The Greek debt crisis has thrown the Euro zone into the most serious crisis of its 11-year history. The Euro zone’s response to the Greek crisis has exposed its weakness. In fact, the EU leaders were unable to react to it, and when the ship was on the brink of sinking, they decided, through back door meetings, in order to save the euro, to break every Treaty rule which explicitly states that no member state is liable for the debts of another. Since then, Brussels is seeking greater coordination and enhanced surveillance of economic policies in the EU and economic and monetary union (EMU), to reinforce the so-called economic governance. Last June, the European Council agreed to enhance surveillance and coordination of national budgets and economic policies. But the EU leaders have only agreed “a first set of orientations.”

For a long time, the European Commission has been eager to introduce new measures to strengthen coordination among Euro zone member states and supervise their national economic policies, the Greek debt crisis has provided the excuse needed. On 29 September, the European Commission presented, the expected, legislative proposals, on the so-called Economic Governance in the EU and EMU. The Commission proposed broader and enhanced surveillance of fiscal policies as well as macroeconomic policies and structural reforms. Member States will be monitored not just for excessive deficits and debts, but also for imbalances and falling competitiveness. The Task Force on economic governance lead by Herman Van Rompuy, the President of the European Council, reached an agreement on the package of measures for economic governance almost three weeks after the European Commission presented its proposals. It adopted a report containing several recommendations and concrete proposals, aiming at achieving “more effective economic governance in the EU and the euro area.

It has become obvious that EMU entails transfer of sovereignty from Member States to Brussels in areas other than monetary policy. The sovereign debt crisis has opened the door for further economic and fiscal policy integration – the EU is moving fast towards the economic government. According to Mr Van Rompuy the task force recommendations and proposals preserve national responsibilities on fiscal and economic policies. But this is a highly misleading statement. 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. It is now clear that member states economic and fiscal policies will be further co-ordinated at EU level. National governments would no longer be responsible for a great range of domestic economic policies. Herman Van Rompuy has said that with that report “the European Union made a great step forward in the European Union's economic governance.” The report reads “Endorsement by the European Council of the recommendations in the present report will contribute to strengthening economic governance in the EU and the euro area and can be implemented within the existing Treaties.” The Commission has also been saying that all the proposals are compatible with the Treaty, but one could say that some of the proposals, such as “reverse majority voting" have no legal basis on the treaty. Moreover, although the UK would not be subject to sanctions, some of the Commission proposals on economic coordination and surveillance would also apply to the UK, which is unacceptable. On 28 October, the European Council endorsed, as expected, the report of the Task Force on economic governance.


Stability and Growth Pact

The European Commission proposed two draft Regulations amending the preventive and the corrective part of the Stability and Growth Pact aiming at reinforcing Member States' compliance and extending fiscal policy coordination.

It is important to recall that the Lisbon Treaty has introduced a new rule, Article 136 TFEU, allowing the adoption of measures strengthening the coordination of economic policies among euro-area Member States, particularly in the area of budgetary discipline. The Stability and Growth Pact emphasises the obligation of Member States to avoid excessive government deficits. The Commission has been in charge of monitoring the development of the Member States’ budgetary situation on the basis of two criteria specified in the Protocol on the Excessive Deficit Procedure annexed to the Treaty, whether governments deficit and debt exceeds 3% and 60% respectively of the GDP.

The euro was created on the assumption that European governments would be fiscally responsible. The aim of the Stability and Growth Pact was precisely to prevent the debt crisis that Euro zone is presently facing. It has been, therefore, a failure!

It is important to recall that the UK is required to report to the Commission its economic and budgetary position but the initiation of the excessive deficit procedure against the UK would not lead to sanctions if the government does not follow the Council recommendations. The Protocol No 15 annexed to the TFEU provides for the UK's opt-out from moving to the third stage of EMU, consequently sanctions cannot apply to the UK under the Stability and Growth Pact.

The Commission adopted a proposal for a regulation amending the Regulation on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies (preventive part of the SGP). It is important to mention that this proposal is going through the ordinary legislative procedure (codecision procedure) and QMV is required at the Council.

Under the preventive arm of the Pact, Euro Zone Member States are required to report their planned and actual deficits and the levels of their debt to the Commission and Council, through stability programmes, whilst non Euro zone Member States submit convergence programmes. Moreover, Member States are required to achieve and maintain a medium-term budgetary objective. Hence, their stability and convergence programme must contain information necessary for the purpose of multilateral surveillance, including information on the medium-term budgetary objective and the adjustment path towards it. Under the regulation, Member States might have a safety margin with respect to the 3% of GDP reference value if they adhere to the medium-term budgetary objective. The obligation to achieve and maintain the medium-term-objective applies equally to eurozone and no eurozone member States. If Member States have not reached their MTO they are expected to converge towards it at an annual pace of 0.5% of GDP. The Commission proposal reforming the preventive part of SGP keeps the current MTOs and the 0.5% of GDP annual convergence requirement, but under “a new principle of prudent fiscal policy-making.” Such new principle would provide the benchmark against which member states’ fiscal measures in the stability and convergence programme will be scrutinized.

As is the case under the present regulation, the Council, within the framework of multilateral surveillance examines the medium-term budgetary objectives presented by both eurozone and non eurozone Member States, in order to assess whether the Member States´s adjustment path towards the medium-term budgetary objective is suitable. Under the Commission's proposal the Council will have, particularly, to examine, in case of Member States with a high level of debt or excessive macroeconomic imbalances or both, “whether the annual improvement of the cyclically-adjusted budget balance, net of one-off and other temporary measures is higher than 0.5% of GDP.” In order to ensure that the medium term budgetary objective is achieved, the Council will also assess whether the growth path of government expenditure is consistent with prudent fiscal policy-making. The draft regulation defines the conditions whereby fiscal policy-making shall be considered prudent.

Under the proposal if the medium-term budgetary objective has been achieved, the member states annual expenditure growth does not exceed a prudent medium-term rate of GDP growth, except the excess is matched by discretionary revenue measures. In the other hand, if Member States that have not yet reached their medium-term budgetary objective, their annual expenditure growth does not exceed a rate below a prudent medium-term rate of GDP growth, except the excess is matched by discretionary revenue measures.

The Council would take into account the implementation of major structural reforms when defining the adjustment path to the medium-term budgetary objective for member States that have not yet reached it and when allowing a temporary deviation from this objective for Member States that have already reached it, however under the “condition that an appropriate safety margin with respect to the deficit reference value is preserved and that the budgetary position is expected to return to the medium-term budgetary objective within the programme period.” The Council shall give particular attention to “pension reforms introducing a multi-pillar system that includes a mandatory, fully funded pillar.” Member States implementing such reforms would be allowed to deviate from the adjustment path or from their medium-term budgetary objective but under the condition that the deviation is temporary and keeping an appropriate safety margin with respect to the deficit reference value. Member States are allowed to temporarily depart from prudent fiscal policy-making in case of severe economic downturn of a general nature in order to facilitate economic recovery. On a recommendation from the Commission, the Council shall issue an opinion on the programmes, and if it considers that the programmes should be strengthened it might invite the Member State concerned to change its programme and to make adjustments to its economic policies.

