Opinion of the Economic and Social Committee on the 'Arrangements for stage three of economic and monetary union: stability and growth pact for ensuring budgetary discipline, reinforced convergence procedures, and a new exchange rate mechanism` (97/C 287/16)

On 18 March 1997 the Economic and Social Committee, acting under Rule 23(3) of its Rules of Procedure, decided to draw up an opinion on the above-mentioned proposal.

The Section for Economic, Financial and Monetary Questions, which was responsible for preparing the Committee's work on the subject, adopted its opinion on 13 May 1997. The rapporteur was Mr Burani.

At its 346th plenary session (meeting of 29 May 1997) the Economic and Social Committee adopted the following opinion by 124 votes to two, with seven abstentions.

This document provides a further contribution () from the Economic and Social Committee to the preparatory work on European monetary union.

It is based on the following documents adopted by the Commission:

- Amended proposal for a Council Regulation (EC) on the strengthening of the surveillance and coordination of budgetary positions ();

- Amended proposal for a Council Regulation (EC) on speeding up and clarifying the implementation of the excessive deficit procedure ();

- Communication from the Commission to the Council: Reinforced convergence procedures and a new exchange rate mechanism in stage three of EMU ()

and takes into account the guidelines which emerged from successive Ecofin Councils.

In presenting the above documents the Commission has fulfilled its duty to put forward broad guidelines for the decisions of the forthcoming Amsterdam Summit. This opinion therefore aims to provide an ESC contribution to the Council's preliminary deliberations.

1. Introduction

1.1. As the Treaty deadlines for the implementation of EMU draw near, the Commission - in partnership with the EMI - has drawn up proposals for the legislation and regulations which the Council will have to adopt. The Committee has already commented on one of the Commission documents: the proposal for two Council regulations on the legal infrastructure for the adoption and use of the Euro ().

1.2. The Commission has adopted a further two proposals, quoted above, which aim to establish the basic foundations for the whole EMU framework: these put forward, on the one hand, the rules needed to ensure initial and lasting stability for the single currency and, on the other, aim to regulate the single currency's relations with the currencies of countries who do not join EMU for the time being.

1.3. The two initiatives cannot be taken separately; on the contrary, they should be considered as an integral part of a policy framework to maintain the intrinsic stability of the Euro, both by regulating the practice of participating countries and by ensuring that the policies of 'non-EMU` countries do not clash with those of countries which have already adopted the single currency.

2. The stability pact - general comments

2.1. The Commission proposal follows in the wake of the German government's document entitled 'A stability pact for Europe`, which was discussed at the Madrid Council in December 1995. It aims to ensure lasting stability for the single currency, provided by the close, converging budgetary discipline of all participants. The following comments confirm the Committee's endorsement of this approach, as stated in its earlier opinion on the subject ().

2.2. The stability pact - the full title of which is the 'stability and growth pact for ensuring budgetary discipline in stage three of EMU` - contains the two distinct proposals for Council regulations mentioned in the introduction above. The following general comments refer to the two regulations as well as to the decisions taken at the European Council meeting in Dublin.

2.3. The Commission has based its proposal on two types of measures: preventive and dissuasive. The first type aims to keep one or several participating Member States from sowing the seeds of budgetary instability; whilst the second type aims to make each participating country aware of the direct consequences it will suffer for conduct which is not compatible with maintaining monetary stability; the latter will become a common heritage after the adoption of the single currency. Defending this heritage will therefore become a common cause and, consequently, subject to strict discipline. The Economic and Social Committee confirms its endorsement of this line.

2.4. Moreover, the Commission proposal takes the view that strict discipline does not exclude the possibility of derogating from the implementation of sanctions where the deficit slippage is due to temporary, exceptional circumstances beyond the control of the Member State. The criterion is doubtless correct, but - as the Commission itself recognizes - the problem lies in identifying sufficiently objective criteria for the implementation of the derogations. The Committee will come back to this in its detailed analysis of the proposal.

2.5. The fact that the sanctions regime provides for derogations for temporary and exceptional circumstances implies that it refers mainly to the possibility of a single Member State deviating due to circumstances beyond its control. It is, however, quite feasible that certain events might affect a Member State for longer - and therefore not temporary - periods. Moreover, there are situations - the 1972 oil crisis, for example - which affect a number of Member States in exceptional circumstances, but whose effects cannot be remedied in the short term. The proposed stability pact does not take into account these possibilities, which - whilst perhaps remote and most certainly undesirable - cannot be ignored.

