European Scrutiny CommitteeWritten evidence submitted by Professor Steve Peers, Law School, University of Essex

Comments on the draft intergovernmental treaty concerning Economic and Monetary Union:

Introduction

1. The following comments are a response to the invitation to comment on the issues surrounding the December 2011 European Council. They focus in particular on the plans for a treaty on reinforced economic union (the “REU treaty”). Since the treaty negotiations have not yet been concluded, the comments focus on the third draft of this treaty, online on the Open Europe website.

Fundamental Issues

2. In the debate on the draft REU treaty, it has often been assumed that giving any role to an EU institution outside the scope of its current powers under EU law would be legally questionable. However, the case law of the Court of Justice of the EU has not ruled this out in all cases. In particular, the Court of Justice has ruled that Member States can act collectively outside the framework of the EU Treaties in areas where the EU and Member States share a parallel competence, and in that context can confer powers to act upon the EU institutions: see Case C-316/91 EP v Council and C-181/91 and C-248/91 EP v Council and Commission. These cases involved collective action by all Member States, although the Court did not refer to this factor expressly in its judgment. So the question remains open whether or not it would be legal in principle for some Member States to confer additional power upon the EU institutions by means of an international treaty outside the EU framework. If this is legal in principle, there would probably be conditions upon the use of those institutions, in particular a requirement of compliance with EU law.

3. Similarly, the Court of Justice has also said that it can be given extra jurisdiction not referred to in the Treaties as long as it does not affect its core nature (see, for instance, Opinion 1/00). The latter case-law concerns the EU’s external relations, but it is open to argue that it applies equally to measures adopted by a group of Member States. Certainly the Member States have assumed that it does, for example when they conferred jurisdiction on the Court of Justice to interpret the Rome Convention on conflict of law in contract.

4. Therefore while the following analysis identifies the provisions of the REU treaty which would confer new powers on the EU institutions, since there is a question about the legality of conferring such power, it must be kept in mind that this fundamental legal issue should be considered open.

Preamble

5. The preamble to the REU treaty states that it will not affect the conditions for financial assistance granted by the EU/IMF, and that obtaining assistance under the future European Stabilisation Mechanism (ESM) treaty will depend on compliance with Article 3(2) of the REU treaty. This makes a direct link between the two treaties, and will likely in practice encourage any eurozone Member State which is receiving support from the ESM, or believes that it might need support under the ESM, to ratify the REU treaty. It might also encourage Member States which lend funds pursuant to the ESM treaty to ratify that treaty and the REU treaty, on the basis that the “moral hazard” of such lending will be reduced.

Title I

6. Much has been made, during the negotiation process, of the inclusion and then the removal of a reference to the “internal market” in Article 1. Legally speaking, the general clause in the REU treaty protecting the pre-eminence of EU law (Article 2) would in any event have prevented the treaty from having any impact upon EU primary and secondary law concerning the internal market.

Title II

7. Article 2 should be sufficient to ensure that in the event of any conflict between this treaty and EU law, EU law will prevail. In addition, there are a number of further more specific provisions in the REU treaty which will have the same effect. Some uncertainties about the relationship between this treaty and EU law remain, though; they are pointed out below. Generally speaking, Article 2 guarantees that although it is not a signatory to the REU treaty, the UK’s rights as a matter of EU law, and the obligations of other Member States towards the UK, are not affected. If necessary, this rule could be enforced by a legal action against other Member States and/or the EU institutions brought by the UK in accordance with the Treaties, or a legal action brought by a British business or national in the national courts of the contracting parties, with a possible request for a preliminary ruling to the Court of Justice. Although the latest draft of the REU treaty has dropped earlier references to the primacy of EU law, that principle will of course continue to exist, since its legal validity does not depend upon an express mention in this treaty. Furthermore, the general wording of the rest of Article 2 could easily be understood as encompassing the principle of primacy, particularly since the Court of Justice has linked that principle to the obligation of loyal cooperation now found in Article 4(3) TEU, which is expressly referred to in Article 2(1) of the REU treaty.

