Towards enhanced economic and financial governance in the EUMarch 6, 2012 - nr.19
Final considerations and recommendations for enhanced economic and financial governance in the EU
The euro crisis has forced European leaders to try and strengthen the foundations of economic and financial governance in the EU – substantively, procedurally and institutionally. However, governance remains fragmentary and the tension between the Community method and the intergovernmental approach makes it difficult to arrive at coherent and effective policies. But since the EU treaties simply do not provide for emergency assistance, there has been no choice but to pursue an intergovernmental route.
We have seen above that the Community method has allowed considerable progress to be made in the areas of bank supervision, financial regulation, enhanced budget discipline and economic policy coordination. In all these fields, the European Commission has been able to exercise its right of initiative again and co-legislation by the Council and Parliament has proved effective. The European semester should in any event facilitate coordinated action on macroeconomic, fiscal and structural policy. The supplementary agenda for euro countries in the Euro Plus Pact is at least a first step towards a more coordinated approach to structural reforms.
The management of the sovereign debt crisis has been fragmentary and wavering. There are too many captains on the ship. The division of responsibility is unclear. The key role of the European Council/Euro Summit is undisputed, as is the importance of Franco-German cooperation. However, sufficient counterweight needs to be provided; in this regard, the UK’s decision to drop out is regrettable. On the other hand, Italy’s return (under the Monti government) to the heart of European cooperation is a positive development. Nevertheless, the top-down approach clearly has its limitations. The proliferation of European Councils and Euro Summits, whose decisions are not implemented promptly, if at all, does not increase confidence in EU governance. Twice-yearly Euro Summits and monthly consultations between the Euro Summit President, European Commission President and Eurogroup President may be useful, but they will not result in essential changes to the decision-making process. Strengthening the administrative structures of the Council Secretariat and the EWG involves a risk of duplication regarding Commission services and the role of the ECB, where sufficient expertise is already present.
In the light of the foregoing, the AIV has arrived at the following final considerations and recommendations:
- The AIV believes that for the time being existing treaties provide sufficient scope for enhancing economic and financial governance in the EU and laying the basis for a crisisproof eurozone. This requires all countries concerned to show discipline, commitment to the common interest and a certain degree of solidarity to mitigate the most painful elements of adjustment processes and jointly create new prospects for restoring growth and jobs.
- The AIV is of the opinion that the Community method offers the best safeguards for efficient and sound policy and that the leakage of powers to parallel intergovernmental structures is not in the Netherlands’ interest.
- The AIV believes that the initiating role of the European Commission needs strengthening and that the Commissioner for the euro should perform a pivotal role in the EU’s economic and financial governance. His presence at Euro Summits and European Councils – when economic and financial issues are being discussed – could be a first step. His chairing of the Eurogroup could also be considered.
- The AIV is of the opinion that discussions should begin now on making European supervision of banks more robust, including a European crisis resolution mechanism. These follow-up steps could be explored in a new De Larosière group.
- The AIV believes that in addition to enhanced budget discipline, which is already clearly beginning to take shape, high priority should be given to structural measures to tackle macroeconomic imbalances and to providing growth prospects for those countries which now need to radically reform their public finances.
- The AIV advises the government and parliament to anchor the European semester firmly in national policy processes, especially as regards budget preparation and adoption.
- For countries that are under enhanced supervision and are dependent on financial assistance, the resources available from Structural and Cohesion Funds should be used to support the structural adjustment programmes these countries are pursuing.
- As far as crisis management is concerned, the refinancing of Italy’s debt at an affordable interest rate should be given top priority in the short term. The emergency fund’s firepower should be increased. The AIV believes that the EFSF and ESM should in any event be used in tandem in 2012.
- Finally, the AIV believes that the necessary structural solutions demand greater interdependence and a more far-reaching redistribution of powers between national and EU level, which cannot be accomplished without strengthening political and public support. To that end, a strategy is required that is geared mainly to increasing the democratic legitimacy of EU decision-making. To secure long-term acceptance of the European project, it is necessary not only to offer effective solutions to major policy issues but also to enable the public to influence the direction of the integration process as a whole. National parliaments and political parties have a special responsibility in this regard.
