Friday, December 14, 2012

EU Summit - all is calm but not all is bright

The last EU summit of the year turned out to be a tranquil pre-Christmas meeting. After finance ministers’ decisions on Greece and bank supervision, EU leaders slowed down their reform efforts. The famous roadmap towards further integration of the Eurozone has been delayed once again. In the tranquil pre-Christmas mood, some EU leaders might have started singing Christmas carols last night. However, unlike in the Christmas song “Silent night, holy night”, all is calm but not all is bright.

What initially was meant to be the big break-through for the Eurozone and course-setter towards a “genuine economic and monetary union”, turned out to be a tranquil year-end summit. Already ahead of government leaders’ arrival to Brussels last night, finance ministers had cleared the way towards a sunshine and roses evening. The EU and the Eurozone have ended the year with the typical mixture of delivering the bare minimum without overachieving a single tiny bit.

The first bare minimum was the break-through on Eurozone bank supervision. After another long meeting, European finance ministers agreed on a single supervisory mechanism for the Eurozone. Non-Eurozone countries can join on a voluntary basis. Supervision of the biggest banks (with balance sheets above 30bn euro or above 20% of a country’s GDP) will be conducted by the ECB, in cooperation with national supervisors. This new Single Supervisory Mechanism (SSM) will become effective in March 2014 at the earliest. Further delays cannot be excluded.

The SSM is meant to be the first step towards a fully-fledged banking union which should break the vicious link between sovereigns and financials. Remember that officially the ESM will be allowed to directly recapitalize banks once the SSM has become effective. Obviously, this will now have to wait at least until March 2014. A time line which clearly pleases the German and other core countries’ governments which still are opposing direct bank recapitalisation for legacy assets, or in other words: core Eurozone countries are not yet willing to put taxpayers’ money on the table to pay the bill of peripheral countries’ financial mistakes of the past. Further steps to complete a real banking union, in theory, would have to be a bank resolution mechanism and a deposit guarantee scheme. Up to now, Eurozone countries are still far off from any agreement on these two issues. Next year, the European Commission will present a first proposal for a bank resolution mechanism. All of this means that after the usual post-marathon meeting euphoria, the decision on the SSM is clearly not a game changer for the Eurozone.

The second bare minimum finance ministers delivered was the final green light to pay the next loan tranche for Greece, amounting to 49.1bn euro. The disbursement will be made in several tranches. The first 34.3bn euro will be paid out in the next days. The rest in the course of the first quarter, partly conditional to further Troika assessments. As we have often said in the past, yesterday’s green light for Greece clears another hurdle but it was not the last hurdle.

Agreement on Greece and the SSM, however, masks that there still is lots of disagreement on other crucial topics, not only on direct bank recapitalisation. Let’s not forget that this week’s summit was intended to even go further and to deliver a roadmap towards more or “genuine” integration. However, last night, EU leaders did not agree on anything else. EU president Van Rompuy’s roadmap had been downgraded to a background document. Binding contracts between countries and institutions to ensure structural reforms, financial incentives for structural reforms, a mechanism to absorb asymmetric shocks, harmonization of tax policies and labour markets? All these issues have been postponed until at least the summer of 2013. More visionary ideas which could have strengthened prevention by reducing national sovereignty like a Eurozone finance minister have disappeared entirely.

The crisis year 2012 comes to a close. It is a tranquil, almost conciliatory, year-end.Yesterday’s agreements on Greece and the SSM are already an achievement. Particularly the SSM is something no one had on the radar screen at the beginning of the year. Within the last year, next to the never-ending fire fighting in Greece, the Eurozone has managed to agree on a fiscal compact with mandatory national debt breaks, start the ESM and set up a Eurozone-wide banking supervision. Even if this week’s summit clearly disappointed on the vision thing, showing that there still is lots of disagreement, let’s try to be mild and not too critical: the Eurozone is still alive and it is moving into the right direction, even if it sometimes moves at a very slow speed. Enjoy the summit-free time, it won’t last for long.

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