Explanatory Memorandum to COM(2018)387 - Establishment of a European Investment Stabilisation Function - Main contents
Please note
This page contains a limited version of this dossier in the EU Monitor.
| dossier | COM(2018)387 - Establishment of a European Investment Stabilisation Function. |
|---|---|
| source | COM(2018)387  |
| date | 31-05-2018 |
1. CONTEXT OF THE PROPOSAL
• Reasons for and objectives of the proposal
In his 2017 State of the Union address and accompanying Letter of Intent, President Juncker announced the Commission's intention to make concrete proposals for the creation of a dedicated euro area budget line within the EU budget, providing amongst others for a stabilisation function. The idea was further detailed in the Commission's Communication on new budgetary instruments for a stable euro area within the Union framework, which is part of a package of initiatives to deepen Europe's Economic and Monetary Union 1 . The package builds, in particular, on the Five Presidents' Report on completing Europe's Economic and Monetary Union of 22 June 2015 2 and on the Commission's Reflection Paper on the deepening of the Economic and Monetary Union of 31 May 2017. 3
Deepening the Economic and Monetary Union (EMU) and modernising EU public finances are key strands in the debate on the future of Europe initiated by the Commission's White Paper of 1 March 2017. 4 This was further highlighted in the Reflection Paper on the future of EU finances of 28 June 2017. 5 At the current juncture, there is a window of opportunity to launch concrete forward-looking proposals on both the future of the EMU and on how future EU public finances can help to respond to identified challenges.
European value added is at the heart of the debate on European public finances. EU resources should be used to finance European public goods. Such goods benefit the EU as a whole and cannot be ensured efficiently by any single Member State alone. In line with the principles of subsidiarity and proportionality, the EU should take action when it offers better value for every taxpayer's euro compared to action taken at national, regional or local level alone.
Deepening the EMU is good for both the euro area and the EU as a whole. A more integrated and performing euro area would bring further stability and prosperity to all in the EU while ensuring that Europe's economic voice is strongly heard on the global stage. The stabilisation function, one of the new budgetary instruments presented in the Commission's Communication seeks to tackle some of the specific needs of euro area Member States and those on their way to joining the euro which are participating in the exchange rate mechanism referred to in Article 140(1) TFEU, while keeping in mind their broader needs and aspirations as EU Member States. In doing so, it also seeks to maximise synergies between existing and future instruments, as they will be presented by the Commission in May 2018 as part of its proposals for the post-2020 EU Multiannual Financial Framework.
The deepening of the Economic and Monetary Union requires determined actions from individual Member States as well as adequate support from the EU budgetary and policy coordination instruments. This creation of a stabilisation functions, is one of the ideas on how better to use the EU budget as a way to strengthen the resilience of our interdependent economies, and thus contribute to economic and social cohesion. Progress made by both euro and non-euro countries in implementing reforms and converging upwards will be beneficial to all.
Under the conditions set out in the Financial Regulation, the EU is empowered to borrow and lend in order to provide financial assistance. This is notably the case for the management for loans provided under the Balance of Payments Facility to support non-euro Member States in the event of difficulties in their balance of payments. It is also the case for loans provided under the European Financial Stabilisation Mechanism. Since the funds raised and the corresponding loans are back-to-back operations, there is no direct impact on the EU budget as long as recipient Member States honour their obligations.
While the EU budget has always promoted upward social and economic convergence and the lending firepower available at EU level was increased in recent years to respond to extreme circumstances, macroeconomic stabilisation has not yet been an explicit objective of the EU budget so far. The experience of the financial crisis years has also shown that the architecture and scope of EU public finances do not yet fully match the specific needs of the Economic and Monetary Union – neither for the euro area Member States, nor for Member States on their way to joining the euro area.
To support euro area Member States to respond better to rapidly changing economic circumstances and stabilise their economy in the event of large asymmetric shocks, a stabilisation function should be created. As a result of the unification of monetary policy in a single currency area, macroeconomic policy instruments in the hands of participating Member States are no longer the same. While each country differs and the size and structure of the economy matter in terms of likelihood of being exposed to shocks, the crisis highlighted the limitations of means available to individual euro area Member States to absorb the impact of large asymmetric shocks, with some losing access to the markets to finance themselves. In several instances, this resulted in protracted recessions and negative spill-overs to other Member States.
