Brussels blog

Herman Van Rompuy, left, with President Barack Obama at last week's EU-US summit.

Fellow Brussels Blogger Josh Chaffin has a scoop in this morning’s paper on the five-page “interim report” on EU treaty changes for this week’s summit written by Herman Van Rompuy, the European Council president, which we were able to get our hands on yesterday.

Our story focuses on what is likely to be the central element debated about the report – the suddenly fashionable proposal to do a quick-and-dirty, limited treaty change through the hitherto obscure Protocol 12 of the EU treaties, which is described on page 3 of the Van Rompuy document, which Brussels Blog loyalists can read here.

But there’s much more to digest in the report, and as is our practice, we thought we’d give a more extended evaluation here on the Blog.

In a separate story in today’s paper, we reported that European negotiators are discussing running the EU’s two rescue funds – the current €440bn European Financial Stability Facility, and the soon-to-operate €500bn European Stability Mechanism – at the same time as a way to bolster the size of the eurozone’s firewall against contagion to Italian and Spanish bond markets.

As our friends and rivals over at Reuters noted in a follow-up to our story, Van Rompuy’s report clearly steers in that direction as well. European leaders had previously agreed that the EFSF and the ESM could, at no time, have more than €500bn in combined lending capacity. In order to have them run at the same time, that provision would have to be revised, and Van Rompuy appears to support that:

[T]he ESM treaty should be finalised and ratified rapidly, while adjusting it to make it more effective through… review[ing] the clause limiting the consolidating ESM and EFSF lending capacity to €500bn to give the ESM its full lending capacity according to the phasing in of its capital.

As we reported, the idea remains controversial and complicated, so it’s hardly a done deal, particularly in Berlin, where opposition is likely. But advocates see it as part of a three-pronged firewall, with the ESM, EFSF and new IMF resources all combining to give EU leaders the financial “bazooka” they have long been seeking.

Van Rompuy also seems to make clear this is his preferred route, explicitly endorsing bilateral loans to the IMF by eurozone countries – money that sources tell us could be the seed money for a trust fund run by the IMF to help struggling countries worldwide:

[T]here is a need to ensure that the IMF has sufficient resources to deal with the crisis through the provision of additional means, as was done in 2009, in particular through bilateral loans.

Sources have told us this most likely will take the form of loans from national central banks to the IMF – but again, it’s not yet a done deal.

Lastly, the Van Rompuy report makes clear that he would like the summit to keep the door open to jointly-backed bonds for all 17 euro countries, something Germany politicians have vociferously objected to. Whether Angela Merkel can return to Berlin with the door still open remains to  be seen, but Van Rompuy appears likely to give it a try:

Opening up the possibility, in a longer term perspective, of moving towards common debt issuance in a staged and criteria-based process, for example starting with the pooling of some funding instruments. Any steps towards that end would have to be commensurate with a robust framework for budgetary discipline and economic competitiveness to avoid moral hazard and foster responsibility and compliance. This would also require more intrusive control of the national budgetary stance by the EU. Such a process would underline the irreversibility of the euro, give a long term prospect for the funding issue, and reinforce the role of the euro as a global reserve currency. At the same time, it would in fact also be a very powerful mechanism for budgetary discipline.