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27 minus 1

What’s at stake: After a long, hard and rancorous negotiation, the European Union split in a fundamental way on Friday 9 December. For the first time in 39 years, a British prime minister used a veto to block an EU agreement after failing to secure a protocol that would have given Britain a veto on financial-services […]

By: Date: December 12, 2011 Topic: Macroeconomic policy

What’s at stake: After a long, hard and rancorous negotiation, the European Union split in a fundamental way on Friday 9 December. For the first time in 39 years, a British prime minister used a veto to block an EU agreement after failing to secure a protocol that would have given Britain a veto on financial-services regulation. The new rules for a "stability union", an intergovernmental agreement outside the EU legal framework, will be drafted by March 2012 and opened to ratification by nations outside the 17-member eurozone. Although Britain has always had an uneasy relationship with its EU partners, choosing not to join the single currency or sign the open borders Schengen treaty, the summit was clearly a turning point that will have consequences for the political and governance structure of Europe.

Introducing the EU crises

Wolfgang Münchau
writes that we now have two crises. A still-unresolved eurozone crisis and a crisis of the European Union. Of the two, the latter is potentially the more serious one. The eurozone may, or may not, break up. The EU almost certainly will. It was clear that a time would come when the interests of the eurozone – as it integrates itself out of the crisis – will not only collide with those of the non-eurozone, but with the EU itself. We are now at that point and the decision by the eurozone countries to go outside the legal framework of the EU and to set up the core of a fiscal union in a multilateral treaty will eventually produce this split.

Niall Ferguson
reports that under E.U. law, it would be much easier for Britain to leave the European Union than for Greece to leave the euro zone. Having the euro countries intent on going down the road to federalism, the non-euro countries face a stark choice: giving up monetary sovereignty or accepting the role of second-class citizens within the E.U. The Economist’s Bagehot further argues that if the crisis deepens, and the euro-plus countries start to feel that they are being made to defend themselves with one hand tied behind their backs, they will not tolerate a legalistic British veto for very long. At that point, expect to hear lots of European politicians calling for the euro-plus 23 or 24 or 25 simply to become the new European club.

Historical perspectives on a relationship based on distrust

Philip Stephens
writes that ever since it negotiated the single currency opt out at Maastricht nearly 20 years ago (Jean Quatremer has a nice summary of the negotiations that led to Maastricht) Britain has managed by dint of power and skillful diplomacy to be both within and without the European club. Mr Cameron’s decision to leave an empty chair at negotiations for a fiscal union in the eurozone marks the end of that road.

The Economist’s Bagehot argues that what happened on Thursday night was the logical end-point of a relationship based on distrust. Successive British governments have believed that on balance membership of the EU is in their interests. But because we take a common law as opposed to Napoleonic view of regulation, favoring a world in which everything is allowed unless it is expressly prohibited, we seek at every turn to pin down every detail of new rules or schemes being proposed, in case some of it turns out to be harmful. What was on the table on Thursday night was not clear in all its details when it came to the implications for the single market, so it was genuinely a tricky document for Mr Cameron. That being so, you can see why he wanted to secure some safeguards. Charlemagne also points that the British government has become convinced that the European Commission, usually a bastion of liberalism in Europe, has been issuing regulations hostile to the City of London under the influence of its French single-market commissioner, Michel Barnier.

Harold James
writes that British obstructionism may be a blessing in disguise for the rest of Europe as it opens the way to a Europe of variable geometry. British leaders always felt that they were not quite welcome in the European fold since a conservative government wanted to join the European Economic Community in the early 1960’s, but was rejected by French President Charles de Gaulle. But as in 1978 – when it sabotaged talks on the EMS – and in 1992 – when it negotiated an opt-out from the Maastricht treaty, British obstructionism opens the way to a Europe of variable geometry, in which only those countries willing to accept stability criteria will go forward with deeper integration. Institutionally, this may be more complex than an EU-wide treaty amendment, but the result can be tailored and crafted more appropriately to the real situations of rather diverse countries.

A political remake

argues that the British diplomatic suicide has opened up the road for a political remake of Europe. Britain has pushed Germany deeper into the arms of France. As Germany is keen to avoid dominating Europe, it will need a partner. Today this leaves only France – which improves the French position towards Germany, as they know Germany has no other partner left to balance the French. Cameron also closed the door on Germany’s preferred choice of a supranational solution, leaving the French intergovernmental plan as the only option on the table. And the traditional partners of Britain are silenced – at the next meeting of the financial attachés I would be surprised if the usual Czech and Scandinavian support would be as strong as before. This means that Britain may just be outvoted on financial regulation – which has practically never happened in the past.

writes President Nicolas Sarkozy had long favored the creation of a smaller, "core" euro zone, without the awkward British, Scandinavians and eastern Europeans that generally pursue more liberal, market-oriented policies. And he has wanted the core run on an inter-governmental basis, i.e. by leaders rather than by supranational European institutions as this would allow France, and Mr. Sarkozy in particular, to maximize its impact. At the summit on Thursday, Mr. Sarkozy made substantial progress on both fronts.

How will the euro-plus parallel structures work?

Kurt Bayer
writes that it is still hard to foresee what the intergovernmental treaty might mean with respect to the already very convoluted EU governance structure: will new, parallel institutions have to be established, will the “new 26” have to conclude cooperation agreements with the Commission and other EU services? In his Sunday Wrap email, Erik Nielsen – Unicredit Global Chief Economist – writes that David Cameron managed to add potentially significant costs to the implementation of the remaining 26 members’ agreement because of his insistence that EU institutions, like the Commission and the Court, can be used only for issues relating to all 27 member states. At a minimum, time will now be wasted on finding legal loopholes so that the institutions can indeed be used in the better integrated Europe; at worst, they’ll have to build a set of parallel structures to deal with what has to be dealt with.

Wolfgang Münchau
writes that the Brussels machinery is working hard at finding a legal way of making a separate treaty among eurozone members possible. One candidate is a procedure called “enhanced co-operation”. Introduced in the 1990s and later amended, it is intended to give a group of at least nine member states the right to go it alone. But this is more a treaty-within-a-treaty procedure. It has been invoked only for the single European patent and, fittingly, for a common divorce law. But the procedure is not intended to change current treaty provisions. It is meant for member states to co-operate on areas not yet covered by the treaty. Another possible legal basis is Article 136, under which the eurozone member states are allowed to “strengthen the co-ordination and surveillance of their budgetary discipline” and to “set out economic policy guidelines for them”. This is the legal basis for eurozone members to co-ordinate tax policies, improve the functioning of labor markets or send a joint representative to the International Monetary Fund.

*Bruegel Economic Blogs Review is an information service that surveys external blogs. It does not survey Bruegel’s own publications, nor does it include comments by Bruegel authors.

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