A Political Deal for the Euro

At a summit in Brussels meant to save the eurozone, EU leaders agreed to sign an intergovernmental treaty establishing a centralized European fiscal compact by mandating the coordination of national budgets. Britain was the only country of the twenty-seven member EU block to reject the new fiscal union, creating an unprecedented schism in the decades-old project of European integration. But economist Iain Begg of the London School of Economics indicates that the UK has only marginalized itself, rather than undermined the larger EU. "The spat with the UK is unfortunate, rather than a serious weakness," he notes. And while the latest comprehensive EU deal may not immediately solve the debt crisis, Begg says, "it reaffirms a strong political commitment to ensure that the euro survives and prospers."

What did the seventeen eurozone states--and at least six non-euro states in the EU--agree to at the December EU Council summit?

They have agreed to move toward a deal (essentially, this means all excluding the UK, given that three other initial refuseniks seemed to have bowed to the common interest) that will not be an amendment to the current--Lisbon--EU treaty, but a separate deal that will be agreed by the governments. It can be regarded as a sort of intergovernmental pact that will not have the full legal status of a treaty, but nevertheless represents a common commitment to sort out the problems of economic governance that have bedevilled the EU, especially the euro area, over the last two years. The key features include a move toward a more rules-based approach to fiscal discipline, acceleration of the timetable for introduction of the new European Stabilization Mechanism--which will take over from the temporary fund set up to deal with the crisis--and a means of bolstering liquidity support via the IMF.

What is the process of implementing the agreed-upon intergovernmental treaty, and what is the time frame?

The stated objective is to agree to the deal by March 2012. However, in many cases the process will involve consultation--and possibly the formal approval--of national parliaments, something that cannot be taken for granted. It must therefore be regarded as an ambitious timetable.

What is the significance of Britain’s decision to opt out of the so-called fiscal union? Will it create a two-tiered European Union?

Given that it looks like being twenty-six to one, it is not so much a two-tiered Europe as a marginalization of the UK. The euro-skeptical tendency in the UK may welcome this and feel that their long-cherished ambition of separating from the EU is now in sight. But more hard-nosed British tendencies will start to fret that the outcome will be to create obstacles to market access inside Europe. It will not be a surprise if the UK tries to spin this to project a more accommodative stance.

How, if at all, does the Franco-German plan address the eurozone sovereign debt crisis; will it stem the tide of contagion?

It is best seen as the latest stage of a series of initiatives designed to recast economic governance in Europe so as to prevent future problems. It is less clear that it offers immediate answers to the sovereign debt crisis, except insofar as it reaffirms a strong political commitment to ensure that the euro survives and prospers. In particular, there is still some uncertainty about quite how much latitude the European Central Bank will have to act decisively to counter market pressures on vulnerable member states. But a balanced verdict would be that it is an important step forwards, although it is likely that markets will continue to have reservations while the fine print is scrutinized--and this may result in further short-term volatility. EU leaders will, nevertheless, expect that markets will now "read my lips" and accept that the doomsday scenarios about the future of the euro are not going to occur.

What does the deal mean for the global economy, and for countries like the United States that are considerably exposed to the euro crisis?

Overall, it should be welcomed globally. Again, the mere fact of a political agreement is critical, bearing in mind the charges of vacillation and procrastination leveled against Europe’s leaders. The spat with the UK is unfortunate--if predictable--rather than a serious weakness, and will probably not detract much from the probable positive impact on global markets. But markets will also want to be reassured that the details and the implementation match the headlines. The United States and others exposed to the euro crisis ought to take comfort from the deal, but will be watching closely to see that it is delivered as fully as possible.