The Continentalist: Closing the EU-German Perception Gap

The Continentalist: Closing the EU-German Perception Gap

Having done all the right things at last week’s European Union summit, German Chancellor Angela Merkel found herself blamed, even attacked, in Germany for the summit’s outcome. Merkel helped prevent Spain -- and, further down the line, Italy -- from going bankrupt, thereby protecting German industries from the potential consequences. Yet, she faced an outcry back home that she had effectively allowed Germany to be blackmailed at the summit by a hostile alliance of French President François Hollande, Italian Prime Minister Mario Monti and Spanish Prime Minister Mariano Rajoy. This gap between what might be the first step toward a victory for Europe and the perception of defeat among Germans matters.

In fact, European leaders came up with three fairly important, if not breathtaking, new approaches last week. First, they agreed on a European Growth Pact that will commit €120 billion ($150 billion) toward investment. Second, they gave the green light for the European Stability Mechanism, the EU’s permanent bailout fund, to recapitalize banks directly, instead of directing bailouts through overly indebted national governments. In this way, contingent liabilities emanating from the banking sector will be removed from sovereign balance sheets, a major step toward breaking the vicious circle between the eurozone’s sovereign debt and banking crises. In doing so, they also agreed to allow the ESM to purchase sovereign debt on the primary and secondary bond markets for countries facing market pressures despite honoring their fiscal discipline pledges, a first step toward open mutualization of debt. Neither move is revolutionary, though, as direct bank recapitalization had already been allowed by the ESM treaty, and there are not enough ESM funds available for bond purchases to make a significant impact.

Third, and most important, the summit called for a transfer of bank supervision from national regulators to the European Central Bank. This corrects one of the biggest flaws of monetary union, which had created a situation in which banks that acted transnationally would be bailed out on a solely national basis in the event of difficulties. Though the summit statement is vague in terms of the details, one can hope that there will be a transfer of supervision of all eurozone banks to the ECB. This would be a big change, and it means a certain loss of sovereignty.

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