At the Eurozone summit in Brussels on Friday 29 June, the heads of state or government of the EU countries (with the exception of the United Kingdom, which is not represented) decided to make the European Stability Mechanism (ESM) into the common backstop of the Single Resolution Fund (SRF), the financial arm of Banking Union.
This is one more step towards the completion of Banking Union that has been taken at this Eurozone summit. Jean-Claude Juncker, the President of the European Commission, told a press conference that for the Eurozone, he was very happy to have made progress on Banking Union and that he particularly welcomes the creation of a backstop, to be effective for the Single Resolution Fund. By making the ESM the backstop of the SRF, the European leaders have effectively expressed their intention of giving Banking Union a financial instrument that can be triggered if the funds of the SRF should prove inadequate in the event of a potential bank default.
The decision was not a surprising one, as the Franco-German roadmap on the future of Economic and Monetary Union (EMU), published on 19 June (see EUROPE 12044), and recent discussions of the Eurogroup (see EUROPE 12047) pointed to this option. It is nonetheless a concession on the part of Berlin, which refused to allow the ESM to play this role when the ‘resolution’ plank of Banking Union was created.
The characteristics of this backstop, however, have not been defined. The Twenty-Seven have given the Eurogroup a mandate to present technical proposals by the end of the year. It appears that the size of the backstop could be in the neighbourhood of €55-60 billion and hence comparable to that of the SRF, and that the new mechanism could be up and running between 2021 and 2024.
The European leaders also agreed to increase the competences of the current ESM, on which the Eurogroup will also work over the coming months in the framework of its mandate.
A general orientation on the ‘banking risk reduction’ package at the end of May was also welcomed (see EUROPE 12027). The attendees of the meeting called upon the co-legislators (European Parliament and Council of the EU) to conclude the inter-institutional negotiations (trialogue) by the end of the year. The adoption of a text is a prerequisite for the creation of the backstop of the SRF, as Angela Merkel, the German Chancellor, acknowledged. Although the Italian Prime Minister, Giuseppe Conte, delayed the adoption of the final declaration on this Eurozone summit somewhat, the root cause of this was the wording of the text concerning the reduction of banking risks, particularly as Conte is reported to have objected to the bilateral Franco-German method used to put together the roadmap on the future of the Eurozone.
Still under the ‘Banking Union’ plank, the attendees of the Eurozone summit expressed their hopes of moving forward the work concerning the European deposit insurance scheme (EDIS). “We need to (…) make progress on Banking Union, including a deposit guarantee”, said Leo Varadkar, the Irish Taoiseach. Technical and political discussions will be able to resume.
Disagreements over fiscal capacity for the Eurozone. The heads of state or government of the EU27 also discussed the possibility of creating a fiscal investment support capacity and an investment stabilisation function. Readers may recall that this debate falls within the scope of the ideas developed by the European Commission in December last year in the framework of its proposals on deepening the EMU (see EUROPE 11920), which were made flesh on 13 May in a more specific proposal (see EUROPE 12031). The institution is proposing to set up these two instruments, which are open to non-Eurozone member states, to be an integral part of the multiannual financial framework (MFF). The Franco-German roadmap takes a position in favour of instruments limited to the Eurozone, but particularly calls for the investment stabilisation function to take the form of an ESM-backed credit line.
The subject of a fiscal capacity was referred to in a letter dated Monday 25 June and sent by Mário Centeno, the President of the Eurogroup, to Donald Tusk, the President of the European Council, with a view to this Eurozone summit (see EUROPE 12049). The leaders furthermore agreed for all points of this letter to be discussed at the Eurogroup.
And although the Twenty-Seven are very much in agreement over the subjects of relevance to Banking Union, questions of a fiscal capacity are the subject of differences of opinion between member states, although all can agree to discuss the matter.
“Everybody agrees that we need a vision to stabilise, a function that allows for greater convergence, a function that allows for investments to be made in competitiveness”, said the French President, Emmanuel Macron, defending the Franco-German position. This position received the backing of certain Mediterranean states, most notably Spain. “We can only support” this point of the Meseberg declaration, said Pedro Sánchez, the new Spanish head of government.
Among the member states opposing these instruments, the Netherlands have been particularly virulent and the country’s Prime Minister, Mark Rutte, struck a very different note at the press conference. “What is a fiscal capacity? The Netherlands is very much against transfer union”, he said, but acknowledged that the EU needed greater convergence and more competitiveness. “We have all the instruments in place” to respond to any crisis that may befall a country, he added.
“We need to put in place a mechanism to withstand asymmetric economic shocks in Eurozone, as these shocks can hit overnight”, said Juncker, in defence of the Commission’s proposal.
It was, however, not time for decisions to be made. Political discussions will continue over the next few months to try to find a solution to the matter.
Another Eurozone summit will, moreover, be held in December, to take stock of progress in discussions on all of these matters. (Original version in French by Lucas Tripoteau)