What the EU agreed last week, what it did not and what happens next
By Andrew Duff
What was agreed
1. At long last the European Council (28-29 June) has taken some very significant decisions on addressing the short term crisis. There are two main elements:-
• to centralise the supervision of the eurozone’s banks under the European Central Bank: this weakens the power of the diverse national supervisory authorities as well as that of the European Banking Authority (EBA) which will still exist for the purpose of stress testing the banking sector across the whole EU;
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• once this is done, to allow the EFSF/ESM to intervene directly to help ailing banks without the intervention of governments: this boosts the confidence of markets because it weakens the power of politicians and breaks the vicious circle between banks and sovereigns.
The Eurogroup, meeting on 9 July, is charged with taking forward these decisions.
2. The ESM recapitalisation deal will apply in the first instance to Spanish banks (perhaps €100 bn) but also, if necessary, to Irish banks – helping Ireland to avoid a second bail-out. The burden of Spanish and Irish taxpayers is therefore shared with their fellow taxpayers across the eurozone. Eurozone bailouts lose their seniority, which helps private bondholders. Relief for Italy is less explicit but the ESM is empowered in general to buy sovereign bonds according to an EU programme based on existing austerity measures ‘in a flexible and efficient manner’.
3. Debt to GDP ratios will therefore be reduced for these countries, which helps to stabilise the euro in the currency markets.
4. The ECB is set to become a very much more powerful institution when it assumes its new functions. The legal base for the banking union reform is Article 127(6) TFEU which allows the Council, acting unanimously on a proposal of the Commission, to confer specific tasks on the ECB relating to the prudential supervision of banks. Parliament and the ECB will be consulted. Other changes to the functions of the ECB, including its market operations, can be made by way of the Statute of the Central Bank through the ordinary legislative procedure (Article 129(3)).
5. The other body which is set to become very powerful is the Board of Governors of the European Stability Mechanism. It already has wide discretion, acting mainly by QMV weighted by shareholding, under the terms of the founding statute to intervene in primary and secondary markets. The decision of the European Council gives the ESM the green light to exercise that discretion. Bailing out banks, shrinking them or closing them down are not mere technical issues but have high political repercussions. The governors of both the ECB and the ESM deserve now to come under close political scrutiny. This raises questions for the European Parliament: whereas the President of the ECB reports frequently to MEPs, there is no provision in the intergovernmental ESM treaty for any kind of parliamentary scrutiny. The incorporation, therefore, of the ESM treaty and the fiscal compact treaty within the EU framework proper as soon as possible – certainly within five years – becomes imperative.
6. The European Council as a whole agreed to the good yet long anticipated Compact for Growth and Jobs, a discussion which involved an inconclusive discussion on the Multi-Annual Financial Framework.
7. The European Council agreed on the location of the patent courts (headquartered in Paris, but with mechanical engineering in Munich and pharmaceuticals and life sciences in London). A scare that Merkel and Hollande wanted to unpick the unitary nature of the proposed patent system, splitting validation from infringement, proved unfounded. But at Cameron’s request, in an unprecedented move, the heads of government ‘suggest’ that Articles 6-8 of the Regulation are deleted by Council and Parliament. These are substantive clauses on the delimitation and protection of patentee rights, whose implications concern the appellate role of the European Court of Justice. As Article 15(1) TEU prohibits the European Council from law making, one hopes that its kindly suggestion will be politely rejected by the legislature. But the episode highlights the anomalous position of the President of the Commission as a member of the European Council: Barroso is now put in the unenviable position of having undermined the legislative work of his own college (Article 15(2) TEU).
What was not agreed
8. The European Council could not agree to accept the ambitious report (25 June) of the Presidents of the European Council, Commission, Central Bank and Eurogroup which laid out four building blocks for an integrated financial framework (including a common deposit insurance scheme), an integrated budgetary framework (including the mutualisation of a portion of sovereign debt), an integrated economic policy framework (building further on the economic governance measures already agreed or in train), and improved democratic legitimation. The heads of government found that the report ‘sketches out important ideas’ and agreed to invite the gang of four to ‘develop … a specific and time-bound road map for the achievement of a genuine Economic and Monetary Union’. At the request especially of the British, this road map will have to ‘include concrete proposals on preserving the unity and integrity of the Single Market in financial services’. It will examine what can be done under the present Treaties and what will require Treaty change. In a curious turn of constitutional phrase, ‘in order to ensure their ownership, Member States will be closely associated to the reflections and regularly consulted’. The European Parliament will also be consulted. An interim report will be presented to the European Council on 18-19 October, with a final report in December.
9. Certain eurozone prime ministers, notably Rutte and Reinfeldt, are unable to share the federalist perspective of the gang of four. The Czechs and Poles have initial worries about losing all control over their banks (which are subsidiaries of eurozone banks). And as is well known, Merkel continues to insist on political union as a prerequisite of fiscal union. How many states will be willing to sign up to the whole package of measures eventually agreed remains to be seen. Fortunately, there exists at least the requisite nine eurozone states ready to move forward in terms of enhanced cooperation (Articles 20 TEU & 326-334 TFEU). And one needs always to recall that, whereas national vetoes work at the level of the European Council to blunt the influence of the gang of four, in the Council of Ministers and European Parliament where the legislative work is to be done no such veto exists.
10. What all agree on, however, was that there will be no return to the previous situation in which the UK was allowed to veto deeper integration. Nobody evinces regret at the split that occurred at their meeting in December. It remains apparent that Cameron cannot prevent whatever is about to happen: his bluff has been comprehensively called. Cameron told the press: ‘We won’t be part of a banking union, fiscal union or political union’. This means that the UK is headed directly either for complete withdrawal from the EU or, more likely, for a formal second-class associate membership based essentially on those aspects of the Single Market which the British may yet find palatable. One may note the delicious irony of the situation in which, just as the UK government rejects the European banking union, the high priests of Anglo-Saxon capitalism in the City of London (itself a victim of light regulation) would prefer to participate in such a centralised banking union at least in so far as their extensive euro dominated operations are concerned.
11. Formalisation of the historic divide between the UK and its EU partners will have to be negotiated in the context of a general revision of the EU treaties (Article 48(2)-(5) TEU) which will also serve to incorporate the fiscal compact and ESM treaties, codify in terms of primary law elements of economic governance agreed since 2008, establish the conditions for fiscal solidarity, rectify some of the mistakes of the Treaty of Lisbon, and adjust the conferral and delimitation of EU competences in a number of cases. Therefore, institutions, governments and political parties need now to begin to prepare for the new constitutional Convention in spring 2015, and, subsequently, for multiple referendums.
12. A last word. Despite the progress made last week, much detailed work remains to be done – and rapidly. The financial crisis is still with us, in modified form. Greece is still virtually bankrupt. And austerity programmes to reduce deficits of many states are causing their debt to GDP ratios to worsen: in other words, Europe is getting poorer. Structural reforms remain laggardly, especially in southern Europe (not excluding France). The size of the ESM firewall, with a maximum lending capacity of €500 bn, is almost certainly too small for the challenges of a hostile marketplace. And the entry into force of the fiscal compact treaty and the ESM yet depends on ratification by many national parliaments and on evading hostile action in constitutional courts. The Stability Mechanism was supposed already to be in force: it is not.
The writer is a UK Liberal Member of the European Parliament