Eurogroup approves reform of MEDE and advances the banking firewall
On Monday, the economy and finance ministers of the Eurozone - the Eurogroup - gave the final green light to the agreement to reform the European Stability Mechanism (ESM) and to bring forward the safety net of the bank resolution fund by two years to 2022, which are key measures for avoiding future crises.
Both had been agreed upon in principle in December 2019, but Italy's reticence regarding the reform of the MEDE and the doubts of the fiscal "hawks" about the risks to banking prevented it from being approved at that time, and the arrival of the pandemic in March relegated the issue to second place.
"The reform of the MEDE strengthens the euro and the entire European banking sector because we are making the euro area even more robust against attacks from speculators. At the same time, we advance the safety net for the bank resolution fund by two years, making European banks more resilient and supporting the real economy", said German Finance Minister Olaf Scholz after the meeting by video conference.
The agreement has yet to be signed and ratified by countries so that the new MEDE treaty can enter into force in 2021, which in turn would allow the fund's board of governors to take steps to have the safety net in place by early 2022.
The reform of the MEDE treaty, which was established in the wake of the financial crisis to help countries in difficulty, envisages giving it more power in future rescues and in the monitoring of countries, as well as improving the precautionary credit lines that it can grant before a full rescue is necessary.
It also introduces collective action clauses with simple aggregation clauses (CACs in financial jargon) into sovereign bond issues from 2022 onwards, which in practice makes it easier for creditors to take off if the debt has to be restructured.
This point stirred up political debate in Italy, where some parties argued that the measure would increase the costs of the country's sovereign debt, preventing Rome from supporting the reform in 2019.
The second leg of the deal is the firewall for the Single Bank Resolution Fund (SBRF).
The RSF is a "piggy bank" set up in 2016, which is fed by contributions from the banks in order to finance the resolution of troubled European banks if necessary, and the firewall would be an extra safety net in case it runs out of money.
The December agreement established that the MEDE would be responsible for providing it in the form of credits and that it could be launched before 2024, the date initially planned, if sufficient progress had been made in reducing banking risks by the end of 2020.
This was a fundamental condition of the more orthodox countries, such as Germany, the Netherlands and Finland.
Bad loans had fallen to 3% in the eurozone by June 2019 (compared to 6% in 2016), according to the European Banking Authority, but the decision comes with the prospect of the pandemic causing them to rise again.
The Third Vice-President and Spanish Minister of Economic Affairs, Nadia Calviño, stressed before the meeting that this is an "important step from the point of view of the resilience and strength of the banking union and, therefore, of the entire Economic and Monetary Union".