1. EU – Between the Nobel Prize and the Financial Crisis Professor Miodrag Jovanović

3. It all started as the financial crisis…

4. … and it soon turned into a political

5. The Rise of Eurozone 1999 Belgium, Germany, Ireland, Spain, France, Italy, Luxembourg, the Netherlands, Austria, Portugal and Finland 2001 Greece 2002 Introduction of euro banknotes and coins 2007 Slovenia 2008 Cyprus, Malta 2009 Slovakia 2011 Estonia Non-Eurozone states: UK, Poland, Hungary, Sweden, Denmark, Bulgaria, Romania, Czech Republic, Lithuania, Latvia

6. The Fate of Eurozone When the euro came into being, monetary policy became the responsibility of the independent European Central Bank (ECB), which was created for that purpose, and the national central banks of the Member States having adopted the euro. Together they compose the Eurosystem. Fiscal policy (tax and spending) remained up until now in the hands of individual national governments – though they undertook to adhere to commonly agreed rules on public finances known as the Stability and Growth Pact. They also retained full responsibility for their own structural policies (labor, pension and capital markets), but agreed to co-ordinate them in order to achieve the common goals of stability, growth and employment.

7. Article 126 of the Treaty on the Functioning of the European Union 1. Member States shall avoid excessive government deficits. 2. The Commission shall monitor the development of the budgetary situation and of the stock of government debt in the Member States with a view to identifying gross errors. In particular it shall examine compliance with budgetary discipline on the basis of the following two criteria: (a) whether the ratio of the planned or actual government deficit to gross domestic product exceeds a reference value, unless: - either the ratio has declined substantially and continuously and reached a level that comes close to the reference value, - or, alternatively, the excess over the reference value is only exceptional and temporary and the ratio remains close to the reference value; (b) whether the ratio of government debt to gross domestic product exceeds a reference value, unless the ratio is sufficiently diminishing and approaching the reference value at a satisfactory pace.

8. PROTOCOL (No 12) ON THE EXCESSIVE DEFICIT PROCEDURE Article 1 The reference values referred to in Article 126(2) of the Treaty on the Functioning of the European Union are: - 3 % for the ratio of the planned or actual government deficit to gross domestic product at market prices; - 60 % for the ratio of government debt to gross domestic product at market prices.

9. EU ‘Six-Pack’ Entered into force on 13 December 2011; Five Regulations and one Directive (that is why it is called six-pack); EU secondary law; Applies to 27 MS with some specific rules for euro-area Member States, especially regarding financial sanctions; The six-pack does not only cover fiscal surveillance, but also macroeconomic surveillance under the new Macroeconomic Imbalance Procedure.

10. Six-Pack – Fiscal Effects In the fiscal field, the six-pack strengthens the Stability and Growth Pact (SGP). According to the SGP Member States' budgetary balance shall converge towards the country-specific medium-term objective (MTO) - so-called preventive arm - and the general government deficit must not exceed 3% of GDP and public debt must not exceed 60% of GDP (or at least diminish sufficiently towards the 60% threshold). The six-pack ensures stricter application of the fiscal rules by defining quantitatively what a "significant deviation" from the MTO or the adjustment path towards it means in the context of the preventive arm. Financial sanctions for euro-area Member States are imposed in a gradual way, from the preventive arm to the latest stages of the EDP, and may eventually reach 0.5% of GDP. The six-pack introduces reverse qualified majority voting (RQMV) for most sanctions, therefore increasing their likelihood for euro-area Member States. (RQMV implies that a recommendation or a proposal of the Commission is considered adopted in the Council unless a qualified majority of Member States votes against it.)

11. TREATY ON STABILITY, COORDINATION AND GOVERNANCE (TSCG) Entry into force following ratification by at least twelve euro-area Member States; Intergovernmental agreement (not EU law); Signed by 25 EU Member States (all but UK and Czech Republic); TSCG will only be binding for all euro-area Member States, while other contracting parties will be bound once they adopt the euro or earlier if they wish (they are allowed to choose provisions they wish to comply with). The fiscal part of the TSCG is referred to as "Fiscal Compact". Requires contracting parties to respect/ensure convergence towards the country-specific medium-term objective (MTO), as defined in the SGP, with a lower limit of a structural deficit (cyclical effects and one-off measures are not taken into account) of 0.5% of GDP; (1.0% of GDP for Member States with a debt ratio significantly below 60% of GDP). Correction mechanisms should ensure automatic action to be undertaken in case of deviation from the MTO or the adjustment path towards it, with escape clauses for exceptional circumstances. Compliance with the rule should be monitored by independent institutions. These budget rules shall be implemented in national law through provisions of "binding force and permanent character, preferably constitutional".

