CHAPTER 3: Fiscal Discipline |
64. Since 1997, the Stability and Growth Pact
(see Box 1 below) has been the instrument through which the EU
seeks to ensure fiscal discipline by Member States. The Commission's
package of economic governance includes three Regulations that
aim to broaden the SGP's surveillance of fiscal policy (see Box
2 on page 26), and strengthen the sanctions regime (see Box 3
on page 29). In addition, the Commission has proposed that Member
States should incorporate certain rules into their domestic fiscal
structures to reflect principles agreed at a European level (see
Box 4 on page 37).
Fiscal surveillance: the Stability
and Growth Pact
65. The SGP requires Member States to comply
with two fundamental rules: keeping public accounts close to balance
or in surplus and avoiding a current deficit in excess of 3% of
GDP, with some latitude in periods of recession. Although a debt
criterion of keeping public debt below 60% of GDP has been applied
as one of the Maastricht criteria for acceding to the euro, it
was not included in the SGP as an explicit target. Sanctions are
available under the Pact to enforce the rules (for euro area countries
The Stability and Growth Pact
|The Stability and Growth Pact (SGP) was established in 1997 as a rule-based framework for the coordination of national fiscal policies in the economic and monetary union (EMU), established to ensure responsible fiscal behaviour among Member States. The rule at the centre of the Pact is that Member States should aim for a budgetary position close to balance or in surplus over the medium term; in normal times, they are also required to ensure that budget deficits do not exceed 3% of GDP. The Pact consists of a preventive and a corrective arm.
The SGP applies to all EU Member States, aside from the provisions for financial sanctions (see below) which apply only to those nations in the euro area. This is because, with the exception of the UK and Denmark which have an opt-out from membership of the euro (see paragraph 2), all Member States are expected to join the euro as soon as they fulfil the convergence criteria. They should therefore be implementing economic policies that will bring them into closer economic convergence with the euro area.
The preventive arm
Under the provisions of the preventive arm, Member States must submit annual stability or convergence programmes, showing how they intend to achieve or maintain sound fiscal positions in the medium term. The Commission undertakes an assessment of these programmes, while the Council expresses an Opinion on them. The preventive arm includes two policy instruments.
- The Council, if asked to do so by the Commission, can address an early warning to a Member State to prevent the development of an excessive deficit.
- The Commission can directly address policy recommendations to a Member State about the broad implications of its fiscal policies.
The corrective arm
The corrective part of the Pact contains the excessive deficit procedure (EDP). The EDP is triggered if a Member State's deficit goes above a 3% of GDP threshold set out in the Treaty. If the Council decides that the deficit is excessive, it issues recommendations to the Member State concerned to correct the excessive deficit, and gives a time frame for doing so. Non-compliance with the recommendations triggers further steps in the procedures which, for euro area Member States only, would eventually involve the possibility of financial sanctions. These could culminate in fines of up to 0.5% of GDP.
66. Its operation, however, has come under critical
scrutiny across Europe. This is partly because of problems in
enforcement, and these problems are considered in more detail
below. In addition, however, it is clear that the design of the
pact was flawed. This can be most clearly seen in the context
of countries such as Ireland which before the financial crisis
were in apparently sound fiscal situations.
67. The main criticism about the surveillance
of the existing SGP has been that it focused almost exclusively
on the deficit criterion of the SGP, allowing some Member States
to run debt levels well above 60% without being penalised.
THE COMMISSION'S PROPOSALS
68. Against this background, the Commission's
proposals aim to reinforce the SGP's surveillance. The suggested
changes are explained in detail in the box.
Proposed changes to surveillance under
the Stability and Growth Pact
Regulation amending the legislative underpinning of the preventive part of the Stability and Growth Pact (amendment of Council Regulation 1466/97)
This proposal would implement a new principle of 'prudent fiscal policy-making', with the aim of ensuring that extra revenues in positive economic circumstances are not simply spent but are allocated towards debt reduction.
If a Member State is judged not to be running prudent fiscal policies it could lead to the Council making a formal recommendation to change its policies. For euro area Member States, this recommendation could be enforced by a financial sanction (see Box 3 for details).
Regulation amending the legislative underpinning of the corrective part of the Stability and Growth Pact (amendment of Council Regulation 1467/97)
The amendments to this regulation would speed up the stages of the excessive deficit procedure (EDP). In addition to the 3% deficit criterion, the EDP would be triggered if a country's public debt exceeded 60% of GDP. Member States will be benchmarked as to whether they can sufficiently reduce their debt. Those whose debt exceeds 60% of their GDP should take steps to reduce it at a satisfactory pace, defined as a reduction of 1/20th of the difference with the 60% threshold over the last three years.
