# EUR-Lex - 52012DC0777 - EN

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# 52012DC0777

**COMMUNICATION FROM THE COMMISSION A blueprint for a deep and genuine economic and monetary union Launching a European Debate /* COM/2012/0777 final */**

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A BLUEPRINT
FOR A DEEP AND GENUINE EMU

Launching a
European debate

1. Rationale, aspirations, and
benefits of EMU

According to the Treaties, the
aim of the European Union is to promote peace, its values and the well-being of
its people. It shall work for the sustainable development of Europe based on
balanced economic growth and price stability, a highly competitive social
market economy, aiming at full employment and social progress, and a high level
of protection and improvement of the quality of the environment. It shall
promote economic, social and territorial cohesion, and solidarity among Member
States. The European Union shall establish an Economic and Monetary Union (EMU)
whose currency is the Euro (cf. Art 3 TEU).

The creation of the EMU and the
introduction of the euro were milestones of European integration. They stand
out among the EU's most far-reaching achievements and the euro is one of
Europe's defining symbols at home and across the globe. The founders of the EMU
pursued great aspirations with the single currency, both economic and
political. Some of these aspirations have already been realised, while others
remain to be achieved.

As the world's second largest
reserve currency, the euro is an integral feature of the global economy. It is
entrenched in balance sheets around the world. Its existence has helped to open
up the internal market to more than 330 million citizens living in the euro
area, by enabling immediate price comparisons for goods and services across
countries. By eliminating exchange rate risk and foreign transaction costs, the
euro also facilitates a more efficient distribution of resources, and makes
prices for goods and services fully transparent across countries. In our
interconnected electronic world, this levelling of the playing field of the
single market is a powerful tool for growth. The euro has demonstrably
facilitated trade between euro area countries and has equally promoted physical
and financial investment between Member States. The stability of the currency has
made the euro area an attractive investment destination. These trade and
investment gains have boosted growth and jobs. Ample liquidity provision by the
Eurosystem has helped to deal with problems in the interbank market during a
period of financial disruption and uncertainty. The euro area is a dynamic and
open construction. Despite the crisis, membership of the euro area, which is
constituted by 17 Member States and is set to increase in the future, has
remained an attractive prospect: Slovakia joined the single currency in January
2009 and Estonia joined in January 2011.

Weaknesses in
the initial design of EMU and
adherence to rules

By the time of the eruption of
the financial crisis in 2008 some euro area Member States had accumulated large
private and public debts, losses in competitiveness, and macroeconomic
imbalances. This rendered them particularly vulnerable when the crisis struck,
with considerable contagion effects across the euro area once it turned into a
sovereign debt crisis. The build-up of these vulnerabilities was partly due to
an insufficient observance of and respect for the agreed rules underpinning EMU
as laid down in the Stability and Growth Pact (SGP). In good part these
vulnerabilities stemmed from features of the original institutional setup of
EMU, in particular the lack of a tool to address systematically macroeconomic
imbalances.

EMU is unique among modern
monetary unions in that it combines a centralised monetary policy with
decentralised responsibility for most economic policies, albeit subject to
constraints as regards national budgetary policies. Unlike other monetary
unions, there is no centralised fiscal policy function and no centralised
fiscal capacity (federal budget)[1].
It has been clear since the inception of the euro that the increased
interdependence of its Member States meant that sound budgetary and economic
policies were of particular importance. The SGP[2]
set down the rules governing the coordination of budgetary policies. It also
foresaw action to be taken against Member States that did not comply with the
rules. It was thought that this coordination would be sufficient to ensure
sound policies at national level. Already in 2008, the Commission's EMU@10
report[3]
presented a range of possible changes to this setup. The crisis accelerated the
need for change.

The following issues have been
at the heart of the challenges faced by the euro area since 2008:

(a) The SGP was insufficiently
observed by the Member States and lacked robust mechanisms to ensure
sustainable public finances. The enforcement of the preventive arm of the SGP, which
requires that Member States maintain a strong underlying budgetary position,
was too weak and Member States did not use periods of steady growth to pursue
ambitious fiscal policies. At the same time, the debt criterion of the Treaty
was not rendered operational in practice in the corrective arm of the SGP. The
result was budgetary slippages during good times, and an inability to bring
down the debt levels of highly indebted countries.

(b) The coordination of
national economic policies beyond the budgetary area relied on soft instruments
– peer pressure and recommendations – and had a limited impact on the action of
individual euro area Member States. The instrument was therefore too weak to
counter the progressive opening of competitiveness gaps and growth divergences
between Member States. Little consideration was given to the euro area-wide spillover
effects of national measures. National economic policy-making paid insufficient
attention to the European context within which the economies operate. The
generalised absence of risks stemming from a global economic liquidity glut
contributed to this.

(c) Financial markets play an
important role in creating incentives for countries to run sustainable public
finances, by pricing the risk of default into the rate at which sovereigns can
borrow money. With the global easing of inflationary pressure in the late 1990s,
there was a rapid and sustained expansion in the money supply by central banks.
Along with new approaches to risk transfer in the financial system this
resulted in globalised excess liquidity, a pervasive search for yield and
ultimately a severe mispricing of risk of both private and public assets. In
parallel, with the introduction of the euro the European Central Bank (ECB)
relied on national bonds for its open market operations, thereby conferring
upon them the top-quality status required for central bank collateral. The
result was strong yield convergence, considerably limiting market discipline,
despite differences in national budgetary performances. This contributed, inter
alia, to the significant investments on sovereign bonds made by banks. Euro
area economies in a cyclical expansion and with relatively higher inflation
rates tended to enjoy low or even negative real interest rates. This led in
some countries to strong credit expansion fuelling significant housing bubbles.

(d) The inception of EMU saw a
sharp acceleration in the pace of financial integration. While this opened opportunities
for portfolio diversifications, it also accelerated the transmission of shocks
across national borders. Despite the increased market integration, the
responsibility for prudential supervision and crisis management remained
predominantly at the national level. This asymmetry between integrated
financial markets on the one hand, and a financial stability architecture still
nationally segmented on the other, resulted in inadequate coordination among
the relevant authorities at all stages of the current crisis. The absence of
common rules and euro area-wide supervisory and resolution institutions for the
financial sector was a major problem in responding to the crisis. The lack of
an integrated EU-level framework and of a mechanism to mutualise the response
to risks coming from the banking sector affecting several or all Member States,
resulted in powerful and damaging negative loops emerging between the banking
system and the sovereigns in the vulnerable countries. These loops fuelled the
debt crisis further and led to a reversal in the direction of capital flows. As
a result, some Member States have been excluded from market financing and there
has been a risk of contagion effects affecting the euro area as a whole. In
this context, the absence of an effective mechanism to provide liquidity to
Member States in distress and thus to manage contagion risk and to safeguard
euro area financial stability emerged as a clear inadequacy in the crisis
management arrangements.

While the EU has taken decisive
action to address those major challenges, EMU needs to be deepened further.
This Blueprint for a Deep and Genuine EMU describes the necessary elements and
the steps towards a full banking, economic, fiscal and political union.

2. The
measures taken so far: a crisis response

In tackling the crisis, the
Commission has taken a leading role in preserving the single market against
emerging protectionist tendencies and fragmentation according to national
borders, especially in the banking sector; in overhauling EMU's economic
governance to address the weaknesses of economic surveillance and in putting
forward important legislative proposals to initiate the reform of financial
sector supervision, in ensuring EU-level coordination and oversight of bank
rescue and in spear-heading support to the real economy under the European
Economic Recovery Programme.

The strong support of the
European Parliament has been instrumental in enabling quick progress on these
initiatives, and in bringing the legislative proposals quickly into force. In
2010, the Task Force set up by the President of the European Council for
strengthening economic governance enabled a swift emergence of consensus among
member states in support of the proposals by the Commission. Frequent meetings
of the European Council have resulted in important commitments and significant
steps by the member states to respond to Europe's crisis.

All euro area Member States and
most others have committed themselves to incorporating the EU rules and
principles of budgetary surveillance into their national legal frameworks under
the Treaty on Stability, Coordination and Governance in Economic and Monetary
Union (TSCG) signed by all EU countries except the Czech Republic and the UK in
March 2012. The creation of a financial firewall for the euro area and
successive decisions to increase its size and flexibility of operations and to
make it permanent have significantly strengthened the crisis management
capacity.

2.1       Budgetary surveillance

The Commission presented a
strategy for strengthening economic governance in Europe in its two Communications
of 12 May 2010 and 30 June 2010[4].
These Communications were followed up by a package of legislative proposals
adopted by the Commission on 29 September 2010.

As a result of efficient inter-institutional
cooperation, the legislative process proceeded quickly and the European
framework of economic and budgetary surveillance was overhauled in December
2011 with the adoption of a package of six legislative proposals (known as the
six-pack) designed to address the weaknesses revealed by the economic and
financial crisis. It comprised three Regulations strengthening the European
budgetary surveillance framework (the SGP), two Regulations introducing a new
surveillance procedure for macroeconomic imbalances and a Directive imposing
minimum standards for Member States' national budgetary frameworks.

The legislative package
drastically reinforced the preventive arm of the SGP by introducing an
expenditure rule anchoring expenditure growth to the medium-term growth rate of
potential GDP. The legislation also introduced the possibility of sanctions
early in the process. Countries will now face lodging an interest-bearing
deposit of 0.2% of GDP if their underlying budgetary position is not strong enough.
The new legislation also provides for stronger action to correct gross policy
errors within the corrective arm of the SGP and a new quantified rule requiring
those Member States that exceed the debt threshold of the Maastricht Treaty to
reduce the excess rapidly. The launch of an Excessive Deficit Procedure (EDP)
can now result from unfavourable government debt developments as well as from
high government deficits. The introduction of the reverse qualified majority rule
significantly strengthens the Commission's hand in decisions relating to
sanctions on euro area Member States. Whereas in the past, such decisions
required the support of a qualified majority in the Council, in future, a
qualified majority would be required to halt the sanction proposed by the
Commission.

The six-pack also included the
adoption of a Directive defining minimum requirements for national budgetary
frameworks to ensure that Member States’ fiscal frameworks are fit to respect
the EU rules. This concept, of ensuring that the national decision-making
processes are set up to deliver policy in line with the European requirements
is also at the heart of the intergovernmental Treaty on Stability, Coordination
and Governance in Economic and Monetary Union (TSCG). Euro area signatory Member
States have committed to integrating the core principles of the SGP straight
into their national legal framework through provisions of binding force and
permanent character which will include a national correction mechanism
supervised by an independent monitoring body to ensure compliance with the
budgetary targets in the preventive arm of the Pact. Although it is
intergovernmental, the TSCG foresees incorporating its provisions into Union
law within 5 years. The Commission is already working with the European
Parliament and the Council to integrate some of the TSCG elements into EU law
applicable to euro area Member States through the legislative proposals known
as the two-pack, which are currently in the EU decision-making process.

The two-pack – which consists
of two Regulations – was proposed by the Commission in November 2011 and aims
to further reinforce both budgetary coordination and budgetary surveillance,
for more targeted prevention and more effective corrective action in case of
deviations from the budgetary policy requirements deriving from the SGP. All
Member States of the euro area will present ahead of parliamentary adoption
their draft budgetary plans for the forthcoming year to the Commission and to
their euro area partners, according to a common timetable. The two-pack also
strengthens the monitoring and surveillance procedures for Member States
experiencing severe difficulties with regard to their financial stability or
for those in receipt of financial assistance.

2.2       Economic policy surveillance

A major weakness of the
pre-crisis surveillance arrangements was the lack of systematic surveillance of
macroeconomic imbalances and competitiveness developments. While such
developments were analysed in the context of the Commission's reports on Member
States, including the opinions on the Stability and Convergence Programmes, and
in the euro area's informal competitiveness reviews every two years, there was
no formal instrument for their systematic analysis and follow-up through
concrete policy recommendations. The six-pack introduced a new Macroeconomic
Imbalances Procedure (MIP) to close this gap: a new surveillance mechanism
aiming to prevent macroeconomic imbalances and to identify and allow the timely
correction of any emerging competitiveness divergences. It is based on an alert
system that uses a scoreboard of indicators and in-depth country studies to
identify imbalances and launch a new Excessive Imbalance Procedure (EIP) where
necessary. The new procedure is backed up by enforcement provisions in the form
of financial sanctions for euro area Member States which do not comply with the
EIP.

The various components of
economic, budgetary and structural surveillance were also fully integrated as a
result of changes introduced since the onset of the crisis which set up the
European Semester. While these components were previously assessed separately,
their surveillance is now undertaken in parallel over the first six months of
each calendar year, allowing Member States to take country-specific guidance
into account in their national budgetary processes over the next six months.
Policy advice is given to Member States before they finalise their draft
budgets for the following year.

2.3       Financial
regulation and supervision

Over the past four years, the
European Union has taken decisive steps in the area of financial regulation and
supervision and an ambitious and substantial financial reform agenda is being
implemented. The aim is to make financial institutions and markets, which have
been at the heart of the crisis, more stable, more competitive and more
resilient. The Commission President asked Jacques de Larosière, the former IMF
Managing Director and Governor of the Banque de France, to present a
comprehensive report on the appropriate measures. Drawing on the de Larosière
Report, the Commission proposed a comprehensive programme of financial
regulatory reform.

