Euro Update(17): Eco-Fin Council – From EFSF to EMS and Portugal

If we are to believe the reports coming out of Monday night’s meeting of eurozone Finance ministers, the metaphorical ball is rolling on the negotiations of the permanent version of the EFSF. According to the FT , the parties agreed to a doubling of the effective size of the EFSF, from €250B now to €500B for its permanent version from 2013. Interestingly although the ever federalist Jean Claude Juncker seemed satisfied with the results and argued that no further steps needed to be taken towards Portugal at the moment, Fernando Teixeira dos Santos, the Portuguese finance minister seemed less upbeat. He insisted that timing was of the essence and that the prolonged absence of a union instrument risked worsening things. I wonder why…
Aside from this, the Eco-Fin meeting the day after also approved a number of measures. These are fairly loosely described, but here is what the Council’s provisional press release says:

<<The Council held a policy debate on a package of measures intended to strengthen economic governance in the EU, and more specifically in the euro area, in order to address the challenges highlighted by recent difficulties on sovereign debt markets. It asked the Permanent Representatives Committee to oversee further work on the package, in the light of its discussion. The presidency’s aim – in accordance with the deadlines set by the European Council on 4 February – is for the Council to agree on a general approach on all six proposals at its meeting on 15 March, with a view to reaching an agreement with the European Parliament in June. The proposals are aimed at enhancing budgetary discipline in the member states and broadening the surveillance of their economic policies, thus implementing the recommendations of a task force chaired by the President of the European Council, Herman Van Rompuy.

The package consists of:

– a draft regulation amending regulation 1466/97 on the surveillance of member states budgetary and economic policies;

– a draft regulation amending regulation 1467/97 on the EU’s excessive deficit procedure;

– a draft regulation on the enforcement of budgetary surveillance in the euro area;

– a draft regulation on the prevention and correction of macroeconomic imbalances;

– a draft regulation on enforcement measures to correct excessive macroeconomic imbalances in the euro area;

– a draft directive on requirements for the member states’ budgetary frameworks.

Four of the propositions deal with reform of the EU’s Stability and Growth Pact. They are aimed at enhancing the surveillance of fiscal policies, introducing provisions on national fiscal frameworks, and applying enforcement measures for non-compliant member states more consistently and at an earlier stage. In particular, a so-called reverse majority rule, whereby the Commission’s proposal for imposing a fine will be considered adopted unless the Council turns it down by qualified majority, will trigger the sanction more automatically than at present. Greater emphasis will also be placed on the debt criterion of the Stability and Growth Pact, with member states whose debt exceeds 60% of GDP required to take steps to reduce their debt at a pre-defined pace, even if their deficit is below the 3% of GDP threshold.

The other two proposals target macroeconomic imbalances within the EU. Here, the aim is to broaden the surveillance of economic policies, introducing the possibility of fines on member states found to be in an “excessive imbalances position”. Risks of macroeconomic imbalances will be assessed using a “scoreboard” of economic indicators.>>

However, the conclusions on Macroeconomic and Fiscal Guidance to the member states adopted (according to page 12) are not yet published. More debate will continue to take place until the Council of the EU meeting on March 15. Among other things are questions of whether the EFSF should be able to purchase debt in primary as well as secondary markets and the Franco-German Pact for Competitiveness, the most recent of such guided proposals. I also think they should give it liquidity in the form of own resources, rather than promised funds. Just in case someone “pulls a Slovakia“. Either way, we should stay tuned for further developments…

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