This Is All That's Left of Macron's Grand Plan to Fix the Euro

(Bloomberg) -- Less than a decade after the financial crisis nearly tore the euro area apart, a long-anticipated push to buttress the currency union is entering its final stretch.

But the compromise that’s taking shape is set to underwhelm supporters of the sweeping vision of an integrated and assertive Europe set out by French President Emmanuel Macron last year.

This Is All That's Left of Macron's Grand Plan to Fix the Euro

Macron’s ambition has been hemmed in by the weakness of his ally Angela Merkel in Germany, the opposition of a group of northern euro members led by the Netherlands, and a slump in his domestic support. Meanwhile in Italy, a toxic brew of populist politics and strained finances is already fueling concerns of another existential threat.

On Monday, euro-area finance ministers will meet to finalize plans their leaders will discuss at this month’s summit.

Here’s where things stand on the three key areas of reform:

Banking Union

Perhaps the most important area countries had been hoping to make progress on is the so-called banking union -- the common rules and institutions that govern the bloc’s largest banks.

The reformers are 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.

Euro-area governments agree that the European Stability Mechanism, the euro-zone bailout fund, should act as this backstop. Technical details are still being hammered out, but the broad outline is agreed.

This is arguably the biggest success of these discussions.

The deposit guarantee scheme however has met fierce opposition in Germany and other hawkish countries. They are loathe to share risks with more fragile countries (like Italy) until their banks have done more to clean up their balance sheets.

Rather than an actual deal, leaders had been simply aiming for a “roadmap for beginning political negotiations.” But even that looks challenging now and the growing unease over Italy is making skeptics even more hesitant, officials say.

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 broadly agree on enhancing the precautionary credit lines the ESM can offer to nations in trouble before they need fully-fledged bailouts.

A proposal to simplify debt restructurings has won partial support.

Most euro-area members are happy with strengthening collective-action clauses to make it more difficult for small groups of creditors to block restructuring plans. And governments also broadly agree that the ESM could act as a facilitator between countries and private investors.

But hawkish members including the Dutch have been calling for a broader, more automatic mechanism that dictates what happens when there are issues with debt sustainability. This is a red flag for Italy while countries including France, Spain and Portugal have also been arguing that any debt restructuring must allow room for discretion on a case-by-case basis as well.

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. As well as opposition from the Dutch-led faction, there are also different ideas about what money would be used for.

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 joint plan didn’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. What’s more, the proposed euro-area budget would fall under the EU’s broader one, meaning it could be held hostage to the long and acrimonious talks over the EU’s overall spending plans.

Crucially, the hawkish nations are still arguing 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.

©2018 Bloomberg L.P.