Reform of the Eurozone adjourned

Several member states of the Eurozone have considerable reservations about the proposals submitted. cep is also not convinced of the need for a Eurozone budget.

In particular, cep rejects financial aid to soften asymmetric shocks, either through an European unemployment insurance or through an investment stabilisation function. Such aid weakens the individual responsibility of the Euro states for a sound economic and fiscal policy.

The establishment of a fiscal backstop for the ESM bailout fund for the EU Single Resolution Fund (SRF), as decided within the framework of the banking union, can increase financial market stability. However, the following clarifications are required in the ESM contract or in the ESM backstop guidelines:

  • Before the backstop can be activated in a given case, the bail-in and state aid rules must be applied very strictly. It must be avoided that the mere existence of the ESM backstop would result in a more intense use of the single resolution fund (SRF) at the cost of lower creditor participation in an emergency. In such a situation, settlement costs and risks would be passed on to uninvolved banks and taxpayers.
  • The SRF-backstop at the ESM is intended to replace the direct bank recapitalization by the ESM. As a result, the risks for the Eurozone taxpayers are reduced because the default risk of a loan to the settlement fund is lower than that of a loan to an individual bank. However, it is unclear whether and how quickly banks in the Eurozone will be able to repay SRF loans from the ESM. For this reason, it would be advantageous if every single activation of the backstop would require the approval of the Bundestag. A one-off ex-ante authorization for the backstop by the Bundestag prevents parliamentary control over the extent of creditor participation and the application of state aid law in specific individual cases.
  • The direct bank recapitalization by the ESM provides for an own contribution of 10% of ESM assistance by the Member State concerned. This should also be applied to the SRF-backstop in order to reduce moral hazard risks: Despite uniform banking supervision by the ECB, the Euro States still have many opportunities (for example through their economic or financial policies) to influence the size and risk sensitivity of the domestic financial sector. Therefore, they should cover at least part of the costs of the bank settlement themselves.