Joint Oireachtas Committee on Finance, Public Expenditure & Reform

Joint Committee on Finance, Public Expenditure and Reform Correspondence Item No. 2012/395 Joint Oireachtas Committee on Finance, Public Expenditure & Reform - Wednesday, 14 November, 2012 at 3pm; Committee Room 4.

Scrutiny of European Commission’s Two Draft Regulations Designed to Further Strengthen Budgetary Surveillance in the Euro Area

Opening Statement by Mr Tony Gallagher, Department of Finance

Thank you Chairman, I am accompanied today by my colleagues Mr John Palmer, Mr Feargal Ó Brolcháin and Ms Alice Smith. I wish to thank the Sub-Committee for its invitation to the Department to brief you on the Commission’s two legislative proposals to strengthen further economic governance in the euro area which are generally described as the “Two- Pack”.

We supplied the committee with information notes on the two draft Regulations on 27 January last, which we have now updated, but before turning to the specifics of the Regulations, I would like to make some general comments on them.

Background

The global financial and economic crisis that emerged in 2008 and the ensuing and associated fiscal crisis that continues to threaten instability for the European Union - and particularly for the euro area - have exposed

1 shortcomings in the governance of the Economic and Monetary Union. These events have therefore highlighted the need for the EU and the euro area to introduce a wide range of measures to reform the fiscal and economic governance system that was in place at the outset of the crisis.

The previous governance system was inadequate in that it was too narrow and shallow in its scope and did not lead to emerging problems and imbalances being identified in time to head off the crisis or even to have lessened its effects.

Although one could argue that the Two-Pack proposals are coming rather late in the day, the justification for them is very strong. Firstly, in the short term, these measures will contribute to restoring global confidence in the economic stability of the euro area and of the EU as a whole. They will also make it difficult in the years ahead for the government of any euro area Member State to adopt policies similar to those that led us to the crisis without the dangers inherent in those policies being identified at an early stage and measures taken to challenge and reverse them.

The main reform process began with Europe 2020, the EU’s growth strategy for the decade which aims to make the EU a smart, sustainable and inclusive economy. This was followed by the European Semester, to which was added the Euro Plus Pact and the so-called Six-Pack which came into effect on 13 December 2011. The Six-Pack is designed to reform and strengthen the Stability and Growth Pact and to introduce new macroeconomic surveillance. The Two-Pack, which we are discussing here today, is a further step in this process and is, to a great extent, a natural extension of the

2 measures contained in the Six-Pack. It is applicable to euro area member states only.

It is important to keep in mind that the Two-Pack is part of a larger package of measures to enhance budgetary and fiscal coordination within Europe. It has become increasingly clear from the high-level debates taking place internationally that such measures cannot be divorced from the other essential building blocks on which a genuine Economic and Monetary Union should be based such as an integrated financial framework and a banking union.

The Two-Pack

Having reached agreement on the Six-Pack of legislative measures with the European Parliament and European Council in September and October 2011, respectively, the Commission unveiled two additional pieces of legislation on 23 November 2011. The two draft Regulations - which have become known as the Two-Pack - are aimed at strengthening the existing surveillance mechanisms and promoting further economic integration and convergence in the euro area.

I want to re-emphasise that the Two-Pack measures should be seen as extensions of the measures contained in the Six-Pack.

The first piece of proposed legislation – COM (2011) 821 - is on the monitoring and assessment of draft budgetary plans and on ensuring the correction of excessive deficits. It will apply to all countries in the euro area, with special provisions being made for those which are subject to an excessive deficit procedure (or EDP).

3 This proposed Regulation will require all euro area Member States to present their draft budgetary plans to the EU Commission by 15 October each year. It will also give the Commission the right to assess these draft budgetary plans and, if necessary, to issue an opinion on them. It is also proposed that the Commission will have the power to request that a draft budgetary plan be revised, should it consider it to be seriously non-compliant with the policy obligations laid down in the Stability and Growth Pact. All of this will be done publicly to ensure full transparency. The Regulation also proposes that closer monitoring and reporting requirements for euro area countries in Excessive Deficit Procedure will apply on an ongoing basis throughout the budgetary cycle. Also, euro area Member States will be required to have in place independent bodies to monitor compliance with fiscal rules and to base their budgets on macroeconomic forecasts which are independently produced or endorsed.

