June 19, 2012 / 11:50 PM / 8 years ago

Europe sketches clearer picture on banking, fiscal union

LOS CABOS, Mexico (Reuters) - Under pressure from financial markets and anxious world leaders, Europe has begun to flesh out sweeping plans for deeper economic integration, including once unthinkable steps toward a banking union and a more unified fiscal policy.

A European Union (E.U.) flag flutters in front of the monument of Parthenon on Acropolis hill in Athens June 17, 2012. REUTERS/John Kolesidis

European officials have sketched the bare outlines of their aims in recent weeks, describing ideas to strengthen Europe’s monetary union by overhauling banking supervision and working in the years ahead toward a fiscal union, which would include shared budgets and taxation policies.

But at a Group of 20 summit in Mexico this week, the European Union’s top two officials for the first time provided specific details of where the EU is headed, including a loose timeline for creating a banking union and a longer-term “roadmap” on fiscal policy.

Their hope appears to be that “more Europe” will help the region get on top of two years of debt turmoil and end speculation about the future of the euro. But it is an ambition that promises to produce intense debate and political friction, with countries such as Germany and Britain at odds over what steps are really possible and how quickly they can be achieved.

“We have come a long way in Europe, learning lessons from the crisis,” European Commission President Jose Manuel Barroso said at the summit in Mexico’s Los Cabos beach resort. “But recent developments demonstrate that we must look further to complete the architecture of our economic and monetary union.”

In comments partly designed to placate the G20, which has grown agitated by a sense that Europe does not know how to quell the debt crisis, Barroso and European Council President Herman Van Rompuy were at pains to be specific about their ambitions, without getting too far ahead of themselves.

One concern is that if they try to move too far, too fast, governments and voters across Europe may reject what many see as a push for a federalised Europe, with too much national sovereignty given up to unelected powers in Brussels.

Move too slowly and the lack of confidence financial markets already have in European decision-making will be exacerbated, and pressure from G20 countries worried about the fallout on their own economies will only deepen.


The final communique from the G20 leaders left Europe in no doubt about what is expected, especially when it comes to deeper banking sector integration - the area where EU officials see the best prospects for making progress in the months ahead.

Underlining the sense of urgency, President Barack Obama met with EU leaders on the second day of the summit to examine near-term steps the EU plans to take and longer-term goals, including the legal and political obstacles that may get in the way.

As one EU official put it, the immediate action is focused on how to put together a banking union, including deposit guarantees and a regional fund for winding up bad banks with operations in several countries.

The longer-term vision is about fuller fiscal integration.

“The fiscal union is something that necessarily requires a degree of political discussion and democratic legitimacy,” the official said, indicating that complex changes to EU law would be needed. “It cannot be done from morning to night.”

Banking union, on the other hand, is something leaders hope can be brought to fruition more quickly and should be possible under existing EU treaties, although Germany is cautious on that point and about too much pooling of bank liability in general.

There is also a pressing need to break the link between distressed European banks and highly indebted governments, something leaders hope a banking union could resolve.

Barroso gave the clearest indication yet that the EU intends to move rapidly on such measures, saying the European Commission, the EU’s executive and the body responsible for proposing EU laws, would present its plan in September.

“The Commission will be ready this autumn to make proposals that complement and deepen the work we have already put on the table for more effective and integrated banking supervision, a common deposit guarantee system and an integrated banking resolution scheme,” he said.


EU leaders will discuss the outlines of the banking and fiscal union proposals at a summit in Brussels on June 28-29, although no definitive decisions are expected at the gathering.

Instead, leaders are likely to ask Van Rompuy to develop the ideas in more detail, including specifics on what steps can be taken under what legal authority and in what timeframe. He would then present his findings in October or possibly December.

“I will propose building blocks for deepening our economic and monetary union so that we can show to the rest of the world and to the markets that the euro and the euro zone is an irreversible project,” Van Rompuy said on Tuesday.

The former Belgium prime minister envisages a four-track approach, with moves toward “banking integration, fiscal integration, economic integration and the strengthening of democratic legitimacy,” in a step-by-step process.

Asked on Monday how long he expects it to take for Europe to realise its ambitions, he was cautious but indicated it would be less than the 10 years that European Central Bank President Mario Draghi has talked about.

“On a lot of issues we can go more quickly,” he said.

“But the most important thing is that we show willingness, and we have a strong political will to correct the weaknesses of the policy infrastructure, a policy infrastructure that was too weak for a common currency.”

Yet the biggest question is where the process will eventually lead the European Union.

Germany, which is Europe’s most powerful country, is opposed to ideas such as jointly issued euro-zone bonds or any sharing, or “mutualisation”, of debt liabilities until there are tools in place to ensure that all member states run responsible fiscal policies.

A fiscal union would do just that, but it would require changing EU treaties and many voters are reluctant to give up more powers.

If all of that can be achieved, Germany and others may finally feel ready to accept shared liability for the euro zone’s debts - meaning euro bonds might eventuality become a reality.

“Some form of debt mutualisation will be considered,” Barroso said. “But let me be very clear: any future euro bonds or stability bonds will not be a licence to spend. On the contrary they will become a powerful tool for increased discipline and stability.”

Writing by Luke Baker; Editing by Kieran Murray

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