You cannot fault the Europeans for their timing. The agreement reached in Brussels on the euro last Friday came 20 years to the day after European leaders signed the treaties that created the single currency. And the pact euro zone members will now join is arguably of equal importance. It marks a huge step toward a genuine fiscal union and a united Europe.
Two things are more certain after last week’s summit, and both are more political than financial or economic. One is that Germany has decisively stepped into the role of Europe’s leader, a position it was reluctant to take before German Chancellor Angela Merkel’s lengthy exchanges with French President Nicholas Sarkozy over the past several months. This will lead to a more disciplined, carefully managed Europe as its draws closer to full unity.
Second, Britain comes out of last week’s summit badly isolated because of Cameron’s veto. His reasons for voting as he did were clear enough -- he wanted to protect London as Europe’s financial center by keeping Brussels and its rules and regulations at arm’s length. What he did not bargain for was a 26-to-1 vote that had even non-euro nations on Merkel and Sarkozy’s side.
What will now go into effect is not the formal treaty German Chancellor Angela Merkel had wanted. A veto by British Prime Minister David Cameron blocked that route (and isolated Britain from the rest of the E.U.). Instead, the 17 members of the euro zone and nine members that do not use the currency will forge an intergovernmental agreement that is binding but does not provide for recourse to E.U. institutions. This is regrettable but far from fatal.
Here are the main ingredients of the pact that emerged in Brussels Friday after a two-day summit of E.U. leaders:
• An agreement to limit budget deficits to 3 percent or less of gross domestic product. Annual structural deficits cannot exceed 0.5 percent of GDP. (This is the core of the new “fiscal compact” Germany and France have sought in recent weeks.)
• Stronger surveillance and enforcement of the budgetary rules. Brussels has a right to assess budgets it deems worrisome, the European Court of Justice can act to insure compliance, and fines will be levied automatically on any government that breaches the 3 percent rule.
• E.U. nations will lend the International Monetary Fund €200 billion to assist the weaker European economies.
• A new fund, the European Stability Mechanism, will begin operating next July with €500 billion. This will eventually replace the smaller European Financial Stability Fund. The EFSF’s funds, €440 billion, will be dispersed immediately via an insurance plan for bond losses.
The document containing these provisions is to be ready by March. But questions emerge already from this complicated menu of steps. One has to do with timing. Euro zone governments have €1.1. trillion in debt due in 2012; Italy, France, and Germany have among them more than €500 billion due in the first six months of 2012. Will there be enough money in time?
Related to this is the European Central Bank. Its new governor, Mario Draghi, had earlier hinted strongly that the E.C.B. would begin buying euro-denominated government bonds once E.U. members reached an agreement. After the agreement was reached, Draghi applauded it as an important basis for “a good fiscal compact and more discipline in economic policy,” but on the question of bonds he was reticent. What the ECB does is crucial; many analysts believe it will eventually be forced—and very soon—by the threat of worsening circumstances to enter the market.
A third question relates to the legality of the pact and its provisions. Can E.U. members reach an agreement among themselves that stands outside the E.U.’s institutions and excludes one member—in this case Britain?
Has Europe put the euro crisis behind it at last? The magnitude of what E.U. leaders got done in Brussels suggests so. The E.U. has been fundamentally transformed. What remains uncertain are the mechanisms of what amounts to Chancellor Merkel’s new creation. Will they work to plan, and—not least—will the markets be satisfied that Europe has set itself on a new road?