European Council draft conclusions: have Merkel's 'reform contracts' made a comeback?

As we noted in our previous blog post - and as we predicted in our briefing trailing the German elections - Angela Merkel could now well be pushing for so-called 'reform contracts' or 'competitiveness pacts' (which is what they're called in the CDU/CSU manifesto). The idea involves trading exceptionally strong reform commitments in the eurozone periphery in return for German cash.

We've managed to get our hands on an updated version of the draft European Council conclusions (which is doing the rounds in Brussels) ahead of the meeting of EU leaders later this week.

And what do you know, the following paragraphs have made it in (our emphasis):

"The Commission will provide a first overview of the implementation of country-specific recommendations that will be a basis for the monitoring of their implementation. This will also assess growth and jobs enhancing policies and measures, including the performance of labour and product markets, the efficiency of public service, as well as education and innovation in the Euro area.

On this basis, work will be carried forward to strengthen economic policy coordination, including on the main features of contractual arrangements and of associated solidarity mechanisms."

It's a vague formulation - and hard to know exactly what it means - but we think it's at least fair to assume that the idea is back on the agenda (our view is it never quite went away). As we've argued repeatedly, the kind of beefed-up supervision and enforcement that the Germans have in mind would most likely require EU treaty change. The nature, scope and timing of such a Treaty change is anyone's guess at the moment, however.

Has the Dutch VVD moved further than the Tories on EU reform and return of EU powers?

In the Dutch Parliament earlier, the VVD (the party of the Dutch PM) EU spokesman Mark Verheijen said he thought EU treaty change was “inevitable” and what is more

"when we want less Brussels in several domains, return whole policy areas, then we should not shy away from the option of treaty change."

This is interesting for three reasons:

First, though stressing the need for the EU to do less, until now, the VVD hasn't really been calling for the return of 'EU powers' - this statement is a challenge to the current division of labour between member states and Brussels.

Secondly,  Dutch politicians - including those from the VVD - have been keen to point out they're not seeking EU treaty change, but want to roll back Brussels' interference within the existing structure.

Finally, together with the recent Dutch "subsidiarity review" - that called time on 'ever closer union' in all policy areas -  the VVD Party has moved into areas that David Cameron has so far not dared not go - explicitly looking forward to and advocating treaty change and outlining concrete areas where the EU shouldn't be involved.

Intriguingly, however, later in the same debate Prime Minister Mark Rutte stepped in to cool it all down a bit. Well, he explained, the Dutch government is not actually proactively in favour of EU treaty change "unless it has already become inevitable". In this scenario he would forward his own ideas but he would not take the initiative.

It's almost as if Europe is waiting for someone to take the initiative...

Italy: A new (and unexpected) ally on EU reform for David Cameron?

Italian Prime Minister Enrico Letta has probably made a lot more friends than he expected on his first official visit to the UK. This is largely due to a couple of quite sensible remarks he has made about the future of Europe and Britain's role in it.

Asked by the BBC's Gavin Hewitt about the UK returning significant powers from Brussels, Mr Letta said, 

"It can be possible and it could be useful for us too...We need a more flexible Europe...We can have a new [EU] treaty negotiation for the UK to have a different link, but remaining on board, and for Italy or other countries in the euro to have a more integrated eurozone."

He was even more specific during the joint press conference with David Cameron earlier today,

"I think it will be possible to have a common very near future in which we can have [EU] treaty changes for having a more flexible Europe in the interests of the UK, but also in the interests of Italy and the euro area countries."

This certainly challenges the assumption that there's no appetite for major treaty changes across Europe.

Meanwhile, in a piece for the Guardian's Comment is Free, Mr Letta also argued,

"Greater integration in the eurozone should not challenge the integrity of the single market or leave countries outside the eurozone less comfortable with their membership of the [European] Union...We need to reshape the Union, so that it can accommodate the interests of countries which want to move forward towards greater political and economic integration, and countries which prefer a co-operation around the single market."

Furthermore, during the joint presser, Mr Letta repeated several times that the single market is "the main pillar" of the EU because, unlike the single currency, it is shared by all 28 member states.

This is music to David Cameron's ears. Italy is traditionally one of the most pro-integration EU member states, and while Mr Letta believes in the 'United States of Europe', the fact that he also acknowledges the need to make the EU "more flexible" is potentially significant. It means that more integration in the eurozone, if that is what happens, is not incompatible with a more flexible, looser relationship for other countries outside the single currency.

As UK Foreign Secretary William Hague put it in his speech at Open Europe's summer reception last night,

"Change in the EU is worth fighting for and that change would not just benefit Britain but every country in the EU."

Well, the UK may just have found a new, and somewhat unexpected, ally in this fight. 

Has Germany really gone off the idea of EU treaty change? (Part II)

Some EU pundits have spent the last several months arguing that a change to the EU treaties is a non-starter. "Don't you know", they say with a high degree of confidence "the Germans have gone off it." And in any case, no one else wants it any way for fear of ratification problems, not least in France.

Charles Grant from the Centre for European Reform said last week that "the Germans have cooled on the idea of rewriting the treaties." Another observer on BBC Newsnight (not our guy of course) said as late as last Friday that "the German government isn't at all keen on EU treaty change in the short-term", which the studio discussion then picked up on.

It's is definitely the case that the appetite for EU treaty change across Europe is limited, and for that reason it'll be a challenge to achieve it. But as we've said repeatedly, it's absolutely 100% wrong to say that the Germans have gone off the idea of EU treaty change. As we stated in our briefing ahead of Cameron’s Europe speech in January:

“There are currently seven broad proposals floating around for more Eurozone integration – most of which need EU treaty changes to be fully completed...Germany, in particular, is nervous about ad hoc-arrangements lacking firm constitutional grounding.”

