CHAPTER 5: THE DECEMBER 2011 EUROPEAN
COUNCIL AND THE PROPOSals for treaty change |
71. In the European Union the most controversial
issue of the past few months, indeed one of the more controversial
issues in the Union's history, has been the proposal for a treaty
on budgetary discipline and economic policy co-ordination centred
on the euro area states. This chapter sets out the background
and identifies the key features of the proposed treaty. We then
examine some of the key legal issues including those created by
the fact that the proposed treaty sits outside the EU treaty architecture.
Finally we examine the implications for the United Kingdom.
Background: developments during
72. Our March 2011 report on economic governance
argued that the root cause of some of the problems currently being
experienced within the euro area can be traced to the structural
failings within the foundations of EMU.
One of the people involved in the construction of economic and
monetary union, Mr Amato, agreed with this view and told
us that in designing this architecture "we made a mistake",
because "we wanted to believe that co-ordinating national
policies was enough, for the simple reason that nobody wanted
to transfer national policies" to the EU. Mr Amato expressed
surprise that the markets accepted this flawed design for so long,
with lending rates to all euro states held at very similar levels
until the crisis erupted in 2007-08.
73. In our March 2011 report we also found that
the Stability and Growth Pact, which was meant to ensure discipline
on fiscal policies at the national level, did not work as planned.
In particular it lacked an effective enforcement procedure, as
demonstrated when France and Germany both breached the Pact in
2002-03, and avoided any adverse consequences.
74. To remedy these structural deficiencies,
calls grew for greater fiscal integration. Speaking to us in November
2011 Professor Begg said that a "union of rules"
was already being put in place through the combination of economic
governance measures described as the "six pack" that
sought to put a better preventive system in place.
Further measures on closer monitoring and co-ordination were agreed
at the October 2011 Brussels summit. And in November the Commission
published two new proposals for "stronger economic governance":
the first to permit the Commission to ask euro area governments
to revise their draft national budgets in line with their euro
and the second to enhance surveillance for euro area countries
being supported by financial assistance or that are threatened
by serious financial instability.
The emergence of the new treaty
75. At the European summit on the evening of
8-9 December 2011 the EU's leaders debated how to improve the
co-ordination of fiscal and economic policy across the euro area,
and whether agreement could be envisaged to the necessary amendments
to the EU treaties. After a fraught meeting, and faced with the
refusal of the United Kingdom to contemplate any such treaty amendments
without certain safeguards, the 17 euro area countries agreed
on a "fiscal compact", to have the status of a formal
treaty. Nine of the ten non-euro countries indicated the possibility
of taking part in this agreement, subject to consultation with
their national parliaments where appropriate.
76. At an informal summit on 30 January 2012
the euro area Member States finalised the text of the "treaty
on stability, coordination and governance in the economic and
monetary union", with signature of the treaty expected to
take place at the European Council on 1-2 March. Eight of the
ten non-euro Member States indicated that they would sign the
treaty. The Czech Republic declined to participate for the time
being, but held open the possibility of signing the treaty at
a later date. The United Kingdom maintained the position it had
taken in December.
The text of the proposed treaty following the 30 January summit
is summarised in Box 2.
Summary of the draft treaty on stability,
coordination and governance in the economic and monetary union
|Article 1(1) states the purpose of the treaty: "to strengthen the economic pillar of the Economic and Monetary Union by adopting a set of rules intended to foster budgetary discipline through a fiscal compact, to strengthen the coordination of economic policies and to improve the governance of the euro area, thereby supporting the achievement of the European Union's objectives for sustainable growth, employment, competitiveness and social cohesion".
Article 1(2) provides that the treaty applies to euro area states and (read with Article 14) to non-euro contracting parties when they adopt the euro. The latter may declare their intention to be bound by its substantive provisions earlier if they so wish.
Article 2 establishes the precedence of European Union law over the treaty, including in article 2(2) that "The provisions of this Treaty shall apply insofar as they are compatible with the Treaties on which the Union is founded and with European Union law. They shall not encroach upon the competences of the Union to act in the area of the economic union."
Articles 3 and 4 set out the terms of the fiscal compact: that
- government budgets shall be balanced or in surplus, with the annual structural deficit not to exceed 0.5% of GDP (unless government debt is very low, in which case the structural deficit can be up to 1%);
- there must be an automatic correction mechanism, triggered if the state deviates from a country-specific medium-term objective, or its adjustment path towards that objective;
- if the ratio of general government debt to GDP exceeds 60%, the difference between the actual ratio and 60% should be reduced by an average of one-twentieth per year.
Article 3(2) provides that the parties must put into national law the balanced budget rule "through provisions of binding force and permanent character, preferably constitutional, or otherwise guaranteed to be fully respected and adhered to"; and also to transpose the automatic correction mechanism specified in Article 3 (above).