Stronger prudential
requirements for banks have been proposed under the fourth Capital Requirements
Directive and the Capital Requirements Regulation (CRD4/CRR) currently under
discussion. For the first time, the capital adequacy requirements will be
enshrined in a Regulation and not a Directive. The adoption of the Capital
Requirement Regulation will be a significant step forward in the completion of
the single rulebook for financial institutions in the European Union. The EU
has also taken action in the field of governance by introducing binding rules
on remuneration practices to avoid excessive risk-taking by the banks.

The EU tightened supervision of
the financial markets by establishing a European System of Financial
Supervisors (ESFS) composed of three European Supervisory Authorities (ESAs) –
the European Banking Authority (EBA), the European Insurance and Occupational
Pensions Authority (EIOPA) and the European Securities and Markets Authority
(ESMA) – and of a macro-prudential watchdog, the European Systemic Risk Board
(ESRB). The three ESAs work together with Member States' national supervisory
authorities to ensure harmonised rules and a strict and coherent implementation
of the new requirements. The ESRB monitors threats to the stability of the
whole financial system, allowing any weaknesses to be addressed in due time.

Credit Rating Agencies, which
played an important role in triggering the crisis, are now closely supervised
by ESMA. Legislation adopted in 2012 will ensure that all standardised over-the-counter
derivatives are cleared by central counterparty clearinghouses, reducing the
risk of default of counterparties. In addition, all standardised and
sufficiently liquid derivatives will be traded on regulated platforms once the
legislation proposed by the Commission is adopted. The issue of short selling
has already been addressed, through the adoption of legislation increasing
transparency.

2.4       Crisis resolution mechanisms

A key part of the crisis
resolution approach was the development of a crisis resolution mechanism that
would address financial market fragility and mitigate the risk of contagion
across Member States. On the Commission’s initiative, in May 2010 two temporary
crisis resolution mechanisms were established: the European Financial
Stabilisation Mechanism (EFSM) and the European Financial Stability Facility
(EFSF). The EFSM is a financial support instrument backed by the resources of
the EU budget, available to all 27 Member States of the European Union, and
based on the existing Treaty framework. The EFSF is a company owned by the euro
area Member States, incorporated in Luxembourg, whose functioning is regulated
in an intergovernmental agreement. The EFSF's lending capacity is backed solely
by the guarantees of participating Member States, and is accessible only to the
euro area Member States.

Faced with the further
entrenchment of the crisis, euro area Member States made the existing support
mechanisms more robust and more flexible; and eventually decided on the
creation of a permanent crisis resolution mechanism to better protect the
financial stability of the euro area and of its Member States. As a result, the
euro area's permanent financial backstop, the European Stability Mechanism
(ESM) was finally inaugurated on 8 October 2012, and is now fully operational following
completion of ratification of the ESM Treaty by all euro area Member States.
The ESM is the world's most capitalised international financial institution and
the world's biggest regional firewall (€500 bn).  Its creation is a key step
for ensuring that the euro area has the capacity needed for rescuing Member
States experiencing financial difficulties from default. On 27 November 2012,
the European Court of Justice confirmed that the ESM Treaty is in line with EU
law as it stands.[5]

The ECB has played a crucial
role in the euro area response to the economic and financial crisis. First, the
official refinancing rate has been lowered almost to zero, as the economy has
slowed. In addition, the ECB has taken a range of measures to address the
effects of the crisis on the functioning of financial markets when interbank
market activity nearly stalled. One of the earliest of these effects was the
drying-up of wholesale funding for banks, amid concerns about the quality of
assets on their balance sheets. The ECB responded to this by expanding banks'
access to monetary policy operations via a relaxation of collateral rules for
both standard refinancing operations and for emergency liquidity assistance. In
May 2010, the Eurosystem started the Securities Market Programme (SMP), purchasing
government bonds in limited and sterilised interventions. As funding pressures
intensified in the second half of 2011, threatening financial stability across
the euro area, the ECB provided banks with access to exceptionally long-term
refinancing operations (LTROs) with maturities of up to three years (compared
to a maximum maturity of three months under normal procedures). The three LTRO
allotments have had a powerful impact on investor sentiment and have
substantially eased the pressure building in funding markets. While access to
wholesale funding remains problematic for many banks, there has been recent
evidence of a gradual thawing in these markets especially for larger banks.

The spread of the crisis to
sovereign debt markets and the development of negative feedback loops between
banks and sovereigns has resulted in a broader fragmentation of the euro area
financial system and the emergence of so-called "redenomination risk"
linked to fears about the reversibility of the euro. The ECB has adopted a
decision as a basis to undertake Outright Monetary Transactions (OMT) in the
secondary sovereign bond markets subject to strict and effective conditionality[6]. The objective
is to safeguard proper transmission of the ECB's policy stance to the real
economy throughout the euro area and to ensure the singleness of monetary
policy. The transactions would be undertaken strictly within the ECB's mandate
to maintain price stability over the medium term. A necessary condition for
Outright Monetary Transactions is strict and effective conditionality attached
to an appropriate European Financial Stability Facility/European Stability
Mechanism (EFSF/ESM) programme. As long as programme conditionality is fully
respected, the ECB Governing Council will consider Outright Monetary
Transactions to the extent that they are warranted from a monetary policy
perspective. They will be terminated once their objectives are achieved or when
there is non-compliance with the macroeconomic adjustment or precautionary
programme. The liquidity created through Outright Monetary Transactions will be
fully sterilised.  The announcement of the OMT programme, which replaces the
more limited Securities Market Programme, has again had a powerful impact on
investor sentiment, resulting in a significant decline in sovereign yields in
the vulnerable Member States.

EMU
has been overhauled, but the work is not yet complete

The totality of measures taken so
far amounts to a strong response to the crisis, particularly when compared with
what was considered politically feasible only a few years ago. It has taken
time to put in place many of these measures, such as the overhauled instruments
of economic and budgetary policy coordination or the permanent financial
firewall. Also, for some of these measures to have a positive impact on
confidence, they will need to be seen working well for some time. That is one
reason why – despite a strong response – it has not been possible to prevent
the sovereign debt crises from turning into a crisis of confidence that threatens
to put into question the integrity of the euro area itself.

Another factor behind this has
been the gap between the sharp acceleration of financial integration under EMU
on the one hand, and the comparatively slow progress in the integration of EU-level
financial regulation and supervision on the other.

The lack of strong
supra-national EU-level institutions for bank supervision made the management
of the crisis much more difficult and costly for the taxpayer than it otherwise
would have been. More importantly, in the absence of such institutions, the
crisis of confidence combined with the lack of appropriate governance of the
financial sector (architecture for regulation, supervision and resolution) and
the consequent public authorities' response based on national interest, resulted
in a re-fragmentation of financial markets, as risk pricing based on national
benchmark bonds led to distinctly different financing conditions for businesses
and households in different euro area Member States, thereby wiping out many
benefits of European financial integration.

This has worked as an
additional drag on growth in some Member States, as credit conditions tightened
in particular where activity was already slow, further exacerbating the
existing feedback interactions between banks and sovereigns in the Member
States concerned and further constraining their capacity to grow out of the crisis,
ultimately with implications for their capacity to refinance themselves in the
markets and the potential need for financial assistance. Conversely, credit
conditions eased further in Member States where activity was already relatively
strong.

The lack of strong integrated
EU-level institutions thus effectively resulted in the reversal of integration
and caused damage to the level playing field for businesses and households
simply on account of their location on one or the other side of a border
between two Member States of the euro area. Quasi-identical businesses within
only a few kilometres on two different sides of such a border may no longer be
able to finance investments on comparable terms. On one side of the border
investment may stall and unemployment rise, as credits are not granted on
feasible terms. On the other side, investment costs and unemployment may fall
to new lows at the very same time. The same applies to the financing conditions
accorded to private households. Such diverging developments that are detached
from economic fundamentals and the needs of citizens and businesses can hamper the
whole project of European integration.

Ultimately, the negative
feedback loop between sovereigns and banks and the associated re-fragmentation
of the EU's financial markets led to the emergence of a re-denomination risk,
the bet by financial market participants that this development would eventually
threaten the existence of the single currency.

Anachronistically, more than 50
years after the foundation of the European Union the crisis of confidence
appears to be reinstating the constraining power of national borders, questioning
the Single Market and threatening the achievements and as yet unfulfilled
aspirations of Economic and Monetary Union. This is also a threat to the
European Union's model of a social market economy.

The lessons learned in the
context of the economic, financial, and sovereign debt crises since 2008 have
been drivers of a major overhaul of the economic governance of Economic and
Monetary Union, which has already led to unprecedented steps. This overhaul has
made EMU much more robust than it was at the onset of the crisis. The crisis
has clearly demonstrated how much the interdependence of our economies has
increased since the foundation of EMU. It has also shown beyond any doubt that
success or failure of EMU will be a success or a failure for all involved.

The threat entailed in the
crisis of confidence is however much more fundamental. It therefore requires a
much more fundamental response. That response must be able to restore
confidence that the achievements of the Single Market and the single currency
will not be undone and that their as yet unfulfilled achievements will be
realised and maintained for citizens and businesses for the future.

To be effective and credible,
that response must first of all deal with the pressing practical difficulties
citizens, businesses, and Member States face today. A banking union would be
able to end the disintegration of the EU's financial market and ensure
reasonably equal financing conditions for households and business across the
EU; it would help sever the negative feedback loops between Member States and
banks; and it would help ensure that divergences between the business cycles
across the euro area are not artificially amplified. Second, the response must
set out the vision for a more deeply integrated EMU to be achieved in the
future. And third, it must chart a clear and realistic path towards that
ultimate ambition based on the firm commitment of the EU's institutions and its
Member States.

3. The way forward: combining
substantial ambition with appropriate sequencing

EMU is facing a fundamental
challenge, in particular as regards the euro area, and needs to be strengthened
to ensure economic and social welfare for the future. The European Council in
June 2012 invited the President of the European Council, in close collaboration
with the President of the Commission, the President of the Euro Group and the
President of the ECB, to present a specific and time-bound roadmap for the
achievement of a genuine EMU. An interim report was presented to the October
European Council, and a final report is due in December 2012. The European Parliament
adopted on 20 November its report "Towards a genuine Economic and Monetary
Union", which outlines the Parliament’s preferences for a more deeply integrated
EMU. The Commission's proposal on the way forward is outlined in this
blueprint.

A comprehensive vision for a
deep and genuine EMU conducive to a strong and stable architecture in the financial,
fiscal, economic and political domains, underpinning stability and prosperity
is necessary. In such a deep and genuine EMU all major economic and fiscal
policy choices of its Member States should be subject to deeper coordination,
endorsement and surveillance at the European level. These policies should cover
also taxation and employment, as well as other policy areas crucial for the
functioning of EMU. Such an EMU should also be underpinned by an autonomous and
sufficient fiscal capacity that allows the policy choices resulting from the
coordination process to be effectively supported. A commensurate share of
decisions with regard to revenue, expenditure and debt issuance should be
subject to joint decision-making and implementation at the level of EMU.

It is clear that the current
EMU cannot be completed overnight by a transformation into a deep and fully
integrated version, in particular considering the significant additional
transfer of political powers from the national to the European level. In order
to arrive at an EMU that can ensure its citizens stability, sustainability and welfare
on a permanent basis, decisive steps towards the goal need to be launched
already in the short term (within the next 6-12 months). Such steps need then
to be followed by further steps in the medium and long term. The steps to be
taken in the short, medium and long term must build on each other and follow
from each other.

The way forward needs to be carefully
balanced. Steps towards more responsibility and economic discipline should be
combined with more solidarity and financial support. This balance has to be
struck in parallel and in each phase of the development of EMU. The deeper integration
of financial regulation, fiscal and economic policy and corresponding instruments
must be accompanied by commensurate political integration, ensuring democratic
legitimacy and accountability.

This chapter identifies the steps
and actions required in the short, medium and long term to arrive at a deep and
genuine EMU on a permanent basis, from stronger policy coordination to fiscal
capacity to greater pooling of decisions on public revenue, expenditure and debt
issuance.

Some of the instruments can be
adopted within the limits of the current Treaties. Others will require modifications
of the current Treaties and new competences for the Union. The former can
therefore progress in the short term and should be completed at the latest in the
medium term. The latter can only be initiated in the medium term and completed
in the long term. It should however be clear throughout that the concept is a
holistic one in which each stage builds on the previous one.

In the short term (within the
next 6-18 months), while immediate priority
should be given to the full deployment of the new economic governance tools
brought by the six-pack as well as rapid adoption of current Commission
proposals such as the two-pack and the Single Supervisory Mechanism, more can
still be done through secondary law, in particular in the area of economic
policy coordination and support to structural reforms necessary to overcome
imbalances and to improve competitiveness. Once a decision on the next Multi-annual
Financial Framework for the EU has been taken, the establishment of a financial
instrument within the EU budget to support re-balancing, adjustment and thereby
growth of the economies of the EMU would serve as the initial phase towards the
establishment of a stronger fiscal capacity alongside more deeply integrated
policy coordination mechanisms. Together, the next step in fiscal and economic
policy coordination and the corresponding initial phase of the build-up of a
fiscal capacity could take the form of a "convergence and competitiveness
instrument". Following the adoption of the Single Supervisory Mechanism, a
Single Resolution Mechanism for banks will be proposed.

