Economic and Finance Council (Hansard, 22 May 1992)

§ Mr. Norman Lamont

The Economic and Finance Council of the European Community met in Brussels on 16 March during the Recess and again in Brussels on 19 May. Finance Ministers and Central Bank Governors also met informally on 8–10 May in Oporto. The United Kingdom was represented by the then Minister of State (on 16 March), the Governor of the Bank of England and me (on 8–10 May) and the Paymaster General and me (on 19 May).

On 16 March the Council discussed aid to the former Soviet Union stressing the primary role of the Bretton Woods institutions but also the need for an early disbursement of the Community's loans. Possible procedures for extending external lending by the EIB were also discussed but without agreement.

President Delors made a statement on the Commission's proposals for the future financing of the Community which were briefly debated. The Council also adopted a recommendation on the Discharge of the 1990 Budget following statements on the Court of Auditors Report from Mr. Angioi, President of the Court, and Commissioner Schmidhuber. The United Kingdom's call for prior appraisal, better evaluation, and improvements in the economy and cost effectiveness of Community spending was well supported.

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The Presidency's latest compromise texts on the Large Exposures and Capital Adequacy Directives were also discussed and remitted to officials for further work.

In discussion of various directives relating to excise duties and structures after the abolition of fiscal frontiers, a directive relating to the structure of excise duties on tobacco was agreed in principle and some progress was made towards agreements on the structures of duties on mineral oils. The Presidency also announced their intention to continue work at official level on directives concerning the abolition of withholding tax on interest and royalties and the treatment of offsetting losses. Finally, Commissioner Scrivener urged support for a Commission proposal for reducing excise duties on fuels made from agricultural products (so called biofuels).

In Oporto from 8–10 May ECOFIN Ministers met informally with their Central Bank Governors. There was a discussion of how the Community might promote non-inflationary growth which focused on the need to tackle structural rigidities especially in the markets for labour, capital and non-traded goods. In this context I reminded colleagues that the Working Time Directive was a retrograde step which would increase labour market rigidities rather than reducing them. It was agreed that structural issues should have a higher profile in multilateral surveillance discussions.

Aid to the former Soviet Union was also discussed and the predominant role of the Bretton Woods Institutions was reaffirmed. It was agreed that the Community's main role was in emergency and technical assistance rather than balance of payments support.

It was agreed that the Governors' Committee should pursue its work on the means for closer association between non-EC countries and the EMS. The Governors also reported on their technical work on EMU and I urged that they should keep ECOFIN closely in touch.

We agreed in principle to extend EIB lending to viable projects in further countries with which the Community has trade and co-operation agreements subject to annual ceilings and secondary EC Budget guarantees.

We also briefly discussed a Presidency paper on the need to improve EC budgetary discipline and transparency and many of my colleagues supported a move to enhance the role of ECOFIN in discussions of future financing more generally.

On 19 May, the Council discussed the economic situation in Germany and Italy as part of our regular examinations of national economic convergence programmes. The Council concluded that Germany was in a strong position to consolidate its public finances following the economic shock of reunification. The Council fully endorsed Germany's need to maintain a tight monetary policy while undertaking fiscal consolidation primarily through restraints on public expenditure. We noted that Germany's plans amounted to a freeze in public expenditure in real terms up to 1995 and to reduce its general government deficit from 4.1 per cent. in 1992 to 1.9 per cent. in 1995. Meanwhile the Council urged the need for wage moderation to avoid overburdening monetary policy and undermining competitiveness in East Germany and for greater efforts to remove structural rigidities in markets for labour, capital and non-traded goods. The Council noted that Germany expects to fulfil all the convergence criteria in time for a move to Stage 3 of EMU.

The discussion of Italy was a follow up to our discussion last November. Since then Italy has fallen short 281W of its targets in a number of areas and the Council expressed "serious concern" at the budgetary situation and outlook. The Council called for "exceptional measures" in Italy's fiscal policy, and for action in several structural and institutional areas. The Council stated that the slippage in Italy's budgetary consolidation was such as to undermine the credibility of Italian economic policy. We concluded that without immediate and effective corrective measures Italy would probably fail to meet the EMU convergence criteria.

The Commission's proposals for the future financing of the Community were discussed over lunch and concern was expressed by a number of states, including the United Kingdom, at the size of the Commission's proposed increases in spending. Member States also called for a fuller discussion of the proposals by ECOFIN before the Lisbon European Council.

On indirect taxes, the Presidency tabled nine draft directives covering excise duty rates and structures on tobacco products, mineral oils and alcoholic beverages; VAT rates and structures; and the VAT treatment of second-hand goods (including works of art).

The minor outstanding points on tobacco duty structures were resolved and the draft directive on mineral oil duty structures now allows for the continuation of all our current exemptions and rebates.

On tobacco rates we stressed the importance the United Kingdom attaches to improving the agreement reached at last June's ECOFIN on a minimum rate for cigarettes by supplementing it with an additional minimum cash figure; and we argued for a similar approach to the minimum duty rates for other tobacco products.

On alcohol duty structures, discussion focused on the text relating to intermediate products (fortified wines) which for different reasons a number of Member States (including the United Kingdom) were unable to agree. On alcohol rates we pointed out that as a major producer of spirits, which were in competition with wine, the United Kingdom could not agree a directive which allowed a zero rate for wine but required some Member States significantly to increase their duty rate on spirits (for example Scotch whisky), and that until this point was satisfactorily resolved we could not agree a minimum duty rate for fortified wines.

There was little substantive discussion of VAT issues. In relation to the draft VAT rates and structures directive, we reaffirmed the political commitment made last year that the United Kingdom had no intention of altering our present standard rate which is already above the proposed minimum rate of 15 per cent. In discussion of the VAT treatment of second-hand goods, we made clear the United Kingdom's view that imports of works of art should be exempt from VAT (as at present in the United Kingdom) rather than taxed as proposed, in order to preserve the important United Kingdom and European art market. I expect ECOFIN to return to this dossier on 9 June.

The Capital Adequacy Directive was also discussed and it was agreed that the Presidency's latest proposal addressing the eight most contentious issues would form a good basis for further work towards an overall political compromise. We stressed that there were a number of important issues outstanding, however, especially in the area of large exposures. The Presidency will be seeking a political agreement on these eight main issues at the next ECOFIN on 9 June. In the meantime we shall be pursuing our interests in further meetings of officials.

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The guidelines for extending EIB lending to further non-EC countries agreed at the informal meeting in Oporto were also clarified and affirmed.

At the end of the meeting the Commission made a brief statement on the future of customs agents and also announced that a draft directive on carbon and energy taxes would be published soon.