2.6. Current realities ought to induce us to err on the side of caution when establishing the basic principles of the stability pact. Some Member States had planned for strict adherence to the convergence criteria for 1996, but socio-economic circumstances and the general state of the economy meant that they were forced to postpone this until 1997. This is a clear indication that governments are not always able to conduct their economies as they would like to, and that forecasts - even the most authoritative - can prove to be wrong.

3. Proposal for a Regulation on the strengthening of the surveillance and coordination of budgetary positions

3.1. The basic idea of the draft regulation is to set up an organic system of 'multilateral surveillance` of budgetary discipline in each of the Member States participating in EMU. From 1 January 1999, each participating country is to submit an annual 'stability programme` containing:

- the medium-term objectives and adjustment path for the government surplus/deficit as a ratio to GDP, and the expected path for the government debt as a ratio to GDP;

- the main assumptions about expected economic developments such as real GDP growth, employment/unemployment, inflation and other important economic variables;

- a description of the budget measures being taken to achieve the programme's objectives;

- a commitment to take additional measures when necessary to prevent slippage from stability targets.

3.2. The Economic and Social Committee cannot but support this approach, but would voice some doubt about the possibility of presenting virtually binding programmes, because the period to be covered extends not only to the current and preceding year, but also the following three years. In practice, this would involve presenting a four-year programme: given the fluidity of the political and socio-economic scene at European and above all at world level, it might be better to talk about programme declarations rather than programmes; such declarations would be binding only insofar as they correspond to real economic developments.

3.3. When the European Council discussed the stability pact, it added the significant words 'stability and growth pact`. In its analysis of the content of the stability programme, the Committee wishes to focus on a particularly sensitive issue: employment. The Committee wishes to put forward the following ideas regarding employment as the most important practical consequence of the pact's new emphasis also on growth. When the convergence criteria were finalized, unemployment levels in most Member States did not give cause for grave concern, and the feeling was that the situation could be kept under control. Today, the opposite is the case. In some Member States, a unilateral effort to reduce the deficit has held back growth, and consequently, employment.

3.4. The Committee's view on this is that the programmes ought to be based on the employment policy guidelines decided by the Council.

3.5. Within two months of the stability programme being submitted, the Council, on a proposal from the Commission and the Monetary Committee under Treaty Article 109c, is to notify its endorsement or make a recommendation to the Member State to adjust its own plans. This preventive measure does not require particular comment. Doubt persists, however, as to the real possibility of examining the programmes of all the participating Member States and drawing up possible proposals for corrective measures in such a short time. Bearing in mind the procedures and the fact that no less than three bodies - the Commission, the Monetary Committee and the Council - are involved, a two-month period seems somewhat optimistic. The Committee also feels that the committee for employment and labour market policy should be involved in this process.

3.6. Under Article 103(3) of the Treaty, the Council is to monitor real implementation of the commitments undertaken by the Member States, with a view to identifying possible divergence. If this should occur, the Council is to make the appropriate recommendations; in the event that, in subsequent monitoring, divergence is seen to persist or worsen, a public recommendation may be issued calling for specific corrective action be taken. The monetary committee must take great care in wording the recommendation for publication under Article 103(4) of the EC Treaty, to take account of the possible impact on the political situation of the Member State in question, and of the sensitivities of its public opinion.

4. Proposal for a regulation on speeding up and clarifying the implementation of the excessive deficit procedure

4.1. The second part of the stability pact concerns the procedures for deciding whether an excessive deficit exists [Article 104c(6)] and the sanctions to be applied [Article 104c(11)]. Since it deals with measures required to comply with Treaty rules, the regulation is essential.

4.2. An excessive deficit is deemed to exist when the ratio of government deficit to GDP ('government deficit ratio`) exceeds 3 % and/or the ratio of government debt to GDP ('government debt ratio`) exceeds 60 %. The decision as to whether an excessive deficit exists is to be taken by the Council within three months of submission of results by the Member States, to whom the appropriate 'recommendations` are sent. If the Council establishes that its suggestions have not been taken into account within four months of its recommendation, the recommendations will be made public.

4.3. A decision of the Member State's real willingness to comply with the recommendations is to be made by the Council on the basis of official decisions by the government, enacted if necessary by law, within a time limit to be defined by the Council. If these laws are not enacted, or are modified substantially during the legislative process, the Council is to decide within one month whether specific measures should be taken, with a subsequent request for compliance with the earlier recommendations. The final decision on whether to apply sanctions must be taken within the following two months. The total time between the date for submission of the Member State report and the date of imposition of sanctions may not exceed ten months.

