Last November the European Court of Auditors published its report on the implementation of the 2010 EU Budget. The Court has issued an unqualified opinion on the reliability of the 2010 EU accounts. However, unsurprisingly, the Court has refused to sign off on how the money from the EU's 2010 budget had been spent. Year after year and nothing has changed; in the meantime taxpayers' money is being spent in a system that does not work. In fact, as this report shows, there are serious errors and mistakes in the system. The EU spending continues to be affected by “material error.” The Court has estimated the error rate for payments from the €122.2 billion 2010 EU budget at 3.7%. There has been, therefore, an error rate increase from 3.3 % in 2009 to 3.7 % in 2010. This means that €4.6bn was spent against EU rules governing the spending, including, according to ECA “breaches of public procurement rules, ineligible or incorrect calculation of costs claimed to EU co-financed projects, or over-declaration of land by farmers.” The court has delivered, therefore, an adverse opinion on the correctness and regularity of payments underlying the accounts.

The EU monitoring and accounting system is inadequate. The ECA concluded, “The control systems tested across the EU budget were still only partially effective in ensuring the regularity of payments”.

The UK as well as the Netherlands and Sweden abstained, last year, on the vote but this year they voted against discharging the accounts for the 2010 EU budget, showing, in this way, their concerns over lack of accountability and transparency on how EU money is spent. Chloe Smith, the economic secretary to the Treasury told the House of Commons “We have not seen enough progress in reducing the level of errors in EU transactions, which is unacceptable.”

The UK, the Netherlands and Sweden said in a joint statement “that the current scarcity of public resources across the EU increases the importance of sound financial management of EU funds and that the credibility of EU spending depends crucially on orderly accounting of EU expenditure;” They also “regret strongly that, for the seventeenth year in succession, the European Court of Auditors has been unable to grant a positive unqualified statement of assurance on the EU budget as a whole and, furthermore, that it has not proven possible to sustain the recent year-on-year reductions in the overall error rate, which remains significantly above the acceptable threshold of 2 %;”

Hence, the UK, the Netherlands and Sweden have decided, for the first time, to vote against approving the EU accounts. They said, "In these challenging times, member states should uphold the same high standards for the EU budget as they would for national budgets. We should remember that national taxpayers stand behind the EU budget, and that's why we are calling for important and urgent improvements to the quality of EU financial management," Nevertheless, the Council recommended the European Parliament to give a discharge to the Commission in respect of the implementation of the 2010 budget. The UK, the Netherlands and Sweden could not block the approval of the EU’s accounts for 2010, as they were approved by qualified majority. The European Parliament is expected to vote on its discharge report in May.

Moreover, the Council also adopted recommendations on the discharge to be given for their 2010 budgets to the directors of 24 EU agencies, six EU executive agencies and seven joint undertakings. However, it is important to recall that according to the EUobserver an ECA’s report found that there are several issues in the way that 31 EU agencies manage their budgets. The Court found that several agencies “could not properly account for half the expenses they filed in 2010”. Monica Macovei MEP, rapporteur on the European Parliament position on granting a discharge to each agency, said "It is scandalous that at a time when governments are struggling to borrow money at high costs, these agencies do not return anything to the EU budget. It is as if they are living in a parallel world, untouched by the economic crisis,".

The proposals would give the Commission powers over national budget decision-making. The Commission has no legitimacy nor a democratic mandate to intervene in member states’ matters in this way, nevertheless the Eurozone leaders called for a speedy approval by the Council and the European Parliament of the Commission proposals. The draft regulations are subject to the ordinary legislative procedure, and QMV is required at the Council, but only eurozone Member states are allowed to vote. In fact, the Council has unanimously supported the draft regulations. On 21 February, the Council agreed a general approach on the so-called Economic governance - Second package ("Two-pack"), giving therefore a mandate for the Danish presidency to start negotiations on behalf of the Council with the European Parliament. According to the ECOFIN’s conclusions “The aim is to adopt the regulations in first reading, before the end of the Danish presidency.”

The European Parliament and the Council of Ministers will work towards reaching a first reading agreement on the two draft regulations aimed at further strengthening economic governance in the euro area therefore the proper consideration of the vital details of the legal texts would be sacrificed in a blind rush to adopt the legislative proposals before summer. Obviously, the behind close doors meetings would be fully used at the expense of a proper debate and analysis of the legislative proposals.

According to Barroso “We need to complement the democracy of nation states with the democracy of the European Union,” However, the Commission’s proposals are a threat to Member states' control of public finances, restricting national sovereignty and undermining democracy. There would be closer co-ordination, and direct supervision of the eurozone member states economic and budgetary policies. The Commission’s proposals are the beginning of the end of budgetary sovereignty for eurozone member states. One could wonder whether eurozone citizens are willing to accept more national sovereignty being given to Brussels. However, they have not been asked whether they accept a fiscal and political union with an economic policy imposed by Germany.

The Commission pointed out that member states are required, under the treaties, to “regard their economic policies as a matter of common concern and that their budgetary policies are guided by the need for sound public finances and that their economic policies do not risk jeopardising the proper functioning of Economic and Monetary Union.” Hence, under the Commission proposal, eurozone member states “should consult the Commission and other Member states whose currency is the euro before the adoption of any major fiscal policy reform plans with potential spillover effects, so as to give the possibility for an assessment of possible impact for the euro area as a whole.” In fact, “They should consider their budgetary plans to be of common concern and submit them to the Commission for monitoring purposes in advance of the plans becoming binding.”

The aim of the Commission proposal is to strengthen the surveillance of budgetary discipline in the eurozone member states. The member states subject to the excessive deficit procedure would be subject to closer monitoring. The Commission proposed a “synchronized monitoring” of member states budgetary policies. It proposed, therefore, a “common budgetary timeline” whereby member states would be required to “make public annually their medium-term fiscal plans in accordance with their medium-term budgetary framework based on independent macroeconomic forecast together with their Stability Programmes, no later than 15 April.” Then, the draft budget laws and the independent macroeconomic forecasts on which they are based shall, annually, be made public, no later than 15 October. Furthermore, budgets would have to be adopted and made public, annually, no later than 31 December.

Eurozone member states would be required to submit annually to the Commission and the Eurogroup their draft budgetary plans for the next year for monitoring purposes before the plans being submitted to national parliaments. The aim is to enable the Commission and the Eurogroup to examine national budgets in order to assess whether draft national budgets are in line with EU economic guidelines and rules on fiscal discipline before they are adopted by national parliaments and recommend changes. This would be another step towards fiscal integration. The plan is to transfer fiscal policy decisions from national parliaments to Brussels. Such proposal would allow the Commission to interfere in member states’s budget decision making. In fact, Barroso has accepted that “increased surveillance by the Commission will lead unavoidably to a greater role in domains previously restricted to national governments or parliaments.” Moreover he said, “This is necessary and indispensable if we want to have a common currency.” However, one can wonder whether the Commission has legitimacy to intervene in member states’ matters in this way, by taking control of member states budgets. Eurozone Member states would no longer be able to pursue their own economic and fiscal policies.

If the Commission believes that a member state is not complying with the Stability and Growth Pact’s budgetary policy obligations, it would be empowered, under the draft proposal, to recommend changes and even to request a revised draft budgetary plan from the Member State concerned. In order to increase the pressure upon eurozone member states such request would be made public.

The Commission would be allowed to give instructions on spending and taxation to eurozone member states.

Under the draft regulation, the Commission would adopt an opinion on the draft budgetary plans, that Member States would be invited to take into account in the process of adopting the budget. Obviously, this opinion would “include an assessment of whether or not the budgetary plans appropriately address the recommendations issued in the context of the European semester in the budgetary area.” The Commission would make an overall assessment of the budgetary situation and prospects in the euro area as a whole, which will be then discussed in the Eurogroup.

In the other hand, the eurozone member states who are already subject to an excessive deficit procedure would be monitored more closely. They would have to provide further information for the purposes of monitoring the progress towards the correction of the excessive deficit. If the Commission identifies risks in the compliance of a member state's deadline to correct the excessive deficit, it will issue a recommendation to that state for measures to be taken within a given timeframe. The Council when deciding whether effective action to correct the excessive deficit has been taken, it would also base its decision on whether or not member states complied with the Commission recommendations.

The competent committee of the European Parliament may invite the member state concerned by a Commission recommendation to participate in an exchange of views, meaning to explain their national budgetary plans and their national policies.

The European Commission also proposed a regulation on the strengthening of economic and budgetary surveillance of Member states experiencing or threatened with serious difficulties with respect to their financial stability in the euro area. The Commission has recalled “The economic and financial integration of the Member states whose currency is the euro calls for a reinforced surveillance to prevent a contagion from a Member State experiencing difficulties with respect to its financial stability to the rest of the euro area.”

Under the draft proposal, a eurozone member state who is experiencing/ at risk of experiencing “severe financial disturbance” would be subject to enhanced surveillance aiming at protecting “the other euro area Member states against possible negative spill over effects.” The European Commission would be allowed to decide whether to subject a member State experiencing severe difficulties with regard to its financial stability to enhanced surveillance. The member state concerned would have the possibility to express its views but that won’t change the Commission position that would then decide every six months whether to prolong the enhanced surveillance.

