The European Union’s ongoing efforts to create a “closer fiscal union,” especially including the most recent (January 31) fiscal union pact, pose serious legal problems. In practical terms, that may not matter much: even if fully implemented, the reforms will fail to calm the financial markets, and they will disintegrate or become irrelevant long before any court could examine their legality. Still, and for what it’s worth, the EU prides itself on being a “community of law.” How does it measure up?
What’s the Problem?
Europe’s fundamental problem, according to its political elites, is that the EU (or at least its 15-member euro zone) has a monetary union without a fiscal union. The common currency has enabled reckless borrowing and spending by the PIIGS, while the union is left without adequate means of prevention or redress. That has to change; and because a looser union is unthinkable, the imperative is to complement the euro with central control over national budgets—a fiscal union. FU, British MEP Dan Hannan observed in a brilliant speech in the European Parliament, has been the EU’s prescription throughout the twists and turns of the debt debate.
What’s the Fix?
At its December 2011 summit, the EU agreed (kind of, sort of) on two FU steps: (1) a commitment by member-states to enshrine balanced budget requirements in their national constitutions; and (2) tougher mechanisms to enforce the “stability criteria” originally adopted under the Maastricht Treaty. The procedure to enforce those criteria (most prominently, a requirement that budget deficits must not exceed 3 percent of GDP) is codified in Art. 126 of the Treaty on the Functioning of the European Union (TFEU). The December summiteers vowed to “reinforce” the procedure for the euro area: “As soon as a Member State is recognised to be in breach of the 3% ceiling by the [European] Commission, there will be automatic consequences unless a qualified majority of euro area Member States is opposed.”
What would it take to implement FU (1) and (2)? The EU summit’s December 9, 2011 Communique supplied an answer in Eurospeak [clarifying comments mine]:
Some of the measures described above can be decided through secondary [ordinary] legislation. The euro area Heads of State or Government consider [know but don’t wish to admit] that the other measures should [must] be contained in primary legislation [i.e. treaty amendments]. Considering the absence of unanimity among the EU Member States [Because Britain won’t play along], they decided to adopt them through an international agreement to be signed in March or at an earlier date.
That agreement is the January 31 FU pact (technically, the “Treaty on Stability, Coordination and Governance in the Economic and Monetary Union”). It will go into effect upon ratification by at least 12 euro states. Financial assistance through the European Stability Mechanism (ESM) will be available only to countries that have ratified and are in compliance with the FU pact.
Is it Legal?
The FU pact is not an amendment to the European Treaties: that would require unanimous approval by all member-states (in some countries, by referendum). Instead, the FU pact purports to revamp the EU’s fiscal arrangements by means of an international agreement among member-states. The Treaties provide three basic options:
- The Treaties provide for an “enhanced cooperation” procedure pursuant to Art. 20 of the Treaty on the European Union (TEU) and Art. 326-334 TFEU.
- Art. 136 TFEU authorizes the Council of Europe to adopt measures for euro zone members only, the better “to strengthen the coordination and surveillance of their budgetary discipline” and to “set out economic policy guidelines for them, while ensuring that they are compatible with those adopted for the whole of the Union and are kept under surveillance.” (The process is principally governed by Art 121, 126 TFEU.)
- Under Art. 273 TFEU, member-states may by “special agreement” submit disputes to the European Court of Justice (ECJ).
However, there are limits to international agreements:
- EU member-states may not change the Treaties by side-agreement (e.g., G. Defrenne v. Sabena, Case 43/75,  E.C.R. 455)
- All agreements inter se must conform to the Treaties (e.g., Commission v. Germany, Case C-546/07,  E.C.R. I___ ).
True to EU form, the FU pact invokes all of the three international agreement mechanisms—but doesn’t tell you which of them the signatories purport to rely on. It doesn’t matter, though: all of them violate the established limits.
One of an endless recitation of “whereas” clauses says that the parties “wish to make use of” enhanced cooperation. But they can’t—not without Mr. Cameron’s consent: enhanced cooperation” requires authorization by a unanimous vote of the Council of Europe. Art. 329 TFEU.
Another clause proclaims that the parties “will act within the framework” of Art. 136, 121, 126. No, they won’t: they explicitly propose to change that framework. The current version of Art. 126 TFEU provides an enforcement procedure with respect to fiscal affairs. It envisions sanctions for non-compliant members, but only after extensive consultations and negotiations between non-compliant members, the Commission, and the Council (i.e., member-states’ political leadership). The FU pact (Art. 8 ) would make sanctions somewhat more “automatic.” Far more importantly, the FU pact authorizes member-states to haul violators before the ECJ pursuant to Art. 258-259 TFEU; and it authorizes the Court to impose sanctions of up to 0.1% of GDP. Here is what Art. 126(10) (current version) has to say about the proposal:
10. The rights to bring actions provided for in Articles 258 and 259 [TFEU] may not be exercised within the framework of […] this article.
Plainly, the FU pact would amend the EU Treaties by agreement among (some) member-states. Recognizing the stark illegality, the parties execute one last desperate maneuver: Art. 8(3) of the FU pact declares that the fiscal enforcement proceedings will be submitted to the ECJ under “special agreement” among member states, pursuant to Art. 273 TFEU. In other words, we’re supposed to believe that member-states can, through bilateral agreement, fabricate a jurisdiction that is specifically prohibited by the European Treaties.
One would like to think and say that the underhanded FU pact is unprecedented. But it isn’t: the EU built its financial stability vehicles (the ESFS and the ESM) in precisely the same fashion—in purported reliance on one article (Art. 122 TFEU) but in flagrant circumvention of another (Art. 125 TFEU).
The EU touts its rule-of-law commitments to set itself apart both from the darker chapters in Europe’s history and from barbaric countries that still subject innocent citizens to waterboarding, imprisonment, and greenhouse gases. The fact that all this is just trash talk raises an uncomfortable questions: if the EU isn’t a community of law, what is it a community of?