Published on EurActiv (http://www.euractiv.com)
Source URL: http://www.euractiv.com/future-eu/europes-new-treaty-multi-speed-union-linksdossier-509753
Europe's new treaty: Towards a multi-speed Union
Published: 15 December 2011 | Updated: 21 December 2011
All 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.
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.
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 rating 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 on 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 states 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 states.
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.
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."
In an interview to newspaper Le Monde after the summit, French President Nicola Sarkozy said he had "done everything" to keep the British onboard with the new treaty. "But there are clearly now two Europes" that have emerged from the summit, Sarkozy said: "One which wants more solidarity between its members, and regulation – and the other which is attached to the sole logic of the single market." About British demands, he added: "Let me add that the [British] demands on financial services were not acceptable. The crisis came from the deregulation of finance. Never can we accept coming back on this. Europe needs more regulation."
Irish Europe Minister Lucinda Creighton said Dublin and many other member states expected the European Central Bank to take a more pro-active approach to the debt crisis in the weeks following the summit, stepping up its bond-buying programme.
Irish Minister for European Affairs Lucinda Creighton said there was "very deep concern" within her government that the new treaty would be taken up by only 26 states. "We have an absolute preference for a treaty at 27," she said. Creighton added that she regretted the British decision to remain apart but hoped to maintain close cooperation with London on EU matters. The minister said that the Irish authorities will attempt make sure Britain finds a place at the negotiating table. "We have an obligation to find a way to bring back the UK into the discussion. We will try to pursue that and hope it will be a shared goal," Creighton said.
Irish Finance Minister Michael Noonan said he wasn’t certain yet if Ireland would need to hold a referendum on the package, but warned: “It really comes down on this occasion to a very simple issue: do you want to continue in the euro or not?... Faced with that question, I think the Irish people will pass a referendum.”
Helle Thorning-Schmidt, Danish prime minister and leader of the Social Democrats, said she would try to seek approval for the new fiscal compact. “We’ll now analyse the agreement and discuss with the foreign policy committee and the European Scrutiny Committee [in parliament],” she said. Meanwhile, it remains unclear whether the agreement would have to be subject to a referendum in Denmark. An opinion poll for Jyllands Posten shows that 53.9% of Danes want the pact to go to a public vote, while 22% think it will solve the euro crisis.
The prime ministers of Hungary and the Czech Republic, both non-eurozone members, have said they will refuse to sign up to a treaty that impinges on their tax sovereignty. “We support the solutions which result in the stabilisation of the eurozone,” Czech Prime Minister Petr Nečas said, citing his country’s dependence on exports to Western Europe. “But we are convinced that tax harmonisation would not mean anything good for us,” he added, according to a report by Bloomberg.
Hungarian Prime Minister Viktor Orbán added that Central Europe had the potential to become the most competitive region in Europe once the current debt crisis is overcome. “So the only kind of cooperation we can have with the eurozone is one which does not damage Hungary’s competitiveness,” Orban said.
Herman Van Rompuy, president of the European Council, said after the summit that the goal of the fiscal compact was to strengthen fiscal discipline, introduce more automatic sanctions and stricter surveillance in the eurozone. However, he did not say how the pact would stimulate growth or improve solidarity among eurozone members. He added he was optimistic that many countries would join. "I am optimistic because I know that it is going to be very close to 27", said Van Rompuy. "In fact, 26 leaders are in favour of joining this effort. They recognise that the euro is a common good."
Speaking before the European Parliament after the summit, José Manuel Barroso, European Commission President, stressed that it was "indispensable" to strengthen budget discipline but that "structural reforms" to stimulate growth and employment were also needed.
Below are post-summit reactions.
The European People's Party (EPP), the largest political group in the European Parliament, said stricter budget discipline rules will strengthen the eurozone's credibility.
However, Elmar Brok MEP (Germany), the EPP's foreign affairs spokesman, also warned about ratification risks and recommended "a two-fold approach" whereby the new fiscal discipline provisions should also be implemented in the EU treaty's existing protocol on the excessive deficit procedure.
