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Europe’s New Treaty: Towards A Multi-Speed Union

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ll EU countries – except Britain – have agreed on a new treaty for tighter fiscal discipline and deeper economic integration to save the euro currency. But as attention now turns to the legal details and ratification process, questions are being raised as to what will happen to countries that fail to ratify, with some fearing exclusion from the club.

Pressed by Germany, European leaders agreed on a new treaty to tighten fiscal discipline in the eurozone and deepen economic integration as a way to address the bloc’s sovereign debt crisis.

The new treaty, approved at a European summit on 9 December, was vetoed by Britain, which tried to win concessions in return for backing an amendment to the EU’s existing treaties.

Prime Minister David Cameron sought to exempt the UK financial services industry from EU regulations, a demand deemed unacceptable by its European partners.

Circumventing the British veto, EU leaders – led by France and Germany – pressed ahead with a new treaty of their own, an intergovernmental agreement outside the EU legal framework.

The new treaty text will be drafted by March 2012 and opened to ratification by countries outside the 17-member eurozone. All 27 EU nations except Britain have expressed their desire to join this new “fiscal compact” (see full text).

However, questions remain as to how EU institutions such as the European Commission or the Court of Justice can be used to enforce what is for now essentially an international agreement among sovereign nations.

Crucially, the agreement remains silent on what will happen to countries – especially eurozone members – that fail to ratify the new treaty. The question becomes particularly acute for Ireland, which will likely have to pass the new treaty via a popular referendum, something that has proven difficult in the recent past with the Lisbon Treaty, initially rejected by Irish voters in 2008 but approved in a second referendum.

Other eurozone members like Finland, which have Eurosceptic parties in their parliaments, might experience difficulties in ratifying a treaty.

As a consequence, the future of these countries as eurozone members could be put into question should they fail to ratify.
Issues

Failure to address short-term concerns

The December agreement contained few measures that financial markets were expecting to help solve the crisis in the short term.

Among the decisions was a commitment to provide up to €200 billion in bilateral loans to the International Monetary Fund to help tackle the crisis. The entry into force of the European Stability Mechanism (ESM), the EU’s permanent bailout fund, was also brought to an earlier date – in July 2012 instead of January 2013.

But Germany did not bow to French pressure to grant a banking licence to the ESM, a move that would have opened the fund to unlimited refinancing by the European Central Bank (ECB). German Chancellor Angela Merkel indeed remained opposed to turning the ECB into a lender of last resort, a measure that observers – including ratings agencies and the United States – had been pushing as the single “bazooka” that could solve the crisis.

The ECB will, however, be involved in the ESM bailout fund as it will become its administrator, the agreement said. And decisions to activate it will no longer have to be taken unanimously but by an 85% majority in case the Commission and the ECB declare it as a matter of emergency.

The summit also once again confirmed Germany’s opposition to Eurobonds that would pool the eurozone’s debt into a single basket.

In Berlin’s opinion – a view shared in Paris and Brussels – such an instrument could only be envisaged at the conclusion of a much deeper fiscal integration process in the eurozone.

Hence Berlin’s insistence to forge a new “fiscal compact” among the eurozone countries as a precondition for any further financial transfers from German taxpayers to troubled economies.

British veto fallout

The summit’s main outcome was an agreement on stricter budget discipline, which was put down in a “fiscal compact” agreed upon by EU leaders.

An agreement among the EU’s 27 member states proved impossible after UK Prime Minister David Cameron demanded to exempt the City of London from financial market regulations in return for his backing.

EU leaders therefore resorted to the less enviable option of a treaty among the 17 eurozone countries, open to others.

All EU member states – except for Britain – expressed their interest in joining although some indicated they would first need to consult their Parliaments (Bulgaria, the Czech Republic, Denmark, Hungary, Latvia, Lithuania, Poland, Romania and Sweden).

This leaves Britain as the sole EU member state clearly outside of the agreement, with its future as part of the EU now put in question.