Here is the full list:

Crucially, this also includes current proposal for a banking union, which from a German point, sit uncomfortably with the EU treaties. A few weeks ago we noted,

"Those who say that Germany has 'gone off the idea' of Treaty change - in light of David Cameron's speech where he mentioned EU treaty change as an avenue for reform - clearly haven't quite appreciated the nature of the proposals floating around."

Well what do you know, as we reported in today’s press summary, at last week's crucial meeting of EU finance ministers, German Finance Minister Wolfgang Schäuble insisted that an EU Treaty revision is necessary to achieve a banking union, claiming that:

“We’ll only do this on a clear legal basis, because I don’t want risks in Karlsruhe.”

Somehow this announcement still managed to surprise people. But wasn't it always obvious? Anyone who is at all familiar with German history will understand why they're so keen to separate monetary policy from bank supervision. If keeping the two tasks with the ECB, such separation can only take place  if there's a rewriting of the EU treaties (so that the final say no longer rests with the ECB Governing Council). This also matters for non-eurozone countries as that guarantees them an equal say in the ECB supervision structure, and therefore makes them more likely to join (particularly Sweden and Denmark, which the Germans are keen on). Indeed, the Swedes - in a very brave moment - tried to push for just such a treaty change but dropped the idea. Further steps, such as a joint resolution fund, will also require treaty changes.

There are plenty of hurdles to fresh EU Treaty negotiations - some countries will want to avoid them like the plague - and even if the Germans can get them off the ground, the timing and scope (limited or full?), remains unclear. It is also still not fully clear whether the eurozone could circumvent the UK via an inter-governmental arrangement if the latter kicks up too much fuss.

But what's clear is that, in the land of ordnungspolitk, the idea of an EU treaty change is alive and well. So hör auf mit dem Blödsinn as the Germans would say.

Has Germany really gone off the idea of an EU treaty change?

Usually technical meetings behind closed doors in Brussels are pretty dull. However, judging by some of the reports floating around, yesterday’s meeting of the EU Committee of Permanent Representatives (COREPER) may have bucked the trend somewhat. This is the negotiation forum for member states' EU ambassadors - the key guys involved in talks over EU policy. This is where a lot of decisions, de facto, are being made.

As we noted in today’s press summary the UK was outright outvoted on the plans for capital requirements for banks (CRD IV), which entail the controversial caps on bankers' bonuses. 

However, though it was already clear that the UK had lost that particular battle, it was the talks over the EU's proposed, and in part agreed, banking union which caught our eye. EU ambassadors failed to reach agreement amid continued North-South divisions, but the reason why is interesting.

Most media failed to pick up on this, but the WSJ Real Time Brussels blog rightly notes that Germany was strongly pushing for a clearer separation between the ECB's monetary duties and supervisory responsibilities, to avoid a running conflict of interest (see here). The only way this can really happen is to give the supervisory board the final say over supervisory decisions (as opposed to now when it rests with the ECB's Governing Council). This, in turn, requires EU treaty change. The Germans wanted a clear commitment from other member states that this would happen.

According to the WSJ, Berlin also insisted on giving national parliaments (not just the European Parliament) the right to ask questions and get answers on supervisory policy, and giving states under the single supervisor along with the EP the power to remove the Vice Chairman of the supervisory body.

A couple of interesting points there. This is an incredibly fluid target but those who say that Germany has 'gone off the idea' of Treaty change - in light of David Cameron's speech where he mentioned EU treaty change as an avenue for reform - clearly haven't quite appreciated the nature of the proposals floating around. Of course, Berlin won't be shouting it from the rooftops ahead of a national elections and with the relationship with France at an all time low (well almost), but in many of the Germans demand on eurozone governance is an implicit acknowledgement that something has to change in the EU's institutional framework (see our table here of the broad proposals being discussed [p.9]).

The scope (limited or full treaty change), nature (EU treaty or inter-governmental) and timing will be discussed, but it will likely happen sooner or later.

Could Cyprus leave the Eurozone but stay in the EU?

Now, we're not necessarily saying that Cyprus should leave the eurozone.

But with eurozone finance ministers set for a pretty long and rough night of talks, trying to reach a compromise that will allow Cyprus to live another day inside the eurozone, the question is, if it came to it (i.e. if a deal can't be agreed and ECB turns off the taps), could the country leave the euro but stay in the EU? As we note here and here, due to Cyprus' geopolitical importance, if it did ditch the Single Currency it would be vital that it stayed in the EU.

Leaving aside the question of how Cyprus would be ring-fenced and given a reasonable chance of bouncing back with its own currency (a big one to leave aside admittedly), what would the legal and political mechanics look like?

There is currently no mechanism for a country to leave the eurozone. However, there is a provision (article 50 TEU) that allows for a negotiated exit from the EU. This has lead some analysts to conclude that a country has to leave the EU if it left the euro. We disagree.

As so often in the EU, this will come down to political negotiations. The below analysis is based on our paper from last year on a possible Greek euro exit (which, incidentally, we said was unlikely to happen in the short-term). The line of reasoning very much applies to Cyprus. 

Given the absence of a specific euro exit article, there are two ways in which a country can leave the Single Currency.

• Changing the EU treaties to allow for a euro exit mechanism, perhaps modelled around article 50 (possibly even simply extending the article to refer to a euro exit) or the idea – floated by German politicians – to automatically trigger an exit if a state is unwilling or unable to comply with the rules governing the single currency. This would require agreement amongst all 27 member states and would essentially be a treaty renegotiation (making it complex and long winded). 

