Mr. Tony Gallagher:

I am accompanied today by my colleagues, Mr. John Palmer, Mr. Fergal Ó Brolcháin and Ms Alice Smith.

I thank the committee for the invitation to brief it on the Commission's two legislative proposals to strengthen further economic governance in the euro area. The two regulations are generally described as the "two pack".

We supplied the committee with notes on the two draft regulations earlier this year and we have updated them. Before turning to the specific points, I will comment on them briefly. The global financial and economic crisis that emerged in 2008 and the associated fiscal crisis that continues to threaten instability for the European Union and particularly the euro area have exposed shortcomings in the governance of the economic and monetary union. These events have highlighted the need for the EU and euro area to introduce a wide range of measures to reform the fiscal and economic governance system in place at the outset of the crisis.

The previous governance system was inadequate in that it was too narrow and shallow in scope and did not lead to emerging problems and imbalances being identified in time to head off the crisis or even lessen its effects. We could argue that the two pack proposals are coming rather late in the day but the justification for them is very strong. In the short term, these measures will contribute to restoring global confidence in the economic stability of the euro area and the EU as a whole. They will also make it difficult in the years ahead for the government of any euro area member state to adopt policies similar to those which led to the crisis without the dangers inherent in those policies being identified at an early stage, with measures taken to challenge and reverse them.

The main reform process began with Europe 2020, the EU's growth strategy for the decade ahead, which aims to make the EU a smart, sustainable and inclusive economy. This was followed by the European Semester, to which was added the Euro Plus Pact and the so-called six pack, which came into effect on 13 December last year. The six pack is designed to reform and strengthen the Stability and Growth Pact and introduce new macroeconomic surveillance. The two pack being discussed today is a further step in the process and is to a great extent a natural extension of the measures contained in the six pack. It is only applicable to euro area member states.

It is important to keep in mind that the two pack is part of a larger package of measures to enhance budgetary and fiscal co-operation within Europe. It has become increasingly clear from the high level debates taking place internationally that such measures cannot be divorced from the essential building blocks on which a genuine economic and monetary union should be based, such as an integrated financial framework and banking union.

Having reached agreement on the six pack with the European Parliament and European Council in autumn 2011, the Commission unveiled two pieces of additional legislation on 23 November 2011. These draft regulations are aimed at strengthening the existing surveillance mechanisms and promoting further economic integration and convergence in the euro area.

The first piece of proposed legislation COM (2011) 821, is on the monitoring and assessment of draft budgetary plans and ensuring the correction of excessive deficits. It will apply to all countries in the euro area, with special provisions being made for those subject to an excessive deficit procedure. This proposed regulation will require all euro area member countries to present the draft budgetary plans to the European Commission by 15 October each year. It will also give the Commission the right to assess these draft budgetary plans and, if necessary, to issue an opinion on them. It is also proposed that the Commission will have the power to request that a draft budgetary plan be revised should it consider the plan seriously non-compliant with the policy obligations in the Stability and Growth Pact.

All this will be done publicly to ensure full transparency. The regulation also proposes that closer monitoring and reporting requirements for euro area countries in an excessive deficit procedure will apply on an ongoing basis throughout the budgetary cycle. Euro area member states will be required to have in place independent bodies to monitor compliance with fiscal rules and base their budgets on macroeconomic forecasts that are independently produced or endorsed.

A second regulation, COM (2011) 819, on the strengthening of economic and budgetary surveillance, sets out explicit rules for enhanced surveillance. It will be applicable in three cases. The first is where member states face severe difficulties with regard to financial stability; the second is when member states are in receipt of financial assistance on either a precautionary basis or as part of a full-scale assistance programme; and the third is where member states have recently exited from such a programme.

The objective of this regulation is to strengthen economic and fiscal surveillance of euro area countries threatened with serious financial instability, as well as those which have recently exited from an EU-IMF assistance programme. In the case of euro area member states under a financial assistance programme or which face a serious threat of financial instability, it also aims to ensure that the surveillance process is robust, follows clear procedures and is embedded in EU law. Member states seeking financial assistance must produce and comply with a macroeconomic adjustment programme. If necessary, the Council may decide that a member state that does not comply with this programme should face financial consequences with regard to disbursements of the financial assistance.

This is a sketch of the two proposals and I will provide more detail on them. COM (2011) 821 is concerned with budgetary surveillance. The draft regulation introduces strong monitoring of budgetary policies for euro area countries through additional ex antemonitoring to run alongside the European Semester, which applies to all 27 member states. It also has increased requirements and close monitoring for euro area countries in an excessive deficit procedure. Under this regulation, a common budgetary timetable must be followed, with member states having to publish by at least 30 April each year the medium term fiscal plans in accordance with a medium term budgetary framework. They must include information that has in the past been published in stability programme updates.

The draft budget for the following year applies to central government and the main parameters of the draft budgets for all subjects of government must be published by 15 October, with full budgets adopted by 31 December. Article 5.3 of the draft regulation effectively requires the same information to be presented in a draft budgetary plan, the content and layout of which would be stipulated by the European Commission. This is to ensure that budgetary information for all euro area member states will be presented in a common format to the European Commission.

