Select Committee on European Union Thirteenth Report

The Committee's Conclusions on surveillance

143.  It is important to avoid a perception in the public, the media and the markets that the rules of the Stability and Growth Pact can be ducked in challenging circumstances. As the Council's decision not to send early warnings to Germany and Portugal highlighted, the present arrangement for early warnings leaves too much room for political tradeoffs, which can severely undermine the credibility of the Pact. The early warning is a statement of fact, based on the technical monitoring by the Commission of the Member States' stability and convergence programmes. It is equivalent to a Commission Communication that provides a technical analysis; it is not part of the enforcement procedure, as it does not entail the Member State being enjoined to follow a particular course of action or implement a particular policy.

144.  To ensure the credibility and proper functioning of the Stability and Growth Pact, situations such as the one last February—when the Council went against the Commission's recommendation and did not send early warnings to Germany and Portugal—must be avoided in the future. The Commission's proposal that it should be given the authority to issue early warnings directly to Member States without recourse to the Council provides an effective way of ensuring this. We therefore recommend that the Treaty be amended to grant the Commission this power. This proposal is in line with the monitoring and surveillance functions of the Commission. In a system where the Commission sends an initial early warning directly to Member States, the Council should retain the right to send a further warning itself. The Member State concerned, however, should be excluded from any Council vote on issuing warnings. This will require a further minor change to the Treaty.

145.  The Committee agrees that the Commission's role should not be extended beyond the right to issue an early warning direct to a Member State. The Council should remain the final arbiter of all the enforcement procedures enshrined in the Pact. Only the Council should have the power to enforce sanctions through the excessive deficit procedure and to oblige Member States to take specific actions to remedy excessive deficits.


146.  The Committee heard that the enforcement measures available under the Stability and Growth Pact were inappropriate, unworkable and needed revision. We analysed the current sanction of fines and examined other possible forms of sanction. We heard a lot of evidence about the role and importance of peer pressure in enforcing the Pact. Finally, we considered whether its was appropriate for the SGP to rely on the 'hard law' of rules founded on legal regulations or whether it would be better for the Pact to comprise a set of 'soft law' measure, based around guidelines. These issues are examined below.

Are fines an appropriate sanction for the SGP?

Fines are perverse-they will only worsen the budgetary situation

147.  Many witnesses agreed that the sanction of fines was an inappropriate way to enforce the SGP. Professor Sibert, for example, called them "a rather perverse punishment", as they would only serve to worsen the budgetary situation in the errant country (p. 110). It would be "counter-productive" to impose a financial burden on a country that was already running an excessive deficit (QQ 16, 171)

Fines will never be imposed-they are not politically credible

148.  Furthermore, witnesses agreed that it was politically highly unlikely that Member States would vote for the enforcement of fines to be levied on a fellow Member State. Witnesses agreed that the Council would not actually impose fines on any EU country through the SGP. It was reported that there was also very little expectation in the markets that sanctions will be applied. As Professor Begg said, "the fines are the nuclear deterrents, they are not to be used." This view was supported by many other witnesses (p. 110; QQ 17, 38, 58, 63, 102, 112, 142). As the TUC explained:

"The fines are really the nuclear option. If any country got to the point where the Commission was seriously thinking about imposing fines, then the system itself is in danger of breakdown; we would be facing a major political as well as an economic crisis." (Q 218)

149.  Accepting this position, it was only a short step to say that unenforceable law was bad law, and so it would be a good thing to write fines out of the Pact. This was the position of Professor Begg and Mr Crook. Professor Begg said the fines were not there to be used, and so consequently "we might as well write them out of the system" because they were "a pointless and rather silly exercise" (QQ 112, 128, 152).

Reasons to maintain the possible sanction of fines

150.  Witnesses gave three reasons to maintain fines in the SGP. First, UNICE maintained that fines had worked as an ultimate deterrent and were "the best means of deterrence between sovereign countries" (q17). UNICE agreed that the practical reality of such fines being imposed was very slim, but that it would be "better to leave this ultimate threat, understanding that it will probably not happen". Secondly, removing them would send out the wrong signal about the Pact, indicating that budgetary discipline in the EU was being relaxed. Thirdly, it was argued that fines should not be abolished at this point, because we do not know what could replace them in the Pact (QQ 241-42, 245, 267).

Are there any other possible sanctions for the SGP?

151.  In response to the argument that fines had to be kept in the Stability and Growth Pact because no credible alternative had been found, the Committee explored other possible sanctions for the Pact. Professor Begg mentioned the possibility of a country losing it structural funds. But he discounted this option as it would operate just like a fine in effect, as it imposed a financial penalty on the errant country (Q 113). Professor Buiter referred to the possibility of the Member State losing its right to vote in the ECB. However, he did not accept this solution, as he thought it inappropriate, as it concerned a different institution (Q 16). He proposed instead that the Member State should lose its right to vote in the Ecofin Council. He suggested that this sanction was "more plausible and more effective than monetary sanctions or fines" (QQ 17, 35). Mr Crook was a keen supporter of this proposal. He said it was "a very good idea," because it would make the penalty a political one rather than an economic one. It would be

"a humiliating thing for a government to have to bear; but in itself there is next to no economic damage and that is exactly how it should be. This regime should punish politicians who are pursuing unsound or even reckless fiscal policy. It should not punish citizens in their economies which the excessive deficits procedure does do." (Q 146)

152.  Professor Sibert also wondered whether this would be a more suitable sanction (p. 110). The Committee noted that already, on the latter stages of the Stability and Growth Pact sanctions, Member States were not allowed to vote on their own case. However, what Professor Buiter was of a significantly different order, as it would involve taking away the Member State's right to vote on other items of legislation. Professor Begg countered that such a sanction would be "just petty" (Q 122).

