EU leaders push for tough rules in new treaty | Europe| News and current affairs from around the continent | DW | 09.12.2011
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Europe

EU leaders push for tough rules in new treaty

The decision to establish a European fiscal union has been made in principle. Now the experts have just three months to negotiate the finer points. What's expected to be in the new treaty?

A finger holds a euro coin over Europe on a globe

The pressure is on European leaders to get it right this time

As the second day of the European Union summit began on Friday, German Chancellor Angela Merkel made it clear that she was expecting confidence in the eurozone to grow and a calming of the financial markets.

"Everyone can see that we have learned from our mistakes," Merkel said in Brussels.

German Chancellor Angela Merkel, center, and French President Nicolas Sarkozy, left, talking as they are on their way to a working dinner during the EU summit

EU leaders worked through the night to reach a deal

She downplayed the significance of the UK blocking an agreement by all 27 EU member states, saying that the important thing was that the deal struck among 23 of the leaders was for strict rules and discipline rather than a watered-down compromise.

The new pact for the 17 members of the eurozone plus six other EU countries that don't use the common currency is meant to be written up by the beginning of March. The three remaining EU countries to not initially agree to the accord, including Hungary, have indicated they may also sign up to the deal after consulting their parliaments where appropriate.

It is expected to create a fiscal union or a merging of the budgetary policy of the EU countries taking part. But what tools will the treaty provide to keep its members in line?

Key elements of the fiscal union

Debt brakes: All signatories commit themselves to establish debt brakes. A maximum budget deficit of 0.5 percent of the countries' gross domestic product should be enshrined in countries basic legal framework. The current deficit limit for the eurozone is 3 percent.

Beginning in 2016 and once this policy is in full effect, Germany's deficit limit will be at 0.35 percent. But there is a loophole. The upper limit can be broken under "exceptional circumstances" such as deep recessions or natural disasters. The European Court of Justice is expected to determine whether such debt brakes can be put into national law.

European Ccommission President Jose Manuel Barroso with his thumb in the air

The Commission will have to give the thumbs up to the countries' budgets

Budget checks: The members of this new agreement would be expected to present their national budgets to the European Commission before final approval by their individual legislatures. If there are foreseeable violations, the Commission can demand changes to the budget that the parliaments must enact. Under this provision the Commission's clout grows.

Automatic sanctions: If the Commission identifies violations of the fiscal union's rules and finds that a country's deficit is too high, then it automatically initiates a pre-determined process with fixed steps.

In the past the EU's finance ministers had to approve such a procedure. Under the new rules, this process against misbehaving countries could only be stopped if two-thirds of the finance ministers agree to override it. This rule had already been agreed upon for the euro common currency union. Whether the penalties will be fines, the removal of voting rights, or something else remains unclear.

The leaders of the members of the new fiscal union are to meet once a month to discuss their common budgetary policy.

No eurobonds: This budgetary cooperation is not yet meant to be a pooling of debt. Germany and other solvent countries have resisted the idea of eurobonds, or jointly issued government bonds. In June, Merkel made it clear that eurobonds were only realistic once a fiscal union was fully established.

This new fiscal union treaty is being agreed upon outside of the EU's Lisbon treaty, while the 17-member eurozone's existing provisions on excessive deficits will continue to apply. This could lead to legal conflicts.

This setup is not the "cleanest," according to sources in the German delegation, but was necessary due to the UK's unwillingness to participate. It's hoped that the treaty will be ratified and enter into force by the end of 2012.

Emergency measures

The fiscal union is meant to reestablish the financial markets' confidence in the government bonds of eurozone countries in the medium- and long-term. In the short-term the EU leaders have agreed to some emergency measures:

IMF emergency fund: Within the next ten days, the eurozone countries are to decide on the transfer of 200 billion euros ($266 billion) to the International Monetary Fund in Washington. That money is meant to be distributed, under strict conditions, as loans to cash-strapped eurozone countries like Italy.

It's not clear yet where exactly the money will come from. The individual central banks could pass on money that they borrow from the European Central Bank, an idea that was discussed but already dismissed by ECB head Mario Draghi.

A hand puts money into a collection can with the EU flag on it

Promised money needs to be rounded up for the emergency measures to work

European Financial Stability Facility (EFSF): This permanent rescue fund is supposed to be pushed forward and begin in the summer of 2012. That means the 500-billion-euro EFSF will have to be funded with money from national budgets sooner than expected, although the buildup is expected to take several years.

For now the EFSF will not have a banking license and so will be unable to borrow from the ECB. Which countries can get loans will be decided by a majority vote of 85 percent of the share in the capital. Small countries will be unable to block decisions, but Germany virtually has veto power.

No obligation for banks: The idea of involving private creditors in national debt restructuring or debt cuts has been abandoned. That's a clear signal to the financial markets. Government debt can now be purchased without any extra risks.

After banks were pressured to erase some of Greece's debt, investors ran from European bonds. Now Greece is meant to be the exception. Merkel had previously insisted on the involvement of private creditors, but she now says that was a mistake.

Author: Bernd Riegert / hf
Editor: Andreas Illmer

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