Title III

8. The “balanced budget” rule in Article 3(1)(b) is defined by reference to the specific provisions of the Stability and Growth Pact (in the first sentence), and by a general reference to that Pact in the third sentence. While there is no reference to the Pact in the second sentence, arguably there is no difference between the Pact and this provision, due to the other references to the Pact in this clause. This is a fundamental question which ought to be clarified, as otherwise it is not clear whether the obligation to “ensure convergence” is any different from the obligations that eurozone Member States already have under the Pact, to ensure “rapid progress” toward meeting their medium-term budgetary objective.

9. Despite the references to the Stability and Growth Pact, the 0.5% deficit rule in the REU Treaty is more stringent than the 1% deficit rule set out in the current EU legislation (see Art 2a of Reg. 1466/97, as amended in 2011); but if the obligation to ensure convergence to that end is no different under the two sets of rules, then the more stringent deficit rule in the REU treaty would have a limited impact in practice.

10. The exceptions to the balanced budget rule in Article 3(1)(c) define a “severe economic downturn” and (apparently) an “unusual event” by reference to the Stability and Growth Pact, so there is no difference between the content of these exceptions as compared to the Pact (see Art 5(1), final paragraph, of the amended Reg. 1466/97). It would be useful to clarify what the treaty means by its reference to a “structural” deficit in Article 3(1)(b).

11. The flexibility offered to eurozone Member States with lower levels of overall public debt in Article 3(1)(d) does not differ at all from the 1% deficit ceiling which is already set out in Art 2a of Reg 1466/97, as amended.

12. Overall, Article 3(1) is not as dramatic at it might first appear, as compared to existing EU legal obligations. The apparently absolute obligation to balance the budget is subject to exceptions and is qualified to an obligation to “converge” with the balanced budget rule, and the rule itself is only slightly more stringent than the rule that the EU has already set. The EU has also established a procedure and penalties to ensure compliance with its rules, whereas the draft REU Treaty relies instead on the obligation to adopt a national debt brake pursuant to Article 3(2).

13. The “debt brake” rule in Article 3(2) is the only provision of the draft treaty which is subject to the jurisdiction of the Court of Justice (see the comments on Article 8 below), although the Court would necessarily have to examine Article 3(1) and possibly also the definitions in Article 3(3) in order to rule on whether a Member State has breached Article 3(2).

14. The substance of the debt brake rule is already partly addressed in EU legislation. There was an initial political commitment to a form of constitutional or equivalent fiscal rule in the “Euro plus pact” of March 2011, which was a political agreement among the eurozone Member States and six of the 10 non-eurozone Member States (the non-participants are the UK, Sweden, Hungary and the Czech Republic) on the issues of competitiveness, public finance, employment and financial stability. However, the Euro plus pact refers on this point back to the obligations imposed by the EU’s Stability Pact legislation as regards “fiscal rules” generally, and provides for more flexibility as to what the rule should address (it could for example, be a “debt brake”, or a rule concerning the primary budget balance or expenditure rules). The Commission was to be “consulted, in full respect of the prerogatives of national parliaments”, on the draft national rule before its adoption. Next, one of the new measures on EU economic governance, Directive 2011/85, provides (in Arts. 5–7 of the Directive) that all Member States (except the UK: see Art 8 of the Directive) must have “fiscal rules” in place in national law which promote compliance with the EU’s deficit and debt rules over a multiannual horizon. The national rules must specify their “target definition and scope” and rules on compliance based on the analysis of independent bodies; they must also provide for “consequences in the event of non-compliance”. Any “escape clauses” must “set out a limited number of specific circumstances consistent with” other EU rules. However, Member States do not have to comply with this Directive until the end of 2013. Finally, one of the Commission proposals for new legislation concerning the eurozone Member States (COM (2011) 821) would require them to put in place binding national rules to implement their obligations under the EU’s surveillance legislation (see comments on Art 3(1)) as regards their medium-term budgetary balance, “preferably” of a constitutional nature. Member States would have to comply with this rule six months after adoption of this legislation (see Art 12(3) of the proposal); the December 2011 conclusions (see paragraph 6) refer to adoption of the proposal by the start of the next budget cycle, ie April 2012.

