Euro Area Reaches Deal on Joint Budget Plan and New Bond Rules

(Bloomberg) -- Less than a decade after the financial crisis nearly tore the euro area apart, a long-anticipated push to shore up the single currency finally started taking shape at a meeting of the bloc’s finance ministers, though it will likely underwhelm those calling for tighter integration.

The compromise struck around 8 a.m. Tuesday after almost 16 hours of talks in Brussels paves the way for advances in areas from debt sustainability to a possible euro-zone budget. But it’s a long way short of the sweeping vision of an integrated and assertive Europe set out by French President Emmanuel Macron last year.

Among the key steps the ministers agreed on during the contentious talks are a stronger role for the euro-area bailout fund including stronger precautionary tools for countries in need of assistance. Crucially, they also agreed that it would act as it as a backstop for the bloc’s fund for winding down failing banks. The ministers also set out on a more detailed outline of how to handle debt sustainability issues and subsequent restructurings for countries in need of emergency loans.

The most controversial discussion was on “possible budgetary instruments” for the euro area, a topic which pitted staunch advocate France against hawkish countries led by the Netherlands, amid persisting disagreements over whether such a tool is needed in the euro-area’s crisis-fighting apparatus.

After hours of fighting over a few words, ministers agreed that, so long as their leaders sign off, “work could proceed on the design, implementation and timing of such an instrument for convergence and competitiveness.” That’s unlikely to please the French, who had been pushing for a tool that would serve to stabilize the bloc’s economies in a downturn.

"We have taken an important step this night that will considerably strengthen the euro zone," French Finance Minister Bruno Le Maire told reporters. "We have a real outlook for the first time for a euro-zone budget with convergence and competitiveness functions and we continue to work on its stabilization function."

The bloc’s leaders will now look to strike a broader deal later this month on how to strengthen the currency union so it can better withstand future crises, but the limited scope of Tuesday’s agreement highlights the difficulties they will face.

Here’s what has been decided on the three key areas of reform:

Banking Union

Perhaps the most important field countries had been hoping to make progress on was the so-called banking union -- the common rules and institutions that govern the bloc’s largest banks. Proponents had been pushing for a common deposit insurance scheme and a backstop of the fund used to wind down failing banks. Those two measures would protect individual members states from taking the full impact of a major banking collapse and bolster the financial system overall.

At their meeting, finance ministers agreed that the European Stability Mechanism, the euro-zone bailout fund, should act as this backstop -- arguably the biggest success of these negotiations.

Yet, progress on the deposit guarantee scheme -- which euro-zone officials have already said is on life support -- has been all but nonexistent, faced with fierce opposition in Germany and other hawkish countries. These countries are loathe to share risks with more fragile countries until their banks have done more to clean up their balance sheets -- a skepticism that has grown amid unease over Italy’s budget issues.

Bailout Fund

The future role of the ESM has been one of the less controversial areas of debate. Countries agree that the crisis-era fund should be given more powers over bailouts in cooperation with the European Commission, which currently oversees and assesses countries’ finances. Ministers also agreed to enhancing the precautionary credit lines the ESM can offer to nations in trouble before they need fully-fledged bailouts.

The ministers also agreed to strengthen collective-action clauses to make it more difficult for small groups of creditors to block restructuring plans by 2022 and they said that the ESM could act as a facilitator between countries and private investors.

Euro-Zone Budget

Despite being one of Macron’s flagship proposals, plans for a euro-zone budget have already been downsized several times over the past year amid fierce opposition from a Dutch-led faction of hawkish states. They argue that it is more important to build fiscal buffers at a national level rather than count on euro-area wide tools to protect members states from adverse financial weather.

The effort got a boost last month when France and Germany agreed to push for a budget that would support investment and foster “convergence and competitiveness” in the region - ie helping poorer countries to catch up. Details of the proposal, however, fell short of what the French president has been calling for over the past two years.

The ministers’ agreed wording doesn’t mention the size of the budget, and fostering convergence is less useful than supporting economies hit by economic shocks, which is what France had wanted.

©2018 Bloomberg L.P.

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