EU LEADERS will attempt next week to give fresh impetus to their stalled rescue plan for the euro zone as pressure mounts on them to come good on their pledge to break the link between bank and sovereign debt.
Taoiseach Enda Kenny is seeking an explicit reiteration of that commitment in the wake of the German-Dutch-Finnish manoeuvre in which their finance ministers called into question the scope of plans for the European Stability Mechanism fund to recapitalise banks.
He meets his EU counterparts at a summit in Brussels on Thursday and Friday next week and goes beforehand to separate talks in Bucharest with the group of centre-right European leaders, among them German chancellor Angela Merkel.
Senior European officials expect the EU summit will “reconfirm” a deal in June when the leaders promised to sever the loop between bank and sovereign debt.
However, the latest draft of the summit conclusions makes only an indirect reference to this agreement. Still, the draft suggests the leaders will urge euro zone finance ministers to develop a concrete framework for the ESM fund to rescue banks in light of the deal.
“The euro group will elaborate the exact operational criteria that will guide direct bank recapitalisations by the ESM, in full respect of the June 29th, 2012, euro area summit statement.”
The draft, circulated to diplomats on Monday by European Council president Herman Van Rompuy, is silent on the question of legacy or historic bank debts.
Mr Kenny wants the ESM to assume legacy debts if it takes shares in institutions such as AIB and Bank of Ireland, but German minister Wolfgang Schäuble and his allies insists the fund should bear only future losses.
The key issue now is whether Dr Merkel sticks with Mr Schäuble’s stance or agrees to more flexible approach to legacy debts.
Although certain European and Irish sources believe she may well be amenable, officials in Brussels point to a marked German slowdown in preparations for a new euro zone bank supervisor.
The leaders said in June that the creation of such a supervisor, operating under the umbrella of the European Central Bank, would be a precondition for any ESM bank rescues.
The leaders wanted a deal by the end of the year but the talks are delayed.
Germany disputes the scope of a legal proposal on new ECB powers from the European Commission. Berlin says only the largest systemically important euro zone banks should be supervised by the ECB but the commission wants all 6,000 banks in the euro zone to be covered.
The draft conclusions suggest the leaders will say the new single supervisory mechanism “should be subject to appropriate phasing-in arrangements”.
Separately, non-euro countries such as Britain and Sweden are concerned they will be squeezed out of decision-making within the European Banking Authority, which will retain important regulatory powers in the new regime.
The draft conclusions call for an “acceptable and balanced solution” in respect of voting rights in the EBA to encourage “non-discriminatory and effective decision-making”.
While the draft raises the prospect of a separate euro zone budget, officials say this question is riddled with political and technical problems.
The basic idea is to develop mechanisms for new support schemes for stricken countries “via an appropriate fiscal capacity”.
However, Germany and France differ as to what exactly this might involve. To French eyes a major budget with institutional support could replace the debt mutualisation Germany rejects. Berlin favours something more modest.
Britain is in favour but Poland, also non-euro, is not. While such a move could cut London’s EU contributions, former eastern bloc countries fear it would curtail cohesion and structural funding.
