EU regulation on the prevention and correction of macroeconomic imbalances

These indicators would most likely include both external and internal ones. Measures of the external position (e.g. current accounts and external debt) and price or cost competitiveness (e.g. real effective exchange rates) would facilitate the detection of external imbalances.

The Commission will release the results of the scoreboard regularly and attach a Commission report putting into perspective any potentially conflicting signals from the various indicators on it. If a Member State, where the alert mechanism indicates possible imbalances or a risk thereof, the Commission will provide country-specific in-depth reviews. Any early warnings or recommendations from the European Systemic Risk Board will be taken into account, along with the policy intentions of the Member State under review, as reflected in its Stability and Convergence Programme and National Reform Programme. As a result of this in-depth Commission analysis, three different outcomes are possible, as provided for in Articles 6 and 7:

1) If the macroeconomic imbalances are considered unproblematic, the Commission will propose that no further steps are taken.

2) If the Commission considers that macroeconomic imbalances (or a risk thereof) exist following the in-depth review, it will recommend to the Council to adopt the necessary preventive recommendations to the Member State concerned in accordance with Article 121(2) of the Treaty. The preventive recommendations may address challenges across a range of policy areas.

3) If the in-depth review points to severe imbalances or imbalances that jeopardise the proper functioning of the Economic and Monetary Union in a specific Member State, the Council may, on a recommendation from the Commission, adopt recommendations in accordance with Article 121(4) of the Treaty declaring the existence of an excessive imbalance; and recommending the Member State concerned to take corrective action within a specified deadline and to present its policy intentions in a corrective action plan. Member States with excessive imbalances within the meaning of the EIP would be subjected to stepped-up peer pressure. These ‘EIP recommendations’ should be made public; they should be more detailed and prescriptive than the ‘preventive’ recommendations provided for in Article 6. Depending on the nature of the imbalance, the policy prescriptions could potentially address fiscal, wage, macrostructural and macroprudential policy aspects under the control of government authorities.

Following the opening of an EIP, the Member State concerned will be under an obligation to adopt a corrective action plan within a specific timeframe, as provided for in Article 8, to set out a roadmap of implementing policy measures. The corrective action plan would confirm the determination of the Member State concerned to work towards resolving its imbalances. Within two months after submission of a corrective action plan and on the basis of a Commission report, the Council shall assess the corrective action plan. If considered sufficient, on the basis of a Commission proposal, the Council shall adopt an opinion, endorsing it. Correction of competitiveness and external imbalances requires significant changes in relative prices and costs and reallocation of demand and supply between the non-tradable sector and the export sector. The economy of many euro-area Member States is shaped by a relatively high level of labour and product market rigidities which – in the absence of appropriate reforms – is likely to lengthen the period of adjustment. In all cases, the Commission will monitor implementation of corrective action by the Member States concerned, who have to submit regular progress reports, as provided for in Article 9. If economic circumstances change, the EIP recommendations may be amended on the basis of a Commission recommendation.

Enforcement of Regulation:

The second proposal for a regulation addresses enforcement of measures to correct excessive macroeconomic imbalances. It accompanies this EIP regulation, focusing on enforcement for euro-area Member States. It specifies that if a Member State repeatedly fails to act on Council recommendations to address excessive macroeconomic imbalances, it will have to pay a yearly fine, until the Council establishes that corrective action has been taken. Repeated failure is defined as failure to address Council recommendations by the new deadline set in accordance with Article 10(4) of Regulation (…). Moreover, the Member State will also have to pay a yearly fine if it repeatedly fails to provide the Council and the Commission with a corrective action plan that is sufficient to address the recommendations of the Council. In this case, repeated failure is defined as failure to provide a sufficient corrective action plan by the new deadline set in accordance with Article 8(2) of Regulation (…). The yearly fine will give euro-area Member States the necessary incentive to address the recommendations or to draw up a sufficient corrective action plan even after the first fine has been paid.

To ensure equal treatment between Member States, the fine should be identical for all euro-area Member States and equal to 0.1 % of the GDP of the Member State concerned in the preceding year. As a rule, the Commission will propose the maximum amount of the fine provided for and this proposal will be considered adopted, unless the Council decides to the contrary by qualified majority within ten days of the Commission adopting its proposal. The Council may amend the Commission proposal by acting unanimously, in accordance with Article 293(1) of the Treaty.

