EU Leaders Seek Plan to Shore Up Euro Amid Risk of Inertia

European Union leaders meeting in Brussels are discussing how to shore up the euro area on the heels of growing economic and political momentum. But persisting differences between the bloc’s members have raised doubts about its ability to strike a deal to reform the single currency in the coming months.

Their gathering -- which doesn’t include the U.K. -- comes as top EU officials and politicians have stepped up calls over the past year to strengthen the euro area in order to ensure it can better withstand future financial shocks. The effort got an extra push with the election of President Emmanuel Macron in France, a staunch advocate of closer integration in the currency bloc, though the lack of a functioning coalition in Germany and the absence of market pressure have stalled progress.

“Today it is quite peaceful times so I think that will not be at the pressure to be very very fast,” Lithuanian President Dalia Grybauskaite said on her way into the summit. She added that the bloc’s ability to reach an agreement on overhauls will depend on the substance of the proposals and so far there have been few details.

In a letter to leaders before this week’s summit, European Council President Donald Tusk echoed the concern that in the absence of market pressure “the collective political will to make further progress has weakened.” Countries “differ in their assessment of what needs to be done, as well as in the urgency they attach to this task,” he added.

Banking Rules

Faced with a narrowing window of opportunity to push ahead with reforms, Tusk tasked leaders to come up with a road map that sets out the path to an agreement on at least some of these issues by June. In order to do so, however, the bloc’s members will have to agree on a set of controversial outstanding reforms, including the completion of the post-crisis banking rules, the creation of a European Monetary Fund and the possibility of a dedicated euro-area budget and finance minister.

While consensus has emerged on the need take further steps on these areas, significant disagreements persist among key capitals.

Despite several rounds of talks between finance ministers, so far there is little evidence that countries are ready to let go of their longstanding positions in order to move closer to a compromise, and remain split on key issues such as the need for greater risk sharing among the bloc. 

Main Disagreements

Countries including Germany and Netherlands are loathe to agree to any steps that they fear could put their taxpayers on the hook for problems lurking on bank balance sheets in other countries unless they take further measures to reduce risks.

Meanwhile, opinions on whether the bloc should have a common budget to support economies in a downturn differ, while consensus is far from achieved on what exactly such a budget would be used for and how it could be financed.

“Sound fiscal policies and a competitive economy make the euro stronger. Running the money press won’t,” Dutch Prime Minister Mark Rutte told reporters after the end of the first day of the leaders’ summit. “I am not in favor of one big European shock absorption fund but 19 smaller ones. These being the countries themselves and their ability to deal with crises individually,” he said.

But divisions on substance are not the only risk to Tusk’s June deadline. A prolonged political vacuum in Berlin -- where coalition talks have been ongoing for months -- could strip the euro area of its key decision-making member at a crucial time for the single currency.

— With assistance by Helene Fouquet, Arne Delfs, Ian Wishart, Jonathan Stearns, John Follain, Andra Timu, Slav Okov, Marek Strzelecki, Ewa Krukowska, and Tim Ross