Under the Commission proposal, according to Article 121 (4), in case of a considerable deviation from prudent fiscal-policy making above-mentioned, and aiming at preventing the occurrence of an excessive deficit, the Commission may address a warning to the Member State concerned. Under the draft proposal such deviation would be considered significant if there is “an excess over the expenditure growth consistent with prudent fiscal policy-making, not offset by discretionary revenue-increasing measures” or if “discretionary revenue-decreasing measures not offset by reductions in expenditure” and “the deviation has a total impact on the government balance of at least 0.5 % of GDP in one single year or of at least 0.25 % of GDP on average per year in two consecutive years.” On the other hand, the deviation would not be considered if the Member State in question has “significantly overachieved the medium-term budgetary objective, taking into account the presence of excessive macroeconomic imbalances, and the budgetary plans laid out in the stability programme do not jeopardise this objective over the programme period” as well as in cases “of severe economic downturn of a general nature.” If the deviation persists the Council, on a recommendation from the Commission, shall address a recommendation to the Member State concerned to take the necessary corrective measures. However, for the first time such recommendation, though being issued in the context of the preventive part, would be supported, for euro-area member states only, by an enforcement mechanism under Article 136 of the Treaty, in the form of an interest-bearing deposit, amounting to 0.2% of GDP. A specific enforcement mechanism would be therefore established for eurozone member states, for cases where a persistent and significant deviation from prudent fiscal policy making prevails.

Pointing out that the Pact only provides for sanctions at the end of the procedure, the Task Force agreed that the Member States fiscal situation needs to be review at an earlier stage. They agreed that in case of deviation from the adjustment path, the Commission will issue an early warning, and then the Council will adopt a recommendation, within one month, setting a deadline for correcting the deviation. The task force recommends, therefore, that sanctions should be triggered if a Member State, even with a deficit below 3%, deviates considerably from the adjustment path foreseen in the SGP and does not correct the deviation. They agreed with the Commission that if a eurozone Member State fails to take appropriate action would be subject to an interest-bearing deposit.

The Commission also presented a proposal for a regulation amending Regulation on speeding up and clarifying the implementation of the excessive deficit procedure (corrective part of SGP). It is important to recall that under Article 126 (14), unanimity is required to amend the Protocol on the excessive deficit procedure as well as rules for its application.

The European Commission noted that “While the deficit and the debt criterion are in principle on an equal footing, … the ‘3% of GDP’ threshold has been the almost exclusive focus of the EDP, with debt playing a marginal role so far.” Moreover, it pointed out, that under the excessive deficit procedure financial sanctions can be imposed in case of continual failure to correct an excessive deficit but “such sanctions arguably come into play too late in the process to represent an effective deterrent against gross fiscal policy errors.” Member States have been running debt above 60% but they have not been placed in excessive deficit procedure because their deficits have been below 3% of GDP. The Commission proposal put therefore “greater emphasis on debt.” Presently, all EU members must keep their debt below 60 per cent of GDP but the Commission proposal would establish benchmarks under which member states with public debt of more than 60% of the GDP must show they are moving towards that threshold.

The Task Force agreed with the Commission that the “debt criterion as defined in the SGP should be made operational to be effectively applied.” As regards the preventive arm of the SGP, the Task force agreed that Member States faced with a debt level exceeding 60% of GDP should be required to achieve a faster adjustment path towards the medium-term objectives (MTO). In the other hand, as regards the corrective arm of the SGP, the excessive deficit procedure, the budget deficit should be assessed in whether it is consistent “with a continuous, substantial and sustainable decline in the debt-to-GDP ratio.” According to the task force bringing the deficit below 3% of GDP would not “be sufficient for the abrogation of the EDP if the debt has not been put on a satisfactory declining path.” Likewise, if Member States have debt ratios over 60% of GDP and a deficit below 3% of GDP they would become subject to the EDP except the decline of debt in a given preceding period is deemed satisfactory. The task force has not provided any figures. According to the Task force report “The precise quantitative criteria, methodology and phasing-in provisions for assessing whether debt is declining on a satisfactory pace shall be defined and will be set out in the secondary legislation and/or the Code of Conduct.

In order to implement the existing excessive deficit procedure on the basis of both deficit criterion and debt criterion the Commission proposal defines a numerical benchmark “to assess whether the ratio of government debt to gross domestic product is sufficiently diminishing and approaching the reference value at a satisfactory pace.” Particularly, under the draft proposal, when the ratio of the government debt to GDP exceeds the reference value, it will be considered sufficiently diminishing “if its distance with respect to the 60% of GDP reference value has reduced over the previous three years at a rate of the order of one-twentieth per year.” The EU leaders, last June, agreed to control excessive public debt, with sanctions based on debt trends rather than absolute figures which would avoid immediate sanctions for member states like Italy and France. Hence, for instances, France which has an estimated public debt of 83% of GDP in 2010 might be required to reduce it by about 4% over three years. The Commission proposal is too prescriptive as the numerical pace would not be an indicative benchmark but a specific rule for debt reduction.

The task force agreed with the Commission “public debt dynamics is not only driven by the budget deficit,” consequently “an assessment will be needed before launching an EDP procedure on the basis of the debt criterion.” The non-compliance with the numerical benchmark would not be the only factor to be taken into account to establish the existence of an excessive deficit based on the debt criterion. The Council and the Commission shall take into account factors such as member states contributions to fostering international solidarity and to achieve Union policy goals when deciding the existence of an excessive deficit but only if the general government deficit remains close to the 60% of GDP threshold and its excess over the reference value is temporary. Moreover, they shall also consider the costs of pension reforms and if the deficit remains close to the reference value, when Member State excess of the deficit or the breach of the requirements of the debt “reflects the implementation of a pension reform introducing a multi-pillar system that includes a mandatory, fully funded pillar.

Under the new Treaty provisions the Commission would no longer address a recommendation but a proposal to the Council if it considers that an excessive deficit exists. The Council decides, by a qualified majority, whether an excessive deficit exists. Then, it addresses a recommendation to the member state concerned. Under the draft proposal, all the member state are required to within six months to report to the Commission and the Council on action taken, including targets for the government expenditure as well as information on the measures taken or envisaged to achieve their targets. The task force agreed on a deadline of six months for member states, under the Excessive Deficit Procedure (EDP), to take effective action to correct the situation According to the task force “The whole process will be no longer than six months.” Nevertheless, if the Commission in its recommendation to the Council considers that the situation is particularly serious and warrants urgent action, the five months period shall be reduced to three.

The Commission draft proposal also foresees that on recommendation from the Commission the Council may adopt a revised recommendation, in case of unexpected economic events with foremost adverse consequences for government finances occurring after the adoption of the abovementioned recommendation as well as “in case of severe economic downturn of a general rule” and when the member state has taken effective action in compliance with the Council’s recommendation. The Council will assess the situation and it may extend the deadline for the correction of the excessive deficit by one year. If the Council establishes that no effective action has been taken, it shall give notice, within two months, to the eurozone member state concerned to take the necessary measures for the deficit reduction. It would request to the Member State in question to achieve “annual budgetary targets which, on the basis of the forecast underpinning the notice, are consistent with a minimum annual improvement of at least 0,5 % of GDP as a benchmark, in its cyclically adjusted balance net of one-off” as well as “temporary measures, in order to ensure the correction of the excessive deficit within the deadline set in the notice.” The Council will indicate measures in order to these targets to be achieved. In the other hand, the member state concerned shall report to the Commission and Council on action taken in response to the Council notice.

