Showdown between France and Commission set to test EU’s budget rules

It has been widely reported over the weekend that the European Commission (EC) is seriously considering rejecting France’s new budget proposal which will see it run a deficit of 4.3% next year rather than the EC target of 3%.

As the graph above shows, France has strayed significantly from the path originally agreed with the EC, even after it requested and was granted additional time to meet its deficit targets just last year.

Importantly, this is the first time a country has flagrantly flouted the budget rules. Other countries have missed their targets or asked for extensions, but with the presumption of good faith and serious efforts being made to meet said targets. However, with its latest budget France has rejected the previously agreed cuts (worth 0.8% of GDP) and offered just 0.2% of GDP in savings. In other words it has flat out chosen to ignore the rules.

This may seem like semantics but it puts the EC and the EU more broadly in a tough position. With much of peripheral Europe failing to meet the fiscal rules agreed under the Stability and Growth Pact (SGP), the Fiscal compact and the European Semester, many have already been questioning the effectiveness of these tools. Ultimately, the EC risks replaying one of the key features of the previous crisis – letting a big country break the SGP and then being unable to effectively enforce it for other countries, helping to facilitate the large build-up of sovereign debt.

This is therefore a key test of the viability of the new rules and whether this time will really be any different. Combined with the renewed bank stress tests and bail-in rules, the coming months are an important testing ground for the new financial architecture which the Eurozone has put in place.

Sadly, as Reuters highlights, another fudge looks to be on the cards. While the EC will probably reprimand France to the fullest extent before getting to outright fines, it will also work up a new looser programme which gives it more time. This helps all sides save face and avoids the risk of further weakening French President Francois Hollande to the benefit of the Front Nationale (something which the EU wants to avoid).

As for what happens now, the EC will provide a verdict on the budget by the end of the month in what will be one of the last acts of the Barroso Commission. This is of course all complicated by the hand-over of the EC and the wrangling over who will actually be in charge of enforcing the budget agreements. When all is said and done another muddle through is likely, but with the Eurozone facing economic stagnation investors may be less than convinced by such moves.

In Europe, a commitment is for life (unless you're France)

Give the French credit, they have an amazing ability to convince others that whatever the French position is, is also the 'pro-European' position.

At times, this can become laughable. Like today for example, when a UK journalist asked French President François Hollande to comment on David Cameron's hints at the 'repatriation' of EU powers. 

Hollande's answer,

To repatriate? Listen, generally when a country commits it is for life. Therefore, I believe that treaties are meant to be complied with. For the moment, I haven’t heard Mr Cameron asking to get out of certain [EU] competences during a European Council [meeting]. This discussion could take place but Europe is not a Europe in which you can take back competences. 

Right. Contrast and compare to François Hollande, March 2012 (during the presidential campaign),

I will renegotiate the fiscal discipline treaty not just for France, but for Europe as a whole. 

The [fiscal] treaty has been signed, but not ratified. Therefore, there’s some room for negotiation…My determination will be total.

Fair enough, "signed but not ratified" but still, hardly a display of cohérence by the French President. And with regard to France's record on the "when a country commits it is for life" stuff, we can't help but to think of this...

Just saying...

Silvio: Who cares about increasing borrowing costs?

We noted on our blog yesterday (and in a piece in today's City AM) that Silvio Berlusconi was likely to opt for populist, anti-austerity (and, potentially, anti-German) rhetoric to regain some ground ahead of the Italian elections.

It took Il Cavaliere 24 hours to prove us right. He told Canale 5 this morning,

The fact that the elections have been brought forward following Monti's resignation is irrelevant, because we are talking about [holding them] just over a month earlier. Therefore, there's absolutely no real reason for the markets to be upset. 

With regard to borrowing costs, let's stop talking about this imbroglio, please. No-one had ever heard about the spread before. We have only heard about it during the past year. Who cares about how much interest we pay to people who invest in our [debt] obligations compared to what is paid to investors who invest in German public debt?

When the euro was introduced, we used to pay a 4.3% [interest rate on our debt], and Germany used to pay a 3.3%. Germany then decided to do one thing in its own interest. It ordered all its banks to sell all the Italian Treasury obligations they had in their coffers...The other American and international funds thought, 'Well, if Germany is selling [Italian debt] there must be something wrong with it.' So they started selling too. 

