EU Leaders Make Little Progress at Informal Summit

EU leaders met in Brussels (Belgium) yesterday (23 May) for an informal summit, hosted by European Council president Herman Van Rompuy. The leaders discussed measures to boost growth in Europe following increasing acknowledgement across the bloc that the use of austerity measures alone is further damaging the economy. The meeting did not result in concrete announcements or measures, although this was not unexpected. As Van Rompuy stated, the meeting was primarily about, "putting pressure, focusing minds, and clearing the air".

Growth Measures

EU leaders discussed measures that could be taken to boost growth across the continent. The meeting achieved nothing groundbreaking in this area. Leaders reaffirmed their commitment to completing the single market and following the initiatives laid out in the EU's 2020 growth strategy. Special mention was given to the importance of making progress on the energy efficiency directive, implementation of the services directive, and finalising the European patent in the next couple of months. EU leaders regularly underline the importance of these issues; however, even if the obstacles to their effective implementation were removed, the impact on short-term growth would probably be small.

In addition, EU leaders discussed various growth measures proposed recently by new French president François Hollande (see France - Europe: 26 April 2012: French Presidential Favourite Elaborates on Plans for EU Growth Measures). These included a boost in capital for the European Investment Bank (EIB) so it can increase its lending to businesses, particularly small and medium-sized enterprises, the redirection of unused structural funds for use in EU infrastructure and investment projects, the introduction of so-called "project bonds" to increase private investment in infrastructure, and the introduction of a tax on financial transactions. Although no concrete announcements were made on these issues, there appears to be growing consensus around increasing EIB capital and redirecting structural funds. It also seems that the use of project bonds may be expanded provided the trial agreed yesterday goes smoothly (see Eurozone - Europe: 23 May 2012: EU Set to Approve Limited Trial of Project Bonds). The introduction of a financial transaction tax remains very unlikely on an EU-wide level. Indeed, discussions between member states earlier in 2012 indicated that there is relatively little support for the measure, even among Eurozone member states (see Europe: 14 March 2012: EU Finance Ministers Lukewarm on Financial Transaction Tax).

Economic Union and Eurobonds

The official conclusions of the summit stated that there was a "general consensus" on the need for more economic union to complement the monetary union. Nevertheless, there appears to be little agreement on how this should be achieved. The summit also demonstrated that Eurobonds will not become a reality in the short or medium term. Although Hollande has been a vocal advocate of such joint sovereign debt issuance for several weeks, the summit underlined the strong objections to such a move by Germany, Finland, the Netherlands, and other northern Eurozone members. Van Rompuy stressed that Eurobonds were a long-term consideration, and could only come alongside greater economic and fiscal union. European Central Bank (ECB) president Mario Draghi added that Eurobonds without fiscal union made no sense in his view. The leaders were also reported to have mentioned more integrated banking supervision and resolution, and a common deposit insurance scheme; however, very significant differences of opinion remain on these issues, and Van Rompuy stated that they "did not have a real discussion on it".

Greek Exit?

With many commentators suggesting Greece is likely to have to leave the Eurozone in the next year, leaders also exchanged views on the political and economic situation in the EU's most troubled economy. Despite admissions that many EU governments are actively planning for a possible Greek exit, EU leaders stuck to the official script at the summit, reiterating their desire for Greece to remain in the Eurozone and underlining their commitment to support the country provided it respects its commitments agreed in the terms of its bailouts. The leaders noted their expectation that the next Greek government would do just that. It remains unclear what EU leaders would do if the next Greek government were hostile to the terms of the bailout yet also keen to remain inside the euro. This question could dominate the next EU leaders' summit, scheduled for 28/29 June, following the Greek election on 17 June.

Outlook and Implications

Negotiations will continue between member states in the lead up to the next European Council summit on 28/29 June. It seems increasingly likely that the lending capacity of the EIB will be increased and that structural funds from the EU budget will be redirected towards infrastructure project investment across the union. Greater scope for project bonds could also be announced. The prospects for a financial transaction tax remain bleak at this point.

Much depends on the situation in Greece. EU governments will hope that the Greek election will return a government that supports standing by the country's international commitments. Should the election result be different, however, and a Greek exit become imminent, Germany and other more fiscally hawkish member states could well soften their stance on measures such as Eurobonds as more favourable and less costly alternatives to a Greek exit or the uncertainty of contagion spreading to other vulnerable Eurozone economies. Ultimately, it is the threat of a Eurozone break-up that is likely to prompt reluctant governments to take more significant steps towards economic union, more integrated banking supervision and resolution, and a common deposit insurance scheme as the "least worst" options. Nevertheless, just as European citizens have demonstrated increasing frustration with successive rounds of austerity measures, so too might they refuse to consent to greater pooling of sovereignty in the EU or effective permanent transfers of wealth from richer to poorer member states.