Blog Post

Slow, but real progress on resolving eurozone crisis

Last week summit of heads as well as finance ministers marks an important step in completing the eurozone architecture. At the same time, the summit’s results fall short of what could have been hoped for.

By: and Date: December 18, 2012 Topic: European Macroeconomics & Governance

This column was previously published on the Financial Times’ A-List.

Last week summit of heads as well as finance ministers marks an important step in completing the eurozone architecture. At the same time, the summit’s results fall short of what could have been hoped for.

Start with banking union. When launched on 29 June, the project was widely and rightly interpreted by markets to indicate that Europe’s leaders had changed their assessment of the euro crisis. Until then eurozone heads of state had behaved as if a mere tightening of the existing budgetary provisions could suffice to restore confidence in the euro. But in June they recognised that the arrest of financial flows within the euro area had deeper roots. Banking union was designed as the first component of a systemic response to a systemic problem. Together with the announcement by the European Central Bank of a new bond-purchase facility, it was instrumental in convincing markets that the worst was not certain.

The finance ministers now agreed on the first important step towards banking union: the establishment of a single supervisory mechanism (SSM). The compromise they have reached seems to be a good one. The ECB will be in a strong position and responsible for the overall functioning of the SSM. It will have direct oversight of eurozone banks in a differentiated way depending on size. The size threshold of 30bn means that perhaps 85% of assets and more than 180 banks in the eurozone (link /nc/<wbr></wbr>blog/detail/article/965-a-<wbr></wbr>banking-union-of-180-or-91-<wbr></wbr>percent/ ) will be under direct oversight of the ECB. The press communiqué suggests that ECB will also have the right to scrutinize banks below the threshold, which will reduce banks’ incentives to fall below or above the threshold. This is important to avoid competitive distortions but also to prevent major problems among small banks, which taken together are still large. Moreover, when financial assistance is given, the ECB will be the supervisor which allows extending the coverage to a number of Spanish Cajas that are smaller in size than 30bn. The compromise also appropriately allows non-eurozone countries to participate in the SSM.

That first step was, however, the easiest of the three steps towards an integrated financial framework. Establishing a common resolution framework will be harder, because it implies giving a European authority the power to distribute losses among shareholders and creditors in several countries, close down banks and lay-off employees. Still, heads of state and government made quite some progress on this front. They explicitly acknowledge that a single resolution mechanism is required and call for the mechanism to be finalized before the European elections in 2014. They also wish the resolution mechanism to be based on resources from the financial sector itself and there is an acknowledgment that a fiscal backstop is needed.

So which principles should the single resolution mechanism be based upon? First, given the distributional choices and the fiscal resources needed, the resolution task should be completely distinct from the new supervisor at the ECB as otherwise there will be a temptation of using monetary policy to reduce the fiscal burden. Second, bank resolution should be exercised by an independent authority. This authority should be guided by clear rules and it should be politically accountable ex-post. However, the actual decisions should be done at arm’s length from the fiscal authorities to avoid excessive politicizations of decisions. Third, the authority should rely on an appropriate fiscal backstop. A clear decision-making framework is needed to determine under which conditions aid can be requested. Defining those conditions will be controversial, because budgetary decisions are always the most acrimonious. Furthermore, agreeing on banking regulation that proves appropriate for reducing fiscal costs will also be controversial. The next steps to be taken for the completion of banking union are therefore clearly on the table but far from easy to achieve.

As regards fiscal union, the summit is a disappointment. The founding fathers of the euro were aware of the need to complement monetary with fiscal union but put off difficult choices to future decision makers. The time has come to address a series of unanswered questions. Should there be a proper euro-area budget? Should a new system be conceived as an intergovernmental transfer scheme?  Or should sovereigns’ ability to borrow be restored through some form of mutual guarantee? What should be the degree and type of conditionality? What does a euro area fiscal union mean for the EU as a whole? It was evidently too early to take any decision now, yet a reflection process should have been initiated. Hermann Van Rompuy, the President of the European Council, was willing to conduct it. By giving him a mandate, the European leaders would have shown that they are able to think strategically, not only to respond to market pressure.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

Read article
 

Blog Post

Will European Union recovery spending be enough to fill digital investment gaps?

The recovery facility will boost digital transformation, but questions remain whether it will be sufficient to achieve Europe’s digital ambitions.

