A Bloody Project: Tweaking SGP in the EU Treaty

Boy oh boy, this story never seems to end. As even I am becoming confused with all the melodrama, let's try to make sense of what's happened to the European Union in recent times. To make a very, very long story short:

1. Plans to implement a European Constitution were shot down by several publics in referenda, most notably the French and Dutch in 2005;
2. In place of a European Constitution, the burghers of Brussels came up with the Lisbon Treaty which retained a lot of the mooted constitution's text but discarded its overtly supranational features;
3. Wary of plebiscites, many EU member states ratified the Lisbon Treaty in their legislatures;
4. Except for the Irish that is, who turned in down in a referendum;
5. Rather annoyed, the EU bigwigs made Ireland hold another referendum. Fearful of being marginalized in the EU at a difficult time--October 2009--the Irish public relented just a year and a quarter after rejecting it;
6. Despite murmurs from dyspeptic Eurosceptic leaders in the Czech Republic and Poland that they would delay signing on to the Lisbon Treaty until the Conservatives assumed power in the UK and put it to a plebiscite there that would likely doom Lisbon, they too eventually relented;
7. Earlier this year, Greece's woes laid bare the somewhat toothless Stability and Growth Pact conditions which are routinely violated;
8. European leaders came up with a massive emergency package to help assuage markets that the project of European integration wasn't about to fall apart as Greek contagion effects affected other peripheral EU economies;
9. The European Commission unveiled a set of proposals to strengthen the Stability and Growth Pact to (hopefully) prevent another Greek tragicomedy.

Whew! This long and winding road brings us up to speed with 10. The current situation in which certain EU leaders like Chancellor Merkel, leader of the German paymasters of Europe, are demanding revisions to the EU Treaty after the convoluted journey of the Lisbon Agenda. I certainly wonder if the others have the stamina or appetite for another round of what would be challenging negotiations:

European heads of state will meet this week to decide whether and how to pursue a controversial change to the European Union treaty that could toughen the bloc's budget rules and create a permanent mechanism for dealing with governments that can't finance their public debt.

German Chancellor Angela Merkel is the driver behind the effort, with most other EU governments grudgingly accepting her demands that the issue at least be discussed. But EU diplomats say governments have serious reservations about changing the treaty, and the summit Thursday and Friday will be one of the first tests of how much support or opposition there is for Germany's demand. "Nobody else wants this, but Germany will get it because Merkel has put her foot down," said one diplomat.

The Lisbon Treaty, the EU's governing treaty, came into force this year after a lengthy process during which Irish voters rejected it once before approving it in October of last year. Ireland and a number of other countries must allow voters to decide on treaty changes through national referendums. With austerity plans coming into force across the EU at the urging of the European Commission, it is unclear whether disgruntled voters will be willing to hand over yet more power to Brussels.

Last week, EU finance ministers on a task force chaired by EU President Herman Van Rompuy agreed to new budget and macroeconomic rules for the bloc. In a key breakthrough, hammered out at a separate Franco-German summit, French President Nicolas Sarkozy agreed to support a treaty change; in return, Germany acceded to French demands that budget rules proposed by the European Commission be softened to allow more political control over their enforcement.

Germany wants a treaty change to create a permanent "crisis resolution" plan, which could include a procedure for allowing EU governments to default on their debt. But EU diplomats say the Lisbon Treaty might accommodate the idea without being changed, so long as the EU isn't given more power over national governments. One possible outcome of the summit will be an agreement calling on Mr. Van Rompuy to come up with proposals for creating the crisis resolution mechanism, including via a treaty change, diplomats say.

Controversially, Ms. Merkel earlier this year floated the idea of taking away the right of countries that violate the budget rules to vote in the European Council. That proposal, however, is stiffly opposed by most governments, and it is unclear to what extent the Germans are still backing it, diplomats say.

Germany's concern is that emergency loan plans organized for Greece and other euro-zone countries earlier this year violate German law. The Germans believe creating an orderly way for euro-zone countries to default on their debt, with creditors absorbing losses as they would in a normal bankruptcy, would get around German laws that prevent the government from bailing out other euro-zone governments.

If they can "Lisbonize" things as much as possible--ram changes via legislative measures instead of via referenda--there is a chance of a more forceful Stability & Growth Pact coming into effect in the near future. Otherwise, the dissension and market overreactions such rule changes may foment in different member states may make them regret they ever brought up the topic in the first place.

UPDATE: To no one's surprise, there is no real appetite for Merkel's proposed changes since the EU member states would have to undergo the same tortuous process to getting the Lisbon Agenda done (and only just). Moreover, with almost exclusively German stick as opposed to any real carrots save for the establishment of a permanent emergency fund, there is not much upside for the rest:

Ms Merkel appeared headed for an outright rejection of one of her proposals – renegotiating the treaty to allow EU voting rights to be suspended for persistent debtor members – after José Manuel Barroso, president of the European Commission, publicly called the measure “unacceptable”.

“If treaty change is to reduce the rights of member states on voting, I find it unacceptable and, frankly speaking, it is not realistic,” Mr Barroso said at a news conference, a stance he repeated inside the summit meeting. “It is incompatible with the idea of limited treaty change and it will never be accepted by the unanimity of member states.”

More importantly, Ms Merkel’s fellow heads of government were preparing to delay a final decision on her central demand: that they re-open the treaties for a permanent version of the €440bn ($607bn) rescue fund that member states cobbled together in May at the height of the Greek crisis.