I have to inform you that this is my last weekender. I have recently accepted to join the Cabinet of President Van Rompuy and I will be starting very soon. I understand that writing this weekender somewhat helped me to get this job and so I'm thankful to Bruegel for offering me the platform and the nurturing environment to do it. I also wanted to thank all of you who responded, argued, exchanged working documents and debated my views every week. These exchanges were extremely useful and I sincerely hope we can continue to have them as much as possible.
I won't write a proper issue this week but I want to stress the importance for the coming European Council to deal with both the short and long term challenges. Indeed, the various documents that have been leaked or circulated (french position paper, draft of the conclusions, Report by the President of the Council) seem to indicate that there are meaningful progress on the discussion regarding the architecture of the future EMU (banking union and fiscal integration leading to common debt issuance).
However, there seems to have been very little progress on the short term and in particular on the redefinition of the Spanish program, the renegotiation of the Greek one and the conclusion of a program for Cyprus.
- On Greece, the program is off track and the IMF seems to be taking its sweet time to review it. This means that Europeans will need to figure out a solution before important redemption are due in August to the ECB to hold outs and loans not covered by the PSI.
- On Spain, the memorandum is under way but it is not clear how much it will clarify the possibility of burden sharing and the degree of intrusiveness of the restructuring process. Short of these details, it is unlikely that Spain will see its access to financial markets improve.
- On Cyprus, that is taking the rotating presidency of the EU in July, there are no meaningful progress towards the conclusion of a program and rumours of negotiations for another loan from Russia which is unlikely to help much.
All in all, the real challenge for policymakers is to manage to successfully tie in whatever progress is made on the medium to long term with the urgent need for policy action on short term challenges. In this sense, the deposit guarantee scheme would partially respond to the Cypriot challenge, a credible spanish program would set in motion an embryonic structure for a supranational banking resolution and restructuring authority. And an agreement on Greece would demonstrate the enduring commitment to the integrity of the euro area and the acceptance of fiscal risk-sharing.
European leaders have an opportunity for the first time since the beginning of the crisis to stop dealing with the crisis month after month and finally combine a long term vision with responses to short term challenges. So far they have dealt with the short-term, ignoring the long term, now they risk making the opposite mistake. Responses have to be provided to both, doing one, without the other would be unsatisfactory.
Thank you again and keep in touch,