When requested, member states under enhanced surveillance would have to communicate to the Commission, the ECB and the European Banking Authority information on the financial situation of the financial institutions which are under the surveillance of its national supervisors as well as to undertake stress test and share the results with the Commission and ECB. They would be also required to communicate all information necessary for the monitoring of macro-imbalances. The Commission would carry out, in liaison with the ECB, regular review missions in the member state under surveillance to verify the progress made in the implementation of the measures required. Such missions would take place even if the member state concerned has not requested financial assistance.

If the Commission reaches the conclusion that the financial situation of the member state concerned has significant adverse effects on the financial stability of the euro area, it would put forward a proposal to the Council recommending to that member state to seek financial assistance and to prepare a macro-economic adjustment programme. The Commission would therefore tell those member states to seek a bailout. The Council would adopt such decision by qualified majority. Only eurozone member states are allowed to vote and the member state concerned has no vote. This has been the most controversial issue in the draft proposal. But, according to the Euobserver, this clause has been removed.

Such enhanced surveillance would entail broader access to information leading to a close monitoring of the economic, fiscal and financial situation and a regular reporting to the Economic and Financial Committee (EFC).

The Commission would be also allowed to decide whether to subject a member state receiving financial assistance on a precautionary basis from other countries, the EFSF, the ESM or the IMF, to enhanced surveillance. The member states, “requesting precautionary assistance” from the EFSF, the ESM, the IMF would be subject to the same type of surveillance.

The Commission would prepare, in liaison with the ECB, an analysis of the sustainability of the government debt of the member state who sought financial assistance from the EFSF or the ESM. In the end of the day, the European Commission would be given the power to administer member states facing severe financial difficulties.

A member state receiving financial assistance has to prepare a draft adjustment programme aiming at restoring its capacity to finance itself on the financial markets. On a proposal from the Commission, the Council shall approve the adjustment programme by qualified majority. The Commission and the ECB monitor the implementation of the programme and the member state concerned is required provide the Commission with all the necessary information.

There might be exchange of views on the implementation of the adjustment programme between the relevant Committee of the European Parliament and representatives of the member state concerned and representatives of the Commission may be invited by the Parliament of that member state to participate to an exchange of views on the progress made in the implementation of the adjustment programme.

A member state would be subject to a post-programme surveillance if a minimum of 75% of the financial assistance received from member states, the EFSM, the EFSF or the ESM has not been repaid. On a proposal from the Commission, the Council, acting on a qualified majority, may extend the duration of the post programme surveillance. The Commission will conduct with the ECB regular review missions in the member state under post programme surveillance to assess its economic, fiscal and financial situation. On a proposal from the Commission, the Council, acting by qualified majority, may recommend to the member state under post programme surveillance to adopt corrective measures.

It is important to recall the inter-governmental treaty on stability and convergence in the Economic and Monetary Union, which will be formally signed at the next European Council meeting on 1 March, provides that “Within five years at most following the entry into force of this Treaty, on the basis of an assessment of the experience with its implementation, the necessary steps shall be taken, in compliance with the provisions of the Treaty on the European Union and the Treaty on the Functioning of the European Union, with the aim of incorporating the substance of this Treaty into the legal framework of the European Union.” There is, therefore, a clear aim of incorporating this treaty into EU legal framework within five years of its entry into force. The incorporation of this treaty into the EU treaties would, obviously, entail a treaty change, which, accordingly, requires the agreement of all member states, including the UK. However, the aim is to integrate provisions of the draft treaty into the EU legal framework via secondary legislation, particularly through these proposals.

The EU Member States are divided on this issue, whereas the UK and Sweden and are against the introduction of the FTT in the EU, France and Germany are very much in favour. Belgium, Greece, Hungary, Portugal and Spain also support the idea. In fact, French President Nicolas Sarkozy is pushing for a financial transaction tax. Angela Merkel’s coalition government is divided over the issue therefore she said that the FTT should be adopted by all 27 EU members. Italy is now backing Germany on this, Mario Monti said "The government headed by (my predecessor Silvio) Berlusconi had voiced its opposition at the EU level, I however have expressed the Italian government's openness on that issue". Moreover, he said "It is necessary that the different countries do not go it alone in the application of this tax. I believe in a European perspective”. It is important to note that some eurozone member states, particularly Ireland, Czech Republic, Malta and the Netherlands, have shown concerns about the proposal. Denmark, which currently holds the Presidency of the Council of the European Union, has also spoken out against the creation of an EU financial transactions tax. Margrethe Vestager, Danish Economics Minister, has recently said "Since everyone agrees that today's priority is to create jobs, we are very reluctant to support a proposal that would have the opposite effect, minimising growth and causing significant job losses”. Moreover, she recalled, "the European Commission suggests itself that you may lose 0.5 percent of growth, and the equivalent of hundreds of thousands of jobs" if such tax is introduced.

Meanwhile, the European Parliament's Committee on Economic and Monetary Affairs has started to examine the proposal for a financial transaction tax, and it has already emerged a broad agreement in favour of it. It seems that only the ECR group is opposed to the tax. The report on the Commission’s proposal would be put to a committee vote in April and then the plenary will vote in June. In the meantime, nine EU member states, including Austria, Belgium, Finland, Greece, Spain, Portugal and Italy, led by France and Germany, sent a joint letter to the Danish government, which holds the rotating presidency of the EU's Council of Ministers, asking it "to accelerate the analysis and negotiation process" of the European Commission’s proposal for  the FTT. These member states are calling for a first reading agreement to be reached by the end of June. Britain, Sweden, Malta and Denmark have now expressly opposed such proposal, as they fear investors would move from Europe. It is clear that there is no unanimity on it, consequently an EU-wide tax is impossible.

However, it has already been mentioned if unanimity is not reached, the FTT would be introduced by the so-called ‘enhanced cooperation’. The fact that nine member states have signed the above-mentioned letter, is noteworthy as nine is the minimum number of member states required in order to use the ‘enhanced co-operation' mechanism to adopt such proposal. It is important to note that according to the Commission it is necessary to introduce such tax to ensure the proper functioning of the internal market. However, one could say if enhanced cooperation is used to adopt the FTT, it could no longer be justified to avoid fragmentation in the internal market for financial services.

The Commission has defined the FTT´s territorial application on the basis of the “residence principle.” Hence, "The tax would not be based on where transactions take place but on the parties involved". Consequently, it would also have an impact in the City of London, as the tax would apply to any transaction involving investors based in the participating member states, even if it was executed in London. In fact, Algirdas Šemeta, the European Commissioner for taxation and customs union, has said to the Financial Times that a eurozone FTT would be “designed in such a way that it doesn’t matter where transactions are taking place. I think that London will lose out.” A financial transaction would be taxable in the EU, if one of the parties to the transaction is established in the territory of a Member State. Taxation will take place in the Member State where the establishment of a financial institution is located, if this institution is party to the transaction, acting either for its own account or for the account of another person, or is acting in the name of party to the transaction. A transaction would not be subject to FTT if the establishments of the financial institutions, parties to the transaction, are located in a third country, however the third-country financial institution will be deemed to be established in the EU if one of the parties to transaction is established in the EU and, in this case, the transaction would become taxable in the Member State concerned.

The Commission has proposed “minimum tax rates”, therefore member states would not be allowed to fix lower but higher rates. Hence, under the Commission proposal, the exchange of shares and bonds shall be taxed at 0.1 per cent whilst derivative contracts taxed at a rate of 0.01%. Member States would be required to apply the same rate to all financial transactions that fall under the same category.

According to the Commission’s own impact assessment a “0.1%, a transaction tax on securities could, without the application of mitigating effects, reduce future GDP growth in the long run by 1.76% of GDP and of 0.17% at a rate of 0.01%,”. According to the Government such figures represent “a fall in economic output of €216 (£186) billion, a fall in employment of 0.2% equates to a loss of 478,000 jobs, a 3.43 % fall in EU GDP equates to a fall in economic output worth €421 (£362) billion and a 0.34% fall in employment equates to a loss of 812,000 jobs.” The Financial Times has recently reported that according to Oxera the FTT might result in a 2% cut to GDP.

In his speech at the World Economic Forum in Davos, David Cameron said that the Brussels's plan for a financial transaction tax is "simply madness". Moreover, he recalled that the European Commission's own original impact assessment “showed a Financial Transactions Tax could reduce the GDP of the EU by 200 billion euros, cost nearly 500,000 jobs and force as much as 90 per cent of some markets away from the EU." Unsurprisingly, the European Commission replied by saying that the study mentioned by David Cameron was "being read completely out of context." Algirdas Semeta said "The commission's own figures have been misused and misrepresented to create doomsday scenarios around the impact on growth, jobs and competitiveness," hence, the Commission has decided to revise its impact assessment of a proposed financial transactions tax. As Dr Kay Swinburne MEP, European Conservatives and Reformists group economics spokesman said, the European Commission “is now treating impact assessments like referenda: keep asking until you get the answer you want.” Dr Kay Swinburne noted that "The assessment was clear: a FTT will lead to job losses, slow growth, and businesses leaving the EU altogether.” Moreover she stressed that “The commission wants to whitewash these warnings” and “is adamant it will impose this tax, regardless of the consequences.”

Obviously, according to the Government it is not “right to impose a tax which will clearly impact on economic growth across the EU, with the UK bearing a disproportionate share of this impact;” The UK is home to Europe’s biggest financial centre, such tax is, therefore, an attack on the City of London. Under the Commission proposal a considerable percentage of the FTT revenue will come from transactions carried out in the UK, consequently investors would leave the City of London.