With this in mind, and provided Member States agree, there are ways to develop budgetary instruments at EU level that can contribute to the stability of the euro area and also benefit the EU as a whole. To ensure their success and effectiveness, and to maximise their efficiency for the taxpayer, these instruments must be conceived in full synergy with other budgetary instruments existing in the broader Union framework. In addition, in the future, the European Stability Mechanism (ESM) or its legal successor in the form of a European Monetary Fund could take up a role in support of macro-economic stabilisation if desired by the euro area Member States which are its shareholders.
The proposed Regulation on the establishment of the European Investment Stabilisation Function (EISF) is one of the initiatives translating the call to establish a stabilisation function which would help soften the effects of asymmetric shocks and prevent the risk of negative spill-overs in the Commission's Communication on 'New budgetary instruments for a stable euro area within the Union framework' 6 . The stabilisation function is conceived for euro area Member States and should be open to non-euro area Member States which have entered the exchange rate mechanism II following a positive decision to this end by ERM II members.
The initiative takes the form of a proposal for a Regulation of the European Parliament and the Council, under Article 175(3) of the Treaty on the Functioning of the European Union (TFEU). Article 175(3) TFEU allows for the creation of an instrument supporting eligible public investment in Member States that are confronted with a large asymmetric shock with a view to strengthen cohesion. This action is necessary outside the Structural Funds which do not provide for a specific instrument to support macro-economic stabilisation by preserving public investment in case of large asymmetric shocks and is without prejudice to measures decided upon within the framework of other Union policies.
Member States have an interest in achieving and maintaining high quality in their public investment management systems and practices. The proposal is therefore complemented by an Annex which determines the methodology and criteria for the assessment of such public investment management systems and practices with a view to identify where they have to be strengthened to increase of the impact of public investment and potential support under the proposed instrument.
Under today's proposal, the Commission is empowered to grant financial assistance to Member States which are faced with a large asymmetric shock, by contracting borrowings on the financial markets or with financial actors, with a view to on-lend such proceeds in support of the Member State concerned in maintaining eligible public investment. In addition, an interest rate subsidy covering the interest rate costs incurred on the loan by the beneficiary Member State is foreseen.
The decision of the Commission to provide support under the instrument is conditioned upon the fulfilment by the Member State concerned of strict eligibility criteria based on compliance with decisions and recommendations under the fiscal and macro-economic surveillance framework. It is recalled that Member States should pursue sound fiscal policies and build up fiscal buffers in prosperous economic times. The criteria for activating the support under the instrument are based on a double unemployment trigger. The latter is chosen because strong increases in national unemployment rates are a relevant indicator of the impact of a large asymmetric shock in a specific Member State.
Moreover, an obligation to use the support received for investment in policy objectives under the Common Provisions Regulation and to maintain the average level of public investment of the five last years, ensures that the aim of the proposed Regulation, namely ensuring that cohesion is not imperilled by the large asymmetric shock, could be reached.
The proposal also includes formulas for determining automatically the amount of loan support and the interest rate subsidy. As regards the loan component, the amount is determined by taking into account the maximum level of eligible public investment that can be supported and the severity of the large asymmetric shock.
However, a limited and circumscribed discretion for the Commission to increase the amount of the loan up to the maximum level of public eligible investment is foreseen. The latter is also determined on the basis of a formula which reflects the ratio of eligible public investment to GDP in the EU over a period of five years before the Member State concerned requested the support and the GDP of the Member State concerned over the same period.
The proposed Regulation is accompanied by a draft intergovernmental agreement for Member States to agree among themselves on the transfer of national contributions calculated on the basis of the share of monetary income allocated to their national central banks to the Stabilisation Support Fund established under the Regulation. The main purpose of this Fund, to be endowed with national contributions, is to finance the interest rate subsidies Member States are entitled to. Such interest rate subsidies cover 100 percent of the interest cost incurred on the loans.
The detailed eligibility and activation criteria as well as the formulas for calculating loan support and interest rate subsidies allow for a swift and lean decision-making procedure by the Commission.
It is not excluded that the European Stability Mechanism (ESM) or its legal successor would autonomously decide at a certain point in the future to provide support in parallel to the instrument established under the proposed Regulation. In such a case, the Commission shall strive to ensure that such assistance is provided in a manner that is consistent with the proposed Regulation.
To cater for such a potential parallel interaction between any future ESM assistance and this instrument, the proposal makes it possible for the Commission to adopt delegated acts in a limited number of fields. In particular, a delegated act is foreseen to regulate the exchange of information as regards the important elements of the loan under this scheme. Furthermore, the possibility to adopt delegated acts is provided for to supplement or amend the proposed Regulation by determining rules of complementarity between ESM assistance and amounts of EISF support calculated on the basis of the proposed instrument and to cater for granting interest rate subsidies for interest cost incurred on ESM assistance.