Article 5 requires parties in breach of the deficit criterion and subject to the excessive deficit procedure to put in place a programme of structural reforms to reduce the deficit. The form and content of such programmes is to be defined in EU law.
Article 6 requires the parties to report their borrowing plans ex ante to the Commission and the Council, for the purpose of better coordination of debt issuance.
Article 7 provides that the parties undertake to support European Commission recommendations where a euro area state is in breach of the deficit criterion and subject to the excessive deficit procedureunless a Qualified Majority of euro area states does not support the recommendation.
Article 8 provides that the EU Court of Justice may rule on whether parties have complied with the requirements of Article 3(2); and that the Court may levy a fine of up to 0.1 per cent of GDP if its ruling is not complied with.
Articles 9 to 11 cover economic policy coordination. Under Article 9 the parties "undertake to work jointly towards an economic policy fostering the smooth functioning of the Economic and Monetary Union and economic growth through enhanced convergence and competitiveness". Article 10 encourages the parties to make use of existing procedures in the TFEU to take forward measures specific to the euro area states (Article 136 TFEU in relation to the euro area; and Articles 326 to 334 in relation to the enhanced cooperation procedure).
Article 12 provides for Euro Summit meetings to be held at least twice a year.
Article 13 provides for a conference of MEPs and national parliamentarians of the parties.
Article 14 provides that the treaty shall come into force when twelve euro area states have ratified it.
Article 15 provides that after it comes into force the treaty shall remain open to other Member States of the European Union.
Article 16 expresses the aim that within five years the treaty may be incorporated into the EU treaty framework.
Note: This summary, and this chapter of the report,
refer to the sixth draft of the treaty, dated 31 January 2012
77. The treaty will come into force when 12 euro
area states have ratified it. Ratification by all 25 states is
not a foregone conclusion. For example, it is expected that France
will not ratify until after the Presidential election in April
(with Socialist candidate Francois Hollande expressing reservations
about key features of the treaty); and Ireland may hold a referendum
78. Six drafts of the treaty have been produced,
several of them by a working group consisting of officials from
the states involved, and three MEPs, plus an observer from the
United Kingdom. This report does not parse the differences from
draft to draft, and our comments relate to the sixth draft, dated
31 January 2012. We note that the changes in successive drafts,
and the unusual speed of negotiations in preparing new treaty
provisions, have not made it easy to understand and analyse the
provisions of the treaty. Evidence from witnesses has necessarily
reflected the text of the treaty as it stood at that time: the
oral evidence heard by the Committee relates to the third and
|The following sections refer to three treaties. The first two listed are the principal EU treaties and are sometimes together called the Lisbon Treaty as they were most recently amended by the treaty signed in Lisbon in December 2007.
- Treaty on European Union (TEU) Sets out the broad principles for the European Union.
- Treaty on the Functioning of the European Union (TFEU) Sets out in greater detail the functioning and institutions of the European Union.
- Draft Treaty on stability, coordination and governance in the economic and monetary union (usually referred to in this chapter as the proposed treaty) This is the outcome of the decision by Member States at the December European Council to agree a new treaty on budgetary discipline and economic policy coordination.
Legal and related issues
79. The proposed treaty raises several critical
legal and related issues, especially because it is separate from
the EU treaty architecture. This section highlights the relationship
between the treaty and EU law; whether the proposed treaty can
legitimately confer new functions on EU institutions (and whether
it does in fact seek to do so); transparency and accountability;
and whether the treaty imposes any new obligations on participating
80. Professor Craig raised a point of legal
principle which he argued did not appear to have been addressed.
Under the EU Treaties, agreement among all 27 Member States is
required for any additions or other changes to those treaties.
The decisional rule is unanimity. The proposed treaty would, by
contrast, be agreed by fewer than 27 states, in effect substituting
a decisional rule permitting a majority of states to proceed.
Professor Craig did not argue that this was unlawful, pointing
out that Member States retain their inherent power to make an
international agreement, but he questioned whether it is legitimate
to proceed to an outcome desired by a majority of EU Member States
by way of a treaty not agreed by all those states. The principle
would be established that "a majority, whether it is 12,
15 or 26 states, could attain ends that are not attainable via
unanimity and they can use the EU institutions in order to achieve
RELATIONSHIP WITH EU LAW
81. The fact that, because not all the Member
States were willing to agree to it, the new treaty is outside
the treaty architecture of the European Union raises several difficult
legal and practical questions. Mr Amato made plain his own
concerns, stating bluntly: "I do not like this treaty very
82. The proposed treaty cannot amend the EU Treaties
or their protocols. Nor may it affect the obligations of Member
States and the functions of the EU Institutions under the EU treaties
and other EU law. The proposed treaty repeatedly acknowledges
the precedence of the EU treaties.
