It could be that the crisis talks swarming around the eurozone will be resolved with a twist to the European Union treaty. A slight change to the bloc’s treaty could prevent the region from plunging into recession. However, this “slight” change could involve greater economic cooperation between members, which leaves a very abrupt question to be asked: Just how tightly knit are the EU countries willing to get?
Ongoing talks in Brussels, which are expected to come to a close on Wednesday with a deal to prevent the region from plunging into recession, have forced policymakers to consider a change to the bloc’s treaty. EU president Herman Van Rompuy said that members would “explore the possibility of limited change,” which is perhaps likely to involve closer fiscal ties between EU members, those that are economically flailing and those that are more calm.
“The aim is deepening our economic convergence and strengthening economic discipline,” Van Rompuy said after a day of talks in Brussels on Sunday.
“The most important thing is not to change the treaty, the most important thing is to strengthen economic convergence,” he said.
Such a decision, if made, would be reminiscent of a family that wants to either be “in it” together, or is cautious about being in it at all. But like any family affair (and more so with a 27-member group), there will be a few grumpy members unwilling to be associated with the mishaps of others. Why? Because there is still too much debt swimming around the eurozone, despite bailout packages for Greece, Ireland and Portugal all being agreed on in recent months. Stock market failures still lurk, as well as the possibility of other countries having their credit ratings slashed. The region’s fiscal environment is being stretched it its limits, with bond yields mounting in Spain and Italy, pressing these EU members to also sort out their finances.
While Van Rompuy said that the words “limited change” implied “not a general overhaul of the institutional architecture” to any possible treaty amendment, he also said that all of the 27 member states would have to agree before a decision on a change could be made.
“If you add up all the resources of Europe, it’s clear that the continent as a whole could deal with this crisis,” Martin Wolf, of the Financial Times, told BBC Radio 4 on Wednesday. But can they really come together with a breakthrough deal that would involve a change to their fiscal coordination?
German Chancellor Angela Merkel and French President Nicolas Sarkozy have already said they are working on possible amendments to the bloc’s treaty, but Ireland is reportedly likely to oppose any change, a recent poll by the The Irish Times/MRBI found. The main policy niggle with Ireland is that, under the country’s law, a referendum is needed to agree to changes in the EU treaty. Treaty amendments in Europe have previously twice been held up after Irish voters rejected changes.
Meanwhile, Britain is one of the EU countries facing a rising tide of public criticism against its involvement in the bloc, with public opinion questioning whether Britain has ever substantially gained from its EU membership (economically). Prime Minister David Cameron spoke out on Sunday, saying that any change to the EU treaty as part of the region’s rescue package would not be “at the expense of Britain’s national interests.”
Britain has made it clear that it wants to stay out of the euro (it is one of the EU-member states that does not share the bloc’s currency) and Cameron has said he wants to “safeguard” the interests of the non-euro countries like his own.
Cameron most probably does not want the UK to be dragged down with the bloc’s “doom and gloom” currency, and indeed, the eurozone’s current fiscal misery now justifies Britain’s refusal to join.
Proposals on possible treaty changes could be put forward in December, Cameron said, adding that he has “secured a commitment that would protect the interests of the UK.”
The deadline
But by the early hours of Thursday the world expects to see the final package agreed on by the EU leaders. Whether or not this involves a treaty change, the following are a series of agreements reportedly already agreed upon by bloc officials:
• European banks must raise more than 100 billion euros in new capital to shield them against possible losses to indebted countries
• The European Financial Stability Facility (EFSF) – the single currency’s 440 billion euro bailout fund – will be given more firepower, although it is not yet clear how this will be achieved
• Lenders to Greece will be asked to agree to much deeper losses than the 21 percent writeoff currently on the table, according to the BBC.
Analysts estimate that the biggest decisions eurozone leaders have to make by the end of their meeting on Wednesday is the method for increasing the size of the bailout fund and the amount that private-sector creditors should reduce or write off what they’re owed by the Greek government. And both of these decisions will correlate. Officials know that the bigger the haircut for private holders of Greek government debt, the more elaborate the plans for the bailout fund (the EFSF) should be.
But on Wednesday’s negotiations, if policymakers fail to emerge with a credible plan, sharp market drops hang in the balance.
“Traders remain jittery and volumes stunted as the market waits for Europe’s leaders to finally put a lid on the debt crisis,” said Manoj Ladwa, a Senior Trader at ETX Capital. Ladwa expects that the recapitalization of European banks and a 50 percent haircut on Greek debt seems to be in the cards, which he estimates could be just enough to ease investor concerns.
“But the market will also look for measures to ring-fence Italy and Spain from any contagion effect,” said Ladwa, who thinks that if these measures are deemed inadequate by traders we could see a return to the volatility of three months ago, when global stocks plunged.
Even if a decision is reached, the talks have already taken far too long. Can the eurozone now take advantage of this last-minute adrenaline rush to seal a credible deal?
(Eman El-shenawi is a writer at Al Arabiya English.)
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