In the
medium term (18 months to 5 years), further budgetary
coordination (including a possibility to require a revision of a national
budget in line with European commitments), the extension of deeper policy
coordination in the field of taxation and employment, and the creation of a
proper fiscal capacity for the EMU to support the implementation of the policy
choices resulting from the deeper coordination should be established. Some of
these elements will require amending the Treaties.

The reduction
of public debt significantly exceeding the Treaty criterion could be addressed
through the setting-up of a redemption fund. A possible
driver for fostering the integration of euro area financial markets and in
particular to stabilise volatile government debt markets is common issuance by euro
area Member States of short-term government debt with a maturity of up to 1 to
2 years. Both of these possibilities would require
amending the Treaties.

Finally, in the long term
(beyond 5 years), based on the progressive pooling
of sovereignty and thus responsibility as well as solidarity competencies to
the European level, the establishment of an autonomous euro area budget
providing for a fiscal capacity for the EMU to support Member States in the
absorption of shocks should become possible. Also, a deeply integrated economic
and fiscal governance framework could allow a common issuance of public debt,
which would enhance the functioning of the markets and the conduct of monetary
policy. As set out in the Commission's Green Paper of 23 November 2011 on the feasibility
of introducing Stability Bonds[7],
the common issuance of bonds could create new means through which governments
finance their debt and offer safe and liquid investment opportunities for
savers and financial institutions, as well as a euro area-wide integrated bond
market that matches its US dollar counterpart in terms of size and liquidity.

This progressive further
integration of the euro area towards a full banking, fiscal and economic union
will require parallel steps towards a political union with a reinforced
democratic legitimacy and accountability.

The progress in terms of
integration will also have to be reflected externally, notably through steps towards
united external economic representation of the euro area.

Box
1: The basic legal principles

In
order to secure the sustainability of the common currency, the EMU must have
the possibility to deepen more quickly and more thoroughly than the EU as a
whole, whilst preserving the integrity of the EU at large.

This
can be achieved through the observance of the following principles:

First,
the deepening of the EMU should build on the institutional and legal framework
of the Treaties, for the sake of legitimacy, equity between Member States and
efficiency. The euro area is a product of the Treaties. Its deepening should be
done within the Treaties, so as to avoid any fragmentation of the legal
framework, which would weaken the Union and question the paramount importance
of EU law for the dynamics of integration. Only EU decision-making rules
provide full efficiency, resting on qualified majority instead of burdensome
unanimity requirements and on a robust democratic framework.

Intergovernmental
solutions should therefore only be considered on an exceptional and
transitional basis where an EU solution would necessitate a Treaty change, and
until that Treaty change is in place. They must also be carefully designed so
as to respect EU law and governance, and not raise new accountability problems.

Second,
the deepening of EMU should primarily and fully exploit the potential of the EU-wide
instruments, without prejudice to the adoption of measures specific to the euro
area. The European Semester, the internal market acquis and the support
to competitiveness and cohesion through the EU budget provide a good basis for
developing a comprehensive legal and financial framework for economic
coordination, integration and real convergence. On-going efforts to make these
policies more effective through e.g. macroeconomic conditionality of the
structural funds or the new governance approach of the single market will also
contribute to the strengthening of EMU.

At the
same time, additional financial, fiscal and structural coordination or support
instruments specific to the euro area should be established whenever needed and
should be designed as a complement to the EU's foundations. The Lisbon Treaty
has provided a useful legal basis (Article 136 TFEU) for deepening the integration
of the euro area. This legal basis has been already widely used with the
successive six-pack and two-pack.

Wherever
legally possible the euro area measures should be open for participation of other
Member States. Indeed, while the Treaties foresee that a number of rules apply
only to euro area Member States, the present configuration of the euro area is
only of a temporary nature, since all Member States but two (Denmark and the
UK) are destined to become full members of EMU under the Treaties.

Third,
moves towards a genuine EMU should primarily be constructed using all the
possibilities offered by the Treaties as they stand, via the adoption of
secondary legislation. Amendments to the Treaties should be contemplated only
where an action indispensable for improving the functioning of the EMU cannot
be constructed within the current framework. Possible changes should be
carefully prepared, so as to ensure the political and democratic ownership needed
for a smooth ratification process.

3.1 In the short term (within
the next 6-18 months): measures possible under secondary EU law to move towards
the banking union, improve policy coordination as well as taking a decision on
the next MFF and creating a "convergence and competitiveness
instrument"

The deepening of EMU must
address the consequences of excessive public and private debt accumulation, and
thereby reduce the associated imbalances that were generated in the European
economy. But adjustment is proving a long and difficult task, involving constraints
in the credit supply, stretching public finances, and weak growth in the
private sector as firms and households clean their balance sheets.

Commitment to budgetary
discipline is an essential safeguard of the stability of the euro area, and a
necessary step towards a fully-fledged integrated budgetary framework. This
will ensure sound budgetary policies at the national and European levels and
thereby contribute to sustainable growth and macroeconomic stability. Full
deployment of the new tools for budgetary and economic surveillance and quick
adoption of the current proposals should be the first priority. In parallel,
the progress towards a banking union needs to start through the adoption and
implementation of the proposals made on financial regulation and supervision,
notably the proposal for a Single Supervisory Mechanism (SSM) for the euro area
and for non-euro area Member States wishing to join.

To ensure a smooth functioning
of the EMU, more should be done in the area of coordination of economic
policies. The weight of the growth and adjustment challenge in the euro area
contrasts with the absence of strong forms of policy coordination in the area
of structural reforms. The evidence of large cross-country externalities calls
for a reinforcement of the way in which economic policy must be run in the euro
area. The proper functioning of the EMU requires that euro area Member States
work jointly towards an economic policy where, whilst building upon the existing
mechanisms of economic policy coordination, they take the necessary actions and
measures in all areas which are essential to the proper functioning of the euro
area. In particular, the setting-up of a procedure for the ex-ante discussion
of all major economic policy reforms is necessary. This should be underpinned
with the corresponding initial phase of the build-up of a fiscal capacity for the
EMU, providing targeted financial support for the Member States facing
adjustment difficulties.

Recalling the importance of
sound public finances, structural reform and targeted investment for
sustainable growth, the Heads of State or Government signed a Compact for
Growth and Jobs on 28-29 June 2012, demonstrating their determination to
stimulate job-creating growth in parallel to their commitment to sound public
finances. The Commission is also monitoring the impact of tight budget
constraints on growth-enhancing public expenditure and on public investment. In
this context, the euro area should ensure that investment is kept at an adequate
level in order to ensure the framework conditions for competitiveness
developments and to contribute to growth and jobs.

All the initiatives presented
in this section can be adopted in the short-term and within the limits of the
current Treaties.

3.1.1 Full implementation
of European Semester and six-pack and quick agreement and implementation of the
two-pack

The completion of the current
economic governance framework and its full implementation must be the first
order of the day.

The introduction of the
European Semester as well as the six-pack legislation has addressed central
lessons learned in the context of the crisis. They included a reform of the SGP,
the creation of the Macroeconomic Imbalances Procedure, and the introduction of
minimum standards for national fiscal frameworks. They represent a leap forward
in terms of economic policy coordination. This promises stronger policy
implementation at national level, in particular for euro area Member States,
and a better functioning of EMU as a consequence, thereby contributing to a
return of confidence. That promise must now be delivered through the full use
and strict implementation of the new tools that are already in place.

For any further steps towards a
deep and genuine EMU to become possible the proposed two-pack legislation ought
to be agreed by co-legislators without any further delay. The two-pack contains
important instruments to sharpen budgetary surveillance and to deal more
efficiently with situations of financial instability in Member States. Its swift
adoption and implementation thereafter should bolster confidence in the
commitment of EU institutions to complete the overhaul of economic governance.

3.1.2 Financial
regulation and supervision: single rulebook and
proposals for a Single Supervisory Mechanism

The euro area summit held on 29
June 2012 marked a turning point in the approach to the crisis. It recognised
the "imperative" need to "break the vicious circle between banks
and sovereigns" that is weakening the finances of euro area countries, to
the point of threatening the very existence of the EMU. In particular, the
agreement to set up a Single Supervisory Mechanism (SSM) was based on the
conviction that financial fragmentation must be overcome and that the centralisation
of banking supervision is necessary to ensure that all euro area countries can
have full confidence in the quality and impartiality of banking supervision.

A true Economic and Monetary
Union must indeed include shared responsibility for policing the banking sector
and intervening in case of crises. This is the only way to effectively break
the vicious circle linking Member States' public finances and the health of
their banks, and to limit negative cross-border spillover effects.

An integrated financial
framework, evolving over time into a full banking union, would help decisively by
providing an integrated set of tools better to monitor and contain the risk in
the financial system. That would lessen financial fragmentation, considerably
reduce the necessity for public intervention, aid rebalancing and in so doing
improve the prospects for growth. The tools are integrated because their impact
will be lessened if any individual components are weak. Although some necessary
parts of the system will take time to develop, that must not delay the swift
implementation of those elements that can bring immediate benefits.

The Commission set out a vision
of a gradually unfolding banking union in its Communication of 12 September
2012.[8]
The Presidents of the European Council, the Commission, the Euro
Group and the ECB have endorsed that vision in
principle.[9]
The European Council of 18 October 2012 confirmed the "need to move
towards an integrated financial framework, open to the extent possible to all
Member States wishing to participate."[10] In
its report "Towards a genuine Economic and Monetary Union" of
November 2011, the European Parliament calls for the adoption of the proposals
of the Commission in this respect as soon as possible.

The first, crucial step on this
path will be the Single Supervisory Mechanism, which must subsequently be
complemented by a Single Resolution Mechanism (see 3.2.1).

A Single Supervisory Mechanism
must ensure full sharing of information between supervisors about banks, common
prevention tools and common action to address problems at the earliest possible
stage. In order to restore confidence among banks, investors and national
public authorities, it must also allow for supervision to be carried out in a
strict and objective manner, with no room left for regulatory forbearance.

On 12 September 2012, the
Commission made legislative proposals to create a Single Supervisory Mechanism
composed of the ECB and national supervisors,[11] and to amend the
2010 regulation establishing the European Banking Authority in order to adapt
it to the creation of the Single Supervisory Mechanism and ensure a balance in
its decision-making structures between euro area and non-euro area Member
States[12].

The Single Supervisory Mechanism
as proposed by the Commission is based on the transfer to the European level of
specific, key supervisory tasks for banks established in the euro area Member
States and for banks established in non-euro area Member States which decide to
join the banking union. Under this new framework, the ECB will be responsible
for supervising all banks within the banking union, to which it will apply the
single rulebook applicable across the single market. The framework proposed by
the Commission ensures effective and consistent supervision in all
participating Member States, while relying on the specific know-how of national
supervisors. It is of crucial importance that the negotiations on the SSM are
completed before the end of the year, and that its implementation starts early
on in 2013. As a complement, the European Banking Authority
(EBA) will be adjusted to the new framework for banking supervision in order to
ensure the integrity of the Single Market.

This will pave the way towards
the use of the ESM as a public backstop in order, where appropriate, and once
an agreement has been reached on this instrument, to directly recapitalise
banks in accordance with the conclusions of the European Council of 19 October
2012. This will further reinforce the euro area, by helping to break the
negative feedback loop between banks and their sovereigns.

Depositor and market
participants' confidence is paramount in resolving banks. To achieve a level of
public trust that is comparable to the best resolution authorities around the
world, there will need to be a credible single resolution system and a powerful
financial backstop in place. That responsibility remains national in the near
term. But once the SSM is in place, and subject to the relevant guidelines, the
ESM should be allowed to offer mutualised support to directly recapitalise
banks that fail to raise funds in the market and that cannot be rescued by their
home Member State without endangering its fiscal sustainability.

An
integrated financial framework including a single supervision and subsequently
a single resolution mechanism must be based on a single rulebook. Therefore, it
is essential to conclude as a matter of urgency the negotiations on the
Commission proposals establishing new regulatory frameworks in the areas of
banking prudential rules, deposit guarantees, and bank recovery and resolution.

3.1.3 A Single Resolution
Mechanism

An effective banking union
requires not only a Single Supervisory Mechanism ensuring high quality
supervision across Member States, but also a Single Resolution Mechanism to deal
with banks in difficulties. This was recognised by the European Council on 19
October 2012, which stated that it "notes the Commission's intention to
propose a single resolution mechanism for Member States participating in the
SSM once the proposals for a Recovery and Resolution Directive and for a
Deposit Guarantee Scheme Directive have been adopted."

Following the adoption of the
Single Supervisory Mechanism, the Commission will therefore make a proposal for
a Single Resolution Mechanism, which will be in charge of the restructuring and
resolution of banks within the Member States participating in the Banking
Union. This mechanism will be articulated around a separate European Resolution
Authority, which will govern the resolution of banks and coordinate in
particular the application of resolution tools. This mechanism will be more
efficient than a network of national resolution authorities, in particular as
regards cross-border banking groups for which, in times of crisis, speed and
coordination are crucial to minimise costs and restore confidence. It would
also entail significant economies of scale, and avoid the negative
externalities that may derive from purely national decisions.

