European Union finance ministers struck a deal on the design of a common budget for the euro area but ducked a key decision that will determine how much firepower it will have.
The agreement after all-night talks in Luxembourg caps more than two years of negotiations as part of a broader effort to shore up the bloc. The compromise means that fiscal hawks abandoned their resistance to a common spending instrument, while proponents curtailed their ambition for a tool with greater firepower. The addition to the euro area’s crisis-prevention tools falls short of the sweeping vision of advocates such as French President Emmanuel Macron.
The deal doesn’t specify the size of the pot of money, as that will be set in the negotiations over the EU’s broader budget for the next seven years. Officials, however, expect it to be close to 20 billion euros ($23 billion) over that time period, far less than what proponents originally advocated for.
Finance ministers also deferred to leaders on whether the funds will be just part of the broader EU budget, or whether the pot could be expanded by government contributions too. The French have been pushing for a deal that would allow it to be topped up by nations because that would make it easier to increase its size in the future.
“We still have a long way to go -- in particular on how we finance the new budget -- and I don’t underestimate the challenges ahead,” French Finance Minister Bruno Le Maire said in a statement early Friday morning. “But we did tonight what we had set out to do: We’ve created a genuine eurozone budget.”
The Dutch and other fiscal hawks wanted it to be funded exclusively from the EU’s broader budget, something that would restrict its total size.
Ministers said that more work is needed to determine the financing aspect of the budget in the coming months. What they did agree on in the late night talks was that the spending tool would be used for “convergence and competitiveness” -- in essence to help poorer countries catch up. But France and other advocates have insisted that it’s important to be able to use these funds to stabilize economies in a downturn.
While the agreed instrument is useful “it does not deal with the other issue that from an economic perspective is also important: macroeconomic stabilization,” Klaus Regling, the head of the European Stability Mechanism, told reporters after the meeting.
The idea of a common budget for the single currency area was born during the financial crisis with its advocates, led by France, arguing that it was needed to help stabilize the economy during downturns.
Since then however the French have lost a series of battles to fiscal hardliners such as Germany and the Netherlands who are wary of sharing liabilities with weaker governments like Italy and Greece.
As a result, the budget will be far too small to have any use as a macroeconomic tool, leaving the euro area still reliant on the European Central Bank’s monetary policy to steer the economy.
The ministers also signed off on a legal text outlining changes to the ESM, the bloc’s bailout fund. These give it broader powers, including acting like the lifeline for the currency bloc’s crisis fund for failing banks.
“We have a new ESM treaty which will radically improve the functioning of the ESM -- a genuine firewall in case of crises,” Le Maire said. “And after six years of negotiations, it is now set in stone that the ESM is the backstop to single resolution fund: this ultimate safety net will reassure savers and markets.”
Finance chiefs also got a report on efforts to put in place one of the key missing pieces of the euro area’s financial architecture, a common insurance for bank deposits. But national experts who had been working on the project for the last several months remained entrenched in their positions against and in favor of such a measure, so further talks are required.
“More work is needed but today we have taken a number of small steps that combined make real progress,” said Mario Centeno, the Portuguese finance minister who presided over the meeting with his counterparts. “Strengthening the euro is definitely something that keeps us up at night.”
©2019 Bloomberg L.P.
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