The New Intergovernmental Treaty - Is the Euro-Kaputt Avoided or Delayed?

The recently declassified intergovernmental Treaty on Stability, Coordination and Governance in the Economic and Monetary Union which is planned to be signed by the concluding parties on March 1st, 2012 and planned to enter into force on January 1st, 2013 appears to demonstrate the opposite to the sceptics claiming the closeness of the collapse of the Eurozone and the European Union as such.

Even though the new Treaty could significantly alter not only the EU, but also domestic political scenery, apparently the most of the EU member states have found the necessary driving force to deepen the European integration at the moment when many analysts and politicians feared the growing nationalism and protectionism.

The financial crisis affecting the financial stability of Eurozone countries and those economically interdependent or with currency pegs to Euro, the political agenda pursued by current French president and German Chancellor and the return of the Franco-German engine at the heart of Europe have been only among the most visible contributing elements introducing the new Treaty. At the same time, a number of new political trends are on the agenda already and will continue to emerge during the next few months. Most important of it will be the constraints put upon the national politicians.

But firstly, the Treaty demonstrates an ability of European countries to find a common ground for cooperation and ability to pull more doubtful countries with. The Euro-Crisis has made the traditional differences between the British position, Czech opposition and the pro-Europeanism of Germany, France and many other Western and Eastern European countries more visible. The Crisis and the Treaty has yet again legally codified the individualistic and traditionally balance-of-power-type British foreign policy approach. Though, the EU countries considering the membership not only an economic gain, but also political and as a small state security aspect, see the Union as an important strategic and geopolitical counterbalance at the least. In the Czech case, evidently, the balancing of the Russian factor is less acute than the question of Germany’s role in regional politics.

Thus, this British and Czech deviation and expressed readiness of several non-Eurozone member states to join the Treaty leads to the trend which appears to become more and more visible – the multi-speed Europe. In this case, it is not two-speed, it’s at least three-speed. Closer integration between Eurozone countries on fiscal discipline creates new formal and informal mechanisms for cooperation between the Eurozone countries, where the biannual informal Euro Summits are the central event. Together with several other formats which do not allow full or actual participation of non-Euro-Zone member states in decision-making process, this Treaty clearly provides an alternative club of countries. Besides the 17 Eurozone countries and the two outsiders, there are eight more countries claiming their readiness to follow the Treaty provisions and in some cases join the Euro-Zone in future. Therefore, the interaction between the three groups will be the true challenge to the European unity in the next few years.

Finally, the last, but clearly not the least challenge the European Union countries will have to be able to cope with in regard to this Treaty is the domestic political implications it brings. The Treaty introduces new mechanisms that many will regard as a significant sovereignty loss as the European Commission’s recommendations will become mandatory and the Court of Justice of the European Union will have the right to impose sanctions upon fiscally undisciplined countries. But the punishing mechanisms aren’t as important in this case as the defined principles the discipline itself implies.

Namely, the core principle of fiscal soundness is based upon the calculations of structural deficit that should not exceed -0.5% of GDP for countries with large public debts and -1% for countries with government debt significantly below 60%, while the central approach is that “The budgetary position of the general government shall be balanced or in surplus.”[1] As already claimed by the French Socialist Candidate Francois Hollande[2] on the readiness to renegotiate the Treaty in case of electoral victory, some politicians and analysts emphasize that this Treaty can therefore end the socialist and social-democratic policies.

The Treaty will put limits on national politicians and their willingness to gain additional votes by populist spending of the money borrowed on financial markets. The Treaty and the requirement to codify the ‘golden rule’ of balanced budget into national legislation will reduce the possibilities of politicians to use the public money for short term political gains. But, this self-limitation can eventually bring the macroeconomic soundness, though putting more pressures upon groups dependent on state assistance. Namely, not only the politicians will be constrained and bound by legal regulations in their sovereign rights, but the necessity to follow balanced budget will lead to the necessity to cut expenditure in the most costly spheres.

Therefore, the new Treaty is both an important step towards fiscal soundness of public authorities, while simultaneously the Great Unknown for both political future of the unified European Union as well as domestic political elites and their readiness to deal with public demands in case of more limited resources available. Moreover, the ability of states to follow the EU2020 Strategy goals, for instance, and compete within the global economy will be demonstrated in the near future. In the nearest future, of course, this Treaty is supposed to serve as the EU financial stability guarantor to the financial markets, thus avoiding the feared Euro-Kaputt. Clearly, more trust to markets during a major distrust caused crisis is brought not only by complicated restraining and long term austerity mechanisms set out in an intergovernmental treaty, but also the immediately available financial coverage. Consequently the Treaty and the ‘market-positive’ news from Greece will ensure that the Euro-Kaputt is avoided at the moment. If it is gone for good or just delayed, though, depends again on the ability of the EU politicians to be pro-European in the newly constructed domestic and European environment.

[1] Article 3 of the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union. – Brussels, 01.02.2012.

[2] French Socialist Candidate Hollande Pledges to Renegotiate Fiscal Treaty// Bloomberg. – 31.01.2012. -

Publicēts 12. februāris, 2012

Autors Kārlis Bukovskis