Whither the Eurozone?


01/03/2012 – by Dr. Harald Malmgren

News headlines about the European Union summit on 8-9 December declared that “Eurozone leaders agree treaty changes.”  UK Prime Minister Cameron vetoed change of the EU Treaties.  So what was really agreed?

Leaders of the 17 Euro members and several other EU members agreed to pursue the possibility of incorporating into their own national laws a “fiscal union” based upon German-devised rules and penalties.  The group of nations that were ultimately successful in carrying out this task would then constitute a “core” Euro membership, with collective commitments embodied in their respective national laws, under a collective system of oversight.

How to give this the legal authority of a treaty is now being examined by the EU Commission and the Euro member governments, but for the time being there is no agreement on “treaty changes.”

The Eurozone is in the flux of significant change. Will a new treaty be part of the solution? (Credit Image: Bigstock)

Some of the leaders who agreed to continue the discussion of potential legislative changes also said they would have to “consult their parliaments,” or hold a national referendum.  Terms of the “fiscal union” were laid out in a December 7 letter from Chancellor Merkel and President Sarkozy to EU President VanRompuy.  This letter lays out specific terms for establishment of a fiscal union, based upon strict fiscal guidelines for national budgets, review of budgets by EU officials, and “automatic” disciplinary measures, subject to “qualified majority voting” (weighted voting according to the share of GDP of the group of countries adopting the fiscal union).  The new rules and automatic disciplines are expected to be written into national laws by each parliament.  The letter declares drafts of the legislative revisions would be reviewed by the European Court of Justice to ensure consistency of national laws with the German-devised provisions of the fiscal union.

The necessary assumption underlying the Merkel-Sarkozy letter was that the EU treaties would be amended.  Cameron’s veto prevented that.  A number of European legal firms have already privately prepared opinions for their clients that without a change in the European treaties, the European Court of Justice and the EU Commission would not have legal authority to enforce the fiscal union rules and disciplinary actions.

Much intricate legal manipulation would likely be needed to find a means for participating governments to erect an appropriate legal structure that might enable the European Court and the EU Commission to play a meaningful role.  That may take months, as the European Court and the German Constitutional Court in Karlsruhe will both need to consider the legal standing of whatever new fiscal union agreement is reached.

Under “qualified majority voting” Germany would be the dominant vote for or against any disciplinary action or “enforcement,” and no other group of governments could jointly enforce an action against Germany.  Politically, this will be a hard sell to many parliaments and their voters.  National spending and tax decisions approved by elected parliaments would be subject to review and revision by non-voting, non-citizens of those countries who preside over a collective decision body.  There can be no doubt that national parliaments would be ceding sovereignty to non-national, non-elected overseers who are citizens of other nations.  Ironically, President Sarkozy has publicly promised his national parliament that France would not cede any degree of sovereignty to Germany or anyone else.  The Merkel-Sarkozy letter calls for participating governments to have new treaty provisions ready by March, 2012.  It is highly unlikely that President Sarkozy could take the German outline of the fiscal union to formally request French parliamentary approval just before French national elections on 22 April and 6 May, 2012.  Moreover, there can be much doubt whether the French parliament would approve substantial ceding of sovereignty to non-French officials who are not subject to French elections, particularly if such a new entity was German-dominated.

As the German rules and disciplines work through various parliaments, and citizens of participating nations express opposition to them, it is highly likely that elaborate negotiations of the specific language will have to take place among two dozen nations.  Some of the participants are likely to drop out, some early and some later in the process.  This process of forming a fiscal union will likely take many months, and by the end of the process perhaps only a few may remain.

It is even possible that only Germany will remain.  Some German politicians believe that it would be desirable for the entire process to result in a much smaller “core” Euro membership, most likely without the “southern neighbors” and without the Scandinavians, who will likely choose a different path.  Many German politicians would be happy if the Italian parliament was unable to agree.

It must also be recognized that a number of senior German politicians privately remain hopeful that all the others will fall away, so that Germany can be left alone to seek a new destiny – with greater attention to Russia, China and the rest of Asia and the Middle East.  This idea of “delinkage from the West” has already become part of German security planning, with deep cuts in military spending and manpower, and gradual disengagement with NATO.

In all of this work on fiscal union the issues of growth and of sovereign debt were not addressed.  Markets have remained hopeful that the ECB might eventually take on the role of lender of last resort and buy substantial quantities of Spanish and Italian debt – with the French hoping for purchases of French sovereign debt too.

The Bundesbank continues to say that ECB bond buying or the issuance of collective Eurobonds would be illegal under present treaties.  The German Constitutional Court would likely support this Bundesbank opinion if the ECB were to lean towards mass bond purchasing.  Until the fiscal union is determined to be a treaty, the ECB is legally unlikely to be allowed by courts to take bold bond purchasing that would constitute financial transfers among EU or Euro members.

Thus, an objective assessment would be that the summit leaders simply kicked the can further down the road, only this time in expectation that some members will not be able to remain in the Euro club.  If a new core Euroland emerges, it will be a more   German-dominated core that faces East, to future economic expansion with Russia and Asia, with less reliance on the political and economic dynamics of Southern and Western Europe – allowing detachment from the Atlantic security umbrella which Germany and some others likely feel is too costly to maintain and no longer needed.