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.

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:

Hungary for change

Last year when Hungary was taking over the rotating Council presidency, the Fidesz government was bringing in a controversial media law which we launched a blogging action over. Though the law was revised after discussions with the EU, EU law in the area is mostly market-based. This time around the independence of the Hungarian Central Bank is under threat and is the source of a dispute between Hungary and the IMF:

"Hungary, the EU's most indebted eastern member, already saw its credit rating downgraded to junk in December and initiated talks for a standby loan from the International Monetary Fund (IMF).

But the centre-right government led by Viktor Orban has pursued controversial legal changes to some of the country's independent institutions, including the central bank and media bodies, prompting IMF negotiators to walk out of talks.

The laws came into force on 1 January, prompting tens of thousands of people to take to the streets on Monday and repeated warnings from the EU commission that it may take Hungary to court."

The markets haven't reacted well to Hungary's course either:

"The forint fell to 319.4 against the euro, a record low after a gradual depreciation of 20 percent in the last six months, while 10-year bond yields spiked to 10.5 percent, the highest since April 2009."

At the moment Orban's government seems intent on sticking to it's course despite protests and pressure from the EU and IMF - perhaps the plan is to use the bank to print more money to avoid the necessity for the IMF loan. Fidesz's two-thirds majority in the Hungarian parliament allows it to change the constitution, and it's been making full use of the opportunity. Orban has made it clear that he sees these changes as the end-point of Hungary's post-Communist path:

"In Orban's view, the new legal text "marks the end of the country’s transition to democracy from Communism" - as he explained in an interview with the Magyar Nemzet newspaper on 24 December.

Foreign journalists are "right when describing what happens in Hungary not just as simple governance, but a regime change," he told the newspaper.

"They say this in a disparaging way but I think this is a compliment. We Hungarians have failed for over a hundred years to show western Europe our own virtues.""

It seems pretty odd to be portraying the rapid expansion of executive power as an anti-Communist evolution, particularly when former Communist dissidents are protesting against Fidesz's constitutional changes. Orban's rhetoric also smacks of Hungarian exceptionalism and is reminiscent of the talk of differing values and rights from the media law debates last year (not that anyone explained how Hungarian rights should differ from those set out in the European Convention on Human Rights or the values in the EU treaties).

As the EU deals mostly with internal market, security and environmental matters, and the Council of Europe's Convention and Court of Human Rights deals with human rights law and standards, the EU isn't well equipped or experienced enough to deal with Member States drifting away from the standards required for membership. Article 7 TEU gives us a nuclear option of sanctioning a Member State who risks breaching the values of the EU, but it would require a four-fifths majority of Member States and a majority in the European Parliament, which is unlikely to be reached (and would need to be focused on the health of Hungary's democracy and media rather than the central bank).

It does raise an interesting question though: what "red lines" should the EU have for Article 7 action, and how much constitutional change can be brought about before the EU starts questioning whether a country is still membership material?

Financial Transaction Tax and Multispeed Europe

The UK government's stated opposition to the FTT was hardly unexpected. With the City of London acting as the financial heart of the EU, and a sacred (cash) cow for the UK government in terms of tax receipts, the UK was always going to be resistant to the idea. Barroso, in his State of the Union speech, seemed to recognise this and generally supported a two-speed (or multi-speed) EU.

When the national interest is invoked as a reason for a policy position, it shuts down debate. However, while national interest is part of it, since the UK government supports the idea of FTT in principle, provided it is applied globally, there has been a bit more debate on the idea. I have to admit that I don't fully understand the mechanics of how the tax would puch financial businesses outside the EU and outside the UK: my understanding is that the proposed tax would be applied to transactions where one side of the transaction was in the EU - so even if the financial businesses and banks moved outside the EU, they would have to pay the tax if they wanted to do business in the EU. It would only make sense to move if the business did most or all of its business outside the EU. However there are good points on the fact that a large proportion of the tax would be collected from the City of London, and this would be unfair if the Eurozone mainly benefited. If the income was used to build a safety net for the banking and financial system across the EU (to reduce the burden on taxpayers in the real economy), than that would probably be fairer.

While the Labour party in the UK will probably support the government's resistance, it would be interesting if they decided to support an EU FTT in some form - after all, their leader Ed Miliband has referred to businesses which were "bad" for the economy: would the FTT not make sense in rebalancing these ethical issues by making the financial industry pay a bit more tax to insure against the danger of being (ultimately) underwritten by the taxpayer? The BBC's Robert Peston has an interesting take on the FTT here.

