As expected, the European Council on 24/25 March agreed on “a comprehensive package of measures to strengthen EU economic governance and ensure the stability of the euro area”, including the Euro Plus Pact, previously referred to as the ‘Pact for the Euro’ and the ‘Competitiveness Pact’. The European Council adopted the draft decision amending the Treaty to set up the future European Stability Mechanism (ESM). Angela Merkel was able to renegotiate the terms of European Stability Mechanism (ESM) recently agreed by the eurozone finance ministers. There was no agreement on expanding the size of the European Financial Stability Facility (EFSF). That decision has been postponed until June. There was, therefore, a lot of room for negotiations and the Prime Minister should have sought a better deal for the UK.

Last October, the EU leaders agreed to amend the Treaty in order to allow the creation of a permanent crisis mechanism by the Member States of the euro area. The European Council has launched the simplified revision procedure provided for in Article 48(6) TEU. Then, on 24 March, the European Council formally adopted the text of a draft decision amending Article 136 TFEU by adding a paragraph whereby the “Member States whose currency is the euro may establish a stability mechanism to be activated if indispensable to safeguard the stability of the euro area as a whole.” The permanent European Stability Mechanism will replace the European Financial Stability Facility (worth €440bn) and the European Financial Stabilisation Mechanism (worth €60 billion). The eurozone Member States have decided that the EFSF will remain in place after June 2013 (when it is set to expire), until all loans have been paid and all liabilities repaid. The European Council is expecting Member States to complete the procedures for the approval of this Decision “in accordance with their respective constitutional requirements” by the end of 2012 so that the Decision can enter into force on 1 January 2013.

The Minister for Europe, David Lidington, has been emphasising that the treaty amendment “does not apply to noneuro area Member States and cannot confer any obligations upon them.” However, I replied saying that “The issue is whether the United Kingdom is affected. The fact is that the arrangements in question do affect the United Kingdom.” Under the EU Bill a treaty or Article 48(6) decision would not be subject to a referendum if it involves “the making of any provision that applies only to member States other than the United Kingdom.” I drew attention to the fact that this is “a twin-track treaty”, meaning that the treaty’s arrangements are “… specifically designed to exclude the United Kingdom, even though we would be gravely affected by it.” That was the reason that I tabled an amendment to the exemption provision, abovementioned, to be taken out of the Bill.

The UK has veto power over any treaty amendment, however David Cameron has not used his negotiating power effectively. The approach of claiming this is between eurozone countries, the measures will not affect the UK, is not defending British national interests. David Cameron should have rejected the Treaty amendment until it was crystal clear that such an amendment as well as the Euro Pact Plus had no impact in the UK. Given the imminence of a Portuguese bailout, David Cameron should have demanded that any future bailout should use just eurozone money and that Article 122.2 TFEU should not apply even before 2013. I said before the EU summit, “Now that the whole issue is under review, the Government should insist on the repeal of the existing mechanism and if not the new mechanism, which requires a Treaty change, should now be subjected to a referendum.” However, the Government has sought none of these options.

Last May, an Extraordinary Economic and Financial Affairs Council adopted the Regulation establishing the European financial stabilisation mechanism. Using Article 122 (2) to set up this mechanism meant that Britain was unable to veto such proposal as Qualified Majority Voting decided it. In fact, Former Chancellor of the Exchequer, Alistair Darling had no say in the creation of such a mechanism as it was decided one day before, behind closed doors, at a eurozone leaders meeting.

It is important to mention that under Article 122 (2), Union financial assistance may be granted to “a Member State (that) is in difficulties or is seriously threatened with severe difficulties caused by natural disasters or exceptional occurrences beyond its control” However, the Greek, the Irish, or the Portuguese crisis have not been caused by “…exceptional occurrences beyond [their] control …”. Brussels went beyond the powers conferred by the treaties to provide a legal basis for the emergency funding. The European stabilisation mechanism is a violation of the “no bailout” clause – Article 125 TFEU that forbids Member States for being liable for the debts of another and a misuse of Article 122(2). The European Commission “is empowered on behalf of the European Union to contract borrowings on the capital markets” up to €60 billion, using the EU’s annual budget as collateral. Hence, if a beneficiary country fails to pay back the loan, all 27 EU Member States are jointly liable for any payments due and would have to pay into the EU budget to cover the default. According to the Government the UK’s contribution to the 2010 Budget is currently estimated at 13.8%.