What matters to us is that the interest rates [on our debt]...have gone up by 2% - which, in a year, means less than €5bn to be added to the €80bn [Italy pays] to service our debt.

Therefore, all the stuff that was invented about the spread is a real imbroglio. The truth is that the spread was used to try and bring down a majority voted by Italians.

Enough German-bashing for one day? Nope,

I was one of the 2-3 most influential leaders in the European Council...[but] I continuously opposed German proposals and demands. I said 'no' when Mrs Merkel was demanding that Greece suffered cuts which, in my opinion, would have brought Greece - as it then happened - almost to civil war. I said 'no' to the Tobin Tax...I said 'no' to the fiscal pact, and I even used the veto...to flag up that Italy could not commit to reducing its [public] debt by €50bn a year.

As we noted before, it will be interesting to see how receptive Italian voters will be to this kind of rethoric - and if the promise of an end to German-imposed austerity will make them forget about Berlusconi's trials and all the rest. 
 

The Fiscal compact in action....?

The eurozone chokes Spain....the fiscal compact in action?

An unfortunate picture has been doing the rounds this morning of Jean-Claude Juncker (Head of the Eurogroup of eurozone finance ministers) jokingly throttling the Spanish Finance Minister Luis de Guindos (don't worry they were all hugs after).

Nevertheless, this as an apt metaphor for the potential which the new fiscal compact has to choke economies such as Spain, with strict budget targets and massive austerity.

(More captions welcome in comments)

Markets vs. Democracy - Round 278

The Irish government has just announced that it will hold a referendum on the euro fiscal compact. The Irish Taoiseach Enda Kenny said he had taken advice from the country’s Attorney General, and made the decision to call a public vote. He also said he would sign the fiscal compact treaty at the meeting of EU leaders on Friday, and the details and arrangements for the referendum will be sorted and announced in the coming weeks, with a vote to be held before the summer.

The Irish government had previously said that the chances (or risks if you ask the markets and EU elite) of a referendum were always 50-50, so this was far from a foregone conclusion. And, as Zerohedge put it, markets have reacted badly to the news of democracy, with the euro weakening significantly. But what is the precise significance of this announcement?

• The vote will essentially determine whether Ireland has access to future bailout funds or not. For a country to access the ESM, the eurozone's permanent bailout fund, it must have ratified and fully adhered to the treaty, according to the terms attached to the deal. The Irish government has already given indications that it will tie its approach closely in with the prospect of further bailout funding, with Deputy PM Eamon Gilmore pointing out the link between emergency funds and the fiscal pact approval. These scare tactics are likely to grow throughout the referendum campaign, with the flip-side of rejecting the treaty being seen as tantamount to a vote for eurozone exit. In other words, the Irish will vote with a gun to their head.

• It provides yet another illustration of the clash between different parliamentary/constitutional democracies (in this case the German vs the Irish constitutions) that time and again have served as an ‘obstacle’ to perceived crisis solutions.

• Irrespective of the outcome, the vote will not derail the euro fiscal compact as it only requires 12 member state ratifications before entering into force, though it could well limit the impact of the pact.

• Those that thought that the complicated political situation in Europe could be reduced to a simple 26 vs 1 narrative, following Cameron’s ‘veto’ to an EU27 Treaty back in December, have received another reminder as to why that isn't the case.

In sum, it would have been difficult to avoid this referendum and we're glad the Irish government did not engage in the legal gymnastics that have been going on elsewhere in the eurozone (*cough* Frankfurt). If further fiscal integration is ever going to succeed (leaving aside whether it's desirable), it will have to happen with a clear and strong mandate from the people. This is also a practical point which market players should ponder. Changes built on a clear mandate from the people (particularly when wrapped in pretty heavy austerity) have a far greater chance of standing the test of time.

But the likely approach of tying a Yes vote to access to more bailout funds and greater security and a No vote to a eurozone exit is already worryingly over-simplistic. Finally injecting some democracy into the eurozone crisis should not be watered down by pigeonholing it into tightly defined categories.

