It could have been a merry get-together. The award of the 2012 Nobel Peace Prize and relatively calm financial markets presented a rare opportunity for EU leaders to deliberate during last week’s summit without undue pressure.
Setting up a parliamentary economic and financial affairs committee is becoming an urgent matter- Joseph Vella Bonnici
The Nobel Prize was given to the EU for its contribution to promote peace in the war-prone continent. As Germany’s Finance Minister stated: “The award of the Nobel Prize of Peace to the European Union reminds us that the EU is endlessly more than (interest-rate) spreads and bailout funds” (Wall Street Journal, October 12).
The European Central Bank’s commitment to purchase unlimited amounts of bonds of troubled euro states soothed financial markets. Both Spanish and Italian bond yields dropped significantly even though investors generally remain uneasy.
Despite this, the euro is not out of the woods and last week’s summit re-opened many past wounds.
In addition, it appears that the IMF is getting impatient with the EU’s half measures and is insisting on decisive action. It wants to ensure that its loans to euro states are well managed and sustainable.
Many of its Third World members are unhappy that so much IMF money is being channelled into more advanced economies.
The IMF wants the EU to accept a €50bn “haircut” from Greece’s massive sovereign debt. Europe is objecting in fear of possible contagion and political repercussions. Post-summit it appears that a solution has been found by the Troika and Greece will get the €31bn tranche it desperately needs by next month.
The October summit also confirmed the EU’s intentions to set up a banking union and to extend the ECB’s duties to include the supervision of eurozone banks.
France wants to move at a fast space on this, while Germany keeps putting on the brakes. Finally, EU leaders agreed that the necessary legal framework will be in place by the end of 2012, allowing the system to be operational during 2013.
A bank union allows eurozone banks to go bankrupt without pulling down with them other banks holding deposits with them. Agreeing on a bank union was a precondition set by German Chancellor Angela Merkel to consent that the European Stability Mechanism be permitted to directly recapitalise banks. This would reduce the debt of national governments, such as the Spanish and Irish, which would otherwise have to borrow themselves to bail out their banks.
Still, Germany continues to object that ESM money be used to make good for past bank debts. Prior to the summit, the President of the European Council distributed an ambitious agenda in the form of an ‘issues paper’. Herman Van Rompuy stressed the importance of agreeing on a ‘fiscal union’ for the survival and success of the euro. Backed by Germany, he proposed that the eurozone builds its own “fiscal capacity” to be able to “absorb asymmetric shocks”.
Building this capacity includes a separate budget for euro states (parallel to the EU one) and a super-Ministry of Finance. The latter would be headed by the Economic and Monetary Affairs Commissioner who will have the final say also in ensuring that national budgets are in line with the set targets. In exchange for giving up fiscal ‘sovereignty’, euro states will be offered ‘fiscal solidarity instruments’, such as jointly issued Treasury bills.
Van Rompuy also proposes a debt redemption fund whereby individual state debt in excess of the 60 per cent Maastricht threshold will be pooled and paid off over a 20-year period.
These ideas were not rejected outright by last week’s summit even though Berlin remains against the issuing of Eurobonds and other forms of debt mutualisation. Van Rompuy was asked to come up with a road map as to how to strengthen the Economic and Monetary Union in time for the December summit.
The UK Prime Minister made it clear that his country is not interested in joining any banking or fiscal union. He reiterated his Government’s commitment to preserve the Single Market, which accounts for half of the trade of his country. David Cameron realises that Europe needs to transfer more power to Brussels if it is to successfully defend its currency. This is not acceptable to London and Cameron is talking about a “fresh settlement with Europe” and cuts to the proposed EU budget, which is one fourth bigger than the last one.
Other non-euro states too are worried about these developments; they have been offered the possibility of joining the bank union but will only get ‘observer’ status.
Malta has agreed to the banking union but not for fiscal union and the tax on financial transactions. Lawrence Gonzi has declared that “Malta is against the EU fiscal union” (The Times, October 8). Few explanations have been given for this position as our Parliament earlier this month rushed related legislation without engaging in serious debate.
Setting up a parliamentary economic and financial affairs committee is becoming an urgent matter as Europe will continue to be obliged to take measures that will also have a significant impact on the future well-being of Maltese society.
The big question is whether Malta’s opposition to the fiscal union is intended to strengthen its bargaining position with regard to the funding it will get over the next seven years or is it really prepared to opt out of the euro to defend its tax sovereignty and tax-dependent economic activities?
fms18@onvol.net