Complete Euro Currency Union Still Dubious

By GABRIELE STEINHAUSER

A new report Thursday lays out what euro-zone leaders must do to complete their currency union. But the leaders are likely to adopt an even tamer version of the report's toned-down recommendations during a summit in Brussels next week.

In 15 pages, European Council President Herman Van Rompuy sketched out a road map "towards a genuine economic and monetary union," designed to correct flaws in fiscal, financial and economic policies that have already driven five euro countries into the arms of hastily set-up bailout funds.

The report is meant to be the basis for discussions among European Union leaders on Dec. 13 and 14, and draws a timeline culminating in a joint budget for the euro zone.

Such a budget, Mr. Van Rompuy suggests, could act both as a buffer for shocks that hit one country more than its neighbors and an incentive for policy overhauls. To make those plans more digestible for politicians in Berlin or Helsinki, Mr. Van Rompuy ditched proposals for common bank-deposit insurance for the euro zone and joint government debts through mutual euro-zone bonds.

In contrast to a more ambitious paper released last month by the EU's executive arm, the European Commission, the council president?whose role is to judge what governments are practically likely to agree to?also erred on the side of vagueness when dealing with more controversial ideas.

Yet an early draft of the summit's conclusions and discussions among national ambassadors in Brussels show that leaders are far from ready to cede more money and sovereignty?even if such commitments would only be called on years down the line. The section of the conclusion dealing with a potential euro-zone budget?"fiscal capacity" in Brussels-speak?is rife with "coulds" and "woulds." It also stresses that leaders won't even begin discussing the idea until after the EU gets a new Parliament and set of commissioners in 2014.

The part of the report?and the draft conclusions?that may yield more-immediate results deals with Europe's banks. Since this summer, when the financial troubles of Spain and Cyprus took center stage, EU institutions have been pushing for a "banking union" in the euro zone, which would break the fatal link between bankrupt lenders and their governments.

Politicians in Paris, Madrid and Dublin were quick to jump on board, while German and Dutch policy makers have, unsurprisingly since their money is on the line, been more reticent with support.

In June, euro-zone leaders agreed in principle on two elements of such a banking union: setting up a powerful supervisor designed to catch weak spots in euro-zone banks early on, and allowing their bailout fund to directly recapitalize failing lenders. Next week, EU leaders look likely to endorse the creation of a common resolution authority that could begin making decisions over the fate of a sick bank, once the central supervisor fully takes over in early 2014.

According to Mr. Van Rompuy's report, such a resolution authority would ensure that a bank's shareholders and "some creditors" take the first hit during any rescue or closure, protecting taxpayers from footing too much of the bill. Until sufficient resources have been built up through bank levies, the resolution authority could draw a credit line from the bailout fund, European Stability Mechanism.

In many ways, a centralized resolution authority is the next logical step toward a banking union: If euro-zone money can be used to prop up banks, such rescues should be free of national bias toward local investors or executives.

But just as setting up a strong supervisor and direct recapitalization has proved much more difficult in practice, the creation of a resolution authority could also hit roadblocks.

The draft conclusions make no reference to resolution credit lines from the stability mechanism, indicating that the dirty work of dealing with the most toxic of assets and institutions will remain in national hands even after the bailout fund can directly recapitalize banks. That means the euro zone will likely stick to the practice of isolating lenders' worst investments in national "bad banks" before bolstering cleaned-up firms, as has been done in Ireland and Spain.

With his report, Mr. Van Rompuy also tried to clear up some of the biggest issues that have held back the first two ventures into banking union. He insists that the European Central Bank should act as the banking supervisor. That plan has been called into question by Germany, amid worries that the role might influence the central bank's monetary policy, and by noneuro states that might want to sign up for the new supervisory regime but wouldn't have a vote in the ECB.

He also wants the framework for any direct bank recapitalizations from the stability mechanism to be decided by March, although he doesn't specify when it would become operational.

Perhaps more importantly, Mr. Van Rompuy didn't take a stance on what the recapitalizations should actually look like. By staying silent, he lent no support to Spanish and Irish politicians keen to eventually offload their own stakes in banks they have already rescued onto the bailout fund, or to the Germans and Finns, who have rejected the idea of taking financial responsibility for other countries' banks bad lending decisions of the past.

A version of this article appeared December 7, 2012, on page A13 in the U.S. edition of The Wall Street Journal, with the headline: True Euro Union Is Still Lofty Ideal.

Source: http://online.wsj.com/article/SB10001424127887324640104578163301959437628.html?mod=europe_home

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