Column - Bloedend hart

Mijn hart bloedt voor Brussel, het gekke warrige ondoorgrondelijke Brussel waar ik tien jaar woonde en waar mijn kinderen hun jeugd doorbrachten. Het Brussel, waar ik nog zo vaak kom om vrienden en collega's te zien en gewoon de sfeer van de stad te voelen. Het is moeilijk om in deze dagen emoties, verdriet, analyse en economie in een column te pakken. Proberen wil ik het toch. Gek genoeg zijn de Europese leiders er bij terreuraanslagen er als de kippen bij om de terreurdaad als Europees te labellen en als aanslag op alle Europeanen te zien. Dat gebeurde in Parijs en nu ook in Brussel. De eerdere aanslagen in Madrid en London waren nog te veel verbonden aan de aanslagen in de Verenigde Staten. Met President Hollande voorop, stonden de leiders weer schouder aan schouder om te laten zien dat Europa niet voor tirannen zal zwichten. Maar zo langzaam klinken ook deze woorden hol. Als oplossing om terrorisme voor te zijn, wordt het uitwisselen van gegevens genoemd en meer samenwerking door inlichtingendiensten en politie. Deze woorden klinken al sinds de Europese Akte van 1986 en de verdragen van Maastricht, Amsterdam en Lissabon. En ondertussen kwamen er nauwelijks bevoegdheden voor de EU en bespioneerden de nationale inlichtingendiensten elkaar en elkaars leiders. Als het om markt en geld draaide, was de Europese Unie wel gewild, maar zodra het om veiligheid en de moraliteit van justitie ging, niet. De terreuraanslagen in Parijs en Brussel laten zien dat de terroristen zijn wat de EU niet is: echt internationaal, samenwerkend over de grenzen, grenzeloos in hun mobiliteit en één in hun doel, wat dat doel dan ook moge zijn. Zij blijken over een internationaal inlichtingen - en financieel netwerk te beschikken en wisselen informatie uit. Hoe kan het dat terroristen slagen in eenheid waar Europa langzaam desintegreert, vanwege de nationale belangenstrijd en het gevecht over wie het voor het zeggen heeft? Terwijl de kille economische analyse eigenlijk zegt dat terroristische aanslagen nauwelijks een meetbaar effect hebben op de economie, zo vrees ik dat het deze keer anders is. Parijs en Brussel zijn een keerpunt met blijvende gevolgen. Het grenzeloze Europa is met de aanslagen van Brussel een stuk verder richting geschiedenis opgeschoven. En ook benadrukken de regeringsleiders juist nu de Europese geest, zo ziet de werkelijkheid toch behoorlijk anders uit. Het gevaar is dat de aanslagen de huidige disintegratie van Europa zullen bevorderen. Het terugdraaien van Schengen zal waarschijnlijk worden versneld, de aanhangers van een Brexit zullen rugwind krijgen en de anti-vluchtelingen sfeer en de steun voor het AfD in Duitsland zullen aan vaart winnen. Terwijl mijn hart bloedt voor Brussel en België, zo bloedt mijn hart minstens zo sterk voor het verlies van het Europese ideaal door niet te willen delen. Deze column verscheen ook in het Belgische dagblad "De Tijd"

EU Summit preview: Flexible, more flexible, Cameron?

They will not bend it like Beckham but when European leaders meet in Brussels this week, they are likely to present varying forms of flexibility. Flexible and rigid. These have probably been the best two key words describing the main issues of this week’s European Summit: flexibility on the Eurozone’s fiscal rules and rigidity in the power game on the nomination of the next president of the European Commission. As regards to the Eurozone’s fiscal rules, the economic stagnation in France and Italy combined with the overall rather anaemic recovery of the Eurozone has revived the debate on growth versus austerity. Irony or not, it is mainly the countries, which up to now have not really been glowing with structural reforms, that are now pushing for more fiscal wiggle room. It is also the same countries which have not built in automatic correction mechanisms in their national debt brakes under the so-called fiscal compact. The basic idea behind a new initiative of mainly social democratic governments is to give countries more time for fiscal consolidation in return for structural reforms. Moreover, it should be possible to exclude certain investments and the costs of economic reforms from nominal fiscal deficits. Many social-democratic leaders suggested that the fiscal framework should be applied in a more flexible way. In our view, these attempts of publicly watering down the Eurozone’s fiscal framework are mainly hot air and much ado about nothing. The discussions on flexible interpretations of the rules are as old as the rules themselves. The calculation of the so-called cyclically-adjusted fiscal balances has already shown how complex and open for interpretations these methodologies can be. Moreover, the Eurozone’s fiscal rules already provide more time to adjust in a period of very low or negative GDP growth. Of course, as long as it is a tit-for-tat, including structural reforms into the fiscal equation can make sense. However, this can be better done by clear-cut and strict commitments and supervision than by new methodological tricks. Moreover, let’s not forget that earlier proposals by Germany to introduce binding reform contracts between countries had been rejected by many. The basic principle for economic rules to work is that they should be easy and simple. Further complexity by adding proxies for structural reforms could make sense economically but would make the fiscal framework even more complicated. Monitoring of fiscal policies would then definitely be an art, not a science. It is obvious that flexibility will be one of the buzz words at this week’s Summit. However, the interpretation of flexibility is likely to differ. While several countries led by France and Italy seem to advocate new rules with new flexibility, Germany will stick to the flexibility under the current rules. As long as there is no agreement on any binding framework for structural reforms, it is very hard to see Germany agreeing to any changes of the fiscal framework. The other big topic that will address at least some government leaders’ flexibility is the first stage of European musical chairs: the nomination of the next president of the European Commission. Remember that government leaders have to propose a candidate who will then have to be nominated by European Parliament. Despite earlier reservations, a consensus amongst government leaders to support Jean-Claude Juncker has emerged. Only British Prime Minister Cameron and his Hungarian colleague Orban are still publicly opposing Juncker. Cameron suggested earlier that failing to get his way may increase the chances of a UK exit from the EU. This threat, however, has turned out to be an own goal. Many other European politicians showed little understanding for what some called tactical exaggeration with Cameron’s aides now seemingly resigned to defeat on Juncker’s appointment. Cameron is in a difficult position having promised a referendum on EU membership should his Conservative Party win the 2015 General Election. He has said that he would campaign in favour of remaining in the EU so long as the UK’s relationship with the EU can be renegotiated with certain EU powers “brought back” under domestic control. With Juncker in charge the perception – rightly or wrongly – is that Cameron will be less likely to win any concessions. With the Labour Party currently leading in the UK polls it is possible that the proposed referendum never takes place. However, the Labour leadership is coming under pressure from its own backbenchers to offer it given that UKIP, the anti-EU party that “won” the recent European parliamentary elections, is starting to eat into its support. However, another interesting aspect of all this is the increased polarisation in the UK population’s thinking on its relationship with the EU. UKIP’s surge in the polls has been attracting headlines, but we also see that a greater proportion (and rising) of the UK's population are in favour of staying in the EU. However, it isn’t a majority being led by positive sentiment to Europe – it is more the fear factor of what might happen should the UK leave with people worried about jobs and growth. If there is a form of negotiation that brings some powers back to the UK then approval to stay in the EU rises to 57% according to a recent YouGov poll. However, if no EU concessions are won by the UK government, which would lead to a widespread press revolt and could quickly lead to a reversal in the polls, there is a high probability that the UK leaves the EU in 2016/17. If this occurs, the assumption is that the UK will quickly be allowed into the European Free Trade Association (with Norway, Switzerland, Iceland and Liechtenstein), which basically would give the UK population what it wants – access to the single market without the political ties. It would also allow Europe to press on with greater integration without having to continually make amendments to appease the British. That said, there may be some concern within Brussels about losing the UK given it is still a large, important (and rapidly growing) economy that positively contributes to the EU’s coffers. Some may also take the view that having the UK within the EU also helps boost the EU’s own global influence – US President Obama has recently explicitly stated he wants to see the UK remain part of the EU. Furthermore, demographics do not look good for the EU and losing the UK (whose demographics are dramatically different) may intensify worries over the outlook for the EU’s population, growth and wealth over coming decades. All in all, this week’s Summit almost looks like sports event with government leaders bending and stretching their flexibility. As in real sports, overstretched flexibility can sometimes lead to unexpected injuries. This piece is a co-production together with my ING colleague and UK expert James Knightley

