The European Council met on 28 and 29 June to discuss measures to overcome the eurozone crisis, including greater fiscal and political integration. The EU leaders discussed the report on the future of the Economic and Monetary Union, presented by the European Council President, Herman Van Rompuy, in cooperation with the President of the European Commission, Jose Manuel Barroso, the Chair of the Eurogroup, Jean-Claude Juncker, and Mario Draghi, the President of the European Central Bank. The report entitled "Towards a genuine Economic and Monetary Union” presented an ambitious vision to move towards deeper EU integration, identifying "four essential building blocks" for the future of EMU – an integrated financial framework, an integrated budgetary framework, an integrated economic policy framework and strengthened democratic legitimacy and accountability. The report put forward far-reaching proposals, urging the EU leaders to move towards a banking union, a fiscal union and, ultimately a political union.
The report proposes therefore a “step by step approach” to transfer national sovereignty to the EU, including giving to Brussels powers to rewrite national budgets for eurozone member states, the creation of a treasury office and a central budget. The plan is to transfer fiscal policy decisions from national parliaments to Brussels. This, obviously, would require treaty changes, as there is no legal basis for such proposals, which, in fact, entail a massive loss of national sovereignty and it would be a step towards a EU superstate.
The European Summit has come up with a decisive step towards banking union. But, no agreement has been reached yet among member states on the above-mentioned plans that would entail a massive lost of sovereignty. Mr Van Rompuy said "It was extremely important that we agreed not on the report itself but on a clear vision about what has to be done". The European Council agreed on a method to move forward towards a banking, fiscal and political union. The EU leaders asked the four presidents to prepare, according to the European Council’s conclusions, “a specific and time-bound road map for the achievement of a genuine Economic and Monetary Union, which will include concrete proposals on preserving the unity and integrity of the Single Market in financial services and which will take account of the Euro Area statement and, inter alia, of the intention of the Commission to bring forward proposals under Article 127.”
The roadmap for the future architecture of the EMU will include a banking and fiscal union, which will entail more sovereignty being transfer to Brussels. They will examine which measures can be introduced within the current Treaties and what would require Treaty changes. The European Council asked for the report to be drafted in consultation with member states and the European Parliament. An interim report is expected to be presented in October 2012 and a final report at the December’s European Council.
David Cameron, in a press statement following the European Council, reiterated his position that “the eurozone needs closer and economic and fiscal integration to secure its future,” and that it is in Britain’s national interests for eurozone to follow this “remorseless logic”. David Cameron said, “… in the conclusion today I secured explicit commitments that as this work, deepening EMU, goes ahead, the integrity of the single market will be fully respected.” The Prime Minister was aware of the risk of a fiscal union and economic government, hence he decided to veto the Treaty on Stability, Co-ordination and Governance in the Economic and Monetary Union. It is important to recall that the single market, including financial regulations, is governed by qualified majority voting. The eurozone leaders by having their own meetings, they will be able to agree positions on financial and economic issues, which they would then impose on the other member states, if unanimity is not required. The eurozone member states can use their voting power at EU level to force through measures in detriment of the UK’s national interest. Nevertheless, David Cameron continues to advocate further integration in the eurozone, chiefly a full fiscal and political union to save the euro. David Cameron should have stand up for democracy and rejected Angela Merkel’s push for banking, fiscal, political union.
It is important to note that Barroso and Merkel have already stressed they would go ahead even without Britain support. In fact, Angela Merkel has recently advocated a two-tier Europe, addressing her message particularly to the UK, saying "We have to be open to make it possible for everyone to participate. But we cannot stand still because some do not want to go with us”. The UK by endorsing the creation of a banking, fiscal and political union within the eurozone, accepts the creation of a two-tier Europe, as described by Bill Cash “one based on fiscal and political union, the other being part of the European Union framework but in a second tier” and “to which the United Kingdom would remain bound by Treaty and law”. Obviously, this would have disastrous consequences to the UK. As Bill Cash stressed “The future of the United Kingdom is at stake – democratically, politically and economically.”
David Cameron has accepted that “Europe is changing.” He said, “The single currency is driving a process that will see its members take more and more steps towards fuller integration. They are necessary if the euro is to survive, but mean that the EU and relationships within it will change.” In fact, the Prime Minister acknowledged, “that change has consequences for Britain.” However, as William Hague said, “What the Prime Minister is saying is that the time to decide on a referendum or a general election on our relationship with Europe is when we know how Europe is going to develop over the coming months and years to the eurozone crisis, and when we know whether we can get that better relationship." This “wait and see” policy on the EMU and on the European issue in general is wrong and unnecessary. Bill Cash noted that a banking, fiscal and political union “will have profound economic, political and constitutional consequences for our vital national interests” and “will fundamentally change the UK‘s relationship with the whole of the European Union, not only our relationship with the Eurozone.” Consequently, “A UK Referendum is essential based on a fundamental change in the relationship between such member states of the European Union and the United Kingdom – rather than a simple transfer of powers from Westminster to Brussels”. Hence, Bill Cash and other Select Committee Chairmen, ahead of the European Council, “have re-introduced a Bill in the House of Commons to require approval by Referendum and an Act of Parliament for provisions leading to fiscal union or economic governance within the Eurozone.”