Article 2 provides that "This Treaty shall be applied and
interpreted by the Contracting Parties in conformity with the
Treaties on which the European Union is founded", and that
"The provisions of this Treaty shall apply insofar as they
are compatible with the Treaties on which the Union is founded
and with European law. They shall not encroach upon the competences
of the Union to act in the area of the economic union." The
fiscal compact set out in Article 3 is to be applied "without
prejudice to the obligations derived from European Union law";
Article 7 on sanctions for states in excessive deficit procedure
is applicable "While fully respecting the procedural requirements
of the European Union Treaties" and Article 10 on enhanced
cooperation applies "In accordance with the requirements
of the European Union Treaties".
83. Despite these multiple disclaimers on the
face of the treaty, the fact remains that a group of Member States
has decided to establish a separate framework concerning the monetary
union established by the EU treaties, which includes amongst other
things provision for closer economic policy coordination.
84. For example, Article 9 provides that "Building
upon the economic policy coordination as defined in the Treaty
on the Functioning of the European Union, the Contracting Parties
undertake to work jointly towards an economic policy fostering
the smooth functioning of the Economic and Monetary Union and
economic growth through enhanced convergence and competitiveness".
85. Article 10 provides that signatories will
make greater use of "enhanced cooperation" (a procedure
under the Lisbon Treaty which permits a group of EU Member States
to take forward initiatives under certain conditions) "on
matters that are essential for the smooth functioning of the euro
area". The Article specifies that this must be done "without
undermining the internal market". The enhanced cooperation
procedure in the Lisbon Treaty includes a number of procedural
and substantive requirements in addition to the requirement not
to undermine the internal market, for example that "Authorisation
to proceed with enhanced cooperation shall be granted by a decision
of the Council, on a proposal from the Commission and after obtaining
the consent of the European Parliament"; and that "such
cooperation shall not undermine the internal market or economic,
social and territorial cohesion. It shall not constitute a barrier
to or discrimination in trade between Member States, nor shall
it distort competition between them".
86. Article 12 provides for regular euro summit
meetings to be held, with a President (who is currently Mr Van
Rompuy, president of the European Council), in close collaboration
with the President of the European Commission, and at whose meetings
the President of the European Parliament may be invited to be
87. It is inevitable that there will be concerns
about the possibility that the provisions on economic policy coordination
and governance might impinge on matters related to the internal
market, which should be the province of the full Union. There
are also concerns that euro area states meeting together might
informally reach common views on matters which would then fall
to be decided by the full European Council ("caucusing").
All three current holders of the key posts of President of the
Euro Summit / European Council, President of the European Commission,
and President of the European Parliament, are from euro area countries.
The question arises whether it might in practice prove difficult
in future for the holder of any of these key posts to be nationals
of non-euro area countries.
CAN THE TREATY CONFER NEW FUNCTIONS
ON EU INSTITUTIONS, AND DOES IT TRY TO DO SO?
88. The question of whether the proposed treaty
can confer new functions on the institutions of the European Union
caused immediate controversy in the aftermath of the December
European Council. On 13 December the Prime Minister told the House
of Commons that "we will look constructively at proposals
to use the EU institutions with an open mind, but this is new
territory which raises important issues",
while Commissioner Olli Rehn argued that, though a full EU treaty
would have been preferable, "this fiscal compact treaty was
bold and effective and legally viable".
89. On 17 January the Minister for Europe clarified
the Government's position: "We think that the legal position
is that any proposal to confer new tasks on the EU institutions
requires the consent of all Member States".
The Government have now indicated that they will not oppose the
use of EU institutions under the proposed treaty provided that
the interests of the United Kingdom are not threatened.
On 31 January the Prime Minister explained to the House of Commons
that "The new intergovernmental agreement is absolutely explicit
and clear that it cannot encroach on the competencies of the European
Union and that measures must not be taken that in any way undermine
the EU single market. Nevertheless, I made it clear that we will
watch this matter closely and that, if necessary, we will take
action, including legal action, if our national interests are
threatened by the misuse of the institutions."
90. Professor Craig argued that the proposed
treaty could not lawfully confer any new functions on the institutions
of the European Union.
He explained that this clear view was based on Articles 5(2) and
13(2) TEU, which provide that:
"the Union shall act only within the limits
of the competences conferred upon it by the Member States in the
Treaties to attain the objectives set out therein" (Article
"Each institution shall act within the limits
of the powers conferred on it in the Treaties, and in conformity
with the procedures, conditions and objectives set out in them"
(Article 13(2) TEU)
91. The functions of the EU institutions are
governed by the EU treaties. The proposed treaty does not and
cannot alter this position. It is less clear, however, whether
the proposed treaty does actually seek to impose any new obligations
(as distinct from recognising functions which are already exercised
by the institutions under the EU treaties and legislation made
under the treaties).