It is also important to recall that the EISF instrument established under the proposed Regulation should be seen as a first step in the development over time of a voluntary insurance mechanism for the purpose of macro-economic stabilisation. The latter mechanism would be based on voluntary contributions by euro area Member States and could have a borrowing capacity. A review of the proposed Regulation is foreseen five years after the entry into force of the Regulation to assess and address possible issues in this respect.
This proposal provides for a date of application as of 1 January 2021 and is presented for a Union of 27 Member States, in line with the notification by the United Kingdom of its intention to withdraw from the European Union and Euratom based on Article 50 of the Treaty on European Union received by the European Council on 29 March 2017.
• Consistency with existing policy provisions in the policy area
The EISF instrument under the proposed Regulation is consistent with other instruments under the cohesion policy. The instrument complements programmes supported by the Union under the European Regional Development Fund, the Cohesion fund, the European Social Fund, the European Maritime and Fisheries Fund and the European Agricultural Fund for Rural Development, which have in recent years accounted for more than half of total public investment, contributing strongly to the process of strengthening the economic and social catching-up of regions and countries across the EU. In this respect it is noted that a greater link between the priorities of the European Semester and the programmes supported by the Union under the European Regional Development Fund, the Cohesion fund, the European Social Fund, the European Maritime and Fisheries Fund and the European Agricultural Fund for Rural Development has also been established, by introducing ex-ante and macroeconomic conditions via the Common Provisions Regulation 7 . Similar conditions determine eligibility for support under the EISF instrument. Moreover, the EISF instrument also complements other EU-level instruments that can specifically help cushion economic shocks at national or local level such as the European Union Solidarity Fund, which provides financial assistance to Member States/regions affected by major disasters; and the European Globalisation Adjustment Fund, which provides support to people losing their jobs as a result of major structural changes in world trade patterns or as a result of a global economic and financial crisis.
• Consistency with other Union policies
The instrument under the proposed Regulation is consistent with the rules for economic policy coordination, including the Stability and Growth Pact. Eligibility under the EISF instrument is premised on compliance with decisions and recommendations under the fiscal and macro-economic surveillance framework. The European Semester is the main tool for the coordination of Member States' economic policies at EU level where Member States discuss their economic, social and budgetary priorities and progress is monitored at specific times throughout the year. In the context of the European Semester, the Stability and Growth Pact and the Macroeconomic Imbalances Procedure serve to ensure sound public finances and to prevent risks of imbalances. Moreover, by making best use of the flexibility built into the existing rules of the Stability and Growth Pact, a strengthening of the link between investment, structural reforms and fiscal responsibility has taken place, while taking better account of the cyclical economic conditions faced by Member States.
2. LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY
• Legal basis
The legal basis for this proposal is Article 175(3) TFEU. To use that Article, three conditions must be fulfilled which are all met.
The first condition is that specific actions must contribute to the strengthening of economic, social and territorial cohesion. The proposed Regulation sets out a lean framework allowing to provide financial assistance to euro area Member States and non-euro area Member States participating in the exchange rate mechanism (ERM II) in support of eligible public investment in the form of loans and interest rate subsidies to cushion a large asymmetric shock to strengthen cohesion. This instrument is a complementary tool which helps beneficiary Member States preserving growth-friendly public investment in case of macroeconomic instability. This in turns helps easing the economic adjustment in the euro area Member State or Member States concerned and helps returning them to a sustainable growth path rather than deepening and lengthening the recession which negatively impacts their economic and social cohesion. The instrument should be activated in the event of a large asymmetric shock in a Member State, or several Member States, when the limits of other mechanisms and national policies materialise, and be subject to strict eligibility criteria based on the Union's fiscal and macroeconomic surveillance framework. Moreover, to be effective, support under the instrument should be channelled to support eligible public investment in support of themes under the ESI Funds. Addressing the effects of a large asymmetric shock through the instruments by supporting the maintenance of the level of public investment thus contributes to the strengthening of economic and social cohesion.
The second is that the action proves necessary outside the Structural Funds. Neither the Structural Funds cater for the purpose of macroeconomic stabilisation in case of a large asymmetric shock by preserving public investment in Member States nor any other specific instrument. The necessity of such an instrument is based on factual elements because structural reforms, automatic fiscal stabilisers, discretionary fiscal policy measures as well as the single monetary policy of the Eurosystem cannot fully mitigate large macro-economic shocks.
