Tuesday, 6 September 2011

EU still terrified of treaty change

During today's midday briefing a European Commission spokesperson emphatically insisted that any tightening of economic integration in the Eurozone will not require treaty change. Reporters in the room didn't seem to be buying it. It's not hard to see why, after the president of the European Central Bank said yesterday that such a change would require such a treaty change.

It's an uncomfortable situation for the EU, which only recently was able to pass the long-stalled Lisbon Treaty after a painful and embarrassing six year saga. There is now a consensus that the only way to save the euro from the contagion of the debt crisis is to establish a tighter economic union between the countries that use the currency, essentially establishing a single finance ministry instead of having separate economic policies for the different states.

But there is fear that doing so will require yet another treaty change, and Brussels is worried that another round of treaty change approval by member states would be a disaster. There is still uncertainty over whether such changes would meet the threshold for UK Prime Minister David Cameron's 'cast-iron guarantee' to hold a public referendum on every treaty change. Because of the widespread antipathy toward the EU in Britain, it is guaranteed that any referendum on an EU question would fail – even if it is on a question that doesn't directly concern Britain, such as the eurozone (the UK does not use the euro and would therefore keep its own finance ministry).

All governments agree that some degree of tighter economic union is needed to save the currency, and it's certain that no parliament, not even in the UK, would reject the proposal to change the treaty to allow this. But most voters don't fully understand what is happening, and there is little appetite amongst the public for further EU integration. If the question of economic integration is put to the public in a referendum in any member states, there is a real possibility it could be rejected. Such news would cause European markets to collapse, and Europe's currency would likely collapse with it.

This is why the commission and member states are desperate to find a way to enact the tighter economic union without having to change the treaties on which the EU is based. But can it be done? It still seems very uncertain. ECB president Jean-Claude Trichet's comments yesterday saying treaty change will be needed sent European stocks plummeting.

Even beyond the concerns over whether such changes would be rejected in a referendum or even by parliaments fearing a public backlash, there is the larger concern over the amount of time treaty change would take.

There was however some good news for the euro today, as Switzerland announced it is setting a cap on the exchange rate between the Swiss Franc and the Euro. The Swiss economy is in crisis mode at the moment as speculators have piled onto the country's currency, which they see as a safe haven as the euro, dollar, pound and yen experience trouble. This has caused an explosive overvaluing of the currency, and last month it was at near parity with the euro. The cap will fix the exchange rate at no less than 1.20 Swiss francs to a Euro, and the Swiss National bank will keep it below that level by buying euros.

This will provide some badly needed support for the euro, and the news sent the value of Europe's currency up today. But market observers are pointing out that the SNB may not have the funds to buy euros at the scale needed. This is the last bow available in Switzerland's quil before it will have to resort to pegging its currency to the euro, something that would be humiliating for the Swiss national psyche.


Captain Kid said...

In today's debate about Germany's budget for 2012, Merkel clearly stated that treaty changes will be needed. She seemed very confident about that.

Kallisti said...

Regarding Merkel - Sent ska syndaren vakna, a Swedish saying meaning "late will the sinner wake up".

Welcome to the real world Mrs Chancellor..