92. Commissioner Rehn indicated that the treaty
would not confer any new functions on the Council or the Commission:
"for the implementation of the agreement, the institutions
of the Union will act within the framework of their powers as
provided by the European Union Treaties". Therefore, he argued,
the question about whether or not it would be legitimate for the
treaty to confer new functions on the Commission was "purely
Commenting on the fourth draft of the treaty Professor Craig
suggested that aspects of Articles 3, 7 and 8 did seek "in
substance [to] confer new powers on the Commission".
The Government have indicated that they share the concerns of
some other (non-specified) Member States in relation to Articles
7 and 8 "which raise important questions of compatibility
with EU law".
93. It has been commonly assumed that no legal
difficulty is caused by the proposed treaty setting out functions
conferred on the EU institutions under the existing EU legislative
framework in the context of the proposed treaty. But Professor Craig
also raised the question whether it is in fact legitimate for
the Commission to exercise existing powers in "this new setting"
under the proposed treaty.
For example, Article 5(1) makes it clear that contracting parties
subject to the excessive deficit procedure shall implement a programme
the content and format of which "shall be defined in European
Union law"; with the submission of such programmes to the
Commission and Council for endorsement or monitoring to "take
place within the context of the existing surveillance procedures
of the Stability and Growth Pact". Article 5(2) seems to
give a (closely related) duty to the Commission and Council but
without a reference to existing EU law: that "the implementation
of the programme, and the yearly budgetary plans consistent with
it, will be monitored by the Commission and by the Council".
EU COURT OF JUSTICE AND THE EUROPEAN
COMMISSION UNDER ARTICLE 8
94. Considerable attention has been focused on
Article 8, under which the EU Court of Justice may determine whether
a party to the treaty has complied with Article 3(2). The first
part of this Article requires transposition of the fiscal compact
into national law "through provisions of binding force and
permanent character, preferably constitutional", implying
that the role of the Court would simply be to assess whether or
not this had been done. The Article goes on to require the putting
in place at a national level of an automatic correction mechanism
to keep states on the right path towards meeting the goals of
the compact. If a state has failed to comply with Article 3(2),
the Court can specify the time period within which the state must
take the necessary measure to comply. If the state then fails
to comply with this ruling, the Court may impose a fine "that
shall not exceed 0,1% of its gross domestic product".
95. A case may only be brought by another party
(state), but there is also a role for the Commission. If the Commission
concludes in a report that a contracting party has failed comply
with Article 3(2), then "the matter will be brought to the
Court of Justice" by one or more of the other parties. This
appears to be a requirement, but it is not clear how it will be
decided which state or states will commence proceedings.
96. The preamble to the proposed treaty states
that Article 273 TFEU gives the Court jurisdiction; and Article
260 TFEU empowers it to impose a fine. Article 273 provides "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"; Article 260 specifies the circumstances in
which the Court may impose a fine.
97. Professor Craig agreed that Article
273 was sufficient to give the Court jurisdiction, but that Article
8 of the proposed treaty caused difficulties because even though
the Commission would not bring a case in name, the provisions
meant that it might do so in effect, and there is no provision
under the EU treaties for the Commission to bring such a case.
98. Concerns have been raised that the distribution
of important rules regarding the economic governance of the EU's
Member States, and particularly the euro area states, between
the EU Treaties, a range of legislation made under those treaties,
and the proposed treaty, will cause confusion about what exactly
is required. Professor Peers concluded that "the EU's
economic governance rules fail the test of transparency, because
of their near-total complexity and unreadability".
99. This lack of clarity, for Member States expected
to follow the requirements and for anyone who wishes to have a
clear understanding of the laws which are affecting them, is undesirable
in principle. It is also causing some confusion in specific matters
of interpretation. For example, commenting on the third draft
of the treaty Professor Peers queried whether Article 3(1)(b)
added anything to obligations that euro area states already have
under the Stability and Growth Pact.
100. Under the EU treaties there is an established
framework for democratic accountability, through national parliaments
and the European Parliament. As the proposed treaty is outside
the EU set-up, the framers have sought in Article 13 to introduce
a role for parliamentary scrutiny:
"As foreseen in Title II of Protocol (No 1)
on the role of national Parliaments in the European Union annexed
to the European Union Treaties, the European Parliament and the
national Parliaments of the Contracting Parties will together
determine the organisation and promotion of a conference of representatives
of the relevant committees of the national Parliaments and representatives
of the relevant committees of the European Parliament in order
to discuss budgetary policies and other issues covered by this
101. This Article raises a number of questions.
- The opening words "As foreseen in"
are puzzling. While the reference to the EU treaties is helpful,
the Protocol was not drafted foreseeing its application outside
the ambit of those treaties.
