The Draft Euro Fiscal Pact: Pretty Bad News for Cameron...

As negotiations on the new European fiscal pact resume today, we have managed to get hold of a copy of the new draft prepared by European Council President Herman Van Rompuy's office, and it makes for interesting reading. First on the scene (at least amongst UK commentators), we'll give our take below:

On the Today Programme this morning, David Cameron said that countries which sign up to the euro+ fiscal pact,

"Shouldn't be doing things that are about the single market or about competitiveness, and we will be very clear that when it comes to that you cannot use the European institutions for those things because that would be wrong."

See here for the background to the legal scramble that has followed in the wake of Cameron's veto back in December of an EU 27 Treaty, with the crucial issue always being whether the EU institutions could be used by the 17+, despite Cameron's veto.

It's not entirely clear whether Cameron actually will try to block the use of the EU institutions in implementing and enforcing the fiscal pact, or merely insist on the EU institutions not being used for single market issues (which never was a concrete proposal but a general worry over the EU institutions, particularly the ECJ, being used to push a eurozone-specific agenda), but what's clear is that the EU institutions are all over this draft proposal.

The draft makes over 20 references to the EU institutions (seven to the ECJ and nine to the Commission).

Here are some of the most significant changes from the previous draft (we got hold of a copy of the revised draft, see here - changes from the previous version are highlighted):

• The scope of the agreement is expanded, as it now involves "an enhanced governance to foster fiscal discipline and deeper integration in the internal market as well as stronger growth, enhanced competitiveness and social cohesion". Note here the references to the single market and social cohesion - a concession to the French and pretty bad news for Cameron.
  

• The wording of Article 6 has changed, and now reads, "The Contracting Parties shall coordinate their national debt issuance," instead of "shall improve the reporting of their national debt issuance". This clearly gives the article more teeth.

• Countries subject to an excessive deficit procedure should submit their structural reforms plans "to the European Commission and the Council for 'endorsement'";

• The treaty would enter into force after fifteen (not nine) eurozone countries have ratified it.

Particularly interesting is the section on the role of the ECJ. In particular,

• Article 8 stipulates that the ECJ would have jurisdiction over any violation of the entire Title III, i.e. on all the provisions of the so-called "fiscal compact". In the previous draft, the ECJ only had a say on Article 3(2), i.e. on whether national governments have correctly transposed the balanced budget rule into their national legislation;

• Furthermore, according the revised text the Commission "may, on behalf of Contracting Parties, bring an action for an alleged infringement of Title III" before the ECJ.

Some subtle but significant changes, despite Commission claims that the previous agreement would form the basis for future discussions. There are three very interesting points from the UK's perspective:

1) EU institutions are playing a large role: In this draft the role of the ECJ and Commission is significantly expanded. Despite David Cameron's on-going insistence that EU institutions would not play a role in enforcing the rules of the treaty, Article 8 does just that. If the final version sticks to this definition it would likely be a defeat for Cameron, with his decision to veto being seen to have stopped very little (although this is far from finalised). On a side note this also seems to be a loss for France, since it had previously opposed such a wide role for the ECJ. Could a Franco-British alliance be in the offing at the next round of discussions? Something to watch for. For the record, we maintain that the use of the EU institutions in this way is a massive legal stretch (hello, EU law) - and that the aim of Cameron's veto was correct (it was an overall strategy and tactics that were lacking).

2) Focus on the internal market: Article 1 stipulates that the signatories of the treaty will work towards "deeper integration in the internal market". This is interesting given David Cameron's comment on the Today programme this morning, where he suggested that the treaty would not involve any discussions on the single market. Again the draft clearly directly contradicts this. The UK is understandably keen to avoid the new treaty along with its regular meetings becoming a talking shop for single market regulation which still has a huge impact on the UK economy.

3) Incorporate the treaty into EU law after five years: Lastly, Article 14 states -

"Within five years at most following the entry into force of this Treaty...an initiative shall be launched...with the aim of incorporating the substance of this Treaty into the legal framework of the European Union."

In other words, as demanded by the Commission and MEPs, it looks like that the new pact will have to be incorporated into the EU Treaties in the medium term, something which will require the UK's approval - suggesting that this argument will continue for sometime. Cameron's veto did not put the issue to bed by any stretch of the imagination.

At least two out of these three points almost directly contradicts what the UK government would have wanted, while the third one could potentially go either way. This is still a draft and much can change, but at the moment it has put the UK onto the back foot.

Further reading: "The ten lessons the UK government should draw from Cameron's EU veto".