ACELG

koedooder-cThe EU is no stranger to crises. It is often said, at least in academic circles, that a crisis can spur necessary further integration (known in Eurojargon as ‘deepening’). At the height of the Eurozone crisis, for example, Member States were willing to accept far-reaching reforms of the Economic and Monetary Union (EMU) that were long overdue. However, in Brexit the EU now faces a formidable new crisis that fundamentally challenges the future of the European integration project. Although the UK and the EU have always had a love-hate relationship, few EU-watchers expected it would ever get this far.

The long-term consequences of the historic victory of the Leave campaign are impossible to predict at this stage. Although in-denial Remain voters initially hoped that an actual withdrawal from the EU could still be averted by calling for a second vote, several Conservatives – including the new Prime Minister Theresa May – have since made clear that the results of the referendum will be honoured. In any event, regardless of whether the UK Government decides to trigger Article 50 TEU* any time soon or will keep delaying such a decision, the impending reality of an EU without the UK, one of its ‘Big Three’ Member States, should prompt a rethink of the dynamics of EU decision-making. The first meeting of the EU27 without the UK in June bears testimony to that.

Given that the UK has been a reliably difficult negotiation partner for the Eurozone Member States throughout much of the Eurozone crisis and the preceding financial crisis, hampering the so-called ‘completion’ of the EMU and seemingly trying to protect the competitiveness of the City of London at all costs, it is tempting to think that Brexit will be good for Eurozone decision-making. Major reforms, as most recently outlined in last summer’s Five Presidents’ Report, become more likely to attain without the UK. But is it really that simple? Leaving aside its obvious negative effects on the Eurozone economy, is Brexit good or bad for Eurozone decision-making?

The UK has long obstructed Eurozone integration

From a Eurozone perspective, one could view the impending Brexit as something of a relief. The ambitious plans outlined in the Five Presidents’ Report will require tough negotiations. With the prospect of the UK leaving the EU, its leverage in the Council and European Council has greatly diminished, paving the way for a more constructive approach. Below are three examples of the UK Government’s willful obstruction of Eurozone decision-making from the last five years.

When the European Council convened in December 2011, after a turbulent first two years of the Eurozone crisis, which still showed scant signs of abating, the main item on the agenda was an amendment of the Union Treaties to solidify the steps that had already been taken. However, the UK Government, represented by Prime Minister David Cameron, sabotaged negotiations by presenting an obviously unacceptable list of demands at the eleventh hour. Unable to secure a general opt-out for the City of London from EU financial regulation, Cameron walked out, thereby essentially vetoing any amendment of the Union Treaties. This ultimately prompted the remaining Member States to go rogue, adopting the Fiscal Compact Treaty, an intergovernmental agreement under public international law, outside the EU legal order. The UK Government’s course of action thus unnecessarily enhanced the complexity of the EMU’s legal framework – the exact opposite of what a vast majority of European leaders had hoped to achieve.

Adding a new string to its bow, the UK Government launched a series of legal challenges before the European Court of Justice (CJEU) in the field of EU financial regulation, targeting secondary EU legislation. The UK Government’s first challenge concerned the power of the European Securities and Markets Authority (ESMA) to adopt emergency measures on the financial markets of EU Member States in order to regulate or prohibit short selling under the (then) newly-adopted Short Selling Regulation (Case C-270/12). Next, the UK Government asked the CJEU to annul a Council decision authorizing eleven Member States to use the enhanced cooperation procedure to set up a financial transaction tax (Case C-209/13). A third challenge targeted provisions of the ‘CRD IV Package’ limiting the ratio of bankers bonuses compared to their basic salary (Case C-507/13). After the CJEU dismissed the first two actions in early 2014, the UK Government cut its losses when AG Jääskinen proposed that the Court should also dismiss the third action later that year. Chancellor of the Exchequer George Osborne deceivingly stated he was “not going to spend taxpayers’ money on a legal challenge now unlikely to succeed” and withdrew the challenge. Such course of action is not just dishonest towards said taxpayers, but more alarmingly it further undermines the UK public’s trust in the democratic process and judicial institutions at EU level. Moreover, it discredits the type of EU legislation which so-called ‘losers of globalization’, i.e. precisely those people that would later overwhelmingly vote Leave, should actually rally behind.