At the UK’s request, the EU leaders agreed, last December, that Article 122 (2), once the new mechanism entered into force, would no longer be needed to safeguard the financial stability of the euro area. The December European Council Conclusions as well as the recitals of the draft decision provide for that. However, the UK has a political commitment but no legal guarantee that the EFSM, based on Article 122.2, will be repealed in 2013. In fact, there is no proposal from the Commission yet to repeal the abovementioned regulation. The UK should have not have agreed to the treaty amendment until there was a legal guarantee that the regulation establishing the EFSM would be repealed. Moreover, the future crisis mechanism will only be effective from 2013, so consequently, until this happens the UK will contribute to any eurozone bailout through the European financial stabilization mechanism. British taxpayers may be asked to pay for other eurozone bailouts. The European Stability Mechanism will be in place in 2013, however eurozone Member States in serious difficulties such as Portugal, are seeking assistance now (not 2013).

The UK government should have endeavoured to avoid becoming liable for any bailout. Article 122(2) TFEU is not an appropriate legal base for the European Financial Stabilisation Mechanism, therefore, the UK could have challenged the mechanism, bringing an action for annulment before the European Court of Justice. It is important to mention that last June, Thomas Ax (Germany) brought an action for annulment of the Council Regulation establishing a European financial stabilisation mechanism before the ECJ (Case T-259/10). According to the applicant “the aid released by the contested regulation would infringe the prohibition under Article 125 TFEU on undertaking liability for or assuming the commitments of other Member States.” However, the ECJ might not consider the merit of this case, as it is very likely it will hold that there is no locus standi.

The European Financial Stability Facility (EFSF) is a temporary instrument established last May, based on an intergovernmental agreement between euro area Member States, to provide financial support to eurozone countries having difficulties refinancing their debts. The ESFS sells bonds and other debt instruments on the open market, which are secured against guarantees from eurozone states. Presently, in order to maintain its AAA credit rating only €250bn of the EFSF can be used as loans as the rest of the money has to be kept in a cash reserve. The fund cannot lend therefore more than €250bn. The Heads of State or Government of the Euro area, on 11 March, agreed that the effective lending capacity of the EFSF should be 440 billions euros until the entry into force of the ESM. The eurozone leaders also agreed that although full assistance from the EFSF will take the form of loans, in order “to maximize the cost efficiency of (its) support,” the EFSF “may also, as an exception, intervene in the debt primary market in the context of a programme with strict conditionality.”

Nevertheless, the eurozone leaders could not reach an agreement on the details on how to expand the effective lending capacity of the EFSF. Moreover, the eurozone Finance Ministers could not complete their work on the EFSF in time for the European Council as they failed to agree on the details of how to share the cost of increasing the effective lending capacity of the EFSF. They could not reach an agreement whether they should increase the amount of state guarantees beyond the €440 billion or use cash contributions. Additional guarantees would place a further burden on the triple A rated countries, including France, Germany and Finland. Finland could not agree to such an increase yet before parliamentary elections on 17 April 2011. According to the European Council Conclusions “The preparation of the ESM treaty and the amendments to the EFSF agreement, to ensure its EUR 440 billion effective lending capacity, will be finalized so as to allow signature of both agreements at the same time before the end of June 2011.”

However, in the meantime, Portugal will apply for the EFSF assistance. Portugal’s government fell just one day ahead of the European council meeting. All the opposition parties rejected the package of austerity measures proposed by the minority Government and Jóse Sócrates announced his resignation. Cavaco Silva, Portugal’s President, has recently called an early election on 5 June. Until then, Sócrates’ government would remain in office in a caretaker capacity. The Portuguese political crisis has further increased the cost of Portugal’s borrowing. On 6 April, Jóse Sócrates announced, “The government decided today to ask the European Commission for financial help,…” The President of the European Commission, José Manuel Durão Barroso, issued a statement saying that “this request will be processed in the swiftest possible manner, according to the rules applicable.”

A formal request for the activation of the EU financial support mechanisms still has to be made. A Portuguese bailout package has been estimated to amount between €60 and €80 billion, most likely to be €75 billion, which would come from the European financial stabilisation mechanism (EFSM), the European financial stability facility (EFSF) and IMF. It is important to recall that the Council, acting by a qualified majority on a proposal from the Commission decides to grant financial assistance, under European financial stabilisation mechanism. On the other hand, in order to release funds from the European financial stability facility, a unanimous decision by the eurozone Member States is required.

