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Brussels, 15 November 2004

Preparation of Eurogroup and Council of Economics and Finance Ministers, Brussels, 15-16 November 2004

(Gerassimos Thomas, Jonathan Todd)

Eurogroup Finance Ministers are due to meet in Brussels at 19.00 hrs on Monday 15 November. A press conference is due to take place at the end of the Eurogroup meeting. The European Union's Council of Economics and Finance Ministers will start their meeting with a working breakfast at 8.30 hrs to discuss “differences in welfare levels EU-US”. The Ecofin meeting will start at 10.00 hrs. EFTA countries’ Ministers will join the lunch to discuss “issues related to population ageing”. Finally a Ministerial dialogue with candidate countries will take place at 16.30 hrs. A press conference will take place at the end. The European Commission will be represented at the Council by Economic Affairs Commissioner Joaquín Almunia and Internal Market Commissioner Frits Bolkestein and Budget Commissioner Michaele Schreyer.

Eurogroup (GT)

The Eurogroup will start with a discussion of the economic situation. Commissioner Almunia will present the Commission’s autumn forecasts (IP/04/1297). Next ministers will discuss oil price developments and policy intentions. As a follow-up to the October 20 Eurogroup meeting the Commission was asked to prepare a technical note that will serve as the starting point of the discussion. Ministers will then have their first discussion on the reform of the Stability and Growth Pact. Following the Commission Communication on 3 September 2004 (IP/04/1062 and SPEECH/04/387) the Economic and Financial Committee (EFC) had a number of technical discussions and will now present to Ministers a Key Issues Paper for discussion. Next Ministers will discuss the revision of the Greek fiscal data. Commissioner Almunia will present Ministers with a Eurostat progress report on the revision of Greek data for 1997-2003. Finally Ministers are expected to review the budgetary situation in the countries under excessive deficit procedure according to Article 104(7) of the Treaty, namely the situation in the Netherlands, Greece, Germany, France, Czech Republic, Cyprus, Malta, Poland, Slovakia and Hungary. The Commission will also inform Ministers about its proposed timetable for the assessment of the measures taken by these countries.

Council of Economics and Finance Ministers

Informal breakfast discussion on EU-US differences in welfare levels (GT)

According to the Commission’s analysis, the breakdown of EU-US differences in income levels (30% lower per capita income in the EU relative to the US) shows that about 1/3 of the gap in living standards is presently due to labour productivity differences and 2/3 is due to differences in the utilisation of labour. In the EU, both the labour force participation rate and the average number of hours worked are lower than in the US. Raising labour force participation over the life cycle is therefore crucial for raising potential growth. However, tackling the challenge of catching-up again in terms of productivity growth is equally valid.

Kok Report: Follow-up to the European Council (GT)

The Commission is currently reflecting on the recommendations made by Wim Kok’s High Level Group. As requested by the European Council we will take due account of the Member States’ opinions. The Commission fully shares the Kok’s report view that the Lisbon strategy has not delivered what was expected. The Achilles heel of the strategy has been the generally poor implementation of reforms by the Member States. This lack of delivery is made worse by the urgency to proceed with the reform agenda in view of the challenges of ageing, enlargement and globalisation.

The Commission’s Spring Report is scheduled for the end of January or beginning of February. The Spring Report will present the Commission’s ideas for the mid-term review of the Lisbon strategy. The Spring European Council is expected to reach final agreement on that point.

Stability and Growth Pact (GT)

Following the Commission Communication on 3 September 2004 (IP/04/1062 and SPEECH/04/387) the Economic and Financial Committee (EFC) had a number of technical discussions and will now present to Ministers a Key Issues Paper for discussion.

The issues that are presented in the key issues paper closely match those that were discussed in the Commission Communication. In some areas agreement is within reach. On other issues views are opposed. At this stage, political guidance is clearly needed in order to make further progress in the coming months at technical level.

Revision of Greek budget data (GT)

Commissioner Almunia will present Ministers with a Eurostat progress report on the revision of Greek data for 1997-2003. The budget and deficit data for 2000-2003 are the ones published by Eurostat on 23 September 2004 (STAT/04/117). For the revision of data for the period 1997-1999 good progress was made notably following a mission of Eurostat to Greece last week. Due to the good cooperation between Eurostat and the Greek authorities most outstanding issues have now been settled although some minor points remain open, which however are not expected to change substantially the data contained in the progress report. Nevertheless Eurostat will not publish the Greek data until they are final.

Lunch meeting with EFTA countries on ageing populations (GT)

Preliminary, recently updated population projections of Eurostat underline that in the EU the old-age dependency ratio will double from some 25% today to over 50% in 2050. From an economic perspective, the working-age population will start declining as from 2010 and drop by 18% by 2050.

Unless this decline in working-age population is offset by increases in productivity growth, the demographic change will have a considerable, negative impact on potential growth rates. At the same time, it will put significant upward pressure on public spending, mainly through pensions, health care and long-term care.

