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19 May 2020

Notes on 162nd Brussels 4 Breakfast: the Merkel/Macron package; German Constitutional Court; Brexit, and CRR quick fix

The Franco/German recovery "bazooka" may also herald major politcal change to re-enforce the "level playing field" - rather than allow Brexit to distort it.

Organised by the Centre for the Study of Financial Innovation (CSFI), via Zoom and YouTube with fellow speakers Brian Polk (PWC) and John Rega (Politico).

We want to involve the Brussels Finance Watchers community in the choice of future topics so my up-coming video invitation for the 163rd meeting (still planned for June 9th) will include my then-current thinking about the top three topics - but we welcome your suggestions to


The overnight news from Chancellor Merkel and President Macron electrified the discussion from the start. The headline was the €500 billion package but reading the full statement reveals that the scale of political change may be just as great – the Conference on the Future of Europe next year may even lead to re-opening “the Treaty”. In the past, that has always been an opening of Pandora’s Box! Such a re-opening could be used to re-affirm the primacy of the ECJ and thus neutralise the German Constitutional Court’s manoeuvres to challenge the ECJ’s primacy.

The plan is for the European Commission itself to borrow from the markets – on behalf of the EU itself. The funds will provide normal EU expenditure rather than loans – based on EU budget programmes.  Moreover, the ESM’s €250 billion of loan finance is now available so the total package may be getting close to €800 billion - without even adding in the much–criticised and speculative multiplier effects.

A third leg of the new policy is the commitment to “economic and industrial resilience and sovereignty and give a new impulse to the Single Market”. This includes boosting the industrial base – with free and fair trade “a crucial part of the solution”. Naturally, all this is likely to top the agenda at the June European Council meeting.

Unfortunately Boris may have other ideas and attempt to hijack the agenda with Brexit issues. A comparison of EU negotiator Barnier’s five-page careful analysis of the issues that were not agreed at last week’s negotiations compares very favourably with the page of tweets from the UK’s negotiator. Frost highlighted that the major obstacle is the EU’s “ideological approach” including to the “level playing field”. The EU’s commitment to this concept may be even further embedded at the June European Council - following Mrs Thatcher’s launch of it in 1985!

We had a little time to discuss the Commission’s 28 April “banking package” of targeted, quick fixes to the Capital Requirements Regulation. Perhaps the most contentious element is the permission for maximizing the flexibility of IFRS 9 in recording “Expected Credit Losses”. Given the tsunami of loan losses that is inevitable from a [10%] contraction in GDP this year, permission for banks to use their judgment may take us straight back to the old days of the 2007/8 financial crisis. The European Parliament is already baulking and so are some member States. Bank shares fell again – rather than responding to the bazooka of the scale of Recovery Fund.

© Graham Bishop

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