The Government believes that over 50% of revenues raised in the EU would come from activity in the UK. According to the Commission such revenues could be around 57 EUR billion every year in the whole EU, and “can be wholly or partly used as own resource for the EU Budget replacing certain existing own resources paid out of national budgets…” The Commission believes that the FTT could account around 22.7% of the EU own resources by 2020. Soon, the Commission will present an own resource proposal setting out how the FTT will “serve as a source for the EU budget”, particularly how the revenues would be divided between the EU budget and national budgets. If such proposals go ahead the UK could become the main net contributor to the EU budget. France believes that the FTT’s revenues should also be used to reduce the debt of EU Member States.

Under the Commission proposal the scope of the tax would be broad, because it would cover transactions relating to all types of financial instruments. The scope covers, therefore, instruments, which are negotiable on the capital market, money-market instruments, units or shares in collective investment undertakings and derivatives agreements. It not only covers trade in organised markets but also covers other types of trades including over-the-counter trade. It not only includes the transfer of ownership but also the obligation entered into. In fact, the Commission has said “The financial transaction tax aims at taxing the 85% of financial transactions that take place between financial institutions.” Under the draft directive, transactions with the European Central Bank and national central banks would not be subject to FTT as well as transactions such as conclusion of insurance contracts, house mortgages, consumer credits or payment services. According to the Commission citizens and small businesses would not be taxed.

However, Brooke Masters, Jeremy Grant and Chris Bryant have written in The Financial Times “According to bankers and corporate executives, Mr Barroso’s stated target, the banks, will probably be able to pass much of the cost on to their customers and shift their internal hedging transactions out of Europe.” Joanna Cound from BlackRock was quoted as saying “The FTT will hit hard pensioners and savers throughout Europe – not just the wealthy – because it applies to all financial transactions including those on behalf of pension and investment funds,” Moreover, in an article for The Daily Telegraph, Karl Sigfrid, Swedish MP, said "The real reason why consumers will have to carry the burden is that the banks, to safeguard their profit margins in a competitive market, would have to implement less generous customer policies.” Furthermore, he said “Customers would be saddled with higher fees, pay higher interest on their mortgages and see less growth in their savings. People will also be hit if they have stakes in pension funds that engage in frequent financial transactions, so add that to the bill.”

According to Mark Hoban such tax would increase trading costs as well as “costs related to complying with the tax”, including administrative costs. Moreover, the minister noted that the tax would not have just an impact on banks and bankers, in fact, it “also increase costs for consumers through this tax being paid by insurers, asset managers, pension funds, industry including manufacturing and the broader service sector;” The City A.M. has recently reported that according to a report published by the Global Financial Markets Association (GFMA) “the cost of trading foreign exchange will soar by up to 18 times if an EU Tobin tax becomes law”. Moreover, the Alternative Investment Management Association has also said “As well as undermining the EU’s single market, the FTT would be likely to reduce EU taxpayers’ savings and pensioners’ incomes, lead to a reduction in the level of investment in the real economy, send asset prices lower, widen spreads, hinder efficient price discovery and increase market volatility.”

There is widespread opinion that such tax won’t stabilise the markets and it would undermine economic growth. As noticed by Howard Wheeldon such tax would “tear what remains of Europe’s financial industry apart.” The Government has pointed out that “there is no clear evidence that the proposal would improve market stability.” According to Euractiv, the head of taxation at the Association of Chartered Certified Accountants (ACCA), Chas Roy-Chowdhury, said "We believe that [a European FTT] would lead to even slower growth in the region and the migration of financial institutions to other financial centers of the world such as Hong Kong, Shanghai, Singapore or New York…” The chief executive of the European Banking Federation (EBF), Guido Ravoet, pointed out "No taxation measure should be detrimental to growth, impede European competition and end up driving business out of Europe.” He stressed that "In adopting a Directive, EU legislators need to carefully look at ways to prevent such a tax from seriously damaging the European economy…” In a letter to The Daily Telegraph, an alliance of bankers and city trade associations, British Bankers’ Association, TheCityUK, International Swaps and Derivatives Association, Investment Management Association and Association of British Insurers, said “The proposed FTT would not achieve the stated aims, and would have a fundamental and negative impact on the European economy and employment across all sectors.”

The regulation on the prevention and correction of macroeconomic imbalances provides for a “new element of the economic surveillance process” the so-called Excessive Imbalance Procedure (EIP), which comprises a regular assessment of risks of imbalances, including an alert mechanism. The alert mechanism is intended to early detect Member States with potentially problematic levels of macroeconomic imbalances. Such mechanism is based on a scoreboard, which consists of a set of economic and financial indicators, with corresponding indicative thresholds, aiming at identifying imbalances emerging in different parts of the economy. A scoreboard rates therefore member states' performances as regards economic stability and competitiveness.

The Commission has therefore established a scoreboard composed of ten economic, financial and structural indicators and it has defined alert thresholds for each of them. It includes indicators on government and private debt, private credit flow, house prices, unemployment, current account balance, net investment positions, real effective exchange rates, trade balance and unit labour cost. Member States performance, including the UK, has been assessed against these indicators.

On 14 February, the European Commission adopted its first annual report, the so-called Alert Mechanism Report, providing for an economic and financial assessment “putting the movement of the indicators into perspective.” According to the Commission “Large and persistent macroeconomic imbalances (…) accumulated over the past decade and were part of the root causes of the current economic crisis.”

Based on a scoreboard of 10 macroeconomic indicators, the European Commission’s Alert Mechanism Report has identified 12 EU Member States that the Commission deems to be affected by, or at risk of, imbalances as well as the cases for which more in-depth analyses are required. The Commission has, therefore, compiled a list of Member States deemed at risk of imbalances (black list) and whose macroeconomic situation requires a further in-depth review. According to the European Commission the macroeconomic situation in the following countries needs to be further investigated: Belgium, Bulgaria, Cyprus, Denmark, Finland, France, Italy, Hungary, Slovenia, Spain, Sweden and the UK. Among the reasons presented by the European Commission for calling for in-depth analysis on the UK are a loss of export market shares over the last decade, although the Commission has noted “some stabilisation can be noted in recent years”, high level of private debt and rising house prices. The Commission pointed out “The household debt largely reflects mortgages in a context of high accumulated increases in house prices.” Moreover, the report reads “While both the level of household debt and real house prices has been reduced, they still remain high which suggests that the unwinding of these imbalances has further to go where the speed of adjustment is an important aspect.” The UK will be therefore subject to in-depth investigation by the European Union.

The Commission has pointed out that “It is only these subsequent in-depth reviews that will assess whether or not imbalances exist and whether or not they are harmful.” The conclusions of the Alert Mechanism Report will be now discussed by the Ecofin and the Eurogroup. Based on the multilateral surveillance procedure and the alert mechanism, and taking account of the discussions in the Council and the Euro Group, the Commission will provide a country-specific in-depth reviews for Member States where the alert mechanism indicates possible imbalances or a risk.

The Commission will start preparing in-depth reviews for the Member States abovementioned, including the UK. The in-depth review will cover an analysis of sources of imbalances in the Member State under review and whether these imbalances constitute excessive imbalances. It will analyze “the origin of the detected imbalances against the background of prevailing economic circumstances, including the deep trade and financial inter-linkages between Member States and the spillover effects of national economic policies” as well as “relevant developments related to the Union strategy for growth and jobs. It shall also consider the relevance of economic developments in the Union and the euro area as a whole.” 

The review may include enhanced surveillance missions by the Commission to Member States concerned and additional reporting by the Member State in case of severe imbalances. The in-depth review will take into account the severity of imbalances and possible spillovers to other Member States, whether the Member State in question has taken appropriate action in response to Council recommendations as well as the Member State policy intentions, as reflected in its Stability and Convergence Programme and National Reform Programme, and any early warnings or recommendations from the European Systemic Risk Board to the Member State under review.

After the abovementioned in-depth Commission analysis, if the Commission considers that there are macroeconomic imbalances, or there is a risk that a Member State is experiencing imbalances, it shall inform the Council and the Euro Group accordingly and the European Parliament. Then, the Council on a recommendation from the Commission may adopt the necessary preventive recommendations to the Member State concerned. An excessive imbalance procedure would be initiated if the in-depth review identified severe macroeconomic imbalances in Member State, including imbalances that jeopardise the proper functioning of the economic and monetary union. On a recommendation from the Commission, the Council may declare the existence of an excessive imbalance and recommend the Member State concerned to take corrective action within a specified deadline to remedy the situation. According to the Commission “Member States with excessive imbalances within the meaning of the EI would be subjected to stepped-up peer pressure.” Such recommendations may address policy challenges across several policy areas such as fiscal and wage policies, product and services markets.

Any Member State for which an excessive imbalance procedure is opened would be therefore required to present its policy intentions designed to implement the Council recommendations in a corrective action plan. Such corrective action plan should also include a timetable for implementation of the measures envisaged. If considered sufficient, on the basis of a Commission proposal, the Council will adopt an opinion, approving it. In the other hand, if the actions taken or foreseen in the corrective action plan or their timetable for implementation are deemed not enough to implement the recommendations, on the basis of a Commission proposal, it will invite the Member State to present a new corrective action plan within a new deadline. The Member State concerned would be under the obligation to report regularly on the progress of implementation. In fact, the Member State concerned shall report to the Council and the Commission on regular basis in the form of progress reports.

