Wednesday, October 23, 2013

Eurozone - No history in the making?

This week’s summit of European leaders will probably not make it into history books as another bold step towards further Eurozone integration.

When European leaders meet today and tomorrow for their Fall Summit, the sense of urgency to take further reforms towards more Eurozone integration seems to have faded away. The latest positive developments in the Eurozone economy and the just started German coalition negotiation talks have clearly lowered the ambition level at this Summit.

More than a year ago, European Council President Van Rompuy presented his first blueprint toward a genuine economic and monetary union. Back then, the proposal was richly filled with new ideas for further integration. The ‘’vision thing” consisted of four building blocks: an integrated financial framework, an integrated fiscal framework, integrated economic policy framework and democratic legitimacy and accountability. The proposals were an attempt to go beyond the patchwork created by the reforms over the last years, consisting of two-packs, six-packs, fiscal compacts and all kind of other regulations. Let’s be clear, the measures taken since 2010 have been impressive and unprecedented, but since the presentation of Van Rompuy’s blueprint, the reform fervour has slowed down.

The biggest achievement since last summer is the single bank supervisor. The current discussions on a possible Eurozone bank resolution mechanism, however, illustrate that already the second step of Van Rompuy’s first out of four building blocks is controversial. While the Commission is pushing for a new European authority with far-reaching powers, the German government, in particular, is arguing in favour of a coordination system, consisting of national resolution authorities. Yesterday, German newspapers reported that – currently acting – Chancellor Merkel could approve a "Single Resolution Mechanism" for failing banks, provided three conditions are met: i) the SRM should only cover the Eurozone's 130 largest banks; ii) there should be clear bail-in rules; and iii)  national parliaments should agree to any public money used to recapitalise banks.

It remains very hard to understand where the German government is heading to. Over the last years, there has been a regular back-and-forth between Treaty changes and plans to strengthen European institutions on the one hand, and more inter-governmental solutions on the other hand. Of course, the sword of Damocles hangs over each step towards further integration, embodied by the German Constitutional Court. However, sometimes the Karlsruhe argument also looks like a welcome negotiation tool. It has happened several times in the past: crucial decisions were initially opposed due to the Treaty change argument but eventually nevertheless embraced, though often in a stripped version. As regards to a bank resolution mechanism, we would still expect the next German government to agree to a common Eurozone solution which is preceded by the already agreed bail-in cascade and which is funded exclusively by the financial sector. With the SPD in the next government, chances that German taxpayers’ money could ever be used to bail out other Eurozone banks have dropped to zero (if they were ever higher).

This week’s European Summit should not bring any news on the banking union or the vision thing. More than a year ago, the political promise of further Eurozone integration was reason enough for ECB President Mario Draghi to give his “whatever-it-takes” speech. It was a kind of advanced payment. Eurozone leaders still need to speed up their visionary reform efforts if they want to get even with Mario Draghi.

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