The draft proposal also foresees that on recommendation from the Commission the Council may adopt a revised notice, in case of unexpected economic events with foremost adverse consequences for government finances occurring after the adoption of that notice as well as “in case of severe economic downturn of a general rule” and when the member state has taken effective action in compliance with the Council’s notice. The Council will assess the situation and it may extend the deadline for the correction of the excessive deficit by one year. If the Council considers that no effective action has been taken in response to its notice, it shall impose sanctions within four months after its decision giving notice to the participating Member State concerned to take corrective measures. It would require the Member State concerned to make a non-interest bearing deposit with the Union until the excessive deficit has been corrected.  

The Commission also adopted a proposal for a Regulation on the effective enforcement of budgetary surveillance in the euro area. This present proposal seeks to amend the Regulation on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies and the Regulation on speeding up and clarifying the implementation of the excessive deficit procedure. This proposal is based on Article 136 of the Treaty, in combination with Article 121(6). It would be, therefore, adopted in accordance with the ordinary legislative procedure and QMV is required at the Council.

The Commission proposal aims at strengthening enforcement of budgetary surveillance in the Euroarea by introducing a new set of financial sanctions for euro-area Member States, which would apply much earlier in the process according to a graduated approach. Under the Commission proposals, eurozone member states with deficits in excess of 3% of GDP and public debt greater than 60% of GDP would receive, therefore, earlier warnings from the Commission. Upon a decision to place a eurozone member state in excessive deficit a non-interest-bearing deposit amounting to 0.2% of GDP would be applied which could be converted into a fine in the event of non-compliance with the initial recommendation to correct the deficit.

The amount of the deposit is, therefore, 0.2% of GDP, which is a fixed component. There is a variable component which is, as presently, “one tenth of the difference between the deficit as a percentage of the GDP in the preceding year and the reference value for government deficit” but, under the draft proposal, “if non compliance with budgetary includes the debt criterion”, the variable component would be calculated as one tenth of the difference between the deficit as a percentage of GDP in the preceding year and “the general government balance as a percentage of GDP that should have been achieved in the same year according to the notice issue under Article 126(9) of the Treaty.” Presently, as a rule, the Council may convert a deposit into a fine if two years after the decision to require the Member State concerned to make a deposit, the excessive deficit has not been corrected.  The task force has made no reference to the size of the sanctions, but it seems that it has agreed to the levels suggested by the Commission. 

It is important to recall that during the negotiations of the original SGP, former German Finance Minister Theo Waigel proposed the imposition of automatic sanctions against member states with excessive deficits, however Jacques Chirac could not accept such idea of a fine being imposed without a vote among the member-states. The ECOFIN does not automatically impose sanctions, but it takes a decision at each step of the EDP. Member States broadly agree that the EU's Stability and Growth Pact needs to be strengthened, but they could find no agreement on sanctions to apply for member states breaking the EU's budget discipline rules. The member states have had different views as to what form such sanctions should take. Germany has been calling for a suspension of voting rights in the Council for member states who repeatedly break the SGP. But, this would require amending the Treaty and would entail another transfer of national sovereignty.

The Commission proposed to grant more powers to itself by becoming less dependent on the Ecofin when implementing budgetary surveillance. Presently, on a recommendation from the Commission, the Council may decide to impose sanctions by qualified majority, excluding the votes of the member state concerned. The Council may decide, on a recommendation from the Commission, to intensify the sanctions, unless the Member State concerned has complied with the Council notice. However, aiming at reducing discretion in enforcement, the Commission proposes to introduce the so-called ‘reverse voting’ mechanism for imposing the new sanctions in connection with the successive steps of the EDP. Hence, the Commission at each step of the EDP, will make a proposal for a relevant sanction which will be considered adopted, unless the Council rejects it by qualified majority within ten days. Thus, the sanctions can only be stopped, if the Council votes against them by qualified majority. Whereas presently a qualified majority of member states is required to impose sanctions on member states that breach the SGP, under the Commission proposal sanctions would be imposed almost automatically as a qualified majority of member states would be required to block their imposition. The Commission proposes therefore a system of “semi-automatic sanctions.

Under the Commission’s proposals a eurozone Member State that is making insufficient progress with budgetary consolidation, in the preventive part of the SGP, would be obliged to temporarily lodge an interest-bearing deposit with the Union. This would happen following an initial warning from the Commission. If in accordance to Article 121 (4) TFEU the Council addresses to a Member State a recommendation asking it to take the necessary adjustment measures in the event of persisting or particularly serious and significant deviations from prudent fiscal policy, the Council, acting on a proposal from the European Commission, shall impose the lodging of an interest bearing deposit. The decision shall be considered adopted by the Council unless it decides by qualified majority to reject it within ten days of if being adopted by the Commission. In accordance with Article 293(1) of the Treaty, the Council may amend the Commission’s proposal by acting unanimously. The Commission will propose therefore the interest-bearing deposit, which shall amount to 0.2% of the gross domestic product (GDP) of the Member State in question in the preceding year.

Following “a reasoned request” by the Member State concerned, the Commission may propose to reduce the amount of the interest-bearing deposit or to cancel it.

If the Council considers that the situation that lead to the obligation to lodge that deposit has come to an end, on the basis of a Commission proposal, it shall decide that the interest-bearing deposit would be released to the Member State concerned with the interest accrued on it.

As regards, the corrective part of the Stability and Growth Pact, the sanctions for eurozone Member States would take the form of an obligation to lodge a non-interest-bearing deposit related to a Council decision establishing the existence of an excessive deficit and the obligation to pay a fine in case of non-compliance with a Council recommendation to correct an excessive government deficit. Such sanctions would be imposed irrespectively of an interest-bearing deposit has previously been imposed on the Member State concerned. Hence, if the Council decides that an excessive deficit exists in a Member State, it shall impose the lodging of a non-interest-bearing deposit, acting on a proposal from the Commission. The Council decision would be considered adopted unless it decides by qualified majority to reject it within ten days of the Commission adopting it. In accordance with Article 293(1) of the Treaty, the Council may amend the proposal by unanimity. The non-interest-bearing deposit will amount to 0.2% of the GDP of the Member State concerned in the preceding year. In the event of the Member State having an interest-bearing deposit lodged with the Commission this shall be converted into a non-interest-bearing deposit.

The Task Force also recommended that the interest-bearing deposit is transformed into a non- interest-bearing deposit, if a Member State has already been subject to interest bearing deposit under the preventive arm of the SGP, and is placed in EDP. A Member States that have already been subject to financial sanctions under the preventive arm would me immediately subject to a non-interest bearing deposit. According to the Task Force, on the basis of a Commission Recommendation, the Council will adopt a recommendation, setting a deadline for effective action if a Member State placed in EDP has not been subject to an interest-bearing deposit under the preventive arm. But, it has stressed that “In case of particularly serious policy slippages, sanctions could immediately be applied by the Council on the basis of a Commission recommendation.”