Any intervention by the single
resolution mechanism will have to be based on the following principles:

- The need for resolution
should be reduced to the minimum, thanks to strict common prudential rules, and
improved coordination of supervision within the Single Supervisory Mechanism.

- Where intervention by the Single
Resolution Mechanism is necessary, shareholders and creditors should bear the
costs of resolution before any external funding is granted, in accordance with
the Commission proposal on Bank Recovery and Resolution.

- Any additional resources
needed to finance the restructuring process should be provided by mechanisms
funded by the banking sector, instead of using taxpayers' money.

Future Commission proposals for
a single resolution mechanism will be based on these principles.

The Commission considers that,
just as the establishment of an effective Single Supervisory Mechanism, the
creation of a Single Resolution Mechanism can be realised by secondary law
without require any amendment of the current Treaties.

3.1.4    A
quick decision on the next Multi-annual Financial Framework (MFF)

The
Commission proposal for the 2014-2020 Multi-annual Financial Framework
represents the decisive driver for investment, growth and employment at the EU
level. It also foresees to tie the funding from cohesion policy, rural development
and the European maritime and fisheries policy more systematically to the
different economic governance procedures. The Common Strategic Framework
(covering the following 'CSF Funds': the European Regional Development Fund,
the European Social Fund, the Cohesion Fund, the European Agricultural Fund for
Rural Development and the European Maritime and Fisheries Fund) establishes a
strong link between these funds and the national reform programmes, the
stability and convergence programmes drawn up by the Member States, as well as
the country-specific recommendations adopted by the Council for each Member
State.

This
will be implemented via partnership contracts/agreements between Member States
and the Commission and the application of rigorous macroeconomic
conditionality.  In the Commission proposal macroeconomic conditionality is
applied in two ways:

1.
Reprogramming: this concerns amendments to the
partnership contracts and relevant programmes in support of Council
recommendations, or to address an excessive deficit, macroeconomic imbalances
or other economic and social difficulties or to maximise the growth and
competitiveness impact of the CSF Funds for Member States receiving financial
assistance from the EU. Where a Member State fails to respond satisfactorily to
such a request, the Commission may suspend part or all of the payments for the
programmes concerned.

2.
Suspension: when a Member State fails to take
corrective action in the context of the economic governance procedures. In such
a case, the Commission shall suspend part or all of the payments and
commitments for the programmes concerned.

The
partnership contracts and operational programmes will ensure that the planned
investments co-financed by the CSF funds will effectively contribute to
addressing the structural challenges facing Member States. In the case of
Council recommendations in the context of Articles 121 and 148 of the Treaty
and the corrective arm of the MIP, a reprogramming will be triggered for those
recommendations that are relevant for the CSF funds and related to structural
challenges that can be addressed through multi-annual investment strategies.
Such recommendations cover, among other things:

•
Labour market reforms that will improve the
functioning of the labour market such as addressing the skills mismatches

•
Measures to foster competitiveness such as the
improvement of education systems or the promotion of R&D, innovation and
infrastructure

•
Measures to improve the quality of government
such as the improvement of the administrative capacity and statistics

Through a swift adoption of the
MFF and the relevant sector legislation, in particular the "Common
Provisions Regulation" for the CSF Funds, incentives and support for
structural reforms in Member States will be rapidly strengthened.

3.1.5 Ex-ante
coordination of major reforms and the creation of a "Convergence and Competitiveness
Instrument"

The fact that Member States'
economic policies are a matter of common concern has been brought into sharp
relief through the experience of the crisis, especially in the euro area. Slow
or absent implementation of important structural reforms over long periods of
time aggravated competitiveness problems and hampered Member States' adjustment
capacity, in some cases significantly. This contributed to increasing these
Member States' vulnerability. Short-term costs, be they political or economic
in nature, often act as a deterrent to reform implementation even when the
medium- to long-term benefits are sizeable. The potentially significant spillover
effects associated with structural reforms in the euro area justify the use of specific
instruments, as has already been done through the enforcement mechanisms introduced
under the six-pack legislation. In view of these considerations, the existing
framework for economic governance of the euro area should be strengthened
further through ensuring greater ex-ante coordination of major reform projects
and, following the decision on the next MFF, through the creation of a "Convergence
and Competitiveness Instrument" to provide support for the timely
implementation of structural reforms (see Annex 1 for a more detailed
description of the intended setup). This instrument would combine deepening
integration of economic policy with financial support, and thereby respect the
principle according to which steps towards more responsibility and economic
discipline are combined with more solidarity. The Commission will, in a
forthcoming proposal, set out the precise terms for this instrument.

Ex-ante coordination of major
reforms

The current EU economic surveillance
framework already provides a basis for economic policy coordination. This
framework, however, does not provide for systematic ex ante coordination among
the Member States of national plans for major economic policy reforms. Ex ante
discussion and coordination of major reform plans, as envisaged in Article 11 of
the TSCG, would allow the Commission and Member States to assess the potential
spillover effects of national action and comment on the plans before final
decisions are taken at national level. In a forthcoming proposal, the
Commission will propose a framework for the ex-ante coordination of major
structural reforms in the context of the European Semester.

A Convergence and Competitiveness
Instrument: contractual arrangements and financial support

The proposed Convergence and Competitiveness
Instrument (CCI) would encompass contractual arrangements underpinned by
financial support.

The implementation of
structural reforms in the euro area Member States would be facilitated by the
set-up of contractual arrangements to be agreed between them and the Commission.
This new system would build on the existing EU surveillance framework, namely
the procedure for the prevention and correction of macroeconomic imbalances (the
Macroeconomic Imbalances Procedure or MIP)[13].
Such arrangements would be negotiated between individual Member States and the Commission,
discussed in the Euro Group and concluded by the Commission with the Member
State. They would be compulsory for euro area Member States subject to an
Excessive Imbalance Procedure and the corrective action plan (CAP) they have to
submit under this procedure would constitute the basis of the arrangement to be
negotiated with the Commission. For the euro area Member States subject to a
preventive action as regards their macroeconomic imbalances, the participation
would be voluntary and would involve the presentation of an action plan similar
to that required under the Excessive Imbalance Procedure.

The arrangements would
therefore be always based on the country-specific recommendations emanating
from the MIP, which typically focus on enhancing adjustment capacity and
competitiveness and promote financial stability, i.e. factors critical to the
good functioning of the EMU. The MIP therefore establishes a sensible filter
for major reforms eligible to be accompanied by financial support in view of
the associated externalities present in a currency union.

The action plan presented by
the Member State would then be assessed by the Commission and a final set of
reforms and measures and the timeline for their implementation would be adopted
as an arrangement. This arrangement would thus set out the more detailed
measures which the Member State commits to implement after having obtained the
endorsement of its national parliament where appropriate under national
procedures. This system of negotiated arrangements would enhance the quality of
the dialogue between Commission and Member States as well as the Member States'
commitment to and ownership of their reforms.

The reforms taken up in the contractual
arrangements would be financially supported, as a complement to the discipline
requirements already introduced by the six-pack. The aim of such support would
be to lead to timely reform adoption and implementation by overcoming or at
least lessen political and economic deterrents to reform. By promoting
structural reforms that enhance the adjustment capacity of a Member State the CCI
would improve the economy's capacity to absorb asymmetric shocks through
enhancing market functioning.

Financial support would only be
granted for reform packages that are agreed and important both for the Member
State in question and for the good functioning of EMU. The financial support would
be supporting the efforts of a Member State and in particular provide support
in cases where the emergence of imbalances happened in spite of full compliance
with previous country-specific recommendations addressed to the Member State
concerned..

The financial support will have
a clear signalling effect recognising both the cost of reform for the Member
State in question as well as the benefit of national reforms accruing to the
rest of the euro area given positive cross-border externalities (which may not be
sufficient though to lead to reform impetus by Member States). Where the
Commission finds ex post that a Member State has not fully complied with the
contract, the financial support can be withheld.

The financial support should be
designed as an overall allocation to be used to contribute to financing
measures flanking difficult reforms. For example, the short-term impact of
reforms raising the flexibility in the labour market could be accompanied by
training programmes financed in part through support provided under the CCI.
The use of financial support would be defined as part of the contractual
arrangement concluded between the Member State concerned and the Commission.

To support this mechanism of
financial support a special financial instrument could be set up in principle
as part of the EU budget.

The instrument would be
established by secondary legislation. It could be construed as part and parcel
of the MIP reinforced by the contractual arrangements and financial support as
outlined above and thus be based on Article 136 TFEU. Alternatively one could
envisage having recourse on Article 352 TFEU, if necessary by enhanced
cooperation (coupled with a decision pursuant to Article 332 TFEU on
expenditure being included in the EU budget).

The financial contributions
necessary to the instrument could be based on a commitment of the euro area
Member States or a legal obligation to that effect enshrined in the EU's own
resources legislation. Contributions should be included in the EU budget as
assigned revenues. Being financed through assigned revenue, the instrument
would not be placed under the ceilings set in the MFF Regulation. Only
contributing Member States would be in a position to enter into a contractual
arrangement with the Commission and benefit from the financial support. Support
through the CCI would be coherent and consistent with the support from the
Structural Funds, in particular the European Social Fund. The volume of the
instrument could remain limited in the initial phase but could become larger
over the medium term provided that the support mechanism proves to be effective
in promoting rebalancing, adjustment and thereby sustainable growth in the euro
area.

The Commission will in
forthcoming proposals set out the precise terms for this "convergence and
competitiveness instrument" based on contractual arrangements and
financial support.

3.1.6 Promoting
investment in the euro area

Structural
reforms supported, first, by the MFF and, second, the Convergence
and Competitiveness instrument will be essential to improve the medium-term
growth potential of euro area members and their adjustment to shocks. Credible
and growth-friendly consolidation that improves the efficiency of the tax
structure as well as the quality of public spending will contribute to
stimulating growth. As recommended in the Annual Growth Surveys 2012 and 2013,
the Member States should strive in particular to maintain an adequate fiscal
consolidation pace while preserving investments aimed at achieving the Europe
2020 goals for growth and jobs.

The EU
fiscal framework offers scope to balance the acknowledgment of productive
public investment needs with fiscal discipline objectives.

Public
investment is one of the relevant factors to be taken into account when the
fiscal position of a Member State is being assessed in the report foreseen under
Article 126(3) TFEU that precedes the launch of an EDP.[14] The
importance of relevant factors, such as public investment, for the assessment
has considerably increased with the recent reform of the SGP. Under certain
conditions, consideration of relevant factors may lead to not placing a Member
State in EDP[15];
and relevant factors should be taken into account in formulating
recommendations for correcting the excessive deficit, including the deficit
reduction path.

In the
preventive arm of the SGP, public investment is taken into consideration in the
new expenditure benchmark, which is used alongside the structural balance to
assess the progress towards the medium-term budgetary objective. Specifically, general
government gross fixed capital formation is averaged over a number of years, in
order to avoid that Member States penalised because of annual peaks in
investment[16].

The
Commission will explore further ways within the preventive arm to accommodate
investment programmes in the assessment of Stability and Convergence
Programmes. Specifically, under certain conditions, non-recurrent, public
investment programmes with a proven impact on sustainability of public finances
could qualify for a temporary deviation from the medium-term budgetary
objective or the adjustment path towards it.[17]
This could apply, for example, for government investment projects co-financed
with the EU, consistently with the framework of macro-conditionality.

While a
fully-fledged framework would have to be worked out to render operational such
conditions (notably in terms of information/definitional requirements), a specific
treatment of public investment could only lead to a temporary deviation from
the medium term budgetary objective (MTO) or the adjustment path towards it.
The Commission will issue a Communication on the appropriate path towards the
MTO in Spring 2013.

Specific
provisions for investment projects should not be confused with a 'golden rule',
which would allow a permanent exception to all public investment. Such an
indiscriminate approach could easily put in danger the prime objective of the
SGP by undermining the sustainability of government debt.

3.1.7 External
representation of the euro area

Building on progress achieved
in the economic governance of the euro area, a strengthening and consolidation
of its external representation should be pursued. This can be fully achieved on
the basis of the current Treaties (Article 17 TEU and Article 138 TFEU).

Such strengthening is necessary
to ensure that the euro area is represented in a manner commensurate with its
economic weight, mirroring the changes taking place in the internal economic
governance. The euro area must be able to play a more active role both in
multilateral institutions and fora as well as in bilateral dialogues with
strategic partners. This should result in delivering a single message on issues
such as euro area economic and fiscal policy matters, macroeconomic
surveillance, exchange rate policies and financial stability.

To achieve these objectives
will require agreement on a roadmap aimed at streamlining and, where possible,
unifying the external representation of the euro area in international economic
and financial organisations and fora.

The focus should be on the IMF,
which through its lending instruments and surveillance is a key institutional
pillar in global economic governance. As the crisis has shown, it is of utmost
importance for the euro area to speak with a single voice in particular on
programmes, financing arrangements and the crisis resolution policy of the IMF.
This will require a strengthening of coordination arrangements of the euro area
in Brussels and Washington on EMU-related matters, to mirror changes in EMU
internal governance and to ensure consistency and effectiveness of the messages
provided.