4.4. In accordance with the second indent of Treaty Article 104c(2a), the procedure confirming the existence of an excessive government deficit does not trigger sanctions when the deficit is exceptional and temporary, resulting from unusual events outside the control of the Member State, or when resulting from a severe economic downturn, in particular in the case of significantly negative annual growth. The regulation provides that the Commission shall submit budget forecasts on the restoration of the situation if the events of economic downturn come to an end during the current year or the following year. However, it says nothing about the case of a prolonged structural or cyclical economic downturn.

4.5. The regulation lays down precise arrangements concerning the criteria for applying (i) the establishment and notification procedures, and (ii) any sanctions:

- if the excessive deficit results from non-compliance with the government deficit ratio (3 % of GDP), the Member State in question must lodge a non-interest-bearing deposit with the Commission, comprising a fixed component equal to 0,2 % of GDP, and a variable component equal to one tenth of the difference between the real government deficit ratio and the reference value (), with an upper limit of 0,5 % of GDP;

- if the excessive deficit results only from non-compliance with the government debt ratio, the amount of the deposit is to be equal to 0,2 % of GDP.

4.6. The criteria are rigid and mathematical. The Economic and Social Committee acknowledges that a fine is the best deterrent against continuing excessively lax public finance policies. It feels, nevertheless, that the size of the fine could be such as to deal a heavy blow in situations where public finances are already in disarray. In the event that the government deficit or debt ratio persists for two years, the deposit would be required - according to the guidelines - each year - in other words, for three years, although the calculation would be slightly more favourable after the first year. The Council must consider the consequences of applying the Commission's proposed criteria with great caution and objectivity.

4.7. It should be pointed out that the impending European monetary union has in fact served to make many governments aware of the need to put their financial affairs in order so as to meet the conditions at the critical moment (Spring 1998). The table below seems to reveal the existence of a real determination to cut deficits - even among Member States whose membership is still in doubt.

>TABLE>

Government debt

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Government deficit

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>END OF GRAPHIC>

Source: European Commission, forecast for April 1997.

4.8. However, the preceding table demonstrates just how much the room for manoeuvre is under threat: after repeatedly claiming that the 3 % deficit and 60 % debt ceilings are upper limits, and that sound economies should be well below these limits, it can be seen that the majority of Member States - including the strongest - are currently dangerously close to the upper limits or have even exceeded them, even in their forecasts.

4.9. The caution urged by the Economic and Social Committee (see point 4.6) becomes indispensable at this stage in view of the fact that while the establishment of the parameters of the government deficit and debt ratios allows a degree of scope for interpretation in establishing whether the conditions for joining the EMU have been met (), this scope will no longer be granted subsequently; criteria for applying sanctions are strictly mathematical and allow no scope for interpretation. It also emerges clearly from the table that if the situation in 1999 is similar to the forecasts for 1997, very few EMU members would escape sanctions.

4.10. It is only natural, then, to ponder the following: over the years, the global - and particularly European - economic situation has gradually changed, to such an extent that it is unlikely that we will return to parameters once considered 'normal`. In the Europe of the 60s and the early 70s (), a normal budget was either close to or actually in the black. For example, the 1970 average government debt for the 15 Member States was 34,6 % of GDP; by 1995 this had shot up to 71,7 % - thus doubling in 25 years. Given such major changes in the situation, there is no reason to think it might not change again. This prompts the Committee to draw the Council's attention to the following proposal: the convergence criteria, particularly those on government deficit and debt, should be reviewed regularly e.g. every ten years. There is no reference to this in the Treaty, but experience and caution should teach us to consider this important issue.

4.11. A sign that the risk involved is being understood is contained in the recent Eurostat review of the statistical and accounting criteria for calculating government deficit (), clearly with a view to the decision to be taken in Spring 1998. The effect of these criteria, which have been described by critics as 'creative accountancy`, is that plus and minus items on the balance sheet are not calculated in accordance with normal practice. The Committee feels that the initiative is acceptable, as long as its aim is to ensure entry to EMU via harmonized criteria based on accounting and statistical neutrality. It would, however, highlight the need for further harmonization of the criteria for collating statistics, particularly on the cost of living and employment; inter-comparable statistics are vital to the application of fair, 'neutral` convergence criteria. It is however essential to retain unchanged the condition that the new rules should allow better assessment of convergence and should not permit divergence from the necessary criteria for budgetary discipline.

5. Reinforced convergence procedures and a new exchange rate mechanism in stage three of EMU

5.1. Member States which do not participate in EMU will undoubtedly pose one of the most delicate economic, monetary and political problems. The harmonious development of the Single Market would suffer greatly if the currencies of countries opting out (termed 'pre-ins` in official documents today) were allowed to fluctuate freely and without limitations. The need for control has been recognized by all the parties in question, as well as by the EMI and the Commission. Commission communication of 16 October 1996 () thus presumably constitutes a basis for forthcoming decisions.