The ECOFIN Council has endorsed a three-pronged strategy to tackle the economic and budgetary implications of ageing populations consisting of (i) a faster pace of debt reduction, (ii) raising employment rates, especially of women and older workers and (iii) reform of pensions and health care systems.

Ministerial Dialogue meeting between the EU and candidate countries (Bulgaria, Romania, Turkey and Croatia) (GT)

The joint Ministerial meeting is the highest level of the multilateral economic dialogue with candidate countries agreed upon by Ecfin in 2000 and in place since 2001. The Finance Ministers of Member States and the Finance Ministers and central bank Governors of the four candidate countries (Bulgaria, Croatia, Romania and Turkey) will be represented in this meeting. Croatia is, after its recognition as candidate country at the June European Council, represented for the first time in this meeting.

Commissioner Almunia will present the Commission’s Autumn forecasts for those countries and our assessment of the March 2004 annual fiscal notifications (done for the fourth consecutive year now). The Economic Policy Committee (EPC) will present a report on structural reforms in the candidate countries.

Financial framework for 2007-2013

Mrs Schreyer will present the Commission's report on the functioning of the Own Resources system (structure and Generalised Correction Mechanism), as well as its legal proposals in this field.

Review of the four level “Lamfalussy approach” to European financial regulation (JT)

Based on a paper from the Financial Services Committee (FSC), which comprises Member State representatives and advises the Council and the Commission, the Council is expected to agree conclusions on the so-called Lamfalussy approach which aims to ensure that EU laws on financial services can be adopted as quickly as possible and implemented in a way tailored to changing market realities, based on thorough consultation throughout the process and effective cooperation between financial regulators and supervisors.

The Commission will support the FSC’s view that, while there is limited experience of the process to date, the four-level approach has been successful in meeting its key objectives. It has improved the quality of legislation and accelerated the legislative process and is encouraging regulatory and supervisory convergence within Europe. Its extension to banking, insurance and collective investment funds (UCITS) has already been agreed and is due to be formally adopted in the near future.

The Commission also broadly shares the FSC’s views on the need for flexibility in the framework so that legislation can be even better adapted to changing market circumstances, for further clarification of the roles of the different levels of the process and for an appropriate balance between speed of adoption of legislation and allowing sufficient time to get the legislation right. The Commission will also stress the importance of swift and correct implementation and of strong enforcement.

The Commission will shortly issue for consultation a working paper on the functioning of the Lamfalussy approach so far and on its future direction.

The four-level approach, established in the light of the recommendations issued in 2001 by the “Committee of Wise Men” chaired by Baron Alexandre Lamfalussy, works as follows:

Level 1 consists of Directives or Regulations, proposed by the Commission following consultation with all interested parties and adopted under the "co-decision" procedure by the Council and the European Parliament. In adopting each Directive or Regulation, the Council and the Parliament agree, on the basis of a Commission proposal, on the nature and extent of detailed technical implementing measures to be decided at Level 2.

At Level 2, four regulatory Committees assist the Commission in adopting the relevant implementing measures. Such measures are used to ensure that technical provisions can be kept up to date with market developments.

Level 3 measures have the objective of improving the common and uniform implementation of Level 1 and 2 acts in the Member States. The Committees of Supervisors are responsible for this.

At Level 4, the Commission will strengthen the enforcement of Community law.

Financial Services Committee report on financial integration (JT)

The June 2004 Council of Finance Ministers had a first exchange of views on an earlier FSC Report. The June Council invited the FSC to prepare a further discussion for this November Council.

The Commission will reiterate its agreement with the FSC’s view, expected to be endorsed by the Council, that all future legislative proposals need to be accompanied by thorough impact assessments and will repeat its undertaking to submit such assessments with new proposals. In June, Commissioner Bolkestein also called for Member States to assess the impact of amendments they bring forward to Commission proposals.

The Commission has already made clear its view that, after the legislative phase of the Financial Services Action Plan (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 in accordance with the subsidiarity principle.

The Commission intends to publish in the first half of 2005 a Communication outlining its post-FSAP financial services strategy for the coming years.

The Commission agrees with the FSC that supervisory convergence and corporate governance remain key priorities, along with the new capital adequacy framework for banks and investment firms (IP/04/899), the 8th Company Law Directive on Statutory Audit (IP/04/340, MEMO/04/60), the Third Money Laundering Directive (IP/04/832) and the Reinsurance Directive (IP/04/513, MEMO/04/90). The Commission will congratulate the Netherlands’ Presidency for the progress made in the preparatory work on those issues and express the hope that the momentum can be sustained.

The FSC review exercise is being conducted in parallel with the Commission’s own review based on three tools: its Financial Integration Monitor, which uses statistical indicators (see IP/04/601), the assessments of the practical effects of integration by four expert groups in the banking, insurance, securities and asset management sectors (IP/04/600 and MEMO/04/106), and an open public consultation, the results of which will be presented in the coming months.

Clearing and settlement (JT)

The Council will agree without discussion conclusions on clearing and settlement, on which the Commission presented a Communication in April 2004 (see IP/04/551 and MEMO/04/99). The Commission is preparing a proposal for a Directive on clearing and settlement and expects to be able to present it, together with an extended impact assessment, in early 2006.

