Split Summit: The Birth of a Two-Speed Europe

By in Brussels

At their Brussels summit, European leaders were able to agree on a fiscal union surprisingly quickly. But the new pact, which Chancellor Merkel had strongly advocated, has a crucial flaw -- Britain is not on board. Prime Minister David Cameron will not be able to prevent his country from becoming a second-class EU member.

French President Nicolas Sarkozy and German Chancellor Angela Merkel in Brussels: Merkel and Sarkozy can't be pleased with the outcome either. Zoom
REUTERS

French President Nicolas Sarkozy and German Chancellor Angela Merkel in Brussels: Merkel and Sarkozy can't be pleased with the outcome either.

Part of the ritual of late-night negotiations in Brussels is that everyone perceives him or herself as the victor afterwards. So there was little surprise when British Prime Minister David Cameron stepped before the cameras on Friday morning and spoke of a "tough but good decision." He said he had defended Great Britain's national interests. At the same time, German Chancellor Angela Merkel and French President Nicolas Sarkozy praised the decisions taken on Thursday night and Friday morning as important steps towards stabilizing the euro zone.

But neither side can truly be pleased with the results. European Union Commissioner GŁnther Oettinger, who is Germany's representative in the EU executive, conceded this as well, noting it was a "good, second-best solution." Instead of a legally clean amendment to the Lisbon Treaty that establishes the operating rules for the European Union, a separate treaty will now be forged between 23 EU governments that have agreed to stricter budget oversight. The agreement has been reached between the 17 euro-zone countries. Nine countries that are not part of euro zone also signalled in the summit's closing statement that they would consult their parliaments about the possibility of joining the pact.

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Photo Gallery: Europe's Leaders to the Rescue
Britain now stands alone in its rejection of the changes. Initially, Hungary had expressed reservations, but it shifted and joined the majority of European countries on Friday. Hungary, Poland, Sweden, Denmark, Bulgaria, Romania, Lithuania, Latvia and the Czech Republic must still consult their parliaments, before it will be certain just how many members the new fiscal union will include.

Questions have already been raised over whether the construct of the new fiscal union can be legally reconciled with the Lisbon Treaty, which defines the governance of the EU and will still remain binding.

More importantly, though, the summit's outcome will seal the status of a two-speed Europe. Back home, Cameron is already being accused of driving his country into isolation. Unyielding euroskeptics aside, most people in Britain can't be pleased that their country will now play second fiddle in Brussels. The British leader is likely to come under particularly harsh criticism for abandoning the kind of pragmatism that is so highly valued in his country, instead caving in to anti-EU ideologists within his party -- just as other Tories before him have done.

British Foreign Secretary William Hague sought to limit the damage on Friday morning, telling the BBC that Britain would continue to play a major role in foreign and economic policy. Formally, Britain will remain a full-fledged member of the EU -- and it will zealously insist on its rights. But Cameron will not be able to prevent his country from increasingly becoming a second-class member. That's because European economic policy is likely to be determined in the future by the euro zone and its associate members.

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Photo Gallery: British Press Reacts to Cameron's Veto
The loss of importance in Europe that Britain has now brought upon itself also isn't in the country's geopolitical interest. Indeed, its trans-Atlantic partnership with the United States will suffer as a result. In the eyes of politicians in Washington, Britain has been particularly useful because of its ability to assert influence in Brussels.

No Reason for Merkel and Sarkozy to Be Pleased

But Merkel and Sarkozy can't be pleased with the outcome either. True, they have achieved their aim: The currency union will now be equipped with a balanced budget measure and automatic sanctions. On top of that, they have also succeeded in avoiding the protracted ratification process that revisions to the Lisbon Treaty would have required.

However, Berlin and Paris haven't heeded the ground rules of diplomacy. They didn't seek any compromise with the British and instead stuck the political equivalent of a knife right into Cameron's chest. Were his demands really as "unacceptable" as Sarkozy portrayed them early Friday morning? Or is it illegitimate that a country wants to avoid being overruled when it comes to issues pertaining to one of the main branches of its economy? If Sarkozy's main intention was to save the financial transaction tax, then he certainly shouldn't feel victorious, because it is still not going to be implemented in London now.

