EU summit: more flexibility, but major issues still to be settled
Last week’s EU Council brought decisions determining the European agenda for the upcoming months. Beyond the important agreement on banking issues the Eurogroup stated that (i) ESM loans to Spain will not be senior and (ii) MoUs for the future support of countries via primary and secondary market interventions will take their content from the European Commission’s country recommendations. The EU President was asked to develop the presented report on the future of EMU into a specific and time-bound road map with the next interim report due in October. Finally, the “Compact for growth and Jobs” was agreed.
The summit is another step towards restoring euro-area credibility and stability. Aligning conditionality of MoUs in the context of primary and secondary market interventions with the content of the European Semester should improve the consistency of economic policy surveillance. However, it is a softening of conditionality in the sense that it refers to an agenda that needs to be implemented anyway and so far is more of a qualitative nature than one with clear quantitative targets (apart from fiscal items). What should also not be forgotten is that primary and secondary market intervention by EFSF/ESM has the major downer that their current liquidity reserves are known. The Ecofin council on 9 July now faces a huge agenda including (1) determining conditionality for bailing out Spanish banks and – in case spreads continue to widen – possibly for Italy (2) discussing the roadmap for upgrading EMU, (3) bringing major decisions on how to operationalize the EUR 120 bn growth programme. While the numbers attached might be biased to the upside as there is some double counting, it is positive that non-financial efforts to improve the growth potential such as the single market or structural reforms form a large part of the Compact. Finally, and not to forget, the EcoFin has to deal with Greece’s request for softening of the adjustment programme. While the ECB is likely to “reward” the summit results with a 25 bp rate cut – reflecting the weakening of euro area economy – and might hint at its preparedness for further non-conventional monetary measures this week, the German Bundestag / Bundesrat has approved ESM and Fiscal Compact already last Friday. However, the Constitutional Court will be swamped with further complaints on ESM in particular.
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Banking supervision in Euroland: What exactly was decided?!
Euro-area leaders agreed to present proposals, by year-end, for a “single supervisory mechanism”. They stipulate that such a mechanism is the precondition for the ESM to recapitalise banks directly, subject to conditionality and the conclusion of a programme. A decision is to be taken by finance ministers on July 9th.
The positive element in the decision is to confirm the link between financial support and control. Also helpful is the declaration of the EU summit to preserve, no matter what the “mechanism” will look like, the Single Market in Financial Services. Less helpful is that it is unclear what leaders have actually decided: It is telling that they speak of a “mechanism” while leaving open the institutional form. There is also confusion about the role of the ECB: The communiqué simultaneously refers to Art 127(6) of the Treaty, which allows for a transfer of specific (sic!) supervisory powers to the ECB, and of merely “involving the ECB”. Rather than the establishment of a common euro-area banking supervision apparatus this suggests a far more limited role. Finance ministers must hence sort out several issues: (i) What is the scope – all banks or cross-border ones only? (ii) What is the purview – day-to-day supervision or crisis-related action only? (iii) What is the relation with EBA and how will activities in non-euro area markets (read: London) be covered? (iv) How can ECB independence be reconciled with accountability and contestability of supervisory interventions? Too much for merely 10 days of deliberations and too important for more fudgy wording!
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Published with kind permission of Deutsche Bank Research.