EU discord to “cost UK dearly”

It shouldn’t surprise that the Leaders of the European Union’s 27 countries did not agree to changes to EU treaties to force fiscal discipline on Euroland, and decided instead to make a new inter-governmental treaty which will probably have less teeth and be negotiated only among 23 members – the core 17 plus six supporters on the sidelines. Of the 27 member states of the EU that leaves the UK out of the pact for sure and three others seemingly undecided: the Czech Republic, Hungary and Sweden.

ECB president Draghi said “It’s going to be the basis for a good fiscal compact and more discipline in economic policy in the euro area members” but without agreement among all 27 countries, it remains unclear how the new fiscal rules the summit leaders promised to follow would or could be enforced not least because EU institutions, including the European Commission, which oversees and passes judgment on such rules in Brussels, cannot legally have a formal role in any agreement outside the EU treaties. Perhaps therefore it’s no surprise that the speeches and briefings were long on rhetoric about shared commitment whilst José Manuel Barroso, the Commission president, said he believed there were ways to
work around such legal constraints. Meanwhile senior EU officials have, according to the FT, acknowledged that it would be difficult to give Brussels new powers over Euroland national budgets outside the EU treaties, and there are inevitable concerns that financial markets will not regard the new pact as credible nor sufficiently detailed and timely

Perhaps it’s no surprise that the UK’s being regarded as the villain of the piece, with Mr Sarkozy stating “Very simply, in order to accept the reform of the treaty at 27, David Cameron asked for what we thought was unacceptable: a protocol to exonerate the UK from financial services regulation…We could not accept this as at least part of the problems [Europe is facing] came from this sector.” The FT quotes one unnamed ‘senior EU official as saying “This is going to cost the UK dearly. They have antagonised everyone.”

Mr Cameron has put forward his own take on what happened in his own news conference following the summit, stating “I had to pursue very doggedly what was in British national interest. It is sometimes the right thing to say, ‘I cannot do that, it is not in our national interest, I don’t want to put that in front of my parliament because I don’t think I can recommend it with a clear conscience, so I am going to say no and exercise my veto’.”

As for what was agreed, Mr Van Rompuy, the European Council president, sought to highlight new short-term efforts agreed on Thursday night including €200bn in new EU funding for the IMF, which will come from Euroland countries and some non-euro members, including the UK. The cash is expected to go into a new IMF fund to help countries struggling to deal with the growing liquidity freeze.

EU leaders are expected to seek contributions from other countries outside Europe, and Christine Lagarde, the IMF managing director, said the money would be used to support the Fund’s “global membership”. This is an important detail for Mr Cameron as it avoids stating that any funds are earmarked for Euroland. Lagarde said “These resources will enhance the IMF’s capacity to fulfil its systemic responsibilities in support of its global membership”.

The less good news – and we do have today so more news will emerge in due course – is that other short-term measures proposed by Mr Van Rompuy ahead of the summit, including running two Euroland bail-out funds in tandem to increase EU rescue resources, and giving the Euroland’s new €500bn rescue facility access to ECB funding – were either rejected or set aside for later debates. Importantly, and much as had been expected, EU leaders also decided to cut provisions governing the European Stability Mechanism, the new rescue fund, that would have required bondholder losses in Euroland countries deemed insolvent. Mr Van Rompuy said “Our first approach to [bondholders]…is now officially over”. We’re also told that the ESM which was originally due to commence in mid-2013, will now begin operation in July.

The text of the new intergovernmental treaty is expected to be completed by March, with complex national ratifications to follow. Mr Sarkozy admitted that the intergovernmental treaty amounted to a “lighter” reform than might habve been hoped for, but the only good news wasn’t lost on him, as he added that it could also be quicker. This was echoed by Mr Van Rompuy who said the new treaty could be completed much more quickly than a full re-write.

James Bevan is chief investment officer of CCLA, specialist fund manager for charities and the public sector. CCLA launched The Public Sector Deposit Fund in 2011 to meet the needs of local authorities and other public sector organisations. You can follow James on twitter @jamesbevan_ccla