Snags, diversions and the crisis goes on - FT.

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12/12/11 7:00 PM

December 11, 2011 7:41 pm

Snags, diversions and the crisis goes on

By Wolfgang Mnchau

The European Union last week destroyed the illusion that the eurozone and the UK could happily coexist inside the EU. That may have made it a historic summit. But the decision to set up a fiscal union outside the European treaties will do nothing whatsoever to resolve the eurozone crisis. There are different notions of a fiscal union some more integrated, some less so, some obsessed with fiscal discipline, others with a joint bond. But whichever your preference, this is not something you would wish to do outside European treaties. The existing treaties form the legal basis for all policy co-ordination of monetary union. It gets very messy when you try to circumvent them. Changing a treaty is a big deal and I understand why there is not much appetite. Everybody still remembers the failed constitutional treaty of the last decade. What is now known as the Lisbon treaty took almost 10 years from inception to ratification. A new treaty requires every members consent, a convention, an intergovernmental conference, a final agreement by the
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Snags, diversions and the crisis goes on - FT.com

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European Council and the European parliament, and then ratification by each country, some by referendum. Germany understood perfectly well that its proposals would require a full-blown treaty change. The involvement of the European Court of Justice as an enforcer of fiscal rules cannot be achieved otherwise. I disagree with the content of the German proposals and the one-sided fixation on fiscal discipline. But I agree with the legal judgment: if you want a fiscal union, nothing less than a full treaty change will do. If the EU had accepted the idea, a treaty convention might have produced a much more balanced fiscal union that the one Germany and France now want to create in a fast-track separate treaty. Now David Cameron has blocked the option of changing the European treaties, the Brussels machinery is working hard at finding a legal way of making a separate treaty among eurozone members possible. One candidate is a procedure called enhanced co-operation. Introduced in the 1990s and later amended, it is intended to give a group of at least nine member states the right to go it alone. But this is more a treaty-within-a-treaty procedure. It has been invoked only for the single European patent and, fittingly, for a common divorce law. One might wonder, therefore, whether it is possible to use enhanced co-operation as a legal basis to create a fiscal union. Could it even be used as a portal into the outer space of another treaty that interacts with the existing one? I think this is very unlikely. For a start, the procedure requires unanimity. So if Mr Cameron blocked a treaty revision because he does not want a strong fiscal union that discriminates against the City of London, he surely would not accept a fiscal union set up by enhanced coordination either. Furthermore,!the procedure is not intended to change current treaty provisions. It is meant for member states to co-operate on areas not yet covered by the treaty. Another possible legal basis is Article 136, under which the eurozone member states are allowed to strengthen the co-ordination and surveillance of their budgetary discipline and to set out economic policy guidelines for them. This is the legal basis for eurozone members to co-ordinate tax policies, improve the functioning of labour markets or send a joint representative to the International Monetary Fund. But Article 136 is not intended as a wormhole to outer space either. A fiscal union set up outside the European treaty would face severe legal and practical limitations. Unless a trick is found, it cannot make recourse to the resources and institutions of the EU. Nor can it issue eurozone bonds. The only conceivable counterparty for a eurozone bond is the EU itself.

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Snags, diversions and the crisis goes on - FT.com

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More important even, a fiscal union created through a legal trapdoor would not help solve the crisis. The eurozone is facing a generalised loss of confidence. Investors no longer trust its crisis management, the solidarity of its citizens, even the ability to conduct sensible economic policies. The EU is not going to restore confidence through legal gimmickry that will face numerous court challenges. Leaders should have admitted on Friday that the summit had simply failed, or perhaps have given it a few more days. Negotiations might have produced a compromise. With the fake pretence of another treaty, that is no longer possible. Remember what everybody said a week ago? To solve the crisis, the eurozone requires, in the long run, a fiscal union with a prospect of a eurozone bond and, in the short run, unlimited sovereign bond market support by the European Central Bank. What we now have is no treaty change, no eurozone bond and no increase either in the rescue fund or in ECB support. Policy changes the ECB announced last week will help banks directly and governments indirectly. But the EU fell short on every element of a comprehensive deal. On Friday, investors reacted positively to what was sold to them as a fiscal compact. But once the implications of a separate treaty are understood, I fear disillusionment will set in. Last week, Europes leaders created a diversion. We will be talking about the UK for a while. The crisis, meanwhile, goes on. munchau@eurointelligence.com

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