Lords Committee sceptical on implementation of EU Economic Governance Proposals

11 March 2011

The House of Lords EU Committee today told the Treasury that EU proposals to tackle Member States’ fiscal discipline were doomed to fail unless EU Member States stuck to the rules.

EU Finance Ministers will discuss these proposals at the ECOFIN meeting on 15 March.

In a letter to the Financial Secretary to the Treasury, Committee Chairman Lord Roper said, “it is the implementation of these measures that we have the greatest concerns about”. He said the Committee remained sceptical that Member States would have the political will to enforce economic governance measures rigorously once the current crisis was over.

The Committee notes that the overall design of the EU's measures is "a step in the right direction" to ensure the EU's long-term financial stability, but certain proposals are flawed. In particular:

  • EU proposals for the surveillance and correction of macroeconomic imbalances in both deficit and surplus countries. The Committee says that it is not appropriate or realistic for the EU to make corrective recommendations to a country which has a current account surplus, particularly where these recommendations might hurt its competitiveness in a global economy. The EU cannot penalise Germany for running a large surplus.
  • EU proposals for the use of sanctions under the excessive imbalance procedure. The Committee has strong reservations about such sanctions, given the difficulty in determining what constitutes a harmful imbalance.
  • EU proposals for the new European Systemic Risk Board, responsible for overseeing macro-prudential risks. It is currently unclear how the ESRB will fit within the new economic governance framework. The Committee states that ESRB should be the route by which central banks, and the ECB in particular, contribute actively to discussions on the fiscal and macroeconomic positions of Member States.

The Committee warns that the causes of future financial crises are likely to be different to those which caused the current crisis. Mechanisms to review and update EU surveillance systems have to be built in to ensure they remain up to date in changing economic circumstances. Member States must remain vigilant.

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