The Judicial ‘Bail Out’ of the European Stability Mechanism: Comment on the Pringle Case. Research Paper in Law 09/2013

Since the beginning of the crisis, many responses have been taken to stabilise the European markets. Pringle is the awaited judicial response of the European Court of Justice on the creation of the European Stability Mechanism (ESM), a crisis-related intergovernmental international institution which provides financial assistance to Member States in distress in the Eurozone. The judgment adopts a welcome and satisfactory approach on the establishment of the ESM. This article examines the feasibility of the ESM under the Treaty rules and in light of the Pringle judgment. For the first time, the Court was called to appraise the use of the simplified revision procedure under article 48 TEU with the introduction of a new paragraph to article 136 TFEU as well as to interpret the no bail out clause under article 125 TFEU. The final result is rather positive as the Court endorses the establishment of a stability mechanism of the ESM-kind beyond a strict reading of the Treaty rules. Pringle is the first landmark ECJ decision in which the Court has endorsed the use of new and flexible measures to guarantee financial assistance between Member States. This judgment could act as a springboard for more economic, financial and, possibly, political interconnections between Member States.

The Single Supervisory Mechanism: A Sound First Step in Europe’s Banking Union? Egmont European Affairs Paper, March 2013

The financial and economic crisis has hit Europe in its core. While the crisis may not have originated in the European Union, it has laid bare structural weaknesses in the EU’s policy framework. Both public finances and the banking sector have been heavily affected. For a long time, the EU failed to take into account sufficiently the perverse link that existed between the two. Negative evolutions in one field of the crisis often dragged along the other in its downward spiral. In June 2012, in the early hours of a yet another EU Summit, the leaders of the eurozone finally decided to address the link between the banking and sovereign debt crises. Faced with soaring public borrowing costs in Spain and Italy, they decided to allow for the direct European recapitalisation of banks when the Member State itself would no longer be in a position to do so. In exchange, supervision of the banking sector would be lifted to the European level by means of a Single Supervisory Mechanism. The Single Supervisory Mechanism, or SSM in the EU jargon, is a first step in the broader revision of policies towards banks in Europe. The eventual goal is the creation of a Banking Union, which is to carry out effective surveillance and – if needed – crisis management of the banking sector. The SSM is to rely on national supervisors and the ECB, with the ECB having final authority on the matter. The involvement of the latter made it clear that the SSM would be centred on the eurozone – while it is to remain open to other Member States willing to join. Due to the ongoing problems and the link between the creation of the SSM and the recapitalisation of banks, the SSM became one of the key legislative priorities of the EU. In December 2012, Member States reached an agreement on the design of the SSM. After discussions with the European Parliament (which were still ongoing at the time of writing), the process towards making the SSM operational can be initiated. The goal is to have the SSM fully up and running in the first half of 2014. The decisions that were taken in June 2012 are likely to have had a bigger impact than the eurozone’s Heads of State and Government could have realised at the time for two important reasons. On the one hand, creating the SSM necessitates a full Banking Union and therefore shared risk. On the other hand, the decisions improved the ECB’s perception of the willingness of governments to take far-reaching measures. This undoubtedly played a significant role in the creation of the Outright Monetary Transactions programme by the ECB, which has led to a substantial easing of the crisis in the short-term. 1 These short-term gains should now be matched with a stable long-term framework for bank supervision and crisis management. The agreement on the SSM should be the first step in the direction of this goal. This paper provides an analysis of the SSM and its role in the creation of a Banking Union. The paper starts with a reminder of why the EU decided to put in place the SSM (§1) and the state of play of the ongoing negotiations on the SSM (§2). Subsequently, the supervisory responsibilities of the SSM are detailed, including its scope and the division of labour between the national supervisors and the ECB (§3). The internal functioning of the SSM (§4) and its relation to the other supervisors are discussed afterwards (§5). As mentioned earlier, the SSM is part of a wider move towards a Banking Union. Therefore, this paper sheds light on the other building blocks of this ambitious project (§6). The transition towards the Banking Union is important and will prove to be a bumpy ride. Before formulating a number of conclusions, this Working Paper therefore provides an overview of the planned road ahead (§7).

Austerity: European democracies against the wall. CEPS Paperbacks. July 2013

The crisis in the eurozone has had a dramatic impact on the economic and social fabric of European countries. However important it may be, the economic dimension is only the symptom of a broader problem. The crisis is primarily political in nature. Lorenzo Bini Smaghi argues in this book that the crisis reflects the inability of western democracies to solve problems that have been building for over two decades. He finds that democratically elected officials are loathe to take unpopular decisions that could jeopardise their re-election. Emergency thus becomes the engine of political action, and the justification for corrective measures vis-à-vis the voters. As a consequence, the cure in the form of austerity, administered belatedly and under pressure from the markets, becomes even more painful and unpopular, giving rise to populist movements and endangering democracy itself.

Europe's Ungainly Banking Revolution. CEPS Commentaries, 24 March 2014

In assessing the compromise agreement reached on March 20th on how to deal with banks in difficulty in the eurozone, Daniel Gros finds that the Single Resolution Fund represents an awkward step in the right direction in that it leaves as many problems unresolved as it addresses. But the end result is likely to be quite strong, because it establishes a key innovation: a common fund that effectively mutualises much of the risk resulting from bank failures.