- The reference to the Protocol also creates an
element of ambiguity. The United Kingdom Parliament (and the Parliaments
of all EU Member States), of course, participate fully under Protocol
1, while it is not currently envisaged that the United Kingdom
(and one other state) will be a party to this treatyand
the reference elsewhere in the Article to "the contracting
parties" makes clear that non-signatories will not be involved.
- Given that the key subject matter of the treaty
is national budgets, for which national governments are accountable
to their national parliaments, and that this treaty sits outside
the EU treaties, it is not immediately apparent why the European
Parliament "will together determine the organisation and
promotion" of the conference along with the relevant national
DOES THE TREATY IMPOSE ANY NEW OBLIGATIONS
ON MEMBER STATES?
102. Witnesses gave two answers to the question
of whether a new treaty is actually required in order to achieve
the ends set out in it: one legal, and one political. Professor Peers
argued that the treaty adds "very little to the measures
already set out in EU law or which have been or could be proposed
as part of EU law" but it "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".
In December, Guy Verhofstadt, one of the three MEPS involved in
the treaty negotiations, agreed that "it is for political,
symbolic reasons that they want to do this agreement".
The legal aspects of the question are considered in this section;
the political context in the following sections.
103. There was general agreement with Professor Peers'
view of the legal aspect, and our witnesses highlighted the ways
in which provisions in the proposed Treaty were effectively mirrored
in existing EU Treaty and legislative obligations.
104. It is worth considering further whether
there is any significant element of the treaty which is not or
could not be achieved within the existing legal framework, not
least for its relevance to the ease with which the proposed treaty
might in due course be integrated into the EU legal framework,
as proposed in Article 16. The Minister for Europe cited two such
"there is no provision in the European Union
treaties to make a balanced budget rule binding in a Member State's
national law or subject to the jurisdiction of the European Court
of Justice. There is no provision in the existing treaties for
an automatic correction mechanism where a Member State deviates
from that balanced budget path".
Mr Amato broadly agreed with this analysis.
But the legal question, whether measures could be adopted under
the EU Treaties to deal with both points, remains open.
Will the treaty help in the short-term?
105. Commissioner Rehn stated that the proposed
treaty is aimed at targeting "weaknesses in economic governance
and ... the lack of credible enforceable mechanisms for fiscal
There was a widespread view amongst our witnesses that the treaty
was necessary, but not sufficient; and that the direct impact
of the treaty would be more about preventing future crises by
hardwiring fiscal rectitude into the system, and not directly
resolving the current crisis.
106. Giving evidence to us on 17 January the
Minister for Europe described as the "prime justification"
for the treaty the view of Germany that if you get the rules right
for the future, "you therefore restore confidence about long-term
stability, [and] that in turn will help you to secure confidence
and recovery now". He added that "even on the optimum
assessment of what is likely to come out of the intergovernmental
negotiations there is still a great deal more that needs to be
done in both the short and long terms".
Mr Amato agreed that in the short-term the proposed treaty
"is not enough", but that it "was and is necessary
to restore trust" on the part of Germany. He explained, "trust
may be the main outcome of this treaty, on which you can build
what in the treaty itself is missing".
107. In considering what else needs to be done,
the Minister for Europe highlighted the need in the short-term
for the effective implementation of the October 2011 agreement
on Greek debt write-down; bank recapitalisation and rescue funds.
This is consistent with chapters 3 and 4 of this report. Mr Amato
emphasised the importance of increasing the capital of the European
Stability Mechanism, and as noted in paragraph 102 Professor Peers
highlighted the role of European Central Bank.
Will the treaty help in the long
108. There has been little questioning of the
policy embodied in the balanced budget rules set out in the proposed
treaty. To a degree this is unsurprising because, as has been
identified, they are very similar to what is already required
in recently passed EU legislation. And there is a universal desire
to avert future crises by avoiding the accumulation of large government
debts and an over-reliance of states on the debt markets.
109. However, it is worthy of note that the rules
being implemented by the European Union countries, and the euro
area states in particular, amount to a major innovation in fiscal
policy. This is softened by the fact that the proposed treaty
specifies that it is only the structural deficit that must be
eliminated, allowing for some continued variation over the course
of the economic cycle. Article 16 of the proposed treaty, which
is considered further below, notes that there will be an assessment
of experience with implementation, well within five years of its
coming into force. We express the hope that this assessment
will encompass a reflection on this major development in the fiscal
policy of euro area states.
