I am accompanied by my colleagues Mr. Ronnie Downes, Mr. Joe Kirwan and Ms Brenda McGovern. On behalf of myself and my colleagues, I thank the committee for its invitation to the Minister, who sends his apologies for not being present. We welcome this opportunity to brief the committee on the Commission's legislative proposals to strengthen economic governance in the European Union.
We supplied the committee with an information note on 22 October 2010 and earlier in the year we appeared before the committee in respect of related proposals. I will make some general remarks before addressing the various specific measures of the various proposals.
The global economic crisis over the past two years has led all policymakers to review and revise the framework used to guide fiscal policy. In response to the deterioration in the public finances throughout the Union, member states and the Commission have determined to reform the operation of economic governance in Europe and to strengthen existing rules. With this in mind, in March 2010 the European Council appointed President Van Rompuy to lead a task force, consisting of Finance Ministers, the Commission and the European Central Bank. The task force submitted its final report at the October meeting of the European Council. As part of the process, the Commission published legislative proposals on 29 September 2010. Consultation with member states is now under way and it is expected that the final Commission proposals will reflect the outcome of the Council's consideration of the task force recommendations which, while largely reflective of the Commission proposals, differ from them in some respects.
An example of an area of difference, where further discussions are needed, is an appropriate quantitative reference for debt reduction. The Commission's legislative proposals are designed to strengthen the Stability and Growth Pact, the EU regulatory framework for member states' public finances, and to broaden the scope of economic surveillance beyond the budgetary position. The proposals aim to achieve this by enhancing the importance of the debt criteria, introducing sanctions, including financial sanctions, for euro area member states in the case of persistent non-compliance with the SGP, and a tiered range of procedures and sanctions designed to prevent the emergence of macro-economic imbalances in a member state which, if left uncorrected, could ultimately jeopardise the functioning of the EU and the euro area.
Specifically, the legislative package consists of six proposals. Five of these are in the form of draft regulations and one is in the form of a draft directive. These proposals have yet to be considered in any significant detail by member states, but I will now briefly outline each for the committee.
COM (2010) 526, a draft regulation on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies, proposes amendments to the preventive arm of the SGP. The preventive arm requires that member states pursue a medium-term budgetary objective that allows them to have a safety margin with respect to the 3% of GDP deficit reference value and allows room for budgetary manoeuvre. This entails ensuring that the growth rate of government expenditure should not normally exceed a prudent medium-term growth rate of GDP unless matched by discretionary increases in government revenues and unless discretionary revenue reductions are compensated by reductions in expenditure.
The purpose here is to provide a benchmark against which countries' fiscal plans will be examined. In terms of enforcement, the regulation envisages a warning being addressed to the member state concerned in a case of significant deviation from prudent fiscal policy. Where a significant deviation persists, a Council recommendation would require corrective measures to be taken. Additional enforcement measures in the form of financial sanctions are envisaged for the euro area.
COM (2010) 524, the focus of which is the draft regulation on the effective enforcement of budgetary surveillance in the euro area, is to provide for enforcement measures in the euro area arising from the amendments to the operation of the Stability and Growth Pact contained in the other draft regulations. Under the preventive arm, the regulation makes provision for an interest-bearing deposit to be temporarily imposed on a euro area member state that is making insufficient progress with budgetary consolidation. This would arise, where necessary, following the issue of an early warning by the Commission and a subsequent recommendation from the Council.
Under the corrective arm, financial sanctions would take the form of an obligation to lodge a non-interest bearing deposit linked to a Council decision establishing the existence of an excessive deficit and the obligation to pay a fine in the event of non-compliance with a Council recommendation to correct an excessive deficit. These sanctions would be imposed irrespective of whether an interest-bearing deposit had previously been imposed on the member state concerned. Under the Commission proposals the above mentioned financial sanctions are 0.2% of GDP in each case. To reduce discretion in enforcement, the "reverse voting" mechanism by qualified majority is envisaged for imposing these sanctions.
The proposals envisage the possibility for the Council to reduce or cancel the sanctions on the basis of a Commission proposal following a reasoned request by the member state concerned. In the corrective part, the Commission would also be able to propose to reduce the size of a sanction or to cancel it on grounds of exceptional economic circumstances.
