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Europe: fighting over reform

Gavin Hewitt | 14:49 UK time, Wednesday, 27 October 2010

Europe's leaders, who will meet in Brussels tomorrow, know broadly what they want. How to get there continues to divide them.

They are still scarred by the debt crisis in Greece which rocked the euro. Some believe that sovereign debt put at risk the entire European project. They want to ensure that never happens again.


French President Nicolas Sarkozy and German Chancellor Angela Merkel in Deauville, France, 19 Oct 10

So the President of the European Council, Herman Van Rompuy, was sent away in March to toil with a task force to come up with some answers. His report will be on the table in Brussels.

In general terms there is little disagreement. In the preface to the draft conclusions it states that a "fundamental shift in European economic governance is required". This will mean increased fiscal discipline, greater economic surveillance and deeper co-ordination.

Strip that down. What the eurozone doesn't want again is a Greek-style surprise, where suddenly they learn of a budget deficit that has risen above 12%. So they want a preview of national budgets. But the aim is to go much further: to enforce sanctions against those who run up excessive deficits, and to set up a permanent mechanism to manage future debt crises.

Where all this becomes more controversial is over how the rules are enforced. The Germans, in particular, want a regime of sanctions against the rule-breakers. The German public don't want again to find themselves bailing out countries like Greece.

Now the fine detail of what those sanctions would be has not been agreed. They could be a combination of fines, or a withdrawal of EU voting rights.

It was presumed that the Germans would back automatic sanctions, but at a meeting between President Sarkozy and Chancellor Merkel last week a softer line was taken. Sanctions would not be automatic. A minority of states could block them. Now some question whether, if the sanctions are not automatic, they would pack a punch. After all, it would then leave it to national politicians to enforce the rules. But the French wanted the more flexible option and they got their way.

In exchange France agreed to back changing the Lisbon Treaty, which is what the Germans say is necessary. The Germans believe that disciplining states requires a treaty change particularly under the German constitution.

The leader of the Eurogroup, Jean-Claude Juncker, attacked the French-German deal as "unacceptable".

In Germany many MPs are unhappy about dropping "automatic" sanctions. Chancellor Merkel said today that nothing could be agreed in Europe without French-German co-operation. The biggest danger for the eurozone, she said, stemmed from excessive deficits. Even with tougher sanctions another crisis could not be ruled out. A new robust crisis mechanism was needed and that could only be achieved by changing the treaty.

But treaty change opens up a Pandora's Box and the proposal is bitterly dividing member states. For changing the treaty opens up the possibility of other issues being put on the agenda. Some countries might try and reclaim some powers. It would once again involve the EU facing inwards and concentrating on institutional change, just when it has spent eight years doing that.

Treaty change is bitterly opposed by David Cameron. If the change involves any new powers going from Westminster to Brussels he is committed to holding a referendum. The British public could deliver a firm "Non" and set up a European crisis.

Now the British position is that the UK is not in the euro and that any treaty change would not apply to it. Under Protocol 15 of the Lisbon Treaty Britain has an opt-out from any sanctions. And this is David Cameron's key card. If sanctions don't apply then there is no need to call a referendum, as no powers would be ceded to Brussels.

Other countries like Ireland would have to put the change to a referendum and it could easily fail there. With Ireland mired in debt, it would be a hard argument to win to back a suspension of EU voting rights in the event of a country exceeding the 3% deficit limit.

So a number of countries - like the Netherlands, Finland and Ireland - are furious at the idea of a treaty change. They don't want it. Nor do EU officials, like the President of the European Commission, Jose Manuel Barroso. They all fear where it will lead.

The expectation is that President Van Rompuy will be told to go away and find a way of meeting German concerns without a treaty change. It may prove a difficult circle to square.

There is another separate battle line that will surface at this summit: the 2011 EU budget. The European Commission and the European Parliament have backed an increased of 5.9%. Such an increase would cost the UK an extra £900 million a year. David Cameron calls it "outrageous", when countries are slashing their deficits and make painful spending cuts.

He said in Parliament today that the "greatest priority for Britain is getting the EU budget under control". He will find some support from other countries, but may have to compromise - perhaps by accepting an increase of just over 2%. When he was challenged not to roll over in Brussels and if necessary just to say "no" to any increase he side-stepped giving a direct answer. He said it would help if Labour MEPs stopped voting for increases in the EU budget.

On all these issues Europe is divided. Two days of painful horse-trading lie ahead. For David Cameron the difficulty will be explaining to the British people why he had to compromise on the budget - if he doesn't come away with a freeze.

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