News
Grayling Political Update - Leaders Agree on a Two-Speed Europe
Posted 09.12.2011
Leaders Agree on a Two-Speed Europe
A fully-fledged fiscal union has begun!
This was the Summit to end all Summits.
Although it’s not over yet, one thing is clear from the marathon negotiations between the EU 27 leaders in Brussels today - the landscape of the European Union has fundamentally and irrevocably changed.
Whatever the official Council Conclusions say, we now have a two speed Europe.
"Fiscal Compact"
The result is to forge ahead with an inter-governmental agreement that imposes on Eurozone Members a tough "fiscal compact". The move from Eurozone monetary union to a fully-fledged fiscal union has begun.
In other words, the European Union will operate at two speeds – the fast lane towards tax and spending integration for Eurozone members, and the slow lane for the "outs".
It is undoubtedly a dramatic development. The European Union functions quite well already at variable speeds – in various areas such as free movement of people and of course the single currency. However, the fiscal compact could change the whole dynamic of the single market.
The compact includes requirements for a cap of 0.5% of GDP on countries' annual structural deficits and automatic sanctions for countries whose public deficits exceed 3% of GDP. The sanction idea, however, has already been dismissed as "a joke" by some senior Brussels insiders.
The new tougher rules on spending and budgets will now be backed not by an EU Treaty but by a Treaty between governments. This will be easier and quicker to adopt.
However, it will be less rigorous – raising the question of how exactly it will provide more protection to the Euro than the original stability pact was supposed to do.
Although it is not yet clear what else the fiscal compact will be comprised of, Eurozone leaders will now have to move fast to get agreement in place by March next year.
A two speed Europe is something that some members outside the Eurozone can live with comfortably. David Cameron was quite clear today: "It is better to have Eurozone countries make amendments separately", he said.
However, his negotiating position has infuriated Nicolas Sarkozy who has accused him of applying his veto at a time of Europe’s greatest need. What particularly needled the French President was that he believed it was the lax regulation of European financial services that was the cause of the crisis, and it seemed inappropriate for the UK to use this opportunity to demand concessions for the City of London on EU banking regulation.
Rescue Funds
Although it was agreed that the European Stability Mechanism (ESM) will be accelerated and brought into force in July 2012, solutions to the immediate sovereign debt crisis were thin on the ground.
Eurozone leaders did succeed in persuading Germany to agree to contribute more money to the IMF and allowing the €440bn rescue fund to continue running when the ESM gets underway next year. This will add another €200bn to the so-called "bazooka" approach of ploughing more money into the system.
However, there is no sign of Euro stability bonds happening soon, and the European Central Bank lowered expectations of heavily intervening in the bond markets, explaining why the Summit has failed to lift the stock markets. Yet there are still hopes that a rigorous fiscal compact will be enough to give the ECB confidence to intervene further.
The cautious position of the ECB will dishearten Sarkozy and reassure Merkel, but on Treaty changes, the French President has won the day. Ms Merkel had wanted all 27 to be part of any new Treaty change.
It has not been a bad summit either for Mr Cameron. He has been sent back to the UK with his tail between his legs, but at least he will not have to contend with messy negotiations over Treaty changes. As far as he is concerned, a fiscal union is a matter for the Eurozone members only in a new "Us and Them" European Union
