Committee on Economic and Monetary Affairs Ordinary meeting
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ECON European Parliament
Follow its sittingsAndrew Bailey
The second part of that though is that, you know, because there are much bigger short term positions, because there is much more leverage, yeah, the markets tend the pricing in the markets tends to move more because position taking gets changed. And we have to be very watchful of how the leverage, you know, can play through, particularly, and I'll come back to this in a moment, with the current situation when we get very big changes in pricing, which in a sense causes big changes in position taking. So that nonbank activity is important. The second one is, as you referred to, Chair, private credit. And the growth of that market, particularly originating from the US, but it's expanded beyond the US now.
It's in Europe more broadly. I'll define that geographically. I think it's important to say, I don't think we should be surprised at the growth of this because in a way, yeah, the longer run shift in the relative balance of bank intermediation and nonbank intermediation is, of course, a response to the reforms we put in place in the bank world post crisis. They were done for good reason, by the way. But we shouldn't be surprised that it's caused some shift in the balance of financial intermediation.
We also, I think, should recognize that if, you know, if this system works by design, you know, the thing for me that distinguishes the banking system is that the liabilities of the banking system are money, and people want to know that they have assured value of their money, nominal value of their money. That's important. In the nonbank world, they don't have assured value. I mean, it is risk taking. It's investment, and that's, of course, a good thing in terms of promoting investment in our economies.
The question, of course, is how will they react when prices, you know, and values move, particularly when they move negatively as they can. And so we'll come back to that in a moment. The other thing I'd say about private credit is it's a relatively opaque world, and it is not yet, of course, because of its relative newness, actually come under stress, and we may be seeing that now. So let me, I'll come back to that at the end in terms of talking about what's going on at the moment. The third one I would pick out is the growth of new forms of money, for payments, particularly stablecoins.
I would distinguish stablecoins from what I would call the sort of Bitcoin crypto world. The Bitcoin crypto world does not have the characteristic of money in my view because it's not assured value. You refer to the overnight news on the use of it. Of course, it may be used as a substitute for money by those who put less value on nominal certainty and more value on doing transactions, which they might otherwise not be able to do, but that's another issue. But I think stablecoins are important.
My view on it is, look, if you want to be money, particularly to perform the payment function of money, then you have to have the, in a sense, the characteristics of money, and assured value is one of them. After all, when we all make payments to each other, we want to know that the unit of currency in my bank account is the same as the unit of currency in your bank account. That's how payments work, it's confidence in the system and trust in the money. And so it's very important, and I'm sure we'll come on to this, as to what are the what characteristics do we need to see and what in a sense framework do we need to see for stablecoins to allow them to fulfill that function with confidence. And, of course, critically also to do that cross border because, of course, you know, 98 or 99% of stablecoins today are denominated in dollars.
That may change, but at the moment, that's the way it is. So in terms of the FSP's agenda, those three things were very prominent and are still very prominent. Now to finish, we've obviously had a very big shock in the last month or so with the conflict breaking out in the Middle East. That has prompted, obviously, much greater market volatility. I mean, we all have to get up in the morning and find out what's going on overnight.
At least we got up yesterday and found the world was still with us, but it obviously is very volatile. Yesterday was a good day, in point, to illustrate that. And so I'll finish by saying two things, key points. One is, what do I worry about most? People often sort of what causes you not to sleep at night.
Fortunately, I'm a pretty good sleeper, actually. But what actually I think we have to be very careful about at the moment is what to, sorry. Sorry. Borrowing an English phrase is what I call the double or the triple whammy. In other words, two or three things happening together.
So, in other words, we've got volatile markets. That's one thing. What if that, a sense, coincides with one of these other things, let's say, private credit, becoming a much bigger problem? What if, you know, the users and the investors in private credits lose confidence in it, and we get a bigger reaction? And what would be the consequences of that?
And from a financial stability point of view, we have to be very focused on that. And I say this double whammy point because I think it's always easy to think about these risks in a very sort of compartmentalized fashion. You know, we've got this one. We have to think what would happen if they came together. Final point I'd make, having been rather doom-laden so far, let me make a point about good news.
We also had a lot of volatility. We've had very big shocks in recent years. We could go back to, obviously, you know, the COVID impact of that, the outbreak of the Ukraine war. We obviously, we've got this new shock. The banking system is resilient.
I mean, is showing itself to be resilient, and that is, of course, essential. And I think it's also important to note that, of course, is why we put the reforms in place after the financial crisis. Now I'm not for a moment, and we can sure come on to this. I never say every one of our reforms in every country and in every jurisdiction is perfect. But, you know, we won't get stable economies, and we won't get growth in our economies without a stable financial system.
I'm afraid financial stability is a core underpinning. Success in the financial stability world is when nothing happens. That's a challenge in itself for financial stability, you know, because, obviously, it's, you know, one can't, well, one can observe it, but one tends not to observe it and take it for granted. But I think we have to be clear that one of the things that we are seeing at the moment is a resilient banking system, and that, of course, is a good thing. I'll stop there, chair, if that's okay.
Aurore Lalucq
Thank you very much. Thank you very much for your introductory remarks. As I said at the beginning, we have quite a few topics to cover because there are crises around the world, and there are many political implications. As you said, the problem with financial stability is not very easy to prevent things from happening in politics. So that's our job here.
But thank you very much for putting this into clear terms. We don't always know what the repercussions will be, but thank you very much for pointing out that the European system is more resilient than many believe, because there have been many serious shocks over the past few years. We've managed to ride the storm. So I'd now like to move on to the Q and A session. I get the impression that we don't have too many speakers.
So rather than 1.5 minutes each, perhaps we could give each speaker two minutes because the topic is very important. We'll start with Markus Weber for the EPP.
Markus Ferber
Mister Bailey, it's a pleasure having you here, and thanks for the insights you are giving us today. But as well, we see annual reports, which I read very carefully. And having read the last one, and that comes from what you said at the end about the financial sector, so let's speak about the nonbank financial intermediation, which is faster growing than the banking activities. And according to your report, it was even twice growing in '24 than the banking sector, and represents now a significant chunk of our global financial assets. So my question would be if you could give us a little bit of elaboration on that.
What does it mean for financial stability? And do you think that you have the right toolkit to interrupt, if necessary, these activities? And the other thing that you spoke before, as we see two different models in the stablecoin reserves world, we, on European level, with MICAR, we ask for bank deposits as the stabilization factor. On the other hand, The United States are moving to a model which is anchored primarily in short-term government securities, so closer to a money market fund structure than the system we have on the European side. So from the financial stability perspective, which model do you think creates more robust circumstances in this world?
And on the other hand, as we have to deal with multi-issuance scenarios, what
does it?
Andrew Bailey
Thank you. Great questions. We should co-opt you onto the financial stability board, actually. Are really, you know, questions that we spend a lot of time on. So let me start, as you say, with the growth of the nonbank financial sector and what does it mean, and what does it mean for our toolkit?
So first of all, as I think I said in my opening remarks, I think it is important to distinguish very clearly between the functions of banks and the functions of nonbanks. However, let me then I when I say when I say what I say next, I'm not gonna contradict myself, but I'll explain why. It would be wrong to think that the two systems are therefore sort of in a sense insulated from each other, bank and nonbank. They're not. What I would say has happened is that I think the connections between the banks and the nonbank banking system and the nonbank system have evolved and changed.
