9 December 2011
Robin Niblett

Dr Robin Niblett CMG

Director, Chatham House


Half way through this historic European summit, an irreversible shift appears to have taken place towards closer fiscal union among the vast majority of EU member states, both those inside and outside the Eurozone. 

A new fiscal compact will seek to limit their future budget deficits, while Euro members at the very least will coordinate much more closely on all areas of economic policy, including some areas of taxation. Although the precise modalities are yet to be finalised, these decisions represent a major dilution of the sovereign power of the participating national parliaments. The UK is the only country to have excluded itself from this process. Sweden and the Czech Republic will consult with their parliaments before deciding whether to join the majority. 

Much of the media focus at this stage has been on the dramatic decision by UK Prime Minister David Cameron to veto the will of the majority to carry forward this compact formally within the EU Treaties. It should not have come as a surprise that he would request something in return for allowing the fiscal compact to proceed with the legal endorsement of all 27 EU member states and have legal access to (as opposed the supervisory support of) the EU's key institutions: the European Council, Commission, Parliament and Court of Justice. As much as Eurozone stability is a vital national interest for the UK, the way in which this is achieved is of increasing concern in London. David Cameron did not demand repatriation of EU powers in the area of working times and other workers' rights, a key priority for many Conservative backbench MPs. He did, however, insist on specific protections for the City of London. That the financial sector is in the gun-sights of Paris and Brussels is in no doubt. The UK was bound to seek to protect its ability to lead the nature of future reform in this sector that is so central to its economy and on which it is a world as well as European market leader.

Problems to Come?

But to focus principally on the UK's strategic dilemma is to miss some equally important other points. Those heads of government who have signed up to the compact have done so at a time of growing public scepticism about the value of the EU as the vehicle for pulling European countries out of the current economic morass. Populist extremist parties are now tapping into a growing anti-EU under-current and, in many cases, are on the rise, especially in France, the Netherlands and Finland, with other countries such as Sweden and Austria also seeing increased anti-EU rhetoric among these parties. Securing parliamentary support for the arrangements agreed by the Heads of Government in Brussels may not prove straightforward over the coming months.

Second, David Cameron's refusal to allow the fiscal compact to proceed under the EU Treaties has handed a victory to President Sarkozy in his struggle with Angela Merkel over how legally binding the new compact should be (was this the French strategy all along?). The summit states that the compact will proceed as an inter-governmental agreement. This ensures a strong element of political oversight of the compact in the future, the approach long-favoured in Paris. But this may prove a short-lived victory. Financial markets, which continue to hold the hammer over the viability of the future of the Euro given the size of most Eurozone governments’ debt and their low prospects for economic growth, will be that much more sceptical in their approach to the fiscal compact. A fraught process of haggling among Eurozone governments over the arrangements to make the compact as credible as possible over the coming months could see the markets once again push sovereign debt interest rates into unsustainable territory. It is noticeable that Moody’s Investor Services picked today to downgrade the credit ratings of France’s three major banks, Société Générale, BNP and Credit Agricole.

Staying on the Sidelines 

Finally, the fiscal compact agreed in Brussels does not appear to have created the sort of homogenous 'core Europe' that many in Paris and other continental capitals had hoped for as an antidote to a more fractious EU of 27. Just as happened when the Euro was first launched, few EU countries apart from the UK have wanted to see themselves excluded from this new inner grouping of EU integration lest it prove to be a success in the future. Without doubt, the UK will find itself on the outside of the new coordination summits, meetings and processes involving the Euro members and 'pre-ins' and will find it harder to defend its national interests as a result across a whole range of policy areas, not just financial services. But fiscal discipline and political cohesion among 23 or more EU member states with such different levels of economic competitiveness and contrasting approaches to European integration will be very difficult to deliver. Staying on the sidelines of this process might not be such a bad option for the UK for now.

Also read:

Next Steps for the UK and the EU
Robin Niblett, December 2011