The regulation also provides that an independent body must be in place in each member state to monitor compliance with numerical fiscal rules. In addition, all medium term fiscal plans and draft budgets must be prepared on macroeconomic forecasts produced or endorsed by an independent body or a body which has functional autonomy from budgetary authorities. Article 6 of the draft regulation sets out the framework to apply in terms of the Commission's assessment of the draft budgetary plans. The Commission will be able to adopt an opinion on these plans, which must be delivered by the end of November at the latest. If a draft budgetary plan is particularly problematic, the Commission may, within two weeks of receipt, address an opinion to the member state requesting revisions to the plan.

Other provisions of the draft regulation include provisions for the closer monitoring of member states in an excessive deficit procedure which involves enhanced reporting. There are also provisions setting out the procedures to be implemented to require a member state to take corrective action to address excessive deficits and assess the suitability or effectiveness of those actions.

Ireland, along with other eurozone countries, agrees with the overall aims of the draft regulations. However, it is likely this will have implications for the timing of the budgetary process and it will be a matter for the Government to consider how future domestic processes will satisfy the requirements of the regulation.

However, with regard to the requirement for independent bodies, it should be noted that the Irish Fiscal Advisory Council, which will be established on a statutory basis following the enactment of the Fiscal Responsibility Bill, is already required to provide an assessment of the official spring and autumn economic and budgetary forecasts set out by the Government. As Ireland is under an EU-IMF programme, the elements in the draft regulation that relate to member states in excessive deficit procedures do not currently apply.

COM (2011) 819 is entitled “Draft Regulation of the European Parliament and of the Council on the strengthening of economic and budgetary surveillance of Member States experiencing or threatened with serious difficulties with respect to their financial stability in the euro area”, and its main features apply where a member state is either experiencing difficulties affecting its financial stability or is receiving financial assistance on a precautionary basis, and it provides for the Commission to make it subject to the enhanced surveillance process. Where a member state is under enhanced surveillance, it will have to adopt measures to address the causes of its difficulties in consultation with the relevant institutions, including the ECB and the IMF. The Commission may request such a member state to provide detailed data on financial institutions and carry out stress tests on them. The member state will also be subject to assessments of its supervisory capacity with regard to its banking system. The Commission and other institutions will carry out regular review missions of the member state under surveillance and, where further measures are needed, the Council may recommend that it takes appropriate action. Any member state that intends to seek financial assistance will have to inform the appropriate institutions, including the Commission and the ECB. A member state requesting financial assistance will be required to prepare a draft macroeconomic adjustment programme aimed at enabling it to return to the financial markets. This programme will be subject to approval by the Council.

A post-programme surveillance process will be put in place and maintained for a member state until a minimum of 75% of the financial assistance it has received has been repaid. Ireland is currently in an adjustment programme and so this draft regulation does not have any immediate impact on us. It will only affect Ireland when we come out of the arrangement, when we will still be subject to enhanced surveillance until we have repaid at least 75% of the assistance we have received.

The main intention of the reforms being undertaken in the economic governance process is to prevent member states reaching a point where they have no option but to seek to enter an EU-IMF programme. Accordingly, introducing a means whereby enhanced surveillance can come into effect before that stage - albeit when the member state is already experiencing significant difficulties - is desirable.

In terms of where the regulations are, ECOFIN, on which the Minister for Finance represents Ireland, reached agreement on a general approach on 21 February 2012. Since then, two European parliamentary reports - the Gauzèsreport on COM (2011) 821 and the Ferreira report on COM (2011) 819 - have been approved at committee level by the Economic and Monetary Affairs Committee of the European Parliament and voted on in plenary in June in respect of their content. We are still awaiting the vote on the final legislative resolution and they formally remain in first reading.

Since last July, an ad hocworking group on economic governance has scrutinised the European Parliament's amendments. In parallel, the Cyprus Presidency has had several meetings with the two above-named rapporteurs to seek common ground. In its Conclusions of 19 October, the European Council urged for the regulations, which it described as “key piece of legislation necessary for the reinforcement of the new economic governance in the EU”, to be agreed by the end of 2012 at the latest. Therefore, considerable efforts are being made to conclude the process by the end of this year. The two draft regulations are still works in progress because both are being negotiated between the Council - as represented by the Presidency - and the Parliament, with the assistance of the Commission with a view to coming to an agreement.

With regard to the current state of negotiations, almost all open issues seem to have been agreed on the budgetary surveillance - the Gauzès report - and we are hopeful of overall agreement shortly. Progress is also being made on the budgetary plans, detailed in the Ferreira report, but negotiations on these are more difficult. Ministers discussed the state of play regarding the legislative process at the ECOFIN meeting yesterday, 13 November. The Council adjusted its position in negotiations with the European Parliament on the two draft regulations in order to facilitate rapid agreement with the Parliament so as to enable the regulations to be adopted before the end of the year. There is the possibility of more trilogues in Strasbourg next week. I thank members for their attention. I and my colleagues are happy to provide the committee with whatever further clarity we can on these proposals.