Yesterday the Council faced the choice of a two-tier structure within Europe or a two-speed Europe, today we have a bit of both thanks to the uncompromising stance of British prime minster David Cameron. With ‘key national interests’ threatened, Cameron saw no other option than to opt-out from signing a new Treaty, which was agreed to by all 17 Eurozone member states, plus another 5 EU member states, and the others are expected to join after counselling with their national parliaments (which might, of course, fail).

Dutch PM Mark Rutte sounded optimistic at his press conference (to be viewed here), despite his generally pro-British outlook (he stressed his promise to Cameron that any decisions concerning the internal market will – insofar as possible – be taken on the 27-EU level, not beforehand in Eurozone summits). But it remains to be seen how much of this will materialize. The new treaty that has been agreed to will increase European powers, whatever fancy talk leaders give about no loss of sovereignty, and Eurozone countries are bound to increase central oversight and policy coherence.

Britain wanted to opt-outs for the City of London, for which it feared a package of economically painful measures – the so called Tobin tax on financial transactions – but neither Sarkozy nor Rutte were in favour of such a deal (Rutte and Sarkozy have, after all, the cities of Amsterdam and Paris to protect, however small financial centres these might be compared to London). Of course, there is much to be said for Cameron’s decision; he cannot scathe over this issue, especially since his own party, packed with EU sceptics, make ratifying a new treaty a semi-fairytale. And one might add, as did The Economist’s Bagehot’s Notebook, that one can question to what extent Britain has used its ‘veto’, as we now read everywhere. He did no more than what is standard procedure in intergovernmental proceedings: Using your right to vote and put it to use for your own national interest. (The treaty is not strictly speaking an EU-treaty).

A few points can be added to this: The City of London is unquestionably an essential pillar of the British economy, hence it needs careful considerations when new legislation, aimed at controlling financial instruments, are introduced. Secondly: Even though Britain did not, strictly speaking, use its veto – reality shows 23 countries proceeding, with potentially 3 more states joining in later. Thirdly, the EU apparatus will function as it always does, but with further integration approaching, will not Britain find itself behind a self-drawn veil?

The new treaty

The statement by the Euro area heads of government starts out optimistically as ever:

“…The European Union and the euro area have done much over the past 18 months to improve economic governance and adopt new measures in response to the sovereign debt crisis”. (Click here for the document).

And even though Europe’s leaders are the essential reason why the Council episodes keep going season after season, I am more optimist about the steps of the past two days than over anything achieved last year. As I wrote yesterday, the Deauville agreements have been reconsidered, thus France and Germany’s compromise on private sector involvement in exchange for a weak form of semi-automatic sanctions have been largely reversed. On top of that, the new introduces (Council document, page 3):

1. General government budgets shall be balanced or in surplus; this principle shall be deemed respected if, as a rule, the annual structural deficit does not exceed 0.5% of nominal GDP.
2. Such a rule will also be introduced in Member States’ national legal systems at constitutional or equivalent level. The rule will contain an automatic correction mechanism that shall be triggered in the event of deviation. It will be defined by each Member State on the basis of principles proposed by the Commission. We recognise the jurisdiction of the Court of Justice to verify the transposition of this rule at national level.
3. Member States shall converge towards their specific reference level, according to a calendar proposed by the Commission.
4. Member States in Excessive Deficit Procedure shall submit to the Commission and the Council for endorsement, an economic partnership programme detailing the necessary structural reforms to ensure an effectively durable correction of excessive deficits. The implementation of the programme, and the yearly budgetary plans consistent with it, will be monitored by the Commission and the Council.
5. A mechanism will be put in place for the ex ante reporting by Member States of their national debt issuance plans.

Then there are several other points agreed on:

1. Adequacy of 500bn-euro (£427bn; $666bn) limit for ESM to be reassessed
2. Eurozone and other EU countries to provide up to 200bn euros to the IMF to help debt-stricken eurozone members
3. European Stability Mechanism (ESM) to be accelerated and brought into force in July 2012

The European Financial Stability Mechanism, which will become the European Stability mechanism as of July 2012, will be increased, but financial instruments to increase its leverage will, sadly, be included (instead of just donating money that is available right away). The “donation” to the IMF is a welcome one, though. The cap of 0,5% of GDP is no more than the ‘golden rule’ I referred to yesterday: There is nothing new about it, it is a mere agreement to balance the books by agreeing that governments can lend only to fund projects that brings benefits in the future, it cannot lend because the current spending pattern is unsustainable.

In a speech to parliament earlier this week, Mark Rutte assured MP’s that any new treaty would not convey new powers to Brussels. The points just summed up are, in his view, simply measures to ensure that agreements in the Lisbon Treaty are adhered to. Nonsense. Of course the EU, or more precisely, the European Commission, will receive powers it did not possess in the past. It will review government budgets and – if it has reason to – demand it to be amended; a European Stability Mechanism is a fund that transfers money, crudely, from one country to another, and it will be a European institution taking care of this (the ECB); and when countries ignore the maximum budget deficit, the (still semi)automatic sanctions can be quickly put to motion by the European Commission, unless a qualified majority vote by the seventeen Eurozone countries rejects action (or the proposed plan).

Even so, we should be glad when all is ratified.

“…The stability and integrity of the Economic and Monetary Union and of the European Union as a whole require the swift and vigorous implementation of the measures already agreed as well as further qualitative moves towards a genuine “fiscal stability union” in the euro area. Alongside the single currency, a strong economic pillar is indispensable. It will rest on an enhanced governance to foster fiscal discipline and deeper integration in the internal market as well as stronger growth, enhanced competitiveness and social cohesion.” (Council document, page 2)

Worst of all worlds for Britain

Yet everything agreed to points to the direction we have been heading in for some time now. Not essentially a two speed Europe, I would argue, but definitely one where economical interests will be debated and converged in Eurozone summits that – whatever Rutte might say to David Cameron – are likely to be held more frequently, as well as implicitly functioning as a preparing summit for larger 27-Council meetings: If there is one things we ought to have learnt, then it is that we need to centralize our economic government to an extent, and for this it is necessary to deliberate and speak with one voice.

A two-tier European Union is what can be expected from this. A core of Eurozone members, to which more states eventually will enter (unpopular as this in the future might become, due to failure to comply with entrance demands in the past), as this has been decided in the Maastricht Treaty on the European Monetary Union and is a given right to any European Union member state (provided the demands are met). These states  will have to gather, more than once or twice a year, to sustain a healthy currency and anticipate rather than follow callous direction-hints by the markets.

Deeper integration in the internal market became all but unavoidable yesterday, and much of that which has been agreed upon is expected to enter into force as of March 2012, in itself a pretty admirable pace. Britain has unwisely excluded itself from this process, more out of fear from populism, I believe, than from a rational decision in London, because while

“….the rest of Europe needed a deal to save the Euro, the European economy, and the global financial system, Britain whined about some petty domestic interests.  Remember, most of the financial regulations the rest of the EU are talking about were actually proposed by Britain to the G20 as a way of saving the global economy.  And also remember that Britain already has a “financial transactions tax” in that stamp duty is already paid on most financial transactions in the UK.  So, what exactly was Cameron trying to veto?  I just don’t get it, and nor does anyone outside a few crazed Europhobes on the extreme right of the British Conservative party.” (Simon Hix, LSE blog)