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04 March 2014

European Integration Monitor - February 2014

The EP elections in 100 days may be momentous. Parliament still on a collision course with Council on SRM. Euro area has emerged from recession but must guard against complacency. Good news on bank capital and asset quality in Spain, Portugal, Cyprus and Romania.

Coming up in March: Commission’s Expert Group Report to be published and Graham Bishop will detail his plan for a Temporary Eurobill Fund

This month in brief:

Politics: The EP elections in 100 days may be momentous: a pivotal role in selecting the next Commission President and ‘capturing’ the next Commission for the people of Europe. The chances of ALDE’s Verhofstadt emerging as the centrist compromise – drawing some support from both Left and Right - are non-negligible. Is Germany’s CDU tacking towards the sceptics? But the Eurosceptic bloc in the Parliament is unlikely to be cohesive enough to shape policy. Chancellor Merkel’s visit to the UK underlined – quietly - her central message that the process of re-enforcing economic union by way of greater integration is a long way from finished. TheCityUK polling showed that 82% said they will give ‘a lot’ of thought to the potential impact on the UK economy of Brexit and 61% want to hear about possible consequences from business leaders. 

Finance: Parliament still on a collision course with Council on SRM: time has nearly run out but fortunately it does not matter in the short term. The German Constitutional Court referred ECB’s OMT bond-buying to the ECJ, arguing that it goes against the ECB’s mandate as it amounts to monetary financing of government debt – prohibited by TFEU Article 123. Markets were undisturbed as fears of a euro break-up have faded – for the moment. But major legal issues lurk in the background. The ECB’s approach to operating the SSM was laid out and SSM Head Nouy said some of the region's lenders have no future and should be allowed to die. 

Economics: Euro area has emerged from recession but must guard against complacency so more far-reaching reform lies ahead. ECOFIN recognised the fragility of the economic recovery, was confident the AQR/stress test will be reassuring but still wants to develop alternatives to bank funding for the economy (as does the ECB). The Commission’s Winter Forecast highlighted the exit from recession and the scale of adjustment already done (Greece achieved its first external balance since 1948). Bruegel highlighted that the biggest risk now is complacency, whilst Commissioner Almunia commented on his investigations into tax competition that may involve dubious state aid. Germany retreated on the breadth of the FTT proposal and the Parliament argued that the Troika’s work should eventually only involve the EU but that might need a State Bankruptcy Law. 

Member States - Budgets and Economics: Good news on bank capital and asset quality in Spain, Portugal, Cyprus and Romania. The IMF applauded Spain’s achievements; ECB’s Praet reported important progress and great headway last year in Portugal though remaining concerned about profitability; Cyprus: Troika said, with the two largest banks now recapitalised and the cooperative credit sector expected to be recapitalised shortly, the authorities need to ensure that banks and coops effectively implement their restructuring plans. In Romania, the IMF/EC staff commented that the banking sector continues to maintain reassuring capital, liquidity and provisioning buffers, despite pressures on asset quality. 

© Graham Bishop

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