COMMUNICATION FROM THE COMMISSION A blueprint for a deep and genuine economic and monetary union Launching a European Debate
Date: 2012-11-28
Institutions: European Commission
Subjects: Economic and Monetary Union, European Central Bank, economic growth, economic integration, economic recession, economic stabilisation, euro area, governance, investment aid, public debt, sustainable development

EUROPEAN 
COMMISSION 

Brussels, 30.11.2012  
COM(2012) 777 final/2 

Corrigendum 
Annule et remplace le document COM(2012) 777 final du 28.11.2012.  

COMMUNICATION FROM THE COMMISSION 

A blueprint for a deep and genuine economic and monetary union 
Launching a European Debate 

EN 

   EN 

 
 
 
 
 
  
 
 
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 

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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 
SGP2  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  report3  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 

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 

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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. 

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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  20104.  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 

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). 

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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.  

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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. 

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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 

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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  conditionality6.  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 

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 

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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 
9 

 
 
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. 

10 

 
 
 
 
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  6-18 
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. 

11 

 
 
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 

12 

 
 
feasibility of introducing Stability Bonds7, 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-
through  e.g.  macroeconomic 
going  efforts 

these  policies  more  effective 

to  make 

7  COM(2011)818. 

13 

 
 
 
                                                            
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.  

14 

 
 
 
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 
in  Member  States.  Its  swift  adoption  and 
with  situations  of  financial 

instability 

15 

 
 
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 

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   

16 

 
 
 
 
 
                                                            
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 States12. 

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 

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 

17 

 
 
 
 
 
 
 
                                                            
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.  

18 

 
 
 
  
 
 
 
 
 
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: 

19 

 
 
 
•  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 

20 

 
 
 
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 
imbalances  (the 
the  prevention  and  correction  of  macroeconomic 
procedure  for 
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 

13 Regulation (EU) N° 1176/2011 

21 

 
 
                                                            
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 

22 

 
 
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  EDP15;  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 

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.  

23 

 
 
 
                                                            
capital formation is averaged over a number of years, in order to avoid that Member States 
penalised because of annual peaks in investment16.  

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).  

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…" 

24 

 
 
 
 
                                                            
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 a revision of national budgets in line with European commitments), 

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

25 

 
 
 
                                                            
the extension of deeper policy coordination to the fields of taxation and employment 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. 

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

26 

 
 
 
                                                            
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 Union20) 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.  

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

27 

 
 
  
 
 
                                                            
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 
28 

 
 
 
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 

29 

 
 
 
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 

30 

 
 
 
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 

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 

31 

 
 
 
                                                            
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 

32 

 
 
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.  

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. 

33 

 
 
 
                                                            
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. 

34 

 
 
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 

35 

 
 
 
 
envisaged in sections 3.2 and 3.3 will need to include reflections on adaptations to the EU's 
model of democratic legitimacy.  

issues  would  however  arise 

if 
Second,  serious  accountability  and  governance 
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 

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

36 

 
 
                                                            
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 
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. 

informed  of 

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: 

37 

 
 
 
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 today24 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 

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. 

38 

 
 
                                                            
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 

39 

 
 
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 
40 

 
 
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. 

41 

 
 
 
 
 
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.  

42 

 
 
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 
43 

 
 
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. 

44 

 
 
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). 

45 

 
 
 
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  area25  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 

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

46 

 
 
                                                            
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.  

See also Final Report of the European Convention's Working Group VI on Economic Governance, WG 

26  
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. 

47 

 
 
                                                            
•  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 
delegation27), could serve as a model. 

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  

48 

 
 
 
 
 
 
                                                            
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, 

49 

 
 
 
(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 
bonds28  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 transferred29, (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 RF30 (see Figure 2). 

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

P
D
G

f
o
%
a
s
a

t
b
e
d

200

180

160

140

120

100

80

60

40

20

0

AT BE CY DE EE EL ES

FI

FR IE

IT LU MT NL PT SI

SK

national debt

debt transferred to redemption fund

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 

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. 

50 

 
 
 
 
 
 
 
 
 
                                                            
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.  

51