AN EU TREATY CHANGE IS NECESSARY BU T HAZARDOUS / THE FINANCIAL TIMES COMMENTARY & ANALYSIS ( VERY HIGHLY RECOMMENDED READING )

An EU treaty change is necessary but hazardous


By Wolfgang Münchau

Published: October 31 2010 20:05

Angela Merkel is right. It is not often that I have said this about the German chancellor. I continue to disagree with her overbearing obsession with fiscal stability at a time like this, and her refusal to engage in a dialogue on macroeconomic imbalances. But on the specific question of the need for a change in the European Union treaties to create a permanent crisis resolution mechanism, she is indeed right. The current Lisbon treaty is simply inadequate to deal with the legal and political complexities of an institutional crisis mechanism. Such an institution is needed to replace the European Financial Stability Facility when it expires in 2013.


Of course, as everybody in Brussels is keen to confirm, there is no “appetite” for another treaty change after a tortuous decade to get Lisbon agreed. But frankly, who cares? Germany’s constitutional court has left Ms Merkel little leeway. Without a treaty change, the EFSF must run out. The eurozone would be back to where it was in May.


The constitutional court is an important factor in the German position. It gave a green light to the EFSF, after the government invoked a “force majeure” defence. The EFSF was set up to protect the eurozone, the government’s lawyers argued. The court accepted that argument. But the German government cannot conceivably extend that reasoning to the establishment of an entirely new EU institution. In its ruling on the Lisbon treaty, the court gave an exceedingly restrictive view on the legitimacy of further European integration without an explicit democratic mandate. Furthermore, the court would read the “no bail-out” clause of the Maastricht treaty in a strict literal sense. It could easily block the new mechanism. The legal risks of going outside the treaty are therefore immense.


The European Council fortunately accepted the logic of a treaty change last week at the end of another long night of negotiations. Herman Van Rompuy, the president of the European Council, will make a proposal by December. The question is whether the proposed changes will be effective, and whether he can manage to construct them in such a way that it addresses the German court’s legal concerns. It is not hard to imagine slip-ups. There are substantial disagreements among member states, which have not yet been resolved. The December deadline seems a touch ambitious.


Formally, Mr Van Rompuy will use a well-crafted wormhole in the Treaty on European Union – Article 48.6 – which essentially allows the European Council to change certain aspects of the treaty by unanimity – and without having to put this to a referendum in Ireland or Denmark. The catch is that this must not involve any power shift to Brussels.

Mr Van Rompuy has already said there will be no change to the “no bail-out” clause. Instead, what he seems to propose is a set of new rules and procedures for the eurozone countries only.


In terms of substance, the aim must be to overcome the big logical inconsistency of three principles underpinning the euro: “No bail-out, no exit, no default”. The first two are firmly enshrined in the European law. Default is legally possible, but politically unacceptable, at least for now. The EU is simply not in a position to handle the repercussions of a sovereign default.


The incompatibility of those goals lies at the heart of the eurozone’s governance crisis. At least one of those principles will have to be sacrificed.

The “no exit” clause will survive. This leaves bail-out and default. But would a regime that combines bail-out and default satisfy the German constitutional court? While Article 48.6 is part of the treaty the court approved, the court will nevertheless scrutinise whether the new arrangements constitute a power shift, and whether this reduces the Bundestag’s influence.


Ingenious as Mr Van Rompuy’s legal trickery appears to be from a procedural perspective, it does not resolve the fundamental conflict with the “no bail-out” clause. How can you have an unconditional “no bail-out” clause in one part of the treaty, and a bail-out procedure in another?


So if this institution is a bail-out mechanism in whichever form, it may well provoke the German justices to rule it unconstitutional.

My best guess is that Ms Merkel will make sure the new regime is as tough as possible. It will not be a continuation of the EFSF by different means. What I suspect will happen is that this mechanism will act as an orderly default procedure. It will be much tougher than the International Monetary Fund in its worst Washington-consensus days. It will be constructed in such a way as to provide the maximum number of reasons not to use it.


Such a regime may be acceptable to the German constitutional court, but I am not sure the wider ramifications are yet fully understood by the politicians who advocate such action, and certainly not by investors. As this becomes clearer, the chances of an agreement, let alone ratification, may diminish.


Copyright The Financial Times Limited 2010.