EMU fatally undermined by the Koenigstedt Declaration

Has all the progress over the last 6 months been undone? The painfully slow summitry of the European Council has proven to be an inadequate firefighter, but there had been some movement towards a banking union and a working economic union. The biggest criticism was that European leaders were putting in the safeguards against the next crisis rather than trying to deal with the crisis we're currently in, but in last June's Euro Area Statement, the European Council finally seemed to have got it (PDF):

"We affirm that it is imperative to break the vicious circle between banks and sovereigns.

[...]

When an effective single supervisory mechanism is established, involving the ECB, for banks in the euro area the ESM could, following a regular decision, have the possibility to recapitalize banks directly."

Finally! Banking union and economic union are based on this logic: that the financial markets are too big for the Eurozone Member States to deal with on their own, and that there needs to be a common regulatory policy, and the means to deal with problems posed by the banks. The statement even signalled support for breaking the link between sovereigns and existing banking debt as a way of  lessening the debt burden for crisis-hit states (especially Ireland and Spain, who stuck to the Stability and Growth Pact criteria):

"The Eurogroup will examine the situation of the Irish financial sector with the view of further improving the sustainability of the well-performing adjustment programme. Similar cases will be treated equally."

However Germany, Finland and the Netherlands have not only set out to turn back the clock on this progress, but to fatally undermine the rationale behind banking union as a concept. In Koenigstedt the three countries declared not only that there will be no deal on existing banking debts that have been taken on by European sovereigns, but that national sovereigns will have to take on banking debt until they have reached their capacity before the ESM should step in to fund the banks directly:

"We agreed that the implementation of the European Semester, including budgetary discipline and targets, in all countries remains key to ensuring financial stability; the ESM and the other crisis mechanisms can only play a supplementary role to these policies that are decided at the national level.

[...]

 Regarding longer term issues, we discussed basic principles for enabling direct ESM bank recapitalisation, which can only take place once the single supervisory mechanism is established and its effectiveness has been determined. Principles that should be incorporated in design of the instrument for direct recapitalization include: 1) direct recapitalisation decisions need to be taken by a regular decision of the ESM to be accompanied with a MoU; 2) the ESM can take direct responsibility of problems that occur under the new supervision, but legacy assets should be under the responsibility of national authorities; 3) the recapitalisation should always occur using estimated real economic values; 4) direct bank recapitalisation by the ESM should take place based on an approach that adheres to the basic order of first using private capital, then national public capital and only as a last resort the ESM.

[Emphasis mine]"

 Far from breaking the link between banking debts and the sovereign, this reinforces it. It states that the order of debt responsibility in the Eurozone is: private, national sovereigns, then the ESM, creating an order for future crises that follows our current debt and banking crisis. Far from pointing towards a sustainable solution for the crisis and a workable Eurozone, this wilfully ignores the lessons of the past 4 years and tries to cement the current Eurozone order.

Why then should we have a banking union at all? The idea behind the banking union is that the financial sector is truly European (and global), and that it needs to be regulated and controlled in common - national authorities are too small and weak to deal with the sector own their own anymore. If it is to be a national responsibility for now and all time - the Konigstedt direction - then why bother with European regulation and oversight? Where is the added value or common purpose to this?

Why this step? Is it because of the ECB's open commitment to bond-buying, and the (current) creditor states want to seize back as much control and initiative as possible? Whatever the reason, it's hard to see this unilateral redirection of the Eurozone as any help for any sense of common purpose at European summits. What's the point of Ireland, Italy, Portugal and Spain waiting for summit time to try and shift the consensus constructively if other Member States start undermining the process of common negotiation? At this rate, they should start holding summits and economic seminars of their own to promote their alternative vision of economic union and crisis resolution - after all, Germany et al have shown their contempt for common decision-making.

It's truly mind-boggling to think how self-absorbed the ministers at this Koenigstedt meeting must be. Not content with vague signals and behind-the-scenes work, they've simply decided to wreck all agreement up 'til now. Diplomacy is not the word.