Verbal acrobatics and a cliffhanger from Brussels

As expected the ECB kept its powder dry at today’s meeting. However, what started off as a rather dull meeting developed into a very exciting press conference. At some point in time, Draghi’s comments looked almost as acrobatic as many performances at Tuesday’s semi-final of the Eurovision song festival. However, in the end, Draghi had prepared everyone for new ECB action at the June meeting. The start of today’s ECB press conference was rather dull. The introductory statement was almost a verbatim copy of the one from the April meeting. According to the ECB, the gradual and weak recovery will continue, while at the same time inflation will remain low for a prolonged period of time. Interestingly, the ECB has put somewhat more emphasis on possible downward risks to the recovery. For the first time, the ECB mentioned private loan developments already in the part on the economic analysis and not only in the monetary analysis part. In addition, Draghi’s comments during the press conference on geopolitical risks also showed that the ECB has become somewhat more cautious. As regards the exchange rate, Draghi’s comments made listeners almost dizzy. Initially, Draghi defended the ECB against all external advice and criticism. He also said that the exchange rate was not a policy target. Later on, however, the exchange rate was called a “serious concern” for the ECB, which could not only have a negative impact on inflation but also on the recovery. Again the recovery. Looking ahead, Draghi gave the final goodbye to his predecessor’s famous “we-never-precommit”. The ECB’s forward guidance, which started last summer, had already been a first emancipation from the no-precommitment. Today’s statement that the Governing Council was dissatisfied with the current inflation path, was not accepting it as a fact of nature and was therefore comfortable with acting next month. Boom. This very last comment was supported by Draghi’s comment that “further information and analysis concerning the outlook for inflation and the availability of bank loans to the private sector will be available in June”. Moreover, Draghi stressed the next staff projections as an essential new piece of information in June. Of course, every next meeting will have new and more information than the previous one. However, with today’s press conference it will be hard for the ECB to take some “manana-manana” attitude. To the contrary, with his comments on the exchange rate and hints at possible June action, Draghi has pushed the ECB into a corner from which it will be very hard to escape. Nevertheless, in our view, it is not a given that the ECB will really act in June. In fact, on the back of better-than-expected Q1 GDP data, growth might even be revised upwards for this year. And what if the inflation forecast for 2015 and 2016 remains unchanged? And what if credit growth has improved slightly? It is exactly these uncertainties which kept the ECB from already acting today and might prevent it from acting in June. All in all, taking a step back and just looking at the facts, not a lot has changed with today’s ECB meeting. In our view, the real new thing is that the ECB has become more concerned about the strength of the recovery and has clearly put more emphasis on the exchange rate. . For the rest, any next steps remain conditional on the June staff projections. Admittedly, with today’s comments, Draghi has clearly presented a cliff hanger which makes it hard for the ECB not to come up with a brandnew episode of monetary action at the June meeting.

Historical day with no one noticing

Eurozone finance ministers have started to see each other almost as often as during the peak of the crisis. After last week’s meeting on bank resolution, they come together this afternoon in Brussels to discuss the European Commission’s latest fiscal assessments. In fact, today’s meeting is a historical meeting. Unfortunately, hardly anyone realises it. For the first time, the Commission has issued opinions on countries’ draft fiscal plans. Contrary to past policies, these opinions were made in parallel with governments sending the draft plans to their respective parliaments. This new set-up is part of the new fiscal surveillance framework, strengthening the role of the Commission. It gives the Commission the opportunity to influence and intervene in fiscal plans while they are still in the making. That’s at least the theory. In practice, the European Commission put on its velvet gloves for the first exercise under the new rules. In fact, the Commission has developed a sophisticated system of verbal categories for their assessments. No single government will be sent to the drawing table to revise its budget. In European slang, this reads as “no Draft Budgetary Plan has been found to be in serious non-compliance with the obligations of the SGP and that it is not necessary to request revised budgetary plans”. The Commission’s categories range from “compliant with the rules of the Stability and Growth Pact”, “broadly compliant”, “compliant with no margins” and “risk of non-compliance”. Using our EU dictionary, this translates into: Germany and Estonia are the only two countries without any fiscal problems, while all other countries need to stick to their plans as closely as possible; additional measures cannot be excluded.  For European insiders, today’s Eurogroup meeting is historical as it marks the next step of the first implementation of the Eurozone’s new fiscal surveillance framework. For this first exercise, however, the European Commission has put on its velvet gloves and left the fiscal axe at home. The Commission remains very cautious in using its newly won powers. Cautious or not, one thing is clear: fiscal policies in the Eurozone continue to point in one direction; and the direction is not towards loosening.

