THE STABILITY AND GROWTH PACT: COM (2002)
Letter from the Chairman to the Minister,
As you will be aware, since last December, Sub-Committee
A (Economic and Financial Affairs, Trade and External Relations)
has been conducting an inquiry into the Stability and Growth Pact.
In connection with this inquiry, the Sub-Committee has under scrutiny
the above Communication from the Commission. The Sub-Committee
took evidence from a wide range of academics, the TUC, UNICE,
the European Commission and yourself, representing the Government.
The Sub-Committee has now completed its inquiry
and drafted a report, which will be published in approximately
two weeks' time. However, we are committed to giving the Government
our conclusions before negotiations on the Commission Communication
take place at the next meeting of the Ecofin Council on 7 March
2003. Accordingly, at its last meeting, the Committee agreed the
key conclusions that have emerged from the inquiry. I trust that
you will take full account of these recommendations when discussing
the Stability and Growth Pact at the next Ecofin Council meeting
and during your preparations for the meeting. The Committee's
conclusions are as follows:
The Committee supports the co-ordination of
national fiscal policies across the EU with a view to maintaining
sound public finances, Market discipline alone cannot be guaranteed
to ensure the sustainability of public finances. A co-ordinating
pact or other method of co-ordination between the Member States
is necessary to deal with the "free-rider" problem,
the risk of default and to help Member States to prepare for the
economic effects of ageing populations in the EU; such a method
of coordination should also provide stability for the European
Central Bank and the market.
The Committee agrees with the Government that
it is extremely important that Member States are free to structure
the expenditure and the revenue side of their budgets according
to their own national preferences. This is not in question in
any of the discussions on the Stability and Growth Pact, which
deals only with levels of government debt and deficit.
It should be made explicit that the medium-term
target of budgets "close to balance or in surplus" is
to be measured in terms of the cyclically- adjusted budget balance.
The common methodology agreed and adopted by the Commission and
Ecofin last year should be used to calculate the underlying budget
balances for this target; this means that an extra body of experts
is not needed to calculate the cycle.
When monitoring Member States' compliance with
the 3 per cent deficit criterion, the Commission should continue
to use the actual deficit-to-GDP ratio.
However, when deciding how the Pact is to be
enforced, the Council should not treat the 3 per cent figure as
an absolute limit, never to be breached. The Council's decision
whether or not to implement the excessive deficit procedure, once
a country has breached the 3 per cent reference value, should
take account of the underlying economic situation, including the
Member State's position in the economic cycle and possibly its
level of debt.
The Commission's proposal that Member States
should set an adjustment path towards the medium-term target of
budgets "close to balance or in surplus" of 0.5 per
cent GDP per year should not be treated by the Council as an enforceable
rule, any breach of which would activate the excessive deficit
It is important to tackle the fact that the
Stability and Growth Pact works asymmetrically across the economic
cycle. Furthermore, countries need to be encouraged not to act
pro-cyclically in times of boom. The Committee does not, however,
consider that the Commission's proposal to apply the sanction
of the excessive deficit procedure in good times would be the
most effective way of achieving these twin objectives. The Committee
shares the concern that the rules of the Pact should not be complicated.
The number of situations that lead to the formal sanctions of
the excessive deficit procedure being invoked should not be extended,
or these measures will lose their force.
We welcome the Commission's proposal to allow
some Member States "a small deviation" from the "close
to balance or in surplus" requirement. We support the fact
that this proposal is only available to those countries with low
underlying debt. We believe that the Government, too, should welcome
this move to a more country-specific interpretation of the Pact,
as it would allow them to target the UK national priorities of
public investment in physical and human capital.
We welcome the Commission's proposal to focus
more on debt. The stability and convergence programmes of Member
States with particularly high debt ratios should contain a clear
commitment to an agreed trajectory of reducing debt. In the light
of these commitments, the Council opinions on the stability and
growth programmes should include guidelines for reducing debt.
To ensure the credibility and proper functioning
of the Stability and Growth Pact, situations such as the one last
Februarywhen the Council went against the Commission's
recommendation and did not send early warnings to Germany and
Portugalmust be avoided in the future. We therefore recommend
that the Treaty be amended to grant the Commission the power to
issue early warnings directly to Member States without recourse
to the Council. This proposal is in line with the monitoring and
surveillance functions of the Commission.
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.
Peer pressure is the most effective enforcement
mechanism currently available in the Stability and Growth Pact.
The sanction of fines is a "nuclear deterrent" only
to be used as a measure of absolute last resort.
Each of the Commission's proposalsto
measure the medium-term target of budgets "close to balance
or in surplus", to encourage Member States to reduce their
underlying deficits to achieve this objective, to encourage countries
not to act pro-cyclically in times of boom, to allow Member States
with a low level of debt to deviate from the "close to balance
or in surplus" target, to encourage highly-indebted countries
to reduce their levels of debtprovides Member States with
a useful aim and sound objective. However, they should be interpreted
as guidelines rather than as rules. Interpreted in an inflexible
way that takes no account of the particularities of each individual
situation, they would increase the complication of the Pact. This
could lead to more transgressions by the Member States and more
interventions by the Commission and the Council, which could possibly
threaten to undermine the credibility of the very rules that the
proposals seek to strengthen. Interpreted in a way that is sensitive
to the specific circumstances of each country, the proposals would
introduce the necessary extra benchmarks against which the budgetary
actions of Member States could be judged and around which peer
pressure could be applied in the Council. Such an interpretation
should encourage Member States to follow sensible fiscal policies,
which could lead to greater stability and growth.
The Committee continues to hold the Commission
Communication under scrutiny.
The Committee has asked to receive in good time
ahead of the European Council on 21 March a full report of the
discussions on the Commission Communication at the Ecofin Council
meeting on 7 March 2003, including an account of the position
adopted by the United Kingdom and the other Member States.
3 March 2003
Letter from the Minister, Ruth Kelly,
to the Chairman
Thank you for your letter of 3 March. I was
interested to read the outline of the Sub-Committee's key conclusions
resulting from its inquiry into the Stability and Growth Pact
ahead of the 7 March ECOFIN Council meeting and look forward to
the publication of their report in due course.
In response to your request for further information
on the ECOFIN discussions, I enclose for your attention the ECOFIN
report on "strengthening co-ordination of budgetary policies",
which was approved by the Council and which the Council decided
to transmit to the European Council (7208/03. Not printed) This
Report reflects the views of all of the Member States of the European
Union and was agreed collectively by their Finance Ministers on
7 March 2003.
May I also draw your attention to the recent
answer given by the Chancellor of the Exchequer to the parliamentary
question tabled by the Member of the House of Commons for Falkirk
East (Mr Michael Connarty) on the outcome of the latest ECOFIN
discussions (Column 491W, 14 March 2003). ECOFIN is an intergovernmental
body, which is why its collective decisions/conclusions (by QWV
unanimity or simple majority) are reported alongside UK positions.
The Government has made consistently clear that it supports a
prudent interpretation of the Stability and Growth Pact, which
takes into account the enconomic cycle, sustainbility and the
important role of public investment.
17 March 2003