Brok also warned of potential new divisions in Europe that could emerge from the new treaty. "It is vital that as many countries as possible participate. And it is indispensable to remain within the existing Community institutions and not to build new structures. Only then can we believe that the champions of the said new Euro Treaty do not have an intergovernmental Europe in mind which would mean less capability to act."
Speaking in the European Parliament after the summit, Joseph Daul MEP (France), leader of the EPP group in the assembly, said the summit had raised the question of the UK's place in the European Union. "Clearly, the isolation of the British shows that their coalition government sees the European Union as a mere free-trade area, without any consideration for solidarity and responsibility towards its partners. In this context, I believe that the British rebate should be put into question. Our taxpayers' money should be used for things other than rewarding selfish and nationalistic attitudes."
In an interview with EurActiv, Sergei Stanishev, leader of the Party of European Socialists (PES), rejected the view that the eurozone crisis could be tackled mainly through fiscal measures, insisting that without policies to restore growth and create jobs, there could be no fiscal stability either.
Important elements missing from the summit decisions include granting the European bailout fund a banking licence, introducing eurobonds, imposing of a financial transactions tax, and a "real plan" for investment and growth, he said.
In the European Parliament, Guy Verhofstadt, leader of the liberal ALDE group, said EU leaders had taken some positive steps such as including fiscal discipline into a new treaty and insisting that a balanced budget rule be incorporated into the constitutions of member states. "However, we doubt this alone will be sufficient to tackle the crisis we face today. There is no mention of a banking licence for enhanced ECB intervention, nor of a Eurobond market or a collective redemption fund to bring down excessive debt."
"This is still not the economic and fiscal union we need." Besides, he said any new treaty would only be acceptable "if the community method and democratic control are fully respected" and insisted on fully involving the Parliament in the drafting process. Verhofstadt was since appointed to a group of around 100 delegates from EU institutions and member states representatives tasked with drafting the new treaty.
In Parliament, the Greens/EFA group was critical of the summit outcome, saying it failed to respond the immediate crisis needs and created new uncertainty with an intergovernmental agreement outside the EU legal framework.
"In terms of responding to the immediate sovereign debt and credit crisis, the summit is a fiasco, with EU leaders totally failing to deliver the necessary emergency financial backstop to extinguish the fire facing eurozone sovereigns," said Greens co-presidents Rebecca Harms and Dany Cohn-Bendit MEP.
"The proposed intergovernmental treaty raises as many new questions as it answers. While it is clear that the UK's unrealistic demands could not be acceded to, the new proposed treaty represents the ultimate failure of the flawed intergovernmental approach to the crisis over the past two years."
The leftist GUE/NGL group denounced the summit's outcome as "a dangerous attempt to enforce extreme austerity by all means". "Enshrining austerity as default economic policy is simply inviting further disaster as it is now so blatantly clear that the neoliberal approach does not work," said group leader Lothar Bisky MEP (Germany). "Only comprehensive financial market regulation will lead to real solutions. We urgently need the decoupling of public finances from markets and the decoupling of politics from rating agency assessments."
The GUE/NGL also warned about the lack of democracy in the treaty revision process. "People must have a voice on the drastic changes that are currently under discussion, a transparent and democratic process with the full involvement of Parliament and the peoples of Europe must be followed."
European Conservatives and Reformists (ECR) group President Jan Zahradil MEP defended British Prime Minister David Cameron for protecting the UK's national interest, saying French and German leaders were doing the same. "It's very clear we are in a multi-speed Europe. It is a reality. When things get tough, we go intergovernmental. The commission and parliament were completely sidelined. Let us stop fooling ourselves. And when and if we go intergovernmental, there is an open question about the legal validity of such a treaty and its compatibility with EU primary law."
Marta Andreasen MEP, from the UK Independence Party (UKIP), said that the UK should now better leave the European Union: "The Conservative Party is deluded if it thinks that it can still wield any influence at European level. From sitting at the top table we have been relegated to getting whatever scraps the rest of Europe chooses to throw our way.
