Euro zone and fiscal union update
Debate on banking and fiscal union comes amid ongoing fears over Spain, Italy and Greece.
“Financial market tensions are high. External, fiscal and financial imbalances are still prevalent, having a major impact on growth and employment prospects and confidence.” This was the assessment of the G20 leaders after their two-day summit in Mexico in June.
The G20 stated that in advocating further economic and monetary union in the EU, it supported “the intention to consider concrete steps towards a more integrated financial architecture, encompassing banking supervision, resolution and recapitalisation, and deposit insurance.”
Its euro zone members (France, Germany and Italy) promised to take “all necessary policy measures to safeguard the integrity and stability of the area, improve the functioning of financial markets and break the feedback loop between sovereigns and banks.”
Efforts to definitively resolve the euro crisis come amidst a backdrop of Spain’s application for up to €100 billion in assistance (the final figure is yet to be determined) to re-capitalise its banks, re-negotiations on implementing the Greek bail-out programme and rising borrowing costs for the Spanish and Italian governments.
Harmonising banking regulation is also supported by the IMF, which, in its annual review of the euro zone said that harmonising bank resolution processes is a “necessary first step.” It called for a deposit guarantee scheme and a common bank resolution authority, backed by a common resolution fund “to ensure burden sharing and to limit fiscal costs.”
Such efforts should be supported by “a common supervisory and macro-prudential framework to forestall further financial fragmentation.”
These banking proposals are contained in a roadmap on European monetary union produced by European Council President Herman Van Rompuy. It also envisages fiscal union: the requirement for EU approval of national borrowing above an agreed level, the issuance of common debt (i.e. euro zone bonds) and an EU treasury.
Germany, which has opposed a deposit guarantee scheme and a common euro zone system for the rescue or ‘resolution’ of failing banks, is the most enthusiastic advocate of fiscal union. This idea has also provoked disagreement among euro zone members.
Non-members such as the UK are also closely watching the debate on the currency’s future. After the G20 summit, David Cameron called for the euro zone to “recognise what we have called the remorseless logic of being in a currency union.”
A common financial transaction tax has already emerged as a proposal to deepen fiscal union. It would involve countries imposing a tax of at least 0.1 per cent of the value of all financial transactions other than those for derivatives. A minimum tax of 0.01 per cent on the value of derivatives agreements would apply. The reaction to it has illustrated the difficulties that agreement on fiscal union might involve. Only nine countries (including Germany, Italy and France) support the initiative. The UK opposes it, claiming that it would damage the City’s interests. Enhanced co-operation (i.e. implementation by a smaller group of member states than the whole EU) will be the vehicle by which it will happen, if at all.
The success or failure of banking and fiscal union will impact on Northern Ireland (see issues, page 12). The Northern Ireland Manufacturing Sales and Exports Survey showed that exports to the EU (excluding the Republic of Ireland) were worth £1.2 billion in 2010-2011 i.e. a 24.3 per cent share. Exports to the Republic also stood at £1.2 billion. The collapse of the euro would undoubtedly harm that trade and Northern Ireland’s economy.
