Eurozone: the Great Leap Forward?
By Tony Connelly, Europe Editor, Brussels
For three years eurozone governments lurched from one crisis to the next, improvising with one ad-hoc solution after another, amid a rising tide of austerity-driven recession.
However, having for so long taken the road ill-travelled, it may just be that the eurozone is finally confronting the hard choices needed first to save – then to rebuild – the single currency.
Hard choices have already been taken and they may not have been the right ones. Hundreds of billions of taxpayers’ money have been committed (and possibly lost) in order to save Greece.
Ireland and Portugal have also received huge bailouts to prevent them careering into default and out of the euro.
Billions more have gone into Spanish banks and will probably be needed for Cyprus.
In the end, eurozone capitals were faced with two choices: muddle through and watch market scepticism finally asphyxiate the weakest economies; or, keep the life-support systems going while rearranging in a fundamental and far-reaching way the very structures of Economic and Monetary Union itself.
Following persistent brow-beating by the ECB, and the corrosive effects of downgrades and widening bond spreads, the latter has been adopted.
It may be too late.
The capacity for eurozone governments, within earshot of the clamour from taxpayers and voters, to spin multiple plates in the air could be limited.
Greece still has enormous debts and taxpayers will probably be told within four years that their contributions have to be written-off.
Spain’s property collapse is a cauldron which could still spit out more vaporous surprises.
Italy is heading into a deeply uncertain electoral season, with Silvio Berlusconi making a boisterous comeback.
However in a remarkably short period of time (June to December) we have set sail towards what the optimists are calling a genuine Economic and Monetary Union.
The grand project may well hit many icebergs, some disgruntled passengers may jump off, while others will clamber on board.
The recent calm in the international markets may – at the outset – provide a fair wind, but some suggest that it is the only thunder of those same markets which will keep the oarsmen paddling at the requisite speed.
A long-awaited deal on the banking supervision
It will take years – at the very least the decade that ECB President Mario Draghi predicted would be needed – and the Government here finds itself at the helm at the start of the process on 1 January.
Last night finance ministers consolidated the first step, agreeing the parameters of what will be called the Single Supervisory Mechanism.
From the beginning of 2014 the ECB will be legally responsible for supervising 6,000 banks.
Despite misgivings about overloading the Frankfurt-based institution and concerns about legality, a new supervisory board will be set up inside the ECB in order to prevent rogue elements of Europe’s banking sector from the kind of wreckless lending which fuelled the crisis.
Germany has resisted the notion of the ECB being in charge of scrutinising so many banks, while France has insisted the more the better.
Under a compromise the ECB will, over time, delegate day-to-day supervision to national regulators and central banks.
It will, however, concentrate its new supervisory powers on several hundred big, cross-border and systemically important banks.
Anglo Irish Bank is a case in point.
It was not regarded as a significant cross-border institution, but the damage it did to the State and the way it collapsed meant that it posed a cross-border, European threat which the new supervisory system would theoretically have spotted.
But the SSM is complex and could be unwieldy.
Already the European Banking Authority sets out common rules for national banking regulators and resolves cross-border disputes.
The EBA is made up of 27 member states, but the new banking union will be made up of three separate strands: firstly the 17 eurozone members, secondly those new countries which want to, or have to, join the euro at some point in the future, and thirdly those non-euro states who do not want to join the euro.
Already Sweden has pulled out saying the safeguards to prevent the EBA simply becoming an arm of the ECB were not sufficient.
Britain will also not be part of the banking union, nor will the Czech Republic.
In order to ensure there is no discrimination against non-euro countries, ministers have agreed a complex set of arrangements including a “double-majority,” whereby two out of the three different strands would have to agree a decision in order for it to pass.
Ireland resigned to slow progress
From Ireland’s point of view, the quicker the SSM is up and running the better.
At the 29 June summit eurozone leaders pledged to break the “vicious circle” between banks and sovereigns, opening up the possibility – long resisted by Germany – that the permanent bailout fund, the European Stability Mechanism, could directly recapitalise banks without shifting the burden on to the state’s balance sheet.
The Government has suffered politically on the issue, and is often accused of over-selling the June statement.
A European Commission-sponsored deadline of 31 October for Ireland’s case to be addressed came and went.
Meanwhile German, Dutch and Swedish reservations about rushing into a SSM (the quid pro quo for deploying the ESM) increased, while Berlin seemed to blow hot and cold on whether the ESM could help for the kinds of bank debt with which the Irish taxpayer is saddled.
However there are signs that a sense of urgency has returned.
Herman Van Rompuy, the European Council President, says the way in which the ESM could recapitalise banks should be clear by March, even if it cannot actually come into effect until later in the year.
Dublin seems resigned to the probability that ESM intervention will come dropping slow. Indeed following the Ecofin deal the German finance minister Wolfgang Schauble said it would be “well into 2014” before the ESM could inject capital into banks.
The other elements of deeper EMU are more aspirational but no less politically fraught.
The roadmap which leaders hope to sign off on during this week’s summit contains four stepping stones.
Banking union, as outlined above, followed in the medium to long term by fiscal, economic and political union.
If followed through the ideas will require at least one referendum in Ireland.
“This is a more fundamental shift than the Treaty of Lisbon,” says one senior EU source.
There is talk of contractual arrangements between member states and Brussels to ensure that budgets are adhered to.
This would build on the existing European Semester rule, whereby each year member states are expected to implement policies designed to hit specific economic growth targets, and targets designed to avoid things like property bubbles.
At the same time the eurozone could have its own budget which would reward countries for pushing key reforms.
But how the budget would be funded, how large it should be, and how countries would qualify for pay-outs are all politically too complex for any definitive answers this week.
Indeed as draft conclusions were being circulated among EU diplomats this week there was criticism that too much was being foisted on one summit.
There was also alarm that there was no explicit reference to eurobonds, or even a debt redemption fund, seen as a possible light-alternative to full debt mutualisation.
Bringing the people on-board
The political timetable in the coming years will also not be kind.
After Ireland’s presidency comes the Lithuanian term (a country as yet untested) followed by Greece and in turn followed by the European Parliament elections in June 2014.
Add in the need for a new European Commission by the autumn of 2014 and the journey towards deeper EMU faces big interruptions.
The final piece of the jigsaw is the need for the eurozone establishment to bring voters – and taxpayers – along.
Arguably that has been left to chance so far, but as one senior EU source observed: “the deeper the integration, the greater the need for democratic legitimacy.”
Some ideas have been canvassed, such as a greater role for national parliaments, strengthening the role of the European Parliament, creating a second chamber, and directly electing the president of the Commission.
However these ideas are unlikely to be tackled before 2014.
Even then, if changes need to be made to the EU treaties – and if there is a substantive transfer of funds from one country to another via a eurozone budget then that is almost certain – there is no guarantee that voters will embrace the idea, even if it is in the eurozone’s best interest.
Remember the shocking rejection of the EU Constitution by French and Dutch voters in 2005. And that was long before the age of austerity.