German reforms meet French solidarity in new ‘competitiveness contracts’

Hollande Merkel May 2012.jpg

France’s François Hollande and Germany's Angela Merkel broadly agreed on a roadmap for deepening the economic and monetary union (EMU) during a two-day summit, which ended in Brussels today (14 December). But they described new contractual schemes to support economic reforms in eurozone states in characteristically contrasting terms.

Both leaders endorsed the objective of agreeing proposals for bank recovery, resolution and deposit guarantee schemes directives by the end of March 2013, with the EU Parliament due to adopt them before June 2013.

Their acceptance of the timeline belied a strong difference of interpretation on the issue of bank recapitalisation by the European Central Bank, however.

Back in June, Germany agreed that the establishment of a single supervisory mechanism for Europe’s banks would enable the ECB to tap Europe’s rescue fund – the European Stability Mechanism – to recapitalise troubled banks. The move was widely seen as a victory for Spain an Italy.

>> Read: Merkel bows to Italy, Spain on bonds and bank supervision

However, Merkel insists that the ECB must be fully established in its supervisory role before being permitted to allot rescue cash. The aim is to have the resolution mechanism and the deposit guarantees all in place by the beginning of 2014.

Two further moves for deepening economic integration in the euro zone will not take place until at least that date.

First, there is no question that any of the longer-term EMU changes – such as a likely proposal for a European budgets minister – would appear before that date, since these may require treaty change.

No proposals for treaty change will be entertained before the European Parliamentary elections set for June 2014.

Values and duties

Also to be introduced in 2014 are "mutually agreed contracts for competitiveness and growth," which were laid down in today's EU summit conclusions.

Along the leaders' thinking, such agreements would be designed to promote structural reforms in eurozone member countries – even when they are neither running excessive deficits nor in financial difficulties – with the reward of financial incentives.

European Council President Herman Van Rompuy was asked to flesh out proposals for the June EU summit but some details surrounding these instruments appear to be agreed between Europe’s two biggest players.

Maintaining her reputation as an upholder of the values of duties, Merkel emphasised the degree to which these contracts could boost competitiveness, but understated the amount of “fiscal capacity” that might be on offer as a result by way of reward.

Such a sum was not intended to be more than between €10 and €20 billion, she said, suggesting the money might be raised from the financial transaction tax, structural funds or other “own resources” within the EU budget.

In turn, Hollande lived up to his reputation for stressing "solidarity" over fiscal obligations – a key strain to his anti-austerity message – and underlined that such contracts would be voluntary.

According to the summit conclusions, the reforms implemented under the competitiveness contracts would be supported by "solidarity mechanisms that can enhance the efforts made by the member states".

Since European institutions lack the competence to lay out contract terms in a range of fiscal issues – say pensions rights for example – such contracts will only be binding on member states to the extent they wish them to be, Hollande suggested.

He added that some states would probably refuse to sign such contracts, and added that he was personally in favour of them, when they came with “solidarity tools or incentives”.

Hollande said that he and Merkel had discussed the contracts and had come to a compromise that worked, but judging from their differing presentation of the idea, they are likely to be the subject of much debate behind the scenes.

At a summit in October, EU leaders have agreed to complete the European banking union by 2014, and to hammer out the legal framework by the end of 2012.

>> Read: EU summit deal aims for full 'banking union' in 2014

At their December meeting, EU leaders are now expected to agree on a "specific and time-bound roadmap" for deepening the euro zone's economic and monetary integration.

Their discussions will be based

on a report by Herman Van Rompuy, European Council President.

>> Read: Van Rompuy fleshes out plans for two-tier Europe, eurozone budget

EU Commission President José Manuel Barroso put forward his own blueprint the week before.

>> Read: Barroso lays out 'ambitious vision' for the eurozone

  • By end March 2013: Council aims to agree on proposals for bank recovery, resolution and deposit guarantee schemes directives
  • By end June 2013: Parliament to agree the directives by co-decision
  • 27-28 June: EU summit to discuss proposals for 'competitiveness contracts' and the new solidarity fund
  • By end 2013: Implementation of the directives within the member states
  • During 2014: Implementation of the contracts and solidarity fund
  • Not before June 2014: Longer term EMU issues, including any requiring treaty change to be discussed only after this date

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