Letter from Brussels - Eurosklerose

 Mit den ersten Sonnenstrahlen ist auch die Grippewelle in Brüssel abgeklungen. Die Freude über den späten Frühling und die neue Gesundheit währt allerdings nicht lange. Eine längst vergessene Krankheit ist wieder im Anflug: Eurosklerose.

Vor 30 Jahren machte sich eine wirtschaftliche Krankheit in Europa breit, dessen Symptome hohe Arbeitslosigkeit, Rezession und düstere Wachstumsprognosen waren. Eurosklerose war damals das Pseudonym für Hoffnungs- und Ratlosigkeit. Genau diese macht sich auch jetzt wieder bei den Euro-Rettern breit. Der große Befreiungsschlag in der Eurokrise will einfach nicht gelingen.

Bisher wurde versucht, die Krise mit einer Art partieller Akupunktur zu meistern. Kleine therapeutische Nadelstiche, meist gesetzt durch die EZB, haben das Gröbste abgewendet, sorgen aber noch nicht für schnelle Genesung. Deshalb versuchen die Euro-Retter im Augenblick die bereits gesetzten Nadeln zu lockern. Das sogenannte Spardiktat steht wieder unter Beschuss. Zu Unrecht, denn es gibt kein Spardiktat, sondern ein Krisenmanagement, das aus Schuldenabbau und Strukturreformen besteht. Natürlich ist es sinnvoll die Geschwindigkeit des Sparens den wirtschaftlichen Bedingungen anzupassen, aber eine Abkehr der Politik von nachhaltigen Staatsfinanzen zurück zu schuldenfinanziertem Wachstum wäre ein verheerendes Zeichen. Im Übrigen würde es die fundamentalen Probleme eines spanischen Immobilienmarktes, der griechischen Staatsfinanzen oder mangelnder italienischer und französischer Konkurrenzfähigkeit auch nicht lösen.

Heilung durch Akupunktur kann gelingen, erfordert aber viel Geduld. Geduld und Kraft, die durch das Streben nach einer gemeinsamen (besseren) Zukunft aufgebracht werden kann. Vielleicht hilft dabei ein Blick in die Vergangenheit. Die Eurosklerose wurde letztendlich durch ein gemeinsames Projekt besiegt: den Euro.


Diese Kolumne wurde eher in der Wochenzeitung "Euro am Sonntag" veroeffentlicht.

Another Sunday night save

Early this morning, Eurozone finance ministers agreed on a revised bailout plan for Cyprus. The Eurogroup re-offered a €10bn package. Small savers will be saved and the burden of the bailout out will now be carried by a smaller number of bigger depositors and shareholders and senior bondholders of the two largest Cypriot banks.

After another extremely long meeting, preceded by other high-level meetings and endless rumors, Eurozone finance ministers agreed on the fifth bailout since the start of the crisis. After Greece, Ireland, Portugal and Spain, Cyprus will be the next official member of the bailout group. 

One week after the first bailout attempt, Eurozone finance ministers and Cyprus agreed on a new bailout. The size of the bailout remains at €10bn euro. The earlier Cypriot contribution of €5.8bn euro was replaced by a complex upfront restructuring of the Cypriot financial sector. The second attempt leaves deposits of less than €100 000 euro unharmed. Instead, the burden of the bailout will now be carried by a smaller number of bigger depositors and senior bondholders of the two biggest banks of the country. In detail, the Eurogroup and Cyprus agreed on the following:

·       The second-biggest bank of Cyprus, Laiki Bank, will be unwound, with full contribution of equity shareholders and bond holders. Viable assets and insured deposits will be put into a “good bank”; €4.2 billion worth of uninsured deposits would be placed into a “bad bank”, with no certainty that big depositors will get any money back.

·       The remainders of Laiki Bank, the good bank, will be merged with the largest bank of the country, the Bank of Cyprus (BoC). BoC will be recapitalised through a deposit/equity conversion of uninsured deposits with full contribution of equity shareholders and bond holders. How much uninsured depositors will eventually lose due to the restructuring remains unclear. According to wire reports, it could be around 30%.

·       All insured depositors in all banks will be fully protected in accordance with the relevant EU legislation.

A happy ending after all? At least a final agreement has come closer and a disorderly default of Cyprus has, at least for now, been avoided. According to the Eurogroup statement, the ECB would continue allowing ELA for Bank of Cyprus. However, a couple of short-term hurdles still remain: i) Will the Cypriot parliament agree on the deal? Probably it will as big parts of the bank restructurings had already been brought forward at the end of last week. ii) Will national parliaments of other Eurozone countries agree? Currently, the Eurogroup expects a formal green light for the bailout only in the third week of April. Still a long way to go. iii) As for the first time during the crisis, temporary restrictions on the movement of capital have been imposed, the question is when Cypriot banks be able to re-open and what will happen then. As more often during the crisis, a Sunday night save brings instant relief but is no guarantee for calmer waters.

More broadly speaking, the crisis in Cyprus, while (at least temporarily) neutralized after this weekend’s decisions clearly shows that the Eurozone still has not found a uniform model to guarantee financial stability in the future. The idea of a banking union to break the link between indebted sovereigns and weak banking systems is not accepted by the stronger countries when it involves burden sharing (which it sooner or later inevitably will have to do). At least not if the banking sector is suspected to be a money laundering place and/or the result of too much risk. The message is clear: the German-led bloc in the Eurozone pushes ahead with conditional solidarity and conditional integration but not with financial charity. As such, failing banks remain the problem of their home country, even if that cripples government finances for many years. Secondly, deposit guarantee schemes cannot be taken for granted. German finance minister Schäuble pointed out that these schemes are only reliable if a country’s public finances can afford them, again emphasizing the direct link between the sovereign’s and the banks’ solvency. On top of that, the challenge for the coming weeks will be how to get the genie - that a cash strapped sovereign may consider a levy on all deposits - back into the bottle. The exemption of small savers could help. However, as so often, it is much harder to restore confidence than destroying it. A recent survey in Spain indeed revealed that nearly 90% of Spaniards are worried that they might face a Cyprus like levy on deposits, while 62% claimed deposits were not safe in Spain. Finally, the decision to impose capital controls, even though loopholes in the Treaty would allow it, shows that the single financial market is far from being assured. The fragmentation of financial markets might be reinforced by the decisions of the last few days, further complicating the ECB’s job. More unconventional measures might be required to cure this.

