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At the E.U. Summit, Cohesion May Be Elusive At the E.U. Summit, Cohesion May Be Elusive
(about 4 hours later)
BRUSSELS — With market pressure on their single currency easing for now, will European Union leaders meeting here Thursday and Friday return to a familiar pattern: bickering and delaying promised reforms that could solve the euro crisis? BRUSSELS — European Union leaders sought Thursday to overcome sharp differences over how to improve supervision of their banks and budgets, at the start of a two-day summit meeting aimed at resolving the euro zone crisis.
A pledge in September by the European Central Bank to buy unlimited quantities of bonds has steadied borrowing costs in some of the most vulnerable euro-area countries like Spain. That, in turn, has bought more time for the Spanish prime minister, Mariano Rajoy, to decide whether and when to make a formal request for aid. But with market pressure on their single currency easing, at least for now, there were already signs that leaders could return to a familiar pattern of bickering, which could delay already agreed-to changes, like creating a single regulator for all euro zone banks.
And with negotiations still up in the air over providing more assistance to Greece, the focus of the E.U. meeting here is expected to be on making Europe’s economic and monetary union more cohesive. One of the issues overhanging the meeting is a dispute between France and Germany on whether to create such a supervisor by January, as the European Commission has proposed. Paris is pushing to meet that deadline.
But that could prove a combustible topic for France and Germany. Agreement between governments in Paris and Berlin is seen as vital to any steps toward further integration in Europe that could ensure the survival of the common currency for the 17 E.U. countries that now use it. French leaders have also pressed for speedy adoption of European legislation to tighten budget discipline across the euro zone, as well as measures to pool at least some of the euro zone countries’ debt.
An immediate concern at the summit is the conflicting positions of France and Germany. Paris emphasizes speedy adoption of legislation to tighten budget discipline across the euro zone; ideas to put all European banks under a central supervisor, and moves toward pooling at least some of the euro zone countries’ debt. Germany, though, is pressing for even greater powers of intervention by the most solvent countries to enforce budgetary discipline in the euro zone. Germany, by contrast, has emphasized a more cautious approach and is seeking even greater powers of intervention to enable the most solvent countries to enforce budgetary discipline in the euro zone.
The summit is “likely to pit Germany and its allies against various coalitions of E.U. countries on a number of issues,” said Christian Schulz, a senior economist at Berenberg Bank. “This should be no surprise: as market pressures recede, the pressure to compromise for Germany is receding, too.” The French-German dispute matters. Agreement between governments in Paris and Berlin is seen as vital to any steps toward further integration in Europe and for ensuring the survival of the common currency for the 17 E.U. countries that use it.
Mr. Schulz also warned that such “disagreements could revive investors’ doubts about Europe’s resolve to overcome the crisis” and “could leave the euro-zone more vulnerable to the next bout of panic which can occur at any time.” Ahead of the Brussels meeting, Chancellor Angela Merkel of Germany signaled the need for caution and a much grander vision for how to secure the longevity of the euro.
The summit could quickly bog down over thorny questions of how far, and how fast, nations sharing the euro should move toward knitting together their banking systems and budgets. “We are of the opinion — and I speak for the whole German government on this — that we could go a step further by giving Europe real rights of intervention in national budgets,” Ms. Merkel told lawmakers in Berlin on Thursday.
Ahead of the summit, German Chancellor Angela Merkel staked out a maximalist position. That earned a tart riposte from President François Hollande of France, who said that budget intervention “is not on the agenda,” as he arrived at the meeting.
"We are of the opinion — and I speak for the whole German government on this — that we could go a step further by giving Europe real rights of intervention in national budgets," Mrs. Merkel told lawmakers in Berlin on Thursday. “The only decision that will be taken is to set up a banking union by the end of the year and especially the banking supervision,” Mr. Hollande said.
She also voiced support for the idea proposed by her finance minister, Wolfgang Schäuble, of a European currency czar that would have wide-ranging powers to intervene in national budgets. The creation of a single banking regulator for the euro area was supposed to be a relatively straightforward matter after leaders agreed at a summit meeting in late June to put all lenders in the region under the aegis of the European Central Bank.
Mr. Schäuble has already questioned the effectiveness of proposals by Herman Van Rompuy, the president of the European Council, who has prepared a report on reforming economic and monetary union for the leaders to discuss. In the German finance minister’s view, Mr. Rompuy’s options are still far too weak to ensure the survival of the euro zone. Mr. Schäuble says the E.U. needs to go beyond them by implementing treaty changes. The idea was eagerly supported by Ireland, Italy and Spain, because it would be a precursor to letting weak banks in those countries tap Europe’s new bailout fund directly, without loading more debt on those countries’ governments.
By contrast, President Francois Hollande of France has emphasized the need for swift moves to sharing debt as a way of shoring up the stability of the single currency, and he has put a new emphasis on creating so-called Eurobonds. Such bonds would make euro area countries jointly liable for debts run up by individual members of the currency union. It is a move steadfastly opposed by Germany, which says shared debt if it ever is allowed should could come only after greater political integration of the euro zone — to give Berlin, for example, greater say in how other countries are managing their share of the debt. Since June, though, Germany has balked at proposals by the European Commission and France to put all 6,000 lenders in euro zone countries under the supervision of the regulator in a system that would be phased in starting Jan. 1.
“Political union is for later,” Mr. Hollande bluntly told a number of international newspapers on Wednesday that included French daily Le Monde. The government in Berlin wants to ensure that the E.C.B. first has the proper capacity to do that job, while a number German regional leaders are opposed to greater scrutiny of state and local banks by the central bank.
