The eurozone’s rulebook and its anti-crisis mechanisms have been bolstered since the sovereign debt crisis hit Europe at the end of 2009. But serious risks still loom large, as growth potential remains low and the bloc’s governance framework is “not fit for purpose”, Benoît Cœuré said after a meeting of EU finance ministers this weekend (12 September).
“We need to have a vision” for the future of the euro area, said Pierre Gramegna, the Finance Minister of Luxembourg who is chairing the Ecofin Council of finance ministers this semester.
In his opinion, this vision should go beyond the Economic and Monetary Union (EMU) to also include growth, employment and welfare policies.
However, this ‘big plan’ could meet obstacles along the way, as the United Kingdom and Germany are ready to play hardball in shaping this future.
While London is warning against further integration that could push non-eurozone members away from the EU single market, Berlin is dragging its feet on the mutualisation of risks among the single currency bloc, since the EMU remains incomplete.
The European Commission is currently working on a package to strike a balance between ‘ins-and-outs’ in the eurozone and national responsibility versus risk sharing.
An EU source explained that the package, to be announced in the second half of October, will consist of proposals to strengthen the external representation of the euro, in particular in the International Monetary Fund (IMF); to revamp the EU semester; and to review the fiscal and macroeconomic rules (the so-called ‘two-pack’ and ‘six-pack’) in order to add a more social dimension. It will also include a plan to set up a eurozone system of competitiveness authorities; an advisory European Fiscal Board, to coordinate the existing fiscal councils; and set out the Commission’s general view on its plan for a EU deposit guarantee scheme.
All these elements were already outlined in the so-called Five Presidents’ report. Most of the proposals are uncontroversial, although some member states are reluctant to continue creating new institutions that could add more burdens to the already baroque economic governance system.
However, the EU deposit guarantee scheme has triggered Germany’s protest, even more after Commission President Jean-Claude Juncker announced in his state of the union speech that the legislative proposal will come by the end of the year, earlier than expected.
“To now start a discussion on further mutualisation of bank risks through a common deposit insurance or an European deposit reinsurance scheme is unacceptable,” the German delegation said in paper sent to the capitals ahead of the Ecofin Council.
Germany prioritises finalising the implementation of the existing rules, in particular the Bank Recovery and Resolution Directive (BRRD). Although the deadline was 31 December 2014, only half of the member states had fully adopted it by early August. The BRRD aims to reduce the cost of bank resolution by making the financial institutions pay the lion’s share before using taxpayer money.
The Luxembourgish Presidency and the Commission played down Germany’s opposition. “It is not that the door is closed, but it is a matter of timing,” Gramegna said. He underlined that there is a “readiness” to move forward, but the eurozone needs first to strengthen national responsibility (i.e by implementing the BRRD) before discussing an EU deposit system. “Lets not put the car before the horses,” he told reporters.
Officials in Frankfurt and Berlin commented that an EU deposit guarantee scheme is needed to complete the banking union, its third pillar together with the Single Supervisory Mechanism and the Single Resolution Mechanism. But they also agreed that it would be “very hard” to make any progress against Germany’s will in the months to come.
A Eurogroup member said that Germany’s obstruction is just a negotiation tactic, and that Berlin’s position will find little traction among other member states.
However, the high-ranking official pointed out that the clash between eurozone and non-eurozone members is becoming more important.
George Osborne, Britain’s Chancellor of the Exchequer, warned his colleagues not to push the United Kingdom outside the EU. Moreover, the non-euro partners recalled that the single market, the banking union, and the upcoming capital market union affects the EU as a whole.
Member states outside the single currency are feeling “more and more excluded”, the source summed up on condition of anonymity.
In his state of the Union address, European Commission President Jean-Claude Juncker said: "I am of course fully aware there is no consensus on this [EU deposit guarantee scheme] yet. But I also know that many of you are as convinced as I am of the need to move ahead. I say to those who are more sceptical: the Commission is fully aware that there are differences in the starting positions of Member States. Some have developed and well-financed their national systems of deposit insurance. Others are still building up such systems. We need to take these differences into account. This is why the Five Presidents’ Report advocates not full mutualisation, but a new approach by means of a reinsurance system. We will present further details on this in the weeks to come."
In order to strengthen eurozone governance, the presidents of the European Commission, the Council, the Eurogroup, the European Parliament and the European Central Bank were invited to combine their efforts to prepare the "next steps for a better economic governance in the euro area".
The report, presented last June, concluded that "for the euro area to gradually evolve towards a genuine Economic and Monetary Union (EMU), it will need to shift from a system of rules and guidelines for national economic policy-making to a system of further sovereignty sharing within common institutions, most of which already exist and can progressively fulfil this task".
The report foresees three stages in deepening integration:
- Stage 1 (1 July 2015 - 30 June 2017): A "deepening by doing" stage, where small steps are taken towards fiscal convergence, using "existing instruments" and treaties.
- Stage 2 (30 June 2017 - 2025): A "more binding" completion stage, with "a set of commonly agreed benchmarks for convergence that could be given a legal nature, as well as a euro area treasury".
- Stage 3 (By 2025 at the latest): A final stage, where the vision would be complete.
As part of this process, the five presidents urged the member states to conclude the banking union by setting up an EU Deposit Guarantee Scheme.
- Mid-October: European Commission presents its package of next steps for deepening the EMU.
- End of 2015: The Commission puts forward its legislative proposal to create a EU Deposit Guarantee Scheme.