Following “a reasoned request” by the Member State concerned or on grounds of exceptional economic circumstances, the Commission may propose to reduce the amount of the non-interest-bearing deposit or to cancel it. A non-interest-bearing deposit amounting to 0.2% of GDP would apply therefore upon a decision to place a eurozone member state in excessive deficit, and it would be converted into a fine in the event of non-compliance with the initial recommendation to correct the deficit. If in accordance with Article 126(8) TFEU the Council decides that the Member State has not taken effective action in response to its recommendation within the period required, the Council, acting on a proposal from the Commission, shall decide that the Member State shall pay a fine. Such decision would be considered adopted by the Council unless it decides by qualified majority to reject the proposal within ten days of the Commission adopting it. In accordance with Article 293(1) of the Treaty, the Council may, unanimously, amend the proposal. Such fine would amount to 0.2% of the GDP of the Member State concerned in the preceding year. In the event of the Member State having a non-interest-bearing deposit lodged with the Commission this shall be converted into the fine.

Following “a reasoned request” by the Member State concerned or on grounds of exceptional economic circumstances the Commission may propose to cancel or to reduce the amount of the fine.

Only members of the Council representing the eurozone Member States shall vote on measures imposing an interest-bearing deposit, non-interest-bearing deposit, and fines and the vote of the member of the Council representing the Member State concerned would not be taken into account.

Any non-interest-bearing deposit lodged by the Member State with the Commission would returned to the Member State concerned, if the Council decides to abrogate some or all of its decisions. Whilst the non-interest-bearing deposit would be released upon correction of the excessive deficit, the Commission draft proposal provides that the interest earned by the Commission on deposits lodgedand the fines collected “shall constitute other revenue referred to in Article 311 of the Treaty” and would be distributed among the eurozone Member States which do not have an excessive deficit and are not subject to an excessive imbalance procedure.

Germany has been calling for “automatic sanctions” but, this will require amending the Treaties, as Ecofin would no longer vote on possible sanctions. Whereas Germany as well as Netherlands and Sweden have been demanding more “automatic sanctions” and favour the so-called “quasi-automatic” sanctions, France, Italy, Spain have been against such idea, as they want more political intervention. Surprisingly, Angela Merkel made a u-turn on more automatic sanctions. She gave up her attempts for Brussels to introduce automatic sanctions in exchange for Sarkozy support for a Treaty amendment to create a permanent “crisis resolution mechanism” as well as to introduce political sanctions such as suspension of voting rights.

However, the so-called reverse majority voting proposed by the European Commission is not foreseen in the Treaties. Such proposal would transfer further powers from member states to the European Commission but have no legal basis. One could say that in order to introduce the so called “semi automatic sanctions” the Treaty should be amended as the Treaty presently just foresees that the Council takes its decisions on the basis of the Commission recommendations, under the qualified majority rule but not the so called reverse majority rule.

The Task Force agreed on “more automaticity in the decision making” endorsing therefore the so-called reverse majority rule. According to the Task Force the decisions on new enforcement measures including interest-bearing deposit in the preventive part of the Pact, non-interest-bearing deposit when a country is placed in EDP, fine in case of non compliance, should be based on Commission recommendations which would be adopted unless a qualified majority of Member States in the Council vote against within a given deadline. The task force report pointed out that a reverse majority rule would be adopted in the context of the secondary legislation to the new enforcement measures proposed. The Commission has already put forward a proposal but one could argue if it “precisely” defines the “practicalities of the decision process.” The task force recommendations and the Commission's legislative proposals are very similar. According to the Task Force if no effective action has been taken within the given deadline, the Council may give notice to the Member State concerned to take measures to reduce the deficit. If under article 126.8 of the Treaty, the Council decides that the Member State has not taken effective action to correct the excessive deficit within the given deadline, a fine will be applied, and decided by the reverse majority rule. The report stressed that “Decisions on the new enforcement measures should be based on Commission Recommendations” which “would be adopted unless a qualified majority of Member States in the Council vote against within a given deadline.” According to the Task Force“This would increase the automaticity in the decision-making in relation with budgetary discipline, enhance considerably the role of the Commission…” But, according to the Task force report “For the later stage of sanction (i.e. increased fine in case of persistent lack of compliance) currently foreseen in the Treaty, the usual majority rule within the Council will continue to apply.”

The task force proposed, as the European Commission, a two-stage approach, starting with the euro area, hence interest-bearing deposits and non interest-bearing deposits and fines will be introduced only for the Euro area on secondary legislation on the basis of Article 136 TFEU. According to the Task Force report “In a second stage, strengthened enforcement measures need to be implemented for all EU Member States, except the UK as a consequence of Protocol 15 of the Treaty, as soon as possible, and at the latest in the context of the next Multi-annual Financial Framework.” In fact, the Commission is also planning to use the EU budget to ensure compliance with the SGP rules. It is therefore considering suspending or cancelling part of current or future financial appropriations from the EU budget in cases of non-compliance with the rules. Current rules already allow EU cohesion funds to be withheld, although in practice this has never happened, under the new plans, sanctions would go beyond regional funding and would also include agriculture and fisheries funds. According to the Commission plans, as a first step the establishment of an excessive deficit could result in the suspension of commitments related to multiannual programmes. However, if a member state does not comply with the initial recommendations to correct the excessive deficit, this could result in cancellation of commitments of a given year as well as cancellation of CAP reimbursements (EAGF). The Commission has stressed that such sanctions would not affect end beneficiaries of EU funds but payment to Member States. The Commission is planning to introduce such changes in its 2011 proposals for the next multi annual financial framework. 

Requirements for budgetary frameworks of the Member States

The Commission also adopted a Proposal for a Council Directive on requirements for budgetary frameworks of the Member States, complementing the reform of the SGP. The proposal is based on Article 126(14), therefore is going through the special legislative procedure and unanimity is required at the Council. The Directive intends to specify the obligations of national authorities to comply with the provisions of Article 3 of Protocol No 12 to the Treaties on the excessive deficit procedure. This Directive is addressed to all Member States, which would be required to bring into force the provisions necessary to comply with it by December 2013. All Member States, would be, therefore, required to reflect on their national fiscal frameworks the priorities of EU budgetary surveillance. This draft Directive lays down uniform requirements as regards the rules and procedures forming the budgetary frameworks of the Member States.

The Task Force has also agreed on a set of requirements to be met by all national frameworks such as “public accounting systems and statistics; numerical rules; forecasting systems; effective medium-term budgetary frameworks, and adequate coverage of general government finances.

Under the draft directive in order to facilitate the monitoring of fiscal developments, Member States are required to ensure that national budgetary frameworks, specifically accounting and statistical issues and forecasting practices are in line with European standards. Moreover, to ensure the achievement of the medium-term objectives set at EU level, domestic budgetary frameworks have to adopt a multi-annual fiscal planning perspective. Furthermore, Member States are required to have in place numerical fiscal rules contributing to compliance with the deficit and debt thresholds.

In order to guarantee the transparency of the budget process, Member States are therefore required to provide detailed information on existing extra-budgetary funds, tax expenditures and contingent liabilities.

As regards national systems of public accounting, Member States must have in place public accounting systems covering all sub-sectors of general government as defined by Regulation on the European system of national and regional accounts in the Community, and containing the information needed to compile ESA 95-based data. They must also ensure regular public availability of fiscal data for all subsectors of general government.

The Regulation 223/2009 on European Statistics sets out the principles governing the development, production and dissemination of European statistics. It is important to recall that the recently adopted Council Regulation 479/2009 on the application of the Protocol on the excessive deficit procedure, has strengthened the Commission’s powers to verify statistical data used for the excessive deficit procedure.

