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Germany understood perfectly well that its proposals would require a full-blown treaty change. The involvement of the European Court of Justice as an enforcer of fiscal rules cannot be achieved otherwise. I disagree with the content of the German proposals and the one-sided fixation on fiscal discipline. But I agree with the legal judgment: if you want a fiscal union, nothing less than a full treaty change will do. If the EU had accepted the idea, a treaty convention might have produced a much more balanced fiscal union that the one Germany and France now want to create in a fast-track separate treaty.
Now David Cameron has blocked the option of changing the European treaties, the Brussels machinery is working hard at finding a legal way of making a separate treaty among eurozone members possible. One candidate is a procedure called “enhanced cooperation”. Introduced in the 1990s and later amended, it is intended to give a group of at least nine Member States the right to go it alone. But this is more a treaty-within-a-treaty procedure. It has been invoked only for the single European patent and, fittingly, for a common divorce law. One might wonder, therefore, whether it is possible to use enhanced cooperation as a legal basis to create a fiscal union. Could it even be used as a portal into the outer space of another treaty that interacts with the existing one?
I think this is very unlikely. For a start, the procedure requires unanimity. So if Mr Cameron blocked a treaty revision because he does not want a strong fiscal union that discriminates against the City of London, he surely would not accept a fiscal union set up by enhanced coordination either. Furthermore, the procedure is not intended to change current treaty provisions. It is meant for Member States to cooperate on areas not yet covered by the treaty.
Another possible legal basis is Article 136, under which the eurozone Member States are allowed to “strengthen the coordination and surveillance of their budgetary discipline” and to “set out economic policy guidelines for them”. This is the legal basis for eurozone members to co-ordinate tax policies, improve the functioning of labour markets or send a joint representative to the International Monetary Fund. But Article 136 is not intended as a wormhole to outer space either.
A fiscal union set up outside the European treaty would face severe legal and practical limitations. Unless a trick is found, it cannot make recourse to the resources and institutions of the EU. Nor can it issue eurozone bonds. The only conceivable counterparty for a eurozone bond is the EU itself.
More important even, a fiscal union created through a legal trapdoor would not help solve the crisis. The eurozone is facing a generalised loss of confidence. Investors no longer trust its crisis management, the solidarity of its citizens, even the ability to conduct sensible economic policies. The EU is not going to restore confidence through legal gimmickry that will face numerous court challenges.
Leaders should have admitted on Friday that the summit had simply failed, or perhaps have given it a few more days. Negotiations might have produced a compromise. With the fake pretence of another treaty, that is no longer possible.
Remember what everybody said a week ago? To solve the crisis, the eurozone requires, in the long run, a fiscal union with a prospect of a eurozone bond and, in the short run, unlimited sovereign bond market support by the European Central Bank. What we now have is no treaty change, no eurozone bond and no increase either in the rescue fund or in ECB support.
Policy changes the ECB announced last week will help banks directly and governments indirectly. But the EU fell short on every element of a comprehensive deal. On Friday, investors reacted positively to what was sold to them as a “fiscal compact”. But once the implications of a separate treaty are understood, I fear disillusionment will set in.
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