Major reform to be discussed at this week’s European Council

Herman Van Rompuy has circulated the draft agenda of the European Council meeting, which takes place today and tomorrow, 18-19 October 2012, in Brussels. It lists three items for discussion: Economic Policy, Strategic Partners, and Other Items. In the draft conclusions, which have been leaked, the last agenda items combined take up roughly less than a page of the ten-page text. It seems clear that, as has been common for European Council meetings since the Greek crisis erupted in late 2009, this Council meeting will be focused on economic policy.

In the draft agenda, Van Rompuy names a number of economic policy issues to be discussed, following up on the outcomes of the June European Council (28-29 June 2012). He will present his Interim Report on “Towards a Genuine Economic and Monetary Union”, developed with the Presidents of the European Commission, European Central Bank and Eurogroup in consultation with the Member State capitals, which deals with “the wider issue of the Banking union and its components”. Progress in the implementation of the Compact for Growth and Jobs, which is appended to the Conclusions of the June European Council, will be reviewed. In the leaked conclusions of the forthcoming Council, there is a detailed discussion of progress on the various points of the compact. Most of the discussion at the Council, however, is likely to focus on the Interim Report, in which there are a number of controversial proposals.

Single Supervisory Mechanism and Banking Union

The report highlights the proposed bank recovery and resolution directive, the proposal on deposit guarantees and the proposal, made in September by the Commission, to establish a “single supervisory mechanism hosted by the European Central Bank, covering the euro area and open to all Member States”. The report states that this move towards a banking union is a “matter of priority”, while the draft conclusions go further, calling for all the above proposals to be agreed by the end of the year at the latest, with the SSM up and running on 1 January 2013. It is worth noting Berlin’s recent objections that this time frame is too short.

Integrated Budgetary Framework and Economic Governance

The report proposes further moves on European budgets under three headings. The first address “Stronger Economic Governance”, which refers to the increased supervisory powers of the EU over national budgets through the six-pack, the European Semester, the Treaty of Stability, Coordination and Governance and the proposed two-pack. The second heading is “Fiscal Capacity”. This is what the Financial Times calls ‘eurospeak’ for a Eurozone budget. The final heading refers to the still-present idea of eurobonds. Interestingly, the German idea of a redemption fund is mentioned under this heading.

The newest of these proposals is clearly the proposal for a Eurozone budget. The report is careful to distinguish the “fiscal functions”, which would fall under a Eurozone budget, from the EU-wide Multiannual Financial Framework (the EU’s long term budget that sets out expenditure ceilings under a number of headings). These new fiscal functions are described in the following manner:

“One of the functions of such a new fiscal capacity could be to facilitate adjustments to country specific shocks by providing for some degree of absorption at the central level. In the EMU, the response to a symmetric shock affecting all countries simultaneously should primarily be provided by monetary policy, whereas in the context of country-specific economic shocks, the response falls primarily on national budgets…Another important function of such a fiscal capacity would be to facilitate structural reforms that improve competitiveness and potential growth in relation to an integrated economic policy framework…the two objectives of shock absorption and support to structural reforms are complementary and mutually reinforcing.”

These two functions, “shock absorption and support to structural reforms”, are clearly very far reaching and could allow for a very substantial Eurozone budget. Indeed, Pierre Moscovici, the French Finance Minister, has advocated that the provision of some unemployment insurance be taken on at a European level through this kind of Eurozone budget. If this kind of fiscal responsibility was delegated to a European level it would qualitatively shift the nature of the EU’s intervention in social and economic life. Interestingly, the idea of a Eurozone budget is something that Germany has supported, with Germany saying that it would be happy with a Eurozone budget providing funding for active labour market policies (retraining programmes etc). Even the UK’s Conservative party has recently supported the idea of a Eurozone budget.

On the question of furthering the integration of economic governance, both the report and the draft conclusion point to the increased integration and supervision of national budgetary coordination, through the implementation of the Six-pack, the European Semester, the Treaty of Stability, Coordination and Governance and the agreement and implementation of the two-pack. The draft conclusions invite legislators to ‘find agreement’ on the two-pack ‘by the end of the 2012 at the latest’. However, here as well there is a significant structural innovation proposed. This innovation is the suggestion that “euro area Member States… enter into individual arrangements of a contractual nature with the EU institutions on the reforms promoting growth and jobs these countries commit to undertake and their implementation.”

The Financial Times reports that, “according to officials involved in the discussion, the idea is to sign all 17 Eurozone governments to deals similar to the economic reform and restructuring plans currently required only of bailout countries”. They explain that the plan that “would require all 17 Eurozone members to sign on to the kind of Brussels-approved policy programmes and timelines now negotiated only with bailout countries. If adopted, the plan could help to meet demands in Germany for tighter control over the economies of highly indebted countries such as Italy and France”.

Notably, it is stated in Van Rompuy’s report that these budgetary “coordination mechanisms could be open to the Member States that have not yet adopted the euro”. This is in addition to the aforementioned reference in the report to the SSM being for “the euro area and open to all Member States”. These would seem to be explicit attempts to move reform of the Eurozone away from creating a two-tier Europe.


As some readers may have noticed, the above description of the Interim Report has covered three of the ‘four building blocks’ found in Van Rompuy’s June report: banking integration, budgetary integration and the integration of economic governance. This leaves the question of democratic legitimacy and political union. On this question, IIEA Researcher Linda Barry has produced a comprehensive consideration of the debates on this question. However, on the issue of addressing the problem of democratic legitimacy at a European level, the Interim Report offers little more than vague injunctions that the European Parliament and national parliaments should play a more important role. For example, it argues, “ways to ensure a debate in the European Parliament and in national parliaments on the recommendations adopted in the context of the European Semester should be explored.” This lack of detail when compared with the other building blocks conveys an implicit sequencing for the actions – economic and financial reforms will take precedence in the immediate term, with political reforms and deepened political integration to be considered later.

Going Forward

It is obviously yet to be seen what the reception of the Interim Report will be at this week’s European Council meeting and how the final conclusions will differ from the leaked draft conclusions.

One thing that is clear is Van Rompuy’s proposal in the Interim Report that building on his “report and taking into account the exchange of views at the 18-19 October European Council and its conclusions, a specific and time-bound roadmap for the achievement of a genuine Economic and Monetary Union will be presented at the 13-14 December European Council.”