• Using existing articles in the treaties which provide flexibility to address a number of issues, such as article 352, to legally facilitate withdrawal from the euro but not the EU. This would also require agreement amongst all 27 member states and the European Parliament. Per definition, a decision for Cyprus to leave the euro has to happen essentially overnight (some estimates have put the real time available at 46 hours). This is problematic as a treaty change could take months, even using the fastest track (the simplified revision procedure, which needs to go through at least some national parliaments). 

Historically, political expediency has trumped EU law. Although it would not be clear cut or easy – and involve a legal stretch – we believe that in order to take a swift decision and avoid a Treaty change EU leaders could (and most likely would) use existing provisions in the EU treaties to allow for a Cyprus euro exit. In particular Article 352 TFEU – sometimes referred to as “the flexibility clause” – allows member states to take measures to achieve EU “objectives” (subject to unanimity and consent of the European Parliament but not ratifications in parliaments), when those are not already provided for in the EU Treaties. Article 352 states,

“If action by the Union should prove necessary, within the framework of the policies defined in the Treaties, to attain one of the objectives set out in the Treaties, and the Treaties have not provided the necessary powers, the Council, acting unanimously on a proposal from the Commission and after obtaining the consent of the European Parliament, shall adopt the appropriate measures."

This article could be used to provide a legal temporary avenue for Cyprus to leave the euro within the framework of the EU treaties. This would be far from an easy process; there would likely be numerous legal challenges against the move, while the negotiations would be hazardous and subject to domestic political constraints.

Precisely for this reason, a full treaty change would almost certainly be necessary very soon after the actual Cyprus exit (and use of article 352), which would change Cyprus status under the EU treaties from a euro member to a non-euro one and recognise, at least in retrospect, that there is a way for a country to leave the euro (under an expanded article 50 for example). Such a Treaty change would, at least in theory, go some way to counter some of the political uncertainty and legal ambiguity around the status of Cyprus’s EU membership and therefore reduce the risk of legal challenges. However, a full treaty change would come with its own set of political and legal complications. As with Article 352, a treaty change could only happen if all member states agreed. In addition, the changes would most likely have to be ratified in national parliaments.

So far from straightforward, but still plausible.  

Cyprus crisis shows Europe cannot perpetually move in one direction only

In an op-ed yesterday's Times, Mats Persson argued that:

No matter how the nail-biting drama in Cyprus ends, the eurozone has never been this close to waving goodbye to a member. Yesterday afternoon the deputy leader of the ruling party claimed that his country was hours away from agreeing an emergency package of tax rises and spending cuts to secure the EU’s €10 billion rescue loan.

If no deal is struck by Monday, the European Central Bank, on whose cash Cypriot banks depend, will pull the plug. With a banking sector seven times the size of GDP, Cyprus would default and probably crash out of the euro. The big question is whether a country can exit the euro without taking all Europe down. In the case of Cyprus the answer is straightforward: it could leave without causing a crisis, but it wouldn’t be pretty.

For Cyprus it would be extremely messy. To avoid massive capital flight there would have to be strict controls on financial movements, with border guards ready to stop people taking cash out of the country. After that would come a decree establishing a new Cypriot currency and a series of defaults on foreign debt. This would probably all have to be done in a weekend to avoid panic and contagion. A new central bank in Nicosia would fire up the printing press, which could trigger inflation. Cyprus could limp on with the help of external cash, possibly from the EU and the IMF or Russia — but it would be painful.

 For the rest of Europe there is a fear that a Cypriot exit could bring down Greece, Portugal, Spain or Italy. There are three ways in which contagion can spread: direct losses for banks or governments elsewhere in the EU start a chain reaction; depositors in other countries panic and cause a bank run; or nervous international investors fearful of losing out to the “next Cyprus” push the cost of borrowing up for other indebted governments.

But this is unlikely. Cyprus accounts for only 0.2 per cent of eurozone GDP, and vulnerable countries have little exposure to its economy. Greece would take a hit, but is already ring-fenced via EU bailout funds. Depositors in other countries have so far been unfazed by Cyprus’s troubles and even markets have been relatively calm. This suggests that Cyprus is a special, and financially marginal, case. In addition, the ECB’s promise to “do what’s necessary” to save the wider eurozone will provide extra reassurance to markets.

Instead the risks of a Cyprus exit are mainly geopolitical. The fear is that Nicosia turns to Russia for aid in return for, say, a Russian naval base on the island. Given its location, this would be a strategic nightmare for Europe.

To avoid such a scenario, it would be vital for Cyprus to stay in the EU, even if it left the euro. While life outside the EU may sound appealing to many Brits, it is different for a small open economy such as Cyprus. To complicate matters, EU treaties currently provide only a way to leave the EU (Article 50 of the Lisbon treaty), not the eurozone.

However, the EU specialises in legal acrobatics and there are articles in EU treaties that can be used for all kinds of purposes. One such clause provides a general legal base to achieve the “objectives of the treaties”, which include protecting the EU itself. It will be wrapped in a cobweb of legal jargon, but will effectively come down to a political decision by EU leaders.

And this is where it gets interesting for Britain. A Cypriot euro exit would have wide political ramifications: one of the founding principles of the EU — “ever closer union” — would be history. A swift, “Band-Aid” solution would almost most certainly have to be followed by a reworking of the EU treaties to recognise that the direction of travel is no longer only towards greater integration. The EU will have become a two-way street in which powers can be passed back to member states and its laws and institutions will have to reflect that.