The proposal also sets out in detail the process by which sanctions would be applied to euro area countries if they failed to follow recommendations issued to them under the EDP.
Both these Regulations will apply to the UK, although the sanctions specified under Regulation 1467/97 are only applicable to euro area Member States.
THE PREVENTIVE ARM OF THE SGP
69. We heard relatively little evidence on the
proposed reform of the preventive arm of the SGP, which aims to
ensure that Member States run prudent fiscal policies over the
medium-term by limiting annual expenditure growth to "medium-term
rate of growth of GDP". Dr Marek Dabrowski, Centre for
Social and Economic Research, while agreeing that the rules "go
in the right direction", noted that determining this growth
rate in the current unstable economic environment "appears
almost impossible and will become a subject of political bargaining".
Professor Louis told us that the revised preventive arm of
the SGP was a "substantial complement" to what was possible
under the original framework.
More importantly, the proposals would allow sanctions to be imposed
on Member States at an early stage under the preventive arm, rather
than just under the corrective arm; we consider this aspect in
more detail later in this chapter.
THE CORRECTIVE ARM OF THE SGP
70. The reform of the corrective arm of the SGP
introduces an explicit debt threshold into the pact, thereby ensuring
that it would be used as a trigger in the excessive deficit procedure.
Our witnesses were generally in favour of this proposal
although some also identified potential problems associated with
it. Professor Jagjit Chadha, University of Kent felt that
there were "significant information hurdles to overcome in
assessing the public debt position of any country",
and said that an increase in debt might not simply be the result
of poor government policies. The Government, while "strongly"
supporting the introduction of a debt threshold, also suggested
that debt was a complex issue, and that Member States needed to
maintain some discretion on how they manage it. The Government
had concerns about the Commission's proposals to benchmark how
quickly countries are reducing their debt, arguing that the main
consideration should be whether a country's debt "is on a
downward trajectory", rather than the pace at which it is
happening. Dr Dabrowski
also raised concerns about setting a numerical target for debt
71. Mr Leandro acknowledged that these issues
were discussed by the Task Force and stated that these factors
would be taken into account and an "intelligent assessment"
made of whether the country is on the right or wrong path.
72. We welcome the Commission's proposals
to introduce an explicit public debt criterion, alongside the
deficit criterion, into the excessive deficit procedure under
the SGP. We consider it important that the most heavily indebted
countries move rapidly to reduce their level of public debt. We
do not, therefore, share the Government's concerns about a numerical
benchmark for reducing debt under the EDP. We believe that having
such a benchmark will be an effective way of exerting pressure
on heavily indebted countries to ensure that the higher a country's
level of debt the faster it is reduced.
73. The effective monitoring of Member State's
fiscal policies, and the triggering of the excessive deficit procedure,
clearly relies on the accurate reporting of deficit and debt statistics.
Eurostat, the overseeing EU institution, does not have the power
to dictate how national statistics are produced.
After repeated problems with Greek government statistics, in particular
after Greece revised its government deficit and debt data substantially
between the 2 and 21 October 2009 at the start of the euro area
the Commission proposed legislation to enhance the powers of Eurostat.
This was passed in summer 2010.
74. The IEA made a strong case for reliable,
objective and timely economic statistics, concluding that "for
the euro to survive, the institutional framework controlling the
quality of economic information must be improved". It suggested
that the poor quality of some Member States' statistics was well
known by Eurostat even before the Greek crisis. However, published
concerns about the quality of Greek data "had no discernible
impact on the bond ratings until 2009".
We have considered this issue in our scrutiny work.
75. The van Rompuy taskforce report contains
recommendations to improve the quality of statistics that go beyond
the recent legislation. Mr Leandro explained that the taskforce
felt that the Commission's proposal to reinforce the powers of
Eurostat was insufficient, and that "steps needed to be taken
to reinforce the reliability, competence and independence of national
76. Asked about the detail of the Taskforce's
proposal, Mr Conrad Smewing, Head of the Fiscal Policy Team
at HM Treasury, informed us that discussions in the taskforce
had concentrated on higher level reforms to the SGP and professional
standards of statisticians.
Mr Laurence Copeland of the Institute of Economic Affairs,
commented that "governments are just as prone to gaming rules
as banks, multinational corporations or, indeed, individuals.
