Last week's European Council proved to be the most significant in years. Leaders, urged on by financial markets and governments around the world, introduced a series of short-term measures aimed a bringing an end to the eurozone's sovereign debt and banking crisis. They also moved to bring the 17 countries that use the euro closer together in the longer term.
Yet for a time, after about eight hours of talks last Thursday (28 June), it looked as though the summit might deliver almost nothing. Even the seemingly uncontroversial and pre-cooked pact for jobs and growth was blocked by Spain and Italy, who were demanding approval for crisis-fighting measures in return for their consent.
The ten non-eurozone leaders went home around midnight and the rest, instead of convening their eurozone summit over lunch on Friday (29 June) as had been arranged, decided to work through the night.
Shortly before dawn a deal emerged; and it was one in which all sides could claim some sort of victory. A smiling Mario Monti, the prime minister of Italy, was jubilant at having persuaded Angela Merkel, the chancellor of Germany, to give in to his demands. Merkel was defiant and pointed to the very real achievement in getting agreement on common banking supervision.
Even François Hollande was content. The president of France got his growth pact and, in the eyes of the French, had stood up to Germany.
Over the past two-and-a-half years, as leaders have struggled to keep their heads above the eurozone's choppy waters, there have been many premature declarations of victory. Leaders have learned their lessons. So far the markets have been reassured by last week's decisions. However, there will be more crucial summits to come before the euro's future is secured.
RESCUE FUND
The European Stability Mechanism (ESM), the eurozone rescue fund that is scheduled to come into operation on 9 July, will be able to recapitalise banks directly rather than via governments.
This is a move that Germany had previously resisted because it removes the ability to impose conditions on countries benefiting from funding. But it was a key demand of Spain, which feared that its own debt problems would increase if the government had to borrow to recapitalise the banks.
Christine Lagarde, the managing director of the International Monetary Fund, was another prominent figure who had urged the eurozone to make this change to help shore up public finances.
European Council President Herman Van Rompuy said that it was “imperative to break the vicious circle between banks and sovereigns” that had left governments saddled with debt as they tried to prop up weak financial institutions.
Strict conditions will still be imposed on any scheme put in place for just one bank or a whole sector. Direct recapitalisation of banks will not happen until the European Central Bank takes up its banking supervisory role – which perfectly reflects German Chancellor Angela Merkel's mantra over the past few months: no debt union before a political union.
BANK SUPERVISION
Germany achieved one of its chief objectives when a proposal that the eurozone establish a common bank supervisor was agreed by the 17 leaders. It will be run by the European Central Bank, which is based in Frankfurt.
The Council said that it hoped that member states would approve legislation by the end of the year so that it could come into operation next year. However, obstacles still remain. The European Commission must formally propose the legislation and will need all 27 European Union members to approve it, not just those in the eurozone, after consultation with the European Parliament.
Many details remain to be filled in, including whether common supervision would be limited only to systemically important banks, and the extent to which powers to take binding decisions on troubled banks would be transferred from national regulators.
The Commission will also present a proposal as to how the new supervisory structure will relate to the ten non-eurozone countries. Currently, the London-based European Banking Authority, which brings together national regulators, carries out EU-wide supervision.
Leaders made no reference in their summit conclusions to a common bank deposit scheme or a bank resolution scheme, which did form part of Herman Van Rompuy's blueprint for the future of the euro (see opposite page).
CONDITIONALITY
On Friday morning (29 June), the immediate reaction in Germany to news of a deal was that Chancellor Angela Merkel had sold out to southern Europe. Jubilation among southern eurozone countries fed a suspicion that Germany and other northern eurozone countries had caved in and allowed struggling countries easy access to cheap money.
It is true that Germany softened its stance against allowing governments to use the eurozone's rescue funds to buy their own bonds and for banks to tap the funds for direct recapitalisation, but such assistance comes with tough conditions attached.
A crucial question for the weeks and months to come is who will police such conditions and how.