Government response to the AIV advisory letter ‘Towards Enhanced Economic and Financial Governance in the EU’
In December 2011, the Advisory Council on International Affairs (AIV) decided on its own initiative to issue an advisory letter, entitled ‘Towards Enhanced Economic and Financial Governance in the EU’, which examines the successive bank and sovereign debt crises in Europe. The government has taken cognisance of this letter. The AIV’s aim was to put forward several ideas on how to strengthen economic and financial governance in the European Union. The letter makes a valuable contribution to the discussion on this subject. In this response, the government examines the letter’s main recommendations and conclusions.
The AIV provides a satisfactory description of how the debt crisis developed. It largely concurs with the picture presented by the government in its letter to parliament of 7 September 2011 (Parliamentary Paper 21501-07, no. 839). The eurozone consists of countries with different economic and financial positions and is vulnerable because some countries have both a low growth potential and large deficits, debts and macroeconomic imbalances. Like the AIV, the government believes that ensuring short-term stability in the eurozone is essential. At the same time, further reforms are needed to minimise the risk of a recurrence of the crisis. In addition, sustainable economic growth and job creation must be stimulated. At present, the government is actively pursuing these aims with our European partners (cf. the letters on growth of October 2011 and February 2012 and the European Council conclusions of 1 and 2 March 2012).
Such an approach, in which responsibilities are assigned where they belong and compliance with agreements is guaranteed, is a prerequisite for stabilising the eurozone. The government attaches great importance to this, given the major benefits the internal market and the euro have brought for the Netherlands. Thanks to the internal market, Dutch GDP is 4 to 6% higher than it would otherwise be and this figure could eventually reach 17%.1 The single currency contributes to the internal market by eliminating exchange-rate risks, rendering competitive devaluations impossible and promoting the integration of the financial markets. Stabilising the eurozone will bolster the internal market and, more generally, our prosperity.
Management of the sovereign debt crisis
The AIV describes the crisis management measures taken in response to the sovereign debt crisis since the bankruptcy of Greece became an evident threat as ‘too little too late’. The government believes that the various bailout packages and funds, the improvements in their deployability, and the large number of reforms carried out in various European countries have proved to be a robust response to the eurozone’s problems. It also believes that the groundwork laid by the recently approved second package for Greece offers that country a positive outlook provided the measures are rigorously implemented, and improves the prospect of restoring confidence and financial stability in the eurozone. Calm is steadily returning to the financial markets and medium-term forecasts seem to indicate that the tide has turned. For instance, the new government in Italy seems to be regaining the trust of the market, and this of course is not entirely unconnected to the unconventional policy measures adopted by the ECB in the recent past. The government has always stressed that it is essential for countries in difficulties to take the measures necessary to retain the confidence of the markets. However, this does not mean that we can now rest on our laurels. As is well known, more far-reaching measures need to be taken in nearly all European countries; vigilance remains vital. Moreover, risks still exist, especially if vulnerable countries do not implement agreed reforms quickly enough, or fail to implement them at all.
The government agrees with the AIV’s recommendation that increasing the combined borrowing ceiling of the EFSF/ESM bailout funds could help consolidate the relative calm that has been discernible recently. The European Council of 1 and 2 March 2012 decided to speed up the contribution of capital to the ESM and later in March the finance ministers will discuss a possible increase in the borrowing ceiling, which the government does not oppose.
The government would like to stress that on 8 and 9 December 2011 heads of state and government laid down in the Treaty establishing the ESM how private sector involvement (PSI) is to be given shape. It was not decided, as the AIV maintains, that ex ante PSI – as in the second Greek loan programme – would no longer take place. The IMF’s practices will be strictly followed with regard to PSI, as the AIV rightly says. This criterion is reflected in the ESM Treaty. The government has consistently supported this because it is in line with the IMF’s current international practices. The IMF determines the gravity of the debt problem by means of a debt sustainability analysis. In the event of solvency problems and unsustainable debt, involvement of, inter alia, the private sector is necessary to restore debt sustainability. The declaration by heads of state and government of 8 and 9 December 2011 pointed out that Greece was a unique and exceptional case. The government would like to highlight this because it is exceptional for a euro country and high-income country to experience such a serious solvency problem.
The government shares the AIV’s opinion that eurobonds cannot solve the present crisis. In the government’s view, eurobonds are only possible as the final step towards EMU. Crucial conditions must first be laid down before they can be introduced. For more information, see, inter alia, the letter from the Minister of Finance to the House of Representatives of 6 October 2011 (Parliamentary Paper 21501-07, no. 833).