If there are rules, we have to make them as game-proof and robust
77. Accurate and comparable statistics are
essential if there is to be effective economic coordination between
Member States. The Commission's proposal to enhance the powers
of Eurostat, adopted in 2010, was a good start. The van Rompuy
taskforce report suggested a need for measures to improve the
quality of national statistical data and to strengthen further
the Eurostat's powers. We agree, and recommend that the Commission
should bring forward legislative proposals to do so to ensure
that measures to improve economic governance are not undermined
by unreliable statistics.
Sanctions under the SGP
78. The Government have been clear that "sanctions
as defined under the Treaty apply only to the euro area".
As a result, this proposal will not apply to the UK, and the UK
will not have a vote in Council on decisions to apply sanctions.
We recognise, however, that the success of these proposals will
have direct implications for the health of the euro area as a
whole. As we concluded in Chapter 1,
the continued health of the euro area is of direct interest to
the UK, and we make our recommendations, therefore, to inform
the debate currently being held at a European level on this proposal.
Enhancing sanctions under the Stability
and Growth Pact
|Regulation on the effective enforcement of budgetary surveillance in the euro area
The Regulation would amend the existing sanctions procedure, detailed above, to introduce a new set of graduated financial sanctions for euro area member-states. In particular:
- Under the preventive arm of the SGP, an interest-bearing deposit of up to 0.2% of GDP could be imposed for significant deviations from the principle of 'prudent fiscal policy making';
- Under the corrective arm, a non-interest bearing deposit of up to 0.2% of GDP would be imposed if a Member State was placed in the EDP. This would be converted into a fine in the event of non-compliance with the recommendation to correct the excessive deficit.
The regulation proposes the use of reverse majority voting when imposing these sanctions. This would mean that the Commission's proposal for a sanction will be considered adopted unless the Council overturns it by qualified majority.
This Regulation will not apply to the UK.
Are sanctions needed?
79. Some witnesses felt that the role sanctions
would play in promoting sensible fiscal policies would be overshadowed
by the disciplining effects of the markets.
Mr Hans Martens, Chief Executive at the European Policy Centre,
for example, commented, "it is clear that whatever sanctions
come out of this system, they are nothing compared with the sanctions
that the market imposes", explaining that when the markets
see irresponsible fiscal behaviour, "the interest rate on
government debt, and perhaps on private debt, goes up so substantially"
that it becomes "the worst sanction" a Government could
face. The Minister
agreed: "Markets can often exert more effective and speedier
discipline than political processes".
80. Yet the markets have not been effective at
restraining irresponsible fiscal policies up until now. We described
in Chapter 2 the markets' failure to assess correctly the risks
posed by different Member States in the euro area.
While the markets may have "learnt their lesson", as
Mr Cliffe informed us,
and will not make the same mistake again, it is clear that Member
States are not willing to rely upon the markets alone to enforce
fiscal discipline. The Treasury stated clearly that Member States
themselves must be willing to enforce the SGP: "for the Stability
and Growth Pact to be effective and credible, the EU must be clear
that it is willing to take action against Member States who do
not comply with its terms".
81. After the events of the last year, the
markets can no longer assume that all sovereign debt issued by
euro area Member States bears the same risk. They will therefore
play the key role in restraining fiscal irresponsibility by Member
States by charging higher interest rates for countries deemed
to have lax fiscal policies. The markets have not, however, always
proven effective at enforcing responsible fiscal behaviour and
further mechanisms to reinforce compliance must also be available.
82. The rules of the SGP must be enforced
by Member States acting together through the Council. Repeated
breaches by Member States in the past are proof that compliance
is not otherwise guaranteed.
Making sanctions credible
83. While in theory there have always been sanctions
available for enforcing the Stability and Growth Pact, Mr de
la Chapelle Bizot suggested that "in reality there were no
sanctions for breaching the Stability and Growth Pact".
The Commission's proposals, therefore, are an attempt to rectify
this situation, by making the sanctions plausible. As Mr Zuleeg
suggested, the Commission is "trying to give the stability
and growth pact teeth".
84. We heard two reasons why the previous sanctions
process had been ineffective: the initial sanctions were too severe
to use for anything less than the most severe infringements, and
the room for political manoeuvre meant that sanctions were never
levied when proposed to the Council.
MORE GRADUATED SANCTIONS
85. Mr Leandro explained one reason why
the previous sanctions regime for excessive deficits under the
SGP had been ineffective: sanctions had started "with a nuclear
bomb", which he explained, "could never be used".
