Moment of truth for Europe

The next EU-summit will not show very substantial results. The European Union is too deeply divided for that to happen. A column by Charles Wyplosz.

Charles Wyplosz
«The elites are awestruck by Trump, Brexit and Italy.»

At the end of June, the Heads of States and Governments of the European Union will meet for their bi-annual Summit. Beyond the now usual Brexit issue, the need to face up to Trump and the fate of Greece, they will make «historical» decisions about the future of the Eurozone, they always do. The most likely outcome will be disappointing, it always is. This time, however, the stakes are higher than usual, because this summit has long been awaited.

This will be the end of a long sequence opened by the election of Macron in France. At a time or rising euroskepticism, his election seemed to show that the people do not really hate Europe, only the way it is mismanaged by grey, spineless politicians and a bureaucratic Commission. Macron then proceeded with ambitious speeches. Yet, nothing could happen without Germany, and Germany had first to go through elections, followed by a lengthy period of formation of the government. Now, even if Italy is in a flux, for the first time in one year the stage is ready for a showdown.

But Chancellor Merkel emerged weakened. On Europe, the three parties of the coalition are split down in the middle between pro-Europeans and Euroskeptics. She obviously wishes to respond to Macron’s enthusiasm, but she is not the enthusiastic type, and she must be even more prudent than she famously is normally.

Macron’s plans and reality

In fact, Macron’s pro-Europe enthusiasm is rather superficial. While he has thought long and deep about what he wants to do in France, his early proposition were either lyrical (encourage high-school students to visit other countries or organize grass-root debates on the future of the Europe throughout the continent) or a mere restatement of long-held French ideas that no other country really supports, like a Eurozone Finance Minister with a sizeable budget. This has made life difficult for other leaders who would have liked to jump on Macron’s European bandwagon, especially so for Merkel, but not only.

At this stage, on many issues, Europe is deeply split. The Northern European countries are totally opposed to paying for their Southern partners. The Eastern Europeans do not want to hear anything about taking in refugees who currently are in the West, mostly in Germany and Italy. Italy not only feels abandoned on this question but it also considers that solidarity, inscribed in vague terms in the Treaty, means helping out with their huge public debt. Furthermore, like many other countries these days, Europe’s public opinion is divided between the pro-European «elites» and the euroskeptic «masses». The elites are awestruck by Trump, Brexit and Italy. Some, like Macron, believe that the response is to make bold new moves to demonstrate that Europe is able to move forward. Others, like Merkel, want small prudent moves to avoid provoking a backlash.

In the past, when bold new moves were being discussed, Great Britain would step in to stop them, or to obtain an exemption. Many Northern countries were glad that it did, and so often was Germany. Now with Brexit and a weak Merkel, they are worried. This is why, a couple of months ago, the Netherlands came out of the wood to oppose the French proposals. With success apparently, since Macron has quietly shelved his more ambitious projects.

What will happen in the next banking crisis?

What are we likely to see come out of the summit, then? The good news is that current negotiations focus on the unfinished business of the Banking Union. This missing piece of the Maastricht Treaty has been created in the midst of the Eurozone crisis. The larger banks are now supervised by the ECB and there is even a «single authority» in charge of dealing with failing banks. The problem is that this authority is not really single, national authorities have survived to coordinate action with the «single authority», a sure receipt for disaster when a crisis erupts. More importantly, perhaps, is that vast amounts is needed to deal with a bank in crisis, even more when several banks tank, while neither the «single authority» nor the national authorities have any substantial resources available.

The risk is that a new banking crisis, always possible, will force a Eurozone member country to dish out large sums of money that it will have to borrow in emergency. This is how the governments of Spain, Ireland and Cyprus drowned in a debt crisis a few years ago. The same goes with bank deposit insurance. All deposits in Eurozone banks are guaranteed up to € 100’000 apiece. This is again a lot of money, to be provided by the home government, hence a serious threat on national budgets.

A common fund to deal with distressed banks and another one to guarantee bank deposits are the natural next step to complete the Banking Union. But the Northern Europeans believe that they will never need that money, which will end up protecting the Southern countries, in effect encouraging them not to clean up their banks. The German Bundesbank has been vocal in requesting that Italy first restructure its fragile banks.

European Monetary Fund might be created

It seems that a deal remains possible, however. The «historic» decision will be to create a European Monetary Fund (EMF), really renaming the European Stability Mechanism that was created in 2012. Attached to the EMF would be a fund for distressed banks, to be filled up by 2024, and maybe a bank deposit insurance mechanism. Whether these funds would be subject to the restrictive rules of the European Stability Mechanism – which requires that decisions be taken by unanimity, including approval by the Bundestag – must still be decided, but the current state of play seems that it would be the case. If so, this would be a small step.

Add to that a few symbolic gestures, like a small Eurozone budget within the Commission’s own budget, and you can conclude that Macron will be disappointed, the Netherlands somewhat reassured and Merkel relieved. Expect a nice picture where all of them congratulate each other as they declare Europe «en marche» – or great – again, while they discretely bite their nails watching Italy’s next move.