policy insight 65 stefano micossi

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How the EZ crisis is permanently changingEU institutionsStefano MicossiAssonime, College of Europe, CEPS and CIR Group

C E P R P O L I C Y I N S I G H T N o . 6

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April 2013

1. Introduction

The Eurozone crisis has elicited oceans of commentand analysis related to crisis management. Muchless noticed is the crisis deep impact on EUinstitutions.

A series of decisions taken at crisis summitsmassively centralised EU executive power overnational economic policymaking. These decisionsalso shifted the institutional power balance strengthening the European Councils role as topexecutive power and diminishing the EuropeanCommissions traditional role as agenda setter and

initiator of legislation. The Commission, however,has seen an important bolstering of its role insurveillance and rule enforcement.

These are not temporary devices to deal with thecrisis. The changes are here to stay since theyare necessary to remedy fundamental aws inthe original construction of the Eurozone (EZ)that would eventually doom it. As such, theinstitutional changes deserve far more attentionthan they have received to date. This PolicyInsight is a contribution to this effort. It discussesthe changing power balance both within EUinstitutions and between EU institutions and themember states as well as the need for reforms torestore legitimacy and democratic accountability.

The next section, Section 2, reviews the shiftingorganisation of executive powers. Section 3describes the substantive content of economicpowers moving to Brussels. Section 4 looks atcomplementary reforms that are needed tounderpin the new executive powers. Section 5looks at questions of democratic legitimacy andaccountability. Section 6 tries to chart the likely

course of differentiated integration within theEU, and the nal section provides a summary andconcluding remarks.

2. The institutional changes described

The Eurozone crisis has deeply affected theinstitutions of the European Union. For decades,the centre of gravity of common policies wasinternal market opening, international trade, andagriculture. Since the EZ crisis blew up in 2010, thecentre of gravity has shifted to the coordination ofEU members national economic policies.

The main examples are:

The Six Pack.

This new EU legislation has strengthened theStability and Growth Pact (SGP) by creating effectivecontrol over EU national budgetary decisions. Ithas also introduced severe and quasi-automaticsanctions for member states in breach of theircommitments. On these matters the Commissionsrecommendations to the European Council standunless opposed by a quali ed majority of members.

The Two Pack.

This locks in even stronger ex-ante budgetarysurveillance for EZ members (the Six Pack appliesto all EU members) entailing the power to vetnational decisions and require modi cations ofbudgetary plans that appear in breach of nationalcommitments (see below).

The European semester procedure.

Under this procedure, recommendations fornational economic policies are approved in the rstsemester, based on national stability (budgetary)and economic-reform programmes, that constrainnational decisions to be approved and submitted

to Brussels in the second semester of the year.

The scal compact.

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This takes the credibility of the tighter EUsurveillance to a new level by requiring Eurozonemembers to adopt German-style constitutionalrules for balanced budget.

More broadly, all economic and social policiesliable to in uence productivity and cost trendshave been brought under Brussels scrutiny. Thevehicle is:

The Macroeconomic Imbalances Procedure(MIP).

This is an early-warning surveillance mechanismthat aims at preventing harmful macroeconomicimbalances from developing, and correcting thosealready present. The procedure may soon involvebilateral legal contracts between EU institutionsand member states detailing commitments forstructural economic reform. The policy areas

covered are vast the functioning of labourmarkets, public spending and taxation structures,regulatory structures and the functioning of thejudicial system, and more.

Most recently, the EU has had to set up in greathurry a full- edged banking union in order to breakthe vicious circle between banking and sovereigncrises. It is also clear that some form of scal unionwill be needed to provide a scal backstop to thebanking union as well as to meet new idiosyncraticshocks threatening the Eurozones stability.

Therefore, it doesnt come as a surprise thatdiscussions about political union haveprominently reappeared in Brussels policy circles,after being absent for two decades following theMaastricht Treaty negotiations.

2.1 From the Community Method toexecutive decision making

As is well-known to EU scholars, the Unionbasically works by deciding laws and regulationsand then entrusting their application to theCommission and the European Court of Justice.It is in the main rule-setting much more than theexercise of discretion. The Community Methodis the main decision-making method wherebyall legislation is jointly decided by the EuropeanParliament and the Council of the Union (thatis, the specialised ministerial Council formation),based on a proposal by the Commission.

