The European Union’s end of year summit delivered what amounts to solid progress: there is a deal on a banking union and the European central bank will in fact become the single supervisor for all European financial institutions. Of course, a lot of details still need to be worked out. For those who expected a big bang and the final chapter of the euro crisis to be finally written, there are good enough reasons to be disappointed. Yet, realistically, despite the widespread crisis fatigue, who actually expected more?
German Chancellor Angela Merkel had already lowered expectations by repeatedly reminding her domestic and international audiences that the crisis could very well last five more years. The head of the European Stability Mechanism, Klaus Regling, in recent days struck a slightly more positive note, but he too said that the crisis would still take some time to be resolved — two years, but probably no sooner.
Whatever the timeline, bond markets remain calm and yields for sovereign bonds of peripheral European countries have continued to fall. Given the fact that political uncertainty is making a comeback in Italy, and in the U.S. the end of year distraction known as the “fiscal cliff” is not over yet, markets could have easily reacted badly to a European glass so obviously only half full. Instead, for the moment at least, investors chose to see the positive side of things or more simply to look the other way.
This calmness is most discomforting to those observers who thrive when the crisis is most acute. Wolfgang Muenchau, writing for the Financial Times, paints the result of last week’s summitry as a victory for Angela Merkel’s stalling tactics, with no substantial progress on a real banking union and no progress at all on moving closer to a fiscal union. According to Muenchau,“If you study the details of what was agreed last week, the substance evaporates. The common supervisory structure will affect only 100 to 150 banks out of a total of 6000, (…).”He added that of course theoretically the supervisor, the European Central Bank (ECB) can overrule national regulators and exert control over all of Europe’s 6000 banks, but “the rules of engagement are not clear.” That sounds a bit disingenuous, as nobody expected the rules of engagement to be ready at this meeting — not even the ECB, which after all will be the regulator that needs to implement the political decisions made last week. Nicolas Veron, an expert on banking regulation at the Peterson Institute for International Economics and at the Brussels based think tank Bruegel, points out how much has in fact been accomplished in his latest post.
It has been clear for months that this end of year summit would only produce the foundations for the banking union. What matters most is that the building of the new house has actually started. Furthermore, the ECOFIN (council of EU finance ministers) also needed to address and recognize the need for a banking resolution authority (a body, in other words, that can unwind failing banks) and a common deposit insurance scheme (either provided by a brand new unified, European fund , by a pool of coordinated national deposit schemes, or a combination of the two). On both counts the Finance ministers addressed those needs and agreed on a road map. In other words, they broadly stuck to the plan European leaders produced at the end of the June summit.
Overall, European politicians resisted the temptation to let their guards down and fall victims to yet another bout of complacency. They even managed to find a compromise that the UK government can live with. France’s President Francois Hollande and Germany’s Angela Merkel are slowly finding some common ground. It is becoming obvious that France is not as opposed to any further transfers of sovereignty to Brussels as some commentators (particularly across the river Rhine) maintain. It is also becoming more apparent that Germany is not willing to rush ahead and cede huge chunks of its own sovereignty in the name of Europe. In reality, both leaders are proceeding on the path to more Europe at a moderate pace, while staying conscious of the fact that national sensitivities need to be taken into account.
What matters for now is that promises made in June were kept in December. European leaders should be allowed to wipe some sweat off their foreheads. At the very least, the euro zone is moving in the right direction. However, the minefield in Europe is far from cleared.