The Council may decide, on the basis of a Commission proposal, to cancel or to reduce the fine. The Commission could make a proposal to this end following assessment of a reasoned request by the Member State and this would reverse the burden of proof for application of the sanction. Furthermore, the Commission could also make a proposal to the same end on the basis of exceptional economic circumstances, as defined in the Stability and Growth Pact (SGP) (Regulation (EC) No 1467/97).

Council decisions concerning such fines will be made only by the members representing Member States whose currency is the euro. The vote of the member of the Council representing the Member State concerned by the decisions will not be taken into account.

The fines provided for in this proposal for a regulation constitute other revenue, as referred to in Article 311 of the Treaty. In line with the practice established in the corrective part of the SGP (Regulation (EC) No 1467/97), this revenue will be distributed between Member States whose currency is the euro and which are not involved in an excessive imbalance procedure within the meaning of Regulation (…), and not involved in an excessive deficit procedure within the meaning of Regulation (EC) No 1467/1997, in proportion to their share of the total GNI of the eligible Member States.

The European Parliament:

On the 5th June 2011 the EP produced it’s evaluation and proposed amendments for the regulation. The Rapporteur for the report was Elisa Ferreira and it was produced by the committee for Economic and Monetary affairs and it drew a lot of inspiration from an opinion from the Committee of the Committee on Employment and social affairs.

The Parliament recognised the significance noted the importance of the six pack of legislative reform, it stated that ‘[This] challenge takes place in a particularly difficult time for the Union and the Euro area, faced with growth, employment and internal divergences and tensions, seriously aggravated by a major international crisis, but it is also the right time to amend, complete and correct the existing model’ It also whether on to note the significance of this legislation in EU political history, ‘This is the first time that the Parliament is co-deciding with the Council on macroeconomic developments and fiscal discipline of the Union...according to these new powers given by Lisbon, the Council needs the Parliaments’ agreement in order to reach a final consensus’

The legal basis of the regulation:

In the Commission’s report, the legal basis of the regulation, was draw from Article 121(6) TFUE which states, “The European Parliament and the Council, acting by means of regulations in accordance with the ordinary legislative procedure, may adopt detailed rules for the multilateral surveillance procedure referred to in paragraph 3 and 4”

In the amended regulation the European parliament sought to have the legal basis changed from a single legal basis of 121(6) to a multiple basis of Article 121 (3) and 121 (6), Article 148(3) and 148(4), Article 136.  However, the committee of legal affairs agreed with the Commission that there should be just a single legal basis, which was t121 (6).  They firstly considered the case of the Commission v Council [2008]; this case laid down a principle that the content of a Union measure should be founded on only one legal basis (unless there are extraordinary circumstances). It then examined the multiple legal basis, which the EP suggested and concluded that Article 121(6) should be the sole legal basis. It deemed 121(3) unnecessary as it is already referred to in 121(6). Article 148 refers to adopting guidelines which MS must have regard to when implementing employment policies. They concluded that these provisions did not constitute a legal basis of adoption of legislation stricto sensu. Lastly, it was concluded that no element of the proposal justified the addition art 136.

The Parliaments emphasis on employment and social protection:

One of the main elements of the EP’s amendments was that it put strong emphasis on the need to pay particular attention to the Europe 2020 strategy and Article 9 of the TFEU. Article 9 makes reference to the importance of employment within the Europe. The Europe 2020 is the EU's growth strategy for the coming decade which states:

‘In a changing world, we want the EU to become a smart, sustainable and inclusive economy. These three mutually reinforcing priorities should help the EU and the Member States deliver high levels of employment, productivity and social cohesion. Concretely, the Union has set five ambitious objectives - on employment, innovation, education, social inclusion and climate/energy - to be reached by 2020. Each Member State has adopted its own national targets in each of these areas. Concrete actions at EU and national levels underpin the strategy.’

The Parliament noted in its position that the Union should ‘aim at full employment and social cohesion, and a high level of protection and improvement of the environment.’ It makes a case for the legal basis of the regulation having its roots in Article 148(2), and thus allowing the article to reference employment issues. The EP wished to place emphasis on skilled training to incorporate principles for improving the skills and adaptability of the EU workforce. The EP position even went as far as suggesting the development of a European project bond market. The thinking behind this was that this would enable the private investment from hedge/pension funds in EU projects and thus greatly improve the scope to which the EU can drive production and infrastructure development.