Co-decision, European democracy and speed

European legislation is not famed for its speed. The EU's institutional triangle of the Commission, Member States in the Council, and the European Parliament means that agreement has to be made both within and between these institutions before draft laws can be passed (where the Parliament is a co-legislator with the Council).

In the "turf war" over the banking union, reported here by EUObserver, an EU diplomat said:

"The debate will be tense. It is not because Council defends its turf, but because MEPs take so long. We simply cannot lose another year."

The banking union will centre on two pieces of legislation: one empowering the ECB as a banking regulator, and the other redefining the role of the London-based European Banking Authority. While the European Parliament has a say over the EBA, the ECB legislation is dealt with by a unanimous Council vote with the Parliament only consulted.

I think the Parliament's right to treat the two drafts as part of the same package. The banking regulation recently put in place fell under areas where the Parliament had a right of co-decision, and the Parliament should get some say over how the new regime will operate before it gives its go ahead to the EBA being changed to fit in with the new rules. It's also about how democracy is valued within the EU system: the European Council gets to set the pace of political debate, and, as we've seen in the past year with the Fiscal Compact, it's not adverse to re-hashing existing law in new, extra-EU treaties for its own political ends. The banking and Eurozone legislation is complex and controversial; we've seen this with the debate over the Fiscal Compact (a treaty that got both the causes and solutions to the crisis wrong), and the place and power of the ECB is an important issue.

This deserves democratic debate and scrutiny. The idea of the Parliament simply being a roadblock to crisis management is just plain wrong. The Council does not have the monopoly over economic or institutional wisdom (let's face it, 3 years of European Council summitry have done little to solve our current predicament), and opening debate up from diplomatic discussions and deal-making enhances the quality of decision-making by opening up the problems and solutions to scrutiny. The idea that the European Council can deliver down commandments and expect to have the Parliament either follow them or be easily ignored is insulting. As we can see from the Council opportunistically changing the legal basis of the Schengen area to exclude the Parliament, the Council is often more about protecting itself and its own interests than about creating common solutions.

And if the ECB is to be both independent as a central bank and have the power of banking regulator, there should be some democratic control and scrutiny. The Parliament may not have a strict legal right to this piece of legislation, but it has some say over financial regulation and should not be expected to stay silent while regulatory responsibility is passed to another, independent, institution.

While speed is important, having an open and more democratic debate is an important core value that shouldn't be overlooked, and which will help us come to better decisions.

Barroso's State of the European Union Speech 2012

Today was the third State of the Union speech by Barroso this parliament, and it fits the description better than the previous speeches, which focused more on the legislative programme for the upcoming year. This makes it harder to mark in comparison to past years because what works for a good legislative programme speech (good rhetoric + great substance) is different to what is needed for a good state of the union speech (great rhetoric + a few key aspirations/details to meet).

First I'd like to quote the President of the European Parliament, Martin Schulz, who made a short defence of European parliamentary democracy before Barroso took the floor:

"Today the world is looking at Europe not least the Karlsruhe Constitutional Court, we have reached a decisive moment. Recent developments in the European Union have been of great concern. We have seen a deparliamentarisation of Europe. Those who think that parliamentary democracy is too slow or raises too many obstacles are arguing in the wrong direction. No decisions in Europe can be reached without the involvement of the European Parliament. The European Parliament is the Parliament for the whole of the European Union. More Europe with less parliamentary democracy is impossible."

 I agree. So I'll also look at the responses of the leaders of the political groups.


Barroso's Speech

(Picture from the Commission's Facebook page).

The speech turned out to be a strange hybrid: while the focus was on the future of the EU economically and politically, the structure and style of the traditional legislative programme speech was painfully evident in places. The economic leg of the speech had more policy and was quite legislative, while the political leg was more rhetorical.

On the Eurozone crisis, Barroso complained that the disunity of the Member States after European Council summits, with leaders calling for further measures afterwards, fed doubt into the markets and public and is undermining the efforts made so far to overcome the crisis (as if people aren't capable of making that judgment for themselves). He called for the strong Member States to commit to helping the weaker ones and for the weaker ones to make the necessary reforms.