5.2. The ECOFIN Council has already achieved a preliminary consensus on the need for monetary solidarity, to be achieved through the creation of a new exchange rate mechanism based on the existing ERM; the 'pre-ins` would be subject to this new exchange-rate mechanism. The aim of the new system would be to impose exchange rate discipline on the 'pre-ins` and ensure that they comply with, or at least move towards compliance with, the convergence criteria. The project is flawed since the new exchange rate mechanism would not be compulsory in all Member States. The likelihood of one of the pre-in Member States refusing to comply with this discipline - which, at the end of the day, is in the common interest - seems somewhat remote, but the problem of how to deal with a freely floating currency should be analyzed very carefully.

5.3. This is particularly tricky with the 'opt out` states. Denmark's EMU membership is currently in doubt; the United Kingdom is not a member of the EMS, and her participation depends on her desire to join and on her observance of the normal fluctuation margins provided for under the third indent of Article 109j(1) of the Treaty. The European Union is political first, economic second and monetary third: the existence of currencies regulated according to purely 'national` criteria is contrary to the spirit of the Treaty, which states that each Member State is to treat its exchange-rate policy as a matter of common interest.

5.4. The new exchange rate system will consist of bilateral links between the Euro and each of the 'pre-in` currencies; central rates and fluctuation margins will be set for each currency in accordance with a common decision-making procedure involving Ministers of Finance, Governors of the European Central Bank (ECB), non-participant national central banks, and the Commission.

5.5. In the event of abnormal fluctuations or market pressures, the mechanism would guarantee automatic support with appropriate financing facilities when pre-in currencies are driven into the margins of the fluctuation bands. Nevertheless the ECB will have the right to suspend intervention if circumstances are such that the overriding policy objective of price stability is jeopardized. Practical ways of limiting fluctuations within the standard bands are also envisaged, though not spelt out in the Commission document.

5.6. Realignments of exchange rates should be made in good time and following a common procedure; all parties involved in the common procedure will have the right to trigger a procedure that might result in realignment.

5.7. The Economic and Social Committee is of the view that the mechanism as described is valid and should be adopted; the exchange rate stability of all European Union currencies is an important and vital requirement. The ESC is nevertheless baffled as to why the support mechanism is described as 'automatic` when it will not be applied necessarily if there are other priorities (cf. point 5.5). Insofar as solidarity is subject to factors beyond the Member States' control, it cannot, strictly speaking, be regarded as a fully automatic mechanism. On the other hand it is hard to imagine what other mechanism could be brought into play in circumstances requiring the concentration of efforts on the priority of the single currency.

5.8. The communication notes that exchange rate stability depends more than anything else upon sound macroeconomic management; the benchmark for this would be the progress achieved in moving closer to sustainable convergence. Given the link between exchange rate stability and convergence, the Commission proposes the introduction of convergence programmes as a useful instrument for managing and controlling the new exchange rate mechanism. It would be tantamount to creating a parallel system for 'pre-ins` alongside the stability programmes envisaged for 'ins`.

5.9. The Commission proposes that the submission of convergence programmes become a formal obligation for the 'pre-ins` - with the same rules and conditions applying as in the case of stability programmes. Special attention should be paid to the inflation rate, the government deficit ratio and the national debt ratio, together with a description of the policies introduced to adjust to the convergence criteria.

5.10. The communication also envisages reinforced convergence criteria at Community level, whilst at the same time recognizing that primary responsibility for fulfilling convergence criteria lies with the 'pre-in` states themselves. These reinforced convergence criteria would in practice result in a closer monitoring of situations and programmes in accordance with Treaty Article 103. The article in question provides for a panoply of measures ranging from Council recommendations to the 'making public` of recommendations and, in the last analysis, an invitation to the president of the Council to appear before the competent committee of the European Parliament.

5.11. The Economic and Social Committee goes along with the proposed mechanisms and measures. At the same time however it notes that, unlike the stability pact, the convergence programmes lack the basic deterrent of penalties. No such measures are provided for in the Treaty, nor would it be desirable for them to be introduced now. The system is weak in that the progress of 'pre-in` states towards convergence is largely dependent on whether such countries show willingness to participate in EMU and whether their macroeconomic and monetary policies meet criteria of rationality. The measures proposed by the Commission therefore make sense but will be inadequate if a country is unwilling or unable to meet convergence criteria because of objective difficulties. The situation is obviously different when a state deliberately engages in 'competitive devaluations`.