There was a split between MEP’s with regard the approach and undertones of this regulation, this split threatened to de-rail the regulation. It was the view of some EP political parties that it was necessary to ensure that austerity was not a priority over growth and employment. The S&D and the Greens/EFA group attempted to ‘place unnecessary obstacles in the way’; according to some MEPs, in the process of negotiations of the regulation. The Greens/EFA believed the regulation had a ‘one-sided preoccupation with simultaneous austerity in all member states is a self-defeating, pro-cyclical cocktail.’ The Greens/EFA ‘refused to accept a SGP which is focused entirely on austerity, because this amounts to imposing the burden of paying for the crisis on the poorest in society’  Mr Stephen Hughes gave insight into the root of the disagreements in the EP; ‘division within the Parliament is not between fiscally responsible and irresponsible MEPs, but rather a matter of how to restore sound public fiancés, at what economic and social cost for Europe’s long-term global competitiveness’

In the end, ‘the differences within the Parliament are not the same as the differences between the Parliament and the Council’ and the vote on the legislation passed with 540 MEPs voting for the amendments agreed after first reading.

Expansion of scope/wording to include vulnerabilities:

The Commission had outlined that surveillance of member states economic policies should focus on macroeconomic imbalances, the EP wished to expand this to economic incorporate surveillance on economic vulnerabilities. This language was not included in the final regulation. It was EP’s position to analyse the ‘linkage between wages and productivity in the labour market and the existence of legal barriers that do not allow direct free concentration between enterprises and workers.’ And thus consider a MS overall competitiveness in its surveillance.  This was included in the final position of the regulation outline.

Increased democracy and public debate or just a power struggle?

As mentioned above, this was the first piece of legislation with regards economic policy where the co-decision procedure has been used. In this light the European parliament sought to ‘promote democracy and increase public debate’ However, it was the opinion of some within the Parliament and the council that the EP seeking increased powers was ‘irresponsible’ and ‘impinge[d] on sensitive issues relating to individual national constitutions’ This was amongst one of the thorniest of issues and considering the pressure to ensure it the passing on first reading (internally and externally), there was much at stake.

The first of these was with regards Article the alert mechanism. The EP wished to receive the annual report regarding the economic and financial assessment of MS. Ultimately, the Council agreed to this in the final legislative act which outlined that the report should be forwarded to the Council, EP and the EESC. However, the EP’s suggested amendment of ‘The competent committee of the European Parliament may organise debates on the Commission report’ was a position which was conceded by the Parliament in the final draft. A further proposal of an EP debate procedure was also scrapped, in the final regulation, with regards the excessive balance procedure.

In the final draft, the Parliament and the Council were both placed on equal footing with regards the establishment and functioning of the indicator scoreboard. The Commission remained the institution which was to establish the mechanism but must do so in consultation with the EP and Council. The inclusion of the EP consultation was mooted as an amendment in the EPs draft and its final inclusion was hailed and celebrated as an example of intuitional co-operation. Representatives of all the institutions in the joint debate, held on the 22th June 2011, noted this in their addressees’. It was highlighted by Elisa Ferreira in her opening of the debate and she noted particularly, ‘the compromise reached on recital 6a regarding the future adjustment of indicators is important.’ Mr Andras Karman pointed to this issue as a improvement of the ‘economic dialogue between the European institutions.’ Commissioner Rehn, also praised this compromise and noted the Commissions support of this meeting of institutional approaches.  Mrs Sylvie Goulard stated ‘that the parliament was not seeking to increase its own powers, but rather calling for an increased role  for MEPs whom the electors send to Brussels to defend their interests’

Reverse Qualified Majority voting:

This was another extremely thorny issue between the Council and the EP. According to the reverse qualified majority voting (RQMV) procedure proposed by the Commission in the context of the economic governance package, a Commission recommendation is deemed to be adopted unless the Council decides by qualified majority to reject the recommendation within a given deadline that starts to run from the adoption of such a recommendation by the Commission.