"We pay tens of millions of pounds daily to be in a club that has effectively blackballed us. I believe that the people of Britain must now be given a say if this is the type of Europe that they want to be a part of. The only sensible solution is wholesale withdrawal."
But he said the summit failed to produce a credible strategy on how to generate growth, especially in southern Europe. "Europe’s south is to different degrees in a growth emergency of weak education performance, poor governance, high debt and low competitiveness. Failure to address this at regional, national and European level will prove harmful."
Wolff also says the summit has remained silent on the fragility of the banking system. "The integrated euro area banking system needs an integrated and powerful banking supervision and resolution authority backed by enough means to prevent bank runs. The current system centred on national supervisors and national fiscal resources is clearly fragile and bank runs have started in a number of countries. While the ECB is stepping up its involvement as a liquidity provider to banks, ultimately more capital may be needed. The heads of state and government have yet failed to convince markets that they are willing to identify those banks in serious trouble and provide them with the capital needed."
In a post-summit analysis, the European Policy Centre (EPC), said the new fiscal compact was a step in the right direction towards strengthening fiscal discipline. But it said it failed to tackle economic divergences within the eurozone that have fuelled the crisis.
"The loss of competitiveness in many countries on the EU's periphery and the increase of competitiveness of core eurozone countries, has significantly contributed to the current crisis. Rising current account deficits in countries such as Estonia, Portugal, Greece, Spain, Ireland and Italy have pushed these countries into the epicentre of the euro crisis. This is why these countries, unable to devalue their national currency, have to implement major structural reforms to increase their competitiveness, which is indispensable if they want to (eventually) grow out of their problems."
The challenge facing the eurozone can therefore be put into simple terms, the EPC says: how can austerity and growth be pursued simultaneously? There is an undisputed need to cut public deficits and the overall level of public debt, writes the EPC but "continuous austerity has negative effects on growth, which in turn worsens the problems in countries most affected by the crisis, with public spending cuts contributing to prolonged and deep recessions."
"Concentrating solely on fiscal discipline will not get EU countries and the euro out of the crisis."
Simon Tilford, from the Centre for European Reform, a UK-based think-tank, said the December summit "will go down as yet another missed opportunity," and has fallen short of a fiscal union as there will be "no joint debt issuance, no shared budget, and no mechanism to transfer monies between the participating countries."
"There was no agreement to close any of the institutional gaps in the eurozone, such as the lack of either a real fiscal union or a pan-eurozone backstop to the banking sector. There was no agreement to boost the firepower of the European Financial Stability Fund (EFSF), while the move to beef up the IMF’s finances fall far short of what is needed. As a result, there is little to prevent a further deepening of the crisis."
The new fiscal compact, Tilford said, is little more than a revamped version of the EU’s existing Stability and Growth Pact. "Fiscal austerity alone will not solve the crisis. Indeed it has become part of the crisis. Such a strategy has already failed in Greece and Portugal and it threatens to make a bad situation in Spain and Italy even worse. What the eurozone needs is economic growth, and this agreement further worsens the outlook for that."
Turning to Britain's relation to the EU, Tilford was equally pessimistic, saying the December summit "could prove a big step towards UK withdrawal from the EU".
Mats Persson, director of Open Europe, a eurosceptic British think-tank, said that “from a strictly legal point of view” the new sub-group of EU member states can only use European institutions to enforce the proposed new treaty “if all member states agree, which is not the case.” However, he notes that politics is likely to trump law on this issue.
Milestones
- 8-9 Dec. 2011: European leaders agree new treaty on budget discipline in the euro area. Britain applies veto, the 26 other EU countries move ahead with an intergovernmental agreement outside the EU legal framework.
- End of Dec. 2011: Forum of around 100 delegates convenes to draft the new intergovernmental agreement text. Three officials from the European Commission, the European Central Bank and the European Parliament are invited. Forum will be supported by the Council's legal service and will meet several times ahead of the March 2012 summit.
