This just in from the Fleishman Hillard team in Brussels. A detailed analysis of the very consequential developments occurring as the EU confronts many of the economic issues head-on.
From Brussels:
Last night’s summit of EU Leaders ended up early in the morning with a dramatic outcome (see conclusions here) with 26 out of 27 Member States agreeing to a proposed Treaty change, leaving the UK entirely isolated and the 26 proposing to move forward on an intergovernmental basis. While further details concerning the nature of the proposed Treaty change have yet to be finalized and not expected to be signed off until March 2012, the core elements being proposed include aspects of fiscal coordination and surveillance, as well as further harmonization of rules in other areas, such as financial regulation, labour market reforms, taxation, etc.
The grounds upon which the UK walked away from the negotiations were a refusal by Sarkozy and Merkel to include a protocol in the Treaty which would have enshrined the following core principles:
- No new powers to the ESAs.
- EBA remaining in London.
- Non discriminatory access to central bank liquidity, irrespective of location in the EU.
- Permitting Vickers report style top up capital charges for banks.
- User charges by ESAs to be on the basis of unanimity not QMV (to avoid backdoor FTT introduced to fund the ESAs).
- Commitment to maintain open access by passporting third country firms into Europe.
These developments clearly have profound implications for the future structure of European integration and the future political relations between UK and its European partners, and between those countries members of the Eurozone and those outside as well as potentially the future enlargement of the EU and future composition of the Eurozone.
Below are a number of key initial points to note – we will provide further analysis following this afternoon’s summit at 26 (minus the UK).
FIRST HEADLINE ANALYSIS:
- The most immediate and obvious question is calling in the UK’s future relations with the EU, symbolically demonstrated by the UK empty chair in the remainder of today’s negotiations.
- This will translate into high political isolation in all legislative negotiations. It is noteworthy that UK could not persuade any country to align with it in its opposition.
- European governments will draw their own conclusions from the fact that the UK appeared to prioritize more highly a narrower national financial services agenda over what is perceived as being vital to the future of the Euro and the EU.
- Given the choice by Merkel and Sarkozy to opt for a more ambitious integration agenda, they raised a much higher risk of non-ratification by the remaining 26 countries, most notably Ireland and the Netherlands which will have to hold referenda.
- Failure to ratify by one country need not prevent the other countries proceeding with the Treaty; failure to ratify will be perceived as a vote to leave the Euro, which creates a higher risk particularly in the case of Ireland.
- The length of time involved and the uncertainties associated with ratification of such an ambitious new Treaty will in the short to medium term lead to significant new instability in the markets. The core strategy in the short term will therefore be heavily relying on the willingness for high ECB intervention.
- The new two-tier structure which will result between those ratifying and those non-ratifying the intergovernmental Treaty will raise significant questions over the future institutional structureof the EU.
- Given new Treaty will not be an EU Treaty, raises questions over how any EU law [ie law applicable to both those who are member of the group and those outside] will be subject to initiatives in codecision within the existing institutions and subject to the limitations on enhance cooperation which exists within the EU institutions. This raises the question whether a parallel set of decision making procedures will have to be integrated within the new intergovernmental Treaty.
- Given the two-tier nature between the decision making structures and the political commitments, there is a high risk that those outside the core will experience the same EEA effect over time of having to apply laws without as much influence over them, given political majorities will be formed around the inner core.
- Strengthens the role of intergovernmentalism and raises profound questions about the future role of the EU Parliament, given the intergovernmental Treaty will be based on international commitments and not formally involve the European Parliament.
- Political outcomes resulting in discrimination between infrastructures and companies inside and outside the core/Eurozone.
- The political will for the UK to pay the cost of not being part of the core will be a lot higher.
- The outcome of the pending ECJ ruling around the access to liquidity of central bank will be crucial in determining how far this discrimination will be limited by the free movement of capital and people within the Single Market, which will continue to apply within the EU.
- Based on that, the Euromarkets could be mandated to relocate within the Eurozone.