The European financial stability facility has enough money to rescue Portugal, therefore there is no need to use the European financial stabilisation mechanism. However, presently the EFSF cannot use its full amount and one could wonder if there is enough money if Spain also applies for it. Consequently, the decision would have an impact on the UK because if the lending capacity of the fund is not increased more money is likely to come out from the 60 billion euros fund, increasing the UK’s liability. David Cameron should have endeavoured for new arrangements to be decided so that Article 122.2 is no longer used and the UK would no longer be liable. With a Portuguese bailout imminent, I sought and obtained an Urgent Question on 24 March in the House of Commons. I made the following arguments “because the existing European financial stability mechanism (..) was described in the report of the European Scrutiny Committee, (…) as “legally unsound”“ and “because it involves the United Kingdom underwriting approximately €8 billion to eurozone countries until 2013” as I stressed, “The motion for a treaty change to create the new mechanism, which was passed yesterday, provides for amending article 136 of the European treaty without a referendum, but the amendment prescribes strict conditionality.” I asked – “Will the Government renegotiate the decision so that the European stability mechanism, if proceeded with at all, is agreed by the British Government with unanimity only if the legally unsound existing European financial stability mechanism, to which we are wrongly exposed, is repealed?” In this way, as I pointed out, the UK would no longer be “required to contribute to the bail-out of other eurozone countries such as Portugal, which would amount to approximately €4 billion.” However, my proposal has not been accepted. David Cameron has not taken that course of action in his negotiations at the European Council and the British taxpayer would not be relieved of the obligation to underwrite eurozone Member States’ bailouts.

The European Council welcomed the decisions taken by the leaders of euro area on 11 March and endorsed the features of the ESM. The eurozone leaders, at their informal meeting, agreed that the ESM “will have an overall effective lending capacity of 500 billion euros” and that “The ESM effective lending capacity will be ensured by establishing the appropriate mix between paidin capital, callable capital and guarantees.” The eurozone leaders pointed out that financial assistance from the ESM will take the form of loans, nevertheless, in order “to maximize the cost efficiency of their support,” the ESM “may also, as an exception, intervene in the debt primary market in the context of a programme with strict conditionality.” The eurozone leaders agreed to allow the ESM to buy sovereign bonds directly from a struggling government, but not on the secondary market, as the European Central Bank and the European Commission had requested, and only after that country agrees to austerity measures similar to those imposed to bailout countries.

On 21 March, the eurozone finance ministers, at an extraordinary meeting, agreed on the technicalities of the ESM. They agreed on a European Stability Mechanism with a capital base of €700bn. Hence, when it enters into force in 2013, the ESM would have an effective lending capacity of €500 billion, through a combination of €80bn of paid-in capital and €620bn in the form of callable capital and of guarantees from eurozone states. According to a “Term Sheet on the ESM” agreed by the European Council “The ESM will seek to supplement its lending capacity through the participation of the IMF in financial assistance operations, while non-euro area Member States may also participate on an ad hoc basis.” The eurozone is, therefore, also expecting voluntary contributions from non-euro zone Member States.

It was agreed that the fund would rely on 80 billion euro in paid-in capital directly provided by eurozone Member States, of which €40bn will have to be injected by July 2013 whilst the rest will be phased in over the three following years. However, Ms Merkel was able to change the details of capital injection, persuading the other leaders to spread the payments to €16bn per year over five years from 2013, which is election year in Germany. The payment contributions to the fund will be calculated according to the amount of capital eurozone Member States have in the European Central Bank. However, in order to address the concerns of Member States such as Estonia and Slovakia, it was agreed that countries whose GDP is lower than 75% of the EU average will contribute less for up to 12 years after they entered the euro. Germany, for instance, will contribute 27.1% of the fund’s capital. This means that German taxpayers will have to contribute in paid up cash to around €21.6 billion to the fund plus the guarantees.

