Op-Ed: “EU enlargement and the future of fiscal and economic governance” by Menelaos Markakis

This Op-Ed is part of an ongoing Symposium on EU Enlargement, which will take place over the next two months. See also previous Op-Eds by Franz Mayer and Thu Nguyen, by Gavin Barrett, and by Carlos Closa. More contributions will follow shortly on EU Law Live.

Introduction

The European Council recently underlined that enlargement is ‘a geo-strategic investment in peace, security, stability and prosperity’ and ‘a driver for improving the economic and social conditions of European citizens’. However, it ‘must foster the values on which the Union is founded’, and ‘both future Member States and the EU need to be ready at the time of accession’ (para 13).

The prospect of an enlarged Union provides an opportunity, and perhaps necessitates, rethinking the workings of the EU in a more fundamental manner. In this regard, the recent Franco-German report that forms the subject matter of this Symposium on EU Enlargement is particularly important. The background to the report has been discussed extensively, such that it will not be repeated here. Suffice it to say for present purposes that the report notes that, for geopolitical reasons, EU enlargement is high on the political agenda, but that the EU is not yet ready to welcome new members, neither institutionally nor policy-wise. Against this backdrop, a ‘working group on EU institutional reforms’ was formed by the French and German Ministers of State for Europe with the following mandate: ‘How can the EU be made enlargement ready while also improving its capacity to act, protecting the rule of law, enhancing democracy and preserving fundamental European values?’ (p. 11). ‘The basic assumption of this report, in line with the group’s mandate, is that while EU enlargement has become a top priority, it needs to go hand in hand with reforms that increase its efficiency, its capacity to act and its democratic legitimacy, as well as empowering the rule of law. Concrete steps should be adopted before or when new countries join the EU’ (pp. 12-13).

There is much that is of interest in this thoughtful report. This contribution will focus specifically on those elements of the report that concern various aspects of EU fiscal and economic governance, notably the long and arduous process towards further fiscal integration, understood as the pooling of more resources and decision-making powers at the EU level. (fn 1) With that said, the proposed reforms adumbrated in the report would clearly affect all areas of EU law. Changing the composition or workings of the EU institutions, or improving democracy at EU level, would also affect the area of Economic and Monetary Union, although not specifically aimed at it. The opposite is also true: any progress made towards a fiscal union, or any further fiscal integration, would inevitably affect the EU as a whole and condition future developments in the EU. Furthermore, while the goal of making the EU ‘enlargement ready’ is central to this report, the current author, much like the authors of this report, believes that reforms aiming to strengthen the EU’s capacity to act, as well as the rule of law, fundamental values and democratic legitimacy, should be pursued even if enlargement were substantially delayed (p. 14).

The report’s recommendations are structured intro three main sections, dealing with the rule of law, institutional reforms, and the process to reform, deepen and enlarge the EU.  All of these aspects are also relevant to EU fiscal and economic governance, such that the structure of this contribution will mirror the structure of the report.

Protecting the rule of law

As regards budgetary conditionality, the authors make two main suggestions: extending the scope of application of the Rule of Law Conditionality Regulation, which establishes the rules necessary for the protection of the Union budget in case of breaches of the principles of the rule of law in the Member States (fn 2); and introducing conditionality similar to the one in the EU’s recovery plan, NextGenerationEU (NGEU), for all future funds. More specifically, they recommend making the Rule of Law Conditionality Regulation, which also applies in the context of the Recovery and Resilience Facility (RRF Regulation, Article 8), ‘…an instrument to sanction breaches of the rule of law and, more generally, systematic breaches of the European values enshrined in Article 2 TEU…’ (p. 16). They take issue with the requirement that ‘breaches of the principles of the rule of law in a Member State affect or seriously risk affecting the sound financial management of the Union budget or the protection of the financial interests of the Union in a sufficiently direct way’ (Article 4(1) of the Rule of Law Conditionality Regulation). The inclusion of such a requirement was seen as necessary in light of the competence basis used for the adoption of the Regulation (Article 322(1)(a) TFEU). (fn 3) They propose relying on Article 352 TFEU instead or amending Article 7 TEU so as to add a new competence basis (p. 16). If the Treaties were not amended, one should be careful not to establish ‘a procedure parallel to that laid down by [Article 7 TEU], having, in essence, the same subject matter, pursuing the same objective and allowing the adoption of identical measures, while providing for the involvement of different institutions or for different material and procedural conditions from those laid down by that provision’, which would infringe Article 7 TEU (C-156/21, para 167; C-157/21, para 206). ‘However, it is permissible for the EU legislature, where it has a legal basis for doing so, to establish, in an act of secondary legislation, other procedures relating to the values contained in Article 2 TEU, which include the rule of law, provided that those procedures are different, in terms of both their aim and their subject matter, from the procedure laid down in Article 7 TEU’ (C-156/21, para 168; C-157/21, para 207). In my view, another important aspect with regards to the Rule of Law Conditionality Regulation would be extending the fairly limited role accorded to the European Parliament in its implementation. (fn 4)