So if you take the, you know, the typically, let's say, the hedge fund leverage type points, what we've seen is a lot of growth in areas like prime brokerage, for instance, which is in other words, banks are still give a primary source of liquidity for the nonbank system, which is sort of natural because the banks, of course, are the primary source of liquidity in the system. And, of course, they rely on central banks to be there as well. And the central bank still is the case, and I think it's right that the central banks, you know, in a sense, the you know, connect to the banking system in terms of providing liquidity. So there is still this sort of umbilical relationship, if you like, there, but it's evolved in the ways that it actually managed. What that means though is that we have to, to your question about what does it mean for financial stability, we have to test, I think, you know, these relation, yeah.
These connections because we have to ask ourselves the question, how could the nonbank system create a risk, a threat to financial stability, and what channels would it come through? Now I'll put my Bank of England hat on for a moment. You know, we certainly in the Bank of England evolved to doing this, for instance, through a different sort of stress test. I always call it a classic bank stress test, is if you like a stock stress test in the sense that you stop the music, take the balance sheet, put a stress, put an come up with an economic stress, put it through that balance sheet, see what happens. Whereas, you know, is the bank still alive?
What we've evolved to with a nonbank world is what I would call a flow stress test. We call it sort of a, you know, a systemic test. And I think that's right because what we're having to say is if we take the system, and that includes the banks, by the way, and put a stress through it, how will these institutions respond to that, and how will it affect these points of connection? So we did that, so the bank mainly we did that for the nonbank hedge fund leverage in the government bond market type things a year before last. We're now running the second one, which is a private credit stress test with stress exercise, systemic wide system wide exercise with the view of having the same thing.
And the way I look at it is we act as it's like a hub and spokes. We act as the hub. We've got 50 odd market participants from private credit, banks, infrastructures. So in the previous one, we did it with hedge funds, banks, infrastructures, and insurance companies. We give them the stress.
We say, you tell us bilaterally how you respond to that. We can add them up, and then we can go back and say, if you all did what you say you're gonna do, it would be okay, or you would blow up the system. I mean, that's the test. And then, what do we do about it? And what we do about it may be regulation.
It may be strengthening the infrastructure.
Come on.
Andrew Bailey
To that, in the second point, I'm make. But I think we're having to evolve new tools. That's the point I would make. Same thing I'd say on this general area about financial stability is, and this is where the FSB is very active, is, you know, again, building on that type of work. Are there areas where we can observe, you know, points where we think, you know, it is too prone to stress.
So one I would observe is that I think the going back to the sort of nonbank activity in government bond markets, a lot of this activity is done at virtually zero initial margining. That's a characteristic of it, which means, of course, that the cost of the trading strategy is very low. You sometimes, you know, you sometimes hear this referred to as the basis trade. And these trades are huge volumes at very low margins. So to make returns, you have to do huge volumes because each bit of it earns a very low margin.
That system works because the margining is very low, but the risk of the problem with that is that when the shock happens, you're postponing the margining decision until you get to the point when the shock happens, and then the margining becomes very procyclical in the sense that it goes up when the shock happens. And I think we have to be very alert. I think this is an unresolved piece of the picture, as it were, too. Is that really robust or not? Is it, you know, it begs all sorts of questions when viewed from the side. On private credit, I'll simply say this.
I think one of the questions around, you know, the opacity of the system. I think there are questions around, do the investors actually, you know, understand what they've got as it were? That's that and how will they respond to it? Stablecoins. You want to.
No. Because, I mean.
Stablecoins. Stablecoins. Stablecoins are important.
Andrew Bailey
Yeah. Two yeah. They are important. Yes. Sorry.
Two questions. On backing assets, you said, well, bank deposits versus short term government debt. I come back to this point about having the characteristics of money. I mean, I think the backing assets have to, in a sense, reinforce this point about, you know, if they're gonna be money, they have to have assured value. And how do you manage that?
You know, if you're gonna have bank deposits, I think you do have the question about, well, you know, do you have to have capital requirements? You limit this, certainly, the scale of bank deposits. Short term government debt, maybe a bit less of an issue with that. Certainly, the UK, our system that we're devising also has quite a high element of central bank reserves in it as well as cash. On multi assurance, I think this is a big issue, because I think that, again, if you know, my core view is, look, these things have to have the characteristic of money.
Now we talked about the assured value. As I understand some of the way the big, at least one of the big, one or two of the big US stablecoins currently operates. If you going back to my point about, you know, euro in my bank account, euro in your bank accounts, you know, I think one of the characteristics of a payment system, if they're gonna be using that, is that we have to have assured value and assured assurance that we can transfer from the stablecoin into a bank account, into fiat money at an assured value. I don't think the current US stablecoins have that characteristic exactly as I understand it because I think in some cases, you do that transaction for a crypto exchange and you don't then have assured value. Now I think if that system is exported to other jurisdictions through multi-issuance, I think we have got to come to the question, are we happy with that?
Because I don't think it's consistent with the definition of money. And I think we've gotta come to the point of having international standards. Sorry about this. I'll stop.
Aurore Lalucq
There. No. It was very important. This is what I was saying. Thank you.
Because it was very important. For the SND, Ero Hidalgooma.
Eero Heinäluoma
Thank you. And may I also welcome you, Mr. Bailey, to our committee. And in these turbulent times of the whole world, and also in our economies, it's really good to have someone who is coming from an organization focusing on stability. Really appreciate your presentation also.
I have three questions in my mind. First, I would like to continue the discussion on stablecoins. And here, especially the jointly issued by the European Union and third country entities, which is something which we have been discussing during recent months and years quite often. Now we have the MIP package on the table, and it seems that there could be an opportunity to create some clarity and legal certainty. But from an FSB perspective, how do you assess the risks, vulnerabilities a little bit more, what you have said, what we are running today in an absence of clear regulatory framework?
And how do you see how urgent it is that we could regulate this third country entities and the issued stable bonds? The second question, I would also like to continue the discussion on the private credit markets. I would hope to hear you a little bit elaborate more on the impact of risks in this market, which are perhaps materializing now. And then what's your evaluation of what the European Union regulatory preparedness is in the case something goes really wrong, as it is now this regulatory landscape. And then my third question is coming from the securitization discussion, which is also on the table of this committee now.
And I suppose there is some kind of overall attitude that we have to accept a little bit more risk concerning the rules. But then the big question is how long will we go? And what are your comments concerning the securitization discussion? What is going on here and in Brazil?
Andrew Bailey
Thank you. Yes. Great questions. Well, a little bit more on stablecoins. I think you're absolutely right to focus on the question of joint issuance.
So in other words, multi-current, multi-country issuance. And, of course, in a way, if stablecoins are gonna fulfill one of their functions and if they are gonna have a role, say, in cross border payments, by the way, the cross border payments, I should say, is another of the FSB's general priorities because it, you know, it is a I sometimes describe land that time forgot in the sense that they're quite slow, quite expensive, and, you know, inefficient and need improvement. Now I don't think stablecoins will necessarily be the main answer to that. But if they are to have a role, then it clearly, as you rightly say, begs the question about multi-country issuance. And I do think that it's important that, yeah, we have and this is where the FSB, I think, does have an important role to play that we do have a very clear understanding of the vulnerabilities.
Just going back to my answer to mister Fobbe's question, I don't think you can have a system where the rules of, if you like, a transfer and redemption are different for a coin in different jurisdictions. Because for obvious reasons, if there was any loss of confidence in that coin, you know, you would get investors or holders would actually be sort of in a sense choosing which jurisdiction to come to, to redeem. And I don't think that's sustainable or stable. So I think we do have to have some international standards around this question. Private credits.
