European heads of state are meeting today in Brussels for their latest bout of dialogue on the EU crisis. European Council president Herman van Rompuy writes, “The main purpose of this meeting will be for us to discuss a specific and timebound roadmap for the completion of the Economic and Monetary Union (EMU)”—which, if taken literally, would include a timeline for debt mutualization, the forfeiture of some national sovereignty, region-wide taxes, and a central monetary area budget. But we’ve been through enough of these euro crisis beer-drinking sessions to know we shouldn’t expect quite that much.
Let’s run through the basic issues…
The most pressing matter of business concerns the “single supervisory mechanism” (SSM), or banking supervisor, that European leaders have promised to establish before they begin to recapitalize the regions banks. And, indeed, a preliminary solution on banking union appears to already have emerged from the region’s finance ministers.
The intent of the supervisor is to cut the close relationship between individual national governments and their banks. This relationship has been feeding the crisis; e.g., Italian banks own lots of Italian debt, Italian debt suddenly tanks in value, and then Italy’s banks risk insolvency. It works the other way around, too: Ireland’s banking problems ended up dragging its government into an EU-led bailout.
Under the plan, the European Central Bank (ECB) would have the power to police at least 150 banks starting March 1, 2014—later than initially anticipated.
There appears to be a lot of finger-pointing about whether the Spanish government needs to be bailed out by Europe. Although it can borrow reasonably cheaply on the open market, paying interest of 3.12% for debt maturing in two years, pervasive concerns about the government’s solvency have everyone on edge. While it seems unlikely that EU leaders would be able to come to an agreement on how to handle Spain during this summit, Spain remains the most visible problem child of Europe that is not yet in detention.
Any centralized EU budget is a step in the right direction, as it would make a central, European power somewhat responsible for the financial obligations of other European countries. However, we’re nowhere close to an EU budget and even further from a US-style federal one. Bloomberg reports that an official draft of plans to create such a budget has already pushed back the implementation date of such a budget to 2014 from sometime next year.
Unfortunately—and as much as we hate the term—”kick the can” continues to describe the progress we’ve seen from EU leaders. Investors have already faced the realization that their squabbles will push the euro area, Germany included, into recession. The question now is how long they will allow it to drag on.