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Preparation of Eurogroup and Economic and Finance Ministers Council, Bruxelles, 6 and 7 July 2009

European Commission - MEMO/09/318   06/07/2009

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MEMO/09/318

Brussels, 6 July 2009

Preparation of Eurogroup and Economic and Finance Ministers Council, Bruxelles, 6 and 7 July 2009

EUROGROUP (AT)

Eurogroup ministers will meet at 17.00 hrs on Monday 6 July in Brussels. Joaquín Almunia, Commissioner responsible for Economic and Monetary Affairs will attend as will European Central Bank Governor Jean-Claude Trichet. A press conference is expected to take place after the meeting.

Eurogroup Ministers are expected to discuss the economic situation and the effect that the crisis will have on potential growth. Euro area GDP is forecast to fall by 4% in 2009 and recover to only +0.1% in 2010, according to the Commission's spring forecasts. But failing policy action, the ongoing credit shortages due to the deleveraging in the financial sector, steep reductions in activity in certain sectors and higher unemployment could lead to a non-negligible loss of structural productive capacities, or potential output, in coming years. The Commission's services have looked at past experience and concluded that financial crises can have a more lasting effect than other recessions. To prevent the risk of a lasting impact on long-run potential growth rates, the challenge now is to devise and implement appropriate policy responses. Regarding the "policy don'ts", these are well specified in last December's European Economic Recovery Plan and include avoidance of protectionism, measures such as early retirement schemes that lower labour market participation rates and short-term policy responses that would prevent essential restructuring from taking place. As regards "policy do's", the measures are also known and include: (i) effective measures to improve the functioning of financial markets; (ii) ensuring compatibility of short-term crisis measures with longer-term aims and developing comprehensive "exit strategies"; (iii) pursuing a "flexicurity agenda" that shifts the emphasis to equipping workers in more flexible labour markets; (iv) raising potential output over the long-run through improving market functioning (especially in services), supporting the business environment, inter alia through lower administrative burdens, and well designed policies to support R&D/innovation.

M inisters are also expected to discuss the outlook for price developments in the euro area. Headline inflation has recently decelerated markedly, reaching 0% in May and falling to –0.1% in June 2009 according to the Eurostat flash estimate ( see STAT/96/2009 ). This decline in inflation can primarily be attributed to lower commodity prices compared to a year ago, the so-called negative base effects, while prices of most consumption items, notably services, continue to increase. The spring forecasts expect the period of negative euro area inflation to be short-lived and a return to positive territory during the second half of the year. In the meantime, low inflation boosts households' purchasing power and reflects adjustments in relative prices within the euro area that can have a positive impact on competitiveness in those Member States where inflation had previously been comparatively higher.

The Eurogroup is also expected to follow up to its budgetary discussions in Prague as well as to discuss th e Commission's opinions on the Stability Programmes of euro area members Austria, Belgium, Slovakia and Slovenia and the excessive deficit procedure for Malta ahead of the following day's Ecofin (see below).

For the latest key indicators for the euro area go to:

http://ec.europa.eu/economy_finance/publications/publication12486_en.pdf

E COFIN COUNCIL

The Council of Economics and Finance Ministers will start at 9.45 hrs on Tuesday 7 July. It will be preceded by a working breakfast at 9.00 hrs. The ECOFIN meeting will be attended by Commissioner for Economic and Monetary Affairs Joaquín Almunia and Internal Market and Financial Services Commissioner Charlie McCreevy. A press conference is planned before 12:00, at the end of the Ecofin, followed by another, still before lunch, after the EU-Med meeting.

E conomic situation and market developments (AT)

Over breakfast, ministers are mostly expected to discuss the economic situation. Some positive signs have recently emerged (e.g. encouraging signs of stabilisation in financial markets, the global economy is no longer in free-fall, visible improvements in confidence indicators) but the activity remains very weak . For the recovery to take hold we still need to stop the negative feedback loop between a shrinking economy and a financial sector under strain, to speed up the cleaning up of the banks' balance sheets and their recapitalisation and for financial conditions to improve for both businesses and households.

Swedish Presidency Work Programme

Ministers will have a debate following the presentation of the work programme of the Swedish presidency for the second half of 2009. This point will be shown on closed-circuit television.

See Presidency website: http://www.se2009.eu/

Follow-up of the European Council (18-19 June) (BH-AT)

The Ecofin Council will follow-up to the June meeting of the European Council for what concerns climate change. When endorsing the conclusions of the June Ecofin on the international financing of climate change, Heads of Government and State had indicated their readiness to decide all aspects of financing at their October meeting, subject to developments in international negotiations. The current round of negotiations under the United Framework Convention on Climate Change (UNFCCC) is targeted to conclude in Copenhagen in December this year. Scaling up financial flows from developed to developing countries to support their efforts to tackle climate change will be a key part of the UN agreement, so the EU needs to agree its position and make it known in good time.

Preparation for the G-20 meetings (AT)

The Council will discuss the state of preparations for the G-20 summit that will take place in Pittsburgh on 24-25 September 2009. From the outset, the EU has been a key driving force behind the G-20 summit meetings on restoring global financial stability and world growth and will continue to take a proactive stance. As previously, the strength of the EU contribution in this process will depend on the coordination of our positions and on the unity with which we represent these. For the EU it is crucial that the agreements of the London summit are implemented swiftly and in full. The EU is doing its share of the work .