All member states, including the UK, are subject to burdensome reporting requirements. The Commission is allowed to carry out enhanced surveillance missions to the Member State in question in order to monitor implementation of the corrective action plan. This will be done “in liaison with the ECB when those missions concern Member States whose currency is the euro or Member States participating in ERM II.”

If there is a change in the economic circumstances, on a Commission recommendation, the Council may amend the EIP recommendations. In this case, the Member State concerned would have to submit a revised corrective action plan. The Council will assess the corrective action plan and, on the basis of a Commission report, it will decide whether or not the Member State concerned has taken the recommended corrective action. If the Council concludes that the Member State has taken the recommended corrective action, the excessive imbalance procedure will be held in abeyance which means that, although the member state is making satisfactory progress because of the possibly long period between adoption of corrective action and its effect, the Member States concerned will have to face periodic reporting and surveillance until the EIP is effectively closed. If the Council concludes, on a recommendation from the Commission, that the Member State is no longer affected by excessive imbalances, the excessive imbalance procedure shall be closed.

However, the Member State concerned will remain subject to the excessive imbalance procedure if it has not taken appropriate action. If the Member State has not taken the recommended corrective action, the Council, on a recommendation from the Commission, will adopt a decision declaring non-compliance and a recommendation setting new deadlines for taking corrective action. The regulation provides “The recommendation on declaring non-compliance by the Commission shall be deemed adopted by the Council unless it decides, by qualified majority, to reject the recommendation within ten days of the Commission adopting it.”

It is important to stress that although the UK will not be subject to sanctions, but it will be subject to the Council policy recommendations and might be placed in Excessive Imbalance procedure, moreover it would be subject to burdensome reporting requirements and surveillance missions from the Commission.

The regulation on enforcement measures to correct excessive macroeconomic imbalances in the euro area, lays down a system of fines for correction of macroeconomic imbalances in the euro area. Hence, if a member state repeatedly fails to comply with Council recommendations to address excessive macroeconomic imbalances would be subject, as a rule, to a yearly fine, until the Council concludes that the Member State has taken corrective action to comply with its recommendations. The Council, acting on a proposal by the Commission, will impose a yearly fine on member states, which fail to follow reforms to boost their economic competitiveness such as measures to counter balance of payments deficits or excessive wage costs. Such decision would be deemed adopted by the Council unless it decides, by qualified majority, to reject the proposal within ten days of the Commission adopting it. Only a qualified majority of the members of the Council of eurozone members can stop the fine being applied. The fine will be therefore adopted based on the so-called reverse voting mechanism.

Unsurprisingly, according to recent research, the new EU targets on employment, research and innovation, education and poverty reduction will not be met.

Research and innovation, as the European Commission said, have been placed at the heart of the Europe 2020 strategy. Yet, according to the 2012 Innovation Union Scoreboard, recently released by the Maastricht Economic and Social Research and Training Centre on Innovation and Technology, the EU as a whole continues to lag behind the United States, Japan and South Korea.

The EU has set the target to lift at least 20 million people from poverty and social exclusion in the context of the Europe 2020 strategy. However, according to a Eurostat’s publication release on 8 February, “In 2010 as in 2009, around 23 % of the European population (115.5 million people) were considered to be at risk of poverty or social exclusion (AROPE), according to the definition adopted for the Europe 2020 strategy.”

Moreover, according to a joint EU Council-Commission report, entitled "Education and Training in a smart, sustainable and inclusive Europe", the EU is also likely to miss its 2020 targets to reduce early school leaving and increase graduate education. The Education, Youth, Culture and Sport Council adopted this report on 10 February. It is important to recall that an average of more than 20 % of young people in the EU are unemployed.

David Cameron must give serious consideration to the repatriation of employment and social laws from Brussels, as indicated in his CPS speech in 2005, otherwise the UK will be trapped within the EU economic and employment policies under the new 2020 strategy, which do not work. As Bill Cash said “The EU‘s economic underperformance compared to the rest of the world is to be attributed to excessive EU regulation.”

In the meantime, the EU Commissioner for Employment and Social Affairs, Laszlo Andor, said last week, at a conference organised by the FPC, the European Commission and TUC , "I therefore think it is clear that repatriating social policy competence is a non-starter — legally, socially and politically,". According to the EUobserver, he pointed out that the treaty would have to be changed so that Britain could be exempted from social and employment laws. However, as Bill Cash pointed out in his pamphlet “It’s the EU, Stupid”, “Using the formula-notwithstanding the European Communities Act 1972, would enable us to re-grow our economy and repatriate powers.” This formula must be applied to Westminster legislation, “thereby overriding unnecessary and damaging European laws by passing legislation at Westminster “Notwithstanding the European Communities Act 1972”.

David Cameron should not only concentrate on repatriation, as Bill Cash said “repatriation as properly defined runs in parallel with renegotiation of the Treaties” and “Because of the framework of the British national interests they are both important.” David Cameron must, therefore, define the terms of a fundamental renegotiation in the relationship between the UK and the EU.

Derk Jan Eppink noted “Over the last eight years, the budgets of the EESC and CoR will have increased by some 50 percent, reaching €130 million and €86.5 million, respectively.” Moreover, he pointed out “There are around 50 officials at each committee with a minimum salary of €123.890 and six officials at each committee earning over €180,000 (…)” Then, Derk Jan Eppink concluded that “Over half of the EESC's and the CoR's annual budgets are devoted to their members' expenses, travel costs and staff salaries and pensions.”

Furthermore, the author noted that there is no information on how the COR and the EESC opinions influenced legislation and that both committees have not been successful in fulfilling their mandate to "engage participation" from citizens.

Hence, both committees are useless and a waste of money, they should therefore be abolished. In fact, according to Derk Jan Eppink the European Parliament “may finally have to demand a merger of the EESC and CoR into a more cost-effective body, or indeed, as the current Prime Minister of Denmark and rotating president of the EU Council once proposed, their complete abolition.”

According to Angela Merkel the eurozone member states have set themselves on an “irreversible course towards a fiscal union”. Moreover, Angela Merkel said in Davos “We have to become used to the European Commission becoming more and more like a government.” However, the answer is not “more Europe”, in fact as more Europe we have as worse become the situation. The eurozone Member States would no longer be responsible for a great range of domestic economic policies. The so-called “fiscal compact” is the beginning of the end of budgetary sovereignty for eurozone member states. They will lose control over their financial and economic affairs. Member States further surrender of their national sovereignty is a recipe for failure. It remains to be seen how southern countries would be able to cope with Germany’s budget discipline. However, eurozone citizens have not been asked whether they accept a fiscal and political union with an economic policy imposed by Germany. As Martin Callanan MEP, Chairman of the European Conservatives and Reformists group, noted “(…) an electorate's ability to vote for a high spending Keynesian economic policy is effectively being removed from them.” Moreover, he said “This pact is effectively rendering all elections null and void across much of Europe.”

It has been said that the new rules enshrined in the draft treaty do not contradict the EU's existing rules. Article 2 has subjected the draft treaty to EU law, whereby the contracting parties are required to “applied and interpreted” this treaty “in conformity with the Treaties on which the European Union is founded, in particular Article 4(3) of the Treaty on European Union (principle of sincere cooperation), and with European Union law, including procedural law whenever the adoption of secondary legislation is required.” Moreover, Article 2 (2) reads, “The provisions of this Treaty shall apply insofar as they are compatible with the Treaties on which the Union is founded and with European Union law. They shall not encroach upon the competences of the Union to act in the area of the economic union. (…)” David Cameron said, “It is not an EU treaty, because it does not amend EU law; it is not a treaty within all of the treaties of the EU”. He mentioned Article 2 and stressed,  “this treaty is outside EU law (…)” Nevertheless, this does not mean that some provisions of the draft treaty are not inconsistent with the EU treaties.

It is important to note that the eurozone member states can negotiate a treaty regarding an area outside the EU’s exclusive competence but they cannot breach EU law. Further powers over Member States’ budgets cannot be conferred beyond that which is foreseen in the Treaty for the EU institutions. In fact, any intergovernmental agreement changing the rules concerning the powers of the EU institutions requires the agreement of all Member States. The treaty has been drafted in order to give the idea that the EU institutions would only be involved in actions and procedures that they already have under the EU treaties, that they would only act within the framework of the EU Treaties, particularly Articles 121, 126 and 136 TFEU. However, the EU institutions will be used in new procedures and would exercise new powers created by the draft treaty. They have stretched the EU Treaties and pushed to the limit the involvement of the EU's institutions in the operation of the new fiscal compact. Unsurprisingly, Brussels has used its usual legal tricks.

As above-mentioned, being intergovernmental, this treaty must be formed outside the EU's existing Treaties and cannot be part of EU law. It will be legally binding as an international agreement. However, the preamble to the draft treaty includes a reference to the eurozone leaders and of other Member States of the EU to “incorporate the provisions of this Treaty as soon as possible into the Treaties on which the European Union is founded”. Moreover, at the European Parliament request, the draft treaty also includes a provision, which reads “Within five years at most following the entry into force of this Treaty, on the basis of an assessment of the experience with its implementation, the necessary steps shall be taken, in compliance with the provisions of the Treaty on the European Union and the Treaty on the Functioning of the European Union, with the aim of incorporating the substance of this Treaty into the legal framework of the European Union.” There is, therefore, a clear aim of incorporating this treaty into EU legal framework within five years of its entry into force. In fact, that is a certainty for Angela Merkel and José Manuel Barroso.

