What’s Behind the New Eurozone Fiscal Stability Union?

This European Council meeting was quite tumultuous, it appears. But we do have an outcome – a “fiscal stability union”. Below I present a preliminary critical assessment of the proposal, as well as a comment on the toxic role of the United Kingdom in the negotiations.

The “Fiscal Stability Union” in a Nutshell

The statement of eurozone leaders is scant on details. However, what we know is that:

• The golden fiscal stability rule that annual structural deficit should not exceed 0.5% of nominal GDP will be enshrined in eurozone Member States constitutions or equivalent acts;
• There will be an automatic correction mechanism in national legislation that shall be triggered in the event of deviation;
• There will be common standards for the automatic correction mechanism and compliance with those standards will be monitored by the European Commission; the transposition of those standards will be subjected to the jurisdiction of the European Court of Justice;
• Eurozone Member states will have to report their national debt issuance plans;
• When a Member State breaches the 3% budget deficit ceiling there will be automatic consequences unless a qualified majority of Member States decides otherwise;
• Some of those measures will be pursued by more active use of enhanced cooperation.

Urgent Measures

The eurozone leaders have also agreed on a couple of urgent measures:

• The European Stability Mechanism (ESM) treaty will enter into force as soon as Member States representing 90 % of the capital commitments have ratified it, preferably by July 2012;
• Ensuring a combined effective lending capacity of EUR 500 billion by the European Financial Stability Facility (EFSF) and ESM;
• Provision of additional resources for the IMF of up to EUR 200 billion (USD 270 billion), in the form of bilateral loans;
• Unanimity for the ESM will be replaced by a qualified majority of 85 % in case the Commission and the ECB conclude that an urgent decision related to financial assistance is needed.

Legal Analysis of Proposals

Given the objection of the United Kingdom, and possibly Hungary, the revision of EU Treaties seems impossible at the moment. That is why the eurozone leaders speak about an “international agreement” that should be signed by March 2012. This agreement will not be part of EU law (at least initially). I fail to see, though, how can the European Commission participate in the monitoring of fiscal stability in this case. Enhanced cooperation (Art. 20 TEU and art. 329 TFEU) seems more appropriate. The problem there is that only the European Commission can propose an enhanced cooperation to the Council, and the European Parliament must also approve it. This can lead to substantial delays of the procedure. That is why a two-track strategy appears more appropriate. Common standards for fiscal stability should be specified in the “international” agreement. Together with it the eurozone member States should initiate an enhanced cooperation authorization procedure. That is important, because any credible fiscal stability regime will need to transfer monitoring powers to the European Commission. This means that the drafting of rules must start now, in close cooperation with the European Commission and the European Parliament.

The Toxic Role of the United Kingdom

For some time I have been quite skeptical of UK’s role in the European integration process. There are deep divisions within the British political establishment on UK’s place in the EU. However, those internal divisions are spilling over to the EU and creating instability. The truth is that there are too many UK politicians that want the UK out of the EU, and in the European Economic Area.

I fully support the right of UK to define its own place in the integration process. With its decision to object to the new eurozone governance rules, the UK is basically signaling its determination to distance itself further from core EU countries. However, I think that the UK must not be allowed to unilaterally obstruct the further building of the European project. That is why a new political dialogue must be started among EU Member States about the possible modifications of UK’s scope of membership and responsibilities in the EU. This process must reflect the UK’s concerns, as well as the strategic objectives of the Union. What is clear is that we cannot continue to pretend that the UK is on board in support of the integration process.