The crisis, however, required urgent decisionsoften taken under the dramatic pressure ofevents. The European Council has emerged as

the principal decision maker and has resortedto intergovernmental decision making, out ofthe Union legal framework when this appearednecessary to cope with the emergency.

Council leadership and the intergovernmentalapproach, however, ran soon into problems asthe direct enforcement of discipline by some EZmembers on other EZ members turned out to bepolitically counterproductive. As a consequence,the European Council had to seek the help ofcommon institutions. Clear examples of this canbe seen in:

The Commissions newfound central role inimplementing common policies decided by theCouncil; and

The establishment of the European StabilityMechanism (ESM), which was set up by theCouncil to meet EZ members nancial needsin times of crisis.

Meanwhile, fundamental questions of democraticlegitimacy and accountability have been raised by

the shift of policymaking powers to a political no-mans land where neither national parliaments northe European Parliament have a say.

Equally fundamental questions for the futureof the Union are being posed by the increasingdifferentiation in the member states participationin common policies, which has brought back tothe fore old questions about variable geometry inEuropean integration.

2.2 The shifting balance in executive powers

The EZ crisis exposed a systemic de cit of executivepowers at EU level (Vron 2012). Nationalgovernments did not have the ability to stop theavalanche. The European Council had to stepinto the breach to provide nancial assistanceto EZ members under attack. Council decisionsrepeatedly determined EZ members continuingsolvency as well as, on occasion, the very politicalsurvival of national governments.

The assistance came with strings attached conditions that included drastic changes innational economic policies. It is these strings thattriggered systematic shifts in power. Many havenoted the shift of power to EU creditor nations;much less noticed is the shift in the distributionof powers among EU institutions as the conditionswere brought under EU control.

Therefore, while some assumption of executivefunctions by the European Council beyond treatycompetences predates the Lisbon Treaty, the crisishas given the process an unprecedented impetusand scope, coming to cover discretionary executive

functions that heretofore were closely guardeddomain of national policy actors (Dullien andTorreblanca 2012).



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As President Barroso stated in the last EuropeDay address: Never in the past have so manycompetences been exercised at EU level (Barroso2012). However, the European Council lacks theunity and continuity of direction required by atrue executive. Moreover, it soon became clear thatconditionality could not be imposed and enforceddirectly by some member states over other memberstates of the Eurozone, because this would bringinto direct contact the national public spacesof debtor and creditor countries with politicallyexplosive consequences.

For debtors, taking orders on how to managetheir economies from their creditors adds anelement of direct confrontation and unneededhumiliation which inevitably generatesresentment and popular resistance to neededadjustment policies.

For creditors, it consolidates the view ofnancial assistance as a transfer of resources

from taxpayers money, hence the demands forconditions harsher than necessary.

Without the lter of common institutions, both theprovision of the bridging funds and the effectiveapplication of economic-policy conditions becomeimpossible feats. Thus, a push that started as anintergovernmental process and was initially defacto managed by a Franco-German directoire hasended up as a massive deepening and centralisation

of power at the EU level.2.3 The Commissions heightened role and

the ESM

In this new EU economic governance, theCommission has been placed at the centre of thestrengthened surveillance procedures under Article121 TFEU.

Commission recommendations to the Councilin the procedures for surveillance over economicpolicies have been given special strength byproviding that they may be changed by theCouncil only by quali ed majority (reversemajority voting).

Many decisions, such as issuing an early warningto a member state going off course, or placing acountry under enhanced review under the MIP,are taken by the Commission alone.

As to the provision of nancial assistance, a newinstitution was set up, the European StabilityMechanism (ESM), endowed with its own capital

(paid in for a minor share, and therefore for themain part not recorded as a payment in nationalbudgets) and able to raise resources directly fromcapital markets to nance conditional assistanceprogrammes to EZ members. Economic policy

conditions are still decided (by consensus) bythe members states in the EMS governing body,but their decisions can be attributed to theinstitution rather than individual member states;and the implementation of conditionality is againentrusted to the Commission.

2.4 A shift in decision-making procedures

These new powers, procedures and institutions donot belong to traditional EU decision making, andthis in at least two fundamental respects.