By starting off with small sanctions, at an earlier stage in the
process, it is hoped that the sanctions will be easier to apply,
and more politically acceptable. Mr Leandro explained what
the van Rompuy taskforce had proposed:
"We would start sanctioning the country in the
preventive phase of the Stability and Growth Pact before we even
get to the corrective phase, with an interest-bearing deposit
if the country seriously deviates from what has been agreed. Then,
if it continues misbehaving and falls into the corrective phase
of the pact, this interest-bearing deposit will be transformed
into a non-interest-bearing deposit. Then, if it continues misbehaving,
a fine will be imposed. Then the fine can be increased, as stated
in the treaty, so it's a more progressive system and starts earlier".
86. Several witnesses suggested fines were not
a credible threat against countries already in fiscal difficulties.
As Professor Buiter explained, "the penalties are still
not credible, because they are fines ... if a country is fiscally
challenged, you are not going to be able to extract money out
87. The Minister felt differently, and drew our
attention to provisions that allow sanctions to be reduced or
cancelled "on the grounds of exceptional economic circumstances".
The ability to impose sanctions earlier in the preventive and
corrective arms of the SGP, starting with less punitive interest
bearing deposits, gives the Council a more credible sanction to
use against countries which may be experiencing financial difficulties.
88. We welcome the introduction of a more
graduated system of sanctions against non-compliance with the
SGP. The availability of sanctions earlier in the process will
help ensure that irresponsible behaviour by Member States is discouraged
so that the corrective arm can be avoided.
LESS POLITICAL DISCRETION
89. France and Germany breached the SGP in 2002-2003,
leading to a conflict between the Commission (which wanted to
initiate sanctions) and the Council (which demurred). Subsequently,
France and Germany simply "changed the rules",
as Mr Leandro phrased it. Many witnesses saw this as an example
of the prime failing of the current sanction regime: too much
political discretion in determining when penalties should be imposed.
Dr Annunziata summarised the issue: "for the sanctions
to be credible, the room for political discretion should be minimisedthis
is the sad but realistic lesson from the original SGP".
90. Several witnesses argued for sanctions to
be made fully automatic, to be triggered when certain criteria
are reached. Dr Annunziata, for example, told us that only
automatic rules would work: "unless enforceability of rules
is ensured, changes to the rules themselves risk being irrelevant".
He concluded that suggestions for reverse majority voting are
Ms Vicky Ford, Member of the European Parliament, reminded us
that "the ECB would like sanctions to be as automatic as
possible". She continued, however, that "colleagues
around the Parliament would like them to be as automatic as practical,
which is slightly different".
91. Mr Leandro described the course taken
by the van Rompuy taskforce and the Commission to deal with this
"It was decided to apply reverse majority decision-making,
which means that a Commission recommendation for a sanction is
automatically approved unless opposed by a qualified majority
of Member States". This would ensure that "the decision-making
process is also more automatic and provides for less political
92. A number of witnesses suggested that the
use of reverse majority voting would make it more likely that
sanctions would actually be applied. Mr Zuleeg suggested
that "this new majority voting rule ... could work well",
adding that it might make it easier for sanctions to actually
apply to large Member States "even if they are unwilling
to accept them".
Professor Buiter was more modest in his praise: "they
have gone a very small way towards having more credible sanctions
by making a switch to opting in rather than opting out".
93. The Government agreed that reverse majority
voting "would make it more difficult for Member States to
However, they argued that there had to be "the proper institutional
between the Commission proposing sanctions, and the Council's
ability to overrule their decision if necessary. They gave two
reasons for this. First, the Minister argued strongly that "there
should be some judgement used to determine whether it is appropriate
to levy sanctions",
as opposed to a fully automatic process. Secondly, Mr Curwen
said: "it is very important for political legitimacy that
the governments of the Member States meeting in the Council ultimately
take that decision".
94. It was the Minister's view that the van Rompuy
taskforce "gets the balance right" between "having
an automatic process and having a blocking or reverse majority
to overturn a decision to levy sanctions".
95. We believe that fully automatic sanctions
are a step too far. The introduction of semi-automatic reverse
majority voting, however, is a positive step. By reducing the
scope for political interference this new voting system will make
it more likely that sanctions will be applied, making them a more
effective deterrent to non-compliance.
96. While the introduction of reverse majority
voting will make it harder for Member States to avoid sanctions,
the blocking ability of the Council means that political expediency
could still affect the way sanctions are applied. The Minister
made the point succinctly: "the effectiveness of any sanctions
system will be determined by the degree of political will within
the Council to apply the system fairly".