It is important to recall that the 2005 Prüm Convention, agreed by a group of EU member states outside the EU framework, contained a clause stipulating “Within three years at most following entry into force of this Convention, on the basis of an assessment of experience of its implementation, an initiative shall be submitted, (…), with the aim of incorporating the provisions of this Convention into the legal framework of the European Union.” Then, in 2007, the Council Decision on the stepping up of cross-border cooperation, particularly in combating terrorism and cross-border crime, incorporated in the framework of the EU the main provisions of the Prüm Treaty. The clause contained in the draft treaty above-mentioned, is very similar to the one included in the Prum Convention. There is no reference to incorporate the treaty into the EU treaties but into the EU legal framework, which would be done trough secondary legislation, as happened with the Prüm Convention.

The incorporation of this treaty into the EU treaties would, obviously, entail a treaty change, which, accordingly, requires the agreement of all member states, including the UK. Bill Cash asked the Prime Minister “Will he give us his assurance that never, while he is Prime Minister, will we fold this non-EU treaty into the treaties as a whole?” David Cameron replied saying “(…) this treaty cannot be folded back into the EU without the agreement of every EU member state. We did not sign this treaty, because we did not get the safeguards that we wanted, and that position absolutely remains.” The Government would not change its position by agreeing to the incorporation of the new treaty into the EU Treaties. However, the aim is to integrate provisions of the draft treaty into the EU legal framework via secondary legislation, particularly through the Commission’s proposals from last November aiming at strengthening the powers of the Commission in surveillance of national budgets, based on Article 136 TFEU and subject to the ordinary legislative procedure and QMV. This would be, therefore, an attempt to bypass the UK veto.

According to David Cameron “(…) the treaty itself is clear that it has to be in line with EU law; it cannot override it, and it cannot get into areas such as the single market.” The negotiators have attempted to align as much as possible the draft treaty provisions with those provided in EU law.

The draft treaty has been cautiously drafted so as to involve the EU institutions only in procedures and activities they already have under the EU Treaties. Nevertheless, the contracting parties have accepted obligations, which contradict their obligations under the EU Treaties, and there are provisions in the text, which confer new powers for the EU institutions. Consequently, those provisions breach EU law.

The treaty is aiming forcing eurozone countries with high debt levels to bring their budget deficits down. Article 3 of the draft treaty provides that “The Contracting Parties shall apply the following rules, in addition to and without prejudice to the obligations derived from Union Law”. However, the balanced budget rule goes beyond what is provided under the EU Treaties. Under Article 3 (1), “The budgetary position of the general government shall be balanced or in surplus.” Such rule, under the last draft, “shall be deemed to be respected if the annual structural balance of the general government is at its country-specific medium-term objective as defined in the revised Stability and Growth Pact with a lower limit of a structural deficit of 0.5 % of the gross domestic product at market prices.” This target is more stringent than the 1% deficit rule foreseen in the existing EU legislation. Moreover, under the draft treaty “The Contracting Parties shall ensure rapid convergence towards their respective medium-term objective.” Furthermore, article 3 (1) (b) states “The time frame for such convergence will be proposed by the Commission taking into consideration country-specific sustainability risks.”

Under the draft treaty, in case of deviation from the balanced budget rule, a correction mechanism would be triggered automatically. Article 3 (1) (e) stipulates, “In the event of significant observed deviations from the medium-term objective or the adjustment path towards it, a correction mechanism shall be triggered automatically.”  Moreover, under Article 3 (2) the contracting parties will have to “put in place a correction mechanism to be triggered automatically in the event of significant deviations from the reference value or the adjustment path towards it” which would be defined at national level, on the basis of “common principles to be proposed by the European Commission”. It is important to note that the balanced budget rule is not provided for in the EU treaties. Hence, one could say that the contracting parties, under such provision, are making use of the European Commission for purposes not provided in the EU Treaties.

Originally the contracting parties would have been obliged to enshrine the "debt brake" in their constitutions. However, several countries, including Denmark and Ireland have indicated that they would have to hold referenda in order to change their constitutions to include the so-called golden rule on balanced budgets. This provision has been, therefore, watered down. Under the last draft, although it is recommended, it is no longer a requirement that this rule on balanced budgets be introduced into the constitutions of the contracting parties. Hence, Article 3 (2) now reads “The rules mentioned under paragraph 1 shall take effect in the national law of the Contracting Parties at the latest one year after the entry into force of this Treaty 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.” 

Under Article 5 of the draft treaty, those contracting parties that are subject to an excessive deficit procedure would have to submit to the European Commission and the Council “a budgetary and economic partnership programme including a detailed description of the structural reforms which must be put in place and implemented to ensure an effective and durable correction of their excessive deficits.” The drafters of the treaty have sought to align this provision with EU law so the involvement of the EU institutions concerns to activities and procedures that they already pursue under the EU Treaties. Hence, the draft treaty provides “The content and format of these programmes shall be defined in the law of the Union. Their submission to the European Commission and the Council for endorsement and their monitoring will take place within the context of the existing surveillance procedures of the Stability and Growth Pact.” It seems that existing EU law would apply to the endorsement and monitoring of the so-called budgetary and economic partnership programmes. Nevertheless, it remains to be seen what the term “endorsement” would entail. Moreover, Article 5 (2) reads “The implementation of the programme, and the yearly budgetary plans consistent with it, will be monitored by the Commission and by the Council.” There is no reference to EU legislation providing for such role to the European Commission and the Council. It is, therefore, possible to conclude that this provision confers a new role upon these EU institutions.

It is important to recall that, last November, the European Commission put forward a proposal for a regulation on common provisions for monitoring and assessing draft budgetary plans and ensuring the correction of excessive deficit of the Member states in the euro area which provides for similar rules. Under this proposal, eurozone member states would be required to submit annually to the Commission and the Eurogroup their draft budgetary plans for the forthcoming year for monitoring purposes before the plans being submitted to national parliaments. The Commission would be empowered to request a revised draft budgetary plan from Member States that have failed to comply with the obligations laid down in the Stability and Growth Pact. The Commission has not legitimacy to intervene in member states’ matters in this way, nevertheless the Eurozone leaders called for a speedy approval by the Council and the European Parliament of the Commission proposal.

Moreover, the draft treaty provides in Article 6 "With a view to better coordinating the planning of their national debt issuance, the Contracting Parties shall report ex-ante on their public debt issuance plans to the European Commission and to the Council.” It is important to stress that the international agreement cannot bind the EU institutions therefore it remains to be seen what the Commission and the Council will be required to do with the information above-mentioned. Nevertheless, the European Commission is already planning to put forward legislative proposals within the EU Treaties framework, regarding a mechanism of ex ante reporting of debt issuance plans of the EU Member States.

Under the draft treaty, the eurozone contracting parties “commit to support the proposals or recommendations submitted by the European Commission where it considers that a Member State of the European Union whose currency is the euro is in breach of the deficit criterion in the framework of an excessive deficit procedure.” In the first draft the word used was “undertake”, they decided, therefore, to use a stronger wording under the last draft, suggesting a clear and binding commitment. Hence, the contracting parties have committed to automatically accept Commission recommendations. They can only reject the Commission proposal to place deficit countries under the excessive deficit procedure, when a qualified majority of eurozone contracting parties, “calculated by analogy with the relevant provisions of the European Union Treaties”, without taking into account the position of the state concerned, is opposed to it. The EU Treaties required qualified majority to support sanctions but not a qualified majority to stop them. This provision also goes beyond what is presently required under the so-called six-pack on economic governance, as reverse qualified majority voting is extended to all Excessive Deficit Procedure, including the preventive arm.

The European Court of Justice has made clear that an international agreement cannot affect the allocation of responsibilities defined in the Treaties and, consequently, the autonomy of the Community legal order. The role of the EU institutions is not only defined by the European Treaties but is limited by those Treaties and it would be unlawful for an institution to operate beyond the powers granted to it by the Treaties. The main issue, during the negotiations, has been whether the contracting parties are allowed to use the EU institutions to implement, monitor and enforce compliance with the draft treaty’s rules. One of the legal grounds for the use of the EU institutions outside the EU legal framework is based on a European Court of Justice ruling from 1993 on humanitarian aid to Bangladesh. The ECJ has ruled that Member States can act collectively outside the framework of the EU Treaties and that they can confer powers upon the EU institutions. However, these joined cases C-181/91 and C-248/91 involve “collective action”, there was, therefore, a unanimous decision of all member states in this regard. Therefore, it is possible to conclude that a group of member states cannot confer any role or further powers to the EU institutions, through an intergovernmental treaty, outside the EU framework, without the approval of all EU member states.

The Treaty establishing the European Stability Mechanism (ESM) also employs the European Commission and the European Central Bank to monitor the memoranda of understanding, however, it is important to note that there was an agreement among all EU member states to involve the EU institutions. The Treaty establishing the European Stability Mechanism reads “On 20 June 2011, the representatives of the Governments of the Member States of the European Union authorised the Contracting Parties of this Treaty to request the European Commission and the European Central Bank ("ECB") to perform the tasks provided for in this Treaty.”

