Eurozone – The plan for EMU completion

Five Presidents' Report

European Monetary Union ("EMU") has been developed under a three-stage process of integration: stage three includes the adoption of the Euro area currency. There are currently 19 members of the Eurozone. The remaining EU Member States are under an obligation to join the Euro, with the exception of the UK and Denmark which have the benefit of opt-outs.

The Five Presidents’ Report ("the report") which was published on 22 June 2015 sets out the plan to complete the final phase of EMU in two stages. The Five Presidents are Juncker, Tusk, Dijsselbloem, Draghi, and Schulz. The report includes a two-stage implementation process with ambitious measures to complete an economic, financial, fiscal and political union by 2025 at the latest. Stage 1 reforms build on current initiatives and are to be incorporated in existing legal frameworks. Stage 2 is intended to complete the Economic and Monetary Union and includes reforms that will require amendments to existing treaties. The European Council stated in its meeting in December that the legal aspects of these long-term measures had to be further explored at the end of Stage 1 in 2017. In this context the European Commission will publish a White Paper by spring 2017.

Each of the proposed ‘Unions’ are discussed separately below.

Recent Developments

Since the publication of the report, there have been a number of developments. Notably:

• The Capital Markets Union (“CMU”) was launched: the revision of the Prospectus Directive and two draft regulations regarding securitisations are under discussion; and Solvency II has been amended to support investment by insurers and reinsurers in infrastructure projects.
• The Banking Union has edged closer to completion with the Single Resolution Mechanism and its Single Resolution Board and Single Resolution Fund effective as of 1 January 2016.
• The European Commission published its 3-stage European Deposit Insurance Scheme proposal on 24 November 2015. The final stage is expected to be completed in 2024.
• The European Economic and Social Committee (“EESC”) at its plenary session of 17 March 2016 encouraged the European Commission to “draw up conclusive proposals which go further in completing Europe's Economic and Monetary Union without delay[1].”
• Proposals for further integration have not been well-received in all Member States. The UK is to hold a referendum on 23 June 2016 to decide the question of UK membership of the EU; if the result it remain the UK/EU settlement will take effect. For further information on the settlement, please see our earlier report here.

Financial Union

The aim of Financial Union is to enhance the financial stability in the Monetary Union and to share risk in the private sector. The proposals for the Financial Union include the launch of the Capital Markets Union (September 2015) and the completion of the Banking Union.

Capital Markets Union

CMU is an EU-wide initiative and is seen as important for recovery in the Eurozone.

In September 2015, the European Commission published an Action Plan to boost business funding and investment financing and to build "a true single market for capital across the 28 Member States". Key elements of the Action Plan include:

• Simplification of prospectus requirements
• New rules for securitisations
• Amendments to the Solvency II Delegated Regulation to address barriers to insurer investment in long-term infrastructure and ELTIFs

For further information on CMU, please see our earlier report here.

Banking Union

The creation of the European Banking Union with its three pillars Single Bank Supervision, Single Resolution Mechanism ("SRM") and Single Deposit Insurance is well underway.

The ECB supervision of Eurozone banks has been in place since November 2014. The SRM (part of the second stage of the Banking Union) became fully operational from 1 January 2016. One of the lessons learned following the financial crisis in Europe was the need for a European legal framework for liquidation of insolvent banks. This was addressed by the enactment of the core SRM Regulation No. 806/2014 and the Bank Recovery and Resolution Directive 2014/59/EU ("BRRD") which provides a supranational framework for the orderly liquidation of banks.

The SRM is complemented by the Single Resolution Fund ("SRF") (effective as of 1 January 2016). The SRF is funded by levies of the Member States which is to be built up over the course of 8 years. Member States’ contributions will be transferred and mutualized to the SRF, which is to have an estimated amount of 55 billion euros. This transfer process is outlined in an intergovernmental agreement which was ratified by a sufficient number of the participating Member States (excluding the UK and Sweden) on 29 November 2015.

For further information see our report here.

European Deposit Insurance Scheme ("EDIS")

The Five Presidents' Report highlights the need to establish the third pillar of the Banking Union the European Deposit Insurance Scheme. Eurozone Banks are subject to the Single Supervisory Mechanism and the Single Resolution Mechanism with its Single Resolution Fund but it lacked a single deposit scheme for the whole of the Eurozone. The Directive on deposit guarantee schemes 2014/49/EU requires only national deposit protection schemes (which must cover up to 100,000 euros for each depositor/bank relationship). This means that depositors can only recover their funds from the assets of the relevant national deposit guarantee schemes (as was very apparent during the recent Greek banking crisis). Setting up a common deposit insurance could help to cope with large shocks in the banking and financial system. On 24 November 2015 the Commission proposed a concept for a mutualization of national protection schemes: the EDIS.

