Economic governance package explained
The EU agreed in the autumn of 2010 to tighten financial supervision in the private sector in an effort to head off any future financial crisis. On 28 September 2011 MEPs approved the so-called economic governance "six-pack" of new rules. This was followed by the "two-pack" initiative aimed at stepping up financial discipline within the eurozone, which MEPs approved on 12 March 2013. Read on to find out more about how the Parliament has been working to strengthen economic governance in Europe.
The two-pack measures are about stepping up the surveillance of eurozone members' national budgets and have more oversight of the economic policy plans of those that are in financial difficulties. Parliament wants to ensure that the corresponding Commission's powers are under democratic scrutiny.
Four of the six-pack proposals aim to strengthen the Stability and Growth Pact (SGP) and budgetary surveillance, while the remaining two focus on monitoring and controlling macro-economic imbalances within the EU.
Green light for economic governance "two pack"
The next round of EU economic governance legislation will do more to deliver growth and the European Commission's new powers to vet Eurozone countries' budgets will be better democratically controlled, thanks to the “two pack” economic governance legislation voted by Parliament on Tuesday 12 March 2013. The rules also lay down clear procedures for countries seeking EU financial help.
The next round of EU economic governance legislation will do more to deliver growth and the European Commission's new powers to vet Eurozone countries' budgets will be better democratically controlled, thanks to the “two pack” economic governance legislation voted by Parliament on Tuesday. The rules also lay down clear procedures for countries seeking EU financial help.
MEPs, led by rapporteurs Jean-Paul Gauzès (EPP, FR) and Elisa Ferreira (S&D, PT), did not radically change the original goals of the legislative package but they did add many provisions to ensure it takes more account of the need to stimulate growth and employment. They also inserted many clauses to improve transparency and democratic accountability.
Growth, not just fiscal consolidation
Parliament's amendments ensure that the new laws will do more to deliver growth. For example, the Commission's country-by-country budget assessments will need to be more comprehensive, to ensure that budget cuts are not made at the cost of killing off investments with growth potential.
Where countries are asked to make substantial cuts, their efforts must not harm investments in education and healthcare, particularly in countries in severe financial difficulty, say MEPs. Moreover, a country’s deficit reduction timetables would have to be applied more flexibly in exceptional circumstances or in severe economic downturns.
Better oversight of Commission powers
The Commission's exercise of its increased powers would be monitored more closely by member states and the European Parliament, so as to ensure better accountability and legitimacy. For example, the Commission's powers to impose extra reporting requirements will have to be renewed every three years and Parliament or Council would be able to revoke them.
The work of the so-called "Troika" (Commission, ECB and IMF) in overseeing economic reforms in countries in difficulty, will also be subject to more oversight, thereby increasing transparency and democratic accountability.
Redemption fund, eurobills and infrastructure investment
The last piece of the agreement, which Parliament insisted upon, addresses the question of a European redemption fund.
The compromise agreed with member states requires the Commission to "establish an Expert Group to deepen the analysis on the possible merits, risks, requirements and obstacles of partial substitution of national issuance of debt through joint issuance in the form of a redemption fund and eurobills".
The expert group will present its conclusions by March 2014 and the Commission will then be asked to assess and, if appropriate, table proposals before the end of its mandate.
The Commission also undertook to explore by summer 2013 ways to create headroom within the Stability and Growth Pact for certain non-recurrent public investments. By the end of 2013 it should also develop a system to provide financial support for countries to undertake competitiveness-boosting reforms.
The deal must now be formally approved by the Council.The rules should apply to the next budgeting period of the Eurozone countries, i.e. their 2014 budgets.
The Gauzès text was approved by 528 votes to 81, with 71 abstentions.
The Ferreira text was approved by 526 votes to 86, with 66 abstentions.
Press release originally published on 12 March 2013
Economic governance with a wider vision
The next round of economic governance legislation must be geared more towards growth and new European Commission powers to vet Eurozone countries' budgets should be better democratically controlled, MEPs said on 13 June when adopting Parliament's position on the so-called "two pack". The biggest changes to the Commission proposal are a new chapter on coordinating debt issuance, including the partial pooling of Eurozone debt, and legal protection for countries about to default.