The AIV states that with the establishment of the European semester and the Euro Plus Pact, and above all through the adoption by the Council and Parliament of the ‘Six-Pack’ of economic governance measures, the EU has created a much stronger framework for coordinating national economic and fiscal policy and for enhanced budget discipline. The government agrees with this.
In response to the AIV’s recommendation that the European semester should be properly anchored in national policy processes, the government – in accordance with the motion submitted by Gerard Schouw MP (Parliamentary Paper 21501-20, no. 537) – will indicate in the ministerial budget documents how it is dealing with recommendations arising from the European semester that are aimed specifically at the Netherlands. The government would also point to the additional options offered by the recently signed Treaty on Stability, Coordination and Governance in the Economic and Monetary Union and the negotiations that will begin soon with the European Parliament on the ‘Two-Pack’ (two Commission proposals for stricter surveillance of national budgets and of euro countries in an excessive deficit procedure or in financial difficulties, based on article 136 of the Treaty on the Functioning of the European Union). Many of the ideas the government proposed in September 2011 can be found in the economic governance package that is now on the table. The independence of the Commissioner for Economic and Monetary Affairs and the Euro is guaranteed within the College of Commissioners. The government proposed greater independence for the Commission with respect to the Council, and this has largely been realised because decision-making under the Stability and Growth Pact (SGP) will henceforth be more automatic (reversed qualified majority voting).
It has also been agreed in the Treaty on Stability, Coordination and Governance in the EMU that the European Court of Justice can assess whether the principle of structural budget balance has been adequately transposed into national legislation. The Two-Pack proposes including the obligation that member states should underpin national budgets with independent macroeconomic forecasts. Another proposal is that the Commission should have the right to propose adjustments to draft national budgets if it thinks that euro countries do not meet the requirements of the SGP. The government is also calling for the possibility of freezing EU funds in the event of non-compliance with SGP rules. The Commission has already proposed this sanction and it forms part of the current negotiations on the multiannual financial framework.
Efforts to strengthen fiscal discipline are beginning to bear fruit, as shown by the way in which the Commission is actively enforcing the new, more stringent SGP agreements. At the Commission’s request, several countries have made adjustments to their national budgets in recent months; the Commission found the measures so far taken by Hungary to redress its excessive deficit to be unsatisfactory. After the Council expressed its agreement, the Commission proposed suspending part of the cohesion funds earmarked for Hungary for 2013 until the country puts its fiscal affairs in order. The ECOFIN Council of 13 March 2012 ratified this proposal. This will give Hungary a significant incentive to make satisfactory structural adjustments.
The AIV warns of the ‘leakage’ of powers to intergovernmental consultative structures. The government acknowledges the great importance of using existing EU institutions and structures to reinforce fiscal discipline. A significant example of this is strengthening the position of the Commissioner for the euro, which the government advocated and which has now largely been implemented. With a view to safeguarding the Commissioner’s independence, the government does not support the AIV’s recommendation for the Commissioner for the euro to chair the Eurogroup.
As regards the Treaty on Stability, Coordination and Governance in the EMU, the government would have preferred agreements to be adopted by all 27 member states. However, it was impossible to reach a consensus at the European Council of 9 December 2011. The government therefore sought to ensure that the treaty was in line with the EU treaties as far as possible and that these were fully respected. The treaty contains the necessary guarantees for this purpose. Several agreements in this treaty will be further developed in EU legislation. The parties also agreed that the treaty’s contents should be included in the EU’s legal framework within five years.
Economic policy coordination
In its advisory letter, the AIV highlights the need to strengthen the growth potential of the EU and its member states. It also points out that high priority should be given to structural measures to tackle macroeconomic imbalances. This is in keeping with the government’s views, as laid down, for example, in the letter to parliament from the Minister of Economic Affairs, Agriculture and Innovation and the Minister of Finance of 17 October 2011 on strengthening Europe’s economic stability and growth potential (Letter to parliament 21501-07, no. 847). The government shares the AIV’s view that serious efforts should be made to prevent and mitigate excessive macroeconomic imbalances. It believes that a strict, independent role for the European Commission is very important in this regard. The initial steps are currently being taken. For instance, the first scoreboard for determining macroeconomic developments has now been published, leading to the Commission’s announcement of in-depth investigations of several member states. The Commission and the ECOFIN Council will provide more detailed follow-up in the coming months.
