EU Ministers to Finalize Watered-Down Euro Zone Reform Plans

November 30, 2018 Updated: November 30, 2018

BRUSSELS—European Union finance ministers will seek final agreement on Dec. 3 on deeper euro zone integration which, after a year of negotiations, is likely to turn out much less ambitious than initially planned.

Championed by French President Emmanuel Macron, the reforms were meant to prepare the 19 euro countries for the next financial crisis and unite the EU around the single currency at a time of growing euroskeptic sentiment across the bloc.

But the talks ran into many difficulties: Germany did not have a proper government for almost six months, Italy elected a euroskeptic administration, and the talks exposed fault lines between the north and the south and even between institutions.

Even though the integration plans concern only the euro zone, all of the EU’s finance ministers except Britain’s will discuss them on Dec. 3 because all might adopt the euro at some point in the future.

“It will be long, it will be intense,” one senior euro zone official involved in the preparations of the ministerial discussions said. “It won’t be as high level [in terms of ambition] as some people expected a year ago, but we may exceed a little bit the low expectations right now,” he added.

The package agreed will then have to be endorsed by EU leaders on Dec. 14.

Starting Point

The initial ideas included the creation of a large euro zone budget financed by dedicated taxes and national contributions, a euro zone finance minister in charge of it, and a euro zone assembly in the European Parliament for democratic control.

The ESM euro zone bailout fund was to be transformed into a European Monetary Fund with wider powers of monitoring euro zone economies and a key role in a sovereign insolvency mechanism that would manage potential debt restructuring.

To break the doom-loop between governments and banks that buy large amounts of a single sovereign’s debt and then collapse as the sovereign becomes insolvent, there were to be limits on the concentration one country’s bonds in a bank’s portfolio.

The banking system was to be strengthened with a European Deposit Insurance Scheme (EDIS) that would guarantee deposits of up to 100,000 euros ($113,000) in any bank in any euro zone country.

Finally a euro zone bank resolution fund, created in 2014, was to get emergency loans from the ESM if ran out of money during a major banking crisis.

Likely Outcome

Only some of these ideas survived and many of those that did are a shadow of what they were when proposed in 2017.

There will be no euro zone caucus in the European Parliament and no finance minister. The euro zone budget, which France initially saw in the hundreds of billions of euros, may not have a set size at all.

“It’s gone from an elephant to a mouse. And the mouse is in a cage,” Dutch finance minister Wopke Hoekstra said about the budget, according to the Financieele Dagblad newspaper.

The ESM will not be transformed into a European Monetary Fund, the very name of which raised objections from the European Central Bank. After months of haggling with the European Commission over the division of responsibilities, the ESM will get some monitoring duties for euro zone economies focused on debt sustainability, market access, and borrowing costs.

It will likely be able to lend with fewer conditions to fundamentally sound euro zone economies so they can avoid the market stigma of a bailout and in this way help prevent crises.

The reform that is likely to be announced with great fanfare will be providing the bank resolution fund with emergency ESM loans of up to around 55 billion euros. But even there, such a backstop would only be provided from 2024.

By Jan Strupczewski

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