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Economic Policies Impacting EU Finance
19 December 2011

Graham Mather: A look at the new Treaty Draft "International Agreement on a Reinforced Economic Union"


Graham Mather presents a short commentary upon the new version of a draft European Treaty, which emerged from Brussels before the weekend.

Summary

a. The language is much less provocative than in the "Merkozy" Franco-German letter[1];
b. The requirement that signatories introduce rules in their constitutions, and may be denounced by other Member States to the European Court of Justice for any shortcomings, will continue to make smaller countries uneasy;
c. Provocative references to tax harmonisation have been removed as explicit language but such possibilities are envisaged through the more elliptical language of Article 10;
d. The EU institutions are deployed in support of the new Agreement;
e. Overall the draft will prove too strong for some small countries to sign or ratify but too weak to assuage market concerns.

Background

3. It is worth briefly recalling recent history. The first indication of what a new Treaty would look like appeared in a Communication from Council President Herman Van Rompuy on 7 December 2011. The document was relatively neutrally worded and seemed compatible with signature by all 27 Member States. It opened up the possibility of eurobonds. 

4. On 8 December 2011, a Franco-German letter effectively superseded the Van Rompuy text. Its wording was blunter; in particular it alarmed the UK with the suggestions that "a new common legal framework, fully consistent with the internal market, should be established to allow for faster progress in specific areas such as financial regulation; labour markets; convergence and harmonisation of corporate tax base and creation of a financial transaction tax; growth-supporting policies and more effective use of European funds in the euro area".

5. At the time of the EU summit, we must recall, no draft Treaty text was available and delegations had to take a view on its likely context against the background of these two documents.

A Treaty Draft Appears

6. On 16 December the draft agreement, see below, made its appearance. Its title, 'An International Agreement on a Reinforced Economic Union', respects the fact that it is not an EU Treaty draft, but one of its preambles explicitly states that the euro area and "other Member States" remain committed "to incorporate the provisions of this agreement as soon as possible in to the Treaties on which the European Union is founded".

7. The agreement then explicitly refers, at length, to the operation of the existing EU surveillance mechanisms to control fiscal deficits and the Euro Pact Plus, before setting out its operative provisions.

8. The agreement applies to the Eurozone and Contracting Parties which ratify it.

9. The agreement is expressed to be subordinate to the EU Treaties (its provisions "shall apply insofar as they are compatible with the Treaties on which the Union is founded and with European Union Law"). Case law of the European Court of Justice has precedence over the agreement's provisions. (Article 2) 

10. The agreement introduces a balanced budget rule using the 3 per cent annual deficit reference value already established, the 60 per cent debt level already in place, and a country specific reference value not exceeding 0.5 per cent with nominal GDP as a convergence target. (Article 3)

11. The agreement says that the rules set out above "shall be introduced in national binding provisions of a constitutional or equivalent nature" and that signatories "shall in particular put in place a correction mechanism to be triggered automatically in the event of significant deviations from the reference value or the adjustment path towards it".

12. The automatic sanctions procedure used in the agreement is that eurozone signatories "undertake to support proposals or recommendations put forward by the European Commission where a member state whose currency is in the euro is recognised by the European Commission to be in breach of the 3 per cent ceiling in the framework of an excessive deficit procedure unless a qualified majority of them is of another view". (Article 7)

13. Any signatory which considers that another signatory has failed to comply with setting up national binding provisions of a constitutional or equivalent nature or an automatic correction mechanism may bring the matter before the European Court of Justice, whose decision will be binding. (Article 8)

14. A new ‘exceptional economic circumstances' exemption is, however introduced. This is deemed as "an unusual event outside the control of the Contracting Party concerned, which has a major impact on the financial position of the government". (Article 3(3)).

Additional Provisions

15. There are a number of additional provisions, the main effect of which is to link the agreement to the existing EU Treaties. 

16. Accordingly, the signatories agree to work jointly towards "an economic policy fostering growth for enhanced convergence and competitiveness and improving the function of EMU through the Euro Pact Plus". (Article 9)

17. In what appears to be a gateway to allow, for example, the introduction of new taxation measures, Article 10 says that signatories "undertake to make recourse, whenever appropriate and necessary, to enhanced cooperation on matters that are essential for the smooth functioning of the euro area without undermining the internal market". Readers will recall that enhanced cooperation is a route already available to EU Member States by which a sub group can, subject to certain safeguards, introduce measures which the 27 as a whole refuse to agree.

18. The institutions of the EU are engaged through Articles 11 and 12 whereby signatories agree that all major economic policy reforms they plan to undertake "will be discussed and coordinated among themselves" involving "the institutions of the European Union as required by the law to the Union".

19. National Parliament economic committees will be invited to discuss the conduct of economic and budgetary policies "in close association with representatives of the relevant committee of the European Parliament".

20. A new series of euro summits of the signatories will be set up and they will elect the President of the Euro Summit by simple majority. These summits will meet twice a year and will be prepared "in close cooperation with the President of the European Commission, and by the Euro Group. (Article 13)

Concluding Observations

21. As noted earlier, the new draft agreement is more temperately phrased than the Franco-German letter which preceded it.

22. From the perspective of smaller countries, however, it presents a number of challenges.

23. In particular, the requirement to build these measures into a country's constitution seems problematic, especially as this is the fourth or fifth time that such a pact has been attempted, starting with the Stability Pact, which became the Stability and Growth Pact, the Euro Pact, the Euro Pact Plus and the Six Pack.

24. Further, the proposal that one signatory country may report another to the European Court of Justice for failing to live up to the agreement will present serious ratification challenges as it will remove national control over fiscal policy.

25. Although references to harmonising taxation have been removed from the face of the agreement the references to the use of the existing enhanced cooperation powers seem to imply that they are still in the mind of the framers. Further measures of financial regulation, similarly, are not explicitly mentioned but may also fall under this rubric.

26. So the agreement remains problematic. It continues to fail to address the main issues concerning financial markets: the policy of the European Central Bank and the possibility of issuing European bonds guaranteed jointly by Member States.

Treaty Draft

[1] Merkel/Sarkozy letter - view article



© Graham Mather


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