Annexes to COM(2017)822 - New budgetary instruments for a stable euro area within the union framework - Main contents
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This page contains a limited version of this dossier in the EU Monitor.
| dossier | COM(2017)822 - New budgetary instruments for a stable euro area within the union framework. |
|---|---|
| document | COM(2017)822  |
| date | December 6, 2017 |
The resilience of economies depends on a number of factors. Member States should manage their budgets in accordance with the principles of sound public financial management, creating fiscal buffers in good times and ensuring a high return on public expenditure, including through well-functioning public administrations. Their regulatory and supervisory institutions should be ready to participate in the Banking Union. Properly functioning labour and product markets should allow for the rapid expansion of new activities and high levels of employment and productivity.
As part of its technical assistance activities, the Commission proposes to set up a dedicated work stream to offer targeted support to Member States on their way to joining the euro. The technical support will be offered upon request and will cover all policies that can help achieve a high degree of convergence, such as support for reforms in the areas of public financial management, the business environment, the financial sector, labour and product markets, and the public administration.
This technical support will be funded through the Structural Reform Support Programme. It will be fully voluntary and offered without any co-financing from the beneficiary Member States. This proposal is reflected in the amendment to the Structural Reform Support Programme Regulation presented alongside this package.
For the period post-2020, the Commission will propose a dedicated convergence facility, as part of the follow-up to the Structural Reform Support Programme, in order to support Member States in their concrete preparation for a smooth participation in the euro area. This is irrespective of the formal process towards euro adoption, which is part of a specific monitoring process. 19
Member States concerned can also decide, already now, to reprogramme part of their technical assistance budget available under the European Structural and Investment Funds for projects to be supported by the Structural Reform Support Service. Progress with the reforms on the ground, including those linked to the reform delivery tool presented above, will continue to be monitored in the context of the European Semester.
6.A BACKSTOP FOR THE BANKING UNION
The creation of a backstop for the Single Resolution Fund was agreed by Member States in 2013, as a complement to the political agreement on the Single Resolution Mechanism Regulation. 20 As last-resort insurance in the event of a bank resolution, a common backstop would only be activated in the event that the resources available in the Single Resolution Fund were insufficient to finance the resolution of the bank(s) concerned. This would enhance confidence of all parties concerned in the actions to be taken by the Single Resolution Board.
Four years on, this backstop is still not operational. The September 2017 State of the Union address and the October 2017 Communication on completing the Banking Union 21 emphasise the need for such a backstop to be made operational as a matter of priority.
The Reflection Paper on the deepening of the Economic and Monetary Union identified certain criteria that the backstop should meet to be operational in the event of a crisis. It should be of adequate size to be able to fulfil its role and be able to be activated swiftly in times of crisis. It should also be fiscally neutral, given that the Single Resolution Mechanism Regulation stipulates that the banking sector in the Banking Union must reimburse any potential disbursements from the Single Resolution Fund.
A common backstop through the European Stability Mechanism/European Monetary Fund
The Commission is today putting forward a proposal for the setting up of a European Monetary Fund, which foresees that the future European Monetary Fund should provide a credit line or guarantees directly to the Single Resolution Fund.
Most Member States have expressed their support for the integration of the backstop function into the European Stability Mechanism. The Commission welcomes the technical preparatory work already carried out to this end. This is also the most pragmatic and efficient solution. The European Stability Mechanism (in the future the European Monetary Fund) would build on its experience and proven track record of tapping markets, even in a challenging environment.
This arrangement should be extended as needed to include on an equal footing all members of the Banking Union. Whenever a new Member State joins the Banking Union without joining the euro area, it should provide a national parallel facility alongside the European Monetary Fund's support to the Single Resolution Fund. Appropriate governance arrangements will ensure that the legitimate interests of non-euro area Member States participating in the Banking Union are taken into account. This is foreseen in today's proposal for the creation of a European Monetary Fund.
Governance
Recognising the importance of managing the failure of a bank while avoiding any contagion or disruption of financial stability, the Single Resolution Mechanism Regulation provides for specific decision-making arrangements. The decision-making procedures for the adoption of a resolution scheme are subject to short deadlines so that they can be completed, when necessary overnight, before markets reopen. 22
The backstop should be available at the point of time when the resolution scheme enters into force. In the event that amounts additional to those readily available in the Single Resolution Fund are needed (i.e. the backstop), the European Monetary Fund's decision-making process on the use of the backstop must be quick and predictable. It must not entail additional conditionality beyond the requirements of the Regulation on the Single Resolution Mechanism. 23 The appropriate governance arrangements therefore need to be rapid and reliable, ensuring equal treatment across the Banking Union.
