STOCK MARKET WATCH, Friday, December 16, 2011

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63. The Pitfalls of the Merkozy Fiscal Pact

http://www.spiegel.de/international/europe/0,1518,803923,00.html

Last week's European Union summit has created more problems than it has solved. By agreeing to enter into a fiscal compact, which would tighten control over national budgets and enact automatic sanctions against deficit offenders, the heads of state and government who make up the European Council have left the solid ground of EU law and entered into uncharted legal territory.

With British Prime Minister David Cameron unwilling to join the other EU member states in modifying the Lisbon Treaty to allow Brussels greater influence over member states' budgets, the rest of the summit participants agreed to enter into a new treaty entirely, one without the United Kingdom. The negotiations over this "17-plus treaty," which will include all countries within the euro zone as well as other willing EU members, are supposed to be completed by March.

Those who sign the treaty will pledge to keep their own budgets in order, with a maximum structural deficit of 0.5 percent of gross domestic product per year and so-called "debt brakes" anchored in national constitutions to automatically correct any violations of that limit. Those who sign up will also agree to subject themselves to a tough sanctions mechanism if their budgets get out of control, with the European Commission required to impose harsh penalties on states that violate the terms of the pact -- unless a qualified majority of EU members supports making an exception in a particular case. Crisis-stricken countries that apply for an EU bailout will in return be obliged to summit their national budgets to Brussels for approval.

But is that all even possible? Can a majority of EU states simply bow out of a common EU treaty and agree on something new instead? David Cameron, no longer part of the new club, has stated that he doesn't accept the other member states' decision to go it alone, but those on the Continent seem unperturbed. This is not the first time that EU member states have agreed on special treaties which are not signed by all members. The Schengen Agreement, for example, which removed border controls among most but not all EU states, was another case where London declined to participate. And the example of the European Social Charter offers proof that a decision to opt out doesn't need to be permanent. This treaty, too, was originally adopted without British participation, but would later be signed by former UK Prime Minister Tony Blair.