EU summit: half measures and imperfect agreements will erode investors’ confidence

The agreement reached at last week’s EU Summit is close to the smallest common denominator. It is true that Mrs Angela Merkel had very little room to manoeuvre in an electoral year, but the consequence is that the euro area integration is moving forward with only half measures and imperfect solutions. The risk is that the positive impact of OMT announcement will rapidly erode investor confidence and, as a result, EU leaders could be forced to take more bold measures again under pressure from financial markets.

EU leaders reach a disappointing agreement
EU leaders have finally adopted the Ecofin’s proposal on the Single Supervisory Mechanism (SSM). But behind this apparent success, the result falls short of expectations after June’s EU summit.

The agreement

  • Supervisory tasks have been conferred to the ECB
  • The SSM will be composed of the ECB and national supervisory authorities
  • The ECB will have direct oversight of euro area banks, although the day-to-day supervision of banks with less than €30bn in assets will be the responsibility of national supervisors
  • The deadline to pass the regulations has been extended from December 2012 to March 2013
  • Accordingly, the whole project has been postponed. The SSM is expected to take over the common supervision on 1 March 2014

The setbacks

  • The ECB will not be in charge of supervising the whole banking sector. Mario Draghi’s fears of a segmentation of the banking market will not be ruled out by this agreement.
  •  Regarding the agenda, a direct recapitalisation of banks by the ESM is unlikely to occur before 2014. In the meantime, any help coming from the ESM will continue to weigh on the beneficiary member’s public finances.
  • The single resolution mechanism, which is the second stage of the entire banking union project, is now expected to be adopted by June 2014. But as this project implies outright losses of sovereignty for country members and commitment of public money for other members, a significant agreement appears much more difficult to reach than the SSM.
  • The third stage of the banking union framework – the single deposit guarantee scheme – is not mentioned anymore.
  • The task of determining which legacy assets will be taken into account when the ESM recapitalises banks has been postponed by six months. This issue will continue to be a nuisance in negotiations with Spain and Ireland.

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