It remains to be seen whether Member States will continue to maintain
their political will to enforce the rules more rigorously once
the crisis is past.
97. Several of our witnesses thought it was implausible
that sanctions could ever be successfully applied or obeyed. They
argued that the sovereignty of Member States would make any attempt
to impose sanctions immensely difficult, particularly against
larger, more powerful Member States such as France and Germany.
Professor Goodhart, for example, told us that "to impose
sanction on large sovereign countries, in the present state of
the world political system, just can't be done".
98. Mr de la Chapelle Bizot recognised the
problem, and argued that the system could work but "only
if there is a real endorsement by the different governments of
the whole system".
Another witness reminded us that much depended on the larger countries
being willing to accept the new system: "Germany is by far
the most economically and politically powerful country in these
questions, so it has to be willing to accept that the rules that
are now being drawn up will apply to it".
99. Dr Dermot Hodson, Lecturer in Political
Economy at Birkbeck College London, raised another potential consequence
of the new system, suggesting that implementing reverse majority
voting might lead to a situation "in which Brussels might
be blamed" for proposing sanctions, because it is "essentially
getting the Commission to take ownership".
Mr Martin Larch, from the Directorate General for Economic
and Financial Affairs in the European Commission, responded to
the concern: "Brussels will take the blame anyway. That may
be the case, but it is certainly not the case that the Commission
take ownership of the sanctions".
Mr Hoban remarked wryly that "it is tempting to blame
Brussels for everything", but added that the van Rompuy report
asserted the need for the Council to be involved in the sanctions
process, which should ensure they took responsibility for the
process as well as the Commission.
100. With its ability to block sanctions under
the reverse majority voting procedure, final responsibility for
the decision to impose sanctions will continue to rest with the
Councilas is only appropriate. Only time will tell whether
the collective will of Member States is strong enough to ensure
that the sanctions process is applied even when the current crisis
is over. We endorse the Minister's remark: "the cost of the
crisis in the Eurozone is a reminder to us that we must make these
processes work much more effectively".
We hope that this continues to be true beyond the immediate crisis.
101. We stress the need for the Council to
ensure that, despite its ability to block sanctions, they become
an effective means to ensure Member States' compliance with the
SGP once the current crisis is over. We remain sceptical this
will be the case.
Types of sanctions
WITHDRAWAL OF VOTING RIGHTS
102. The van Rompuy taskforce examined the question
of whether Member States repeatedly breaking the rules should
have their voting rights in Council suspended. Mr Leandro
told us that "this was rejected by the taskforce. It was
not considered politically feasible",
a view which he said the Commission shared.
However, the van Rompuy taskforce report did not rule out the
possibility, instead noting in a final sentence that it was an
"open issue" that the European Council might consider
103. Mr de la Chapelle Bizot was clear that
the matter was not closed. "According to the German view,
non-financial sanctions could be more dissuasive. It is a question
of removing voting rights for outliers. France has decided to
support Germany in that view and it is one of the questions that
should be raised at a European Council level".
Professor Buiter, among others, told us that this would be
a useful power for the Council to have: "they should have
opted for things like suspending the right to vote on the euro
council for wilfully non-compliant Member States".
104. The Minister refused to express a view on
the proposal, simply noting that there would be "significant
barriers" to implementing such an idea.
Mr Curwen from the Treasury went slightly further, suggesting
that "I think we would be concerned by any measure which
undermined democratic legitimacy in the EU".
Other witnesses expressed similar concerns.
105. Professor Louis indicated another difficulty,
telling us that there would need to be "a revision of the
treaty" to suspend Member States' voting rights for breaking
Mr de la Chapelle Bizot, conceded that a treaty change would
be required, but added, "[that] is why some Member States
thought about a kind of political agreement, with each Member
State recognising the fact that if it is under the excessive deficit
procedure, it will decide not to vote in some cases, without any
constraint ... [although] it would only be a political commitment
without any legal force".
106. We are unconvinced that a political agreement
of this nature is practicable. The removal of voting rights would
be an extreme measure, presumably only to be used when a country
has repeatedly breached the SGP and refused to take corrective
action. Under these circumstances, we do not think it would be
sensible to rely on such a state keeping to a political agreement
that has no validity in law.
107. We do not believe that the withdrawal
of voting rights in Council is an appropriate sanction. Not only
would it require a significant treaty change, it would raise significant
questions about legitimacy and sovereignty if Member States were
unable to have any say in decisions taken in Council. Nor do we
think that a voluntary 'political agreement' is a plausible solution
as an alternative.