Under this RQMV, if the Council decides to vote on the Commission recommendation, the weighted votes of Member States as laid down by the Treaties will remain unchanged (see table below). The current rules for the calculation of a qualified majority are contained in Article 3 of Protocol (No 36) on transitional provisions(1). The effect of that article can be summarised as follows.

An act is adopted if there are at least 255 weighted votes (out of a total of 345) in its favour, representing at least two thirds of the members of the Council when it acts on a recommendation from the Commission(2)(3). Where qualified majority vote applies, the blocking minority is 91 votes. Where RQMV applies, the minimum required number of votes to reject the Commission recommendation is 255.

According to Mr Wolf Klinz the RQMV was necessary to ensure the SGP was not ‘toothless’ and it help ‘end [the] unseemly haggling behind the closed doors in the Council’. Mr Carl Haglaund stressed its necessity by stating that it is needed because ‘the Council had shown that it cannot take the necessary steps... [and] it is not acceptable that large member states can contravene rules simply because of their size and influence’ This can be seen as a direct reference to the failures of the past. When Germany and France broke the rules regarding the SGP, the Council of Ministers failed to apply sanctions against them, while punitive proceedings were started (but fines never applied) when dealing with Portugal (2002) and Greece (2005)

I have mentioned earlier that this regulation was a part of a six pack of regulations, and in these proposals the EP sought 15 instances of RQMV.  Mr Karman stated that ‘of the 15 instances where the Parliament wanted to extend the application of reverse qualified majority voting, some were not possible for legal reasons. The Council had nevertheless accepted others in its general approach for the Decision on imposing financial sanctions. In May 2001, the Council had agreed to two or more instances of RQMV over and above its approach. On 20th June 2011, the Council had made additional significant concessions regarding the preventive arm of the SGP, including a clause in three years’ time and the strengthening of the comply or explain procedure. These additional safeguards should reassure the parliament that deviations from the Commission’s proposals and recommendations will be kept to a minimum and that cases of non-compliance with the rules and thus the need for explanations will be very rare exceptions” This statement can been seen as a laying out the Council’s willingness for compromise but also underlining it’s final stance and had undertones that they went as far as they would.

        Commissioner Rehn in the same debate warned that ‘should a first reading not been reached, neither the Council nor the Parliament, should think that they could successfully shift responsibility onto the other institution.’ He also went on to state that the concessions which the Hungarian Presidency had secured from the Council would disappear if the first reading passing proved impossible. In the end, the EP had been satisfied with the compromise which had been reached.

The passing of regulation upon first reading:

This regulation, along with the other 5 pieces of the ‘six pack’; were watched closely by the world. The crisis was deemed to be at breaking point in the EU. People were speculating that the euro was going to fail and that the EU itself could face ruin and that this package ‘could be the last chance to save Economic and Monetary Union’. These measures were a result of a pressing need for EU reform and it well know that these had to be adopted urgently. It was mooted in the inter-institutional debates that it was hoped ‘to reach a compromise agreement in first reading’ and that ‘the differences between the Council and the Parliament are not great and can be overcome’ On the 8th November 2011, the regulation was agreed upon on the first reading and signed by the Council and the EP. Mr Karman stated that this ‘show[s] how the European institutions can co-operate in a responsible, efficient and constructive manner.’ He also noted that there had been criticism of the intergovernmental method and the quick passing would be noted as a success for the process.

Conclusion:

I have outlined in this essay the thought process and disagreements within the EU institutions regarding this regulation. It is an example of how intergovernmental approach and the negotiations between the institutional actors can lead to a common ground and it can be seen that the EU institutions can move quickly and effectively when there is the political will and necessity for it. However, despite the hope that these legislative measures would quell the appetite of the market, it seems to not have had its desired effect. At the end of the, 8th/9th December 2011, EU summit in Brussels, the President of the European Council Herman Van Rompuy confirmed that the 17 members of the euro area and several other EU countries were ready to participate in the new fiscal compact and engage in a significantly stronger coordination of economic policies. The goal of the compact, as a response to the current crisis, is to strengthen fiscal discipline and introduce more automatic sanctions and stricter surveillance. This will most like come in the form of new treaty, the details of which have yet to be finalised. It will no doubt see a revisiting of the issues outlined in this assignment and it will be interesting to see how the institutions will deal with the new challenges and changes that face them.

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