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Macroeconomics 06 Jul 2018

European partners postpone euro reform

The European Council meeting held on June 28 and 29 took some steps toward euro reform; conclusion of agreements will likely occur at the next meeting in December. Although it was hoped that the summit would address key questions like the budget proposed by Germany and France, ultimately the European partners chose to adopt a minimum agreement. The agreement includes measures such as support for a banking resolution fund, but the reform of the euro was deferred.

Although the June meeting served as a forum for debate where the EU members’ positions were presented, some topics remained unresolved due to a lack of consensus. The European summit concluded without significant agreement on euro reform. Elements such as the approval of a European Deposit Insurance Scheme (EDIS) and the creation of an “anti-crisis” eurozone common budget, one of the priorities for the French president, Emmanuel Macron, have been left open until the next Council meeting.

The only area where the Council made some slight progress related to the economy was in regard to the Banking Union. Included among the agreed measures is the strengthening of the competencies of the European Stability Mechanism’s (ESM) by creating a single resolution fund (SRF) for which there had already been prior consensus between the twenty-eight members. European leaders are committed in the coming months to finalizing agreement about launching a security mechanism to address failed banks facing resolution.

Regarding the approval of a European Deposit Insurance Scheme, EU representatives concluded “we should begin work on a roadmap for beginning political negotiations.” Nonetheless, they have not set concrete dates for its approval, and discussions will resume at this year’s December meeting. Also to be addressed at a later time is the creation of a common eurozone budget, an initiative that didn’t even appear in the concluding statements of the European Council’s meeting.

An agreement to convert the European Stability Mechanism (ESM) into a kind of European monetary fund was also expected. However, this discussion was postponed to the end of the year as well.

“The Banking Union project will remain up in the air unless they take concrete measures to set up an EDIS. “There is a real risk that in the short term euro-zone member states won’t reach an agreement,” BBVA Research believes. The chief economist for Regulation at BBVA Research, Victoria Santillana, said: “It is essential they unravel this legislative standstill and move ahead in the mutualization of risks.” This, along with the lack of progress and the bare reference to fresh talks on the instruments of fiscal union (fiscal capacity, common budget), expose the deep divisions that exist among member states on euro-zone integration, BBVA Research believes.

The Banking Union project will remain up in the air unless they take concrete measures to set up an EDIS. There is a real risk that in the short term euro-zone member states won’t reach an agreement

Another key theme on the Council’s agenda was the U.K.’s departure from the European Union. According to Article 50 of the EU Treaty, the “Brexit” will go into effect on March 29, 2019. Yet there are still loose ends regarding the future relationship of the U.K. and its erstwhile European partners. The Council concluded that there has been progress to date but reiterated that there is still work to be done.

Elements of the negotiations that are pending agreement include the situation with Gibraltar and the future relationship between Ireland and Northern Ireland. In this respect, the European Council stressed that “negotiations can only progress as long as all commitments undertaken so far are respected in full.”

What started off as a meeting with economic objectives, was seen to be considerably influenced by recent events related to immigration and the control of Europe’s external borders. In regard to migration, a minimum agreement was adopted to fight against smugglers and prevent vessels in the Mediterranean from being used for human-trafficking. The creation of volunteer migrant shelters in EU member states was also proposed.

In regard to reform of the Common European Asylum System (CEAS), the Council recognized advances made to date, but urged European leaders to reach consensus based on the principals of responsibility and solidarity that will facilitate reform of the Dublin Regulation thus helping to provide a more rapid and effective response.

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