The votes come after the Economic and Monetary Affairs Committee approved the two texts, but with majorities deemed too slim to provide a clear mandate for negotiating with Member States. Now, with a plenary mandate, Parliament's negotiators will enter into talks with them in order to reach a deal on the legislation.
Jean-Paul Gauzès (EPP, FR), rapporteur for the rules dealing with countries in significant financial trouble, said, "with such rules in place two years ago we would have avoided the problems currently experienced by some countries since early and clear actions would have been taken".
Elisa Ferreira (S&D, PT), rapporteur on the text which steps up budgetary reporting requirements for all Eurozone countries, argued that the legislation must respond to a broader political context. "Fiscal discipline cannot be the Alpha and Omega of our strategy. We need to rebalance our short term objectives to also address growth and the vicious spiral of high debt-financing interest rates", she said.
Redemption fund, Eurobonds and infrastructure investment
Parliament's position adds a very direct growth dimension to the package and provides some immediate fix solutions to reduce debts. Most importantly, a European Debt Redemption Fund would be set up to group together all Eurozone members' debt which exceeds 60% of their GDP. Currently amounting to around €2.3 trillion, this debt would then be repaid over 25 years and at a lower average interest rate. This would provide breathing space for countries to carry out difficult structural reforms and would also help to break the spiral of high interest rates, higher debt, and less growth.
As to longer-term solutions, one month after the legislation's entry into force, the Commission would also be required to present a roadmap for introducing Eurobonds and a proposal for a growth instrument which would mobilise 1% of GDP per year, or around €100 billion, over ten years, for infrastructure investments.
More Commission oversight but no blank cheque
The Commission's exercise of its increased powers would be monitored more closely by Member States and the European Parliament, so as to ensure oversight, accountability and legitimacy. To this end, the extra powers would need to be renewed every three years and Parliament or the Council would be able to revoke them.
The text dealing with exceptional Commission powers in countries facing bankruptcy nonetheless places the Commission in a stronger position than it would have been under its own initial proposals, notably by providing for greater use of the "reversed qualified majority" rule for votes in the Council.
For example, this rule would apply when the Commission recommends corrective measures to be taken by a country or when it requires new debt reduction plans to be submitted. Such decisions would be considered adopted unless the Council rejected them outright.
Growth as the ultimate goal
In line with shifting sentiment, both texts stress the need to ensure that fiscal monitoring does not hamper growth. The Commission's country-by-country budget assessments would therefore need to be more comprehensive, to ensure that budget cuts are not made at the cost of killing off investments with growth potential.
Moreover, for countries being asked to make significant cuts, these efforts must not harm investments in education and healthcare, particularly in countries in severe financial difficulty. The Commission would also be required to look at spillover effects, to be sure that a country's difficulties do not also stem for bad policy elsewhere in the Eurozone.
Member States would also be required to detail which of their investments has growth and jobs potential, and deficit reduction timetables would be applied more flexibly in exceptional circumstances or in a severe economic downturn.
Finally, the texts also entrench the rights of social partners and civil society to express their views on Commission recommendations and be better included in policy formulation.
Legal protection from bankruptcy
A new rule would empower the Commission to place a country on the verge of default under legal protection, to give it more clarity, stability and predictability in tackling its problems. Once under such protection, a country could not be declared to have defaulted, its creditors would need to make themselves known to the Commission within two months, and loan interest rates would be frozen.
The Gauzès resolution was adopted with 471 votes in favour, 97 against and 78 abstentions, and the Ferreira one with 501 votes in favour, 138 against and 36 abstentions.
Procedure: Co-decision, 1st reading
Press release originally published on 13 June 2012
Parliament gives green light to future economic governance plans
Eurozone members will no longer be able simply to ignore Commission warnings to correct their budgetary policies. The economic governance legislation voted in plenary on 28 September 2011 should also help ensure that countries tackle unsound economic policies more promptly, considerably increases transparency and accountability and will improve the compilation of statistics to make them more reliable and accurate.