Addressing institutional challenges

The authors note that ‘[i]institutional reforms to make the EU enlargement ready will have to find a delicate balance between the increased capacity to act, the power and influence of small, medium, and large Member States, the democratic legitimacy of decision-making, and the protection of legitimate national interests’ (p. 18). Insofar as concerns the subject matter of this contribution, the authors propose that qualified majority voting (QMV) in the Council be generalised, such that all remaining policy decisions should be subject to QMV before the next enlargement. This should be accompanied by full co-decision with the European Parliament, through the ordinary legislative procedure, with the exception of Common Foreign and Security Policy and what the authors refer to as constitutional decisions, such as changing the EU Treaties (p. 21). It is hard to imagine anything akin to this for norm production in the area of Economic and Monetary Union, where various competence bases either require unanimity in the Council and/or grant a reduced (or even no) role to the European Parliament in the adoption of acts. This is so, in the current author’s view, notwithstanding the measures proposed in the report so as to render QMV more acceptable to the Member States (p. 22). As regards fiscal and tax policy, the authors argue that: ‘The current treaty gives Member States veto rights for both policy decisions on tax harmonisation and EU fiscal decisions. This contributes to the inflexibility of the EU budget as well as difficulties in reaching any decision on tax policy. The EU should create the basis for both greater tax policy harmonisation for Member States but also a greater pool of common EU resources, which would be required to finance an enlarged EU and can only be achieved by matching decision-making on resources and spending’ (pp. 21-22). Although there is no mention of specific Treaty provisions, the emphasis seems to lie on EU budget law as well as provisions such as Articles 113 or 115 TFEU.

The authors further rightly note that ‘[t]he democratic legitimacy of EU decision-making is crucial’ and that ‘the question of the EU’s democratic quality remains at the heart of the debate’ (p. 23). They make a wealth of recommendations on how to improve democratic legitimacy in the EU. Suffice it to say for present purposes that democratic legitimacy in the Economic and Monetary Union also needs to be bolstered, in the manner explained in more detail in various writings in this area. (fn 5) The authors further propose clarifying certain provisions related to the EU’s powers and competences on the occasion of a future Treaty revision. ‘This ranges from a clearer [broader?] legal basis for the ECB in the context of the banking union [Article 127(6) TFEU], […] or the integration of crisis response instruments that […] were created outside the formal treaty framework (such as the European Stability Mechanism (ESM))’ (p. 28). As regards the former proposal, it has previously been argued that a greater role should be accorded to the European Parliament in adopting or amending legislation on the basis of Article 127(6) TFEU by switching to an ordinary legislative procedure, on the basis of the second subparagraph of Article 48(7) TEU. (fn 6) As regards the latter proposal, although clearly in favour, the current author does not hold much hope for bringing the ESM within the fabric of EU law, as even the more limited reform of the ESM Treaty that was opted for is currently stalled. (fn 7) The authors further propose that the EU ‘strengthen provisions on how to deal with unforeseen developments, competency-wise, and including the EP’ (p. 28). In their view, Article 122 TFEU, which was most recently used as the basis for the SURE instrument and the EU recovery instrument that underpins the NGEU, should be amended to include the European Parliament in the decision-making process (p. 28). In this connection, it will be recalled that during the negotiations for the Multiannual Financial Framework (MFF), own resources, and the recovery plan, the European Parliament managed to secure the adoption of a Joint Declaration on budgetary scrutiny of new proposals based on Article 122 TFEU with potential appreciable implications for the Union budget. The authors further touch upon the debate on ‘who is the ultimate arbiter of the reach and limits of EU competence’ (p. 28), which has also plagued the EMU. (fn 8) They propose an additional forum for dialogue between courts at different levels, without the authority to take binding decisions.