6. Additional and final comments

6.1. Some Member States have raised the possibility of creating a Stability Council comprising the ministers of finance of the 'ins` (a sort of informal or limited Ecofin Council) with the task of coordinating the budgetary policies of EMU states and serving as a dialogue partner for the ECB. The widespread perception of the thinking behind this proposal is that the Stability Council would act as a political counterweight to the powers of the future ECB whose independence in laying down monetary policy is guaranteed by Treaty Article 107. The Economic and Social Committee considers that although the powers of the Council in the economic policy field should remain in place and the Commission should continue to play its key role, the letter and spirit of the provisions governing the independence of the ECB should be observed. The Stability Council, should it be established, should adhere to these principles. Moreover, any assessment is hampered by the lack of precise information regarding the role, remit and powers of the institution.

6.2. The Economic and Social Committee underlined in points 3.3 and 3.4 the importance of employment in a climate quite different from that which obtained when the Treaty provisions were drawn up. It is therefore essential to ensure consistency between convergence and stability on the one hand and the maintenance of a welfare state and increased competitiveness on the other. The Committee reserves the right to express its views on these aspects in a subsequent opinion.

6.3. Under the conditions produced by a single currency, an imbalance can develop between monetary and real economic goals, since the pursuit of monetary goals will be supported by a strong European central bank. It is therefore necessary, for the sake of macro-economic reflection and social cohesion, to find mechanisms which will firstly ensure improved coordination of macro-economic policies (growth, employment, taxation, etc.) at European level, and secondly provide for a regular dialogue between monetary policy bodies and economic policy bodies.

6.4. In conclusion, the Economic and Social Committee is in basic agreement with the Commission Communication, but would draw the attention of the Council to the various points and reservations made in this opinion which, if not proposing a different approach, might be helpful in carrying forward the study of the Commission's proposal.

Brussels, 29 May 1997.

The President of the Economic and Social Committee

Tom JENKINS

() Previous contributions are contained in the ESC opinion of 26 October 1995 on the Green Paper on the practical arrangements for the introduction of the single currency (OJ C 18, 22. 1. 1996); the ESC opinion of 26 September 1996 on the impact of economic and monetary union: economic and social aspects of convergence and measures to increase awareness of the single currency (OJ C 30, 30. 1. 1997); and the ESC opinion of 31 October 1996 on market implications of the legislation and regulations required for the transition to the single currency (OJ C 56, 24. 2. 1997).

() Presented by the Commission pursuant to Article 189a(2) of the Treaty establishing the European Community on 19 March 1997 (OJ C 117, 15. 4. 1997).

() Presented by the Commission pursuant to Article 189a(2) of the Treaty establishing the European Community on 19 March 1997 (OJ C 130, 26. 4. 1997).

() COM(96) 498 final, 16. 10. 1996.

() Cf. ESC opinion of 31. 10. 1996.

() Cf. ESC opinion of 26. 9. 1996, chapter 5.

() In the theoretical case of a real deficit of 3,5 % the calculation would be as follows: 0,2 % + >NUM>1/

>DEN>10

of 0,5 % = 0,2 % + 0,05 % = 0,25 %.

() See the ESC opinion of 26. 9. 1996, point 2.7.

() The following information is taken from a report by Mr Duisenberg, president of the Dutch Central Bank, and the Bank for International Settlements, on 20. 3. 1997 (published in BIS Review, No 36 of 3. 4. 1997).

() Cf. Eurostat News Release No 10/97, 3. 2. 1997, No 16/96, 21. 2. 1997 and No 24/97, 26. 3. 1997.

() COM(96) 496.

APPENDIX to the opinion of the Economic and Social Committee

The following amendments were defeated during the discussion on this document but were supported by at least a quarter of the votes cast.

Point 3.5

Delete the last two words and replace with the word 'unrealistic`.

Result of the vote

For: 35, against: 53, abstentions: 21.

Insert a new sub-section 5.12:

'The Economic and Social Committee is extremely concerned by the reaction of public opinion to the tight economic and social policies required by the convergence criteria.

The Committee regrets the failure to carry out and publish a detailed economic and social evaluation of, in particular, the impact on employment. This at a time when the conclusions reached by many parties - the UN Economic Commission, the BRI report, various economic institutes in Germany, the UK and France - tend to show that the policy driven by the Maastricht constraints precludes a return to enough growth to stop the increase of unemployment in Europe, and accentuates the deterioration in the competitiveness of Europe vis-à-vis the rest of the world.`

Reason

Self explanatory.

Result of the vote

For: 35, against: 77, abstentions: 15.