- End of Jan. 2012: First draft of the intergovernmental accord set to be agreed.
- Late Jan./early Feb. 2012: EU summit to focus on the fiscal compact text, as well as growth policies and competition within the EU at large.
- 1-2 March 2012: New treaty text submitted for signature at EU summit.
- 6 May 2012: French Presidential election results.
- 1 July 2012: Entry into force of the eurozone's permanent bailout fund, the European Stability Mechanism (ESM).
- By end 2012: Ratification expected to be finalised at national level.
Policy Summary
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 concernsThe 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 rating 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 on 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 states 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 states.
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.
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."
Positions
- EUROZONE
In an interview to newspaper Le Monde after the summit, French President Nicola Sarkozy said he had "done everything" to keep the British onboard with the new treaty. "But there are clearly now two Europes" that have emerged from the summit, Sarkozy said: "One which wants more solidarity between its members, and regulation – and the other which is attached to the sole logic of the single market." About British demands, he added: "Let me add that the [British] demands on financial services were not acceptable. The crisis came from the deregulation of finance. Never can we accept coming back on this. Europe needs more regulation."
Irish Europe Minister Lucinda Creighton said Dublin and many other member states expected the European Central Bank to take a more pro-active approach to the debt crisis in the weeks following the summit, stepping up its bond-buying programme.
Irish Minister for European Affairs Lucinda Creighton said there was "very deep concern" within her government that the new treaty would be taken up by only 26 states. "We have an absolute preference for a treaty at 27," she said. Creighton added that she regretted the British decision to remain apart but hoped to maintain close cooperation with London on EU matters. The minister said that the Irish authorities will attempt make sure Britain finds a place at the negotiating table. "We have an obligation to find a way to bring back the UK into the discussion. We will try to pursue that and hope it will be a shared goal," Creighton said.
Irish Finance Minister Michael Noonan said he wasn’t certain yet if Ireland would need to hold a referendum on the package, but warned: “It really comes down on this occasion to a very simple issue: do you want to continue in the euro or not?... Faced with that question, I think the Irish people will pass a referendum.”
- NON-EUROZONE
Helle Thorning-Schmidt, Danish prime minister and leader of the Social Democrats, said she would try to seek approval for the new fiscal compact. “We’ll now analyse the agreement and discuss with the foreign policy committee and the European Scrutiny Committee [in parliament],” she said. Meanwhile, it remains unclear whether the agreement would have to be subject to a referendum in Denmark. An opinion poll for Jyllands Posten shows that 53.9% of Danes want the pact to go to a public vote, while 22% think it will solve the euro crisis.
The prime ministers of Hungary and the Czech Republic, both non-eurozone members, have said they will refuse to sign up to a treaty that impinges on their tax sovereignty. “We support the solutions which result in the stabilisation of the eurozone,” Czech Prime Minister Petr Nečas said, citing his country’s dependence on exports to Western Europe. “But we are convinced that tax harmonisation would not mean anything good for us,” he added, according to a report by Bloomberg.
Hungarian Prime Minister Viktor Orbán added that Central Europe had the potential to become the most competitive region in Europe once the current debt crisis is overcome. “So the only kind of cooperation we can have with the eurozone is one which does not damage Hungary’s competitiveness,” Orban said.
- EU INSTITUTIONS
Herman Van Rompuy, president of the European Council, said after the summit that the goal of the fiscal compact was to strengthen fiscal discipline, introduce more automatic sanctions and stricter surveillance in the eurozone. However, he did not say how the pact would stimulate growth or improve solidarity among eurozone members. He added he was optimistic that many countries would join. "I am optimistic because I know that it is going to be very close to 27", said Van Rompuy. "In fact, 26 leaders are in favour of joining this effort. They recognise that the euro is a common good."
Speaking before the European Parliament after the summit, José Manuel Barroso, European Commission President, stressed that it was "indispensable" to strengthen budget discipline but that "structural reforms" to stimulate growth and employment were also needed.
- EUROPEAN PARLIAMENT and POLITICAL PARTIES
Below are post-summit reactions.
The European People's Party (EPP), the largest political group in the European Parliament, said stricter budget discipline rules will strengthen the eurozone's credibility.
However, Elmar Brok MEP (Germany), the EPP's foreign affairs spokesman, also warned about ratification risks and recommended "a two-fold approach" whereby the new fiscal discipline provisions should also be implemented in the EU treaty's existing protocol on the excessive deficit procedure.
Brok also warned of potential new divisions in Europe that could emerge from the new treaty. "It is vital that as many countries as possible participate. And it is indispensable to remain within the existing Community institutions and not to build new structures. Only then can we believe that the champions of the said new Euro Treaty do not have an intergovernmental Europe in mind which would mean less capability to act."
Speaking in the European Parliament after the summit, Joseph Daul MEP (France), leader of the EPP group in the assembly, said the summit had raised the question of the UK's place in the European Union. "Clearly, the isolation of the British shows that their coalition government sees the European Union as a mere free-trade area, without any consideration for solidarity and responsibility towards its partners. In this context, I believe that the British rebate should be put into question. Our taxpayers' money should be used for things other than rewarding selfish and nationalistic attitudes."
In an interview with EurActiv, Sergei Stanishev, leader of the Party of European Socialists (PES), rejected the view that the eurozone crisis could be tackled mainly through fiscal measures, insisting that without policies to restore growth and create jobs, there could be no fiscal stability either.
Important elements missing from the summit decisions include granting the European bailout fund a banking licence, introducing eurobonds, imposing of a financial transactions tax, and a "real plan" for investment and growth, he said.
In the European Parliament, Guy Verhofstadt, leader of the liberal ALDE group, said EU leaders had taken some positive steps such as including fiscal discipline into a new treaty and insisting that a balanced budget rule be incorporated into the constitutions of member states. "However, we doubt this alone will be sufficient to tackle the crisis we face today. There is no mention of a banking licence for enhanced ECB intervention, nor of a Eurobond market or a collective redemption fund to bring down excessive debt."
"This is still not the economic and fiscal union we need." Besides, he said any new treaty would only be acceptable "if the community method and democratic control are fully respected" and insisted on fully involving the Parliament in the drafting process. Verhofstadt was since appointed to a group of around 100 delegates from EU institutions and member states representatives tasked with drafting the new treaty.
In Parliament, the Greens/EFA group was critical of the summit outcome, saying it failed to respond the immediate crisis needs and created new uncertainty with an intergovernmental agreement outside the EU legal framework.
"In terms of responding to the immediate sovereign debt and credit crisis, the summit is a fiasco, with EU leaders totally failing to deliver the necessary emergency financial backstop to extinguish the fire facing eurozone sovereigns," said Greens co-presidents Rebecca Harms and Dany Cohn-Bendit MEP.
"The proposed intergovernmental treaty raises as many new questions as it answers. While it is clear that the UK's unrealistic demands could not be acceded to, the new proposed treaty represents the ultimate failure of the flawed intergovernmental approach to the crisis over the past two years."
The leftist GUE/NGL group denounced the summit's outcome as "a dangerous attempt to enforce extreme austerity by all means". "Enshrining austerity as default economic policy is simply inviting further disaster as it is now so blatantly clear that the neoliberal approach does not work," said group leader Lothar Bisky MEP (Germany). "Only comprehensive financial market regulation will lead to real solutions. We urgently need the decoupling of public finances from markets and the decoupling of politics from rating agency assessments."
The GUE/NGL also warned about the lack of democracy in the treaty revision process. "People must have a voice on the drastic changes that are currently under discussion, a transparent and democratic process with the full involvement of Parliament and the peoples of Europe must be followed."
European Conservatives and Reformists (ECR) group President Jan Zahradil MEP defended British Prime Minister David Cameron for protecting the UK's national interest, saying French and German leaders were doing the same. "It's very clear we are in a multi-speed Europe. It is a reality. When things get tough, we go intergovernmental. The commission and parliament were completely sidelined. Let us stop fooling ourselves. And when and if we go intergovernmental, there is an open question about the legal validity of such a treaty and its compatibility with EU primary law."
Marta Andreasen MEP, from the UK Independence Party (UKIP), said that the UK should now better leave the European Union: "The Conservative Party is deluded if it thinks that it can still wield any influence at European level. From sitting at the top table we have been relegated to getting whatever scraps the rest of Europe chooses to throw our way.
"We pay tens of millions of pounds daily to be in a club that has effectively blackballed us. I believe that the people of Britain must now be given a say if this is the type of Europe that they want to be a part of. The only sensible solution is wholesale withdrawal."
- THINK-TANKS
But he said the summit failed to produce a credible strategy on how to generate growth, especially in southern Europe. "Europe’s south is to different degrees in a growth emergency of weak education performance, poor governance, high debt and low competitiveness. Failure to address this at regional, national and European level will prove harmful."
Wolff also says the summit has remained silent on the fragility of the banking system. "The integrated euro area banking system needs an integrated and powerful banking supervision and resolution authority backed by enough means to prevent bank runs. The current system centred on national supervisors and national fiscal resources is clearly fragile and bank runs have started in a number of countries. While the ECB is stepping up its involvement as a liquidity provider to banks, ultimately more capital may be needed. The heads of state and government have yet failed to convince markets that they are willing to identify those banks in serious trouble and provide them with the capital needed."
In a post-summit analysis, the European Policy Centre (EPC), said the new fiscal compact was a step in the right direction towards strengthening fiscal discipline. But it said it failed to tackle economic divergences within the eurozone that have fuelled the crisis.
"The loss of competitiveness in many countries on the EU's periphery and the increase of competitiveness of core eurozone countries, has significantly contributed to the current crisis. Rising current account deficits in countries such as Estonia, Portugal, Greece, Spain, Ireland and Italy have pushed these countries into the epicentre of the euro crisis. This is why these countries, unable to devalue their national currency, have to implement major structural reforms to increase their competitiveness, which is indispensable if they want to (eventually) grow out of their problems."
The challenge facing the eurozone can therefore be put into simple terms, the EPC says: how can austerity and growth be pursued simultaneously? There is an undisputed need to cut public deficits and the overall level of public debt, writes the EPC but "continuous austerity has negative effects on growth, which in turn worsens the problems in countries most affected by the crisis, with public spending cuts contributing to prolonged and deep recessions."
"Concentrating solely on fiscal discipline will not get EU countries and the euro out of the crisis."
Simon Tilford, from the Centre for European Reform, a UK-based think-tank, said the December summit "will go down as yet another missed opportunity," and has fallen short of a fiscal union as there will be "no joint debt issuance, no shared budget, and no mechanism to transfer monies between the participating countries."
"There was no agreement to close any of the institutional gaps in the eurozone, such as the lack of either a real fiscal union or a pan-eurozone backstop to the banking sector. There was no agreement to boost the firepower of the European Financial Stability Fund (EFSF), while the move to beef up the IMF’s finances fall far short of what is needed. As a result, there is little to prevent a further deepening of the crisis."
The new fiscal compact, Tilford said, is little more than a revamped version of the EU’s existing Stability and Growth Pact. "Fiscal austerity alone will not solve the crisis. Indeed it has become part of the crisis. Such a strategy has already failed in Greece and Portugal and it threatens to make a bad situation in Spain and Italy even worse. What the eurozone needs is economic growth, and this agreement further worsens the outlook for that."
Turning to Britain's relation to the EU, Tilford was equally pessimistic, saying the December summit "could prove a big step towards UK withdrawal from the EU".
Mats Persson, director of Open Europe, a eurosceptic British think-tank, said that “from a strictly legal point of view” the new sub-group of EU member states can only use European institutions to enforce the proposed new treaty “if all member states agree, which is not the case.” However, he notes that politics is likely to trump law on this issue.
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