The proposal includes a three-stage process. Stage 1 - the re-insurance phase - is planned to start in 2017. Under this, national deposit insurance schemes can only access EDIS funds after exhausting their own resources. At the Co-Insurance phase - Stage 2 - which is planned in 2020, the EDIS contributes from the first euro of loss; however, the share contributed by EDIS will start at a low level. At Stage 3 - the full insurance phase - the EDIS will fully insure national deposit guarantee schemes.

Some Member States have expressed their concerns regarding the mutualisation of national protection schemes at this time and argue that first step should be the reduction of risks in the banking sector.

Further information on the EDIS can be found in our earlier report here

Economic Union

‘Convergence’ is a recurring theme in the report in relation to Economic Union. The aim is for Member States to ensure that robust policies are in place to keep their respective economies on an even keel. Stage 2 of this ‘convergence process’ is to involve “a set of commonly agreed standards with a legal character.”

To move towards Economic Union the Five Presidents' Report proposed the following measures:

• Creation of a euro area system of national competitiveness authorities to monitor tracking performances and policies in the field of competitiveness
• Strengthened implementation of Macroeconomic Imbalance Procedure
• Greater focus on employment and social performance
• Stronger coordination of economic policies

Fiscal Union

Following the financial crises in Europe, the report emphasises that responsible national fiscal policies are imperative. To take steps towards a Fiscal Union the Presidents propose the creation of an advisory European Fiscal board. This will build on the current governance framework in the short term. The European Fiscal Board is to “provide a public and independent assessment, at European level, of how budgets – and their execution – perform against the economic objectives and recommendations set out in the EU fiscal governance framework.” The Board's advice would be taken into consideration by the Commission in the context of the European Semester. The European Semester integrates different institutions and programs relating to Eurozone policy coordination. Annex 2 of the report outlines that the European Fiscal Board, the European Systemic Risk Board, the Competitiveness Authorities and the European Parliament and Commission would assess and shape policies relating to growth in the Euro area.

The longer-term plans involve putting in place a “common macroeconomic stabilisation function” to enable Member States to cope with shocks that cannot be managed at the domestic level alone.

Political Union

The proposed moves towards greater economic and fiscal integration necessitate greater democratic accountability and stronger institutions. As such, the Five Presidents propose these key measures to facilitate Political Union:

• Strengthening the role of the Eurogroup – to include creating a permanent President and setting a clear mandate
• Enhancing the role of the European Semester - to include greater parliamentary (both European and national) involvement and strengthening parliamentary oversight
• Consolidating external representation of the euro area in international fora
• Creating a Euro Area Treasury at Stage 2 of EMU – for accountable, collective decision making on matters of fiscal policy

The EESC at its plenary session in March 2016 voiced concerns, noting that the “issue of democratic legitimacy is not tackled seriously by any of the Commission's proposals[2].”

Bringing the legal basis of the Eurozone into the EU legal framework

• Integrating the Treaty on Stability, Coordination and Governance, the relevant parts of the Euro Plus Pact, and intergovernmental agreements concerning the SRF into EU law
• Integrating the European Stability Mechanism into EU law at Stage 2 of EMU

After 2017, when we enter Stage 2 of EMU, these agreements must be formally integrated in the EU legal framework through EU Treaty change. We expect greater detail on the legal measures in the White Paper to be published in 2017.

Timeline

Stage One (1 July 2015 – 30 June 2017)

• Complete the Banking Union
• Strengthen the European Systemic Risk Board
• Create a new European Fiscal Board
• Create Competitiveness Authorities
• Rework the European Semester to facilitate greater oversight of the European Parliament
• Enhance the Eurogroup steering group to enable the group to better promote the interests of the Euro area
• Consolidate external representation of the Euro area
• Integrate the Treaty on Stability, Coordination and Governance; the relevant parts of the Euro Plus Pact; and the Inter-governmental Agreement on the Single Resolution Fund in existing legal framework

The Council of the EU is to report on progress made regarding the Five Presidents’ Report/EMU in June 2016. A White Paper is expected to be published in 2017 to outline next steps to achieve ‘Stage 2’ of the process.

Stage Two (July 2017 – 2025)

• Formalise the Economic Union convergence
• Create a macroeconomic stabilisation function for the euro area
• European Stability Mechanism (ESM) to be integrated in EU law framework
• Create a Euro area Treasury
• Complete the CMU

[1] EESC press release.

[2] EESC press release.