Conditions not yet fulfilled for direct banking recapitalisation and European Council President Herman van Rompuy still has to explain his ideas on deeper economic and monetary integration.
The European Council today followed agreed lines in June on direct recapitalisation of banks. However, this summit was short to clean the road to the ECB. It has agreed on the objective that legislative framework for Single Supervisory Mechanism of banks will be ready by 1 January 2013 and it has added that the implementation or actual operation of this mechanism will be ready in the course of 2013. This misses the objective to create an effective supervision of European banks by the end of 2012.
According to the saying of the European Central Bank, and as quoted by the President Herman van Rompuy, this implementation would require less than a year, but more than few months. It would be necessary to have a clear separation of monetary and supervisory functions within the ECB and to ensure that this supervision is handled in a direct and differentiated manner by involving national regulators. It should be also noted that legal conditions must be ready for the participation in the system of non-euro member wishing to join.
Coincidently, by the end of 2013 we will have parliamentary elections in Germany so that Angela Merkel wins more time for a while and maybe for a longer, as she claims this supervision shall be effective, which requires adequate administrative resources and a time to get ready. German Chancellor has indicated in the press conference that this might not be a case up until 2014.
The European Council also has mandated its President to explore further options for a genuine EMU. This is a matter of a much longer perspective and of thorough debate. Next to integrated financial framework or direct supervision of banking sector, the aim would be to have a budgetary or fiscal capacity to withstand symmetric shocks at the central level of EMU. This can be done either in a form of fiscal solidarity, which can be exercised over economic cycles, or by incentives to structural reforms, which seem more reasonable to improve competitiveness of the economy. The latter could be facilitated by individual arrangements between EU institutions and EU Member States on economic partnership programmes.
To be effective, this capacity needs strong institutions and Herman van Rompuy mentioned a Treasury function, which now is partly addressed by the European Commission (DG Ecfin) under the framework of enhanced European Semester. This may require a Treaty change, however it is not yet evident that the political will is still there and enough steam is left in the markets. Yesterday Italy and Spain were led by success in their debt auctions by easing pressures for the next months to come while the Commissioner Rehn on the eve of the European Council was cautiously optimistic hoping the worst part of crisis is behind us.
The picture now seems not as rosy as before to the proponents of deeper economic and political integration and of stronger European institutions. The markets may have also reached a turning point and their expectations may be gradually falling. If that would be the case then it would too late and we would be back to normal of missed opportunities.
Photo: © European Union 2012 – European Parliament