EU treaty games

What, exactly, does Germany want from EU Treaty change to enforce budget discipline in the eurozone? Even if one speaks to diplomats and ministers with a front row seat on this issue, a straight answer is hard to come by – which is partly due to the fact that Berlin itself doesn’t quite know (Germany being internally divided).

But it seems as if Angela Merkel has managed to convince, first, Nicolas Sarkozy, and secondly, at least the Netherlands, Finland and possibly Italy of the need to beef up the rules in the eurozone to impose more budget discipline. Viewed from Berlin, stronger rules would both sooth markets and avoid a repeat of the mess we’re currently living through. Viewed from Paris, such rules would serve as quid pro quo for the Germans to agree to the ECB properly stepping in to prop up the bond markets.

That the Germans are dead-set on putting toughened rules in place now seems certain. Far from clear though is the nature of any Treaty change and the number of players involved. There are basically three options on the table:

EU-27: Looking at the substance of what the Germans want – automatic sanctions for those violating eurozone budget rules and the final say over these rules resting with the European Court of Justice – it’s difficult to see how this can be achieved outside the existing EU structure (as the ECJ is the property of the EU-27). Intergovernmental arrangements – such as the EFSF – are by their nature far more susceptible to time-consuming political squabbling, in turn undermining the credibility of the measures. This is exactly what the Germans want to avoid (just consider the wrangling that has surrounded the use of the EFSF at every point in its short history). For this and other reasons, Germany has a huge incentive to agree a treaty at the level of all 27. But getting unanimous consent from the 27 is not an easy task – Britain and other ‘outs’ may want to get in on the act, for example, to ensure carve outs or safeguards against a eurozone ‘caucus’.

Eurozone-only: Absent a deal at 27, Berlin and Paris may be forced to pursue an inter-governmental treaty involving only the 17 eurozone members. This would be pretty bad for Merkel, but wouldn’t bother the Elysee at all. The French government, with some exceptions, has long been in favour of doing more business at the level of 17.

Tougher budget rules would be agreed, but, importantly, they would not be grounded in the established EU institutions and would therefore be more difficult to enforce – calling into question their effectiveness and credibility. On the upside (viewed from Berlin), in theory, they could be agreed more quickly and, given the chaos that is the eurozone crisis, Germany may have no choice but to go for the swift option. German Finance Minister Wolfgang Schaeuble told ARD yesterday that “The goal is for the member states of the common currency to create their own Stability Union and to concentrate on that.”

This option could also include some of the "pre-ins" such as Poland.

A Pruem-style treaty involving a limited number of euro members: However, there’s a third possibility. A eurozone-only treaty may not be swiftly achieved either. Several eurozone members aren’t that keen on what the Germans are proposing. It’s hard to see how Portugal and Greece – or even Italy – would be able to live with Germany’s budget discipline, other countries may disagree with the idea of further losses of sovereignty on principle, while in Ireland it could well trigger a referendum (which almost certainly would generale a No vote). As Reuters reported yesterday, officials are therefore exploring a new treaty based on the model of the 2005 Pruem Convention – or Schengen III – involving only a limited number of euro countries. The Pruem Convention was initially signed by only seven member states, which were later joined by another six countries (including Norway incidentally). Another option would be a narrower Franco-German Treaty, with other eurozone states able to opt in.

Clearly, given the current market pressures and the fact that Germany is effectively underwriting the entire single currency (giving it a lot of clout), eurozone countries may feel that they have little choice but to opt in to whatever Berlin and Paris agree.

However, whether an inter-govenrmental deal would work in practice is far from clear, not least since Germany and France aren’t exactly on the same page when it comes to the precise nature of the rules and on the bigger issue of how to deal with the immediate crisis (i.e. whether the ECB should be doing more).

So where does this leave the UK and David Cameron, who hopes to get something in return for a new EU Treaty deal? Well, our hunch is that Berlin will still want to ground whatever budget rules it agrees (possibly initially via an intergovernmental deal) in the EU Treaties. At some point fairly soon, Germany will need a Treaty change at 27, and therefore a UK signature. This would again present Cameron with leverage. It’s not a guarantee and Germany could look to the 17, but again, the rules and sanctions that Berlin envisions would be far less effective if agreed on intergovernmental basis and do far less to appease the country's economic elite and consititonal court. Merkel knows this.

One thing is clear: the political complexity and manoeuvring as a result of the eurozone crisis is increasing by the day.