What kind of European Banking Union? Bruegel Policy Contribution [2012/12?]June 25, 2012

This paper discusses the creation of a European Banking Union. First, we discuss questions of design. We highlight seven fundamental choices that decision makers will need to make: Which EU countries should participate in the banking union? To which categories of banks should it apply? Which institution should be tasked with supervision? Which one should deal with resolution? How centralised should the deposit insurance system be? What kind of fiscal backing would be required? What governance framework and political institutions would be needed? In terms of geographical scope, we see the coverage of the banking union of the euro area as necessary and of additional countries as desirable, even though this would entail important additional economic difficulties. The system should ideally cover all banks within the countries included, in order to prevent major competitive and distributional distortions. Supervisory authority should be granted either to both the ECB and a new agency, or to a new agency alone. National supervisors, acting under the authority of the European supervisor, would be tasked with the supervision of smaller banks in accordance with the subsidiarity principle. A European resolution authority should be established, with the possibility of drawing on ESM resources. A fully centralized deposit insurance system would eventually be desirable, but a system of partial reinsurance may also be envisaged at least in a first phase. A banking union would require at least implicit European fiscal backing, with significant political authority and legitimacy. Thus, banking union cannot be considered entirely separately from fiscal union and political union. The most difficult challenge of creating a European banking union lies with the short-term steps towards its eventual implementation. Many banks in the euro area, and especially in the crisis countries, are currently under stress and the move towards banking union almost certainly has significant distributional implications. Yet it is precisely because banks are under such stress that early and concrete action is needed. An overarching principle for such action is to minimize the cost to the tax payers. The first step should be to create a European supervisor that will anchor the development of the future banking union. In parallel, a capability to quickly assess the true capital position of the system’s most important banks should be created, for which we suggest establishing a temporary European Banking Sector Task Force working together with the European supervisor and other authorities. Ideally, problems identified by this process should be resolved by national authorities; in case fiscal capacities would prove insufficient, the European level would take over in the country concerned with some national financial participation, or in an even less likely adverse scenario, in all participating countries at once. This approach would require the passing of emergency legislation in the concerned countries that would give the Task Force the required access to information and, if necessary, further intervention rights. Thus, the principle of fiscal responsibility of respective member states for legacy costs would be preserved to the maximum extent possible, and at the same time, market participants and the public would be reassured that adequate tools are in place to address any eventuality.

Proportionality needed in the subsidiarity debate in the EU – Appraisal of the British and Dutch initiatives. CEPS Essay No. 11, 8 April 2014

In a new CEPS Essay, Michael Emerson assesses the initiatives taken by the UK and Dutch governments to cut out excessive EU regulatory intrusion, namely in the form of the ongoing British Balance of Competences Review and the Dutch list of 54 items of EU regulation that they would like to see repealed or reformed. He concludes that while one can approve of a campaign for better EU regulation and for cutting out unnecessary micro-regulation, it would require impressive commitment by all member states and the EU institutions to follow the best features of the British and Dutch leads for this to have a real effect in the fight against populist euroscepticism. In his view, that battle will have to be won primarily with bigger weapons – some combination of better macroeconomic results, bigger foreign policy achievements and the emergence of a European-level political leadership to which the people can relate. In short, there has to be due proportionality in the diagnosis of the responsibility of inadequate subsidiarity for the EU’s ills.

The History and Challenges of Cohesion Policies. Jean Monnet/Robert Schuman Paper Series Vol. 14 No. 2, February 2014

