The long, hot summer of the euro area

Ralitsa Kovacheva, August 12, 2011

Holiday August may be poor of events but instead it is full of rumours and ideas that foreshadow a hot European autumn.

Undoubtedly, the most tense remains the situation in the euro area. The financial markets continue to attack consistently one or another country - no longer on the periphery but in the very heart of the monetary union. The pressure on Italy and Spain remains strong and attention is already shifting to France. The reason is not even in the fiscal and economic indicators of the country, which are not bad by themselves. It is on the one hand the large exposure of French banks to debt of troubled eurozone countries and, on the other – possible pressure on the budget from the need to “rescue” more, even larger economies.

Against this background, there is an urgent need to arrange the adoption by national parliaments of the decisions taken at the meeting of eurozone leaders on July 21. The difficulties stem not so much from the parliamentary holidays but from the uncertainty whether governments are able to ensure the necessary political support. It is already clear that there will be problems in this regard (not for the first time) in Finland, as Prime Minister Jyrki Katainen said the country was against any changes in the eurozone bailout fund - the EFSF.

The President of the Slovak Parliament, Richard Sulik, even openly declared that he would do everything possible the proposals not to pass through Parliament. Sulik is a leader of the Freedom and Solidarity party, the second largest partner in the ruling centre-right coalition. He said the decision to take debts of troubled countries made the EU a “debt union”. This is “a straight road to complete socialism,” Mr Sulik said, quoted by EurActiv, comparing the European Union with the Soviet Union.

To give an example that the others could follow and to ensure that the decisions of 21 July will be implemented, the leaders of Germany and France issued a special statement, where they pledged that the changes would be adopted by their national parliaments by end-September.

France and Germany, however, use quiet diplomacy to achieve their goals. After the meeting of eurozone leaders French President Nicolas Sarkozy announced that in the autumn the two countries would present their own proposals for EU's economic governance. Given the blocked negotiations between the European Parliament and the Council on the economic governance legislative package, this intention bodes new inter-institutional struggles.

Mr Sarkozy did not specify in what direction the proposals would be focused. In early August, however, French newspaper Le Monde reported that France would propose to Germany the President of the European Council, Herman Van Rompuy to be appointed to lead the euro area formally and permanently. The French wish to institutionalise the governance of the monetary union is not new, but until now Germany was against the idea of formal separation of the seventeen euro countries from the other ten. Now, however, according to the newspaper, Berlin is likely to support the idea. On the one hand, this year the euro area has already had two separate summits, chaired by Mr Van Rompuy, and most likely there will be at least one more summit in the autumn, so it only remains to establish this practise permanently. On the other - as we have often witnessed in the past year, Germany will trade its support against a French “yes” on another issue.

At this stage we can only guess what the deal could be. But one recently reported news may indicate at least the direction. German Economy Minister Philipp Roesler proposed a new European institution to be created to take over the supervision of the implementation of the Stability and Growth Pact by eurozone member states. The so called “Stability Council” should be “non-electable” and independent of political pressure in order to be able to impose automatic sanctions against countries violating the debt and deficit criteria. The new institution must also conduct “competitiveness tests” among the euro area countries.

The German government officially differentiated itself from the words of the minister, who is a leader of the smaller coalition partner of the Christian Democrats - the Free Democrats. It is not a secret, however, that Germany has for long insisted on a mechanism for faster and more severe sanctions (including political ones) against eurozone countries violating fiscal discipline.

The idea was met with warm support from the ALDE Group in the European Parliament. Group's leader Guy Verhofstadt agreed with Mr Roesler that “the decisions on sanctions within the stability and growth pact must be taken away from the Member States in the Council.” This position has been expressed repeatedly both by Mr Verhofstadt himself, and the European Parliament as a whole. It was Parliament's efforts to reduce the Council's influence in this respect, through the new legislation on economic governance, that caused the deadlock in the negotiations on the so called Six Pack. Liberal MEP Sylvie Goulard also believes that “this could be a very good way forward, though it is important that the proposed Stability Council does not in any way weaken the position of the Commission”. She said the proposal was constructive and “deserves further consideration.”

What exactly the Franco-German proposals would be, we will see probably in September. It is interesting how they will affect the negotiations between the Parliament and the Council on the economic governance package and whether they will contradict to some aspects of the new legislation even before it is adopted. What can be seen at this stage is the direction – towards institutionalisation of the eurozone.

This is not the first time there are clear intentions for that but for the first time there are such favourable conditions. However, when a year ago euinside compared the euro area with a European Super League (by analogy with football), now it is not about the separation of the elite but literally about survival. How exactly a separate governance of the euro area would help it survive and how the remaining ten countries would react, as well as the Parliament and the Commission, we will see when the ideas are put on the table.