Preparation of Eurogroup and Council of Economics and Finance Ministers, Brussels, 17-18

MEMO/03/34

Brussels, 17 February 2003

Preparation of Eurogroup and Council of Economics and Finance Ministers, Brussels, 17-18 February 2003

Eurogroup Finance Ministers are due to meet in Brussels at 19.00 hrs on Monday 17 February. A press conference is due at the end of the Eurogroup meeting. Economic and Finance Ministers will meet for an informal breakfast to discuss EMU related issues in the framework of the European Convention on Tuesday 18 February at 8.30 hrs. The European Union's Council of Economics and Finance Ministers will meet at 10.00 hrs. The European Commission will be represented at the Council by Economic Affairs Commissioner Pedro Solbes and Internal Market and Taxation Commissioner Frits Bolkestein.

Eurogroup (GT)

The Eurogroup will start with an exchange of views on the economic situation and policy developments in Member States. Commissioner Solbes will present to Ministers the Commission’s assessment of the latest economic developments.

Ministers will subsequently discuss the recent Commission Communication on strengthening budgetary policy co-ordination (IP/02/1742). The main elements of the Commission proposal are: (i) the 3.0% reference value should continue to be monitored in nominal terms; (ii) the close to balance or in surplus requirement of the Stability and Growth Pact (SGP) should be monitored on the basis of cyclically adjusted budget deficit calculations, i.e. by taking the economic circle into account; (iii) countries with deficits exceeding the close to balance or in surplus requirement should commit to an annual reduction in their underlying deficit of at least 0.5% of GDP until they reach such a position; (iv) pro-cyclical budget polices in good times should be prevented in the future including through the use of Treaty and SGP procedures; (v) greater attention should be paid to the assessment of the long-term sustainability of public finances; (vi) the pace of decline in public debt as % of GDP should play an important role in budgetary surveillance and Treaty procedures could contribute in ensuring a satisfactory pace of debt reduction; (vii) the quality of public finances and in particular the focus of budget policies in promoting the raising of EU’s growth potential in conformity with the Lisbon agenda should be in the centre of budgetary policy co-ordination; (viii) the EU budgetary co-ordination process should become more transparent including through the regular publication of the Commission’s assessments; (ix) member states which have already reached a close to balance or in surplus budgetary position and which have a public debt to GDP ratio below or well below the 60% reference value and sustainable public finances could maintain small temporary deviations from the close to balance or in surplus requirement without being in breach of the SGP.

The Communication was discussed at the last Economic and Financial Committee (EFC) meeting. The debate to date has been useful in highlighting the economic rational of the Commission proposals. There is no need for a formal approval of the Communication by Ecofin although it is likely that the March Ecofin will adopt an Ecofin Council report on this issue for submission to the Spring European Council meeting. The main elements of the Communication are expected to be included in some form in the Spring European Council conclusions.

Finally Ministers will discuss the role of financial markets in promoting sound public finances in EMU. Finnish Finance Minister Sauli Niniisto will introduce the discussion. Commissioner Solbes will present the Commission’s analysis. In a single-currency environment financial markets have a different role in promoting budgetary discipline than before the introduction of the euro. Increased transparency and predictability of policy making in the framework of the Stability and Growth Pact should improve the capacity of financial markets to review national budgetary performance. Moreover, the increasing attention to long term sustainability and the impact of ageing on public debt dynamics should be central in financial markets considerations.

Council of Economics and Finance Ministers

Preparation of the Brussels Spring European Council 21-22 March 2003 (GT)

Commissioner Solbes will present to Ministers the Commission’s Spring Report (IP/03/43) as well as the supporting Broad Economic Policy Guidelines Implementation Report (IP/03/38). Ministers are expected to discuss a first draft of the key issues paper for the future BEPGs.

For his part, Internal Market Commissioner Frits Bolkestein will emphasise the need to close the gap between the good intentions expressed by the European Council and the adoption and implementation in practice of the necessary economic reforms. He will remind the Council that the latest Commission report on the performance of product and capital markets pointed to serious delays in implementation into national law (see IP/02/1969). On average, the time needed to implement reforms is twice the time foreseen in the Directives when they are adopted.