David Cameron said “We need to be absolutely clear about what we really want, what we now have and the best way of getting what is best for Britain. We need to answer those questions before jumping to questions about referendums.” David Cameron should have followed Bill Cash’s suggestion that said that a Convention should be convened so that all the member states can have the opportunity to discuss and decide what kind of Europe they want. Last May, Bill Cash told the House of Commons, “We need a convention of the whole of Europe, at which the leaders of Europe sit down opposite each other and talk this through in a sensible, rational manner, admitting that what has gone wrong has to be remedied. Representatives of the national Parliaments must be present, too, and there must be a constructive dialogue about the kind of Europe we want, because at the moment it is heading for disaster.” He also suggested that “the negotiation position of each country” should be followed “by a referendum in each country to ascertain the question of democratic consent and then after that, the future structure of European Union could be identified.” If the other EU Member States want to go ahead with a political union, the UK must get ahead of the curve. The UK needs to have its own referendum before a European political union is created.
The above-mentioned report proposed “An integrated financial framework”, meaning a banking union entailing the transfer of financial supervision to the European level. The member states are being asked to transfer to Brussels their powers to run their banks. The President of the European Commission has put forward the concept of a banking union at the last informal European Council in May. According to the European Commission a banking union would need to rest on four pillars: a single EU rulebook for banks, a single European banking supervision, and a common deposit insurance and resolution framework.
The report proposed a single European banking supervision system to ensure the “supervision of banks in all EU Member States”. It reads “The current architecture should evolve as soon as possible towards a single European banking supervision system with a European and a national level” and, unsurprisingly, “The European level would have ultimate responsibility.” Such system would ensure “the supervision of banks in all EU Member States”. The report has suggested the creation of a EU supervisory authority (a single EU banking supervisor) with “pre-emptive intervention powers applicable to all banks”. Under Van Rompuy’s plans a single European banking regulator would be in charge with overseeing all EU banks and not just Eurozone's biggest banks with cross-border operations. The European Commission has been calling for the so-called banking union to be established for all 27-member states. In fact, Barroso has been pushing for the UK to sign up to it, which would make British banks subject to a EU bank supervisor and UK's taxpayers liable for recapitalising eurozone banks. David Cameron said, "Let me be absolutely clear: there is no way that Britain is going to be part of that banking union. We are not part of the eurozone. We chose not to join the euro, precisely because of the loss of national sovereignty that would be involved, the loss of flexibility to manage our banks in the way we wanted to, to manage our public finances in the way we wanted to."
The EU summit has taken a step further towards the so-called banking union. The Eurozone leaders agreed that a “single supervisory mechanism” should be established, “involving the ECB, for banks in the euro area.” They agreed therefore to create a single bank supervisor for Eurozone banks. The list of the ECB's objectives presently does not include banking supervision, but the EU leaders now are planning to expand that remit and make the ECB the single EU supervisor. Under Article 127 (6) The Council may, unanimously, decided to “confer specific tasks upon the European Central Bank concerning policies relating to the prudential supervision of credit institutions and other financial institutions with the exception of insurance undertakings.” The Eurozone leaders called upon the European Commission to present proposals on the basis of Article 127(6) for a single supervisory mechanism and asked “the Council to consider these Proposals as a matter of urgency by the end of 2012.” They committed therefore to setting up a supervisory body for banks in the eurozone, consequently member states are set to lose their control over their banking sectors. Hence, having on single banking supervisory, replacing the 17 eurozone bank supervisors, it is deemed as a major leap towards a banking union. In fact, the transfer of power on banking supervision from national level to the European Central Bank is a major step towards eurozone political integration.
Jose Manuel Barroso has already said the Commission will present proposals this summer. However, it remains to be seen what would be the ECB’s jurisdiction. Germany has called for a EU supervisory authority for cross-border banks. It is not clear yet which powers would be confered on the ECB as regards banks based outside the eurozone, particularly banks in the City of London. It is important to recall that under Article 127 (6) all member states must endorse such proposals increasing the ECB's supervisory role, hence the UK could use its veto. However, David Cameron has already said, “the eurozone countries are well on the way to making the eurozone bank, the ECB, the regulator of their banks and that would be a good outcome.”
