Friday, October 19, 2012

EU Summit - Long night, few results

The first session of this week’s European Summit was again one of these red-eyed long nights with few concrete results. The new bank supervisory mechanism will come but will not be effective on 1 January 2013.

During a 10-hour marathon, European leaders discussed nothing less than the future of the monetary union or – to be more precise – EU president Van Rompuy’s report on possible paths to more Eurozone integration.

It was already obvious from the start that probably the only really fruitful discussion would be on the banking union. The principle agreement on common bank supervision had already been taken in June but negotiations on the exact implementation had slowed significantly recently with rising tensions between Eurozone countries on details and the possible starting date.

In a typical European compromise, which had something for everyone, European leaders last night called for “swift progress, with the objective of agreeing on the legislative framework by 1st of January 2013. Once this is agreed, the Single Supervisory Mechanism could probably be effectively operational in the course of 2013.” This compromise had the “1st of January 2013” that French president Hollande wanted and the “course of 2013” for German chancellor Merkel. Even if the countries can agree on a common legal framework before the end of the year, it would not become effective on 1st of January due to national implementation and ratification processes.

Details of the new bank supervision will still be worked out by finance ministers in the coming months. It seems clear that the ECB will play “a central part” and that all banks will fall under supervision. However, the phrase “the ECB should also be able to carry out supervision directly in a differentiated manner, meaning: using national supervisors in regular supervisory tasks as much as possible” shows that Germany succeeded in getting different treatments for some of its smaller banks and particularly the saving banks (Sparkassen).

The issue of direct bank recapitalization by the ESM once an effective supervisor has been established was also confirmed last night. However, operational criteria will still have to be developed which in our view implies that the issue of legacy assets will remain on the table. It looks unlikely that Germany, Finland and the Netherlands will give this one up during the upcoming negotiations.

The “vision-thing” on deeper integration of the monetary union will continue. Reading between the lines of Van Rompuy’s official statement, there does not seem to be a lot of agreement on anything. Strong emphasis on the measures already taken up to now is always a bad sign. It also shows that Germany’s latest idea of a super-Commissioner seems to be off the table. The only element explicitly mentioned last night by Van Rompuy was the issue of individual reform contracts. Other issues like a possible Eurozone budget or emergency fund are mentioned in code language and could still return in the next report to be presented at the EU summit in December.

All in all, the new single supervisory mechanism will come but direct bank recapitalization looks very unlikely any time soon. Moreover, all other big-picture issues for deeper Eurozone integration remain schematic. The integration pace remains slow. Last night’s marathon session again illustrated how cumbersome and difficult the European decision-making process is.

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