Europe inches forward

Well that was a big night for Europe. Lots to cover, so apologies for the long post.

Firstly to the German constitutional court and its decision on the legality of the ESM in terms of German constitutional law.

The German Federal Constitutional Court Decision

So basically the German constitutional court, via president Voßkuhle, has stated that it us up to German politicians and not his court to determine how the ESM should be used, but no further liability over what is already specified under the existing ESM agreement can be created without further full ratification of the German parliament.  So pretty much as expected really, a “capped” YES which means the ESM has maximum working capital of €500bn.

The paragraph that is also quite interesting as it grants the German parliament veto power over the use of any funds:

In its judgment of 7 September 2011, the Senate held that the German Bundestagʼs overall budgetary responsibility was safeguarded with regard to the giving of guarantees in the context of the aid to Greece and of the European Financial Stability Facility because the amount of the Federal Republic of Germanyʼs overall financial commitment was limited, the German Bundestag had to individually approve every large-scale aid measure, the Bundestag was entitled to monitor the conditionality of the measures, and the aid measures were subject to a time- limit (see BVerfGE 129, 124 <185-186>). With a view to the Federal Republic of Germanyʼs overall financial commitment involved with the Treaty establishing the European Stability Mechanism (1), and with a view to the Bundestagʼs rights to be informed, which are necessary to safeguard the Bundestagʼs overall budgetary responsibility (2), the Treaty establishing the European Stability Mechanism only fulfils these requirements if it is interpreted in conformity with the constitution.

This is only a preliminary ruling but it’s hard to see the final ruling changing significantly. Germany currently has a €190bn liability ceiling and , at present, I think it is unlikely that German lawmakers could find political will to approve more given existing obligations via the ECB/TARGET2 and other channels. The court also explicitly ruled out the ESM borrowing via the ECB which it claimed was “incompatible with Article 123”.

There are two additional points of interest. Firstly, the current ESM treaty grants the mechanism’s governors the right to secrecy in their decision making yet the court stated that the German parliament must be kept fully informed about the ESM’s actions. This suggests a treaty change is in order, which may require re-ratification. Secondly,  the court is yet to rule on the new OMT and whether it grants powers at a European level beyond what has already been ratified by the German Parliament. Given the opinion on limiting the liability without parliamentary approval it’s difficult to see how Mr Draghi’s “unlimited” plan is compatible. In that vein the lessening of collateral standards may also apply. Something to watch out for.

While the court was bringing down its judgement the European Commission President , Jose Barroso, was giving a State of the European Union address. The speech once again outlined the EU’s need for further integration and a move towards a true fiscal/political union. I must admit I found the whole thing a bit of a gloomy affair, at times completely removed from the reality of Europe as it is today, and at other times drifting off into la la land.

José Manuel Durão Barroso President of the European Commission State of the Union 2012 Address

There’s a lot in the Speech so in case you don’t have time  to read the entire thing here’s brief overview of some of the key statements by Mr Barroso:

The European Union should ultimately become a “federation of nation states,” the president of its executive said on Wednesday, as he used the unveiling of a joint banking supervision proposal to urge a leap in integration.

The suggestion is bound to prove controversial, with the EU’s 27 member states traditionally loath to relinquish sovereign powers. European Commission President Jose Manuel Barroso further heightened the stakes by calling for changes to EU treaties, a move that in the past has proved a formidable task.

“I’m sure many will say that this is too ambitious, not realistic,” Barroso told EU lawmakers in Strasbourg, France during his State of the Union speech. “But let me ask you: is it realistic do go on as we have been doing?”

The EU has been struggling for more than two years to get a handle on a debt crisis plaguing its common currency area and to restore trust in the eurozone.

“Let’s not be afraid of the word: we will have to move towards a federation of nation states,” Barroso said.

“Today, I call for a federation of nation states – not a superstate – that can tackle our common problems through a sharing of sovereignty,” he added. “Creating this federation of nation states will ultimately require a new treaty.”

The commission is preparing a “blueprint for deepening the economic and monetary union” – including details on necessary treaty changes – that will be presented in the autumn, Barroso said.

In the short term, however, the EU first has to concentrate on stabilizing the crisis-battered eurozone, he said. That includes the establishment of a banking union for the currency area, with a joint supervisor as its first step.

Having a supranational supervisor oversee all of the eurozone’s approximately 6,000 banks would be one of the most significant steps towards integration since the creation of the euro.

The commission is on Wednesday bringing forward the proposal, which will have to be approved by EU member states and the European Parliament to become law. EU officials are pushing for the joint supervision to be at least partly in place already next year.

“When things went wrong (in the past), it was the taxpayers who had to pick up the bill … Mere coordination is no longer adequate,” Barroso noted. “Getting the European supervisor in place is the top priority now.”