According to the Preamble to the draft treaty “the obligation to transpose the "Balanced Budget Rule" into national legal systems through biding and permanent provisions, preferably constitutional, should be subject to the jurisdiction of the Court of Justice of the European Union, in accordance with Article 273 of the Treaty on the Function of the European Union.” Hence, the legal basis used by the drafters to give jurisdiction to the Court under the draft treaty to verify the contracting parties compliance with their obligation to give effect to the balanced budget rule is Article 273 TFEU. Under Article 273 TFEU Member States are allowed to give powers to the ECJ to settle dispute between them in a special agreement relating to the subject-matter of the EU Treaties. However, the negotiators are making an extensive interpretation of this provision. Article 8 goes far beyond as a clause that intends to settle disputes between contracting parties, as foreseen in article 273. Article 8 of the draft treaty, by conferring jurisdiction upon the Commission and the ECJ as regards the obligation of the contracting parties to enshrine the balanced budget rule into national law, involves the use of the EU institutions in a way that breaches the EU Treaties.

Under the draft treaty, the Court would have competence to verify whether the contracting parties have put in place provisions complying with Article 3(2), whether they are biding and if there is a ‘correction mechanism”. It is important to note that the European Court of Justice, without amending the treaties, cannot strike down national laws that conflict with such rule. It is important to note that the obligation to give effect in national law to the balanced budget rule is not an obligation under EU law.

Under Article 8 (1) of the draft treaty “The European Commission is invited to present in due time to the Contracting Parties a report on the provisions adopted by each of them in compliance with Article 3(2). If the European Commission, after having given the Contracting Party concerned the opportunity to submit its observations, concludes in its report that a Contracting Party has failed to comply with Article 3(2), the matter will be brought to the Court of Justice of the European Union by one or more of the Contracting Parties.” Moreover, “(…) where a Contracting Party considers, independently of the Commission's report, that another Contracting Party has failed to comply with Article 3 (2), it may also bring the matter to the Court of Justice.” This provision is similar to Article 259 TFEU whereby “A Member State which considers that another Member State has failed to fulfil an obligation under the Treaties may bring the matter before the Court of Justice of the European Union”, but “(…) it shall bring the matter before the Commission” which “shall deliver a reasoned opinion.” Moreover, under this provision Member States are not prevented from bringing the matter before the Court “if the Commission has not delivered an opinion within three months”.

The last draft has conferred therefore even more powers on the European Commission. The referral to the ECJ is no longer reserved to the contracting parties as foreseen on the first draft, but it has been indirectly extended to the Commission. The Commission no longer needs to be invited by contracting parties but is authorized, under the last draft, to issue a report on the provisions adopted by each contracting party in compliance with Article 3(2). The European Commission would be allowed to assess whether the contracting parties have properly implemented the balanced budget rule and to ask a country that has incorrectly incorporated such rule into its national law to give an explanation. Then, if the Commission is not satisfied, the other contracting parties are obliged to refer the case to the ECJ. The contracting parties accepted therefore an obligation to bring the matter to the ECJ when the Commission finds that another contracting party has failed to comply with the article 3 (2) of the draft treaty.

The Commission cannot take the contracting parties to the ECJ if they don’t comply with Article 3 (2) of the draft treaty. It is important to note that Article 273 TFEU does not foresees other forms of jurisdiction of the Court, namely infringement procedures brought by the Commission. Under Article 273 the ECJ has jurisdiction for settle disputes between member states, but no role is foreseen to the European Commission. The draft treaty does not allow the European Commission to directly take contracting parties to the ECJ as this would be a clear breach of the EU treaties, but it still plays a considerable role. The European Commission would be allowed to decide whether a country should be taken to the ECJ. This is another legal trick to overcome the EU treaties and provide the European Commission with a role on this matter – whether to take contracting parties to the ECJ. Under Article 273 only a Member State may be an applicant before the Court of Justice, having the Commission involved is incompatible with Article 273TFEU. Article 8 (1) of the draft treaty, confers additional powers upon the Commission, which would be allowed to participate in proceedings that go beyond those which already exist under the EU Treaties. In this way the contracting parties would be allowed to make use of the Commission for purposes, which are outside the scope of EU treaties, breaching, therefore, EU law. Further powers given to the Commission by an international agreement require the approval of all the Member States.

The draft treaty also reads, “The judgment of the Court of Justice of the European Union shall be binding on the parties in the procedure, which shall take the necessary measures to comply with the judgment within a period to be decided by said Court.” This is not provided in Article 273, but the Court’s jurisprudence makes clear that its rulings must always be binding. Under Article 260 “If the Court of Justice of the European Union finds that a Member State has failed to fulfil an obligation under the Treaties, the State shall be required to take the necessary measures to comply with the judgment of the Court.” Hence, if a member state does not comply with a judgment of the Court, the Commission may bring the case before the Court. If the Court finds that the Member State concerned has not complied with its judgment it may impose a lump sum or penalty payment on it.

The draft treaty provision is similar to Article 260 TFEU whereby the member states are required to comply with the ECJ judgments but if a Member State fails to comply with an ECJ’s ruling pursuant to Article 8 of the draft treaty, the Commission cannot bring the matter before the Court and ask for fines to be imposed. The ECJ cannot fine countries if they do not comply with such judgments, as foreseen in the EU Treaties. However, according to the Preamble to the draft treaty “Article 260 of the Treaty on the Functioning of the European Union empowers the Court of Justice of the European Union to impose the payment of a lump sum or penalty on a Member State of the European Union having failed to comply with one of its judgments.” Moreover, Article 8 (2) provides, “If, on the basis of its own assessment or of an assessment by the European Commission, a Contracting Party considers that another Contracting Party has not taken the necessary measures to comply with the judgment of the Court of Justice referred to in paragraph 1, it may bring the case before the Court of Justice.” The last draft has added to this provision “and request the imposition of financial sanctions following criteria established by the Commission in the framework of Article 260 of the Treaty on the Functioning of the European Union.” According to the Legal Counsel opinion “The analogy between this Article and draft Article 8(2) could be further guaranteed by adding a mention, both in the recital and in the Article of the draft, to the criteria established by the Commission for the determination of the lump sum or the penalty to be paid in the framework of Article 260 TFEU.” It noted, “This would ensure that the request compares with what the Commission would do in a similar situation, and that an identical methodology is followed,” This advice has therefore been followed. However, this is another legal trick, as under article 273 TFEU the European Commission cannot seek to impose upon contracting party penalties in accordance with Article 260 TFEU.

At Germany request, under Article 8 (2), “If the Court finds that the Contracting Party concerned has not complied with its judgment, it may impose on it a lump sum or a penalty payment appropriate in the circumstances and that shall not exceed 0,1 % of its gross domestic product.”  The draft treaty confers, therefore, on the ECJ the power to impose fines on countries, which have failed to transpose or correctly incorporate the balanced budget rule into national law. Under the draft treaty the penalty must not be higher than 0.1% of a country’s GDP.  Furthermore, article 8 provided “The amounts imposed shall be payable to the European Stability Mechanism.” This provision has been amended, in order to persuade Denmark to sign up to the treaty, and it now reads “The amounts imposed on a Contracting Party whose currency is the euro shall be payable to the European Stability Mechanism. In other cases, payments shall be made to the general budget of the European Union.” Hence, the fines imposed by the ECJ on eurozone contracting parties would be paid into the ESM whilst fines impose on non eurozone contracting parties would go to the EU budget.

One could say that Article 273 TFEU mainly refers to disputes concerning the interpretation or application of agreements, excluding the ECJ’s competence to impose penalties. Under Article 260 TFEU the Court has competence to impose penalties on Member States, which have not taken the necessary measures to comply with its judgments for violations of EU law, however Article 8(2) does not concern violation of EU law. The ECJ has no powers to impose fines on countries that failed to bring their national laws into line with article 3 (2).

According to the Legal Counsel of the Council, Article 8 of the draft is compatible with the choice of Article 273 TFEU as the legal basis for the jurisdiction of the Court. However, it is important to note that the Legal Counsel said, “that the substance of the draft Treaty is intended to be incorporated into the law of the Union” and “When this happens, Article 260 TFEU will be directly applicable to the norm concerned.” Consequently, according to the Legal Counsel “The construction of Article 8, including its paragraph 2, thus broadly anticipates the framework that will apply to the norm when it becomes an EU one, while being entirely compatible with the legal basis of Article 273 TFEU that has to be used before that date.” Nonetheless, if the contracting parties could use the EU institutions to enforce this treaty there would be no need to incorporate it into EU law.

Moreover, Article 8 (3) of the draft treaty also stipulates, “This Article constitutes a special agreement between the Contracting Parties within the meaning of Article 273 of the Treaty on the Functioning of the European Union”. This provision deceitfully gives the idea that the use of the ECJ and the European Commission by the contracting parties is legal under the EU treaties. Article 8 of the draft treaty is not compatible with the EU Treaties. The European Commission and European Court of Justice cannot enforce the draft treaty provisions. The Court of Justice has allowed Member States to use the EU institutions in procedures established outside the framework of the Treaties, but there was a unanimous agreement. Consequently, all EU Member States must agree on the use of the EU institutions outside the framework of the EU Treaties. Under the present draft treaty, the EU institutions would be exercising functions beyond those given to them under the EU Treaties, which breaches EU law. However, the drafters of the treaty are not particularly concerned with its legality, the main aim is to save the euro. Therefore, they have turned a blind eye to potential breaches of the EU Treaties.

