The first thing one should do when a European Summit is over is to read the conclusions and ignore the spin of the participants.
In that context the conclusions of the meeting held on 9 December are a bit of a puzzle. There is a commitment by all Member States (apart from the UK) to a Fiscal Rule which envisages tougher sanctions should a Member State breach current Treaty provisions about excessive deficits. However, the actual content of this Rule is quite ambiguous and much of the language is a mere repetition of what already exists in the Lisbon Treaty. In addition, such a Rule will not apply to at least six eurozone members until 2015 at the very earliest. We need to remind ourselves that fiscal discipline and fiscal union are two quite different concepts; the Summit addressed the former only. There are commitments to examine Commission proposals about non-compliance with National Stability and Growth Pacts but nothing concrete was agreed. All of this is to be included in what is called an intergovernmental Fiscal Compact Treaty.
So what is new? Not a lot is the short answer. The intention is that the (revised) Treaty on the European Stability Mechanism (with an enhanced budget of €500m) will be fast-tracked to become operational in July 2012; by the way this is a separate Treaty to the mooted Fiscal Discipline Treaty. The requirement to involve private bondholders in sharing the burden of any future rescues has been dropped. The text of the ESM Treaty will be finalised in the coming days. The EU will also provide the IMF with some €200 billion as part of a multilateral endeavour to increase its resources. Otherwise the conclusions are a rehash of much of what has been said before.
What is more important are the decisions taken by the ECB on 8 December to support bank lending and money market activity. Europe has an acute bank liquidity problem and the ECB’s decisions to increase collateral availability (by way of accepting lower-quality collateral for example), will go some way to calm nerves as over €1.6 trillion in sovereign and bank debt needs to be repaid in the first months of next year. Mario Draghi is quite prepared that the ECB continue to be the lender of last resort to the EU’s banks but not to play the same role for stressed eurozone governments as the Bank is not allowed to do so under the Lisbon Treaty. The acid test of the market’s reaction to this bold move will be the S&P rating of eurozone countries in the coming days. If a start is made to resolving the bank liquidity crisis one would imagine that the separate sovereign debt crisis will also begin to stabilise as the two are so closely interwoven.
David Cameron’s ‘veto’ of the Fiscal Pact may well back-fire. Being isolated is one thing but blocking a deal supported by everyone else (and for spurious reasons) will have a wider impact. His tactics were described as ‘clumsy’ and the FT quoted a French diplomat as saying ‘he was like a man attending a wife-swapping party without a wife.’ The PM needs to be reminded that the City is regulated by EU internal market rules determined by qualified majority voting. At those negotiations affecting the UK’s vital national interests they can expect little sympathy for special pleading. Will Europe’s big banks in the City move their operations where regulatory certainty prevails? How will sterling fare on the markets if the UK persists with what many consider to be an ill-conceived and botched attempt at securing opt outs for some of the UK’s on-going grievances that have nothing to do with the eurozone crisis?
Is a referendum required in Ireland? Nobody can tell definitely until the text of a proposed Fiscal Discipline Treaty is drawn up. If the Commission gets new competencies to enforce fiscal discipline over and beyond what is envisaged in the Lisbon Treaty then probably, but on the other hand an inter-governmental Treaty outside the EU Treaty framework may not be covered by the Supreme Court’s Crotty judgement. On calm reflection, Member States may conclude that much of what is in the Fiscal Discipline Treaty could be adopted by secondary legislation as Article 136 of the Lisbon Treaty allows eurozone members to adopt legislation to strengthen the coordination and surveillance of their budgetary discipline and to set out economic policy guidelines. As the European Parliament is opposed to Treaty change, as there is rising opposition to an intergovernmental Treaty that cannot use the EU’s Institutions, and as the convening of a formal Inter-Governmental Conference/Convention which is a requirement for all Treaty change has not apparently happened, do not be surprised if some of the Summit conclusion’s language never makes into in a Treaty. That said the Government will need to clarify if a referendum is needed to ratify the ESM Treaty. It goes without saying that if a referendum is needed Ireland should be the last to put such a proposition to the people. Let the French, Dutch, Greeks and Danes vote before we do!!
Last July, Ireland was promised lower interest rates on the borrowings used to recapitalise the banks, longer maturities and a grace payment period of ten years i.e. the same generous conditions which were approved for Greece. Six months later all the government has done is to write a letter ‘to begin a conversation’. As the taxpayer is over-paying to the tune of billions of euros, would it not be better to stop the polite conversations and start active and tough negotiations to reduce our bail-out costs to more manageable proportions. For example, all of the recent social welfare cuts could be reversed if the interest servicing costs associated with the banks’ bail-out were reduced.
The Summit displayed all the features of an ill-prepared meeting where the result – talk of a Treaty but with no text on the table – will only serve to confuse matters further. Treaty change at some point in the future is no substitute for clear political decisions that address market and investor confidence. History shows the EU never takes a decision until it has to. This suggests the Rubicon has not yet been reached. Only when a major pan-European bank does a Lehman due to its liquidity problems will the EU Heads of State and Government take the decisions the markets expect of them.
Peter Brennan