12. TREATY ON STABILITY, COORDINATION AND GOVERNANCE (TSCG) - Sanctions European Court of Justice may impose financial sanction (0.1% of GDP) if a country does not properly implement the new budget rules in national law and fails to comply with a ECJ ruling that requires it to do so. In the case of euro-area Member States, sanctions would be channeled to the European Stability Mechanism, in the case of "non-euro-area Member States", the money would be attributed to the EU budget.

13. The Fiscal Compact and ‘Six-Pack’ – Legal Issues The Fiscal Compact, which is the fiscal part of the TSCG - once it enters into force - and the six-pack will run in parallel. On the one hand, a couple of provisions included in the TSCG are mirroring concepts existing in the Stability and Growth Pact as reformed by the six-pack: medium-term objectives (MTOs), significant deviation, exceptional circumstances. On the other hand, some provisions of the TSCG are more stringent than the six-pack. For example, it says that at each stage of the Excessive Deficit Procedure (EDP) euro-area Member States will support the Commission's proposals or recommendations in the Council if a "euro-area Member State" is in breach of the deficit criterion, unless a qualified majority of them is against it. In practice this means that if a "euro-area Member State" breaches the deficit criterion a kind of reverse qualified majority voting (RQMV) applies to all stages of the EDP, even if not foreseen in the six-pack.

14. Situation on the ground During the recession (2009), most of European countries exceeded the permissible limits and were subject to the excessive deficit procedure. Only three countries managed to escape it: Estonia, Luxembourg and Sweden. On 12 July 2011 they were joined by Finland. On 22 June this year, European Union finance ministers (Ecofin), in accordance with the recommendation of the European Commission, decided to abrogate the procedure against Bulgaria and Germany. On 7 November, the European Commission recommended the abrogation of EDP against Malta whose deficit fell to 2.7% in 2011 and will amount to 2.6% of GDP this year.

16. EU as a two-tiers polity? Has the crisis created a two-tier EU with the insiders, the 17 Eurozone countries, driving decision-making, while the 10 Euro "outs" are not even in the room? The situation is even more complicated, since the UK was the only non-Eurozone country to explicitly oppose the new ‘Fiscal Compact’ Richard Corbett, adviser to Herman van Rompuy, the European Council president, says most policy "will remain for the 27: the single market, rules on consumer protection, competition, trade and other areas like environment or justice and home affairs".

17. BVerfG’s ruling on the Fiscal Compact Germany's Federal Constitutional Court has rejected a lawsuit brought by opponents of the euro, and has set only a few conditions for the ratification of the European Stability Mechanism and the fiscal pact. The main proviso is that the ESM cannot increase the scope of Germany's liability without the country's agreement.

18. ‘Fiscal Compact’ as a road to the European state? Indicative terminology: “qualitative moves towards a genuine ‘fiscal stability union’ in the euro area”; “a strong economic pillar is indispensable”; “fiscal discipline and deeper integration”; “social cohesion”; “fiscal integration”; “a common economic policy” Does this step constitute an ultimate loss of national sovereignty?

19. Latest Developments – EU Banking Union EU finance ministers have agreed a landmark deal establishing the European Central Bank (ECB) as the single supervisor of the European banking sector, beginning in 2014. Under the final compromise, which is expected to encompass around 150 banks, at least three banks from each member state will fall under the regime alongside all banks with assets worth €30 billion or more or 20 percent of national GDP. Ministers agreed that a 'double majority' of countries both in and outside the eurozone would be required to make decisions. Although Spain and other countries would like bank bailouts to begin in early 2013, Germany is against this happening before the supervisory regime is in place and fully operational.

20. Financial crisis and the future of EU Does this episode demonstrate that the EU can survive only by strengthening the competences of the full-fledge state? Questioned about a move towards a more federal Europe, 64% of people polled in Spain and 49% in Greece said they would like to see further powers centralized, while only 36% of Germans and 35% of French agreed.