Economic governance

Are the Dutch attempting to lead a mutiny on bank reform? It is hard to tell whether the objections are serious enough to unravel the deal last week on the EU rules for handling a bank crisis. But something mildly rebellious is certainly afoot. And it could end in another golden-gloves showdown between Jeroen Dijsselbloem, the Dutch finance minister, and his Swedish sparring partner Anders Borg.

At issue is the draft deal on the bank recovery and resolution directive (BRRD), which was agreed between negotiators for the European parliament and EU member states on Wednesday, brining to a close months of difficult talks. The reforms give all EU countries a rulebook at national level to handle a bank in trouble and, if necessary, bail-in creditors to help foot the bill.

The Dutch, however, are unimpressed. They think the draft agreement offers too much freedom to governments wanting bailout banks with public money, rather than impose losses on bondholders. And it looks like they have a significant number of allies. Read more

Sweden's Borg, centre, during last night's meeting, where he sparred with his Dutch counterpart

It’s become something of a routine in the EU’s ongoing effort to build a “banking union” that finance ministers try to come to a deal at their normal Brussels meetings – only to fail and call a special emergency session at the 11th hour before a crucial summit.

It happened last December when ministers held a last-minute emergency meeting to agree a new EU supervisor for all eurozone banks; it happened again in June to get to a deal on rules for how much creditors should lose when a bank fails. After yesterday’s 15-hour marathon on a new EU bank resolution authority, ministers will now have one last shot next Wednesday before the last EU summit of the year begins the next day.

The hold-up this time is a dispute over how a new EU-wide bank rescue fund should function. And if anyone is looking for evidence of how much work still needs to be done, consider these two documents which were circulated among finance ministers late last night – one here outlining an emergency backup to the fund and another here on a new treaty to set up the fund. Both are almost completely substance free, meaning a lot must be done before Wednesday. Read more

Wolfgang Schäuble, the German finance minister, during the marathon talks on Tuesday

EU finance ministers meeting late into the night are edging closer to a deal on a new European bank executioner. But as always in the eurozone crisis, ministers have become hung up on small but potential significant details. Officials say the differences are significant enough that a final deal will have to be delayed until next week.

Brussels Blog got its hand on “Terms of Reference” circulated by the Lithuanians, who hold the rotating EU presidency, around 6:30pm this evening that includes some details that are new – but have already raised objections in certain quarters. We’ve posted a copy of the 10-page document hereRead more

Van Rompuy at last month's EU summit. Will December's summit agree to the contracts?

When is a eurozone bailout not a eurozone bailout?

It’s a question that sherpas to the EU’s presidents and prime ministers will be grappling with on Tuesday when they are scheduled to debate a new proposal from Herman Van Rompuy, the European Council president, intended to further centralise economic decision-making in Brussels.

Under the 9-page plan (first uncovered by our friends and rivals at Reuters; we’ve posted the copy we got our hands on here), a country that is struggling economically could agree to a “contractual agreement” with Brussels that legally codifies its economic reform programme.

In return, that country could avail itself of a low-cost loan that would only be disbursed in tranches to insure compliance with the “contractual arrangement”. Oh, and one other thing: the European Commission would monitor the country to make sure its complying with the “contractual arrangement”.

Legally-binding economic reform agreement. Low-cost eurozone loans. European Commission monitoring missions. Sounds a bit like a bailout, no? Well, because it would be available to all eurozone countries, Van Rompuy doesn’t call it a bailout. In eurocrat-ese, it’s a “solidarity mechanism”. And if sherpas give it the signoff Tuesday, it will be debated by EU leaders at their December summitRead more

Rehn, right, consults with Germany's Wolfgang Schäuble at last month's IMF meetings.

Over the last few weeks, the normally über-dismal science of German economic policymaking has unexpectedly become stuff of international diplomatic brinkmanship, after the US Treasury department accused Berlin of hindering eurozone and global growth by suppressing domestic demand at a time its economy is growing on the backs of foreigners buying German products overseas.

The accusation not only produced the expected counterattack in Berlin, but has become the major debating point among the economic commentariat. Our own Martin Wolf, among others, has taken the side of Washington and our friend and rival Simon Nixon over at the Wall Street Journal today has backed the Germans.

Now comes the one voice that actually can do something about it: Olli Rehn, the European Commission’s economic tsar who just made his views known in a blog post on his website. Why should Rehn’s views take precedence? Thanks to new powers given to Brussels in the wake of the eurozone crisis, he can force countries to revise their economic policies – including an oversized current account surplus – through something soporifically known as the Macroeconomic Imbalance Procedure.

On Wednesday, Rehn will announce his decision on whether Germany will be put in the dock for exactly what the US has been accusing it of: building up a current account surplus at the expense of its trading partners. And if Rehn’s blog post is any indication, he’s heading in exactly that direction. Read more

Backstops? A safety net for banks in difficulty? Why the fuss? We have one already! That is the rough conclusion from finance ministers meeting in Luxembourg on Monday and Tuesday.

