Split Summit The Birth of a Two-Speed Europe

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.

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 Günther 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.


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.


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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