What are the major points of this agreement, and what are the immediate next steps?
Under the old Stability and Growth Pact, states agreed to participate in a peer-reviewed budget surveillance mechanism that caps budget deficits at 3 percent of GDP. After consideration, the Ecofin (Economic and Finance ministers) can trigger the “excessive deficit procedure” with a majority vote, possibly resulting in fining recalcitrant states. However, this mechanism has proved insufficient time and again, whether it’s because a state conceals its finances (Greece), or uses its large contingent in Ecofin (France and Germany), to vote against such measures.
The proposed agreement would reverse this system, and permit automatic sanctions for states running a deficit over 3 percent, unless a supermajority of states voted against the penalty. This will ultimately have to be processed through the European Court of Justice. It also commits its signatories to a deficit no greater than 0.5 percent of GDP in periods of economic stability (written in domestic constitutions), and requires them to submit national budgets to the European Commission for approval.
However, what we have is an agreement to negotiate the aforementioned changes, rather than a change. Yet, the British veto has blocked any European Union (EU) treaty (all EU treaties require a unanimous vote). Hence, the 17 Eurozone members and six more have agreed to a treaty among states outside the EU. This is a major fault point, as the mechanisms described above require the involvement of major EU institutions, and there can be no such involvement unless everything gets written in an EU treaty. As such, this agreement may be quicker to set up, but it may prove to be much less stringent than the existing mechanism.
How significant is this agreement to Europe's political and economic stability going forward?
We have yet to see the actual negotiations, but I believe the 0.5 percent target will be negotiated up to the old 3 percent, as almost all EU member states have not, and cannot, meet this criterion, including Germany. However, this new agreement is a massive change toward supranationality (and federalism). Taxation and spending are two of the few policy areas remaining outside EU competence, and bringing them under a common EU mechanism would create a brand new union. Even defense will not be spared, as it is part of state budgets.
The agreement’s significance lies also in its attempt to calm markets, and convince investors that the EU will not let any of its members default on its debts. In this respect, there is no new agreement in augmenting the temporary Euro-bailout fund (remains at 440 billion euros), which is already running low, and Italy’s debt is looming in the horizon. They did, however, agree to speed up the creation of the European Stability Mechanism (500 billion euros), and provide the IMF with another 200 billion euros. But these last two have yet to be realized.
Why didn't Britain back this plan, and what will this refusal mean for the country in the short and long term?
Britain’s “pick and choose” attitude in terms of major EU agreements is not new, and it has received opt-outs from several EU treaties. Fearing that proposed financial services regulations would affect the London financiers, Prime Minister David Cameron proposed yet another opt-out, which others refused. Hence, Cameron had no choice but to veto the agreement, as it ran counter to Britain’s interests, and European leaders chose to go forward without Britain.
It seems European leaders have grown tired of Britain reaping the benefits of cooperation and opting out of provisions if their interests are at stake. This veto will alienate Britain even more from the Continent, and may trigger the “Eurosceptics” in Cameron’s party to ask for yet another referendum on membership. However, the reality remains that Britain conducts over half of its trade with EU countries; that France needs Britain as a counterbalance to the ever-soaring German economy; and that Germany needs Britain to counterbalance the French propensity for traditional industrial policy.