While assistance that falls short of a full bail-out does not require a full monitoring programme by the troika – European Commission, European Central Bank and International Monetary Fund – nor the imposition of structural reforms such as those forced on Greece, Ireland and Portugal, countries will still have to comply with certain targets.
Any country that wants to use the European Stability Mechanism (ESM) to buy bonds has to conform to the targets of the EU's stability and growth pact, and the macro-economic imbalances procedure and respect the Commission's country-specific recommendations, based on each year's budget plan. Even then, any programme still has to be approved unanimously by eurozone member states, or, in emergency cases, by 85% of eurozone countries based on the amount they contribute to the ESM – which gives Germany the power to block.
Germany was quick to emphasise that the conditions attached to measures falling short of a full bail-out are as stringent as those previously seen. Merkel asserted that there was “absolutely no ambiguity” in the final summit statement that no rules or terms were being changed.
She acknowledged that discussions among the leaders of eurozone countries “went a bit in this direction, as if we would deviate from normal procedures”, but added that “we have today [29 June] added to the general decision that the provisions will be applied following the existing guidelines” under the ESM.
BLUEPRINT FOR THE FUTURE OF THE EURO
Herman Van Rompuy's report ‘Towards a genuine economic and monetary union', written in collaboration with José Manuel Barroso, the president of the European Commission, Mario Draghi, the president of the European Central Bank and Jean-Claude Juncker, the president of the Eurogroup, was presented at the European Council.
The quartet will now add further details to the roadmap, including deadlines to be published by the end of the year. An interim report will be issued in October and the European Parliament will be consulted.
Van Rompuy said that some of the measures he was proposing would require a change to the EU treaties.
In the version presented to EU leaders, Van Rompuy raised the prospect of alternatives to fully-fledged eurobonds, including “the pooling of some short-term funding instruments on a limited and conditional basis, or the gradual roll-over into a redemption fund”.
A eurozone treasury could be set up, capable of managing “economic interdependences”.
BOND-BUYING
Mario Monti, Italy's prime minister, persuaded the European Council to agree that the European Stability Mechanism (ESM) should be allowed to buy government bonds on the open market. This was necessary to lower countries' borrowing costs without forcing them to go through a fully-fledged bail-out programme, he said.
Italy, whose bond yields have risen close to unsustainable levels, may be the first country to request such help. Eurozone countries would have to approve every bond-buying programme on a case-by-case basis once a country had requested it. Finland and the Netherlands signalled their objection to the idea, although it is unlikely that they could block a request.
The terms of the ESM normally mean that any assistance programmes have to be approved unanimously by eurozone countries. But it allows “emergency” approval by 85% of member states, measured by the amount of capital they put into it – if the stability of the eurozone is deemed to be at stake, and if the move is supported by both the European Commission and the European Central Bank.
Both the Finnish and Dutch governments said that they thought that using the ESM to buy bonds was expensive and inefficient.
PATENT
Leaders broke months of deadlock by reaching an agreement on a European unitary patent.
The disagreements over where the court of the European patent should be located were resolved by splitting the court's functions among the three competing locations. The central division will be in Paris, while the London office will handle litigation relating to chemicals and medicines. Munich will handle engineering-related cases.
The issue of the court's location was the last sticking point in a saga that has for decades been a symbol of the EU's inability to live up to its ambitions. The disagreements persisted during the summit, with the UK's prime minister, David Cameron, initially blocking a deal.
Earlier disagreements over the language regime of the European patent have been bypassed by leaving Spain and Italy out of the remit of the common patent. The European patent is, at least initially, being taken forward by the mechanism of ‘enhanced co-operation', without the need to have Spain and Italy on board.
The European Parliament was scheduled to discuss the patent at its plenary session on Tuesday (3 July). However, it was taken off the agenda to give MEPs more time to study the outcome.
FINANCIAL FRAMEWORK
EU leaders took note of the negotiations on the EU's next multi-annual financial framework (MFF), to apply in 2014-20, but without much debate.
