TEARING UP TREATIES IS A HIGH - RISK GAMBLE FOR EUROPE / THE FINANCIAL TIMES COMMENTARY & ANALYSIS ( A MUST READ )

Tearing up treaties is a high-risk gamble for Europe

By David Owen and David Marsh

Published: October 28 2010 20:39

The latest imbroglio between France and Germany over economic and monetary union represents a high-risk gamble, at a time when Europe is starting to look hopelessly split between higher-growth northern creditor members of the euro led by Germany and hard-up southern states – with Britain and other non-Emu members watching from the sidelines.


In an accord that has raised hackles among her coalition partners, Angela Merkel, the German chancellor, has agreed with France’s president Nicolas Sarkozy to water down proposals for rigid controls on states’ budget deficits in exchange for reopening the European Union treaties. At the EU summit in Brussels that started on Thursday, Ms Merkel is playing a game of brinkmanship insisting other European countries rewrite the European treaties in exchange for Germany’s support for debtor states such as Greece, Portugal and Ireland.


Many European leaders are understandably reluctant to envisage further treaty amendments. The last set of governance changes in Europe took years of wrangling and multiple setbacks before the new agreement came into force.


But members of the EU that are not part of Emu – in particular the UK, Sweden and Denmark – may find treaty amendments could allow them to free themselves from involvement in the onerous financial transfer mechanisms being developed to rectify monetary and capital imbalances within Emu.


Nearly six months after the €750bn support package for indebted euro countries from EU governments, the International Monetary Fund and the European Central Bank, the future of Emu remains uncertain. Beyond the evident economic challenges, one important reason for doubts rests on the possibility of far-reaching intervention over euro support arrangements by the German constitutional court.


The German judges are taking seriously lawsuits against the bail-outs decided in May. Fears that German help for errant countries may be ruled unconstitutional unless backed up by stringent new governance structures are at the root of Ms Merkel’s insistence on a new treaty. Enhanced economic conditions for bail-outs could include, according to the Berlin government, the ultimate sanction of declaring a member state insolvent.


However, rather than showing qualms over a new treaty saga, the UK and other non-Emu countries should embrace the idea and declare they will support new Europe-wide legislation – but only if a new treaty declares non-participation in monetary union is consistent with their status as a fully-fledged EU member.


Separating the UK, Sweden and Denmark from the expensive and potentially explosive support networks under which stronger countries assist weaker countries would be in the non-members’ best interests.


According to people who have spoken to Ms Merkel, she has expressed worries in recent months that the May bail-outs may be judged unconstitutional. Fear of such a ruling spurred the board of the Bundesbank, the German central bank, to oppose, in a secret meeting on May 9, the ECB’s controversial decision (finally reached on May 10) to start purchasing the bonds of weaker states. Axel Weber, the Bundesbank president, publicly stated he opposed the move because of risks to stability. He is Germany’s candidate to become the ECB’s new president next year. But he has made clear he will take the job only if all Emu member states agree rigorous “stability-first” German-style principles – a condition France would find difficult to digest.


The court has already displayed leanings towards a narrow interpretation of EU treaties, in a judgment in 2009 on the Lisbon treaty that opened the way for Germany’s later ratification.


In an eventual decision over the euro bail-outs, the Karlsruhe court might link its judgment to further treaty amendments necessary for the EU accession of Croatia and Iceland in the next few years. In the political machinations between Berlin and Paris and at the EU summit in Brussels, we are already seeing the first glimmerings of an issue that has considerable potential for political and economic upheaval in Europe.


Lord Owen, former UK foreign secretary, is a member of the advisory board of the Official Monetary and Financial Institutions Forum. David Marsh is co-chairman


Copyright The Financial Times Limited 2010.