Source: The Wall Street Journal
With disparate proposals to cut risk in the currency union, Europe’s finance chiefs have raised a high bar to progress
After ignoring the question of how to make the eurozone more shock-resistant for the better part of a year, the currency union’s finance chiefs seem to have found a new way of avoiding progress: pushing so many different ideas at once that gridlock is unavoidable.
First out the gate was French Economy Minister Emmanuel Macron, who wants the eurozone to set up an economic government, with its own budget and parliament, as well as a finance minister to distribute investments and steer labor-market policies. “The status quo will lead to self-destruction,” Mr. Macron warned in a recent interview with German daily Süddeutsche Zeitung.
A few days later, Jeroen Dijsselbloem, the Dutch finance minister who also presides over the meetings of his eurozone colleagues, suggested that what the currency union needs is more “convergence,” or streamlining, of national economic policies—but no new institutions to enforce, incentivize or legitimize them. If governments want their citizens’ support for the euro, they have to ensure it leads to prosperity and prevent one country’s bad tax rules from creating problems for its neighbors, said Mr. Dijsselbloem.
Next up was Jean-Claude Juncker, the president of the European Commission, who in his “State of the European Union” speech promised to present proposals for a European deposit-guarantee system in the coming year and, further down the line, a European treasury.
Many economists see a common system for insuring deposits as a logical—and necessary—part of the eurozone’s “banking union,” complementing the centralized supervisor and the resolution authority that were created to prevent failing banks from bankrupting their governments. In other words, once a broken lender has been identified and the cost of resolving it has been shared among its shareholders and creditors, what is needed is a big pot of money to compensate savers with less than EUR100,000 in their accounts.
The commission proposal is likely to be less ambitious. Instead of having one fund for all 19 euro countries, the proposed system is expected to supplement national funds running low on their own resources with credit lines from their eurozone counterparts.
Even this scaled-down reinsurance system is too much for Germany, the leading opponent of mutualizing risks in the currency union. Yet, rather than ruling it out from the get-go, Finance Minister Wolfgang Schäuble is pursuing a new strategy.
“One has to be careful not to put the cart before the horse,” he told reporters after discussing the issue with his eurozone colleagues on Saturday.
Before teaming up to protect savers, Mr. Schäuble argued, the bloc has to take a host of other steps. Among them are obvious ones—such as requiring all countries to actually implement the agreed rules on imposing losses on bank investors—but also some that are clearly designed to delay progress. These include requirements for banks to build up capital buffers for government bonds and a system to restructure excessive government debts. (Finland, a traditional ally of Germany, has already convened its own expert group to look at how best to restructure sovereign bonds).
Even a eurozone finance minister isn’t unthinkable, Mr. Schäuble said, but before going there, the decision on whether national budgets are in line with EU rules should be taken out of the hands of the European Commission. Instead of the EU executive, which he said is less strict with large countries such as Germany or France, an independent “fiscal board” should be given the power to strike down national spending plans.
With this wish list Mr. Schäuble pulled a classic divide-and-rule move. Obvious supporters for a common deposit-insurance system and a centralized budget such as Italy or Portugal are bound to block any initiatives that would make their own large debts seem less safe. The European Central Bank, which favors a strong banking union, meanwhile, doesn’t want to get rid of the zero-risk labeling for government bonds in the eurozone unless others around the globe do the same for their own debts.
There are some ways to unblock the logjam. Rather than immediately force banks to hold significant capital on their holdings of government bonds, European regulators could set limits for how many bonds from one country a bank can hold, suggests Christian Odendahl, chief economist at the London-based Centre for European reform. That, he says, could help overcome German resistance to a limited deposit reinsurance system.
But officials involved in the discussions among ministers aren’t overly optimistic. “There’s no pressure,” says one of them. With policy makers’ attention focused on dealing with the refugee crisis and no imminent threat to the eurozone, progress on reinforcing Europe’s monetary union is bound to be slow.
“Improving EMU can only happen if we move in parallel on all fronts,” Benoît Cœuré, the French member of the ECB’s executive board, said after ministers’ deliberations last week.