First, as already said, EU decisions are typicallylegislative decisions establishing common rulesand normally not entailing the exercise ofdiscretionary executive powers over memberstates national policies.

For example, traditional topics would be internal

market opening, health and consumer protection,or the establishment of a digital marketplace; inthese matters, Union legislation establishes a policyregime not entailing the exercise of discretionaryexecutive powers.

Implementation of EU law was entrusted tothe Commission which can start infringementprocedure for non-compliance against themember states. In this role, the Commission isthe 'guardian of the Treaty', more of an executivelaw-enforcing agency than a political body (albeit

the intensity of enforcement may at times takeaccount of political practicability, e.g. when in the1990s the Commission was initially very cautiousin enforcing state aid rules against public utilities).

Controversies on the correct interpretation of EUlaw between the Commission and the memberstates are eventually decided by an independentjudiciary, i.e. the European Court of Justice.

Second, as has been recalled the ordinary EUlegislative procedure is co-decision by Counciland Parliament based on proposal by theCommission; without a Commission proposal,there can normally be no legislative decision.

This gives the Commission a central role. Ifthe Commission disagrees with amendmentsintroduced by the Council or Parliament, it maywithdraw its proposal and stop the procedure.In any events, the Community method is, andalways was, a normative decision making power,designed to establish directives and regulations (deSchoutheete 2012).

Such formalisms, however, hide a more complexreality as in practice the Commissions powerof initiative is exercised upon requests by theEuropean Council or Parliament. That said, theCommission still brings to the legislative process



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a supranational element going beyond the simpleaggregation of national interests. This is why theordinary EU legislative procedure, or CommunityMethod, is dear to the advocates of closer Europeanintegration. The Commission adds a near-federalcomponent to EU decision making.

Clearly, the new executive functions taken upby the European Council to tackle the EZ crisisdo not belong to, and cannot be confused with,the Community Method. Instead, the string ofdecisions detailed above (Six Pack, etc.) entailthe direct exercise of discretionary executivepowers. The Commission enters the process as animplementing arm. Thus the Commissions newtasks more closely resemble its role as Guardian ofthe Treaty than that as initiator of legislation.

3. Additional reforms to underpin thenew executive powers

The next question, then, is how to ensure a stableand predictable structure for the emerging Europeanexecutive powers in economic policymaking. Theingredients of a solution may include:

A stronger EU presidency evolving in thedirection of a true head of the Europeanexecutive.

This power shift would inevitably create problems

with democratic legitimacy. That is, a strong EUpresident could face problems of legitimacy vis--vis his/her elected colleagues on the EuropeanCouncil and in the member states.

Several solutions may be envisaged. One would bedirect election of the president by popular vote;this proposal is often advocated by those whoseek a merger of the Council and Commissionpresidencies, and full parliamentarisation ofthe Union by making this uni ed presidentaccountable to the European Parliament. On this,more below.

A possible alternative, more in line with the newrole of the European Council in national economicpolicymaking, would be election of the Councilpresident by a system akin to the US system ofelectoral colleges used for the election of thepresident; electors would be chosen by nationalparliaments (as described by Fabbrini 2012).

Establishment of a European minister of nanceand the economy.

This new post would chair the Eco n Council aswell as be a member of the European Commission the Commissioner in charge of economic affairs,

conceivably a Commission Vice-President on parwith the High Representative of the Union forForeign Affairs and Security Policy for the EuropeanUnion. Note that this new gure could be a strongenforcer of polices decided by the EuropeanCouncil not the decision maker.

Greater resort to majority voting within theEuropean Council, notably by exploitingthe passerelle clause of Article 48 7 TEU toovercome unanimity. This would not require atreaty change.

An important consequence of the considerationsdeveloped so far is that the frequently voiced ideaof strengthening the political legitimisation of theCommission by means of a direct popular vote e.g. by having the main parties in the Europeanelection declare their (partisan) candidate for theCommission presidency and then placing the

Commission at the apex of the Union executiveby merging it with the presidency of the EuropeanCouncil, does not rest on very solid ground,politically and institutionally.

