31 May 2015

Financial Times: Why Britain has no chance of European treaty change

There are two overriding reasons why the EU needs to change its treaties: first to fix the eurozone; and second to fix the relationship between the EU and Britain. Of the two tasks, repairing the eurozone is the more difficult. But neither can be tackled alone; the EU will not go through the hell of treaty change twice in quick succession.

The bits that need fixing in the eurozone have not changed since the days of the financial crisis. The eurozone will need a proper fiscal backstop for the banks before the next banking crisis.

The current banking union — if you want to call it that — has joint supervision and a common legal framework for bank resolution. But, crucially, the banks remain national organisations, governed under national law.

A proper banking union would require a joint legal framework and a joint fiscal commitment, and especially a joint bankruptcy code. It would constitute the kernel of a fiscal union. Member states would probably want it to include other policy areas as well, including perhaps a common employment insurance fund.

The more the eurozone integrates, the bigger the problem for EU members such as Britain that are not in it. This conflict was not foreseen in the existing treaties. I do not fully agree with David Cameron’s list of grievances, but given where we are today, some of the British prime minister’s demands are perfectly logical.

For starters, European law stipulates that the euro is the currency of the EU — and it says so without qualifications. It did not foresee that the British and Danish opt-outs from the euro could be permanent. Once you come to accept reality as it is, it would be illogical to expect Britain to subscribe to the ideal of “ever-closer union”, another treaty commitment. By not accepting the euro, Britain automatically rejected the notion of ever-closer union. There are also areas where the interests of the eurozone and Britain naturally collide, as in financial regulation — something that was not foreseen either.

On a technical level, it would probably be possible to change the treaties in a way that allows both more integration for the eurozone, and more disintegration for Britain. But as so often, politics intrudes; there are two reasons why treaty change will not happen soon.

The first is French opposition. Last week was the 10th anniversary of the French No vote in a referendum on the EU’s constitutional treaty, which was subsequently dropped and transmuted into the Lisbon treaty. The French political establishment, and especially the governing Socialist party, is still traumatised by that defeat. President François Hollande, keen to avoid reopening old wounds in his party, is in no mood to discuss the subject before the next presidential election in the spring of 2017. Expect no treaty change discussion until then at the earliest.

Last month, an Ifop poll for Le Figaro asked how the French would vote in a referendum on a treaty change; 62 per cent said they would vote No. This despite the fact that a majority wants a European army and a European president, both of which would require treaty change. What these polls tell us, aside from the fact that you get stupid answers when you ask stupid questions, is that we should never take the outcome of a European referendum for granted.

The second reason why treaty change will not happen is a lack of agreement about what should be changed. The June summit of European leaders will discuss various proposals to improve governance in the eurozone. What is remarkable about the discussion documents that have been leaked is their lack of ambition. The big idea of the joint French and German paper is to remove powers from the European Commission — as though excessive centralisation had been the eurozone’s problem.

The whole purpose of the Italian proposal, meanwhile, seems to be to avoid upsetting the French and the Germans by studiously avoiding any mention of eurozone bonds. No one really wants to touch this subject right now. Germany can be relied on to boycott meaningful eurozone reforms for as long as its economy benefits from the eurozone’s internal imbalances. That might not change for a decade or so.

Until that moment arrives, any debate on treaty change is likely to end in failure. There is a saying in Brussels: never waste a treaty change. If you do something this difficult, you have to make sure you get it right.

Mr Cameron’s problem is primarily one of timing. The last treaty change took almost eights years from inception to completion. This one may take longer. The more referendums there are, the longer it will take. And the longer it takes, the smaller the value of any undertakings Britain might receive in respect of a future treaty change.

© Financial Times