A group of Member States without unanimous approval of the other member states cannot confer any new powers to the EU institutions outside the EU legal framework. The Commission or the ECJ cannot enforce the draft treaty on stability, coordination and governance in the Economic and Monetary Union, as it’s not within their mandate. However, according to a Communication by euro area Member States when the treaty is signed in March “an arrangement will be decided about the procedure to be followed to bring to the Court of Justice a case of noncompliance with the Treaty.” In this way, they would confer on the ECJ the power to rule on excessive deficit breaches, which would conflict with Article 126 (10) TFEU. This provision specifically excludes the launch of infringement procedures against member states that fail to comply with decisions taken under the excessive deficit procedure. The ECJ has no powers to issue judgments and impose fines on countries that failed to comply with the treaty's provisions. This intergovernmental treaty is not part of the Community legal order, therefore, it is not legally binding on the European Court of Justice and the other institutions. It is not enforceable because the European Court of Justice has no competence to rule on the compliance of the agreement, but it has competence to consider any potential conflict with the EU treaties. If there is a conflict between the EU treaties and this intergovernmental treaty obviously the EU Treaties would take precedence. Patrick Sensburg, German MP, said to Euractiv "Everything is fine as long as the signing parties keep their promises. But if a signing party decides that it does not accept the new stability criteria anymore, you could not accuse it of violating EU law."

David Cameron has been arguing that contracting parties to this treaty cannot use the EU institutions to enforce this treaty. However, David Cameron has not kept his pledge to do "everything possible" to stop the contracting parties of a new treaty from using the European Commission and the European Court of Justice, for purposes outside the EU framework. On 31 January, the Prime Minister made a statement at the House of Commons, on last Monday’s Informal European Council, he said “there are uses of the EU institutions set out in previous treaties― mostly put through this House by the Labour Government― but this treaty outside the EU goes further than that, and that raises legal issues.” Hence, David Cameron acknowledged that the contracting parties are illegally using the EU institutions. He said the UK would take legal action if the new treaty undermines British interests, "There are a number of legal concerns about this treaty. That's why I reserved the UK position on it. We will only take action if our national interests are threatened." Ultimately, it would be for the ECJ to decide on this mater, which favours further EU integration.

The draft treaty explicitly states that “the Contracting Parties stand ready to make active use, whenever appropriate and necessary, of measures specific to those Member States whose currency is the euro as provided for in Article 136 of the Treaty on the Functioning of the European Union and of enhanced cooperation as provided for in Article 20 of the Treaty on European Union and in Articles 326 to 334 of the Treaty on the Functioning of the European Union on matters that are essential for the smooth functioning of the euro area, without undermining the internal market.” They are referring to the possibility of using the general rules on enhanced cooperation within the current EU Treaties, to adopt EU measures that will apply solely to the member states that participate in this treaty. Under Article 326 TFEU the use of enhanced cooperation must respect the EU Treaties. It is important to note that enhanced cooperation measures must be based on a Commission proposal, which is then blocked in the Council, consequently the decision to enter into enhanced cooperation is “a last resort.” Following a request by the Member States that wish to establish enhanced cooperation, the Commission may submit a proposal to the Council to that effect. The Council will grant authorisation to proceed with the enhanced cooperation by a qualified majority of all Member States in the Council and after obtaining the consent of the European Parliament. However, the draft treaty refers to “whenever appropriate and necessary” bypassing the treaty requirement that it should solely be used as “a last resort.” As Bill Cash pointed out “This could cause serious damage to British national interests in relation to the internal market.” Under Article 326 TFEU enhanced cooperation “shall not undermine the internal market or economic, social and territorial cohesion. It shall not constitute a barrier to or discrimination in trade between Member States, nor shall it distort competition between them.” It is important to recall that according to the Commission it is necessary to introduce the financial transaction tax to ensure the proper functioning of the internal market. However, one could say if enhanced cooperation is used to adopt this tax, it could no longer be justified to avoid fragmentation in the internal market for financial services. Furthermore, enhanced cooperation shall be open to all Member States, consequently it cannot be address just to eurozone States, or the contracting parties to this treaty. Under Articles 20 TEU and 329 and 331 TFEU, it is required a minimum of nine participants, moreover, only willing Member States participate and any Member States can participate. If these criteria are not complied with the use of enhanced cooperation could be challenged at the ECJ.

Article 12 (1) of the draft treaty, confirms what the Eurozone leaders agreed at the Euro Summit of 26 October, that the eurozone Heads of State or Government and the President of the European Commission will meet informally in Euro Summit meetings. The appointment of the President of the Euro Summit by the eurozone leaders by simple majority was also enshrined in the draft treaty. There is no legal basis in the TFEU to this new EU institution and the new post of president of the Euro summit. Consequently, if they want to formally institutionalise the Euro summits, the EU Treaties would have to be amended.

The draft treaty also provides that “ Euro Summit meetings shall take place, when necessary, and at least twice a year, to discuss questions related to the specific responsibilities which the Contracting Parties whose currency is the euro share with regard to the single currency, other issues concerning the governance of the euro area and the rules that apply to it, and strategic orientations for the conduct of economic policies to increase convergence in the euro area.” According to the European Council and Euro summit President, Herman Van Rompuy, such meeting would be, in principle, held after meetings of the European Council. Moreover, as it has already been agreed at the October’s summit, the other member states would be merely informed by the President of the Euro Summit of the preparation and outcome of the Euro Summit meetings. Article 12 (5) provides “The President of the Euro Summit shall keep the Contracting Parties whose currency is not the euro and the other Member States of the European Union closely informed of the preparation and outcome of the Euro Summit meetings.”

Poland has threatened not to sign the draft treaty unless it is allowed to take part in future eurozone summits. There has been an attempt to please Poland, whereby non-euro countries will be solely invited if they have ratified the treaty as well as accept to be bound by some provisions of it, namely the so-called golden rule and provisions concerning “economic policy coordination and convergence.” However, Polish Prime Minister Donald Tusk said “Poland is ready to take co-responsibility for this fiscal compact under one condition: that the country will participate in the decision making process on how the treaty is implemented.” Consequently, in order to convince Poland to sign up to this treaty, Article 12 (6) has been amended, stipulating “The Heads of State or Government of the Contracting Parties, other than those whose currency is the euro, who have ratified this Treaty shall participate in discussions of Euro Summit meetings concerning competitiveness for the Contracting Parties, the modification of the global architecture of the euro area and the fundamental rules that will apply to it in the future, as well as, when appropriate and at least once a year, in discussions on specific issues of implementation of this Treaty on Stability, Coordination and Governance in the Economic and Monetary Union.” Hence, non-eurozone contracting parties will no longer need to declare “their intention to be bound by some of its provisions in accordance with Article 14(5) to a meeting of the Euro Summit” in order to be invited to eurozone summits. Whereas under the previous draft the non-eurozone countries would be invited to the eurozone summits “to discuss specific issues concerning the implementation of this Treaty”, under the last draft they will be invited to meetings “concerning competitiveness for the Contracting Parties, the modification of the global architecture of the euro area and the fundamental rules that will apply to it in the future, as well as, when appropriate and at least once a year, in discussions on specific issues of implementation of this Treaty on Stability, Coordination and Governance in the Economic and Monetary Union”. It would be like a European Council meeting without the UK and Czech Republic.

David Cameron was aware of the risk of fiscal union and economic government, hence he decided to use his veto. In fact, William Hague said "We are, by preventing a new Treaty or amendments to the Treaties of the European Union, ensuring that the key decisions that affect us, such as to do with the single market, are still made by the 27 nations including us…" However, Cameron by using his veto prevented the situation from getting worse but the status quo has not changed. The City of London continues to be subject to further EU regulations. It is important to recall that the single market, including financial regulations, is governed by qualified majority voting. From November 2014, QM will be calculated according to double majority: 55% of EU Member States (15 Member States) and 65% of the EU’s population.  Hence, by 2014 the eurozone will have a qualified majority. The eurozone leaders well as other contracting parties to this treaty by having their own meetings, they will be able to agree positions on financial and economic issues, which they would then impose on the other member states, if unanimity is not required. Although they say that the Euro summits will just discuss eurozone issues, one can just expect that matters affecting British interests would be also discussed. The eurozone member states can use their voting power at EU level, and they will also have the support of the non-eurozone contracting parties to this treaty, to force through measures in detriment of the UK’s national interest. They will vote together outvoting the UK.

On 30 January, twenty-five EU member states have decided to sign up to the treaty. The Czech Republic has decided to join the UK and stay out of it. The draft treaty will be formally signed on 1 March. The contracting parties, according to their constitutional requirements, through national parliaments or possibly some referendums, will ratify the agreement. Amid concerns that some countries might face difficulties in passing the treaty through national parliaments or it might be subject to referenda, under the last draft, the threshold of countries necessary to ratify the agreement is twelve. Consequently, it will still enter into force even if some countries national parliaments reject it or it is not approved in referenda. It also specifically provides that “This Treaty shall enter into force on 1 January 2013, provided that twelve Contracting Parties whose currency is the euro” have ratified it. It remains to be seen what would happen if less than twelve eurozone states fail to ratify the treaty before 1 January 2013. The draft treaty might be subject to referendum in Ireland as the Irish government is seeking legal advice from Attorney General on whether a referendum would be required to ratify this treaty, and Denmark. In the other hand, Nicolas Sarkozy has recently said that France might not be able to ratify the treaty before the presidential elections, in April and May. It is important to note that the socialist candidate for the French presidency, François Hollande said he would “renegotiate this deal” if elected in the upcoming presidential elections.