Thirdly, the proposal is without prejudice to the measures decided upon within the framework of other Union policies. In particular, the eligibility for any support under the instrument is explicitly based on the premise of compliance with decisions and recommendations provided for in the Union's fiscal and macro-economic surveillance framework pursuant to Title VIII of Part III of the TFEU.
A measure based on Article 175(3) TFEU which is intended to strengthen economic, social and territorial cohesion may be designed in such a manner that only a subset of Member States fulfil the necessary conditions of eligibility for the support, where the limitation rests on an objective reason. The promotion of economic, social and territorial cohesion and the establishment of an economic and monetary union are both key objectives under Article 3 TEU. The currency union, by the nature of its current architecture, is not equipped with the possibility to mitigate large asymmetric shocks by means of a mechanism allowing effectively ensuring the maintenance of the Member States' level of public investment. The lack of monetary policy and exchange rate adjustment channels at national level limits the tools available to address asymmetric shocks in euro area Member States while placing any response to address such a shock on remaining national instruments of economic policy, namely structural reforms and fiscal policy, but also more heavily on the single monetary policy. Although non-euro area Member States remain responsible for their national monetary and exchange rate policy, those that will adopt the euro in a foreseeable future and participate in the exchange rate mechanism (ERM II) as part of fulfilling their obligations regarding the achievement of the economic and monetary union are de facto already limited in their exchange rate and monetary policies.
• Subsidiarity (for non-exclusive competence)
The economic stability of the economic and monetary union (EMU) and the Member States which have adopted the euro have a Union wide dimension. Euro area Member States are economically highly interconnected. It should be avoided that economic shocks and significant economic downturns result into deeper and broader situations of stress negatively impacting economic and social cohesion. However, due to the architecture of the EMU with a centralised single monetary policy but a decentralised fiscal policy at national level, euro area Member States are insufficiently capable to absorb large asymmetric shocks in isolation. There is a need to reinforce the availability of tools when the EMU is confronted with critical problems whenever large economic disruptions arise in individual Member States. Although non-euro area Member States remain responsible for their national monetary and exchange rate policy, those that will adopt the euro in a foreseeable future and participate in the exchange rate mechanism (ERM II) as part of fulfilling their obligations regarding the achievement of the economic and monetary union are de facto also already limited in their exchange rate and monetary policies. The financial and subsequent economic crisis in the euro area has evidenced strong limits to the functioning of automatic fiscal stabilisers and discretionary fiscal policy measures at national level, even in Member States with low levels of public debt and seemingly sound public finances. This has resulted in a pro-cyclical pattern for fiscal policies, which has been detrimental for the quality of public finances and in particular for public investment. The sequence of events also shows that too much weight may be put on the single monetary policy to provide for stabilisation in severe economic circumstances. These observations point to the necessity to establish a common instrument at Union level to absorb such shocks with a view to avoid widening differences in macro-economic performance between euro area Member States and also non-euro area Member States participating in the exchange rate mechanism (ERM II) imperilling economic and social cohesion.
The objective of this proposed Regulation cannot be sufficiently achieved by the Member States individually and can therefore, by reason of the scale of the action, be better achieved at Union level in accordance with Article 5(3) TEU.
• Proportionality
The proposal aims to support public investment with a view to strengthen cohesion in Member States which are confronted with a large asymmetric shock. It sets out a streamlined framework for the provision of financial assistance in the form of loans and an interest rate subsidy. The instrument is a complementary tool next to existing Union instruments for financing jobs, growth and investment, national fiscal policies but also financial assistance for tackling crisis times like the EFSM and the ESM.
The decision-making procedure allows for a lean and swift mobilisation and disbursement of support by the Commission following the fulfilment of clearly defined eligibility and activation criteria as well as a criterion determining the public investment that should be supported.
At the same time the proposal does not go beyond what is necessary to achieve the objective of addressing a large asymmetric shock by supporting public investment. Any support under the proposed instrument is subject to strict eligibility criteria based on compliance with decisions and recommendations under the Union's fiscal and macro-economic surveillance framework and clear well-defined activation criteria based on a double employment trigger. Moreover, a beneficiary Member State has an obligation to use the assistance received for eligible public investment in support of the policy objectives of the Common Provisions Regulation. A control and corrective mechanism is foreseen. The amount of loans and interest rate subsidies is determined on the basis of a formula which takes due account of a maximum level of eligible public investment that can be support and the severity of the large asymmetric shock. Moreover, with a view to ensure that as many Member States as possible could qualify for loan support under the instrument, a ceiling which is function of the remaining available means in the EU budget is set. Interest rate subsidies cover the interest cost incurred by Member States on the loans received under the instrument. Finally, with a view to increase the impact of public investment and potential support under the scheme, a process to enhance the quality of Member State's public investment systems and practices is foreseen.
