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Germany’s price for saving the euro

Gloom has been the dominant mood in Brussels ever since the eurozone crisis began, but this could be about to change. EU officials thrive when Europe’s “motor of integration” is in top gear, and they wilt when it stalls. Smiles may soon start returning to their faces as they realise, paradoxically, that the crisis could be about to prompt the biggest leap in European integration for many years.

On Friday December 9, EU leaders meet in Brussels to discuss how to stop eurozone governments from living beyond their means. Germany’s price for saving the euro is to insist that governments submit their draft annual budgets to EU scrutiny before national parliaments approve them. Such rules already exist, but they are toothless as the current crisis shows. Germany wants to give them real bite by empowering Brussels to withhold EU money from profligate governments or impose fines on them. 

This amounts to the EU influencing how national governments tax and spend. It is arguably the most sensitive area of national sovereignty - second only to the right to send troops into battle – and Brussels is about to get a foot in the door. No wonder those smiles are returning, for it is no less than the first real step towards the full economic and fiscal integration that EU believers always hoped would happen when the single currency was created. 

This giant leap forward will create massive waves in national politics. In many EU countries the annual budget is the high point of the political calendar. Imagine the backlash when your average treasury minister tells the press: “I hereby submit this Government’s budget to Parliament for approval. However, EU rules dictate that I must ask Mr Barroso what he thinks first”. Brussels has never been less popular with electorates than it is now. Your average opposition will tear your average finance minister to shreds.

As always, the big countries disagree on how those new rules should be introduced.  Germany wants this new budgetary scrutiny to be done centrally by the EU’s core institutions like the Commission, Parliament and even the Court of Justice, under the so-called “Community method”. France favours the “inter-governmental” approach, whereby governments decide amongst themselves with minimal input from Brussels.  Germany will win of course, because these days what Angela Merkel wants, Angela Merkel gets. 

Most other eurozone countries will probably hold their nose and swallow the medicine, because it cannot be as bad as watching their beloved euro collapse. Whether EU bodies are yet equipped with the knowhow to vet national budgets is a moot point. But experts in Brussels believe it is relatively straightforward for the EU Commission to work out whether the figures add up. 

The optimistic scenario is that Merkel emerges victorious from Friday’s summit saying she has imposed German austerity on the whole of the eurozone. She then gives the nod to the European Central Bank to start escalating bond purchase programmes for Greece, Italy and other strained eurozone government bond markets. The financial markets take the hint, and doomsday is averted.

There is, of course, a catch. The budget austerity rules will apply only to the 17 members of the euro, but as they are “borrowing” the institutions of the EU proper to enforce the rules, the EU Treaty itself needs changing, which means all 27 countries must give their approval. Treaty changes require unanimity, so each country has a right of veto. 

As non-members of the single currency are hit just as badly by the euro-crisis, you might think they would sign up to sensible rules governing their spend-thrift euro-neighbours.  Not so Britain.

“Europe”, that old chestnut, is back to haunt the ruling Conservative Party. David Cameron is under pressure from the party’s deeply eurosceptic rank-and-file to “repatriate” powers from Brussels, preferably with a referendum to approve the new Treaty. Some Tories are calling for Britain to withdraw from the EU altogether. So Cameron’s price for letting Europe take its first step towards full economic and fiscal union will be…what? 

Withdrawal from the Common Fisheries Policy? Cod and haddock follow the krill, not the confines of British coastal waters. 

Withdrawal from EU Social Policy and the much-demonised Working Time Directive? The Daily Mail and other papers that speak to Middle England might see through that one, for Britain already has an opt-out. As one EU official put it wryly: “they can withdraw twice if they wish”.

The hot talk is that Cameron’s price will be to tell Brussels to get its tanks off the City of London’s lawn. An opt-out from EU financial services regulation, then? The City could lose more than it gains. If – a massive ‘if’ – the EU ever approves a tax on financial transactions, the City could gain a competitive advantage by being outside.  But confidence in Britain as a place to trade and invest could be eroded if it chose to stand aside from the EU regulations – most of them moderate and sensible – that are currently being drafted to prevent a 2008-style credit crunch from recurring. And Britain would forfeit its right to influence those rules in the first place.

Whatever happens, history just might remember Friday December 9 as the day Europe stepped back from the brink. And Brussels insiders might remember it as the day the beleaguered single currency gave birth to a new wave of European integration. Nobody will remember it as the day Europe’s economy started to grow again.  But that’s another story.