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ECOFIN May Force a Country to Ask for Help but in Confidentiality

Published on , , Sofia

The EU finance ministers discussed the new proposals for strengthening the economic governance of the euro area presented by the European Commission on 23 November 2011. The proposals are aimed at building upon the legislative package on EU's economic governance, adopted at the end of last year. euinside has already published a detailed analysis of the texts that can be read here.

The first proposal aims to strengthen surveillance on the budgetary policies in the euro area and requires member states to introduce debt brakes in their constitutions, to make their budget plans based on independent forecasts and to send them to Brussels by 15 October each year in order to be assessed by the Commission. If necessary, the Commission may require the preparation of a new budget plan. With regard to this proposal, the Danish Presidency of ECOFIN raised the question whether the requirement to submit their budget plans to be applied to all countries in the euro area, as proposed by the Commission, or only to countries in an excessive deficit procedure.

Most ministers supported the proposal all countries to provide in advance information on their budgets but asked the Commission to distinguish between those who follow the rules and those who violate them. For example, countries that are not in excessive deficit procedure could obtain preferential terms or relaxed requirements for the content of the information. The ministers stressed that this will create incentives for countries with good fiscal discipline to go on the same way.

Far more interesting were the discussions on the Commission's second proposal, which empowers the Council to recommend a member state in difficulty to request financial assistance. EU Economic and Monetary Affairs Commissioner Olli Rehn defended the need for such a measure with "past experience". I will not name specific countries, but our experience shows that delaying the application for financial assistance creates excessive market pressures and makes the rescue programme more costly, the commissioner explained. It is not too difficult to remember, for example, the case of Ireland, which was refusing to ask for a bailout loan and was under strong political pressure to accept it, in order to prevent the spread of the crisis inside the euro area.

Most countries supported this proposal too, but stressed that if the Council decided to recommend a Member State to ask for bailout this should be done in strict confidentiality until the decision on the loan was taken by the euro rescue fund too. The reason is that the temporary fund EFSF has a separate decision making process on granting financial assistance, according to certain conditions and its own voting rules. Some ministers pointed out that while the Council may decide on this issue by qualified majority, the rescue fund should decide unanimously, so a situation might arise where the Council recommends financial assistance, but the rescue fund is unable to secure it.

This problem will be solved after the enactment of the permanent bailout fund, the European Stability Mechanism (ESM). At their meeting on Monday evening (23 January) the EU finance ministers approved changes in the EMS treaty, whereby in an emergency situation the fund will be able to decide by a majority of 85% rather than the usual unanimity. The specific cases where qualified majority voting could be used will be clearly and specifically described, Commissioner Olli Rehn explained. The treaty has to be ratified by the member states to allow ESM to become operational by July this year.

The discussions on the two proposals are linked with the negotiations on the fiscal compact, so the texts of the two legislative proposals will not be finalised until the treaty is agreed. Based on article 136 of the Treaty on the Functioning of the European Union, the regulations require a qualified majority of delegations from the 17 countries of the euro area for adoption by the Council, after consulting the European Parliament.

And while the new Commission proposals find apparently a broad support in the Council of Ministers, the attitude of the European Parliament is quite the opposite. During the first discussion on the papers in the Committee on Economic Affairs MEPs expressed serious doubts about the democratic legitimacy of the proposed changes. They give too much power to the European Commission without it being accountable to anyone and at the expense of limiting the powers of national parliaments, lawmakers argue. The economic committee will continue this discussion in the end of February, when reports of Jean-Paul Gauzès for monitoring of countries with bailout programmes and of Elisa Ferreira for increased budgetary surveillance in the euro area will be presented.

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