The second proposed Regulation – COM (2011) 819 - on the strengthening of economic and budgetary surveillance - sets out explicit rules for enhanced surveillance. It will be applicable in three cases:

1. for Member States facing severe difficulties with regard to their financial stability; 2. for those Member States in receipt of financial assistance on either a precautionary basis or as part of a full-scale assistance programme; and 3. for those Member States that have recently exited from such a programme.

4 The objective of this proposed Regulation - COM (2011) 819 – is to strengthen economic and fiscal surveillance of euro area countries facing or threatened with serious financial instability as well as those which have recently exited an EU/IMF assistance programme. In the case of euro area Member States which are under a financial assistance programme or are facing a serious threat of financial instability, it also aims to ensure that the surveillance process is robust, follows clear procedures and is embedded in EU law. Member States seeking financial assistance will have to produce and comply with a macroeconomic adjustment programme. If necessary, the Council may decide that a Member State which does not comply with this programme, would face financial consequences with regard to disbursements of the financial assistance.

Detailed description Having already briefly sketched out the proposals in each of the two draft Regulations, I will now set these out in more detail as well as setting out the approach Ireland has taken in respect of each of them.

COM (2011) 821 – concerning budgetary surveillance First I will deal with the text of Proposed regulation COM (2011) 821: Draft Regulation of the European Parliament and of the Council on common provisions for monitoring and assessing draft budgetary plans and ensuring the correction of excessive deficit of the Member States in the euro area

5 This draft Regulation introduces stronger monitoring of budgetary policies for euro area countries through additional ex ante monitoring to run alongside the European Semester - which applies to all 27 Member States - and through increased requirements and closer monitoring being placed on those euro area countries in excessive deficit procedure.

Under this Regulation a common budgetary timeline will have to be followed, with Member States being required to publish by, at the latest, 30 April each year their medium-term fiscal plans in accordance with their medium-term budgetary framework, to include the information that has in the past been published in Stability Programme Updates.

The draft budget for the next year as it applies to central government, and the main parameters of the draft budgets for all other sub-sectors, must be published by 15 October, with full budgets adopted by 31 December. Article 5.3 of the draft Regulation effectively requires the same information to be presented in a draft budgetary plan, the content and layout of which will be stipulated by the European Commission. This is to ensure that budgetary information from all euro area Member States will be presented in a common format to the European Commission.

The Regulation also provides that an independent body must be in place in each Member State to monitor compliance with numerical fiscal rules. In addition, all medium-term fiscal plans and draft budgets must be based on macroeconomic forecasts produced or endorsed by an independent body or a body which has functional autonomy from the budgetary authorities.

6 Article 6 of the draft Regulation sets out the framework to apply in terms of the Commission’s assessment of the draft budgetary plans. The Commission will be able to adopt an opinion on these plans, which must be delivered by the end of November at the latest. If it sees a draft budgetary plan as particularly problematic, the Commission can - within two weeks of receiving it - address an opinion to the Member State requesting it to make revisions to the plan.

Other provisions of the draft Regulation include provisions for the closer monitoring of Member States in excessive deficit procedure, which involves enhanced reporting. There are also provisions setting out the procedure to be implemented to require Member States to take corrective action to address excessive deficits and to assess the suitability or effectiveness of those actions.

Ireland, along with other Eurozone countries, agrees with the overall aims of the draft Regulation. However, it is clear that it is likely to have implications for the timing of our budgetary process. It will be a matter for Government to consider how future domestic processes will satisfy the requirements of the Regulation.

However, with regard to the requirement for independent bodies, it should be noted that the Irish Fiscal Advisory Council - which will be established on a statutory basis next month following the enactment of the Fiscal Responsibility Bill - is required already to provide an assessment of the official Spring and Autumn economic and budgetary forecasts set out by the Government.

