The Eurozone saga continues to roll on. Following a
relatively quiet summer, the future of the Euro is dominating the
headlines once more. While initial impressions are that Europe has
responded positively to the first challenges of the autumn, there
are big questions still to be answered.
Markets responded positively to the ECB's proposal that it
would embark on a potentially unlimited bond-buying programme to
bring down the borrowing costs of Italy, Spain and other troubled
Eurozone countries. The announcement was accompanied by strongly
pro-Euro rhetoric from the head of the ECB, Mario Draghi, who
declared he would do "whatever it takes" to save the
Euro.
This was followed by Germany's Constitutional Court rejecting
legal challenges to the creation of a permanent bail-out fund (the
ESM). The court ruled that the ESM is not unconstitutional although
it stated that German liability to the ESM must not exceed
€190 billion without the approval of Parliament. The
court also agreed to a European fiscal treaty designed to force
governments into budgetary discipline.
The outcome of the recent Dutch election also appeared to send a
positive message about the future of Europe, with EU members
breathing a collective sigh of relief at the victory of the Dutch
Prime Minister, Mark Rute, and his conservative-liberal VVD party
who took 41 seats in the 150-member lower house (likely to form an
alliance with the Labour party). These results signify the
victory of a pro-European party over the eurosceptic socialists and
the populist freedom party, who were not only in favour of leaving
the Euro but also the EU. This goes some way to quelling the
potential anti-Euro cries which have recently been heard from the
Netherlands.
However, the mood music is not all upbeat and significant
challenges lay ahead.
The fundamental economic problems in the periphery countries have
not gone away. The Greek economy continues to face severe
problems. The Finance Minister met with Troika inspectors at
the start of September and was unable to reach an agreement on
austerity measures. Greece has been unable to stick to the
terms of its bailout and it looks inevitable that it will have to
ask for a third bailout or face bankruptcy and a possible Eurozone
exit without a further tranche of aid. At the same time, the
Spanish prime minister's insistence that a bail out is not yet
inevitable (and that Spain would not accept tough austerity
conditions) looks increasingly unrealistic, given the continued
problems facing its banks, the deep recession and over 25%
unemployment.
The increasing popular resistance to austerity in these countries
is significant given that the so called "big bazooka" of
bond buying by the ECB would come with strings attached. Countries
would first have to apply to the ESM for a bail-out and fiscal
conditions would be imposed in return (possibly supervised by the
IMF). It remains unclear what steps the ECB would take if a country
whose bonds it had purchased (in potentially significant amounts)
subsequently went back on promises of economic reform.
Additionally, doubts remain over the appetite throughout Northern
Europe to guarantee the future of the periphery countries within
the Euro. For example, the Finns continue to voice their concerns
over the problems facing the Eurozone. Having initially
negotiated special terms for Finland's contribution to the
Eurozone bail-outs, the Foreign Minister was recently reported as
having stated that the country has put in place contingency plans
in the event of the break-up of the Euro. The recent decision
of the German court, while widely heralded as positive, placed
important limits on the ESM (extinguishing hopes it might be given
a banking licence which would have allowed it to borrow directly
from the ECB). At this stage mutualisation of European sovereign
debt (i.e. Eurobonds or debt pooling) still looks unlikely to
gather support.
Against this background, all eyes will soon turn to the summit in
October where EU members are expected to continue to discuss the
possibility of greater integration within Europe and a closer move
towards economic union.
Perhaps the biggest issue on Europe's agenda is the EC's
proposals for central supervision of Europe's banks (and
whether this will cover all 6,000 lenders in the Eurozone or just
the "systematically important" banks). Plans under
consideration include the ECB creating a fresh Council with powers
to grant banking licences and sanction violators. The early
stages of these plans are expected to be introduced in the middle
of next year and extended to cover all banks by early 2014.
However, Germany (and others) remain dubious about the ECB's
capacity to supervise 6,000 banks in the future. In
particular, Germany is not comfortable with the plans for the ESM
to recapitalise lenders directly in a crisis.
The proposed plans will almost certainly cause concern within the
UK. Under the plans UK banks could be shut down or forced
into taxpayer-funded bailouts. The powers being discussed
would include the right to police the financial sector in the City
of London and allow an independent panel full decision making
powers to impose EU law and to arbitrate disputes between Britain
and the Eurozone over the risks posed by British banks, with
decisions potentially being automatically binding (in contrast to
the current position whereby final adoption of the EBA panels'
decisions is subject to the support from the majority of all the 27
EU countries). On the other hand, if the UK seeks to stay outside
central supervision this could have implications for the City's
position as a pre-eminent financial centre.
What is clear is that the Euro will continue to face stern tests
this Autumn and its future is not yet secured.
To read more on the Eurozone crisis and its implications see our
Eurofit briefing which considers the contractual implications
of a Eurozone fragmentation.
This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq
Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.
The original publication date for this article was 24/09/2012.