Today's summit was initially intended to tighten the bloc's economic governance in the wake of the Greek sovereign debt crisis.
But talks have reached a dead-end over what sanctions to apply for countries breaking the EU's budget discipline rules, laid down in the Stability and Growth Pact.
Germany is pushing hard for changes applicable to all EU countries, while the UK insists they should only apply to the 16 eurozone members.
In an interview with the Financial Times newspaper yesterday (15 September), Christine Lagarde, French finance minister, said "the whole question of sanctions, the timing and pattern of sanctions, is at stake here".
European Council President Herman Van Rompuy, who is chairing the summit, will give an update to EU leaders over lunch on the progress made by his task force on economic governance, put in place on 26 March in the midst of the Greek crisis.
But it appears the group has made little progress. "There is still quite a bit of disagreement about sanctions – when they kick in, to which bits of the EU budget they will apply, who decides on them and how automatic these decisions will be," said a senior diplomat from one of the large EU member states, who was speaking on condition of anonymity.
"I think, however, that the sanctions regime is focused on the euro zone," the diplomat added, saying that the UK does not expect to be covered by the new rules.
Lagarde, however, says other countries outside the 16-member euro zone would like to see the same rules applied to everybody. "We have the other 10 members saying: 'Why should you exclude me? Why am I not part of the club?'," she told the FT.
Extending the mandate of the Van Rompuy task force?
The European Commission is expected to table proposals for sanctions on 29 September that could go some way to breaking the deadlock. Meanwhile, the Van Rompuy task force will continue its work and is scheduled to report in time for the next summit of EU leaders on 28-29 October.
But the diplomat said there are "one or two around the table" who want to continue the talks and would be ready to extend the deadline. "Our view is that you might want to stick to the October deadline and force people to come to a decision."
Germany has long backed the idea of suspending EU voting rights for countries that repeatedly break the bloc's budget rules. But that would require changing the EU treaty, a lengthy process that would involve extensive additional work, beyond the mandate of the Van Rompuy task force.
"We've said from the beginning that the mandate of the task force is open-ended," said another EU diplomat, who was also speaking on condition of anonymity.
"Germany thinks that it is important to make progress on extending the scope of possible sanctions within the Stability and Growth Pact," the diplomat added, mentioning cuts to EU regional funding as one possible option. "In our view, this is something that is still on the agenda and should be elaborated."
However, the diplomat admitted that the task force is "not there yet" and that "the sanction discussion might be difficult to finish by mid-October".
"If due to the complexity of the issue, we do not manage to finish our discussion by mid-October, we should be clear that we have to continue our discussion in one way or another."
Treaty change still on the agenda
Jean De Ruyt, permanent representative of Belgium to the EU, said there was little political room for manoeuvre in deciding new sanctions without changing the treaty.
"We cannot go very far, be it at the eurozone level or at the EU level," De Ruyt told a July seminar organised by the Centre for European Policy Studies (CEPS) in Brussels. "In fact, at the eurozone level, you cannot do much more than what is already in the treaty. And at the EU level, you can't do more without changing the treaty."
De Ruyt said proposals to temporarily cut off EU regional funding for errant member states was problematic because it would require changing the treaty. "Playing with structural funds can be done but it can only be done at the level of the 27. So it is very difficult to find new sanctions in the euro zone without changing the treaty."
Meanwhile, more radical options like suspending a country's voting rights in the EU Council of Ministers would be equally difficult as they would also require treaty change, he said.
In July, Lagarde and her German counterpart Wolfgang Schäuble presented their joint contribution to the Van Rompuy task force, suggesting to circumvent the treaty issue by agreeing "a political accord" among the 16 eurozone members. The accord would include a possible "neutralisation" of EU voting rights for countries repeatedly breaking the rules (EurActiv 22/07/10).
But De Ruyt says "other ways" can be found to punish member states, for example by pointing the finger at them during EU summits "in a sort of name and shame process".
However, analysts have little trust in peer pressure. In a briefing note, Alessandro Liepold from the Lisbon Council think-tank said "peer pressure generally gives way to peer accommodation, amidst an overall reluctance to pull triggers".
