12 September 2012

Issues Paper on Completing the Economic and Monetary Union

For each building block set out in President Van Rompuy's June report, "Towards a Genuine Economic and Monetary Union", this issues paper summarises the main points put forward and raises a number of issues.

In the short run, progress towards a more integrated financial framework, starting with the setting up of single supervision as decided by the Euro Area Summit of 29 June, is a top priority. The Commission has submitted legislation on single supervision in September and swift progress on the other elements of an integrated financial framework are thus necessary.

The consultation process should aim to generate consensus on a roadmap for both what is feasible in the short term, and what is desirable in the longer term.

1. An integrated financial framework

The single supervisory mechanism will need to apply the substantive prudential and other internal market rules set out in the single rule book for banks by the EU co-legislators. It is therefore essential that they quickly adopt the existing proposals updating the bank capital requirements (Capital Requirement Directive IV and Capital Requirement Regulation) before the end of 2012, as requested by the European Council.

Agreement should also be found quickly on the existing proposals to upgrade and further align national deposit guarantee schemes and ensure they are adequately resourced and to put in place common bank resolution tools and adequate resourcing in all Member States. These measures are needed for the stability and integrity of the internal market, to ensure that there is a level playing field and that different supervisors and resolution authorities can work together to manage and resolve effectively failures in banks that operate across the EU.

Common supervision requires common resolution and backstops to deal with cases of supervisory failure. Building on the single market measures already tabled, progress is thus needed towards more harmonised deposit insurance and an integrated resolution framework.

Issues for discussion:

• The euro area has agreed that once the single supervisory mechanism is established for banks in the euro area, the ESM could, following a regular decision, have the possibility to recapitalise banks directly. How should this be implemented?
• As regards the future of deposit insurance and resolution schemes, how should fiscal backstop and liquidity support be arranged? What should be the interaction with the ESM?
• Beyond banking union, are there other parts of the financial services sector for which the deep interdependence in a monetary union would imply a need for further integration of governance structures (e.g. systemically relevant market infrastructures such as central clearing houses, central securities depositories, etc.)?

2. Towards an integrated budgetary framework

As pointed out in the June report, a fiscal union needs to ensure sound budgetary policies at the national and European levels that contribute to sustainable growth and ensure macro-economic stability. It should include effective mechanisms to prevent and correct unsustainable fiscal developments in the Member States. It should also include tools to deal with asymmetric shocks and to help prevent contagion possibly through a central budget for the euro area. This could in turn involve limited common debt issuance as long as the risk-sharing is accompanied with commensurate steps towards common decision-making on budgets that safeguard against moral hazard.

Issues for discussion:

• What further steps could be undertaken to improve the effectiveness and enforcement of the new governance architecture (6-pack, 2-pack and TSCG)? Could safeguard clauses (i.e. ex ante correction mechanisms) for national budgets be established?
• The Member States part of the TSCG agreed to coordinate the issuance of sovereign debt. How could such coordination be taken further? Could it include requiring approval for debt issuance beyond the limits defined in fiscal programmes or assigning such debt issuance a junior status?
• A fully-fledged fiscal union could entail stronger capacity at the European level (e.g. the creation of a treasury office) and a central budget whose role and functions would need to be defined (stabilisation, risk-sharing...).

3. Towards an integrated economic policy framework

As required under the Treaties, Member States shall regard their economic policies as a matter of common concern. To foster competitiveness and ensure the capacity to adjust to economic shocks, the smooth functioning of EMU requires stronger coordination, convergence and enforcement in the areas of economic policy. The framework for policy coordination should be made more enforceable. This involves a framework that facilitates labour mobility, promotes more efficient labour markets, and facilitates wage and price adjustments for goods and services in the euro area.

Issues for discussion:

• In addition to recent changes in the governance architecture (e.g. creation of the macro-economic imbalances procedure), what further steps could be taken to encourage Member States to restore and maintain a high level of competitiveness in a monetary union?
• Are there economic policy areas that require more common standards or policies?
• Should the principles in the Europlus Pact that guide policies on competitiveness, employment, fiscal sustainability, financial stability and tax coordination be made more binding? How would such principles be enforced?

4. Strengthening democratic legitimacy and accountability

Moving towards more pooling of sovereignty on financial, fiscal and structural policies requires strong mechanisms to legitimise the decisions taken in common, and to ensure the necessary democratic accountability and political participation. Stronger decision-making power at the European level and democratic accountability would reinforce each other. This is essential to build public support for European-wide decisions that have a far-reaching impact on the everyday lives of citizens. Citizens should not only be able to enjoy the benefits in terms of more stability and prosperity but also feel that their concerns are recognised and their voices heard.

It will be essential to ensure the close involvement of the European Parliament and national parliaments, in the respect of the community method.

Issues for discussion:

• How to give effect to the cooperation between the EP and national parliaments (based on Protocol 1 TFEU and on Article 13 of the Fiscal Compact) on issues related to EMU?
• How to enhance the discussion of country-specific issues in the EP (building on the existing "economic dialogues") and vice versa, to strengthen debates on European issues in national parliaments?
• Would a more integrated economic policy framework require dedicated accountability structures specific to the euro area?
• What measures could be taken to foster the emergence of a genuine European debate transcending discussions along national lines and within national fora/media?

Next steps - Proposal for a working method

Further work is necessary to develop a specific and time-bound roadmap for the achievement of the genuine Economic and Monetary Union.

A report could be submitted to the December European Council by the President of the European Council in close collaboration with the President of the Commission, the President of the Eurogroup and the President of the European Central Bank. There will be regular and informal consultations with the Member States and the EU institutions. An interim report could be presented in October 2012.

Issues Paper

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