The Five Presidents’ Report on Completing the EMU: A Glimpse at the Future of Europe

Menelaos Markakis, DPhil student at University of Oxford, Academy of Athens scholar

On 22 June 2015 the Presidents of the EU and Euro area institutions presented their report on ‘Completing Europe’s Economic and Monetary Union’. The report provides a roadmap for ‘deepening’ and ‘completing’ the Economic and Monetary Union (EMU). Building on the measures enacted to combat the crisis, the Five Presidents’ Report makes a wealth of valuable suggestions for strengthening the EMU governance framework and deepening economic integration in the Euro area. The EU Presidents recommend that progress be made towards a genuine Economic Union, a Financial Union, a Fiscal Union, and a Political Union.

An overview of the proposed reforms

The proposed reforms would be implemented in two consecutive stages. In the first stage (1 July 2015 – 30 June 2017), the EU institutions and Member States ‘would build on existing instruments and make the best possible use of the existing Treaties’ (p. 5). In the second stage (mid-2017 to 2025), ‘concrete measures of a more far-reaching nature would be agreed to complete EMU’s economic and institutional architecture’ (p. 5). What follows is perforce merely a general indication of the content covered within the report.

(i)                 A genuine Economic Union

As regards the economic ‘pillar’ of the EMU, the Five Presidents’ Report recommends that each Euro area Member State create a Competitiveness Authority which would be ‘in charge of tracking performance and policies in the field of competitiveness’ (p. 7). The rationale behind this proposal is twofold. Such bodies ‘would help to prevent economic divergence’ and ‘would increase ownership of the necessary reforms at the national level’ (p. 7).

It is patently clear that these Authorities are expected to boost economic convergence in the Euro area, most notably in relation to policy areas which fall outside the EU’s competence. These bodies would have a mandate to ‘assess whether wages are evolving in line with productivity and compare with developments in other euro area countries and in the main comparable trading partners’ (p. 8). Moreover, ‘these bodies could be mandated to assess progress made with economic reforms to enhance competitiveness more generally’ (p. 8). The Five Presidents’ Report further recommends that a Euro area system of Competitiveness Authorities be created, in order to coordinate the actions of these Authorities on an annual basis.

The report seeks to link this proposed technique of policy co-ordination to already existing forms of rules-based governance in the Euro area. The Commission is expected to ‘take into account the outcome of this coordination … in particular for … decisions to be taken under the Macroeconomic Imbalance Procedure (MIP), including whether to recommend the activation of the Excessive Imbalance Procedure’ (p. 8). In principle, Euro area Member States are and would remain free to choose whether to follow the best practices in Europe. However, if they choose not to, the Commission and Council might respond to such divergence by subjecting the Member States concerned to the Excessive Imbalance Procedure. In this connection, the presidents of the institutions explicitly recommend that the corrective arm of the MIP be used ‘forcefully’, in order to ‘encourage structural reforms’ (p. 8). Furthermore, they do not shy away from adding that social partners ‘should use the opinions of the Authorities as guidance during wage setting negotiations’ (p. 8).

At a later stage, ‘the convergence process would be made more binding through a set of commonly agreed benchmarks for convergence that could be given a legal nature’ (pp. 5 and 9). These binding standards would be laid down in EU legislation. In some areas, this would lead to ‘further harmonisation’ (p. 9). In other areas, ‘it will mean finding country-specific solutions’ (p. 9).  ‘Significant progress towards these standards – and continued adherence to them once they are reached – would be among the conditions for each euro area Member State to participate in a shock absorption mechanism for the euro area’ (p. 5), which will be discussed below (iii).

It is not clear which competence basis the EU institutions would use for the adoption of such instruments. It might be the case that the Five Presidents’ proposals rest on the implicit assumption that the EU Treaties will be amended before or during stage two of this process. It might also be the case that the EU institutions plan to make full use of Articles 114, 136, 153 and 352 TFEU and/or of the Treaty provisions on enhanced cooperation.

In this connection, the Constitutional Affairs Committee of the European Parliament has proposed that binding economic policy guidelines for the Euro area countries be adopted on the basis of Article 136 TFEU (p. 10 para. 15). It has further called for ‘the dropping of the restrictions under Article 136 TFEU’ and for ‘the upgrading of this article into a general clause for the adoption of legal acts concerning the coordination and setting of legally-binding minimum standards with regard to economic, employment and social policy’ (p. 16 para. 73). This would give more say to the European Parliament on Country-Specific Recommendations.

