A Very Ordinary Summit

Date

22 Oct 2012

Sections

Euro & Finance

Press release

The Summit: What was agreed

  • Agreement to work towards a legal framework for a banking union, although France and Germany differ over the pace of reform.
  • There was support for a so-called “Euro-budget” from UK, Germany and France – though for different reasons.

EU leaders have agreed on a way forward towards a legal framework for a single Eurozone supervisor, with oversight of all banks operating in the Eurozone.

At a regular summit of the Heads of the 27 EU Governments today in Brussels, agreement has been reached that will settle the institutional architecture for the future of the Eurozone.

The Summit in Brussels this week was one of the six scheduled European Council summits. In other words, it was not an extraordinary summit – and for the first time in a long while, it was not held under intense pressure from financial markets, which have calmed since the commitment by the European Central Bank (ECB) last month to buy bonds of troubled Eurozone states.

With new decisions thin on the ground, it looked very much like a normal summit – and in itself, that is no bad thing.



Institutional fiddling

The EU is often accused of fiddling while Greece burns. While EU leaders discussed the mechanisms for a Single Supervisory Mechanism of banks in the Eurozone, the streets of Athens were ablaze with anti-austerity protesters.

However, the institutional fiddling at the EU Summit last night was necessary, because if Eurozone countries are to turn a corner, Europe’s leaders need to show that they are serious about breaking the viscous cycle between banks and sovereigns – as they had promised they would do in June.

Although much of last night’s deal is little more than a reaffirmation of an earlier agreement reached in June, it was an important statement by the EU that it aims to resolve the crisis and secure the future for the Euro.

Breakthrough

Agreements between the 27 leaders on a new banking and bail-out regime with new powers and responsibilities for the ECB and the European Stability Mechanism is an important breakthrough in the three-year crisis.

However, the agreement on a legal framework has masked some serious tensions between Paris and Berlin.

Before this week, a banking union was becoming a symbolic battle ground between France and Germany.

French President François Hollande wants to fast-track a new banking and bail-out regime for the Eurozone. German Chancellor Merkel wanted to go at her own pace – and in the meantime shift the focus to stricter rules for national budgets.

Merkel insisted on quality over speed and, mindful of German elections next year, she does not want to rush into a full banking union before 2014.

The compromise appears to be that all 6,000 banks in the single currency area would gradually come under ECB supervision by 2014, starting with banks receiving state aid, then large cross-border institutions.

This appears to be a defeat for German Finance Minister Wolfgang Schäuble's efforts to delay and limit the scope of banking union. He does not want to see Germany’s politically sensitive savings come under outside supervision.

France and Germany were also at odds over when the European Stability Mechanism (ESM) would be able to re-capitalise troubled banks. Again, Germany wants to take its time. Ms Merkel succeeded in holding out against pressure to activate the €500bn ESM early.

The French full-speed approach to banking union has been met with scepticism by EU diplomats who say that there are legal obstacles that need to be overcome, whilst the approval of the European Parliament also needs to be secured.

Fiscal Capacity

The most controversial idea was from Ms Merkel who wanted stronger authority for the European Commission to veto national budgets that breach EU rules.

This was in line with a proposal from Council President Herman van Rompuy for the 17 member Eurozone to have its own budget – known as a “fiscal capacity”. This would be in addition to the EU’s common budget.

UK Prime Minister David Cameron appears to favour the idea of a Euro-budget – even if it only means it may give him some leverage to limit or reduce the UK’s commitments to the wider EU budget.

The fiscal capacity idea still needs to be fleshed out, but it could come with its own Commissioner – or “Euro Tsar” – and a Eurozone Treasury department.

President van Rompuy was keen to point out that it would not mean a transfer union, but rather a reliable mechanism to support country-specific shocks and support states undertaking structural reforms.

Although a supporter of the idea of a Euro budget, President Hollande does not particularly like the so-called economic contracts that Germany is demanding and says that the move would require a Treaty change. Germany would, of course, want to contain the scope of such a budget.

Non-Euro countries such as Poland and Hungary said that this was yet another way of creating a two-tier Europe.

British concerns

While the UK is conspicuously relaxed about the Euro budget, it is becoming increasingly agitated about the banking union. London is worried that its banks could be disadvantaged if a balance is not maintained between the ECB and its oversight of Eurozone banks and the powers of other authorities to oversee non-Eurozone banks.

The UK wants a system that would give countries outside the banking union the possibility of blocking those within the project from clubbing together to shape EU-wide regulations.

While the UK supports the banking union as a practical response to the Eurozone crisis, it will veto moves to a union if there is any sign that the ECB could use its authority to impose EU-wide regulation that would favour the Euro over the Pound.

While the agenda seems to be the stuff of a federalist’s wildest dreams – a separate Eurozone budget, single European banking supervision, binding budget contracts for Eurozone Member States, and some form of jointly-backed borrowing to finance a Eurozone treasury, in many other respects this week’s Summit seems to be rather normal.

The relationship between France and Germany is the key to the future of the Eurozone – and, yes, there has been a noticeable withering of the Franco-German axis since Sarkozy’s departure earlier this year (President Hollande has been making a point of dealing directly with Italy and Spain on the Eurozone’s woes), but their compromises are driving a way through the crisis – balancing austerity with growth.

Meanwhile the UK is again looking detached. No change there, then. Could this be the return of “business as usual”?

Contact Kevin.Doran@grayling.com