A quick bluffer’s guide to what’s happened in the EU

I suspect that an awful lot of people are trying to understand the dramatic events in the EU on Thursday night.  And they are dramatic.

Here’s a very brief attempt to make sense of it.

The EU leaders met (this is the “European Council”) to decide new common fiscal rules.  They did this to stem the collapse in confidence in the euro, following runs on sovereign debt in Greece, Italy, Spain and, increasingly, elsewhere in the EU.  The French and the Germans had earlier agreed an outline deal whereby member states would sign up to a much stricter set of rules on budgeting.  In many ways, these rules, which require balanced budgets and prevent states from running up unsustainable debt burdens, amount to a “fiscal union”.  A fiscal union is in essence ceding member states’ powers to decide their own budgets to the EU itself.  For some therefore, a fiscal union amounts to something pretty close to a political union - the final ceding of sovereign powers of government to the collective EU, arbitrated by member states acting together and by the European Commission, the “Secretariat” of the EU (though in reality this body is much more powerful than this term implies, and its new powers in this arrangement are not yet clear).

These proposals were packaged as a new EU treaty, dramatically changing the nature of the EU itself.  The UK’s David Cameron refused to sign up to the treaty, on the grounds that other member states would not agree to other rules which would protect the UK’s financial services industry from certain common EU rules, which the UK judged might harm the City’s global competitiveness.  Since new treaties require unanimity among the 27 member states, the UK effectively veto-ed a new treaty.

Once this became clear, other member states of the EU agreed that they would nevertheless pursue the new budgetary rules without the UK.   This means that these rules will have to be agreed and implemented outside of the EU structures.  This opens up significant questions about how these rules will be effected, since the established architecture of the EU - the Commission, the European Court of Justice etc - cannot be used.  At least, this is the case for now.  The necessity to pursue this new treaty outside of the EU may damage the agreement’s credibility in financial markets.  In this sense therefore, the goal of restoring the fiscal credibility of the EU has been undermined.  Whether this effect is severe or insignificant will depend on market reaction, immediately and in the longer term as these plans play out.

Meanwhile, the UK is diplomatically isolated.  It failed to get agreement to protect the City from certain EU regulations which, under the EU’s existing treaties, the UK is obliged to implement.  At the same time, the irritation caused by Britain’s veto on a new EU treaty will limit its ability to influence future legislation on financial services, and indeed anything else.  So in this sense, this was a very severe diplomatic failure for the UK.  In diplomacy, if you ask for something and don’t get it, and others agree to something else, it’s very hard to pretend that this is anything other than a failure.  Moreover, the UK has severely limited its influence in future EU decisions.  Double the failure (if not more).

The overall significance for the EU as a body is considerable.  The large majority of EU member states have agreed to establish new and stringent fiscal rules governing their national budgets.  Whatever label you choose, this is a very big step towards political union.  And the UK is not part of it.  Some commentators, such as the Economist’s Charlemagne are calling this a “divorce”, and in many senses it is.

But less clear is whether the imbroglio in Brussels will prove sufficient to restore confidence in the euro.  So far, market reaction has been generally positive.  But this will only be sustained if the new inter-governmental agreement reached in Brussels effects strict budgetary rules with credible enforcement mechanisms.  Had this been agreed as an EU treaty (i.e. had the UK not vetoed), the credibility of the new agreement would be higher.  In this sense, the UK’s veto may have damaged efforts to restore the eurozone’s finances.  Little wonder that the UK is so unpopular.

But there are other subtexts beneath all this late night wrangling among the elite club of European leaders.  Not one of those leaders has consulted their populations whether they wish to join this emerging fiscal union.  Not a single one.  And it’s not clear whether any of them will.  Member states traditionally have avoided referendums on major treaty changes, correctly suspicious that their populations would rebuff them.  So while the EU’s leaders may have taken a massive step towards fiscal and thus political union, they have taken a step further away from real political consent.  The long term consequences of this cannot be imagined as positive, even if they are today unclear.

For this, and perhaps for this alone, Cameron can be credited.  While the urban British elites may be horrified at the UK’s new and deep European isolation, which may well be prolonged, there can be little doubt that the majority of British people will be happy that the UK has not joined this undemocratic rush, untrammelled by any popular consultation, towards a centralised European state.  But this is just guesswork.  The British people won’t be asked whether they like or not either.  So any credit for Cameron in this sense should be (very) limited.  

And this is an early interpretation.

The FT has a very good narrative of what actually happened at this meeting.  I shall try to post a link shortly (tho they have an irritating paywall).  Stop press: I can’t even find the original article on their site.  However, here is their summary of the agreement:

Agreement highlights

New treaty

● To be agreed intergovernmentally outside the judicial and institutional framework of the EU

● 17 eurozone and 6 non-eurozone countries to take part, 3 others consider. UK stays outside.

● Treaty will enshrine new fiscal compact

Fiscal compact

● Each government to adopt a “golden rule” to ensure balanced budget (a structural deficit of no more than 0.5 per cent)

● European Court of Justice to ensure that national fiscal rules comply

● Automatic fines for governments that breach 3 per cent deficit limit, unless qualified majority decides otherwise

Firewall

● Rapid deployment of leveraged rescue fund, the €440bn European Financial Stability Facility

● European Stability Mechanism, the new €500bn fund, to come into effect from July 2012

● No agreement to run the two funds simultaneously which would have increased total firepower but this will be reviewed in March

● Eurozone and other EU countries to lend €200bn to the International Monetary Fund via their central banks

Contagion

● The requirement to get private bondholder to share burden of future rescues will be dropped from European Stability Mechanism treaty

● The ESM will be able to make bail-out decisions according to an 85 per cent majority, if Commission and European Central Bank conclude a decision is urgent.