It was in the wee hours of the morning, after prolongations, that finally President van Rompuy was able to whistle an end to what turned out to be anything except a picnic! The ensuing declarations underscored the acrimony of the discussions but revealed, also, a number of very interesting elements:
a) The “Growth” Pact
On the substance there was nothing new, barring the formal endorsement of previously agreed largely consensual measures mobilising the EIB, EU budget guarantees (Project Bonds) and undisbursed structural funds. These, always welcome, growth measures remain however totally inadequate, both in terms of amounts and sequencing, to have a significant effect on dealing with the crisis though it provides President Hollande with an alibi to ratify the Treaty on Budget discipline.
On the other hand, and far more interesting, is the use of the negotiations made by Italy and Spain in order to secure, in exchange for their approval, short-term support measures to lower their financing costs and recapitalise their banks. This proves that president Hollande’s strategy of subordinating everything to an agreement on a growth strategy was turned against him and forced both Germany and France to accept measures to which they had been, so far, firmly opposed: mobilising the EFSF/ESM to provide “direct” recapitalisation of banks and the purchase of sovereign debt instruments, as far as Germany is concerned; and, for France, accepting new “transfers of sovereignty” by imposing the ECB as Regulator/Supervisor of eurozone banks, in anticipation of further measures completing a “Banking Union”.
b) The transfer to the ECB of EMU banking supervisory responsibility
This agreement recognises (at last!) the necessity for coherence, ending the fiction of a failed “cooperative” model between 27 sovereign Member States and replacing it with a fully integrated system, endowed with enforceable and intrusive powers over the sovereignty of 17 EMU Members, in the area of banking regulation and supervision.
Though one should applaud this decision without any reservation, its implementation faces a number of serious problems. First, the articulation of responsibilities between the ECB and the EBA; common sense would suggest that the ECB represent all 17 EMU Members within the EBA but one can readily anticipate the forthcoming difficulties concerning “majority” voting powers needed for decision-making. Second, the concentration of regulatory/supervisory power within the ECB will, inevitably, reinforce its powers to impose rules that jeopardise the British interpretation of EU “single market” rules for financial services, in particular in the area of clearing and settlement procedures or location, at least for operations denominated in euros. Any suggestion that the EU would act as arbiter in a conflict situation would thoroughly undermine the absolute authority that the ECB needs to retain in order to establish its credibility.
Rather than aiming at reaching an unholy compromise, it might we wiser to reconsider fundamentally both the purpose and structure of the EBA. Member States, excepting the UK and Denmark, being committed by Treaty to joining EMU, it would be more rational to suggest they be granted an “opt-in” (to become compulsory when membership is requested) to the ECB managed framework. The EBA would become the ECB affiliate managing on its behalf regulatory and supervisory matters for the EMU banking sector; it should be relocated in Frankfurt!
These potential conflicts, that do not even consider at this stage the more sensitive matters involving the mutualisation of bank deposit guarantees or the establishment of an EMU banking resolution process, provide all the necessary ingredients to sustain – if not aggravate – the doubts markets continue to express with regard to the capacity of the EU/EMU to provide credible long-term solutions to underpin its cohesion. Authorities should pay attention and provide clear and rapid answers, pre-empting adverse market reactions; complaining that “speculators” are unfair is just not an adequate response.
c) Mobilising the EFSF/ESM to recapitalise banks and purchase sovereign debt
The hard-fought victory secured by Prime Ministers Monti and Rajoy for short-term measures of financial support should not hide the difficulties that face their implementation. A first problem relates to the availability of funds: it is clear that existing commitments fall far short of what is needed, should interest rate tensions exacerbate further in peripheral States' bond markets or if a further economic slowdown (currently in progress), were to increase the amount of non-performing loans on banks' balance sheets.
This problem could be addressed by conferring “banking” status on the ESM in order that it could access the “unlimited” resources of the ECB. Such an option is, however, only conceivable within the framework of an agreement on the strict budgetary discipline and controls demanded by Germany in exchange of their acquiescence. Indeed, it would simply amount to another form of “sovereign debt mutualisation” of EMU Members and imply, therefore, the same additional “transfers of sovereignty” required for the issuance of “eurobonds”. One can readily anticipate the difficulties facing both Germany and France when they will be faced with making the prerequisite concessions!
As to the “direct” recapitalisation of banking institutions, one remains completely uninformed of the nature of the proposed instruments (loans, equity or quasi equity?) except for one feature: the funds provided will not count as part of the national debt of the Member States whose banks are provided with assistance. This calls for two remarks:
a) This clause may prove useful to ensure “formal” compliance with European legal and regulatory rules (SGP, Six Pack, Budgetary treaty, etc.).
b) On the other hand, it is totally naïve to believe that investors (or rating agencies) will not consider such financing as an increase of a country’s obligations and of the associated risks; consequently it will impact markets accordingly.
On this last point, the “privileged creditor” status conferred on claims held by the
ESM is of crucial importance. Recent proposals, suggesting that this privilege be waived in the case of
ESM claims on Spanish banks, prove the accuracy of warnings expressed at the time the Treaty was negotiated, that investors would focus on this clause with negative consequences for the market reception of all other securities issued by Member States benefiting from
ESM assistance. This “technical” feature, on which Germany insists upon, should be purely and simply abandoned.
Conclusion
If, at half time, the European Council appears to have reached agreement on several promising practical avenues for further and deeper cooperation and solidarity among Member States, it remains nevertheless true that their implementation raises at least as many questions as it provides answers.
One is still far from the “great leap forward” (a metaphor for more federalism) that citizens and markets are craving for. The instruction to the four authors of the EU President’s brief, to flesh out before year-end the contents and timing of the roadmap implementing the proposals, is thoroughly disappointing and underscores, once again, the incapacity of leaders to rise to the challenge imposed by the dire situation on hand.
A far more constructive approach would have been an agreement on a progressive planned increase in the EU budget, through the extension of the EU’s “own resources”, accompanied by a significant increase in the 2014-2020 financial perspectives. The inability to conceive of such an accord is proof, if need be, of the difficulties facing any ambition of real further European integration. One can always dream – I guess!
Paul N Goldschmidt, Director, European Commission (ret); Member of the Advisory Board of the Thomas More Institute
Tel: +32 (02) 6475310 / +33 (04) 94732015
Mob: +32 (0497) 549259
© Paul Goldschmidt
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