Wednesday

7th Dec 2022

Agenda

German elections to set EU agenda in coming months

  • Angela Merkel campaigns for a third mandate as German chancellor (Photo: Felix O)

The German federal elections on 22 September are keenly awaited in Brussels, as several key dossiers - notably on banking union - are on hold until a new government is formed in Berlin.

Opinion polls end of August suggest Chancellor Angela Merkel will have trouble recreating the current centre-right coalition and the most likely outcome is a grand coalition with the Social-Democratic opposition.

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Berlin insiders do not count on a radical change of course - regardless of who will be chancellor - in Germany's stance on debt mutualisation and eurobonds, but small steps in the banking union dossier could happen after a government is formed, by the end of October.

So far, Merkel has rejected or at least delayed any decision on using the eurozone bailout fund to directly bail out ailing banks in southern-European countries. The governments in Spain and Cyprus had to apply for the loans - which were then redirected to the banks.

But after the October elections, Merkel, or her rival Peer Steinbrueck- if he manages to put together a parliamentary majority - will have to deliver on the promise of allowing banks to be recapitalised directly by the eurozone fund once a supervisory board for the 150 largest banks in the eurozone is set up within the European Central Bank.

The European Central Bank (ECB) is currently drafting rules on an in-depth scrutiny of the largest banks' balance sheets, looking at their possible funding gaps and bad loans.

The rules should be finalised by end October, so that the review is carried out in the first half of 2014. The ECB has said it would only take on the yet-to-be-established Single Supervisory Mechanism - a centralised supervisory body for eurozone's 150 largest banks - once this test is carried out.

The new German government will also have to deal with another element of the so-called banking union that still needs to be created: a euro-wide authority (Single Resolution Mechanism) telling banks to shut down and deciding on what money to be used to fill the gap.

This is yet another highly sensitive subject for whatever government there will be in Berlin, as no party is in favour of using German taxpayers' money for failing banks in Spain or Italy.

The European Commission has also proposed that this authority be complemented by a fund - to be paid for by the banks themselves - to be used if a bank needs to be shut down. Again, the German government has opposed this initiative and demanded a change of the EU treaties, effectively kicking the initiative into the long grass.

But the ECB has also insisted this resolution authority and fund be set up by the time it is start supervising the eurozone's largest banks.

ECB board member Yves Mersch said end of August that there should be clarity on the so-called backstops - national or euro-wide bank bailout funds - before the ECB starts looking at the balance sheets of the banks.

"The exercise may reveal capital shortfalls, and we need to know how they will be filled. Without solid backstops in place, I fear markets will not see the exercise as credible as they will expect the results to be fudged," he said.

During the month of September, eurozone finance ministers and ECB experts will still have to clarify these issues, including the pecking order for shareholders in banks that need to be recapitalised.

An EU summit on 24-25 October - possibly already with a new German government in place - will have to look at the bank resolution dossier. If this this timetable fails, the file will come up during the last EU summit this year, on 19-20 December.

Elsewhere in the EU, Austria will hold elections on 29 September, with polls suggesting a tight race between the two largest parties, the Social-Democrats and the People's Party, who are currently in a grand coalition.

The Czechs are also going to the polls on 25-26 October, after the government led by Petr Necas had to resign three years into its mandate amid a corruption scandal.

Last months before EU election campaign

Meanwhile, in Brussels, EU institutions will have a lot of legislation to finalise by the end of the year and early 2014, before they go into campaign mode ahead of the 22-25 May EU elections.

EU commission chief Jose Manuel Barroso will set the scene with his last State of the Union speech before the elections.

Addressing the European Parliament on 11 September, Barroso will lay out the priorities of the commission for the coming months, with banking union and the US free trade agreement talks high on the agenda.

EU political parties will start the process of nominating top candidates for the EU commission top job, a novelty of the Lisbon Treaty which will be tested for the first time in the May elections.

The winning parliamentary majority after the EU elections will claim its own candidate as head of the EU commission, with Barroso unlikely to be reappointed.

One of his potential rivals is justice commissioner Viviane Reding, a centre-right politician from Luxembourg who has presented herself as a vocal supporter of democracy and data privacy rights.

Reding plans to table a reform of EU data protection laws in the coming months, following the increased public interest in data privacy after the US secret surveillance system revealed by whistleblower Edward Snowden.

The Snowden revelations also have an impact on EU-US free trade talks, with a dormant transatlantic data protection agreement likely to be wrapped up in parallel to the business talks.

The European Parliament, also involved in the EU-US trade talks and a similar free trade deal with Canada, will also work at maximum speed to finalise the outstanding laws by mid-April, before the EU elections campaign kicks in.

Some 75 pieces of legislation related only to the long-term EU budget for 2014-2020 will have to be passed by the end of this year.

On banking union, MEPs will have to vote on the two bodies yet to be created - the single bank supervisor within the ECB and the resolution authority. In addition, there is pending legislation on market abuse, including criminal sanctions, and on reforming the structure of the banking sector so that investment banks will be clearly separated from traditional banks in order to avoid risky speculations with people's deposits.

Syria, Ukraine

A possible armed strike on Syria, if the US goes ahead and is followed by France, risks exposing divisions among EU among countries in favour and against military intervention. A first chance to discuss a unified EU position will be on 6 September during an informal meeting of foreign ministers in Vilnius.

As for the EU's eastern neighbourhood policy, a key test will be on 28-29 November, also in Vilnius, when Ukraine hopes to sign a so-called association agreement. The EU commission has given Kiev a to-do list in order to sign this agreement, particularly the release of political detainees such as ex-Prime Minister Yulia Tymoshenko.

The EU is not alone in pressuring Ukraine. As winter nears, Russia could once again halt gas exports to its neighbour, a move Kremlin critics have in the past said is a form of political blackmail.

As for EU-Russia relations, visa freedom will continue to be a big issue. Germany recently for the first time signalled openness to starting the process by first giving visa-free travel to Moscow diplomats.

The mood may shift after elections, particularly as Merkel and Putin publicly traded barbs regarding the imprisonment of Putin-critical female punk band, Pussy Riot.

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