Mr Bolkestein will congratulate the Council and European Parliament for adopting several financial services reforms, such as the Directives on market abuse (IP/02/1789), financial conglomerates (IP/02/1712) insurance mediation (IP/02/1390) and collateral (IP/02/713) and the Regulation on International Accounting Standards (IP/02/827).

But he will call for further quickening of the pace of reform in order to help restore investor and consumer confidence by delivering the full Financial Services Action Plan on time by the end of 2005. That requires adopting the proposed Directives on investment services, prospectuses, pension funds and takeovers, as well as the forthcoming Commission proposal on transparency for listed companies. It is also crucial that the Lamfalussy process begins to deliver the first implementing measures for securities in the second half of 2003.

To meet the 2005 target, the main negotiations will need to be concluded by March 2004, before enlargement and the subsequent European Parliament elections in June 2004. That would allow sufficient time for transposition.

Voting modalities in the ECB Governing Council following enlargement (GT)

Ministers are expected to discuss the ECB recommendation to amend Article 10.2 of the Statute of the European System of Central Banks and of the European Central Bank. The ECB recommendation was taken by unanimous agreement in the ECB Governing Council. The Nice Treaty enabling clause provides for a change in the voting modalities in the ECB Governing Council but limits any changes only to Article 10.2. The Commission will issue its Opinion on the ECB’s proposal before the end of this month. A unanimous agreement by the Council is necessary on this point. National parliaments have to ratify the changes thereafter.

Stability and convergence programmes (GT)

Commissioner Solbes will present the Commission’s recommendations for:

-  an Opinion on the Belgian stability programme (IP/03/139)

-  an Opinion on the Spanish stability programme (IP/03/141)

-  an Opinion on the Irish stability programme (IP/03/140)

-  an Opinion on the convergence programme of Denmark (IP/03/143)

-  an Opinion on the convergence programme of the United Kingdom (IP/03/142)

Following consultations at the level of the Economic and Financial Committee (EFC) an agreement is expected on these points by Ecofin.

Energy taxation (JT)

The Council is due to seek a political agreement on the draft Directive on a Community framework for the taxation of energy products. The Council will focus in its discussions on three main points:

-  the arrangements for the taxation of diesel fuel, in particular the question of a common definition of commercial use and transitional arrangements for those countries which currently apply a reduced rate of excise duty to diesel used by road hauliers or lower rates in general

-  the possibility of applying tax reductions or exemptions for agriculture or horticulture

-  the application of tax reductions below the new minimum levels of taxation where agreements have been reached with businesses which lead to achievement of environmental protection objectives or improvements in energy efficiency.

Commissioner Bolkestein will welcome the Presidency’s proposed compromises on all the outstanding points including those above. He will invite Member States to show the flexibility necessary for an agreement to be reached. On the eve of enlargement of the EU it is very important that this new Community framework for energy taxation is adopted.

The EU's Council of Ministers has been debating for some years the Commission's 1997 proposal for a Community framework, including minimum tax levels, for the taxation of all competing sources of energy (see IP/97/211). At present only mineral oils are governed by a Community system of minimum taxation and the minimum rates have not been revised since 1992. This can lead to distortions of competition between mineral oils and competing products, particularly gas and electricity, and between different Member States. The Spanish Presidency earlier this year drew up guidelines (for further details see MEMO/02/121) providing a clear direction for further work on the basis of the Commission's proposal. The Danish Presidency continued these intensive discussions (for most recent developments see MEMO/02/223 and MEMO/02/226).

The compromise would thus create a level playing field for the first time by subjecting all energy products to minimum rates. At the same time, it would give Member States the necessary flexibility to differentiate the rates of taxation on the basis of environmental criteria, as well as in special situations such as that of energy intensive industries or for public policy reasons that do not involve distortions of competition. In order to avoid jeopardising price stability, transitional arrangements have been included for those Member States that would have to substantially increase their levels of excise duty.

