The UK and the Eurozone

In March the then Cabinet Minister Iain Duncan Smith told an interviewer that the UK had ‘just given away our right to veto’ over Eurozone area changes, for ‘next to nothing in return’ (see here). Another cabinet minister, Chris Grayling, said that the deal constitutes a ‘significant – and underappreciated – loss of leverage’ because ‘we now lack a key tool in preventing further EU integration – which we might be dragged along into’ (see here). A report by the campaigning group Vote Leave, explained that ‘a new EU Treaty is now planned, which ‘will transfer more powers and more money to the EU institutions’ but over which the United Kingdom has ‘seemingly given up its right to veto.’ The Report concludes that this entails that ‘the UK will be dragged into further Eurozone political integration, even if it remains outside the single currency’. 

A Government report, on the other hand, claimed that the new settlement has ‘protected the UK’s rights as a country within the Single Market, but outside the Eurozone, to keep our economy and financial system secure and protect UK businesses from unfair discrimination’ and that ‘we have secured agreement to a set of legally-binding principles that will make sure the UK is not penalised, excluded or discriminated against by EU rules because we have chosen to keep the pound.’

The two camps’ claims are strikingly different. They can create confusion that may prove material to people’s choice, given the role of banking and finance in the economy of the United Kingdom as a whole. The government estimates that the financial sector employs about one million people and creates about 7 per cent of UK economic output in the UK. So it is worth getting these points right. These issues turn on the new UK/EU legal settlement, which is still relatively unknown.[1]

My paper ‘The UK and the Eurozone after the Referendum’ discusses these claims in detail. It starts from the premise that further Eurozone integration can take place in three different ways (leaving aside the fourth option of ‘enhanced co-operation’ for simplicity).

First, substantial reform can take place by EU treaty amendment. Under Article 48 TEU, all such amendments require the unanimous agreement of the Member States, in the form of a new Treaty subject to their ratification. Nothing in the UK/EU settlement seeks to change this fundamental aspect of the Treaties – in fact the settlement explicitly says that it does not amend the EU Treaties. It is therefore false to assert that as a result of the UK/EU settlement Britain cannot block EU treaty making regarding the Eurozone. All new EU treaties require Britain’s assent.

Second, some reform can take place by a treaty outside the EU framework. This is what happened with the ESM Treaty, which is only a treaty for the Euro Area, or the 2013 Treaty on Stability, Coordination and Governance, which the UK refused to sign. This process, however, has strict legal limits. The Court of Justice made clear in the Pringle case that member states are prohibited from concluding an agreement between themselves which might affect common rules or alter their scope. The UK, thus, can ask the Court of Justice to stop any treaty to which the UK is not part, if it affects the single market in this way. This is a matter of existing primary law, which the EU/UK settlement did not and could not change.  

Third, less radical reform can take place by secondary legislation, under the existing treaties.  Here the suggestion that the UK has given up its veto is inaccurate for a different reason. There was no UK veto to begin with. The ordinary legislative procedure provides for qualified majority voting in the Council (Article 114 TFEU).[2] Finally, for secondary legislation that is specific to those Member States whose currency is the Euro, the UK has no say at all. Only the members of the Eurozone have a right to vote on such proposals (Article 136(2) TFEU).

Let us now turn to the issue of discrimination. British politicians often assume that the Eurozone will wish to create discriminatory laws by way of secondary legislation, making use of the Eurozone’s secure majority in the Council. The UK/EU settlement introduces a simple prohibition that is on its face clear, unconditional and precise enough to create direct effect, if it were part of a treaty provision:

Discrimination between natural or legal persons based on the official currency of the Member State, or, as the case may be, the currency that has legal tender in the Member State, where they are established is prohibited. Any difference of treatment must be based on objective reasons’.

Nevertheless, this is not – at least not yet – a provision of an EU Treaty. The EU/UK settlement is not meant to change the treaties, but to assist in their interpretation. 

Yet, the existing law is equally clear. Article 18 TFEU prohibits discrimination on the basis of nationality as follows:

Within the scope of application of the Treaties, and without prejudice to any special provisions contained therein, any discrimination on grounds of nationality shall be prohibited.

How does this protect the UK against discrimination on the basis of the use of a currency? The connection is direct and simple. Since the adoption of a currency as legal tender for the settlement of debts is always a power of special dominion that belongs to the sovereign state and its legislature – and which has been exercised by the members of the Eurozone through their decision to join the EMU - it follows that any discrimination on the basis of official currency is discrimination on nationality. If so, it is caught by the simple prohibition of Article 18 TFEU.

This connection between currencies and sovereignty is already a feature of existing secondary legislation on financial services. For example, the Regulation on over the counter derivatives (EMIR) is designed to prevent discrimination against central counterparties located in any member state, and its recital 47 states that ‘Nothing in this Regulation should attempt to restrict or impede a CCP in one jurisdiction from clearing a product denominated in the currency of another Member State or in the currency of a third country.’ The same principle of non-discrimination is recognised by the second Markets in Financial Instruments Directive (MiFID II), which requires (in Article 37) that investment firms have the rights to access Central Counterparties in other member states subject to the same ‘non-discriminatory, transparent and objective criteria.’

An argument along those lines was deployed by the United Kingdom in a claim against the ECB’s decision to require location in the Eurozone as a requirement for clearing houses established in member states that are not party to the Eurosystem.[3] The United Kingdom won that case on a different – but equally important - ground. The Court annulled the ECB’s policy on the ground of lack of competence, and did not offer judgment on the issue of discrimination. The Court’s silence on the matter could perhaps be attributed to the fact that the principle was entirely clear. In any event, the law of the relationship between the single market and the Eurozone is new and still developing.[4]  

Ironically perhaps, a careful look at the law suggests the opposite of what is being claimed by Iain Duncan Smith and Chris Grayling. If the UK left the EU, as they propose, it would lose both the veto over future integration of the Eurozone and the claim against discrimination on the basis of Article 18 TFEU. It would also stop having access to the Court of Justice. In short, if the UK were outside the EU, it would have no legal means of influence over the Eurozone. A vote for ‘Leave’ means less leverage, not more. The EU law of the single market remains the best chance the City of London has to secure a level playing field with the Eurozone.  


[1] For a discussion of the UK/EU settlement in general see the informative analysis by the House of Commons Library, EU Referendum: Summary and Analysis of the new Settlement for the UK in the EU, by Vaughne Miller, Arabella Lang, Daniel Harari, Steven Kennedy and Melanie Gower, Briefing Paper Number 7524, 26 May 2016. I discussed the settlement in P. Eleftheriadis, ‘The Proposed New Legal Settlement of the UK with the EU’ U.K. Constitutional Law Blog (13th Feb 2016).

[2]This means the new rules on qualified majority voting that came into effect on 1 Nov. 2014.

[3]No appeal was lodged as the parties reached a settlement following the decision, whereby the UK withdrew its two other challenges to the ECB’s policy.

[4] For a discussion of these relations see Alan Dashwood, ‘Living with the Eurozone’ 53 Common Market Law Review (2016) 3-10. See also Paul Craig & Menelaos Markakis, ‘The Euro Area, its Regulation and Impact on Non-Euro Member States’ Oxford Business Law Blog, 13 April 2016. 


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