The talks, which have so far focused on the underlying principles and the balance between different areas of spending rather than actual figures, are due to be concluded by the end of the year, so that all implementing legislation can be put in place in time.
The European Council called for the acceleration of legislative work to ensure the prompt adoption of legislation once there is a political agreement on the MFF.
The swift adoption of the MFF and associated legal acts could be jeopardised by a threat from MEPs to block the MFF unless there is a reform of the way in which the EU raises its own revenue, for example through a tax on financial transactions.
There is little prospect of member states agreeing on such a tax, however.
PLAN FOR FUTURE SUMMITS
On the assumption that the European Council might one day be able to do more than fight the fires of the eurozone crisis, Herman Van Rompuy, the president of the European Council, presented to government leaders his plans for 2012-14.
At the start of his second two-and-a-half-year term, he has mapped out the agendas of future meetings of the European Council, including frequent reviews of the economic and financial agenda, relations with strategic partners, and member states' commitment to the justice and home affairs issues.
There will be one-off reviews of progress as the EU heads towards targets for energy (review, 2013; target, 2014), the digital single market (review, 2013; target, 2015), and Europe 2020 (review, 2014; target, 2020), as well as a review of the single market in late 2012. He has put trade on the tentative agenda for early 2013, and with a particular concern for manufacturing, he has pencilled in industrial competitiveness for debate in early 2014. For the October 2014 summit – his last before stepping down – he wants a discussion of “the future of the European idea”.
GROWTH PACT
Leaders of the EU's member states adopted a pact on growth and jobs. Despite initial resistance from Spain and Italy, which used it as a bargaining tool in their attempts to get immediate crisis-fighting measures adopted, Such a pact was one of the election promises of François Hollande, France's president.
It includes “urgent measures” that the EU should take to boost employment and make Europe more competitive. The European Investment Bank's paid-in capital will be increased by €10 billion and a pilot project bond scheme worth €4.5bn will be launched.
The pact includes a pledge to deepen the single market, particularly in the digital field. The Council says that priority should be given to measures aimed at further developing cross-border online trade by making e-invoicing easier; promoting cross-border e-identification; modernising the EU's copyright regime, “while ensuring a high level of protection of intellectual property rights and taking into account cultural diversity”; and boosting demand for high-speed broadband.
The pact also calls for the completion of the internal energy market by 2014 and a strengthening of support for research and development. On-going discussions on energy taxation, the revision of the savings tax directive and the common consolidated corporate tax base are referred to, but no specific measures are spelled out.
COUNTRY BY COUNTRY
Several member states expressed annoyance at some of the country-specific recommendations issued by the European Commission on the basis of the budget plans. Some of the recommendations had prompted bad-tempered exchanges at the last meeting of EU finance ministers on 22 June, and the discord carried on at the European Council.
Countries are supposed to translate the recommendations into their national budgets, structural reforms and employment policies, but there are signs that some member states may refuse to do so.
Belgium was one of the most vocal in its opposition to references in the recommendations to its wage-indexation policy. Hungary argued against the Commission's request for it to change some of its tax policies. Cyprus and Luxembourg were others to take against some recommendations.
GERMAN RATIFICATION
The crisis-fighting measures agreed by leaders at the summit depend on the European Stability Mechanism (ESM), the eurozone's permanent rescue fund, coming into force. However, this will happen later than expected because of delays over ratification in Germany.
The ESM and the fiscal pact, an intergovernmental agreement on tighter economic discipline, were both approved by the upper and lower houses of Germany's parliament on Friday evening (29 June) by the requisite two-thirds majorities.
However, they will not become law in Germany until they are signed by the country's president, Joachim Gauck. He said he would not do that until Germany's constitutional court makes a ruling on whether they comply with the German constitution.
The court, based in Karlsruhe, was asked to rule on the matter by critical German MPs, who believe that the terms of the ESM and fiscal pact represent too great a transfer of sovereignty to the EU than is allowed under Germany's constitution.
