Pressure on to agree terms of bailout fund

Euro zone finance ministers gathered in Brussels yesterday in advance of today’s meeting of all 28 EU finance ministers. The brevity of the meeting, at under three hours, reflected the relatively light agenda.

But while the meeting may have been light in terms of decision-making, significant negotiations on financial matters are ongoing at official level in Brussels as the EU ploughs ahead with plans for a banking union, the euro zone’s main policy response to the economic crisis.

Top of the agenda is the Single Resolution Mechanism, the second key “pillar” of banking union, to comprise a single resolution board and a €55 billion fund built up over a decade, which will be used to fund bank restructuring.

Following political agreement between member states at an emergency Ecofin meeting and leaders' summit in December, consensus must be reached with the European Parliament on the shape and structure of the single resolution body.

Concession to Germany
As expected, the parliament has raised significant issues with the framework agreed in December – most notably the decision to structure the fund through an intergovernmental agreement (rather than a treaty), largely seen as a concession to Germany. Two meetings have taken place between the Council, representing member states, and the European Parliament, with a third scheduled for today. EU officials said agreement is likely, with the parliament expected to largely accept the premise of an intergovernmental agreement, in exchange for greater flexibility on "mutualisation"; that is, the contentious issue of how the fund is built up over time, with MEPs favouring an "accelerated" move towards a fully mutualised, or shared, fund.

Minister for Finance Michael Noonan said yesterday he was supportive of a faster move towards mutualisation, with Ireland understood to be in favour of the resolution board having more of a say on the funding arrangement.

At a speech last night in Brussels, German finance minister Wolfgang Schauble said that changing the EU treaties has become increasingly difficult, hence Germany had advocated the intergovernmental agreement as a last resort, and it was not Germany ‘s ‘preferred method’ .

All of this, of course, is being worked out as the European Central Bank gears up to become the main supervisory authority for most of the bloc's banks by the end of the year. The ECB is expected to provide an update on the progress of the Single Supervisory Mechanism to finance ministers at today's Ecofin meeting in Brussels. Overhanging all this are the imminent asset quality reviews and stress tests, with concerns emerging about the health of some banks in the east, including in Romania, Bulgaria and Hungary.

Stern note
ECB president Mario Draghi struck a stern note at Davos at the weekend, warning that banks found unviable by the asset quality reviews and stress tests will be shut down.

The prospect of tough bank stress tests by year-end should provide a strong impetus for both the European Council and parliament to ensure a clear resolution mechanism is in place in good time for the next phase of banking union.