EU comes to terms with ‘two-speed Europe’

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The debt crisis has forced European leaders to realise that monetary union requires much deeper economic integration in the eurozone, and probably further transfers of powers to Brussels. The debate now centres on how to work out the tricky relationship between the "ins" and "outs", with a first proposal due for the December meeting of EU leaders.

Albeit reluctantly, Europeans are now coming to terms with the idea that deeper political and fiscal integration will be needed for the 17 countries that share the euro currency.

Once considered a taboo in Berlin, the implication is that euro area countries will in future answer to a different set of rules than the wider EU-27, creating a two-speed union.

"Clearly, there will be a two-speed Europe: One gear with greater integration in the euro area and a more confederal gear in the European Union," said French President Nicolas Sarkozy, speaking in Strasbourg on 9 November.

Jean Leonetti, European Affairs Minister, summed up the French view during a recent hearing in the French Senate. The eurozone will move towards "economic federalism", he said, although he admitted that the expression was "scary to some".

"In the European Union, monetary union means fiscal union," added Axel Poniatowski, president of the Foreign Affairs Committee in the French National Assembly.

A 'limited treaty change' at Germany's insistence

At their last summit on 26 October, eurozone leaders asked European Council President Herman Van Rompuy to "identify possible steps" to deepen economic integration in the eurozone, "including exploring the possibility of limited Treaty changes."

This phrasing was included upon insistence of German Chancellor Angela Merkel, who fears that deepening eurozone integration without grounding it in the treaties might be ruled illegal by Germany's constitutional court in Karlsruhe.

The acceptance of a two-speed Europe did not occur naturally for Germany. Berlin has indeed always insisted on keeping the EU as a single entity, for fear that a two-speed Europe would unravel the Single Market and close lucrative export markets for its industry.

But Merkel has since changed her mind and now seems to consider the crisis as an opportunity to enforce strict budgetary surveillance on the entire eurozone.

Merkel's ruling CDU party has even launched a working group to amend the European treaties, reports euractiv.de. A CDU motion debated at the party's November congress suggests moving towards a "political union" in the eurozone and supports "further devolution of powers to the European level".

"We will have to give up powers to Brussels, for example the right to intervene, if countries do not stick to the stability and growth pact," said Merkel in a 13 November interview with ZDF television. The Euro zone, she added, must transform step by step "into a fiscal union and then a political union."

Among the ideas supported by the CDU is the creation of a Commissioner in charge of enforcing stricter budgetary surveillance in the eurozone and the transformation of the EFSF rescue fund into a "European Monetary Fund".

The 'ins and 'outs'

How far these ideas will be developed in the new Treaty remains to be seen. But making sure that both the "ins" and "outs" feel their interests are safeguarded will certainly prove tricky.

A diplomat from one of the 10 countries currently not in the eurozone gave the sentiment among the "out" group: “We cannot afford to be left in an inferior second-stream,” he said, speaking on condition of anonymity.

These fears were elaborated by Open Europe, a British Eurosceptic think-tank: "The crisis in the eurozone is forcing its 17 members closer together, with a risk that these countries start to act and vote as a ‘caucus’ in areas which do not directly relate to eurozone governance."

"This could leave Britain consistently outvoted on measures with a profound impact on its economy, potentially including single market legislation and social policy."

Indeed, the 17 eurozone heads of states are now regularly holding closed-doors meetings on the sidelines of the regular EU summits, in addition to the existing 'Eurogroup' meetings of finance ministers.

Britain battling for the 'outs'

The "out" group, led by British Prime Minister David Cameron, has responded by attempting to coordinate their own views ahead of key meetings.

“We all have similar concerns in relation to what might happen as a result of the creation of further fiscal consolidation of the eurozone,” said a source from the non-eurozone countries.

For Cameron, the chief concern is to safeguard London's position as a financial services hub within the European Single Market, which he said was "under constant attack through Brussels directives."

But the interests within the "out" group diverge widely as joining the euro is a legal obligation for the 12 countries that joined the EU in 2004 and 2007. Britain and Denmark, for their part, have secured opt-outs when the single currency was launched, via a popular referendum in Copenhagen's case.

And even the countries that are legally bound to join the euro are not monolithic. Countries like Poland for instance are keen to adopt the euro one day while others like the Czech Republic have taken an openly Eurosceptic stance.

“There are still too many issues that divide us," said a diplomat from one of the "out" countries ahead of one of their coordination meetings. "This is very much about discussing what our priorities are, and seeking common ground,” he explained.