Even if Cyprus does not leave the euro — and a revised bailout deal remains the most likely outcome — this episode signals that Germany and the other northern European countries are no longer willing indefinitely to foot the bill alone. At the same time the eurozone continues to lack the tools to deal with an acute crisis. This makes change almost inevitable for the way the eurozone is governed. Some governments have already called for a formal mechanism to allow a country to exit the euro. Europe cannot, perpetually, move in only one direction. And, in one way or another, Cyprus may be about to prove that.

How realistic is Cameron's timetable for EU reform?

As Open Europe Director Mats Persson notes over on his Telegraph blog, in his speech today, Cameron has set himself a concrete timetable, despite the fact that timetables in Europe are notoriously difficult to control. A treaty change discussion could drag on for years. Here we look at how a few examples of how slowly or quickly it takes to reach a decision in Europe.

Basically, EU treaty changes or fundamental reform can take an enormous amount of time - or it can happen in months. It's all a matter of political expediency - and how bad Europe needs it / wants it. The single EU patent, for example, took 37 years to negotiate. Setting up a €440bn bailout fund took 12 hours (though it was followed by a year of bickering over what they actually had agreed).

So here are some examples. Those who say Cameron is stuffed, could point to:

Single EU patent – 37 years 
The Convention for the European Patent for the common market was signed at Luxembourg on December 15, 1975, by the 9 member states of the European Economic Community at that time. However the CPC never entered into force as it was not ratified by enough countries. It took until last December for a an agreement on the creation of a single patent system across 25 member states.

Fisheries reform – 21 years and counting 
In 1992, it was determined that there had been over-investment in vessels, overfishing and that numbers of fish landed were decreasing, and that reforms were needed to address these issues. Completing the reform of the Common Fisheries Policy (CFP) by the end of June 2013, in a single reading if possible, is the goal of the current Irish EU Presidency.

UK Rebate – 10 years 
In 1974/75 the Wilson Government sought to resolve the UK contribution question - which was the highest in net terms - during the “renegotiation” of the UK’s terms of accession which it had promised in its October 1974 election manifesto. The UK did achieve a new corrective mechanism but the revised formula (which placed more emphasis on national wealth when calculating our contribution) in practice produced no real benefit to Britain. In 1984, Margaret Thatcher secured the UK rebate in its current form.

European Constitution/Lisbon Treaty – 8 years 
The drafting for European Constitution was initiated by a declaration annexed to the Treaty of Nice in 2001, and the draft Constitution was signed on 29 October 2004 by representatives of the then 25 member states. Following the ‘no’ votes in the French and Dutch referendums, negotiations over the Lisbon Treaty began in 2007 and the new Treaty was ratified in 2009.

...but those who say that, given the enormous stakes, Cameron actually achieve something substantial, could point to:

Limited treaty change to establish new eurozone bailout fund – 5 months 
On October 29 2010, following pressure from German Chancellor Angela Merkel, EU prime ministers and presidents backed "a limited treaty change" to deliver tighter fiscal discipline and allow for the creation of a permanent bail-out fund for members of the eurozone. On March 25 2011, the European Council agreed to amend Article 136 of the Treaty on the Functioning of the European Union with regard to a stability mechanism for Member States whose currency is the euro.

Setting up a new €440bn eurozone bailout fund - 12 hours
On May 9 2010, following 12 hours of talks in Brussels, EU financed ministers agreed to establish the EFSF, a temporary bailout fund composed of government-backed loan guarantees and bilateral loans worth up to €440bn provided by eurozone members.

In EU politics, when you hear someone giving you an easy answer, it's probably the wrong answer...

The Coalition's mid-term review on Europe: Bland and blander

Yesterday saw the publication of the Coalition's 'mid-term review', the aim of which was to "take stock of progress in implementing the Coalition agreement" and to set out the government's objectives for the remainder of its period of office.

The Europe section of the review was arguably the blandest part of what was a very bland document overall. So hardly exciting. The government highlighted the "referendum lock" on future treaty changes, disentangling the UK from the eurozone bailouts, and establishing the single European patent as its "achievements" (the first and third are genuine achievements). Like all UK governments in recent decades, it also stressed the need to remove the burden of unnecessary regulation and to secure a tough EU budget settlement.

As ever, the differences within the parties on Europe - though you wonder if they aren't sometimes more perceived than real -  mean that the Government seems unable to set out a 'grand vision'. As the Sun noted in its leader today, 'Europe' remains the "elephant in the room". To be fair, the Labour party, which has the luxury of the purity of opposition, has also failed to set out where, exactly, it wants the UK in Europe.

In other words: we're all still waiting for Cameron's EU speech...

Who said EU federalists don't get headlines in UK media (but 'associate membership' for Britain is hardly a revolutionary thought)

The Union of European Federalists – an umbrella group of federalist organisations and lobby groups – got a pretty good hit in the UK media on New Year’s eve when the Times (and later other papers) picked up on a forthcoming paper by the group, which is expected to argue that the UK be granted “associate status” in the EU, a few days after Jacques Delors made similar comments.

So EU federalists can make headlines in the eurosceptic UK press after all, although we would hasten to add that an intervention by a few MEPs and retired politicians can’t qualify as a “Brussels plot” – you at least need to have some scheming Commission bureaucrats on-board for that. Apparently, the paper, which will come in the form of a draft “EU Treaty”, will be based on a report by Andrew Duff, the Lib Dem MEP.

According to Duff, the UK would be given “membership based on trade and the single market”, with a UK judge at the ECJ but no Commissioner and no MEPs. The objective is clear: Given that the UK is a perceived as a  “continual impediment” to greater EU integration, associate membership of the EU would be devised “to prevent a British veto of the constitutional evolution needed and desired by its partners”. Curiously, and perhaps testament to the world view of the author, there’s no mention of what would happen to the UK’s voting weight/rights in the Council of Ministers, the forum where national governments are represented. They might want to work that one out before publishing their draft EU treaty.