Let me just, yes. Let me take the sort of discussion on a bit further on this one. We've obviously had some, you know, some cases of, you know, happen in the US, particularly on where private credit has, in a sense, you know, gone wrong and we've got defaults happening. I think the question is this. It does get said to me quite often.
Well, don't worry. They're idiosyncratic. You know, they are often said, well, they're fraud, and it's got sort of particular characteristics of the case in point, so let's not generalize from that. And my issue, okay. Well, I can understand why you say that, but the but is pretty important.
And this goes back slowly to my experience in the financial crisis. That there is a risk, that when investors start to observe more of these incidents, it begs a bigger question about their confidence in the system as a whole. It's what I call a version of the lemon problem in economics. So the lemons problem, you know, is when you go to buy a used car, you go to the parking, you know, the car lot. The person selling you the car knows a lot more.
There's a lemon. You know, there's a car that is not what it's claimed to be. The person who's selling the car knows a lot more about where that lemon might be than you, as the buyer, do. How do you solve that problem? This is a sort of an adaptation of the lemons problem to say, if you start to observe more lemons in the sense of more, you know, problems in the private credits world, but you don't know where, you know, the rest of them may be, do you start to lose confidence in the whole thing?
And I think that's what happened with, yeah. That's one of the things that happened with subprime credit in the financial crisis, and it caused a much bigger problem. And it meant that the subprime problem was worse than we sort of imagined it could be if that dynamic had not happened. And I think now I'm not saying this will happen this time because it depends on how investors react, what they think they're getting. But we have to be very sensé, I think, you know, in terms of stress testing, these are the sorts of things we have to look for.
There is, by the way, a variance to the lemons problem, which may be a very British thing to say. Call the sausage problem. The sausage problem is, you know, we don't all eat sausage. People eat sausages, and then you tell them what's in them. And then they say, yeah.
I didn't know that was in it. On securitization, I mean, again, you know, obviously, quite a history to this one. I mean, I think the lessons we learned in the past were it's not that securitization is a bad idea. It's not that it's a bad thing. In many ways, it's a way of pooling risk.
But is the thing robust? You know, is the risk transfer investors understand what they're getting? Is the rating system robust? You know? Because it won't, you know, we observed in the past that it wasn't.
We observed that it wasn't everything that was made out to be. So in my view, and I'd say it's not for me to let you on what you should do here, but, I think it really does have to be robustly tested, but there is a role for it, I think.
Auke Zijlstra
Thank you, madam chair. If you don't mind, I will continue in Dutch.
Bailey. Chair,
Mister Bailey, I've been reading this report, but there were a couple of things missing. You mentioned stablecoins, etcetera. I know you've got that under control. You've analyzed that. That was also reflected in your answers.
However, in the FSB annual report from 2025, you mentioned the impact of technological development, cube assets, stable coins. But what about the digital euro, the central bank digital currency? You know that the EU, the ECB, are trying to introduce it swiftly. What about the impact on financial stability and the banks? The ECB tells us that digital euro will cost 20, will amount to €24,000,000,000, €26,000,000,000. Savings banks don't have the capital requirements necessary.
If half of savers were to use the digital euro. So, could you tell us some more about this scenario? And then, what about cooperation with the Islamic Financial Services Board? We've got more and more Sharia banks in Europe. The FSB and national authorities have pointed out the risks here, and how this is tied in with the financing of terrorism.
They're very complex structures to generate profit, different types of transactions, and it's very difficult to trace all these transactions. And there's not really a due diligence requirement within the system. What are your thoughts on these kinds of banks which are active in social aid, for example? They're not reflected in your report. So I wanted to hear your thoughts on that, please.
Any comments? What does the situation look like, and the effects on the banking system?
Andrew Bailey
Thank you. Let me start, as you say, on the question of digital payments. I let me step back to start with to the quest not to the question of digital technology. I think the issue that we're all trying to solve here is how to incorporate the benefits of digital technology into the payment system. What do I mean by that?
I think digital technology has clear potential to improve the quality of payment systems. Give you two examples. I think it has a clearer potential to reduce fraud because it, you know, has an ability to be used more systematically and more, you know, cleverly to detect fraud, and that's a good thing, obviously. The second one, and this is particularly a UK issue. I mean, one of the consistent complaints about, for instance, from small firms in The UK is what's called late payments where, you know, they provide goods and services to other people and get paid, you know, very late for it, and that affects their financial position.
Now I'm not saying digital payments would solve that on its own, but the fact that it increases the smoke scope for so called smart contracts, which might be, you know, might be better able to link the delivery of a good or a service to the payment, it has seems to me it has potential. So I say all of that because I think we want to harness the benefits of digital technology into the payment system that, you know, if we don't, then I think we're, you know, we're standing in the face of the benefits of technological change. The question then is, how do we do it? Now I, you know, I'm not gonna come here and say how the EU should do it. It's really I know you spend a lot of time.
I follow it very closely. I've been following it very closely because we're considering, obviously, ourselves in The UK and other countries that are considering it. If I overs if I simplified it a bit, I think you have a choice. You can obviously introduce a new form of central bank money, a digital, as you say, digital euro. You can introduce tokenized deposits, which is essentially taking commercial bank money and digitalizing it.
And stablecoins is obviously the third way of doing it, which can be issued by nonbanks or could be issued by banks as well. And you can choose, of course, that, you know, you could have some combination or all of them if you wish. I can look. Put my Bank of England hat on for a moment. We are looking at a, you know, a digital central bank currency.
But the question I come back to is, I think we have to ask the question, why do we need to issue a new form of central bank money to solve the problem of how do we get digital technology into the payment system? I think that's an important question to answer. We have put it to the banks in The UK. Look. I think you really need to, you know, we need to work with you to, you know, to work out the scope for doing tokenized deposits, and we are doing that work with the banks in The UK.
And so I'm not gonna come and preach as to how this issue should be dealt with in the EU, but we are doing that. And I think that's important, and we've talked about several coins already. So probably not much more to say on that front. I, you know, I think it would be most natural to do to see this develop free tokenized deposits because most of the stock of money is held in the banking system. And, you know, that's a system that, you know, we've sort of developed it, made it work.
Most of the payment systems these days, you know, originate in commercial bank money. So that's, you know, that's the approach we've done. But I say this because I think, you know, that's the sort of the framework to think about it. You asked about the impact on financial stability. Well, of course, they all need to be robust.
I mean, that's clear. On your second question, I really don't have anything specific to say about Islamic banking. We have Islamic banks in The UK as well. What I think it's a general point, which is, of course, and, Che, you referred to, of course, the news overnight about using Bitcoin to pay for, you know, for ships going through the strait. And the rather explicit reporting that it was being designed that way to avoid sanctions.
I mean, I think we have to have, you know, robust anti money laundering and anti financial crime controls in place. Any form of payment has to have those attached to it. We at the FSP work closely with the Financial Action Task Force, FATF. They are, you know, very active in this field. They are very active on the technology front, and I am very keen that we all work together closely with them because, yeah, we need to make these things work.
But, again, we need to make sure that, you know, the ways of, in a sense, designing the controls for financial crime evolve with the technology. Thank you.
Gaetano Pedulla'
Thank you, chair. I'll speak in Italian. President Bely, thank you.
Thank you very much for this exchange of views. Now you have mentioned various issues and concerns in the private credit sector and also in the bond, the repo market, I think. So it's an unstable situation at the moment. Things are difficult, but I would like to know what your proposals are. You said that we need new tools or instruments.