As expected, the plenary vote was tight with left-of-centre groups abstaining and voting against some parts of the deal for fear that the package is overly focused on budgetary correction, to the detriment of growth and employment. On the part of the package dealing with macroeconomic imbalances, a large majority was obtained because centre-left groups felt that an adequate balance had been struck between social and financial imperatives.
ECB President Jean-Claude Trichet had congratulated EP negotiators a week earlier for resisting attempts to water down the package: "If I compare the deal to the initial proposals, there is substantial improvement. I have to pay homage to the Parliament for this."
Less horse trading, more responsibility
The vote came two weeks after certain Member States, led by France, climbed down from their insistence that a warning to a country would require approval by the Council. MEPs feared that this would lead to back-room deals in which countries needing to reform their budgetary policies would be let off the hook.
Instead, the agreement will force Eurozone governments to muster a majority to block a warning being issued. Neither can the governments opt to do nothing, since such a warning will in any event be issued if the vote is not taken within 10 days of it being proposed by the Commission. And if governments do vote to reject a warning, they will need to explain themselves to the European Parliament in public.
Public hearings and macroeconomic surveillance
Parliament also won the right to invite finance ministers from countries that have received a warning to hearings. Member States long insisted that this should not be the case.
MEPs also negotiated that the Commission would look not only at countries with a trade deficit, but also at those running current account surpluses, when investigating the sources of macroeconomic instability. Member States had initially insisted that only current account deficit countries would be investigated. The agreed rules will therefore require the Commission to consider the possibility that countries like Germany or the Netherlands are a cause of instability and reforms could be asked of them too.
Other improvements by Parliament
Apart from the issues settled, many other improvements were brought about by pressure from MEPs.
Some of the most important improvements are:
putting into law the European semester (annual assessment of national budgets for economic policy coordination), through its inclusion in the legal texts. This will give the procedure much more weight and bite,
establishing a legal framework for the surveillance of the national reform programmes
increased powers for the Commission, which can ask for more information to be supplied to it than envisaged in the original proposals and through on the spot checks to Member States,
A new fine (0.2% GDP) for Eurozone members which supply fraudulent statistics with regard to data on deficits and debt,
an interest-bearing deposit sanction (0.1% GDP) for Eurozone members in cases where a Member State fails to act on recommendations to rectify a macroeconomic imbalance.
greater independence of statistical bodies and standards for the compilation of statistics, and
safeguarding social bargaining processes and wage setting agreements when delivering recommendations.
Background: the package in a nutshell
Firstly, the "six-pack" gives more bite to the current stability and growth pact (SGP), so as to control deficits and debt levels better and from an earlier stage.
Secondly, it innovates, by aiming to oblige policy makers to act swiftly to restore the health of economies that are threatened by macro-economic imbalances, such as house-price bubbles or loss of competitiveness. Both these aims are to be achieved through preventive action, primarily warnings, and corrective action, in the form of sanctions.
Thirdly, the rules aim to ensure that the statistics vital to sound budgetary policy-making and budget monitoring are more accurate, inter alia by having them gathered more independently.
Besides these three key goals, the "six-pack" is also designed, specifically at the insistence of MEPs, to improve transparency and accountability across the board and to increase the powers of the Commission.
Wortmann Kool report: 354 in favour, 269 against, 34 abstentions
Feio report: 363/268/37
Ferreira report: 554/90/21
Goulard report: 352/237/67
Haglund report: 394/63/206
Ford report: 442/185/40
Procedure: Co-decision, Consultation and inter-institutional non-legislative procedure
Press release originally published on 28 September 2011
Wortmann-Kool: economic governance pillar of EU's competitiveness
Reining in spend-thrift governments and making sure macroeconomic imbalances do not undermine economic growth are the two main goals of the economic governance package on which the Parliament and the Council tentatively agreed 20 September 2011. We talked to parliament's lead negotiator Dutch Christian Democrat Corien Wortmann-Kool ahead of a vote in plenary on 28 September 2011. who said the package does not focus only on reducing debt but also provides incentives for growth-friendly reforms and policies.
What has the Parliament achieved in negotiations?