Last summer, when a third Greek rescue package was negotiated, amid talk of a humanitarian crisis in the debt-ridden Eurozone Member State, Cameron and Osborne made a big fuss about the intended use of the EFSM – until then Europe’s least controversial rescue fund – for bridge financing. As Nik de Boer and I concluded at the time, the UK Government’s claims were morally questionable and based on legally weak arguments, but nonetheless sorted effects, likely because the prospect of the referendum provided the UK Government extra leverage in Brussels. A mechanism was designed to ensure that non-Eurozone Member States would not carry financial risks should Greece default and the EFSM Regulation was amended accordingly.

Post-Brexit, France and Germany will likely dominate EMU-related decision-making

After 43 years of obstructing European integration, which culminated in the deal brokered with the European Council in February 2016, the reaction of many Europeans may well have been ‘good riddance!’. Indeed, European leaders – no doubt weary of Cameron’s stranglehold on EU politics since announcing his ill-fated referendum strategy – immediately voiced their discontent with the antics of the Conservative Party elite, calling for the UK to leave as soon as possible. A prominent example was the statement by Martin Schulz, the President of the European Parliament. On the day that the referendum results were made public and both Cameron and Boris Johnson appeared intent on postponing the triggering of Article 50 TEU, Schulz made clear he wanted to get rid of the UK swiftly, arguing that “a whole continent is taken hostage because of an internal fight in the Tory party”. In fact, European leaders initially seemed to take a tough-love approach, likely to prevent ‘contagion’. As Christina Eckes has already noted on this weblog, many governments face calls for similar in/out referendums from anti-European parties and rising public dissatisfaction with the European integration project. However, while still sending a strong message by urging the UK Government to notify the European Council of its intention to withdraw from the EU as quickly as possible (withholding any negotiations until that time, formal or informal), European leaders decided to give Cameron or his successor some time to let the dust settle.

What may be overlooked in the current coverage of the Brexit referendum and its immediate aftermath, is the added value of the UK’s presence at the negotiation table for small Eurozone Member States and non-Eurozone Member States whatever their size. One should not forget that ever since its accession, in 1973, the UK has been a counterbalance to the centrifugal force that is the Franco-German axis. Historically, France and Germany are regarded as the engine behind European integration and these two Member States still see themselves as such, as was evidenced during the Eurozone crisis. Though France and Germany have always had fundamentally different views of what the EMU should look like, when these two Eurozone Member States do agree on reforms it is evident that they jointly set the agenda.

In October 2010, ahead of a crucial European Council meeting, at a bilateral summit in Deauville, French President Nicolas Sarkozy and German Chancellor Angela Merkel agreed on limited Treaty reform, non-automatic sanctions for violations of the Stability and Growth Pact, and private sector involvement. In December 2011, ahead of yet another crucial European Council meeting (already referred to above), Merkel and Sarkozy outlined ambitious plans – stricter budgetary rules for Eurozone Member States enshrined in primary EU law, more regular Euro Summits and a permanent Euro Summit President, a ministerial structure for the Eurogroup – in a letter to European Council President Herman Van Rompuy. Similarly, in May 2013, Merkel and Sarkozy’s successor, François Hollande, suggested far-reaching reforms – a permanent Eurogroup President, a separate Eurozone Parliament – that were later put on hold. While not always successful, these examples show that France and Germany have been able to shape the Union’s crisis response by means of common statements. Indeed, Franco-German plans for a strong, post-Brexit Europe have already been announced.

Small Member States benefit from strong institutions, but also from the counterbalance that the UK until recently provided. The Benelux countries, for example, have traditionally favoured a strong role for the Commission and put emphasis on the importance of procedural rules (which makes their support for Merkel’s attempted side-lining of the Commission and European Parliament in response to the Eurozone crisis somewhat curious). Small Member States can influence decision-making through coalition-building, but given the North-South division within the Eurozone and with the bargaining power of Spain and Italy greatly diminished during the Eurozone crisis, successfully opposing France and Germany is – without a veto at least – highly improbable.