Enhancing the euro area
representation in the IMF should be done through a two-stage process. In a
first stage, the country constituencies should be rearranged so as to re-group
countries into euro area constituencies which could also include future euro
area Member States. In parallel, observer status in the IMF executive board
should be sought for the euro area [18].

These measures should prepare
the ground for the euro area seeking, at a second stage, a single seat in the
IMF bodies (the executive board and the IMFC). The Commission will in due
course make formal proposals under Article 138 (2) TFEU to establish a unified
position to achieve an observer status of the euro area in the IMF executive
board, and subsequently for a single seat. The appropriate institution to
represent the euro area in the IMF, in accordance with Article 138 TFEU, would
be the Commission, with the ECB being associated in the area of monetary
policy. More details on this aspect of deepening EMU are found in Annex 2.

3.2 The
medium term: Enhanced economic and budgetary policy integration and steps
towards a proper fiscal capacity

The
medium term should see the establishment of further
budgetary coordination (including the possibility to require amendments to
national budgets or to veto them), the extension of deeper policy coordination
to the fields of taxation and employment, a
single resolution mechanism for the financial sector and the
creation of an autonomous, proper fiscal capacity for the EMU to support the
implementation of the policy choices resulting from the deeper coordination.
Some of these elements will require amending the Treaties.

The
reduction of public debt significantly exceeding the SGP criteria could be
addressed through the setting-up of a redemption fund. A possible
driver for fostering the integration of euro area financial markets and in
particular to stabilise volatile government debt markets is common issuance by
euro area Member States of short-term government debt with a maturity of up to
1 to 2 years. Both of these possibilities would require
amending the Treaties.[19]

3.2.1 Reinforcement
of budgetary and economic integration necessitating Treaty changes

The overhaul of the budgetary
and economic governance that the euro area would have undergone with the
adoption of the two-pack and the availability of the Convergence and
Competitiveness Instrument would represent major steps forward in ensuring
budgetary discipline but also economic competitiveness.

However, moving towards more
mutualisation of financial risk would require bringing the coordination of
budgetary policy one step further by ensuring that there is collective control
over national budgetary policy in defined situations.

In particular, the innovations
brought by the two-pack and especially the possibility of a Commission opinion
on draft budgetary plans, and in extreme cases, the possibility to request a
new draft budgetary plan in case of serious violation of the Member State’s obligations
under the SGP, are reaching the limit of what is possible under the current
Treaties in terms of coordination and intervention from the EU level in the
national budgetary process. With the two-pack, once adopted, the EU will largely
have exhausted the limits of its legislative competence in these respects.

Moving further in terms of
national budgetary policy control, for example by setting up a European right
to require a revision of national budgets in line with European commitments, would
require a Treaty change.

The following (non-exclusive)
avenues could be considered:

•          First, an
obligation for a Member State to revise its (draft) national budget if the EU
level so requires in case of deviation from obligations of budgetary discipline
previously set at EU level. This would involve changing the nature of the
opinion on national budgets foreseen in the two-pack from a non-binding to a
binding character.

•           Second, building upon
the tighter monitoring and coordination process set up by the two-pack, in
certain particularly serious situations to be defined, a right to require a  revision
of individual decisions of budget execution in line with European commitments which
would result in a serious deviation from the path of budgetary consolidation
set at EU level.

•           Third, a clear
competence for the EU level to harmonise national budgetary laws (along the
lines of the Treaty on Stability, Coordination and Governance in Economic and
Monetary Union[20])
and to have recourse to the Court of Justice in case of non-compliance.

As
regards economic policy, tax policy can support economic policy coordination
and contribute to fiscal consolidation and growth. Based on the experience to
be gained with the structured discussions of tax policy issues which focus on
areas where more ambitious activities can be envisaged, one might in future
consider in the context of a Treaty change providing scope for legislation on
deeper coordination in this field in the euro area. Another area of similar
importance where such progress could be considered is labour markets, given the
importance of well-functioning labour markets and in particular labour mobility
for adjustment capacity and growth within the euro area.

Coordination and surveillance
of employment and social policies should be reinforced within the EMU
governance, and convergence promoted in these areas. The
current Broad Economic Policy Guidelines and Employment Guidelines could be reinforced
by merging them into one single instrument.

These changes would provide the
basis for developing a proper fiscal capacity for the euro area to support
structural reform on a large scale as well as for enabling forms of debt
mutualisation to facilitate the solution of the problems of high debt and
financial segmentation that are among the legacies of the crisis.

3.2.2 A proper fiscal capacity
for the euro area

Building on the experience of
systematic ex-ante coordination of major structural reforms and the CCI, a
dedicated fiscal capacity for the euro area should be established. It should be
autonomous in the sense that its revenues would rely solely on own resources,
and it could eventually resort to borrowing. It should be effective and provide
sufficient resources to support important structural reforms in a large economy
under distress.

This proper fiscal capacity for
the euro area could initially be developed under secondary law, as explained in
section 3.1.3. Its enhancement would however benefit from new, specific Treaty
bases which would be necessary if the capacity had to be able to resort to
borrowing.

3.2.3 A redemption fund

A clearly reinforced economic
and fiscal governance framework could allow addressing the reduction of public
debt significantly exceeding the SGP criteria through the setting-up of a
redemption fund subject to strict conditionality.

The initial proposal of a
European Redemption Fund (ERF) as an immediate crisis tool was developed by the
German Council of Economic Experts (GCEE) as
part of a euro area-wide debt reduction strategy.

In order to limit moral hazard,
and to ensure the stability of the structure as well as the redemption of
payments, the GCEE proposed several supervisory and stabilising instruments,
such as: (1) strict conditionality, similar to the rules agreed within EFSF/ESM
programmes; (2) immediate penalty payments in case of non-compliance with the
rules; (3) strict monitoring by a special institution (e.g. Court of Justice of
the EU); (4) an immediate stop of debt transfer to the fund during the roll-in
phase in case of non-compliance with the rules; (5) pledging of Member States'
international reserves (foreign exchange or gold reserves) as a security
against their liabilities and/or assignment of (possibly newly introduced)
taxes to cover the debt service (e.g. VAT revenues) to limit the liability
risk.

The Commission agrees that a
strong economic and budgetary framework is a pre-requisite for a workable
redemption fund. Increased surveillance and power of intervention in the design
and implementation of national fiscal policies would be warranted as discussed
in the previous section. The credibility of the adjustment plans would require
appropriate fiscal conditions to be set when a Member State enters the system. Strict
observance of the adjustment path towards the medium-term objective as proposed
by the Commission would represent a minimum in this respect.

A European Redemption Fund under
such strict conditionality (see also Annex 3) could thus provide an anchor for
a credible reduction in public debt, bringing the level of government
indebtedness back below the 60% ceiling as foreseen in the Maastricht Treaty.

The introduction of such a
framework could give another signal that euro area Member States are willing,
able and committed to reduce their debt levels. This could in turn lower the
overall financing costs of over-indebted Member States. By assuring the funding
of the reduction of the "excess debt" at sustainable cost, in
combination with both incentives and continuous monitoring of its reduction, it
could provide euro area Member States with the possibility to gear debt
reduction in a manner that could facilitate investment in growth-supporting
measures. Furthermore, such a framework could contribute to debt reduction being
done on a transparent and coordinated basis across the euro area, thereby
complementing the coordination of budgetary policies.

The setting up of
such a debt redemption fund could only be envisaged in the context of a
revision of the current Treaties. For accountability reasons, the act creating
such a fund would need to be framed with great legal precision, as regards the
maximum transferrable debt, the maximum time of operation and all other
features of the fund, to guarantee the legal certainty required under national
constitutional laws.

A possible model
ensuring appropriate accountability for a debt redemption fund thus designed
would be as follows: a new Treaty legal base would allow the setting up of the
fund through a decision of the Council, adopted by unanimity of the euro area members
with the consent of the European Parliament, and subject to ratification by
Member States under their constitutional requirements. That decision would set
up the maximum volume, length and conditions of participation in the fund. A European
debt management entity within the Commission, accountable to the European
Parliament, would then manage the fund in accordance with the rules set up by
the Council decision.

3.2.4
Eurobills

An important effect of the
crisis has been the reassessment of sovereign-credit risk within the euro area.
After more than a decade during which Member States could borrow at almost
identical conditions, markets started again to differentiate risk premia across
countries. Government securities issued by the weaker euro area Member States
have been traded at considerably higher yields, with adverse consequences for the
sustainability of public finances for the sovereigns concerned as well as for the
solvency of the financial institutions holding those government securities as
assets. This segmentation of credit risk together with the "home
bias" that characterises financial institutions has proved to be a
powerful engine of financial fragmentation in the euro area. Banks overexposed
to weaker sovereigns find it increasingly difficult to refinance and credit
conditions for the private sector have become significantly diverse according
to the location of the borrower. At the same time, segmentation of the
financial market hinders the transmission of monetary policy and easing at central
level does not translate into an appropriate improvement of lending conditions
where it would be more warranted.

In light of this situation,
there is a strong argument for the creation of a new euro area sovereign
instrument. A possible driver for fostering the integration of euro area
financial markets and in particular to stabilise volatile government debt
markets is so-called eurobills. This common issuance by euro area Member States
of short-term government debt with a maturity of up to 1 to 2 years would
constitute a powerful tool against the present fragmentation, reducing the
negative feedback loop between sovereign and banks, while limiting the moral
hazard. Additionally, it would also help restoring the proper transmission of
monetary policy. Eurobills could progressively replace existing short-term
debts, and not expand the overall amount of national euro area short-term debt.

These
so-called eurobills could contribute to completing European financial markets
by creating a large integrated short-term securities market in the euro area. 
Given the important role of short-term papers for cash management and the
short-term nature of bills, these securities typically enjoy a particularly
high credit quality. At the same time, the revolving, short-term nature of such
bills makes it possible to adjust the funding schemes quickly to national
fiscal behaviour, thereby setting incentives for fiscal discipline.

The
common issuance would strengthen financial stability insofar as it would ensure
a ready supply of short-term liquidity for all euro area Member States. It
would also create a pool of safe assets across the euro area, which would
greatly facilitate the liquidity management of financial institutions and
thereby reduce their often strong home bias, which proved very detrimental in
crisis situations. The eurobills would also help greatly for the conduct of
monetary policy in the euro area, as the transmission channels would be
strengthened and harmonised. Eurobills would thereby be fully compatible and
complementary to the concept of a redemption fund.

Due to
their character as financial instruments requiring joint and several guarantees
by the participating Member States, changes to the Treaties would be required
to allow these instruments to be developed. Eurobills are not a substitute for
improved economic governance and fiscal discipline. The implementation of such
a common debt instrument would require a closer coordination and supervision of
Member States' debt management in order to ensure sustainable and efficient
national budgetary policies. This monitoring and managing function could be
provided by an EMU Treasury within the Commission.

3.3 A longer-term vision for
EMU

In the longer term, the
European Union should move towards a full banking union, a full fiscal union, a
full economic union, which all require, as a fourth element, appropriate democratic
legitimacy and accountability of decision-making. Major Treaty reform will be
required on this path.

3.3.1 Full banking union

Over the longer term, the logic
of aiming for a full banking union for all banks is compelling. The direct
supervision by the ECB applying the single Rulebook and the standards developed
by EBA ensure a consistently high quality of supervision across the euro area.
In combination with euro area level macro-prudential policy tools, there will
be an effective system to monitor and contain both micro- and macro-prudential
risks in the financial system.

That
system and a common system for banking resolution, combined with effective and
solid deposit guarantee schemes in all Member States, will lastingly place the
banking sector back on a solid footing and contribute to keeping up confidence
in the sustainable stability of the euro area. To maximise public trust, there
will also need to be a credible and powerful financial backstop. That could
ultimately be facilitated by the development of a euro area safe asset.

Combining
all these elements, a full banking union is a key part of a long-term vision
for economic and fiscal integration.[21]

3.3.2 Full fiscal
and economic union

Arriving at a full fiscal and
economic union would be the final stage in EMU. As a final destination, it would
involve a political union with adequate pooling of sovereignty with a central
budget as its own fiscal capacity and a means of imposing budgetary and
economic decisions on its members, under specific and well-defined circumstances.
How large this central budget would be will depend on the depth of integration
desired and on the willingness to enact accompanying political changes. Such a
deep degree of integration would have created the conditions for a common
issuance of debt through Stability Bonds as set out in the Commission's 2011
Green Paper.

The absence of a central budget
with a stabilisation function has long been identified as a potential weakness
of the euro area in comparison with other successful monetary unions.

Central Budget providing for a fiscal
capacity with a stabilisation function

The current EMU architecture
relies on decentralised national fiscal policies under a rules-based framework.
The stabilisation function of fiscal policy in this setting is expected to be
already exerted at national level, within the limits of the rules of the Treaty
and the SGP. Indeed, a traditional view of EMU arrangements assigns to national
fiscal policies the task of responding to country-specific shocks, and to monetary
policy the task of ensuring price stability and in so doing stabilise EMU-wide
macroeconomic conditions. Moreover, national automatic stabilisers carry a
significant potential for stabilisation in EMU countries, given the relatively large
size of welfare states.