The EP achieved a much stronger surveillance procedure in the stability and growth pack in order to ensure sustainable public finance in the member states and prevent us from having another Greek debt crisis. One of the last stumbling blocks was the EP's request to introduce reverse qualified majority voting (eurozone governments would have to come up with a qualified majority to reject the Commission recommendation or it would be automatically adopted) to trigger sanctions for governments that haven't taken the necessary steps to cut public debt. The EP got agreement on that for all decisions in the framework of the Stability and Growth pact.
The economic governance package is an important pillar to boost EU competitiveness, because its aim is not only to limit the unsustainable debt burden but also to provide strong incentives for the reforms and policies needed (to boost growth).
Why push austerity, if public debt wasn't the cause, but the consequence of the crisis?
Those member states with the most prudent fiscal policies and growth strategies are now performing best. This is proof that fiscal stability leads to growth and employment.
We should put in place the necessary safeguards on our financial markets by further strengthening the European financial supervisors, ensuring more transparency on our financial markets and by establishing a European crisis mechanism for the banking sector. In addition, a number of further measures such as a financial transaction tax and Eurobonds are being studied.
Economists warn that macroeconomic imbalances arise from excessive surpluses as well as excessive deficits, but it seems that deficit countries like Greece and Spain are getting all the flak, while surplus countries are let off the hook
The EP managed to secure a balanced approach with regard to "intelligent symmetry" pointing at both deficit and surplus countries. Nevertheless, we should keep in mind that the need for policy action is particularly pressing in member states showing persistently large current-account deficits and competitiveness losses.
Disagreements remain between the political groups with left-of-centre groups fearing that the package is too closely focused on austerity, to the detriment of growth and employment.
Story originally published on 26 September 2011
Economic governance: Parliament seals its position ahead of European Council
The six rapporteurs: (L-R) Elisa Ferreira, Diogo Feio, Vicky Ford, Sylvie Goulard, Corien Wortmann-Kool, Carl Haglund
The EP plenary adopted its position on the economic governance six-pack on 23 June 2011, insisting on a number of new rules which give more ambition and clout to the Commission's original proposals. More transparency, stronger automatic warnings and sanctions as well as new fines are all part of Parliament's position, although left-of-centre groups argued that this represents too much austerity. Negotiations with the Council continued with the aim of settling everything by July 2011.
Parts of the package, particularly those dealing with strengthening of the stability and growth pact, went through Parliament on 23 June 2011 with slim margins, with the S&D, Greens/EFA and GUE/NGL groups voting against because of what they considered to be an excessive focus on fiscal control with little room for continuing vital investment needed for long-term growth and employment. The texts dealing with preventing macro-economic imbalances (overheating economies) garnered significant majorities.
The adopted texts now provide finance ministers and heads of state, ahead of the European Council of 23-24 June, with an official position of the EP as a whole. This position will form the backbone of the talks between MEPs and Member States, which are set to continue in earnest in order to reach a final deal as soon as possible. Parliament held back from a final procedural vote on 23 June 2011, precisely to allow time for further negotiation. MEPs could take that final vote in July, provided a deal has been hammered out with Council.
Important points emerging from the vote
The adopted texts contain a range of improvements extracted by MEPs during the latest negotiation session concluded with the Hungarian presidency. They do not include Ecofin's proposals made on 20 June 2011, deemed insufficient by the rapporteurs. Among the new points are:
Increased use of reversed qualified majority voting (RQMV) to make warnings and sanctions more automatic. This is particularly the case regarding the declaration that a Member State has taken no corrective action to remedy identified macroeconomic imbalances.
More transparency by making public more texts and discussions than previously envisaged. Also through the involvement of the EP and national parliaments in holding Member States to account.
Codification of the European semester into the legal texts, thereby giving legal weight to this procedure.
Increased powers for the Commission through requiring more information to be supplied to it than previously envisaged and through surveillance missions to Member States.
A new fine (0.5% GDP) for fraudulent statistics with regard to data on deficits and debt.
An interest bearing deposit sanction (0.1% GDP) in the event of a Member State not acting upon recommendations to rectify a macroeconomic imbalance.
Increased independence of statistical bodies.