Furthermore, Member States shall prepare their macroeconomic and budgetary forecasts taking into account the Commission forecasts. The official macroeconomic and budgetary forecasts prepared for fiscal planning shall be published, including the methodologies, assumptions and parameters on which they are based. The macroeconomic and budgetary forecasts for fiscal planning shall be regularly audited, including ex post evaluation and its result shall be published.

Member States are also required to have in place numerical fiscal rules that effectively promote compliance with their obligations under the Treaty in the area of budgetary policy. In order to incorporate the multi-annual budgetary perspective of the budgetary surveillance framework of the Union, member states shall plan annual budget legislation on the basis of on multiannual fiscal planning stemming from the medium-term budgetary framework. Member States are therefore required to “establish an effective medium-term budgetary framework providing for the adoption of a fiscal planning horizon of at least three years to ensure that national fiscal planning follows a multiannual fiscal planning perspective.” Medium-term budgetary frameworks shall therefore include procedures for establishing a “comprehensive and transparent multi-annual budgetary objectives in terms of the general government deficit, debt,…” as well as “detailed projections of each major expenditure and revenue item,” a “statement of the government’s medium-term priorities” and any departure from these provisions shall be duly justified.

According to the Commission, all general government sub-sectors shall be duly covered by the scope of the obligations and procedures laid down in domestic budgetary frameworks. Hence all the operations of extra-budgetary funds and bodies shall be integrated into the regular budgetary process.

Member States would be required to publish detailed information on the impact of tax expenditures on revenues as well as information on contingent liabilities with potentially large impacts on public budgets.

Although the UK already complies with some of the proposed provisions, for instances the UK already has independent statistical and fiscal authorities as well as a multiannual budget but, one could wonder if the draft directive respects the UK's national fiscal competence and the subsidiarity principle. It should be for each Member State to decide their fiscal frameworks however as abovementioned, the Commission is proposing uniform requirements for national fiscal frameworks.

The Task Force agreed that “a set of non-binding additional standards should be agreed upon”, covering particularly “the use of top down budgetary processes, fiscal rules and the role of public bodies (e.g. fiscal councils) tasked with providing independent analysis, assessments and forecasts related to domestic fiscal policy matters.” Moreover, according to the Task Force, Member States should also consider creating independent fiscal councils and look at writing EU debt and deficit limits into national law. They stressed that the European Commission and the Council should “assess the effectiveness of national fiscal frameworks when assessing stability and convergence programmes and if necessary issue recommendations to strengthen them.” They also suggest that sanctions should be considered for member states with repeated statistical problems, such as lack of validation of data by Eurostat.

Macroeconomic surveillance

The Commission has been calling upon Member States to broaden macroeconomic surveillance as well as to better integrate structural reform in overall policy coordination within EMU. There is a general agreement among the member states that economic surveillance has to be broadened to cover macro-economic policies and that macroeconomic surveillance should function alongside the budget surveillance under the Stability and Growth Pact. At their June summit, EU leaders agreed on "developing a scoreboard to better monitor competitiveness developments and allow for early detection of unsustainable or dangerous trends". However, there are divergences among the Member States as regards the indicators to broaden economic surveillance.

The Commission wants to supplement the multilateral surveillance provided in Article 121(3) and (4) of the Treaty with specific rules for detection, prevention and correction of macroeconomic imbalances and divergences in competitiveness within the Union. It is important to mention that under Article 121 (3) with the view of ensuring “closer coordination of economic policies and sustained convergence of the economic performances of the Member States,” the Council monitors the Member States economic developments as well as the consistency of their economic policies with the broad guidelines. Before the Lisbon Treaty, the Council was competent to address a first warning to Member States in case of deviation from the economic guidelines, but now this competence belongs to the Commission. Then the Council, voting by qualified majority, may address recommendations to the Member State in question. Hence, the Commission and the Council are able to call on a member state to correct “economic deviations” at an earlier stage.

The UK is required to inform the Commission about economic policies measures and it will be subject to the Commission warnings and Council recommendations if its economic policy is not consistent with the broad economic guidelines. However, it is important to recall that under Article 139 “adoption of the parts of the broad economic policy guidelines which concern the euro area generally (Article 121(2)” do not apply to member states outside the Euro zone. David Cameron must, therefore, endeavour as far as possible to avoid the application of such provisions in the UK ensuring that Brussels will not interfere with British economic affairs.

The European Commission proposed, therefore, a mechanism for the prevention and correction of macroeconomic imbalances based on two draft proposals, whereas the first proposal outlines the excessive imbalance procedure (EIP), the second focuses on the associated enforcement measures.

The Commission presented a proposal for a regulation on the prevention and correction of macroeconomic imbalances based on Article 121(6) (multilateral surveillance procedure) therefore is going through the ordinary legislative procedure (codecision) and QMV is required at the Council.

The scope of this draft Regulation would cover all Member States. The draft regulation defines ‘imbalances’ as “macroeconomic developments which are adversely affecting, or have the potential adversely to affect, the proper functioning of the economy of a Member State or of economic and monetary union, or of the Union as a whole” whereas ‘excessive imbalances’ include “imbalances that jeopardise the proper functioning of economic and monetary union.

The Commission proposes 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. The EIP will apply to every Member State, including the UK.

The Task force also recommended the creation of a mechanism for macro-economic surveillance, which according to Mr Van Rompuy is the “biggest innovation” and “will strengthen the economic pillar of the Economic and Monetary Union.” It has recommended that the new surveillance mechanism should be based on a two-stage approach. First, an annual assessment of the risk of macroeconomic imbalances and vulnerabilities will be carry out on the basis Member States' National Reform Programs (NRPs) and Stability and Convergence Programs. This first assessment would include an alert mechanism based “on scoreboard covering a limited number of indicators and economic analysis.

The Commission proposed surveillance would start with an alert mechanism intend to early detect Member States with potentially problematic levels of macroeconomic imbalances. Such mechanism would be based on a scoreboard, which would consist of a set of economic and financial indicators, with corresponding indicative thresholds, aiming at identifying imbalances emerging in different parts of the economy. A scoreboard will rate therefore member states' performance as regards economic stability and competitiveness. The Commission, after consulting the Member States, will establish an indicative scoreboard. Hence, the indicators composing the scoreboard including their respective values and their associated underlying methodologies will be published in a separated document.

The Commission will define and announced alert thresholds for each indicator. Such scoreboard would be composed of macroeconomic and macrofinancial indicators for Member States. According to the Commission a "competitiveness scoreboard" would review macro-economic indicators 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. The thresholds applicable to eurozone Member States might be different from those applicable to the other Member States.

The task force pointed out “The scoreboard of indicators, and in particular alert thresholds, should be differentiated for euro and non-euro area Member States in order to take into account specific features of the monetary union and reflect relevant economic circumstances.” Moreover, it has indicated that the Commission will set up a list of indicators, which would be then endorsed by the Council.

The Commission will present a report providing for an economic and financial assessment “putting the movement of the indicators into perspective.” The report will also identify Member States that the Commission deems to be affected by, or at risk of, imbalances. The Council will adopt conclusions on the Commission report. The Commission will compile, therefore, a list of Member States deemed at risk of imbalances (black list).