The role and importance of Peer Pressure

153.  Our witnesses unanimously agreed that peer pressure was the most important enforcement mechanism in the Stability and Growth Pact. The most appropriate way of enforcing the Pact was through building political consensus among all the Member States. The focus should not be on sanctions so much as on political processes which could change the political will of Member States whose fiscal policy risk breaching the terms of the Pact (QQ 45, 59, 102, 109, 127, 146, 167, 189, 196). Witnesses accepted that Member States could not be left to put pressure on one another. Peer pressure would not come about by itself but would need to be focused. For this to happen, it was necessary to put in place a credible framework, with bench marks and an effective surveillance process, so that comparisons could be made and peer pressure applied. Mr Crook, for example, pointed out that

"if there is no number at all then there is no focus for peer pressure to begin. It seems to me that you need a bench mark of some kind for the process even to start […] a number to organise the discussion. If you do not have that then I think it is much harder to mobilise peer pressure, harder to organise opinion in a certain direction" (Q 170-72)

154.  The question was: what would be the most effective framework within which peer pressure could operate?

Would it be better to have 'soft' guidelines rather than 'hard' rules?

155.  If peer pressure was accepted as the only effective means of enforcing the SGP, as the official sanction of fines might never be used, some witnesses asked whether it would be better to move to a Pact that is based on 'soft' guidelines, rather than 'hard' rules. The distinction between hard and soft in this context is that hard rules have legal sanctions backing them, whereas the softer procedures are only proposals that can be advocated to the Member States. The BEPGs are an example of the 'softer' approach, as there is no sanction against not doing something in the Guidelines.

156.  Professor Begg was the main proponent of this view; Mr Crook agreed with him. Professor Begg said that the rules did not make it any easier to enforce the Pact, so the emphasis should be put instead on offering guidelines to Member States. He suggested that this would allow the Commission to use other 'soft' tools, such as benchmarking, peer review, and league tables, which were ways in which pressure could be put on a Member State (Q 109).

157.  In opposition to this, UNICE said the hard law element of the SGP was needed to avoid the free-rider problem (q 16). Others witnesses argued that the Pact (and they saw rules as an integral part of this) had been successful in getting Member States to pay close attention to their fiscal policy. By removing the rules, one risked allowing more profligate fiscal policies in the EU. The Commission also considered it important to keep the hard elements of the Pact, even though it hoped they would never have to be used (QQ 254, 267).

The Committee's Conclusions on enforcement

158.  The Stability and Growth Pact is, first and foremost, a political agreement. Its effectiveness depends on the willingness of countries to cooperate with the Commission and in the Council. The policy makers must accept and implement rigorously the principle of peer pressure. The success of the Pact depends upon the willingness of politicians to give and receive open and frank advice and to adjust policies when necessary.

159.  Fines are a generally unsatisfactory penalty for the Stability and Growth Pact, because they would aggravate the budgetary problems that the Member State is supposed to be dealing with, and, in any case, they are unlikely to be used. We agree, however, that abolishing the threat of fines in the SGP would give the wrong signal to the public, the media and the markets that budgetary discipline in the EU was becoming less strict. Accepting that the sanction of fines is a 'nuclear deterrent' and unlikely to be enforced, we are content to leave this aspect of the SGP unchanged, in order to act as an ultimate deterrent and to be used as a measure of absolute last resort for the extreme case where a Member State completely disregards the rules.

160.  Moreover, we did not find another penalty that could work and that would be more appropriate. We do not support Professor Buiter's proposal to deny Member States that break the rules of the Pact the right to vote in Ecofin. We do not consider that this a sanction that could be acceptable to the Member States or that could work in the real political world. Moreover, politicians in the Council vote for their national interest, therefore the proposal would not only affect the politicians, as intended, but it would affect the country as a whole, including the country's citizens. Nonetheless, we do not support the sanction of fines in normal circumstances, and, as we have made clear, we do not wish to see any extension in the use of the excessive deficit procedure.

161.  We accept that peer pressure is the most effective enforcement mechanism currently available in the Stability and Growth Pact. The question is how the Pact can be shaped so that peer pressure does what is required so that the necessary level of fiscal coordination is achieved. We agree that peer pressure can be effective only if there are quantitative yardsticks against which it can be applied. The excessive deficit procedure is there as a measure of absolute last resort. Beyond this, it is essential to have a series of guidelines that make it easier to place the emphasis on policy coordination and peer review. These guidelines can work alongside the statutory, binding elements of the Pact.

162.  In its Communication, the Commission proposed that Member States should reaffirm their political commitment to the SGP in a "Resolution to reinforce the co-ordination of budgetary policies" to be endorsed by the European Council at their meeting in Brussels in March 2003. We would support such a Resolution, as it could function as one of the necessary yardsticks against which peer pressure can be applied. The proposed Resolution, however, is not enough; it is time that the politician's words and commitments are backed up by firm actions. It is also necessary to update the Code of Conduct to incorporate the Commission's new proposals interpreted as guidelines.

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