Europe’s achievements since World War II have been nothing short of fantastic. The East-West division of the Cold War era has been brought peacefully to an end. Democracy and prosperity have been spreading. The European Union has been partly responsible for these successes, yet now the eurozone crisis is making the EU’s present situation economically and politically unsustainable. Resolving this crisis in a durable, long-term manner has become an existential priority.
The causes of the crisis are well known; a single currency was adopted, but participating states were allowed to retain their budgetary and economic powers. For several years, financial markets treated all eurozone members in much the same way, and allowed them to benefit from low rates of interests for their loans, regardless of their respective budgetary deficits, accumulated debts, economic policies and overall economic competitiveness. Weaknesses were not only hidden during those years but allowed to worsen.
When the eurozone crisis at last exploded, it quickly became both acute and deep-scaled. It is now so serious that not a few well-placed observers fear that it could destroy not just the euro itself but the EU too.
The crisis over the euro has also occurred after successive enlargements of the Union, which were no doubt positive events, but which took place without the adaptation of the EU’s institutions and decision-making that was badly needed.
At the same time, all EU countries, whether big or small, northern or southern, continue to need the strengths of the Union. None will alone be able to meet future challenges that lie ahead, ranging from both external and internal security, to international criminality, climate change, and so on. European countries’ comparative smallness, their ageing populations, their indebtedness, along with a widespread lack of energy resources, and insufficient investment in research and development, means they are confronted with tough competition from emerging countries that is jeopardising their high living standards and generous social protection arrangements. Acting together, with their highly educated populations, stable and democratic political institutions and generally competent public services, European countries could do much to improve their macro-economic governance and their competitiveness. But this supposes a Union that is able to help them get out of the present crisis, that is able to take decisions efficiently, enjoys strong political legitimacy and has the means to monitor the implementation of its decisions.
In truth, the crisis has already led to a number of positive steps. EU member states last year adopted the non-legally binding “Euro Pact Plus” and in March of this year signed the “fiscal compact”, an inter-governmental treaty. The eurozone members together adopted various measures, just as the EU treaties allow them to do: in September 2011 there was the so-called “six-pack” legislation and soon they should adopt the “two-pack” measure. These all amount to serious progress towards better co-ordination and control of national budgetary policies. But this alone won’t be enough, as it leads neither to a real convergence of economic and budgetary policies, nor to a genuine economic union, so it will not convince the financial markets. That in turn means it will not enable Greece, Ireland, Italy, Portugal and Spain to obtain loans at “normal” interest rates, and without that they will find it extremely hard to make their economies work and grow. In short, the results will not be enough to give people reason to hope, and therefore to accept further sacrifices to improve their countries’ economic competitiveness.
The fact is that the eurozone’s present architecture, based as it is on a centralised monetary policy while preserving the decentralisation of national budgetary and economic policies, is not viable in the long term. Continuing to work on the present path and at the current speed has few chances of success and could, moreover, open the risk of a split in the case of a sudden aggravation of the crisis.
Are there other ways, then, of finding a lasting solution to the eurozone crisis? Bail-outs and fire-walls, however necessary they may be, don’t treat the real causes of the problems. But as substantial revision of the EU treaties requiring the agreement of all member states is excluded politically, accelerating the pace of integration of the eurozone through a “two-speed Europe” seems like the only available solution. There are two different options for doing so.
The first option would consist in progressing de facto towards a two-speed EU without there being any legal commitment. A group of EU states, which logically would mean all the eurozone members, could proclaim their determination to use all available legal means to co-operate more closely together. They would then decide on the matters which this co-operation would apply, including at a minimum economic and monetary union.
This co-operation should preferably take place within the EU’s institutional framework. If the group were to be composed of all eurozone members, it could use Article 136 of the Treaty on the Functioning of the European Union, which says, “…in order to ensure the proper functioning of EMU…the Council shall…adopt measures specific to those member states whose currency is the euro”, while “only members of the Council representing member states whose currency is the euro shall take part in the vote”. The scope of this provision is wide; measures adopted on its basis are EU law. And using Article 138 of the treaty would allow a unified representation of the eurozone in the IMF and the World Bank. The group could also, so as to avoid being seen as exclusively concerned with economic matters and austerity policies, and thereby also gain greater political visibility as well as become economically coherent, decide to extend co-operation to other policy areas.
It could do so in four areas, while remaining within the EU’s institutional framework:
• A minimal approximation of tax laws, such as adopting a common basis for assessing corporate taxation, and of social policy, such as a greater liberalisation of national labour markets, and measures to encourage labour mobility.
• The adoption of common policy measures on immigration linked to labour market needs.
• Closer judicial co-operation in civil matters, notably concerning the law of contracts and family law with cross-border implications, again with the aim of encouraging mobility.