Based on the multilateral surveillance procedure and the alert mechanism, and taking account of the discussions in the Council and the Euro Group, the Commission will provide country-specific in-depth reviews for Member States where the alert mechanism indicates possible imbalances or a risk. The in-depth review will cover an analysis of sources of imbalances in the Member State under review and whether these imbalances constitute excessive imbalances. The Commission would undertake a detailed investigation of the underlying problems in the identified Member States. The review may include enhanced surveillance missions by the Commission to Member States concerned and additional reporting by the Member State in case of severe imbalances. According to the task force such in-depth analysis might include country surveillance missions conducted by the Commission, but just “for euro area and ERM II Member States.”

The in-depth review will take into account the severity of imbalances and possible spillovers to other Member States, whether the Member State in question has taken appropriate action in response to Council recommendations as well as the Member State policy intentions, as reflected in its Stability and Convergence Programme and National Reform Programme, and any early warnings or recommendations from the European Systemic Risk Board to the Member State under review.

After the abovementioned in-depth Commission analysis, if the Commission considers that there are macroeconomic imbalances, or there is a risk that a Member State is experiencing imbalances, it shall inform the Council who, on a recommendation from the Commission, may adopt the necessary preventive recommendations to the Member State concerned.

An excessive imbalance procedure would be initiated if the in-depth review identified severe macroeconomic imbalances in Member State, including imbalances that jeopardise the proper functioning of the economic and monetary union.

On a recommendation from the Commission, the Council may declare the existence of an excessive imbalance and recommend the Member State concerned to take corrective action within a specified deadline to remedy the situation. According to the Commission “Member States with excessive imbalances within the meaning of the EIP would be subjected to stepped-up peer pressure.” In fact, under the draft proposal “Depending on the nature of the imbalance, the policy prescriptions could potentially address fiscal, wage and macro-structural as well as macro-prudential policy aspects under the control of government authorities.” Such recommendations may address policy challenges across several policy areas such as fiscal and wage policies, product and services markets.

The task force agreed, therefore, that the Commission might address an early warning directly to a Member State whose economic policies are not consistent with the broad economic policy guidelines, or risk jeopardising the proper functioning of economic and monetary union. As well as in “case of particularly serious imbalances” based on a recommendation by the Commission the Council should decide to place the Member State in an "excessive imbalances position", with a deadline to take a set of policy measures to address the problem.

Any Member State for which an excessive imbalance procedure is opened would be therefore required to present its policy intentions designed to implement the Council recommendations in a corrective action plan. Such corrective action plan should also include a timetable for implementation of the measures envisaged. If considered sufficient, on the basis of a Commission proposal, the Council will adopt an opinion, approving it. In the other hand, if the actions taken or foreseen in the corrective action plan or their timetable for implementation are deemed not enough to implement the recommendations, on the basis of a Commission proposal, it will invite the Member State to amend its corrective action plan within a new deadline.

The Task Force agreed that on the basis of Commission recommendations the Council should address a set of policy recommendations to correct the imbalances to the Member State concerned. The Member State concerned would be under the obligation to report regularly on the progress of implementation. In fact, the Member State concerned shall report to the Council and the Commission on regular basis in the form of progress reports. Under this proposal member states, including the UK, would be subject to burdensome reporting requirements.

Under the draft proposal “The Commission may carry out surveillance missions to the Member State concerned to monitor implementation of the corrective action plan.” According to the Task Force the Commission will monitor such implementation through surveillance missions, in the context of the excessive imbalances procedure, but just “for euro area and ERM II Member States.

If there is a change in the economic circumstances, on a Commission recommendation, the Council may amend the EIP recommendations. In this case, the Member State concerned would have to submit a revised corrective action plan. The Council will assess the corrective action plan within two months and, on the basis of a Commission recommendation, it will decide whether or not the Member State concerned has taken the recommended corrective action. If the Council concludes that the Member State has taken the recommended corrective action, the excessive imbalance procedure will be held in abeyance which means that, although the member state is making satisfactory progress because of the possibly long period between adoption of corrective action and its effect, the Member States concerned will have to face periodic reporting and surveillance until the EIP is effectively closed. If the Council concludes, on a recommendation from the Commission, that the Member State is no longer affected by excessive imbalances, the excessive imbalance procedure shall be closed. However, the Member State concerned will remain subject to the excessive imbalance procedure if it has not taken appropriate action.

In this way Brussels would be able to interfere on member states taxes policies and demand taxes increases to avoid and correct “macroeconomic imbalances” and to achieve the targets of the 2020 strategy. It seems this might goes beyond the “recommendations” foreseen in the treaty. 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.

The Commission also proposed a regulation on enforcement measures to correct excessive macroeconomic imbalances in the euro area based on Article 136, in combination with Article 121(6). It goes through, therefore, the ordinary legislative procedure and QMV is required at the Council. The draft Regulation lays down a system of fines for correction of macroeconomic imbalances in the euro area.

The Task Force agreed that, in case of repeated non-compliance with the Council recommendations, the euro area Member States would be subject to sanctions. Under the Commission proposal if a member state repeatedly fails to comply with Council recommendations to address excessive macroeconomic imbalances would be subject, as a rule, to a yearly fine, until the Council concludes that the Member State has taken corrective action to comply with its recommendations. Moreover, if a Member State repeatedly fails to present a corrective action plan that is sufficient to address the Council recommendations would be also subject to a yearly fine, until the Council establishes that the Member State has provided a corrective action plan that sufficiently addresses its recommendations.

The Council, acting on a proposal by the Commission, will impose a yearly fine on member states, which fail to follow reforms to boost their economic competitiveness such as measures to counter balance of payments deficits or excessive wage costs. Such decision would be deemed adopted by the Council unless it decides, by qualified majority, to reject the proposal within ten days of the Commission adopting it. Only a qualified majority of the members of the Council of eurozone members can stop the fine being applied. The fine will be therefore adopted based on the so-called reverse voting mechanism.

The Council may amend the Commission proposal by acting unanimously in accordance with Article 293(1) of the Treaty.

The fine would be equal to 0.1% of the gross domestic product (GDP) of the Member State concerned in the preceding year. However, under the draft proposal, on grounds of exceptional economic circumstances or following a reasoned request by the Member State concerned addressed to the Commission within ten days of adoption of the Council conclusions, the Commission may, propose to reduce the amount of the fine or to cancel it. The Council may decide, on the basis of a Commission proposal, to cancel or to reduce the fine.

The task force agrees that the reversing majority voting shall also apply to all the new enforcement measures for the macro-economic surveillance mechanism. The Task Force has made no reference to the size of the sanctions but it seems that it has agreed to the Commission proposed 0.1% of GDP.

It seems that eurozone member states would no longer be able to pursue their own economic and fiscal policies to avoid “the occurrence of severe imbalances within the euro area.” It is up to national governments to decide on balancing spending and taxes, as well as on level of wages but under the new proposals this would be the Commission task. Such measures would give Brussels the power to tell member states how to run their economies and fine them if they refuse to do it.