In any case Member States have a veto on the matter, so the UK can block it. But the implications for the EU of a Eurozone FTT haven't received much attention. We already have a multi-speed EU, with some countries in or out of the Euro, the Schengen Zone, the EEA but not EU Members, etc, but these have been in different areas of integration. If you start to adopt different speeds to the internal market in a way that affects the four freedoms, then it could cause some political headaches. It would raise the EU's West Lothian Question. Why should MEPs from the slower countries have votes in areas where their countries aren't affected? Already the British Commissioner couldn't (politically) be the Commissioner for monetary policy since the UK is not a Eurozone member. The more the Eurozone countries pull ahead, the less influence those outside Euroland will have.

Honohan on Irish debt uncertainty

The Governor of the Irish Central Bank, Professor Patrick Honohan, gave a lecture on the need to restore certainty regarding the Irish budget and on the banks to the IIEA.



It's well worth watching. Apart from some interesting insights into uncertainty, there seemed to be key messages which pose key questions for Irish and European politics:

1. The bail-out is just a stop-gap meeasure. It is a more secure, and cheaper, source of lending, but it doesn't solve any of the underlying problems of the Irish economy, nor the uncertainty that caused the Irish crisis. (Interesting to note is Honohan's thoughts on Europe insuring against the tail risk, which isn't part of the current bail-out. Should it be part of future Eurozone governance in these kinds of crises? Would an insurance element be enough?).

2. The Programme is drawn mainly from the 4 year plan already set out by the Irish government, and the next government would be in a position to change how the Programme is implemented after 2011 (since the next year's budget is set in more detail). This is not to downplay the fact that the IMF-EU bail-out limits Ireland's room for maneuver, but, as Honohan highlights, Irish policy making will be key.

It will be interesting to see how this will influence the policy and election debate.

SWIFT II: European Data Protection Supervisor's Report to Council

The European Data Protection Supervisor yesterday sent a report (PDF) on the SWIFT II agreement (or TFTP agreement) to the Council. Given the criticism of the agreement from Parliament (though there is recent news of some agreed compromise), the EDPS report is interesting.

For example, at paragraph 5, the EDPS notes that the proposal does not see Article 16 TFEU (on data protection) as a legal basis, though the agreement and proposal note the data protection concerns. The report tersely notes: "...the EDPS reiterates that this agreement not only relates to the exchange of personal data, but also to the protection of these data. Article 16 TFEU is therefore not less relevant as legal basis than Articles 82 and 87 TFEU relating to law enforcement cooperation that have been chosen as legal bases."

The scope for future agreements on data protection and for a general agreement between the US and EU on data protection is discussed as well, particularly in paragraph 8. The EDPS recommends that the current proposal (agreement) be amended so that if there's a general agreement on data protection, it will apply - or at least get an agreement that it would apply to TFTP circumstances.

The EDPS takes a look at the question of privacy rights and the security question through explicitly rights-based language (Para 15):

"15. Against this background, the Commission proposal highlights the usefulness of the TFTP Programme, as put forward by the US Treasury and by the eminent person's reports. However, the condition laid down by Article 8 ECHR in order to justify interference with private life is "necessity" rather than "usefulness"."

The report goes on to flag up the same concerns that the agreement's critics in Parliament have highlighted: the retention of data for up to 5 years regardless of whether it's been extracted or if there's a "proved link with a specific investigation or prosecution.", and bulk transfers are the big concerns. In fact, paragraph 20 urges for a transitional approach to bulk data if it is to be used at all:

"...EDPS believes that solutions should be found to ensure that bulk transfers are replaced with mechanisms allowing financial transaction data to be filtered in the EU, and ensuring that only relevant and necessary data are sent to US Authorities. If these solutions could not be found immediately, then the Agreement should in any event strictly define a short transitional period after which bulk transfers are no longer allowed."

Also worth higlighting is the whithering criticism for handing the judicial oversight role to Europol:

"25. Moreover, Europol has specific interests in the exchange of personal data, on the basis of the proposed agreement. Article 10 of the proposal gives Europol the power to request for relevant information obtained through the TFTP, if it has a reason to believe that a person or an entity has a nexus to terrorism. It is hard to reconcile this power of Europol, which may be important for the fulfilment of Europol's task and which requires good relations with the US Treasury, with the task of Europol to ensure independent oversight.

26. Furthermore, the EDPS wonders to which extent the current legal framework entrusts Europol - especially without changing its legal basis pursuant to the ordinary procedure established by the Lisbon Treaty - with the tasks and powers to make an administrative request coming from a third country "binding" (Article 4.5) on a private company, which will thus become "authorized and required" to provide data to that third country. In this context it is useful to note that it is under the present state of EU law not evident whether a decision of Europol vis-à-vis a private company would be subject to judicial control by the European Court of Justice."

The report also criticises some aspects of the personal rights under the agreement when it comes to the correction/deletion of information. (As it's already turning into a long post, I'll let you read it [paragraphs 28-33], but it raises questions over the ability of people to exercise these rights). The EDPS also urges the inclusion of a sunset clause in the agreement to help encourage sustained work towards improving data protection under its provisions.