So I would like to know what you propose, what you expect from this committee, and from the European Parliament. More austerity, more recommendations to the financial system, an increase in stress testing. I mean, I'm sure you've got ideas as to how we should deal with these difficult situations. And then two further questions, if I may. One which was recalled by Mrs.
Lalouk on the issue of ships that are being allowed through the Straits of Hormuz on the payment of crypto or stablecoins. Now the very nature of these cryptocurrencies is that they can't be supervised. Now would you say they're more of a problem for the euro or for the dollar? Is this something that we should be more concerned about, or is it someone else you should be worrying about? And then a final question, if I may, seeing as I have a little bit of time left.
In the FSB report, there's a great deal of emphasis placed on the advantages of the energy transition. So my question, this pressure to delay things, this idea of reforming or abolishing the ETS, for example, the emissions trading scheme. I mean, is this something that you're concerned about? Is this something that worries you? Is this something that could have an impact on stability, also financial, in Europe?
Thank you very much.
Andrew Bailey
Thank you. Well, let's come back to the proposals. I mean, what could we do and what should we do in response on both private credit and repo? I think, actually, this is the sort of common ground here, as I said, and I think the two things I would come back to. Let me start on the question of disclosure and transparency.
I think in both cases, we have, you know, a task force in the financial stability board on this very question. I think there is a certain there's quite a bit of catching up to do in terms of the transparency of these markets and these activities, and data because, of course, that's absolutely key to surveillance of issues. So it's not regulation in the sense of limiting activity. It's regulation in the sense of saying, I think we've gotta, yeah. We're gonna have to work on the disclosure and data standards here because I don't think they're yet where we need them to be.
That's the first thing. Second thing is stress testing. But as I was saying earlier, and I think in response to mister Ferber's question, it's not sort of classic stress testing of the sort of, you know, bank type. It's a different sort of test, but I think we need that test. But I think you can only, of course you can only move systematically to stress testing once you've addressed the data and disclosure question because you've got to have the building blocks, as it were, to do it.
As I said, we've done things in The UK. We've actually done those things as the financial stability regulator outside our sort of micro prudential, regulatory responsibilities. We don't actually regulate hedge funds in that sense. But we were able to, in a sense, actually, in both cases, both with the one we did on sort of hedge funds and leveraged, nonbanking exposure year before last and the one we're doing this year on private credit, we put it to the different parts of the financial system in those markets. Would you come into this test voluntarily?
And they actually have come in very voluntarily, and that's very good, and I thank them for that. But I think we've got a lot of work to do to move towards, you know, more systematic testing of that nature. So those are areas I mentioned also earlier, the question of margining particularly. That was an issue that came out of our first system wide stress test as well, and it's a so it's an issue that we've got to come back to. On crypto, I made the distinction earlier between stablecoins, which are, you know, in a sense, you know, designed to be money with assured value, and Bitcoin type crypto, which doesn't have assured value.
Now it's, and I think I made this point earlier. It's, of course, interesting is the overnight news as the chair referred to that I think the Iranians are clearly referring to this to the second of those, to the Bitcoin type crypto. They and that, of course, what lies behind that is the desire to obscure the transaction, and therefore, assured value is not the priority for people who are using the money. I put it now in inverted commas because it says it doesn't, to me, satisfy the basic tenets of money. But, of course, their in a sense, their, you know, their priorities are different.
They're prepared to accept the risk on the value of the money for the greater confidence of actually doing the transaction. But, you know, as we were saying to the last question, I mean, this raises big questions obviously about money laundering and about controls. And I mean, I you know, so I've not been involved in what's been announced, but it does raise issues, obviously. You're right. So we have to get to that one.
On the question of energy transition, so let me be clear. I, you know, the FSB's role is very much risks to financial stability. We have done a lot of work over the years on the risks of climate change to financial stability, and that remains an issue. But it has to be focused on financial stability. I think there are broader macroeconomic consequences, so I'm not wearing my FSB hat now.
There are broader macroeconomic consequences of what we're seeing. I think it is certainly sensible that there is a debate around the economics of energy supply because I think one of the lessons we can take from the last month is that probably the economics when you've got a supply of renewable energy, then, you know, I think the events of the last month would probably, you know, change the calculus somewhat in favor of, you know, the economics of renewable energy. So it's not just a, I mean, it's a very good environmental argument. Don't get me wrong, but there is also an economic argument here. Because it's certainly the case for the UK that we are still reliant on gas quite often, but less than we used to be as the marginal source of energy, but the share of renewables has grown.
And I know the UK government's very focused on this question as to, yeah, what do we learn from the events we're going for at the moment, is what's the right thing to do. So I think it's important. Not, so I'm not speaking as chair of the FSB now. It's important not just to have that debate in the environmental context, important though that is, but have it actually in the economic context as well.
Aurore Lalucq
Thank you. Second round of questions. We have ten minutes left. So I will say that there is one minute and a half for the question, and let's say 3 minutes for the answer. Okay.
So I would start with Fernando Navarrete for the EPP.
Fernando Navarrete Rojas
Thank you, chair. Thank you, mister Bailey, for coming to this committee. I had originally three questions. Let me try, in one minute. First one is highly political.
So, how is international cooperation really working in the domain of financial stability? Are we still better off than in the trade domain? And please, if you can distinguish what happens at the surveillance level that I've seen from your report, it's still working okay globally. But what about political action and the implementation of measures? First one.
Second one, it's on what you mentioned about that to a large extent, the growth of NBFI was by design, okay, the interconnectedness. So don't you think we've maybe gone too far in that? Because, I mean, now we've seen the stress test is real. It's not just a theoretical thing with private credit. Don't you think that not allowing banks to fund longer term has been a problem that has fueled too much private credit with the cost of reduction of lending standards, which I think is the key for financial stability or at least one of the keys.
And the third one is stablecoins again. And what is money? Specifically, I'm talking about settling financial transactions. So no for making transfer peer to peer, but settlement asset for financial transaction. Don't you think that the core element for such an instrument to be a settlement asset is to have access to central bank liquidity because it's either issued by the central bank or indirectly has access to central bank liquidity.
For me, it's hard to find out money that functions as money without that characteristic.
But please.
Tell me.
Andrew Bailey
So that's 20 each, I think. How is international cooperation in the finance diversity world? Look. It's very much continuing. The FSB is very much functioning.
I put a lot of emphasis. We have to preserve multilateral engagement. It's absolutely critical. You know, we're in more of a multipolar world now. It's more challenging, but we have to do it.
You're right to point to the fact that it's probably more effective in surveillance. I think on the implementation front and particularly rules, I think one of the questions we've got a review going on at the moment, which the South African g twenty presidency asked us to do, about implementation. I think where I would point there is that as we have the FSB agenda has moved to reflect this discussion increasingly into the nonbank environment. I think financial stability doesn't always figure so prominently in the domestic objectives of the non-bank regulatory world. And I think we do have to sort of, in a sense, make sure we've got a consensus that, yep, we will be appropriate.
You know, we will not, in a sense, extend our remit where it doesn't need to go, but where we do see financial stability risks, those have to be tackled. Have we gone too far on non-bank finance versus the banking system? Well, as I said earlier, I'm gonna be very robust again and say that we are seeing the benefits of the resilience of the banking system at the moment. But I was saying this is true in the UK debate. Does it mean every one of our rules and every one of our regulations is perfectly designed?
