Germany’s chancellor scores partial victory at European Council.
● EU leaders hope to make minor changes
● G20 urged to take action to stop currency wars
● Support for taskforce reforms
● EU, national budgets to be linked
Angela Merkel, Germany’s chancellor, came away with a significant win from the European Council meeting of 28-29 October: an agreement in principle from her fellow government leaders to change the European Union’s governing treaty.
Merkel argued that a treaty change was needed to permit the creation of a permanent mechanism to rescue governments that suffered a debt crisis.
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Having initially resisted the idea of an EU rescue mechanism, Merkel argued that the arrangement had to be legally robust enough to withstand any challenge at Germany’s constitutional court.
A temporary mechanism is already in place – the European Financial Stability Facility, agreed on 9 May – but that device, and assistance offered to Greece, are the subject of legal challenges at the national constitutional court in Karlsruhe. Merkel’s hope is to have a permanent mechanism in place, backed by a treaty change, before the constitutional court rules next year.
Where Germany did not succeed, however, was in getting agreement that the treaty could be changed to permit automatic punishment of those countries that do not keep their public finances under control – such as depriving errant countries of the eurozone of their EU voting rights.
While Merkel’s counterparts from other EU countries were prepared to contemplate a limited treaty change to allow the permanent mechanism for dealing with a debt crisis, they thought sanctions were a bigger issue that would require a more extensive change to the EU’s treaty. And a more extensive change of the treaty would require ratification by a referendum in Ireland and probably also the UK – too risky a course of action.
A large number of national leaders came out against the idea during the discussions on the first night of the European Council meeting. José Manuel Barroso, the European Commission president, said the idea was “unacceptable”.
Merkel came away with only part of what she wanted, but it was still a striking achievement. The other countries of the eurozone had been shocked when Merkel and Nicolas Sarkozy, France’s president, jointly called for treaty change after a Franco-German summit in Deauville on 18 October. Perhaps they should not have been – Wolfgang Schaüble had put treaty change on a list of German demands earlier in the summer. But treaty change was not, for instance, on the agenda of the taskforce on economic governance (basically the EU’s finance ministers) being chaired by Herman Van Rompuy, the president of the European Council, on the same day as the Deauville summit.
By the time that Van Rompuy hosted a dinner in Luxembourg on the eve of the meeting of foreign ministers on 25 October – a meeting that would prepare for the European Council – Germany was beginning to pick up support.
While Merkel won, it was Jean-Claude Trichet, the president of the European Central Bank, who lost, at least in the short term.
Trichet wanted the new rules on economic governance to exert the greatest possible pressure on national governments to maintain budgetary discipline. For him, that would mean punishment for errant nations being automatic. But at Deauville, Merkel had conceded to Sarkozy, as the price of winning France’s backing for the treaty change, that sanctions would have to be approved by a weighted majority of member states.
What emerged from the European Council was something more than that, but less than full automaticity. Sanctions will be applied unless a weighted majority of member states votes against. So there is still room for political influence over the imposition of sanctions, but not as much room as there might have been.
Trichet lost on another count too. Germany was insistent that if eurozone governments did, during the course of a debt crisis, have to resort to the rescue mechanism, then private investors – banks, for the most part – should be obliged to carry a share of losses incurred.
Merkel said that the inclusion of private investors was “very important” to German taxpayers.
“We won’t allow taxpayers alone to bear all the costs of a future crisis,” Merkel said at the close of the meeting, adding that investors should share responsibility if a country’s debt had to be restructured.
Mark Rutte, the Dutch prime minister, echoed Merkel’s comments, saying that any effective crisis mechanism should “emphasise burden-sharing for the private sector”.
The European Council agreed in principle that there should be “a role for the private sector” in the mechanism, though details of the new mechanism will not be settled until the next leaders’ summit in December, after Van Rompuy and the European Commission have drafted proposals.
During Thursday evening’s discussion on the permanent mechanism, Trichet had warned leaders about placing too much emphasis at this stage on the role of private investors, saying it could be “counter-productive” if it led to a loss of confidence in existing debt.
Jean-Claude Juncker, Luxembourg’s prime minister, said the issue of including private investors was “very sensitive”, adding it could “lead to confusion in the markets”.
Trichet’s fears appear to have been realised. The bond markets took fright on Friday and again at the start of the following week, with the cost of holding Greek, Portuguese and Irish debt rising sharply. The eurozone is paying a heavy price for pushing through treaty revision so quickly.
The market response was a timely reminder that the European Council, though it can change the EU treaties, is not all-powerful.