• Choice of the instrument
This act takes the form of a Regulation because the act creates a new instrument contributing to macro-economic stabilisation and has to binding in its entirety and directly applicable in all Member States.
3. RESULTS OF EX-POST EVALUATIONS, STAKEHOLDER CONSULTATIONS AND IMPACT ASSESSMENTS
• Collection and use of expertise
The assessment of the proposed mechanism mostly relied on internal expertise. To assess the potential activity of the stabilisation function or the insurance mechanism, simulations were run based on past data (1985 to 2017). This approach is in line with the standards of the literature on the topic (Carnot et al. 2017; Arnold et al. 2018; Claveres and Stráský, 2018). The stabilisation impact of both the stabilisation function and the insurance mechanism is assessed through simulations of a macroeconomic model (QUEST developed by the Commission and often mobilised to assess the impact of policy reforms). Results are in line with a similar exercise conducted by the IMF (Arnold et al., 2018). More generally, relevant economic and policy oriented literature on the rationale for a stabilisation function was duly taken into account. Ongoing discussions at Union level as well.
• Impact assessment
The proposal is supported by an Impact Assessment. On 27 April 2018, the Regulatory Scrutiny Board has issued a positive opinion with reservations on it. [inclusion of hyperlink to opinion of RSB necessary] The issues raised by the Regulatory Scrutiny Board were addressed in the revised version of the Impact Assessment Staff Working Document [inclusion of hyperlink to opinion of RSB necessary]. The description of the main policy option and the interaction with other instruments were further elaborated, including the composition and funding arrangements. The conclusion on the preferred option is now presented in more detail. A specific annex in the Impact Assessment Staff Working Document further details the changes made following the Regulatory Scrutiny Board’s opinion.
The impact assessment examined three policy options for a stabilisation function, besides option 1, the status quo:
Option 2 corresponds to a borrowing and lending scheme, focussed on public investment. A central agent, i.e. the European Union would provide loans together with limited grants to Member States affected by large shocks in order to maintain public investment activity. It mostly corresponds to the Commission proposal as regards the European Investment Stabilisation Function.
Option 3 is an insurance mechanism. Regular contributions, in particular in normal and good economic times, or an own resource would be accumulated in a fund. When a Member State is affected by a large shock, it would benefit from support in form of pay-outs/grants. A limited borrowing capacity would likely be needed to ensure credible and continuous operation.
Option 4 is a dedicated euro area budget. A common budget would not primarily target economic stabilisation, but rather the provision of European public goods. Still, reliance on cyclical revenues (e.g. corporate income tax) and countercyclical spending (e.g. unemployment benefits) would contribute to macroeconomic stabilisation via automatic stabilisers at the EU level. In addition, one could foresee discretionary elements, which could further foster stabilisation properties.
A European Investment Stabilisation Function (option 2) would contribute to the cohesion objective by offering financing support in the event of a large asymmetric shock affecting a Member State. This support would target public investments in priority sectors and be subject to economic triggering and eligibility conditions. This provision of support will provide a strong incentive to protect key public investments and thereby preserve at an appropriate level expenditures which are essential for the future growth of the economy. As such the scheme would foster outcomes in sharp contrast to the past crisis in some countries where public investment was sizeably cut. The macroeconomic stabilisation impact in this option is limited by the fact that support takes the form of a loan. Confronted with a large shock, the concerned Member State would still face a trade-off between supporting activity via deficit spending or controlling the increase in its public debt. This trade-off would nevertheless be mitigated as the Member State would be given access to cheaper financing than on the market. Moreover, the provision of EU financing may exert a strong signalling effect to market participants, which can act as a catalyst for avoiding the loss of market access and a full-blown financial adjustment programme. This option is consistent with a requirement for no permanent transfers, in the sense that loans are by nature temporary support and the Member State concerned is legally required to pay it back. This condition is particularly important. The view of stakeholders remains divided at this juncture on the need and form of a stabilisation function, especially in the light of worries concerning cross-country neutrality. Option 2 may thus be politically more feasible, at least in the near future.