Either way the idea is for the UK to effectively be given access to the single market but with little say - like Norway but with some twists and without the EEA-wrapping. This is hardly revolutionary stuff and the author, though an interesting guy, isn’t exactly the go-to guy in key national capitals. So don’t expect this to become policy any time soon. To view the UK as an “impediment” - ignoring the moving goal posts created by the eurozone crisis - is also predictably simplistic.

In addition, there are massive obstacles to more EU integration also amongst “EU partners” and European public opinion – from joint and several liabilities in Germany, to Bundesbank-style budget controls in France to banking union in Sweden. But Duff’s contribution is nonetheless welcome as it does remind us of the need to develop a new model for EU integration in light of changing economic, political and economic circumstances – one that is better at reconciling different democratic decisions in member states with EU cooperation. This is a debate that should be in everyone’s interest to have under way.

EU treaty change: Nowhere to run, nowhere to hide…

 It’s not the focus of the SW1 bubble today, but David Cameron will be taking a deep breath after Jose Manuel Barroso used his ‘state of the Union’ address (we know…) to call for a debate on rewriting the EU Treaties in 2014. It seems there is now no avoiding the major strategic decisions on Europe that both the Conservatives and the Lib Dems have been desperate to avoid lest they tear apart their increasingly fraught marriage.

In one of his most overtly political speeches to date, Barroso was explicit: this crisis is the perfect time to take the next great leap towards a federal Europe. “Where we cannot move forward under the existing treaties, we will present explicit proposals for the necessary Treaty changes ahead of the next European Parliamentary election in 2014, including elements for reinforced democracy and accountability,” he said. “No one will be forced to come along. And no one will be forced to stay out. The speed will not be dictated by the slowest or the most reluctant.”

He hinted that the new treaty discussions would be a wide-ranging affair rather than the more limited crisis-response changes made so far. “This is not just a debate for the Euro area in its present membership. While deeper integration is indispensable for the Euro area and its members, this project should remain open to all Member States.”

The details of the proposals were left open but Barroso did offer his broad vision for the future:

“A deep and genuine economic and monetary union, a political union, with a coherent foreign and defence policy, means ultimately that the present European Union must evolve.”

“Let’s not be afraid of the words: we will need to move towards a federation of nation states. This is what we need. This is our political horizon. This is what must guide our work in the years to come.”

“I call for a federation of nation states. Not a superstate. A democratic federation of nation states that can tackle our common problems, through the sharing of sovereignty in a way that each country and each citizen are better equipped to control their own destiny.”

There was much talk of making the EU “more democratic” and he hinted that his preferred vehicle for doing so is the European Parliament, whose role he described as “essential.” He called for the development of pan-European political parties and for the parties to announce their candidates for Commission President as part of the election campaign.

He also called for a “better developed set of instruments” to bring wayward member states into line with the values of the EU, “not just the alternative between the ‘soft power’ of political persuasion and the ‘nuclear option’ of article 7 of the Treaty,” which currently allows the EU to suspend the voting rights of countries deemed to be in “serious and persistent breach” of the values set out in the Treaties.

In short, it looks like the European Commission is shaping up for a full scale constitutional shake up of the EU a year before the General Election in the UK, a year that is already packed full of EU agenda items: the block opt-out of crime and policing law, the Government’s audit on EU powers is due to be published, there are also European elections, where UKIP could do very well, the aftermath of the long-term EU budget talks and the appointment of a new UK EU Commissioner. There are a huge number of strategic decisions for the UK involved in this discussion (which we have looked at, and will continue to look at).

But one thing is clear, if Barroso gets his way, there will be nowhere for Cameron to hide from an EU renegotiation before 2015.

A new eurozone parliament?

This morning, Handelsblatt is reporting that EU Council President Herman Van Rompuy, Commission President José Manuel Barroso, Eurogroup chief Jean-Claude Juncker, and ECB President Mario Draghi's plans to redesign the architecture of the economic and monetary union include the prospect of a new 'eurozone parliament'.

The details are understandably vague but, according the German daily's report, the new parliament, in which both MEPs and national parliamentarians would sit, would have powers over eurozone members’ fiscal and economic policy. Whether the EU will need yet another building for this is yet to be addressed...

Nevertheless, the proposal, if it ever sees the light of day, will be hugely controversial with both euro and non-euro members and would of course require Treaty change.

In addition, Van Rompuy and Barroso need reminding that they represent the 27 member EU and not simply the eurozone and that any brief to restructure the eurozone needs to square this with the EU as a whole and the requirements of the single market. Additionally, as we have argued, the UK must ensure that any grand eurozone plans such as these are a quid pro quo for establishing a space in Europe for those countries not intent on joining the single currency, and also for those that may choose to leave.

This might then provide a new form of membership that the UK could live with in the long term.

A new EU treaty, a December summit… Déjà vu anyone?

A key question for the future institutional arrangement of the Eurozone is whether further integration will happen at the level of all 27 member states, within the framework of the EU treaties, or whether the Eurozone will simply press ahead with an ‘inter-governmental’ deal, circumventing the acquis communautaire and non-eurozone members.

This is critical for the UK as under the latter option, Britain will have little to no leverage over future Eurozone integration, whereas under the former it’ll have a solid veto, which it can use to extract all kinds of concessions in pursuit of its national interest. Following Cameron’s veto to an EU-27 treaty change last December – which resulted in the intergovernmental fiscal treaty - a host of eurosceptics and status-quo defenders alike now tend to argue that the precedence has been set; Eurozone members can do whatever they want inter-governmentally, they say, and use the EU institutions at that. Britain has been reduced to the role of a spectator. The plot has been lost and the goose has been cooked.