Fiscal union

Along the lines of the new “fiscal compact”, sanctions would apply automatically to countries exceeding the 3% deficit ceiling unless blocked by a qualified majority – or three-quarters of eurozone member states. Moreover, the annual structural deficit should “not exceed 0.5% of nominal GDP” (i.e.: before inflation adjustments), according to the summit text. This will be done via an amendment to Article 126 of the EU treaty.

Pressed by Germany, countries committed to enshrine a “golden rule” to run budgets which are balanced or in surplus into their national constitutions. The signatories recognise the European Court of Justice “to verify the transposition of this rule at national level,” the text reads.

The new procedure will also oblige euro area countries to submit their draft budgetary plans to the European Commission before they are adopted by their national parliaments, although the Commission will not have the power to annul them.

In the longer term, countries took a commitment to work towards deeper fiscal integration, with more detailed plans to be presented by European Council President Herman Van Rompuy at a March 2012 summit.

Economic union

Pushed by the Franco-German duo, the 26 EU leaders sought to address one of the fundamental shortcomings of the monetary union by launching a process to deepen economic integration among eurozone countries.

This process is seen in Berlin as a precondition for introducing Eurobonds that could one day mutualise the eurozone’s debt.

According to the summit statement, this new process “will rest on an enhanced governance to foster fiscal discipline and deeper integration in the internal market as well as stronger growth, enhanced competitiveness and social cohesion.”

As long as the crisis continues, summits will be held every month to reduce disparities between the member states on issues such as pension reform, labour and taxation policy.

In a letter sent to EU leaders before the summit, France and Germany said that policies under the eurozone’s economic pillar would encompass proposals which have been strongly resisted by Britain, such as the coordination of labour market policies as well as financial regulation.

An existing proposal for a common consolidated corporate tax base (CCCTB) and a financial transactions tax (FTT) – both resisted in London and Dublin – would also be addressed under this closer economic integration process.

Heads of state who signed up to the new “fiscal compact” acknowledged that a majority would be difficult to find on such topics and agreed to “make more active use” of the enhanced cooperation mechanism, which allows smaller groups of countries within the European Union to move ahead on areas of common interest.

A treaty outside the EU’s legal framework

Given the British veto, and the Franco-German insistence to forge ahead with a new treaty regardless, an intergovernmental agreement outside the EU legal framework was the only solution at hand.

“The objective remains to incorporate these provisions into the treaties of the Union as soon as possible,” reads the declaration by the eurozone’s heads of state.

But doubts have been expressed as to whether the European Commission and the European Court of Justice (ECJ) could be used to police the new fiscal compact.

“There are issues that are raised by this [treaty proposal] about institutions serving two masters – the eurozone and the European Union – and we need to look at those issues very carefully,” a Downing Street spokesman said immediately after the summit.

Olli Rehn, the EU’s economic and finance commissioner, dismissed such doubts and insisted that the European Commission is on firm legal ground as Britain remained “an exception” with its opt-out.

“If this move [the UK veto] was intended to prevent bankers and financial corporations of the City from being regulated, that’s not going to happen,” he told reporters in Brussels after the summit.

“I would also like to remind you that the UK government has also supported and approved the six-pack of new rules tightening fiscal and economic surveillance which enters into force on [13 December]. The UK’s excessive deficit and debt will be the subject of surveillance like other member states, even if the enforcement mechanism mostly applies to the euro area member states,” Rehn said.

EU officials told EurActiv that the issue of how the EU institutions could be used to police such an intergovernmental agreement had been carefully scrutinised by lawyers in the Commission and Council before the fiscal pact was unveiled.

They pointed out that the Commission’s memorandums of understanding relating to Greece and Portugal – negotiated in the context of the eurozone crisis – offered precedents for the institutions working along similar lines.

Cameron himself appeared to row back on the tone of earlier threats as he spoke in the House of Commons after the summit deal. “I understand why they [the eurozone-plus group] would want to use the institutions… So in the months to come we will be vigorously engaged in the debate about how institutions built for 27 should continue to operate fairly for all member states, and in particular for Britain,” Cameron said.

Ratification: A referendum in Ireland?