• The implementation of “permanent structured co-operation” in defence policy, as allowed in the EU’s Lisbon treaty.
The group could also consider taking some measures outside the EU framework, and indeed outside co-operation would be unavoidable if some eurozone members were to decide not to participate, as the use of Articles 136 and 138 is open only to the eurozone as a whole. This form of co-operation could for instance include measures to strengthen the European Stability Mechanism, the Euro-Pact, a de facto co-operation in the Bretton Woods institutions, as well as a voluntary approximation of national laws in given areas.
One of the issues for the states participating in the group would be to decide whether to commit themselves to a common list of co-operation policies, or alternatively whether its members would have the right to opt in or out in any specific case or area.
Any list of obligatory areas for co-operation should certainly include EMU matters. As for the rest, the more all eurozone members participate, the more coherent the group would be and the easier to present to the public.
A weakness in this option would appear to be that if, when acting outside the EU framework, an intergovernmental co-operation were followed. It would be better to act within the EU framework, or at least to provide for decisions to be taken by a qualified majority vote, and for their implementation to be submitted to a judicial control.
Another difficulty would be the legitimacy of the decision-making process. In the Council, as in all cases of enhanced co-operation, only participating members have the right to vote. But this is not the case for either the European Parliament or the Commission, where all members will participate in the decision-making, while the measures adopted will only concern 17 countries. This might raise difficulties for the members of the group and might push them to develop their co-operation outside the EU framework, although that would result in inter-governmental co-operation and therefore lead to less efficiency.
The second option would imply an international agreement “additional” to the EU treaties, which would bind the participating states legally. This would allow them to commit themselves to establish a genuine economic union that would be more convincing vis-à-vis the financial markets, and also to define the organs and rules they wish to govern their co-operation.
A new treaty of this sort would obviously take time to be agreed, ratified and implemented. But an announcement of a decision in principle, providing it’s clear and precise, as well as accompanied by a bold ECB policy that is in line with its September 2012 decision, might be enough to convince both the financial markets and the people of the eurozone countries that a lasting solution is realistic and genuinely within sight. The conclusions of the June 28-29 European Council, although still a long way from any such decision, do at least show the way forward, in particular with the request to Herman Van Rompuy: “the President of the European Council was invited to develop, in close co-operation with the President of the Commission, the President of the Eurogroup and the President of the ECB, a specific and time-bound road map for the achievement of a genuine Economic and Monetary Union (…). An interim report will be presented in October 2012 and a final report before the end of the year.” It was a request made on the basis of the European Council president’s Preliminary Report, with its four “key building blocks”, namely an integrated financial framework, the move towards an integrated budgetary framework and towards an integrated economic policy framework, and the strengthening of democratic legitimacy and accountability.
But this option also raises a number of institutional and political issues: The first is its legal feasibility. An additional treaty would have to be compatible with the EU treaties, and the participating states would, of course, continue to be bound by these treaties and by the laws adopted on their basis. Providing these conditions are met, there is nothing in international law or in EU law that prevents some member states from concluding another treaty and organising their joint co-operation as they would wish.
The second issue concerns the choice of substantive areas of co-operation. These could be the same as in the first option, and might extend further, firstly in order to establish a genuine Economic and Monetary Union. The group could accept a “joint responsibility” by conferring powers of control and decision-making to central organs on national budgetary and economic policies. Each country would adopt its national budget after obtaining a green light on its deficit level, taking into account the level of its debt. Failure to respect a red light would not be legally impossible, but would exclude the possibility of receiving further financial aid. Other aspects of budgetary policy and of economic policies would also be subject to convergence mechanisms, and these would clearly be tighter for countries receiving financial aid. Countries with a strong surplus, such as Germany, could be asked to encourage domestic demand. A strong Eurozone Banking Supervision Authority could open the way to a possible Banking Union, possibly with a single supervisor, as well as a Eurozone Authority to settle such problems as bank failures, along with a Eurozone Deposit Guarantee Fund. If this sort of move were to appear possible in terms of all 27 EU members, then it should be done at the EU level, perhaps with some opt-outs.
“Joint responsibility” would allow “joint solidarity”, meaning that a eurozone Debt Agency, or Redemption Fund, could be established to allow joint answers to any moves in the financial markets against a eurozone member. However, necessary precautions should be taken to avoid “moral hazard”, and the mutualisation of debts would be only partial; moreover, it will happen only in parallel and under the condition of the realisation of a federal fiscal union.
