The autumn has begun in the EU with two key messages. We are already moving away from the crisis talking and are moving toward discussing structural issues is the first, conveyed by Eurogroup chief Jeroen Dijsselbloem during his hearing in the economic committee of the European Parliament on September 5th. Growth is very very green and a change of approach is not advised, said European Central Bank governor Mario Draghi at a news conference after the weekly meeting of the ECB Governing Council, also on September 5th. But although both were highly cautious (Mr Dijsselbloem definitely radiated more optimism), still there is one piece of indisputably good news, articulated by Mr Draghi - growth is now driven more by domestic demand than exports. Against the backdrop of the extremely green growth, though, as well as of the challenges ahead, with this the good news are over. Leading issues this autumn, too, will be Greece, the construction of the banking union, the budget consolidation measures, unemployment. The only complement to the already painfully known issues will be the European elections in May next year.
A third season of the drama 'Greece in the euro area'
In spite of all recent incantations that there will be no more financial injections for Greece, additional debt write-offs or, generally, problems with an address in Athens, the need of a third bailout programme is no longer a secret. What is yet to be clarified is only how would that programme look like. The issue about the Greek government's financial woes was in the headlines throughout the summer with various speculations, but at official level the bomb was dropped by Wolfgang Schäuble, the German finance minister, in the peak of the election campaign in Germany. He said there was no doubt Greece needed a third bailout, which is a sensitive issue for the German taxpayers and voters, as the Open Europe poll showed in the beginning of September.
Jeroen Dijsselbloem, a minster of finance of The Netherlands who has been sitting in the hot chair of the Eurogroup chief since the beginning of the year, did not wait to be asked by MEPs on the issue and said that Greece needed additional assistance. Later in his hearing, however, he tried to use Brusselsian linguistic skills to avoid saying directly the word "loan". He specified that it was not about a third bailout programme, but that after the current one expired (in end-2014), Greece might need additional assistance. The reason, he said, was that, generally, the implementation of the budget targets was on track against the backdrop of all the difficulties and problems. What limps, though, is the implementation of structural reforms. He stopped short from criticising the Greek government. On the contrary - there was a feeling of understanding about the situation in the country.
According to him, it is very difficult to pass the necessary reforms without the necessary political support. Mr Dijsselbloem refused to speculate on the issue whether additional assistance for Greece could come in the form of a debt haircut. The minister underscored many times that a debt sustainability analysis would be made in April and only then it will become clear what measures can be undertaken. We are ready to do more given that Greece implemented the programme, the Dutch finance minister added. Mario Draghi, however, firmly rejected the possibility of a debt write-off, bearing in mind that ECB is one of the big holders of Greek bonds. "Well, the answer is no. We went through this when we had the discussions about Greece almost a year or a year and a half ago. It is pretty clear that we cannot undertake monetary financing. Article 123 of the Treaty forbids the ECB from undertaking monetary financing", Draghi recalled.
He also said that if it came to expansion of the current programme for Greece it will most certainly be again with conditionality. According to The Wall Street Journal, the gap that needs to be filled is between 10 and 15 billion euros. For this year, the shortage of funding is 4 billion euros and the main reason are the disappointingly low tax revenues and the weak privatisation. More clarity about the Greek financial situation is expected in November when the troika report will be published, whose mission begins this month in Athens. The situation gets additionally complicated by the fact that some members of the International Monetary Fund, which co-finance the Greek programme, already stated Greece should no longer be helped. After the entry into force of the two-pack (the package of two legislative proposals to tighten the European control over the eurozone member states), the EU already has a possibility to continue on its own. The question is, though, will it have sufficient funds to do it.
The word 'fragmentation' - the most frequently mentioned in the beginning of the season
One of the issues Jeroen Dijsselbloem had to talk with MEPs about and Mario Draghi with journalists was the fragmentation of financial markets - one of the sources of tensions in the peak of the debt crisis in the euro area, when for some countries yields on loans were unbearably high while for others they were comfortably low. In Brussels this question was raised by French Liberal MEP Sylvie Goulard asking what the Eurogroup could do concretely to handle fragmentation, especially in terms of interest rates. According to Dijsselbloem, fragmentation is a structural problem which needs to be dealt with in order to restore confidence between banks, to banks and to stabilise markets. This is one of the fundamentals of the banking union that needs to be urgently built, the Dutch finance minister added.
