The Five Presidents’ Report, a roadmap for the completion of EMU
The Five Presidents’ report (published by the EC and the ECB) was released in late June 2015, signed by European Commission’s Jean-Claude Juncker, Euro Summit’s Donald Tusk, Eurogroup’s Jeroen Dijsselbloem, ECB’s Mario Draghi, and European Parliament’s Martin Schulz. The European commission describes it as an ambitious plan on how to deepen the Economic and Monetary Union (EMU), even if it were overshadowed by Greek negotiations (Patrick Smyth). For Wolfgang Munchau, it actually matters more than Grexit in the long run.
The Report sets out measures to achieve genuine economic, financial, fiscal and political union in two phases, to be completed at the latest by 2025. Overall, while not completely unambitious, the report includes few new proposals and medium-term measures are notably vague. For Eurointelligence, the various stages are postponement, not advancement, as nothing will happen until the 2017 elections in Germany and France. Odendahl and Begg also emphasize that EU leaders have scaled down their ambitions compared to the Herman Van Rompuy report (2012).
Huw Pill (Goldman Sachs) recalls that the first Four President report identified a need to: (1) break the link between sovereign and bank balance sheets; (2) create a common economic policy framework based on ‘contracts’ between EU institutions and individual member states; and (3) develop a central fiscal capacity in the Euro area—and notes key achievements: the ECB’s outright monetary transactions (OMT) program; and progress on the banking union. But the measures fell short, in particular of breaking the potentially toxic link between sovereign and bank balance sheets, in developing a contractual approach for progress on structural reforms and convergence, and in developing an area-wide fiscal capacity.
However, Renaud Thillaye highlights that the report shows more realism on process, taking into account the lack of political willingness in EZ. Goldman Sachs stresses that political capital is scarce and calls on policy makers to focus on issues where complementarities across actions and endogenous responses to them multiply the impact—especially focusing on financial issues so that monetary policy can deliver on (1) price stability across the Euro area as a whole; and (2) access (for both the private and public sector) to deep and liquid continent-wide financial markets to support growth and investment. Guntram Wolff points the concrete idea to prepare a White Paper in spring 2017. Stage 1 – “Deepening by doing” (1 July 2015 - 30 June 2017) focuses on: Build on existing instruments and make the best possible use of the existing scope under the Treaties—with a focus on structural measures and economic convergence. Stage 2 – “Completing EMU”: Agree concrete measures to complete EMU’s economic and institutional architecture, with a more binding convergence process and a fiscal macroeconomic stabilization function for the euro area. Final Stage – “Deep and genuine EMU” (at the latest by 2025) More concretely, the Five Presidents’ Report calls for:
Strengthening the Economic Union of convergence, notably by the creation of a euro area system of Competitiveness Authorities and a better implementation of the Macroeconomic Imbalance Procedure. According to Wolff, the report is right to put significant emphasis on structural divergence - unit-labour costs and current account imbalances - within the EZ. Though Eurointelligence questions the focus on competitiveness given that the whole EZ runs a large structural surplus and warns that the wage/productivity monitoring might lead to a “race to the bottom”.
Progressing towards a Fiscal Union, by creating in the short run an advisory European Fiscal Board and in the longer term a common macroeconomic stabilization function to enhance public risk sharing in the Euro area. G. Wolff (Bruegel) regrets that the report misses the opportunity to question the current, complex and ineffective, system of fiscal rules. He calls for a system in which political decisions on national fiscal policy become joint decisions. Roubini warns the risk of “Germanification” of the EZ (greater integration without greater differentiation), adding to global and European imbalances.
Completing the Financial Union, by fully implementing the Banking Union and launching the Capital Markets Union. Eurointelligence approves the suggestion of a financial backstop for the single resolution fund – probably a credit line from the ESM, which could become a hidden Eurobond issuer – and a deposit guarantee scheme. Erik Jones wishes the report had established the principle that banks are the business of the EZ as a whole, not the member states, suggesting that the system would become more self-equilibrating, and then the fiscal rule less important. Finally, for Iain Begg, the report fails to clarify the future role of the ECB.
The report was globally welcomed but, as seen above, suffers several shortcomings. For Christian Odendahl, the report rightly aims to complete a financial union in the EZ, but over-emphasizes structural reforms and underplays the need for stronger counter-cyclical policies. Columnists associated with the LSE and CER found the report lacking on the role of the ECB and too vague on fiscal union matters. For Munchau, the report’s main weakness is that it fails to openly accept and thereby push the debate on the necessity of treaty change. Ultimately, Eurointelligence shows that the report omits one big issue: the creation of a political union with its own fiscal capacity.
Is China's bubble ready to burst?
EconMatters reports that 1Q15 has been the “darkest period” for China's economy. According to Bloomberg GDP growth was 7% in Q1, the slowest since 2009, while industrial production in March rose at the slowest rate since November 2008, and inflation turned negative for the first time since 2009. Although China has cut its benchmark interest rates three times since November, and has twice lowered banks’ reserve requirements, freeing up more cash for them to lend, The Economist highlights that the stimulus was disappointing. It has done little to increase demand for new loans. Instead, it has triggered a sharp rise in China’s stock markets. Tyler Durden is concerned with a possible bubble burst because much of the recent buying has been with borrowed money. Margin debt as a percentage of China’s stock-market capitalization is now higher, at $348 billion (Wolf Richter) than on the NYSE.
Wolf Richter reports that over the last fifteen trading days, the Shanghai Composite Index has plunged 19% – the steepest two-week plunge since December 1996 (read Craig Stephen from MarketWatch). The proportion of investors who see bond markets as overvalued reached a record of 84% in April (WSJ).
What’s next ? Ana Swanson believes the situation is going to get worst as Chinese last arrived investors are mainly uneducated and uninformed agents (Reuters). Sheng and Geng (Project Syndicate) argues that China is much less “financialized” than the US and could avoid a crisis by resisting price intervention, and instead allowing market forces to propel the business cycle. Wolf Richter and Tyler Durden on the opposite believe that the PBOC will continue to fuel the bubble because state-owned companies and local governments (Bloomberg) are drowning in debt as well. A failure of local governments could lead to a domino chain. Finally Craig Stephen fears a change in new investors’ behavior that would let the PBOC defenseless.
EconMatters ironically concludes: the world is freaking out that Greece is just days away from defaulting on a $1.72 billion loan payment, just wait till the margin call on the $370 billion margin debt in China's stock.
