Mats Persson: The political lesson from the Portuguese bail-out is don’t give up EU vetoes

Mats Persson is Director of Open Europe.

That Portugal has joined Greece and Ireland on the eurozone casualty list has become a fact of life – so has the UK’s liability in the latest EU bail-out.

Open Europe has looked at the various economic implications of the bail-out for Portugal, the eurozone and Britain in detail elsewhere. However, the biggest political lesson from this episode for any British government has so far been overlooked. That lesson is simple: don’t give up vetoes over sensitive areas of EU policy without first thinking through every possible consequence.

And here’s the thing, the reason why the UK is now required to underwrite a Portuguese bail-out to the tune of £3-4 bn (partly via the EU budget, the legality of which is dubious, party via the IMF, which is fair game) isn’t Alistair Darling, who signed the emergency bail-out deal in May last year, or George Osborne, who allegedly was consulted by Darling. The UK long ago gave up its veto over the part of the EU treaties – the now infamous article 122 – that can be used to commit Britain to financially assisting other EU countries in trouble, if that country is hit by a “natural disaster” or “occurrences beyond its control.” Even if Darling, or Osborne for that matter, had objected to the emergency EU bail-out fund last May, they would probably have been outvoted as the decision was subject to majority voting (whether a UK Chancellor, even if he had had a veto, would have wanted to block the deal, given the enormous financial and political pressures at work is also open to debate).

The question then is, whose brilliant idea was it to give up the veto over article 122 – which has effectively become the financial equivalent to Nato’s Article 5 on mutual military assistance?

Before answering that question let’s make something clear: there is no legal basis in the EU treaties for eurozone bail-outs. As we argued back in January last year when eurozone rescue packages were first discussed, the official line from the legal service of the Council of Ministers, was always that the “no bail-out” clause in the EU treaties is superior to the article allowing for financial assistance to member states (Article 122). And consider this statement from German Chancellor Angela Merkel, as late as March 2010:

"According to our understanding, this article 122 sets as a condition that the countries should not have contributed to the situation that has evolved, but that exceptional circumstances are responsible. According to my and our understanding these are rather earthquakes and floods, but also natural catastrophes, than something that can be applied to the Greek situation. So according to my opinion there is no contractual basis in the Treaty, on which basis of which one could do that.”

You can hardly be much clearer. Therefore, the Conservative leader in the European Parliament, Martin Callanan, and others are correct to point out that the Portuguese bail-out lacks both legal and democratic legitimacy – in the UK as well as the EU as a whole.

But in the EU, the rule of law is too often sacrificed at the alter of political expediency, which is precisely what happened last May when article 122 was invoked as part of the bail-out deal, and the UK got involved (as part of a €60bn pot of money, the EFSM, facilitated by the Commission and underwritten by all 27 member states via the EU budget). The UK could try to challenge this legal basis in the Courts, but would its challenge stand up? I doubt it. In the EU, decisions can be de facto illegal but de jure legal.

But this is hardly news, and it’s precisely because of this integration-by-stealth tendency that it’s extremely important to maintain control – through vetoes – over areas of the EU Treaties that are susceptible to creative interpretations by EU leaders and officials, when things get messy. 

So who did give up the UK’s veto over article 122? The simple answer is the Labour government that back in 2001 agreed the Nice Treaty and signed away the UK’s veto right over all article 122 decisions.  Until that point, majority voting had only applied to the part of that article which dealt with natural disasters – not the second, more controversial “exceptional” circumstances part. In retrospect, giving up the veto over an article which is so vague and so open to interpretation – what in the world does “exceptional circumstances beyond one’s control” actually mean? – seems extremely naïve and foolish. Financial aid to countries that run into hard time for one reason or another can certainly be justified, but why make this subject to majority voting on such ambiguous grounds? Alas, it wasn’t the first or last time the UK government foolishly gave away EU vetoes.

There were those who warned against it, however. Michael Howard, for example, who back in 2001 said (ignore the different article numbers, which have since changed):

“What if in future article 100 were used to provide for financial assistance to countries that get themselves into severe difficulties because they cannot meet their pension obligations? There is nothing in article 100 to rule that out.”

But such warnings were dismissed by then Labour Europe Minister Peter Hain:

“The use of QMV in article 100 does not undermine the no-bail-out rule set out in article 103. Article 103 makes it clear that there will be no bailing out of member states, whether of Britain or of any other state.”

The same old nothing-to-see-here line, in other words. The Tories can’t be completely let off the hook however, as they allowed article 122 into the Treaties in the first place (in the Maastricht Treaty). But the part which is now being used to justify the euro bail-outs has the fingerprints of the previous Labour government all over it.

Given this, it’s quite interesting to observe Ed Balls make a song and a dance about how the UK should limit its involvement in the bail-outs. The man had a first row seat all along.

But the more interesting question is: what lessons will be learnt from this? While the Coalition hasn’t been convincing on Europe so far, it has actually taken a positive step in ensuring that episodes like these aren’t repeated. The EU Bill – while it could be significantly improved – makes the future removal of vetoes over sensitive areas of EU law subject to either a referendum or an Act of Parliament.  In other words, it will be far more difficult for future UK governments to casually remove vetoes, opening up a range of unintended consequences down the road.

You would hope that this is a sign that the UK is starting to learn from some of the mistakes made by previous governments on Europe.