Moreover, it should not escape our notice that ‘Country-Specific Recommendations would continue to be used in this context’ (p. 9). Furthermore, the report suggests that the MIP ‘be utilised as a tool … to foster reforms and monitor progress in each euro area Member State towards these common standards’ (p. 9). As such, rules-based and co-ordination based governance techniques would continue to ‘form “hybrid” normative grids and accountability frameworks’ (Armstrong).

(ii)               Towards a Financial Union

As regards the proposed Financial Union, the Five Presidents’ Report recommends that the Banking Union be completed and that the Capital Markets Union be launched. First, the report recommends the full transposition into national law of the Bank Resolution and Recovery Directive. It is recalled that, in the opinion of the Commission, 11 Member States have not fully implemented the Directive into national law. Second, the report argues that, before the Single Resolution Fund (SRF) is sufficiently capitalised, an ‘adequate bridge financing mechanism’ should be created for banks that need to be orderly unwound (p. 11). Third, a common backstop to the SRF should be implemented. In the opinion of the EU Presidents, this could be achieved through a credit line from the European Stability Mechanism (ESM) to the SRF (see p. 11). ‘In due course, the effectiveness of the ESM’s direct bank recapitalisation instrument should be reviewed, especially given the restrictive eligibility criteria currently attached to it’ (p. 11). Fourth, the report recommends that a European Deposit Insurance Scheme be launched. Fifth, it proposes strengthening macroprudential supervision at EU level and ‘review[ing] the treatment of bank exposures to sovereign debt, for example by setting large exposure limits’ (p. 12).

Building on the Commission’s Green Paper on ‘Building a Capital Market Union’, the report further proposes launching a Capital Markets Union for all 28 EU Member States. This would ‘ensure more diversified sources of finance’ and would ‘strengthen private sector risk-sharing across countries’ (p. 12). However, financial integration carries risks with it, because a problem in one country can rapidly spread to another. As such, the Five Presidents’ Report recommends that financial supervision be strengthened in the EU and that a single European capital markets supervisor be created (p. 12).

(iii)             Towards a Fiscal Union

As regards the proposed fiscal union, the Five Presidents’ Report puts forward two proposals. First, it recommends that an advisory European Fiscal Board be created. This body would coordinate and complement the national fiscal councils that have been set up in accordance with Regulation 473/2013. The European Fiscal Board ‘would provide a public and independent assessment, at European level, of how budgets – and their execution – perform against the economic objectives and recommendations set out in the EU fiscal framework’ (p. 14), thereby adding extra pressure on national Executives and legislatures to take EU fiscal rules seriously. ‘Such a European Fiscal Board should lead to better compliance with the common fiscal rules, a more informed public debate, and stronger coordination of national fiscal policies’ (p. 14).

Second, the report proposes the creation of a fiscal stabilisation function for the Euro area. Such a mechanism would enhance public risk-sharing in the Euro area (p. 4) and could build on the European Fund for Strategic Investments. However, it ‘should not lead to permanent transfers between countries or to transfers in one direction only’ (p. 15). ‘It should also not be conceived as a way to equalise incomes between Member States’ (p. 15). Notably, this stabilisation function ‘should be developed within the framework of the European Union’ (p. 15, emphasis added).

Democratic Accountability, Legitimacy, and Institutional Reform

The discussion thus far has focused on the economic reforms proposed by the presidents of the EU institutions. The focus now shifts to proposed reforms for enhancing the democratic credentials of the EMU. Save for the proposals for a more timely and better-structured parliamentary debate during the European Semester (see p. 17), it is hard to see how these proposals add anything to the already existing ‘six-pack’ and ‘two-pack’ arrangements for ‘institutional dialogue’. Be that as it may, the added emphasis on the role of social partners and civil society, as well as on consultation with EU-level social partners, should be readily applauded (see p. 22).

There is a strong focus on output legitimacy and on synergies between the European and national parliaments. ‘After many years of crisis, governments and institutions must demonstrate to citizens and markets that the euro area will do more than just survive. They need to see that it will thrive’ (p. 5).

