Last November, the European Commission put forward proposals to further deepening fiscal surveillance for euro area Member states, namely a proposal for a regulation on common provisions for monitoring and assessing draft budgetary plans and ensuring the correction of excessive deficit of the Member states in the euro area and a proposal for a regulation on the strengthening of economic and budgetary surveillance of Member states experiencing or threatened with serious difficulties with respect to their financial stability in the euro area. Both regulations would be directly applicable under the national law of member states whose currency is the euro. The proposals represent another step towards “fiscal union.”

The draft regulations are subject to the ordinary legislative procedure, and QMV is required at the Council, but only eurozone Member states are allowed to vote. In fact, last February the Council unanimously supported the so-called Economic governance – second package ("Two-pack"). It agreed a general approach on the draft regulations, giving therefore a mandate for the Danish presidency to start negotiations on behalf of the Council with the European Parliament. In the meantime, the European Parliament adopted, yesterday, its position. The MEPs approved by large majorities the two draft regulations aimed at further strengthening economic governance in the euro area, but they introduced a series of contentious amendments to the Commission’s initial proposal, which are unlikely to be acceptable to member states. The European Parliament and the Council of Ministers will now work towards reaching a first reading agreement on the two draft regulations by the summer. Obviously, the behind close doors meetings would be fully used at the expense of a proper debate and analysis of the legislative proposals.

The proposals will give the European Commission more powers over national budget decision-making and to control national economic policies. The Commission has no legitimacy nor a democratic mandate to intervene in member states’ matters in this way, nevertheless the Eurozone leaders called for a speedy approval by the Council and the European Parliament of the Commission proposals. According to Barroso “ We need to complement the democracy of nation states with the democracy of the European Union”. However, the Commission’s proposals are a threat to Member states' control of public finances, restricting national sovereignty and undermining democracy. There would be closer co-ordination, and direct supervision of the eurozone member states economic and budgetary policies. In fact, the Commission’s proposals are the beginning of the end of budgetary sovereignty for eurozone member states.

Under the Commission proposal, eurozone member states “should consult the Commission and other Member states whose currency is the euro before the adoption of any major fiscal policy reform plans with potential spillover effects, so as to give the possibility for an assessment of possible impact for the euro area as a whole.” In fact, “They should consider their budgetary plans to be of common concern and submit them to the Commission for monitoring purposes in advance of the plans becoming binding.” The Commission proposed a “synchronized monitoring” of member states budgetary policies. Member states would be required to “make public annually their medium-term fiscal plans in accordance with their medium-term budgetary framework based on independent macroeconomic forecast together with their Stability Programmes, no later than 15 April.” Then, the draft budget laws and the independent macroeconomic forecasts on which they are based shall, annually, be made public, no later than 15 October. Furthermore, budgets would have to be adopted and made public, annually, no later than 31 December. Eurozone member states would be required to submit annually to the Commission and the Eurogroup their draft budgetary plans for the next year for monitoring purposes before the plans being submitted to national parliaments. The aim is to enable the Commission and the Eurogroup to examine national budgets in order to assess whether draft national budgets are in line with EU economic guidelines and rules on fiscal discipline before they are adopted by national parliaments and recommend changes. This would be another step towards fiscal integration. The plan is to transfer fiscal policy decisions from national parliaments to Brussels. The European Commission would have powers to review member states' budgets and to demand changes. Such proposal would allow the Commission to interfere in member states’ budget decision making. In fact, Barroso has accepted that “increased surveillance by the Commission will lead unavoidably to a greater role in domains previously restricted to national governments or parliaments.” Eurozone Member states would no longer be able to pursue their own economic and fiscal policies. One could wonder whether citizens from eurozone member states are willing to accept more national sovereignty being given to Brussels. However, these measures would be forced onto citizens without giving them a say.

If the Commission believes that a member state is not complying with the Stability and Growth Pact’s budgetary policy obligations, it would be empowered, under the draft proposal, to recommend changes and even to request a revised draft budgetary plan from the Member State concerned. The Commission would be allowed to give instructions on spending and taxation to eurozone member states. Under the draft regulation, the Commission would adopt an opinion on the draft budgetary plans, that Member States would be invited to take into account in the process of adopting the budget. Obviously, this opinion would “include an assessment of whether or not the budgetary plans appropriately address the recommendations issued in the context of the European semester in the budgetary area.” The Commission would make an overall assessment of the budgetary situation and prospects in the euro area as a whole, which will be then discussed in the Eurogroup. In the other hand, the eurozone member states that are already subject to an excessive deficit procedure would be monitored more closely. They would have to provide further information for the purposes of monitoring the progress towards the correction of the excessive deficit. If the Commission identifies risks in the compliance of a member state's deadline to correct the excessive deficit, it will issue a recommendation to that state for measures to be taken within a given timeframe. The Council when deciding whether effective action to correct the excessive deficit has been taken, it would also base its decision on whether or not member states complied with the Commission recommendations. The competent committee of the European Parliament may invite the member state concerned by a Commission recommendation to participate in an exchange of views, meaning to explain their national budgetary plans and their national policies to the MEPs.

The European Parliament has introduced amendments to the Commission’s proposal that would make the Commission’s increased powers over Eurozone member states’ budgets subject to the Council and European Parliament control, as they would have be to “be renewed every three years and Parliament or the Council would be able to revoke them.”

