COUNCIL OF THE EUROPEAN UNION

Brussels, 8 December 2011

SN 35/11 LIMITE

DRAFT EUROPEAN COUNCIL CONCLUSIONS ON ECONOMIC UNION 1. Further to the report presented by the President of the European Council in close cooperation with the President of the Commission and the President of the Eurogroup, the European Council endorses the decisions taken by the euro area Member States to enhance economic coordination and convergence as well as budgetary discipline, to move towards closer economic union and to strengthen crisis mechanisms (annex). 2. The European Council is determined to preserve the integrity of the EU and the coherence between the euro area and the EU as a whole. 3. The European Council accordingly agrees on the following steps which are needed to implement in the EU framework the measures needed to enhance economic coordination and convergence as well as budgetary discipline in the euro area: [secondary legislation/ treaty change: to be completed in light of the discussion]

__________________

SN 35/11

LIMITEEN

SN 35/11

LIMITEEN

ANNEX STATEMENT BY THE EURO AREA HEADS OF STATE AND GOVERNMENT

The European Union and the euro area have done much over the past 18 months to improve economic governance and adopt new measures in response to the sovereign debt crisis. However, market tensions in the euro area have increased, and we need to step up our efforts to address the current challenges. Today we agreed to move towards a stronger economic union. This implies action in two directions: - a new fiscal compact and strengthened economic policy coordination; - the development of our stabilisation tools to face short term challenges. A reinforced architecture for Economic and Monetary Union 1. The stability and integrity of the Economic and Monetary Union and of the European

Union as a whole require the swift and vigorous implementation of the measures already agreed as well as further qualitative moves towards a genuine "fiscal union" in the Euro area. Alongside the single currency, a strong economic pillar is indispensable. It will rest on an enhanced governance to foster fiscal discipline as well as stronger growth and enhanced competitiveness. To achieve this objective, we will build on and enhance what has been achieved in the past 18 months: the enhanced Stability and Growth Pact, the implementation of the European Semester starting this month, the new macro-economic imbalances procedure, and the Euro Plus Pact. 2. With this overriding objective in mind, and fully determined to overcome together the

current difficulties, we agreed today on a new "fiscal compact" and on significantly stronger coordination of economic policies in areas of common interest. 3. This will require a new deal between Euro area Member States to be enshrined in

common, ambitious rules that translate their strong political commitment into a new legal framework.

SN 35/11

LIMITEEN

A new fiscal compact 4. A new fiscal rule will be established, containing the following elements:

General government budgets shall in principle be balanced. Member States may incur deficits only to take into account the budgetary impact of the economic cycle or in case of exceptional economic circumstances.

This principle shall be deemed respected if, as a rule, the annual structural deficit does not exceed 0.5% of nominal GDP. This rule will be adapted to country specific circumstances to take into account long term sustainability. Countries having a debt significantly below 60% of GDP may have higher structural deficits.

Such a rule will also be introduced in Member States' national legal systems at constitutional or equivalent level. The rule will contain an automatic correction mechanism that can be triggered in case of deviation. It will be defined by each Member State on the basis of principles defined by the Commission. The Court of Justice will have jurisdiction to verify the transposition of this rule at national level.

Member States are committed to converge rapidly towards their specific reference level. Member States in EDP shall submit to the Commission and the Council for endorsement, an economic partnership programme detailing the necessary structural reforms to ensure an effectively durable correction of excessive deficits. The implementation of the programme, and the yearly budgetary plans consistent with it, will be monitored by the Commission and the Council.

A mechanism will be put in place for the ex-ante reporting by Member States of their national debt issuance plans.

5.

The rules governing the Excessive Deficit Procedure (Article 126 of the TFEU) will be reinforced for Euro area Member States. As soon as a Member State is recognized to be in breach of the 3% ceiling by the Commission, there will be automatic consequences unless the Council (Euro area Member States voting), acting by qualified majority, decides otherwise. Exceptional circumstances will be taken into account. Steps and sanctions proposed or recommended by the Commission will be adopted by the Council (Euro area Member States voting) unless a qualified majority of the Euro area Member States decides otherwise.

