The opportunity for euro-area reform is closing

Subject

Euro-area governance.

Significance

In the EU, macroeconomic governance reform is focusing around the creation of a euro-area budget and a European Deposit Insurance Scheme (EDIS) -- the final pillar for the completion of the European Banking Union (EBU) which would provide stronger insurance coverage for member states. However, northern countries are reluctant to pay for crisis-prone ones in the south, so compromise on detail could take years while the initiatives will have limited scope in responding to crises.

Impacts

• The ECB’s Single Supervisory Mechanism will continue to focus on ‘risk reduction’ measures, including the disposal of non-performing loans.
• The EU is unlikely to give Italian budget concessions perceived as acceptable by Rome, possibly hardening the position of Italy’s populists.
• If Manfred Weber’s candidacy to become European Commission president fails, Berlin will likely insist that it gets the ECB president post.
• The rise of migration flows in the Mediterranean and the lack of EU resolution on burden-sharing will worsen north-south relations.