Also important is to unclog credit because, otherwise, this will choke the already weak economic growth, he added. The banking union is the key to overcome the fragmentation of the financial market. This opinion is shared by the ECB chief, too, who noted that the repayment of LTROs has led to significant reduction of market fragmentation, but there still is a lot to do. Since last summer a significant progress is noted in improving the situation with the financing of banks, as the deposit base has been enhanced at national level in many of the troubled countries. Next decisive steps to build the banking union will help achieve a significant reduction of fragmentation, is Draghi's conclusion.
In his words, currently the excessive liquidity is adequate, but the central bank is ready to act. As a result of the bank's interference last year, the excessive liquidity was reduced from 800 billion to 250 billion euros, which is a very good news because it means fragmentation is shrinking, the European central banker interpreted. The less fragmentation, he said, the less excessive liquidity. The issue was included also in the report Herman Van Rompuy and Jose Manuel Barroso prepared for the G20 summit in St Petersburg on September 5-6. Before the leaders of the twenty biggest and most influential economies in the world the European Council chief, Mr Rompuy, emphasised precisely on the fact that a reduction of fragmentation had been achieved which led to considerable reduction of the price of loans for most of the fragile economies. "The existential threat to the eurozone is over for almost a year now", he added.
Last spring, the ECB vice governor Vítor Constâncio said at a conference about financial integration that in spite of the improvement the climate at the financial markets still remained instable. The level of fragmentation continues to be high at the money markets and the improvement of financial conditions did not have an adequate impact on the real economy. That is why a key role will have structural reforms at national level and at European one it is necessary to move toward building a stronger Economic and Monetary Union.
A genuine one?
But how genuine should that union be and most of all when, are the two questions that will entertain the European institutions in the upcoming months. On the one hand, there are encouraging news, but on the other more often can be felt some cooling of enthusiasm about a deepening of the integration and undertaking of bolder steps. One of the reasons is the expectation of the outcome of the federal elections on September 22nd in Germany. On the other, though, the centrifugal forces in the EU are growing stronger in the EU because of the gigantic unemployment in some of the most affected member states and the danger of a decade of unemployment. The ambitious plans from last year that crystallised in Herman Van Rompuy's road map toward "a genuine monetary and economic union" seem abandoned, although Jeroen Dijsselbloem pointed out that the road map was still on the table and was discussed at all summits and within the Eurogroup (which prepares the summits) too.
But he also said that for him a priority will be the implementation in practise of the what has been already agreed. Any new ideas are in the background, it became clear from his response in the economic committee on Thursday. Dijsselbloem noted that there were elements in the road map the establishment of which went with different speed. The most urgent ones are the supervisory mechanism and the bank resolution mechanism. On the former an agreement was struck between the European Parliament and the Council before the summer break, but currently ongoing are negotiations between the Europarliament and the European Central Bank. Mario Draghi assured that positive news were on the way in a few days. This week the supervisory mechanism is to be debated and possibly voted in the plenary in Strasbourg [today].
The second element of the banking union is the establishment of the bank resolution mechanism on which there is a serous division on the issue who should take the decision whether a bank should be saved or not. In the European Commission proposal it is suggested this role to be taken by the Commission itself, but Germany is of the opinion that such a decision should be taken by a body consisting of the national resolution bodies. Several days ago a statement by Germany's representative in the ECB Governing Council Jörg Asmussen was quoted that such a decision should be taken by the ECB. Mario Draghi said, though, that this was impossible and Mr Asmussen's words were interpreted wrongly. There is no way the supervisor to decide what to do because they do the assessment fully independently and then they pass it on to the resolution body which, currently, as Mario Draghi explained, in many countries is the government.
Unemployment will also be a central issue on the European agenda this autumn and as of today the European Parliament is launching the election campaign for the May elections, an important part of which will be the nomination of a president of the European Commission. In this sense, the annual state of the union speech by Mr Barroso is very much anticipated on September 11th, which will probably be his last one. So far he was focusing mainly on the deepening of the European integration as he even broke the taboo on federalisation, but for now he has the support only of the big European political parties against the backdrop of growing euroscepticism and nationalism in many member states. So, another hot autumn is to come in Europe which will pass under the shadow of the developments in Syria and their impact on the peripheral member states.