"Fast track" approach

The Task Force’s report pointed out that the “Adoption of the secondary legislation on the basis of Commission proposals will be needed for the implementation of many of these recommendations.” Consequently, Task Force called “on all parties to opt for a "fast track" approach, to ensure the effective implementation of the new surveillance arrangements as soon as possible.” The Commission's proposals from 29 September and the Task Force's report recommendations match in several aspects. The secondary legislation needed for the implementation of the task force's recommendations is therefore already in place. It seems that the main aim of the Task Force was to reach an early agreement on the Commission proposals. The Commission proposals would give Brussels unprecedented power to intervene in domestic politics. The Commission also called upon the Council and European Parliament “to work towards a speedy adoption of these proposals.” The European Council called, therefore “for a "fast track" approach to be followed on the adoption of secondary legislation needed for the implementation of many of the Recommendations.” The EU leaders noting that the Task Force report does not cover all issues addressed in the Commission’s proposals and vice-versa, stressed that “The objective is for the Council and the European Parliament to reach agreement by summer 2011 on the Commission's legislative proposals.

Taking into account that the majority of the proposals would be decided by the co-decision procedure and QMV, they are therefore aiming a first reading agreement. Only the proposal for a Council Directive on requirements for budgetary frameworks of the Member States and the proposal amending the Regulation on speeding up and clarifying the implementation of the excessive deficit procedure (corrective part of SGP) will be decided through the consultation procedure. The UK could veto these proposals, as unanimity is required at the Council. It remains to be seen what will come out of the negotiations between the member states and the Council with the European Parliament. On 26 October, the European Parliament’s rapporteurs expressed their first views on the Commission’s proposals on economic governance. In general terms they endorsed the Commission’s proposals but they are likely to ask for a stronger role for the Commission in applying its rules. The European Parliament is very likely to ask, as Finland's Foreign Minister Alexander Stubb said, for "much tougher" changes to be adopted. In fact, several MEPs have already called for a European Monetary Fund (EMF) to be put in place as well as common euro bonds, guarantee by the EU budget.

"Limited Treaty amendment"

Since last March that Angela Merkel has been saying that the Lisbon Treaty should be amended in order to prevent any repetition of the current Greek crisis. She has been calling for the development of a “procedure for the orderly insolvency of a [eurozone] member state.” It is well known that the EMU has been the product of negotiations between France and Germany. Unsurprisingly, France and Germany have recently agreed that the Treaties should be amended for “a permanent and robust framework to ensure orderly crisis management in the future, providing the necessary arrangements for an adequate participation of private creditors and allowing Member States to take appropriate coordinated measures to safeguard financial stability of the Euro area as a whole.” Moreover, they also agreed to amend the Treaties so that “In case of a serious violation of basic principles of Economic and Monetary Union” the voting rights of the Member State concerned can be suspended. They called for “concrete options allowing the establishment of a robust crisis resolution framework” to be presented at the EU summit next March, by the President of the European Council. Moreover, Mrs Merkel and Mr Sarkozy stressed, in their joint statement, that “The necessary amendment to the Treaties should be adopted and ratified by Member States in accordance with their respective constitutional requirements in due time before 2013.”

The €440bn European Financial Stability Facility will expire in June 2013. Ms Merkel has made clear that Germany will not extend the three-year period of the €440bn eurozone rescue package. Angela Merkel has been calling for the treaty to be amended, to set up a permanent eurozone stability mechanism to replace the temporary facility because she fears that any extension of this mechanism would be legally challenged in the German Constitutional Court. In fact, having the permanent mechanism set up outside the treaties could be considered illegal by the Court for breaching EU rules banning eurozone bail-outs. Consequently, Angela Merkel is seeking a legal basis for a new permanent mechanism. The German Constitutional Court is presently analysing the Greek bailout as well as whether the financial facility complies with the German Constitution and EU treaties.

The proposal for treaty change has been included in the Task Force report, which reads “The Task Force considers that in the medium term there is a need to establish a credible crisis resolution framework for the euro area capable of addressing financial distress and avoiding contagion.” According to the Task Force such mechanism should “strengthen incentives for Member States to pursue sound fiscal and overall macroeconomic policies and for financial market participants to lend responsibly, while respecting the prerogatives and the independence of the European System of Central Banks.” They pointed out that establishing a crisis mechanism “will require further work”, particularly on defining its features and operational means, including on the respective roles as well as the “responsibilities of the EU, the euro area and euro area Member States.” Moreover, the Task Force noted that “As it may imply a need for Treaty changes, depending on its specific features” which “is an issue for the European Council” as well as “the suspension of voting rights.”

Several member states were not willing to go through the process of amending a treaty again, just one year after the Lisbon treaty has entered into force. Any Treaty amendment requires the approval of all 27 EU member states and not all of them were willing to do it. But, at the end Angela Merkel got what she wanted, she was able to persuade unwilling member states to accept a change to the TFEU. Angela Merkel said "everybody agreed that there must be a permanent crisis mechanism and […] that this will require limited treaty change.” The EU leaders agreed, therefore, to amend the Treaty providing it is a “limited” change in order to allow the creation of a permanent crisis mechanism that will replace the 440-billion-euro European Financial Stability Facility.

According to the European Council Conclusions, the EU leaders agreed “on the need for Member States to establish a permanent crisis mechanism to safeguard the financial stability of the euro area as a whole.” They invited “the President of the European Council to undertake consultations with the members of the European Council on a limited treaty change required to that effect, not modifying article 125 TFEU ("no bail-out" clause).

Herman Van Rompuy is now in charge of analysing the possibilities to introduce the so called “limited change”, particularly he will endeavour to such amendment to the treaty to go through a simplified revision procedure, meaning without the need to call a full Intergovernmental Conference (IGC) and national approval by referendum.

The Lisbon Treaty has substantially amended Article 48 TEU. It has introduced different Treaty amendment methods: the ordinary revision procedure and the simplified revision procedure whereas the old Article 48 TEU solely provided for the convening of an IGC to amend the Treaties. Under the Ordinary Revision Procedure, proposals for amendments to the Treaties, may be submitted by a Member State, the European Parliament or the Commission to the Council, which are then submitted to the European Council. The European Council will have to decide, after consulting the European Parliament and the Commission, by a simple majority in favour of examining the proposed amendments. In that case, the President of the European Council calls a Convention which includes representatives of the national Parliaments, of the Heads of State or Government of the Member States, of the European Parliament and of the Commission to examine the proposals for amendments and shall adopt by consensus a recommendation to a conference of representatives of the governments of the Member States, which will decide by common accord the amendments to be made to the Treaties. There is an alternative procedure as the “European Council may decide by a simple majority, after obtaining the consent of the European Parliament, not to convene a Convention."  

The Lisbon Treaty also introduced “simplified revision procedures” which means that the Treaty is self-amending. Article 48 (6) allows Treaty amendments to be made without the necessity of a new, amending treaty and ratification. It allows for the revisions of text, within Part III, "on internal policies and actions of the Union" without convening an IGC. Under Article 48 (6) “The Government of any Member State, the European Parliament or the Commission may submit to the European Council proposals for revising all or part of the provisions of Part Three of the Treaty on the Functioning of the European Union relating to the internal policies and action of the Union.” Then, after consulting the European Parliament, the Commission or the European Central Bank, the European Council “may adopt a decision amending all or part of the provisions of Part Three of the Treaty on the Functioning of the European Union” acting by unanimity.