The Cyprus bailout has been an unprecedented power struggle in the euro crisis. While Cyprus tried to call the Eurozone’s bluff, the Eurozone, led by Germany, wanted to make an example that the rescuers do not like to be blackmailed. Particularly the German government played hardball, based on the assumption that the consequences of a Cypriot “no” would be much graver for Cyprus than for the rest of the Eurozone. Germany won the bet as Cyprus eventually bended. However, this strategy is not risk-free and will hardly work with bigger countries with a broader economic business model than Cyprus. 

Germany's structural reforms - Role model but not a blueprint

Ten years ago, Germany ended its reform deadlock. The reforms of the Agenda 2010 have contributed to the current strength of the economy but are no blueprint for the rest of the Eurozone.

Today, it is exactly ten years ago that then-chancellor Gerhard Schröder gave his blood-sweat-and-tears speech in the German Bundestag, preparing the country for a series of economic reforms, known as the Agenda 2010. The current strong economic performance of the German economy combined with a balanced budget has given rise to new celebrations of the Agenda 2010, proposing it as a blueprint for structural reforms in the rest of the Eurozone.

The structural reforms were mainly aimed at making the labour market more flexible, creating more jobs and making social security systems more sustainable. The main tools were a reduction of unemployment benefits, privatisation of job agencies to bridge the mismatch between vacancies and job-seekers and tax reductions. In the first two years after the start of the reforms, German unemployment actually continued to increase and breached the 5-million mark. It took until 2006 before the economy started to accelerate again. The economic recovery, however, was not only the result of Schröder’s reforms. The reforms also coincided with wage moderation (even embraced by the unions), corporate restructurings and outsourcing, low interest rates and a favourable global economy with the emergence of the Chinese economy as an important trading partner. Interestingly, the first two years of structural reforms were accompanied by only mild fiscal austerity. Between 2003 and 2006, the German cyclically-adjusted deficit improved by roughly 0.5% GDP on average per year.

During the 2009-crisis, the labour market benefitted from earlier reforms but also – and probably even more – from fiscal stimulus (car scrap scheme) and the subsidised short-time work schemes.
The empirical success of Schröder’s reforms is still disputed. While proponents point to the new strength of the labour market and the economy, critics stress the increases low-wage sector and the growing phenomenon of working poor. Indeed, in the first years of the reforms, new jobs were almost exclusively created in the low-wage sector. This, however, has changed. Since 2010, employment growth has spread through the entire economy, starting to support private consumption.

For the German economy, Schröder’s Agenda 2010 was crucial – not only in terms of the actual but also in a broader meaning. The reforms ended a period of self-pitying about the German role as sick man of Europe and reform deadlock. However, while this symbolic impact can clearly be used as a role model for other Eurozone countries, the actual reforms should not necessarily be used as a reform blueprint. Each Eurozone country will have to find its own blood-sweat-and-tears Agenda 2020.

EU Summit - Don't miss the after-party

Today's and tomorrow's European Summit should leave financial market participants rather untouched. However, the after-party of Eurozone finance ministers Friday evening should be followed closely.

When European leaders meet in Brussels today and tomorrow, the sense of urgency and emergency has disappeared. It does not look to be another night-braking or even make-it-or-brake-it summit, but more like a conversational group therapy. However, while the summit should probably fall short in producing far-reaching results, it should at least pave the way for the first test case of the new fiscal framework.

In recent weeks, the discussion amongst policymakers and economists about the right policy mix has flared up again. While critics of the Eurozone’s mix of austerity and structural reforms cited cockroaches and hamsters to make their point, the proponents have pointed to reform progress in peripheral countries. This week’s European Summit should emphasise the need for reforms and austerity. However, the Summit could give the official green light for a shift of fiscal surveillance. Instead of focussing on nominal deficit targets, the new fiscal framework is likely to shift towards structural efforts, not to an overburdened, battered economy with additional austerity measures. Beneficiaries of this regime change should be France and the Netherlands. Both countries run the risk of receiving a fine for not bringing their fiscal deficit below 3% of GDP this year but have delivered the required structural efforts. These two countries should soon receive an additional year to achieve the nominal deficit target.

Next to the fiscal regime shift, record-high unemployment in the Eurozone will be on the economic agenda of EU leaders. The social and political impact from high unemployment could be the biggest threat to the survival of the Eurozone. European leaders could pick up earlier ideas for some kind of solidarity fund to tackle at least high youth unemployment.

And there is more. Yesterday, a special meeting of Eurozone finance ministers was announced for Friday evening. Obviously, the meeting will be on Cyprus and the unsolved issue of a possible bail-in. Several core Eurozone countries have been pushing for a bail-in of depositors as part of a bail-out package for Cyprus. A bailout without private sector involvement could have problems passing national parliaments, particularly the German Bundestag. German opposition parties already signaled that – contrary to earlier bail-outs – it would not support the government. For a private sector involvement, several options look possible: privatization of state assets, restructuring of the banking sector, a bail-in of depositors and/or bank bond holders or a sovereign haircut as in Greece. Obviously, any of these forms of private sector involvement (PSI) could have unwanted averse effects either on Cyprus (as a bail-in could lead to a wide-spread withdrawal of funds, eventually undermining the entire business model of the economy) or other Eurozone countries as the uniqueness of PSI in Greece would be more than only second-guessed.

Apparently, a new proposal is currently circulating. Cyprus could levy a tax on deposits or increase other taxes to reduce the size of the required bailout package. While this could help improving Cyprus’ debt sustainability, it is questionable whether it would meet core countries’ political demand of some kind of private sector involvement. The discussions at Friday’s meeting will not be easy.

It is obvious: While the big summit could fall short on tangible decisions, the after-party should not be missed.

Eurozone: Adjourned game – again

At last night’s Eurogroup meeting, Cyprus moved another small step closer to a bailout. The big issue of possible private sector involvement remains unsolved.