Administrative co-operation in the field of VAT (JT)

The Council will seek to reach political agreement on a Regulation which would both strengthen co-operation between Member States' tax authorities to combat fraud relating to value added tax (VAT) and extend the scope of the Mutual Assistance Directive (77/799/EEC) to allow Member States to exchange information concerning taxes levied on insurance premiums. The two legal texts are based on the Commission proposal of 19 June 2001 (see IP/01/857). The main outstanding issue is the extension of the scope of the Mutual Assistance Directive to taxes on insurance premiums. Some Member States are opposed to the inclusion of this point in the Regulation while others will not adopt the Regulation as long as no agreement is reached on insurance taxes.

Commissioner Bolkestein will stress the need for a measure allowing mutual assistance between tax administrations in the insurance tax area now that, in a liberalised market, insurance companies can offer their services in other Member States. The Council has already agreed to extend to insurance taxes the scope of the Directive providing for mutual assistance between Member States in the recovery of taxes (44/2001/EC).

Before the Council can formally adopt the Directive, it must re-consult the European Parliament. A Parliament opinion on the Regulation is necessary because the Council has changed its legal basis from Article 95 of the Treaty (co-decision by Council and Parliament) to Article 93, under which the Council decides on the proposal unanimously following an opinion from the Parliament. The Commission believes that Article 95 is the correct legal basis.

Savings Taxation (JT)

Taxation Commissioner Frits Bolkestein will report to Ministers over lunch on the discussions on savings taxation that have taken place with Switzerland and other third countries since the Council political agreement on the tax package against harmful tax competition on 21st January (see MEMO/03/13). The Council has committed itself to formally adopting the tax package before the European Council in March 2003.

Under this agreement, in the case of savings taxation, twelve Member States are due to implement automatic exchange of information concerning interest income derived from savings in another Member State from 1 January 2004, whereas Austria, Belgium and Luxembourg will apply a withholding tax on savings held by residents of other Member States (15% from 1.1.04, 20% from 1.1.07 and 35% from 1.1.10) and share the revenue with the country of residence (handing over 75% and keeping 25%). It has been a condition of the savings tax negotiations that six third countries (Andorra, Liechtenstein, Monaco, San Marino, Switzerland and the United States) should adopt measures “equivalent” to those agreed within the EU. The Council on 21st January considered that this condition was effectively satisfied in the case of the United States and that it would be satisfied in the cases of Switzerland, Liechtenstein, Monaco, Andorra and San Marino if these countries offered to enter into agreements as outlined in its conclusions. It asked the Commission to continue the negotiations with these countries, in close conjunction with the Presidency of the Council.

Financial regulation, supervision and stability (JT)

The 3rd December 2002 Council of Economics and Finance Ministers endorsed a report by the EU's Economic and Finance Committee (EFC) on a more efficient system, based on a new committee structure, for EU institutions to prepare, adopt and implement financial services legislation (on banking, insurance and pension funds, and financial conglomerates). (see MEMO/02/280)

The new committee structure would be based on the framework already agreed with the European Parliament specifically for securities legislation on the basis of the report from a Group of Wise Men chaired by Baron Alexandre Lamfalussy (see IP/02/195).

The 18th February Council is expected to take a decision on the establishment of a reconfigured Financial Services Policy Group (FSPG). The FSPG is currently chaired by the Commission. It would be re-named the Financial Services Committee (FSC) with a Member State chair and a secretariat provided by the secretariat of the Council. The FSC is not part of the legislative process. It would advise the Council and the Commission on financial market issues and report to the EFC where advice to the ECOFIN Council is requested.

The Ministers meeting in the Council and the Commission will each nominate one senior representative and an alternate to the new FSC.

For the Commission, Mr Bolkestein will welcome this arrangement, pledge that the Commission will play an active role in the new FSC and say that he hopes it will start work quickly. But he will stress, as he has stressed throughout this process of improving the framework for preparing financial services legislation, that respecting the institutional balance, full transparency and co-operation with the European Parliament are absolutely essential.

Code of best practice on the compilation and reporting of data by member states and fifth progress report on information requirements in EMU (GT)