7.STABILISATION FUNCTION
A stabilisation function at European level would provide the possibility to activate resources rapidly to deal with shocks that cannot be managed at the national level alone. The Five Presidents’ Report and the Reflection Paper on the deepening of the Economic and Monetary Union have set out the rationale for such an instrument and important principles have been identified, which remain valid. 24 Access to the stabilisation function would be subject to eligibility criteria and an agreed mechanism to trigger its use. The rest of this section envisages a stabilisation function intended for the euro area Member States and open to all who wish to participate.
Such a stabilisation function would only complement the stabilisation role played by national budgets in the event of large asymmetric shocks. Given their central role in the economy, national budgets will continue to be the main fiscal policy instrument for Member States to adjust to changing economic circumstances. This is why Member States need to continue to build up and sustain adequate fiscal buffers, notably in good times, as foreseen by the Stability and Growth Pact. 25 In case of a downturn, Member States would first use their automatic stabilisers and discretionary fiscal policy in line with the Pact. Only if these buffers and stabilisers are not sufficient, in the case of large asymmetric shocks, should the stabilisation function at European level be triggered.
Such a function would help soften the effects of asymmetric shocks and prevent the risk of negative spill-overs. The objective is to provide resources to a Member State hit by a shock that would otherwise force it to turn to the market for financing – in potentially difficult circumstances – with possible impacts on the deficit/debt position of the Member State concerned.
Key features of a stabilisation function
In order to be effective, the stabilisation function should fulfil several criteria. In particular, it should be:
·Distinct from and complementary to existing instruments in the EU public finances toolbox.
Such a function should fill the gap between, on the one hand, existing instruments financed from the EU budget for jobs, growth and investment and, on the other hand, financial assistance under the European Monetary Fund in extreme cases. Looking ahead, it is also important to consider the role of existing instruments under the EU budget with some stabilisation effect. 26 These could also be enhanced to assist in shock absorption more effectively in the future, as a complement to what is presented here. Likewise, it is worth considering the idea of a temporary increase of the EU co-financing rate and/or a possible modulation of the level of pre-financing of the European Structural and Investment Funds depending on the circumstances. 27
·Neutral over the medium-term and not lead to permanent transfers between Member States. The stabilisation function should be constructed in such a way that all participating Member States would have the same probability to benefit and would contribute consistently.
·Contribute to sound fiscal policy and minimise moral hazard. There would be no conditionality attached to the support but there would be strict, pre-defined eligibility criteria based on sound macroeconomic policies in order to access the stabilisation function. As a general principle, only Member States that comply with the EU surveillance framework during the period preceding the large asymmetric shock should be eligible for access. This will avoid moral hazard and create an additional incentive for compliance with sound fiscal and structural policies.
·Contribute to financial stability. It should reduce the risk that a beneficiary Member State ends up needing a programme from the European Monetary Fund.
·Economically meaningful in the steady state. It should be large enough to provide real stabilisation at Member State level. Estimates suggest that to be effective in the euro area, such a function should allow for overall net payments of at least 1% of Gross Domestic Product. Moreover, to be credible, the stabilisation function needs to have sufficient resources available, even in the middle of the downturn. This could imply some form of a borrowing capacity, bearing in mind the need to ensure that the EU budget remains in balance.
·Timely and effective. For those Member States fulfilling the eligibility criteria for accessing the stabilisation function, triggering should be activated automatically and rapidly on the basis of pre-defined parameters (for example, based on a large temporary negative deviation from their unemployment or investment trend).
·Include a budget support/grant component. Relying only on a system of loans could have a limited impact, since the Member State could simply borrow in the markets or access one of the existing precautionary credit lines. On the other hand, a loan component has the merit of addressing some possible liquidity concerns without creating risks of permanent transfers. A stabilisation instrument via a system of grants could have stronger and more immediate macroeconomic effects.
There are different ways of envisaging such a stabilisation function. The Commission outlined three different options in its Reflection Paper on the deepening of the Economic and Monetary Union.
First, a European Investment Protection Scheme could protect investment in the event of a downturn, by supporting well-identified priorities and already planned projects or activities at national level, such
as infrastructure or skills development. Second, a European Unemployment Reinsurance Scheme could act as a "reinsurance fund” for national unemployment schemes. Third, a rainy day fund could accumulate funds from Member States on a regular basis and disbursements would be triggered on a pre-defined basis. These options all have their merits and can also be combined over time.