Moreover, the report lays down a number of proposals for strengthening the EMU governance framework. More specifically, the EU Presidents suggest that the various treaties concluded outside the formal confines of the Lisbon Treaty be incorporated into the EU Treaties and secondary legislation and that the governance structure of the ESM be ‘fully integrated within the EU Treaties’ (p. 18). The report further suggests that a full-time presidency of the Eurogroup be considered and proposes the creation of a Euro area treasury (see p. 18). In the opinion of the authors of the report, ‘the world’s second largest economy cannot be managed through rule-based cooperation alone’; ‘it will need to shift from a system of rules and guidelines for national economic policy-making to a system of further sovereignty sharing within common institutions’ (p. 5). The division of labour between a Euro area and national treasuries is not made clear.

Regrettably, there is no elaboration of what accountability structures should be put in place if a Euro area treasury or fiscal stabilisation function were to be created. Likewise, there is no analysis of the desired accountability mechanisms for the proposed Financial Union. To be sure, requiring the consent of the European Parliament for the appointment of the Chair and the Vice-Chair of the Supervisory Board was a major step forward (see Article 26(3) of Regulation 1024/2013). What is more, there are no proposals for improving transparency in the workings of the Eurogroup, whose role in economic governance has now been heightened. A body actively seeking to foster economic convergence among Euro area countries (see p. 9) should not operate behind closed doors.

Final remarks

There will be no attempt to summarise the preceding argument. It is nonetheless worth highlighting certain features that are of particular importance. First, since ‘all euro area Member States must participate in all Unions’ (p. 5), these proposals would, if implemented,  put the idea of a multi-speed Euro area to sleep. To be sure, it might still be the case that not all Euro area Member States would meet the requirements to make use of the proposed shock absorption mechanism. Second, the EU Presidents’ proposals would, if implemented, entail a massive upward flow of power from the national to the EU/Euro area institutions and bodies. Arguably, this should be matched by increased democratic controls and robust accountability mechanisms. Third, it is particularly noteworthy that the report notes that all members of the Euro area should gain from EMU membership (p. 4). Spreading welfare gains across the Union and promoting economic, social and territorial cohesion might require that more thought be given to the EU’s regional and structural policies (see also the 1989 Delors Report). Lastly, at least some of the proposed reforms might require a Treaty amendment in order to be implemented, and therefore the Prime Minister of the United Kingdom might get his chance to renegotiate Britain’s relationship with the EU and to enshrine the desired precepts in primary law.

Barnard & Peers: chapter 19 

Photo credit: roarmap.org

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Jailing the bankers: the new EU Directive on criminal penalties for market abuse

Steve Peers

It must come as a relief to EU politicians to find that there is still one group in society which is much less popular than they are: the bankers. Indeed, bankers’ unpopularity has only grown as the austerity caused by the global financial crisis has an ever-greater impact on ordinary people in many Member States.  No politician ever lost an election because he or she demonised unpopular groups of persons, and so the EU institutions have duly agreed on legislation which would lead to jail terms for particular types of bad behaviour by bankers.

Context of the Directive

The new Directive was approved by the European Parliament today, and will likely be formally adopted by the Council in March. It will apply in parallel alongside a Regulation on market abuse, which requires administrative sanctions to be applied for certain behaviour by bankers. Member States will have to apply the Directive by two years after its adoption.

The ‘legal base’ for the Directive is Article 83(2) of the TFEU, which allows the EU to adopt legislation setting out ‘minimum rules’ for the ‘definition of criminal offences and sanctions’ if this ‘proves essential to ensure the effective implementation of a Union policy in an area which has been subject to harmonisation measures’. Clearly this area has been subject to harmonisation measures, and the preamble to the new Directive sets out the reasons why, in the EU legislature’s view, it was ‘essential’ to adopt an EU measure concerning criminal liability on this issue. Basically, the Council and European Parliament were convinced by information that Member States imposed weak and diverse sanctions to enforce the previous EU legislation on this subject (Directive 2003/6, on market abuse).

Article 83(2) requires the criminal law rules to be adopted by the same legislative method as was used to adopt the main legislation that the criminal law Directive is supplementing. In this case, the market abuse Regulation was adopted on the basis of the EU’s internal market powers, ie the ordinary legislative procedure. So the market abuse criminal law Directive was adopted by the same method. This meant that the European Parliament could have a significant influence on the text, as detailed below.

Substance of the Directive

The Directive requires Member States to criminalise three types of activity, as further defined in detail therein: insider dealing; unlawful disclosure of inside information; and market manipulation. The first of these offences also extends to recommending or inducing another person to engage in insider trading. Member States must also criminalise inciting, aiding and abetting and attempting most of these offences. In each case criminalisation is only required where the acts were committed intentionally and ‘in serious cases’. The European Parliament had also wanted to oblige Member States to criminalise reckless acts which entailed market manipulation, but the Council resisted this. Also, the Council insisted on limiting Member States’ obligations to ‘serious cases’. The preamble to the Directive lists certain factors which should indicate whether the case is ‘serious’, such as the impact on market integrity and the profit derived or loss avoided.