By: Zsolt Darvas, J. Scott Marcus and Alkiviadis Tzaras Topic: European Macroeconomics & Governance, Innovation & Competition Policy Date: July 20, 2021
Read article Download PDF
 

Policy Contribution

A new direction for the European Union’s half-hearted semiconductor strategy

The EU needs a more targeted strategy to increase its presence in this strategic and thriving sector, building on its existing strengths, while accommodating its relatively low domestic needs.

By: Niclas Poitiers and Pauline Weil Topic: European Macroeconomics & Governance, Innovation & Competition Policy Date: July 15, 2021
Read article More by this author
 

Blog Post

Fit for 55 marks Europe’s climate moment of truth

With Fit for 55, Europe is the global first mover in turning a long-term net-zero goal into real-world policies, marking the entry of climate policy into the daily life of all citizens and businesses.

By: Simone Tagliapietra Topic: Energy & Climate, European Macroeconomics & Governance Date: July 14, 2021
Read article More on this topic
 

Blog Post

Fair vaccine access is a goal Europe cannot afford to miss – July update

European countries must do more to tackle the vaccine uptake gap. Vaccination data should be published at the maximum granularity level so researchers and local decision-makers can monitor progress.

By: Lionel Guetta-Jeanrenaud and Mario Mariniello Topic: European Macroeconomics & Governance Date: July 14, 2021
Read article More by this author
 

Blog Post

SPACs in the gap

Special-purpose acquisition vehicles could fill a gap in European equity markets and lure risk-averse investors off the sidelines.

By: Rebecca Christie Topic: European Macroeconomics & Governance, Finance & Financial Regulation Date: July 13, 2021
Read about event More on this topic
 

Upcoming Event

Sep
1
12:30

The EU recovery fund - state of play and outlook

Bruegel Annual Meetings, Day 1- In this session we will discuss the EU recovery fund, its state of play and outlook.

Speakers: Nadia Calviño, Karolina Ekholm and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read about event More on this topic
 

Upcoming Event

Sep
2
10:00

Conversation on the recovery programmes

Bruegel Annual Meetings, Day 2- In this session, we discuss the recovery programmes.

Speakers: Maria Demertzis, Mehreen Khan and Tadeusz Kościński Topic: European Macroeconomics & Governance Location: Palais des Academies, Rue Ducale 1
Read about event
 

Upcoming Event

Sep
2
13:00

European banks: under global competitive pressure?

Bruegel Annual Meetings, Day 2 - European banks have lost stature and remain generally low-profitability, low-valuation in comparison to their global peers. Is that a problem? If so, what can EU policymakers do to address it?

Speakers: José Antonio Álvarez Álvarez, Mairead McGuinness and Nicolas Véron Topic: European Macroeconomics & Governance, Finance & Financial Regulation Location: Palais des Academies, Rue Ducale 1
Read about event More on this topic
 

Upcoming Event

Sep
2
15:45

Blending physical and virtual: shaping the new workplace

Bruegel Annual Meetings, Day 2 - This panel will cover the changes the COVID-19 pandemic made to our workplaces, and what to expect in the near future.

Speakers: Nicholas Bloom, Michael Froman, Mario Mariniello, Sara Matthieu and Luca Visentini Topic: European Macroeconomics & Governance Location: Academy Palace
Read about event More on this topic
 

Upcoming Event

Sep
3
09:00

The role of the EU's trade strategy for an inclusive and sustainable recovery

Bruegel Annual Meetings, Day 3 - We are delighted to welcome Valdis Dombrovskis, Executive Vice President of the European Commission for An Economy that Works for People to talk about Europe's trade strategy.

Speakers: Valdis Dombrovskis and Alicia García-Herrero Topic: European Macroeconomics & Governance Location: Palais des Academies, Rue Ducale 1
Read about event More on this topic
 

Upcoming Event

Sep
3
10:15

Conference on the Future of Europe: envisioning EU citizens engagement

Bruegel Annual Meetings, Day 3 - Panellists will discuss different options and what they may entail while revisiting the debates on the future of Europe at national and EU-level that have been conducted thus far.

Speakers: Caroline de Gruyter, Kalypso Nicolaïdis, Niclas Poitiers and György Szapáry Topic: European Macroeconomics & Governance Location: Palais des Academies, Rue Ducale 1
Read article More on this topic
 

Blog Post

A breakdown of EU countries’ post-pandemic green spending plans

An analysis of European Union countries’ recovery plans shows widely differing green spending priorities.

By: Klaas Lenaerts and Simone Tagliapietra Topic: European Macroeconomics & Governance Date: July 8, 2021
Load more posts