United Kingdom

IX - Fiscal Compact

The Fiscal Compact (Treaty on Stability, Coordination and Governance in the Economic and Monetary Union) was signed on March 2, 2012. Negotiations on this Treaty began between 26 member states of the EU (all but the UK) after the 8/9 December 2011 European Council. 25 contracting parties eventually decided to sign the Treaty (not the Czech Republic).       
After ratification by the twelfth Eurozone member state (Finland) in December 2012, the Fiscal Compact entered into force on 1 January 2013. For several contracting parties the ratification is still on-going.  

What political/legal difficulties
did the United Kingdom encounter in the negotiation of the Fiscal Compact, in particular in relation to the implications of the treaty for (budgetary) sovereignty, constitutional law and the budgetary process.

Britain did not agree to the Fiscal Compact. It claimed to exercise a veto, however the result was simply that a separate agreement was made between 25 other Member States. The negotiations have been referred to as carried out in a “Flashman” way. The need has been stressed in the future for Britain to come up with a clear line defining our constitutional bottom line and what we are rightfully to demand. This is because Britain needs to recognise that as the Eurozone crisis unfolds and constitutional changes are being made, and there are deep and profound consequences for the constitution of this country.[1]

David Cameron (The Prime Minister (Conservative)) made a statement in the House of Commons on 12 December 2011.[2] He claimed his objective in Brussels was solely to protect Britain’s national interest and that he made it clear that if the eurozone countries wanted a treaty involving all 27 members of the European Union, we would insist on some safeguards for Britain to protect our own national interests. According to him, some thought that the safeguards asked for -on the single market and on financial services-were modest, reasonable and relevant. He claims there was no intention to create an unfair advantage for Britain.

It is unclear exactly what were the safeguards sought and the House of Lords European Union Select Committee strongly criticised the Government for not releasing the full details of this. Instead, it set out three potential explanations of the safeguards sought:[3]

  1. According to the Minister for Europe, the Government focused on two areas, seeking: “some sort of general safeguard with respect to the integrity of the single market and … something more specific on the issue of financial services” … to protect “the financial services industry in every EU Member State against the risk of discriminatory legislation or protectionist legislation on financial services”.
  2. According to the Financial Times, the UK’s demands included: a clear statement that euro area integration would preserve the interests of the single market and would not undermine the common interest of all 27 Member States; a “protocol on financial services” in relation to the powers of the new European Supervisory Authorities (including a reassurance that the EBA would remain in London) and including a unanimous vote on any “user charges” in financial services regulation, which would have attempted to clarify that the UK would have been able to veto any variant of the financial transaction tax proposal; ensuring that stringent rules did not close off the EU to US or Asian financial groups; and allowing the UK the flexibility to raise capital requirements for retail banks, in reflection of the recommendation of the Vickers Commission.[4]
  3. According to French President Nicolas Sarkozy: “in order to accept treaty revision among the 27 EU states, David Cameron asked us—something we all judged unacceptable—for a protocol to be inserted into the treaty granting the United Kingdom a certain number of exonerations on financial services regulations … We could not accept this, since we consider, quite on the contrary, that a part of the world’s woes stem from the deregulation of the financial sector.”

David Cameron went on to state that the EU treaty is the treaty of those outside the euro as much as it is for those inside the euro and so creating a new eurozone treaty within the existing EU treaty without proper safeguards would have changed the EU for the UK. It would not just have meant a whole new bureaucracy, with rules and competences for the eurozone countries being incorporated directly into the EU treaty; it would have changed the nature of the EU-strengthening the eurozone without balancing measures to strengthen the single market.

He later referred to the balance of powers between Britain and Europe stating that he believes these are not right. He claims that the Treaty was prevented from going ahead because there were not adequate safeguards but that, furthermore, no one knows where this new organisation outside the European Treaties will go, what powers it will seek and how it will act. The concern in such a scenario is to protect and defend national interests.

The main issues of debate in Parliament were:

Use of EU institutions

One of the main concerns in the debates was the use of EU institutions as part of the fiscal compact. David Cameron commented that there would be extensive debate about “how institutions built for 27 should continue to operate fairly for all member states, Britain included. The UK is supportive of the role of the institutions, not least because of the role they play in safeguarding the single market, so we will look constructively at any proposals with an open mind.”[5]

It was later commented by Edward Miliband (Leader of the Labour Party) that the Prime Minister rests his whole case on the fact that 26 countries will not be able to use the existing treaties or institutions – that is “apparently the win that he got for this country.”[6]

Protection of the British financial services industry

Edward Miliband (Leader of the Labour Party) also raised this issue. According to him, it was never even proposed that the fiscal rules being imposed on euro area countries would have applied to Britain. He also notes that the Prime Minister did not secure any extra protection for financial services such as a veto on financial services regulation or a guarantee on the location of the European Banking Authority.[7]

Britain isolated and marginalised

A further major concern was that Britain would be left without a voice.