7 As Ireland is under an EU/IMF Programme, the elements in this draft Regulation which relate to those Member States in excessive deficit procedures do not currently apply.

COM (2011) 819

I now turn to the other draft Regulation – COM (2011) 819 entitled “Draft Regulation of the European Parliament and of the Council on the strengthening of economic and budgetary surveillance of Member States experiencing or threatened with serious difficulties with respect to their financial stability in the euro area”

The main features of this proposal are as follows:

Where a Member State is either experiencing difficulties affecting its financial stability or is receiving financial assistance on a precautionary basis, to provide for the Commission to make it subject to the enhanced surveillance process.

Where a Member State is under enhanced surveillance it will have to adopt measures to address the causes of its difficulties in consultation with the relevant institutions, including the ECB and the IMF.

The Commission may request such a Member State to provide detailed data on financial institutions and carry out stress tests on them. The Member

8 State will also be subject to assessments of its supervisory capacity in relation to its banking system.

The Commission and other institutions will carry out regular review missions of the Member State under surveillance and, where further measures are needed, the Council may recommend that it take appropriate action.

Any Member State which intends to seek financial assistance will have to inform the appropriate institutions, including the Commission and the ECB. A Member State requesting financial assistance will be required to prepare a draft macroeconomic adjustment programme aimed at enabling it to return to the financial markets. This programme will be subject to approval by the Council.

A post-programme surveillance process will be put in place and maintained for a Member State until a minimum of 75% of the financial assistance it has received has been repaid.

Because Ireland is currently in an adjustment programme, this draft Regulation does not have any immediate impact on us. It will only affect Ireland when we come out of the arrangement when, as stated above, we will still be subject to enhanced surveillance until we have repaid at least 75% of the assistance we have received.

The main intention of the reforms being undertaken in the economic governance process is to prevent Member States reaching a point where they

9 have no option but to seek to enter an EU/IMF Programme. Accordingly, introducing a means whereby enhanced surveillance can come into effect before that stage - albeit when the Member State is already experiencing significant difficulties - is desirable.

Conclusion

In terms of where the Regulations are, the ECOFIN Council, on which the Minister for Finance represents Ireland, reached agreement on a "general approach" on both texts on 21 February 2012.

Two European parliamentary reports – the Gauzès Report on COM (2011) 821 and the Ferreira Report on COM (2011) 819) - have been approved at Committee level by the Economic and Monetary Affairs Committee (ECON) and voted on in Plenary in June regarding their content, but are still awaiting the vote on the final legislative resolution and thus formally remain in first reading.

Since last July, an Ad-Hoc Working Group on Economic on Governance (AHWG) has scrutinised the European Parliament's amendments. In parallel, the Cyprus Presidency has had several meetings with the two above-named EP Rapporteurs to seek common ground. In its Conclusions of 19 October, the European Council urged for the regulations, which it described as “key piece of legislation necessary for the reinforcement of the new economic governance in the EU”, to be agreed by the end of 2012 at the latest. It is clear therefore that considerable efforts are being made to conclude this process by the end of this year.

10 The two draft Regulations are still works in progress because they are both still being negotiated between the Council - as represented by the Presidency - and the Parliament, with the assistance of the Commission, to come to an agreement.

With regard to the current state of negotiations on the Two-Pack, almost all open issues seem to have been agreed on the budgetary surveillance (Gauzés) report and we are hopeful of overall agreement shortly. Progress is also being made on the budgetary plans (Ferreira) report but negotiations on these are more difficult. Ministers discussed the state of play regarding the legislative process at the ECOFIN Council on Tuesday 13 November. The Council adjusted its position in negotiations with the European Parliament on the two draft regulations in order to facilitate rapid agreement with the Parliament so as to enable the regulations to be adopted before the end of the year.

Thank you for your attention. I and my colleagues are happy to provide the Sub-committee whatever further clarity we can on these proposals at this point if so desired.