An insurance mechanism (option 3) would offer significant pay-outs in the event of a large asymmetric shock affecting a Member State, subject to economic triggering and eligibility conditions. These insurance pay-outs would significantly reduce the short-term trade off faced by the concerned Member States between supporting activity and controlling the rise in their debts and deficits. The pay-outs would therefore complement the national automatic stabilisers in adverse circumstances. They would facilitate the conduct of a smoother and more counter-cyclical fiscal policy throughout the cycle, which would also be beneficial for the quality of national public finances and the avoidance of booms and busts in public investments. Depending on its parameterisation, that option can offer a powerful demand stabilisation impact, even for a limited amount of contributions. Option 3 is however relatively challenging to reconcile with the objective of cross-country neutrality, as some Member States could benefit from pay-outs more often or more than others, for example because their economies feature more volatile cycles. Some design features could be important to improve on the objective of country neutrality, such as higher contributions in good times (which would ensure that volatile economies contribute more and would accelerate the constitution of buffers), and a form of experience rating (contributions modulated as a function of past usage). However, the support of stakeholders for this option appears mixed at this stage, as some may see it as entailing too many risks and going beyond a proportionate response to the challenges at hand.
A euro area budget (option 4) would contribute to the stabilisation of large shocks through automatic fluctuations with the cycle of the revenues and/or expenditures of that budget. The effectiveness of that mechanism depends on the cyclical sensitivity of the composition of the budget and on its size. The implications of option 4 would go somewhat beyond that of providing a stabilisation function, as a full budget implies that allocative competences on the revenues and on the expenditure sides are shifted from the national to the European level, in addition to the current EU budget. The setting up of such a budget would therefore require strong political will and consensus. Further reflections and discussions would be needed to assess its content and raise its political acceptability.
It should be noted that the different policy options are not mutually exclusive and can be combined. At this stage, a European Investment Stabilisation Function (option 2) is the preferred option. It would bring an important contribution to the objectives lined out in section 4 of the Impact Assessment Report. As such it has been retained by the Commission as part of its proposal. An insurance mechanism (option 3) can offer very effective stabilisation properties and may be consistent with country neutrality if well-designed, but further reflections and discussions are needed to assess its viability and raise its political acceptability. An insurance mechanism would significantly strengthen the EMU architecture and thus be highly valuable. While the Commission is not making a formal proposal at this stage, an insurance mechanism should be considered as part of the stabilisation function as a package, topping up and complementing option 2. Such a package would create a consistent ensemble enabling significant stabilisation. Option 4 can offer some stabilisation properties, the extent of which greatly depends on its size and composition, but further reflections and discussions are needed to assess its content and raise its political acceptability.
The impact of an investment stabilisation scheme (option 2) and an insurance mechanism (option 3) would be primarily of macroeconomic nature, along the lines discussed above. In addition, option 2, the investment stabilisation instrument, would improve the composition of public finances by protecting public investment activity. As such it partly captures a dimension of maintenance/upgrading of skills and entails thus some social benefit. In option 3, the insurance mechanism, the environmental and social impact would be fairly indirect and difficult to assess. In option 4, the euro area budget, the environmental and social impact would likely be positive, but the definition of the option is not detailed enough to allow for an in-depth assessment.
4. BUDGETARY IMPLICATIONS
The proposal could have budgetary implications. The loans which the Commission could grant under this proposed instrument to Member States are a function of a fixed ceiling of EUR 30bn. As such loans constitute contingent liabilities for the EU budget in case a Member State would default on a loan repayment granted under the scheme.
The interest rate subsidy would be financed by a Stabilisation Support Fund endowed with annual national contributions based on the share of each euro area Member State's national central bank in the monetary income of the Eurosystem. The same benchmark would be used for non-euro area Member States participating in the exchange rate mechanism (ERM II). As such these national contributions constitute externally assigned revenue and do not have a bearing on the EU budget.
5. OTHER ELEMENTS
• Implementation plans and monitoring, evaluation and reporting arrangements
The act provides for a reporting and review of its application every five years. To this end, the Commission should present an evaluation report that assesses, among others, the effectiveness of the Regulation as well as its contributions to the conduct of the economic policies of euro Member States in such a way as to strengthen cohesion in the Union, to the achievement of the Union's strategy for growth and jobs, and to public investment in euro area Member States benefitting from support under the act. The report shall also examine the appropriateness of developing an insurance mechanism serving the purpose of macro-economic stabilisation. Where deemed appropriate, the report shall be accompanied by proposed amendments to this act. The European Parliament, Council and Eurogroup will receive the report.