Two main objections stand out. First, politicisationof the European Commission could make itsdecisions as impartial enforcer of economicconditionality and guardian of the treaty lessreadily acceptable by the member states. Moreover,direct election of a uni ed presidency wouldunsettle the careful balance between the citizens

of large and small states that lies at the root ofthe present system of double legitimisation ofEuropean institutions (people and states, as fromArticle 10 2 TEU; on this, cf. Fabbrini 2012) whereby small states are overrepresented in theCouncil (as in the US Senate) whereas large stateselect a larger share of members of Parliament,re ecting their larger population (albeit even herenot quite proportionately to population shares).

The Commissions new powers may also requiresome underpinning changes. The effectiveperformance of the Commissions new functionsrequires strong expertise and full independencefrom the member states. The latter would bestrengthened by relinquishing the principle ofcountry representation in the composition of theCommission. It would also help to substantiallyreduce the number of commissioners from itscurrent ludicrous number.

In this changed environment, it might be morerealistic to think of the Commission President ashead of the EU administration a leader chargedwith the implementation of the policies decided

by the European Council and the application ofEuropean laws. As a complement, the post shouldremain accountable to the European Parliament for



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the proper performance of its enforcement powers.Within this context, it would be useful to bolsterthe statutory protection of the Commissionsindependence from the member states.

It is an open question whether or not we shouldmaintain the Commissions exclusive powerof initiating legislation. On the pro side of theargument is the idea that the Commission couldplay a useful role in ensuring the coherence ofEuropean legislation, de facto or de jure initiatedby the European Parliament and the EuropeanCouncil.

In any event, the president of the European Councilshould be formally empowered (de facto, it alreadydoes it) to ask the Commission to initiate legislationwhen this was required for the implementation ofits policies. This prerogative should be balancedwith the attribution of the formal power to initiate

legislation also to the European Parliament.

4. What economic powers?

Following the Four Presidents Roadmap (VanRompuy, 2012), a genuine economic andmonetary union (EMU) will be built on the threepillars:

Financial integration

Fiscal integration Economic policy integration

In all domains, the criterion driving the centralisationof decisions always was, and remains, the presenceof external effects of national economic policies.That is to say, potentially adverse effects that onemembers policies may have on another member,or the overall stability and sustainability of the EUand Eurozone which are not fully internalised innational decision making.

Importantly, the crisis has produced a remarkableexpansion of the notion of external effects. Inthe Treaty of Lisbon, that notion amounted to ageneral requirement with little teeth, where itstates that the member states shall conduct theireconomic policies with a view to contributing tothe achievement of the objectives of the Union(Article 120 TFEU). It went on to link this to the so-called Broad Economic Policy Guidelines (BPEG)approved by the European Council and monitoredby the Eco n Council on the basis of reportssubmitted by the Commission (Article 121 TFEU).

External effects also included the excessive de citprocedure of Article 126. This, along with theSGP, was supposed to constrain member statesbudgetary policy to prudence. The credibility of

this discipline, however, was crippled by the 2003Eco n Council decision to exempt France andGermany from its strictures.

Now, after the crisis, we have moved to the entirelydifferent world of the European Semester, the SixPack, the Two Pack, and the Fiscal Compact. Thesehave given the BPEG much stronger teeth albeittheir legal force remains unclear as long as theCourt of Justice has no say over them.

For EZ members, binding policy commitmentsunder the strengthened surveillance of Article 121TFEU will now cover the broad domain of structuraleconomic reforms, from labour market policies tothe pension and welfare system, the quality ofpublic spending and regulation, taxation, marketopening and the like.

As a result, countries will be less free to decide their

preferred combination of exibility and protectionin economic and social policies.

4.1 A new twist in subsidiarity

In this context, the criterion of subsidiarity istaking up new meanings. In the post-crisis setting,subsidiarity (i.e. principle of taking decisions at alevel corresponding to the external effects) alsodepends on the credibility and commitment ofnational policymakers to disciplined policies.Decisions move to the centre whenever national

polices represent a threat for the stability of theEurozone; otherwise they remain in nationalhands. Interestingly, the need to centralise policiesmay well be reduced to the extent that the neweconomic governance, and notably the bankingunion, managed to remove the incentives to rundivergent national policies.

In each of the domains of the Roadmap, the criticalissues will be:

How far to go in the centralisation of economicpolicies? And

How to go about their legitimisation?

