The "Gang of Four" leaders of the European Union--European Council President Herman Van Rompuy, European Commission President Jose Manuel Barroso, ECB President Mario Draghi, and Eurogroup President Jean-Claude Juncker--released a plan (PDF) on June 25 calling for an EU banking and fiscal union (WSJ).The proposals are part of a comprehensive effort to spur further European integration and combat the ongoing eurozone sovereign debt crisis and will likely dominate the EU Council summit on June 28-29. Approval of the plan would send a "strong," positive signal to financial markets, says Benedicta Marzinotto, a research fellow at Brussels-based Bruegel. "At the same time," Marzinotto notes, "it's very important that the EU continues its commitment to growth" in the form of increased capital to the European Investment Bank and project bonds.
Financial markets have been exploiting the fact that markets and banks are fragmented along national lines. Now, with the banking union, there is no room for more hazards, and it's a very strong [deterrent] to bank runs.
What should we expect from the EU summit, and will there be a strong push for new growth measures?
There are quite a lot of expectations ahead of this one. I'm hoping this time is different [from other EU summits that failed to deliver concrete measures] mainly because of the letter that [European Council President Herman] Van Rompuy submitted, which includes a proposal for a banking union--which is very important, and not easy, because for some time national financial supervisors have been skeptical about the idea of devolving sovereignty to the European level. At the same time, I don't think that the growth measures are going to be the main pillar of the negotiations; they will end up being a secondary item.
In terms of the plan proposed by Von Rompuy and other EU presidents yesterday, how would a banking union be constructed? And what are some of other pieces of the plan, including the proposed fiscal union?
The proposed banking union has three elements. One is European supervision, so national supervisors [the central banks of EU countries that supervise the banking sector] may give up part of their sovereignty. That task is going to be performed, if they agree, by the European Central Bank. The second item is the common European public insurance, which is important in the current context, where there is a high risk of bank runs. The third element is a resolution scheme and resolution funds, whereby there is a European-level authority that deals with bankruptcies so that there is less of a probability that taxpayer money is being used to rescue banks.
The other part of the proposal is the fiscal union. Mutualizing the debt is now completely off the agenda. What they're suggesting is a first step toward a fiscal union, where the European Commission will be able to look at national budgets before they are approved in parliament and possibly recommend revisions to the draft budgets.
Where does Germany--the de-facto leader of the EU--stand on these proposals?
The letter by Van Rompuy, which contains the elements I just described, is a very good compromise between the German and the French positions; it's realistic. The banking union would be launched for the entire EU. The end result will be that many countries not in the eurozone will not agree to the banking union, which is not a major problem, because you can go ahead legally with the eurozone group. So Germany would not have any special resistance to the banking union, and also is very keen, on the other hand, on the fiscal union, because it has an interest in controlling other countries' budgets, or at least having an authority like the European Commission that makes sure that fiscal discipline is really respected.
A fiscal union in the long term cannot be called as such if it doesn't have something like eurobonds, but politically at the moment it isn't [feasible], so what they will agree on is stronger intervention rights for the Commission, but not to the point that they will actually lay down a road map for eurobonds.
Would you say the eurozone crisis hotspots of Greece, Spain, and Italy are now contained? What are the next steps for alleviating the sovereign debt crisis in those countries?
It's important that, if this decision of the banking union is achieved, the momentum for stimulating growth is not lost.
I don't think the situation is contained, but the banking union [proposal] will send a very strong signal to financial markets. Financial markets have been exploiting the fact that markets and banks are fragmented along national lines. With the banking union, there is no room for more hazards, and it's a very strong [deterrent] to bank runs. We see capital outflows, especially out of Greece, of course, but also out of Spain, so that's an important issue.
At the same time, it's very important the EU continues in its commitment to growth. It's important that, if the banking union is achieved, the momentum for stimulating growth is not lost. There are different growth proposals that the European Union is putting forward. On the agenda [is] the use of unallocated structured funds; there's an outstanding amount in the European Union of $60 billion, so there will be an initiative for accelerating the absorption of these funds. The other [proposal] is to increase the capital of the European Investment Bank, which issues bonds to finance large infrastructure projects. The third item is project bonds--bonds issued with the purpose of financing investment. The authority issuing this bond is not a European authority like the European Investment Bank, but a private issuer, and what the EU does is only [provide] credit enhancement to this private issuer. There will be a pilot project for these bonds.
What are the broader risks of eurozone contagion to the global economy?
The risk of [global] contagion is high at the moment; it will diminish dramatically the minute that the banking union project goes ahead.
The risk of contagion is high at the moment; it will diminish dramatically the minute that the banking union project goes ahead. It will be deemed to have increased financial stability in the eurozone. There are on international financial markets huge asymmetries of information and doubts about the national regulatory frameworks when it comes to supervision, so having a European supervisory authority will introduce more clarity and will provide more confidence and more stability to the outside.