EU discussions dominated by reform of frail financial system
EUROPEAN DIARY:Meetings in Deauville and Luxembourg moved a small step closer to recasting the EU to better withstand crises
ALBEIT AT a halting pace, new governance rules in the EU economic system are taking shape. Many hurdles remain to be cleared but a new deal seems closer now after key meetings yesterday in Luxembourg and France.
As EU finance ministers met under the chairmanship of European Council president Herman Van Rompuy in Luxembourg, German chancellor Angela Merkel prepared to meet her French counterpart Nicolas Sarkozy in Deauville.
At the outset of the Luxembourg meeting mid-morning, positions were said to be polarised as ministers discussed whether sanctions against persistent transgressions should be quasi-automatic or whether an element of political discretion should be retained.
By its close about teatime, Merkel and Sarkozy had issued a joint declaration which pointed to an effective settlement of a wider alignment between Berlin and Paris on permanent measures to deal with grave financial crises.
There was some surprise in Luxembourg at this turn of events. In all likelihood, however, the demarche could well force the pace of events when EU leaders descend on Brussels next week to discuss the reform plan in their autumn summit.
The stakes couldn’t be higher. When Greece went to the brink of the abyss last spring, the very existence of the single currency was thrown into question – and with it the viability of the EU itself. “If the euro zone had fallen apart it would have been the end of the European Union,” Mr Van Rompuy said in a recent New York Times interview.
That did not happen, thanks in the main to a series of extraordinary ad hoc interventions. Now, however, EU leaders are confronted with the inevitable task of recasting the foundations of a frail system which proved all too vulnerable to shock.
The dilemmas here are tough, there’s no miracle solution and effective measures carry with them the prospect of pain.
At issue first are the terms of the core reform package from economics commissioner Olli Rehn, which involves increased fiscal surveillance and new sanctions against errant governments.
Also in the frame is the future of the €440 billion loan guarantee scheme for distressed euro members, a temporary safety net that may now be made permanent. The price for that, however, may be the development of formal procedures for “orderly national insolvencies”.
That these are big, big steps is obvious. As Ireland struggles with a mammoth budget deficit and a giant-sized bank bailout, all of these moves will have no small impact on domestic affairs. At the very least, they mean greatly increased oversight from Brussels and much less national lassitude when it comes to economic policy.
In the not-so-distant future, a new European referendum may well be in prospect if EU leaders agree to follow Merkel’s push for treaty change. While there’s little appetite for that in Dublin and other European capitals, the response in Berlin is “so be it”. As the biggest contributor to the bailout schemes for Greece and any other distressed euro member, Germany has no qualms at all in seeking to impose its will on its EU partners.
For months, Merkel stood alone on the question of treaty change. Now Sarkozy has come on board. In their Deauville declaration, the two leaders said they consider narrow amendments to the EU treaties are needed and that Van Rompuy should be asked to present “concrete options” for the establishment of a robust mechanism for the resolution of sovereign financial crises when EU leaders meet next March for their spring summit.
Specifically, Paris has joined Berlin’s push for a mechanism “to ensure orderly crisis management in the future, providing the necessary arrangements for an adequate participation of private creditors and allowing member states to take appropriate co-ordinated measures to safeguard financial stability of the euro area as a whole”.
In other words, the quid pro quo for extending the life of the ad hoc bailout fund would be the introduction of graduated default procedures under which distressed sovereign borrowers would be empowered to seek an extension on the maturity of their debt and, in extreme cases, a “haircut” on the monies due to their lenders. According to a well-placed German source, such measures would apply only to debt issued after the enactment of the treaty change.
Furthermore, Sarkozy now sides with Merkel on her demand for a suspension of a government’s EU voting rights following any “serious violations” of its requirements under newly strengthened budget rules.
The price of Sarkozy’s acquiescence to all this is a weakening of the “quasi-automatic” sanction procedures sought by Rehn.
France – backed by Spain and Italy – favoured retaining an element of choice. Until yesterday at least, Germany was at one with the Netherlands and the Nordic states in seeking a stronger automatic element to penalties.
That’s changed now. Ministerial agreement on sanction procedures and the role of debt in economic surveillance will go for sign-off by EU leaders next week. While these changes don’t require any treaty change, events in Deauville suggest a reopening of the EU’s basic law is again on the cards.