Tuesday, June 19, 2012

Preparing the groundworks

Tomorrow’s meeting of Eurozone finance ministers will be the prelude to another European meeting marathon with the sole aim of getting a handle on the worsening debt crisis.

The announced bailout for Spanish banks and the Greek elections have not succeeded in restoring calm on financial markets. To the contrary, bond yields are still increasing and some market participants are already speculating about a full-fledged bailout for the Spanish government. It looks as if the Eurozone is running out of options and that stopgap measures no longer do the trick. It is obvious that next week’s European Summit with the scheduled fundamental discussion on the future of the Eurozone comes anything but too early.

Despite the obvious attempt by Eurozone leaders to temper expectations about next week’s summit, there seems to be a growing consensus that more integration is needed to keep the Eurozone alive. However, the exact definition of more integration or even a political union still seems to be a matter of dispute. Judging from the proposals circulating officially and unofficially, the new vision thing could be a combination of burden sharing with more fiscal and political integration. Proposals for burden sharing are, for example, a permanent liquidity or funding facility (eg, Euro bills or Euro bonds), a banking union with a single Eurozone bank supervision and a Eurozone bank deposit guarantee. As regards further fiscal and political integration, ideas like a Eurozone finance minister and an independent budgetary authority are currently being discussed.

Eurozone experience tells that there can be a discrepancy between what is discussed and what eventually sees the political light and reality. In this respect, the German position remains crucial, as there will not be a Eurozone solution without German consent. While the German government wants fiscal and political integration first, before agreeing to any idea of joint debt issuances, the French government (and other peripheral countries) have exactly the opposite sequencing in mind. Bringing both extreme positions together will be the challenge of the next days.

Listening carefully to comments from the German government over recent days and weeks sheds some light on the possible flexibility on the German side. A single European or Eurozone bank supervision has found more German support but a full-fledged banking union will take more time. The same holds for common Eurobonds. A debt redemption fund and maybe even temporary short-term Euro bills could be a gnashing German sacrifice, but accepting Eurobonds right away still looks very unlikely. While the German government could turn out to be more flexible than some market participants, it still looks very determined to stick to the principle of conditional integration for as long as possible.

Obviously, Eurozone leaders still have many issues to solve before presenting a first draft and outlines of the vision thing. One thing seems clear, even if Eurozone leaders agree to some new principles and elements next week, there will neither be a banking union nor Euro bonds on 1 July 2012. Let’s not forget: most, if not all, of the potential elements of the vision thing require changes of the European Treaties and these changes always require ratification by national parliaments.

Tomorrow’s meeting of Eurozone finance ministers in Luxemburg is the kick-off of a new meeting marathon, preparing the groundwork for next week’s European summit. Even if the summit looks very unlikely to put an immediate end to the crisis, it could prepare the groundwork for a new architecture of the monetary union. While this could be crucial step in a historical perspective, it might not be enough to restore calm on financial markets. Maybe it is enough to bring the ECB back in action.

No comments:

Post a Comment