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Eurogroup (GT)
The Eurogroup will start with a presentation by Michael Deppler, IMF Director, of the IMF Article IV statement on the euro area. This presentation will precede a more in depth discussion among Eurogroup Ministers, the Commission and the ECB on the economic situation –including on the implications of higher than expected oil prices - and the policy stance. Following that Commissioner Almunia will introduce the discussion on budgetary developments with emphasis on the Netherlands and Greece. Finally Ministers will discuss procedural issues related to ERM II preparations of new member states.
Council of Economics and Finance Ministers
Broad Economic Policy Guidelines (GT)
Following the orientation debate during the May Ecofin meeting Ministers are expected to adopt the 2004 update of the Broad Economic Policy Guidelines (BEPGs) and submit it to the European Council of 17-18 June.
The European Commission adopted a recommendation for the 2003-2005 BEPGs update on the 7th of April (IP/04/467). Building on the consensus built during the orientation debate, the text before the Ministers devotes more explicit attention to the euro area and addresses more directly the implementation gap of the Lisbon agenda. The country recommendations have been left largely unchanged.
The Commission intends to point out to the need to deliver results. In the Commission’s view it is crucial to explain and debate the policy strategy of the BEPGs in national parliaments in order to build the necessary consensus for implementing this strategy during the 2005 budgetary year.
Implementation of the excessive deficit procedure for the Netherlands (GT)
Ministers are expected to discuss the Commission recommendation (IP/04/661) on the existence of an excessive deficit in the Netherlands (Article 104(6)) and the recommendations to the Dutch authorities with a view to bringing this situation to an end (Article 104(7)).
The general government deficit reached 3.2% of GDP in 2003 and could remain at or above 3.0% of GDP in 2004 despite additional savings measures adopted by the government on 16 April 2004. Public debt reached 54.8% of GDP in 2003, below the 60% Treaty reference value.
The Dutch government adopted an additional savings package of 0.6 percentage point of GDP, after the publication of the Commission Spring forecast on 7 April (which showed deficits of 3.5% of GDP and 3.3% of GDP in 2004 and 2005 respectively). This package is intended to bring the deficit below 3% of GDP in 2004 However, in the analysis of the Commission, which was shared by the EFC, there is a risk that this objective will not be met by the measures taken so far. Nevertheless, in the Commission’s view further saving measures implemented this year could be counterproductive in the light of weak growth. This implies that additional measures are needed in 2005, if the deficit is to be brought below 3% of GDP in that year, as is required by the Treaty. The Dutch government intends to adopt a package for 2005, mainly of a structural nature, to ensure the sustainability of the adjustment. Taking as a base the macroeconomic scenario in our Spring forecast, we believe that this should be sufficient to bring the deficit below 3% from 2005 onwards.
Statistics – information requirements in EMU (GT)
Since the start of EMU, the EFC has been monitoring the state and progress of macro-economic statistics in view of EU/euro area policy needs. This year’s report has six main messages:
(1) Significant gaps remain for labour market and short-term business statistics in spite of substantial improvements initiated during the EMU Action Plan.
(2) The project of Principal European Economic Indicators has made significant progress, and its full implementation could be achieved by 2005 if all Member States honour their commitments to the project. Examples of progress are that the EU/euro area HICP estimates are now available at the end of the reference month, and quarterly GDP flash estimates are available 45 days after the reference period.
(3) The EDP notifications of March 2004 showed good compliance with the Code of Best Practice as regards reporting deadlines. Most countries also provided the required detailed data on the government sub-sectors. But serious problems remain to be solved both in old and new member states. In addition, institutional arrangements in some new Member States - i.e. between the Statistical Office, the Finance Ministry and, where applicable, the Central Bank - are not yet satisfactory.
(4) The Action Plan on Economic, Monetary and Financial Statistics for the Candidate Countries produced good results for most Countries concerning annual national accounts and convergence statistics. The length of time series, however, is not yet satisfactory for many countries.
(5) Member States are reminded to provide sufficient resources for the required improvements of statistical information.
(6) A speed up of the development of the statistical basis for the services economy and for harmonised and detailed productivity estimates are requested as of utmost importance.
Savings taxation (JT)
Taxation Commissioner Frits Bolkestein will provide an up-date to the Council in restricted session concerning the negotiations on savings taxation with certain third countries.