Furthermore, the report looks at the potential impact of enlargement as well as of governance and competence reforms on the EU budget. In the authors’ view, ‘[e]quipping the EU with the financial means to have the capacity to react quickly and substantively to changing economic circumstances requires profoundly modifying the governance and the negotiation process of the EU budget and the MFF’ (p. 28). ‘First and foremost, the EU budget must grow over the coming budgetary period in nominal size as well as in terms of a proportion of GDP’ (p. 28). The authors mention inter alia that the EU will need to raise enough revenue to repay the principal and the interest for the funds borrowed for its recovery fund, NGEU (p. 29). It will be recalled that a roadmap for the introduction of new own resources was set out in the budgetary interinstitutional agreement. Absent meaningful progress on that front (see here and here), it would be the Member States themselves that would have to pick up the slack through direct contributions from their national budgets. This would inevitably shift the focus to national net budgetary balances or a ‘juste retour’ logic. The authors’ preferred option is that the EU ‘create truly new own resources for the EU budget that would limit tax optimisation, avoidance, and competition within the EU’ (p. 29). They further call for ‘a profound reform of how the EU budget is adopted, which should move towards QMV for spending. The own resources decision, or any transfer of taxation power to the EU, would still be voted for under unanimity’ (p. 29). The EU’s long-term budget, laid down in the MFF Regulation, is currently adopted by the Council acting unanimously after obtaining the consent of the European Parliament, but the Treaties provide for the possibility of switching to QMV in Council (Article 312(2) TFEU). In practice, an overall compromise is reached between the leaders in the European Council, and the subsequent negotiations between the Council and the European Parliament on the MFF take place in the shadow of detailed European Council Conclusions. The authors further argue that: ‘In the absence of a full move to QMV, there should be more enhanced cooperation or other forms of cooperation between even smaller groups of Member States to agree to finance policies together’ (p. 29). This has proven notoriously difficult in the past, as evidenced by the tumultuous history of the Financial Transaction Tax.

The authors further propose ‘establishing a thorough spending review to reduce the size of some spending areas and increase others’ (p. 29) They also recommend ‘draw[ing] on the positive experience of NextGenerationEU by enabling the EU to issue common debt in the future’ (p. 29). Centralised debt issuing was of course not foreign to the EU prior to the COVID-19 crisis. (fn 9) The current author gathers that this should continue into the future, also to fund other policies, presumably under different rules or a different procedure (otherwise it is unclear why a Treaty change would be required – see p. 48). Could the Union perhaps finance itself through borrowing on a more permanent basis? The RRF could be turned into a common fiscal capacity or fiscal insurance device to deal with shocks and/or to achieve other objectives, possibly complemented by the issuance of common debt to finance its operations. Other, more permanent ‘inter-governmental financing agreements’ could be brought into the fabric of EU law (p. 29). Last but definitely not least, the authors propose that ‘each institutional cycle should set a new MFF based on its strategic agenda and popular mandate’ (p. 29). (fn 10) Any changes to the long-term budget would be particularly important, as the annual budget must comply with the long-term budget (third paragraph of Article 312(1) TFEU). In practice, the room for manoeuvre in the annual budgetary procedure is limited, hence the need for innovative solutions in the context of NGEU. (fn 11)

The process to reform and enlarge the EU

The authors of the report explore various options to implement their proposed reforms, such as a Treaty revision, an ordinary one being their preferred option (see Article 48 TEU), as well as various options short of Treaty change (pp. 30 et seq. and Annex II). Space precludes a detailed exegesis of the various options considered by the authors and of the principles that should govern this process (see also the Op-Ed by Gavin Barrett on ‘Reforming the Treaties’). As regards the possibilities for differentiation in an EU of 30+ States, the authors argue inter alia that: ‘Member States should be more ready to make use of existing flexibility instruments. However, differentiation is not without risk for European integration, for the coherence of the EU’s actions and the integrity of the principles that govern it’ (p. 33). ‘In budgetary matters, it should be possible to develop fiscal capacities through enhanced cooperation, in the form of new own resources, budgets based on Member States’ contributions and/or borrowing capacities…’ (p. 34). In my view, much that is discussed in this contribution could be achieved within the framework of the existing Treaties and could involve all Member States. This would also serve to safeguard the unity of the Union’s public finances. The authors also argue that ‘[i]n the future, the euro should be considered as part of the non-negotiable elements of European integration’ (p. 34). As previously argued, I do not however believe that this requirement should stand in the way of, e.g., the UK rejoining the EU and having back its opt-out in this area.