The court will start its deliberations on 10 July. The ESM was expected to come into effect on 9 July, but cannot do so without Germany's ratification, since it requires the approval of 90% of eurozone countries, based on the amount of capital they are putting into it.
EUROGROUP PRESIDENT
Jean-Claude Juncker, Luxembourg's prime minister, said that he was willing to chair the group of eurozone finance ministers for a further six months – but only if Yves Mersch, the head of Luxembourg's central bank, is appointed to the executive board of the European Central Bank (ECB).
A decision on those two appointments, and that of Klaus Regling of Germany as head of the European Stability Mechanism (ESM), the eurozone's permanent bail-out fund, is expected at a meeting of eurozone finance ministers next week (9 July).
Juncker said that he stands ready to continue as head of the Eurogroup – but not for longer than six months – because of the “acute crisis situation that we face”.
He added: “But because the heads of state and government were not able to appoint Mr Mersch as a member of the ECB board today [29 June], I told the ladies and gentlemen [of the European Council] that as long as Mr Mersch is not appointed, I will not accept the nomination proposal.”
Eurozone leaders have not yet named a successor for José Manuel González-Páramo of Spain, whose term on the ECB's six-member board expired at the end of May.
Herman Van Rompuy, the president of the European Council, said that no decision had been taken on Friday (29 June) because Angela Merkel, the German chancellor, had to leave the summit to attend a debate in the German Bundestag on the ratification of the ESM.
He said that it was “highly likely” that a decision on the ECB's board would be taken “at the beginning of July”, apparently a reference to the meeting of eurozone finance ministers on 9 July.
“I won't be led on thin ice,” Juncker said. “I have first got to have the confirmation that Mr Mersch has been appointed to the [ECB's] executive board for several years, then I am ready to continue the chairmanship [of the Eurogroup] for another six months.”
Apart from Mersch, Antonio Sáinz De Vicuña, head of the ECB's legal service, is a contender for the ECB job.
IRISH BAIL-OUT
In 2011, the economic problems of Greece, Portugal and Spain enabled Ireland's centre-right prime minister Enda Kenny to demand – and get – the agreement of the European Council to lower the interest rate charged on international loans given to bail out Ireland. Heading into last week's summit, the question for the Irish government was whether it could secure another concession: over what Kenny calls its ‘legacy debt' of liabilities that the Irish government accepted when it bailed out banks in 2008-09.
It did. When agreement was reached to allow the permanent bail-out fund, the European Stability Mechanism, to inject money directly to banks, Kenny got an extra clause added to allow this to happen retrospectively. “The big principle that has been accepted and is being implemented is the breach between sovereign and bank debt,” he said. “What was deemed to be unachievable has now become a reality.”
Another part of reality, though, is that Ireland still needs international credit, which is why Kenny emphasised Ireland's need to continue building up another form of credit, a reputation as a good patient accepting the economic medicine prescribed to it. “I do sense that the reputation that we have rebuilt...is serving us well.”
MONTENEGRO
Montenegro opened membership talks with the European Union in the margins of the European Council on Friday afternoon (29 June), after EU leaders approved the move.
The backing of member states' leaders was a formality after ministers for foreign and European affairs had approved the opening of talks on Tuesday (26 June), despite concerns voiced by France, the Netherlands and Sweden that Montenegro's centre-left government had not done enough to combat organised crime and corruption.
In anticipation of the negotiations with Montenegro, the EU has tightened its monitoring of critical areas such as the rule of law. Several innovations have been introduced to avoid the Union's unhappy experience with Bulgaria and Romania, which revealed deficiencies after they joined in 2007, and Croatia, which is set to join next summer.
After a request from Carl Bildt, Sweden's foreign minister, the European Commission will base its assessment of Montenegro's compliance with EU law in part on a report by Europol, the EU's police co-operation agency. Another innovation is to open negotiations in policy areas related to the rule of law early on in the talks, to give Montenegro sufficient time to improve its track record.
Montenegro is on course to become the third of the seven countries that emerged after the demise of Yugoslavia to join the EU, after Slovenia and Croatia.