Because of their economic strength, population size, administrative capacity, and superior resources, big Member States have more bargaining power in the European Council and other intergovernmental EU forums than small (and medium sized) Member States – the imbalance is less pronounced than in classic international forums, but still considerable. At the height of the Eurozone crisis, much was made of the Eurozone’s turn towards ‘intergovernmental’ institutions, such as the EFSF and ESM. Criticism of this intergovernmental approach has faded somewhat since then, thanks in part to the CJEU’s endorsement of the ESM Treaty in Pringle and measures such as the Two-Pack, which integrated macroeconomic adjustment programmes adopted under the EFSF and ESM into the EU legal order, and the SRF Agreement, which was more closely interwoven with EU law than prior crisis resolution measures even though the legal form (an agreement under public international law) remained exactly the same. As the biggest contributors to these rescue funds, France and Germany naturally wield the most political power. Their votes are decisive in Eurozone decision-making. However, while the UK is not represented in the decision-making bodies of these rescue funds, the example of last year’s bridge financing for Greece, mentioned above, shows that Eurozone decision-making – and bargaining – is so interwoven with EU28 decision-making that a non-Eurozone Member State such as the UK simply cannot be ignored.

The example of the bridge financing for Greece also highlights the UK’s importance for non-Eurozone Member States. As the City of London is by far the largest financial centre in Europe (and is thus important for the Eurozone), none of the remaining non-Eurozone Member States can match the UK’s bargaining power. On Cameron’s insistence, the EFSM Regulation was amended to guarantee that non-Eurozone Members – so, not just the UK – would be fully compensated in the event of a non-payment under the EFSM Facility if that would result in the use of resources within the EU Budget (see the final note here). Similarly, Cameron’s letter to European Council President Donald Tusk, which served as the basis of the deal brokered with the European Council in February 2016, suggested “legally binding principles that safeguard the operation of the Union for all 28 Member States”. Among other things, this New Settlement for the UK within the EU addressed the UK Government’s fears of ‘caucasing’ by the Eurozone Member States. As the Eurozone Member States can theoretically outvote non-Eurozone Member States under the post-Lisbon Council voting rules, the UK Government sought – and received – reassurance that the Eurogroup would not be used to discuss the Internal Market and Banking Union without the non-Eurozone Member States, thus strengthening the position of the Council vis-à-vis the informal Eurogroup, which had become the central decision-making body during the Eurozone crisis. Now that a majority of the British people voted Leave, however, the whole deal is officially considered not to exist.

Conclusion

Simply put, for small Member States and non-Eurozone Member States alike, it is ultimately better to live in an EU with a ‘Big Three’ that keeps each other in check than in an EU dominated by the ‘Big Two’. While the UK Government, under David Cameron, seemed to willfully sabotage Eurozone decision-making (of which three examples were given above), it can be argued that the UK counterbalanced the political power of Eurozone heavyweights France and Germany and that the UK successfully defended the interests of the non-Eurozone Member States. As such, Brexit is most likely bad for Eurozone decision-making.

Then again, there have been signs that the Franco-German engine is stalling. Unable to act in unison on matters such as the refugee crisis and counter-terrorism, France and Germany currently cannot provide the EU a strong sense of direction. Also, as Paul Craig has suggested, the UK Government’s fears of caucusing and discrimination by Eurozone Member States seem unwarranted, as the Eurozone is by no means a homogenous bloc. While the Eurozone Member States certainly pre-discuss Council decision-making in the Eurogroup, it is unlikely that all 19 Eurozone Member States will always see eye-to-eye on issues related to the Internal Market or Banking Union. After all, the Eurozone comprises both creditor and debtor Member States with diverse views and interests.

Is Brexit therefore good for Eurozone decision-making, if it makes the ambitious plans detailed in last year’s Five Presidents’ Report more easily attainable? The answer to this question ultimately comes down to one’s perspective on the desirability of further deepening the EMU along the lines of the Report. Eurozone decision-making might become more efficient without the UK, but that does not make the EU economic policy regime more democratically legitimate and social or the measures currently foreseen more effective in combating the still-ongoing Eurozone crisis.

 

* Article 50 TEU governs withdrawal from the EU.

 

Chris Koedooder, MA, LL.M is a PhD researcher at the Amsterdam Centre for European Law and Governance (ACELG), University of Amsterdam.

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