Eurogroup to nudge forward EMU reform before next week’s EU summit

Pierre Moscovici, EU Commissioner for Economic and Financial Affairs, Taxation and Customs. [EPA-EFE/ROBERT GHEMENT]

EU finance ministers will try to close a deal on deepening the Economic and Monetary Union, including a tentative new budget for the eurozone, during the Eurogroup meeting on Thursday (13 June) in an inclusive format. 

The eurozone budget – or “Budgetary Instrument for Convergence and Competitiveness” in technical EU jargon – remains the main outstanding issue in the talks.

France and Germany tabled a joint proposal for a eurozone budget in June last year, but their plan has been progressively watered down since then. 

Differences still persist on key issues, including the actual size of the new budget, whether it will require new sources of funding coming from the capitals, and whether or not it should include a “stabilisation function” for countries facing speculative attacks on financial markets. 

“It looks good but we are not there yet,” one EU official said about progress made in the talks.

As things stand, the eurozone budget would be drawn from the EU’s long-term budget for 2021-2027, which is currently being negotiated among the 28 EU member states.

This means the 19 eurozone countries have to convince their non-eurozone peers about the benefits of the new budget, and possibly include perks for them as well.

“It will not be the big bazooka some people had hoped for,” one EU official admitted, borrowing an expression coined by former UK Prime Minister David Cameron at the peak of the eurozone debt crisis.

As a starting point, the new budget will remain small. From there, member states could decide to scale it up with extra revenues, on the basis of an intergovernmental agreement. 

However, divergences persist on how to use the new budget. Some would like it to be another “convergence and competitiveness” instrument aimed at encouraging structural reforms in the member states while others would like to add a “stabilisation” function to support investment in countries facing a crisis. 

The issue is “heavily debated” among member states, the official admitted. While Spain, Portugal or France have backed a stabilisation function, others like the Netherlands are strongly opposed. 

“We really would need to create a budget that allows for convergence if we want to ensure politically that the eurozone has a useful instrument to counter the rise of populism and nationalism,” the EU’s economic Commissioner Pierre Moscovici said ahead of today’s Eurogroup meeting.

Although EU sources are confident that ministers will eventually reach an agreement, the difficult discussion makes it likely that the meeting to last longer than usual.

EU reaches limited agreement to bolster economic and monetary union 

EU finance ministers concluded a deal on Tuesday (4 December) to bolster the region with new tools to save ailing banks and member states but postponed Europe-wide instruments to protect depositors or stabilise national economies.

Risk reduction vs risk sharing

On Thursday, Eurogroup member states are expected to draft the treaty changes aimed at reinforcing the role of the European Stabilisation Mechanism (ESM) – EU’s anti-crisis fund –in the euro area governance, including by broadening its competences.

The backstop for the Single Resolution Fund, as a last resort in case of a major financial crisis, is also part of the package to bolster the economic and monetary union. EU leaders endorsed its creation last December to fuel a pot aimed at resolving Europe’s ailing banks with around €60 billion as of 2024.

“For the backstop to serve its purpose we need to ensure that resources are available with certainty and swiftly,” said Valdis Dombrovskis, Commission vice-president for the euro.

Member states will also take stock of discussions about another outstanding key element of the Banking Union, the European Deposit Insurance Scheme (EDIS). They will be briefed about a new report which aims to unlock discussions on the European guarantee for banks’ deposits.

Negotiations have been blocked for years because of reluctance by Germany, the Netherlands and others to move forward on risk sharing before risk reduction measures have proved their worth. The main goal is “to keep it alive,” one EU official said of EDIS, reflecting the low level of ambition in the talks.

Dombrovskis, however, regretted the lack of progress in the negotiations “despite significant improvements on risk reduction on the EU financial sector.”

According to the Commission, the ratio of non-performing loans in the EU has come down by more than half since 2014, declining to 3.3% in the third quarter of 2018. 

In any case, the Commission showed a willingness to study any new proposal that might unlock the negotiation. “We stand ready to do our part to facilitate discussions and hopefully reach an agreement,” Dombrovskis said.

Commission calls to move swiftly 

Ahead of the Eurogroup meeting and in view of next week’s EU summit, Moscovici and Dombrovskis took stock of progress made in reinforcing the EMU and urged member states to do their share. 

“We are approaching more challenging economic times and that makes this a key moment to deliver on the progress we need,” Dombrovskis pointed out. 

In what he called “an expression of friendly impatience,” Moscovici prompted EU leaders and finance ministers to live up to their responsibilities “and respect the objectives they set last December.”

Although he admitted that the completion of the EMU will not happen during this mandate, Moscovici called on member states not to postpone what can be agreed at the upcoming EU summit.  

Leaders wrap up year-long euro reform with face-saving package

EU leaders concluded on Friday (14 December) a year-long discussion to bolster the eurozone by approving extra money to resolve failing banks and additional powers for the European Stability Mechanism, the EU’s rescue fund.

[Edited by Frédéric Simon]

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