The finance ministers of the Twenty-Seven (all but Britain) reached an agreement on Friday morning, June 14, on the objectives of fiscal capacity for the euro area. However, they have not found a compromise on the financing and governance issues of this instrument, which will be launched in 2021.
“The text on the table is by necessity a compromise and it leaves open a wide range of issues”, Pierre Moscovici, European Commissioner for Economic and Financial Affairs, told the press. “It is the best compromise we could reach with the present state of play of Europe”, he added.
“We have agreed on a complete list of the main points and there is now still work to be done to finalise the remaining elements and put everything in place”, said Mário Centeno, President of the Eurogroup.
Indeed, it was the feeling of a glass half full that dominated at the end of this new marathon discussion between the major European economies, although the tone used by Bruno Le Maire, the French Finance Minister, was particularly optimistic.
“It is a beautiful day for Europe, a beautiful day for the euro area”, he said, even calling it later a “mini-revolution” at a joint Franco-German press conference. An expression that his German counterpart, Olaf Scholz, took up in his own words.
The previous evening (see EUROPE 12274/1), it seemed complicated to predict an outcome for this meeting, which was expected to finalise, in view of the Euro Summit on 21 June, a detailed proposal for a fiscal capacity architecture for the euro area, in accordance with the mandate given by EU heads of state or government at the end of 2018 (see EUROPE 12160/1).
In reality, only the questions on the objectives and support for the future instrument were the subject of a political agreement.
Thus, ministers agreed, without much surprise, that this tool should support public investment and structural reforms in order to strengthen convergence and competitiveness in the euro area. Exit for now, any need to set up a stabilisation function.
“The EC is still of the view that we need to have a stabilisation function if we want to address in the future asymmetric shocks and if we want to reach real convergence”, Mr Moscovici, however, reaffirmed.
On the basis of guidelines provided by the Euro Summit and the Eurogroup, States participating in this fiscal capacity (euro area countries and, on a voluntary basis, countries outside the euro area but part of the ERM II exchange rate system) will submit proposals for fiscal reform and investment.
If the Commission 'approves' these proposals, support will be provided in the form of grants, bearing in mind that the beneficiary countries should co-finance the projects concerned, to a varying extent. Finally, it should be noted that in the event of unsatisfactory implementation of reforms or investments, payments could be suspended or even cancelled.
The ‘financing’ component of this future fiscal capacity was undoubtedly the most sensitive. On the one hand, countries on Germany and France’s side want additional contributions, on top of the resources from the Multiannual Financial Framework (MFF) 2021-2027, to finance this instrument. On the other hand, some Northern European countries led by the Netherlands want only MFF resources to be mobilised.
During the meeting, it became clear fairly quickly that no agreement could be reached on this point. The reflection will therefore have to continue at the political level. The financial allocation of fiscal capacity will only be decided in the context of the negotiations on the MFF 2021-2027, as was agreed several months ago.
“The two issues could be resolved at the same time”, we were told.
Linked to this issue of financing fiscal capacity, the issue of governance is therefore not resolved. Indeed, if additional funding to the MFF were to be provided for this tool, a legal gymnastics would be necessary, including the elaboration of an intergovernmental agreement. This is something that the Northern European States do not want.
It was envisaged that governance within the Union's legal framework stricto sensu would first apply, and that the door would later be opened to an intergovernmental agreement. But this solution has not been the subject of a compromise, as the positions are still too far apart.
Also on governance, ministers agreed that the euro area budget will be established through a legislative procedure, on the basis of a Commission proposal. And this governance will have to be codified in an additional act, without it being known today when and how this will be done.
While some points have been agreed, several questions still need to be answered. The objective set last December has therefore been only partially met, after several Eurogroup meetings during this six-month period (see EUROPE 12257/6, 12230/4, 12212/10, 12192/18).
“If we look at where we are coming from, there is something positive”, one source told us. “We could have been much more ambitious”, said Giovanni Tria, the Italian Finance Minister.
Discussions will therefore continue. However, next week's Euro Summit is not expected to make further progress on fiscal capacity, as EU leaders are expected to take note of the outcome of the Finance Ministers' discussions and set new targets.
The aim is to make this instrument effective in 2021, as Mr Le Maire pointed out. Mr Scholz stressed the need and his desire to see the negotiations on this subject concluded in the coming months.
Reform of the statutes of the ESM. Optimism was much higher regarding the reform of the statutes of the European Stability Mechanism (ESM), the permanent rescue fund of the euro area.
Last semester, it had already been noted that the ESM will act as the common backstop of the Single Resolution Fund (SRF), the financial arm of the banking union's resolution component, and that it will have a more important role in macroeconomic crisis management (see EUROPE 12152/2). As such, a reform of the treaty governing this international organisation based in Luxembourg is necessary. The terms of this reform were to be agreed in June, again under the mandate given by EU leaders last December.
The objective has been achieved. After several months of technical work and a few hours of political discussions during this Eurogroup, an agreement has therefore been reached and will be presented for validation by the heads of state or government next week.
“The agreement on a series of reforms to the ESM treaty is in our view very welcomed.”, Mr Moscovici said. “This is a real progress”, although the political decision was “difficult” to take, said Klaus Regling, the managing director of the ESM.
Thus, the ESM will serve as the SRF safety net for no later than 2024 but potentially earlier, depending on the degree of financial risk reduction in the banking system. It will also play an increasing role in crisis prevention and management, and the conditions for access to the ESM’s precautionary instruments (ECCL and PCCL credit lines) will be simplified.
Nine points remained open in advance of this meeting, among them: - the sustainability of public debt; - compliance with the rules of the Stability and Growth Pact as a condition, for a solvent State in fiscal difficulty, of access to these credit lines; or - decision-making by a reinforced qualified majority and not by unanimity, in certain exceptional cases.
On the first point, the conditions were referred to the annexes and not to the body of the future revised treaty. And if Estonia has expressed reservations about the possibility of taking a decision by a qualified majority of 85% of the States, in some specific cases, this point should ultimately be retained.
In addition, the work also focused on strengthening the use of collective action clauses (CACs) in the context of sovereign debt issues. Thus, from 2022 onwards, it should be easier to restructure sovereign debt, regardless of the duration of the sovereign securities issued.
Following the approval of these new statutes by the Euro Summit, the Eurogroup will have to work in the coming weeks on rewriting the guidelines for the ESM. This should enable States to start the process of ratifying this future new treaty from December onwards.
EDIS. Finally, the results of the High-level working group on the European deposit insurance scheme (EDIS) were presented to the ministers.
Very little progress has been made in this direction, regretted Mr Moscovici and Mr Regling.
Several Member States, including France, want the next European Commission to be invited to give new impetus to this issue on the basis of a renewed mandate. The issue of completing the banking union in the euro area has been included in the draft strategic agenda for the first five years that the Twenty-Seven will adopt at next week’s European Summit (see EUROPE 12275/8). (Original version in French by Lucas Tripoteau)