That said, as we've noted, the fiscal pact has already been watered down itself and signing up to it would not be the end of the world for Ireland - but only if that's what the people decide after a full discussion of the issue.

Holding The Fiscal Treaty Hostage

Socialist candidate François Hollande (see picture) has begun to flesh out what his pledge to renegotiate the new European fiscal treaty on budgetary discipline would involve, if he wins the upcoming French presidential elections.

First, (and predictably, given that it is by far the most controversial point of the fiscal treaty, as we argued here and here), the leader of the French Socialists will seek to "clarify" the role of the European Court of Justice. In an interview in yesterday's Le Monde, Hollande said:

"In what framework would [the ECJ] intervene to verify the respect of budgetary discipline? What is the nature of the sanctions imposed on countries which don't respect [budgetary discipline]? These are all points that will have to be clarified."

Secondly, Hollande pledged to make the fiscal treaty less focused on austerity by introducing specific provisions aimed at boosting growth and employment in the EU. In particular, he mentioned,

"The possibility for the European Investment Bank to increase its lending capacity."

and,

"The possibility, within the framework of the EU budget, to use part of the structural funds to subsidise investment projects in weak growth countries."

Perhaps most interestingly, when reminded that twelve ratifications are needed in order for the fiscal treaty to enter into force, meaning that the agreement could potentially go ahead without France, he noted,

This treaty will be signed on 1 March, but I'm not sure that, in May [the second round of the French presidential election is scheduled for 6 May], more than one or two countries will have ratified it. Therefore, we will be able to renegotiate this treaty, signed but not yet ratified.

Hollande also said that he expected to get support from "countries such as Denmark or Italy, which are also seeking clarifications or additions [to the fiscal treaty]." However, he has no intention of putting the fiscal treaty to a referendum (bad memories from the French referendum on the EU Constitution perhaps?), because,

We won't hold a referendum on a treaty which doesn't mark a real rupture, unlike the Maastricht Treaty.

So, we might be looking at a pretty big showdown between Hollande and Angela Merkel. The German Chancellor isn't exactly helping either - saying that she is not planning to meet the French Socialist leader in the short term because "heads of state have more important things to sort out." Therefore, if Hollande - who according to opinion polls is heading for a victory - sticks to his electoral pledges once in power, France could effectively turn from a major supporter into a major obstacle for the new fiscal treaty.

As ever, the 26-versus-1 narrative is looking quite fluid...

Germany still doesn’t understand Greece

Despite being locked together in economic turmoil for almost two years, the reports which emerged over this weekend further suggest that Germany still does not understand the depth of some of the problems facing Greece (and that they cannot be tackled by a one dimensional policy).

We are of course referring to the leaked German proposal calling for Greece to cede budget sovereignty to the EU. Naturally, this is an impossible claim and was roundly rejected by Greece and the Commission, while German officials have spent the weekend trying to douse the flames behind the scenes.

It is not clear whether or not this was ever a serious proposal on the part of the German government, although stern talk from the German Finance Minister Wolfgang Schaeuble and the Economy Minister Philipp Roesler suggested that the sentiment behind the proposal was real enough. We will not dwell on the obvious and well documented political and democratic questions which this raises – it is clearly a step too far which could and would not ever be accepted by the EU in the current framework. There has been talk of a Eurozone finance ministry at some point in the future, but this stands apart from asking a single country to undemocratically cede control of taxation and spending to the EU- meaning the proposal was destined to sink as soon as it hit the water.

This substantial issue aside, the sentiment behind the proposal reveals a continuing misunderstanding of the Greek problem from the German government. Despite all the talk of “growth and jobs” in recent days, it is clear the emphasis is on austerity above all else. It also raises serious questions about Germany’s belief that Greek debt could ever be sustainable under Greek control – which should be a concern for German citizens since they are about to finance the largest share of another €130bn bailout.

Fundamentally though, as a recent OECD report noted, the problems within Greece run a lot deeper than just the ability to agree on the ‘right’ policies. For all its shortcomings, the Greece has instituted a multitude of deficit and debt reduction plans over the past year. However, the real issue comes with the implementation of these reforms, as the OECD comments:

“Ministries take decisions but these are often not reflected in concrete results. A succession of reforms launched in recent years (including reforms of the administration) did not bring the expected results, due to poor implementation.”