In COM (2010) 522 the particular focus of the draft regulation is on speeding up and clarifying the implementation of the excessive deficit procedure to strengthen the SGP rules on budgetary discipline by giving a more prominent role to the level and evolution of debt and overall sustainability. The focus to date has been on the deficit, rather than the debt. The proposal provides for the use of a numerical benchmark for debt reduction where debt levels exceed 60% of GDP, they should be reduced annually by 5% of the excess over the benchmark. The numerical benchmark would be one of a range of factors to be taken into account in the report prepared by the Commission on the excessive deficit procedure. This report would also take account of the quality of national fiscal frameworks, tying in with the proposed directive on national budgetary frameworks.
COM (2010) 527 concerns the draft regulation on the prevention and correction of macro-economic imbalances and sets out a framework for identifying and addressing macro-economic imbalances, including deteriorating competitiveness trends. As such, it complements the country surveillance process provided for under Europe 2020. The new monitoring procedure aims to prevent the occurrence of harmful macro-economic imbalances such as housing bubbles, large current account deficits or excessive overheating in the economy that could jeopardise the functioning of the EU and the euro area. An annual assessment of the risk of macro-economic imbalances and vulnerabilities would be undertaken using an alert mechanism based on a limited number of indicators. In case of actual or potential excessive imbalances, the Commission would conduct an in-depth analysis. In particularly serious cases, an "excessive imbalance position" should be launched by the Council, with a deadline to take a set of policy measures to address the problem.
COM (2010) 525, the final draft regulation by the Commission, further develops the surveillance of macro-economic imbalances. It focuses on enforcement measures to correct excessive macro-economic imbalances in the euro area by proposing financial sanctions in the case of serious and repeated non-compliance by a euro area member state with Council recommendations issued arising from the new surveillance procedure for the prevention of macro-economic imbalances. These would take the form of a yearly fine, until the Council establishes that the member state has taken corrective action to comply with its recommendations. It is proposed that to ensure equal treatment between member states, the proposed fine would be identical for all euro area member states and equal to 0.1% of GDP of the member state concerned in the preceding year.
Directive Commission (2010) 523 is a draft directive on requirements for budgetary frameworks of the member states that sets out detailed rules concerning the characteristics of the budgetary frameworks of the member states that are considered necessary to ensure the effectiveness of the excessive deficit procedure, as provided for under Article 126(14). The proposal sets out minimum requirements for matters relating to accounting and statistics and to macro-economic and budgetary forecasts. It provides that member states should put in place numerical fiscal rules that effectively promote compliance with their respective obligations deriving from the treaty in the area of budgetary policy. Under the directive, member states are required to "establish an effective medium-term budgetary framework providing for the adoption of a fiscal planning horizon of at least three years to ensure that national fiscal planning follows a multiannual fiscal planning perspective". Other provisions deal with the transparency of general government finances and the desired comprehensive scope of budgetary frameworks.
The Commission's proposals envisage that member states will enact the necessary measures to comply with the directive by 31 December 2013 at the latest. It is important to be aware that the Commission's legislative proposals are just that, and will be subject to the normal procedure of consultation and discussion with member states. We will engage positively in this process taking account of Ireland's circumstances and needs.
The Council has set summer 2011 as a target for agreement with the European Parliament on the Commission's legislative proposals. I feel it is worth mentioning in the context of the Commission's legislative proposals, a very significant element in the process of enhancing economic governance in Europe which has already being agreed, is the introduction of the European semester, a reinforced cycle for co-ordination of economic policies with effect from January 2011. We discussed the European semester when we last appeared before the joint committee. Under this it is envisaged that at the start of each year the Commission will publish a growth survey for the European Union including analysis of recent performance and prospective developments at member state level. This will inform subsequent consideration by the ECOFIN Council and the Spring European Council. Based on this work, the Council will identify the main economic challenges facing the EU and provide policy guidance. Taking this on board, member states will submit stability and convergence programme updates for the following year by end-April at the latest. This will not involve submitting the full budget, rather the projections for the budget balance and broad spending and revenue forecasts for the following year. In July, the Commission will issue policy recommendations based on the various considerations that would have been taken by the Council of Ministers in the intervening period. These recommendations will be considered when preparing the annual budget as normal at the end of the year. This will facilitate greater EU ex ante co-ordination of economic policies and discussion of national fiscal policy intentions before they take the form of detailed budgetary proposals. The new arrangements also provide for greater consultation with national parliaments. This process, which we discussed here before, comes into play in 2011.