From there, some eurosceptics reach the conclusion that Britain should withdraw altogether, whereas the status quo defenders say Britain should hop on the train towards more integration (at which point they cease to be status quo defenders and turn into brave souls advocating that Britain signs up to a euro superstate).

So has the goose been cooked?

Well, this week’s Spiegel magazine splashed with the news that the German governmet is pushing for a new EU treaty that will consolidate and expand Eurozone budget oversight powers – referred to in Germany under the euphemism of ‘political union’ - under a firm legal framework. Chancellor Angela Merkel is reportedly pushing for a convention – comprising representatives from national governments and parliaments, the European Parliament and the European Commission – to be formed by the end of the year, with a first meeting to be agreed at an EU summit in December. If the article is accurate, a ‘convention’ would be about a ‘full’ Treaty change, not the limited one agreed in December 2010.

One of the main changes sought is the provision for the ECJ to rule if national budgets comply with the EU's fiscal rules, with the option of credible sanctions for non-compliance, something Merkel failed to secure in the inter-governmental fiscal treaty last year – courtesy of French nervousness over loss of souveraineté.

It’s difficult to gauge how credible the story is – speaking on ARD Merkel said that “I am not calling for a convention… that’s not the point”. Though politicians’ denials count for zero these days, it’s probably right that December is not realistic as a start date for a new EU treaty. Apart from everything else that needs to be sorted first, EU leaders still remember how long it took to push through the European constitution/Lisbon treaty – which Europe’s citizens didn’t like that much (as for being a ‘crisis’ this was of course a mere prelude to what has come to pass since). And unlike the Lisbon treaty, codified central fiscal controls would be about decisions over taxation and spending – the bread and butter of national politics. Also, non-euro member states – such as Poland - oppose a new treaty at this time on the basis that it would widen the euro/non-euro divide with a negative impact on the single market.

But while it is clear that there is no great enthusiasm for it, it is difficult to escape the conclusion that at some point in the near future, the eurozone will need a new set of rules if it is to stay together in the longer term. As good as the EU is at fudging it, ploughing on incrementally with economic and fiscal integration is politically unsustainable. So the question for Britain’s leverage in Europe really becomes, how bad does the Germans want to anchor Ordnungspolitik in EU law. Well, as we argued in the Telegraph back in February:

 “The Germans in particular – ever conscious of their Constitutional Court– know that the current arrangement involving an ad hoc euro treaty is legally dubious. As long as the Germans feel uncomfortable, Cameron maintains his leverage.” 

This is key. For a range of reasons (see here, here and here), the Germans don’t have that much confidence in Eurozone inter-governmental arrangements, as it leaves them more at the mercy of the ‘Club Med’ and creates a grey zone between EU law and the German ‘basic law’ which is just too awkward to bear for many Germans. Sooner or later, there will be an attempt at EU treaty changes.

Does the UK know what it wants?

An EU banking union within a year? Don't think so.

In an interview in today's FT, Commission President Jose Manuel Barroso is raising the stakes in the talks on a 'banking union' in the EU and/or eurozone, involving an EU-wide deposit guarantee scheme, a rescue fund paid for by financial institutions and giving an EU-wide supervisors the power to order losses on banks, without the approval of national authorities. The Commission, keen to get back in the game following the shift in focus to national capitals in the wake of the crisis, says it'll present a proposal for a banking union at the EU summit at the end of June.

According to the FT, Barroso said all of this could be achieved within the next year and didn't necessarily require an EU Treaty change. He said, "there is now a much clearer awareness" in national capitals, including Berlin and London, that Europe needed to press ahead with more integration "especially in the euro area."

Barroso noted,

“We have a chancellor of Germany that is indeed proposing a political union for Europe, which is extremely ambitious. We have a French president that has been highlighting the need for a more European approach regarding crucial issues like growth and investment. And we have a British government – and this is indeed a very interesting development – that while stating its willingness to stay out of the euro, assumes as indispensable and desirable to further integration in the eurozone.” 

Good marks for optimism. In reality, though, there's no way a banking union will be up and running within a year. Even if he was hinting at an agreement in 2013, that too is optimistic - at least on the chunkier stuff. A number of member states still have huge reservations. The UK won't be part of a banking union regardless, and anything requiring unanimity and/or Treaty change may be used by Britain to re-heat demands for safeguards over UK financial services, which Osborne has already floated. Other non-euro members also have reservations, with the Swedes opposing a banking union based on cross-border liabilities on a point of principle and the fear of moral hazard (unlike the Treasury, which seems happy for the eurozone to do this as long as the UK is not on the hook).

Merkel will face resistance from various corners: the Bundesbank, the legal class (hello Treaty change), its financial supervisors BAFIN, the media and a host of backbench MPs. This will have to go through the German Parliament, which per definition takes time. And as for the French, we're not entirely sure that Hollande quite has his head around what a banking union would involve - and that France's position is somewhat fluid at the moment.

And remember, a proposal by the Commission for limited cross-border bank deposit guarantees has been stuck in the Brussels machinery for two years, at the hands of resistance in member states.

This will be a drawn-out one.

A bit of European political dynamite in the Queen's Speech

The Queen delivered her "Queen's Speech" earlier today - which, for non-UK readers, isn't her speech at all but rather the government's, setting out its agenda for the forthcoming year (a rather odd ceremony but good opportunity to see Ken Clarke in a wig if nothing else).

For those interested in the ever-so-opaque EU dimension, the Queen said in passing:

"My Government will seek the approval of Parliament relating to the agreed financial stability mechanism within the euro area."

And

 "My Government will seek the approval of Parliament on the anticipated accession of Croatia to the European Union."