So Europe’s fabulous four (Barroso, Draghi, Jean-Claude Juncker and  Van Rompuy) are slowly jawboning, politicking and pushing Europe’s governments and citizens towards a more politically, economically and fiscally integrated zone. Of course the major issue is that the utopia Barroso speaks of is miles away from the Eurozone of today and making delusional claims, such as the one below about Greece, just makes him appear like a man way in over his head:
Allow me to say a word on Greece. I truly believe that we have a chance this autumn to come to the turning point. If Greece banishes all doubts about its commitment to reform. But also if all other countries banish all doubts about their determination to keep Greece in the Euro area, we can do it.
That relatively large point aside, the banking union is a good step forward because the lack of supra-Eurozone deposit insurance has clearly added to the economic strain on periphery Europe in both a political and financial way. The resolution framework is also welcome and, as I have mentioned previously, appears to be heading down the path of Sweden which is also positive.
The full statement on the banking union proposal follows:

Commission proposes new ECB powers for banking supervision as part of a banking union

Today’s proposals for a single supervisory mechanism (SSM) for banks in the euro area are an important step in strengthening the Economic and Monetary Union (EMU). In the new single mechanism, ultimate responsibility for specific supervisory tasks related to the financial stability of all Euro area banks will lie with the European Central Bank (ECB). National supervisors will continue to play an important role in day-to-day supervision and in preparing and implementing ECB decisions. The Commission is also proposing today that the European Banking Authority (EBA) develop a Single Supervisory Handbook to preserve the integrity of the single market and ensure coherence in banking supervision for all 27 EU countries.

The Commission calls on the Council and European Parliament to adopt today’s proposed regulations by the end of 2012, together with the other three components of an integrated “banking union” – the single rulebook in the form of capital requirements (see IP/11/915), harmonized deposit protection schemes (see IP/10/918), and a single European recovery and resolution framework (see IP/12/570).

President of the European Commission José-Manuel Barroso said: “Today, the Commission has presented proposals for a single European supervisory mechanism, a major step to a banking union. This new system, with the European Central Bank at the core and involving national supervisors, will restore confidence in the supervision of all banks in the euro area. The European Parliament will have a crucial role to play in ensuring democratic oversight. We should make it a top priority to get the European supervisor in place by the start of next year. This will also pave the way for any decisions to use European backstops to recapitalise banks.” The President added: “We want to break the vicious link between sovereigns and their banks. In the future, bankers’ losses should no longer become the people’s debt, putting into doubt the financial stability of whole countries.”

Internal Market Commissioner Michel Barnier said: “Banking supervision needs to become more effective in all European countries to make sure that single market rules are applied in a consistent manner. It will be the role of the ECB to make sure that banks in the euro area stick to sound financial practices. Our ultimate aim is to stop using taxpayers’ money to bail out banks”. He continued: “We have proposed a mechanism to separate supervision from monetary policy within the ECB, and made sure that the ECB will be accountable to the European Parliament for supervisory decisions”.

Today’s package includes:

  • A regulation conferring strong powers on the ECB for the supervision of all banks in the euro area, with a mechanism for non-euro countries to join on a voluntary basis.
  • A regulation aligning the existing regulation on the EBA to the new set-up for banking supervision in order to make sure that EBA decision-making remains balanced and that EBA continues to preserve the integrity of the single market
  • A communication outlining the Commission’s overall vision for the banking union, covering the single rulebook and the single supervisory mechanism, as well as the next steps involving a single bank resolution mechanism.

Specific supervisory tasks will be shifted to the European level in the Euro area, notably those that are key to preserving financial stability and detecting viability risks of banks. The ECB will become responsible for tasks such as authorizing credit institutions; compliance with capital, leverage and liquidity requirements; and conducting supervision of financial conglomerates. The ECB will be able to carry out early intervention measures when a bank breaches or risks breaching regulatory capital requirements by requiring banks to take remedial action.

The ECB will cooperate with the EBA within the framework of the European System of financial supervision. The role of the EBA will be similar to today: it will continue developing the single rulebook applicable to all 27 Member States and make sure that supervisory practices are consistent across the whole Union.

For cross-border banks active both within and outside Member States participating in the SSM, existing home/host supervisor coordination procedures will continue to exist as they do today. To the extent that the ECB has taken over supervisory tasks, it will carry out the functions of the home and host authority for all participating Member States.

The Commission is proposing to have the SSM in place by 1 January 2013. To allow for a smooth transition to the new mechanism, a phasing-in period is envisaged. As a first step, as of 1 January 2013, the ECB will be able to decide to assume full supervisory responsibility over any credit institution, particularly those which have received or requested public funding. As of 1 July 2013 all banks of major systemic importance will be put under the supervision of the ECB. The phasing-in period should be completed by 1 January 2014 when the SSM will cover all banks.


Boosted by the single currency and the single market, the EU banking sector has grown and has become more and more integrated. Many banks have developed cross-border activities and have outgrown their national markets.

Given pooled monetary responsibilities in the euro area and closer financial integration, there are specific risks in the euro area in terms of cross-border spill-over effects in the event of bank crises. Coordination of national banking supervision is no longer an option for the euro area. A move to an integrated system is necessary.