VAT – One Stop Shop (JT)

The Commission is due to present to the Council its proposal of 29 October that is designed to simplify current Value Added Tax (VAT) compliance obligations so as to help cross-border traders who supply goods and services to other EU Member States (see IP/04/1331 and MEMO/04/249). The proposal would, in particular, provide for a “one-stop-shop” system whereby a trader could fulfil all his VAT obligations for his EU-wide activities in the Member State in which he is established.

The Commission will point out that the European Council has identified the reduction of the administrative burden on business as a key element of fostering economic growth and meeting the Lisbon agenda. The Commission’s proposal is a valuable contribution towards that objective.

Businesses expressed strong interest in the one stop shop idea during the Commission’s public consultation (see IP/04/654) and might even have wanted the Commission’s proposal to be more far-reaching. However, the Commission has opted to present a pragmatic and realistic proposal that has regard to the failure of the Council so far to reach agreement on the Commission’s previous more ambitious proposals for replacing the cross-border VAT refund procedure by a principle of cross-border deduction (see IP/98/560). The present proposal would rather simplify the existing procedure for claiming cross-border refunds and speed up the making of those refunds.

He will express the hope that, in consequence, the Council will adopt the proposal quickly so as to reduce the burden on businesses trading in the Internal Market.

VAT – reduced rates (JT)

At the request of France, Ministers are due to have a discussion on reduced rates of VAT. The Commission will point out that there is no time to lose in drawing up a solution that would ensure that all Member States, both old and new, are treated in the same manner. The Commission will indicate its strong support for the establishment of a calendar with a deadline for agreement and underline that the best basis for discussions continues to be the Commission’s proposal of July 2003, combined with its non-paper of February 2004 analysing areas where Member States could be allowed greater autonomy than at present to decide individually on the goods and services to which reduced rates of VAT should be applied, where this does not give rise to distortions of competition.

The Commission presented a proposal in July 2003 for simplifying the rules on reduced rates of VAT (see IP/03/1024 and MEMO/03/149). The Commission's aim is to seek a balanced approach for the whole of the European Union in this area. This requires going beyond a review of the restrictive list of goods and services to which a reduced VAT rate may be applied (Annex H to the Sixth VAT Directive) and examining the various specific derogations available only to some Member States (e.g. in respect of restaurant services, housing, domestic care services and the supply of gas and electricity), with a view to removing potential distortions of competition that have given rise to numerous complaints from traders. The proposal would also provide for definitive rules concerning the VAT treatment that should be applied to labour-intensive services. The proposal would not alter the present optional nature of reduced VAT rates: no Member State would be obliged to introduce new reduced VAT rates.

Regulation concerning cash controls (JT)

The Council will seek to reach political agreement on a common position on a Commission proposal of June 2002 for a Regulation to introduce an EU-wide approach to controlling cash movements in and out of the EU (see IP/02/955).

The Commission would have preferred that the Council had agreed on the application of the Regulation to movements of cash above €15,000 as this would have been consistent with the €15,000 threshold used in the money laundering Directives. However, the Commission is prepared to show flexibility in the interests of ensuring agreement on the proposal. Whilst the Commission would endeavour to support any reasonable threshold; a threshold of €10,000 would seem best to meet the need for a firm and clear response.

Once the common position has been formally adopted by the Council, work on the proposal will continue in the Parliament in accordance with the Treaty co-decision procedure.

The proposed Regulation would require Member States to ensure travellers entering or leaving the EU through its external borders made a declaration if they were carrying more than a certain threshold in cash (€10,000 or €15,000 - to be decided) (or its equivalent in other currencies or easily convertible items such as cheques drawn on a third party and traveller's cheques/postal cheques).

The measure would complement the controls already applied under the EU's Money Laundering Directive (91/308/EC) to transactions via financial institutions. A joint operation by EU customs authorities to monitor cross-border cash movements in excess of €10,000 from September 1999 to February 2000 revealed total cash movements in that period of €1.35 billion. While some Member States already apply controls to cash movements others do not and the types of controls vary considerably. The current lack of an EU-wide arrangement reduces the effectiveness of controls applied under the Money Laundering Directive.

Excise Duties – regulation to strengthen administrative co-operation (JT)

The Council is due to adopt without discussion a Regulation to strengthen co-operation between Member States' tax authorities so as to combat fraud in the field of excise duties on alcohol, tobacco and energy products. The Regulation will ensure more direct contacts between local tax offices of Member States, so as to speed up information flows; establish clearer and more binding rules on cooperation between Member States; require more automatic and spontaneous information exchange (as opposed to information exchange on request); and improve the systems in place for the transmission of information. The Regulation that is based on a Commission proposal of January 2004 (see IP/04/28) will complement the initiative to computerise the movement of excisable goods in the Community adopted in June 2003 (see IP/03/788) and is the counterpart to rules strengthening administrative co-operation in the VAT and direct tax fields adopted by the EU’s Council of Ministers over the last year (see IP/03/1350 and IP/04/539).

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