European leaders are meeting in Brussels almost four months after their previous summit, at the end of June, where they launched a project for European banking union and agreed on direct recapitalisation of banks in crisis-hit countries. Since then the eurozone has benefited from a respite, but in fact many of the decisions taken in June still await implementation.
The European Commission tabled its proposals for common banking supervision in mid-September, but negotiations are far from complete. On the other components of banking union, especially a programme to wind up failing banks and the creation of a fiscal backstop – on which there was no firm commitment, anyway – discussions have not really started. Spain may soon agree on a memorandum of understanding with the European Stability Mechanism, but after months of delay. In the meantime, the European Central Bank has announced its outright monetary transaction programme but in the absence of a Spanish MOU, it has not yet been able to implement it. Furthermore, a dispute has emerged on the meaning and scope of direct recapitalisation of banks by the ESM.
Delay is sometimes justified. It is true that the details of supervisory arrangements matter considerably and, as Germany rightly points out, should not be overlooked in haste. But Europe’s leaders should not believe that positive market reactions to announcements will substitute for actual decisions for long.
With that in mind, what should we hope for from this week’s summit? And how should we assess the new proposals prepared by the EU president Herman Van Rompuy for discussion there?
By far the most important priority for this weeek’s meeting is to ensure a consistent follow-up on previous initiatives. Mr Van Rompuy’s report must be commended for stating clearly that banking union involves a single supervisory authority, a common framework for winding up failed banks, implemented by a common resolution authority and common standards for a national deposit guarantee scheme. Absent these dimensions common supervision alone would simply create new problems without solving the existing ones. The acid test for this week’s summit then will be whether the proposed blueprint for comprehensive banking union is actually endorsed by the European leaders.
For the longer-term Mr Van Rompuy does not deliver the comprehensive blueprint many of those who wonder how the eurozone may evolve were hoping for. Instead he makes two proposals, both of which are bound to be controversial, although they are couched in cautious and rather imprecise terms: he envisions a eurozone “fiscal capacity” equipped with an ability to borrow, that would help absorb asymmetric shocks. He also puts on the table again the pooling of sovereign funding instruments, in other words the issuance of eurobonds. Both ideas deserve serious discussion. But although the common perception is that they represent two sides of the same coin, it must be recognised that they in fact draw on two different, largely alternative models.
A fiscal capacity would be a sort of eurozone budget whose borrowing would result in bonds issued by a eurozone treasury. These would be federal bonds, whose collateral would consist in a eurozone power to raise revenues through its own resources. There are questions to be raised about the public goods this budget would finance, how large it would be, the volume of bonds it could issue and the nature of its own resources. But the model is clear enough: it draws on the federal template.
Jointly issued bonds, on the other hand, would rely on a mutual insurance model through which states would provide guarantees to each other, without creating a common budget or granting the eurozone revenue-raising powers of its own. Each state would spend separately but they would mutually guarantee a fraction of each others’ debt. The volume of bonds could be larger, because it would suffice to decide which part of the national debts to mutualise. But there are serious questions about the institutional arrangements that could underpin the provision of such guarantees. They would certainly require giving a common authority the power to veto national budgets.
Both avenues can be explored but it is clear that they lead to different outcomes and have vastly different economic and political consequences.
Uncertainty is even higher as regards the institutional arrangements envisaged in the report. Mr Van Rompuy rightly speaks of democratic accountability, but in general terms he mentions both the European parliament and national parliaments without specifying their roles.
Depending on the nature of fiscal arrangement, however, a choice must be made between two sources of legitimacy. If the resources that are mobilised come from national budgets – as is the case for the ESM – national parliaments are the legitimate bodies as far as accountability is concerned. The problem is that no one, in the national democratic accountability processes, is in charge of the European interest. Only through duress and crises are national parliaments reminded that the sharing of a currency has created new forms of economic interdependence. So the common interest only exists in the last resort. Yet the European parliament, which has no responsibility for raising the corresponding revenues, would not be a solution either. Rather, the logical response would be to build on national parliaments and find ways to let them socialise through a common parliamentary assembly.
If, alternatively, resources were to come from a federal budget – which is not the case at present – the European parliament, rather than national parliaments, would be the legitimate body.
In either case, clarity is what matters the most.
It is understandable that at this stage of its discussions the eurozone is still uncertain about its model. Leaders, however, should aim at intellectual discipline and explore consistent solutions. The blurring of responsibilities is the last thing Europe needs if it wants to engage its citizens.
A version of this column was published in FT A-list