Hence, under this "special revision procedure," the treaty can be amended solely by European Council, as long as there is unanimity and the amendments do not extend the competences of the European Union. The abovementioned provision states “The decision referred to in the second subparagraph shall not increase the competences conferred on the Union in the Treaties” which will require an IGC. That decision shall not enter into force until it is approved by the Member States in accordance with their respective constitutional requirements, however this is not the same as Treaty ratification. It would not require ratification in some member states and it would be possible to avoid referenda. The intention of this provision is to simplify the revision of the Treaties and to move away from the IGCs and the signature and ratification of a new Treaty by all Member States.

It is therefore a sine qua non condition to the Member States to amend the treaty without convening an intergovernmental conference. Van Rompuy has said "We don't want to reopen the treaty,". The European Council wants therefore to avoid long negotiations among the member states and between the Member States and with the European Parliament. They want to avoid, therefore, an IGC whereby member states, could come up with several amendments to the treaties. In this way the UK would not be able to ask for repatriation of powers. Moreover, and the main reason, of the so called “ limited treaty amendment” is to avoid referenda in certain member states. Swedish Prime Minister Fredrik Reinfeldt has said "Many countries do not want a huge treaty reform, and therefore we are trying to narrow it down to a very limited treaty change that should be acceptable for countries without having to face referendums."

The European Council conclusions state that Article 125 TFEU, the "no bail-out" clause will not be modified. Obviously, such amendment would require without any doubt an ordinary revision procedure of the treaties. It seems they are planning to amend Article 122. Article 122 (2) of the TFEU provides "Where a member state is in difficulties or is seriously threatened with severe difficulties caused by natural disasters or exceptional occurrences beyond its control, the council of ministers, on a proposal from the European Commission, may grant, under certain conditions, Union financial assistance to the Member State concerned….” According to Angela Merkel "The crisis mechanism is only valid for cases there the stability of the euro as a whole is at risk…”. Are they planning to add to Article 122 financial aid to member states when the “the stability of the euro is threatened” ?

It is important to recall that Article 122 (1) provides “Without prejudice to any other procedures provided for in the Treaties (…).” Moreover, a declaration annexed to the Nice Treaty states “The Conference recalls that decisions regarding financial assistance, such as are provided for in Article 100 (now Article 122) are compatible with the "no bail-out" rule laid down in Article 103 (now Article 125 (…)” The treaties do not provide for any modalities of financial assistance to Euro zone member states in financial distress. Under the existing treaties there is no such mechanism to help out a eurozone member state through loans and grants, therefore they must amend the treaties if they want to, legally, bailout eurozone countries. However, it is hard to understand how come they are intending to create a permanent crisis mechanism “to safeguard the financial stability of the euro area as a whole” without amending the bail out rule. It seems that any amendment to Article 122 in this regard would be incompatible with Article 125 and with the principles of the EMU.

It seems that the EU leaders are seeking a greater involvement of the private sector and IMF in the new permanent crisis mechanism nevertheless member states would still contribute for the costs of a sovereign debt rescheduling with eurozone member states. It remains unclear what such mechanism would entail and which member states would participate, namely if it is just for eurozone member states.

Moreover, it is important to stress that simplified revision procedures is only possible if the European Council decision to amend the treaty does not “increase the competences conferred on the Union in the treaties.” The details of a permanent crisis mechanism are not known yet but it is hard to believe that such mechanism would not further increase the Union competences. It remains to be seen how far Brussels will go on its creativity. It seems obvious that such mechanism would entail further transfer of powers to Brussels namely further political and fiscal cooperation. Such mechanism would entail lost of sovereignty. Hence, if there is transfer of powers from member states to the EU, the so called “limited treaty amendment” cannot be adopted under Article 48 (6). Consequently, such amendment cannot be introduced without approval in a national referendum in certain member states. In the UK, both houses of parliament would have to ratify the treaty amendment. The UK government has also pledged to hold a referendum on any treaty change that would transfer more powers to the EU.

The nature of the treaty amendment is not known yet. The European Council has given a mandate to Herman Van Rompuy to come up with the proposals on a “limited treaty change.” The European Commission will present concrete proposals, including the structural details of the 'crisis management mechanism'. According to the European Council conclusions the European Commission will carry out, “preparatory work on the general features of a future new mechanism, i.a. the role of the private sector, the role of the IMF and the very strong conditionality under which such programmes should operate.” Van Rompuy has said “The Commission will be coming forward with proposals. On the basis of these I will be proposing amendments to the treaty in a very limited fashion, preferably by using rapid procedures. We are not talking about a wholesale revision of the treaty.” The European Commission and Van Rompuy will present their proposals to the European Council in December.

The European Council will discuss this issue again at its December meeting with the aim of “taking the final decision both on the outline of a crisis mechanism and on a limited treaty amendment so that any change can be ratified at the latest by mid-2013.” It seems that the plan is to reach a “final decision” on the treaty amendment at the next European Council in December so it can be ratified by 2013, in time to replace the existing facility.

David Cameron has trade an agreement on amending the treaty in exchange of a cap on the EU’s 2011 budget. He has claimed victory for having the support of 10 Member States to limit the budget increase to 2.9%, which is exactly the same increase that the UK voted against a few months ago. David Cameron said “We have also established that any possible future treaty change, should it occur, would not affect the UK. To be absolutely clear: no powers will be transferred from Westminster to Brussels.” Moreover, he pointed out that “In terms of what Eurozone countries have agreed for themselves, the most likely outcome is they will simply put on a more formal basis the arrangements which exist already for bailing each other out in the event of a crisis. We welcome that. It is good for the UK, because it means the UK taxpayer is protected from the risk of having to pay up to sort out another EU country’s debt.” However, it is not known yet for sure that an amendment to the Treaty will not affect the UK and sovereignty of Parliament over fiscal and economic policies. It remains to be seen if the treaty amendment entails transfer of powers from the UK to Brussels. There is no clear statement on the European Council conclusions that the creation of a permanent crisis mechanism would have no impact on the UK. Moreover, it is important to mention that Article 122, presently, applies to the UK.

The UK must veto such “limited treaty amendment”, if it goes through the special revision procedure. David Cameron should endeavor for any amendment to the treaty go through the normal procedure, in this way he would have the chance to demand repatriation of powers. It is important to recall that the Coalition Agreement states “We will amend the 1972 European Communities Act so that any proposed future treaty that transferred areas of power, or competences, would be subject to a referendum on that treaty – a ‘referendum lock’.” The Government will have, therefore, to keep its promise.

Angela Merkel proposal for suspending voting rights for countries that break the SGP has not gather much support. In fact, the majority of the member states were unalterably against it. Jose Manuel Barroso, president of the European Commission, said “If treaty change is to reduce the rights of member states on voting, I find it unacceptable and, frankly speaking, it is not realistic,” moreover he stressed that “It is incompatible with the idea of limited treaty change and it will never be accepted by the unanimity of member states.” Obviously the suspension of voting rights would entail a clear transfer of national sovereignty to Brussels, consequently it would have been impossible to use the argument of limited treaty change as an IGC would have to be convened and, because it would involve transfer of powers from the member states to Brussels, in certain member states, particularly in Ireland, national approval by referendum would be required, which is exactly what the EU leaders want to avoid.

According to the European Council Conclusions Mr Van Rompy “intends to subsequently examine in consultation with the Member States the issue of the right of euro area members to participate in decision making in EMU-related procedures in the case of a permanent threat to the stability of the euro area as a whole.” He would examine the issue at an indeterminate date.