I will discuss the former issue here and leave thelatter for the next section.

4.2 Banking and fnancial union

Taking banking (and nancial) union rst, thecrisis has exposed huge problems of moral hazard.Bankers took excessive risks knowing they could if things went wrong count on the protection of

opaque prudential rules and rampant supervisoryforbearance by national supervisors. Inevitably, theresponse has been full centralisation of bankingsupervision and the creation of the new Europeansupervisory authority at the ECB.



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The system, however, will not eradicate moralhazard as long as banks can expect to be rescuedfrom their mistakes with taxpayers money. Atleast for the large cross-border banks, there isalso a need to centralise deposit insurance andresolution procedures. Centralisation of the latterhas been accepted by the European Council, whileresistance to national deposit insurance has notbeen overcome. The main fears holding it up aremoral hazard and intra-member transfers, notablystemming from the pooling of existing nationalguaranty funds and, more important, of unknownrisks.

Some kind of last-resort scal backup for the depositinsurance and resolution schemes is also required.As a minimum, there will need to be some formof a key, or pre-determined allocation, that de nesnational contributions in case of need. It shouldbe kept in mind that nancial requirements for

resolution would in general not be very large if thecommon supervision works well (barring the caseof a systemic banking crisis; on this cf. Carmassi,Luchetti and Micossi 2010).

4.3 Fiscal union

On scal union, the main ingredients ofstrengthened scal discipline seem well in place provided the European Council remains committedto serious enforcement. There are two unresolvedissues:

The lack of a common scal cushion to meetidiosyncratic economic and nancial shocks.

Such shocks, even if they hit one or a few EZcountries, are capable of shaking con dence in theentire Eurozone. The cushion would remove thisspillover and thus lessen the cost of the shocks forall involved. As long as a larger common budgetis unavailable, the Eurozone could tackle thisproblem with some kind of mutual-insurancemechanism or rainy-day fund, thus withoutany need to centralise speci c scal functions.The possibility to have the ESM issue jointlyguaranteed euro-bills for this purpose has beenmentioned in the Roadmap documents as well asthe Commission Blueprint for a deep and genuinemonetary union (European Commission 2012).

The second unresolved issue is how to buildeffective risk-sharing arrangements forsovereign debts.

This is necessary to restore normal creditconditions in the EZ nancial markets, but any

plan must avoid fresh problems of moral hazardand (signi cant) inter-country scal transfers.

This requires rewalls, which, albeit with somelimitations, have been provided by the ECB.

Events since the rst Greek rescue package, in May2010, seem to con rm that a main trigger of thecon dence crisis was doubt among investors thatsuf cient liquidity would be made available by theECB to roll over sovereign debts (De Grauwe and

Jin 2013; for a contrary view see Buti and Carnot2012).

Restoring normal lending conditions may alsorequire a one-off operation of debt centralisationto overcome the unwanted segmentation of

nancial markets linked to excessive sovereign-debt accumulation by some member states as hasbeen done at the onset of other federations, e.g.after the US war of independence and in Brazil inthe 1990s (Cottarelli, 2012). A workable schemeto this end has been proposed by the GermanCouncil of Economic Experts (2011) and deservescontinuing consideration.

There are other areas where increased centralisationmay make sense. One relates to the nancing oflarge common investment projects with newpublic debt issued by EU institutions, but with theultimate backing of EU members. These operationswould be self-liquidating as the project bonds arereimbursed.

A version of this already operates via the EuropeanInvestment Bank (EIB) and the EuropeanInvestment Fund (EIF). Some member states remainreluctant to let the scale of these operations rise

signi cantly to meet the nancing gap that stillhampers the completion of cross-border networksfor telecoms, transport and energy. Undoubtedly,their completion would boost the Single Market inthese domains and EU productivity.

4.4 Economic union

The last topic to address is structural economicreforms. One unpleasant feature here is thatCouncil polices have predominantly re ected theviews and economic philosophy of some memberstates those holding the purse strings. As hasbeen recalled, the communication damage wasampli ed by creditor countries initially taking upa direct role in the monitoring and enforcement ofadjustment programmes.