More detail on indicators to be used for checking for macroeconomic imbalances to ensure that the Commission does not only look at pure economic indicators but also keeps the social dimension in mind.
Safeguarding of social bargaining processes and wage setting agreements.
Revision clause on Eurobonds (Eurosecurities). By the end of 2011 Commission to prepare a report and possibly legislative proposals.
Pending issues also in the six-pack adopted in plenary
Although there is as yet no firm agreement with Member States on the following points, they also feature in the texts adopted on 23 June 2011 by MEPs:
No agreement yet on automatically issuing declarations to Member States which disregard Commission warnings on expenditure overshoots. This automaticity is provided in the adopted texts since it is considered as the door to imposing sanctions and therefore can provide a real incentive to a country to rectify its situation. The inserted clause reduces the power of the Deauville deal coined by France and Germany to keep a firm grip on Commission assessments of non-compliance.
Hearing of finance ministers by the EP. The drafting proposed by the plenary would see the EP "offer the opportunity to the Member State concerned (...) to participate in an exchange of views".
A reference to the need to look at high surplus current account countries (like Germany) as well as countries with deficit current accounts (high import countries) when evaluating the causes of a macroeonomic imbalance.
Results of votes
Prudent fiscal policy and economic policy coordination (Wortmann-Kool report): 333 in favour/303 against/26 abstentions
Speeding up and clarifying the implementation of the excessive deficit procedure (Feio report): 339/304
Sanctions related to breaches of the stability and growth pact rules (Goulard report): 336/269/58
Preventing and correcting macroeconomic imbalances (Ferreira report): 551/88/29
Sanctions related to macroeconomic imbalances (Haglund report): 368/80/209
Standards for national budgetary frameworks (Ford report): 468/156/48
Procedure: Codecision & Consultation
Press release originally published on 23 June 2011
Preventing, fixing macro-economic imbalances
Demonstration May 27, 2011 in front of the Greek Parliament against a new austerity package©BELGA/AFP/A.Messinis
The current economic and financial crisis can be explained partly by economic imbalances between Member States and within the private sector. To prevent and correct those imbalances at an earlier stage, Parliament proposes a new early warning mechanism as part of the package on economic governance. We asked some MEPs to explain further.
Why does it matter if member states' economies differ?
"Given that we share the same currency, if we end up in a situation in which we have social imbalances in one country, it will impact everyone's economy," Belgian Green Philippe Lamberts said.
Greek GUE/NGL member Nikolaos Chountis notes "when you are a member of an economic and monetary union, which faces huge structural problems, every macroeconomic imbalance (either surplus or deficit), implies extreme socioeconomic inequalities. For example it is employees in the peripheral countries, who are affected by the austerity measures, and workers in Germany, who have had to deal, for decades now, with salary stagnation."
But are those imbalances to blame for the current crisis in the euro-zone?
"No single factor can be seen as the cause for the crisis, but the macroeconomic imbalances in member states have contributed to the poor state of public finances in certain countries," according to Carl Haglund, who drafted the report on enforcement measures to correct excessive macroeconomic imbalances in the euro area. "For example, Portugal has struggled with low competitiveness for years and this has contributed to the situation the country is in today. In other countries the roots of the problems can be found in irresponsible lending and unsustainable public finances."
"The crisis results from many factors: housing bubbles in Ireland and Spain; divergences in productivity, for example between Germany and Greece. Labour costs are just a small part of the picture but played a big role for the Germany’s surpluses," said Mr Lamberts.
"Constant monitoring of different indicators of macroeconomic development in the member states, such as house prices, export trends, public and private debt levels would be helpful," said Italian Christian Democrat Herbert Dorfmann. "We will be able to see if something is going wrong."
Mr Haglund sees the surveillance framework "as a tool for the future, aiming at reversing problematic trends before they lead to great economic difficulties. Rightly-targeted measures can prevent imbalances or reverse unsustainable trends."
Elisa Ferreira, who is guiding the report on the prevention and correction of macroeconomic imbalances through the EP, said, "When the Commission assesses a country's performance it must take into account social factors such as the level of unemployment and investment in education."