The latter won't be much of an issue - most MPs will play along as further enlargement rightly enjoys buy-in across the political spectrum.

The former is a different story. This relates to the EU treaty change dating back to December 2010, when the Germans managed to get agreement for tweaking the Lisbon's Treaty Article 136 to allow the eurozone's permanent bailout fund, the ESM, to be put on a more legally sound footing (at least that's how Berlin sees it). This treaty change has now finally come up for UK ratification in Parliament. Before carrying on, just to clarify, this is not the EU treaty change that Cameron vetoed in December 2011, and which gave rise to the separate Fiscal Treaty.

The December 2010 agreement didn't cause a whole lot of fuss at the time, and MPs gave their preliminary approval. Back then, Cameron had far greater control over both events and his own backbenchers. And the UK media was still waking up to the massive - and ongoing - continental political shift unleashed by the euro crisis.

2012 is a different matter altogether.

The ESM won't actually impact on the UK itself, so the 'referendum lock' wouldn't kick in. However, the treaty change that Cameron vetoed back in December wouldn't actually have had a direct impact on the UK either - that veto was about getting guarantees that UK interests were protected as the eurozone integrates further, and the rules of the game are effectively changed.

Exactly the same logic could apply to the Treaty change to put the ESM on legal footing. Like the Fiscal Treaty, the ESM will lead to greater integration in the eurozone (indeed, the two go together - see here), so Tory MPs could use the same line of reasoning they did leading up to the December summit in calling for the UK to block the measure, in return for EU concessions. Remember, an EU treaty change is not a change at all until it has been ratified by all member states.

Will they? So far, there are no signs that this issue is fully on MPs' radar and the UK government prays it will stay that way. But a lot of things to look out for:

• The UK government is likely to sell the measure as a guarantee that it will never again be forced to indirectly contribute to eurozone bailout funds - a few papers have already run with that story. At the same December summit, Britain won a political declaration and an EU decision that the article that forced it to contribute to the EU-wide bailout funds, the EFSM, won't be used again (Article 122 - for background, see here and here). However, the legal status of this guarantee is uncertain. It is not part of the treaty change itself, and MPs may argue that a guarantee that isn't anchored in the Treaties could well prove ineffective. After all, the UK has received guarantees before which proved to be pretty worthless (clue: Charter of Fundamental Rights, Working Time Directive). If MPs wake up to the legal ambiguity underpinning the 'guarantee' they may ask for something firmer in return for ratifying the treaty change.

• The timing of the ratification will be crucial, i.e. if it coincides with some cataclysmic event or political row in Europe (there will be a few to choose from), it would make life potentially much more difficult for the UK government. The ratification certainly won't happen before the summer' that's for sure. 

• Under the current agreement between eurozone leaders, the ESM is supposed to be up and running by 1 July (in parallel with the temporary bailout fund, the EFSF). This is important, because without the ESM in force, the lending capacity of the euro bailout funds will be a lot lower than markets are expecting, meaning more market nervousness, in particular as Spain is struggling.  

• To make matters even more complicated, the treaty change itself isn't actually what's needed to approve the ESM in eurozone countries - for that, eurozone leaders have agreed a separate 'ESM treaty' which is now going through national parliaments in the eurozone. As you'd expect, this is by no means plain sailing as the treaty - for obvious reasons related to taxpayers' cash - is subject to controversy in Germany and the Netherlands, which are still to ratify it. Before the ESM treaty can become operational and lend money to countries and banks, it needs to be approved by eurozone countries accounting for at least 90% of the contributions to the fund (meaning that Germany, France, Italy and Spain have an effective veto).

• And this is where things get rather bizarre.  Even if all euro countries manage to ratify the ESM treaty, the Germans originally said that they absolutely need the separate EU Treaty change for the ESM to be fully legal. However, since the UK won't have ratified the EU treaty changes by 1 July, the ESM will be up and running before the 'vital' Treaty change designed to make the whole construction legal is actually ratified in national parliaments. In other words, expect another batch of court cases to soon land in the in-tray of the German Constitutional Court in Karlsruhe.

Pretty messy - but then again, we're talking eurozone politics and EU 'law'. That one short line in the Queen's Speech hides so many complications...

Calm down dear: Cameron's EU veto isn't dead yet

Over on the Telegraph blog, we argue:

MPs and MEPs – from different parties and for different reasons – have lined up over recent days to explain how David Cameron lost the plot over his EU veto, as it has become clear that the EU institutions are now involved, albeit on the margins, of the fiscal treaty that 25 out of 27 EU countries signed up to earlier in the week.

As we've noted before, the veto that Cameron pulled at the December EU summit was never the best of the possible outcomes. However, the veto hasn't left Cameron empty-handed. In fact, contrary to popular belief, if played cleverly, the veto could remain a source of UK leverage in Europe for years to come. Here’s why.

In the treaty that was signed off, the role of the Commission and the ECJ is very limited. All the ECJ can do is impose a hypothetical fine on countries that fail to transpose spending caps into national law – but not prosecute states that break these spending limits. This makes virtually no practical difference to the UK.

However, as we have pointed out before, it still sets a worrying precedent, which the UK needs to be all over like a cheap suit. But the most effective way to disarm this potential threat is not to seek to blow up the dam by launching an all-in legal challenge.

Instead, Cameron should keep his cards close to his chest. The threat of legal action is Cameron's greatest asset at the moment. Any legal challenge would be a messy, lengthy affair, involving a lot of uncertainty. The Germans in particular – ever conscious of their Constitutional Court – know that the current arrangement involving an ad hoc euro treaty is legally dubious. As long as the Germans feel uncomfortable, Cameron maintains his leverage.

