Friday 17 August 2012

The Fiscal Stability Regulation

The second proposal of the two-pack, the Fiscal Stability Regulation (PDF), focuses on budgetary surveillance where Member States are “experiencing or threatened with serious difficulties with respect to their financial stability”. The Regulation would only apply to the Eurozone Member States. The Regulation would mean that Eurozone Member States will, just like Member States requesting precautionary assistance from the EFSF, ESM or IMF, be subject to a higher level of budgetary surveillance than would normally be the case under the Eurozone legislation so far.

The Regulation

- The Commission can decide whether a Member State should be put under enhanced surveillance, and whether to prolong that status every 6 months. The Commission must put Member States receiving financial assistance on a precautionary basis under enhanced surveillance if they actually draw on the precautionary aid;

- If a Member State is under enhanced surveillance, it must adopt measures aimed at addressing the sources or potential sources of difficulties and, on request from the Commission, the Member State shall: communicate information on the financial situation of financial institutions under the surveillance of national supervisors to the Commission, ECB, and European Banking Authority; carry out stress tests to test the resilience of the banking sector to financial and macroeconomic shocks; be subject to regular assessments  of its supervisory capacities over the banking sector; communicate information needed for the monitoring of marco-imbalances

- The Commission will conduct regular review missions in Member States under enhanced surveillance. If further measures are needed, the Council may recommend that the Member State seek financial assistance on a qualified majority vote;

- Where financial assistance is sought, the Commission will prepare an analysis of the sustainability of the Member State’s government debt;

- The Member State receiving financial assistance will prepare a draft adjustment programme in agreement with the Commission to be approved by the Council by QMV. If the Commission highlights significant deviations from the programme, the Council may make a finding of non-compliance by QMV;

- The monitoring under adjustment programmes will suspend the monitoring over other Eurozone legislation;

- There will be “post-programme surveillance” as long as a minimum of 75% of the financial assistance received by a Member State has not been repaid, and this period may be extended by the Council, voting by QMV. For this surveillance, the Commission will conduct regular review missions and the Council may recommend corrective measures to the Member State on a QMV vote;

- For qualified majority votes, only Eurozone members can vote in procedures under this Regulation, with the Member State concerned excluded from the vote.

European Parliament Report

The report in the Economic and Monetary Affairs Committee was drafted by Jean-Paul Gauzes (EPP). The report was adopted by Committee by 25 votes to 4, with 13 abstentions. It was passed in a plenary vote, but I haven’t been able to find out what the vote was.

The report contains 72 amendments, and the main changes are:

- Like the Excessive Deficit Regulation, more referenced to employment and social protection have been made in the recitals, and in the first article with regard to wage formation and collective agreements;

- Amendment 8 would include a recital referring to ECJ case law that Member States can restrict the free movement of capital on ground of public security, stating that this may be possible to fight tax evasion where a Member State faces serious difficulties in retaining financial stability. It would also insert a reference to the ability of the Council, on a Commission proposal, to authorise restrictions in the free movement of capital concerning third countries. Provisions addressing this are also to be included as articles;

- It would make it a requirement for Member States to report debt issuance plans to the Commission and Council;

- The report seeks to tie the decision that a Member State is at risk more closely to objective factors, including warnings from the European Systemic Risk Board;

- Requiring the Commission to examine the potential negative spill-over effects generated by Member States, including in the field of taxation, and the Council may make recommendations to the Member State regarding this on a proposal from the Commission;
- Requiring the Commission to report the findings of its reviews (including post-programme reviews) to the European Parliament;

- Requiring Member States intending to request financial assistance to inform the European Parliament;
- That the assessment of government debt sustainability also include an assessment of the impact of the adjustment programme on the Member State’s ability to repay, and the Commission will make public its methods of economic assessment;

- The Commission would be given the power to approve draft macroeconomic adjustment plans, with the Council being able to reject an approval by qualified majority voting. Likewise, the Commission can adopt recommendation for a new draft plan where it judges the old one to be insufficient; a recommendation which the Council can reject. (This would increase the power of the Commission in comparison to the original draft);

- The Commission can also make changes to the adjustment programme where there is a significant gap between forecasts and realised figures, which the Council can reject by QMV within 10 days of the decision;

- Similarly, the Commission will be empowered to decide whether a Member State has significantly deviated from the adjustment plan, with the Council having 10 days to reject this decision;

- Adjustment plans must take into account the need to ensure sufficient means for fundamental policies such as education and healthcare;

- A Member State subject to an adjustment plan shall audit existing debt to assess the reasons for its accumulation;

- Social partners and civil society shall be given the opportunity to express their views on the Commission public recommendations and opinions provided for under this Regulation;

- A Member State can be placed under “legal protection” if it is going to default on a decision of the Commission (which can be rejected by the Council within 10 days). Under legal protection a Member State should be able to stabilise and honour its debt. Legal protection would: have the effect of “close-out netting” or “credit event” provisions becoming inoperative; maintain (freeze) loan interest rates and ensure that new loans (apart from financial assistance) are to be reimbursed as a priority; creditors of the Member State must make themselves known to the Commission within 2 months or have their debts extinguished; the Member State submits a recovery and debt settlement plan to the Commission for approval;

- For post-programme surveillance, the Commission can take these decisions, with the Council having the power of rejection.


The European Parliament has put forward some amendments to increase scrutiny and oversight over the budgetary monitoring, with more reporting to the European Parliament and opening up Commission recommendations and opinions to the comment of social partners and civil society. There are also references to the need for the social impact of the adjustment programmes to be assessed and for the necessary funding for health and education to be ensured.

However the drive to empower the Commission is striking. In all cases the Council can reject the Commission’s decision so the Commission still needs the Council’s consent in a way, but it matters that the consent can be implied through inaction and that it doesn’t have to be won in a vote. This would make it more likely for the provisions of the Regulation to be exercised since it is politically difficult for Member States to vote on issues for another Member State. The “legal protection” amendments are the most radical. I don’t know much about state bankruptcy, but the provisions seem to be far too concerned with ensuring that creditors can be paid off (and by implication that the failed adjustment programme be taken as far as possible to secure enough repayment as possible, despite this failure). That the Commission can declare this protection without an application by the Member State goes too far in empowering the Commission. There is no way this amendment will pass in the Council, and it should be noted that the Commission is considering ways bankruptcy could be dealt with in the Eurozone.

No comments:

Post a Comment