No. I don't think we should ever say that because that would be unwise, frankly, because the world moves on if for no other reason. Does it mean that we need to reconsider our lending standards? Well, I think we need to look, yeah. As we are doing it, we're all doing it in various ways.
I think, again, we need to keep reviewing those, but I've just come back to this point that it is at times like the ones we're experiencing at the moment that we most value the resilience of the banking system, and we most value the risk, the fact that it isn't causing us a problem. On the point about stablecoins, let me again speak as governor of the Bank of England for a moment. We are actually designing, you may have seen, we've put a consultation paper out, and we do envisage that systemically important stablecoins will have access to accounts at the Bank of England. And they will, you know, they will hold parts of their backing assets in Central Bank reserves, and they will have access to have a facility at the Bank of England should they need liquidity, which goes beyond that. Now why do we take that view?
We take that view because I think it's really what you said. If they're going to be money, they must have the characteristics of money. I talked about a short value earlier. But what goes with that, of course, is that they must have all the characteristics of money. And one of the characteristics of money is access to the central bank.
So I do think that. Now I understand that not other yeah. A lot of other central banks don't take that view. So I'm not going to, you know, go beyond what we've done at the Bank of England, but that is why we've approached the question in that way. Thanks.
Jonás Fernández
Thank you so much, sir. Welcome, Mr. Bellis. This is an honor to have this time to talk with you. I will be very short. I have only one question related to the money market funds, more concretely on cost and net value money market funds and low volatility money market funds.
You were talking about quasi-money or quasi-deposits. Now it's clear that this kind of projects are similar to deposits, and I don't know if we have the perfect framework, yeah, to regulate them. There is some reference in the annual report on this matter, and I would like to add more about it.
Andrew Bailey
Well, yeah, we learned the hard way through the financial crisis when people advertise constant net asset value money market funds, which turned out not to be constant net asset value money market funds. If you market something as a constant value, it has to have the characteristics of a constant value. And we have to keep testing that to say, do these things have that characteristic? And it's a pretty high bar, frankly, to get over that because you have to say, will they preserve that characteristic during stress? And, of course, in many ways, it's exactly the same issue for stablecoins.
Aurore Lalucq
K. Any request for the floor? No? Well,
Thank you very much indeed for this exchange of views. I think, as Eira was saying, it's great to have a discussion about stable, rational things in this current world. So thank you very much. It's good to be able to look at this on a regular basis, because things are moving very quickly. Thank you very much for responding to all of our questions on stablecoin, on private credit, on finance, on cooperation with the United States, cryptocurrencies, and so forth.
I think you were very clear in your responses, so thank you very much. And I look forward to the next time we can host you here in the Econ Committee.
Thank you. You.
Aurore Lalucq
Resuming our work in the Econ Committee, we just discussed financial stability, an important matter in the current context. Now we have the pleasure of welcoming Commissioner Aldous Dombrovsky for this economic dialogue. This is happening two years after the intrainted force of the economic government's framework, and it's important to take stock of the implementation of the first budgetary and structural plans of the member states. But today, I believe we've got different concerns. We've got a new conflict in the Middle East, which is having an impact on our economies, on oil prices and growth, and our member states' budgetary capacities.
We all read the Financial Times this morning. They mentioned crypto being used for the Strait of Ulmaz. And we want to hear about stagflation, about revisions of growth predictions, and the member states' budgetary capacities. So I believe this is a very timely moment to have this economic dialogue. Dear commissioner, I'll hand over to you in just a second.
I think that we all need a lot of information, so we're here to listen to you. Take the floor, please.
Valdis Dombrovskis
Yes. Thank you, madam chair, honorable members. Good morning, everyone, and it's good to return to this house for today's exchange. Well, it comes at a critical moment, as madam Geraldine said, when the resilience of the European economy is once again being tested. The war in the Middle East has triggered one of the largest supply chain disruptions in the history of the global energy market.
Attacks on the Strait of Hormuz and the targeting of energy infrastructure has resulted in a major surge in energy prices, and shockwaves from these disruptions are reverberating across the global economy. Of course, the full impact will depend on the duration, scope, and intensity of the conflict. For now, the recently announced two weeks ceasefire brings some much needed deescalation. This is reflected also in energy markets, with Brent crude now trading below $100 per barrel. But the longer-term outlook still remains clouded by a profound uncertainty.
The European economy thus remains at the risk of a stagflationary shock, as you just mentioned. This is to say a situation where slower growth coincides with higher inflation. The analysis undertaken by the Commission found that the EU growth this year could be around 0.2 to 0.4 percentage points lower than projected in the autumn economic forecast under a short-lived disruption scenario. And inflation, in this case, could be up to 1 percentage point higher. If supply disruptions prove more substantial and longer-lasting, the negative consequences for growth would be even higher.
So, the growth could be 0.4 to 0.6 percentage points lower, and inflation up to 1.1% to 1.5% higher in both 2026 and 2027. Moreover, other channels could further amplify the negative economic impact I just outlined. So it's worth noting that the figures are mentioning this is not an economic forecast. This is a scenario analysis. We'll be coming with our forecast mid-May.
And, obviously, also there, we'll have to use some underlying assumptions. So in this context, at the meeting of the European Council last month, EU leaders called on the Commission to present a toolbox of targeted temporary measures to address higher energy prices. The commission will present proposals to mandate lower tax rates on electricity to make sure that electricity is taxed less than fossil fuels, improves the productivity of grid infrastructure, and modernize the emissions trading system, including by updating the benchmarks for free allocations and increasing the firepower of the market stability reserve to reduce price volatility. In this context, it's important to recall that beyond managing the immediate energy shocks, a key priority is to structurally transition to an electrified economy, including by reducing the relative price of electricity compared to fossil fuels, and by reinforcing grids. This is the only real solution to permanently protect the European economy from volatility of fossil fuel prices and supply conditions.
Commission also works closely with member states to design policy measures at national level to mitigate the impact of higher energy prices. And here, it's important to note that recent developments in energy prices and in the Middle East put additional stress on public finances. This stem not only from deterioration of the economic outlook, but also from cost associated with member states' policy responses. And it's crucial to keep in mind that our room for maneuver here is more limited than before previous shocks, given both higher deficit and debt levels, higher interest rate environment, and also an urgent need for additional defense spending. So national policy responses to protect our economy and people must align with certain key principles.
So first, the automatic stabilizers would need to be allowed to operate to cushion the impacts on citizens and companies. And in fact, our new fiscal framework has a number of built-in features that have the effect of cushioning this negative impact on the economy. First, as a framework is centered on the next expenditure benchmark, revenue shortfalls resulting from economic slowdown do not need to be compensated for. Second, increases in interest spending are not counted in the expenditure benchmark, net expenditure benchmark. And, thirdly, the cyclical component of unemployment benefit spending is excluded from that benchmark.
So, therefore, in a sense, that already provides for some fiscal leeway even before member states take discretionary fiscal measures. Then if additional support is envisaged, it should be temporary and targeted. So, have a clear end date, not increase the aggregate demand for oil and gas at the time when savings are needed. So, when designing policy measures, Member States should follow these principles and keep net expenditure growth within the limits recommended by the Council and the flexibilities provided within that. There, backward, we have been assessing also our policy response to the previous energy crisis of 2022.
