IMF chief Lagarde, left, with the EU Commission's Olli Rehn at last night's meeting in Luxembourg
For those trying to figure out what the highly-anticipated EU treatise to be unveiled at next week’s summit on the future of the eurozone will say, it’s worth having a closer read at the International Monetary Fund report presented last night to eurozone finance ministers at their gathering in Luxembourg.
The concluding statement presented by Christine Lagarde, the IMF chief, contains almost all the elements being weighed by EU leaders who are writing the report, and Lagarde was quite open about the fact she actively consulted two of the institutions involved in its drafting: the European Central Bank and the European Commission. Indeed, Olli Rehn, the commission’s economic honcho, explicitly endorsed the report at a press conference last night.
The most likely areas of consensus are in Lagarde’s three long-term recommendations for a eurozone banking and fiscal union, though several of them remain controversial, particularly in Berlin, and it remains unclear whether the four EU institutions drawing up their plan will be as willing to confront the German government as head-on as the IMF has. Read more
Herman Van Rompuy, president of the European Council and chair of all EU summits
For anyone reading the tea leaves ahead of a major EU summit, early drafts of the final communiqué are always essential reading – not necessarily for what’s in them, but for what’s not.
The latest version obtained by the Brussels Blog – the second iteration ahead of next week’s increasingly high-stakes gathering in Brussels (which we’ve posted here) – has quite a few items listed as “p.m.”, an abbreviation for pour mémoire, which loosely translated means “to be added later”. It’s those items where the real debate still rages, and where all eyes will be focused.
The most important p.m. is in the very first section of the 11-page draft: the so-called “report on EMU”, which is the highly-anticipated treatise being drafted by Herman Van Rompuy, the summit chair, with input from José Manuel Barroso, president of the European Commission; Mario Draghi, head of the European Central Bank; and Jean-Claude Juncker, chair of the eurogroup of eurozone finance ministers. Read more
Italy's Mario Monti, left, being greeted at the G20 summit by Mexican president Felipe Calderon
When EU leaders agreed last year to give the eurozone’s €440bn rescue fund more powers to deal with a teetering country short of a full-scale bailout, it actually created two separate tools to purchase sovereign bonds of a government finding itself squeezed by the financial markets.
Some officials in northern creditor countries believed the most efficient tool would be using the fund, the European Financial Stability Facility, to purchase bonds on the primary market (when a country auctions them off to investors) rather then on the secondary market (where bonds already being openly traded).
The rationale was simple: By declaring the EFSF was going to move into an auction, perhaps at a pre-agreed price, they would effectively set a floor that would encourage private investors to pile in. Indeed, as one senior official said at the time, the EFSF might not even need to spend a cent; the mere threat of auction intervention might be enough to drive up prices and spark confidence, luring buyers back.
In addition to the prospect of using only very little of the EFSF’s increasingly scarce resources, a primary market intervention also had another political benefit: instead of buying bonds off private investors – in essence, rewarding the bad bets made by bankers and traders – the EFSF money would go directly to the governments selling the bonds.
With the topic of using the EFSF – and its successor, the €500bn European Stability Mechanism – to purchase sovereign bonds back on the table for Spain and Italy, it would seem an opportune time for advocates of a primary market programme to have their say. But there’s a problem: as designed by eurozone officials, it can only come as part of a full-scale bailout, meaning it is virtually impossible for Rome or Madrid to accept one. Read more
Planning for a European banking union is racing ahead, in spite of the considerable political obstacles. The vision is for two, five or even ten years in the future. But be in no doubt: the institutional turf war is already afoot.
It was on display today in the pages of the international press. Speaking to the FT Jose Manuel Barroso, the European commission president, laid out his vision of a banking union built on the foundations of existing EU institutions.
At the same time Christian Noyer, the governor of the Bank of France, made his pitch in the Wall Street Journal for eurozone central banks to provide “the backbone of the financial union”.
The clashing views highlight the great unanswered question of the banking union: if power over banks is centralised, who will be given control? Cui bono? These three scenarios lay down the broad templates for a union, and the institutions that would stand to win and lose depending on the outcome.
1. An EU banking union
Broadly as outlined by Barroso. A single supervisor, resolution regime and deposit guarantee fund serving all 27 member states. Should the UK refuse to take part — which it will — arrangements would be found to enable the other members to go forward. This union would cover countries outside and inside the single currency club, but remain within an EU framework.
Treaty change would not be necessary, at least according to the commission. Read more
Madrid police stand guard outside Bankia, the troubled Spanish bank, during a protest Saturday.
In talking to senior officials about plans for a Spanish bailout for our story in today’s dead tree edition of the FT, several steered us to the seemingly overlooked bank recaptialisation guidelines for the eurozone’s €440bn rescue fund that were adopted last year.
Those six pages, available for all to see on the website of the rescue fund, the European Financial Stability Facility, make clear European leaders were contemplating exactly the situation Spain now finds itself in: having done the hard work on fiscal reform, but suffering from a teetering banking sector that needs to be recapitalised.
The important thing to note in the current context is that the EFSF guidelines, adopted after more than a year of fighting over whether the fund should be used for bank rescues at all, allow for a very thin layer of conditionality for bailout assistance if the aid goes to financial institutions – notably, it foresees no need for a full-scale “troika” mission of monitors poking around in national budget plans. That’s something the government of Mariano Rajoy has been demanding for weeks. Read more
Some issues to bear in mind when considering whether a European banking union is a realistic possibility. The difficulties highlighted are not impossible to overcome. But it would be a wrench.
1. Germans don’t like strong EU supervision of their banks. Berlin is fond of federal EU solutions. But it is even more keen on running its own banks. The political links — especially between the state and regional savings banks — are particularly strong in Germany. To date Berlin has proved one of the biggest opponents of giving serious clout to existing pan-EU regulators.
2. Germans really don’t like strong EU supervision of their banks. There is again some wishful thinking about Berlin shifting position. Angela Merkel did say she supported EU supervision. But there were important caveats. She referred to supervision of “systemically important banks” — which is likely to exclude the smaller Sparkassen banks and the 8 Landesbanks. To some analysts, this represents a giant loophole. She also did not explain what kind of supervision. Berlin may only support tweaks to the current system.
3. Germans don’t like underwriting foreign bank deposits. Another pillar of a banking union is common deposit insurance. To Berlin this proposal represents another ingenious scheme to pick the pocket of German taxpayers. A weaker proposal to force national deposit guarantee schemes to lend to each other in emergencies has been stuck for two years in the Brussels legislative pipeline. Most countries opposed it. German ministers say it could be considered, once there is a fiscal union across the eurozone. So don’t wait around.