Euro area: Quantum leap ahead?
Against the background of a renewed escalation of the crisis, market expectations are building ahead of the June 28-29 summit that EU leaders will take decisive action towards a fiscal and banking union. While the European Commission is pushing for a pan-European deposit scheme in the context of a banking union, France is reverting to the idea of a banking licence for the ESM, while Italy and Spain are emphasising the need for eurobonds.
The unrealistic expectations are unlikely to be met. While some sort of fiscal and banking union is necessary to complement monetary union, this is most certainly a medium-term undertaking. Not only does the legal and institutional framework have to be worked out thoroughly at EU level and anchored in national constitutions, more importantly, most of the elements discussed – already in the context of the banking union – will encounter resistance from a number of EU members, above all the UK.
It is almost certain that the new integration steps cannot be pursued in the context of the existing treaty but that they will have to follow the course taken for the fiscal compact, i.e. a new intergovernmental treaty. Also, new institutions, decision procedures and elements of democratic legitimacy will be required. The major challenges for such a two-speed Europe will be to keep the coherence of the EU-27 in other policy areas that need to be addressed at the global level and to leave the door open for new EMU members.
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Published with kind permission of Deutsche Bank Research.