110. There is also a tension between the desire
to hardwire balanced budgets and automatic sanctions for excessive
deficits into the system; and the desire to retain flexibility
where that is justified. This has been highlighted during the
negotiations on the various iterations of the proposed treaty.
In January the European Central Bank issued a strongly-worded
warning that too many get-out clauses were being written in;
while by contrast Mr Amato expressed satisfaction that one
element of flexibility which was important in the case of Italy
(regarding the reduction of excessive government debt) had been
added into the fourth draft of the treaty.
111. It is vital that, while the euro area
states take the steps they consider necessary to strengthen the
euro, including on fiscal integration, matters relating to the
internal market remain the preserve of all 27 EU Member States.
We welcome the disclaimer on the face of the treaty which is designed
to ensure that this point is respected.
112. The proposed treaty raises a number of
other questions, particularly concerning the relationship between
it and the EU treaties and laws made under those treaties; and
the proper role of EU institutions. The history of the institutional
development of the European Union is characterised by pragmatic
flexibility and 'finding a way', suggesting that some of the rough
legal edges of the proposed treaty will be softened over time.
With the United Kingdom reducing its objection to the use of the
EU institutions under the proposed treaty, it might be argued
that this process is already underway. But even so, the lack of
clarity about whether it is legitimate for the proposed treaty
to confer new functions on institutions of the European Union,
and the extensive overlap between the provisions of this treaty
and functions which have already been imposed by EU legislation,
is undesirable. The treaty aims to bring certainty about the fiscal
rules that euro area states will follow, and anything that risks
creating new areas of confusion should be avoided. Therefore the
objective of bringing these provisions within the scope of the
EU treaties, as provided for in Article 16, is one which we consider
is in the interests of all Member States including the United
Implications for the United Kingdom
THE APPROACH TO THE DECEMBER 2011
113. Even though the UK is not a member of the
euro area, it is far from immune from the effects of the euro
area crisis. The size and importance of the financial sector to
the UK's economy makes it particularly vulnerable. As we have
seen, part of the emerging solution to the crisis has been a move
towards closer fiscal integration among members of the euro area,
and there has been an understandable tension underlying the approach
of the United Kingdom Government towards these developments.
114. On one hand, the Government have been supportive,
accepting the "remorseless logic" of closer integration.
The Financial Secretary to the Treasury explained in October 2011
that "The reason we opposed membership of the euro is we
recognised that along with monetary union must come closer fiscal
integration, and we are urging that on our eurozone partners to
enable them to get the right institutional mechanism in place
to support monetary union."
115. On the other hand, there has been a fear
that a closely integrated bloc based on the euro area might shape
EU policies to benefit this core, to the detriment of the ''periphery''
including the United Kingdom. Before treaty change moved decisively
up the political agenda the former, supportive, view tended to
be to the fore. When asked on 8 November 2011 about the danger
that euro area states might work together to 'pre-cook' matters
for discussion at the Council of Ministers, the Minister for Europe
accepted that "when the new voting weights provided for in
the Lisbon Treaty come in in 2015, at that stage the 17 current
members of the eurozone would have a built-in qualified majority,
should they vote as a bloc. Clearly there is an inherent risk,
just in that arithmetic", but he added that "there is
no evidence whatsoever that that is how eurozone countries themselves
are thinking at the moment."
116. The lead-up to the December European Council
seemed to signal a hardening of the UK Government's position,
towards seeking explicit guarantees that any significant moves
to further integration would not disadvantage the UK. Immediately
before the 9 December summit, the Prime Minister set out the Government's
view of the crisis: "What matters most to Britain's national
interest now is that the eurozone sorts out its problems ... That
requires three things. First ... there needs to be much tighter
fiscal discipline and closer fiscal co-ordination within the eurozone
... Second, the members and institutions of the eurozone should
take whatever action is necessary to prevent a second global credit
crunch ... above all a big firewall to prevent contagion along
with properly capitalised banks. Third, and more fundamentally,
we need to see improved competitiveness ... a change in the treaty
governing all 27 members of the European Union ... is the most
comprehensive and credible way to provide tough sanctions to ensure
that eurozone countries stick to the rules on debt".
117. Significantly he added that "If we
are changing the treaty that applies to all EU countries and allowing
the eurozone countries to have new rules, it is also important
that there are rules to keep the single market fair and open for
key industries for Britain, including financial services."
In the event that a treaty of the 17 euro area members were introduced
instead and they were applied through the EU Court of Justice
and the Commission, then "their use outside the treaty of
the 27 would clearly require safeguards." 
118. As we have seen, the UK Government refused
to negotiate changes to the EU treaties. Soon after the break-up
of the negotiations Mr Cameron explained his reasons for
refusing to take part:
"We want the eurozone countries to come together
and solve their problems. But we should only allow that to happen
within the EU treaties if there are proper protections for the
single market, for other key British interests."
