by Katinka Barysch

The EU summit on December 10th-11th was a success in so far as EU leaders managed to agree on all major agenda items. The fact that there was a lot of bitter wrangling and a big dose of compromise was only to be expected against the backdrop of a rapidly worsening European economy. However, the longer-term consequences of these compromises are worrying.

* Lisbon treaty

The most unequivocally positive but least noticed deal of the summit concerned the future of the Lisbon treaty. Under quite a bit of pressure from their European colleagues, the Irish government eventually agreed to attempt a repeat referendum in the second half of 2009. Ireland obtained the pledge of legally binding guarantees that the Lisbon treaty would not affect their country’s tax system, neutrality and laws on abortion and gay marriage (since the other EU countries do not want to re-ratify the Lisbon treaty, these clauses will be tacked on to Croatia’s accession treaty which EU countries will need to ratify around 2010-11). EU leaders also agreed that each country would keep its ‘own’ commissioner, abandoning the unworkable and unpopular (in particular among smaller countries such as Ireland) plan to move towards a rotation system.

The outcome of a second referendum is still hard to call. Acute economic worries could turn the Irish against any initiative put forward by their unpopular government. On the other hand, pro-treaty campaigners will raise the spectre of Ireland being marginalised in, or even pushed out of, the EU in case of a second No – an uncomfortable thought at a time of extreme uncertainty.

If the Irish say Yes next year, the treaty could come into force at the start of 2010. If more evidence was needed, the war in Georgia and the struggle to find a concerted response to the financial crisis confirmed that the institutional changes contained in the Lisbon treaty are needed, in particular the streamlining of the EU’s foreign policy machinery and the abolition of the rotating presidency.

* Economic stimulus

Most media attention ahead of the summit had focused on the EU governments disagreeing about the Commission’s proposal for a €200 billion economic stimulus programme. Since the EU’s own central budget is both small and mostly tied up in farm aid and regional spending, €170 billion would have to come from the member-states. The UK and France in particular had criticised Germany for not doing enough to revive its economy, especially since years of prudence had left the country with a sound budget and big external surplus. Chancellor Angela Merkel pointed to the €12 billion worth of measures already passed by the German Bundestag (which the government expects to lead to investment of €50 billion), while her finance minister, Peer Steinbrueck, accused the UK of moving towards “crass Keynesianism” in a newspaper interview. The impression that Germany was isolated in Europe was reinforced when Gordon Brown invited Nicolas Sarkozy and Commission President Jose Manuel Barroso to an economics summit on December 8th but not Merkel.

In the end, EU leaders backed a somewhat watered down stimulus package amounting to “about” 1.5 per cent of EU GDP. However, since this so-called package consists of vastly different national efforts – some already passed, some still under discussion, and many containing spending items that had in any case been planned – it is hard to predict the impact on Europe’s contracting economy. Bruegel, a Brussels-based think-tank, has calculated that the tax cuts and additional spending announced by Europe’s 13 biggest economies for 2009 would amount to only 0.53 per cent of their GDP. The bulk of the planned measures (amounting to 1.16 per cent of GDP) consist of additional credit and spending brought forward, which will have a much more limited impact on demand.

* Climate change

The most important deal of the summit did not concern economics but the EU’s long-term commitment to fight climate change. The French presidency was determined to forge an agreement on how to implement the EU’s 20-20-20 targets from March 2007 before the Czechs – not necessarily known for their green credentials – take over the EU’s rotating presidency in January 2009. To the relief of many – and in particular the 10,000 delegates at the UN conference on climate change that was taking place at the same time in Poznan, Poland – EU leaders managed to clinch a deal, albeit at a price.

EU states kept their commitment to increase the share of renewable sources to 20 per cent and to cut total greenhouse gas emissions by 20 per cent compared with 1990 levels, both by 2020. An agreement on the (non-binding) target of achieving energy savings of 20 per cent was left to later. However, following heavy lobbying from Austria, Italy, Germany and the new member-states, a gradual move towards auctioning all emissions permits from 2013 onwards was delayed. Making energy generators and manufacturers pay for their emissions permits provides greater up-front incentives for investments in energy-savings technologies, it eliminates opportunities for windfall profits and it generates additional revenue that can be used for investments in environmental technology, such as carbon capture and storage.

Under the EU’s summit compromise, power generators in Western Europe will have to pay for all their emission rights from 2013 but those in Central and Eastern Europe will still get most of them for free until 2020. Poland in particular, which still relies on coal for more than 90 per cent of its electricity, had argued that full auctioning would at least double its power prices. Germany had led the group of those countries that had warned that saddling European producers with the cost of pollution permits would force them to relocate to countries with lax environmental standards, such as Ukraine or China. This sounds credible for energy-intensive industries, such as cement and aluminium but not for other manufacturing sectors, which could gain long-term competitiveness if forced to invest in new, energy-efficient production technologies. Now all industries that face cost increases of 5 per cent or more from being part of the emissions trading scheme will continue to get their pollution permits for free – which is more than 90 per cent of all EU industries. Equally controversial is a clause that allows EU countries to achieve a significant part of their emission reduction targets by investing in environmental projects in developing countries. Such offset projects are a lot more difficult to verify and they take the pressure off EU countries to invest in green technologies at home.

Despite an immediate outcry from Green MEPs (calling the compromise a “free for all”), the European Parliament is likely to adopt the package on December 17th. In case it does not, Sarkozy has already said he would call an emergency EU summit before year-end.

Troubling outlook

The December summit has shown that the EU can act even under very difficult circumstance. However, some of the longer-term implications are troubling. First, the fact that EU countries found it so hard to agree on what is little more than a rag-bag of national economic measures shows that the scope for economic policy co-ordination in the EU, and even within the eurozone, is limited. Given that the euro may yet come under pressure (spreads between German government bonds and those issued by Greece, Italy and Spain are still widening), the EU needs to overcome this handicap.

Second, although the EU has in principle stuck to its 20-20-20 targets – still the most ambitious in the world – its role as global leader in climate change has been weakened. The argument that the current economic downturn would make it impossible for European companies to shoulder the costs of emission rights is not convincing: the move to full auctioning would in any case not have started until 2013, a couple of years after even the most pessimistic forecasters say growth will return. By putting the interests of business lobbies first, the EU has weakened its hand in the crucial 2009 Copenhagen summit. How will the Europeans respond when China and India argue that economic development takes priority over fighting climate change?

Thirdly, the summit showed the limits of EU solidarity. EU governments – all EU governments – will put the interests of their own taxpayers and business lobbies first. What came as a surprise to many was that Germany – traditionally seen as the “good European” – is now just as willing to fight for its national interest as traditionally more assertive countries such as France and the UK.

Katinka Barysch is deputy director of the Centre for European Reform.