The relative calm in financial markets combined with some tender signs of economic stabilisation have taken the sense of urgency and emergency from most Eurogroup meetings. Contrary to many meetings over the last years, meetings of Eurozone finance ministers have been healthier for ministers who often suffer from too little sleep. Meetings lasting until the middle of the night have again become an exception and are no longer the rule. The fate of the Eurozone no longer depends on make-it-or-brake-it summits until sunrise. Still, several important fundamental issues, such as shaping the future of the monetary union, are still unsolved. Besides further steps towards a banking union (eg, the definition of legacy assets for possible direct bank recapitalisation through the ESM or a bank resolution mechanism) and the first test for the new fiscal framework, the pending bailout for Cyprus remains a crucial issue.

At last night’s Eurogroup meeting, Eurozone finance ministers confirmed its principal commitment to offer a bailout for Cyprus. In June last year, Cyprus had officially requested such a bailout. Now, with a new Cypriot government in place, the final agreement seems to be closer. Currently, the Cypriot authorities are still negotiating with the Troika on the details of the so-called Memorandum of Understanding. While initially the Cypriot government had tried to negotiate a Spanish-style bailout, only targeted at bank recapitalisation, the sharp deterioration of public finances seems to argue in favour of a fully-fledged bailout. Details of the negotiations were not revealed last night but the announcement that the new Cypriot government has agreed on an independent evaluation of the implementation of the anti-money laundering framework in Cypriot financial institutions shows the willingness to make further concessions. Eurozone finance ministers agreed to “target political endorsement of the programme around the second half of March”.

One of the crucial questions of the probable bailout package is not only its scope (bailout light vs fully-fledged bailout) but also its financing. In several Eurozone countries, concerns have increased that a bailout for Cyprus would see taxpayers’ money bailing out what some have called a money laundry paradise. A bailout without private sector involvement could have problems passing national parliaments, particularly the German Bundestag. For a private sector involvement, several options look possible: privatization of state assets, restructuring of the banking sector, a bail-in of depositors and/or bank bond holders or a sovereign haircut as in Greece. Obviously, any of these forms of private sector involvement (PSI) could have unwanted averse effects either on Cyprus (as a bail-in could lead to a wide-spread withdrawal of funds, eventually undermining the entire business model of the economy) or other Eurozone countries as the uniqueness of PSI in Greece would be more than only second-guessed. As so-often during the euro crisis, the eventual compromise will have to balance both political but also economic calculations.

Eurozone - Obviously enjoying the silence

At the first Eurogroup meeting of the year, Eurozone finance ministers gave the green light for the next tranche of the Greek loan and appointed a new Eurogroup president but postponed all other crucial and controversial issues.

Last night’s first Eurogroup meeting of the year reflected the general mood of important policymakers in the Eurozone: relax and take it easy, the worst of the crisis is over. Contrary to many meetings before, last night’s meeting was not heavily-loaded with crucial decisions. In fact, there were only two concrete decisions: i) Eurozone finance ministers took was to give the green light for the next tranche of the Greek loan, amounting to 9.2bn euro. 7.2bn euro will be for further bank recapitalisations and 2bn euro to finance the budget. And ii) Dutch finance minister Jeroen Dijsselbloem was officially appointed as successor of Jean-Claude Juncker as Eurogroup president. On all other issues, conclusions were postponed.

As regards Cyprus, the adjourned game continues. In fact, the Cypriot government already (unofficially though) asked for help last summer. Many Eurozone countries, above all the German, however, are hesitant to offer financial aid to a country they suspect to be a money laundering paradise. The German government was already reported as wanting to see Russia chipping in to the bailout, extending financial aid provided in 2011 when Russia provided a €2.5bn euro loan to Cypriotic banks.

No official figures have been put forward yet but wire reportes refer to a bailout package of around 17bn euro (which would be around 100% of GDP). A €17bn bailout would mean that Cyprus' debt - currently over 70% of GDP - would reach 170%, way more than the troika of international lenders has ever accepted as "sustainable" for other bailout states. One crucial question is therefore whether Cyprus, or better holders of Cypriotic government bonds, should receive a haircut. A Greek-style haircut could create new turmoil on bond markets as it would “aufheben” the earlier promise that the Greek haircuts were one-offs (even if the ESM Treaty includes the option of exceptional private sector involvement). Moreover, as most bondholders are probably the banks themselves, a Greek-style haircut could increase the recapitalisaiton needs. However, a bailout out without any private sector involvement should be hard to sell politically in some Eurozone core countries. As a consequence, privatisations and eventually some baill-in of bank debt owners could become part of any bailout agreement.

The other controversial issue of the coming weeks and months remains the direct bank recapitalisation by the ESM once the single supervisory mechanisme is up and running. Unsolved issues are obviously how much money the ESM could spend on bank recapitalisation without jeopardising the financial capacity to bailout more governments, whether ESM should be the first or rather the final line of defence, whether the ESM should be allowed to fund “legacy assets” (mistakes from the past) and whether direct bank recapitalisation could be applied retroactively (for Spain and Ireland).

Eurozone policymakers are obviously enjoying the calm on financial markets. The copious time spent on and the obsession with the right pronunciation of the name of the new Eurogroup president, Dutch finance minister Jeroen Dijsselbloem,suggests that imminent pressure to deliver concrete results has faded away. Let’s hope it does not lead to complacency.

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.

Eurozone - Haste makes waste

Eurozone finance ministers have a strong affinity for cliff-hangers. Last night’s almost twelve-hour meeting did not bring any conclusion on how to finance more time for Greece. The decision was postponed until next week Monday.


The only thing that is clear after last night’s Eurozone finance minister meeting is that nothing is clear. The Eurogroup postponed the decision on how to finance more time for the Greek adjustment to next week Monday. The phrase in the official statement that “the Eurogroup has had an extensive discussion and made progress in identifying a consistent package of credible initiatives aimed at making a further substantial contribution to the sustainability of Greek government debt” shows that disagreement remains deep.

For once, Greece had apparently no responsibility for the further delay. Indeed, the final statement praises Greece for having met all prior actions required ahead of the meeting, citing structural reforms, the budget for 2013 and the 2013-2016 medium term fiscal strategy. Data released yesterday by the Greek Ministry of Finance confirmed that progresses in the implementation of the adjustment are indeed being made, with the state sector budget execution ahead of schedule at end of October.

