Brussels, 31/01/2012 (Agence Europe) - European leaders have put the final touches to two draft treaties, one strengthening budgetary discipline and the other establishing a permanent European rescue fund, the European Stability Mechanism (ESM). Their meeting took place on Monday 30 January as a general strike denouncing austerity measures brought Belgium to a standstill. The Czech Republic refused to sign up to the budgetary pact, known as the fiscal compact.
European Council President Herman Van Rompuy said they had given their approval to the fiscal compact whereby every signatory country undertakes to include in its national legislation a “debt brake” or “golden rule”, at a constitutional or equivalent level. In his view, the very fact that 25 member states - but not the United Kingdom or the Czech Republic - agree to sign the treaty is in itself a success. German Chancellor Angela Merkel went as far as to call it an “exploit”, given how little time there had been. Commission President José Manuel Barroso gave a list of the satisfactory elements of the treaty: - no creation of a new European institution, respect of the Community method, opening up to non-signatory countries, and integration of the treaty into European law at the latest after five years. French President Nicolas Sarkozy underlined that the European Court of Justice may not cancel a budget but simply verify the conformity of the golden rule transposed by a member state.
Czech refusal. The Czech Republic has pulled out of the fiscal compact, for what appears to be constitutional reasons. Czech Prime Minister Petr Neca had stated earlier that, “if they want us to sign, if they want us to pay, then we must have the same rights around the negotiating table”. His British counterpart, David Cameron, confirmed that his country would not be signing the treaty, underlining several times that the United Kingdom is not under any obligation to do so. In his view, focusing on budgetary issues, the fiscal compact will not settle the problem of competitiveness in the eurozone.
Until the very last moment, talks came up against the matter of participation by non-eurozone member countries at eurozone summits. Meetings will be with all 27 when discussing the internal market, in 25 formation for questions on the Euro Plus Pact, and in 17 formation on strictly eurozone issues. Van Rompuy said the countries not belonging to the eurozone would nonetheless be invited to eurozone summits at least once a year.
Poland finally agreed to sign up to the treaty. Prime Minister Donald Tusk appreciates that countries not belonging to the eurozone will be consulted with the countries that sign up to the fiscal compact. The hammer came down in Poland's favour regarding the predominance of 27-member meetings. Normally, a European Council will take place each time a eurozone summit is held, unless circumstances do not warrant it.
Luxembourg Prime Minister Jean-Claude Juncker sounded a note of caution against stepping up the number of variable geometry formations. He said he could not accept the fact that the euro and the Eurogroup are seen as the reflection of deliberate variable geometry, as that is not so. “We have a treaty”, he said, “the treaty of Maastricht. The treaty provides for accession to the eurozone for countries respecting a number of criteria. (…) I would not wish for us to step up the different configurations of which we are becoming specialists. I want us to act - we move forward at 27, not at 26 or at 25”.
Referendum? Irish Prime Minister Enda Kenny said that the treaty would be subject to legal verification which would determine whether or not a referendum will have to be held in Ireland. If the text is in line with the constitution, there will be no referendum, he said. The corollary of this is, of course, that if it is not, there will have to be a referendum.
The treaty on stability, coordination and governance requires the 25 countries that are party to it - the whole of the EU with the exceptions of the United Kingdom and the Czech Republic - to build into their national, and preferably constitutional, law a budgetary “golden rule”. The countries party to the treaty will have to keep their public finances in balance or in surplus. At worst, the structural public deficit may go to 0.5% of national GDP, except in “exceptional circumstances”, such as a period of severe recession. The structural deficit may extend to 1% of GDP when public debt is under 60% of GDP. If any country's debt goes above 60% of GDP, the pace of the debt reduction trajectory must be 1/20th per year after a three-year transition period, in line with the rules of the revised Stability and Growth Pact. Infringement of the deficit rules will incur sanctions. Not, however, those related to debt.
Any country party to the treaty may ask the European Court of Justice whether, on the basis of a specific European Commission report or not, to check if any other state has properly transposed the “golden rule”. The Court has the power to impose financial penalties on states. Any fines, which will not be more than 0.1% of GDP, will be paid into the European Stability Mechanism (ESM).
The treaty will be officially signed at the next European Summit at the start of March. It was decided in December of last year to take the step to draft the treaty after the United Kingdom refused to agree to amendment of the EU treaties as a 27-state bloc. The UK wanted guarantees, including on repatriating responsibility in financial matters. The other member states refused to accede to this request.
ESM. Any country which has failed to ratify the fiscal compact will not be able to seek financial aid under the European Stability Mechanism (ESM). The mechanism, which will become operational I July 2012, will have a lending capacity of €500 billion. Unlike the European Financial Stability Fund (EFSF), on which there are no national guarantees, the ESM will have initial capital of €80 billion. The ESM will be able to help countries financially in exchange for these countries' implementing an austerity programme. It will also be able to buy sovereign bonds directly from states or on the secondary markets, and support national banking sectors which are experiencing difficulty. In the event of restructuring public debt, this permanent bail-out fund will not make a priori provision for private sector participation, in line with IMF doctrine. Only those states which have ratified the fiscal compact will be able to call on the ESM.
ESM decisions will, as a general rule, be taken by unanimous agreement. When financial stability is at stake, provision has been made for an emergency decision-making procedure allowing decisions to be taken immediately as soon as 85% of votes have been cast.
The issue of the proper size of the European firewall to be able to tackle debt crisis contagion will be dealt with at the next summit on Thursday 1 March. “In less than five weeks”, member states will assess the adequacy of the bail-out funds, Van Rompuy confirmed.
At this point, Germany wants to retain the €500 billion threshold. Italy would like intervention capacity to be substantially beefed up. The IMF looks favourably on combined ESM/EFSF action, an option that would take the European firewall up to €750 billion. France and Italy are of the view that, to check the crisis once and for all, the bail-out fund should have a banking licence that would give it access to the unlimited funds of the ECB. This oversteps the red line for Germany which believes that it is not for the Central Bank to finance states' debt. (MB/EH/CG/AN/SP/JK/transl.jl/rt)