Bail-outs and Budgets: The Big Three leading Europe

European leaders are hoping that just two sentences to be added to the Treaty will be enough to put an end to the on-going crisis that has plagued the Eurozone in 2010. EU Heads of State reached an agreement yesterday in the Justus Lipsius building in Brussels on a permanent mechanism for bailing-out stressed Euro-zone countries.

Germany succeeded in ensuring that the mechanism was only used in extremis. However, it failed to make it a condition that it is activated only as a last resort – an important distinction given Chancellor Merkel’s nervousness about the treaty change.

“The Member States whose currency is the euro may establish a stability mechanism to be activated if indispensable to safeguard the stability of the euro area as a whole. The granting of any required financial assistance under the mechanism will be made subject to strict conditionality” ; – the Eurozone is counting on these two sentences to deal with the single currency’s inherent flaws. It was Germany – with the support of France – that nailed an agreement where others failed. The Italy-Luxembourg proposal for Europe-wide bonds was dismissed as was the Belgian proposal to increase the £440bn fund to buy bonds from at-risk countries.

The European Stability Mechanism will replace the European Financial Stability Facility (EFSF) and the European Financial Stability Mechanism (EFSM) in 2013. The UK also got what it wanted. The Council agreed to limit explicitly the application of the ESM to Eurozone countries – to reassure UK Prime Minister David Cameron that the UK would not be sucked into any bail-out obligations.

Mr Cameron is having a good summit. He has guaranteed the UK won’t be part of the Eurozone stability mechanism. He has had more mixed results in his other battle to avoid any increase in the EU budget. The UK has agreed to the increase for 2011 to be kept under 3% without giving MEPs anything in return for backing down over demands for a 6% increase. However, Mr Cameron had gone into budget negotiations with the intention for a freeze on the budget.

The European Parliament on 15th December backed down on its demands to have a greater role in the post 2013 multi-annual budget negotiations in return for a limited increase to the 2011 budget. It has been a humiliating end to 2010 for the European Parliament since winning new powers under the Lisbon Treaty 12 months ago. The Council position – held together by the UK and Germany – took the European Parliament to the brink. The alternative would have been a 2011 budget being approved on a month to month basis. The Parliament finally acknowledged the troubles this would bring.

Mr Cameron is reported to have struck a deal last night with Germany and France on the 2013-2020 budgets which would in effect bring about a real-term freeze in EU spending. The acquiescence of the French suggests that this deal would most likely affect the EU cohesion funds which disproportionately affect the Member States in Central and Eastern Europe. Poland will lead the backlash against the deal, if it transpires, given that it is a large beneficiary of cohesion funds. The French will have insisted on ring-fencing agricultural funds. France has been a long-term defender of the Common Agricultural Policy and this time the Germans are supporting them. Germany had recently signed a joint declaration with France calling for a strong CAP.

The UK would get to keep its rebate as part of the deal. France and the UK would be the winners; Poland and her East European neighbours the big losers. This is a scenario that ResEuropa had floated a few weeks ago and while there is no confirmation of the deal, reports in today’s press suggest it could well be on the cards. David Cameron will need to be careful to explain why he is not pressing for reductions in CAP rather than the cohesion funds.

The EU big three have out-foxed the Commission President Mr Barroso who will want to see cohesion funding kept in tact since this funding is regarded as European solidarity in action.

Time will tell whether this summit has marked the start of a powerful axis of UK, France and Germany – or whether it was just the easy thing for Mr Cameron to do since he will not have the appetite to deal with yet more calls to give up the UK rebate. I suspect that this new alliance won’t last for long: It was a minor miracle that the France and Germany could agree on the stability mechanism. Nevertheless this week demonstrates that, even if only for now, the big three are in the driving seat. What both the agreement on the budget and on the stability mechanism show is that when it comes to Europe, Mr Cameron and his coalition government will do almost anything for a quiet life.