- The decision severely compromises leadership roles for the UKin any areas of core economic importance in the EU,
- In the short term it will undermine those in prominent positions such as Chairmanship of ECON Committee, Director General of Internal Market DG, Chair of ESMA, Vice-Presidency of the European Commission.
- In the medium term it will prejudice their capacity to hold such posts.
- Implications for future enlargement prospects: countries willing to join will need to agree on the core political vision.
DETAILS OF THE COMMUNIQUE
FISCAL PACT
- Scope: Eurozone members + Bulgaria, Denmark, Latvia, Lithuania, Poland and Romania. Sweden, Hungary and Czech Rep will consult their parliaments first, the UK will stay out.
- Implementation: New intergovernmental Treaty, outside of the EU framework – to be approved in March.
- Details:Based on the Merkel-Sarkozy proposals:
- The Treaty will render the Stability and Growth Pact more robust (based on secondary legislation until now).
- Automatic sanctions in case of non respect of the 3% deficit target – reverse qualified majority voting to reject these.
- Harmonised “Golden rule” / budget balance rule to be enshrined in national constitutions (0,5% of nominal GDP).
- Rule complemented by automatic correction mechanism if deviation (spending cuts and/or taxes increase) to be specified by each Member State.
- European Court of Justice will control that the national implementation of the fiscal rules gives national constitutional courts the power to reject a budget on the ground of its unconstitutionality (related to this national golden rules).
- Calendar for convergence to be established by the Commission.
- “Economic partnership programme” to be submitted by Member States in EDP – implementation monitored by EC and Council.
- Ex ante reporting of national debt issuance plans.
- Debt adjustment path of 1/20 to be enshrined in new provisions.
- Secondary law: Complemented by further reinforcement of the excessive deficit procedure – secondary legislation (cf Commission proposals of November: strengthened surveillance for programme/EDP countries) and Commission powers.
- Further details: To be discussed today without the UK and Hungary presence.
- Ratification: Agreement expected by March, ratification to start after the French elections.
- Open questions:
- How will this be articulated with the EU institutions? (given UK veto over using them)
- How will it impact the Single Market?
- What other areas will this Treaty cover?
- Future of the EU / Eurozone +.
- Eurobonds never mentioned, even at longer term horizon.
STRONGER POLICY COORDINATION
- Scope: Eurozone members, others?
- Implementation: Unclear – secondary legislation?
- Details:
- Will make stronger use of enhanced cooperation on matters essential for the smooth functioning of the euro area, “without undermining the internal market”.
- Procedure to make all major economic policy reforms planned by a Member State discussed and coordinated at Euro area level.
- Euro Summits at least twice a year + other measures agreed in October (Eurozone President, stronger Eurogroup, etc).
- Ratification: Unclear.
- Open questions:
- Extent to which enhanced cooperation will be used?
- Articulation with Single Market?
STABILISATION TOOLS
- Scope: Eurozone members.
- Implementation: Reforms of existing intergovernmental treaties (ongoing).
- Details:
- EFSF leveraging to be rapidly deployed.
- ESM brought forward to July 2012 (as soon as 90% members have ratified).
- PSI in ESM to be aligned to IMF practices.
- Voting rules changed to include emergency procedure – mutual agreement replaced by qualified majority of 85% in case EC and ECB conclude urgent decision needed as euro area sustainability in danger (need be confirmed by Finnish parliament).
- Overall EFSF/ESM ceiling of 500 Bn € (to be reassessed in March 2012).
- EU to provide 200 Bn € to IMF (hopes other will increase provisions as well).
- Ratification: Ongoing (intergovernmental).
- Open questions:
- Role of the ECB – no change so far.
- Ceiling too low, especially if EFSF and ESM won’t run in parrallel?
- Capacity to bring ESM forward (national ratifications).
- Finnish parliament to confirm ESM change of majority rule.
- ESM access to ECB money – ruled out by Germany.