The Report “Towards a genuine Economic and Monetary Union” also suggested that the European Stability Mechanism could ultimately back the so-called Europe-wide deposit guarantee scheme. The report reads “as regards the euro area, the European Stability Mechanism could act as the fiscal backstop to the resolution and deposit guarantee authority.” It is therefore suggesting that the ESM could be used to recapitalise banks directly, rather than having to lend first to member states. Ms Merkel has been against the idea of having the bailing-out fund directly injecting capital into banks. Aiming at reducing borrowing costs for Spain and Italy, France, Spain and Italy have been urging Angela Merkel to accept the use of the EMF to buy government bonds in the secondary markets and to directly inject capital to Spanish banks.
According to the Eurozone Summit Statement “When an effective single supervisory mechanism is established, involving the ECB, for banks in the euro area the ESM could, following a regular decision, have the possibility to recapitalize banks directly”, under specific conditions. The Italian Prime Minister, Mario Monti, has threatened to block the European Union's growth pact unless short-term measures to deal with the debt crisis were approved. Merkel has been calling for more budgetary and fiscal powers to be transferred to Brussels and the need to move towards a political union to ensure compliance of budget rules. She has agreed to allow the ESM to recapitalise ailing banks directly, without having to go through governments, but a political agreement for single banking supervision must be achieved first. Hence, it can only happen after Europe-wide banking supervisory body, run by the ECB, is set up.
Moreover, Angela Merkel’s position as regards eurobonds has not changed at the summit. The above-mentioned report also outlined a path to the creation of common eurobonds, it stated that “the issuance of common debt could be explored as an element of such a fiscal union and subject to progress on fiscal integration.” Nevertheless, suggested the introduction of “partial common debt issuance”, such as a redemption fund “as long as a robust framework for budgetary discipline and competitiveness is in place to avoid moral hazard and foster responsibility and compliance”. Merkel has made clear that she would never agreed to any form of common sharing of debt before a political union is created among EU states. It is important to note that the German Constitutional Court has already ruled out Eurobonds without a change to the German Constitution and the existing EU treaties. Ms Merkel said, ahead of the Council, "I don't see total debt liability as long as I live." According to the German Chancellor "Accountability and control clearly stand in disproportion in this report," she stressed "Apart from the fact that instruments like eurobonds, eurobills, debt redemption schemes and much more are not compatible with the constitution in Germany, I consider them wrong and counterproductive."
It is important to mention that such measures, entailing joint issuance of debt in the eurozone, would be a breach of the 'no bail-out clause' included in the Maastricht Treaty and today provided in Article 125 TFEU. This provision prohibits the EU and Member States from assuming and being liable for the debts of another Member State. Consequently, this provision is an obstacle for joint issuance of Eurobonds. The creation of Eurobonds would be illegal under the existing EU Treaties.
There was also no agreement on other aspects of a banking union namely a deposit guarantee scheme or a bank resolution authority. The four presidents proposed the creation of a European deposit insurance and resolution schemes to tackle bank failures, to “be set up under the control of a common resolution authority.” They called for a European deposit insurance scheme “to introduce a European dimension to national deposit guarantee schemes for banks overseen by the European supervision.” It is important to recall that the European Commission had already proposed a single deposit guarantee scheme, which was unanimously rejected by member states years ago, but the Commission believes, due to the crisis, the member states will now endorse such scheme. The Commission is proposing again “the possibility of mutual borrowing, in case one of the schemes is depleted.” Hence, under a EU common deposit insurance, member states would share the risks of underwriting deposits. Whereas Angela Merkel has been calling for a Europe's largest banks to be subject to EU direct supervision, she is against EU deposit guarantee and resolution schemes, which are favoured by Francois Hollande and other eurozone leaders. Unsurprisingly, Ms Merkel is not willing to endorse measures that would subject German taxpayers to the risk of having to bailout southern countries banks without first putting in place a fiscal union. According to Sabine Lautenschläger, vice-president of the Bundesbank, having a banking union without a fiscal union would result in “…joint sovereign liability through the back door – without the possibilities for intervention and control, and therefore the protection, of a fiscal union.” She stressed that “comprehensive EU treaty changes” would be necessary to create a banking union.
Moreover, Merkel is unwilling to accept any joint deposit guarantee as well as a common bank resolution fund. According to the report “A European resolution scheme to be primarily funded by contributions of banks could provide assistance in the application of resolution measures to banks overseen by the European supervision with the aim of orderly winding-down non-viable institutions and thereby protect tax payer funds.” Van Rompuy and Barroso are therefore calling for a European resolution scheme to be mainly funded by contributions from banks that are overseen by the common European supervisor to bailout distressed banks.