Eventually, all countries signing up to the pact will have to secure approval at national level either in parliament or via a popular referendum.

The international agreement will be presented for signature at an EU summit on 1-2 March 2012 and submitted for ratification afterwards, with the aim of completing the process by the end of the year.

But ratification cannot be taken for granted, and it remains to be seen how many countries will end up clearing the international agreement.

The fiscal compact was initially meant for the 17 countries that share the euro but all other EU member states apart from Britain expressed their interest in joining.

Bulgaria, the Czech Republic, Denmark, Hungary, Latvia, Lithuania, Poland, Romania and Sweden have already indicated they would first need to consult their Parliaments before signing.

In Poland, a non-eurozone member, any transfer of sovereignty requires a two-thirds majority in both houses of the Parliament, which the government cannot be sure of. And the prime ministers of Hungary and the Czech Republic – also non-eurozone members – have suggested they weren’t prepared to give away their tax sovereignty.

Among eurozone countries, Finland might have difficulties ratifying the agreement as the True Finns party – the third largest in parliament – said it will oppose any new transfer of sovereignty.

And Ireland will likely have to organise a popular referendum on the treaty as the fiscal compact arranges significant transfers of sovereignty to the European level. Ireland’s two main political parties – Fianna Fáil and Sinn Fein – said that the new rules must be put to a referendum.

What if a eurozone country rejects the treaty?

When the ratification process is over, the European Union might therefore find itself in an odd situation where non-eurozone countries may have ratified the fiscal compact while full members like Finland or Ireland may have rejected it.

In which case, the question arises as to whether these countries should be allowed to stay in the eurozone or whether they should be told to leave.

“They will have to decide whether they want to stay in the eurozone or not,” one diplomat told EurActiv, adding in the same breath that there was no legal obstacle for a country to stay in the eurozone without ratifying the fiscal compact.

“We’re still unclear about many issues,” the diplomat conceded.

France and Germany said in their joint letter that they are determined to go ahead “with the member states that have the will and the capacity to go forward,” suggesting that countries that ratify the treaty may decide to leave the others behind.

The idea is to avoid a situation where a single country can block the others, a diplomat said, citing the difficulties in ratifying changes to the EU’s bailout fund in Finland and Slovakia.

European federalists denounced the Franco-German push as a “coup d’état” and warned that sidelining any eurozone country would send a new wave of panic across financial markets.

“The markets will immediately attack those who do not form part of [this group], with dramatic consequences for them, for the euro area and the EU as a whole,” said the Spinelli Group, a federalist formation which lists Italian Prime Minister Mario Monti among its most prominent supporters.

French ratification disrupted by presidential election?

Moreover, ratification in a country like France should not be taken for granted either. François Hollande, the socialist candidate for president, said he would renegotiate the agreement if elected in May 2012.

In France, the procedure for ratifying an international treaty requires the endorsement of the two Chambers of Parliament. MPs can either approve or reject the text on a simple majority vote, or they can ask for it to be put off. Having taken a turn to the left at the last elections, the Senate could eventually reject the new treaty but the National Assembly will have the last word.

President Nicolas Sarkozy might have been tempted to force the treaty through parliament before the presidential election. But this will not be possible since the National Assembly’s current mandate expires on 24 February, before the EU summit on 1-2 March which is expected to finalise the text of the new treaty.

The treaty will therefore have to be approved by whatever majority comes out of the legislative election in June, by which time France might have a new president hostile to it.

Sarkozy acknowledged this, saying in an interview with Le Monde that France wants to complete the ratification process “by summer 2012”. “There is a democratic timetable. We are not going to suspend elections because there is a crisis.”

More uncertainty could also emerge further upstream of the legislative procedure. The Constitutional Council will first need to specify whether or not a constitutional change is warranted for the treaty to be ratified (Article 54 of the Constitution). An affirmative assessment might put the ratification at stake given the reluctance of the Congress – both the upper and lower houses of the French parliament – to pass a fiscal ‘golden rule’.

Original article

EurActiv

EurActiv

EurActiv publishes free, independent policy news and facilitates open policy debates in 12 languages.

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