MNI INSIGHT: EU Summit To Signal Progress On Strengthened ESM

--EZ Budget Set To Stay An Aspiration

By David Thomas

     BRUSSELS (MNI) - The European Council Leaders' Summit in Brussels later

this week will signal clear progress on banking union and on bolstering the

crisis-fighting role and capacity of the European Stability Mechanism, MNI has

been told.

     But the new, stronger ESM will be built according to a German blueprint,

with ideas of a Eurozone stabilisation fund looking set to remain just a vague

aspiration with euro-using states at odds on the idea of a zone budget, as

actively pushed by French President Emmanuel Macron.

     "Differences of views remain on the need for and the features of a euro

zone budget for competitiveness, convergence and stabilisation," said Eurogroup

President and Portugal's Finance Minister Mario Centeno in a pre-summit letter

to EU President Donald Tusk.

     While German Chancellor Angela Merkel has consistently opposed the idea of

any kind of transfer union in the single currency bloc, she at last conceded the

concept in a Franco-German leaders' meeting last week.

     Some officials see the mere fact of German agreement with the idea of a

zone budget as a milestone in itself and insist it is going to have legs. "It's

a big departure for Germany to even consider a euro zone budget," MNI was told.

"The budget issue will not go away and the leaders are likely to mandate the

Eurogroup to look further into the issue".

     --NO SUMMIT BARGAINING

     But the notion of a grand political bargain on Friday, involving trade-offs

between migration and more meaty euro zone 'deepening' are said to be way off

mark.

     "That's not how summits work, I know that's how some people think they do.

But that's not the reality," MNI heard from an official.

     France's Macron had pushed for a stabilisation fund of E200bn - E300bn,

while Merkel sees a budget in the 'low double-digit billions'.

     "There is a lot of resistance against euro zone fiscal capacity," another

official said, noting the opposition from countries like the Netherlands,

Austria, Finland and other Baltic states to any kind of transfer union.

     More crisis-vulnerable states on the southern and eastern periphery of the

bloc, on the other hand, want a fund at the upper end of Macron's E200bn-E300bn

range, or even more. The fact is, euro zone countries are not so much split on

this topic as scattered.

     Leaders will agree on a significant bolstering of the role, powers and

'toolkit' of the ESM, with the details to be agreed at December's EuCo summit.

     --SINGLE RESOLUTION BACKSTOP

     The leaders will also sign off on making the ESM the backstop for the

Single Resolution Fund, a crucial pillar of the EU Banking Union. But while the

leaders will take note of "very important progress" on cleaning bank balance

sheets across the zone, they will say they are not ready to sign off on a

euro-wide deposit insurance scheme (EDIS).

     The crisis-fighting role of the ESM will be strengthened in situations

where euro zone states are at risk of losing market access, but the

Franco-German paper makes clear that help will be limited to those states

committed to reducing public debt, giving this proposal a distinctly German

flavour.

     Centeno's letter also moots resort to private sector bail-ins in any future

sovereign debt rescheduling, with the ESM acting as facilitator of talks between

debtors and private creditors, but adds:

     "...Some Member States expressed concerns about the market impacts of such

an approach."

     That latter may well be a point on which European Central Bank President

Mario Draghi might intervene during Friday's talks. The mere whiff of private

bail-in was an accelerant of the euro zone government bond crisis of 2009-12.

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

--MNI London Bureau; tel: +44 207-862-7492; email: dthomas@mni-news.com

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