The eurozone leaders stated “the ESM will provide financial assistance when requested by a Euro area member”, which “…will be subject to strict conditionality under a macroeconomic adjustment programme.” The Commission will propose a Regulation intend to clarify the necessary procedural steps under Article 136 of the Treaty in order to enshrine the policy conditionality in Council decisions and ensure consistency with the EU multilateral surveillance framework. The permanent stability mechanism is based on an intergovernmental arrangement. The treaty amendment allows for its creation but it does not provide for its establishment as in this case Article 125 (no bail out clause) would have to be amended. A treaty signed by the euro area Member States, subject to public international law, will, therefore, establish the ESM. However, it is important to recall that the European Parliament endorsed only one day before the European Council the so called “limited Treaty” amendment and, according to a press release “MEPs were satisfied with the “positive signals” given by the Member States on bringing the intergovernmental mechanism closer to the EU framework.” Moreover, the European Parliament agreed “with the view expressed in the opinion by the ECB supporting recourse to the Union method allowing for the European stability mechanism to become a Union mechanism at an appropriate point in time.”

The EMU has now proven to be a failure. Indeed, the crisis has exposed that the whole system of EU government is not working. Nevertheless, the eurozone crisis has provided an opportunity for closer political integration in the European Union and has opened the door for further economic and fiscal policy integration. If the Member States are already in a straightjacket, the situation is set to get worse as their flexibility will be further reduced, particularly with a strengthen stability pact and budgetary surveillance. Last September, the European Commission presented legislative proposals, on the so-called Economic Governance in the EU and EMU. It proposed broader and enhanced surveillance of fiscal policies as well as macroeconomic policies and structural reforms. The Council has recently agreed on a general approach on this package of measures, which was welcomed by the European Council. According to George Osborne “The UK negotiated a UK opt-out on the articles in the fiscal frameworks directive pertaining to fiscal rules…” However, the UK will still be subject to the macroeconomic surveillance framework.

The Commission has proposed a “new element of the economic surveillance process” the so-called Excessive Imbalance Procedure (EIP), which comprises a regular assessment of risks of imbalances, including an alert mechanism. It is important to stress that although the UK will not be subject to sanctions, it will be subject to the Council policy recommendations and might be placed in Excessive Imbalance procedure, moreover it would be subject to burdensome reporting requirements as well as surveillance missions from the Commission.

As expected, the Heads of State or Government of the Euro area formally adopted the Euro Plus Pact. The Pact has been drafted by Mr Van Rompuy and Mr Barroso and it is not as strict as the Competitiveness Pact proposed by Germany and France whereby Ms Merkel attempted to impose the German economic model on the rest of the eurozone. Nevertheless, at the end of the day, Ms Merkel got her Pact. According to Mr Van Rompuy, the Pact is now called the Euro Plus Pact, “because it is about what eurozone countries want to do MORE…” and “because it is also OPEN to the others.” The non-eurozone Member States are invited to participate on a voluntary basis. Bulgaria, Denmark, Latvia, Lithuania, Poland, Romania have decided to join the Pact. The UK has decided to opt out from it, David Cameron has said “…that Britain is not in the euro and will not be joining the euro, …That is why we are not intending to join the ‘pact’ that euro area countries have agreed.” Nevertheless, even if the UK does not participate, it will be subject to the side effects of it. It has not been clarified yet how the participating Member States intend to move forward without it having an impact in non-participating countries.

The pact aims to strengthen “the economic pillar of EMU and achieve a new quality of economic policy coordination, with the objective of improving competitiveness and thereby leading to a higher degree of convergence.” The main focus of the pact is on “areas that fall under national competence.” It seems that the participating Member States would be giving away their national competences over tax, wages and social security policies. The Pact is based on an intergovernmental agreement, but it is not outside the EU’s existing legal framework. The Euro Plus Pact stresses that it will be in line with the EU economic governance rules, and “consistent with and build on existing instruments” such as the EU2020, European semester, Integrated Guidelines, SGP and new macro economic surveillance framework. The UK is subject to all this measures and it is far from clear how the pact would be link to them and to the existing report requirements.

The heads of state and government will, annually, agree to common objectives. Each country would be responsible for choosing the specific policy measures to be implemented and the choice will take into account the issues mentioned below. Such commitments will be reflected in the national reform programmes and stability/convergence programmes submitted each year and will be assessed by the Commission, the Council and the Eurogroup in the context of the European semester. It is important to recall that the UK has to present national reform as well as convergence programmes and is subject to the European semester. The HOSG of the euro area and participating countries will politically monitor the implementation of such commitments and progress towards the common policy objectives under the pact, on the basis of a report by the Commission. The Pact is base on an intergovernmental agreement but one could say it follows the ‘Community method’, as the Commission will have “a strong central role” in monitoring the implementation of such commitments, and the European Parliament “will play its full role in line with its competences.” Moreover, the Pact reads “In addition, Member States commit to consult their partners on each major economic reform having potential spill-over effects before its adoption.” However, there is no reference to the euro zone/participating Member States therefore one could conclude that it involves all Member States.

