Momentous EU Summit This Week

Marc To Market's picture

There are two big issues for the EU heads of state meeting at the end of this week: A review of the fiscal plans and structural reforms of member countries and the appointment of the EC President, following the recent EU parliamentary elections. To the chagrin of many observers, especially in Berlin, the attempt some countries, like France and Italy to link the two issues is troubling, to say the least.

French and Italian officials seek greater flexibility over the EU's fiscal demands in exchange for supporting Juncker as the EC President. In principle, this is controversial, and the controversy is evident in the very language used to refer to the key relevant agreement. In Germany, and in much of the Anglo-American press, it is commonly referred to as the Stability and Growth Pact. However, in Italy, France and other countries, it is known as the Growth and Stability Pact.

Merkel quickly responded to calls for a change in the agreement, which would permanently ease the fiscal restraints by noting that Pact already has flexibility build into it. France, which has been granted several reprieves surely recognizes. Despite the extensions granted, on its current trajectory it will still overshoot the next year's 3% deficit target.

The recent EU parliamentary election and the strong anti-EU vote have reinvigorated efforts to rebuild the political middle by emphasizing jobs and growth. The EU parliamentary election was also important because the two leading factions named their own presidential candidate (dubbed spitzenkandidat). The operating treaty agreement signs the power of picking the EC President to the Council of Ministers, the heads of state. The Lisbon Treaty requires that the Council of Ministers takes into account the election results.

Therein lies a thorniest of issues. The democratic roots of the European Union appear terribly fragile, and the European Parliament is a key democratic institution. Yet, its powers have been carefully circumscribed to preserve the power of the nation-state and as a check on creeping federalism. There are some voices, not just the UK, that does not want "an ever closer union", or a United States of Europe as Churchill called for in 1946. There is a (healthy?) tension between retaining power on the national level and the federalist urge.

There is another wrinkle to the story. To help facilitate greater decision making efficiency, especially in the context of the increase in members since the fall of the Soviet Union, there has been agreements, endorsed by UK Tory Prime Ministers, including Thatcher, that allow greater use of qualified majority decision-making as opposed to unanimity. This weakens the power of dissenters and the minority, where the UK often finds itself in the EU.

Domestic politics are also important constraints on the behavior of members on the EU level. The strong showing of the UKIP in local and EU parliament elections has encouraged Prime Minister Cameron to take a stronger stance against the drift toward federalism embodied in the encroachment of the prerogatives of the Council of Ministers and Juncker himself. Cameron has promised a referendum on the EU after the next national elections, and a defeat this week could antagonize the anti-EU sentiment.

While the UK economy is poised to be the fastest growing economy in the G7 this year, Cameron’s foreign policy efforts do not show the same success. Cameron has antagonized many. His anti-immigration stance and proposal to cut the benefits going to EU immigrants has incurred the rather of central and eastern Europe, with Polish officials the most vocal. Cameron has pulled the Tories out of the EU Parliament center-right faction (EPP) and recently entered an alliance with the AfD, the anti-EU German party (Merkel’s CDU is an important member of the EPP). He seems not to have taken the Scotish referendum seriously enough, allowing, for example, the decision to be decided by a simple majority that excludes the roughly 800,000 Scots that live in England.

From another perspective, the antagonism toward the UK is also a veiled effort to push against Germany. Germany’s ordo-liberalism and the Tory’s austerity (which may have helped secure a majority for the Scottish National Party in the 2011 election, and in turn, insisted on a referendum) have much common ground. A UK exit from the EU (“Bexit”), would leave Germany more isolated within Europe. The biggest winners of a UK exit could very well be the periphery of Europe and the debtors.

If played a bit differently and had he protected his flanks better, Cameron’s opposition to Juncker may have drawn greater support from the Council of Ministers. They could have been persuaded to defend their perogoative over the power grab by the EU parliament. He could have cited the German Constitutional Court’s recent misgivings about the EU Parliamentary election process. It had argued that the election rules violated the one-person one-vote foundation of representative government. In fact, the German Constitutional Court was so adamant that it forced the dropping of the 3% electoral threshold for representation.

 

In effect, the rules of the EU parliament election weight votes by size fo the country, with smaller countries at a distinct advantage. The center-left faction (S&D) actually won more popular votes that the center-righ faction (EPP), but due to the rules, the EPP won seats in the European parliament. Here is one example, cited in the press, that illustrates this point. In Luxembourg, where Juncker hails from, the EPP garnered 52k more votes than the S&D faction. That was worth 2 more seats for the EPP (or 1 seat = 26k votes). In Italy, where the S&D drew about 5 mln more votes than the EPP, it received only 14 more seats (1 seat = 370 votes).

There are other criticisms of the process that Cameron could have used to seek to forge allies within the Council of Ministers to reject a fait accompli over Juncker. The turnout of the EU parliament election did not surpass 50%, making it hardly representative. Moreover, no one voted for Juncker. Taken together, these criticisms blunt arguments over the democratic forces behind Juncker. Finally, the acceptance of Juncker is part and parcel of backroom deals that allow the Schultz (the S&D Spitzenkandidat) to continue to be the President of the EU Parliament, and it looks like Germany will have the vice president of the European Commission.