A difficult year ends on a promising note
The eurozone’s financial markets end this year in a much better shape than they did last year, but this gain rests on the promise that real progress towards banking union will be achieved in the coming year, writes Daniel Gros.
Daniel Gros is director of the Centre for European Policy Studies (CEPS) in Brussels.
"As 2012 ends, the European Union seems bent on confirming the widely held prejudice that it is incapable of decisive action. Decisions are being delayed in two key areas: the EU budget and the reinforcement of the euro area’s framework.
No agreement is in sight concerning the medium-term financial planning for the entire 27 EU member states, also called the ‘multi-annual financial framework’.
One member state has openly threatened a veto and the various official proposals on the table are not promising. If adopted, they would lead to little change: most of the EU budget would continue to be spent on a declining sector (agriculture) and on aid to poorer regions of questionable efficiency.
The funding for R&D and for key external Union policies is likely to remain marginal, and might even be cut further. Little progress is thus to be expected on this front.
The other big dossier that awaits fundamental decisions – under the heading creating a ‘genuine’ monetary union‘– has seen important initial progress with the agreement to create a so-called ‘Single Supervisory Mechanism’ (SSM) within the European Central Bank.
But all the crucial detail is missing and it remains to be seen whether this first step will be followed in 2013 by further action on bank resolution and deposit insurance. Without these latter two elements, the SSM is unlikely to work well.
Some delay is understandable given the legal, institutional and political complexity of the issue. But it is a pity that not more progress on this front has been achieved given that the euro area seems to have found during the summer a strategy to end the self-destructive phase of ever-higher risk premiums for both banks and sovereigns.
The risk premiums have now come down to levels that no longer threaten the sustainability of the public debt of Italy or Spain, but the turnaround, which started in the summer of 2012, is still fragile and the recent political ‘noise’ coming from Italy shows that there is no lack of potential problems going forward into the new year.
We at CEPS (as many others) have for years argued that the euro crisis was not just, or even mainly, a fiscal crisis, but reflected an inherent instability in the financial system, which needed institutional action, not just general declarations by the European Council that financial stability was a ‘collective responsibility’.
The need to take concrete steps to ensure systemic stability was finally recognised in June 2012 when the European Council called for the establishment of a ‘Single Supervisory Mechanism’ to be headed by the ECB.
The challenge for the EU institutional machinery is now to translate this lofty declaration at the highest political level into concrete legal and institutional provisions that actually deliver a mechanism that works.
The initial deadlines might have been too ambitious, but what is missing is not so much a tight timetable as the details of the new mechanism and how the conflicting interests of the ECB and the national supervisors can be reconciled in a sensible compromise.
The euro area’s financial markets end this year in a much better shape than they did last year, but this gain rests on the promise that real progress towards banking union will be achieved in the coming year."