The Strategist

Eurogroup agrees to strengthen the monetary union

12/05/2018 - 06:14

Following long negotiations, the Eurogroup agreed to partially strengthen the monetary union within the euro area. In particular, it is proposed to expand the financial stability mechanism and introduce new requirements for the placement of country debt. More significant changes, including the emergence of a general monetary union budget within the framework of the EU financial plan, have not yet found sufficient support from euro zone participants.

Eurozone finance ministers, following negotiations that lasted all night in Brussels, agreed on measures to transform the monetary union. Now, proposals for the strengthening of the bloc will be submitted to the summit of heads of EU countries scheduled for December 14. In particular, the parties agreed to strengthen the existing financial stability mechanism (ESM), expanding its work beyond the framework of support to countries experiencing debt problems.

In addition, by 2022, new requirements for the issue of government bonds should appear for the euro area, allowing the ESM fund to negotiate, if necessary, between a country in crisis and its private creditors. This should simplify restructuring of debts in the future, depriving minority investors of the opportunity to achieve more favorable conditions. Recall that in 2012 the authorities of Greece had to negotiate with private owners of bonds, and Cyprus had to do it in 2013. Amendments to the agreement on the establishment of a fund may be ready by June 2019, the European Commission indicated. If a new country approaches the fund, its credit rating will be evaluated jointly with the EC.

As part of strengthening the banking union, it is proposed to write down more stringent rules to the financial institutions' own funds, as well as clarify on bankruptcy procedures. Among other things, these measures include allowing government authorities to suspend bank payments and fulfill their contractual obligations when such organizations are under a recovery procedure (for the sake of stabilizing their condition). By the spring of 2019, analysts expect some progress in common capital markets of the euro zone countries, as well as in creation of a unified deposit insurance system.

During the talks, Germany and France proposed a new framework of the euro area budget, which would be part of the EU budget - this could ensure compliance with the usual rules of budgetary control and participation of the European Parliament in decision-making. The size of such a budget can be set by the heads of the countries participating in the currency bloc. While the details of this idea are being coordinated, its support is growing, French Finance Minister Bruno Le Maire said after the talks. “Without a single budget, there will not be a strong euro area, and the European currency will not play a strong international role as a medium of circulation,” said the minister.

Earlier, the heads of the Central Bank of Germany and France put forward proposals to create a common euro zone finance ministry, but this idea has not yet found sufficient support. The parties failed to agree on a tax on digital services. However, according to Pierre Moscovici, the European Commissioner for Economics and Finance, “the tax injustice in this connection” persists and “must be corrected”.