Building
on the fiscal capacity, an EMU-level stabilisation tool to support adjustment to asymmetric shocks,
facilitating stronger economic integration and convergence and avoiding the setting up of long-term transfer flows,
could become a component for a genuine EMU. Such a mechanism would need to be
strictly targeted to address short-term asymmetries and cyclical developments
in order to avoid permanent transfers over the cycle. It must be supportive of
structural reforms and be subject to strict political conditionality to avoid
moral hazard.

A common instrument dedicated
to macroeconomic stabilisation could provide an insurance system whereby risks
of economic shocks are pooled across member states, thereby reducing the
fluctuations in national incomes. Second, it may help improve the conduct of
national fiscal policies throughout the cycle. In particular, it may encourage
fiscal retrenchment during economic booms, while providing additional room for
manoeuvre for a supportive fiscal stance in downturns. Overall, a shared
instrument could deliver net gains in stabilising power, as compared with
current arrangements.

Depending on the design, the mechanism
could focus on asymmetric shocks or also comprise shocks that are common to the
euro area. However, this second approach, while more encompassing, would
require strong safeguards to maintain fiscal credibility, as increased stabilisation
power against common unfavourable shocks could only be obtained by effectively
increasing the total borrowing flow of the euro area in these periods, and thus
would have to be financed by higher surpluses in good times. Under this
approach, the central budget should probably be given the capacity to borrow
and issue bonds. Moreover, monetary policy would still remain the primary
instrument to address common shocks.

In its simplest formulation, a stabilisation
scheme to stabilise asymmetric shocks could require monetary net payments that
are negative in good times and positive in bad times. For example, a simple
scheme would determine net contributions/payments of countries as a function of
their output gap (relative to the average). No further requirements would be made
on the use of the payments received from the fund.

Alternatively, schemes may
require that the payments from the fund be earmarked for a defined purpose,
with counter-cyclical effects (as e.g. in the US unemployment benefit system
where a federal fund reimburses 50% of the unemployment benefits exceeding
standard duration up to a given maximum, conditional on unemployment being at a
certain level and rising). While earmarking transfers might enhance
stabilisation properties, the risk that governments offset the impact of the
transfers via fiscal measures with opposite effects cannot be fully prevented.

Schemes should operate in such
a way to avoid “permanent transfers” across countries. In other words, they
should be designed in such a way to avoid that, over a too long period of time,
any country is a net loser or gainer from the scheme. A necessary condition is
that cross-country differences in net transfers to the scheme do not depend on
absolute income differences but rather on differences in cyclical positions.
Income level differences may persist over decades, while relative cyclical
positions are likely to change sign in the course of a decade. There is a
trade-off between the extent to which transfers are obliged to be temporary and
the degree to which asymmetric long-lasting demand shocks (e.g. capital
outflows cum deleveraging) could be addressed.[22]

Institutional considerations

Treaty amendments providing the
legal bases for such a fiscal capacity with a stabilisation function could,
inter alia:

•
create a new explicit legal basis allowing to
set up a fund serving objectives more broadly defined than is currently
possible under Article 136 TFEU, including for macroeconomic stabilisation
purposes;

•
create a corresponding, dedicated budgetary and
own resources procedure;

•
create a new taxation power at the EU level, or a
power to raise revenue by indebting itself on the markets (presently barred by
Articles 310 and 311 TFEU);

•
provide for an EMU Treasury within the
Commission;

•
and finally if wished, allow other Member States
to freely opt in to such a fiscal capacity, as a step in preparing their
joining the euro area.

Attaining a deep and genuine
EMU involves incremental measures, building on what would have been achieved
over the short and the medium-term and introducing further integration on a
step-by-step, policy-by-policy basis. In this way deeper economic and budgetary
policy coordination accompanied by financial support instruments for
implementing jointly agreed policy priorities could eventually be followed by
the emergence of a central budget with common stabilisation mechanisms, by the
integration of the ESM into the EU Treaty framework and by steps towards the
mutualisation of issuance of sovereign debt between the Member States.

The progress towards a deep and
genuine EMU would over the medium term necessitate a structure akin to an EMU
Treasury within the Commission to organise the shared policies undertaken with
the common fiscal capacity to the extent that they imply common resources
and/or common borrowing. Such a Treasury would embody the new budgetary
authority and manage the joint resources. It would need to be headed by a
senior member of the Commission such as the Vice President responsible for Economic
and Monetary Affairs and the euro, in appropriate coordination with the Budget Commissioner,
and supported by appropriate collegiate structures.

While it would not be excluded
to integrate the ESM into the EU framework under the current Treaties, via a
decision pursuant to Article 352 TFEU and an amendment to the EU's own
resources decision, it appears that, given the political and financial
importance of such a step and the legal adaptations required, that avenue would
not necessarily be less cumbersome than operating an integration of the ESM
through a change to the EU Treaties. The latter would also allow the
establishment of tailor-made decision-making procedures.

All the different steps mentioned above imply a higher
degree of transfers of sovereignty, hence responsibility at the European level.
This process should be accompanied by steps towards political integration, to
ensure strengthened democratic legitimacy, accountability and scrutiny.

4. Political Union: Democratic legitimacy and
accountability as well as enhanced governance in a deep and genuine EMU

4.1. General principles

Any work on democratic
legitimacy as a cornerstone of a genuine EMU needs to be based on two basic
principles. First, in multilevel governance systems, accountability should be
ensured at that level where the respective executive decision is taken, whilst
taking due account of the level where the decision has an impact. Second, in
developing EMU as in European integration generally, the level of democratic
legitimacy always needs to remain commensurate with the degree of transfer of
sovereignty from Member States to the European level. This holds true for new
powers on budgetary surveillance and economic policy as much as for new EU
rules on solidarity between Member States. Briefly put: Further financial mutualisation
requires commensurate political integration. This section sets out preliminary
and non-exhaustive avenues for further work.

It follows from the first
principle that it is the European Parliament that primarily needs to ensure
democratic accountability for any decisions taken at EU level, in particular by
the Commission. A further strengthened role of EU institutions will therefore
have to be accompanied with a commensurate involvement of the European
Parliament in the EU procedures. At the same time, whatever the final design of
EMU, the role of national parliaments will always remain crucial in ensuring
legitimacy of Member States' action in the European Council and the Council but
especially of the conduct of national budgetary and economic policies even if more
closely coordinated by the EU. Cooperation between the European Parliament and
national parliaments is also valuable: it builds up mutual understanding and
common ownership for EMU as a multilevel governance system; concrete steps to
further improve it, in accordance with Protocol N° 1 of the EU Treaties and
Article 13 of the TSCG, are thus welcome. Interparliamentary cooperation as
such does not, however, ensure democratic legitimacy for EU decisions. That
requires a parliamentary assembly representatively composed in which votes can
be taken. The European Parliament, and only it, is that assembly for the EU and
hence for the euro.

The maxim of ensuring a
legitimacy level commensurate to sovereignty transfers and solidarity within a
political Union leads to two general considerations.

First, the issue of
accountability arises in fundamentally different ways as regards short-term
action, which can be undertaken through EU secondary law, and the further
stages which involve Treaty change. The Lisbon Treaty has perfected the EU's
unique model of supranational democracy, and in principle set an appropriate
level of democratic legitimacy in regard of today's EU competences. Hence, as
long as EMU can be further developed on this Treaty basis, it would be
inaccurate to suggest that insurmountable accountability problems exist.
Conversely, discussions on medium and long-term Treaty amendments as envisaged in
sections 3.2 and 3.3 will need to include reflections on adaptations to the
EU's model of democratic legitimacy.

Second, serious accountability
and governance issues would however arise if intergovernmental action of the euro
area were significantly expanded beyond the current state of play. This would
in particular be the case if such action were used to influence the conduct of
Member States' economic policies. Such an avenue would first raise problems of
compatibility with the EU's primary law in this area. As confirmed by the Court
of Justice, the Treaty attributes the task of coordination of the Member
States' economic policies to the Union; the ESM is in line with the Treaties precisely
because its object is not to achieve such coordination but to provide a
financing mechanism and because it contains express provisions by virtue of
which the conditionality foreseen by the ESM Treaty - which is not an
instrument of economic policy coordination - ensure that the ESM's activities
are compatible with EU law and the EU's coordination measures. Moreover,
intergovernmental action could entrust only limited tasks to the Union's
institutions, such as the Commission and the ECB, which may be tasks of
coordination of a collective action or management of financial assistance, to
be exercised on behalf of the Member States and which must not denature the
functions attributed to those institutions under the Treaties.[23]
In any event, one fails to see how parliamentary accountability could be
organised for an intergovernmental European level seeking to influence economic
policies of individual euro area Member States.

To the extent that a need
arises for reinforced governance structures in a deepened EMU, these should
therefore be devised, with efficiency and legitimacy, as part of the Union's
institutional framework and in line with the Community method.

4.2 Optimising accountability
and governance in the short term

Bearing in mind the above
principles, the discussion on how to ensure optimal democratic accountability
and governance without Treaty change should focus on practical measures, in
particular those designed to foster parliamentary debate in the European Semester.

The starting point in this
respect should be the Economic Dialogue which has been recently set up by the
six-pack and which provides for discussions between the European Parliament, on
the one hand, and the Council, the Commission, the European Council and the Eurogroup
 on the other hand. Thus, one could foresee the involvement of the Parliament
in the discussions on the Commission's Annual Growth Survey and that, in
particular, that two debates in Parliament be held at key moments of the
European Semester, namely before the European Council discusses the
Commission's Annual Growth Survey and before the adoption by the Council of the
country-specific recommendations (CSRs). This could be achieved through an
inter-institutional agreement between the European Parliament, the Council and
the Commission. The Commission and the Council could also be present at
inter-parliamentary meetings to be held between representatives of the European
Parliament and of national parliaments during the European Semester. Moreover,
to facilitate the task of national parliaments, members of the Commission could
attend debates within such parliaments, on their request, on the EU's CSRs.

The application of the
comply-or-explain principle, according to which the Council is publicly
accountable (in practice mainly to the European Parliament) for any changes it
introduces to the Commission’s economic surveillance proposals, such as the CSRs,
should be reinforced in practice.

In a deepened EMU, the
Parliament should also be more directly involved in the choice of the multiannual
priorities of the Union as expressed by the Integrated Guidelines of the
Council (Broad Economic Policy Guidelines and Employment Guidelines).

The European Parliament should
be regularly informed of the preparation and implementation of the adjustment
programmes concerning Member States receiving financial assistance, as foreseen
in the two-pack. It should be underlined that this economic policy
conditionality vis-à-vis the Member States concerned is framed by the economic
policy coordination pursued within the EU framework.

Furthermore, the European
Parliament has the possibility of adapting its internal organisation to a
stronger EMU. For instance, it could set up a special committee on euro matters
in charge of any scrutiny and decision-making pertaining especially to the euro
area.

Similarly, some further
practical measures can still be taken without Treaty change to improve the
functioning of the Euro Group and its preparatory instance, in line with the euro
area summit statement of 26 October 2011.

Finally, and without this being
a point specific to EMU, a number of steps of significant importance can be
taken to foster the emergence of a genuine European political sphere. This
includes, in the context of the European elections of 2014, most importantly
the nomination of candidates for the office of Commission President by
political parties, as well as a number of pragmatic steps that are possible
under current EU electoral law. Moreover, the proposal recently tabled by the
Commission for a revised statute for European political parties should be
rapidly adopted.

4.3 Issues for discussion in
case of Treaty amendment

In the context of a Treaty
reform conferring further supranational powers to the EU level, the following
steps should be considered to ensure a commensurately stronger democratic
accountability:

First, for the sake of
visibility, transparency and legitimacy, the current Broad Economic Policy Guidelines
and Employment Guidelines (currently presented together as "integrated
guidelines" but based on two distinct legal bases) should be merged into
one single instrument expressing the Union's multiannual priorities, and crucially,
that instrument should be adopted through the ordinary legislative procedure
providing for co-decision by the European Parliament and the Council.

Second, to be appropriately
legitimised, a new power of requiring a revision of a national budget in line
with European commitments, if considered necessary, could
be taken as a legislative act by co-decision. This solution, ensuring maximum
democratic legitimacy, is justified given that Member States' annual budgets
are also adopted by their parliaments, usually with legislative character. To
ensure speedy decision-making, a Treaty amendment should create a new special
legislative procedure consisting of only one reading.

Integration of the ESM into the
EU framework, as called for in this blueprint, would allow it to become subject
to proper scrutiny by the European Parliament.

Institutional adaptations might
also be considered:

A "euro committee" established
within the European Parliament could also be granted certain special
decision-making powers beyond those assigned to other committees, e.g. a
greater weight in the preparatory parliamentary stages or even a possibility to
perform certain functions or take certain acts in lieu of the plenary.