Evaluations will be carried out in line with paragraphs 22 and 23 of the Interinstitutional Agreement of 13 April 2016 8 , where the three institutions confirmed that evaluations of existing legislation and policy should provide the basis for impact assessments of options for further action. The evaluations will assess the programme's effects on the ground based on the programme indicators/targets and a detailed analysis of the degree to which the programme can be deemed relevant, effective, efficient, provides enough EU added value and is coherent with other EU policies. They will include lessons learnt to identify any lacks/problems or any potential to further improve the actions or their results and to help maximise their exploitation/impact.
• Detailed explanation of the specific provisions of the proposal
Part I of the proposed Regulation (Articles 1 and 2) provides for the establishment of the European Investment Stabilisation Function (EISF) as a financial assistance instrument under Article [220] of the revised Financial Regulation in support of public investment for Member States being faced with a large asymmetric shock serving the goal of strengthening cohesion. Furthermore, it indicates the forms which such financial assistance would take, namely loans and interest rate subsidies. Moreover, this part also emphasizes that the Regulation should apply to euro area Member States as well as to non-euro area Member States which participate in the exchange rate mechanism (ERM II). This part also provides for the most important definitions that are used throughout the act.
Part II of the proposed Regulation (Articles 3 to 5) contains the criteria which would need to be fulfilled by a Member State in order to benefit from support under the EISF. A distinction should be made between two sets of criteria.
Firstly, the proposed act contains eligibility criteria based on compliance with decisions and recommendations under the Union's fiscal framework provided for in Articles 126(8) and 126(11) of the TFEU and Regulation (EU) No 1466/97 as well as under the macro-economic surveillance framework established by Regulation (EU) No 1176/2011. It should also be determined that in case a euro area Member States is under a macro-economic adjustment programme it would not benefit from support under this scheme but that any financing needs in support of public investment would be taken care off under the programme. The same system is envisaged for non-euro area Member States within the scope of the proposed act which benefit from balance of payments support. Finally, in case Member States would agree to conclude an intergovernmental agreement for financing the interest rate subsidy, payment of annual contributions should constitute an eligibility criterion before a Member State would be able to benefit from an interest rate subsidy under the scheme.
Secondly, activation criteria should be foreseen to cater for a timely and effective activation of EISF support. Such activation should be determined by a double unemployment trigger which is based on both the national unemployment rate compared to its past average and the change in unemployment compared to a certain threshold in the last year. Firstly, the choice for the activation criteria based on unemployment rates is considered for several reasons. The unemployment rate serves as an excellent indicator of the business cycle. Moreover, the effects of shocks on public finances tend to lag the growth cycle and actually more or less match the unemployment cycle. In addition, the lag reflecting the use of the unemployment rate would not undermine the utility of the stabilisation purpose of the instrument because initially Member States would need to take recourse to their automatic stabilisers and policies. Secondly, making use of a double activation trigger would ensure with a greater degree of assurance that the Member State concerned is confronted with a large asymmetric shock with a temporary and country-specific element. The double activation trigger would also allow for support being targeted at times of sizeable economic worsening. The double trigger would target situations where unemployment is rising.
This Part also provides for an obligation by Member States in receipt of assistance under this proposed Regulation to invest the support in eligible public investment, i.e. gross fixed capital formation by the general government in support of policy objectives identified in the Common Provisions Regulation and social investment (education and training) and also to maintain the level of public investment in general compared to the average public investment over the last five years. As regards the second element, the Commission should have some discretion in its assessment to cater for situations where public investment developed in an unsustainable manner in a Member State. A corrective mechanism should be foreseen to avoid ineligible expenditure and Union bearing liability for ineligible loans. That appears necessary to protect the Union's financial interest. In case a Member State would not have respected this criterion, the Commission should be able to request the full or partial repayment of the loan and decide that upon repayment of the loan the Member State concerned would not be able to benefit from an interest rate subsidy. The result of this control should also be made public.
Part III of the proposed Regulation (Articles 6 to 8) contains the procedure for granting swiftly EISF support. Following a request, the Commission should verify the fulfilment of the eligibility and activation criteria and also decide on the terms of the support that takes the form of a loan. Elements such as the amount, average maturity, pricing, availability period of support should be determined. The beneficiary Member State should also be entitled to an interest rate subsidy upon repayment of the loan or when interest payments are due. Moreover this part of the proposed act also determines the forms of EISF support.