From Introduction. Regional economic disequilibria was viewed as both an obstacle to and result of integration (European Commission 1965; European Commission 1962; European Commission 1969). Even within the Treaty of Rome, the Community tried to establish mechanisms to alleviate regional inequality. However, it was not until 1975 that the main mechanism of regional policy was established as a result of British and Irish enlargement: the European Regional Development Fund (ERDF). Since then, cohesion policy has become a significant EU expenditure accounting for €347bn, or 35.7% of the total EU budget for 2007-13(European Commission Regional Policy-Info Regio 2012). It has also become a key policy linked to enlargement. The underlying principle of cohesion policy assumes that the market alone cannot solve development problems and therefore government intervention is needed. This notion is in direct contrast to the underlying principle of EU competition policy, which asserts that the free market can solve economic development problems (Meadows, interview by author, 2003). The logic underlying cohesion policy is not only counter to EU competition policy, but also regulatory policies. Unlike other EU policies, cohesion policy is not a sectoral policy, but rather territorial in nature (Leonardi, 2006). Thus at times EU regulatory policy has also unintentionally worked counter to the goals of regional policy, sometimes disadvantaging poorer regions (Dudek, 2005). As the Community has sought to ameliorate regional disparities, it meant that all levels of government: local, regional, national and supranational would need to be involved, however, member states have different territorial governance and European regional development programs have to varying degrees impacted the relationship and policy responsibility of different levels of government (Leonardi, 2006; Bachtler and Michie 1993; Marks, 1993). The very nature of regional development policy has provoked a re-examination of subsidiarity, or which level of government is the lowest and most appropriate level. The discussion of policy formulation and implementation at the lowest level possible also addresses the issue of the democratic deficit. Some argue that the closer government is to the people the more responsive and representative it is. Democracy, however, also implies that public funds are used in a transparent way and for public rather than private good. Yet, as we examine the history and current situation of EU regional funds we find that corruption and misuse still abound. Thus, to understand the history of regional policy it is imperative to look at the major transformations of the policy, how regional policy has impacted subsidiarity and the quality of democracy, become an important instrument of enlargement and contradicted or conflicted with other EU policies.

Europe's social problem and its implications for economic growth. Bruegel Policy Brief 2014/03, 1 April 2014

The European Union faces major social problems. More than six million jobs were lost from 2008-13 and poverty has increased. Fiscal consolidation has generally attempted to spare social protection from spending cuts, but the distribution of adjustment costs between the young and old has been uneven; a growing generational divide is evident, disadvantaging the young. The efficiency of the social security systems of EU countries varies widely. Countries with greater inequality tended to have higher household borrowing prior to the crisis resulting in more subdued consumption growth during the crisis. The resulting high private debt, high unemployment, poverty and more limited access to education undermine long-term growth and social and political stability. Policymakers face three main challenges. First, addressing unemployment and poverty should remain a high priority not only for its own sake, but because these problems undermine public debt sustainability and growth. Second, bold policies in various areas are required. Most labour, social and fiscal policies are the responsibility of member states, requiring national reforms. But better coordination of demand management at European level is also necessary in order to create jobs. Third, tax/benefit systems should be reviewed for improved efficiency, inter- generational equity and fair burden sharing between the wealthy and poor.

Is Independence Possible in an Interdependent World? Scotland vs. the UK's Participation in the European Economy. Bruges European Economic Policy (BEEP) Briefing 30/2013

Many commentators have criticised the strategy used to finance regional governments such as the Scottish Parliament – both the block grant system and the limited amount of fiscal autonomy devised in the Scotland Act of 2012. This lecture sets out to identify what level of autonomy or independence would best suit a regional economy in a currency union, and also the institutional changes needed to sustain those arrangements. Our argument is developed along three lines. First, we set out the advantages of a fiscal federalism framework and the institutions needed to support it, but which the Euro-zone currently lacks. The second is to elaborate a model of fiscal federalism where comprehensive powers of taxation and spending are devolved (an independent Scotland and the UK remain constituent members of the EU and European economy). Third, we evaluate the main arguments for the breakup of nations or economic unions with Scotland and the UK as leading examples. We note that greater autonomy may not result in increases in long run economic growth rate, but it does imply that enhancing the fiscal competence and responsibility of regional governments would result in productivity gains and hence higher levels of GDP per head. That means the population is permanently richer than before, even if ultimately their incomes continue to grow at the same rate. It turns out that these improvements can be achieved through devolved tax powers, but not through devolved spending powers or shared taxes.

Frontex and the respect of fundamental rights: from better protection to full responsibility. EPC Policy Brief, 3 June 2014

The European Agency for the Management of Operational Cooperation at the External Borders of the Member States of the European Union (Frontex) was created to improve border management cooperation between Member States. Seen from its inception as a security-oriented body, tools and rules have been gradually developed to enhance the human rights dimension and protection regarding Frontex activities. However, this step has not been accompanied with the explicit recognition of Frontex’s legal responsibility regarding violations of human rights occurring during joint operations it coordinates. Despite Frontex position rejecting such a responsibility, it is no longer clear whether this position can be maintained, as Yves Pascouau and Pascal Schumacher demonstrate in this Policy Brief.