The German government justified its categorical "no" to any special wishes by warning that it could open up a Pandora's box, with other EU member states then making additional demands. Memories are still fresh in Berlin of the decision made this summer to increase the funds available to the euro bailout fund, the European Financial Stability Facility (EFSF). The decision threatened to unravel only a few days later as Finland, the Netherlands and Slovakia demanded, one after the other, that additional guarantees be provided.

That argument carries a certain amount of weight, but the rigid position comes at a price. The prospect of a Europe that is drifting apart is not exactly the signal of unity that euro-zone leaders wanted to send at the crunch summit. They can take some comfort in the fact that six non-euro countries are planning to join the pact and that two others, Sweden and the Czech Republic, may still follow suit, subject to parliamentary approval. That would leave the United Kingdom and Hungary as the sole refuseniks.

The pact between the 23 states also represents a shift of power in their favor at the EU level. The "economic government" made of these countries' leaders can make decisions via euro summits and would not need to seek the approval of the European Parliament. Merkel and Sarkozy will likely view that fact as an additional benefit of this approach.

Just a Sideshow

From the perspective of the financial markets, however, the dispute over the treaty amendment is a mere sideshow. They are only interested in the question of how the firepower of the euro backstop fund can be boosted and what role the European Central Bank will play in combating the crisis.

On this front, European leaders have made little progress. The start date of the permanent rescue fund, the European Stability Mechanism (ESM), has been moved forward from 2013 to mid-2012. But leaders rejected a proposal to combine the temporary rescue fund EFSF and the ESM in order to increase the volume of funds available, as well as the idea of a banking license for the ESM. Nevertheless, the heads of state and government committed themselves to reviewing the total lending capacity of the EFSF and ESM, currently capped at €500 billion, in March 2012. During the talks on Thursday night and Friday morning, there had been disagreement over whether to lift the cap.

It's already clear that there will be further conflict within the bloc. Cameron has warned of legal problems with the new pact. There were always dangers, he said, when "agreeing to a treaty within a treaty." If anyone had been hoping for a quick solution to Europe's problems, it looks like they will be disappointed.

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1. Lemmings
pmoseley 12/09/2011
As stated in the article, you can't expect the UK to allow the EU to tax away 30% of it's GP, just as Germany would not allow its car exports alone to be taxed or Sarkozy allow French farming to be preferentially taxed. In any case, this Mercozy formula won't work - they won't get Euro stability even with inflexible monetary and fiscal union because it also needs political union. The UK warned all along about these deficiencies but were ignored. Now they are being accused of being anti-European because they can see that the Mercozy plan won't work in the long-term. It is not just the Tory party sceptics who are now against UK membership of the EU, it is a general feeling in the population - and that is growing all over Europe. And this is coming from a long-term committed European. As the British saying goes "You can take a horse to water but you can't make it drink". Well, I say "You can take the lemmings of Europe to the edge of a cliff but you can't stop them jumping".
2. The world has to unite on sane principles of governance.
learntm 12/09/2011
There will always be those who drag their feet, trying to resist any change from the status quo because of their false belief that it is in their interest. As far as the financial transactions tax is concerned,it is in everyone's long term interest that those who benefit from the system be the ones who actually produce value rather than those who who simply rotate the money.
3. Isolated?
mathspuzzlelover 12/09/2011
We will not long continue to be one of the biggest contributors (even after the rebate) to the EU while having fewer rights than other members: by the end of this decade, we will leave the club. We will then enjoy a Swiss-style relationship with the EU, "free riding" without the burdens of cost and excessive regulation. We will be "isolated" in the way a passenger who refused to board the Titanic would have been!
4. Good for Cameron
oldone 12/09/2011
Limiting the 17 member euro treaty to an intergovernmental agreement instead of a European treaty was a good thing. In avoiding referndums (especially when the fear is a negative result!) the European Commission has shown how little regard it has for people and their opinions. Cameron should be thanked for blowing that up. We now will have an intergovernmental agreement short of a treaty. Participation will be voluntary and revokable. That actually makes for better and more lasting results, and provides a blowoff valve when pressures get too high. This will result in a more stable euro. For more, see:- http://seekingalpha.com/article/307969-how-to-save-the-euro-and-preserve-sovereignty
5. Refusnik Britain
geroldf 12/10/2011
After Euro stabilization, Britain will finally ask to join the currency union. This time they will ask politely.
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