Euroscepticism vs. Political Pragmatism: The Finns Party tones down its criticism of the EU. EPIN Commentary No. 19, 26 June 2014

While many Eurosceptic parties in Europe achieved historical successes in this year’s EP elections, Finland’s populist Finns Party was unable to fulfil its own high expectations. With the eurozone crisis at least temporarily subsiding and Finland’s own economy struggling, the party has been unable to find a new electoral trump card. Facing a changed political climate and stiffer competition, the party is currently toning down its criticism of the EU, as indicated by its recent decision to join the British Tories in the European Conservatives and Reformists (ECR) group.

Flexibility clauses in the Stability and Growth Pact: No need for revision. CEPS Policy Brief No. 319, 24 July 2014

This Policy Brief offers an in-depth review of the Stability and Growth Pact (SGP) and looks at whether the margins of flexibility within existing rules are sufficient in the current climate of low growth, or whether there is a need to broaden them. The issue is especially relevant as the changing economic environment is raising fresh questions about whether the EU’s current common economic policies are able to manage dismal growth and low inflation. The fragile state of confidence in financial markets and the unresolved but inevitable questions of moral hazard linked to lax fiscal policies mean that no large-scale fiscal expansion to support the recovery of economic activity is feasible. The discussion may therefore only concern the scope within the SGP to accommodate an unexpected drop in economic activity and to provide room for the implementation of structural reforms. Here, we analyse the flexibility clauses of the Stability and Growth Pact under three headings; namely “exceptional circumstances”, “structural reforms and other relevant factors”, and the “investment clause”. Recommendation: Our main conclusion is that the SGP contains sufficient flexibility to accommodate an unexpected drop in economic activity and has the margins needed to finance structural reforms during the transition to the new regime. We therefore see no need to change the existing rules of the SGP. We believe that the ongoing debate about a fresh growth strategy for the eurozone and the European Union would greatly benefit from removing from the Council table ill-formulated and unnecessary demands for greater flexibility in the SGP.

The transatlantic growth gap. CEPS Commentary, 5 August 2014

Daniel Gros argues in this commentary that the cause of the transatlantic growth gap following the recovery starting in 2010 from the global financial crisis should not be sought in excessive eurozone austerity or the excessive prudence of the European Central Bank. Rather, compared to the US, he argues that the excess debt created in the EU during the boom years has been much more difficult to work off. He acknowledges that European officials are right to promote structural reforms of EU countries’ labour and product markets, but advises that they should also focus on overhauling and accelerating bankruptcy procedures, so that losses can be recognised more quickly and over-indebted households can start afresh, rather than being shackled for years.

Fighting Deflation: Would QE work in the euro area? CEPS Commentary, 9 October 2014

With inflation in the eurozone stubbornly remaining on a downward trajectory, pressure is growing on the ECB to do “something” to prevent outright deflation. But, given the financial structure of eurozone countries, would the preferred "something" – quantitative easing – actually do the trick?

Policy recommendations for the new European Commission: priorities for stabilising EMU. EPC Discussion Paper, 30 September 2014

The euro area crisis exposed substantial structural flaws in the currency area’s architecture. Addressing these flaws this discussion paper explores the ways in which the European Institutions can re-evaluate and overcome challenges for a more positive European future. To do this, Janis A. Emmanouilidis, Jan David Schneider, and Fabian Zuleeg recommend that the coming European Commission should develop a new framework to assess the real returns to growth of public and social investment, which could open the path for more flexibility on deficits in future. In close coordination with the European Parliament, the Commission should also review the Country Specific Recommendations with a stronger focus on a smaller number of key priorities for each country. The construction of a fiscal capacity should be made a priority in the new political cycle to resolve the absence of a mechanism to provide effective ex ante fiscal risk sharing in the Eurozone. Furthermore, to boost growth, there is a need to encourage private, public and social investment through a European Investment Programme (EIP) in the short term. Finally, the Commission should ensure that the implementation of an EIP is compatible with the long term goals of a fiscal capacity.

Financial Transaction Tax (FTT): Why the EU needs the FTT but the FTT does not need the EU. EPC Policy Brief, 17 June 2014

Through an Enhanced Cooperation Procedure (ECP) 11 eurozone countries (ECP-11) – among them the four biggest; Germany, France, Italy and Spain – have aspired to go ahead with the introduction of a Financial Transaction Tax (EU-FTT). Apart from generating substantial revenues for tight fiscal budgets, an EU-FTT could also contribute to the reduction of transactions, which are harmful for the efficient functioning of financial markets and the real economy. However, the willingness to go forward with the finalisation of an ambitious proposal has lost some momentum recently; some of the envisaged compromises may even threaten the viability of the whole project.