108. Professor Pisani-Ferry suggested that
there should be some form of incentive for better economic governance
in Member Statesin his words "better institutions
could go hand in hand with more flexibility in the implementation
of the common rules".
Mr de la Chapelle Bizot argued that "we are sure that
we have to create incentives", referring to examples such
as better access to European Investment Bank financing.
Dr Schelkle also expressed her support for the idea.
109. Others however, were less enthusiastic:
Mr Martens said dismissively that he could not see the EU
giving out incentives like a "Christmas present",
while Mr Hoban informed us he was "old fashioned"
and thought that "virtue has its own rewards". He questioned:
"should people be incentivised simply to obey the rules?".
Mr Leandro echoed this viewpoint, arguing that "the
real incentive for countries to abide by the rules is the fact
that, going forward, the markets will be applying a much more
110. We believe that the overriding incentive
for Member States is that of maintaining a stable and prosperous
euro area. We do not feel that other incentives should be necessary.
SANCTIONS OUTSIDE THE EURO AREA
111. At present, sanctions under the SGP can
only be imposed on euro area countries.
The Commission's proposals do not propose any change to this status
quo. The van Rompuy taskforce report, however, proposes extending
"enforcement mechanisms" to all Member States "by
making a range of EU expenditures conditional upon compliance
with the SGP". It suggests that this should be done as soon
as possible and "at the latest in the context of the next
multiannual financial framework". A footnote in the report
excludes the UK because of its opt-out from EMU.
112. This appears to us to be a significant step.
The Treaty only envisages the imposition of financial sanctions
on Member States whose currency is the euro, reflecting the greater
need for a strict observance of fiscal rules in the euro area.
This situation has not changed. The problems currently being experienced
by euro area Member States are the result of structural failings
in the EMU. To suggest widening the scope of a coercive enforcement
mechanism to Member States outside the euro area seems unjustified
and inconsistent with the principle underlying the Treaty.
113. The Government, considering this issue in
the context of structural funds, have stated that they "have
a principled objection to proposals for contractually binding
'conditionality' to be applied to funding". They argue that
there should be no "punitive link" between entitlement
to cohesion funds and the effectiveness of macroeconomic and fiscal
policies. We consider
the idea of making EU funds conditional upon compliance with the
SGP further in our report on the EU financial framework from 2014.
114. We do not support the recommendation
in the van Rompuy taskforce report to extend sanctions to Member
States outside the euro area (excluding the UK) by making EU expenditure
conditional upon compliance with the SGP. Sanctions are imposed
on euro area countries on the basis of express Treaty provisions.
It is inappropriate to do so through other means for Member States
outside the euro area.
Supplementing the SGP: implementing
sound fiscal rules at a national level
NATIONAL FISCAL FRAMEWORKS
115. During the inquiry a key question that emerged
about fiscal surveillance was whether fiscal discipline had to
be imposed by stronger rules and tighter surveillance at an EU
level, or should come from reinforcing domestic fiscal structures
at a national level. The van Rompuy taskforce report focuses on
central oversight, while encouraging the development of domestic
fiscal rules and improved institutions.
The Commission, meanwhile, have proposed a new Directive on national
fiscal frameworks. This Directive would see the objectives of
the SGP reflected in national budgetary rules and establish minimum
standards for different aspects of the budgetary process (see
Box 4 below).
116. Mr Larch explained the rationale behind
this Directive: "EU rules are necessary to co-ordinate fiscal
policymaking in the EU and in the euro area, but they are not
sufficient to make fiscal policy coordination work". He concluded
that "there would need to be national fiscal frameworks that
are conducive to the kind of fiscal policymaking that is consistent
with the provisions of the Treaty".
117. The Commission propose that Member States
implement national fiscal rules along the line taken by Germany,
which in 2009 introduced a constitutional provision to mandate
balanced regional and federal budgets. Ms Barysch explained: "Germany
would like to see similar legislation in all Eurozone Member States".
She noted that "they also know that not all European countries
are as rule-abiding as they are, so they want to have some sort
of external oversight for that". Germany envisaged this external
oversight coming from the markets which would impose discipline
through higher borrowing costs.