So, the problems do not necessarily lie with the politicians or the top level civil servants (or at least they do not stop there) meaning that shifting top level control to the EU would make very little practical difference.

These problems cannot be tackled overnight or by simply imposing more austerity. Germany has continually refused or failed to understand the nature of the problems facing Greece despite much of the public posturing. With the outcome of the Greek restructuring negotiations still far from clear, a change in tact is needed - although it could well already be too late.

Fifth time lucky?

Thanks to La Stampa Brussels correspondent Marco Zatterin's blog, we've just got hold of the fifth (maybe last) draft of the new 'fiscal treaty' on budgetary discipline, due to be discussed at today's meeting of EU leaders in Brussels.

As we are at the 'finishing touches' stage, changes from the previous version are getting more subtle and harder to spot. However, there are still a few interesting changes, including:

• In Article 3(1b), the so-called 'balanced budget rule' seems to have been further watered down. The wording "with the annual structural deficit not exceeding 0.5% of the GDP at market prices" has been replaced by "with a lower limit of a structural deficit of 0.5% of the GDP at market prices." We wonder how the markets will react: There's quite a substantial difference between imposing a maximum cap and a blander lower limit. We interpret this as meaning that the lowest the limit will be set for any country will be 0.5% (where as previously it could have been even stricter). Since the article still refers the the Stability and Growth pact we can infer that the new balanced budget targets will probably fall somewhere between 0.5% of GDP and 3% GDP (the deficit limit in the treaties);

• Non-euro countries will no longer need to implement at least part of the budgetary rules set out for eurozone countries in order to qualify for a place by the table at future summits of eurozone leaders. However, invites will still be allowed only for meetings which specifically focus on the implementation of the 'fiscal treaty'. In light of the recent agreement with the opposition Social Democrats, this is probably enough to have the Swedish government sign up. Poland's stance remains more uncertain, as the Polish government is clearly seeking greater participation;

• In a bid to win Denmark's support, the latest draft stipulates that fines imposed by the ECJ will be paid into the eurozone's permanent bailout fund, the ESM, only if they are imposed on eurozone countries. Otherwise, the money will be channeled into the EU's general budget;

• Regarding the fines, there's an aspect of the 'fiscal treaty' that is worth flagging up. Under the agreement, the ECJ will impose fines of 0.1% of GDP on countries that failed to comply with its previous ruling (on whether the countries have correctly incorporated the balanced budget rules into their national laws). This is a power that the ECJ seems to have under Article 260 of the Lisbon Treaty. The power to impose fines in such circumstances is therefore not a new power (and the ECJ still does not have the power to punish countries for missing their deficit targets). However, questions still remain over the eligibility of the ECJ to rule on whether the balanced budget rules have been correctly incorporated in the first place;

• Countries who want to join the agreement at a later stage will not have to wait for other Contracting Parties to "approve the application by common agreement." Under the latest draft, accession will become effective as soon as a country deposits the necessary instruments of accession - i.e. when it decides to ratify the 'fiscal treaty'.
  

Most changes aimed at convincing the remaining holdouts to sign up while keeping the tone of the treaty the same, but the 'lower limit' change does suggest a further watering down of the rules.

Update, 30/01/12, 1pm

Over on the Telegraph's live blog, it has been noted that this version of the pact does allow for some of the fines to go into the EU budget (as we also note above). The Telegraph suggests that this could benefit the UK, since budget surpluses are distributed to all member states. In theory this is true, but the fines which are paid into the EU budget will be those levied on non-eurozone countries. However, as we point out above, non-eurozone countries no longer need to incorporate any of the rules in order to be invited to attend future eurozone summits. In other words, non-euro countries would have no incentive to accept the rules set out in the 'fiscal treaty' before joining the single currency. What would they be fined for then? It seems very unlikely that non-eurozone countries would ever be fined and therefore that it could ever benefit the UK.

A new year, the same old problems...

Ahead of the first (full) EU summit of the new year, we've put together our thoughts on what progress to expect.