Mr. Hollande also emphasized that euro zone countries should be given the capacity to stimulate internal demand with salary rises and tax cuts. “If we don't breathe some life into Europe's economy, budget discipline measures won't work,” said Mr. Hollande. Moreover, last month finance ministers from Germany, Finland and the Netherlands set off new alarms with a joint statement proposing that any bank rescues from the bailout fund go only toward future problems — not to help clean up current messes.
French officials also have underlined their support for plans to set up a single banking supervisor for euro area banks by the end of the year that would cover all 6,000 lenders in countries that use the single currency. Non-euro Eastern and Central European countries have their own concerns about a potential run on their banks, which would not be part of the new central system or backstopped by the European bailout fund.
Yet there are problems here, too. And then there is Britain, which is an E.U. member but has its own currency. The British are seeking to secure a voting system that would ensure that decisions cannot be imposed on Britain’s banks by the euro zone countries working together as a bloc.
Britain, which is an E.U. member but has its own currency, is seeking to secure a voting system that ensures that decisions cannot be imposed on British banks by the euro zone countries working together as a bloc. Eastern and Central European countries have their own concerns about a potential run on banks not regulated by the new single supervisor and backstopped by the European bailout fund. And although Britain does not intend to submit its banks to the new supervision system, its prime minister, David Cameron, was expected to press at the meeting for the system to cover a large number of banks and to include plans for a resolution system for shutting down banks and a common deposit-guarantee system.
The banking union proposals are also a problem for Germany. The government in Berlin wants to ensure that the European Central Bank, which is meant to take over the supervisory role, first has the proper capacity to do that job. Meanwhile, a number German regional leaders are opposed to greater supervision of state and local banks by the E.C.B. Some diplomats said Germany could signal support for allowing the centralized bank-oversight system to get underway as soon as next year — perhaps in exchange for pledges by other euro area countries for robust supervision of a euro-zone-only budget. But they said an overall deal was unlikely.
Some analysts characterize some of Germany’s demands, in particular changes to the E.U. treaties, as merely a negotiating position rather than a red line during the upcoming talks in Brussels. “There might be some progress,” said an E.U. diplomat who spoke on condition of anonymity because the talks were going on behind closed doors. “But you can say something positive without achieving any progress at all,” the diplomat warned.
“By staking out an extreme position on treaty change which no other countries have appetite for, Germany may actually get what it really wants,” Mujtaba Rahman, an analyst with the Eurasia Group, said Thursday. Another French-German dispute focuses on the possible creation of a budget strictly for euro zone countries. France has strongly argued in favor of using that pool of money to fight sudden shocks to individual euro area economies.
Those German desires include, above all, another form of fiscal surveillance, which have been dubbed “contracts,” in exchange for agreement on a separate budget for the euro zone that could be backed by a central treasury that would have the ability to borrow money. Such a weapon would differ in important ways from the new European Stability Mechanism, the bailout fund that held its first board meeting this month, by providing direct aid.
Talks to create such a budget still could gain traction at the summit, partly because France has strongly argued in favor of creating a new pool of money available to fight sudden shocks to individual euro area economies. But Germany has emphasized the need for another form of fiscal surveillance, or “contracts,” in exchange any such budget for the euro zone.
That new weapon would differ in important ways from the new European Stability Mechanism, the “bazooka” fund that held its first board meeting during the past week. Instead of loans, which the E.S.M. is set up to provide, the pool that the French are describing would provide direct aid to troubled countries. Germany also wants any such budget to encourage structural changes rather than be used simply to fight fires.
For all the expected debate, though, some analysts warn of what they see as an absence of urgency to tackle the most pressing problems still overhanging the eurozone. For all the expected debate, though, warnings are growing louder of a creeping lack of urgency to tackle the most pressing problems still hanging over the euro zone.
“While political pressure on Spain to request a bond-buying program is mounting, market pressure on Spain is waning,” said Nicholas Spiro of Spiro Sovereign Strategy in a note. The credit agency Moody’s last week down-graded Spain’s debt to just above junk-bond status. But, Mr. Spiro wrote, “the decision by Moody's not to ‘junk’ Spain has, paradoxically, made it even less likely that the Rajoy government will apply for a bond-buying program any time soon.” A pledge in September by the European Central Bank to buy unlimited quantities of bonds has steadied borrowing costs in some of the most vulnerable euro zone countries like Spain. That decision has taken the edge off the crisis but could set the scene for a new outbreak of market jitters.
In the case of Greece, little is expected from the summit beyond a statement designed to paper over the slow pace of the negotiations with Athens, and to lend support for Prime Minister Antonis Samaras. “It is very important that the summit now maintains the momentum of reforming the economic and monetary union including the banking union,” Olli Rehn, the European commissioner for economic and monetary affairs, said Thursday. “Now the political will of member states is tested.”
In the case of Greece, little is expected from the summit meeting beyond a statement designed to paper over the slow pace of the negotiations with Athens, and to lend support for Prime Minister Antonis Samaras.
“The language will welcome action that Saramas has taken, and it will encourage him, but it won’t put pressure Greece or take the pressure off of Greece,” said one diplomat, who spoke on condition of anonymity ahead of the formal meetings in Brussels.“The language will welcome action that Saramas has taken, and it will encourage him, but it won’t put pressure Greece or take the pressure off of Greece,” said one diplomat, who spoke on condition of anonymity ahead of the formal meetings in Brussels.