In addition, the UK will be invited to comment on the state of play of the savings taxation discussions in which it is engaged with its dependent and associated territories in the Caribbean. The objective is to arrive at model agreements that can be used to conclude bilateral savings tax agreements between Member States and these territories. The Council already on 9 March welcomed model draft agreements concerning the UK's Crown Dependencies (see MEMO/04/52) and agreements between each of the EU Member States and these Crown Dependencies are in the process of being finalised according to these models. The Netherlands has also achieved a similar successful result with respect to model agreements with the Dutch Caribbean territories.
The Council is due to adopt without discussion a final text of an agreement with Switzerland concerning the taxation of savings income that the Commission tabled in February 2003. The Council had already approved the content of this agreement in June 2003. It is hoped that the agreement will be signed by Switzerland and the EU as soon as possible.
The Commission has been engaged in intensive negotiations with Andorra, Liechtenstein, Monaco and San Marino to reach agreement on the application by those four countries of savings tax measures "equivalent" to those agreed within the EU concerning interest income of EU residents. The Council in June 2003 (see IP/03/787) agreed on a Directive to ensure effective taxation of interest income from cross-border investment of savings that is paid to individuals within the EU and agreed that this Directive should be implemented into Member States' national laws from 1 January 2004 and be applied from 1 January 2005. The Council agreed that the four elements of the draft agreement with Switzerland should also constitute the basis for agreements between the EU and Liechtenstein, Andorra, Monaco and San Marino. The Council must decide before 30 June 2004 whether sufficient guarantees have been met concerning savings taxation measures in the third countries and dependent and associated territories to allow the Directive to enter into force on 1 January 2005.
Financial Integration (JT)
A series of reports on various aspects of financial integration will be presented to the Council by Internal Market Commissioner Frits Bolkestein. Together they build up an overall picture that the Financial Services Action Plan (FSAP) has been successful so far and will increase integration in EU financial markets. However, at the same time they point to the conclusions first, that it is too early to say to what extent the Financial Services Action Plan (FSAP) is already delivering real benefits on the ground and second, that the true effectiveness of the FSAP in the medium to long term will depend on the timely and consistent implementation and enforcement of all its measures, most of which have only been adopted recently.
The reports also broadly agree that after the legislative phase of the FSAP, the EU should adopt further legislation only where this is clearly beneficial for the functioning of EU financial markets. Major new proposals should only be made after wide consultation and detailed impact assessment and in accordance with the subsidiarity principle. Commissioner Bolkestein will endorse this view, but point out that Member States should also carefully assess the impact of amendments they bring forward to Commission proposals, on the basis that “what is sauce for the goose, is sauce for the gander”.
Kees van Dijkhuizen, the Chairman of the Financial Services Committee (FSC), which comprises Member State representatives and advises the Council and the Commission in this area, will formally present the final FSC report examining overall progress of financial integration and the key areas where further financial integration could deliver more benefits. The report was requested by the Council in its meeting of 3 June 2003. A preliminary version was already discussed at the informal meeting of Finance Ministers in Ireland on 2 April 2004. Commissioner Bolkestein will welcome the report as a major input to the continuing reflection on future priorities.
Mr Bolkestein will then present the tenth and penultimate Progress Report on the FSAP (IP/04/696), which shows that 93 % of FSAP measures have been completed on time. He will emphasise as priorities for the next year adopting the Directive on Statutory Audit, proposed by the Commission in March 2004 (see IP/04/340 and MEMO/04/60), along with forthcoming Commission proposals on Capital Adequacy Requirements (see also below) and for a Third Directive on Money Laundering which is due to be submitted before the end of July. The Commissioner will also remind the Council of the importance of implementing the existing second Directive on Money Laundering, which has still not been written into national law in four Member States (Greece, Sweden, Luxembourg and France) though the deadline for implementation has passed.
Next Mr Bolkestein will present the reports of the four expert groups on integration in the banking, insurance, securities and asset management sectors. Those four reports, which reflect the position of the groups concerned and not necessarily that of the Commission, were published in April and are now the basis for wider consultation on the follow–up to the FSAP, open until 10 September this year (see IP/04/600, MEMO/04/106).