SN 35/11

LIMITEEN

6.

We will adopt swiftly the new rules proposed by the Commission on 23 November 2011 on (i) the monitoring and assessment of draft budgetary plans and the correction of excessive deficit in euro area Member States and (ii) the strengthening of economic and budgetary surveillance of Member States experiencing or threatened with serious difficulties with respect to their financial stability in the euro area. We call on the Council and the European Parliament to rapidly adopt these regulations so that they will be in force for the next budget cycle. Under this new legal framework, the Commission will in particular examine the key parameters of the draft budgetary plans and will, if needed, adopt an opinion on these plans. In case the Commission identifies particularly serious non-compliance with the Stability and Growth Pact, it will request a revised draft budgetary plan.

7.

For the longer term, we will continue to work on how to further deepen fiscal integration so as to better reflect our degree of interdependence. This will imply more intrusive control of the national budgetary stance by the EU, such as the ex ante approval of budgetary plans. In this context, the possibility of moving towards common debt issuance in the longer term and in a staged and criteria-based process, should be considered, once significant progress will have been made in reinforcing fiscal rules and discipline. Any steps towards that end will have to be commensurate with a robust framework for budgetary discipline and economic competitiveness to avoid moral hazard and foster responsibility and compliance. These issues will be part of the report of the President of the European Council in March, which will also deal with the relations between the EU and the Euro area.

Stronger policy coordination and governance 8. We agree to use more actively enhanced cooperation on matters which are essential for the smooth functioning of the euro area, without undermining the internal market. 9. A procedure will be established to ensure that all major economic policy reforms planned by Euro area Member States will be discussed and coordinated at the level of the Euro area.

SN 35/11

LIMITEEN

10.

Euro area governance will be reinforced as agreed at the Euro Summit of 26 October. In particular, regular Euro Summits will be held at least twice a year. These new arrangements should be reflected at Treaty level.

Strengthening the stabilization tools 11. Longer term reforms such as the ones set out above must be combined with immediate

action to forcefully address current market tensions. 12. The European Financial Stability Facility (EFSF) leveraging will be rapidly deployed, through the two concrete options agreed upon by the Eurogroup on 29 November. 13. We agree on an acceleration of the entry into force of the European Stability Mechanism (ESM) treaty. The Treaty will enter into force as soon as Member States representing 90 % of the capital commitments have ratified it. Our common objective is for the ESM to enter into force in July 2012. 14. Concerning financial resources, we agree on the following: EFSF will remain active in financing programmes started until mid 2013 as foreseen in the Framework Agreement; it will continue to ensure the financing of the on-going programmes as needed; the ESM will have a maximum lending volume of EUR 500 billion, irrespective of the EFSF commitments;

SN 35/11

LIMITEEN

during the phasing in of the paid-in capital, we stand ready to accelerate payments of capital in order to maintain a minimum 15% ratio between paid-in capital and the outstanding amount of ESM issuances.

15.

We agree on the following adjustments to the ESM Treaty to make it more effective: Concerning the involvement of the private sector, we will strictly to adhere to the well established IMF principles and practices. This will be unambiguously reflected in the preamble of the treaty. We clearly reaffirm that the decisions taken on 21 July and 26/27 October concerning Greek debt are unique and exceptional; In order to ensure that the ESM is in the position to take the necessary decisions in all circumstances, voting rules in the ESM will be changed to include an emergency procedure. The mutual agreement rule will be replaced by a qualified majority of 85 % in case the Commission and the ECB conclude that an urgent decision related to financial assistance is needed to safeguard the financial and economic stability of the euro area. The ESM will have the possibility to directly recapitalize banking institutions and to have itself the necessary features of a credit institution.

16.

Euro area Member States stand ready to provide to the IMF additional resources up to [EUR XXX billion], under the form of bilateral loans, to ensure that the IMF has adequate resources to deal with the crisis. The Euro area is looking forward to parallel contributions from the international community.

____________________

SN 35/11

LIMITEEN