The Prime Minister commented regarding the idea of a ‘two-speed’ Europe that “This is not about the speed at which different organisations travel: it is about the fact that Europe already has different facets. Britain is not in the single currency or in the Schengen no-borders agreement, but we are a leading member of the single market and we play a huge role in foreign and defence policy throughout Europe and NATO. We should not be embarrassed about that, and we should do what is in our national interest-rather than thinking that the right thing to do is to sign up whether or not it suits us.”[8]

A European superstate

Mr Jeffrey M. Donaldson ((MP Lagan Valley) (Democratic Unionist Party)) “The reality is that a bandwagon driven by Germany and France is taking the EU inexorably towards a European superstate. Those countries are using the current crisis in the eurozone as a cover to advance their agenda, and the fiscal compact is deepening and strengthening their desire—and the mechanisms that go with it—to build that European superstate.”[9]

He then went on to comment on how the Irish Government are subjected to the ignominy of having to give their budget to Europe for approval before their Finance Minister has the opportunity to get up in the national Parliament to tell the people of the country what their Government are doing. Many people in Dublin now regard Berlin as the capital of the Republic of Ireland, not Dublin, because that is where the real decisions are being taken about their future. For this reason he believes the real agenda is to build a European superstate, which is to denude nations of their democratic sovereignty. In his opinion, the fiscal compact exists precisely to benefit that agenda, as when a country and a nation cedes fiscal independence, it cedes a huge part of its national sovereignty. DUP Members are strongly against UK fiscal independence being abrogated and given to those in Brussels, who are accountable to nobody, who were not elected by anyone in this country and who are not answerable to the Parliament or people of this country.

How has the Fiscal Compact been ratified in the United Kingdom and on what legal basis/argumentation?

Not applicable.

Ratification difficulties    
What political/legal difficulties
did the United Kingdom encounter during the ratification of the Fiscal Compact?

Not applicable.

Balanced Budget Rule      
Article 3(2) Fiscal Compact prescribes that the Balanced Budget Rules shall take effect in national law through “provisions of binding force and permanent character, preferably constitutional, or otherwise guaranteed to be fully respected and adhered to throughout the national budgetary processes.” How is the Balanced Budget Rule (intended to be) implemented in the United Kingdom? Will there be an amendment of the constitution? If not, describe the relation between the law implementing the Balanced Budget Rule and the constitution. If the constitution already contained a Balanced Budget Rule, describe the possible changes made/required, if any.

Not relevant.

Debate Balanced Budget Rule 
Describe the national debate on the implementation of the Fiscal Compact/Balanced Budget Rule, in particular in relation to the implications of the treaty for (budgetary) sovereignty, constitutional law and the budgetary process.

Not applicable.

Relationship BBR and MTO     
What positions, if any, are taken in the national debate about the relationship between the Balanced Budget Rule of article 3(1)(b) Fiscal Compact and the Medium-term Budgetary Objective (MTO) rule in the Six-Pack (section 1A, article 2a Regulation 1466/97, on which see above question VII.10)?

Not applicable            .

Case law  
Is there a (constitutional) court judgment on the Fiscal Compact/implementation of the Balanced Budget Rule?

Not applicable.

Non-Eurozone and binding force  
Has the United Kingdom decided to be bound by parts of the Fiscal Compact on the basis of article 14(5) Fiscal Compact already before joining the Euro area, or has this option been debated?

Not applicable.


What other information is relevant with regard to the United Kingdom and the Fiscal Compact?

The House of Commons EU Select Committee have produced a report entitled “Treaty on Stability, Coordination and Governance: impact on the eurozone and the rule of law.”[10] Similarly, the House of Lords European Union Select Committee has produced a report entitled ‘The euro area crisis’.[11]

The Government’s main concerns regarding the Fiscal Compact appear to be the risk that the new procedures and competences it gives the EU institutions may ‘spillover’ into other areas of the Treaties and thus affect the functioning of EU law. For example, the first concern related to the reverse qualified majority voting mechanism and the potential this might have for a precedent possibly being set for the use of this mechanism in other areas of the European Union treaties.

A second concern related to the possible role both of the Commission and of the European Court of Justice to judge national budgets. David Lidington MP on behalf of the government gave evidence to the Commons that the “The principle that [the government] continue[s] to assert is that we think EU institutions should only be used outside the EU treaties with the consent of all Member States, and any such use must respect the treaties, because it is the treaties that have primacy in any clash.”[12] The concern that the Fiscal Compact is illegal  due to the conferral of powers on the EU institutions without the agreement of all Member States has been repeated in Parliament is. On 29th February 2012, Bill Cash (Conservative MP) scheduled an emergency debate to encourage further discussion on the legality of the Treaty.[13]

[1] Lord Owen, HL Hansard 10 May 2012, Col 93 ff

[2] HC Hansard, 12 Dec 2011, http://www.publications.parliament.uk/pa/cm201011/cmhansrd/cm111212/debtext/111212-0001.htm#1112127000001

[3] ‘The euro area crisis,’ 25th Report of Session 2010-12, HL Paper 260

[4] ‘‘Cameron’s demands over financial regulation spark French resistance’’, Financial Times, 9 December 2011.

[5] HC Hansard, 12 Dec 2011, Col 521  http://www.publications.parliament.uk/pa/cm201011/cmhansrd/cm111212/debtext/111212-0001.htm#1112127000001

[6] HC Hansard, 12 Dec 2011, Col 523 http://www.publications.parliament.uk/pa/cm201011/cmhansrd/cm111212/debtext/111212-0001.htm#1112127000001

[7] HC Hansard, 12 Dec 2011, Col 523 http://www.publications.parliament.uk/pa/cm201011/cmhansrd/cm111212/debtext/111212-0001.htm#1112127000001

[8] HC Hansard, 12 Dec 2011, Col 527 http://www.publications.parliament.uk/pa/cm201011/cmhansrd/cm111212/debtext/111212-0001.htm#1112127000001

[9] HC Hansard 13 Dec 2011, Col 735

[10] Sixty-second Report of Session 2010-12

[11] 25th Report of Session 2010-12, HL Paper 260

[12] David Lidington MP response to Question 142, in HC European Scrutiny Committee inquiry, Reinforcing the Eurozone, 23 February 2012 http://www.publications.parliament.uk/pa/cm201012/cmselect/cmeuleg/uc1817-iii/uc181701.htm

[13] HC, Hansard, 29th Feb 2012 Col 298ff