Malta was last night fighting its corner in complex negotiations over the future of the eurozone at the EU leaders’ summit in Brussels, described as the most important for a generation.
Late-night reports from quarters close to the closed-doors meeting spoke of agreement having been reached in principle on a new fiscal compact for euro members, with lower limits on deficits and debts and changes to national legislation obliging member states to move towards balanced budgets.
EU diplomats told The Times that the summit will probably agree to introduce a deficit limit of not more than 0.5 per cent of GDP.
However, the changes to be made to the EU Treaty to bring in the new rules was still far from settled as another day of talks stretched out before the gathered heads of state desperate to win back investor confidence in the euro area’s sovereign bonds.
They started the evening with an informal working dinner followed by tete-a-tete negotiations that stretched into the early hours, as Prime Minister Lawrence Gonzi and Finance Minister Tonio Fenech kept a watchful eye to make sure the island’s red lines are not crossed.
Sources close to the Maltese delegation told The Times Malta has made it clear that although not desirable, the island would be able to live with Treaty changes to strengthen economic governance as long as member states retain flexibility.
“We think that changing the Treaty is not the quickest of solutions as there are other avenues to calm the markets including by implementing the commitments already made in previous summits,” the source said.
“However, if there are to be any Treaty changes, we can agree as long as we keep our current flexibility on how to conduct our own fiscal policy.”
Malta had agreed in principle with many of the pre-summit proposals made by both France and Germany but it stands staunchly against the introduction of common taxation, particularly on financial transactions and corporate earnings. Malta is also keen on retaining flexibility where it comes to its labour market.
The government believes tax harmonisation may have devastating effects on the island’s open style economy and will endanger its competitiveness. Financial services have become a major pillar of Malta’s services economy and both financial transaction and corporate taxes could reverse that growth.
“We fully agree with more financial discipline in the eurozone and with binding commitments towards balanced budgets. However, the method used to achieve these goals should be left up to individual member states, as it is today,” the sources said.
Draft European Council conclusions seen by The Times state that “general government budgets shall in principle be balanced and member states may only incur deficits to take into account the budgetary impact of the economic cycle or in the case of exceptional circumstances”.
EU diplomats said that the 0.5 per cent deficit rule will be implemented over a cycle as it was obvious that many member states with large deficits cannot adhere to the rule overnight.
The 27 EU leaders are focusing their discussions on two main options. One is a two-tier Treaty change approach pushed by the EU institutions, with stricter economic governance rules implemented through amendments to a protocol in the current Treaty after a long-term discussion.
The second option to enhance the euro’s stability is a more robust treaty overhaul promoted by Germany and France – the biggest two economies in the Eurozone.
There is also a third option – suggested through the Franco-German agreement – of a two-speed Europe, with a new Treaty completely dedicated to the eurozone members but open to others who want to join. This path, however, seemed to have been discarded last night.
Evidently putting pressure on leaders to try to be as flexible as possible in order to reach a deal, Commission President Jose Manuel Barroso made it clear there would be no Treaty change without a guarantee by member states that they would be able to ratify their commitments.
“We need member states to tell us what they can do, not what they can’t,” he said.
The summit is expected to come to an end this afternoon although changes to the agenda were not being excluded last night.
Excerpts from draft conclusions on new fiscal rules:
• General government budgets shall in principle be balanced. Member states may incur deficits only to take into account the budgetary impact of the economic cycle or in case of exceptional circumstances.
• This principle shall be deemed respected if, as a rule, the annual structural deficit does not exceed 0.5 per cent of the nominal GDP. This rule will be adapted to country specific circumstances to take into account long-term stability. Countries having a debt significantly below 60 per cent of GDP may have higher structural deficits.
• Such a rule will also be introduced in member states’ legal systems at constitutional or equivalent level. The rule will contain an automatic correction mechanism that can be triggered in case of deviation. It will be defined by each member state on the basis of principles defined by the Commission. The Court of Justice will have jurisdiction to verify the transposition of this rule at national level.
• Member states in an Excessive Deficit Procedures (EDP) shall submit to the Commission and the Council for endorsement, an economic partnership programme detailing the necessary structural reforms to ensure and effective durable correction of excessive deficits. The implementation of the programme, and the yearly budgetary plans consistent with it, will be monitored by the Commission and the Council.