David Cameron is in favour of a banking union for the eurozone but ruled out joining it. It is absolutely necessary that the UK keep the sovereign power to decide whether to provide money to support banks. The UK cannot be obliged to contribute to EU bailouts to rescue eurozone’s banks. David Cameron said, “Outside of the single currency, I want the Bank of England properly regulating Britain’s banks. Outside the single currency; yes, we have to stand behind our own banks but I do not want British taxpayers guaranteeing eurozone banks: Spanish banks or Greek banks.”
Despite being denied by Brussels, further integration within the Euro area would undermine the integrity of the single market. According to David Cameron the Council conclusions are very important as “it says that these things must go ahead in a way that protects the security and the integrity of the single market.” It remains to be seen how such safeguards would be achieved. The proposed banking union would have a damaging impact on Britain’s financial sector, even if Britain does not join in. The eurozone is likely to vote as a block on crucial issues of financial services and to impose further regulations on the City under the existing single market provisions. Hence, David Cameron instead of endorsing a baking union for the eurozone, he should have said No.
According to José Manuel Barroso it is possible to move towards financial integration, creating a banking union, without amending the EU treaties. Brussels would be able to regulate and supervise all banks transactions, which entails a substantial transfer of national powers to Brussels, nevertheless Barroso says there is no need to amend the treaties. David Cameron believes that “the issue of banking union at 17” probably will go through by “some form of enhanced cooperation under the existing treaties.” Moreover, he said, “It is never entirely clear how far these changes will go, exactly which treaty clauses will be used, whether further treaty changes will be suggested.” According to David Cameron “we need the safeguards for Britain and those outside the Euro that the single market is safe.” He believes “we are well on the way to getting those” but he also acknowledged that “permanent vigilance is required…”
The Report “Towards A Genuine Economic and Monetary Union” stresses the need for “strengthening democratic legitimacy and accountability” of the EMU. In fact, it notes “Decisions on national budgets are at the hear of Europe’s parliamentary democracies.” According to the European Commission “A fully-fledged economic union would require more decisions taken at European level when it comes to public expenditure, revenues and borrowing, and thereby a higher degree of political integration.” Brussels would have more powers over spending and taxation policies of Eurozone member states. Durão Barroso has noted that, “These decisions on deeper economic, financial and fiscal integration imply major changes to the way our citizens are governed and to the way their taxes are spent.” He stressed, “Greater democratic accountability and legitimacy are absolutely crucial.” The Report also stressed, “Building public support for European-wide decisions with a far-reaching impact on the everyday lives of citizens is essential.” However, the solution presented to address such issues is “Close involvement of the European parliament and national parliaments will be central, in the respect of the community method.” In fact, Barroso stressed, “the European Parliament is the basis of the European democracy.” According to Martin Callanan, “The democratic deficit caused by the EU’s extended Economic Governance will only widen if the EU moves further towards a fiscal union.” The EU leaders have been failing to remedy the fundamental democratic flaws within the European Union. The issue of lack of democratic legitimacy of the EU institutions has been addressed by increasing the role of the European Parliament, by increasing substantially the policy areas subject to co-decision and by introducing more QMV decision-making. The European Parliament has acquired more powers, but at the expense of voters and national parliaments who have lose more power. The EU leaders should recognise that it is not possible in one hand to give more powers to the EU and to reduce the democratic deficit in the other. The European integration has resulted in a shift of power from national to the European level and the progressive transference of competences from member states to the EU has increased the democratic deficit. The solution to the EU's democratic deficit is to repatriate powers from Brussels to the Member States.
As Bill Cash has been saying, the EU has failed to respond to the need for reform and it has created this implosion by moving towards greater centralisation, by refusing the results of referendums and by undemocratic insistence on the European project. The European Union continues to fail to recognize the need for its radical reform and is now moving towards further integration calling for a banking, fiscal and, ultimately, political union. The so-called fiscal union is the end of budgetary sovereignty for eurozone member states. They will lose control over their financial and economic affairs. Such far-reaching proposals must be endorsed at national level. It is hard to believe how come eurozone countries are willing to give in so much sovereignty. Their citizens do not want to transfer more powers to Brussels. Particularly, citizens of the bailed out countries are not willing to accept more national sovereignty being given to the EU. In fact, they would not accept a fiscal and political union, with an economic policy imposed by Germany. It is about time Brussels start listening to people democratic wishes. An alternative model to further integration must be presented.
According to Bill Cash the creation of a political union would make irreparable damage to the UK and it won’t stabilise the EU. It “will lead to greater implosion, greater sovereign debt, more defaults and more trouble.” As Bill Cash said if the UK as well as other Member States want to regain their democracy and economic stability they must return to an EFTA-plus arrangement. He believes that the real problems are contained in the existing treaties and they are the reason why we have the crisis in Europe, consequently they must be fundamentally changed.