The draft treaty will apply as from the day of coming into force amongst the eurozone contracting parties, which have ratified it, but the provisions related to the Euro summit meetings will apply to all eurozone-contracting parties from the date of the entry into force of the agreement. In order to address several non-eurozone member states concerns and convince them to sign up, under the draft treaty non-eurozone contracting parties will be bound by it when they join the single currency, unless they decide to be bound at an earlier date, by all or part of the provisions in titles III (budgetary discipline) and IV (economic policy coordination and convergence) of the agreement.

At Germany request, the preamble to the draft treaty provides that “the granting of assistance in the framework of new programmes under the European Stability Mechanism will be conditional, as of 1 March 2013, on the ratification of this Treaty by the Contracting Party concerned and, as soon as the transposition period mentioned in Article 3(2) has expired, on compliance with the requirements of this Article,” Hence, in order to an eurozone member state to be granted assistance within the framework of the ESM, which is expected to come into force in July 2012, it must ratify this treaty and comply and implement the so called balanced budget rule provided in Article 3 (2) within one year of entry into force of the intergovernmental treaty.

The draft treaty also includes a provision, Article 15, which states, “This Treaty shall be open to accession by Member States of the European Union other than the Contracting Parties upon application that any such Member State may file with the Depositary." This provision is particularly addressed to the UK, but it also includes all states that initially signed up for this treaty but then have not become contracting parties. This provision has been amended in the last draft so it is no longer required the approval by “common agreement” by the contracting parties. Under the last draft “This Treaty shall be open to accession by Member States of the European Union other than the Contracting Parties. Accession shall be effective upon the deposit of the instruments of accession with the Depositary, who shall notify the other Contracting Parties thereof.”

We must congratulate David Cameron for not yielding to Brussels, particularly to France and Germany arguments, and having refused to sign this treaty. In his statement at the House of Commons, on the Informal European Council, David Cameron said, “(…) this is a treaty outside the EU. We are not signing it, we are not ratifying it, we are not part of it and it places no obligations on the UK. (…) That is the fundamental protection that we secured with our veto in December, and that protection remains.” However, it is important to recall that David Cameron vetoed the EU treaty amendment to avoid having the eurozone club pursuing its interests using the EU institutions. He said, “the fact is that an organisation outside the EU treaties is not allowed to cut across those treaties or the legislation under those treaties.” The use of the EU institutions by the draft treaty contracting parties is the outcome of stretching the EU treaties. David Cameron has decided to soften his opposition and has backed own on his pledged to block the use of the EU institutions by the contracting parties to this new non-EU treaty. David Cameron said, “(…) it is in Britain’s interests that the eurozone sorts out its problems. It is also in our interests that the new agreement outside the EU is restricted to issues of fiscal union and does not encroach on the single market.” According to David Cameron “The new intergovernmental agreement is absolutely explicit and clear that it cannot encroach on the competencies of the European Union and that measures must not be taken that in any way undermine the EU single market.” Nevertheless, it is far from certain that this won’t undermine the single market. But, the Prime Minister also said, "There are a number of legal concerns about this treaty”, stressing that “we will watch this matter closely and that, if necessary, we will take action, including legal action, if our national interests are threatened by the misuse of the institutions.”

David Cameron believes “we have the ability to exercise leverage to ensure that they stick to fiscal union, rather than getting into the single market, which is what we want to protect.” One could wonder whether the UK will ever bring a legal action before the ECJ. It is important to mention that on 6 January, David Cameron said to the BBC’s Today programme “There are legal difficulties over this. One of the problems is that the European Court of Justice, we all think it is great independent arbiter, but the European Court of Justice tends to come down on the side of whatever more Europe involves.” It is undeniable that the ECJ has been the motor of the European integration.

As Bill Cash said if the UK as well as other member States want to regain their democracy and economic stability they must return to an EFTA-plus arrangement. The Prime Minister has accepted that the only possible way to protect British interests was for the Government to veto changes to the EU Treaties. However, David Cameron must accept that the only possible way to continue protecting British interests is for the Government to initiate the renegotiation process of all EU treaties, by taking the lead in creating an association of nation states – an EFTA-plus, as Bill Cash argued in “It’s the EU Stupid”. Bill Cash has proposed, in his pamphlet, a framework for renegotiation, which must follow from a Referendum. (Please refer to p.2, 8, 14 -16, 35, 73 -78) The time has come for David Cameron to define the terms of a fundamental renegotiation in the relationship between the UK and the EU.

 

 

Under such Directive all flights departing or landing in the EU, including intercontinental flights, have been integrated in the EU's emissions trading system (ETS) from 1 January 2012. The directive applies to all airlines flying in and out of the EU, including airlines from third countries. Hence, from that date all airlines are required to buy permits under the ETS. In 2012 85 per cent of the emissions permits will be allocated for free however 15 per cent of the airlines emission permits will be auctioned.

Obviously, the aviation industry is not pleased with such piece of EU legislation, as they believe that their future business was not taken into account by the EU institutions. It has been estimated that the directive could add €9bn to the costs of the aviation industry by 2020.

Moreover, the US as well as Australia, Canada, China, Japan, India, South Korea (including their airlines), even before the directive has been adopted, have shown their opposition to the EU’s ETS and stressed that such move would violate EU Member State international obligations under the Convention on International Civil Aviation. In fact, the Air Transport Association of America, American Airlines Inc., Continental Airlines Inc. and United Airlines Inc. (collectively ‘ATA and others’), contested the measures transposing Directive 2008/101 in the UK, and brought proceedings against the Secretary of State for Energy and Climate Change before the High Court of Justice of England and Wales, Queen’s Bench Division (Administrative Court). They argued that the EU infringed several principles of customary international law and various international agreements, namely the Chicago Convention, the Kyoto Protocol and the Open Skies Agreement because it imposes a form of tax on fuel consumption, as well as certain principles of customary international law as it seeks to apply the allowance trading scheme beyond the European Union’s territorial jurisdiction. The High Court of Justice of England and Wales referred the matter to the ECJ and has asked the Court whether the directive is valid in the light of those rules of international law. On 21 December, the ECJ delivered its ruling, confirming the validity of the directive that includes aviation activities in the emissions trading scheme.

The US as well other countries such as China and India are not willing to give up their fight to exclude their airlines from the EU's ETS, despite the ECJ’s ruling. They are already talking about retaliatory measures against the EU, as they cannot appeal against the ECJ decision.

China has announced today that its airlines are banned from participating in the EU ETS. China believes that its aviation sector will end paying an additional €97 million per year on flights originating or landing in Europe. Moreover, according to the Civil Aviation Administration of China (Caac), and despite the ECJ’s ruling, the EU ETS "runs contrary to relevant principles of the United Nations Framework Convention on Climate Change and international civil aviation regulations". Hence, "The Civil Aviation Administration of China recently issued a directive to Chinese airlines that without the approval of relevant government departments, all transport airlines in China are prohibited from participating in the EU ETS,".

However, as above-mentioned, all airlines are required to comply with the EU Directive since 1 January 2012. Under the Directive, all airlines flying in and out of the EU are required to report on their verified CO 2 emissions (2009-2013) by April 2013. Consequently, if airlines refuse to apply Community law they would be subject to sanctions including fines or, as a last resort, a EU flight ban, “in the case of a permanent and constant infringement”. Consequently, Chinese airlines are likely to be banned from flying to the EU from April 2013.

Nevertheless, according to the Euobserver, “(…) the US, China, India, Russia and around 30 other countries will hold talks in Moscow on 21 February on potential retaliation measures.” In fact, China has already warned that such measures would lead to a "trade war".

In the meantime, Lufthansa, Brussels Airlines and Delta AirLines have already included the ETS charge in the price of tickets. Obviously, other airlines will raise ticket prices to compensate for the costs of ETS. According to the Guardian Ryanair will add between €15 and €20m to the passengers’ costs this year. The head of Ryanair’s communications Stephen McNamara said "This latest EU stealth tax will damage traffic, tourism, European competitiveness and jobs." It is obvious that such measures will have a negative impact on the competitiveness of member states’ national airlines.

Emma McClarkin MEP, Conservative spokesman on sport and culture in the European Parliament, said that this report “was vehemently opposed by Conservative MEPs.” She pointed out that “it was Conservative opposition to the report at committee stage which saw clauses removed that sought to make the EU flag compulsory on international kit”. Hence, “the report voted through by the socialists and liberals now simply recommends that national sports governing bodies should adopt the Brussels flag.”

Emma McClarkin has described such proposal as "outrageous and unnecessary". She rightly said “The EU cannot impose an artificial European identity on us by forcing our athletes to wear its emblem.”

According to The Express “opponents warned it still showed that eurocrat fanatics were intent on stamping out nation states’ identities and interfering in every aspect of people’s lives.” Moreover, it noted “Despite the financial crisis engulfing the eurozone, the flag issue had taken up MEPs’ time at seven committee meetings, culminating in final speeches on Wednesday night and yesterday’s vote by the whole European Parliament.”

This is an own initiative report. Therefore, it will now be up to the Commission to take on board European Parliament's recommendations, in upcoming proposals. It is important to recall that the Lisbon Treaty has given the EU a new competence on sport. Sport is one of the areas where the Member States should have exclusive competence but the Union provides support or co-ordination. The EU has now competence for coordinating member states' sports policies.