15. Article 3(2) of the proposed treaty will therefore be similar to the proposed EU legislation, which equally (in the latest draft) must only “preferably” be of a constitutional nature. Moreover, the proposed one year delay in the application of this clause would leave eurozone Member States more time to comply with it than the Commission has proposed.

16. Also, Article 3(2) states that the correction mechanism as regards the debt brake will be based on principles agreed on the basis of a Commission proposal. It is not clear if this will be a proposal for EU legislation and if not, which decision-making rule will apply to its adoption. As noted above, it is also questionable whether the treaty can give a new role to an EU institution, going beyond simply referring to the roles of the institutions as already provided for by EU law. This point therefore needs to be clarified. Finally, the end of the second sentence makes clear that the substance of the correction mechanism as regards deviations from the deficit obligations does not differ from the Stability and Growth Pact. Overall, the current draft of Article 3(2) does not differ much from current or proposed EU law.

17. As for Article 3(3), Protocol 12 attached to the EU Treaties also includes definitions of “government”, “deficit”, “investment” and “debt”; there are more elaborate definitions of these concepts in Reg. 479/2009. While the same provision of the EU’s Stability Pact legislation refers to, but does not define, a “severe economic downturn”, which is a crucial exception to the balanced budget rule in the draft treaty, the June 1997 resolution of the European Council on the Stability and Growth Pact suggests a normal rule of an annual reduction of more than 0.75% in real GDP as a definition. It is odd that the definitions set out in, or referred to in, Art 3(3) only apply to Art 3, and not also to Arts. 4 or 6, which also include the terms “government” and “debt”.

18. Article 4 confirms that the reduction in the total debt must take place in accordance with the Stability and Growth Pact legislation. It therefore does not add anything to the substantive obligations under the EU legislation.

19. The basic obligation in Article 5 broadly reflects one of the Commission’s November 2011 economic governance proposals (COM (2011) 821; see Article 7 of that proposal). The second sentence of Article 5(1) does not add new roles for the EU institutions, referring only to the adoption of EU legislation on this issue. As for the third sentence, it makes clear that the EU legislative rules on this issue will apply to the endorsement and monitoring of the relevant plans, so does not confer more power upon EU institutions.

20. On the other hand, there would apparently be a new role for the EU institutions in Article 5(2), which does not refer to EU legislation. The legality of this provision might therefore be questioned, unless it is amended to refer to the EU institutions’ role under that legislation.

21. Article 6 refers to the coordination of debt issuance plans, but only entails an obligation to report them. While this clause gives a new role to the EU institutions, it is harder to doubt the legality of a provision which merely provides for those institutions to be passive recipients of information, rather than confer power upon them. The preamble to the draft treaty indicates that the Commission intends to propose EU legislation on this issue, which would take precedence over Article 6 of the REU treaty by virtue of Article 2 of the treaty.

22. Article 7 only specifies that Member States “commit” to apply it; this falls short of a fully-fledged legal obligation. It leaves open the possibility that Member States might decide not to support the Commission’s proposals or recommendations. Since this Article does not amend the role of the Commission or the Council as such, it would not breach any rule (if there is one) that a group of Member States cannot confer new powers upon the EU institutions. To some extent this reverse voting rule is already set out in EU legislation, for instance in Articles 5(2) and 6(2) of Reg. 1173/2011, concerning the enforcement of the excessive deficit rules as regards the imposition of fines on eurozone Member States.