The European Parliament also proposed certain amendments to the Commission's initial proposal that are likely to be rejected by some member states, particularly Germany. The European Parliament proposed the establishment of a European debt redemption fund to mutualise all eurozone member states' debts above 60% of their GDP (around €2.3 trillion), allowing it to be repaid over 25 years at lower interests rates. This would entail, therefore, partial pooling of eurozone debt. Moreover, under the draft proposal, as amended by the MEPs, the Commission would be required to present a roadmap for introducing eurobonds, one month after the draft regulation entry into force. However, 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. Article 125 TFEU provides that “The Union shall not be liable for or assume the commitments of central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of any Member State” and “A Member State shall not be liable for or assume the commitments of central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of another Member State”. This provision prohibits, therefore, 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 EU Treaties. Hence, the Treaties would have to be amended to allow for joint debt issuance. It has been reported that Angela Merkel might accept the debt redemption fund idea provided member states move towards a fiscal and political union.

It is important to recall that both the EFSF and the ESM are not in line with the EU Treaties, they breach, particularly, article 125 TFEU. One could say that under the terms of the EU treaties it is not possible to create a permanent crisis mechanism “to safeguard the financial stability of the euro area as a whole” without amending the bail out rule. Hence, any amendment to the Treaties in this regard is incompatible with Article 125. By amending the Treaty authorizing the eurozone countries to create a permanent financial support mechanism has not reduced the effect of the bailout clause, as any derogation from this provision is incompatible with the principles of the EMU.

The European Commission also proposed a regulation on the strengthening of economic and budgetary surveillance of Member states experiencing or threatened with serious difficulties with respect to their financial stability in the euro area. Under this proposal, a eurozone member state that is experiencing/ at risk of experiencing “severe financial disturbance” would be subject to enhanced surveillance aiming at protecting “the other euro area Member states against possible negative spill over effects.” The European Commission would be allowed to decide whether to subject a member State experiencing severe difficulties with regard to its financial stability to enhanced surveillance. The member state concerned would have the possibility to express its views but that won’t change the Commission position that would then decide every six months whether to prolong the enhanced surveillance. The European Commission would be given the power to administer member states facing severe financial difficulties.

When requested, member states under enhanced surveillance would have to communicate to the Commission, the ECB and the European Banking Authority information on the financial situation of the financial institutions which are under the surveillance of its national supervisors as well as to undertake stress test and share the results with the Commission and ECB. They would be also required to communicate all information necessary for the monitoring of macro-imbalances. The Commission would carry out, in liaison with the ECB, regular review missions in the member state under surveillance to verify the progress made in the implementation of the measures required. Such missions would take place even if the member state concerned has not requested financial assistance.

If the Commission reaches the conclusion that the financial situation of the member state concerned has significant adverse effects on the financial stability of the euro area, it would put forward a proposal to the Council recommending to that member state to seek financial assistance and to prepare a macro-economic adjustment programme. The Commission would therefore tell those member states to seek a bailout. The Council would adopt such decision by qualified majority. Only eurozone member states are allowed to vote and the member state concerned has no vote. This has been the most controversial issue in the draft proposal.

Such enhanced surveillance would entail broader access to information leading to a close monitoring of the economic, fiscal and financial situation and a regular reporting to the Economic and Financial Committee (EFC). The Commission would be also allowed to decide whether to subject a member state receiving financial assistance on a precautionary basis from other countries, the EFSF, the ESM or the IMF, to enhanced surveillance.

A member state receiving financial assistance has to prepare a draft adjustment programme aiming at restoring its capacity to finance itself on the financial markets. The Council would approve such programmes by qualified majority, on a proposal from the Commission. Then, the Commission and the ECB monitor the implementation of the programme and the member state concerned is required provide the Commission with all the necessary information.

A member state would be subject to a post-programme surveillance if a minimum of 75% of the financial assistance received from member states, the EFSM, the EFSF or the ESM has not been repaid.

The Commission will conduct with the ECB regular review missions in the member state under post programme surveillance to assess its economic, fiscal and financial situation. On a proposal from the Commission, the Council, acting by qualified majority, may recommend to the member state under post programme surveillance to adopt corrective measures.

The European Parliament has strengthened the Commission proposal and gave even more powers to the Commission, as it would be able to decide to place a country on the brink of default under legal protection and the Council would have just 10 days to repeal such decision. The MEPs proposed greater use of the "reversed qualified majority" rule for votes in the Council, namely where the European Commission requires a debt settlement plan to be submitted by the member state in question and implementation of corrective measures. Hence, such decisions would be considered adopted unless the Council rejected them.

It is important to recall the inter-governmental treaty on stability and convergence in the Economic and Monetary Union, which was formally signed on 1 March, provides that “Within five years at most following the entry into force of this Treaty, on the basis of an assessment of the experience with its implementation, the necessary steps shall be taken, in compliance with the provisions of the Treaty on the European Union and the Treaty on the Functioning of the European Union, with the aim of incorporating the substance of this Treaty into the legal framework of the European Union.” There is, therefore, a clear aim of incorporating this treaty into EU legal framework within five years of its entry into force. The incorporation of this treaty into the EU treaties would, obviously, entail a treaty change, which, accordingly, requires the agreement of all member states, including the UK. However, the aim is to integrate provisions of the draft treaty into the EU legal framework via secondary legislation, particularly through these proposals. In fact, according to a European Parliament’s press release “Most of the new economic governance treaty is introduced into the "two pack" by the Gauzès report. This is in line with the European Parliament's regularly-voiced view that much of the treaty should be integrated into normal EU law as soon as possible.”  This is, therefore, an attempt to bypass the UK veto.