The EMU framework and economic governance within the eurozone need to be revamped. This was one of the main messages to come out of a draft resolution on the euro area and public finances adopted on February 23 2010 by the European Parliament's economic and monetary affairs committee.

The resolution, which the EP adopts annually, covers monetary policy, economic governance and this year also the situation of public finances.

"MEPs note the absence of effective mechanisms to prevent the growth of imbalances in the eurozone and ask the European Commission to examine ways of preventing future excessive growth of these imbalances and the asymmetric shocks to which they contribute," the European Parliament said in a media statement. 

The resolution also calls for significant improvement of economic governance in the eurozone, particularly by developing binding commitments between governments. 

The resolution repeats the European Commission's view that a strengthening of macroeconomic surveillance is urgently needed.

On public finances, the resolution calls for greater efforts to be made on fiscal coordination than that required by the Stability and Growth Pact (SGP), which only covers deficits and debt. 

"The committee believes these criteria are only some of the causes of economic imbalances and that all factors have to be taken on board."

In addition, the SGP must be applied more rigidly than it has been during periods of growth to make sure that EU member states do not overspend.

As a solution to reducing the high cost that some EU member states are facing with repaying their public debt, the draft resolution proposes the idea of issuing eurobonds.

Addressing the specific situation of Greece, the committee says this case should serve as a lesson when future enlargements of the eurozone are being planned.  It also asks that particular attention be paid to the quality of the statistics of the aspiring eurozone countries.

The need for more ambition and more Europe was the main message to emerge from debates on the EU financial supervisory package in the European Parliament's economic affairs committee on February 23.

Calls for tougher legislation and a bigger transfer of powers to the EU supervisory level were among the chief demands made by the four MEPs presenting their draft reports.
 
All four EP rapporteurs questioned the Council compromise that emerged from the December 2009 Ecofin meeting.

The safeguard clause protecting member states' fiscal powers, which the rapporteurs consider over-restrictive, was the major bone of contention, a statement by the European Parliament said.

Another concern was the possibility of geographical fragmentation, as the Commission is currently proposing different cities for each authority.

The watchdog system being proposed by the Commission is made up of three separate micro-supervisory bodies for the monitoring of banking, insurance and market institutions respectively and another macro-supervisory body for the monitoring of systemic risk. 

Although willing to preserve these four bodies, the rapporteurs suggest grouping them together under the European System of Financial Supervision proposed in the de Larosière report on financial supervision in the EU.

Consequently they also argue - unlike the initial proposal - that a common location should be chosen, with the European Systemic Risk Board report proposing that this be Frankfurt.  This would not only reduce operating costs but could also be very useful in the event of a crisis necessitating emergency action.

As it currently stands, the safeguard clause found in the proposed texts establishing the three micro-supervisory authorities offers a quasi-veto for Member States regarding the decisions of these authorities. 

The rapporteurs therefore propose that the opportunity to invoke such a safeguard be limited and that the member state concerned be required to provide an impact assessment detailing the extent to which the decision impinges on its fiscal sovereignty.

Apart from the very important question of the safeguard clause, the three rapporteurs for the micro-supervisory authorities proposed a number of other improvements to the European Commission's proposals, mostly to increase the role of supervision at EU level. 

The reports propose that these authorities also be tasked with preventing regulatory arbitrage and that they should have a power of initiative to undertake stress tests. 

They should also represent the EU during international dialogues of supervisors. 

To varying degrees, the rapporteurs would confer mediating powers on the authorities with regard to conflicts between national supervisors, with the report on the banking authority going furthest by suggesting a binding mediating role.
 
All reports give a more important role to the European Parliament, particularly by entrusting it with the task of overseeing the activities of the authorities.

Specifically for the banking authority, the rapporteur proposes that the authority takes over from national supervisors the direct supervision of cross-border "too big to fail" financial institutions and puts forward the idea of setting up a European guarantee fund which could be used to bail out banks in difficulty.

As for the markets authority, the draft report proposes that the authority be granted the right to prohibit the trading of certain products to protect investors and ensure stability.

The rapporteur proposed a host of amendments which review the governance bodies of the ESRB, including their composition and most importantly a proposal is made for the president of the ECB to also be the president of the ESRB.  The role of the EP is also increased by proposing that Parliament can conduct hearings of the ESRB's president and other members of the steering committee.

The report empowers the ESRB to issue a warning declaring the possibility of an emergency if it detects a risk which may destabilise the financial markets or the financial system in the European Union.  It can also declare the existence of an emergency.  When it issues these warnings it will transmit them through the Parliament and not only through the Council. 

Finally it is proposed that the ESRB should be able to request information from undertakings not covered by the banking, markets or insurance supervisory systems.

Other reports discussed as part of the financial supervisory package were those dealing with the role of the ECB in the work of the ESRB, and a report dealing with the specific powers of the European micro-supervisory authorities. 

All reports are expected to be put to the vote in committee in May, with a plenary vote to follow in July.