As per usual there are lots of topics to be discussed but we don’t expect too many concrete decisions. We’d expect a final draft of the euro fiscal pact to be completed, some progress on ESM - the eurozone's permanent bailout fund - and a commitment to "growth and jobs" (as opposed to recession and unemployment..?). Huge questions over Greece and size of bailout funds will probably remain. Below we outline the key issues to watch out for (take 2):

Fiscal pact: This should be last round of discussions on the new European treaty. The aim has always been to have the final draft completed by end of January. However, there are still a few issues which need to be resolved.

The key interaction is between how the rules will apply to those non-eurozone which sign the pact and how much influence they will have (i.e. how many meetings they get to attend and what decisions they will have an impact on). Sweden, Poland, Denmark and the Czech Republic will make their decision on whether to sign based on how this plays out. The final agreement won’t be finalised as the Czechs and Irish will still have to decide whether to hold a referendum on the treaty. Expect it all to be tied up at the March summit.

Our bet is on the Poles, Danes and Swedes signing up if they're guaranteed some sort of place at the table and if the rules of pact actually don't apply to them - creating a rather bizarre situation.

The UK and the use of EU institutions: We suspect that Cameron will reluctantly accept the formulation in the fourth draft of the fiscal compact which gives the ECJ the right to slap fines on member states for not implementing the pact's spending ceilings. Technically, this marks an overlap between the fiscal compact and the EU treaties - something which Cameron has argued against in the past.

ESM treaty: Behind the scenes negotiations have been on-going, so the draft should be fairly far along. The biggest sticking point was the use of Qualified Majority Voting (QMV) to make decisions within the ESM, which Finland objected to. There now looks to be a compromise. The Finnish Constitutional Committee announced today that it approves of the new wording in the ESM treaty, whereby QMV is used to disburse loans but for any change in the size of the ESM a unanimous decision is needed. The Grand Committee (representing the Finnish Parliament) will rule on Monday and is expected to support this position. This is pretty big.

Additionally, there should also be a discussion on the size of the ESM and whether the ESM and EFSF can run in parallel. It's hard to read Germany on this issue. There have been indications that Germany may be willing to let ESM and EFSF run together, but it would want the fiscal pact and Greece sorted before it is considered. It's likely the topic will be broached but final decision will be delayed until March.

Greek restructuring: EU leaders are unlikely to have a deal ready to present at the meeting so it may be more of a general discussion. Even if a deal is achieved, which reconciles the differences between Greece and its bondholders over the level of interest paid on the new bonds, there is still the huge question of holdouts and ECB. Expect these issues to be covered along with talk of increasing the size of the second Greek bailout and losses for public sector - but don't expect any big movements (at least not publicly).

Growth and jobs agenda: EU leaders have been pushing this 'new' agenda recently. After coming in for massive criticism for their undying commitment to austerity, they are keen to focus on boosting competitiveness, promoting growth, creating jobs and the like. Despite that, as of yet a coherent policy agenda to achieve this has not been formulated - most of the time there is just a broad commitment to ‘structural reforms’.

We expect much of the same from this meeting - leaders (David Cameron in particular) will play up the renewed focus on growth rather than just austerity but it remains unclear how much difference the EU can make on this front. Ultimately, national governments need to push ahead with long term changes to the structure of their economies (labour market reforms, increased education and training, investment in R&D, increased competition etc.) This will take time, money and political will, all of which the eurozone is short of at the moment.

The Draft Euro Fiscal Pact - Episode IV

We have just got our hands on the fourth draft of the European 'fiscal pact' (this time, the Telegraph's Bruno Waterfield - who is always quick off the blocks - beat us to it), which is being circulated among national delegations tonight. At a first glance, a very limited number of Articles have changed from the previous version - but all the changes look pretty significant:

• At the request of Germany, the preamble of the agreement makes now clear that, as of 1 March 2013, struggling eurozone countries will be allowed to apply for a bailout under the eurozone's permanent bailout fund, the ESM, only if they have ratified the 'fiscal pact'. The previous version only required that countries incorporate the balanced budget rule.
  

