Preparations for the euro summit at the end of the month indicate that the decisions to be taken — or dodged — fall into three buckets. The first relates to “completing the banking union”: steps to complement the already well-developed efforts at Europeanising the banking system. The second is to boost the capacities of the European Stability Mechanism for emergency lending to governments, and turn it into a “European monetary fund”. The third is to put in place “fiscal capacity” of some sort — a taxpayer-funded mechanism for cross-country macroeconomic stabilisation when one country is hit by economic troubles.
What should we expect on each of the three issues? Last year, the most common but oversimplifying narrative was that the answer would be the outcome of a Franco-German bargain, especially given Emmanuel Macron’s choice to make deeper eurozone integration a flagship ambition for his presidency. In this perspective, a German interest in market discipline and self-reliance is to be balanced against a French push for “solidarity” and political control over the economy.
But other countries matter too, of course. The “new Hanseatic League” of eight smaller countries on the EU’s northern rim issued a joint statement in March that was very much on the self-reliance side, focusing on completing the banking union rather than fiscal integration. The new Italian government, meanwhile, explicitly supports French proposals. A Spanish contribution — albeit before the new centre-left government took over this month — fell somewhere in the middle, emphasising private market stabilisation but both calling for a firm deadline for a common deposit insurance scheme and arguing for common fiscal “rainy day” and investment support facilities.
What does this all mean for what is likely to be agreed? Here are the expectations I have been picking up from decision makers.
On banking union, there seems to be agreement to allow the ESM to “backstop” the common system for resolving failed banks. There is less optimism about an agreement on common deposit insurance, although there is much support in principle so long as it does not put some countries’ banks on the hook for existing “legacy” problems in others’. The thing to watch here is whether a firm timetable for introducing common deposit insurance can be agreed, along Spanish ideas.
On the ESM, agreement is emerging on boosting its capacity to monitor policy in countries receiving emergency loans, turning it into a European version of the IMF. Along with that goes German chancellor Angela Merkel’s very concrete proposal for an additional form of shorter-term loans that the ESM could grant to countries with only temporary market access problems. Where agreement is still elusive is on the approach to restructuring government debt when necessary — in particular whether this should be the expected course when ESM lending is granted. This question is a potential deal-breaker.
Finally, the joint fiscal stabilisation capacity is where minds remain the farthest from meeting. Even here, however, there are signs of a budding compromise. Paris has long pushed for a substantial eurozone budget, although details have been few and far between. More flesh is now being added to the bone: finance minister Bruno Le Maire’s speech last Friday is the most concrete public indication of what France wants. It seems to be a permanent eurozone investment budget, tilted towards investment in countries with a need to catch up, and set up to ensure public investment spending (he mentions “education and innovation”) is not cut in a crisis.
That stands in contrast with some other proposals, but is also similar enough that a consensus is within sight: Spain envisages support for private investment, for example, while the European Commission wants a fund for temporary lending to support national investment spending in a crisis (rather than permanently).
Most importantly, what Le Maire sketches out seems designed to match Merkel’s support for an investment budget in form if not in size (Merkel has mentioned the “low double-digit billions”). But Le Maire says the “amount can grow in power over time”. Add in that German finance minister Olaf Scholz has just revived in an interview another model for cross-country fiscal stabilisation: a pan-European reinsurance scheme for unemployment benefits. Together, all this amounts to energetic footwork to be in a position to deliver a surprise agreement at the end of the month.
So is all this enough? As I argued yesterday, even without any further reforms at all, the euro has actually come a long way since the financial crisis. In that regard, any agreement comes as a bonus. But the real test is whether eurozone countries can avoid self-reinforcing downturns, that is to say whether they can ensure a countercyclical buttressing of aggregate demand. While a common investment budget will help marginally with this, what matters most is what is missing from the likely outcomes in June.
Two things in particular seem to be left unaddressed. One is the question of a eurozone-wide safe asset, a benchmark financial security banks can hold on to in difficult times rather than fleeing solely to German government bonds. The absence of this makes balance of payments crises more likely. The other is the importance of letting national fiscal policy — by far the best tool for cross-country stabilisation — do its countercyclical work. That means taking a hard look both at the fiscal rules and at the conditions that might be put in place for emergency lending.
As the Bundesbank’s Jens Weidmann reiterated in a recent speech, responsibility and sovereignty should go hand in hand. To the extent nation states remain responsible for the public finances, in other words, they need to have the freedom to ensure countercyclical policy. There is a bargain to be teased out here that is not currently on the table but should be: a framework for predictable sovereign debt restructuring combined with looser fiscal rules and a presumption of strong fiscal stimulus in the conditions for emergency loans. Now that would be a reform package worth celebrating.