This mistake has been corrected only partially byshifting more power on details to the Commission.What will be more important for overcomingresistance to the prevailing economic-policyphilosophy is that it succeeds in combiningausterity and growth, discipline and solidarity. It iscritical to show convincingly that there is light at

the end of the tunnel. Without higher growth, thesovereign debts of the southern periphery will notbe sustainable and the Eurozone may well breakdown.



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To this end, at its meeting of June 2012, theEuropean Council agreed on a number of actions,under the so-called Growth Compact, that couldbear signi cant fruit in terms of producing higherinvestment and growth, but unfortunately thesehave not yet been followed up as seriously as theausterity policies.

5. Democratic legitimacy andaccountability

Democratic legitimacy and accountability of theeconomic governance of the Eurozone and theUnion requires rst of all re-establishing the roleof elected parliaments in the scrutiny of economicpolicy decisions taken by the European Council.

The December 2012 European Council Conclusionsstated that any new steps towards strengthening

economic governance will need to be accompaniedby further steps towards stronger legitimacy andaccountability. Such steps should be appliedat the level at which decisions are taken andimplemented.

A reasonable application of this principle isto envisage an allocation of tasks between theEuropean and the national parliaments. TheEuropean Parliament comes in when decisions aretaken in the Council by majority voting. Nationalparliaments have their say when decisions are taken

by unanimity, following the intergovernmentalmethod.

The reason should be self-evident. When decisionsare taken by unanimity, then governments may bebound by a mandate established by their nationalparliaments, since they can veto decisions contraryto their mandate. When decisions are taken by theCouncil by majority vote, the outcome of the votemay turn out to be quite different from the originalmandate for many a Council member. It seemsthen appropriate to envisage that democraticaccountability be achieved by some form ofscrutiny by the European Parliament.

5.1 Making the European Council accountableto parliaments

Proper scrutiny by the European Parliamentof the new economic policies and institutionsmeans eventually that the European Council mustbecome accountable to the European Parliament,in forms to be decided. However, there is no basisfor this in the treaties (cf. Article 15 TEU) and anysuggestion going in that direction would need

a treaty change, which would certainly meetconsiderable opposition. On the other hand, inview of the broad language of Article 17 8 TEU(The Commission, as a body, shall be responsibleto the European Parliament), there is no doubt

that the Commission is accountable to theEuropean Parliament also in its activities as theimplementing arm of common economic policies.

The question then arises as to whether and towhat extent the institution from which thesepolicies emanate i.e. the European Council will be willing to accept some accountabilityto the European Parliament going beyond theimplementing actions by the Commission.

Importantly, sharing decision making on theBPEG with the European Parliament would becontroversial and possibly counterproductive. Asindicated above, for the EZ countries the BPEG arebecoming strict obligations which tightly constrainnational budgetary polices, with strong, early andquasi-automatic sanctions for non-compliance. Tosubmit such matters to the European Parliamentwould politicise the debate, making the system less

predictable and credible. It would also weaken therole of national parliaments and thus increase thedistance between European decisions and nationalpublic spaces.

5.2 Building a two-tier solution

Legitimising and accountability institutions willbe built up gradually for each institution of theemerging executive powers at the European level,as can already be observed.

At Union/EMU level, the common pattern thatis emerging involves regular reporting to theEuropean Parliament and the latters right to assessperformance and ask questions. For instance, withthe adoption of the Six Pack, an Economic Dialoguewas set up between the European Parliament, onthe one hand, and the Council, Commission,European Council and Eurogroup on the other.With regard to the Single Supervisory Mechanism,Parliament is claiming a right to vet appointments,ad hoc hearing procedures, and a right to audit.

The legitimisation of economic policies decided atEuropean level will also have to rely on nationalparliaments (indirect legitimisation). Clearly,the main domain of national parliaments is thepreparation of national economic-policy decisionsand notably the national stability and reformprogrammes presented to the European Council inthe context of the European Semester. Discussionof these documents must become the centre ofnational budgetary processes which is as yet farfrom happening. Any direct implication of nationalparliaments in decision making at European levelmust in general be rejected as it would surely lead

to complete paralysis.