Conclusions

A future EU enlargement would necessitate changes in the workings of the EU, including perhaps a Treaty revision. The Franco-German report contains a wealth of valuable proposals in that regard. It is relatively easy to point out flaws when someone puts something concrete on the table, or to argue that something is not feasible, and we, lawyers, are particularly good at that. This contribution sought to provide a legal analysis of various proposals contained in the Franco-German report, insofar as they pertain to EU fiscal and economic governance, broadly defined. Arguably, most of those reforms are necessary and should be implemented regardless of the demands associated with a future EU enlargement. Such reforms would also serve to increase the Union’s ‘absorption capacity’. The ball is now firmly with the EU institutions and Member States to achieve meaningful progress on all relevant fronts, prior to or in parallel with a potential EU enlargement. The lofty ambitions set out in the Granada Declaration demand as much.

Menelaos Markakis is Assistant Professor at Erasmus University Rotterdam and Scientific Coordinator of the Erasmus Center for Economic and Financial Governance.

(fn 1) See further Fabian Amtenbrink and Menelaos Markakis, ‘Never Waste a Good Crisis: On the Emergence of an EU Fiscal Capacity’ in Alicia Hinarejos and Robert Schütze (eds), EU Fiscal Federalism: Past, Present, Future (OUP 2023) 171-204.

(fn 2) The reader should pay particular attention to Articles 2 and 3 of Regulation 2020/2092, which define the rule of law and provide an indicative list of breaches of the principles of rule of law, respectively, as well as to Article 4(2), which lists the situations or conduct of the national authorities that breaches of the principles of rule of law must concern, as interpreted by the Court in the cases cited in fn 3.

(fn 3) The Court held in Hungary v European Parliament and Council of the European Union (C-156/21), paras 97-154 and Republic of Poland v European Parliament and Council of the European Union (C-157/21), paras 111-190 that this was an appropriate legal basis for the adoption of the Regulation.

(fn 4) See further Diane Fromage and Menelaos Markakis, ‘The European Parliament in the Economic and Monetary Union after COVID: Towards a Slow Empowerment?’ (2022) 28(3) The Journal of Legislative Studies 385-401, esp. 394.

(fn 5) Menelaos Markakis, Accountability in the Economic and Monetary Union: Foundations, Policy, and Governance (OUP 2020); Menelaos Markakis, Charikleia Kafka and Lina Papadopoulou, ‘Accountability and Democratic Legitimacy in European Union Economic Governance: From the Euro Crisis to the Pandemic and Beyond’ (2023) 70 Irish Jurist 68-110, with further references.

(fn 6) See e.g. Fabian Amtenbrink and Menelaos Markakis, ‘The Legitimacy and Accountability of the European Central Bank at the Age of Twenty’ in Thomas Beukers, Diane Fromage and Giorgio Monti (eds), The New European Central Bank: Taking Stock and Looking Ahead (OUP 2022) 265-291, 283.

(fn 7) Menelaos Markakis, ‘The Reform of the European Stability Mechanism: Process, Substance, and the Pandemic’ (2020) 47 Legal Issues of Economic Integration 359-384; Giovanni Zaccaroni, ‘The Reform of the ESM within a Hybrid EMU Law’ (2022) 28 European Public Law 373-396.

(fn 8) See further Ana Bobić, The Jurisprudence of Constitutional Conflict in the European Union (OUP 2022); Nik de Boer, Judging European Democracy: The Role and Legitimacy of National Constitutional Courts in the EU (OUP 2023).

(fn 9) See the chapter in fn 1.

(fn 10) For a similar proposal, see Richard Crowe, ‘An EU Budget of States and Citizens’ (2020) 26 ELJ 331, 342-43.

(fn 11) See Bruno de Witte, ‘The European Union’s COVID-19 Recovery Plan: The Legal Engineering of an Economic Policy Shift’ (2021) 58 CML Rev. 635-682.

SUGGESTED CITATION: Markakis, M; “EU enlargement and the future of fiscal and economic governance”, EU Law Live, 19/01/2024, https://eulawlive.com/op-ed-eu-enlargement-and-the-future-of-fiscal-and-economic-governance-by-menelaos-markakis/