Within the Commission,
any steps designed to reinforce even further than today[24] the position
of the Vice President for Economic and Monetary Affairs and the euro, would
require adaptations to the collegiality principle and, hence, treaty changes.
They could be contemplated in the long run to allow for political direction and
enhanced democratic accountability of a structure akin to an EMU Treasury
within the Commission. In this context, a special relationship of confidence
and scrutiny between the Vice President for Economic and Monetary Affairs and a
"euro committee" of the European Parliament could be created. Their
design should however be carefully pondered. The collegiality principle applies
to decisions across all policy areas for which the Commission has competence,
from competition to cohesion policy. It stands for a system of collective
internal checks and balances which contributes to improving the legitimacy of
the Commission's action.

Sometimes a call is also made
to strengthen the Euro Group further by making it responsible for
decisions concerning the euro area and its Member States. This would require
Treaty change, since the purely informal character of the Euro Group as set out
in Protocol n° 14 implies a mere forum for discussions without decision-making
powers. That said, the current Treaties, in Articles 136 and 138 TFEU, have
already created the model of the Council adopting decisions with only its
euro area members voting. In this blueprint, the Commission makes the case for
creating further Treaty legal bases following this model. The main practical
difference between it, and a Euro Group endowed with decision-making powers,
would be that, in the second case, delegates from non-euro area Member States
would be excluded not only from voting but also from deliberations and from
preparatory work carried out at instances below the ministers' meetings. That
would however be undesirable in the Commission's view, since it would in
reality lead to building up a "euro area Council" as a separate
institution without adequately taking into account the convergence between
existing and future members of the euro area.

Furthermore, a specific point
to be addressed by Treaty change would be to strengthen democratic
accountability over the ECB insofar as it acts as a banking supervisor, in
particular by allowing normal budgetary control by the European Parliament over
that activity. At the same time, Article 127 paragraph 6 TFEU could be amended to
make the ordinary legislative procedure applicable and to eliminate some of the
legal constraints it currently places on the design of the SSM (e.g. enshrine a
direct and irrevocable opt-in by non-euro area Member States to the SSM, beyond
the model of "close cooperation", grant non-euro area Member States
participating in the SSM fully equal rights in the ECB's decision-making, and
go even further in the internal separation of decision-making on monetary
policy and on supervision).  A Treaty change creating a special status for
Agencies in the field of financial regulation, strengthening the supranational
character of these Agencies, and their democratic accountability could also be
considered. Not only would this very significantly enhance the effectiveness of
the ESAs, but it would significantly facilitate the establishment and working
of the Single Resolution Mechanism to be created.

A further way of strengthening
the EU's legitimacy would also be to extend the competences of the Court of
Justice, i.e. by deleting Art. 126 paragraph 10 TFEU and thus admitting
infringement proceedings for Member States or by creating new, special
competences and procedures, although one should not forget that some of the
issues do not lend themselves to full judicial review.

If a Treaty reform were to
extend beyond EMU matters, it should include the objective of generalising the
ordinary legislative procedure, i.e. making applicable co-decision by the
European Parliament and the Council, voting by qualified majority, instead of
the currently remaining instances where special legislative procedures apply.

Finally, special challenges to
ensure appropriate democratic accountability would arise in case the Treaty is
changed to permit the mutualisation of the issuance of sovereign debt
underpinned by a joint and several guarantee of all euro area Member States.
The underlying accountability problem is that such a joint and several
guarantee, if claimed by creditors, may result in considerable financial burden
for one individual Member State's finances, for which that Member State's
parliament is accountable, although the burden is the result of policy
decisions that have been made over time by one or several other Member States
under the responsibility of their parliaments. As long as the EU level is not
granted very far-reaching powers to determine economic policy in the euro area
and the European Parliament is not responsible for deciding on the resources of
a substantial central budget either, this fundamental accountability problem
cannot be overcome simply by entrusting the management of mutualised sovereign
debt to an EU executive even if it is accountable to the European Parliament.

In contrast, that problem would
no longer arise in a full fiscal and economic union which would itself dispose
of a substantial central budget, the resources for which would be derived, in
due part, from a targeted, autonomous power of taxation and from the possibility
to issue the EU's own sovereign debt, concomitant with a large-scale pooling of
sovereignty over the conduct of economic policy at EU level. The European
Parliament would then have reinforced powers to co-legislate on such autonomous
taxation and provide the necessary democratic scrutiny for all decisions taken
by the EU's executive. Member States would not be jointly and severally liable
for each other's sovereign debt but at most for that of the EU.

If the Treaty were changed so
as to allow, as an intermediate step, the issuance of short-term eurobills,
combined with reinforced powers of economic governance, an accountability model
resting both on the EU and national levels would have to be devised. The
European Parliament would provide the necessary accountability for decisions of
management of the eurobills to be taken by an EMU Treasury within the
Commission. However, there should also be Council decisions, adopted by
unanimity of the euro area Member States with the consent of the European
Parliament, on the first establishment and subsequent periodic renewal of the eurobills
scheme. Member States could provide, within their national constitutional
systems, the degree of accountability through their national parliaments that
they deem necessary for consenting to these establishment and renewal
decisions.

The proposal for a debt
redemption fund raises accountability issues of a distinct nature. To design a
model ensuring appropriate accountability for a DRF would presuppose that its
legal basis can be framed with great legal precision, as regards the maximum
transferrable debt, the maximum time of operation and all other features, to
guarantee the legal certainty required under national constitutional laws. If
this could be ensured, then a new Treaty legal base might be imagined that
would allow the setting up of the fund through a decision of the Council,
adopted by unanimity of the euro area Member States with the consent of the
European Parliament, and subject to ratification by Member States under their
constitutional requirements. That decision would set up the maximum volume,
duration and precise conditions of participation in the fund. The Commission,
accountable to the European Parliament, would then manage the fund in
accordance with the precise rules set up by the Council decision.

ANNEX
1: The Convergence and Competitiveness Instrument

Steps towards a genuine
EMU in the area of economic policy coordination should build on the current
system while further reinforcing the process. National ownership of the reforms
in this setup would be key, as well as a gradual increase in the intrusiveness
of euro area-level guidance when Member States fail to take appropriate action.
Larger spillover effects within the currency union call for such a more
stringent process of economic policy coordination for euro area Member States.
On the basis of the current Treaties, the legislator could therefore set up an
integrated framework for the surveillance of economic policies consisting of
two elements: 1) a mechanism for systematic ex ante
coordination of all major reform projects of Member States in the context of
the European Semester, envisaged in Article 11 of the TSCG. 2) A Convergence
and Competitiveness Instrument (CCI) in the framework of the Macroeconomic
Imbalances Procedure (MIP) based on contractual arrangements between Commission
and euro area Member States coupled with the possibility of financial support.

This framework would
complement the MIP and the existing framework for the surveillance of the
budgetary situation of the Member States (the SGP). Its objective would be
twofold: first it would reinforce the existing procedures in particular by
strengthening ex ante coordination of major economic reforms; second, it would
strengthen the dialogue with the euro area Member States to enhance national
ownership through the introduction of contractual arrangements to be concluded
between the Commission and Member States. It would be coupled by a dedicated
system of financial support, representing the initial phase of the build-up of
a fiscal capacity for the EMU. The contractual arrangements together with the
financial support would be bundled into a CCI for theEMU.

The Commission will in forthcoming
proposals set out the precise terms both for the mechanism for ex ante reform
coordination and the CCI, which is based on contractual arrangements with
financial support. The Commission proposals will also aim to streamline the
existing procedures that have been created over the time (European Semester, National
Reform Programmes, MIP etc.).

The
envisaged process would develop as follows:

The innovations to the
European Semester would consist of the introduction of a systematic ex ante
coordination of major economic reforms; stronger dialogue with the Member
States; the introduction of contractual arrangements to be agreed by the
Commission and euro area Member States; and financial support attached to the
implementation of the contractual arrangements.

1. The
Commission publishes the AGS and a proposal for integrated guidelines: Broad Economic
Policy Guidelines (BEPGs) and Employment Guidelines (EGs). These would set out
the priorities and objectives (quantified or not) for the coming year both for
the policies of the Member States and for the EU level. The EU-level measures
could include concrete proposals where the co-legislators would need to act
once agreed and launched. The European Parliament would be consulted (this is
currently obligatory only for the EGs; a political agreement would be concluded
to consult the EP on the whole guidelines package). In parallel, the Commission
presents the Alert Mechanism Report, which identifies Member States that are
considered to be affected by imbalances and which will then be subject to an
in-depth review (to assess whether those imbalances exist and if so, whether
they are excessive).

2. On
the basis of this guidance, each euro area Member State submits a National
Reform Programme, a single document containing proposals for policy measures
central to improving its growth and competitiveness, and a Stability Programme
which presents its fiscal plans for the medium term.

3. The
Commission assesses the programmes and presents its evaluation in a series of
Staff Working Documents which also highlight remaining challenges. These
documents would be published earlier than currently to enable a dialogue on the
analysis. In parallel, the Commission writes a horizontal appraisal of the
proposed major economic reforms in the euro area countries. This horizontal
document and its conclusions are discussed in the Euro Groupand the ECOFIN Council
in view of systematically coordinating ex ante the major reform plans.

4. After
this, the Commission comes forward with a proposal for country-specific
recommendations (CSRs) setting out the specific policy measures agreed as well
as the envisioned timeframe for implementation. In parallel, the Commission
presents for the Member States with excessive imbalances a recommendation
establishing the existence of such an excessive imbalance and recommending that
the concerned Member States take corrective action. Thanks to the process of
informal dialogue on the policy analysis, country-specific recommendations will
be more detailed, policy-specific and time bound. The country-specific
recommendations would focus on a small number of key elements related to growth
and adjustment weaknesses in the Member State concerned. This increased focus
and specificity could give a greater impetus to reform efforts in Member
States.

5. After
the adoption of the country-specific recommendations including the MIP recommendations
by the Council, Member States under the preventive and corrective arm of the MIP
submit (on a voluntary basis for the former and on a mandatory basis for the
latter) a contractual arrangement proposal including specific policy action
they intend to implement and a timetable for those actions, based on the
aforementioned recommendations. For Member States under the corrective arm of
the MIP, the Corrective Action Plan would correspond to the contractual
arrangements to be set up with the Commission. For Member States under the
preventive arm of the MIP, the contractual arrangements would consist of an
action plan similar to that required under the corrective arm.

For
Member States under the corrective arm, the negotiation of the contractual
arrangements corresponds to the approval of the Corrective Action Plan, so Articles
8 to 12 of Regulation 1176/2011 apply.

For
Member States under the preventive arm, a similar procedure and deadlines
should also apply, including on the monitoring and assessment of the
implementation of the measures foreseen in the contractual arrangements.
However, sanctions are not applicable.

Each
year, the Member States would report on the progress in implementation of their
contractual arrangements in their National Reform Programmes.

6. The
contractual arrangements would be accompanied by financial support. They would
be related to the CSRs emanating from the MIP, which focus on strengthening
Member States' adjustment capacity and competitiveness, i.e. areas where
reforms would lead to large positive spillover effects to other Member States
and hence are necessary to ensure a smooth functioning of EMU.

The
financial support would consist in a lump sum to be attributed per contractual
arrangement, not earmarked to specific reforms. The definition and use of the
amounts involved and of the disbursement (which can involve more than one
tranche) will depend on the conditionality (measures/reforms to be implemented
by the Member States) and should be also specified in the contractual
arrangements.

In
addition to the sanctions and underlying procedure applicable to Member States
under the corrective arm (as envisaged by regulation 1174/2011), contractual
arrangements could then be enforceable in that the Commission can issue
warnings (by the use of 121.4 TFEU) if a Member State does not meet the contractual
arrangements. These warnings, which the Commission can issue autonomously,
could include a call for Member States to correct the deviation, including a
timeline. When this is not met, the financial support can be withheld.

The
financial support will be financed by a special fund/financial instrument, as
mentioned in the main text. Euro area Member States will be required to
contribute to that fund, based on a contribution key dependent on GNI.

When the Commission presents
its proposal on reinforcing and streamlining the existing procedures, it will
also address the risks of potential unintended consequences of introducing such
financial support, such as moral hazard (e.g. rewarding relatively poor
performers) and deadweight losses (reforms that would anyway have been
implemented even without additional incentive).

ANNEX
2: External representation of the euro area

The progress that will be
agreed on further integration will have to be reflected externally, notably
through progress towards united external economic representation of the EU and
of the euro area in particular. A strengthened voice of the Economic and
Monetary Union is an integral part of the current efforts to improve the
economic governance of the euro area.

One of the key lessons of the
crisis is that, when faced with a global shock for which a collective response
is needed, it is the size of the euro area that matters in influencing the type
of policy responses that will be taken in international financial institutions
and fora. Over the past few years, the Union, especially because of the euro, has
become the natural counterpart of major economic powers when global growth,
financial assistance or financial regulation are discussed. However, because of
the current fragmentation of its representation in international financial
institutions and fora, the euro area does not have an influence and leadership
commensurate to its economic weight.

The efforts to strengthen the
economic governance of the euro area need to be accompanied by a move towards a
more unified and coherent external representation of the euro area in order to
be fully effective. Such a step should mirror the significant strengthening taking
place in the internal economic governance.