On the economy, Barroso announced that the Commission would introduce a Single Market Act II to help open up the single market and improve competitiveness (in fact I think "competitiveness" was mentioned much more than democracy in this speech). The first Single Market Act hasn't been fully passed or implemented yet, so I don't know what the second one will do (or if it's simply a repackaging of the first one). There was also talk of a new industrial policy, with Barroso calling for coordination on an attractive tax environment for industry. That there was no mention of common taxes or tax bases indicates that Barroso's thinking of softer cooperation between Member States. Barroso also said that the Commission would pursue a more active trade policy and that the Commission wanted a mandate to negotiate saving tax agreements with third countries to reduce the impact of tax havens.

Banking and fiscal union was a big issue. Barroso made the case for European and coordinated supervision (with national regulators) for all banks, and committed the Commission to pursuing a financial transaction tax through enhanced cooperation (so that it will only apply to willing Member States). Fiscal union will mean greater coordination of national fiscal policies, but Barroso did not spell out any vision for how this might work or how far it would need to go for the Eurozone to work. He also strongly rejected the creation of new institutions alongside the Commission, Council and Parliament or separating out parts of these institutions for Eurozone purposes.

The Commission will present a blueprint for deepening economic union - including treaty changes - this autumn. Barroso also urged MEPs and Member States to back the next EU budget, which he called a growth budget.

On political union and reform, Barroso said that Europe cannot "use the political tools of the past to tackle the problems of the future". The European Parliament should have a strong role, and the Commission will introduce a new statute for the Europarties to strengthen them so they can better offer alternatives in the elections. Barroso also called for Europarties to present candidates for the President of the European Commission at the European elections in 2014. Greater cooperation between the European and national parliaments was also called for, but what this would mean wasn't elaborated on. Barroso defended the independence of the ECB and urged others to respect and defend it.

Barroso called for an intergovernmental conference to decide on treaty change, and a "federation of nation states". This choice of words was picked up on by some MEPs as a way of saying "federation" but meaning continuing on with more of the same.

Foreign policy got some time as well - mostly that Europe needs to act more together in order for the Member States to be heard in a world with the US and China at the helm.

It was a much better state of the union speech than last year for vision, but it had a lot of problems as a speech. Barroso's stronger points where when he could reference legislation because he could tie ideas closer to a sense of direction. That's not to say that vision speeches have to be dotted with legislative proposals, but the speech needed to do a better job of making the case for a certain type of union rather than the more generalised pro-European rhetoric that we got. The debate over what a "federation of nation states" and what that means will probably dominate any comment on the speech because it's so qualified and vague in practice, and in fact that there is little else to grasp on to. Barroso was far more passionate and convincing in his reply to the MEPs' questions and debate - he should have brought that Barroso to the speech.


Political Group Leaders

Daul (European People's Party):

Daul gave a rambling speech, which he admitted wasn't prepared but it would have been better if he had. It was generally supportive of Barroso (who was the EPP candidate for the Commission presidency in 2009), but was the worst speech from a group leader. One thing I got from this was that the EPP supports the ECB buying of bonds (this may contrast with the ECR if you're on the right and distrust central banks taking that kind of action).

In the end I did much better with my Buzzword Bingo for Daul's speech than Barroso's - not a good sign!

Swoboda (Socialists and Democrats Group):

Swoboda said that his group would only support the next EU budget if it was serious about delivering growth, and heavily criticised the EU Troika for their policies in the bailed-out countries for contributing to the recession. He signalled that the S&D Group would be willing to support the saving tax agreements, but there needed to be much more focus on investment. Swoboda pointed out that the US, China and Japan are all putting more into investment at a time when Europe is following austerity.

Swoboda called for a social compact to combat the erosion of solidarity in Europe. Hopefully we'll get to hear more on what this means - Swoboda said his group was agreed on it, so we should get to see the S&D (or the Europarty PES that sits as part of the group) proposing some detail. Maybe something for the PES Congress at the end of the month?