The new draft gives the European Commission a greater role, compared with the previous version. In fact,

• The Commission will set out "common principles" on the establishment of the national corrective mechanisms which, under the agreement, should be triggered automatically every time governments fail to comply with their deficit targets;

• Furthermore, the Commission is now allowed to issue a report on whether governments have correctly transposed the balanced budget rule into national law on its own initiative (under the previous draft, it needed to be "invited" to do so by a member state);
  

• More importantly, if the Commission's report concludes that a country has failed to transpose the balanced budget rule properly, "the matter will be brought to the ECJ by one or more of the Contracting Parties." In other words, a government can only be taken to the ECJ by its peers, at least formally. However, what the Commission says in its report plays a key role in the process.

In regards to the ECJ, its jurisdiction remains limited to Article 3(2), i.e. how national governments implement the balanced budget rule. But some very relevant changes have been made in Article 8, in particular:

• If a member state fails to comply with the first ECJ ruling (see above), it can be taken to the ECJ again. If the ECJ confirms that the government concerned has actually ignored its previous ruling, it can now impose a fine (no more than 0.1% of the country's GDP);

• Interestingly, under the latest draft, the fines "shall be payable" to the eurozone's permanent rescue fund, the ESM;

• In addition, a new paragraph has been added, which makes clear that Article 8 "constitutes a special agreement between the Contracting Parties within the meaning of Article 273 of the Treaty on the Functioning of the European Union".

What does that mean in practice?

This new paragraph really reads like an insurance against any possible objections from the UK regarding the use of the ECJ outside the EU Treaties. For those who, unlike us, do not remember the Lisbon Treaty by heart, this is what Article 273 says,

"The Court of Justice shall have jurisdiction in any dispute between Member States which relates to the subject matter of the Treaties if the dispute is submitted to it under a special agreement between the parties."

Therefore, this small paragraph makes the use of the ECJ (albeit still limited to a legislative rather than enforcement role) 100% legal under the EU Treaties.

One last thing is worth noting. Following suggestions from the Polish government that Poland might decide to stay out of the agreement in the end, unless non-euro countries are allowed to be present at future meetings of euro leaders, the latest draft establishes that:

• Non-euro countries that decide to sign up to the agreement must be kept "closely informed of the preparation and outcome" of eurozone summits;

• The leaders of non-euro countries must be invited to eurozone summits at least once a year. However, the invites would be restricted to non-euro countries that not only signed and ratified the agreement, but also "declared their intention to be bound by some of its provisions."
  

Sounds like a tricky trade-off: the Poles are unlikely to take too kindly to having to institute the eurozone fiscal rules before they've joined the euro...

Fresh Trouble for the Fiscal Pact

One week after we published the third draft of the new European 'fiscal treaty' setting out tougher deficit and debt rules for eurozone countries, and with a fourth draft imminent, a quick update on where negotiations are at the moment.

The big news today comes from Prague. We reported last week that Czech Deputy Prime Minister Karel Schwarzenberg had threatened to pull his party out of the ruling coalition if the government decided to stay out of the 'fiscal treaty', but Czech President Vaclav Klaus had insisted that he would not sign the agreement "under any circumstances."

Well, the Czech government has now decided to put the issue to a referendum after several rounds of "very bloody negotiations", in the words of Radek John, the leader of Public Affairs - the smallest party of the coalition (pictured). The Czech Republic is not part of the euro, meaning that eurozone countries could still go ahead with the adoption of the fiscal treaty, without having to wait for the outcome of the referendum (non-euro countries can join at a later stage).

However, the announcement is extremely relevant for at least two reasons. First, there's now a concrete possibility of the Czechs staying out of the 'fiscal treaty', which would be the coup de grâce for the 26-versus-1 scenario depicted by a large portion of UK and European media in the wake of Cameron's veto at last month's EU summit (we had a go at showing why these reports were rushed, to say the least, see here and here).

Second, the news of a Czech referendum may trigger public and political pressure for a referendum in Ireland. This would not necessarily destroy the treaty because if a referendum were held on Irish ratification of the treaty, rather than simply the government's agreement to it, the treaty could still enter into force in theory. The last draft required 12 ratifications among euro states to enter into force but, certainly, it would throw a major spanner in the works and thoroughly undermine the credibility of the treaty if Ireland (the recipient of a bailout package) were not fully signed up at an early stage.