The Commissioner will also present the first annual Financial Integration Monitor (FIM) Report (IP/04/601), which was published by the Commission in parallel with the expert group reports, in response to a request by the Council of Finance Ministers for indicators of financial integration and a call from stakeholders for a more evidence-based policy-making process. The indicators to measure financial integration applied in the FIM report were discussed in the Council in December 2002 and June 2003. On the basis of selected indicators, the FIM report shows increased integration of financial markets, though the degree of integration differs from one market to the next and it is difficult to determine the extent to which the FSAP – as opposed to the introduction of the euro, cyclical factors or technology – has contributed to that integration. Mr Bolkestein will emphasise to the Council the importance of the FIM exercise in helping to prioritise future financial policies.
International Accounting Standards (JT)
The Council will discuss the pending endorsement of the remaining IAS 32, on disclosure of financial instruments (derivatives) and their classification as debt or equity and 39, on recognition, de-recognition, measurement and hedge accounting. Commissioner Bolkestein will point out that the Commission is still awaiting the final position of the International Accounting Standards Board (IASB). He will report on progress in discussions between the International Accounting Standards Board and the banking and insurance sectors.
The next step is a meeting on 9 June of the High Level European Consultative Group - assembling the IASB, regulators, industry and Commission. This Group will discuss the present state of play on IAS 32 and 39 as well as the mandate of the International Working Parties to be set up on IAS 39 and insurance accounting. After this meeting, the Commission will have a final consultation with Member States on 14 June at the Accounting Regulatory Committee.
The Commissioner will emphasise that markets need certainty and companies want to know what exactly they have to prepare for, so the Commission will have to take a view on both standards by mid-June, by which time Mr Bolkestein has urged the IASB to come up with an acceptable solution.
He will add that in the longer term the Commission attaches great importance to the reform of the IASB’s governance structure, aimed at making the board more transparent and responsive to market needs, being examined now by the IASB Trustees.
Financial Services – EU-US regulatory dialogue (JT)
In the light of the discussion at the informal meeting of Economics and Finance Ministers in April 2004, there will be an informal discussion on progress with the EU-US Financial Markets Regulatory Dialogue and on how to take relations forward.
Mr Bolkestein will update Ministers on progress, particularly on the recent testimony by the Commission before a hearing of the US House of Representatives on 13 May. That testimony is published in full at:
http://www.europa.eu.int/comm/internal_market/en/finances/general/index.htm
He will note that there is consensus on both sides of the Atlantic that the Dialogue is working well – indeed is becoming a model for cooperation for other sectors - and that there will be a joint report to the EU-US Summit by participants to the Dialogue (the European Commission, US Treasury, the Securities and Exchanges Commission (SEC) and the Federal Reserve Board). He will stress that both sides believe that the key to this success has been the informality and “as and when” needed nature of the Dialogue.
Whilst being clear that the immediate focus of the Dialogue must be the resolution of existing issues, and upstream cooperation to prevent new conflicts from emerging, there is potential over the longer term to remove unnecessary barriers to investors, intermediaries and companies by tackling regulatory duplication. Mr Bolkestein will suggest a four-pronged approach: increased understanding; better flow of information; convergence on underlying principles; and above all, recognition that where standards are equivalent, approaches should be found which recognise this and do not duplicate each other. He will set out some ideas for how to take this forward practically in the coming months.
Capital Adequacy – the macro-economic consequences of the Basel II Accord (JT)
The European Council at its meeting in March 2002 requested the Commission ‘to present a report on the consequences of the Basel deliberations for all sectors of the European economy with particular attention to SMEs’. The definitive version of the study has now been delivered by PricewaterhouseCoopers (PwC), coinciding with the agreement on Basel II reached by the Basel Committee on Banking Supervision in May.
Mr Bolkestein will present the report to the Council. Its broad conclusion is that the new capital requirements are positive for banks, SMEs and the EU economy as a whole.
Firstly, banks will evaluate risk better. This will produce a more efficient allocation of capital in the EU economy. This is an important prerequisite for a strong and sound growth of the economy in the long run;
Secondly, the report even envisages a small but positive impact on economic growth because of Basel.
Thirdly, and very importantly, there will be no negative impact on the availability and cost of finance for SMEs in most EU Member States. Capital requirements for lending to SMEs will in fact decrease significantly.
The report is available on the Europa website:
http://europa.eu.int/comm/internal_market/regcapital/index_en.htm
The Basel Committee on Banking Supervision will publish the text of the new framework at the end of June 2004. In early July, the Commission intends to come forward with proposals on capital adequacy requirements in the EU to reflect Basel II.