Procyclicality ( OD)

The working group on pro-cyclicality set up in the informal ECOFIN meeting in Nice (September 2008) has pursued its efforts to develop mechanisms both to mitigate pro-cyclicality and build up buffers to strengthen the solvency of banks. According to the Final Report issued by the working group, the four main priorities are: introducing dynamic provisions in the current framework, building up counter-cyclical capital buffers, establishing a sound framework for remuneration schemes and monitoring system wide risks. There is a broad consensus on the need to increase the solvency of banks through new counter-cyclical capital buffers and to create the correct incentives by establishing dynamic provisions and appropriate remuneration schemes.

Implementation of the Stability and Growth Pact (AT)

As the economic and financial crisis takes its toll on public finances, the implementation of the Stability and Growth Pact is guiding Member States to ensure that the budgetary impact is reversed once the crisis subsides, that excessive deficits are corrected and that fiscal policies are specified and subsequently implemented to achieve long-term fiscal sustainability. The SGP possesses the necessary flexibility to deal with current exceptional circumstances, while maintaining focus on the consolidation needed to prepare for the budgetary impact of ageing as well as the structural reforms required to enhance stability and growth potential.

  • Excessive deficit procedures (AT)

The Council will decide whether excessive deficits exist in Latvia, Lithuania, Malta, Poland and Romania. This follows earlier reports by the Commission of 18 February ( IP/09/274 ) and 13 May ( IP/09/752 ) and Commission opinions and recommendations issued on 24 June (see IP/09/990 ) and 2 July ( IP/09/1069 ). Based on the April notifications of fiscal outcomes for 2008, the general government deficits in the five countries exceeded the 3% of GDP deficit threshold as laid down in the Treaty. If the Council decides that the deficits are excessive, it is expected to issue recommendations to the authorities concerned to take effective action to correct them by 2010 in the case of Malta, 2011 in the case of Lithuania and Romania and 2012 in the case of Latvia and Poland. As for Hungary, because of the significant deterioration of the economic outlook and based on the Commission report issued on 24 June, the Council is expected to adopt a revised recommendation setting the deadline for the correction of the deficit to 2011. The Member States concerned will have six months to take effective action to correct their excessive deficits.

  • Assessment of Stability and Convergence Programmes (AT)

The Council will give its opinion on the latest updates of the stability programme of Austria, Belgium, Slovenia and Slovakia and the convergence programme of Romania on the basis of recommendations by the Commission (see IP/09/990 ) . This will close the 2008/09 round of assessments of stability and convergence programmes which started in February this year. The Council is expected to encourage Austria, Belgium, Slovenia and Slovakia to implement the adopted stimulus measures in line with the European Economic Recovery Plan (EERP), but to reverse the fiscal stimulus once the economic crisis subsides so as to return to a consolidation path compatible with the long-term sustainability of public finances. In line with the commitments in the framework of the EU balance of payment assistance, the Council is expected to invite Romania to ensure the correction of the excessive deficit by 2011, and, to this effect, implement the fiscal measures as planned in the February 2009 budget and the April 2009 amended budget, especially in the area of public sector wages and pension reform.

  • Medium-term Budgetary Objectives (MTOs) and implicit liabilities (AT)

Ministers will discuss the criteria and modalities for taking into account implicit liabilities in the medium-term budgetary objectives, in line with the Stability and Growth Pact and following up on the 9 October 2007 ECOFIN Council conclusions.

Union for the Mediterranean ECOFIN Ministerial meeting (AT)

Immediately after the regular ECOFIN, Finance Ministers from the EU and from partner countries in the Mediterranean will gather for the second Euro-Mediterranean Finance Ministerial in the format of Union for the Mediterranean (UfM) launched in 2008. The format encompasses partner countries from the southern Mediterranean and from candidate and potential candidate countries, in particular Albania, Bosnia Herzegovina, Croatia, Montenegro and Turkey. This meeting is significant for the UfM process as Arab countries have not attended any high-level UfM meetings since the beginning of 2009 in the aftermath of the renewed conflict in Gaza.

Ministers are expected to exchange views on the impact of the economic and financial crisis in the Euro-Mediterranean region and possible policy responses. They will also review the state of play of economic reforms in the region.

For background on Euro-Mediterranean relations see:

http://ec.europa.eu/external_relations/euromed/index_en.htm

For background on Neighbourhood Policy, see:

http://ec.europa.eu/economy_finance/int_economic_issues/int_economic_issues198_en.htm

For background on FEMIP see EIB website:

http://www.eib.org/projects/regions/med/index.htm

Facility for Euro-Mediterranean Investment and Partnership (FEMIP) (AT)

Over lunch, ministers are expected to exchange views on the activity of the t he 9 th Facility for Euro-Mediterranean Investment and Partnership (FEMIP) for the period 2009-2011 as well as future options for the structure of the FEMIP Committee meetings. The FEMIP gathers together the whole toolkit of European Investment Bank's services and financial instruments aimed at promoting economic development in the Mediterranean Partner Countries (MPC). FEMIP was launched in October 2002 and it has contributed to an enhanced dialogue and cooperation between the European Union and the MPC. It is a key player in the economic and financial partnership between Europe and the Mediterranean region. Its objective is to support the modernisation and opening-up of the MPC economies by supporting the private sector and creating an investment-friendly environment. FEMIP is also a forum for meetings and dialogue between Euro-Mediterranean partners.


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