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12 February 2014

European Integration Monitor - January 2014

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The race for the Commission Presidency is now heating up. Economic integration continues to be driven by the demands of the crisis and the increasing recognition of policy errors by the Troika. Good news on budgets around the euro area.

This month in brief:

Politics: The race for the Commission Presidency is now heating up – with only the EPP yet to choose its candidate. In an emotive debate with euro-sceptics, ALDE’s charismatic Verhofstadt could score well. ECON grilled the Troika over its performance – Europe’s new-found experience may obviate the need for it in the future. Chancellor Merkel held her State of the Nation address and she underscored her support for closer economic integration in Europe, warning that the crisis will never be overcome in the long term unless the bloc undertakes a "quantum leap" to fix the "lacking" economic coordination. The Czech government is setting a new policy course on Europe. Possibly profound implications for the UK as the UK’s deal on Banking Union will turn to ashes if the Czech government signs up for Banking Union. Respondents to the UK's Balance of Competences Review on EU Budget and Financial Services argued that the UK has much to gain by retaining influence on EU rule-making for financial services. 

Finance: The stand-off between the European Parliament and Council seems to be deepening as the issue has moved on from the simple mechanics of Banking Union to the relative constitutional roles of the two institutions. It is increasingly difficult to see either side backing down from deeply entrenched positions. Fortunately, competition rules already provide swift bail-in provisions if any state aid is required. The precise accounting rules to be used for measuring the impairment of banks’ assets is emerging as a difficulty and also whether the AQR exercise will impact 2013 financial statements. The answer is No – it will be reflected in the 2014 profits – giving time for banks to earn another €60ish billion of profits to help plug gaps. However, investors who buy securities on the basis of 2013 financial statements that turn out to be mis-stated may have reason to feel aggrieved if they are subsequently bailed in. 

Economics: Economic integration continues to be driven by the demands of the crisis and the increasing recognition of policy errors by the Troika at the most intense moments of the crisis. But the budgetary and economic benefits of these policies are now appearing. So attention is swinging to democratic legitimacy and control issues that are to be addressed by cooperation between the European and national Parliaments. At the sharp end of policy-making, the Commission is trying to balance fiscal and structural reforms with classical demand management. 

Budgets: Good news is building up around the euro area: Spain has emerged from its ‘bank’ programme with its banks in a comfortable solvency position and a recovering economy. Ireland is seeing a settled trend in employment growth – perhaps the most encouraging indicator. Portugal is making startling progress: deficit below target; debt declining at the EU’s fastest rate; first current account surplus in two decades; and the first primary surplus since 1997. But Greece remains the outlier: 555 OECD recommendations to remove regulatory restrictions on competition and the government seems only likely to accept 80%. But the biggest plus point could be a historic turn in French economic policy. Has Hollande begun a U-turn to match that of Mitterrand 30 years ago? 


© Graham Bishop

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