So it’s yet another two days where the leaders of the EU get together for a dinner (this time it’s tarte, fine eggs/mushrooms, braised veal on bed of fresh spinach followed by a chocolate trio) and attempt to thrash out greater economic integration. Up for discussion is Greece and Spain, what to do with the funds from the financial transaction tax and most importantly the plan for a banking union.
Given previous results the expectations are running fairly low and Reuters reported that Hollande and Merkel are already at odds over some key points:
Germany and France, Europe’s two central powers, clashed over greater European Union control of national budgets and moves towards a single banking supervisor before a summit of the bloc’s leaders began on Thursday.
German Chancellor Angela Merkel demanded stronger authority for the executive European Commission to veto national budgets that breach EU rules, but French President Francois Hollande said the issue was not on the summit agenda and the priority was to get moving on a European banking union.
The two leaders met privately for 30 minutes just before the start of the 22nd EU summit since the euro zone’s debt crisis erupted nearly three years ago. Afterwards, a French source said they had agreed on the need for a tight timetable for introducing banking union.
In the lead up to the summit Angela Merkel had stated that Germany wouldn’t be rushed on the banking union and reports in the last hour look as if she has got her way:
German diplomats say leaders meeting in Brussels have reached agreement on creating a powerful single supervisor for eurozone banks and the plan will be implemented at some point next year.
France and Germany have been tussling over how to best shore up Europe’s struggling banks. France wanted a single supervisor in place by the end of this year — because that would allow Europe’s bailout fund to directly loan money to banks, a key tool in fighting the crisis.
But Germany has been dragging its heels because it’s nervous about such loans.
The diplomats said leaders reached agreement Thursday night to draw up the legal basis for the supervisor by the end of this year. They will then put it into place sometime in 2013.
It is yet to be seen what the UK, Finland and Sweden have to say about this given they have been opposed to a banking union for their own reasons, and let’s not forget the risk of post-summit backflips.
The single supervisor makes way for direct banking re-capitlaisation and a further move towards a banking union. As I’ve talked about previously, without the banking union there is no supra-European deposit insurance which means that deposit outflows from the periphery are likely to continue and this will add to the pressure on the weaker sovereigns. In regards to that we saw Spanish bad loans reach a new record overnight:
Spanish households and companies defaulted on their debts in record numbers in August, hurting the country’s lenders and highlighting the need for an aid package and bad bank to help the economy out of recession. A property crash left banks with billions of euros in bad debt from real estate developers on their balance sheets but the problems have spread to small businesses and other sectors. Loans that fell into arrears in August increased by 5.3 billion euros ($7 billion) from July, reaching 178 billion euros, Bank of Spain data showed on Thursday.Spain is setting up a bad bank to siphon property assets off lenders’ balance sheets and banks are preparing to receive the first funds from a 100-billion-euro credit line agreed with the European Union. But the record loan data raises the question of whether consumer loans should also be transferred to the bad bank and if Spain will take too little of the European cash. The government estimates it only needs 40 billion euros.
We are also expected to hear from the Greek PM on the progress, or lack there of , on Greece’s progress to meet its emergency program obligations. I don’t expect the speech to lead to anything as everyone is well aware that Greece already needs a further debt write-off , although the EU does appear to be pushing for a debt buy-back in order to hold off the inevitable. In the meantime back in Athens anti-austerity rallies have turned violent once again.
There is another full day of the summit to come , so we will get further announcements over the next 24 hours.