Arguments between leaders of the European Union at the final European Council of 2012 summed up how the eurozone crisis has evolved. Fire-fighting and questions over the currency’s very existence have been replaced by the politics of who pays. This tough issue has lurked in the background for much of the year, and now, with calmer markets and a banking- supervision deal reached, it has moved centre-stage.
Angela Merkel, Germany’s chancellor, who had killed off the idea of a simple pooling of eurozone debt in the shape of eurobonds, is determined not to see the return of that approach in a different form. Germany and its northern eurozone allies are firmly against forcing their taxpayers to find the money to solve the financial difficulties of other countries. So this summit set the scene for a theme that will dominate the eurozone debate in 2013.
As a result of this dilemma, the most recent scheme, which relates to a bank resolution fund, kept leaders occupied until the early hours of Friday morning. For the same reason, exploration of a separate eurozone budget with pooled resources was downgraded at this summit to little more than talk of a small ‘fund’ to contribute towards structural reforms. The arguments necessitated additions to the draft summit conclusions, spelling out that a bank resolution mechanism “should be based on contributions by the financial sector itself”, rather than requiring further pooled resources.
“This backstop should be fiscally neutral over the medium term, by ensuring that public assistance is recouped by means of ex post levies on the financial industry,” the leaders agreed. Critically, another line was added to the summit conclusions: “It is important to ensure a fair balance between home and host countries.”
Merkel talked tough at the conclusion of the first day of talks. “This winding-up mechanism – and this has been elaborated very clearly in the documents – must not be at a cost to the taxpayer but must be set up so that those who bear responsibility for the failure of the banks also bear the costs,” she said.
Discussions about bank resolution showed that leaders were ready to inch forward after the deal on supervision that had been agreed by the EU’s 27 finance ministers barely 12 hours before the European Council started. But this is no more than a first step. A bank resolution arrangement – because it carries with it the thorny question of one country paying for the winding up of a bank in another – is likely to prove even more controversial than supervision.
Few believe that supervision without powers of resolution is sufficient – a point reiterated by Mario Draghi, the president of the European Central Bank (ECB), when he spoke to the European Parliament’s economic and monetary affairs committee on Monday (17 December).
Under the agreement reached, the ECB will take on the role of pan-eurozone banking supervisor, but a separate agreement will be necessary before it has the power to wind down stricken banks. Summit conclusions said that the Commission would propose a single resolution mechanism “in the course of 2013”, with the intention of it being adopted before the European Parliament elections in June 2014. Draghi said he wanted his institution to have bank resolution powers by the time that it takes over bank supervision in March 2014.
Much of the rest of this European Council was characterised by a watering down of ideas to strengthen economic and monetary union. Leaders were at pains to stress that they had not become complacent, that they accepted that economic and monetary union had to be strengthened, and that the eurozone’s “architecture” needs to be “completed”. Yet this European Council showed that they have little appetite for anything revolutionary unless or until the crisis flares up again and their hands are forced.
The leaders of the member states diluted still further the attempt by the European Commission and Herman Van Rompuy, the president of the European Council, to introduce contracts between member states and the EU institutions that would oblige them to deliver economic reforms. A pre-summit draft of the conclusions – itself already an attenuation of earlier tougher drafts – had said: “Individual arrangements of a contractual nature with EU institutions on the measures and reforms [the member states] commit to undertake could enhance ownership and effectiveness.” The contracts would apply to eurozone countries, it added, while non-eurozone countries could choose to enter similar arrangements. And it said the European Council would return to the issue in March. The revised version of the conclusions merely asks Van Rompuy and the Commission to present possible measures to the European Council in June, including, among other things, “the feasibility and modalities of mutually agreed contracts for competitiveness and growth”.
Merkel and François Hollande, the president of France, separately said that proposed contracts between member states and the Commission on structural economic reforms would be voluntary. “I believe that it is the right thing to do to allow countries to enter or not to enter into contracts,” Hollande said. But he added that it was important to guard against national economic policies that harmed the rest of the eurozone.
Merkel described the “shared determination” not only to preserve the euro as a currency “but also to strengthen its foundations”. The truth is that it was she who blocked many of the more radical suggestions floated by Van Rompuy in his work on the ‘roadmap’ for deeper economic and monetary union that leaders had ordered in June. The concept of a separate eurozone budget was reduced to “solidarity mechanisms that can enhance the efforts made by the member states” to implement structural reforms. Leaders did not agree on a timeframe, and much less on an idea – even approximate – of the fund’s size. Hollande, who had been the most vocal supporter of a fully fledged budget, said, tellingly, that he could live with a sum as low as €20 billion. And, in Merkel’s view, “This is a very limited budget, perhaps €10bn, €15bn, €20bn”.
No longer is the debate about doing – as Draghi once said – “whatever it takes” to save the euro. This European Council set the tone for a long debate about who is going to foot the bill.