"Requiring member states to address their macroeconomic imbalances is not about imposing measures that hurt countries or their citizens and punishing those already under a lot of pressure," said Mr Haglund. "It is more harmful if excessive macroeconomic imbalances are not dealt with, as they can have a drastic effect on the economy as a whole."
What about countries with big surpluses like Finland or Germany?
Countries with current account surpluses must also be included in the checks on economic stresses between countries, Ms Ferreira said. "These countries need to be closely monitored because their surpluses often reflect weaknesses in domestic demand."
Mr Lamberts said, "we can prevent such imbalances by making sure that productivity and development fall more into line between member states, but also in the way wages and power are distributed. In Germany, the price of labour has been kept artificially low. Much of the surplus has been produced at the expense of workers."
"We have to recognise that we are collectively responsible, in different ways, to different extents, but no one can claim to be perfect and say that it is all someone else's fault," he added.
Economics committee chair on economic governance package: big shock for Council
While member states are trying to fix the crisis in some euro-zone countries, Parliament is already focusing on preventing this happening in the future. It is focusing on a package of measures to better monitor member state budgets and deficits and measures to determine and repair imbalances between EU economies. We put a few questions on the economic governance package to Economics Committee Chair Sharon Bowles, who is currently negotiating with member states, ahead of a vote in plenary in June 2011.
What does Parliament want to achieve with this package?
Most important is the transparency issue, which also means the accountability of the member states. We want to apply reversed qualified majority voting (Council would have to vote to stop measures being imposed on members that do not correctly apply Stability and Growth Pact rules rather than vote in favour, making it easier to get the measures approved) as the normal process for economic governance measures.
The European Central Bank agrees with us on this, wanting to increase the automaticity of decisions. The reason is simple; we do not trust the Council because in the past the bigger member states like France and Germany have not applied the rules. We want to be sure this cannot happen again in the future.
Then there is the issue of the fines. They are important, although we are not fond of countries that are already in trouble needing to pay a fine. Our preference is that when a country is not doing well, the situation is fixed at an earlier stage, but if action is not taken after the need is clearly indicated, fines are the ultimate sanction. Where fines are applied we would rather they were put to a common cause like the European Investment Bank than given to better off member states.
It is also very important to ensure the professional independence of statistics and audits about a country's financial situation.
How important is the transparency issue?
Very important. Information relating to off-balance sheet as well as on-balance sheet exposures is necessary. Furthermore, people need to know what is going on in their own country and in Council, especially if some kind of action or recommendation that might affect them is likely. We want the member states, their parliaments and their citizens to have ownership of this project of budgetary cooperation.
Isn't there a danger that austerity measures will hinder growth and recovery?
The package does not prescribe austerity, but that is a consequence if large fiscal adjustments have to be made. This is a big part of the debate and the area where there is a difference of opinion in the Parliament. However, all reports are about stimulation and growth which is why we are pushing for the inclusion of the 2020 strategy in all the factors that are taken into consideration. The majority in the Parliament takes the view that there is enough flexibility in the Stability and Growth Pact for structural reforms, but to discount all investment that might reduce expenditure in the future from the balance sheet is too uncertain.
Are imbalances to blame for the current crisis in the euro-zone?
Well, the imbalances have not helped. In the future, this is something we need to be able to address. The countries that have a large surplus have some responsibility through the effect on the economy and interest rate decisions or through their bank lending and investment policies in the countries that are now in trouble. That is why this not just a problem for the countries that are in trouble. We are all in this together and have to find solutions.
Can member states claim the political groups in the EP cancel each other out?
No, the vote for the package in committee was electronic so we know what the majority was for every single amendment and in most things we were together. Where we did differ, the majority was still substantial, not marginal, and that is the basis of our mandate for negotiating. The Council is in the same position; they do not have unanimity either.
What do you hope Member States have learnt since the tough negotiations with the EP on the financial supervision package?
Well, we have had co-decision on financial services for many years and have always had battles. What is new here is that we have co-decision in an area of budgetary surveillance. It was perhaps a bit of a shock for the Council to realise we have a role. However, they changed the Treaty and gave us this role. In fact in this package, there are 4 legislative proposals for which we have co-decision. Two are not co-decision but we are in the position to sell this to the Council as a package. So we want the Council to consider our point of view for the reports of Ford and Ferreira as well. They need to negotiate with us on the package as a whole.
