The Euro
Europe’s 27 leaders failed to reach full agreement on a new European Treaty, having to settle for a second-best option of an intergovernmental agreement. This ‘compact’ represents the first serious step towards a common European fiscal policy, and to even closer European integration. While this may do little to calm the financial markets in the short term, it sets out a much needed plan for the Eurozone, and provides a route map out of the current debt crisis. With a shared set of fiscal rules and automatic penalties the risks of a repeat of the current crisis are greatly reduced. A full 27-nation treaty was always unlikely, and would have taken far too long to construct and ratify, increasing uncertainty and putting additional pressure on the fragile Euro. The final intergovernmental treaty will include the Euro-17, plus the majority of the non-Euro EU members, with the most notable, and possibly the only absentee being the UK. Although the details of the fiscal union are still to be laid out, membership of the union will oblige national governments to submit their draft budgets for inspection, and require them to agree to a series of ‘automatic’ fiscal rules. This will reduce the ability of member states to undertake discretionary fiscal policy – a central principle of sovereign independence.
Describing this as the formalisation of a two-speed Europe fails to appreciate that the overwhelming majority of the EU states, including the non-Euro states, are likely to ratify the agreement and thereby take a giant step towards completing the ‘final stage’ of European integration. This means not only sharing common goods and labour markets, a single agricultural, industrial and competition policy, and a single currency and interest rate, but also sharing a common policy on tax, government spending and borrowing. However, the extent to which non-Euro countries are committed to adhere to tight fiscal scrutiny in order to save the Euro remains to be seen. Failure to ratify the treaty in the non-Euro countries may, indeed, lead to a two-speed Europe.
It is with respect to taxation and spending that the UK government has taken exception. This clearly isolates the UK which, given worries about the effect of tighter financial regulation and the impact of any new financial taxes on the City of London, used its veto to stop the agreement becoming a full EU treaty. The markets are likely to react favourably in the medium term, but the long term position of the UK remains unclear.