A viable opportunity for formal involvement ofnational Parliaments in EU-level decisions maybe offered by the new contractual arrangements



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proposed by President Van Rompuy with hislatest Road Map document (Van Rompuy 2012).These arrangements, signed by a member statewith the EU institutions, would be internationaltreaties normally requiring national parliamentaryrati cation. Since they would also bind the Union,they would need approval by the EuropeanParliament. Thus, the proposal introduces aninteresting institutional innovation entailing atwo-level legitimising mechanism.

The European Council, in its December Conclusions,also stated that new mechanisms to increase thelevel of cooperation between national parliamentsand the European Parliament could be useful, andrecommends the organization and promotion ofa conference of their representatives to discussEMU related issues ( 14). Similar references arecontained in Protocol No. 1 of European treaties(Article 10) and the Fiscal Compact (Article 13).

Once it is clari ed that these conferences will notdecide policies at Union level, they may offer a usefulforum for discussing general policy orientationsand related institutional developments in EMU,and thus help build a broader understanding andcommon ground among elected representatives.

6. A multi-level and multi-speedUnion

EU members now fall into one of three categories: Eurozone ins (the 17 EU members that now

share the euro);

Eurozone pre-ins (those wishing to join EMUbut not yet able or ready to do it); and

Others (those who do not intend to join theEurozone).

Because of the pre-ins, the Eurozone is a multi-speed system (the objective are shared but timeframes differ). Because of the others, the EU isa multi-level system. The essential point is that,as EMU progresses, the large number of pre-insmakes it plausible to envisage that the Eurozonemay one day cover most EU members.

The December 2012 European Council con rmedthat deeper integration and reinforced solidaritywould apply rst of all to the Eurozone (Conclusions 3). However, it also stated that the processof completing the Eurozone will be open andtransparent towards member states not using the

single currency and will fully respect the integrityof the Single Market (Conclusion 4). Therefore,not only must the door remain open for anybodywishing to join the inner circle of integration ata later stage, but the decisions and instruments

of enhanced integration shouldnt prejudge therights of non-participants in the broader contextof the Union.

And indeed, the long-term objective of a Eurozoneextended to encompass much of the Union isre ected in the European Councils determinationthat the process of completing EMU will buildon the EUs institutional and legal framework(December Conclusions 4). Similarly, in itsBlueprint document, the European Commissionstated that the deepening of Economic andMonetary Union should primarily and fully exploitthe potential of EU-wide instruments (EuropeanCommission 2012, p. 13).

Thus, while the Eurozone is emerging as a nucleusof enhanced economic and political integration,its future relations with non-Eurozone Unionmembers remain mired in ambiguity. EZ members

are not ready yet to say that they intend to builda new separate political body. Those outside thesingle currency oscillate between queasiness aboutenhanced integration within the Eurozone, andan urge to participate in emerging arrangementsand instruments, such as the euro-plus pact (23members), the Fiscal Compact (25 members),and now the Single Supervisor Mechanism (SSM,possibly with an eventual membership of 24 or25). Most of them do not want to lose contact withthe inner circle.

Enhanced integration in the Eurozone does notentail insurmountable dif culties in decisionmaking for the European Council. The Council hasalready created within itself dedicated subgroups(the Eurogroup and related working groups).Reinforced cooperation (Articles 20 TEU and 326-334 TFEU) provides for a modi cation in thevoting rules of the Council in a multi-level system.Speci c rules for the Eurozone (Articles 136-138TFEU) also allow for a modi cation of Councilvoting rules.

In principle, special dif culties do not arise forthe Commission, which can perform the tasksmandated by the European Council for theEurozone without modifying its composition orvoting rules. This is of course predicated on strictadherence to the principle of independence ofCommissioners from national authorities (de factoweakened in recent years).

The question is more complex for the EuropeanParliament to the extent that it may on occasionbe called upon to deliberate on legal acts andpolicies affecting only the Eurozone. Should non-

EZ Members of European Parliament (MEPs) voteon Eurozone issues? Parliament maintains that it isentitled to intervene in these matters as a unitarydemocratic representative of the Union polity (cf.European Parliament 2012 and Representative of



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the European Parliament 2012). Others, however,consider that only MEPs from EZ countries couldlegitimately vote on EZ matters and participatein related accountability mechanisms (e.g. theWesterwelle Report 2012).

