10 May 2019

EU（欧州連合）27カ国の今後5年間の道のり

(With apologies to Bob Dylan)

The Heads of State met in Sibiu in Romania on Europe Day 2019 (9^th May) to consider the future path of Europe at 27. The 8^th European Parliament has just ended and the 9^th Elected been elected. The “Juncker” Commission is drawing to a close and the new Commission should take office on 1^st November. So it is a time for some introspection about what has been achieved in the last five-year political cycle but – more importantly, where might the EU27 journey in the next five years (though it may yet be EU28 making the journey.)

The Commission’s 82-page reflection paper on the Future of Europe[1] sets out its thoughts. But the most striking charts are those from the Spring 2019 Eurobarometer on the strength of positive public opinion toward the EU and the euro (see pages 62-65). Belief that the EU is a “good thing” has risen from a low of 53% at the moment of the Brexit referendum to 62% now. The opposite - that the EU is a “bad thing” - has fallen from 16% to just 11%. Support for the euro by its users has risen from a low of 62% at the time of the euro crisis to 75% today. So the leaders met with confidence that the EU vision has weathered a terrible storm and the public is showing its support for what had to be done. Where next?

In the economic field, the familiar refrain was repeated – calling for a further deepening of the Economic and Monetary Union, especially given the likelihood that the Eurozone will expand beyond 19. However, if Brexit actually happens, then the British eurosceptics’ expectations of the euro disintegrating may be totally confounded as it moves towards become THE single currency of the entire Union.

There are logical consequences that will flow from such a trend: banking union will be “completed”, capital markets union will be developed progressively after its modest start, and the international role of the euro is likely to be enhanced. Europe now sees this latter step as a necessity to counter President Trump’s overt weaponising of the dollar. For financial institutions based in the UK, the logic is clear: the relative role of sterling would decline even further in a bi-polar currency world for at least the next decade.

The EU 27 has made crystal clear any future trade relationship with the UK will not restrain the autonomy of its own regulatory decision-making. So UK institutions will have an ever-stronger reason to follow EU rules as the euro rises in global importance to match the EU’s share of world trade and GDP.

“To complete our Economic and Monetary Union, a European safe asset, introduced gradually, would also be a beneficial stabilising tool…” That gradual introduction could well involve starting with a variant of my proposal for a Temporary Eurobill Fund (link). So banking union, capital markets union and the enhanced international role of the euro would collectively encourage the launch of a new globally liquid asset within the Eurozone. UK-based institutions – if not inside the EU – would not be best placed to capitalise on such a global innovation.

Amidst the end of the political cycle, the EU 2016 banking package did finally scrape across the line. There is certainly need for it – and CRD6/CRR3 are already on the horizon so there will be ample work for the next ECON. ECB Vice-President de Guindos re-iterated[2] the need for further reform of the EU’s banking structure. Profitability – RoE – has now doubled in the past two years but only to 6% which remains well below the typical cost of capital of 8-10%. An unsustainable banking sector cannot provide the private-sector buffer that the EU economy needs for unexpected shocks. The Vice-President pointed to the recent stress-test data where “the banks’ behavioural reaction to the adverse scenario” compounded the fall in GDP by a further 1.6%.

Ring-fencing of capital within the boundary of national deposit protection schemes exacerbates the national characteristics of any crisis – underlining yet again the need to proceed with the European Deposit Insurance Scheme (EDIS). As has been apparent for the last couple of years, EDIS requires a further reduction in banking risks and then the political will to deepen financial integration. Part of the mix will include full implementation of Basle III in EU rules by 2027. The EBA’s first look concluded that Tier 1 capital of “all banks” would have to rise by a further 19% - a tall order for a sector that is not even earning its cost of capital.

The fine sentiments expressed at Sibiu will have to be followed through with real deeds during the next legislative cycle. During this period, the EU economy may well need a strong private sector buffer against economic shocks – in the form of both adequate bank capital and a thriving capital market.

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© Graham Bishop