The government is committed to strengthening Europe’s growth potential (see also the above-mentioned letters on growth). The AIV rightly points out that improving the functioning of the internal market and making better use of the EU budget are key tools for achieving this goal. In this regard, it calls for better use of the EU budget to promote recovery in countries in difficulties. This is in keeping with the Netherlands’ position; we will continue to advocate improved use of the EU budget. The government believes that the use of structural funds should be geared more strongly to promoting economic growth, jobs and competitiveness. Funds should be used where they are most needed and have the most effect. An example is the recent initiative by Commission President José Manuel Barroso to use existing structural funds to support employment projects and small and medium-sized enterprises. Barroso launched his idea at the informal European Council on 30 January 2012. He has presented the initiative to member states with the highest youth unemployment rate (Greece, Lithuania, Italy, Ireland, Latvia, Portugal, Slovakia and Spain). The proposal is that the Commission and these member states set up action teams to draw up plans for using structural funds to combat youth unemployment. This relates to existing earmarked funds, which should be used in a more targeted manner to reduce youth unemployment. As long as this does not lead to a budget increase, the Netherlands believes it is an excellent way of using the EU budget to help solve the crisis.
Banking supervision and financial regulation
The AIV regards the measures already taken at EU and national level as merely the first step towards effective European supervision. As well as improving fiscal discipline and economic policy, the government agrees with the AIV that strengthening European supervision of the financial sector is very important.
Like the Netherlands Bureau for Economic Policy Analysis (CPB) before it,2 the AIV concludes that efforts should be made to create a European deposit guarantee system. In the letter to parliament of 7 September 2011, the government wrote that, in addition to harmonising European supervision, a European crisis and resolution framework should be created. However, a fully-fledged framework (including a European deposit guarantee system) is only possible if all countries ensure that their banks have been capitalised to the same high degree. It is also very important for the European crisis management framework to ensure that the costs of a possible recapitalisation or, in the worst-case scenario, liquidation of a financial enterprise are borne as far as possible by private parties, so that bank problems no longer pose a threat to public finances. The European Commission has announced that it will present a proposal for a harmonised European crisis management framework in the near future. The government’s aim is that the European supervisory authority should also be assigned an important role in order to consolidate the level playing field in the area of crisis management.
In 2013 the European Commission will conclude an evaluation of the European supervisory framework. The results will play a major role in the government’s decision on whether the tasks, powers and organisation of the European supervisory authorities should be modified. The government will play an active part in this evaluation process, taking recent experiences into account. The AIV believes that discussions should begin on a more robust system for European supervision of banks, including a European resolution mechanism. The government agrees with the AIV that these follow-up steps could be explored by a new ‘De Larosière Group’. The findings of the evaluation of the European supervisory framework in 2013 will have an important bearing on the government’s position.
The AIV is critical of Basel III minimums being set as maximums, as proposed by the Commission, and rightly says that there should be more scope for setting higher capital requirements for systemic banks in certain areas. This is in line with the Netherlands’ position in the negotiations; it calls for partial harmonisation of maximums with certain specific exceptions for instruments designed to cover systemic risk and macro-prudential risks nationally.
Strengthening public support
The government agrees with the AIV that strengthening public support is essential for the sustainability of EMU and the EU itself. The AIV therefore believes that the efforts to strengthen political and public support should be an integral part of any measures taken. The government notes that the AIV does not make specific recommendations in this regard and welcomes its announcement that it will return to this issue in its advisory report on the European Parliament, which is in preparation. It is precisely with this point in mind that, in its call for a stronger EMU, the government has assigned a central role to the Commission, scrutinised by the European Parliament. The government has also held very frequent consultations with the House of Representatives on the Netherlands’ stance on this issue. A detailed debate took place on the support packages for Greece, both in the House and in the media. The government expects that an extensive public debate will also take place on the Treaty on Stability, Coordination and Governance in the EMU, which will be presented to parliament for approval. Confidence in the EU cannot be taken for granted. In this context, it is important for the EU to adhere to its own agreements, and preferably to confine itself to those areas where more far-reaching cooperation between member states has obvious added value and effectively helps to promote Dutch interests. A greater appeal to solidarity between member states should go hand in hand with stronger mutual trust in the functioning of a European area of freedom, security and justice. In short, solidarity must go hand in hand with solidity. It is in this context that the government advocates more active supervision of the development of the rule in law in the EU (mindful, inter alia, of the motion by MPs Klaas Dijkhoff and Henk Jan Ormel, Parliamentary Paper 33 001, no. 10).