Verhofstadt (Alliance of Liberals and Democrats for Europe):

Verhofstadt focused on Barroso's "federation of nation states" remark, and said it represents the same approach rather than something new. He criticised Barroso for not taking more initiative without Council approval, particularly since the Commission tends to act more on Council ideas than those from the Parliament. Verhofstadt called for a federation of the citizens, and said that federal solutions are necessary - and that the ECB's bond-buying policy will only buy 5-6 months. He said that there needs to be resolution for the banks, a debt redemption fund and a European treasury.

Interestingly, Verhofstadt said that the independence of the ECB meant less democracy and seemed to argue for greater parliamentary control (if I understood his argument correctly).

Cohn-Bendit (European Greens/European Free Alliance):

Cohn-Bendit pointed out that the environment wasn't mentioned in Barroso's speech, but focused on social welfare. Cohn-Bendit said that the US federal budget had expanded to protect social welfare, and that the EU budget would need to expand to at least 5% of GDP in order for it to have the fiscal firepower to do anything to support social welfare across Europe. He argued that there should be more own resources rather than Member State contributions to the budget in order to achieve this, and that there would be financial support for Greece and its social system in the form of a social fund, with more time given to it to reform and pay back the debt.

Callanan (European Conservatives and Reformists):

Callanan opened by borrowing a line from Mitt Romney, saying that he wished that Barroso succeeded (as the ECR supported his election as Commission President), but that he had gone too far down the road of knee-jerk calls for more Europe, instead of focusing on reducing regulation (which he said Barroso had had some success in, but not enough). (He seems to be a big fan of Romney). For the Eurozone, Callanan said that the only way for it to work was for there to be transfers from the stronger countries, which was impossible, or for some countries to leave the Euro, and he advocated Greece leaving the Euro. (I wonder if Cameron supports this line).

He criticised the ECB's bond-buying policy, and said that there needed to be an economic solution to the crisis through less regulation. In response to a question he said that he didn't support quotas to bring about more gender equality in the boardroom.

Callanan also referred to our Buzzword Bingo and the chat on Twitter in his second speech, making him the first MEP to reference it in the chamber!

Farage (Europe of Freedom and Democracy):

Farage started by remarking it is the 20th anniversary of Britain leaving the European Exchange Rate Mechanism. He said that he was wrong in his speech last year that Greece would leave the Euro within a year, but that was because he underestimated how fanatical Barroso and European leaders would be to save it.

Zimmer (United Left Alliance/Nordic Green-Left):

Zimmer attacked the crisis policies for not solving the problem and for weakening European democracy.


Verhofstadt, Cohn-Bendit and Callanan were the strongest performers, taking the opportunity to get their visions and ideological points across. Swoboda was good too, and it's interesting that he kept referring to things that his group had agreed on, but without any detail it lost impact - hopefully there are a few interesting ideas being saved for the PES Congress at the end of the month. Daul, Farage and Zimmer were the dullest. Farage normally manages to inject some personality into his speeches, but it just fell a bit flat, whereas Daul was unfocused and rambling and Zimmer was, well, just dull and didn't make any impact.

ECB lending to buy time for... what?

The European Central Bank's announcement that it would buy Eurozone government bonds is a massive boost to the Eurozone, but a lot remains to be done before we can say that the Eurozone is starting on its path out of the crisis. The banking union legislation will be a key part of the agenda over the next months (the Commission should publish a draft law on banking union next week), and it is vital in separating the link between national banks, which have grown as part of an EU-wide financial system, from national governments, many of whom are simply too small to support such large financial sectors.

However like most initiatives banking union focuses on preventing similar problems next time - in order for it to have an appreciable effect on today's crisis there would need to be a deal on old banking debt that has been taken on by national governments, in particular Spain and Ireland. (The Fiscal Stability Treaty, the six pack and the yet-to-be-passed two pack share this weakness too). Could this be agreed? Would there be joint liability for debt already generated and taken on by national governments (that the ECB pressured the protection of banks to ensure the stability of the system means that there was also a European interest in these national financial systems from early on in the crisis too)? It's a highly political area and the Irish government - and no doubt Spain too - are eager to reduce their debt as far as they can while avoiding austerity.

