Brussels, 07/12/2011 (Agence Europe) - On Tuesday 6 December 2011, the president of the European Council, Herman Van Rompuy, unveiled his interim report on ways of strengthening economic union in relation to monetary union. In agreement with the president of the European Commission, José Manuel Barroso, and the chair of the Eurogroup, Jean-Claude Juncker, he set out two options for changes to the EU Treaty to boost budget discipline in the eurozone. The document will be discussed by the European summit on Thursday and Friday (8-9 December).
Supporting some aspects of the Franco-German deal unveiled in Paris on Monday, Van Rompuy's document says that tighter budget discipline is required in Europe and therefore penalties against spendthrift countries need to be made more automatic, introducing “golden budget rules” and strengthening the EU's right to scrutinise and influence national budgets. He wants the changes to be incorporated in the EU Treaty to make them genuinely binding.
Budget discipline. Two options are set out in the report. The first would be easier to implement because it would only require agreement among EU27 heads of state without ratification by national parliaments. Some sources say this is the option favoured by Van Rompuy and Barroso. It would amount to revising Protocol 12 to the Lisbon Treaty on the excessive deficit procedure as a means of ensuring that excessive deficits are avoided and that debt is brought down below 60% of GDP. In addition, the protocol would also include the obligation for euro area member states to include such a golden rule in their national legal systems, preferably at constitutional or equivalent level. Any member state failing to comply with the rule could be sent to the European Court of Justice (as is already the case for infringement of any other EU legislation).
French President Nicolas Sarkozy and German Chancellor Angela Merkel mentioned this aspect in Paris on Monday. The golden rule would be accompanied by an automatic correction mechanism (automatic reduction in public spending, tax increases or a combination of the two) to be specified by each member state.
The European Union would be given the highly controversial power to intervene in national budget preparations. The changes to Protocol 12 could be made in the form of a unanimous decision by the EU Council of Ministers (where each member states has a representative) following a proposal published by the European Commission after consulting the European Parliament and European Central Bank (ECB), explains the document, and would not need to be ratified at national level. Such a change could be introduced very rapidly but has the disadvantage of not being able to make penalties any more automatic than at present.
In order to make penalties automatic, a complicated process of changing the EU Treaty (Article 136 and Protocol 14) would be required. This would require ratification by all 27 member states, always a risky process. In practice, making penalties more automatic means making it easier to launch excessive deficit proceedings against member states by removing governments' wriggle room and veto options.
Economic union. The document sets out two ways of boosting economic union: (1) Using “enhanced cooperation with the participation of all euro area member states, focusing on areas which are essential for the smooth functioning of the euro area such as the functioning of labour markets, sustainability of pensions and social security systems, as well as pragmatic tax coordination measures. Steps toward further financial integration in the euro area should also be considered. In the context of a possible Treaty change, a similar mechanism to that which already exists in the area of freedom, security and justice could be introduced to accelerate the recourse to enhanced cooperation. Such developments must not undermine the internal market”; and (2) Introducing the option “in a longer term perspective (Ed: timeframe) of moving towards common debt issuance in a staged and criteria-based process, for example starting with the pooling of some funding instruments. Any steps towards that end would have to be commensurate with a robust framework for budgetary discipline and economic competitiveness to avoid moral hazard and foster responsibility and compliance. This would also require more intrusive control of the national budgetary stance by the EU. Such a process would underline the irreversibility of the euro (..) it would in fact also be a very powerful mechanism for budgetary discipline.”
At the end of last month, Barroso unveiled proposals in this connection in a Green Paper, but France and Germany reject any idea of setting up eurobonds in the immediate future and it is far from certain that Merkel would even countenance vague references to such a move in the future.
European Stability Mechanism. The document says that the existing bailout schemes need to be expanded and the decisions that have already been taken need to be implemented, like the changes to the EFSF bailout fund (European Financial Stability Fund) and increasing the International Monetary Fund's resources. The document prepared by Van Rompuy contains two other suggestions that may be highly controversial.
The first is to include the option of “reviewing” an existing clause to ensure that the new European Stability Mechanism (a bailout fund for the euro to replace the temporary EFSF) has an effective lending capacity of €500 billion when it starts up (probably in 2012). The ESM will replace the EFSF, which was set up in 2010 following the Greek crisis, but is finding it difficult to raise enough cash to be credible in the face of the spreading debt crisis. The idea that is that the €500 billion to be fed into the ESM would be in addition to the money already used by the EFSF. At present, the EFSF only has €250 billion available to lend out (of its total starting capacity of €440 billion). This would mean that eurozone countries would have to agree to increase their national guarantees to the bailout fund, but Germany and most other eurozone countries have rejected this idea in the past. The idea is to start afresh with the ESM by putting the meter back to zero, rather than simply renaming the EFSF, which would therefore increase the ESM's clout. Another controversial idea set out in the document is the “possibility” that the ESM would itself have the “necessary features of a credit institution”, by which he means the characteristics of a bank. This would mean that the ESM could borrow cash from the ECB (as can all banks in the eurozone) and therefore be able to raise extra cash if necessary to deal with the debt crisis. This idea has already been unsuccessfully mooted by France, but was opposed by the ECB and Germany.
Cameron wants guarantees about any new EU treaty. The British prime minister, David Cameron, threatened on Tuesday 6 December not to sign any new European treaty if it does not protect the UK's interests and the City of London. He was speaking the day after Nicolas Sarkozy and Angela Merkel announced their plan for a new EU treaty to save the eurozone. Asked about the Franco-German initiative, Cameron said he would not sign a new treaty unless it contains safeguards for the single market and financial services. He said that if they want to change the EU institutions, then the UK would demand safeguards and protection for the UK's interests. (LC/transl.fl)