European View

Italy presses Brussels for deposit guarantees, eurobonds for migrant crisis

by Davide Colombo and Rossella Bocciarelli

Italy has called for replacing the informal Ecofin with a European fiscal board led by a Eurozone Finance minister. The minister would manage the unemployment fund and the resources to enhance border protection in the migrant emergency. He would also manage the Eurozone budget, with adequate resources to promote investment and support anti-cyclical policies.

The recommendation is contained in a “position paper” which will certainly represent the basis for the meeting with European Commission President Jean-Claude Juncker scheduled for the end of the week.

In the paper, Italy called for an unemployment fund to support the jobless in the short-term, and proposed to relaunch European Commission President Jean-Claude Juncker's investment plan by effectively tapping into the resources to support transnational investments in strategic sectors.

The country also insisted on the need to complete the banking union through the adoption of a European deposit insurance scheme and have effective resources for the Single Resolution Fund for banks (SRF). It also supported the open borders of the Schengen agreement.

The document was prepared by Economy Minister Pier Carlo Padaon and released yesterday along with proposals to relaunch a strategy of European growth and stability.

The “super minister” would need full political support, would be named as high representative to the European Commission and have strong ties with parliament.

The government also suggested transforming the current European Stability Mechanism in a European equivalent to of the International Monetary Fund which, in the first instance, would financially support the SRF.

In this context, the European fiscal board would approve a budget policy for the 19 countries of the euro area. The goal of having a shared economic policy is to achieve more symmetry in macroeconomic stabilization measures.

The document highlighted that a very high budget surplus (in Germany it's of around 9% of GDP) has a negative impact on the overall Eurozone system as much as excessive deficit.

Moreover, the document said that a context of low growth and very low inflation have an impact on the main budget indicators (deficit-to-GDP, debt-to-GDP), and consequently proposed to include price trends in the valuation of budget rules.

Not all the proposals imply changes to the EU Treaty, starting from the automatic fund against cyclical unemployment, a proposal that Padoan has several times presented and which would be funded through both national and EU budget resources.

The renewed proposal to issue eurobonds for transnational interventions on networks and to counter the migrant emergency could be adopted within the current regulation framework.

As for banks, the document reiterates the importance of completing Europe’s banking union, stressing that the European deposit guarantee scheme would support confidence, a key ingredient for the success of the credit system, and would contribute to reduce risk factors.

Regarding non-performing loans (NPL), Italy called for further initiatives, stressing the need to improve the bankruptcy regulation of the several countries.

As for banking resolutions, Rome acknowledged the results of the mechanism of the Banking Recovery and Resolution Directive (BRRD), while in terms of the possible revision of the bail-in rules, the government accepted the timing of having a first review in 2018.

However, the regulation must be implemented and managed in an appropriate way to avoid effects of financial instability, the paper said. Before the review of the bail-in regulation, the government called for a better analysis of the margins that the current rules offer (including the possibility of accessing European state aid when the resolution procedure is destabilizing.)