Tag Archives: Monetary crisis

Supporting developing countries in coping with the crisis

Outline of the Community (European Union) legislation about Supporting developing countries in coping with the crisis

Topics

These categories group together and put in context the legislative and non-legislative initiatives which deal with the same topic.

Development > Sectoral development policies

Supporting developing countries in coping with the crisis

Document or Iniciative

Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions of 8 April 2009 – Supporting developing countries in coping with the crisis [COM(2009) 160 final – Not published in the Official Journal].

Summary

Developing countries are particularly vulnerable to the effects of the international financial crisis. Development policies have improved their economic situation, but their resilience capacity remains limited.

Their monetary and budgetary policies are particularly constrained by inflation peaks, exchange rate volatility, deteriorating external balances, rising food prices and increasing energy costs. The European Union (EU) has chosen to support the countries that are most vulnerable to the effects of the crisis as a priority. These countries may be identified by combining several criteria corresponding to the main channels by which the crisis has been spread to developing countries, in particular:

dependence on export revenues and the degree of integration into world trade;
dependence on international financial flows and transfers;
capacity to react in response to the crisis.

Funding aid

The EU provides the largest portion of Official Development Aid (ODA), almost EUR 50 billion or 59 % of ODA overall. Its contribution is increasing, but Member States should nevertheless commit to add a further EUR 20 billion of aid in order to meet their objectives set for 2010 (0.56 % of Gross Domestic Income).

This increase in ODA is essential for participating in economic recovery and meeting the Millennium Development Goals (MDGs). Aid must be supplemented by the use and mobilisation of other development resources and instruments. This is the case for export credits, investment guarantees, technology transfer and innovative development funding mechanisms (e.g. voluntary solidarity levies, such as the airline tax applied by some Member States).

The Commission recommends that Member States adopt counter-cyclical development policies consisting of:

adapting 2009 and 2010 strategies and programmes, and re-directing EIB loans to key sectors in order to eliminate the crisis and boost economic activity (infrastructures, energy, activities related to climate change, green growth and the financial sector);
accelerating payment and making advances on aid commitments and budgetary support for all countries, in particular for those in a situation of emergency;
giving macro-economic assistance, for ENP countries, accession and pre-accession countries, in cooperation with the IMF.

Aid effectiveness

The fragmentation of agencies and bilateral or multilateral donors, and the lack of stability and predictability of funding have a high cost. It would be possible to make gains in effectiveness each year, which could translate into billions of euros allocated to supporting reforms, projects and action. The EU has adopted a European programme for aid effectiveness and a Code of Conduct on the Division of Labour. In 2008, it committed to the Accra Agenda for Action and plays an essential role in rationalising international development aid architecture.

The Commission proposes to accelerate the implementation of these programmes, as well as the application of the Commission Recommendations aimed at ensuring maximum impact for EU aid.

Recovery measures

In order to combat the social effects of the crisis and to contribute to the MDGs, particular support must be given to social protection systems and labour markets. Thus in 2009 and 2010, almost EUR 500 million will be committed under the European Development Fund (EDF), in order to protect public spending in essential sectors. This funding is to be implemented through:

the FLEX system which allows export losses to be compensated for according to the years preceding the crisis;
the additional and temporary “vulnerability FLEX” system, established expressly to respond more quickly and in a targeted way to the crisis in the most vulnerable countries.

Growth and employment are also promoted by the funding of infrastructures (EU-Africa Trust Fund), through support for agriculture and the creation of links between places of production and sale, by means of measures to foster private trade and the increase of credit facilities (in particular, the EIB’s investment facility, the Facility for Euro-Mediterranean Investment and Partnership (FEMIP), and the ENP investment facility for Eastern Europe).

The support provided by the EU in the context of the crisis also includes measures adopted to meet the food crisis (particularly the Food Facility with a budget of EUR 1 billion) which persists in many countries.

Recovery strategies take into account objectives for sustainable development and tackling climate change, including in the Least Developed Countries (LDCs).

Sustainable economic development necessitates the strengthening of economic and financial governance, including tax governance. Fighting corruption and the introduction of a healthy macro-economic and regulatory environment should be the key elements in political dialogue between the EU and its partner countries.

The EU should also work towards a better balance of the global governance system (particularly within the United Nations, the International Monetary Fund (IMF) and the World Bank), in order to make these authorities more complementary and to ensure greater representation for developing countries.

2009 Annual Statement on the Euro Area

Outline of the Community (European Union) legislation about 2009 Annual Statement on the Euro Area

Topics

These categories group together and put in context the legislative and non-legislative initiatives which deal with the same topic.

Economic and monetary affairs > Stability and growth pact and economic policy coordination

2009 Annual Statement on the Euro Area

Document or Iniciative

Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee, the Committee of the Regions and the European Central Bank of 7 October 2009 – Annual Statement on the Euro Area 2009 [COM(2009) 527 final – Not published in the Official Journal].

Summary

Following the economic crisis which began in summer 2007 and peaked in 2008, signs of stability are beginning to emerge in the financial system. Throughout the crisis, the euro has effectively protected the euro area from turbulent exchange and interest rate movements that have previously been so detrimental for European Union (EU) countries in times of financial market stress. The ability of the euro area to act quickly and coordinate with central banks has helped to stabilise the whole international monetary system.

The financial crisis has demonstrated benefits of euro membership, increasing its attractiveness for non-euro area EU countries. Benefits include domestic institutions being granted access to euro central bank liquidity.

