“We need more Europe, we need not only a monetary union, but we also need a so-called fiscal union, in other words more joint budget policy. And we need most of all a political union - that means we need to gradually give competencies to Europe and give Europe control. ... Whoever is in a currency union will have to move closer together. We have to be open to make it possible for everyone to participate. But we cannot stand still because some do not want to go with us." Angela Merkel, 7 June 2012
"Of course, they've got 17 countries that have to agree to every step they take. So I think about my one Congress, then I start thinking about 17 congresses and I start getting a little bit of a headache." Barack Obama, 21 May 2012
The present deeply troubling state of the European Union demands urgent, radical and decisive action to be taken by the European Council at its meeting of 28-29 June 2012.
Europe needs a blueprint, roadmap and schedule for political union. All the EU institutions must be involved in the preparation of this process according to their own mandates but, at least initially, a core group of states must come together to form a determined vanguard under a new European Fiscal Solidarity Treaty.
Unless concerted action is taken the cost of saving the euro will rise out of control. The stabilisation of the financial markets and the restoration of democratic trust in the European project require strong economic government.
To date, none of the EU institutions has proved capable of providing leadership of the quality required. Indeed, many of the EU's decisions taken have compounded the crisis by being too little too late. National capitals have lagged further behind.
The Fiscal Solidarity Treaty will be another intergovernmental treaty which, like the fiscal compact treaty, will be intended in due course to be incorporated within the EU framework proper. The Fiscal Solidarity Treaty should be signed no later than December this year. Its integration within the EU treaties can be part of a general revision of the Treaty of Lisbon undertaken by a constitutional Convention starting no later than spring 2015.
This Convention, followed by an Intergovernmental Conference, will codify the emergency measures taken in the heat of the crisis, install full fiscal union, rectify some of the weaker points of Lisbon and enhance the political legitimacy of the European Union as a whole.
We know that it is no longer credible to expect all EU member states to progress along the path to federal union. So the new core formation of signatory states to the Fiscal Solidarity Treaty is likely to be based in the first instance on Germany, France, Belgium and Luxembourg. They will need from the outset a new executive authority ? the European Financial Authority (EFA) ? with the political power to shape common policies aimed at fiscal consolidation and economic growth. This body, which will act by qualified majority vote, will be the precursor of the federal economic government required in a full fiscal union.
Membership of the EFA group will be open to all member states of the EU without a derogation from the euro. Once its membership rises to nine states the EFA will be in a good position to trigger the use of enhanced cooperation under the Treaty of Lisbon across a range of issues, including the Common Consolidated Corporate Tax Base and financial transaction or activities taxation. The EFA caucus would also establish a united position among its members on reform of the EU's Multiannual Financial Framework (MFF) and the 'own resources' revenue system.
The EFA will have a treasury facility to raise revenue directly, probably via VAT, booked on the account of the ECB. With triple 'A' status, the EFA will be a valid political counterparty to the European Central Bank and the governors of the ESM. Comprising senior cabinet ministers responsible for EU affairs and chaired by the President of the European Commission, the Authority would appoint a treasury secretary.
The first job of the EFA will be to oversee the repair of the banking sector by the orderly wind down of toxic banks. It should consider proposals to widen the remit of the European Stability Mechanism (ESM) in order to recapitalise banks directly. The reinsurance scheme for bank deposits, as proposed by Mario Monti, should be swiftly implemented with the creation of a single, pan-EU guarantee fund.
The Fiscal Solidarity Treaty should also adopt the European redemption fund scheme and empower the new EFA to issue eurobonds based on joint liability for sovereign debt above 60% of GDP. This will allow participating countries to reduce their excessive debt over a 25 year period. The EFA will have the power to expel a state from the redemption fund if it breaches the agreed terms and conditions of membership.
The EFA should also take forward decisively the Commission's tentative proposal for the longer term issuance of stability bonds based on joint and several liability.
Another main feature of the new Fiscal Solidarity Treaty will be the banking union for the eurozone, with a fully-fledged central bank facility. The EFA will decide how to strike the balance between recapitalisation of the banks on the one hand and the harmonisation of banking regulation on the other.
The regulatory framework put in place since 2010 has gone a long way to ensure that an outbreak of systemic financial failure cannot recur, but it does little to address the current turmoil. The European Banking Authority (EBA), the European Securities and Markets Authority (ESMA), and the European Insurance and Occupational Pensions Authority (EIOPA) have proved their worth. The European Systematic Risk Board (ESRB) conducts valuable macro-prudential oversight. But more is needed to centralise supervision and to draw policy conclusions from the superior intelligence gleaned.
Measures can already be taken under Article 129(3) of the Treaty on the Functioning of the EU (TFEU) to strengthen the capacity of the European Central Bank to do whatever it takes to save the banks. Reform of the ECB, as well as the strengthening of the EU wide regulatory framework and system of supervision and surveillance across the whole of the financial sector, can be carried out according to the ordinary legislative procedure on the initiative either of the ECB or Commission.
We welcome the Commission's proposals announced this week for crisis management measures to prevent future bank bail-outs. These should, if swiftly implemented, reduce the risk of contagion from bank to bank across Europe and beyond. I believe, too, that those cross-border finance institutions 'too big to fail' should now be placed directly under the EU supervisory authorities and not left merely to weakly coordinated national authorities.
The European Parliament must learn how to live up to its voluminous rhetoric by playing a full and constructive part in the making of these new banking laws and in the enhancement of EU supervision. Parliament should also accelerate our completion of the 'Two Pack' legislation on budgetary coordination and surveillance which will make the important connection between the 'community method' and the operation of the ESM. Inter-party dispute between left and right about the direction of economic policy should not be allowed to obstruct agreement on the putting in place of the necessary constitutional framework without which nothing we do at EU level will actually happen.
Meanwhile, national parliaments have an important role to play in pressing forward with the ratification of the three constitutional amendments already agreed, as follows:
• the revision of Article 136 TFEU (ratified by only 12 of 27 states);
• the ESM Treaty (ratified by only 4 of 17 eurozone states);
• the fiscal compact treaty (ratified so far by 7 of the 12 signatory states needed for its entry into force).
We have a couple of weeks left to get the agenda of the European Council right and to raise the height of its ambition. If we fail this time to salvage the euro and begin economic recovery by building a European federal union, future generations will look back at us in much the same way as we look back on our forebears in the 1920s and '30s and ask how could they have let happen what happened.
9 June 2012