THE president of the European Commission, Jean-Claude Juncker, likes to compare the euro zone to a house in need of repair. Fix the roof, he counsels, while the economic weather is favourable. Leaders from across the European Union will have the opportunity to take that advice when the European Council meets in Brussels on June 28th-29th.
In preparation Emmanuel Macron, France’s president, and Angela Merkel, Germany’s chancellor, laid out joint proposals for reforms on June 19th. The result of weeks of ministerial negotiation, they reconciled long-standing differences on the future of the currency bloc and set the scene for discussion at the wider summit. In a victory for Mr Macron, the Germans have consented to a euro-zone budget. In other areas, notably banking reform, progress is likely to be halting.
The reforms aspire to mend the institutional weaknesses revealed during the years following the financial crisis. Lacking control over interest rates and the ability to devalue their currencies, some countries struggled to cope with violent economic shocks. Some, like Greece, were stuck in a “doom loop” where wobbly banks destabilised the governments supporting them, which in turn weakened the banks holding government bonds.
To be fair, the bloc has already done quite a lot. At the height of the crisis, a bail-out fund was cobbled together for emergency lending to countries that lost access to capital markets. In 2012 the euro zone agreed to establish a banking union to contain risks and break the doom loop. The European Central Bank now supervises all the euro zone’s systemically important banks. If a bank needs winding down, the Single Resolution Board provides short-term funding and imposes losses on creditors, limiting the cost to the taxpayer.
But more than five years on, banking union remains incomplete. Mr Macron is keen both to push through those remaining reforms, and to go further. His proposal for a euro-zone budget aims to ensure members’ economies continue to converge and to help those buffeted by external events. New prime ministers in Italy and Spain appear to agree.
The Germans, Dutch and Nordics, however, resist the pooling of risks across the bloc. They worry that fiscally prudent countries would end up subsidising profligate ones. Italy, where an earlier version of the new governing coalition seemed to scorn the euro zone’s spending rules, will not have reassured them.
The Franco-German compromise gives the nod to various proposals from the European Commission. The first involves reforms to the euro zone’s sovereign bail-out fund, the European Stability Mechanism (ESM). It would act as a backstop to its bank-resolution board, beefing up banking union. And countries that have been prudent, but suffer an economic shock, would be given access on relatively lenient terms to a precautionary line of funding, so they could seek money before they lose access to the markets. So far most ESM lending has been to countries already cut off from markets, and conditional on implementing tough structural reforms.
All this would be a step forward, says Guntram Wolff of Bruegel, a think-tank. But he thinks the reforms should go further. The French and Germans agreed to keep the governance of the bail-out fund unchanged. But it is too complicated. In order for it to be tapped, finance ministers must reach unanimous agreement. National laws mean that parliaments in some countries, notably Germany, must grant their approval. That could stop the fund winding down a failed bank swiftly over a weekend, as it may need to.
But the Germans insisted on national control, saying that it has not held up decision-making so far. Their reservations also stymied immediate progress towards a common deposit-insurance scheme. Mr Juncker had hoped to soothe northerners’ fears with a gradual implementation during which the common fund would lend to national schemes in times of trouble. His hope that banking union would be complete by 2019 now seems unrealistic. A proposal from the commission to create securities backed by a pool of sovereign bonds has been nixed. Without it, banks will have little incentive to diversify sovereign risk.
Mr Macron’s prize is a concession from Germany on the euro-zone budget. For the first time, the French point out, Germany has acknowledged that macroeconomic stabilisation is not a matter for national governments only, but a common concern. Though Mr Macron envisions a budget in the region of several percent of GDP, Mrs Merkel is known to want something much stingier. Nevertheless, as Mr Macron says, it would be a “real budget with annual revenues”. He would like to see it raise revenues directly, possibly from a financial-transactions tax, though that would be contentious.
Most of the money would be invested in innovation, helping economic convergence. There is a mention, too, of an unemployment-stabilisation fund to act as an emergency credit line for national unemployment-insurance schemes. But such a design, which accords with German nervousness about fiscal transfers, might not be enough in deep downturns.
Mr Macron and Mrs Merkel may finally agree on the merits of a central budget. But others must now be convinced. Mrs Merkel’s coalition partner, the Christian Social Union, has expressed scepticism. The Dutch prime minister, Mark Rutte, has said he sees little point in it if countries keep their public finances in order. Yet even a well-maintained roof may spring a leak.