EIU: On the eve of the European Council on October 18th-19th, France’s president, François Hollande, outlined his views on how best to tackle the euro zone crisis, spelling out a vision for the future integration of the single currency area. However, far from offering a credible path for euro zone states to resolve conflicting interests, Mr Hollande simply reiterates long-standing French demands, putting the onus on Germany to come up with a solution.
The EU summit is not due to take any major decisions on proposals for a banking supervisor or on steps to deepen economic and monetary union (EMU), although these issues will dominate the discussions. The summit will provide the first opportunity for heads of state and government to respond to the interim report on the future of EMU drawn up by Herman Van Rompuy, the president of the European Council. Mr Hollande provided a preview of the French contribution to the debate in an interview with six European newspapers on October 17th.
The French president stated that his first priority is to ensure that the decisions taken at the EU’s summit in June—namely to establish a new European banking supervisor at the start of 2013—are respected. The talks have made limited progress to date, partly because of strong German objections. The European Commission’s proposals call for the creation of a “single supervisory mechanism” (SSM) from January 2013, at which time the European Central Bank (ECB) would assume powers of oversight over banks that have received or requested public funding. Under the Commission’s plan, systemically important banks would be brought under the ECB’s wing from the middle of the year, followed by all 6,000 euro zone banks by the start of 2014.
France has emerged as the leading supporter of this ambitious timetable. Germany is trying to delay the process, while also favouring a less centralised system that leaves its regional banks, the Landesbanken, under local supervision. Germany also harbours legitimate concerns that adding a supervisory role to the ECB’s responsibilities could pose a threat to the Bank’s independence with respect to monetary policy decisions. Added to these concerns is the thorny issue of the position of non-euro zone countries (notably the UK). The October summit is due to assess the progress made and at most may give some indication of the timescale for a decision. Some officials have suggested that the talks could drag on well into 2013, or beyond.
Mr Hollande fires a shot at Germany
The issue is not just an example of EU navel-gazing on the question of institutional reform. It is of vital importance for the future trajectory of the euro zone crisis because until such time as a supervisor is in place—and established—euro zone leaders are unlikely to begin considering the question of how to resolve the mass of bad debt within Europe’s banking system. The alternative approach has been simply to rely on financial backstops from increasingly shaky sovereigns. Thus, without progress on the issue, it will not be possible even to attempt to reverse the financial fragmentation of the euro zone, which poses an existential threat to the single currency.
In his interview on October 17th, Mr Hollande did not seek to hide his frustration with foot-dragging on the issue, saying: “It has not escaped my notice that those who are most eager to talk about political union are sometimes those who are most reticent about taking urgent decisions that would make it inevitable.” He is openly critical of Angela Merkel, accusing the German chancellor of prioritising domestic politics and calls on his European partners to “put Europe’s interests first”. However, he also dismisses summarily proposals emanating from Germany for the creation of a federalised euro zone or “political union” as a distraction.
Throughout the interview, Mr Hollande appears to place the burden of adjustment on Germany, while offering little in return. He revives long-standing French demands for more “economic governance” within the euro zone, proposing to establish monthly meetings of heads of state and government and to strengthen the Eurogroup (of finance ministers) and its president. Helpfully, he also provides a glimpse of what greater policy co-ordination might look like, calling on Germany to help rebalance the euro zone economy by cutting taxes and raising wages to spur domestic demand. Unsurprisingly, Germany is opposed.
Mr Hollande also repeated his call for a budgetary union to be established, completed by “a partial mutualisation of debts through eurobonds”. Precisely what is meant by budgetary union is unclear. But in recent months, the minister of finance, Pierre Moscovici, has floated some proposals for deepening fiscal integration, centred around the ideas of a distinct euro zone budget to finance priority spending areas and boost so-called automatic fiscal stabilisers in countries experiencing economic shocks (for example, through the creation of a common euro zone unemployment insurance fund). Germany is seemingly open to the idea of a bigger centralised budget, but one limited to short-term targeted assistance (for example for retraining unemployed workers).
Mr Hollande acknowledges that such changes would require new forms of democratic oversight, but he also states that any discussion of such issues would have to wait until after the 2014 European Parliament elections. Political union, he said, is a step that should follow fiscal union, banking union and social union. In this, Mr Hollande appears to be reiterating the line taken by other leading figures within the French Parti socialiste (PS) who are of the view that further European integration is politically impossible until the EU has first demonstrated its ability to solve the crisis through greater solidarity—a view which is diametrically opposed to that prevailing in Germany, where greater risk-sharing is impossible without the transfer of sovereignty to the centre.
French public opinion remains a powerful constraint
As it stands, it is doubtful whether Mr Hollande’s strategy will be able to deliver results. While advocating “intégration solidaire” for other countries, Mr Hollande remains tight-lipped on whether France is willing to cede sovereignty over its public finances. Domestically, such a move would be deeply unpopular with the French public, which is becoming increasingly sceptical of European integration. Some within the French government, including the minister of foreign affairs, Laurent Fabius, see Mr Moscovici’s plans for a euro zone budget and a more powerful European Commission as a dangerous fantasy. Even after the 2014 European election, a reluctance to test public opinion on European issues means that the French government would probably seek to avoid substantial changes to EU treaties.
Nonetheless, the ideas of Mr Hollande and others will feed into the work currently being undertaken by Mr Van Rompuy, who will present his final report in December. Little progress is expected on major institutional reforms ahead of the German federal election in September 2013. But after that, scope may exist to reconcile French and German views. German politicians from both the government and centre-left opposition have begun discussing the possibility of changes to the German constitution that could allow greater risk-sharing within the euro zone. This would be highly unlikely to include substantial fiscal financing via eurobonds, but could involve limited transfers to smooth out economic cycles or to finance retraining. Such transfers would not relieve indebted countries of the need to reform their economies, but they could send a signal of political unity and help make the loss of national sovereignty over policymaking politically more acceptable.