German Chancellor Angela Merkel (left) and French President François Hollande arrive at the Élysée Palace
The leaders of France and Germany agreed to an outline for the future of the eurozone that strongly leans towards Berlin’s vision of more control from Brussels on fiscal matters but more leeway for national authorities on banks.
In a nine-page “contribution” issued after a meeting in Paris between François Hollande, French president, and Angela Merkel, German chancellor, the two leaders laid down their most detailed vision on issues bedevilling the eurozone since Mr Hollande came to office last year.
Most significantly, it calls for national bank authorities to continue to have a prominent role in the repair and recapitalisation of eurozone banks, a German demand that is strongly at odds with a proposal being prepared by the European Commission and the wishes of the European Central Bank.
Under the Franco-German plan, bank bailouts would be handled by a “single resolution board involving national resolution authorities” – a far looser configuration than originally envisioned when the EU’s highly-touted “banking union” was launched last year.
ECB officials have been particularly concerned about leaving control of bank clean-ups to national authorities now that European leaders have agreed to create a single EU bank supervisor in Frankfurt. Central bank officials are worried that the ECB will now have the authority to declare eurozone banks insolvent, but have no power to do anything about it other than push national governments to move.
Berlin publicly broke with the ECB on the issue earlier this month, arguing that current treaties do not give the EU authority to perform bank bailouts on its own – which, as in the case of Cyprus, could involve seizing private property – and that the legal authority must only come after the treaties are changed, a potentially long and laborious process.
French officials insist the “resolution board” goes further than Berlin originally envisaged. Under Germany’s original publicly stated position, future bank clean-ups would be managed by a “network” of national supervisors. But the creation of a single board is significantly closer to the single agency originally envisioned by Brussels, Paris said.
“This was very important in terms of the robustness of the system,” said one French official. European Commission and French officials also insisted that the joint agreement was much closer to where their proposal will end up, noting it allows for “decision-making at the central level” – something Berlin appeared to previously oppose.
“It was never planned, nor would it be possible, to eliminate the national authorities from the system,” said one commission official, arguing the document also appears to give them leeway to propose a single European bailout fund.
The French official said Paris won German agreement to have the eurozone’s €500bn bailout fund serve as a “public backstop” – meaning all national governments will have recourse to EU-level money to clean up their banks if they cannot do it on their own, once fiercely resisted by Berlin.
Still, Ms Merkel got Mr Hollande to push off a decision on how the €500bn fund, the European Stability Mechanism, would be used to bail out struggling banks.
The so-called “direct recapitalisation” – where the ESM would inject cash directly into failing financial institutions – was the cornerstone of last June’s deal aimed at shoring up Spanish finances, and EU leaders had vowed to have an “operational framework” in place by next month.
But under the Franco-German deal, such a plan will be put off until agreements on more incremental banking regulations are completed, potentially delaying them for several months.
Eurozone in crisis
The eurozone struggles with austerity and attempts to regain competitiveness
Taken together, the less-ambitious bank resolution scheme and delayed direct recapitalisation plan means Ms Merkel can go into September’s German national elections without the potential for new EU agencies with the authority to use German taxpayer money to assist banks in struggling eurozone countries.
Ms Merkel’s opponents in the election, the Social Democrats, had vowed to make the use of German cash to bail out eurozone banks an issue in the upcoming vote.
The two also agreed to back a more German vision of the eurozone’s fiscal future. Paris, with the backing of Brussels, had sought a substantial eurozone budget that could be used to provide counter-cyclical payments to struggling countries, such as a eurozone-wide unemployment insurance scheme.
Instead, the two sides agreed to explore a less-ambitious “specific fund” that could only be tapped to provide incentives for countries to agree tough economic reform measures.
Such reform measures would be part of new “contractual arrangements” between national governments and Brussels that would be akin to the detailed reform agenda’s currently agreed only with bailout countries.
The contractual arrangements and a limited incentive fund have long been part of Berlin’s agenda for eurozone reform.
Additional reporting by Quentin Peel in Berlin, Alex Barker in Brussels and Matthew Steinglass in Amsterdam