23. According to the preamble to the draft treaty, Article 8 is based on Article 273 TFEU, which provides that:

The Court of Justice shall have jurisdiction in any dispute between Member States which relates to the subject matter of the Treaties if the dispute is submitted to it under a special agreement between the parties.

Therefore it cannot be objected that this provision per se is in breach of EU law. Although it has been argued that Article 8 exceeds the scope of Article 273 TFEU, since the 0.5% debt brake rule is new to EU law, and is therefore outside the “subject-matter” of the Treaties, this argument is not convincing. Article 344 TFEU subjects all disputes concerning the “interpretation or application” of the Treaties to the exclusive jurisdiction of the Court of Justice. Since Article 273 provides for only optional jurisdiction of the Court of Justice, the two provisions cannot overlap. So Article 273 cannot apply to EU law as such, since Article 344 applies to EU law; it follows that Article 273 applies (only) to disputes regarding measures which are not part of EU law as such, but which are connected to the “subject-matter” of the Treaties. Obviously the debt-brake rule meets that criterion.

24. On the other hand, the option to invite the European Commission to give its opinion on whether a Member State has complied with the debt brake rule, the Commission’s role in a procedure similar to the pre-judicial stages of the infringement procedure in such a case, and the subsequent obligation to bring an action against a Member State which has breached the debt brake rule, in the Commission’s view, would all confer significant additional powers upon that institution. Article 8 should also be clarified to make clear that the Member State which has allegedly breached Article 3(2) would be joining in the action against itself.

25. A dispute brought pursuant to Article 8 of the REU Treaty is similar to infringement actions in that a Member State is required to comply with the Court’s judgment (compare to Article 260(1) TFEU); but it is different in that the Commission does not have the power to ask the Court to impose fines for non-compliance with the prior judgment (compare to Article 260(2) TFEU). Presumably, however, if a Member State allegedly fails to comply with the ruling of the Court of Justice pursuant to Article 8 of the REU Treaty by the required deadline, another Member State could again seize the Court with a complaint that the Member State in question is still in breach of Article 3(2) of that treaty.

26. The final sentence of Article 8 makes clear that the Court’s ruling will be binding; this is not expressly specified in Article 273 TFEU, but the Court’s jurisprudence makes clear that its rulings must always be binding.

Title IV

27. Article 9 is broadly drafted but does not include any precise obligation, other than the implementation of the Euro Plus Pact in the second sentence. While this Pact is currently not binding, it leaves great flexibility to the participants as regards achievement of its aims. The first sentence of Article 9 is not a fully-fledged legal obligation, since the word “undertake” indicates that the parties have signed up only to a political commitment. Finally, the opening words of Article 9 give pre-eminence to EU law measures on the coordination of economic policy, reiterating the general rule in Article 2 of the draft treaty.

28. Article 10 refers to all requirements in the Treaties, not just procedural requirements, and specifies the particular Treaty rules referred to. It therefore fully protects the position of non-participants in the eurozone, such as the UK, as regards the legality of the measures which it refers to, pursuant to EU law. For instance, Article 326 TFEU provides that any enhanced cooperation “shall not undermine the internal market”, and shall not undermine “economic, social and territorial cohesion”, or “constitute a barrier to or discrimination in trade between Member States” or “distort competition between them”.

29. It is clear that the measures referred to in Article 10 could either be measures regarding economic governance adopted for eurozone States only pursuant to Article 136 TFEU, or pursuant to the general rules on enhanced cooperation. In the latter case, there will need to be a proposal from the Commission, consent of the EP, and approval of a qualified majority of all Member States in order to launch enhanced cooperation. In principle, it seems that these rules would rule out the use of enhanced cooperation (as distinct from Article 136) for all the eurozone Member States and only the eurozone Member States, unless it might possibly be argued that eurozone membership could be applied as a valid condition for participation in enhanced cooperation. Even in that case, it is hard to see how all eurozone Member States could be required to participate, since the Treaty rules on enhanced cooperation refer to Member States which “wish” to participate in it.