Unfortunately, we have to note that policy responses of Member States were much less temporary and much less targeted than they normally should have been, correspondingly also coming with substantially higher fiscal costs. And that's what we are now, therefore emphasizing a lot. Turning briefly to the implementation of our economic governance framework. So in December, I presented you with the main elements of the European semester autumn package, including the commission's opinions on the draft budgetary plans for 2026 for Euro member states. So the only update since is that we have received the draft budgetary plan from Belgium and assessed it as compliant with our fiscal rules.
And overall, we see that our fiscal rules are working well. They are delivering on their promise to help strike the right balance between accommodating higher expenditure for new and urgent priorities, while preserving debt sustainability. And looking ahead, we'll provide an updated assessment of budgetary developments of all member states as part of the 2026 European Semester spring package, which we currently are envisaging for early June. So I will stop here and look forward to your questions and comments. Thank you.
Aurore Lalucq
Thank you, Somer. So much, dear Commissioner. Q and A session now. One minute and a half for the questions, three minutes for the answers. There are a lot of people on my list, so you will have to respect your allocation of time.
And I will start with Ludac Nidarmeyer for APP.
Luděk Niedermayer
Thank you, madam chair, and thanks, commissioner, for quite clear description of the situation. Just to have a very short question to save time, let me ask you, how do you see the different impacts on different member states? Because last year, we saw substantial heterogeneity in the economic growth. Some countries were doing pretty well. I guess around 10, 12 countries reached the growth above 2%, but quite a few below 1%.
And one can assume that also the impact of potentially higher oil and gas prices will not be spread equally. Some countries rely on supply that is now disrupted. As you mentioned, some of them have higher exposure to fossil fuels. So how big a variation of the impacts can we would likely see if the situation persists.
Valdis Dombrovskis
Yes. Thank you for this question. So, as a scenario analysis or simulations I was outlining, those are done at an aggregate level. So we do not have those scenario analyses member state by member state. But as I was mentioning, next month, we'll be presenting the autumn economic forecast where we will have exactly this member state by member state assessment as well.
So we'll be able to seize a much more detailed picture, and in a sense also that may help guide our thinking about the necessary policy response as well.
Claire Fita
Thank you, madam chair, and thank you, commissioner, for this very valuable information that you've given us. Obviously, this is something that we're all concerned about. But I wanted to go back to what you mentioned as a priority, which I share, this transition towards decarbonization. So moving away from our dependence on fossil fuels, which makes us dependent on crises such as the one we're living through. Now as a commissioner, do you think that has consequences on the resources we use for decarbonization, but also the timetable?
I mean, should we speed things up? So, could you suggest something there? And then a second question on the reactions of the different member states to tackle this crisis. What's your assessment of the various proposals that are on the table? I mean, you talked about the principles that the commission raises for the actions of each member state.
So what will be your initial assessment of the various proposals that have been made and their effectiveness for consumers and also for member states' budgets? Thank you very much.
Valdis Dombrovskis
Well, yes. So as regards the decarbonization, it's clear that we need to stay the course. And indeed, the way to end our dependence on volatility of fossil fuel prices is to end our dependence on fossil fuels. And therefore, I was also emphasizing one feature which is needed when designing policy measures, a part of them being temporarily targeted, but also the ones which do not unduly increase demand for fossil fuels, as unfortunately we saw with measures taken in some member states in a previous energy crisis. So, and in a sense, there's already lots of development policy decisions, lots of investment going in this decarbonization, and it's important that we follow it all properly.
Well, assessment of member states' proposals. At this stage, we have not been making formal assessments of member states' proposals, but we are following them closely, and we are in engagement and in discussions with member states. And there, well, our assessment will depend to a large extent on which extent those measures are in line with the principles I just outlined. And there, it's important that we learn lessons from a previous crisis where many of those measures were less temporary and less targeted than they should have been. And so we are very much emphasizing this focus.
And given the overall more limited fiscal space, indeed, it's important that the measures are taken. They are effective measures focused on the most affected households or most vulnerable households and most affected companies and sectors in the economy.
Mireia Borrás Pabón
Very much, Madam Chair. I'll be speaking Spanish. Thank you very much, Commissioner. As you know, the European economy has been growing at a rate of less than 1%, with stagnated growth and private investment, which has not recovered. We have weak growth, constant inflation, and clear loss of competitiveness.
And if you compare this with the United States or Asia, things are very different. Europe is being left behind. Now given that, my question is what specific measures does the commission plan to take to reactivate investment and productivity without continuing to penalize producers with more costs, more regulation, and more uncertainty? Second question, regulatory simplification, yes, of course, we are seeing many omnibus packages, but the reality on the ground is very different. We could see 4% of companies and SMEs turnover that could be linked to complying with regulations.
When are we going to see a proper, measurable, and effective reduction in regulation, which will lead to a reduction in costs for SMEs? And thirdly, on the recovery mechanism, only 30% of our funds are going to the private sector, but 50% of companies say that they haven't seen any impact of these funds on their business. Do you think that this is insufficient given the fact that this is happening, will this be rectified in order to have a better impact on the real economy? Thank you.
Valdis Dombrovskis
Yes. Thank you for those questions. So that brings us into, I would say, a broader debate. But indeed, when this European Commission took a mandate, we set out two overarching priorities, which were competitiveness of the European economy and security and defense. And if we look now, so well over a year later, we see that if anything, those two priorities have become more urgent.
Talking about competitiveness, that's why one of the first initiatives we put forward in January was Competitiveness Compass, where we outline all the important factors affecting the competitiveness of the European economy and ways to address them. And it's important that we are pursuing now all the different initiatives and elements we are putting forward in a context of Competitors Compass, because the challenge is obviously there and we need to react to strengthen our competitiveness, to strengthen our productivity growth, where indeed we are lagging behind other major economies. Simplification is an important part of this agenda. And in terms of measurable relief for companies, we have set ambitious targets for our simplification agenda. So overall, reduction of administrative burden by 25%, and by 35% for SMEs.
So if we look on quantitative terms, it should mean a reduction of administrative burden, meaning in recurring annual administrative costs by 37,500,000,000. So the proposals we have put forward in a first year, so last year, amount or would generate some savings of around €15,000,000,000 annually if they are legislated without losing the level of ambition as regard to simplification. You mentioned that businesses are not yet feeling the impact on the ground, which to a large extent can be true. Because so far, only three out of 10 omnibus packages or omnibus proposals actually help finalize the legislative process. Other seven are still in different stages in the legislative process, so it's important to move forward swiftly with approval of those omnibuses.
And the more we advance this work, the more the impact will be felt on the ground. Then as regards RF, well, in terms of RF, there are several ways the private sector is benefiting from the RF. First, they are dedicated programs to support entrepreneurship, support financing for companies, including SMEs. Second, well, public sector, sorry, private sector is the one which is winning tenders for implementing different projects where maybe it's a, well, it says a beneficiary of sorts of projects maybe in a private or in a public sector, but it's still public sector, perhaps private sector doing the works. And also, the reforms linked with the RRF are linked also with improving the business environment and facilitating investments.
So there are multiple channels how RF is benefiting the private sector. Obviously, looking forward in a context of next month's annual financial fund. It's important that we learn lessons from the implementation of our RF and, in a sense, pursue an approach which can deliver positive results in the context of both the Competition Fund and the funds with the national envelopes. Thank you.
Anouk Van Brug
Thank you, Chair, and thank you, Commissioner, for being here. I fully agree that reducing national debt levels and ensuring strict compliance with the Stability and Growth Pact is essential. And this is not only a matter of sound economic governance, but it is also a precondition for strengthening the international role of the euro. And at the same time, current geopolitical and energy developments are exposing vulnerabilities in the global reliance on the US dollar. We see countries, particularly in the Middle East, increasingly exploring diversification, and this creates a strategic window of opportunity for us.