Part IV of the proposed Regulation (Articles 7 to 10) determines firstly the financial envelope for the instrument. As regards loans, the Commission should be able to contract borrowings on the financial markets with the purpose of on-lending them to the Member State concerned. Such borrowings should be limited to a fixed ceiling of EUR 30bn. As regards interest rate subsidies, they should serve to offset the interest costs that Member States incur on the loan. The Commission should be able to use the Stabilisation Support Fund to finance the latter. This part also sets out the formulas which the Commission should use for determining the amounts of the loan and interest subsidy under the EISF instrument.
As regards the loan component of this instrument a distinction should be made between the formula for determining the maximum level of eligible public investment (Is) that can be supported and the formula for calculating the amount of the support (S) in the form of loan. Both formulas interact with each other. The maximum level of eligible public investment (Is) that could be supported by the EISF should be automatically set on the basis of a formula which captures the ratio of eligible public investment to GDP in the EU over a period of five years before the request for support by a Member State and the GDP of the Member State concerned over the same period. This maximum amount should also be scaled towards the available means, namely the fixed ceiling determined in the Regulation. The maximum amount of loan support should also be automatically set on the basis of a formula which takes into account the maximum level of eligible public investment that can be supported and the severity of the large asymmetric shock. The loan should also be scaled in function of the severity of the shock. The amount of the loan could be increased up to the maximum level of eligible public investment (Is) in case the asymmetric shock would be particularly severe. The increase in the quarterly national unemployment rate would serve as an indicator to this end. Finally, the loan support should be limited to 30 percent of remaining available means under the ceiling set for calibrating loans to the available means in the EU budget in order to ensure that as many Member States as possible could qualify for support under this instrument.
The amount of the interest rate subsidy should be automatically determined as a fixed percentage of the interest costs incurred by the Member State on the loan under this instrument.
This part of the proposed Regulation finally also provides for a potential involvement by the European Stability Mechanism (ESM) or its legal successor in case the latter would autonomously decide in the future to also provide financial assistance in support of public investment to cater for macro-economic stabilisation purposes. To this end, the Commission should strive to ensure that such assistance would be awarded under conditions which are consistent with the ones under this proposed Regulation. An empowerment for the Commission should be foreseen to adopt delegated acts to supplement the proposed Regulation as regards the exchange of information on the different elements of the loan and the rules determining complementarity between ESM assistance and support under this instrument calculated on the basis of the formulas for the loan and interest rate subsidy.
Part V of the proposed Regulation (Articles 11 to 16) contains the procedural rules for disbursement and implementation of the loan support under this instrument. More specifically, it concerns rules on the disbursement, the borrowing and lending operations, the costs, and the administration of the loans. Finally, rules on control are foreseen.
Part VI of the proposed Regulation (Articles 17 to 19) provides for the establishment of the Stabilisation Support Fund (the Fund) and its use. The Fund should be endowed with contributions by Member States in accordance with an intergovernmental agreement which determines the method for calculating them and the rules regarding their transfer. For euro area Member States, national contributions should be calculated as a percentage of the monetary income allocated to the euro area Member States' national central banks. For the purpose of calculating the contributions, the ECB should every year by 30 April at the latest communicate to the Commission the amount of monetary income for each national central bank. For non-euro area Member States within the scope of application of the proposed act, a Eurosystem monetary income should serve as a calculation base for its national contribution. A specific key should be applied. Provided such an intergovernmental agreement would be concluded, the receipt of an interest rate subsidy should be conditional upon Member States having paid their annual contribution.
The Fund should only be used to pay the interest rate subsidy. Granting such a subsidy should be conditional upon the availability of resources in the Fund and a system of deferral of payment should be put in place in case resources would be insufficient. The Commission should administer the Fund on the basis of a prudent and safe investment strategy.
Part VII of the proposed act (Article 20) provides for an assessment by the Commission of the quality public investment systems and practices in Member States. Such an assessment should be foreseen as an accompanying measure in order to increase the impact of public investment and EISF support. The detailed methodology is provided for in an annex to the proposed Regulation and is based on state-of-the art practices employed by the IMF and OECD.
Part VIII of the proposed Regulation (Articles 21 to 23) provides for rules on the exercise of delegated powers, reporting and review and the entry into force of the proposed Regulation. As regards the regular reporting, the Commission should inter alia examine the appropriateness of developing an insurance mechanism for macro-economic stabilisation purposes and whether to include social investment in education and training in the definition of eligible public investment as soon as reliable figures are available.