The external
representation of the euro area[25] should be strengthened to allow it to play a more active role
both in multilateral institutions and fora as well as in bilateral dialogues
with strategic partners. This should result in delivering a single message on
issues such as economic and fiscal policy, macroeconomic surveillance, exchange
rate policies, and financial stability.

To achieve these
objectives will require agreement on a roadmap aimed at streamlining and unifying the
external representation of the euro area in international economic and
financial organisations and fora.

The focus should be on the IMF,
which through its lending instruments and surveillance is a key institutional
pillar in global economic governance. At the moment, the 17
euro area Member States are spread across eight constituencies and chairs and have
up to five Executive Directors. Currently, the presence of Union institutions in
the IMF is very limited. The European Central Bank is an observer on the IMF
Executive Board and the IMFC. The European Commission only has observer status
at the IMFC.

Article 138 (2) TFEU foresees
the adoption of appropriate measures to ensure unified representation within
international financial institutions and conferences. The objective underlying
this Treaty article was to achieve a stronger and unified representation of the
Union for the euro area Member States in such institutions and conferences,
given that the effectiveness of the current informal arrangements for
representing the euro area was deemed unsatisfactory.[26]

It
is necessary to step up the euro area coordination infrastructure in Brussels
and in Washington. The euro area coordination process should be
improved, and Member States should follow common messages on a compulsory
basis. Constituencies should be rearranged so as to re-group countries into euro
area constituencies for the IMF which could also include future euro area Member
States. In parallel, an observer status in the IMF
Executive Board should be sought for the euro area. This requires negotiations
with the IMF. Euro area members share a single currency, a single monetary and
exchange rate policy, and the management of members’ external reserves by the
European System of Central Banks. The recent changes in euro area governance
have fundamentally changed the way fiscal and economic policies are coordinated
at European level. In euro area matters, the European Commission has become a
natural interlocutor of the IMF. In addition, more recently, the Commission and
the ECB have worked closely together with the IMF in negotiating the financial
assistance packages for euro area and EU Members and by collaborating in
general with the Fund on surveillance. Against this background, conferring
observer status on the euro area, represented by the European Commission with the
European Central Bank being associated in the area of monetary policy, is
essential to increase the synergies of the cooperation between the IMF and the
institutions that are at the core of the daily management of the euro area.

To reach the longer-term aim of
a single seat of the euro area in the IMF, one should envisage a gradual approach
that would allow all actors involved to make the necessary institutional
arrangements to accommodate a single euro area seat.

In terms of concrete steps
forward, the European Commission:

· will
submit a roadmap with steps for consolidating the euro area representation in
the IMF over time into a single seat.

· will
in due course make formal proposals under Article 138 (2) TFEU to establish a
unified position to achieve an observer status of the euro area in the IMF for
an observer status in the IMF executive board, and subsequently for a single
seat.

· will
put forward a proposal for improving the coordination amongst Member States on
IMF issues related to EMU.

· Will
consider making use of the possibilities under Art. 138 (1) TFEU to propose
common positions on matters of particular interest for economic and monetary
union within the competent international financial institutions and
conferences.

· will
foster further the representation of the euro area in the context of bilateral
relations with major economic partners. The setting of the discussions with
China on macroeconomic and exchange rate issues (which are dealt with by a euro
area delegation[27]),
could serve as a model.

ANNEX 3:
A European Redemption Fund

The concept
of the Redemption Fund (RF) was first presented in 2011 by the German Council
of Economic Experts. The key idea of the RF is to provide a framework for
bringing the euro area Member States’ public debt to sustainable levels by
lowering their overall financing costs in exchange for additional commitments
to fiscal governance.

As a basic approach,
the Member States' public debt would be divided into two parts: (1) one part is
equivalent to 60% of GDP, which is the threshold stipulated by the Stability
and Growth Pact; this part would remain each single Member State’s
responsibility; and (2) a part consisting of public debt above the 60% of GDP
threshold, which would be transferred and pooled into a RF, and therefore be
owned by the RF, though Member States would be obliged to autonomously redeem
the transferred debt over a special period of time (e.g. 25 years). The RF
would finance itself by issuing its own bonds, which would be serviced on a
pooled basis by all participating Member States. In order to make these RF
bonds attractive and marketable, investors would need sufficiently strong
assurances about their credit quality. Therefore, the RF bonds would ideally be
backed by a joint and several guarantee of all euro area Member States. The
joint and several guarantees on RF bonds would result in a relatively low cost
of financing for participating Member States thereby easing their overall
debt-servicing burden. The repayment schedule for every Member State will have
to be precisely specified and follow a transparent calculation key specifying
the type of instalments (equal over time, or dependent on the economic
situation, e.g. as a percentage of GDP, which would adapt the annual payments
to the economic cycle). The scheme of this framework is depicted in
Figure 1.

Figure
1: Scheme of the European Redemption Fund

A problem of
moral hazard is inherent to the RF approach, as the joint and several guarantee
and ensuing lower financing costs for Member States could create unintended
incentives for incurring further debt. This risk of moral hazard would need to
be addressed by additional commitments by Member States in the area of economic
governance. As a pre-condition for participating in the RF, a path for
budgetary consolidation and structural reform would be laid down for each Member
State, which would oblige the Member State to redeem autonomously the
transferred debt over a certain period. Consolidation and reform agreements are
a crucial condition of credibility and could include: (i) earmarking of tax
revenue specifically for payment obligations to the redemption fund, (ii)
depositing collateral, (iii) mandatory commitment to previously agreed
structural reforms and consolidation measures. In case of non-compliance, the
transfer of national debt to the redemption fund could be immediately stopped.

From a
practical point of view, the redemptions of maturing debt and new financing
needs of participating Member States would be financed with the money received
from the sale of RF bonds[28]
until the transferred liabilities reach the agreed amounts. A clear and strict
legal framework/contract governing this transfer of debt would be required,
which would regulate in particular: (i) the maximum amounts to be
transferred[29],
(ii) the repayment scheme, as well as (iii) the seniority of bonds issued
by the RF over national bonds.

As a result
of the transfer to the RF, a country's total debt would be divided into two
parts - national debt and bonds issued by the RF[30] (see Figure
2).

Figure 2: Member States' debt structure under a
Redemption Fund scheme

Source:
European Commission Autumn 2012 forecast, debt figures forecast for 2013

The
establishment of a RF would pose several challenges. Firstly, although the
entire euro area would benefit from a decline of sovereign and systemic risk
due to reduction of overall debt levels and particularly debt levels in more
vulnerable countries, high-credit quality Member States would seem to benefit
relatively less from the Fund. Therefore, incentives for participation by these
Member States would need to be created. Secondly, as excessive debt would be
covered by joint and several guarantees it would be converted into a relatively
low-risk asset. Hence, the market-disciplining effect would be substantially
weakened. In fact, the disciplining task would be transferred entirely to the
co-guarantors. Thirdly, the RF is intended as a way of bringing the debt levels
down and Member States should not have incentives to prolong unnecessarily the
participation in the RF only to benefit from lower financing costs. Finally, from
a market perspective, a limited duration of the scheme would reduce market
liquidity towards the end of the scheme. This would put in question the role
and use of the commonly issued bonds as a benchmark and also the likelihood of
establishing proper derivative markets. After the expiry of the common
issuance, the euro area government bond market would be as little integrated as
now and none of the potential benefits of common issuance would be achieved.

[1] The adjective “fiscal” in this text is used in the sense of
“budgetary”.

[2]
The EMU policy framework comprises a set of detailed Treaty
provisions, which (a) establish the European Central Bank (ECB) as an
independent monetary authority for the euro area; (b) elaborate a set of rules
governing the conduct of national budgetary policies (such as the excessive
deficit procedure, the prohibition of monetary financing and privileged access
and the so-called "no bail-out clause"); and (c) govern the
surveillance of economic policies more generally in the Member States.

[3] http://ec.europa.eu/economy_finance/publications/publication_summary12680_en.htm

[4] See the Commission's communications
of 12 May 2010 (COM (2010) 250 final) and 30 June 2010 (COM(2010) 367 final),
and its "six pack" legislative proposals of 29 September 2010 (COM
(2010) 522 through 527 final).

[5] Judgment of 27 November 2012 in case C-370/12 Pringle. The Court
also confirmed the validity of European Council Decision 2011/199/EU amending
Article 136 TFEU and that the Member States were free to conclude and ratify
the ESM Treaty before the entry into force of that Decision.

[6] ECB Press Release of 6 September 2012 on Technical features of
Outright Monetary Transactions: http://www.ecb.int/press/pr/date/2012/html/pr120906_1.en.html

[7]  COM(2011)818.

[8] See Commission Communication titled "A Roadmap towards a Banking
Union" outlining the Commission's overall vision for rolling out the
banking union, covering the single rulebook, common deposit protection and a
single bank resolution mechanism", COM(2012)510, http://ec.europa.eu/internal_market/finances/docs/committees/reform/20120912-com-2012-510_en.pdf

[9] http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/132809.pdf

[10] http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/132986.pdf

[11] http://ec.europa.eu/internal_market/finances/docs/committees/reform/20120912-com-2012-511_en.pdf

[12] http://ec.europa.eu/internal_market/finances/docs/committees/reform/20120912-com-2012-512_en.pdf

[13] Regulation (EU) N° 1176/2011

[14] Specifically,
according to Article 126(3) TFEU: "The report of the Commission shall also
take into account whether the government deficit exceeds government investment
expenditure and take into account all other relevant factors (...)".

[15] First, consideration of
relevant factors may lead to not placing a Member State in EDP despite a breach
of the deficit criterion when the debt ratio is below the reference value.
Second, a breach of the debt reduction benchmark should result in the opening
of an EDP only after the assessment of the relevant factors.

[16] Also, expenditure on EU
programmes, and thus also investment expenditure, to the extent that it is
fully matched by EU funds revenue, is also excluded from the expenditure
considered for assessing the compliance with the expenditure benchmark.

[17] The
SGP embeds specific provisions that allow for such a possibility. Regulation
1466/97 - Article 5(1): "...When defining the adjustment path to the
medium-term objective for Member States that have not yet reached this
objective, and in allowing temporary deviation from this objective for Member
States that have already reached it, provided that an appropriate safety margin
with respect to the deficit reference value is preserved and that the budgetary
position is expected to return to the medium-term budgetary objective with the
programme period, the Council and the Commission shall take into account the
implementation of major structural reforms which have direct long-term positive
budgetary effects, including by raising potential sustainable growth, and
therefore a verifiable impact on the long-term sustainability of public
finances..."

[18] I.E., the EU representing the euro area Member States in accordance
with the Treaties.

[19] See Judgment of 27 November 2012 in case C-370/12 Pringle, points
137 and 138.

[20] In any event, the substance of that Treaty should be integrated
into Union law as foreseen in its Article 16.

[21] See Commission Communication titled "A Roadmap towards a Banking
Union" outlining the Commission's overall vision for rolling out the
banking union, covering the single rulebook, common deposit protection and a
single bank resolution mechanism", COM(2012)510, http://ec.europa.eu/internal_market/finances/docs/committees/reform/20120912-com-2012-510_en.pdf

[22] Some existing analyses assess econometrically the contribution of
existing transfer schemes available in federal states on the absorption of asymmetric
shocks. For example, estimates on the stabilisation capacity of transfers
across US States vary from 10% to 30% of the shock offset by the transfer for
the US.

[23] See the judgment in Case C-370/12, Pringle, at points 109 – 111 and
158 - 162.

[24]
It should be recalled that, in October and November 2011, the position of the
Commissioner for Economic and Monetary Affairs was already significantly strengthened
by several acts adopted within the limits set by the current Treaty rules, in
order to guarantee the independence, objectivity and efficiency in the exercise
of the Commission's responsibilities of coordination, surveillance and
enforcement in the area of the economic governance of the Union and of the euro
area. In particular, following an amendment to the Commission's Rules of
procedure, Commission decisions in this area are adopted upon a proposal from
the Vice-President responsible for Economic and Monetary Affairs and the euro
by a special written procedure allowing for a more objective and effective decision-making.
The Vice-President is also empowered to adopt, acting in agreement with the
President, decisions on behalf of the Commission in several areas relating to
the 'six-pack' and in relation to economic adjustment programmes in the
framework of the EFSM, EFSF and ESM. Finally, all Commission initiatives which
have a potential impact on growth, competitiveness or economic stability
require the prior consultation of the Vice-President's services.

[25] I.E., the EU representing the euro area Member States in accordance
with the Treaties.

[26]          See also Final Report of the European Convention's Working
Group VI on Economic Governance, WG VI 17, 21.10.2002, p. 8. Cf. equally Final
Report of Working Group VII on External Action, WG VII 17, 16.12.2002, pt. 66.

[27] This delegation is composed by the Commissioner for Economic and
Monetary Affairs accompanied by the President of the Eurogroup and the
president of the European Central Bank

[28] The management of the RF would
be entrusted to a dedicated institution to be established under the Treaty, i.e. a
European Debt Management entity within the Commission, accountable to the
European Parliament.

[29] The contract should also
specify clearly that the agreed amounts to be transferred are not expandable.

[30] The overall size of the RF
could reach EUR 3 trillion. Calculation done on the basis of the European
Commission Autumn 2012 forecast.