The euro has the potential to emerge as a leading global reserve currency, but this will not happen automatically. So, dear commissioner, I would like to ask you what concrete steps will the commission take to actively strengthen the international role of the euro, particularly in key regions such as the Middle East? Thank you very much.
Valdis Dombrovskis
Yes. Thank you for this question. And indeed, we are working now on strengthening the international role of the euro, and also the EU leaders gave a mandate in June to the Council, Commission, and European Central Bank to take a work forward to reinforce the international role of the euro. So what concretely are we proposing or what are the work directions? Well, the starting point is that the EU needs an updated strategy to strengthen the international role of the euro in a context of strategic competition, regional conflicts, trade tensions, diverging political preferences.
So we should, therefore, promote a wider use of the euro abroad and, at the same time, reinforce the resilience of our economic, financial and payment system to support derisking and strategic autonomy. So to move forward, first, we need to deliver on current files, including the savings and investments union and on our competitiveness agenda, because it is a strong European economy, which provides us a basis for a strong euro. We need to strengthen ongoing efforts to enhance the efficiency and resilience of the EU payment system, including speeding up the work on digital euro and also to decrease dependence on non-EU operators, develop a European strategy for digital finance to fully benefit from innovation while minimizing risks, promote the use of euro with our companies and international partners. And there, we start sounding them out on the obstacles they perceive of using the euro in invoicing and other transactions, and also to work with European financial institutions in a sense to promote the use of the euro in their operations, and, well, certain further work streams. So this strengthening of international or also euro is firmly on our agenda.
Aurore Lalucq
Thank you. Thank you. For the left, Catarina Martins. Thank you, manager. I'll speak in Portuguese.
Catarina Martins
Commissioner,
You mentioned various future scenarios, but I want to talk about the cost of living emergency at the moment. I mean, I come from Portugal, and as you know, we suffered major storms. There are parts of the country that don't have electricity, and the cost of living reached a record this week. A basket of essential goods is more expensive than it's ever been this week in Portugal. So I wanted to ask you about immediate measures to reduce prices.
Now I have no doubt that we need to move forward with the energy transition. If we'd already done that, then we'd be in a better position than we are now. But currently, there are people who have to fill up their cars with petrol. They have no alternative. Now the Portuguese government is part of a group of governments that has asked for measures to be taken, but the measures that they've requested won't have immediate effects, so they won't solve the problem.
In addition, many fossil fuel companies take their profits outside the country, so windfall profit tax won't work. So now we have people who are struggling to get to the end of the month. I mean, it seems as though people who, for example, are earning €1,000 a month in Portugal are not seen as vulnerable in your calculations, but they're struggling. So there are various measures that have been taken elsewhere, which are pretty aggressive. VAT on fuel was cut in Spain, for example, and they've taken other measures.
Now in Portugal, we're being told, well, the commission doesn't want to see that happen. The speaker is interrupted and asked to move to the question. So the question is, is the commission going to give Portugal a green light to lower prices, as is the case in Spain? Or are you going to continue to insist that balancing the books is more important than people's living standards? Thank you.
Valdis Dombrovskis
Well, indeed, as I was mentioning also in introductory remarks, the first impact or the first channel through which the energy crisis or supply disruptions are felt is through energy and not least fuel prices. And then they are spreading into a broader economy. So, and obviously, every time we experience a period of elevated inflation, it does have a negative effect on the purchasing power. In a sense, if we look ever since the global economic crisis, the only period when, say, overall purchasing power was falling in the EU was this period of elevated inflation in the context of the previous energy prices. So it's important indeed that we address and also bring down inflation as soon as possible.
Therefore, member states do have a possibility to take measures, including reduction of the taxation, and a number of member states have taken those measures. What we are insisting, as I was saying, is that to the extent possible those measures need to be temporary and targeted to have higher efficiency, also to address the fiscal impact. Well, as regards specifically Portugal, Portugal overall has a strong fiscal position, also with last year being in fiscal surplus. So there may be certain room for maneuver, and the principles we are applying for this policy response are the same in all member states. So, from that point of view, there is no difference.
Thank.
Siegbert Frank Droese
You, chair. Commissioner, thank you for coming here. You said an awful lot, but there wasn't a lot of substance in there. Apologies if I have to say that. Your portfolio is one of implementation and simplification.
At the same time, businesses in Europe are seeing more regulation, reporting requirements, and meddling. How can you square this with your mission? The ESN believes things haven't improved when it comes to alleviating the administrative burden. Then the war of aggression on Iran and its effects, you mentioned. But with the new economic policies, we're seeing a change when it comes to the competencies in Europe.
How are you going to help member states deal with the energy crisis? Member states are being told that their national measures would probably violate the treaties or the deadlines. That's not helpful. The commission wanted to set out a package to deal with the surge in energy prices, but this seems to be taking an awfully long time. Whether we're paying $2.50 or $1.70 for diesel makes a huge difference, and it's having an impact on businesses and people.
It's a huge burden for people in my country, I can tell you. Do you have any news on that front?
Valdis Dombrovskis
Yes. Thank you for this question. So first, on simplification and reduction of bureaucracy. We touched upon this question before. So we continue to deliver proposals for simplification.
We had 10 omnibus packages last year, commissions work program for, say, three omnibus packages this year. And more than half of all the proposals in this year's commission's work program have what's called a strong simplification dimension, meaning that they need to bring net savings in terms of administrative costs. And we also have called one in, one out principle in terms of, well, bringing forward new legislation, because omnibus is indeed backward looking. I would say the feedback we are getting from the business community, including Business Europe, other institutions, organizations, is overall positive on our simplification agenda. Obviously, there are expectations that we stay the course, that we can deliver more, and we are working on this.
But as I was mentioning before, for impact to be felt on the ground, it's important to conclude the legislative process so that then those measures or simplification can be directly applied by companies. And so far, only three out of 10 omnibus packages have been legislated. So that's worth noting. Well, in terms of national measures, those are principles which we are presenting to member states. Member states, obviously, may take different decisions, different approaches.
And it's, so to say, within member states' competencies to do so. So, what we are doing from the EU side, we do the overall fiscal and macroeconomic policy surveillance. So, what we are telling to member states, it's important that the measures taken are in line also with our overall framework, which provides also for some flexibilities, automatic stabilizers, and also we need to learn lessons from the previous crisis as I was mentioning before.
Follow-up question?
Aurore Lalucq
Think you have the time for a follow-up question, but I think we'll have the time for it. We can put you on the list for the CACI. Okay? We have two speakers before you, and then you can move on. Lou Dechniedermeja for AFP.
Luděk Niedermayer
So let me try another one, and I will wait for your economic forecast very anxiously. But you mentioned that you have some principles on how the member states should react to the current energy crisis. You mentioned it should be temporary. It should be targeted, and it should be in line with the economic framework. So I'm sure you are monitoring what the member states are doing.
So to which extent are they complying with that? Because in the letter of commissioner Jorgensen, there is mention of the principles proposed by the international energy agency that are aimed to reduce the consumption of petrol and diesel. Are member states implementing this? I don't see that the cutting the consumption tax is a targeted measure. So how do you see the member states complying with the recommendation by the commission?
Yeah.
