Economic crisis, bailout to weigh on Cypriots
By Sarah Collins | Thursday 12 July 2012
Cyprus, which infamously kicked off its EU Presidency with an application for a rescue loan, will be presiding over the EU as it charts a course towards further integration of its banks, budgets and politics. The island of 1.1 million inhabitants is the first eurozone country in two years to hold the rotating Presidency, during which it will oversee the adoption of a raft of new rules designed to further clamp down on government spending and borrowing. The Presidency says its priorities in the economic area are to monitor ratification of the ‘fiscal compact’ and the European Stability Mechanism treaties and steer talks on twin regulations on budgetary surveillance (the economic governance ‘two pack’), but it will also be negotiating a bailout programme of between €2.5 billion and €10 billion with the EU and possibly the IMF. Cypriot President Demetris Christofias, in his first speech to the European Parliament on 4 July, urged EU leaders not to pander to financial markets and make sure to “work in the service of growth”. “We need a breath of fresh air in Europe’s economy,” he said.
Cyprus applied for an EU rescue loan on 25 June, blaming the fallout from last February’s Greek debt restructuring for a €2.5 billion hole in Cyprus Popular Bank that it can not fund. The country has been shut out of financial markets since late last year, when it asked for a bilateral loan from Russia worth €2.5 billion. The first formal talks on the bailout took place at a Eurogroup meeting, on 9 July.
FISCAL COMPACT, ESM
The first task on the Presidency’s list will be the ‘fiscal compact’, the treaty that commits its 25 signatory countries to balanced or surplus budgets. It has been ratified by ten countries so far: Greece, Portugal, Slovenia, Hungary, Latvia, Romania, Denmark, Sweden, Ireland and Germany. At least 12 of the 17 eurozone countries have to approve it before it can come into force by a 1 January 2013 deadline. France is holding out until key paperwork on an EU financial transaction tax and ‘growth pact’ have been finalised, President François Hollande has said. Meanwhile, the European Stability Mechanism treaty – which sanctions bailouts only for countries that have ratified the ‘fiscal pact’ – has been approved by 11 countries: Germany, Greece, Belgium, France, Austria, Cyprus, Portugal, Luxembourg, Slovenia, Slovakia and Finland. It requires ratification from states representing 90% of its capital base before it comes into effect, making Italy a key link in the process.
Second item on the list is to conclude negotiations on a ‘two pack’ of economic governance legislation, the second major overhaul of EU debt and deficit rules since 2010. Three-way talks between Parliament, Commission and Council on two proposals to bring extra surveillance to bear on deficit countries and stressed economies are winding their way through the legislative process. The Commission published the two draft regulations last November – COM(2011)819 on countries facing market stress and COM(2011)821 on excessive deficit countries – a follow-up to the ‘six pack’ of rules that came into effect the same month. They set out a new timetable for budget making, beginning in April and ending in December, provide for more regular and intensive monitoring for countries in danger of missing their deficit reduction targets and allow for eurozone countries to bounce each other into bailouts. The proposals have been significantly strengthened by members of Parliament’s Committee on Economic Affairs (ECON), who have introduced rules offering legal protection to defaulting states and called for a temporary redemption fund that would involve pooling and commonly issuing national debt. Sharon Bowles, the head of the ECON committee, has said the rules are “as intrusive as an IMF programme” but that the market has failed to grasp their complexity. A plenary vote on the two pack is set for 22 October.
FUTURE OF EMU
October will also see the release of an interim report on the future of the eurozone from a group of four EU officials led by European Council President Herman Van Rompuy. A first version was published in June by Van Rompuy and the presidents of the European Commission, European Central Bank and Eurogroup and a more detailed version, including deadlines, is due by December. The report will map how eurozone countries are to achieve closer banking, budgetary and political integration over the next decade, including a new eurozone banking supervisor (the ECB) and common deposit insurance and resolution funds, further centralisation of budgetary policy (limits on and pre-approval of government spending) and moves towards debt mutualisation (eurobonds).
EU officials say a move towards eurobonds is the only way to allow weaker countries the breathing space to apply stricter debt and deficit rules, such as those laid down in the ‘two pack’. “In the long term the monetary union can only be sustainable with mutualisation of debt, with joint and several liability in some form,” said one source. “We need to shield these peripheral countries from the pressures of the markets.” The European Commission published a green paper on eurobonds last November – at the same time as the ‘two pack’ – but Parliament is now calling for it to come forward with proposals for a 25-year debt redemption fund, which would pool member states’ excess debts and roll them over via bond issuances. “If we are to get to the, if you like, utopia of complete fiscal union with full eurobonds, you need to have some kind of highlight on the way,” says Bowles.
9-10 July: Eurogroup and Ecofin: to discuss Spain, Cyprus and euro summit agreements of 29 June (ESM bond buying and direct recapitalisation of Spanish banks, reduction of Irish bank debt)
14-15 September: Informal Eurogroup and Ecofin in Nicosia
October: Interim report of the Van Rompuy ‘group of four’ on the future of EMU
22 October: Parliament plenary vote on the ‘two pack’
December: Final report of the Van Rompuy group