At the Eurogroup level, the two issues at stake still are: i) the financing of the Greek funding gap, resulting from two additional years to adjust, and ii) how to restore long-term debt sustainability. Finding the money for two additional years (up to 32bn euro) is probably the easier task than restoring debt sustainability. According to latest reports, Greek debt will rather be above 140% of GDP in 2020 than close to the official target of 120%. In euro, this gap in 2010 will probably amount to 70bn to 100bn. Finding such an amount requires lots of financial creativity as long as Eurozone countries do not want to embark on clean-cut solutions like debt forgiveness or a third package. The current deadlock seems to result from strongly diverging views between the IMF and the Eurozone on how to restore debt sustainability. While the IMF favours a clear-cut solution, most Eurozone countries seem to support a the fudge option, interpreting debt sustainability in a more flexible manner than the IMF.

Last night’s meeting has again shown that that the Greek case pushes the limits of Eurozone finance ministers’ financial creativity. Or to put it more positively: maybe ministers just follow the principle of haste makes waste.

Eurozone - Two more years

Last night’s Eurogroup meeting paved the way for Greece to stay in the Eurozone. Ministers decided on two additional adjustment years for Greece. Finding the money to fund these extra years, however, was postponed.

Last night’s Eurozone finance minister meeting was finally a meeting that ended before mid-night. European experience, however, also shows that shorter meetings are normally a sign of significant disagreement and that crucial decisions have simply been postponed. Yesterday’s meeting adds evidence to this experience. 

As expected, ministers agreed that Greece could have two more years to meet its fiscal target, shifting the goal of having a primary budget surplus from 2014 to 2016. These two years are a kind of reward for the Greek government. Notably, the official Eurogroup statement is full of praise for the undertaken efforts by the Greek government. Interestingly, the statement also refers to the efforts taken by citizens, a gesture of acknowledgement of the social impact of austerity measures and structural reforms. 

Of course, more time also means more money. Two additional years lead to an immediate funding gap of around 30bn euro which needs to be filled but also put the debt sustainability target of a debt ratio of 120% of GDP by 2020 at risk.

As regards the funding gap, no decision was taken last night. Eurogroup president Juncker announced that this issue should be discussed at another meeting on 20 November and at the latest on 28 November. These dates will give governments the chance to get the green light from national parliaments for changes to the Greek programme. As regards debt sustainability, media reports mentioned a debt ratio of 140% of GDP in 2020 in the new troika report.

The race on how to finance the new 30bn euro and how to restore debt sustainability is still open. Option range from a clean-cut third bailout package for Greece to debt forgiveness. In our view, probably none of these two options will eventually be chosen. The most likely outcome of the next two weeks should be a typical Eurozone fudge: lower interest rates on the current Greek loans and an extension of the loans. Imagination or creativity has no limits. Yesterday, Juncker offered another fudge, saying that the date of bringing the debt ratio down to 120% of GDP could simply be delayed by two years. But let’s be clear, even such a Eurozone fudge would be a covert Official Sector Involvement as rescheduling of debt obviously also has its costs.

Yesterday’s meeting was another small step in the Eurozone saga. The political will to keep Greece in the Eurozone had already emerged over the summer. Now, it looks as if all other elements have to fit into this political will. We remain confidence that the next tranche will be paid and that the Eurozone will also find an agreement on how to bridge the new funding gap in the next two weeks. Needless to say that the final decision on the next Greek tranche, a new financing gap and debt sustainability will not be the end of the matter.

Merkel's thought leadership takeover?

It seems as if German chancellor Merkel wants to capitalise the current lack of a Eurozone thought leadership, trying to actively steer the integration debate.

At Yesterday, German chancellor Merkel spoke before the European Parliament, calling for far-reaching reforms of the monetary union. What she said was not new but it was another advance, trying to steer the European debate. According to Merkel, the Eurozone 2.0 required more common policies in the fields of financial sector regulation, fiscal and economic policies. The monetary union needs more coordination, not only of fiscal policies but also of other policies. Merkel mentioned a further harmonization of labour market and tax policies as further areas of closer coordination. To reach this goal, the Merkel again proposed a king of two-pillar strategy of stick-and-carrot. The stick would be a further loss of national sovereignty with far-reaching powers and authorities for the European Commission. Merkel even mentioned the possibility that the European Commission could directly intervene in national budgets. The carrot could be the so-called fiscal capacity, a Eurozone fund, which should reward successful structural reforms. The ultimate carrot of real financial burden sharing like for example Eurobonds, however, was not (yet) part of the official German strategy.

While the rest of the Eurozone’s government leaders have their hands full with enormous domestic tasks and challenges, the German government is slowly but surely filling the power vacuum as opinion leader in the euro crisis. Obviously, it would still take a couple for years before the German ideas and proposals could eventually be implemented. However, it looks as they are seriously trying to push the Eurozone into the German direction. Given the current (im-)balance of political forces in the Eurozone, Merkel’s chances of success look currently better than ever before.

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.

European Day of Imaginativeness

A week ahead of the next EU Summit, new ideas, proposals and suggestions come thick and fast. However, the traditional jumble of ideas looks unlikely to already lead to concrete conclusions next week.


It was an eventful day yesterday. Several senior officials presented ideas, proposals and suggestions on possible next steps in the euro crisis. IMF head Christine Lagarde was the first, saying that the IMF was striving to save Greece, but that the country may need two years more than planned to get back on its own feet. Of course, Lagarde stated only the obvious, namely that the recessions in Eurozone peripheral countries currently undermined the austerity efforts, leading to a downward spiral – and not only in Greece. However, just one week ahead of the next EU summit and still awaiting the Troika report on Greece, Lagarde’s comments come at a sensitive moment.

Over the last weeks, there had already been signals that the Eurozone (including Germany) could be willing to give Greece more time. More time, however, would eventually also cost more money. According to market reports, a two-year delay of the austerity measures could lead to a financing gap of between €15bn and €30bn. Generally speaking, more time for Greece could be “bought” by two main options: a third bailout package or debt forgiveness. Within these boundaries, options like lower interest rates on the Greek loans, front-loading of the current bailout package and fiddling around with medium-term growth forecasts or a combination of all options could still be on the agenda.

Interestingly, German Finance Minister Schaeuble reacted immediately after Lagarde’s comments at the IMF/World Bank meetings, saying that debt forgiveness was not an issue. However, he did not comment on the possibility of giving Greece more time with its adjustment programme.

While Christine Lagarde increased pressure on Eurozone policymakers, not only to solve the Greek issue but also to seriously tackle the issue of Eurozone integration, EU President Van Rompuy revealed more details of his building blocks for more integration. At a speech in Brussels, Van Rompuy reiterated the three main areas of further integration: financial affairs, budgetary matters and economic policies. According to Van Rompuy, the immediate priority was progress in the banking sector with the well known Single Supervisory Mechanism. However, even if Van Rompuy called the efforts for a Single Supervisory Mechanism a sprint in the midst of an EMU marathon, this sprint looks more like a 800m run than a 100m sprint as principle agreement is still overshadowed by disagreement on many details.

The newest kid in the Eurozone integration town is the so-called fiscal capacity. This is a new buzzword which simply means a new Eurozone crisis fund to help suffering countries to fulfill all adjustment requirements. Eventually, this could become something like an unemployment compensation mechanism or a social solidarity mechanism. However, size, purpose, conditions and funding source are still more than unclear. Another new idea, which eventually could be linked to financial incentives, is to put structural reforms into binding contracts. Elsewhere yesterday, EP president Martin Schulz suggested that the next European elections could already see transnational front-runners.

All in all, the debate continues. Next week’s summit will probably not (yet) lead to any substantial conclusions; neither on Greece nor on further integration. Yesterday’s events nicely illustrated that Europe remains a region of thinkers and poets. There is clearly no lack of ideas, sometimes only of concrete decisions.

Eurozone - Wake me up when September ends

The German Constitutional Court will present its verdict on the ESM and the fiscal compact on 12 September. A reversal of the ESM looks unlikely, but more powers and control to the German parliament would limit the often called for flexibility of the ESM already from the start.

At least one European institution does not seem to see a need to rush. The German Constitutional Court yesterday announced that it will present the final verdict of the expedited proceedings on the ESM Treaty and the fiscal compact only on 12 September. This is later than expected. Normally, the so-called fast-track procedure leads to final verdicts after three weeks. It is broadly expected that the verdict on the expedited proceeding could already encompass a verdict on the “normal” lawsuits filed against the ESM and the fiscal compact.

The common denominator of the several filed lawsuits is that the ESM would lead to unlimited risks and liabilities for German taxpayers. Moreover, the ESM would undermine the national sovereignty on the national budget. The complainants argue that the ESM would fundamentally change Europe, while the German government has always answered that both the ESM and the fiscal compact were only necessary requirements to ensure the stability of the euro as provided in existing European Treaties.

Basically, there are three possible scenarios possible: 1) an unconditional yes to the two Treaties; 2) a conditional yes to the two Treaties, asking for more control powers and responsibilities for the German parliament; and 3) a refusal of the two Treaties. Obviously, the third option would lead to sheer chaos on financial markets as it would reverse all rescue efforts taken over the last two years. In our view, however, this outcome is highly unlikely and would not be in line with past verdicts. The other two options would finally give the green light for the ESM. Our current take on the most likely outcome is along the lines of an earlier verdict by the Constitutional Court, which had given the German parliament a veto right for all Eurozone bailouts. In this scenario, however, the often called for flexibility of the ESM would obviously be reduced or limited already at the start.

An announcement of the German Constitutional Court’s verdict on the ESM in September should still be quick enough not to derail markets, but will not lower uncertainty in the coming weeks. Maybe even more important, the upcoming verdict is another reminder that the destiny of the monetary union is not exclusively in the hands of policymakers. It might be an irony of fate that on the day of the Court’s announcement there will be a second event which could also have an impact on the Eurozone crisis management: the Dutch elections.

All of a sudden it looks as if the month September, rather than June or July, will bring new milestones in the Eurozone crisis. It might not be their favourite music style, but with two crucial upcoming events that are out of their direct influence, Eurozone policymakers might start humming the tune of a successful hit of the American rock band Green Day. “Wake me up when September ends.”

Letter from Brussels - Keine einfachen Fussballweisheiten

Es wird wohl für immer ein Geheimnis bleiben, ob Angela Merkel und Mario Monti am Donnerstag zusammen Fußball geschaut haben. Die Schadenfreude des Einen wird der Anderen aber nicht verborgen geblieben sein. Es ist ein Augenzwinkern des Schicksals, dass der Kampf um den Euro zum gleichen Zeitpunkt wie der Kampf um die Euro 2012. Natürlich gibt es viele Parallelen zwischen Fußball und Politik oder Wirtschaft. Wenn man sich aber in den kommenden Wochen und Monaten nur auf Fußball Weisheiten verlässt, wird es 2016 immer noch die Euro, aber vielleicht keinen Euro mehr geben.

Es klinkt einleuchtend: wie die deutsche Fußballnationalmannschaft ist die deutsche Wirtschaft nach mehreren Tiefschlägen, eingreifenden Reformen und neuer Taktik wieder in die internationale Topklasse aufgestiegen. Verständlich, dass man nach dem lange Weg aus der Krise und aus der Depression die neue Glückseligkeit nicht schnell mit anderen Ländern teilen will. Schließlich gab es ja auch bei der EM keine Vergemeinschaftlichung der deutschen Tore.

Bei der Euro 2012 gibt es morgen einen (nicht deutschen) Gewinner. In der Euro-Krise jedoch nicht. Beim Ende der Euro-Krise wird es nur Gewinner oder nur Verlierer geben. Daher ist der einzige Ausweg ein gemeinschaftlicher bei dem jeder etwas Wasser in den Wein schütten muss. Kurzfristige Hilfe muss konditionell bleiben. Deutschland kann seinen größten Trumpf nicht einfach so aus der Hand geben. Langfristig wird der Euroraum nur überleben können als politische Union nach dem Subsidiaritätsprinzip, d.h. weitgehende Macht für Europa, aber nur auf bestimmten Gebieten. Sobald das gewährleistet ist, kann auch die Bundesregierung die Tür zur Haftungsgemeinschaft öffnen. Ob nun als Bankenunion, Schuldentilgungsfonds oder kurzfristige gemeinsame Anleihen ist dabei beinahe zweitrangig. Es wäre doch schön, wenn die deutsche Nationalmannschaft ihre Titelprämie 2016 in Euro ausgezahlt bekommt.

Dieser Letter from Brussels erschien in der Euro am Sonntag vom letzten Wochenende

Sequel or sequencing?

The vision thing is out. However, this week’s summit will rather be the sequel of a crisis evergreen than the start of the sequencing towards a Eurozone 2.0.

When EU president Van Rompuy presented his report “Towards a genuine economic and monetary union” yesterday, even the last one should have realised that this week’s European Summit will hardly conclude with a roadmap towards more integration. This will only be an overview map but without sequencing or a detailed timetable. Nevertheless, no one could accuse Van Rompuy or his co-authors (the presidents of the European Commission, the Eurogroup and the ECB) of a lack of ambition.

As expected, the report presents four building blocks for a Eurozone 2.0:  1) an integrated financial framework (with the main features being a banking union with a European bank supervision, a common bank resolution mechanism and Euro-wide deposit guarantees); 2) an integrated budgetary framework (which could include a Eurozone finance minister, a loss of national budgetary national sovereignty and eventually common debt issuance); 3) an integrated economic policy framework (going beyond the Euro Plus Pact towards more coordination and harmonization); and 4) ensuring democratic legitimacy and accountability. While all of this is indeed highly visionary and includes in our view the right elements for the Eurozone to survive, it remains vague and is far from being a road map.

So far it is only a loose collection of crucial elements and hardly any of these elements are likely to be agreed at this week’s summit. Coincidence or not, shortly after Van Rompuy had released his report, news wires quoted German Chancellor Merkel saying that total debt collectivization in the Eurozone would not happen as long as she was alive. Let’s hope that this will not lead to any assassination attempts in Brussels.

For this week’s summit, all of this means that the most concrete conclusion will be the growth initiative of €130bn and a wider growth compact. The expected discussion on more flexibility for the ESM and even direct ESM support for banks should be blocked by the German government. Let’s not forget that Germany has still not ratified the ESM Treaty. Changes to the ESM would definitely not increase the German parliament’s appetite for ratification. Finally, as regards the vision thing, Van Rompuy’s report has something for everyone and remains non-committed enough for all Eurozone government leaders to embrace it and to ask Van Rompuy to return with a more detailed plan after the summer. The only element this week’s summit could already decide, is a European bank supervision, which could be regarded as a first step towards a banking union.

In our view, such an outcome would clearly not lower bond yields in peripheral countries, but it could at least be sufficient to keep the ECB at it. While this would not automatically trigger new non-standard measures, it could at least be another argument for a rate cut next week. Beyond this week’s summit, the Eurozone will need to hurry up to transform the overview map into a real roadmap with a detailed sequencing of the way towards a Eurozone 2.0. Ideally, the Eurozone reform would come with one big bang, one total package. However, given the legislative process and Treaty changes involved, this would probably take far too long. We therefore think that a first next step could be more flexibility for the ESM through ECB liquidity support. Direct bank recapitalisation will only come once first steps towards a banking union have been taken. If the situation worsens and the ESM capacity is insufficient, shorter-term Euro t-bills could follow. However, this first step of joint liabilities would probably only be accepted by the German government if strict conditionality is ensured.

This week’s European Summit will be the sequel of what has almost become an evergreen: another decisive summit. The sequencing of the way towards Eurozone 2.0, however, remains a cliff-hanger.

Conditional integration

Even if the German government might be less dogmatic than some think, it will stick to the principle of conditional integration at this week’s crisis summit.

Ahead of this week’s European Summit, there does not seem to be a lack of ideas of how to solve the Eurozone crisis. Euro-bonds, a Eurozone banking union and a growth pact could, at least in the eyes of some politicians, market participants and commentators bring an end to the crisis. However, all these proposals still meet strict German refusal. What can we expect from the German government this week?

In a long interview, German finance minister Schäuble gave some insights in his and the government’s long-term view for the Eurozone. Germany wants to morph the monetary union into a political union. According to Schäuble, national constitutions are reaching their limits and it could be rather earlier than later that Germans would have to vote on a new constitution. Schäuble wants to shift political power from the national level to the European level, developing the European Commission into a European government. The president of the Commission should be elected directly. Europe would have to find its own, specific model of a political union. According to Schäuble, neither the federal system in the US nor in Germany could be a guideline for Europe. It is obvious that the German government is slowly on preparing the Germans for a political union. No fully-fledged political union but a Europe (or a Eurozone) based on a more accentuated subsidiarity principle.

Visionary for the long run but what about the short run? Ahead of this week’s summit, the main area of conflict between government leaders is exactly the different time horizons. While the German government wants to subordinate all next steps to the long term view for the Eurozone, most other Eurozone countries look more focussed on possible short-term fixes. A face-saving compromise for all countries is obviously the growth compact. Probably the most tangible result of this week’s summit. On Friday, government leaders from Germany, France, Italy and Spain agreed on a package to stimulate growth, amounting to €130bn (c.1% of EU GDP). This package needs to be embraced by all countries this week. As already decided earlier, funding of this package will mainly come from the EIB, unused European funds and private-public sector investment tools. Deficit spending will not be part of the package. To the contrary, in the more general growth compact, the new pro-growth initiative that should also be agreed this week, the German handwriting is more dominant than the French. Most emphasis seems to be on structural reforms not on more spending.

Up to now, the German government has been opposing proposals as direct EFSF/ESM loans to banks, Euro bonds, Euro t-bills or a banking union. Any kind of collectivisation seems to be like a red rag to a bull to the German government. It does not look as if the German government would change this position easily. This does not mean that the government is not committed and determined to save the Eurozone. It is. The German government simply sticks to its principle of strict conditionality.

In our view, all Eurozone countries will eventually have to poor some water into the wine but they will have to give up their strict ideas of sequencing. For Germany, possible first concessions could be a single European/Eurozone bank supervision and a Eurozone redemption fund. Most other countries would have to embrace the idea of more political integration and a loss of national sovereignty. As a result of this process towards a typical European compromise, this week’s summit should at least outline the basic principles of a more integrated Eurozone. Combined with a growth compact, the €130bn growth initiative and maybe even some short-term liquidity band-aid, this could be sufficient to at least convince the ECB to take action again.