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Macroeconomics 28 Jun 2018

A key meeting for Europe's future

The Council of Europe will hold its June summit at a complex time with significant challenges on economic, political, and social issues. As BBVA Research points out, it also represents an opportunity to further strengthen the EU’s Economic and Monetary Union. As such, the reform of the euro will be one of the decisive elements, although also one of the most controversial.

The U.K.’s departure from the European Union, the immigration crisis, growing protectionism from countries like the U.S., and Euroscepticism are challenges that will headline at the European Council’s meeting, which starts today. Nonetheless, the main challenge facing Europe’s institutions and member countries is the very future of the EU itself. There is a clear opportunity to further strengthen Economic and Monetary Union (EMU). Although there is consensus on key topics such as open markets and the invigoration of the single market, the truth is that the European Council will have a lot of work to do to reach agreements that will allow the reforms needed by the EU.

BBVA’s research services arm singles out the completion of the Banking Union and defining the future role of the European Stability Mechanism (ESM) as priorities. In doing so, Victoria Santillana, a BBVA Research economist, warns that it will not be possible to achieve these priorities until a European Deposit Insurance Scheme (EDIS) and a common mechanism backing the Single Resolution Fund are implemented. She believes it is essential for the European Council to define a specific time frame for addressing these issues.

The main obstacle for their approval lies in the differing approaches of various European members. On one hand, there are those who believe the priority should be placed on reducing the risks inherited from the crisis without establishing measures that entail any kind of “mutualization.” On the other hand, there are those who prefer to push for the finalization of Banking Union with a joint EDIS before addressing the lingering risks. The Spanish government, among others, aligns itself with the latter position.

A precursor to the summit took place last June 19th at Meseberg Castle (Berlin) in a meeting where the German chancellor, Angela Merkel, and the French president, Emmanuel Macron, established the basis for revamping the euro. They agreed on the creation of a eurozone budget from 2021, as well as a European Unemployment Fund that would reduce the risks of future crises. These proposals, however, have not met with the unanimous acceptance of Europe’s member states. Member states such as the Netherlands, Ireland, Malta, Belgium, Luxembourg, Finland, Austria, the Scandinavian countries, and the Baltic republics view these types of measures as unnecessary and believe they only serve to increase moral hazard among European members.

Beyond the EU structure itself, the Council of Europe members will address other topics of specific importance to Europe. In the coming days, European leaders anticipate debating a common reform to immigration policy and the Common European Asylum System (CEAS), which will help formulate a pan-European response to the massive arrival of immigrants and refugees on the shores of Italy, Greece, and Spain. To this end, the Council of Europe recently raised the possibility of creating refugee centers outside the EU’s borders to administer the arrival of immigrants, a proposal that will be debated by European members at the summit.

Another agenda item will be the status of negotiations with the United Kingdom. Attention will mainly focus on finalizing pending work for the U.K.’s final departure from the EU in March 2019. The fundamental questions will be the border between Ireland and Northern Ireland and the framework that will define the United Kingdom’s future relationship with its erstwhile European partners. In regard to this final point, and despite the advances made for the conclusion of the Brexit, bodies such as the European Banking Authority have already warned the finance industry that they need to be prepared for a possible “no-deal Brexit.”

On matters of security and defense, the European leaders will review the EU-NATO cooperation (given that the NATO summit will take place in July). Topics such as Permanent Structured Cooperation, military mobility, and the future of the European Defense Fund, created by the European Commission in 2016, are also topics that will be discussed. Depending on the conclusions reached, the Council of Europe does not discount addressing questions related to EU foreign policy.

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