Merkel secures major victory

German chancellor concedes ground on financial discipline to secure deal on permanent crisis mechanism.

Angela Merkel, Germany’s chancellor, won a major victory at the EU leaders’ summit in Brussels by convincing reluctant governments to accept a change to the EU treaty as the price for setting up a permanent eurozone crisis mechanism.

The deal was secured, however, only after a number of important concessions on other demands. Germany had to give up demands for member states that break eurozone budget rules to lose voting rights and face automatic sanctions.

Other eurozone countries were shocked when Merkel and Nicolas Sarkozy, France’s president, jointly called for treaty change at their summit in Deauville on 18 October. Nonetheless, by the early hours of this morning, all of the EU’s leaders had been persuaded to agree to a limited treaty change to allow for the creation of a permanent crisis mechanism to help eurozone countries unable to re-finance their debts.

EU leaders accepted that a temporary eurozone crisis facility set up in May had to be replaced with a permanent mechanism to avert the possibility of a recurrence of the problems faced by the eurozone earlier this year.

Merkel managed to translate this consensus on the need for a permanent mechanism into support for treaty change, despite opposition from countries such as Ireland, where a referendum might be needed, and the UK, where the government had vowed to hold a referendum on any treaty change that would transfer more powers to the EU.

Merkel argued that Germany’s constitutional court could rule that a permanent mechanism would breach EU rules banning eurozone bail-outs. Only with treaty change would the new mechanism have a firm legal base, she argued.

Leaders agreed to a limited treaty change that could be ratified by national parliaments without the need for a referendum in Ireland or the UK, as this would entail no transfer of powers to the EU.

Suspension of voting rights

Merkel and Sarkozy had also insisted in their Deauville declaration that eurozone countries that persistently broke budget rules should lose their voting rights. But this was fiercely opposed by a large number of EU leaders during discussions on the conditions for the crisis mechanism on Thursday, the first day of the summit. José Manuel Barroso, the European Commission president, said the idea was “unacceptable”.

It was also incompatible with the limited treaty change agreed at the summit, because, for offending countries, it would have been a clear transfer of sovereignty to the EU. That would have required a referendum in Ireland – and few doubt such a referendum would have been lost. A senior official said: “I can’t imagine the Irish voting in a referendum not to have voting rights if they don’t respect the rules of the stability and growth pact.”

Sarkozy’s price for backing Merkel on treaty reform was to impose a degree of political influence over the imposition of sanctions for breaching EU rules on budget discipline. Merkel had wanted sanctions to be automatic but Sarkozy persuaded her to accept that sanctions should be approved by a weighted majority of member states, opening the door for politically motivated blocking of punitive measures.

The terms for the sanctions under new economic governance rules agreed at the summit made it harder to block penalties by requiring a weighted majority of member states to prevent sanctions.

EU budget

David Cameron, the UK’s prime minister, linked his agreement to a treaty change to support for a tough line on the EU’s budget. He convinced Merkel and Sarkozy to back his demand that the increase in the EU’s budget should be no bigger than 2.9%. He also won agreement that the size of the EU’s budget should be in line with member states’ efforts to cut budget deficits.

Nine countries also made their support for the mechanism conditional on getting favourable treatment for reform of their pension systems. Bulgaria, the Czech Republic, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia and Sweden want the short-term costs of pension reforms to be left out when the EU calculates member states’ levels of public debt. The nine were concerned that they would be punished for reform efforts, since the reforms will add to the budget costs in the short term. The summit agreed to “acknowledge the importance of systemic pension reforms”.

The deal to set up the permanent crisis mechanism had the strongest political support among EU leaders. But the concessions that other countries secured in exchange for agreeing to treaty change showed that, despite annoyance with the Deauville statement, France and Germany cannot simply dictate terms to their EU partners.