on the State in breach of Article 3(2), in line with the powers of the Commission under Article 260 TFEU; and
· the Court of Justice may fine a State in breach of Article 3(2) if it concludes that the State concerned has not complied with its judgment. The maximum fine is 0.1% of the State's GDP, which shall be paid into the ESM for eurozone States and the EU Budget for non-eurozone States.
Article 8(3) states that Article 8 constitutes "a special agreement between the Contracting Parties within the meaning of Article 273 of the Treaty on the Functioning of the European Union".
Articles 9 to 11 concern economic policy coordination and convergence. Under Article 9 contracting States undertake to "work jointly towards an economic policy that fosters the proper functioning of the economic and monetary union and economic growth through enhanced convergence and competitiveness", with the objectives of "fostering competitiveness, promoting employment, contributing further to the sustainability of public finances and reinforcing financial stability."
Under Article 10 the contracting States:
stand ready to make active use, whenever appropriate and necessary, of measures specific to those Member States whose currency is the euro, as provided for in Article 136 of the Treaty on the Functioning of the European Union, and of enhanced cooperation, as provided for in Article 20 of the Treaty on European Union and in Articles 326 to 334 of the Treaty on the Functioning of the European Union on matters that are essential for the proper functioning of the euro area, without undermining the internal market.
Article 11 requires the contracting States to ensure that all major economic policy reforms that they plan to undertake are discussed ex-ante and, where appropriate, coordinated among themselves. "Such coordination shall involve the institutions of the European Union as required by European Union law."
Articles 12 and 13 concern governance of the eurozone. Article 12 contains provisions for informal meetings of heads of State or Government and the President of the Commission in the newly created "Euro Summit", and for the appointment of its President. The Euro Summit will meet at least twice a year to consider issues arising from the single currency, and "other issues concerning the governance of the euro area and the rules that apply to it, and strategic orientations for the conduct of economic policies to increase convergence in the euro area". The Euro Group will be responsible for preparing Euro Summits, and implementing their conclusions. The President is to keep other Member States (including the UK) and the European Parliament informed of the outcome of Euro Summit meetings.
Article 13 states that, "as provided for in Title II of Protocol (No 1) on the role of national Parliaments in the European Union", the European Parliament and national Parliaments "will together determine the organisation and promotion of a conference of representatives" of the relevant committees of the national Parliaments and of the European Parliament "in order to discuss budgetary policies and other issues covered by this Treaty."
Articles 14-16 (Title VI) concern general and final provisions. Article 14 states that the agreement will enter into force on 1 January 2013 if 12 eurozone States ratify it, or the first day of the month after the 12th ratification if earlier. Article 15 states that non-eurozone States can ratify the agreement. Article 16 states that "steps shall be taken" to incorporate the agreement into the legal framework of the EU within five years at most.
Arrangements for bringing a case to the Court of Justice under Article 8
Annexed to the Minutes of the signing of the SCG Treaty on 2 March was a document entitled "Arrangements Agreed by the Contracting Parties at the time of signature concerning Article 8 of the Treaty". It has not been published on the Council's website, nor made available by the Government. It lays down the following procedure:
· the Trio of Presidencies (the previous, current and subsequent presidency Member States) will lodge an application with the Court of Justice for a declaration that a contracting State has failed to comply with Article 3(2) within three months of the receipt of the Commission's report to that effect;
· so long as i) the Trio States have not been found to be in breach of their obligations under Article 3(2) of the Treaty by a Commission report, ii) they are not otherwise the subject of proceedings before the Court of Justice under Article 8(1) or (2) of the SCG Treaty, and iii) they are not unable to act on other justifiable grounds of an overarching nature, in accordance with the general principles of international law;
· if none of the three States concerned meets these criteria, the duty to bring the matter to the Court of Justice will be assumed by the members of the former Trio of Presidencies, under the same conditions.
1 See para 2 of the European Council Conclusions of
28-29 October 2010, http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/117496.pdf. Back
The simplified revision procedures are set out in Article 48(6)
of the Treaty on European Union. Back
See Annex II, page 21, of the European Council Conclusions of
24-25 March 2011, http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/120296.pdf. Back
See para 13 of the Statement by the eurozone Heads of State or
Government of 9 December 2011, http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/126658.pdf. Back
Q 203 Back
See para 35 of the Euro Summit Statement of 26 October 2011, http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/125644.pdf. Back
See p 7 of the Statement by the Eurozone Heads of State or Government
of 9 December 2011, http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/126658.pdf. Back
See Article 3(3)(b), http://european-council.europa.eu/media/639235/st00tscg26_en12.pdf. Back
The Government said these arrangements were a political agreement,
which did not have the force of international law. By contrast,
Professors Craig, Dougan and Peers thought they were drafted to
create legally binding obligations. Back