The Meseberg declaration and euro-zone reform

Martin Sandbu thinks the Meseberg declaration is a small step for the euro economy, a bigger leap for its politics, and has exceeded expectations. The momentum – moderate, but momentum nonetheless – is back. The agreement on a budget for the euro zone – although eye-catching – is not as consequential as the agreement on the fundamental principle that economic convergence, investment for growth and indeed macroeconomic stabilisation are common concerns for euro-zone countries.

Sandbu also thinks that linking up the euro-zone budget with the MFF is to make it a commitment that will be made good on, and opens up the political space for finding a compromise because it guarantees that the euro-zone budget will be small, which will reassure the German political class. At the same time, it creates the possibility of freeing up resources from other uses to devote them to the euro-zone budget’s purposes. And it also allows for creative approaches to invite non-euro countries aboard any institutional change, as demanded by the countries of the ‘new Hanseatic League’.

Thomas Piketty thinks that this is a compromise without ambition, that will change nothing of the sentiment of inertia that is widespread in Europe and the world. France and Germany show that they are incapable of formulating precise and ambitious proposals to reform Europe, due to their respective national egoism and short-sightedness.

Piketty thinks that there is too little detail on the proposal of a euro-zone budget, arguing that Macron and Merkel do not want to change anything essential in the current state of Europe because they are prone to a similar kind of blindness, as they find that their respective countries do not face the kinds of problems faced by southern members. But by doing so, they risk triggering an explosion of the system. To escape from the current challenge of nationalism, it is necessary to propose that the future euro-zone budget be funded by common taxation, voted upon by a truly democratic assembly and allocated to each country according to its fiscal contribution, with net transfers limited to 0.1%-0.5%.

Guntram Wolff thinks Meseberg is a sign that we are moving – but painfully slowly. The banking union package included in Meseberg is weak: the European Stability Mechanism (ESM) backstop is limited in size to that of the Single Resolution Fund (SRF), which means effectively that the SRF is doubled. There is no detail on how the governance of such a backstop would work and there is nothing on a European Deposit Insurance Scheme (EDIS), except a weak commitment for political dialogue.

The budget for the euro zone is for convergence and investment, not stabilisation, possibly with a credit line for unemployment insurance. But what Wolff considers most interesting here is the fact that it might get funding from three sources: the EU, Member States and its own tax. Decision-making is also interesting, combining strategic decisions by euro-area Member States with decisions on expenditure by the European Commission.

Nicolas Véron has a long thread commenting on a second Franco-German ministerial document that was published (Jeremie Cohen-Setton has a detailed thread on what was changed from this document to the actual statement). On banking union, the document refers the Ecofin roadmap of June 2016, which Véron thinks is not a great signal because that roadmap followed a pretty catastrophic meeting that ended in complete deadlock and the freezing of the Commission’s EDIS project.

On non-performing loans (NPLs), the ratios of 5% gross NPLs and 2.5% net NPLs for all Systemic Risk Board (SRB) banks and all other banks sound unnecessary, one-size-fits-all, and artificial in light of potentially differing cycles. On backstop, the more detailed document raises concerns: not much in the size cap (no more than SRF), nor the timing, but in the paragraph on decision-making – suggesting national veto and possibly Bundestag review too.

Philippe Waechter thinks the proposal rests within the framework that Merkel had delineated in her interview to Frankfurter Allgemeine Zeitung, and that we need a lot more details to understand whether this budget will be beneficial. Size seems to be already controversial, as Macron called for several points of GDP and Merkel speaks of tens of billions, so the margin for interpretation is large.

An important point is how the German parliament will vote on this measure in light of the ongoing tensions internal to the majority. If there were to be a compromise with the CSU on a trade-off between a limited budget and refugee policy, that would be the worst outcome – according to Waetcher. He fears that this declaration could be an announcement intended to give an appearance of unity at a time when France and Germany are faced with an Italy where the League party is by now very powerful, and the issue of refugees is the first question in Europe for its political implications.

Ferdinando Giugliano thinks that the Meseberg declaration looks like a missed opportunity: it is ambitious where it can afford to be vague and modest where it needs to be concrete. The priority was completing the banking union project with a backstop fund and a common deposit insurance and, according to Giugliano, the Meseberg declaration offers little progress on either front.

Merkel and Macron have committed to using the ESM to backstop the resolution fund, but the exact governance of the backstop remains fuzzy and the
size is small. The deposit insurance project has been kept alive by saying that political negotiations could start after the end of the European Council, but the summit offered an ideal opportunity to at least start on the initial steps. These concrete deliverables appear to have been traded off for a euro-zone budget which would start in 2021. This is well beyond what most observers had deemed possible, but Merkel and Macron offered little detail on how such a budget would work.

Andrew Watt thinks the creation of a euro-area budget within the EU budget and a European unemployment reinsurance fund are, on paper, a concession by the German side to Macron, as they reflect his longstanding agenda. There is quite a lot of language in the Declaration on the European Stability Mechanism, without a very clear picture emerging. Generally, both the stabilisation function (i.e. ability to lend) but also the measures to apply conditionality to support are to be reinforced in parallel.

Where the declaration is clearly disappointing, according to Watt, is in failing to make a clear commitment for a common deposit insurance (i.e. EDIS). One can only conclude that considerable differences of opinion pertain on this issue between the two countries. Overall, given the lack of concreteness it is easy to dismiss the Meseberg declaration as lacking ambition or importance. This would be serious error, Watt says, because EU politics is a battle of position not of movement. The precise details of a proposal are less important. What is crucial is to get a basic institutional concept – such as an economic and monetary union budget, or an unemployment insurance scheme – on to “the books”.