Given that the role of the ECJ is so limited, by holding the option of a legal challenge in reserve, Cameron can tackle the use of the EU institutions head on if it ever genuinely threatened the UK's interests: ie if the ECJ or the Commission started to dabble in single market issues under the auspices of a euro treaty.

In other words, Cameron can credibly tell Merkel: we want you to get on with the business of saving the euro (whether the current policies will actually work is a different matter), but stick to the rules, or it's game over. Just as Merkel is seeking this treaty to assuage domestic political opinion, Cameron can point to his MPs. They will not allow him to stand by should he fail to launch a fully fledged legal challenge if the circumstances require it.

In contrast, playing all his cards now would be far riskier. Since the role of the ECJ is minimal, it’s not certain that a legal challenge would be successful at the moment (see here for our thoughts on this). If he lost a court case over an issue of little practical importance to the UK, he would lose his leverage and set an even more worrying precedent.

And remember, it's still the explicit aim of the fiscal pact members to incorporate the treaty into EU law within five years – over which the UK retains its veto. This sets the UK up for another round of negotiations where it will be free to make demands of its own.

At the end of the day, there’s no escaping that Britain, and most other euro outs, need a different set of arrangements under EU law than euro members – on an increasing number of issues. If the EU, for all practical circumstances, becomes equivalent to the eurozone, then the UK is out, and life won't be easy for the Swedes of the world either. For all the posturing, all EU countries will want to avoid this.

In any case, the fiscal pact is big on talk but small on action – non-euro members are invited to one eurozone summit a year if the fiscal pact is being discussed at that summit. In itself the fiscal pact won’t change the world. Sorry everyone – there’s not that much to see here.

Better then for Cameron to save his ammunition – there are many, many EU negotiations to come.

Would EU law introduce border controls with Scotland?

The last time there was a formal English border with Scotland was under the Romans, although for some parts of the middle ages both England and Scotland may have wished for one. Since then, it's pretty much been come and go as you wish. Well, that may - at least hypothetically - soon change.

This week saw the debate over Scottish independence heating up again, in turn throwing up a number of questions about whether Scotland would have to negotiate new membership terms with the EU, and if so, how this would work. Most discussions have focussed on the euro - which all EU members that don't have an opt-out (which only the UK and Denmark have at the moment) - are required to join.

But there's another interesting twist. You might assume that if Scotland again became independent, the current open border would continue. Well, you could be wrong. This is because while the UK has a specific opt-out from the EU's common travel area (the Schengen agreement) under, the Amsterdam Treaty incorporated the Schengen agreement into EU law (Article 77, previously it was a stand alone agreement), meaning that whoever signs up to the full body of EU law, also signs up to Schengen. In other words, similarly to the euro, Scotland would not automatically have an opt out.

The EU considers that all states should join the borderless EU. This would pose a problem for an independent Scotland as the UK and Ireland have their own Common Travel Area and external borders - to help facilitate travel over the Northern Irish Border. If Scotland was in Schengen, England (and the rump UK and Ireland) would need to apply an external border and passport checks on the new frontier.

That is if Scotland was in the EU at all. The UK's membership does not extend to former members. Scotland would therefore have to negotiate for itself an opt-out from Schengen as a part of its accession process from outside the EU.

In addition to a Schengen opt-put, an independent Scotland would also have to negotiate:

• Opt out from the Euro - so it could keep the English (or Scottish?) pound (the SNP says it want this option until the time is right to join the euro).
• Possibly its own budget rebate so it is not unfairly penalised
• A fair deal on fishing.

Plenty to play for in Europe, in other words, should Scotland wish to go down that path...

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...

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".

How will the UK judge the role of the ECJ?

A draft of the new European treaty proposed by France and Germany has been leaked and attention has immediately turned to the thorny issue of the role of the EU institutions in enforcing or policing the new deal – remember the UK's line is broadly that they can't, a key source of potential leverage in future talks.

The proposed document would see a role for the European Court of Justice in judging whether national governments have transposed a new “balanced budget” obligation and, if this is breached, an automatic “correction mechanism” into national law. The new treaty states:

NOTING that compliance with the obligation to transpose the "Balanced Budget Rule" into national legal systems at constitutional or equivalent level should be subject to the jurisdiction of the Court of Justice of the European Union, in accordance with Article 273 of the Treaty on the Functioning of the European Union.

The question is whether this is allowed under EU law, can the ECJ be used for this? (NB, the draft foresees no role for the ECJ in enforcing any sanctions but simply judging whether the new rules have been adequately transposed into national law.)

Article 273 of the EU Treaties, cited by the new treaty, states that:

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.

So this EU Treaty article clearly provides the new group with a hook on which to try and hang the new arrangement and get the ECJ involved. Article 273 would allow the ECJ to be used to judge a dispute (in this case whether the “balanced budget” rule has been adequately transposed), as long as the subject of the dispute is “related” to the EU Treaties. The question is whether this 0.5% rule can reasonably be seen as “related” to the Treaties. This is where the legal grey area begins and where it seems that the justification for ECJ involvement is iffy to say the least.

The existing EU Treaties contain obligations for governments to remain within a 3% deficit limit and a 60% debt to GDP limit. But there is no mention of the new 0.5% “structural deficit” limit proposed by the new treaty.

The 0.5% limit is a new obligation. It is therefore a legal stretch to say that this falls under the category of things to which the EU Treaty “relates”. Using the ECJ to judge whether this new obligation has been transposed properly is therefore also a huge legal stretch and one that the UK would be well advised to investigate and possibly challenge. If Cameron does wave the proposal through it will certainly raise political questions about what his veto actually achieved.