The strains on common institutions are also likelyto intensify as these are called on to accommodateincreasingly divergent policy courses. This may bethe case with the Fiscal Compact or the SSM. Thesestrains will be all the more evident as the Eurozonesolidi es its separate governance apparatus(summits, a permanent president and stableministerial working groups). Over time, this couldbring members positions in Council deliberationsto be increasingly aligned, with non-EZ membersfeeling marginalised.

Looking further ahead into the future, one possibleoutcome is that the EU will eventually coincide

with the Eurozone. Current EU member who refuseto adopt the euro may eventually be forced to leave.The existing differentiated circles of participationin common policies would in this case eventuallycollapse into the single EU framework.

An alternative scenario is however conceivablewhereby separate circles of differentiatedintegration may consolidate. For example, therecould be one for defence policy or border controland internal security. In this case, there would bemore likely an interest for non-EZ members to stay

in the EU. In this scenario, the single market wouldnot necessarily coincide with the Eurozone even ina nal equilibrium.

7. Conclusions

Four main conclusions stand out from thepreceding analysis.

The centralisation under way in executivepowers for economic policymaking cannot beseen as a temporary device to deal with thecrisis,

The crisis has exposed systemic design aws in theinstitutions of the EU Economic and MonetaryUnion that therefore require systemic changes inorder to be xed. This is notably the case for thenew rules and institutions developed to ensure theconsistency of national economic policies witheconomic and nancial stability in EMU.

While the Eurozone is emerging as thecentre of enhanced integration of economic

policymaking within the Union, it is nota foregone result that the broader EU-wideframework will be relinquished.

The gradual extension of the Eurozone to most EUmembers remains a paramount political goal; thissigni cantly in uences and shapes the design ofEZ institutions.

The European Council is likely to remainthe top executive power in the EU, with theEuropean Commission playing a central role inthe implementation of common policies, ratherthan initiating or deciding them.

The Community Method is likely to stay as themain EU legislative technique, but it is not likelyto be extended also to economic-policy decisionmaking.

The mechanisms and institutions that willbe needed to restore adequate legitimacy andaccountability to economic-policy decisionmaking will require stronger involvement

of national parliament in legitimisingcommitments taken by national governmentsin European Council deliberations, and someforms of direct accountability of the EuropeanCouncil to the European Parliament.

Direct participation by national Parliaments indecisions taken at EU level must be resisted asan institutional short-circuit, as it would in alllikelihood engender decisional paralysis.

In closing, I wish to stress that the direct election

of the Commissions president, in this context,does not seem a viable idea. Politicisation of theCommissions president seems incompatibleboth with the European Councils new executivepowers and the Commissions increasing role asthe implementing arm of common policies.

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Buti M. and N. Carnot (2013), Fiscal policy inEurope: searching for the right balance, VoxEU.org, 14 March.

Carmassi J. and S. Micossi (2010), How politiciansexcited nancial markets attach on the Eurozone,VoxEU.org, 24 June.

Carmassi J., E. Luchetti and S. Micossi (2010),Overcoming too-big-to-fail: A regulatory framework

to limit moral hazard and free riding in the nancialsector , CEPS Paperback, Brussels, March.

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Stefano Micossi is Director General of Assonime, Visiting Professor at the College of Europe in Bruges, a member ofCEPS Board of Directors, and Chairman of the Board of Directors of the CIR Group. This note elaborates on the mainmessages of a CEPS Essay prepared by the author together with Philippe de Schoutheete (de Schoutheete and Micossi2013). I wish to thank Vox editor for his useful comments that have helped me improve considerably the presentation.

The Centre for Economic Policy Research , founded in 1983, is a network of over 800 researchers based mainlyin universities throughout Europe, who collaborate through the Centre in research and its dissemination. The Centresgoal is to promote research excellence and policy relevance in European economics. Because it draws on such a largenetwork of researchers, CEPR is able to produce a wide range of research which not only addresses key policy issues,but also re ects a broad spectrum of individual viewpoints and perspectives. CEPR has made key contributions to awide range of European and global policy issues for almost three decades. CEPR research may include views on policy,but the Executive Committee of the Centre does not give prior review to its publications, and the Centre takes noinstitutional policy positions. The opinions expressed in this paper are those of the author and not necessarily thoseof the Centre for Economic Policy Research.

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