To provide some context, the apple of discord is whether Europe should pool more public funds to stand behind its banking system. Looming on the horizon is a stress test of banks next year that is supposed to restore faith in the financial system. It may uncover horrors that can’t be covered by contributions from private investors. If a bailout is needed, the open question is whether the bank’s sovereign will be able to fund it by borrowing from the market or from eurozone bailout funds without rekindling the sovereign debt crisis.

So what is the plan? Well there is no sign of new money. For the more optimistic finance ministers the ultimate, ultimate backstop — only to be used in exceptional circumstances — is apparently a “direct recapitalisation” from the European Stability Mechanism, the eurozone’s E500bn bailout fund.

The trouble is that there are a legion of hurdles to clear before using this instrument in practice — especially if it is to be used to cover any shortfall exposed next year. The rough rules on the use of the instrument were published in June. Many senior officials think it is so encumbered with conditions as to be almost pointless. If direct recap is the backstop, some finance ministers will be worriedly looking over their shoulder.

TEN OBSTACLES TO A DIRECT RECAPITALISATION

1. German veto: Any ESM decision to take a direct stake in a bank is subject to a German veto. Berlin is determined to ensure that even if this tool is theoretically “available”, it remains unused. Wolfgang Schäuble, Germany’s finance minister, even said on Tuesday that German law would need to be changed to use the direct recap instrument.

2. German veto: the Bundestag would have to vote through any direct recap. Germany’s centre-left Social Democratic Party, the most likely coalition partner for Chancellor Angela Merkel, is dead-set against direct recapitalisation of banks. It thinks the financial sector, not taxpayers, should foot the bill for bank failure. Read more

Moscovici, left, and Rehn at press conference where Rehn held the new French budget aloft

After an hour-long meeting this afternoon up in Olli Rehn’s office in the European Commission’s Berlaymont headquarters, Rehn and Pierre Moscovici, the French finance minister, wandered down to a crowded press area to make the expected enthusiastic noises about Paris’s economic reform effort.

But what might be most noticeable about the appearance was not what was said but what was done: Moscovici handed over a copy of France’s 2014 budget, which he had unveiled in Paris just yesterday.

“Pierre has given me the draft budget law for 2014 for France,” Rehn said, holding aloft the document, marked “Projet de Loi de Finances 2014” on the cover. “This is the real spirit of governance at the European level.”

To the uninitiated, the display might have appeared to be a bit of empty symbolism, a courtesy Moscovici was paying to the perpetually besieged Rehn. But there was nothing symbolic about the handover. This year, for the first time in EU history, every eurozone member must submit its national budget to Rehn’s office for review within the next two weeks – before they are debated by national parliaments. Read more

Reactions around Europe to Angela Merkel’s sweeping victory in Sunday’s German parliamentary elections were mixed. As expected, fellow leaders – particularly those of the centre-right persuasion – sent their congratulations while some on the centre-left called for Merkel to join the Social Democrats in a grand coalition.

In Italy, the Berlusconi-owned newspaper Il Giornale warned the result left the EU “in the hands of the chancellor who helped exacerbate the economic crisis.”

The differing views reflect increasingly polarising opinions towards Merkel across the eurozone. Just last week, the German Marshall Fund published its annual “Transatlantic Trends” report, which included polling of 11 EU countries (plus Turkey) and their views of Merkel’s handling of the eurozone crisis.

 Read more

Bank investors beware. Dazzling political fireworks will be launched in Brussels today that may distract you from the reform that really matters, at least over the next few years.

All the attention will naturally be on a bold move to create a powerful authority to wind up eurozone banks — a great leap forward for banking union that puts Germany’s red-lines to the test. Read more

Noonan addresses reporters outside the finance ministers' meeting in Luxembourg Friday

When EU finance ministers reconvene on Wednesday for a last-ditch attempt to strike a deal on bank bailout rules after they couldn’t get one in the early morning hours Saturday, it won’t be the first time fights over Europe’s “banking union” have gone to the eleventh hour before a major EU summit.

The last major decision – how many banks would be overseen by a new single supervisor based at the European Central Bank – also took one failed finance ministers’ meeting late last year before they reached a deal on the eve of a summit.

But EU leaders are sounding a bit more cautious this time than last December, since the issues at hand – who will pay for bank bailouts – are far more politically sensitive than last time around. They involve both power and money. Last time, it was just power.

To get an idea of where things lie after the Friday night/Saturday morning 18-hour marathon, we’ve posted this three-page proposal tabled by Michael Noonan, the Irish finance minister who chaired the meeting as holder of the EU’s rotating presidency, near the end of the debate. Read more