However the euro is not able to shield the euro area from all economic problems – in particular those related to imbalances. The crisis emphasised certain weaknesses within the euro area. Imbalances within the euro area meant that some economies were left more exposed to the crisis than others. Prior to the crisis many euro area countries ignored the risk of imbalances, but the financial crisis has demonstrated the need for change.

The euro area’s response to the crisis

There was a lack of satisfactory supervisory arrangements, which failed to act quickly and provide a coordinated response when the crisis began. Initial responses tended to be primarily defined by euro area countries’ individual domestic considerations. In October 2008, the first Eurogroup summit helped to generate an EU-level response, whereby the Commission provided a common strategy for the implementation of national banking rescue plans.

The Commission has since presented its formal legal proposals for a new framework of European financial supervision. The objective of these proposals is to heighten the prudential supervision of individual financial institutions as well as the financial system as a whole.

Alongside the internal policies, the EU is also at the head of the regulatory reform of financial markets, helping to form and develop the initiatives and commitments of the G20.

Fiscal consolidation within the euro area, in accordance with the Stability and Growth Pact, meant that most countries were better able to deal with the crisis than before. However, fiscal consolidation was unfinished in some euro area member countries, where levels of public debt remained high and public finances become dependant on fiscal revenues. As a result, some euro area countries were unable to adequately contribute to the joint fiscal stimulus that the European Economic Recovery Plan set out.

As a result of their close economic and financial relationship with a common currency and single monetary policy, coordination is essential for countries in the euro area. The euro area’s response to the crisis could have been quicker and more effective if coordination between the member countries had been more efficient.

The way forward – a broader macroeconomic surveillance

The crisis has demonstrated the need for euro area member countries to progress on and apply the EMU@10 reform agenda. In this communication of 7 May 2008 the Commission proposed a reform policy agenda to improve the functioning of the Economic and Monetary Union (EMU) against the fast-changing global environment, ageing populations and increasing energy and climate change concerns. The external policy area of the reform agenda proposed that the euro area should play a prominent role in global economic governance.

Imbalances within the euro area were not dealt with prior to the financial crisis. A broader surveillance is therefore required to establish a coordinated policy response. This broader surveillance should include financial market developments. Too much debt in the private sector resulted in unsustainable economic trends. Such financial imbalances need to be discovered and treated earlier.

The surveillance must be broadened to ensure sustainable public finances. Low growth together with an increasing debt puts public finances in a precarious position at a time when the impact of ageing is beginning to emerge. A concrete strategic commitment is required to achieve a strengthened fiscal cooperation, which adequately balances concerns of stabilisation and sustainability in accordance with the Stability and Growth Pact.

Coordination across policies and euro area countries must be improved to allow judicious exit strategies. Such coordination must consist of common understandings on the appropriate timing, pace and sequencing of normalisation of policy settings.

Taxation of the financial sector

Outline of the Community (European Union) legislation about Taxation of the financial sector

Topics

These categories group together and put in context the legislative and non-legislative initiatives which deal with the same topic.

Internal market > Financial services: general framework

Taxation of the financial sector

Document or Iniciative

Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions of 7 October 2010 – Taxation of the Financial Sector [COM(2010) 549 final – Not published in the Official Journal].

Summary

This Communication proposes further exploration of two tax instruments which could be applied to the financial sector:

Financial Transactions Tax (FTT);
Financial Activities Tax (FAT).

Why are new taxes on the financial sector required?

The financial sector is regarded as one of the main sectors responsible for the 2008 crisis, particularly for the considerable growth in government debt in the world. As a result, the European Commission believes that the application of specific taxes to this sector could have the following positive effects:

these taxes could complement the essential regulatory measures which aim at enhancing the efficiency and stability of financial markets and reducing their volatility;
these taxes would enable the financial sector to contribute to national budgets in return for the support they received during the crisis;
these taxes could enable the financial sector to contribute more to public finances given that the majority of financial services are exempt from Value Added Tax (VAT) in the European Union (EU).

What is the Financial Transations Tax (FTT)?

The FTT would tax the value of each transaction relating to:

equities;
bonds;
currencies;
derivatives.

According to an estimate based on 2006 figures, if this tax had been implemented in that year, the tax revenues would have been around EUR 60 billion, with a rate of 0.1 % on stocks and bonds transactions.

The advantage of such a tax might lie in the application of the ‘polluter pays’ principle. This tax could reduce ‘undesirable’ operations by penalising short-term transactions. However, it would need to be applied by several financial centres in the world in order to achieve market stability and prevent relocations. For these reasons, the Commission believes that a global FTT would be the most appropriate.

What is the Financial Activities Tax (FAT)?

The FAT is an instrument which has been proposed by the International Monetary Fund (IMF). It has the following elements:

in principle it falls on total profit and wages;
it can be designed to specifically target economic rents and/or risk;
it taxes corporations.

The implementation of this tax, with a rate of 5 %, by the 22 ‘developed economies’ identified in the IMF report to the G-20, could generate the equivalent of 0.28 % of their GDP. At EU level, the tax revenues could be EUR 25 billion.

In principle, the FAT does not change the prices of financial instruments and does not affect the market structure. However, it could encourage profit shifting via relocating income and remuneration outside the EU. Certain technical aspects of this tax still need to be examined further in order to avoid such practices. The Commission believes that the implementation of the FAT would be more relevant at EU level.

Context

In its Resolution on financial transaction taxes of 10 March 2010, the European Parliament asked the Commission and Council to look at how a financial transaction tax could be used to finance development cooperation, help developing countries to combat climate change and contribute to the EU budget. In June 2010, the European Council insisted on the leading role that the EU should take in this area as part of a global strategy. However, there is currently no global consensus on additional tax instruments in the financial sector.