WHY DID THE UK REFUSE TO PARTICIPATE?
119. In evidence to us on 17 January the Minister
for Europe explained to us in some detail the reasons for the
Prime Minister's actions on 9 December. First, he reiterated that
the Government had hoped to secure an agreement: "when the
Prime Minister went to Brussels for the December European Council,
he did so on the basis of an agreed government position that the
optimum outcome would be agreement of all 27", provided that
certain safeguards could be achieved.
"The reason why we wanted the safeguards was
that it was not at all easy to predicteven now it is not
easy to predictwhat the outworking of the new arrangements
would be in practice. We accept that the economic logic of a common
currency is that there should be a move towards greater fiscal
and economic integration of the eurozone. Given those countries'
sovereign decision to take part and to commit themselves to the
single currency, it is in our interest as a nation that they should
be able to sort out their grave problems and to restore economic
Clearly, also, the creation of a tightly integrated
structure focused on the eurozone within the architecture of the
EU would mean giving a higher priority in the activities of the
European Union to the concerns of the eurozone ...
When it was clear that explicit safeguards were not
forthcoming, the Prime Minister took the decision that it is not
in our national interest to agree. We have as an outcome an intergovernmental
structure that, whatever else it does or does not do, cannot create
obligations on the United Kingdom, cannot form part of the European
Union's acquis and cannot be a treaty basis for future EU secondary
legislation that is binding on us."
120. The Government's case is therefore that
the events at the December European Council, including their inability
to achieve what they describe as the "optimum outcome"
of an agreement between all 27 Member States, were dictated by
the failure of the other Member States to agree the safeguards
sought by the UK Government.
121. We repeatedly asked the Minister for Europe
to explain precisely what safeguards the United Kingdom had sought
at the December European Council.
Members of both Houses of Parliament have done the same.
While Ministers have outlined in general terms the safeguards
they say were sought, they have consistently refused to give a
precise answer, or to make available to Parliament the text of
the draft protocol they put forward at the December European Council
and which the other Member States declined to agree. The Minister
for Europe argued that "I do not think that any Government
have got into the habit of disclosing routinely the text of negotiating
amendments that they suggested to European partners in a particular
122. The Government's position on this point
is regrettable, not least because the system by which Parliament
scrutinises proposals for European legislation relies on the provision
of often quite detailed information by the government about its
views on matters to be discussed at forthcoming Council meetings,
and the system usually works well. It is unacceptable that
the Government have not released appropriate details of the safeguards
which the Prime Minister sought at the December European Council.
This makes it impossible to form a balanced judgement about the
outcome. Coming to the present, we invite the Government to indicate
what necessary safeguards they think have yet to be achieved,
and what provisions (if any) in the proposed treaty are objectionable
123. As there has been no authoritative detailed
statement from the Government on this matter, we set out three
suggested explanations of the safeguards sought. The first is
from the Minister for Europe, who explained in general terms that
the Government had focused on two areas, seeking: "some sort
of general safeguard with respect to the integrity of the single
market and ... something more specific on the issue of financial
services" ... to protect "the financial services industry
in every EU Member State against the risk of discriminatory legislation
or protectionist legislation on financial services".
The Minister denied that the Government was tilting at imaginary
windmills: "We have had, in the European Central Bank's location
policy, an example already of a legislative initiative that we
believe goes blatantly against single market principles and which
has been brought forward because the ECB regards it as their priority
to protect the interests of the eurozone. We did not want to see
that becoming a trend."
124. The second explanation is from the Financial
Times, which reported that the UK's demands included: a clear
statement that euro area integration would preserve the interests
of the single market and would not undermine the common interest
of all 27 Member States; a "protocol on financial services"
in relation to the powers of the new European Supervisory Authorities
(including a reassurance that the EBA would remain in London)
and including a unanimous vote on any "user charges"
in financial services regulation, which would have attempted to
clarify that the UK would have been able to veto any variant of
the financial transaction tax proposal; ensuring that stringent
rules did not close off the EU to US or Asian financial groups;
and allowing the UK the flexibility to raise capital requirements
for retail banks, in reflection of the recommendation of the Vickers
125. The third is from the French President Nicolas
Sarkozy: "in order to accept treaty revision among the 27
EU states, David Cameron asked ussomething we all judged
unacceptablefor a protocol to be inserted into the treaty
granting the United Kingdom a certain number of exonerations on
financial services regulations ... We could not accept this, since
we consider, quite on the contrary, that a part of the world's
woes stem from the deregulation of the financial sector."
126. The proposed treaty would impose no new
obligations on the United Kingdom as a non-member of the euro
area, whether or not the UK chose to sign and ratify the treaty.