Directive on budgetary frameworks of Member
|This proposed Directive sets out minimum requirements to be followed by Member States to strengthen and align their budgetary frameworks with the new European economic governance rules, by:
- ensuring consistent accounting systems;
- aligning national fiscal rules close to the balance goal, the 3% deficit limit currently set out in the SGP and the proposed addition of a debt threshold of 60% of GDP;
- switching to multi-annual budgetary planning; and
- ensuring that the system of public finances is covered by the framework (for example, ensuring that public expenditure through regional authorities is accounted for in the same way).
118. We heard evidence that the fiscal discipline
in the EMU had a better chance to be respected in a decentralised
system. Professor Pisani-Ferry felt that it was difficult
to exercise fiscal discipline from Brussels, which could not create
a model of fiscal discipline which reflected the differences between
Member States' domestic institutional arrangements. He concluded
that "you need to decentralise and find definitions of fiscal
discipline on which there is ownership at national level",
while emphasising that such an approach "was not inconsistent
with the overall aim of EU fiscal discipline", but simply
a different model.
Dr Annunziata took a similar view, and argued that, in the
absence of a greater degree of political union, a decentralised
system for fiscal discipline was needed where fiscal rules were
enshrined in national legislation, so as "to tie the hands
of national governments in a way which is recognized as desirable
by the elected national legislature".
ACCOUNTING FOR REGIONAL EXPENDITURE
119. This proposal would make countries which
delegate substantial levels of expenditure to regional or sub-national
bodies ensure that all levels of government operate under the
same accounting rules and are subject to the same fiscal rules
as the central government. Given that in some countries excessive
expenditure by sub-national authorities has had negative effects
on public finances at a national level, we welcome this step.
MINIMUM STANDARDS AND BEYOND
120. The Directive would require Member States
to place minimum standards on their domestic fiscal frameworks
but, as Mr Larch confirmed, the proposed directive "does
not require the implementation of these requirements by law. There
can be any kind of provision".
The van Rompuy taskforce report echoes the Commission's proposals.
Mr Leandro explained that "some countries are more sensitive
than others about transposing common requirements into national
legislation", which was why the report did not specify how
the minimum standards should be incorporated.
121. Dr Hodson saw this as a key proposal
that might have a real impact:
"If you ask, 'How could we get compliance without
exerting peer pressure or sanctions?' it is by making sure that
the objectives set at the EU level are compatible with the framework
conditions for making fiscal policy. Those Member States that
have better defined fiscal rules tend to have a better track record
of compliance. I think that was perhaps the most significant part
of the Commission's proposals".
122. He expressed regret that the proposal did
not require Member States to incorporate the rules in national
law, lamenting that it "takes a big step back from what could
be a real change to how fiscal policy is made".
123. The Government have not been enthusiastic
about the proposal, stating that "the construction and operation
of Member States' national fiscal frameworks should be a matter
for national governments to decide".
The Minister, whilst conceding that it was important to ensure
that the right fiscal frameworks were in place in Member States
and that a "high-level political agreement" on their
outline might be appropriate,
emphasised that it was "dangerous to be too specific".
He argued that a prescriptive legal framework would make no allowance
for differences between Member States, and that "it almost
takes away responsibility from Member States ... Real change takes
place when Governments take ownership of their fiscal position".
124. Mr Persson also opposed the use of
legislation, arguing that it would be "very difficult to
tell a national Parliament that from now on, one of our key policiesour
budget policywill be subject to [EU] rules rather than
to votes in Parliament".
125. We heard two variants on the proposal. Ms
Ford informed us that among some Members of the European Parliament
there was a desire for a two-tier system, where euro area nations
would have to go further than the proposed Directive and incorporate
the fiscal rules suggested in the Directive into national legislation.
She explained that "there is quite a lot of concern that
they need to have enforceable, clear, transparent budgetary processes
across the Eurozone", and suggested that an amendment on
these lines might be made by the European Parliament.
126. Dr Annunziata, meanwhile, contended
that it was possible to have a set of rules "that are in
principle generally accepted and where the thrust of the rule
is the same across countries", but where the "details
of implementation could vary from country to country".
He proposed that limits could be imposed on deficits and public
debt, as is currently the case with the SGP, but that each country
would have the flexibility to choose what correction mechanism
they would use. The details of these mechanisms could vary from
country to country "as long as they are set in stone in the
legislation giving reasonable assurances that they will guarantee
an automatic correction of fiscal policy if certain limits are
127. The Commission's proposal to complement
the top-down oversight of fiscal policy through the incorporation
of EU-wide rules in domestic budgetary frameworks is a welcome
development. We believe it will complement other proposals to
enforce responsible fiscal behaviour through promoting a national
ownership of EU rules.