Brexit or not? Time for the EU to move. EPC Commentary, 8 September 2014

The deteriorating relationship between the United Kingdom (UK) and the rest of the EU, including the prospect of a referendum on EU membership, would have dominated the Union’s agenda had it not been for the economic/financial crisis, followed by the external crisis which we are now facing in the East. Precisely because of these crises, it is now time for the incoming European Commission to take the bull by the horns and ensure that the EU can move on from a potential referendum and its possible outcomes. The June European Council noted that “the UK raised some concerns related to the future development of the EU. These concerns will need to be addressed. In this context, the European Council noted that the concept of ever closer union allows for different paths of integration for different countries, allowing those that want to deepen integration to move ahead, while respecting the wish of those who do not want to deepen any further.” While the EU has, arguably, successfully developed at different speeds for decades, to address the UK’s (fundamental) concerns, it is now time to work out whether and how the UK can be accommodated, and what this would mean in practice. UK membership is desirable but not at any price, so the aim should be to keep the UK in, while also ensuring that the principles on which the EU is built are protected. There will need to be a modus operandi which enables the EU and in particular, the Eurozone, to continue to make progress in addressing the shortcomings of European integration and European Monetary Union (EMU) in particular, while at the same time offering a reform package that can satisfy the UK. This does not necessarily mean that all EMU reforms have to be within the EU framework: additional intergovernmental arrangements could also be a possibility. However, this could add to the complexity and inefficiency of the system, as well as sidelining the supranational element of EU governance which will be needed to make EMU function.

Social cohesion in Europe after the crisis

In the last few years, Europe has been forced to re-think its socio-economic model. Social indicators speak for themselves. Real household income declined significantly between 2008 and 2012, employment rates are lower and the number of people in poverty saw a steady rise with a growing divergence between EU countries. In the eurozone, cuts in public spending and internal devaluation have been the main tools to aim at a correction of unsustainable fiscal positions and a strengthening of competitiveness. It has carried a heavy social price tag. Outside of the eurozone, austerity has also been the prevailing policy, seen as inevitable to avoid economic instability. The crisis has not hit everyone equally. The general losses have been high, but there have also been some quite important redistributive effects. With all the difficulties of defining and measuring 'fairness', it is clear that the adjustment has not been equitable. Apart from issues of market failure, there have been direct increases of inequality within each of the member states. Higher poverty rates have been observed, rises in inequalities between higher and lower income earners as well as intergenerational inequalities between age groups. Long-term consequences are only beginning to surface in the public debate as the most immediate pressures of the crisis are slowly overcome. In this report, the authors first of all look at the results of the survey we have carried out in seven European countries and review perceptions of the socio-economic model. Subsequently, they assess the importance of the social dimension in the broader context of the European growth model. The authors discuss the impact of the structural challenges of globalisation, demography and technological change. They then review the EU’s performance in the crisis. Finally, the authors make a number of recommendations on how to bridge the gap between Europeans‘ expectations and reality.

The ECB AQR and the EBA Stress Test: What will the numbers tell? CEPS Commentary, 23 October 2014

From the Introduction. With the results of its asset quality review (AQR), to be published on 26 October 2014, the European Central Bank intends to provide clarity on the shape of the 120 banks it will supervise in the eurozone, and it may request a series of follow-up actions before assuming its new set of tasks under the Single Supervisory Mechanism (SSM) Regulation in November. On the same day, the European Banking Authority (EBA) will also be publishing the results of its stress test, covering 123 banks across 22 European Economic Area (EEA) countries. For the ECB, it will be a matter of setting the standard for its future task, whereas EBA, seeks to restore the confidence it lost in the 2011 stress test and 2012 capital exercise. Both institutions will need to indicate how they will cooperate in the future in these tasks, and through enhanced disclosure, strengthen the confidence in the European banking system.

A Monetary Union Requires a Banking Union. Bruges European Economic Policy (BEEP) Briefing 33/2014

This paper argues that a monetary union requires a banking union. While the USA developed both during a time span of two centuries, the EMU was created in the course of two decades and remains unfinished as the economic pillar is largely missing. The financial crisis and the Eurocrisis have shown that a genuine banking union is even more needed for the Eurozone than a budget or a fiscal union to let the euro survive.

Germany on Russia. Yes to links, no to rapprochement. OSW Point of View Number 39, March 2014

The German media have been correctly describing the atmosphere between the Chancellor's Office and the Kremlin as the chilliest in years. Various factors have laid bare the fact that the strategic partnership between Germany and Russia is at best currently undergoing a 'technical pause’: the underwhelming outcomes of the German-Russian intergovernmental consultations in the autumn of 2012 and of Chancellor Merkel's meeting with President Putin during the Hanover fair in the spring of 2013, as well as the way in which the EU dealt with the Cyprus debt issue and, finally, the support that Germany has extended to the anti-presidential protests in Ukraine. Meanwhile, the priorities of Germany's foreign and economic policy have changed considerably, not only as a result of the eurozone crisis, but also, even more importantly, because the attention of German business and politics has been shifting to the so-called neue Gestaltungsmächte, or new regional powers. German politicians increasingly believe that Russia should not be offered new methods or mechanisms of co-operation. Firstly, because the existing ones have not been fully utilised, and secondly, because Germany at this stage seems to have no idea of what the long-term strategy of co-operation with Putin's Russia should be.