The Pact stresses, “Participating Member States are fully committed to the completion of the Single Market which is key to enhancing the competitiveness in the EU and the euro area.” One could say that this has been David Cameron’s “achievement” at the European Council. The Pact also points out that “This process will be fully in line with the treaty” and it “will fully respect the integrity of the Single Market.”

The Pact is, therefore, based on participating Member States’ commitments to achieve several commonly agreed goals in key policy areas and the Heads of State or Government will politically monitor its implementation on the basis of policy and quantitative indicators. Participating Member States would be required to take all necessary measures to pursue the following objectives: foster competitiveness, foster employment, contribute further to the sustainability of public finances, reinforce financial stability. The Pact provides that “Countries facing major challenges in any of these areas will be identified and will have to commit to addressing these challenges in a given timeframe.” Whereas Ms Merkel’s Competiveness Pact has foreseen sanctions for Member States which breach the agreement, the present Pact does not provide yet for enforcement measures. According to the President of the European Council “the commitments under the Pact” will have “a politically binding force.”

The progress towards fostering competitiveness will be assessed on the basis of wage and productivity developments. According to the Pact each country will be responsible for choosing specific policy actions to achieve this objective, but attention should be given to reforms such as “review the wage setting arrangements,” and “the indexation mechanisms.” Moreover, participating Member States should reform labour markets to promote flexicurity and they will have to introduce tax reforms, “such as lowering taxes on labour.” Participating Member States will also have to consider the necessary reforms to ensure the sustainability of pensions and social benefits such as “Aligning the retirement age with life expectancy.”

It is important to mention that under the Commission proposal for a regulation on the prevention and correction of macroeconomic imbalances, currently being negotiated, the Commission will draft a “competitiveness scoreboard”, which will rate Member States’ performance as regards economic stability and competitiveness, including current accounts and external debt, price or cost competitiveness as well as productivity, unit labour costs, public debt and private sector credit. Member States performance, including the UK, would be assessed against these indicators. An excessive imbalance procedure would be initiated if the Commission in-depth review identified severe macroeconomic imbalances in a Member State. The Council may recommend the Member State concerned to take corrective action within a specified deadline to remedy the situation. One could wonder whether the Pact indicators and targets would not be taken into account for the launching of the excessive imbalance procedure.

The participating Member States also “commit to translating EU fiscal rules as set out in the Stability and Growth Pact into national legislation.” Each country will decide on the formulation of the rule limiting their debt levels, but it should have “a sufficiently strong binding and durable nature (e.g. constitution or framework law).” The Commission would review the precise fiscal rules before their adoption to ensure they are compatible with the EU rules. Member States also commit to introduce “national legislation for banking resolution, in full respect of the Community acquis.” Hence “Strict bank stress tests, coordinated at EU level, will be undertaken on a regular basis.” The level of private debt for banks, households and non-financial firms of each Member States will be closely monitored.

Obviously, the economic crisis is also being used as an excuse to harmonise Member States’ tax policies. Sarkozy and Merkel have called, in their Competitiveness Pact, for the creation of a single company tax regime. The Euro Pact Plus stresses that “Direct taxation remains a national competence” however, it also says that “Member States commit to engage in structured discussions on tax policy issues,….” The Pact points out that a common corporate tax base could “ensure consistency among national tax systems while respecting national tax strategies,….” In the meantime, on 16 March, the Commission proposed a draft Council Directive on a Common Consolidated Corporate Tax Base (CCCTB). Several Member States, particularly Ireland and the UK as well as the Czech Republic and Slovakia are opposed to the proposal. Nevertheless, it is already known if there is no unanimity, the CCCTB would be pursued by “enhanced cooperation.” No one should be surprised if the Commission puts forward other legislative proposals intended to attain other objectives included in the Pact, which are very likely to apply to all Member States.

The so-called Euro Plus Pact would be another failure as the SGP, the Lisbon strategy and as it will be the “2020 Agenda”. The Pact would reduce Member States’ ability to run their own economic and social policies without achieving competitiveness. Moreover, the Pact is set to create a ‘two-tier’ EU. The UK has no guarantees that it won’t be affect by the Pact, in fact it will damage the UK’s own ability to compete.