Do you expect an agreement with Council before summer?
I certainly hope so. We have already been through all the proposals once in trialogue so we have started to work out where we are close and where we differ. Drafting suggestions are already being exchanged.
You could say we have divided the issues into the good, the bad and the ugly. The good are where we agree already, the bad where we can find a compromise and the ugly where we are far apart and maybe we will need to give in on some points and the Council on others. The committee gave us a clear mandate to try to get a first reading agreement. However, we do not want a deal at any cost.
EP committee wants stricter adherence to debt, deficit rules
The vote was tight on 19 April 2011 when the Economics Committee considered the economic governance package. The Parliament wants to give the European Commission a stronger role in controlling member states that break EU rules on debts and deficits. However, some MEPs were concerned that tougher rules on debt could limit investment and jeopardise economic growth.
We asked the MEPs dealing with the proposals on the reform of the Stability and Growth Pact to explain further.
What problems do high deficits and debt cause?
"Problems with high deficits and debts can easily escalate. When concerns arise that the country may not be able to repay its debt, financing costs increase," British Conservative Vicky Ford, who drafted the report on budgetary surveillance, explained. "This is an even bigger concern for countries in a common currency, like the euro. Bound by a common interest rate, Greece, for example, cannot devalue its currency to regain some competitiveness, or seek to inflate away its debt burden."
"History has recently shown us that the member states with higher growth rates and the best performances are also the ones with the lowest deficit and debt," said. Diogo Feio, the Portuguese draftsman on the excessive deficit procedure.
Why didn't the old rules for the deficit procedure work?
Dutch Christian Democrat Corien Wortmann-Kool, responsible for steering the proposals on the coordination of economic policies through the EP, said, "it actually went wrong in 2003 when France and Germany violated the budget rules, but the Council accepted the situation. So, later it was difficult to impose discipline on other countries."
Won't austerity measures endanger growth and hurt the economy?
"You can have austerity measures in some fields and not cut the spending that is necessary for the future. There must be a fair burden of measures; they need to be shared fairly between rich and poor," French Liberal Sylvie Goulard, the rapporteur for budgetary surveillance in the euro area, said.
"The public debt is a millstone around the neck of members. If we don't solve this, it will be a heavy burden for future generations. The interest that needs to be paid is putting a brake on economic growth. Reducing it will provide financial room for investment, Ms Wortmann-Kool said.
Ms Ford said, "there is certainly a delicate balance to be struck between managing debt levels and promoting growth. However, trying to spend your way out of a crisis is not a miracle solution."
"We fear that only talking about sticks and not talking about carrots is going to ruin countries and the European economy as a whole," said German Socialist Udo Bullmann, who is following the coordination of economic policies for the Socialists. "The Pact as it stands does not distinguish between whether an investment is for today or tomorrow, for instance if a government invests public money in buying weapons or in building a new educational system. Our proposal is that the Commission should distinguish such 'good spending'."
"The purpose of this legislation is not to punish. It is to make clear that rules have to be respected and to have some deterrent sanctions in order to avoid states going too far," said Ms Goulard. "We have to prevent big deviations; we need to intervene at a very early stage."
"Fines are only levied if a country fails to take the required action to redress the situation, not simply because such a situation exists," Ms Ford noted, while Mr Feio said, "We want to create an efficient system that avoids further punishment. We want problems to be spotted early and immediately corrected since the future of the EU lies in the stability and growth of all its members and not just a few."
...by letting transparency do the work
"We need to make peer pressure more efficient. The idea is to have a cross-border public discussion at a point where it is easier to correct something. Peer pressure behind closed doors has simply not worked," Ms Goulard said.
"Reports about missions to the member states should be made public and we need reporting to the European Parliament to have a public debate. This will put some pressure on the countries to comply with the rules," said Ms Wortmann-Kool.
And there are other sanctions like public warnings and recommendations before having recourse to fines, Ms Ford added.