Valdis Dombrovskis
Thank you for this question. Well, yes, there is a certain tension between immediate relief, which reduction of energy taxation may bring, with certain medium, longer term targets. We have and will help to take this balance. Therefore, we are not objecting to Member States reducing energy taxation, but emphasizing in this case indeed it's not a targeted measure, more a temporariness of this measure, and the need to monitor the fiscal cost of this measure carefully. There is also some discussions and several member states have called for, say, windfall profit tax, which if implemented may also actually bring some revenues, not only expenditures on International Energy Agency in cooperation with International Energy Agency with G7 Partners. Now we had also come to coordinate the release of our oil reserves to release immediate pressure on oil prices.
And indeed, the recommendation is also to work on measures to save the consumption, and in the case design and measures in a way that does not increase fossil fuel consumption. But you're right, there are certain trade-offs between those different elements. So we are following those developments. We are in engagement with member states, but obviously, we'll be providing a more structured and detailed assessment in the context of a spring European semester cycle. And I think by that time, we'll also see better the overall picture on different measures member states are taking, and also probably also better picture on the overall macroeconomic impact of this conflict.
Thomas Bajada
Thank you. Country-specific recommendations are often perceived as reflecting a neoliberal approach to economic governance. Right now, we see a new economic policy that tends to place a strong emphasis on fiscal constraints and austerity, and too often, CSRs are linked to measures that risk weakening public social services, pensions, and also limiting public investments in vulnerable populations such as islands. Yet, the current realities of war, supply chain disruption, and increased impact of climate-related events should remind us that it is essential to invest in the well-being of our people and in a truly resilient society. And in that respect, and also in view that the CSRs are expected to have an aspect of conditionality in the upcoming EU budget, do you believe that the CSRs should shift towards a greater focus on investing in people and in building up socioeconomic resilience?
And do you think that EU households are losing their individual resilience to cope with crises due to fiscal conservatism promoted through EU policy? And finally, do you think that the widespread resilience and reliance on traditional economic metrics are too narrowly focused on economic output rather than our people's well-being? Because if every shock leaves us saying that there is no room to act, it means that the problem is not the crisis. It is our EU economic policy and our priorities.
To your point. Thank you.
Valdis Dombrovskis
Yes. So on this, well, first of all, we are in early stages of implementation of our new economic governance framework. In the previous mandate, we worked quite extensively to revise the framework. And the aim of this revision was exactly to provide more flexibility to member states in determining their fiscal trajectories, how more countercyclicality in our fiscal framework. And I was already talking in introductory remarks about certain automatic stabilizers we have in our economic governance framework, which allows in a sense for deterioration of fiscal position as a result of cyclical developments, which does not need to be compensated for.
And, also, we believe that this new economic governance framework helps to strike the right balance between preserving debt sustainability and public investment. Because when we saw the first economic cycle under the new economic governance framework, actually, we saw that it helped to ensure this debt sustainability according to our new rules, while also ensuring a small but still increased public investment. So that's so therefore, I would not argue that what is constraining us is the fiscal framework, but the reality is that we do have and member states do have less fiscal space than during the previous crisis, because we had gone through several major crises and we had done a major economic or fiscal stimulus to respond to those crises as regards economic impact of COVID-19 pandemic, as regards energy crisis in 2022. But now we are in a different environment with higher overall debt and deficit levels than before entering those two crises, and with an entirely different interest rate environment. When during the COVID, we had more or less zero interest rates.
Now interest rates are much higher. So that also limits the fiscal room for maneuver. As regards country specific recommendations, I would outline that around one third of country specific recommendations are actually dealing with, so to say, social and labour aspects. And we intend to continue this also strong social focus in the European semester and in country-specific recommendations, and ensuring the socioeconomic resilience is exactly what we aim to achieve through this framework and also through our country's specific recommendations. Thank you.
Aurore Lalucq
Thank you. I've got two requests for the floor, and I will start with Mr. Fredericoux. Will group the question. Okay?
Pasquale Tridico
Okay. Thank you very much, madam chair, Mr. Dombrovsky. The consequence of the energy crisis is visible and concrete to everybody in Europe. Two straightforward questions. Do you see any margin for the windfall tax for additional profit in the energy sector, which are largely due to speculation in the sector?
And second, do you see any margin, politically speaking, and as well from an economic point of view, to suspend the Stability Pact in the current crisis? Thank you very much.
Siegbert Frank Droese
You, Kjell. Be brief. On the war of aggression on Iran, commissioner, Iranians seem to think that they should be paid for passage in the Strait of Hormuz. We're spectators in this. What measures is the commission taking?
What are your contact? Are you in touch with the US? This will affect us even if some national states have tried to become independent from oil from the Middle East. Will there continue to be fees for the passage in the strait? Is it gonna stay at that?
Are you involved in the negotiations with the US? And what's the commission's position on that?
Valdis Dombrovskis
Yes. Thank you for those questions. So first on the question of windfall profit tax. So several member states have addressed the commission in a sense calling for that kind of measure, and we were actually proposing that kind of a measure of windfall profit tax during the previous energy crisis. Strictly speaking, there is nothing preventing member states from applying this windfall profit tax because direct taxation is, so to say, by and large, within the competences of member states.
We are looking whether we come with some kind of more coordinated approach at the European level. It's currently being assessed, but it was a response during the previous crisis, and it remains a possibility now. On suspension of the stability and growth pact, that's probably more linked to the question of general escape clause. So a condition for activating the general escape clause is to have a severe economic downturn in the Euro Area or European Union as a whole. We are currently not in this scenario.
Also, the potential economic impact I was outlining at the beginning indicates a slowdown of economic growth, but not a severe economic downturn. Obviously, we continue to monitor the situation, and we need to respond as appropriate per real situation. So as regards the war in Iran and its implications, well, yes, we are in constant contact with various parties. Also, the HR VP was just now in the region to discuss the situation, to discuss the impact. Well, we, therefore, welcome this two-week ceasefire, which has been concluded.
And the goal right now is to negotiate a swift and lasting end to the war. And from European Commission side, or from European Union side, we are ready to play our role there, and we are in close engagement with United States, with the partners in a region, and supporting those diplomatic efforts. We know that the ceasefire is agreed. There are however some interpretations of the ceasefire, not least its application also in Lebanon, and it's also obviously the question on say fees for passing say Strait of Hormuz. And from EU perspective, we are working to ensure the freedom of navigation in the Strait of Hormuz.
Aurore Lalucq
Thank you. Thank you so much, dear commissioner. And you have two minutes if you want for some closing remarks.
Valdis Dombrovskis
Yeah. Yeah. Well, honorable members, thank you very much for this exchange. As we see, we are currently in a context of high economic uncertainty, where we need to respond to this energy price shock and find a balanced policy response. From the EU side.
We continue on European Commission side. We continue to monitor very closely the situation and continue our close engagement with member states and also the European Parliament as regards the necessary policy response, as it may imply also some legislative work. And as I was mentioning, we'll have now the next more structural point in the context of the European semester spring package, which will allow us to evaluate in more detail both macroeconomic implications and as a policy response regarding that. Thank you.
Aurore Lalucq
Thank you very much, Commissioner, and thank you very much for responding to all our questions. In the economic and budgetary repercussions of this conflict, we are paying the price. Once again, we didn't start this conflict, but we are suffering as a result. Thank you very much. We'll continue these frequent exchanges of views with you, and we'll continue working with you because the situation means we'll probably need to work together even more.
Thank you very much to everybody, and thank you to all of those who organized these two debates this morning. They're both extremely important given the context we are in. The next meeting will be on April 14 in Brussels. Thank you.
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