In terms of where the proposals currently stand, the Commission is aiming for the adoption of their legislative package by summer 2011 and work is ongoing at the various EU level meetings on the outstanding issues. A Council working group has being set up to deal with the Commission's proposals, which will include liaising with the European Parliament.
In terms of their implications, these proposals are very significant in terms of economic governance. The regulations and directive in their current form before consultation with member states have concluded, and would have far reaching implications for all member states. These implications include: more onerous obligations to reduce debt levels; having to satisfy an expenditure rule as a new principle of prudent fiscal policy making; and a broadening of the range of reputational sanctions for failure to meet budgetary obligations.
For the euro area, the proposals provide additionally for financial sanctions in the case of persistent non-compliance with new guidelines on prudent fiscal planning and financial sanctions once deficits exceed 3% of GDP.
Alongside the existing EU oversight of fiscal performance, a new monitoring system in respect of competitiveness issues and structural reforms will aim to prevent the development of harmful macroeconomic imbalances. Euro area countries would be subject to financial sanctions for persistent non-compliance. Member states will also be required to strengthen their budgetary frameworks, for example, fiscal rules to underpin respect of their EU budgetary obligations, ideally on a statutory basis by end-2013.
Before concluding Chairman, if I may make one or two points on the current economic and fiscal landscape at EU level. Events have been evolving rapidly during the last year and it is important to view these proposals as part of the wider developments at EU level. The most important of these developments that has occurred since these proposals were last discussed by the committee is the European stability mechanism. Throughout the current crisis, euro area member states have taken co-ordinated action through the euro area loan facility to Greece, the European financial stabilisation mechanism, EFSM, and the European financial stability facility, EFSF. The focus of recent times is on the need for a more permanent arrangement, as the arrangement for Greece was specific to Greece and the other two arrangements were temporary measures. The committee members will be aware the EU Council will discuss a limited treaty change this week that will be necessary for the introduction of this mechanism. Following this, it is anticipated that Finance Ministers will work on the finer details of the mechanism over the coming months.
The European stability mechanism as it is being termed, will complement the Commission's legislative proposals on reinforced economic governance, as the proposals will focus on prevention and on reducing the probability of a crisis arising in the future, while the mechanism will deal with a crisis if it does occur. Due to the interrelatedness of the proposals and the mechanism it is no harm to bear the mechanism in mind at this point.
The important EU economic policy areas that now need attention are the banking sector, structural reforms that will help economic growth, and fiscal consolidation. The Commission's legislative proposals will help address these important areas. I think we can all agree that the context from when these proposals were published on 29 September 2010 and now has changed substantially, not least in Ireland's case. As members are aware there is policy conditionality attached to the package of support we have, with many policies corresponding to the Commission's proposals. Therefore, the implications of the Commission's proposals for Ireland have a somewhat lessened impact than they might have had heretofore.
The key challenges facing Ireland in the coming years are boosting growth, fostering sustainable employment, repairing the banking sector and restoring the public finances to sustainability. One of the factors that will assist in this is the development of a stronger framework for setting fiscal policy. As outlined in the Government's four year plan, a budget advisory council to provide an independent commentary on the Government's budgetary planning, by means of assessing the appropriateness of the budgetary stance and aggregate budgetary targets, will be established in the first half of 2011. It is also envisaged that a fiscal responsibility Bill will be brought forward. The intention is that this will put key reform measures on a statutory basis. Therefore, much of that envisaged by these proposed Commission legislative proposals are measures that are now very timely in an Irish context. Obviously, these are still in draft form, they will have to take on the views of the member states before coming into force. In this regard work will go on in the first number of months of the new year. In that context hearing the views of the committee members will be of assistance in shaping the Irish position.
I thank the Chairman and members for their attention.