European leaders are looking for ways to tighten budget discipline within the euro zone to convince financial markets—and the European Central Bank—that they have the rules in place to stop future Greece-style government borrowing binges and ease the region's debt crisis.
But how best to do it? Changing the treaty that governs the European Union would carry the most credibility—but to be effective it would require ratification by the national parliaments of the 27 EU members, including those in the 10 countries outside the euro zone.
"We're open to changing the treaties for the 27; that would be the most logical way," German Chancellor Angela Merkel said on Monday after a meeting with French President Nicolas Sarkozy ahead of a European summit at the end of this week aimed at settling the issue. "But the euro is so important for us that we would also go the path of the 17 euro-zone countries."
Changing EU treaties, never a task to be embarked upon lightly, has become ever more difficult as the EU has expanded to 27. The process for the Lisbon Treaty, which now governs the EU, took eight years after initial negotiations began and needed substantial revisions following "no" votes in referendums in France and the Netherlands in 2005. It was finally ratified in late 2009.
The process would involve calling a convention, including all national governments and the European parliament. Any proposals that emerge that would lead to member states ceding power to EU authorities would require ratification by all 27 parliaments. Some countries, such as Ireland, would probably insist on holding referendums.
One extra complication is that this gives leverage to countries outside the euro zone, including the U.K. This would provide an opportunity for London to demand a deal to repatriate powers from Brussels—as members of Prime Minister David Cameron's Conservative party have demanded.
Is there a way to avoid this? Ms. Merkel suggested that there is: a pact among the 17. Ostensible precedents are the Schengen accord on border-free travel, which now includes 25 EU and non-EU countries such as Switzerland, and the convention of Prüm, a German town where seven EU countries agreed in 2005 to share DNA, fingerprint and vehicle registration data.
But Brussels lawyers say there are obstacles: The Schengen and Prüm agreements relate to issues not already covered by the existing EU treaty, unlike proposals to tighten up budgetary discipline. And in the Lisbon Treaty governments agreed not to make separate agreements among themselves on issues the treaty already covers. Furthermore, the European Commission—the EU executive—and the European Court of Justice, its highest court, cannot enforce sanctions related to non-EU treaties.
A report to be presented to euro-zone leaders at their summit by EU President Herman Van Rompuy, seen by The Wall Street Journal, sidesteps this intergovernmental approach entirely. The report suggests a two-step process, the first of which can be implemented quickly and the second that would require treaty change.
The report suggests the quickest fix would not change the treaty but articles in the annex attached to it—where the procedures handling excessive deficits are described. In the annex, euro-zone member states could commit to maintain a balanced budget over the business cycle and to cut their debt to 60% of gross domestic product—and agree to include such a rule in their national constitutions. The ECJ would then have powers to make sure the rule had been introduced.
Here also, governments would report to other euro-zone members their plans to issue debt ahead of time. This could be introduced after a unanimous agreement of all 27 EU countries, and does not require ratification at national level, the paper says. "This procedure could therefore lead to rapid and significant changes," it says.
Then, the report says "another avenue to be pursued in parallel or subsequently" would be to change the treaty, which it says "would be time consuming and subject to ratification in all member states."
That change would make sanctions for budget busters more automatic and bolster the role of EU institutions to force economic changes on recalcitrant governments.
Officials say France, which would prefer to avoid ceding more powers to the Commission, is keener on an agreement among the 17 than is Germany, which prefers the greater certainty that a treaty change would provide. Some say Germany's threat to fall back to such an approach may be a tactic aimed at making Britain less demanding in treaty-change negotiations.
In an interview Tuesday, the U.K.'s Mr. David Cameron warned he wouldn't sign any treaty to help sort out the euro zone's troubles unless it has "safeguards" to protect British interests in areas like the single market and financial services.
"As long as we get those, then [a] treaty can go ahead. If we can't get those, it won't," he told the Press Association news agency.
He acknowledged the possibility that a pact may just need signatures from the 17 euro-zone members, in which case the U.K. would have little say. But he did not speak of repatriating powers from Brussels back to London.
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