What the Commission envisages here is a stabilisation function which can support investment levels at national level and which can be developed over time, starting with loans and a relatively limited grant component. This would be in line with the importance this Commission attributes to investment as a driver of long-term growth, and would allow for a swifter roll-out in comparison to the two other options. Given the architecture and composition of the EU budget (annual balance and limitation on own resources), a stabilisation function would have to be constructed in such a way that it can reach its full potential over a certain period of time, notably to reach the necessary financial firepower.
The stabilisation function: a dedicated vehicle bringing EU public finances together to respond to large asymmetric shocks
In this construction, a dedicated vehicle managed by the Commission could bring together different sources of funding at European level in an efficient way to provide the stabilisation function. This vehicle would be based on the logic of a European Investment Protection Scheme and would aim to support well-identified priorities and already planned projects or activities at national level, such as those identified in the context of the national investment platforms mentioned above.
Subject to strict eligibility criteria, the Member State facing a large asymmetric shock would automatically be entitled to benefit from the assistance provided through the stabilisation function. A mixed support based on loans and budget support would kick in, which could be based on three components that can be progressively developed:
·The EU budget and the European Monetary Fund could provide loans guaranteed by the EU budget to the affected Member State. The European Monetary Fund could play a role of back-office to the stabilisation function by providing precautionary loans to deliver short-term liquidity support. This would be complemented by back-to-back loans guaranteed by the EU budget (for this, a limited borrowing capacity could be constructed in the post-2020 Multiannual
Financial Framework 28 ).The beneficiary Member State would reimburse those loans to the stabilisation function.
·The EU budget could provide some limited annually budgeted grant support to the Member States concerned. The corresponding appropriations would be committed on a specific budget line, possibly as part of the European Structural and Investment Funds for the participating Member States. This budgetary line would feed every year into the stabilisation function to help build up its capital. To avoid the crowding-out of resources for other EU policies, the related budgeted expenditure would be counted against the 'margin' between the Multiannual Financial Framework and the own resources ceilings. 29
·An insurance mechanism based on voluntary Member States' contributions could complement the grant support of the stabilisation function over time. Member States could contribute annually to this dedicated fund outside the EU budget and/or could agree on setting up a dedicated work stream of resources. Once Member States have committed to contribute and sufficient resources are accumulated, this mechanism would reinforce the capacity of the stabilisation function.
A European stabilisation function in support of investment
Source: European Commission
The Commission will continue to assess the further implications for the EU budget in the context of the preparation of the post-2020 Multiannual Financial Framework and will make the necessary proposals.
8.CONCLUSIONS
With this Communication, the Commission presents ideas for new budgetary instruments for a stable euro area within the Union framework.
For the period 2018-2020, the Commission proposes:
·To ensure a swift agreement, by mid-2018, and operationalisation, by 2019, of a backstop function to the Single Resolution Fund. This proposal is contained in the proposal for the establishment of a European Monetary Fund in the Union framework.
·To strengthen the activities of the Structural Reform Support Service in order to support reforms in all Member States, and to put in place a dedicated work stream for Member States on their way to joining the euro. This is reflected in the proposal to amend the Structural Reform Support Programme Regulation, with the objective of doubling the budget available for the activities of the Structural Reform Support Service for the period up to 2020.
·To extend the possibility to use the current performance reserve in the European Structural and Investment Funds in support of structural reforms, as a way to test the idea of a reform delivery tool in a pilot phase. This is reflected in a targeted change to the Common Provisions Regulation covering the European Structural and Investment Funds.
For the period after 2020, the Commission intends to present its proposals in May 2018, as part of the post-2020 Multiannual Financial Framework, which would include the following:
·A reform delivery tool to support Member States' reform commitments.
·Further technical support for specific actions at the request of the Member States.
·A dedicated convergence facility for Member States on their way to joining the euro.
·A stabilisation function for euro area Member States and open to all, in the event of large asymmetric shocks.
Appendix 1: Overview of available funds and firewalls
Source: European Commission
(1) COM (2017) 821, 6 December 2017.
(2) Completing Europe's Economic and Monetary Union, Report by Jean-Claude Juncker, in close cooperation with Donald Tusk, Jeroen Dijsselbloem, Mario Draghi and Martin Schulz, 22 June 2015.
(3) COM (2017) 291, 31 May 2017.
(4) COM (2017) 2025, 1 March 2017.
(5) COM (2017) 358, 28 June 2017.
(6)
On 15 July 2015, the Commission presented the Communication "A new start for jobs and growth in Greece" (COM (2015) 400) and proposed a series of exceptional measures which helped to maximise the absorption of EU funds in support of the Greek real economy.
(7)
Other such mechanisms include the Youth Employment Initiative, which provides support to Member States and regions facing high youth unemployment; 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.