Tough negotiations ahead
"At the current stage we are still in negotiations with the European Commission and the Council and although we still have a long a way to go I believe we will be able to reach a common understanding that will prove adequate for the EU," Mr Feio said.
But Mr Bullmann is less sanguine. "I am totally dissatisfied with what is on the table. The package as it stands at the moment is unjust, ineffective and it is the opposite of what we need to modernise our economies," he said. We will come back with our proposals especially for the Wortmann-Kool report to prevent a pure austerity concept from coming into existence."
Originally published April 2011
Economic governance: MEPs demand tougher sanctions for excessive deficits
- 6 proposals on new economic rules
- aim to curb imbalances, reckless government spending
- 2000 amendments from MEPs
Despite an encouraging, but fragile recovery , MEPs haven't lost sight of the continuing economic and social hardship in the European Union. On 19 April 2011, MEPS from the Economic Committee backed a legislative package introducing tougher sanctions to address the root causes of the crisis: a worrying build-up of economic imbalances within European economies and the propensity of governments to finance spending by getting deeper into debt.
MEPs tabled over 2000 amendments to the six legislative proposals in the European Commission's economic governance package, calling for a tougher regime to deal with spendthrift member states than that proposed by the Commission. The main points are:
the Commission should have a more important role in the surveillance of, and decisions on excessive deficits, vis-à-vis the Council, so that member states have less room for manoeuvre
countries caught cooking their accounts (reporting false statistics on debt etc.) should face a fine of 0.5% of GDP
sanctions for failing to take action on macroeconomic imbalances (0.1% GDP) should kick in earlier, at the first failure to respect recommendations; if failure is persistent, a fine could be increased to 0.3% of GDP
Council votes on imposing deposits and fines should be held in public, except in crisis situations, when decisions can be taken behind closed doors
MEPs also demand that the Commission allow member states to continue making investments that would be beneficial to their long-term health. There is a fear among MEPs that growth and jobs are being left out of the recent legislative packages. Quite a few MEPs have warned that cutting deficits in the face of recession might prolong and deepen it.
The approved texts also give a stronger legal backing to the European economic semester, some elements of the Euro Pact, and the National Reform Programme (NRP) procedures.
Diagnosis: crisis as a consequence of economic imbalances, exploding debt
Two complementary problems are seen as at the root of Europe's economic crisis - reckless government spending and economic imbalances and both can lead to the EU having to step in with emergency loans.
An example of the first case is Greek government spending. To finance spending on wages, investment and social services in excess of tax revenue, the government ran a deficit and borrowed money from banks. When the banks begin to fear loans might not be repaid because of high levels of public debt and recession, they cut back lending and the EU had to step in with emergency loans.
Economic imbalances arise because some countries like Germany have large trade surpluses, while others like Greece and Portugal have large trade deficits. This leads the private sector in countries with a deficit to borrow from countries with a surplus to finance for example a real estate bubble (like those seen in Ireland and Spain). When the bubble bursts, government steps in to save the banks hiking up public debt.
Remedy: curb imbalances, sanction excessive spending
Of the six economic governance proposals, four deal with deficits and debt (reinforcing the existing Stability and Growth Pact) and the other two break new ground, introducing surveillance of macroeconomic imbalances:
strengthening the SGP through more focus on the public debt limit of 60% of gross domestic product. If it is above that, the government has to start reducing it, by 5% a year on average over three years Until now the focus has been mainly on keeping deficits within 3% of GDP. In addition, the aim is to introduce semi-automatic sanctions for countries that fail to meet commitments on debt and deficit. Once proposed, sanctions (of between 0.2-0.5% of GDP) would only be rejected if a majority votes against them - at the moment sanctions require a majority in favour.
curbing imbalances through surveillance of, as yet undecided, national indicators of imbalances and recommendations of action to reduce them. There would be sanctions for countries that failed to comply.
ECB looking to EP for stricter procedures
The European Central Bank is counting on the EP to back stricter procedures on debt and deficits because not all EU countries are strongly in favour of a stronger role for the Commission and automatic sanctions.
The story was originally published on 26 April 2011