Article 14 makes clear that the treaty applies to contracting
parties whose currency is the euro; and that it does not apply
to other contracting parties until they adopt the eurounless,
that is, they choose to declare their intention to be bound by
the substantive provisions of the treaty.
127. The United Kingdom Government have consistently
recognised the "remorseless logic" of further integration
between the euro area states. In principle those states should
be supported in their efforts, given the severity of the crisis
and the implications for the United Kingdom of a failure to resolve
it. However, this further integration does raise important questions
about the future development of the EU, and in particular whether
and how the internal market can be maintained and developed further
as a level playing field across all 27 Member States when the
majority, but not all, of those states are also engaged in the
fiscal integration that must ultimately accompany monetary union.
The United Kingdom Government, together with the other Member
States of the Union, and the EU institutions, must devise a means
of securing the fiscal integration desired by some of the euro
area Member States while at the same time protecting the integrity
of the single market, including its provisions for financial regulation,
as an engine of economic growth for all 27 Member States of the
128. We agree with the assessment of the United
Kingdom Government that the "optimum outcome" at the
December European Council would have been an agreement at the
level of all 27 EU Member States, with the interests of the United
Kingdom protected. But the creation of mechanisms outside the
EU treaties risks causing confusion, and we have sought to identify
some of these issues in this report. Shifting discussions outside
the main EU channels to forums where the United Kingdom has no
voice also risks marginalising the UK over time.
129. For the longer term, we note that the
proposed treaty states in Article 16 that it remains the intention
for its provisions to be folded in to the main EU treaty framework.
We can see no reason in principle why this should not in due course
66 The future of economic governance in the EU,
paras 30-33. Back
Q 98 (Select). Back
The future of economic governance in the EU, chapter 3. Back
Q 86 (Sub-Committee). Back
Press remarks by the President of the European Council Herman
Van Rompuy, following the informal meeting of members of the European
Council, 30 January 2012. Back
Q 86 (Select). Back
Q 100 (Select). Back
For a helpful summary, see Professor Peers (Select). Back
Articles 329 and 326 TFEU respectively. The enhanced cooperation
procedure is set out in Article 20 TEU and Articles 326 to 334
HC Deb 13 December 2011 col 757. Back
"Rehn rejects British line on implementing fiscal treaty",
Financial Times, 13 December 2011. Back
Q 67 (Select). Back
As reported in "Cameron U-turn over policing of tough new
eurozone rules", The Guardian, 28 January 2012. Back
HC Deb 31 January 2012 col 678. Back
Q 92 (Select). Back
Commissioner Olli Rehn (Select). Back
Q 92 and Professor Craig (Select). Back
Minister for Europe (Select). Back
Q 93 (Select). Back
Q 95 (Select); see also Professor Peers (Select). Back
Professor Peers, "Analysis: Draft agreement on reinforced
economic union (REU treaty)", for Statewatch, 12 December
2011; see also Professor Craig, Q 96 (Select). Back
Professor Peers (Select). Back
Professor Peers (Select). Back
Reported in EUObserver.com, 20 December 2011. Back
e.g. Minister for Europe Q 79, Professor Craig QQ 88 and 97, Mr
Amato Q 100 (all Select). Back
Q 79 (Select). Back
Q 100 (Select). Back
Commissioner Olli Rehn (Select). Back
QQ 73 & 74 (Select). Back
Q 102 (Select). Back
Minister for Europe QQ 73 & 74; Mr Amato Q 102; Professor
Peers (Select). Back
"ECB raps revisions to draft fiscal pact", Financial
Times, 13 January 2012. Back
Q 103 (Select). Back
Mark Hoban MP, Q 55 (Sub-Committee). Back
Q 51 (Sub-Committee). Back
Q 8 (Select). Back
''Yes to treaty change-but only on our terms'', by David Cameron,
The Times, 7 December 2011. Back
QQ 53-54 (Select). Back
QQ 58, 61, 83 (Select). Back
e.g. HL Deb 12 January 2012 cols 322 and 334; and uncorrected
transcript of oral evidence of Rt Hon George Osborne MP before
the House of Commons Treasury Committee, Wednesday 11 January
Q 61 (Select). The Government also declined to give their view
on the draft proposed treaty as "the Government cannot comment
in detail on a draft text on which we are not negotiating".
(Minister for Europe (Select), 27 January 2012.) Back
Q 58 (Select). Back
Q 56 (Select). Back
''Cameron's demands over financial regulation spark French resistance'',
Financial Times, 9 December 2011. Back
''EU suffers worst split in history as David Cameron blocks treaty
change'', Daily Telegraph, 9 December 2011, and ''Cameron
cold shoulders Europe'', Financial Times, 10 December 2011.