SOME in the Irish opposition are already calling it the “Judas Kiss”. Angela Merkel, the German chancellor, greeted the Irish prime minister, Enda Kenny, with a kiss at the start of the European summit that ended today. But then she betrayed his hope that the euro zone would lift at least some of the burden of saving Ireland’s banks from the shoulders of the Irish sovereign.
At the end of the summit, the French and European officials had claimed a points victory over the Germans by getting them to agree more firmly to a target date of January 1st next year to entrust the European Central Bank (ECB) with the ultimate authority to supervise the euro zone’s 6,000-odd banks.
The importance of this “Single Supervisory Mechanism” (SSM) is that, once up and running, and deemed “effective” in the course of 2013, the euro zone’s rescue funds could start directly recapitalising troubled banks. When the deal was first agreed in June, Spain hoped this would save it from taking on more debt to salvage its banks, and Ireland had been led to believe it could benefit retroactively.
The Taoiseach, or prime minister, Enda Kenny, left Brussels in upbeat mood, insisting that EU leaders had given a clear reaffirmation of the June promise. And the Spanish prime minister, Mariano Rajoy, declared himself to be “very satisfied”.
But down the corridor, Mrs Merkel was quickly disabusing them. “There will not be any retroactive direct recapitalisation,” she said, “If recapitalisation is possible, it will only be possible for the future.” In the case of Spain, she said, the timetable is such that “when the banking supervisor is in place we won't have any more problems with the Spanish banks, at least I hope not.” The problem of Spain’s banks would be dealt with by euro-zone loans already approved earlier this year. By implication, Ireland would also have to lump it.
Her comments inverted the familiar cycle of European summits: leaders arrive in a climate of crisis, and leave after having decided action that, they hope, will control the fire. This time they gathered in Brussels with markets relative calm, but left in disarray.
One senior eurozone source claimed, improbably, that the issue of recapitalising Spanish and Irish banks had, in fact, not been discussed directly. Instead the leaders debated the preliminary steps needed to get to the stage of direct recapitalisation. Many issues remain open and were left for finance ministers to settle in the coming months, not least how to deal with "legacy assets". But the source added: “Mrs Merkel’s declaration is a surprise for me. She is prejudging decisions that ministers of finance will take.”
Germany often worries that easing market pressure on troubled countries will dent their zeal for budgetary and economic reforms. But this week the feeling is that the reduction in bond yields in recent weeks had blunted Mrs Merkel’s readiness to fix the flaws of the euro zone – not least because she is entering her campaign for re-election in autumn next year.
Some diplomatic sources think Germany’s stance is a negotiating position, and that direct recapitalisation of Spanish and Irish banks will eventually take place – though perhaps not before the German election. If such measures did not apply to Spain and Ireland, say Eurocrats, to whom are leaders referring in their communiqué restating that “it is imperative to break the vicious circle between banks and sovereigns”?
The Spanish prime minister at least had the foresight to sense the obstacle: he said that having to take on another €40 billion worth of bank recapitalisation on to its books, or about 4% of GDP, was "not the biggest worry”. Instead he welcomed the evidence that the euro zone was moving towards banking union.
A more immediate question is whether Mr Rajoy will formally seek a wider bailout from the rescue fund, the European Stability Mechanism. This would come with strings attached (how onerous remains unclear) but would activate the commitment by the ECB to intervene in bond markets to bring down Spain’s borrowing costs. Mr Rajoy must calculate whether the relief is worth the political humiliation and, more importantly, be sure that it would not be blocked by sceptical German leaders. Both sides may be still hoping that the gradual but steady narrowing of bond spreads in recent weeks (see the charts in my earlier post here) will obviate the need to ask the restive Bundestag for more money.
Though ostensibly “independent”, the ECB president, Mario Draghi, participates in European summits and proved instrumental on setting out a clearer timetable. “He is the only expert in the room,” says one source.
Another thorny problem is how to reconcile the ECB-linked supervisor with the interests of the ten EU members who do not use the euro.
Most want to take part in the system, but fear they will be left without a voice as the treaties give decision-making power to the ECB’s governing board, from which they are legally excluded. The strategy will be to create a supervisory arm where euro-outs will enjoy “equitable treatment and representation”, as the conclusions put it.
But Britain is principally concerned with not being over-ruled by a giant euro-zone supervisor, carrying the weight of 17-plus EU members, in the European Banking Authority, which co-ordinates supervisors’ work and sets rules.
Part of the summit was taken up in a row about the impact of a proposed new budget for the eurozone on current negotiations for the EU’s regular seven-year budget.It had been sparked off by comments in recent days by the British prime minister, David Cameron, who appeared to argue that the proposed "fiscal capacity" for the euro zone reduced the need for an increase in the EU's budget, to be fought over at a special summit next month (Mr Cameron said he was ready to veto a budget deal he did not like). The communiqué insisted any “fiscal capacity” for the euro zone would be “unrelated” to the EU budget.
The “fiscal capacity” will be part of a final report to be submitted by Herman Van Rompuy, who presided over the summit, setting out a “specific and time-bound roadmap” to fix the euro zone’s flaws. But nobody expects it to be the final report on reforming the euro zone, and there is a growing belief that the EU will have to start renegotiate its treaties some time in 2014.
David Cameron, the British prime minister, seized on these momentous changes to argue that Britain’s relationship with the EU would also change, though he insisted that membership of the EU was in Britain's national interest:
Am I happy with the status quo in Europe? No I am not, I think there are changes that we need. There are opportunities opening for what I have said should be a new settlement between Britain and Europe and there will be opportunities to seek that new settlement.
It is a state of mind that is worrying liberal-minded allies of Britain. Finland's Europe minister, Alexander Stubb*, told Reuters:
I think Britain is right now, voluntarily, by its own will, putting itself in the margins. We see it in foreign policy, we see it in economic policy, we see it linked to the single currency. And I, as someone who advocates the single market and free trade, find that very unfortunate, very unfortunate. (molly)
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