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Nikos Chrysoloras: Eurozone enters a new phase

The Banking Union and taxation policy will be Eurozone’s next big bets at least for the following 9 months, as it emerged from the meeting of the Eurogoup and ECOFIN on the 13 and 14 of May. The other two “open fronts”- the debt crisis in the region and the rate of fiscal adjustment – seem to enter, at least for the time being, in a “recession period”.


More specifically, the Eurogroup has decided the disbursement of 9.5 billion euros in total for Greece and Cyprus. For Cyprus two billion euros have already been disbursed from the European Stability Mechanism. Another one billion euros will be released before 30 June, completing in this way, the first installment of the total package of 10 billion euros.

Following this, in August the quarterly review from the Troika will begin while as Eurogroup’s announcement has demonstrated, our partners will continue to monitor closely the external audit procedure conducted in the Cyprus banking system so to determine whether the legislation for anti-money laundering is been properly implemented. The head of the Eurogroup, Jeroen Dijsselbloem, has noted that the first findings of the audit confirm that the Cyprus development model was not sustainable”.

The most significant development from the Eurogroup regarding Cyprus, was most probably the reassurance by the head of the European Stability Mechanism, Klaus Regling that the impairment of unsecured bank deposits in the two largest banks of the island, has not contaminated the rest of the banking system in the Eurozone, as no outflow of deposits or deterioration in the interbank market have been observed. As far as the restrictions on transfer of funds are concerned, there is an unanimous agreement in Brussels that they should be removed as soon as possible, however the right moment has not arrived yet as the risk of a mass outflow of deposits from the island still remains.


With regards to Greece, the Eurogroup has decided to release 4.2 billion euros before May 20, provided that all prerequisite requirements for this month are completed. If this is the case, an additional 3.3 billion of euros will be disbursed during June without prior reassessment by the Troika, under the three following conditions: first, to vote for the legislation for indebted households, secondly, to vote for the legislation to combat corruption and thirdly to proceed with the liberalisation of the energy market. Also, as revealed by the Vice- President of the Commission, Olli Rehn, within the next few weeks, the troika mission for the next assessment will arrive in Athens. As far as the disbursements are concerned- the amount of which is constantly changing- Mr. Regling has commented on their dependency on the financing needs of the country, and of course on the implementation of the agreed commitments by the government in Athens.
In a press conference following the Eurogroup meeting, the Greek Finance Minister, Giannis Stournaras, confirmed that the atmosphere towards our country was better than ever and that the partners have pledged to address the issue of the roll-over of Greek bonds held by the European Central Bank and the central banks of the Eurosystem. He added that the repatriation of the profits of the Eurosystem deriving from its Greek bond portfolio are progressing normally.

However, the announcement of the Eurogroup shows that for Brussels, not everything is evolving smoothly in Greece. The ministers of Finance across the Eurozone highlight the necessity to accelerate the liberalisation of goods and services in Greece in order to reduce prices and for the economy to recover faster. At the same time, emphasis is given to the announcement for the need to combat tax evasion and the completion of the recapitalization of the banking system in Greece. What is more, the head of the body, Jeroen Dijsselbloem, has highlighted the need to proceed with the restructuring of the public sector and tax collection in Greece, as well as to open up closed professions.

Finally, regarding the Commission’s report on Greece’s progress with its obligations under the excessive deficit procedure- which has caused an uproar since it leaves open the possibility for new measures during the years 2015-16- the Vice president of Commission Olli Rehn has stated: “Indeed we are predicting that the fiscal gap is a little larger for those two years than expected. But any forecast at this stage is uncertain and there is a serious possibility that the budget figures for Greece will be much better. It’s too early to talk about new measures”. The imposition of any additional measures was also rejected- in the most categorical manner- by Mr. Stournaras, who stated that the budget gap is already known and will be covered by other savings rather than tax increases or reductions to wages and pensions. Also, people within the European Commission have characterized as “unjustifiable” the panic that prevailed in the Greek media and argued that the key message in the report was that our country is complying with its obligations to reduce its excessive deficit and achieve the fiscal targets.

Austerity- Development

Consensus seems to have been reached also for the mix of economic policy, as the recession in the Eurozone continues for the second consecutive year. Although there is no chance that a signal for “relaxation” will be announced, the rates of fiscal adjustment have already slowed significantly compared to previous years and much lower than in the U.S. The aim is to not compress any further the economic activity in the Eurozone. Therefore, is it excepted that in its upcoming recommendations – which will be announced at the end of May- the European Commission will likely propose that the countries that fail to meet their deficit targets, are given extra time and not be forced to implement new restrictive measures.

At the same time, the reduction of interest rates by the ECB at historic lows and its commitment to guarantee the stability of the euro, have significantly contributed to the reduction of the spread on bonds of the European region, the restoration of stability in the Eurozone and the facilitation of the return of Portugal and Ireland in the markets as well as their expected exit from the Memorandum, by the end of this year. The only negative development is the situation in the banking system of Slovenia, who may be forced to appeal to the European Stability Mechanism. “We are not out of the woods yet. But we are close to our target. We will follow growth-friendly fiscal consolidation, and exploit the flexibility given in our rules Mr Dijsselbloem said after the Eurogroup.

Banking Union

While the old fronts are closing, new ones open since disagreements on the next steps of the unification of the Eurozone have not gone away.

The German finance minister, Wolfgang Schäuble has sought to postpone indefinitely the full banking union, arguing that the creation of a single authority for clearing banks will require a change in the Treaties, which is expected to be a lengthy process. His view is shared neither by France, nor the southern countries, or the European Commission.

On the contrary, while the process for the creation of a single supervisory mechanism in 2014 and for the creation of a coordinated (but not common) system of deposits guarantees seem to be progressing more smoothly, many questions remain to be answered regarding the direct recapitalization of banks by the European Stability Mechanism. In particular, there are questions concerning the point at which the ESM will interfere, under what conditions and what will be the contribution of national financial stability funds. The possibility that the direct recapitalization will have a retroactive effect and thus benefit Greece by allowing it to remove 50 billion of public debt, borrowed for the recapitalization of the Greek banks, is unfortunately fading. Equally disappointing is the fact that the ESM will likely intervene to bail out banks only after having exhausted the possibility of participation (bail in) of uninsured depositors (those that have deposits exceeding 100,000 euros).

Finally, regarding the fight against tax evasion, on 14 May the ECOFIN has  instructed the European Commission to renegotiate agreements on the taxation of deposits’ interest of European citizens in Switzerland and in small European countries outside the EU that are considered tax havens. Due to the reactions of Luxembourg and Austria, no agreement was reached for the automatic exchange of information on depositors between European countries and the automatic taxation of deposits’ interest. However, it is expected, that in the upcoming summit of 22 May, Luxembourg will be isolated, since Austria is already showing signs of succumbing to pressure from its partners regarding the limitations on bank secrecy.