German Policy Watch

October 17, 2012

Germany to call for institutional steps to fiscal union

• Ahead of the EU summit Finance Minister Schäuble has reiterated previous German ideas for a true fiscal union. This move comes under the impression gained during his recent trip to Asia that the euro area has to devise a more consistent institutional framework to regain credibility and investors’ trust.
• The steps proposed – European competence to veto excessive national budgets and establishment of a parallel decision-making structure for the euro area in the European Parliament – require a revision of the EU treaties. Schäuble is thus calling to launch a Convention in 2013 in order to work out necessary changes to the treaties. Any further institutional steps towards a genuine monetary and fiscal union, as sensible and necessary as they may be, will increasingly pit the EMU-17 against the EU-27 and increase the risk of splitting the European Union.
• While these proposals follow the very logic of a monetary and fiscal union we doubt that there will be sufficient backing by other EU partners to quickly progress in this direction. This might be true also for the German public as polls today revealed that two-thirds of the respondents oppose further transfers of competence to the European level. The proposals will also raise constitutional issues and the related question of a referendum in Germany.

Following his trip to Asia Finance Minister Schäuble added proposals to the reform agenda for the euro area. These proposals are not new per se, as they had already been presented as a German position earlier, for example in the negotiations for the fiscal compact. He now wants to focus on:

• upgrading the position of the EU Commissioner for Economic and Monetary Affairs to assume more independence in decision-making. The role would be modelled on the Commissioner for Competition who can decide on competition issues without (formal) interference by Commission colleagues or member states.
• conferring this Commissioner with the right to veto national budgets if they do not comply with the fiscal rules and the guidelines set by the Commission. Even under the regime envisaged by Schäuble, though, it would remain the remit of the national parliaments to decide on the means to ensure compliance with the rules, i.e. to cut expenditures or increase revenues. So far, the Commission can only recommend that member states revise their national budgets.
• ensuring better democratic legitimation of this and other procedures in the context of the euro area by involving the European Parliament at an earlier stage and by limiting voting on euro-area topics to the MEPs from these countries.

The timing to push forward again with these proposals is somehow surprising given the already tabled four presidents’ interim report on a genuine monetary union which will be discussed at the European summit tomorrow and Friday. The trigger, though, is the Minister’s impression, gained during his trip to Asia, that without decisive changes to the institutional framework EMU will not regain the credibility and trust among foreign investors necessary to overcome the financial and sovereign debt crisis. Indeed, while the interim report has broadly spelled out the chapter on the banking union, the blueprint for the fiscal union remains vague in terms of institutional set-up and concentrates on financing issues such as a separate euro-area budget or debt mutualisation instruments. This is not to say that there are no good arguments to equip the euro area with its own budget for assuming some of the stabilisation and allocation functions that national budgets – under balanced budget rules and a common currency – cannot provide in case of asymmetric shocks. The description in the interim report, though, resembles more of yet another new financing facility than a structured euro budget approach. In any case, both avenues of upgrading the euro area’s functioning have to be pursued in parallel.

The possibility and the design of splitting the voting procedures in the European Parliament (and consequently its committees) imply a significant change to the institutional shape of the European Parliament. A “parliament within a parliament” might be a theoretically convincing idea, but how this should be handled in reality needs thorough analysis. The idea of a budget commissioner having a veto is not as new as the proposal on the EP. It has been discussed regularly in the context of better budget supervision but has, for well-known reasons, not found its way into legislation so far. The so-called two-pack currently in the legislative process foresees that member states have to put forward their budget to the European Commission, which assesses the draft budgetary plan and, if it is in serious non-compliance with the SGP, can require a revised draft. Otherwise it may address an opinion to the member states concerned, which would also be discussed by the Eurogroup. To allow the commissioner a veto would be a decisive step forward in the context of this legislation, and certainly only as a follow-up to respective changes in the EU treaties and national constitutions since the member states lose fiscal sovereignty at least partially.

The road to a treaty change is bumpy, though, and member states do not show any great appetite to engage in this direction given the last experience with treaty changes. The European Council can, by simple majority vote, ask the European President to launch a Convention to work on treaty changes and come back with a recommendation to the EU heads of state and government. This Convention consists of representatives from the national parliaments, the national governments, the European Parliament and the Commission. The last Convention was called upon back in 2001 to work out a constitution for Europe. The Convention finished its work in 2003 and the (modified) treaty was signed by 25 EU member states in 2004. The ratification process came to a sudden end, though, when said treaty was rejected in referenda in France and the Netherlands. After a period of reflection the Lisbon Treaty was agreed and ratified.

Gaining the support of national electorates might be as difficult this time as it was back then. Eurobarometer polls show that while there is support in principle for a stronger role of the European Union (not only) in fiscal matters in most member states, people oppose the related concrete shift of sovereignty. In a German poll revealed today, two-thirds of the respondents are against a further transfer of national sovereignty to the European level. Obviously, going down this road will also raise the constitutional stakes in Germany and other euro-area countries. With the German Constitutional Court’s focus on budgetary rights of national parliaments it will be difficult to reconcile such changes to the EU treaties with the existing German Basic Law. While the Basic Law does not provide for a referendum in such a case, this might – for political reasons – constitute the situation for calling a vote on Europe’s future.

Author :
Barbara Böttcher +49 69 910 31787, barbara.boettcher@db.com