Binary politics

One thing that the "outs" seem to agree on though is to avoid creating a ‘bloc’ of non-eurozone countries forwarding their own interests within the EU.

But at the end of the day, the "ins" will remind the "outs" about a difficult choice they have to make: They can either choose to stay out of the crisis like Britain did – and refuse to participate in costly bailouts – or accept to contribute in some way or another.

France's Sarkozy said it rather bluntly at the last EU summit, telling Cameron to "shut up" and stop interfering in the eurozone's business. "We are sick of you criticising us and telling us what to do. You say you hate the euro and now you want to interfere in our meetings."

Jean Leonetti, the French Europe Minister, put it in more diplomatic terms: "One cannot at the same time stay out of the euro area and participate in decisions," he said. "I told my British counterpart, who has lots of humour, that in order to know more about the euro area, it would be best to enter."

Van Rompuy, for his part, told Leonetti that the 27 should be "informed and involved" but in no way decide for the eurozone.

Seeking to reassure Britain and the other non-eurozone members, he also vowed to defend the single market. "Let us be clear: we will not 'prune' the eurozone to a more selective club," Van Rompuy said in a speech on 11 November, adding: "That would be contrary to the letter and the spirit of the European political pact, as embodied in the Treaties."

"If the eurozone's integrity would not be preserved, one should not take the continued functioning of the Internal Market for granted," he said in terms aimed at soothing British fears. "I will personally do my utmost to keep the 17 and the 27 together."

Treaty change 'roadmap' due in December

EU leaders will debate "first orientations" and a "roadmap" for treaty change at their next meeting in December, based on a report by Van Rompuy.

A final draft treaty is expected to be agreed in March or June 2012, Van Rompuy said.

Just how far sovereign countries will be willing to go on deepening integration however, will probably depend on how bad the crisis gets.

And it is still unclear whether the treaty change will concern the 27 EU member states or just the 17 eurozone members. A national ratification process would then have to follow, with all the risks associated with it (another referendum in Ireland is not to be excluded).

In his Florence speech, Van Rompuy said he will be pragmatic about treaty change. "My intention is that first we discuss the 'what' before we discuss the 'how'," he said. "Treaty changes take time, whereas an immediate financial crisis can only be dealt with by other, swifter means," he earlier told the European Parliament.

Van Rompuy added that there could also be quicker ways to strengthen budgetary surveillance using the EU Treaty's article 136, which provides for euro zone countries to adopt their own rules, without requiring the approval of all the others (see 'background').

"Let us also de-dramatise this debate," Van Rompuy said. "The Treaty already provides a separate article on the Eurozone (art. 136). I do not call it a 'two-speed Europe' but a specific method to go forward."

At their last summit in October, the eurozone leaders said the focus of the treaty change "will be on further strengthening economic convergence within the euro area, improving fiscal discipline and deepening economic union."

Britain would certainly not disagree as UK finance minister George Osborne himself said the eurozone countries should pursue the "remorseless logic" of monetary union with fiscal union.

What Britain could get in return for its support is a clarification of its relationship with the EU and a repatriation of some powers to Westminster.

Another silver lining for Britain and the "out" group could be a further expansion of the European Union's single market to countries in the Balkans and Turkey.

Nicolas Sarkozy said it plainly: "One cannot plead for federalism [in the eurozone] and at the same time for the enlargement of Europe. It's impossible. There's a contradiction.  We are 27. We will obviously have to open up to the Balkans. We will be 32, 33 or 34. I imagine that nobody thinks that federalism—total integration—is possible at 33, 34, 35 countries."

Background

Some EU leaders, including German Chancellor Angela Merkel, have argued that a treaty change could help enforce fiscal rules to avoid repeats of the debt crises plaguing members of the eurozone.

Making changes to the EU Treaty has proven cumbersome. The most recent example was Lisbon Treaty, which was eventually ratified by all 27 member states after heated debate and two referendums in Ireland.

Art 136 of the Treaty on the Functioning of the European Union (TFEU) says eurozone countries may "adopt measures specific to those member states whose currency is the euro", for example:

  • "to strengthen the coordination and surveillance of their budgetary discipline;"
  • "to set out economic policy guidelines for them, while ensuring that they are compatible with those adopted for the whole of the Union and are kept under surveillance."

Timeline

  • 9 Dec. 2011: Van Rompuy to submit "interim report" on treaty change options at EU summit in Brussels.
  • 1-2 March 2012: EU leaders to approve roadmap on how to implement the agreed measures.
  • 2012-2013: Possible end of ratification process.

Further Reading

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