On Friday 29 June, at a Eurozone summit open to all European leaders except that of the United Kingdom, the Nineteen are expected to decide to make the European Stability Mechanism (ESM) into the common backstop of the Single Resolution Fund (SRF), the financial arm of Banking Union.
The creation of the backstop is one of the most important points of the completion of Banking Union and Mario Centeno, the President of the Eurogroup, reiterated the importance of this role being given to the ESM in a letter to Donald Tusk, the President of the European Council, taking stock of the Eurogroup's discussions on the completion of Economic and Monetary Union (see EUROPE 12049).
This is an important concession on Germany's part, as the country had refused to allow the ESM to play this backstop role when the 'resolution' plank of Banking Union was created. Berlin has, however, placed safeguards on reducing the level of risk in the banking sector.
The Franco-German roadmap on the future of the Eurozone, which was agreed upon at the bilateral summit of Meseberg (see EUROPE 12044) and discussed at the Eurogroup meeting of 21 June (see EUROPE 12047), will give the discussions a certain steer.
Although the precise details of the backstop will be discussed over the coming months, its size could be in the region of €55 billion, a level comparable to that of the Single Resolution Fund, and its entry into force is realistically expected to take place between 2021 and 2024. The right of scrutiny of the national parliaments, a matter close to Berlin's heart, is also likely to be discussed in the coming weeks.
The heads of state or government of the EU27 will also discuss increasing the functions of the current ESM, which should have a greater role in the design and supervision of future financial assistance programmes.
The Eurogroup is expected to be given a mandate to present specific technical proposals by the end of the year on the future architecture of the ESM, which the Commission hopes to convert into a European Monetary Fund (see EUROPE 11920).
The European leaders will also take note of the political agreement in principle reached at the end of May at the Council on the 'reduction of banking risks' legislative package (see EUROPE 12027), which should pave the way for inter-institutional negotiations with the European Parliament (trialogue) to begin.
Although no major decisions are anticipated of this meeting concerning the European deposit insurance scheme (EDIS), the third pillar of Banking Union, work may resume at political level after the summit.
Fiscal capacity
The heads of state or government will also discuss the possibility of creating a fiscal capacity to support investment and an investment stabilisation function in the Eurozone.
The Franco-German suggestions, to which the declaration of the Eurozone summit is likely to refer, according to Paris, differ from the European Commission's proposals of 31 May (see EUROPE 12031). The Commission would like to make these tools available to non-Eurozone states. And although it is also in favour of a stabilisation function within the EU budget, Paris and Berlin would like it to take the form of an ESM-backed line of credit.
There are considerable differences between the Nordic countries, and the Netherlands (see EUROPE 12040), which oppose these instruments in principle, unlike the Mediterranean countries.
“Why we need a fiscal capacity and what we are going to do with it lacks all clarity”, said a diplomatic source from a member state that opposes the Franco-German proposals.
“It is too early to make any decisions on the fiscal capacity of the Eurozone”, a European source said on Wednesday 27 June, adding that the summit declaration will call on the finance ministers to work on “all elements” of the Eurogroup President's letter. (Original version in French by Lucas Tripoteau)