Overall the report echoes the concerns of the critical EP voices, while welcoming the changes make since SWIFT I. How much of an impact will it have in the Council? It's hard to tell how wedded the Member States are to the agreement, though it's interesting to note that the report mentions that the German Constitutional Court (Bundesverfassungsgericht) considers the retention of data over 6 months to be excessive, so it is possible that some Member States could share worries over the diminution of privacy rights of their citizens. What will be the extent of any agreed amendments be? Hopefully these clear calls will have a positive impact.

Will European bonds translate into Eurobonds?

There are, we are told, no plans to bail out Greece, which has come under a lot of pressure and scrutiny for its government debt. However there seems to be a general feeling that if it came to it, Greece would be bailed out: see the Irish Times and A Fistful of Euros. A few months ago, when the pressure was more focused on Ireland, I had the impression that, in the end, Merkel would relent and accept the need to bail out Ireland to prevent the Euro from being damaged. In terms of the Euro, any state is probably too big to fail, and so there probably needs to be some mechanism for supporting Eurozone states.

If Greece is bailed out by the EU, then there’ll be a strong precedent and expectation to do it again – and it could be called to do so again, as AFoE seems to suggest when you consider its articles on Spain. Of course, it may not come to a bail out, but already the EU is setting precedents through checking the Greek government’s figures and offering advice on the economy. Granted, the EU isn’t yet setting fiscal policy or writing Athens cheques, but it does show a growing need for greater formal economic co-ordination – and a certain willingness to do something about it.

There have been calls for more co-ordination in tax (which would be resisted by Ireland, among many member states).

Also, the Eurobond issue has been raised again, as it was when Ireland was the focus, and with the S&D group coming out in favour of its creation. It would make borrowing cheaper for countries like Ireland and Greece, but more expensive for countries in a better position, which in political terms looms large as Germany. Germany rejected the idea back when Ireland was the issue, and Berlin remains an obstacle to the idea. But if idea proves resilient and keeps coming back – as it probably will during what will likely be a long recession, and particularly if Greece does need to be bailed out – it could happen. Is it a necessary element of a stronger Eurozone?

The S&D group is also advocating the EU adoption of Obama-like plans for the banking sector. Given the UK’s unease with the prospect of financial regulation at a European level in the guise of a simple oversight system, and the dominance of the right generally, it isn’t really a serious prospect. Except... It is interesting that in the UK the Conservatives have, strangely, enthusiastically adopted Obama’s ideas and David Cameron has called on the Prime Minister to clearly come out publicly in favour as well. I doubt they adopt the same position in the EP.

Could Gordon Brown turn around and say, “Why, yes, of course we support such a plan – and we’re part of an EU-spanning political party that advocates it too. Given the international value of banking, and the single market, it would make sense to have common rules on the matter – and we’re the only party in the UK that has the political clout in Europe to make it happen.”? Well... no. Besides Britain’s euroscepticism and the government’s continued awe of the City, it would be too risky to support it at a European level because the S&D are in opposition, so there’s no guarantee that it would pass in the EP, never mind in the Council and Commission; the Commission, which would need to introduce any draft legislation on the matter, may not back the idea; it could end up playing as a victory for the French and a result of their “winning” an economic portfolio, even if it was originally Obama’s idea, etc.
Pity: the thought of Labour turning its European-dimension to its advantage on an issue (to show coherence and effectiveness on several levels compared with the Tories) is a nice thought, but still a fantasy.

Will European bonds translate into more co-ordinated action and a more structured way of working together in the future? Necessity might demand it, but there may not be the supply of political will.

Anglo-Irish Bank to be Nationalised

The Irish Government is to nationalize the Anglo-Irish bank, a move which some critics say should have been made as far back as September when the government famously guaranteed the deposits of the six biggest Irish banks. If Cowen was hoping to get some positive press about his visit to Japan, then this will make sure it has no effect. The Commission will examine whether or not the nationalization complies with state aid rules.

It's hard not to feel outraged when you hear some of the stories about Anglo-Irish, like how Chairman of the bank Sean FitzPatrick loaned some €84-87 million to himself, and managed to keep it from the bank's auditors. This amounts to over half the bank's current market value with the bank currently valued at just over €160 million (down from €13 billion at its peak). And now it turns out that the actual figure for the loan might be much more.

The government should have replaced some of the chairmen of the six banks (one analyst called for 5 of them to go at the time of the guarantee) back in September. I can only hope that the government is keeping a close eye on the other banks which it's guaranteed, and now re-capitalizing. Though I wouldn't hold my breath.

In other news, the recently-made-ex-boss Rody Molloy of Fás, a state body set up to provide training programs, will get a six-figure severence pay packet. His is a man who had to resign following a scandel over the lavish wasting of money by Fás. Hardly a way of cutting public expenditure, is it?