27 November 2013

Graham Bishop: The Grand Coalition in Germany - Some implications

Curiously, about 100,000 members of the losing party have a veto on the agreement due to the SPD commitment to put it to a vote of its membership. Whilst the items on European policy suggest that little will change, the texts are generally rather woolly so may permit an evolution of policy during this Parliament that could be quite significant. Two examples give a flavour of possible developments outside the economic sphere:

1. To strengthen the democratic legitimacy of EU institutions, the new German government is in favour of a strong European Parliament combined with close cooperation with national parliaments. The EU commission needs a tight and efficient college with clear competences for the commissioners.
2. The EU council should deal once a year at the level of heads of state and government with matters of foreign policy, security and defence … We are in favour of further linking civilian and military instruments of the EU and improving military capacities for crisis prevention and conflict resolution.

Turning to the crucial economic aspects, fiscal discipline is an obvious priority though some 'solidarity’ is foreseen via binding contracts with the European Commission for all euro area countries to boost their competitiveness and reduce their deficits/debts. This author has a particular interest in the statements made about 'pooling' of debt given his membership of the Commission’s Expert Group on Debt Redemption Funds and Eurobills. The key text seems to be "Any form of pooling of sovereign debt would jeopardise the necessary alignment of national policies in each Member State. National budget responsibility and supranational, joint liability are incompatible."

The wording on 'joint liability' probably rules out the classical/original version of the Debt Redemption Fund put forward by the German Council of Economic Advisers. However, the Temporary Eurobill Fund (TEF) (link to Summary) proposal of this author remains in play as it is not a joint liability, and explicitly encourages Member States to align their economic policies with the 'Country Specific Recommendations' that the European Council approves. Moreover, exclusion from the TEF would be a massive sanction against deviation. All participants remain completely liable to the Fund for their own borrowings from it.

The tortuous progress of these negotiations did not prevent ECOFIN from agreeing on many detailed aspects of Banking Union two weeks ago. As it seems odds-on that Wolfgang Schäuble will retain his post as Finance Minister, the chances of a sudden change of policy on the Single Resolution Mechanism are not high. But the details of the ECOFIN agreement – with its reiteration of the state aid rules for bail-in and commitment to have national back-stops in place for the start of the SSM – suggests that the SRM may not need to be deployed for several years. But there is a critical proviso: The ECB’s comprehensive assessment must be credible.

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© Graham Bishop