27 May 2015

A number of documents have now been produced by France and Germany, Italy, the European Commission and Spain as part of their contribution to the upcoming Four President’s report which will follow up to previous reports on creating a genuine economic and monetary union (the FT Brussels blog has a useful round-up of some of the documents).

What does this mean for the UK’s EU Reform push?

There is no doubt that what the Eurozone does will have big implications for the UK and for David Cameron’s reform push. As I noted on the Spectator Coffee House blog earlier this week, most of the proposals do not mark a significant shift from the previous positions – especially that of France and Germany. In the end, it is probably too early to tell exactly how the Eurozone’s plans and UK plans will fit together – neither has been finalised or properly discussed yet. Furthermore, there is a broader acceptance of the need for EU Treaty change in the longer term. The Franco-German paper accepts this, while the Spanish paper actually suggests Treaty change may be needed as soon as 2017.

On top of this, as we have pointed out at length, treaty change can come in a number of forms.

But there are a couple of other interesting points from the UK perspective. For example, the Spanish paper backs up some of the UK’s concerns about the “fragmentation” of the single market and calls for improvements on this front. Importantly, the Commission’s paper says the final report must,

Stress the need to bring intergovernmental structures within the framework of EU law (Treaty on Stability, Coordination and Governance; European Stability Mechanism; Intergovernmental Agreement on the Single Resolution Fund; and the Euro Plus Pact).

This could turn out to be crucial, since bringing these mechanisms into the EU Treaty framework will require Treaty change and therefore the UK’s approval. This potentially opens the door for a bargain. More generally, though, such a move would create a number of new EU institutions only suited to the Eurozone. How these are managed, funded and overseen are key questions, which reinforce the UK’s desire for clearer safeguards for non-Eurozone countries and protections for a multi-tier EU.

What does this mean for the Eurozone?

Possibly the most concerning aspect of these documents is the lack of progress on the Eurozone front. Despite the crisis now having run for over five years, and Greece once again teetering on the edge of exiting the Eurozone, the balance seems to be moving towards superficial and incremental changes once again. The approaches are also quite different, highlighting the divergent views on how best to proceed.

Spain – The Spanish contribution appears to be the most detailed and ambitious. The Spanish government essentially sees the need for debt pooling and is willing to accept the transfers of sovereignty that go with it. In that sense, this is an intellectually honest and balanced document. This would come in a number of stages, but should progress quickly with Treaty changes allowing for budget and debt pooling potentially as soon 2017, but certainly after 2020. The Spanish also go very hard on the ECB and want to make its mandate broader including taking account of differences in inflation within the Eurozone (although how exactly this would be done is unclear). Generally speaking, the Spanish document has a clear vision and idea of where it wants to go – although it seems unlikely to find much support in other countries at this point in time. It chimes quite a bit with the Commission’s own previous Blueprint for the Economic and Monetary Union, which in the end amounted to very little.

France and Germany – There is little in this document, and it focuses on tweaks to existing policies. It seems to want to boost domestic ownership of the reforms by limiting the all-encompassing reform programmes and focusing more on specific issues (something the Commission has already said it is doing). There is also some talk of greater convergence and harmonisation in the single market, including on certain tax bases. Institutional changes are limited but there are some focused around creating more Eurozone-specific representations and groupings within the European Parliament and at international institutions. Ultimately, the lack of any substantive propositions may well be a sign of significant differences between France and Germany on how best to progress with Eurozone integration.

Italy – Similarly to the Spanish paper, the Italian contribution is far more detailed than the Franco-German one. The document criticises the rigidity of current Eurozone rules – a long-standing Italian position – and stresses the need for “cooperative rebalancing” within the single currency, in what can be seen as a message to Germany and other surplus countries. The paper argues for, in the longer term, “the development of a proper stabilisation function to cope with asymmetric shocks implies increasing degrees of fiscal integration and cross-country transfers financed by a common fiscal capacity.” As with Spain, the paper accepts that such changes must go hand-in-hand with “further transfers of sovereignty”. According to the Italian government, Treaty changes “will be necessary in the long run”, although it’s not needed to establish a separate Eurozone budget (though we’re not so sure about that). On institutions, it suggests that changes could be made using “enhanced cooperation” to avoid treaty changes. As with other papers, the Italian contribution also seeks to “maximise national ownership of reforms”. The general tone seems to suggest the Italian government is indeed concerned that support for the single currency among the Italian public is eroding.

European Commission – This is more of a guide about how the Four Presidents’ report should look and what content needs to be filled in, than about the substance of the paper itself. Still there are some hints. In general, it lies somewhere between the Spanish contribution and the Franco-German one, maybe leaning more to the latter. But it does go further when talking about a “second phase” where it sees a “set of common standards” on structural policies which would be “regularly monitored and would be a condition to benefit from a future shock absorption mechanism to be set up at the euro area level”. Building on this idea, it talks of a genuine fiscal union with “some public goods…provided commonly”. This would have to come with a “system of commensurate sovereignty sharing within common institutions”. Here it seems to overlap a bit with the Spanish paper though it remains far less ambitious and much vaguer.

Given that these are only some of the contributions – it is likely that all countries made their own – it seems clear that the Eurozone remains incredible divided over its future. When this happens, the Eurozone often ends up settling for just getting over the lowest bar possible.

How might the final Four Presidents’ report look?

The likely outcome is probably a mix of all of the above, but as usual we would expect the Franco-German approach to carry most weight. It has always been likely that the focus will be on trying to enhance the structural reforms and reduce the negative perception of them. It had been thought that this would be supplemented by some movement towards a Eurozone budget or at least some form of further solidarity. However, given the contributions, this is far from certain. It also seems likely that the focus will be on the short term, something Commission President Jean-Claude Juncker has already suggested.

The response of the ECB to all this will be interesting. Reports suggest that, back when the ECB agreed to launch its bond-buying programme, part of the deal struck was that the Eurozone would push ahead quickly with changes to enhance reforms and ensure that governments do not shy away due to the positive impacts of the bond purchases. However, now it looks as if there is a good chance that the recent relatively positive economic data from has allowed the Eurozone once again to pull back from the big questions around its future.