What can the EU summit deliver?
By Tony Connelly, RTE Europe Editor, in Brussels
EU officials are playing down expectations of any major decisions at the Informal Summit in Brussels, but there is plenty of scope for an unprecedented clash on the kinds of solutions the eurozone needs.
The big ideas involve the ECB, eurobonds and the new permanent rescue fund the European Stability Mechanism (ESM). What makes this summit fraught with expectation is that for the first time Germany and France will be at loggerheads on the fundamental issues.
While Paris has been talking up the idea of eurobonds, Germany remains implacably opposed.
“There would have to be a considerable evolution in German thinking for any movement on this,” says an EU diplomat.
The summit takes place against a crisis of the kind last experienced in the run up to the December 9 summit last year. Unemployment is rising across the EU, the eurozone remains in a “mild recession,” Spain is confronting a major banking crisis, and numerous countries are missing their deficit targets under the Stability and Growth Pact.
Added to the mix is the toxic issue of the second Greek general election, and the prospect that the country could be heading for a hard default and disorderly exit from the euro.
Both the Paris-based economic organisation the OECD and the IMF have issued stark warnings about the dangers of spillover dragging down the world economy into a severe recession.
Although no hard decisions will be taken (this is an informal summit), the President of the European Council Herman Van Rompuy has told EU leaders that the exchange of views should be as “open and frank” as possible. There should be “no taboos” and leaders should contemplate “fundamental changes” in how economic and monetary union works.
Indeed, the demarcation of the debate between growth on the one hand, and austerity on the other, has never been drawn so starkly as now.
François Hollande, the newly-elected French president, has been pushing for eurobonds, a greater role for the ECB in buying up the debt of vulnerable countries directly, and the use of the ESM to directly recapitalise banks in such a way as to avoid inflating sovereign debt.
Germany has bluntly ruled out such ideas – for now. For Angela Merkel countries that get their finances in order and implement painful but necessary structural reforms to increase competitiveness are more likely to deliver the growth that is needed.
Deficit spending – ie running up expenditure to stimulate the economy but in so doing increasing the budget deficit – is out.
On eurobonds, there is a growing clamour for their consideration. Put simply, eurobonds would mean that eurozone countries issue most of their debt through mutually backed eurobonds. The idea would be to lower the risk for investors when countries like Italy, Spain, Ireland, Portugal and Greece need to raise money on the markets.
Germany and other triple A rated countries like the Netherlands, Austria and Finland are opposed for two reasons. Firstly, it would raise the costs they pay to borrow over the average, and secondly there is a fear that southern countries cushioned by eurobonds would ease off on the reforms to lower their deficits and make them more competitive.
Non-one expects the idea to be agreed and adopted at the summit. There is not only political opposition from the countries mentioned above, there is also a belief that eurobonds are contrary to EU treaty law, and also to the recent ruling by the German Constitutional Court in Karlsruhe.
But the summit should at least reveal how far the likes of France – and supportive countries like Italy and Spain – are prepared to really force this issue onto the agenda against German wishes.
Even if eurobonds are reluctantly accepted as part of a possible overall, longterm solution, there are no clear pathways as to how eurobonds would legally evolve. While this meeting has been described as a stepping stone towards the next formal summit of EU leaders at the end of June, it’s highly unlikely that any embryonic notion of how eurobonds would look like will be presentable by then, even in the unlikely event of German objections being overcome.
A key figure will be Mariano Rajoy, the new centre-right Spanish prime minister. Spain’s banking sector is in trouble, and the country is way off on its deficit targets. The fallout from the property bubble has left a banking hole to the tune of around €180 billion – at best.
Madrid has promised to get to the bottom of the banking mess – in the way Ireland had to do as a condition of our bailout – and it’s widely believed that the scale of recapitalisation required would force the country into a rescue package the eurozone bailout funds could barely afford.
The possibility that the ESM could be changed so it could recapitalise banks directly without transferring the debt burden on to the sovereign, is being openly discussed since it would obviate the need for Spain to go the whole hog towards a country bailout.
It’s also tantalising for the Irish government. Should Spain be allowed to use ESM funds in this way the Irish government would have a strong case in asking for the same thing for Anglo-Irish debt, thus eliminating the dreaded promissory notes.
An Irish No vote in next Friday’s referendum would put that idea in question, because according to both the ESM treaty and the fiscal treaty we would be precluded from accessing the fund unless we’re signed up to new fiscal rules.
Rajoy has yet to signal if he will bring a demand, or bring clear figures on bank debt, to the table. But the fact that it is him that François Hollande will meet in advance of the summit – and not Angela Merkel – is being seen as highly significant.
Aside from these fundamental issues, there are other elements that appear, at least, to be manageable.
Already the European Parliament has reached agreement with the European Commission and the Council of Ministers (ie the member states) on a pilot project to create so-called project bonds.
The figures are relatively small given the scale of the eurozone crisis: €230 million to be used from the EU budget to leverage a possible €4.5 billion which would then be spent on energy, transport and communications infrastructure projects.
It is a small step – but it’s limited. Any expansion of the project would have to be agreed in the context of the next EU budget round (2014-2020) and already those negotiations have been characterised by countries like the UK wanting to cut spending rather than increasing it.
The European Investment Bank (EIB) has also been heavily tipped to play a more decisive role. There is talk that member states will be asked to increase their contributions by between €10 billion and €20 billion so that an overall pot of €180 billion can be leveraged through a mix of public and private investment sources.
The problem is that the EIB is jealous of its Triple A rating and while there may be plenty of investors wanting to put money into projects in “reliable” economies like Germany, Finland and the Netherlands, there may be fewer who will want to spend money on peripheral economies.
That’s something the Taoiseach Enda Kenny is certain to raise at the meeting.
Another idea is to redirect unspent EU structural funds to areas where it can yield more jobs and more quickly. While that may have an appeal in Greece it has “zero application” in Ireland, according to one diplomat, since we have been so efficient in spending all our structural funds.
So overall the areas where agreement may be more easily reached will not deliver the massive stimulus Europe needs.
According to officials the President of the European Council Herman Van Rompuy, who chairs EU summits, has kept the agenda to a minimum. That may be because he will want to avoid wholesale, precooked division in favour of a more open and imaginative discussion.
For that reason he has been keen to avoid high expectations and to avoid the classic market slump if the communique falls short of what analysts have hoped for.
The EU, of course, cannot function at the speed which markets prefer. But sometimes the bloc can lurch forward in a time of crisis. The president of the ECB Mario Draghi has spoken of moving towards a closer fiscal union in order to restore the fortunes of the single currency. Indeed, the things which many observers are calling for – a single European bank resolution system, a Europe-wide bank deposit system, and jointly issued eurobonds – would be a giant leap into the unknown, but Europe has been capable of such leaps in the past.
“All these issues are complex and politically controversial,” cautions one EU diplomat.
But the political dynamic in Europe has been changed dramatically by the French presidential election. While François Hollande may not want to charge into a head-on collision with Angela Merkel, he is keeping one eye on his political base with the legislative elections imminent.
It’s unlikely he will use the informal summit to prize open the fiscal treaty, but he has certainly shifted the terms of the debate.
And with Mario Monti, the highly respected Italian prime minister, also trying to forge a more even-handed policy direction, Angela Merkel is missing the dubious comforts of having Nicolas Sarkozy at her side, with a pre-cooked Franco-German plan which everyone else must sign up to.