Other elements of Option No. 2 could be the adoption of minimal harmonisation of tax measures, particularly corporate taxation, and such social legislation as a common minimum salary, as well as the linking of retirement conditions to demographic trends. It could also involve organising shared public procurement and a more common approach to planning the defence industry’s needs. A crucial further element would be the conferring of new political rights on European citizens, allowing them to take part in political elections after a number of years of residence, along with other rights that would encourage mobility within the participating countries.
A third issue is the institutional framework that might be needed. It scarcely needs saying that it would be better not to create any new bodies or institutions – Europe is complex enough already! But how possible will it be to avoid this? EU institutions like the Court of Justice, the Court of Auditors and the ECB could work on the implementation of an additional treaty with their present composition and status, so long as all 27 EU members agree. For the European Council as well as the Council there would be no difficulty either, because Eurogroup meetings already take place with the 17 finance and economy ministers or the heads of state or government.
The question arises much more for the Parliament and the Commission. The sine qua non requirement of the whole project is that it should be submitted to effective and legitimate democratic control. Would it be legally (given Articles 10(2) and 14(2) of the TEU) and politically acceptable to hand over power of control only to MEPs elected in the participating states? On the other hand, would it be politically acceptable to bring the eurozone’s close co-operation under the entire EP? Would the European Parliament have enough legitimacy to decide on these matters? Moreover, would it be possible to ask national parliaments to accept to transfer a part of their essential current powers, without having a say in the decisions which will be taken in the future at the European level? If not, one hypothesis, which would also avoid new elections, might be to create a new body composed of national parliamentarians in the countries concerned, coming perhaps from their specialised budgetary committees. Such a small body could be given legislative powers comparable to those of the EP on EU matters, although applicable to different issues, with co-decision powers on important EMU decisions concerning budgetary matters.
As to the European Commission, the 17 eurozone governments might find it difficult to accept that a Commission whose decision-making college is made up of one member
for each of the 27, voting (in principle) with a simple majority, could impose decisions on
them in such sensitive matters. But the creation of a new body, with functions similar to those of the Commission, and all the required human resources that would be needed, is clearly out of the question. One might perhaps imagine a small political-administrative authority, or a “eurozone finance minister” to oversee the implementation of the decisions and to bring possible infringement procedures before the Court of Justice. This authority would not be allowed to set up a new bureaucracy. It should outsource the substantive preparation of its decisions to other entities, and in priority to the Commission itself, providing the 27 agree. This could be made easier if the Commission were to be re-organised without changing the treaties to make it more efficient and independent. In short, the whole system could be made very close to the present EU institutional framework.
A fourth issue is that of protecting the rights and interests of the other EU member states. This is, of course, an imperative. Different means could be used to reach this aim. The openness and transparency of the activities of the group should be ensured. The additional treaty should underline the EU obligations of its contracting parties. The treaty should guarantee the legal protection of the Court of Justice, which could be seized by any of the 27 as well as by the Commission. The treaty should be open to the other EU members, and should provide for help for those wishing to join.
As to those non-eurozone members whose policy is to have the euro as their currency in the future, once they have ratified the Fiscal Compact and confirmed their policy, they should be offered an active observer status in the eurozone’s meetings. This would allow them to participate in a decision-making process that will yield decisions they will later have to implement.
The fifth issue is the necessity to preserve the European Union’s unity and cohesion. This is an essential pre-requisite that needs to be assured by all appropriate means. The eurozone must not become the first class of a permanent two-class EU, but should remain the temporary vanguard of the whole Union, playing the role of a locomotive and showing the way to all other member states willing to be part of it. Its aim should not be to become an autonomous organisation, aiming at transforming itself into a federal state, which nobody wants. The eurozone will not exist separately from the EU because it is and must remain part of it.
The matters on which the eurozone would be allowed to act should be restricted so as to avoid the areas that are the exclusive competence of the EU, as well as the internal market and external relations not directly linked to monetary policy. It is also important that the additional treaty should recognise that the Commission’s proposals to legislate in the EU framework will always have a legal priority over corresponding proposals to legislate within the eurozone. The additional treaty should also preserve the unity and cohesion of the EU as a single European actor in external relations, both in the areas of trade and foreign policy.
The last (but not least) issue is that of the political feasibility of this option. The European Council gave itself, in its June 2012 conclusions, the very difficult task of deciding on a road-map for transforming the eurozone into a genuine economic union, with the strengthened democratic legitimacy that will be needed. Nobody should have any illusions; the political difficulties facing all the member states will be enormous. Germany’s Chancellor Angela Merkel was absolutely right when she said this will be “a Herculean task”. It will take time and demand political leadership. But, as many others have said: “what else…?”
Jean-Claude Piris was Director General of the Legal Service of the Council of the European Union and author of the recently published “The Future of Europe: Towards a Two Speed EU?” (2012, Cambridge University Press). email@example.com