But it's not just in Ireland and Spain's banking case that the debt question is posed (though they raise the spectre that rigid application of public debt rules bear little relation to the ability to weather economic crises), since debt and economic growth is a European question. So what is the ECB buying time for: for an agreement on economic union? How far should economic union be extended? If debt needs to be shared to ease the burden and to provide breathing room for reforms and recovery in the most crisis-hit countries what kind of institutions do we need, and how do we make them accountable?

Merkel has signalled that she wants a convention by the end of the year to decide on the future of the EU, and apparently France and Germany are moving closer together on political union. Barroso has also called for a EU Treaty "renewal". There's very little detail on what is meant by different people about economic or fiscal union, so it's hard to get a debate going it. It's likely that the only debate we'll get is on the results of a convention - hardly a good way to build such a union or to build support for it. In any case Barroso is supposed to put forward some ideas in his State of the Union speech on September 12th. If he does put some ideas on the table, it could be one of the few opportunities for civil society to study the up-coming integration debate.

Choppy waters for the Fiscal Stability Treaty in the Bundestag

BY CC norbert_blech

It's interesting to see the politics of passing the Fiscal Stability Treaty in the German Bundestag over the last few weeks. Angela Merkel's government needs the opposition for the two thirds majority needed to pass the Treaty, and the opposition Social Democrats and Greens are trying to extract concessions on a growth agenda for Europe that echoes some of François Hollande's proposals.

The opposition wants:

- The strengthening of the European Investment Bank.
- Bonds for the indebted countries of the EU (I understand this to mean bonds that cover the debts in excess of the 60% of GDP-limit).
- Better use of the EU structural funds.
- Project bonds.
- A financial transaction tax.

(There is also an issue of how it will affect the Bundesländer, or the states, and local government).

The biggest clash lately has been over the financial transaction tax (FTT). Initially the government said that it would be impossible for an FTT to be brought in before the end of the legislative period, but now the Commission has come out contradicting the German government. The Süddeutsche Zeitung reports that it could be possible to pass a law on FTT by the end of the year, and collect the tax in 2014 (in the next German legislative period). If the FTT is to pass this year, it will be under enhanced cooperation between at least 9 Member States, given that taxation is still subject to the veto and the UK refusal to sign up to an FTT. Die Süddeutsche notes that the finance ministers of Germany, France, Spain, Italy, Greece, Portugal, Finland, Belgium and Austria signed up to the principle of an FTT in February, though obviously there would be a lot of detail to hammer out between them, and there's no guarantee an FTT coalition will look the same when it comes to passing the law.

It's worth noting that the Süddeutsche also reports that the German finance minister, Wolfgang Schäuble, seems to be considering another extra-EU treaty if it would be a faster way of achieving an FTT. What could this mean for the talking point of the month, the Banking Union? If an FTT was seen as a way of financing support of the financial sector without burdening the taxpayer, then it could be dangerous for other Eurozone countries to sit out talks on this FTT if it could be expanded to fit into the Banking Union or be taken as a model for it. Another extra-EU treaty would be a bad direction to go in: the EU provides a procedure for further integration of a group of Member States, and circumventing the EU institutions further poisons the trust in the rules and procedures agreed to by all Member States being respected.

The Fiscal Stability Treaty is part of a piecemeal approach that is rightly open to criticism: it doesn't solve the crisis in itself, and without a comprehensive deal on what a fiscal union will look like, these half-measures will erode confidence in the ability of the Eurozone to get its affairs in order. Hopefully this initiative of the German opposition will help push a more balanced and fairer approach to the Eurozone crisis, but it would be better if the left started cooperating across borders on what it wants to see from a fiscal union.

Mmm... Banking Flavoured Union

With Barroso calling for a banking union - and saying parts of it could be put in place in 2013 - there's wall-to-wall coverage of Banking Union in the media. There's not much I can add, except that it seems pretty clear to me that separating banking debt and the Eurozone banking system from sovereign debt is a key issue we need to gets to grips with and a Banking Union is urgently needed as part of the solution to the crisis. I've been thinking of covering Irish MEPs a bit more too, so I'll just leave you with a video I found of Marian Harkin's One Minute Speech on the subject: