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Capital Markets Union And The Future Of The Eurozone, A Conversation With Paschal Donohoe

Are you confident that the euro area is in a comfortable position to deal with financial distress in the banking system? Do we have the institutions in place to wind down a bank or to rescue a bank, as the Swiss authorities did with Credit Suisse or as the US did with SVB two years ago? We seem to have made a lot of progress in theory, but we have no real experience in resolving a bank in practice. 

I believe there is a broader argument to be made about the resilience of the Euro and its potential. In today’s volatile global economy, the Euro is an essential economic instrument for helping countries in the Euro area navigate through this moment of significant economic policy transition and chances.

I am very confident in the resilience of our banking and financial system. The fact that our resolution authorities and procedures haven’t yet been tested in the way they have been in other countries is actually evidence that our efforts in regulation and supervision have worked. In debates and discussions, we underestimate how much progress we have made from a regulatory perspective in ensuring the stability and safety of the European banking system.

The best example of the success of our efforts is the fact that our financial sector did not become a source or magnifier of risk during and after the Covid-19 pandemic. 

While I am confident that what we have done has had a positive impact, we need to look at how we can do more and how we can strengthen the impact and the scale of the tools that we have at our disposal. One of the lessons I’ve learned from last year, from the financial difficulties that you mentioned, is the speed with which they happened.

This is a really significant point of change from where we were at equivalent moments in the global financial crisis of 2008. We have more work to do. 

How did the Crisis Management and Deposit Insurance (CMDI) workstream evolved after Credit Suisse and SVB? 

The Crisis Management and Deposit Insurance (CMDI) proposal is currently in the European Parliament and efforts are underway to make progress before the June elections. I think a vote on this is very likely in the next few weeks. In terms of where we stand on broader initiatives such as the European Deposit Insurance Scheme (EDIS), it is fair to say that our efforts to reach agreement on a broader work plan to make progress on all the other pillars of the Banking Union have not, for a variety of reasons, progressed as quickly as one would have hoped. 

How do you plan to move forward? 

There are two steps that have the potential to unlock further progress.

First, we need to make progress on the crisis management framework. The proposals were published by the European Commission in the second half of last year. Then we need to continue our efforts on the adequacy of the backstop we have for the single resolution fund.

All of our efforts to secure an agreement on the reform of the European Stability Mechanism, particularly the ratification in the Italian Parliament, are extremely important. Making progress on these projects will enable us to do more in the future. Then, they will be of great value in strengthening the existing framework of the Banking Union.

Regarding the Capital Market Union, there has been, in the last few months, an intensifying debate. I’m thinking in particular of a speech of President Lagarde where she argued for a kantian revolution in the way we approach the issue.  was criticizing the approach that had been followed up to now, which is piecemeal and bottom and favoured a  more top-down, institutional approach focusing on creating the equivalent of a European Securities and Exchange Commission (SEC), a European supervisor for capital markets. Are we really changing our approach? 

To follow President Lagarde’s line of thinking and her reference to Kant, one of the Enlightenment’s philosophical strands is the notion that we can progress towards a better future by using reason and engaging in active debate based on a shared acknowledgement of an objective truth.

I argue that the recent debates on the Capital Market Union signify a significant shift. There are two noteworthy changes occurring in the debate. 

The first consists of political and institutional leaders, including the European Central Bank, who now see the future of CMU as a key factor in achieving a better economic future for the European Union. The Eurogroup has been working on this for a year, and it’s encouraging to see this debate intensify before our meeting. It’s also significant that this is now on the agenda for the upcoming European Council meeting, where President Lagarde and I will present our views.

The second shift is the connection between completing the Capital Market Union and enhancing the competitiveness of the European Union and the euro area. This connection highlights the importance of mobilizing capital in Europe to improve our future competitiveness. This is a new dimension to the competitiveness debate and provides a stronger perspective on the CMU. I will leave it to others to evaluate whether what the Eurogroup has done is Kantian or not, but it is certainly part of a broader march of progress. 

There is a Kant quote that offers good insight into where we are: “Two things fill the mind with ever new and increasing admiration and awe, the more often and steadily we reflect upon them: the starry heavens above me and the moral law within me”. I don’t know if the Capital Market Union is part of the moral law or the starry heavens, but it’s really important at the moment.

There is a growing consensus on its importance in financing the transition, innovation, competitiveness, and stabilizing the euro area. 

However, there are also points of contention, including the question of europeanizing supervisory powers. How prepared are we to transfer authority from the national to the European level?  

I make an optimistic and positive case for the language that was included in the Eurogroup statement. We successfully obtained the agreement of all 27 Member States to commit to a process that recognizes the importance of a common European rulebook on supervision. 

This is a significant step forward. Additionally, linking the issues of supervision and competitiveness represents an important departure and political development in our approach to this matter. I am certain that this will lead to a significant debate on supervision.

Are we ready to harmonize our taxation on financial  products such as withholding tax for example? 

Taxation will remain under national jurisdiction, and finance ministers will make decisions independently. However, could it be a significant contribution to the development of our capital markets if ministers made decisions that were more aligned and based on how to incentivize capital market growth within their economies?

The positive spillover effects of these externalities on the development of our capital markets across Europe would be significant.   It is highly probable that ministers will give this heightened consideration in the near future.

On all these questions, do we need to advance in a united fashion, or can we use enhanced cooperation in some areas as a recent Dutch National Bank Non Paper has suggested ? 

It is up to individual ministers to decide on such matters.

My role is to secure agreement at a 27 level on a common denominator of high value, which we have achieved. If other countries wish to proceed via enhanced cooperation in a particular area, they may do so at their discretion. However, it is important not to lose sight of the bigger picture.

The concept of countries working together has always been about the potential benefits of supervision. However, we concur on various other matters regarding, for instance, the potential of securitization and facilitating the listing of medium-sized European companies in Europe. 

These are areas where we can collaborate and make further progress together as a group of 27. It is important not to lose sight of these opportunities. 

You have successfully completed long negotiations on the economic governance review and the introduction of a new set of European fiscal rules. There are some criticisms that are already addressed to this compromise. In particular, one is that they may be even more complex than the previous ones. While one of the key objectives of this reform was simplification. The second is that because of a set of safeguards. they may lead to procyclical fiscal policy in some cases. And Three, they may not enable as much public and public investment, and in particular investment in the transition as necessary. Do you think these criticisms are fair?

The new governance framework has complex dimensions due to the increasing complexity of our world. Decisions regarding budgetary policy cannot be made in isolation from the effects of climate change and ongoing conflicts. While some aspects have become more complex, it is important to consider these factors when making decisions. Governments now face the challenge of making complex trade-offs between changes in budget policy and competing priorities.

While I understand the concern that the rules may be pro-cyclical, I am not convinced by that argument. I believe that the progress made in securing agreements on minimum debt reduction, minimizing debt levels, and encouraging higher debt economies to have credible medium-term debt reduction plans based on a clear expenditure benchmark is a credible and clear journey to be on.

In terms of investment, this governance framework achieves a clear but gradual journey towards deficit reduction. Because the reduction in borrowing will take place over several years, governments should still have the ability to prioritize necessary investments, especially in the context of the green transition. In most economic conditions, the number of years over which borrowing needs to be reduced should create enough headspace or budget space to deliver credible national investment plans.

That is why the NextGenerationEU and the upcoming EU budget is crucial. It serves as a complementary means of delivering these necessary investments. 

Given the heightened level of complexity and given the overlapping set of expenditure benchmarks and safeguards that are based on either nominal or structural targets, don’t you think the European Commission will find it very difficult to implement excessive deficit procedure and that therefore implementation might be weaker than it was before? 

I believe the Commission will be well positioned to ensure a credible implementation of these rules. The budget statement provides an early indication of what the transitionary period will look like.The Eurogroup has adopted a recommendation for the euro area for 2025 to have a mildly contractionary fiscal stance.

On Monday morning, we adopted the statement on fiscal stamps for next year. We are collaborating with the Commission and following their guidance to transform the euro area journey into a more tailored national plan.

Our focus is on taking the next step forward, which is always the most crucial one. We are now broadly clear on the fact that, again, for 2025, we want to see borrowing reduced again. 

You have already linked this debate on national budgets to the future of NGEU and the EU budget. In the second part of 2026, Ireland will preside over the EU, possibly during a critical period when several crucial issues for the future of the EU will arise: negotiations on the EU budget, a potential decision on whether to renew or extend NGEU, a discussion on own resources. In 2020, when NGEU was adopted, Finance Minister Scholz and his State Secretary Jörg Kukies referred to it as a Hamiltonian moment. Do you agree? 

NextGenEU offered the promise and the potential for a hamiltonian moment. In the US, the Hamilton movement was about a couple of different elements, one of which was capital markets, the location of capital markets and a federal commitment to it.

That part of the vision we have yet to realize, which is why the work that we are doing in the capital markets union is so important. On many other levels, and for two particular reasons it was a transformative moment.

The first reason was the clear political decision to fund spending in new ways through the common issuance of debt. However, the second reason, which will be more significant in the centuries to come for the European Union, is the unambiguous political commitment made at the head of state level, that the euro and our dedication to economic integration are absolute, and we will not allow ourselves to be tested or shattered by any development, including a pandemic. And that impulse will persist in the many decisions to come.

If we look at what is going to mean for Ireland presiding the Council in 2026, for me, the most important endeavor that needs to be completed before we get to this point is to assemble the evidence on the positive effects of the NextGenEU. We already know that the political commitment, accompanied by the decisions of the European Central Bank, has already worked. At that moment, the financial market volatility began to contract and reduce very significantly. For that reason alone, we know that it has worked.

There are two further pieces of evidence we will need to gather. First, we must demonstrate that implementing the resilience and recovery plans at the national level has improved the medium-term growth performance of the economies where this funding is being invested.Finally, we need to see increasing evidence that this has deepened convergence within the European Union. I am optimistic about this.

I will specifically mention the performance of Greece, Portugal, and Spain, as well as any evidence that becomes available in Italy regarding the effectiveness of the plan.   Overall, I am optimistic, but it is important to continue implementing the current plans and demonstrating how they have passed the three tests.

On the whole, we have clearly proven that NGEU helped avert a major catastrophic crisis, we are starting to prove that it is helping the growth potential of the EU and we now need to show how much it is enhancing convergence by 2026.   

Assuming these three tests are passed, do you think the case for another NGEU, for a larger EU budget and for true owned resources will be strong and could lead to a decision that would fulfill the Hamiltonian promise you referred to? 

I believe those decisions are possible. But it’s also the case that there would be very strongly differing political views amongst the capitals on that. Which is why I go back to the points I made a moment ago.

There is evidence we need to assemble to inform that debate when it begins. I don’t know if it’ll be turned into a musical, but it has certainly been a multi act drama. I am very hopeful that as the next acts develop, we will be able to continue to make progress on how we use our integration as a source of resilience.

You mentioned the strong political commitments that were made to the euro. Are you concerned that the incapacity to take that hamiltonian leap in 2026/2027 would undermine the confidence that markets and citizens have in the European political commitment to the euro? 

I am confident that the euro will remain resilient and credible in any foreseeable circumstance. Its success in the past few decades and potential for future achievements are undeniable. If we meet in a few years, the Euro will have gained more value and more countries will have joined it. The projects we discussed will contribute to this success.