At the European Council and the Euro area summit of 28/29 June, EU leaders agreed to deepen economic and monetary union as one of the remedies of the current crisis. One of the main building blocks towards deeper integration is banking union. All four component parts of the banking union are vital (seeMEMO/12/656 on banking union). Pending proposals should be adopted by the end of the year.

It is important to note the Member States’ decision to make the set-up of a single supervisory mechanism a precondition for the possible direct recapitalisation of banks by the European Stability Mechanism (ESM).

After agreement on the pending proposals, as a next step the Commission envisages making a proposal for a single European resolution mechanism to deal efficiently with cross-border bank resolution and avoid taxpayers’ money going into rescuing banks.

See also MEMO/12/662

The German Finance Minster has been quite vocal over the last few months in his opposition to some components of the banking plan, so it wasn’t too much of surprise to hear his comments after the speech:

German Finance Minister Wolfgang Schaeuble welcomed proposals for the European Central Bank to supervise euro zone lenders as a “good basis” in establishing a banking union, but warned quality must take precedence over speed in setting up the new supervisor.

“The quality and efficiency of the new supervisor must be the focus. Purely on practical terms it seems impossible for the ECB to monitor 6,000 banks appropriately,” he said in a statement on Wednesday.

He repeated his call for the new supervisor to stick to systemically relevant banks and not all euro zone banks.

Obviously we have a ways to go on this front, remembering that this is just a proposal at this stage. A suspicious mind may conclude there is more to Mr Schaeuble concern about non-national oversight than simply quality and efficiency. Those Landesbanks aren’t exactly squeaky clean… Just sayin’. Either way, I suspect there will be further argy-bargy over the ability of ECB/EBA to over-rule national prudential authorities so the January 2013 timeframe looks a bit hopeful IMHO.

Finally overnight, as AnonNL commented on recently, it was the Dutch national election. The results aren’t finalised yet, but the exit polls appear to be coming in quite close to the original poll mentioned by AnonNL in that post:

An exit poll commissioned by the two biggest Dutch news broadcasters predicted a narrow election victory Wednesday for Prime Minister Mark Rutte’s free-market and pro-European Union VVD party, but the result was considered too close to call.

The poll gave VVD 41 of the House of Representatives’ 150 seats and the centre-left Labor Party 40 votes. It has a 1.5 per cent margin of error.

If official results bear out the poll, the result would set up VVD and Labor — both pro-Europe parties — to forge a two-party ruling coalition with Rutte returning for a second term as prime minister. Both parties won an extra 10 seats compared with the last parliament.

The election was cast as a virtual referendum on Europe amid the continent’s crippling debt crisis, but the result was a stark rejection of the most radical critic of the EU, anti-Islam firebrand Geert Wilders, whose Freedom Party was forecast to win 13 seats, 11 fewer than at the last election.

Wilders appeared to have been punished by voters for walking out of talks with Rutte in April to hammer out an austerity package to rein in the Dutch budget deficit.

AnonNL will hopefully give us a more in-depth round up once the results are in.

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  1. ESM + OMT … and I like the “inching” as it’s such an accurate picture.

    Martin Wolf had a nice post last night on the FT on this.

  2. Fantastic elections for various reasons, not in the least because of how engaged the Dutch voters are/were… saw some exit comments and it seemed to me that lots of people had really considered the various options and had valid arguments for their choices.

    I’ll do a round up later today, although it will take a while for them to count the votes. A couple of years ago there was a fright about hardrives being “hackable” so they reverted from voting using computers back to paper ballots (overreaction in my opinion).

    About a third of the votes have been counted so far.

    Live results as they are being counted:

      • The problem is well known in The Netherlands and was a big factor in the elections. It will be an even bigger factor in coalition forming as VVD (Liberals) has vowed to keep tax deductibility intact for existing homeowners. The idea is that people plan futures around these sort of schemes and should be able to rely on government to not just change things. On the other end is PvdA (Labour) who would like to get rid of the entire scheme asap.

        I’m personally not a fan of VVD’s point of view but I can see how PvdA’s point of view has some inherent dangers in it as well. If coalition forming is successful expect the approach to be a compromise between both.

        I cannot deny the risky position The Netherlands is in. For now I take comfort that in the NL the issue is not denied or masked by national pride, but firmly on the political agenda as a priority issue which needs to be solved.

        Boy that guy is bearish. Must be how MB comes across to you. 😛

  3. Allow me to say a word on Greece. I truly believe that we have a chance this autumn to come to the turning point. If Greece banishes all doubts about its commitment to reform. But also if all other countries banish all doubts about their determination to keep Greece in the Euro area, we can do it.

    ROFL.. What a truly delusional man. Does he expect jobs to fall off trees in autumn and eliminate Greek unemployment?

    Now, I keenly await Nigel Farrage’s response to that.

  4. I wonder if Barrasso et al “slowly jawboning, politicking and pushing Europe’s governments and citizens towards a more politically, economically and fiscally integrated zone” dread considering further the recent protests in Spain’s Catalonia region where 600,000 (govt estimates) 1,500,000 (police estimates) called for Catalan secession.