Eurogroup: IMF proposes Germany disposes

In yesterday’s Eurogroup, Eurozone’s policy setting council, the 17 ministers of Finance had two important items on their agenda; IMF’s recommendations for the European economy under Article IV Consultation with the Euro Area, and the approval of the next loan trance to Greece. On both accounts the opinion of Germany weighed a lot. In this Eurogroup’s session participated the general director of IMF Christine Lagarde and the heads of the troika for Greece, made up by officials from the European Commission, the European Central Bank and the IMF. Let’s start from the beginning. IMF proposes, Germany disposes IMF’s appraisal for Eurozone’s economy was not without thorny corners both on steps taken so far and on policy initiatives for the future. In the Press conference after the council, Ollie Rehn, the EU Commissioner responsible for Finance and the euro, mentioned four IMF observations with which he said he agreed. He noted: “I will leave it to Christine to outline the key findings of the consultation. I agree, and the Commission agrees, on the four points outlined by Christine Lagarde”. Rehn explained that “In particular, I share the view that a full banking union is necessary to reduce financial fragmentation, and so is a profound cleaning up of banks’ balance sheets through comprehensive and forward-looking asset quality reviews and system-wide stress tests. I also agree we need to have credible fiscal backstops in place – national and/or European”. At this point it must be mentioned that Rehn’s remark in relation to ‘fiscal backstops’ was made in reference to Ecofin’s decision about the bank resolution procedure. This is a new EU draft Directive considered as one of the cornerstones of the European Banking Union. Those fiscal backstops are meant to protect member states taxpayers from undertaking obligations stemming from toxic assets of failing banks during resolution. Rehn however said nothing about the most crucial issue raised in IMF’s report about the banking union. The Fund observes that Eurozone banks are in a bad shape and most of them cannot recognize and write down losses. In view of this the IMF’s report says that a strong banking union is the only cure. The problem however the IMF raised is that the resolution mechanism and authority, cornerstone mechanism for the banking union, have to be centrally managed and not decentralized at national level, as the Ecofin decided recently. Says the IMF: ”A strong single resolution mechanism is critical to ensure timely and least-cost resolution of banks. The goal should be a centralized authority with power to trigger resolution and make decisions on burden sharing. By contrast, compromise solutions that leave resolution at the national level while supervision (by ECB) is centralized carry significant risks, including of perpetuating bank-sovereign links and potential conflict between national supervisors in cross-border resolution”. This position for centrally managed bank resolutions was held also by the European Central Bank, the European Commission and Ollie Rehn personally. Unfortunately Germany insisted that resolutions should be left to national authorities. Berlin didn’t want a central resolution authority because in case of a big bank failure there might surface obligations which would have to be born also centrally. Obviously Germany didn’t want to share risks that might stem from a let’s say Spanish bank resolution. Ecofin followed Berlin’s option and decided decentralized (in member states) bank resolution, while bank supervision remains centrally managed by the ECB. This is the antithesis that the IMF believes it may undermine the banking union. Rehn avoided commenting on that. Greece gets want she wants Last but not least, yesterday’s Eurogroup had to deal with another chapter of the Greek tragedy. The heads of the troika found that the country was behind with its obligations, mainly in upgrading the tax authority and tackling overpopulation of the public sector. Both those issues were enough to block the next loan tranche disbursement. Such a development, however, could trigger a chain reaction, leading to the conclusion that the whole Greek programme, of German aspiration, is wrong. Obviously the Merkel administration is to be held responsible for that. With the September German elections in view, though, this could have devastating effects on Merkel’s re-election prospects. It was not a surprise then that the German minister of Finance, Wolfgang Schaeuble, rushed even before the Eurogroup meeting and announced that Greece is doing well and only some details of the country’s obligations are still pending. As a result the Eurogroup decided, “with satisfaction that the programme is broadly on track with the prior actions to be implemented shortly. Greece has made further progress in implementing the fiscal and structural reforms foreseen in the agreed policy conditionality, albeit in some areas at a slow pace”. In any case Greece is to receive the next soft loan sub-tranche of EUR 2.5 billion from the EFSF plus “an amount of €2bn, equivalent to the income on the SMP (Securities Markets Programme) portfolio accruing to euro area national central banks in 2012, will be disbursed to Greece’s segregated account”. In short, every important decision is now expected to support Merkel’s re-election prospects even at the expenses of EU taxpayers, whose interests she widely advertises to effectively protect.