On the other hand, the European Parliament successfully insisted that specific rules for criminal penalties for natural persons appear in the Directive. Member States must ensure that bankers guilty of insider dealing or market manipulation could potentially be subject to a maximum penalty of at least four years, and those guilty of unlawful disclosure of inside information could potentially be subject to a maximum penalty of at least two years.  The Directive also includes standard rules on liability for legal persons, but this need not be criminal liability, in deference to those Member States which do not impose criminal liability on legal persons.

The European Parliament also insisted that the Directive include rules on criminal jurisdiction. Member States must criminalise the relevant behaviour where an act was committed on a Member State’s territory, or where the act was committed by a Member State’s citizen outside its territory, at least if the act was criminal in the country where it was committed.  Furthermore, the European Parliament convinced the Council to add a provision on training judges, prosecutors et al about the relevant crimes. However, the European Parliament did not convince the Council to add provisions on investigative techniques and media coverage of the relevant crimes.

Comments

This is the first time that the EU has used the legal powers conferred by Article 83(2) TFEU, which was added to the Treaties by the Treaty of Lisbon. Previously, it has used only Article 83(1) TFEU as regards substantive criminal law. Article 83(1), also added to the Treaties by the Treaty of Lisbon, lists ten crimes which are deemed to have such sufficient cross-border impact that the EU can legislate upon them. The EU has used this power to adopt legislation on cyber-crime, sexual offences against children and trafficking in persons, and negotiations on legislation concerning counterfeiting currency are underway. The Commission has also suggested criminal law rules on fraud against the EU budget on the basis of Article 325, a legal base dealing with that specific issue, but the Council (and probably the European Parliament, when it defines its position) believe that Article 83(2) will again have to be used in order to adopt that legislation.

Prior to the Treaty of Lisbon, the EU’s Court of Justice, in a controversial line of case law, ruled that European Community law (as it was then) could be used to adopt criminal law measures closely related to the environment (Cases C-176/03 and C-440/05). The EU then adopted Directives to that end (Directive 2008/99 and Directive 2009/123), as well as a Directive imposing criminal liability for employing illegal immigrants (Directive 2009/52). But the CJEU ruled that prior to the Treaty of Lisbon, such European Community measures could not specify criminal penalties. In practice, those measures did not contain jurisdiction rules either. So the market abuse Directive breaks new ground on these issues.

The Directive also breaks new ground by imposing criminal liability in a new area. All of the other post-Lisbon substantive criminal law Directives or proposals (referred to above) simply replace pre-Lisbon measures on the same subjects, but there was no pre-Lisbon measure imposing criminal liability for market abuse. The market abuse Directive is also particularly detailed when compared to the EU’s other substantive criminal law measures, no doubt because it is enmeshed within the broader EU legislative framework imposing highly detailed regulation on the financial sector.
Will the Directive be effective at curbing bad behaviour by bankers? First of all, as with any crime, perpetrators have to be caught and punished, and the behaviour concerned is technically complex.

Secondly, it must be borne in mind that the two-year and four-year sentences referred to in the Directive must merely be on the books; there is no obligation to impose them in any particular situation. So even if bankers commit the activities criminalised by the Directive, and are caught and convicted, their sentences might be lighter (or indeed heavier: Member States can set a higher potential maximum penalty if they wish). And it is hard to imagine that many bankers will spend much jail time inside the unpleasant institutions where (say) burglars and muggers are incarcerated – even if the bankers’ crimes were far more lucrative and had a much bigger impact upon the economy.

More profoundly, the United Kingdom, the home of the largest proportion of the EU’s financial industry, has opted out of this Directive – although the UK is subject to the parallel Regulation (Denmark is in the same situation). And even if a French national (for instance) commits the acts criminalised by the Directive while working in the City of London, it must be recalled that Member States are only obliged to criminalise the acts concerned if committed by their citizens in a State which also criminalises that activity. So it is up to the UK to decide whether to criminalise some or all of the acts referred to in the Directive, and only if it does so are other Member States obliged to criminalise the acts of their citizens when committed in the UK.

Barnard & Peers: chapter 25

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