128. We welcome the proposal to ensure that,
where countries delegate substantial levels of expenditure to
sub-national authorities, these bodies are subject to the same
fiscal rules as central government.
129. We support the thrust of the draft Directive
which states that 'provision' for fiscal rules should be introduced
at a national level. We note, however, that the Directive may
be more effective if Member States implement these rules through
national legislation as far as possible, rather than relying on
92 EGE 14 (HM Treasury) Back
COM (2010) 526 Back
COM (2010) 522 Back
EGE 10 Back
Q 357 Back
EGE 9 (Dr Annunziata), EGE 14 (HM Treasury), EGE 18 (Dr Dadush)
EGE 5 Back
EGE 14 Back
EGE 10 Back
Q 251 Back
EGE 8 Back
Report on Greek Government Deficit and Debt Statistics, European
Commission, COM (2010) 1 final Back
Q 387. Council Regulation (EU) No 679/2010 Back
EGE 8 Back
Correspondence with Ministers December 2009-April 2010
Q 223 Back
Q 3 Back
Q 442 Back
EGE 14 Back
See paragraph 22 Back
COM (2010) 524 Back
Only the Member States of the euro area, other than the state
on which sanctions would be imposed, may vote. A Qualified Majority
must comprise at least 55% of the voting states, representing
at least 65% of the total population of the voting states (see
Article 8 of the draft Regulation and Article 238 (3)(a) TFEU. Back
QQ 453 (Ms Barysch), 202 (Dr Gros) Back
Q 339 Back
Q 528 Back
See paragraph 38 Back
Q 79 Back
EGE 14 Back
Q 296. See also Q 500 (Professor Buiter), EGE 9 (Dr Annunziata),
EGE 14 (HM Treasury), EGE 24 (Dr Hodson) Back
Q 343 Back
Q 269 Back
Q 269 Back
Q 501. See also Q 340 (Mr Martens), EGE 6 (Professor Gortsos) Back
EGE 8 Back
Q 234 Back
EGE 16. See also Q 453 (Ms Barysch), EGE 16 (Dr Annunziata), EGE
10 (Dr Dabrowski) Back
EGE 9. See also Q 458 (Ms Barysch), EGE 21 (European Movement
Q 476. The ECB has argued for a "quasi-automatic application
of sanctions"-see European Central Bank, Reinforcing economic
governance in the euro area (June 2010) Back
Q 269 Back
Q 343 Back
Q 500 Back
EGE 15 Back
EGE 15 Back
Q 528 Back
Q 20 Back
Q 537 Back
EGE 23 Back
Q 90. See also QQ 453 (Ms Barysch), 128 (Dr Annunziata), EGE 7
(Open Europe) Back
Q 297 Back
Q 343 (European Policy Centre) Back
Q 126. See also Q 297 (Mr de la Chapelle Bizot) Back
Q 393 Back
Q 530 Back
Q 534 Back
Q 252 Back
Q 253 Back
Report of the van Rompuy taskforce to the European Council, Strengthening
economic governance in the EU (2010) Back
Q 296 Back
Q 500. See also EGE 6 (Professor Gortsos), EGE 3 (Dr Schelkle),
EGE 16 (Dr Annunziata) Back
Q 525 Back
Q 31 Back
EGE 18 (Dr Dadush), EGE 21 (European Movement UK) Back
Q 355 Back
Q 300 Back
Q 277 Back
Q 299 Back
Q 121 Back
Q 338 Back
Q 531 Back
Q 254 Back
Article 126 (II) TFEU gives the Council power to impose sanctions.
By virtue of Article 139 and Protocol 15this provision only applies
to Member States whose currency is the euro. Back
van Rompuy taskforce, Strengthening economic governance in
the EU, op. cit. Back
Government Explanatory Memorandum 16336/10, Conclusions of
the fifth report on economic, social and territorial cohesion:
the future of cohesion policy (November 2010) Back
The report from the European Union Select Committee, EU Financial
Framework from 2014, will be published in March 2011. Back
Q 276 Back
Q 371 Back
Q 470 Back
Q 276 Back
EGE 9 Back
Q 370 Back
Q 241 Back
Q 126 Back
Q 126 Back
Government Explanatory Memorandum 14497/10, Proposal for a
Council Directive on Requirements for Budgetary Frameworks of
the Member States (October 2010) Back
Q 539 Back
Q 538 Back
Q 431 Back
Q 481 Back
Q 129 Back
Q 129 Back