October 27, 2013

Euro zone suffers from integration fatigue

BRUSSELS, Oct 25 (Reuters) - The euro zone is suffering from integration fatigue and banking union might be the last big push for the foreseeable future, officials in the currency bloc say.


After three years of tightening policy cooperation, forced by a sovereign debt crisis, the single currency area may be reaching the limits of how much power governments are willing to cede.

"Governments now think that enough has been done already and now let's just implement it, let it function and then we will see," one of four senior euro zone policymakers, who all spoke on condition of anonymity, told Reuters.

More ambitious ideas for a euro zone fiscal union, treasury or even jointly issued debt, floated at the height of the crisis, now seem too optimistic or even unnecessary.

Some policymakers say the euro zone will be lucky even to finish a banking union because it entails a further transfer of powers from national to pan-European level, especially when it comes to closing down banks and financing that process.

"We basically arrived at a point where transferring more power to the European Commission and 'Brussels' in general to dictate national policies is no longer something that people are ready to agree with," a second policymaker said.

European leaders will stress on Friday the need to stick to an ambitious timetable on banking union, keeping up pressure to solve thorny issues of financing and power transfer by the end of the year. Their two-day Brussels summit has been hampered by the lack of a German government, as coalition talks drag on in Berlin. But insiders say there are deeper reasons for inertia.

When the debt crisis was raging in the first half of 2012, leaders came up with ambitious integration plans to convince investors the euro would not break apart. "But that was more a move to prevent disintegration, than a move towards real integration," a third senior euro zone policymaker said.

Later in 2012, the European Central Bank declared it would underpin the euro through a bond buying programme, Germany said Greece would not leave the euro zone and a new financing deal for Athens was agreed. Markets calmed and the sense of urgency has gone. A messy bailout of Cyprus earlier this year presented no wider threat.

"The last Eurogroup (euro zone finance ministers) meeting in Luxembourg was almost friendly," one participant said half-jokingly, contrasting the mood with the tense debates that were a feature of the last three years.

Despite public declarations that there is no room for complacency, politicians believe the crisis is over, a fourth official, who takes part in euro zone meetings, said.

"This enthusiasm is completely premature," he said. Stopping integration now would be dangerous, that official said. If there is no appetite to move further, the euro zone should at least have a blueprint for when and how it would achieve the next steps, even if far into the future.

"A really bad idea is to move with half-cooked initiatives," he said. "We are lacking this agreement on where we are heading."

NOBODY IS HAPPY

With market pressure gone, politicians worry more about their voters ahead of elections to the European Parliament in the second quarter of next year.

Five euro zone bailouts since 2010 have increased support for anti-European parties on the far right and left in many countries, including France and Germany, forcing mainstream parties to harden their rhetoric towards "Brussels".

French President Francois Hollande rebelled against recommendations from the European Commission at the end of May saying the EU executive could not dictate to Paris what it must do. While the bailouts saved the euro, voters in countries lending money to Greece, Portugal, Ireland and Cyprus believe they are picking up the tab for spendthrift policies.

Those in countries that took emergency loans don't feel the benefit, just the pain associated with the tough reforms that come with the credit.

"Both the lenders and the borrowers associate Europe with hardship, unfairness and injustice, so it is not a good starting point," the first euro zone official said.

Since anti-European parties are likely to gain ground in European Parliament elections, it might be even harder to push through any major euro zone reforms thereafter.

DOES EURO ZONE NEED MORE?

Many policymakers, both from euro zone institutions and national governments, say once the banking union is complete with a euro zone bank supervisor, a single authority and fund to close banks, and a harmonised deposit guarantee scheme, the euro zone will be pretty durable. The latter, at least, seems to have fallen by the wayside.

Euro zone governments have already agreed to give up a lot of sovereignty in economic policymaking. Budget rules have been dramatically sharpened, forcing governments to write debt break rules into national laws.

The Commission now has powers to monitor national budgetary processes from start to finish. If it detects something fundamentally wrong it would tell a government to do something about it. If the warning is ignored, fines can follow.

"There is a feeling that it is OK what we have done so far, but enough is enough and there really is no support for any more," the second euro zone official said. Even if long-term integration are baulked at, further steps might happen as a by-product of banking union.

"Although for everybody else the fiscal and economic integration at this stage is sufficient to move towards banking union, for Germany it may be not," the first official said.

"For Germany, agreeing to the banking union with everything that it needs, is possibly a step so huge that they will need additional steps on the economic and fiscal integration as well to feel safe," he said.

yahoo.com

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