(8)
By the end of November 2017, the deals approved under the European Fund for Strategic Investments (EFSI) amount to EUR 49.6 billion in financing and are located in all 28 Member States, with the European Fund for Strategic Investments expected to trigger EUR 251.6 billion in investments overall. Around 528,000 small and medium-sized companies (SMEs) are expected to benefit from improved access to finance.
(9) Council Regulation (EC) No 332/2002 of 18 February establishing a facility providing medium-term financial assistance for Member States' balances of payments (OJ L 53, 23 February 2002, p.1).
(10) The European Financial Stabilisation Mechanism was set up on 11 May 2010 on the basis of Council Regulation (EU) No 407/2010 of 11 May 2010 (OJ L 118, 12 May 2010, p.1). It functions in a similar way as the balance of payments facility but is available to all Member States, i.e. including euro area Member States.
(11) COM (2017) 821, 6 December 2017.
(12) The fact that these contributions are based on the Gross National Income of each Member State means that their absolute amount changes over time depending on the economic cycle, all other things being equal.
(13) Unlike national budgets, the EU budget cannot incur debt, as its revenue and expenditure must be in annual balance. Instead, it relies on financing through "own resources" There are three main types of own resources today: contributions from Member States based on their income level measured by Gross National Income, contributions based on Value Added Tax, and customs duties collected at the external borders of the Union.
(14) See the Reflection Paper on the future of EU finances of 28 June 2017, which also took inspiration from the final report and recommendations of the High Level Group on Own Resources December 2016. This Group was chaired by former Italian Prime Minister and EU Commissioner Mario Monti and was composed of members designated by the European Parliament, the Council and the European Commission.
(15) See also Article 4 of the Common Provisions Regulation (EU) No 1303/2013 of the European Parliament and of the Council of 17 December 2013.
(16) COM (2015) 12, 13 January 2015.
(17) COM(2017) 690, 22 November 2017.
(18) In Declaration 52 annexed to the Treaty of Lisbon, 16 Member States (Belgium, Bulgaria, Germany, Greece, Spain, Italy, Cyprus, Lithuania, Luxembourg, Hungary, Malta, Austria, Portugal, Romania, Slovenia and Slovakia) declared that for them the "euro as the currency of the European Union" would continue as a symbol to express the sense of community of the people in the European Union and their allegiance to it. By means of a parliamentary resolution of 27 November 2017 of the French National Assembly, France has taken steps to adhere to that declaration.
(19) According to Article 140 of the Treaty on the Functioning of the EU, the Commission and the European Central Bank present a report at least every two years. The next reports are expected in May 2018.
(20)
Statement of Eurogroup and Economic and Financial Affairs Council Ministers on the Single Regulation Mechanism backstop, 18 December 2013.
(21)
COM(2017) 592, 11 October 2017.
(22)
Article18 of the Single Resolution Mechanism Regulation.
(23) Regulation (EU) No 806/2014 of the European Parliament and of the Council of 15 July 2014 establishing uniform rules and a uniform procedure for the resolution of credit institutions and certain investment firms in the framework of a Single Resolution Mechanism and a Single Resolution Fund and amending Regulation (EU) No 1093/2010; see Article 18.
(24) A number of guiding principles were mentioned. A stabilisation instrument should i) minimise moral hazard and not lead to permanent transfers, ii) be strictly conditional on clear criteria and continuous sound policies, in particular those leading to more convergence within the euro area, iii) be developed within the EU legal framework, iv) be open and transparent vis-à-vis all EU Member States, and v) not duplicate the role of the European Stability Mechanism – the future European Monetary Fund – as crisis management tool.
(25)
In recent years, the Stability and Growth Pact has been reinforced to take account of what makes sense for a given Member State at the particular juncture of its economic cycle, for instance to avoid being contractionary when the circumstances call for the reverse. The Stability and Growth Pact provides for additional buffers in good times and the necessity for a smaller fiscal effort to be undertaken during difficult economic conditions.
(26) See footnote 7 in particular for examples of existing EU instruments designed to smoothen and/or absorb shocks.
(27) Such exceptional measures were taken to support Greece in recent years. Modulating co-financing rates could have a one-off stabilisation effect as it would help to keep afloat public investment which otherwise the Member States may be unable to finance. Adjusting pre-financing level could for instance mean advancing payments from the European Structural and Investment Funds agreed for the whole Multiannual Financial Framework period, subject to lower payments later on.
(28) It has to be noted that an increase of the own resources ceiling could be necessary, depending on the amount envisaged.
(29) The own resources decision and the Multiannual Financial Framework Regulation would have to be adjusted accordingly.