30. Article 11 does not confer any power on EU institutions, but simply refers to the use of EU law. According to the preamble to the REU treaty, the Commission plans to propose legislation on this issue. It is not clear whether or how the discussion and coordination would take place if no EU legislation has yet been adopted.

Title V

31. Article 12 is based on points 1–4 of Annex I of the October 2011 conclusions of the eurozone heads of State and government, which set out ten new points regarding governance of the eurozone. This Article supplements the existing Protocol to the Treaties concerning the Eurogroup meetings of eurozone Member States’ finance ministers. It should be noted that the Eurozone heads of state and government have already been meeting regularly since 2009, and have in practice taken the main political decisions relating to the eurozone’s financial crisis. As regards Article 13(1), the eurozone Heads of State and Government have already appointed Herman van Rompuy, the President of the European Council, to this post, for the remainder of his current term of office, which will expire on 1 June 2012.

32. Article 13 reflects, in simplified form, paras. 45–47 of the EP’s resolution of 1 December 2011 on the European semester. It could be compared to Arts. 9 and 10 of the Protocol on national parliaments attached to the EU Treaties, which is the legal basis for the more general interparliamentary cooperation as regards EU law as a whole. Note that this Article refers to the EP as a whole, but only to the national parliaments of the eurozone States. While the draft treaty only refers to an “invitation” to meet, presumably a more formal system would be established by the EP and the national parliaments concerned.

Title VI

33. Article 14(2) includes a target date of entry into force, but this does not really have any legal relevance, as the treaty will still enter into force one month after it has sufficient ratifications, whether that takes place before or after the target date. The bigger issue is the number of ratifications—riginally nine eurozone States, then 15, and now 12 (2/3 of the eurozone States). This provision fails to provide for the legal position if fewer than 12 eurozone States have ratified the treaty before 1 January 2013; this issue ought to be clarified.

34. Article 15 opens the treaty to EU Member States which are not “contracting parties”. The latter phrase is not defined, but presumably refers to all States which sign the treaty initially; it would be useful to confirm this point. It remains to be seen whether all 26 States which expressed an interest in signing the treaty will do so. If they do not, then Article 15 would also be applicable to some other Member States as well as (obviously) the UK.

35. The prospect of integrating this treaty into the EU legal framework, as set out in Article 16, cannot amend the rules on the amendment of the EU Treaties, which still require the UK’s ratification. But Article 16 does not require a Treaty amendment as such, but refers instead more generally to integration into the EU legal framework. It is therefore conceivable that at least some provisions of this treaty could be integrated into EU law by means of secondary EU measures, in particular measures concerning eurozone States only, preventing any veto by non-eurozone States. Indeed, as already noted, much of the treaty reflects existing, proposed or planned EU law.

General Comments

36. In legal terms, the REU treaty would add very little to the measures already set out in EU law or which have been or could be proposed as part of EU law. The treaty might nonetheless have a useful impact if it encourages Germany or the European Central Bank to take a more active role in saving the euro—although it would have been preferable by far for them to take a more active role as soon as the “six-pack” legislation on economic governance had been adopted.

37. The draft treaty is fully subject to EU law both in general (Article 2) and as regards many of its specific provisions, thereby preserving the rights of the UK and the obligations of other Member States toward it under EU law, in particular as regards the internal market.

38. As regards the use of the EU institutions, the draft treaty only provides for a modest number of new powers for them. However, for those who take the view that a group of Member States can never grant any new powers to the EU institutions outside the EU legal framework, such provisions will nevertheless violate EU law. On the other hand, for those who believe that it is legally open for a group of Member States to do this, there is no legal clarity on what the conditions on the grant of such powers are, and so it cannot be concluded in the abstract whether or not the draft treaty would violate such conditions.

13 January 2012

Prepared 30th March 2012