“A secret plan to save Europe”: That’s how the German newspaper Welt am Sonntag described it this weekend. According to the paper, European Council President Herman Van Rompuy, European Commission President Jose Manuel Barroso, Eurogroup chief Jean-Claude Juncker and European Central Bank President Mario Draghi were all working behind the scenes on a master plan.
But it turns out the grand plan is not all that secret. At the last European summit on May 23, the four were explicitly given the task of finding a permanent solution to the crisis by the end of this month.
Already the goalposts have moved. The main question is no longer whether Greece can stay in the eurozone, but whether Spain, a far larger economy, will be in a position to rescue its struggling banks.
Yesterday, German Chancellor Merkel’s CDU party and the biggest opposition party SPD failed to resolve a row holding up parliamentary ratification of the EU’s new fiscal treaty and the ESM rescue fund. Merkel needs the backing of the SPD but in exchange they insist on a financial transaction tax as well as more steps to boost European growth and create jobs. Talks will resume next week (June 21). Another item on the agenda was a discussion about the German Council of Economic Experts’ proposal to create a European Redemption Pact(ERP). The pact includes a binding commitment of all participating countries to bring public debt ratios below the reference value of 60% within the next 20 to 25 years. To ensure that this objective can be reached within realistic primary balances, participating countries can transfer their excessive debt exceeding the 60% threshold at a certain date, into a redemption fund for which participating member countries are jointly and severally liable.
The UK Telegraph reports today that Merkel signaled a shift in favor of the ERP. Stern Magazine on the other hand says that German FM Schaeuble rejects the proposal as it would violate EU treaties. Anyway, it is clear that the Germans are looking into the proposal which might eventually be part of a solution (‘master plan’) to save the euro.
The fundamentals of that master plan are likely to be agreed on at the June 28-29, 2012 EU Summit. Press reports suggest that Germany and France are preparing measures to propose at that summit. France is pushing hard for a banking union.
A first step would be giving the ECB responsibility for supervising systemically risky banks and their winding up in case of failure. A next step would be using the ESM to directly recapitalize banks and finally granting the fund a banking license so it can leverage itself and increase firepower. German Chancellor Merkel on the other hand keeps calling for a closer political and fiscal union. It seems as if both parties will need to given somewhat in on their diverging opinions on how to tackle the crisis. The draft conclusions for the June 28/29 EU Summit show: “The new stage will build on deeper policy integration and coordination. There is a need for more specific building blocks centered around a much stronger banking and fiscal integration, underpinned by enhanced euro governance.”