But there could be another problem, and a quite surprising one. In fact, it looks like the Polish government is not happy with the latest draft, which (as the previous two) would exclude non-euro countries from attending meetings of eurozone leaders - a strong incentive for many of the non-euro countries to sign the treaty.

And sure enough, the Polish government is now suggesting that it might not join the 'fiscal treaty' unless its request is taken on board - Germany is thought to be rather keen on having the Poles signed up. This is what Polish Prime Minister Donald Tusk told the press yesterday,

"Our efforts aim at a fiscal agreement the shape of which does not make the division of Europe into two clubs - the eurozone and countries outside the club - more lasting than is safe in our opinion."

Meanwhile, a fourth draft of the agreement is being finalised, and should be made available ahead of the next meeting of finance ministers on 23-24 January. The way ahead still looks quite rocky...

The Euro Fiscal Pact: The saga continues, now with better news for Cameron

Following last Friday's meeting of negotiators from EU member states (including the UK), a third draft of the new European fiscal pact is now out. As with the version of the draft out last week, Open Europe has got hold of a copy of the revised draft (available here) and, yet again, we're the first in the Anglosphere to publish the draft.

From the UK's point of view, there are some significant changes, at this stage marking a victory for Cameron and Clegg. The controversial reference to the single market in Article 1 is no longer there - the UK has consistently said there should be no overlap between the euro fiscal compact and single market rules - and the role of EU institutions has been narrowed substantially.

From the eurozone's point of view, the draft may actually be worse news than the previous version, as the markets could judge the watering down of the enforcement mechanisms through the EU institutions as a weakness similar to those haunting the original Stability & Growth Pact. Looks as if the Germans have caved in a bit on an extensive role of the ECJ (which the French never were entirely happy about).

After a first glance, the following are the most significant changes from the previous version:

• The reference to the single market which reportedly infuriated UK negotiators has gone;

• A sentence in Article 2 establishing that "In accordance with the case law of the Court of Justice of the European Union, EU law has precedence over the provisions of this treaty" has also disappeared (this could be both good and bad news for the UK and other non-euro members - we'll return to that);

• The expression "structural deficit" has been replaced by "structural balance", but details on what it means in practice are still lacking;

• Article 6 on the coordination of debt issuance has been tweaked and now reads, "With a view to better coordinating the planning of their national debt issuance, the Contracting Parties shall report ex-ante on their public debt issuance plans to the European Commission and to the Council";

• Under the revised draft, the Commission would not be allowed to submit proposals/recommendations to countries with an excessive public debt (something Italy is particularly concerned about, due to its large debt), but only to those running excessive deficits;

• There seems to be a major backtrack on the role of the ECJ, as its jurisdiction is now again restricted to overseeing whether member states properly transpose the balanced budget rule into national legislation;

• In addition, the European Commission no longer has the power to take governments to the ECJ. Under the revised draft, the Commission can be "invited" by member states to issue a report on a country which is thought to be in breach of Article 3(2) - the one on the balanced budget rule. If the Commission supports the breach, the concerned government can be taken to the ECJ, but only by another government;

• The Economic and Monetary Affairs Commissioner would be excluded from the meetings of eurozone leaders, along with the Chairman of the Eurogroup (but Jean-Claude Juncker should not worry too much about this, given that he will attend as Luxembourg's Prime Minister);

• The latest draft includes a specific date for the entry into force of the fiscal pact, 1 January 2013. The number of countries that need to ratify the treaty before it enters into force is now twelve (down from fifteen, which was probably too ambitious, given the problems that could potentially arise in Ireland, Slovakia and Finland);

• A brand-new Article 15 has been added, which reads very much as an invitation to the UK and other non-euro members, "This Treaty shall be open to accession by Member States of the European Union other than the Contracting Parties upon application...The Contracting Parties shall approve the application by common agreement";

• As regards the transposition of the fiscal pact into the EU Treaties, the wording has been slightly toughened up. The expression "an initiative shall be launched" has been replaced with "the necessary steps shall be taken...with the aim of incorporating the substance of this Treaty into the legal framework of the EU."
  

We doubt this is the last word though...